Will the G-20 Come Up With a New Game Plan?

Wall Street ended a turbulent week with another crazy volatile day, with stocks plunging, recovering and then plunging again as investors absorbed another wave of downbeat economic news:

The Dow Jones industrials fell almost 340 points and the major indexes all fell sharply for the second straight week.

Hedge fund selling in advance of a Saturday deadline contributed to the market's gyrations, and some retrenchment was to be expected following a big rally Thursday, when the Dow rallied more than 550 points after falling near its lows for the year. But there was plenty of discouraging news for investors to focus on, including comments from Federal Reserve Chairman Ben Bernanke that the markets remain under "severe strain" and a sobering report on October retail sales.

Analysts believe the market is still searching for a bottom after last month's huge losses, and that the pattern of volatility will continue for some time -- selling, even on technical reasons like looming deadlines for cashing out hedge fund holdings, is still coming against a backdrop of an extremely weak economy.

"Clearly, the trading crowd like hedge funds can take this market in any direction they want to. Anybody looking to build a position is just not confident," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

The session saw another stream of bad news. Bernanke said during a speech in Frankfurt, Germany, that he would work closely with other central banks to try to alleviate the global financial crisis and left open the door to a fresh interest rate cut. The Fed is scheduled to meet Dec. 16 at its last regularly scheduled meeting this year.

While Wall Street would like to see another rate cut, many investors aren't sure, given the litany of bad economic and corporate news, of how effective a rate reduction would be in the near term. Many investors are still trying to assimilate the idea that the economy's downturn will be protracted, lasting well into next year and perhaps longer.

"The economic news continues to be very negative," said Ben Halliburton, chief investment officer of Tradition Capital Management. "The realization that '09 is going to be a very bad year for economic activity is starting to dawn on people and they are starting to digest how bad it's going to be."

The Commerce Department reported that retail sales plunged by the largest amount on record in October as consumers cut back on spending in the wake of the financial crisis. Retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

As far are stocks are concerned, I still think we are heading higher in the near term. Looking at the 5-day chart of the Dow, I think yesterday was a key reversal day.

Hedge funds started it off and mutual funds and pension funds will follow through next week and going into the end of the year.

However, this is just another bear market rally. The synchronized global economic downturn is just unfolding and it will get a lot worse. Moreover, this will be a protracted recession, which means that global interest rates are heading lower and will stay low for the next two years and possibly a lot longer.

Consumers are retrenching everywhere. All you need to do is read the latest economic outlooks from the IMF and the OECD to see this is a global consumer recession. Moreover, I agree with the Financial Ninja, it will be an economic nuclear winter.

Going into this weekend's G-20 meeting, leaders of the world's 20 largest economies will have to come up with solutions to deal with the worst economic crisis we have experienced since the Great Depression of the 1930s.

Ken Georgetti, president of the Canadian Labour Congress and chair of the committee on workers' capital of the International Trade Union Confederation, wrote an excellent article for the Vancouver Sun, stating that real economic solutions require listening to those that are affected:

Some, including President Nicolas Sarkozy of France, have called for nothing less than a profound transformation of the global economic system as it has existed for the past two decades.

Leaders of the international labour movement, including myself, will be in Washington to press our own ideas for real change. We will be meeting with the head of the International Monetary Fund and with representatives of president-elect Barack Obama's transition team.

We expect that the world's political leaders will finally heed the voice of labour. We've been telling governments for years that working people have been experiencing a crisis, yet many leaders continue to talk to the people who got us into this market-led mess in the hope that they can get us out of it.

The immediate cause of this crisis was the inadequate regulation of investment banks, hedge funds and other self-serving players prepared to take huge risks with enormous amounts of other people's money (including workers' savings and pension funds.) But this crisis began in the real economy.

The rise of the financial sector and casino capitalism produced huge profits for the Masters of the Universe on Wall Street and in the City of London, but investment in the real economy needed to produce good jobs stagnated as once viable companies were loaded up with unproductive debt and squeezed by private equity funds, hedge funds and investment banks.

Meanwhile, the soaring share of financial profits and the global shift of income to a tiny elite at the top of the corporate ladder squeezed the wages and the incomes of ordinary working families almost everywhere.

In Canada, as in the U.S., the average worker has barely seen a real wage increase for 20 years. Consumer spending and home purchases have kept economic growth going, but only at the cost of over-stretched families working even longer hours and going deeper into debt.

The G-20 has to come up with a new game plan, a return to a world in which finance serves the real economy, and where we invest in a sustainable real economy to boost the living standards of working people in all countries.

The G-20 leaders will have to put in place much more stringent rules around the financial sector to stop a crisis like this from happening again. The Canadian Labour Congress is proposing that a small tax be levied on all financial transactions as a means of curbing speculation and funding rescue packages for ordinary workers hit by this crisis, not just for the banks. I have proposed that the proceeds of such a tax in Canada go toward improving public pensions and protecting private pension benefits.

The world needs not just lower interest rates and a temporary stimulus, but a major, coordinated, longer term shift to growth and job creation driven by public investment, especially investment in energy conservation and new energy systems, environmental infrastructure, education and skills training, as well as in public services like child care and care for the elderly.

Governments can now borrow at a low cost, and their actions will support new private investment in the industries of the future. We also need a plan to raise wages and living standards so as to put a floor under the fast-sinking real economy. The Great Depression of the 1930s happened not just because the banks failed, but also because of a self-feeding downward spiral of rising unemployment and falling wages.

We must also ensure that workers have rights to organize and bargain throughout the global economy, and that basic systems of social protection like minimum wages, unemployment insurance and decent public pensions are in place.

I don't expect for a minute that the G-20 heads of government will solve the problems of the world in a single day. What I do hope is that they, our prime minister included, see the need for a real change of direction in the troubled days ahead.

I do not expect that a tax on financial transactions will be warmly received by Prime Minister Harper or President Bush. Nor am I convinced that it will curb speculation (it might even exacerbate it).

But clearly something needs to be done to protect public and private pension plans that are being decimated by virulent deleveraging and excessive volatility.

While some are writing that pension plans may produce the next wave of trouble, I can tell you unequivocally that if leaders do not come up with solutions, the global pension crisis will deepen and threaten the financial security of millions of people across the world.

Capitalism as we know it is at a historic crossroad. I read an article in Bloomberg today that I found extremely disturbing. It seems that more senior citizens in Japan are resorting to picking pockets and shoplifting to cope with cuts in government welfare spending and rising health-care costs in a fast-ageing society:

Criminal offences by people 65 or older doubled to 48,605 in the five years to 2008, the most since police began compiling national statistics in 1978, a Ministry of Justice report said.

Theft is the most common crime of senior citizens, many of whom face declining health, low incomes and a sense of isolation, the report said. Elderly crime may increase in parallel with poverty rates as Japan enters another recession and the budget deficit makes it harder for the government to provide a safety net for people on the fringes of society.

``The elderly are turning to shoplifting as an increasing number of them lack assets and children to depend on,'' Masahiro Yamada, a sociology professor at Chuo University in Tokyo and an author of books on income disparity in Japan, said in an interview yesterday.

``We won't see the decline of elderly crimes as long as the income gap continues to rise.''

As you enjoy your weekend, I would like you to stop and think about these poor elderly people in Japan that have to resort to crime to cope with economic hardship. What does this say about the values of our wealthy economies when we can't provide a decent retirement or basic social services for the elderly and those in need of social assistance?

It's high time that we stop treating pension funds like casinos and start thinking about solid long-term solutions to the pension crisis. When it comes to the pension promise, failure to deliver is simply unacceptable.

***Update (15-11-2008): President-elect on YouTube

President-elect Barack Obama delivered the Weekly Democratic Radio Address this morning, his second since the election. In addition, the radio address was also simultaneously released as a YouTube video on Change.gov. This marks the first time that a President-elect or President has turned the radio address into a multi-media opportunity.