Finance and Economic

It’s the bonuses, stupid.

As the economy bleeds jobs and government bailouts for the private sector balloon, taxpayers and investors have become increasingly outraged about bonuses paid to employees at distressed companies – particularly those viewed as having had a hand in sparking the global downturn.

Over the past few weeks, battered insurer American International Group Inc. has become a lightning rod for criticism after it paid out $165 million (U.S.) in bonuses to current and former employees after receiving $173 billion in U.S. government bailout money.

Now, some U.S. lawmakers are calling on Washington to halt retention bonuses for hundreds of executives at troubled mortgage giants Fannie Mae and Freddie Mac.

Toronto-based Nortel Networks Corp., meanwhile, won court rulings in both Canada and the United States yesterday that allow eight senior executives to share in an already-approved $45 million bonus pool, even as the maker of telecom gear struggles to exit bankruptcy protection.

Some of Nortel’s U.S. creditors had held up the approval process because they were seeking projections for the 2009 fiscal year, while some former employees had protested paying bonuses to senior executives when the company isn’t honouring severance payments for as many as 1,100 laid off workers.

"These are obviously well-compensated individuals that are now being paid additional millions of dollars to stay on and do the jobs they already agreed to do," said Eli Karp, a Toronto lawyer who is representing about 60 of the former Nortel employees.

"Our clients have lost their jobs and aren’t getting the severance promised to them."

Nortel, with about 30,000 global employees, including about 6,000 in Canada, stopped paying severance to former workers after it filed for protection from its creditors in mid-January with about $2.4 billion in cash on its balance sheet. It has since announced plans to shed another 3,200 workers.

But while granting big executive bonuses when a company is struggling for survival strikes many as unfair, experts argue there are legitimate reasons for providing performance-based incentives to a firm’s key personnel during a crisis.

"I think there has been an overreaction to this whole issue," said Rick Powers, executive director of MBA programs at the University of Toronto’s Rotman School of Management. "An integral part of an executive’s compensation is meeting performance targets.

"The problem is that companies have not been transparent with their compensation policies."

While Powers isn’t a fan of retention bonuses – giving employees money, in other words, simply for sticking around – he said performance-based bonuses are often a critical tool for companies mired in difficulties to align the goals of key managers with those of creditors and other stakeholders.

The key, according to Powers, is ensuring that the targets are real and achievable, and that bonuses are awarded only to employees who deliver results.

In the case of Nortel, the $45 million bonus program is to be paid out to close to 1,000 executive and mid-rung employees if certain targets are met during the company’s restructuring.

CEO Mike Zafirovski, who took home a salary of $1.3 million in 2007, the most recent year for which figures are available, is not included in Nortel’s 2009 bonus program.

But eight other senior executives, including three in Canada, could collectively receive as much as $7.3 million in bonuses if they meet cost-cutting targets and other parameters designed to make Nortel more focused, as well as achieving the approval of any restructuring plan by creditors and the courts online cash advance.

"It is important to note that the vast majority of employees at all levels are already on a quarterly incentive plan aligned to the short-term goals of company," Nortel spokesperson Mohammed Nakhooda said.

"Of those employees, we have identified a few hundred additional individuals to be part of a separate incentive program, including some executives, to ensure that key employees with specific skills and experience remain in place as we deliver on the restructuring."

Nortel did not award any bonuses to employees under its annual incentive plan for 2008.

The real rub for critics, however, is AIG.

Its bonus payouts sparked the ire of U.S. President Barack Obama, who sharply condemned management’s "recklessness and greed."

In some cases, the bonuses were paid to employees who worked in AIG’s financial unit, the same division responsible for nearly bringing the insurer down by making bad bets on derivatives.

The U.S. House of Representatives has since voted to slap a 90 per cent tax on employee bonuses at AIG and any other companies in receipt of $5 billion or more in federal bailout money.

AIG, deemed too big to fail, recently reported a fourth-quarter loss of $61.7 billion, the largest in corporate history. It has been rescued four times on the taxpayers’ dime after major missteps involving credit-default swaps.

The insurer sold those derivatives – a type of insurance on debt – to financial institutions around the world. The problem was that some of the debt securities they insured were tied into America’s hyper-vulnerable subprime mortgage market.

When the credit crunch sent the debt instruments plummeting in value last year, global banks wanted to collect on their insurance. AIG, however, did not have enough money to cover all the payouts and the U.S. government was forced to step in to prevent the insurer’s collapse.

Bonuses, to a lesser degree, have also struck a painful chord with Canadian taxpayers.

Canadian Broadcasting Corp., which is facing a budgetary shortfall, found itself embroiled in a fracas this week when it was revealed the public broadcaster still plans to pay its executives half of their annual bonuses even as it freezes their salaries in the next fiscal year.

That decision to preserve part of the executive payouts comes at a time when the Crown corporation’s rank-and-file employees are bracing for layoffs over the coming weeks.

Most regular CBC employees are not paid bonuses. Some staff, such as on-air personalities, do receive additional remuneration. Many of those employees have been informed that their bonuses will not be renewed, says the Canadian Media Guild, which represents thousands of CBC employees.

"If there is pain to be had, it has got to be equally shared by all," said guild president Lise Lareau in a telephone interview.

"We are anxious and willing and working with the CBC to do whatever is reasonable to alleviate layoffs and program cuts."

The issue of executive bonuses was reportedly raised at meetings in Ottawa yesterday between the CBC and union representatives.

CBC officials did not return calls seeking comment yesterday.

With files from the Star’s wire services

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GMAC Financial Services plans to bring “several hundred” jobs to Charlotte, N.C. Gov. Bev Perdue says.

Perdue told WBT on Friday morning that she will make a major announcement in Charlotte this afternoon regarding GMAC and those jobs. She didn’t disclose the operation’s location or other details.

The announcement is scheduled for 1 p.m. at the Government Center.

Speculation began early this year about GMAC moving operations to Charlotte. The Charlotte Business Journal in January reported former Bank of America Corp. (NYSE:BAC) Corp. Chairman Hugh McColl Jr., among others, was pushing for the company to focus on center city for more offices fast cash advance. GMAC has also considered a Ballantyne location, where the company has a 200-employee back-office operation.

Some believed GMAC planned to move its headquarters here from Detroit. But Perdue suggested Friday the company’s corporate headquarters will remain in Michigan.

The early speculation about GMAC’s plans was fueled, in part, by the fact that former BofA Chief Financial Officer Al de Molina, who became chief executive at GMAC in April, has maintained a residence here.

Go to www.charlottebusinessjournal.com later today for updates.

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A healthcare agreement struck between Ford Motor Co and the United Auto Workers would not work for General Motors Corp, GM’s chief executive said Tuesday.

"It probably works for Ford. It does not work for us," Rick Wagoner said, without elaborating why. "So we need to do something different. We’re working with the UAW on how we might do that."

As part of the $17.4 billion bailout extended to the two companies in December, GM (GM, Fortune 500) and Chrysler are required to bring wages and benefits of U.S. factory workers in line with those at Toyota Motor Corp (TM) and other Japanese automakers.

GM and Chrysler have reached tentative agreements on some issues, but have not released details.

Unlike Ford (F, Fortune 500), the two have yet to settle on a plan for restructuring a retiree healthcare trust in which the companies would offer a sizable amount of stock or equivalents to reduce their cash contributions.

Wagoner also told a meeting of newspaper reporters and editors that suppliers could see some help soon and restructuring without bankruptcy was still the best option for GM, which faces a March 31 deadline to prove to U.S. government that it can be viable and worthy of more bailout funds.

Wagoner again dismissed the idea of a court restructuring where concessions and other provisions are worked out up front, saying it was unproven for the industry and too risky overall. He said GM’s research continues to show that consumers would not buy cars from a bankrupt automaker.

"It could work and it might not work, and if it doesn’t work, it could mean a long period of bankruptcy, which I believe would result in the liquidation of the company," Wagoner told the meeting, sponsored by the Christian Science Monitor.

"It makes sense from everybody’s perspective that we have to do this outside of court," Wagoner said.

He also expressed hope that GM and its bondholders could work out their differences on concessions without "government engagement payday loan companies."

Bondholders have balked at a proposal to reduce by two-thirds the roughly $27 billion they are owed through an exchange of new equity in a recapitalized company. Bondholders call that proposal unfair compared to payout terms being offered to the UAW and for remaining GM debt.

The Obama administration task force weighing a bailout request of more than $16 billion from GM and a $5 billion from Chrysler LLC would prefer an out-of-court restructuring, its lead adviser said this week.

On suppliers who have asked for billions in government help to survive, Wagoner said their problems are getting "more precarious" and that the task force is "well informed" on the matter.

"Hopefully, some help is on the way soon because I think it’s getting pretty drastic for the suppliers," Wagoner said.

On GM’s Opel subsidiary, Wagoner said GM is willing to take a "less than 100 percent" stake in the company in order to receive German government aid and save it.

"We’re open to a different structure in Europe. We need more cost savings," Wagoner said, noting conditions for its participation are being discussed.

Germany is open to the possibility of helping Opel but has said it needed to be sure no state support would find its way back to Detroit.

Wagoner met with the German Economy Minister Karl-Theodor zu Guttenberg on Monday night in Washington. Guttenberg said it was essential for GM to find a private investor.

GM shares closed down 2% at $2.47 on the New York exchange. Ford shares were up 8.6% at $2.28. 

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A year after the government rescued Bear Stearns, the economy has stumbled badly.

But one market that regulators were deeply concerned about when Bear hit the wall — the one for unregulated over-the-counter derivatives called credit default swaps — has defied fears of a meltdown.

When Bear Stearns faltered last March, federal officials rushed to save it by making some $30 billion in loans to Bear’s fire sale buyer, JPMorgan Chase (JPM, Fortune 500).

What wounded Bear was a cash crunch that ensued as investors fled from risky mortgage-related assets. But officials acknowledged their decision to keep the brokerage firm from defaulting was driven by the threat a bankruptcy may have posed to Bear’s trading partners.

"The sudden discovery by Bear’s derivatives counterparties that important financial positions they had put in place to protect themselves from financial risk were no longer operative would have triggered substantial further dislocation in markets," said Tim Geithner, then the president of the Federal Reserve Bank of New York and now the Treasury Secretary, in congressional testimony last April.

Geithner wasn’t alone in worrying about so-called counterparty risk in the markets for derivatives such as credit default swaps, or CDS, which allow one party to pay another to take on the risk that a company will default on its bonds.

Regulators and market participants have been warning for years about the dangers of the unchecked growth of the credit default swap market — and about the difficulty of assessing who could be at risk for derivatives blowups.

Yet the events of the past year — including the collapse of Lehman Brothers six months after Bear — suggest regulators may have overestimated the risk of counterparty failures.

Market functioned despite ‘unprecedented’ turmoil

A report earlier this month from the senior financial supervisors of the G-7 nations concluded that the credit default swap market functioned well in the second half of 2008, despite "an unprecedented 12 credit events" — or actions that obliged the sellers of credit protection to make payments to those who had bought protection.

The credit events included the government takeover of U.S. mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the collapse of Icelandic bank Landsbanki and, most notably, the bankruptcy of Lehman, a broker-dealer that was even bigger than Bear.

"Overall, the review confirmed the effectiveness of the existing auction-based settlement mechanism," the report said.

The fact that CDS settlements have worked largely as advertised doesn’t mean the worries have dissipated. To the contrary, the fiasco at AIG (AIG, Fortune 500), the insurer that has been propped up by the government at a cost to taxpayers of more than $160 billion, has led to a new round of scrutiny for the credit derivatives market.

AIG was pushed to the brink of bankruptcy last fall when a credit downgrade allowed swap counterparties to demand tens of billions of dollars of collateral AIG didn’t have. Rather than risk another blow to already fragile markets, policymakers chose to rescue AIG.

It’s worth wondering how the CDS market would have handled an AIG bankruptcy, which might have led to losses at counterparties such as Goldman Sachs and some big European banks.

But a more pressing question is whether there are other AIGs out there — a worry that is impossible to dispel in part because there is no way of telling whether a firm has failed to make sure it has the cash on hand to honor its swap obligations creditreport.

"Clearly there have been institutions that wrote CDSs that didn’t expect to honor them and didn’t have the recourse to cover them," said Charles Taylor, a fellow at the Wharton Financial Institutions Center at the University of Pennsylvania. "It would appear these things did contribute to credit market stresses."

Those stresses have prompted some notable responses.

House Agriculture Committee Chairman Collin Peterson, D-Minn., proposed legislation that would restrict the use of credit default swaps. And Myron Scholes, a Nobel prize-winning economist, said this month regulators should "blow up" the derivatives markets because they have stopped providing useful information.

But even some longtime critics of over-the-counter derivatives markets say the AIG case isn’t a reason to take drastic action.

"Credit default swaps are not the centerpiece of this crisis," said Benn Steil, director of international economics at the Council on Foreign Relations. "AIG was just greedy and irresponsible."

Clearinghouses could clear up confusion

To be sure, substantial reforms are still necessary. The International Swaps and Derivatives Association trade group says it is working on refining procedures governing how credit default swaps are documented and settled.

But observers say introducing clearinghouses into the CDS markets, which could happen by year’s end, should eventually eliminate the counterparty risk problem.

Earlier this month, the Federal Reserve made an IntercontinentalExchange (ICE) unit a member of the Federal Reserve System. That will enable this entity to act as a central counterparty.

Exchange companies such as Intercontinental, Chicago’s CME Group (CME) and NYSE Euronext (NYX) are eager to set up clearinghouses for CDS trades because their days of go-go growth from existing products appear to have come to an end.

Meanwhile, installing central clearing could ensure that parties to CDS trades have the wherewithal to make good on their obligations.

Howard Simons, a strategist at Bianco Research in Chicago, added that the CDS market is useful as a source of information about the health of credit markets. One popular CDS-based indicator of credit market stress - the Credit Derivatives Research counterparty risk index - recently surpassed the peak it reached the week of Lehman’s failure, though it has since eased off those highs.

Establishing central clearing won’t end all the questions about the derivatives markets, and the fear that another big financial company will emerge as the new AIG may continue to lurk.

"People have been warning about the CDS market for years," said Simons.

But with the economy and the markets reeling, investors have bigger problems than the CDS market, Simons said.

He points instead to the deflation of an asset bubble that was created in part by easy monetary policy that started in earnest when Alan Greenspan took over the Fed. So no matter what policymakers do, Simon thinks it will take a long time to heal the economy.

"You can’t just bail out 25 years of policy mistakes," he said.  

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These Colorado attorneys have been named Colorado "Super Lawyers" for 2009 as announced by their firms.

Super Lawyers are selected annually by the legal journal Law & Politics based on 12 indicators of peer recognition and professional achievement. They represent the top 5 percent of attorneys in each state. The selections are drawn from peer nominations and evaluations and third-party research.

"Rising Stars" are outstanding young and new attorneys.

Practice areas given below are as provided by the attorney’s firm. Submit Super Lawyers lists by e-mail to denvernews@bizjournals.com .

Click here for the Super Lawyers home page .

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Otten Johnson Robinson Neff + Ragonetti PC

• Douglas J. Becker (tax)
• William R. Neff (business corporate/tax)
• Thomas J. Ragonetti (land use/zoning, real estate, government/cities)
• Frank L. Robinson (real estate, business/corporate)
• Brad W. Schacht (business litigation, bankruptcy & creditor/debtor rights)
• John D payday loans in one hour. Sternberg (real estate)
• Darrell G. Waas (business litigation, bankruptcy & creditor/debtor rights, construction litigation)
• Michael Westover (real estate)
• Rising Star: Amy Hansen (real estate)

Fairfield and Woods PC

• Caroline C. Fuller (commercial bankruptcy, receivership, out-of-court debt restructuring)
• John A. Eckstein (corporate finance, securities)
• Robert L. Loeb Jr. (corporate attorney)
• Craig D. Joyce (litigation)
• Charles F. Brega (litigation)
• Thomas P. Kearns (real estate)
• Charlton H. Carpenter (real estate)
• J. Chris Kinsman (mixed-use development)
• Rising stars: Frank C. Debick, Rehan K. Hasan

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The Obama administration sought to ease Chinese Premier Wen Jiabao’s concern about the security of his country’s investments in U.S. government debt, reiterating pledges to cut the budget deficit in half in four years.

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said today.

Wen earlier said that China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” he said at a press briefing in Beijing.

President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of U.S. debt sales to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. Investors abroad own almost half of all U.S. debt outstanding, and China last year overtook Japan as the biggest foreign buyer.

Wen’s words contributed to a decline in Treasuries, before the losses were recouped. Yields on benchmark 10-year notes rose as high as 2.96 percent, from 2.85 percent late yesterday, and were at 2.89 percent at 4:14 p.m. in New York.

White House National Economic Council Director Lawrence Summers, asked today about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline payday advance.

Japan, China

China held $696 billion in U.S. Treasury debt as of Dec. 31, more than Japan’s holdings of $578 billion. Foreign holdings of U.S. Treasury debt at the end of last year totaled $3.1 trillion.

The Treasury also offered a response that sought to reassure investors.

“The U.S. Treasury market remains the deepest and most liquid market in the world,” Treasury spokeswoman Heather Wong said in an e-mailed statement. “President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long- term deficit in half over the next four years.”

During the first five months of fiscal 2009, which began Oct. 1, the U.S. budget deficit swelled to a record $764.5 billion for the period, compared with a $265 billion shortfall during the same period a year earlier. The shortfall this year already has exceeded the record $459 billion gap for all of 2008.

The administration is “tackling many long-ignored problems, ensuring that the U.S. will be in a stronger position than ever,” Wong said. “We are facing whatever challenges come up and will continue to do so.”

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More than half of Texas business leaders interviewed in a new survey say they are under pressure to cut costs.

Fifty-eight percent of respondents to a survey released Thursday by Waco-based Profiles International said they would have to cut costs this year, with the same number saying the survival of their business would depend on successfully implementing change. Profiles International is an employment evaluation and human resources management assessment tools firm.

But while leaders say change must happen, 28 percent are finding it difficult to manage internal restructuring or reorganization, and 39 percent are more aware of competition threatening their business, the survey shows.

“It’s evident the economy is forcing Texas companies to do more with less,” Bud Haney, co-founder and president of Profiles International, said in a statement. “Smart companies are employing strategies to reorganize existing resources quick payday loan.”

Of business leaders who responded, 65 percent said one of their biggest staffing challenges this year will be to improve the performance of existing employees. Fifty three percent said they plan some level of hiring freeze, but if they did hire, 66 percent said they would choose a seasoned worker over a new graduate.

Leaders also thought other companies’ layoffs could be good for their own company. Sixty percent responded that the current economy made it easier to recruit top talent, while 57 percent said it was easier to retain top executives.

The Profiles International Texas Business Challenges Survey was administered as an online survey in partnership with Sam Houston State University College of Business, and 285 business leaders responded between Dec. 1, 2008 and Jan. 31, 2009.

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Latin American investors in the unraveling financial empire of Texas billionaire Allen Stanford do not want their names published for fear they could be targeted by criminals, a lawyer said.

Dallas lawyer Stephen F. Malouf, whose firm is representing hundreds of Latin American clients who were Stanford investors, said lawyers were negotiating with the receiver overseeing the Stanford companies to keep the clients’ names from being publicly revealed.

Malouf said the clients “have concerns for their safety.”

In much of Latin America, public knowledge that a person is wealthy or has money for investment purposes can make that person or his family targets for kidnappers.

The office of the court-appointed receiver, Ralph Janvey, could not be immediately reached for comment and had not responded to an e-mail query.

Stanford, his two top aides and three of his companies are accused by U guaranteed payday loans.S. regulators of a massive securities fraud.

Clients of Bernard Madoff, accused of bilking investors out of $50 billion in a separate securities fraud case, were made public — a precedent that Malouf said his Latin American clients, which include many investors in Venezuela, did not want repeated.

The U.S. Securities and Exchange Commission last month accused Stanford of carrying out a “massive Ponzi scheme” over at least a decade and misappropriating at least $1.6 billion of investors’ money.

His crumbling financial and investment network stretched from Houston to the Caribbean and Latin America.

(Editing by John Wallace)

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Whole Foods Market Inc. says it has reached a settlement with the Federal Trade Commission over the commission's antitrust challenge to the upscale grocer's 2007 acquisition of Wild Oats Markets Inc.

Under the terms of the agreement, a third-party divestiture trustee has been appointed to market for sale:

• Leases and related assets for 19 nonoperating former Wild Oats stores, 10 of which were closed by Wild Oats prior to the merger and nine of which were closed by Whole Foods Market;

• Leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store; and

• Wild Oats trademarks and other intellectual property associated with the Wild Oats stores.

The trustee will have six months to market the assets to be sold and another six months beyond that for any good faith offers not finalized during the initial period. According to Whole Foods (Nasdaq: WFMI), the only other obligations on the company imposed by the settlement are in support of the divestiture process.

â€We are pleased to have reached a mutually satisfactory agreement with the FTC," said Whole Foods CEO John Mackey. Mackey added, "It will be business as usual in the 13 operating stores to be marketed for sale payday loans."

Whole Foods operates four stores in the Raleigh-Durham area. None of the 13 operating Whole Foods stores that will be up for sale under the FTC settlement is located in the Triangle.

In keeping with FTC protocol, the settlement agreement has been placed on public record for a 30-day comment period that ends April 6. After that the FTC will issue a final ruling.

As for how the settlement will affect Whole Foods' financial results, the company said it expects to record a noncash charge of up to $19 million related to the sale of the 13 operating stores. The combined stores had sales of about $31 million in the first quarter of fiscal year 2009, or about 1.3 percent of the company's stotal sales of $2.5 billion.

Whole Foods closed on its purchase of Boulder, Colo.-based Wild Oats in August 2007 after an FTC antitrust challenge to the deal was blocked by a U.S. District Court judge. Last year, an appeals court ruled that that judge had erred in blocking the challenge, which allowed the FTC to reopen the case. An administrative hearing on the antitrust case was scheduled for April 6, but the two sides agreed in January to halt litigation in an attempt to negotiate a resolution.

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It has been a bad week. It will get worse.

On Tuesday, U.S. Steel indefinitely laid off 1,500 Canadian workers from its plants in Hamilton and Nanticoke.

On Wednesday, Chrysler laid off 1,200 workers at its Windsor assembly plant.

Insurance giant American International Group Inc. announced the biggest corporate loss in U.S. history. In Europe, the continent’s largest bank, HSBC, revealed that its profits fell last year by a stunning 70 per cent.

Here at home, unemployment is on the rise, as are bankruptcies. North America’s Big Three auto companies are reeling. Even Alberta is hurting.

Abroad, the situation is even grimmer.

In the U.S., one in every eight American households is in mortgage arrears, an all-time record. The U.S. unemployment rate is now more than 8 per cent. Japan’s economy has contracted by more than 12 per cent, thanks to falling exports, while Eastern European countries like Ukraine face bankruptcy. In January, Bank of Canada governor Mark Carney predicted that Canada’s economy would start to bounce back by mid-year.

This week, he admitted he was overly optimistic. He now says recovery won’t start to take hold until 2010. If he’s correct, that means the slump will still be relatively short.

But is he correct? Or is he being a Pollyanna?

THE LIMITS OF FORECASTING

The short answer is: We don’t know.

Indeed, if this recession has done anything, it has revealed the limitations of economic forecasting.

Most forecasters, including those employed by Canada’s central bank, use sophisticated mathematical models. These models are elegant, robust and – in normal times – useful.

But in the end all suffer from the same limitation: They are based on past behaviour.

In effect, forecasters assume that the relationships among various parts of the economy will be pretty much the same year to year.

No world wars. No financial meltdowns.

Which is why major forecasters didn’t predict this recession.

Go back to March 2007. The consensus then among private sector forecasters polled by Canada’s finance department held that the economy would grow by a respectable 2.9 per cent in 2008.

A year later, the consensus growth forecast had been downgraded to 1.7 per cent. But there was still no suggestion from the experts that a recession might be in store.

In the end, as Statistics Canada announced this week, the economy grew by just 0.5 per cent last year. Now most forecasters agree that the recession no one predicted has already begun.

TWO CRISES IN ONE

What confounded economists was the global financial crisis that began last March with the near collapse of New York investment bank Bear Stearns.

Slumps in the so-called real economy of goods and services are relatively common. Firms produce more commodities than consumers are able or willing to buy; these firms then cut back production and lay off workers.

Minor slumps either solve themselves (eventually, consumers have to start buying again) or are solved by governments. Usually, a central-bank-inspired drop in interest rates is enough to get the economy moving.

Before last March, Canada was already headed for a run-of-the-mill slowdown in the real economy. But then Bear Stearns happened and matters became exponentially worse.

The reason is that the financial and real economies, while analytically separate, are impossible to disentangle.

Money insinuates itself into every productive action. We labour at our jobs in exchange for intrinsically valueless pieces of paper. We then trade these pieces of paper for useful items like food, Scotch whiskey and bicycle helmets.

By sticking some of our paper bits into savings accounts we permit banks to re-lend them many times over – to, in effect, create more money.

Sometimes the banks lend this money back to us so we can buy houses or cars.

This is the traditional financial economy. The modern version differs only in that it introduces new levels of abstraction, with investors purchasing securities backed by assets they have never seen and that they know nothing about.

In many ways, it is a gigantic pyramid scheme built on the assumption that no one will call anyone else’s bluff.

Last March, someone called Bear Stearns’ bluff and the entire system began to unravel.

It is this intertwining of financial and real crises that makes this slump so dangerous. When Prime Minister Stephen Harper compares the current situation to the Great Depression of the 1930s, that is what he means free instant credit report.

BIGGER IS WORSE

Which brings us to another crucial element of this downturn: its scope.

We have faced down financial whirlwinds before. In 1997, the economies of Asia were beset by a financial crisis that began in Thailand. A year later, the world faced another, this time centred in Russia.

A collapse in Tokyo real estate prices in the early ’90s crippled the country’s economy for a decade. But those slumps, bad as they were, remained localized. Europe and America continued to surge ahead, as did Canada

That, in turn, allowed the stricken economies to recover quickly – mainly by exporting to countries that were still faring well.

Today, the pain is near universal. Japan’s economy shrank by 12.7 per cent in the final three months of 2008. During the same period, the U.S. economy contracted by about 6 per cent, as did that of the European Union.

For a while, the world pinned its hopes on so-called emerging economies. But they, too, are struggling.

Brazil’s growth rate is expected to slow to less than 2 per cent, down from almost 7. India’s economy, which expanded by a stellar 9 per cent in 2007, is expected to register growth in the 3 to 5 per cent range this year.

China remains the wild card. But even its supercharged economy is slipping below the level of 8 per cent growth that the ruling Communist Party says is required to maintain social stability.

This, too, is reminiscent of the 1930s. Then too, not all nations suffered equally. Britain, for instance, did far better in the ’30s than either United States or Canada.

But what made the Great Depression great was its global scale. Most countries were slammed. None was strong enough to pull any of the others from slump.

WHAT WE KNOW

As the television commentators coyly say, there’s that D-word again. Is this a depression we’re in? Or is it something less?

Once again, we don’t know. But then, in 1929, no one knew that the financial panic set off by the New York stock market crash would last the entire decade.

We do, however, know a few things.

We know from the International Monetary Fund that the global economy is shrinking. This is real. Companies aren’t laying off workers because they fear their profits will fall; they are laying off workers because their profits are falling.

Similarly, consumers aren’t curtailing their purchases just because they’re frightened by what might happen. In many cases, they’re cutting back in order to rebuild savings that were wiped out by the stock-market collapse.

We also know that, while Canada’s version of the slump began last September, unemployment is just starting to rise significantly.

That’s standard. The recession of the 1980s, for instance, began in July 1981. But the unemployment rate didn’t reach its 13 per cent peak for another 18 months.

In the Great Depression, Canada’s jobless rate didn’t peak at 20 per cent until 1932, four years after the crisis began.

We also know from experience that downturns need not be labelled depressions to cause significant pain. The ’80s recession lasted just 18 months. But Canada’s jobless rate remained in the double digits for almost four years and didn’t return to pre-recessionary levels for another 13 years.

Most important, we know that – unlike the slump of the `80s – this one isn’t the result of deliberate government policy, and therefore can’t be as easily reversed.

The ’80s recession was induced by the U.S. Federal Reserve and the Bank of Canada acting in unison to push up interest rates in an effort to literally wring inflation out of the North American economy. When they reached their inflation targets (achieved by inducing firms to lay off thousands of workers which, in turn, squeezed wages and ultimately prices), they reversed course and allowed the economy to grow again.

As one financial economist told me in 1982, this is what made that downturn a recession rather than a depression: It was planned.

A depression, he said, is a recession that gets out of control.

By that criterion, this current slump might just qualify.

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