Crisis Ahead?

Careening Towards A Crisis
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By Michael J. Panzner | 6 August 2008

It's been debated many times: Who is responsible for the mess our nation's finances are in— Democrats or Republicans? The reality, of course, is that both sides share the blame. No matter how hard they try, partisans can't deny that politicians on the left and the right have had plenty of opportunity to change things. But they haven't[[— or, if they have, it was definitely for the worse— to further ease the burdens on society's 'fat cats'...: normxxx]] Instead, with few exceptions, it seems like virtually anyone who gets elected to office— often on a platform based on change, ironically enough— ends up falling into line with the bad habits of a system that has long been broken. And now, with the financial system and the economy under increasing stress, America's financial condition is careening towards a crisis.

In "U.S. Spending Obligations Surge," The Christian Science Monitor's Gail Russell Chaddock details the latest.

Recent Bills— For Students, Gis, Housing Market— Add To Long-Term Budget Commitments. The Democratic-controlled Congress and the Bush administration have presided over a surge in new federal spending obligations that may be the most enduring legacy of the 110th Congress. From new entitlements such as a GI bill for military veterans to recent federal commitments to shore up a troubled housing market, Washington is taking on obligations with long-term consequences for taxpayers. At the same time, critics say, lawmakers aren't exercising the oversight needed to keep these commitments manageable. "In the last three or four months, the momentum has really built up for more spending," says Michael Franc, vice president of government relations for the Heritage Foundation, a conservative think tank in Washington. "Congress has moved a whole range of bills that take the problem up another notch." Here are some of the items. A new housing law, signed last week, commits the government to backing some $300 billion in troubled mortgages. A higher education bill adds $169 billion over the next five years. The GI bill that extends education benefits to veterans or their family members will cost $62 billion over 10 years. Congress boosted the statutory debt ceiling by $800 billion to $10.6 trillion. That's $4.8 trillion more than it was at the end of 2001. Moreover, last week the White House Office of Management and Budget (OMB) projected the US budget deficit for the next fiscal year to be $482 billion, the largest deficit in US history in nominal terms. [[Probably a lot closer to $800 billion, if you count all of those "off-budget" items, like the two foreign wars plus we are waging...: normxxx]] Relative to the size of the US economy, the deficit would make up 3.3 percent of the gross domestic product. OMB director Jim Nussle noted during the July 28 mid-session review that, in those terms, the projection is "well below the record deficit of all time, which was 6 percent of GDP back in 1983." "The important point to remember is that near-term deficits are both temporary and manageable if, and only if, we keep spending in check, the tax burden low, and the economy growing," Mr. Nussle said. "Excessive spending beyond the president's budget plan will make the problem worse." [[Ah, but in 1983, we were still largely self-supporting, and not living at the mercy of such benevolent democracies as China, e.g.: normxxx]] Congress has yet to approve even one of the must-pass annual spending bills for the fiscal year that begins Oct. 1. Democratic lawmakers blame the soaring deficit on the Bush tax cuts, especially for people with the highest incomes. "Mr. Bush came to office with the biggest surpluses in history and he will leave office with the biggest deficits in history. That's the bottom line," said Rep. John Spratt Jr. (D) of South Carolina, chair of the House Budget Committee, on July 28. One reason for the surge in red ink is the joint decision by Congress and the Bush administration in February to pass an economic package, including stimulus checks for most American families. If that plan had not been passed, the projected deficit for the current fiscal year would be $117 billion lower than the estimated $389 billion, Nussle said. Congress and Mr. Bush agreed that "getting the economy back on track was a higher priority than immediate deficit reduction," he added. But these record-high estimates don't capture some new programs Congress has approved recently, such as the housing bill, or a rollback of cuts in entitlement programs, such as last month's mandated cuts to doctors treating Medicare patients. Defying a presidential veto, Congress put off a 10.6 percent cut in payments to doctors in the Medicare program, which had been slated to take effect July 1. The cuts were intended to ensure that Medicare costs could be sustained in the long term. Before leaving for August break, Congress also passed a rewrite of the Higher Education Act that increases the maximum Pell grant for low-income students to $8,000 a year by 2014, up from $4,800, and extends the grants to part-time students. College costs have tripled in the past 20 years, and lawmakers said they wanted to help families catch up. Critics say the bill, at $169 billion over the next five years, is a budget buster that didn't get enough scrutiny in an election year. On Sept. 18, the House Financial Services Committee will open a hearing on whether government must do more to ensure that lenders have the capacity they need to make loans to students. The law also bans the US Department of Education from imposing mandates on colleges and universities, including testing to measure student progress, along the lines of the No Child Left Behind Act. It's hard to put a price tag on recent US support for the housing market. If the market recovers, the cost to taxpayers would be zero, according to a Congressional Budget Office estimate of the housing-rescue law. But if the market worsens, this new commitment could cost taxpayers at least $25 billion before the authority expires in December 2009. On July 14, the Bush administration authorized the Treasury to purchase obligations and securities of government-sponsored enterprises that deal with housing (Fannie Mae and Freddie Mac, and the federal home loan bank)— a potential commitment that's even tougher to estimate. "Congress didn't get into this by choice," says Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing, and Urban Affairs Committee. "The Bush administration failed in its oversight."

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[August 04, 2008] Economic blackmail?

It's long been said that the U.S. relies on the kindness of foreigners to fund its ever-growing current account deficit. By the same token, our dependence on overseas investors and lenders also makes us vulnerable to external pressures that could be at odds with domestic needs and goals. If you read between the lines of the following report by Bloomberg's Dawn Kopecki, "Fannie's Mudd Soothed Asian Investors as Bonds Rose," you get the distinct impression that the impetus behind the scramble to bail out the nation's largest mortgage lenders might have been a bit of economic blackmail by countries America is financially beholden to.

Fannie Mae Chief Executive Officer Daniel Mudd was just sitting down to a final glass of wine with his wife at their Washington home around 10 p.m. on Saturday July 12 when Treasury Secretary Henry Paulson called. Concerns about the financial health of the biggest U.S. mortgage finance company had driven Fannie Mae's borrowing costs to the highest since March the previous week and its shares had tumbled 45 percent on the New York Stock Exchange. Investors in Asia, the biggest foreign owners of Fannie Mae's $3 trillion of bonds, were asking the Treasury to bolster the government— sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks. Paulson told Mudd he had a plan to restore confidence in Fannie and Freddie, the core of the Bush administration's efforts to revive the U.S. housing market. "At that point, the proposal began to take form," Mudd, 49, said in an interview. "We're trying to solve a crisis of confidence. Would this do it?" The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week. Asian investors were among the most important groups to soothe because central banks, financial institutions and funds in the region own $800 billion of Fannie Mae and Freddie Mac's $5.2 trillion in debt, according to data compiled by the Treasury. U.S. officials were concerned that sales from the region would push lending rates higher, said the people, who declined to be named because the discussions were confidential. Stocks Plunge The extra yield investors demanded to own five-year notes of Washington-based Fannie rather than Treasuries rose to 101 basis points, or 1.01 percentage points, on July 9, from an average of 39 basis points over the previous five years. Borrowing costs climbed and the companies' shares collapsed after analysts at New York-based Lehman Brothers Holdings Inc. said in a July 7 report that proposed accounting changes might force Fannie Mae and McLean, Virginia-based Freddie Mac to raise a combined $75 billion in capital. Fannie tumbled 45 percent to $10.25 in New York Stock Exchange trading that week, while Freddie fell 47 percent to $7.75. A year ago both companies traded above $60. At the height of the panic, Mudd dispatched two lieutenants to Asia to meet with debt investors. He declined to say which countries were visited, or the names of the officials. `Extremely Worrisome' Freddie and Fannie rely on foreign institutions. Investors and central banks outside the U.S. own about $1.3 trillion of Fannie and Freddie's corporate and mortgage bonds, according to the Treasury. Chinese institutions are the biggest holders in Asia. European investors own $300 billion of the securities. "If they stop buying the agency debt, then yields would increase," Ajay Rajadhyaksha, the head of U.S. fixed-income strategy at Barclays Capital in New York, said in reference to Asia investors. "The costs would get passed to the consumers." The average rate on a 30-year mortgage jumped to 6.59 percent on July 18 from 6.22 percent on July 11 as demand for the companies' debt waned, he said. If Asia started selling Fannie and Freddie holdings, "that would be extremely worrisome," Rajadhyaksha said. Like when it announced the bailout of Bear Stearns Cos. by JPMorgan Chase & Co. on a Sunday in March, the Treasury rushed to pull together a statement on July 13 before markets opened in Tokyo. Seen the Movie Paulson, the 62-year-old former CEO of Goldman Sachs Group Inc., "knows the markets; he's seen parts of this movie before," Mudd said. The decision to allow Fannie and Freddie to borrow from the Fed's so-called discount window was meant to "send a message to the markets that it wasn't just a someday aspiration, but those confidence building measures are in place right now before Tokyo opens on Sunday night," he said. Freddie CEO Richard Syron, 64, declined to comment. Fannie was created as part of Franklin D. Roosevelt's New Deal in the 1930s, a time when the U.S. economy was struggling to emerge from the stock market crash, industrial production had tumbled 50 percent and the unemployment rate rose as high as 30 percent. Freddie started in 1970, when the economy was strained by the Vietnam War. Both have the implicit guarantee of the U.S. government, so they can borrow at lower rates than banks and make money by purchasing higher-yielding mortgages from home lenders, providing new capital for loans. The companies own or guarantee almost half the $12 trillion of residential mortgages outstanding. Primary Source Congress and the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, loosened restrictions on the companies this year, allowing them to buy more mortgages and temporarily purchase loans up to $729,500 in larger markets, compared with the previous limit of $417,000. The new legislation allows them to buy loans up to $625,000 in the 91 most-expensive markets. The companies have become the primary source of cash for the housing market as banks and brokers, battered by $480 billion of losses and writedowns from subprime-contaminated securities, reduce lending. Fannie and Freddie were responsible for more than 80 percent of the mortgage bonds created in the first quarter, OFHEO said. "The markets care as much about the government's comments about us, especially in this market," Fannie General Counsel Beth Wilkinson said in an interview. "If there's any kind of mixed message during a very volatile market it could be very detrimental to the GSEs and therefore the economy." Marines in Lebanon Mudd, the son of former CBS Evening News reporter Roger Mudd, has some experience with crisis management. While a first lieutenant in the Marines, he led the first platoon airlifted into Beirut on Oct. 24, 1983, one day after a truck bomb leveled a barracks that housed Marines dispatched as peacekeepers during Lebanon's civil war. He ran General Electric Capital Corp.'s Asian businesses during the region's slump in 1998. In 2004, four years after joining Fannie as chief operating officer, he took over for CEO Franklin Raines as the company tried to recover from an $11 billion accounting restatement and securities fraud charges. "You develop a pretty simple, straightforward set of priorities and marching orders," said Mudd, who'd canceled plans to spend summer weekends with his wife and four children at their rented vacation home in Nantucket. As the declines steepened, his wife flew home to support him, leaving the kids with her sister. Yields Narrow Yields on Fannie five-year debt narrowed to within 76 basis points of Treasuries. Fannie shares rose 1 cent today to $11.83 on the New York Stock Exchange, up from a 16-year low of $7.07 on July 15. Freddie declined 46 cents, or 5.8 percent, to $7.52, compared with its 16-year low of $5.26 the same day. "Given the circumstances, he's done a pretty good job," David Dreman, chairman of Dreman Value Management LLC in Jersey City, New Jersey, said of Mudd. Dreman's firm held 10.4 million of Fannie shares at the end of March. He said he added to those holdings last quarter, though is "holding tight" now. Fannie reports second-quarter results this month, and will likely announce a loss of 74 cents a share, or about $730 million, according to the average estimate of 11 analysts surveyed by Bloomberg. Freddie may report a loss of 60 cents, or about $388 million.

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[August 02, 2008] The Future is Now?

A number of books and films have explored the idea of living in a post-apocalyptic age. More often than not, the paradigm-changing event is a nuclear war, a plague, an alien invasion or some other relatively abrupt catastrophe. But that is not always the case. James Howard Kunstler's recent novel, for example, World Made By Hand, offers an absorbing account of a world that has largely been transformed by the fallout from long-running problems like global warming and peak oil, among other things.

In his book (and in his other writings), Mr. Kunstler writes about a future of "abandoned highways and empty houses." When I read the following article by the Wall Street Journal's Alex Roth, "After the Bubble, Ghost Towns Across America," I got the distinct impression that Kunstler's dystopia is closer than many might think.

Half-Built Subdivisions Are Lonesome Places; 'There's Just No Noise' Dennis Pflueger and his wife won a rent-free year in a nice new house in an expensive subdivision not far from the headquarters of Wal-Mart Stores Inc. As part of the prize, they then have the option to buy the four-bedroom home for $452,000. Mr. Pflueger, a telephone-cable installer who describes himself as an "old redneck," is in the middle of his free year. But the Pfluegers are a bit lonely. Just one other family lives in any of the 28 new or unfinished houses on Foxboro Court. Up the street, a sign announcing "Elegant Homes" sits on a lot choked with weeds. The block is as quiet as an old ghost town. Since real-estate tanked, many new planned communities across the country are half-empty, with for-sale signs outnumbering residents by a large margin. Some of the projects abandoned by bankrupt developers are in places that were hotbeds of new housing construction: Southern California, Atlanta, Las Vegas, Phoenix. As of July, the percentage of vacant housing stock available for sale or rent stood at 4.8% nationally, the highest figure in at least 33 years, according to Zelman & Associates, a real-estate research firm. Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon. Robert Waltenspiel lives with his wife and two daughters in a unfinished subdivision in Auburn Hills, Mich. Standing in front of his house, he can see more than 30 weed-choked lots where new houses were supposed to go. The developer halted construction more than two years ago. "As far as working on my yard and saying, 'Hey, neighbor, want a beer?,' that's not going to happen," says Mr. Waltenspiel, an account manager for Hewlett-Packard Co. The hot tub at the community center doesn't work. The communal fountains are dry. Mr. Waltenspiel's kids have no one in the subdivision to play with, so he has to take them to a nearby park for social interaction. His 4-year-old "will walk up to strange girls in the park and say, 'Hey, will you be my friend?' " he says. "A, it's adorable. B, it's sad." In the past year, roughly 15% to 20% of residential developers have gone out of business, suspended operations or changed their line of work, according to an estimate by the National Association of Home Builders. The people who bought into these subdivisions encounter all sorts of other unexpected problems, including burglars looking to steal toilets, appliances and copper wiring. And blight. Krista Anderson, an administrative assistant, lives in a subdivision outside Phoenix where the developer suddenly halted construction last fall, leaving behind not just unfinished houses but also scaffolding, piles of cement and construction material that "is turning yellow and looks bad." Many residents aren't sure exactly who is in charge of mowing the weeds, maintaining the street lights, cleaning up when someone uses open space as a dump. Some residents form especially tight bonds with neighbors 10 or 20 doors down the street. Others relish the peace and quiet. "With my art and my books, I don't need to go outside," says Miriam Ramirez, who lives with her husband, a retired doctor, in a stalled subdivision in suburban Atlanta. "But not everybody's like that." Her subdivision, Woodbridge Crossing in Smyrna, 15 miles from downtown Atlanta, was supposed to consist of several hundred garden-style houses. Instead, she lives on a street where most of the roughly 30 units have never been lived in. It's the only inhabited street. Paved roads surround acres of empty lots. At night, she says, Woodbridge Crossing can feel a bit like "a cemetery." One plus: She usually has the community swimming pool to herself. In overdeveloped Northwest Arkansas, real-estate officials estimate that property values have been steadily declining since 2007. Early in the decade, the region saw a population explosion as more than 1,000 people a month moved to Bentonville, Rogers and several nearby communities to work for Wal-Mart or one of its 1,250 locally based suppliers. Developers began building new houses at a frantic pace, carving up sprawling farmland into fancy developments with names like Stone Meadow and Kensington Hills. Then the housing market collapsed. Soon developers were defaulting on their loans and declaring bankruptcy. In May, federal regulators seized one Northwest Arkansas lender, ANB Financial, whose portfolio was overloaded with bad construction loans. Now, many of the region's new subdivisions, with houses that can't be rented, much less sold, are forlorn monuments to disastrous real-estate forecasting. A subdivision called Tuscany, five miles west of Bentonville, was envisioned as an enclave of luxury homes with landscaping meant to evoke an old-world Italian village. Developers installed an enormous hand-built stone wall surrounding several hundred acres of what had been cow pasture. So far, only five houses have been built, and just two sold. Carol Trees, who paid $570,000 for a 4,800-square-foot house six months ago, admits the solitude is a bit disconcerting. The good news is that her three children have the run of a pasture longer than several football fields. "We love it right now," says Mrs. Trees, a nurse practitioner. "We sit on our back porch and fantasize that we own all this land." Then there's Quail Ridge, the temporary home of Mr. Pflueger, his wife, Joyce, and their 11-year-old chihuahua, Peaches. Real Estate Company of Arkansas, a local outfit, had been so eager to sell units that it raffled off a year's free rent for one house. On a cold weekend afternoon last December, more than 1,000 people showed up at the subdivision in hopes of winning the prize. As a marketing effort, the event was a total bust. "We didn't sell one house," real-estate agent Michael McKinnon says. "We didn't get diddly." But for the Pfluegers, who won, the outcome appeared to be nothing short of divine intervention. Mr. Pflueger had been out of work for eight weeks. Unable to afford the rent for their $475-a-month apartment, the couple was planning to move into a trailer in their daughter's back yard. Suddenly they were moving into a new 3,400-square-foot house with an entertainment center, an outdoor hot tub, stainless-steel appliances and more than enough room to store the 61-year-old Mr. Pflueger's collection of guns and antique fishing reels. The last seven months have been an odd existence. Chickens wander by from a nearby farm, poking around in the brush. Not long ago, someone broke into one of the unoccupied houses around the corner. Now the Pfluegers say they pay close attention to passing traffic, but hardly anybody passes by. "There's just no noise," Mrs. Pflueger said. When their 12 months end, the Pfluegers will move on too— perhaps to that trailer on their daughter's property. Mr. Pflueger recently found a job but still can't afford to buy the house. "That's way out of my league," Mr. Pflueger says. Unless someone else moves in, only one family will be left in the 28 houses on Foxboro Court.

August 02, 2008 Moving the Retirement Goal Posts?

In my book and at Financial Armageddon, I have suggested that, at some point, authorities would have little choice but to raise the retirement age. In a post I published more than a year ago, "No Rest for the Weary," I wrote the following: Given that the U.S. faces similar demographic pressures [as a number of advanced economies in Europe and elsewhere] and is burdened with a social safety net veering towards eventual collapse, it won't be long before the idea of raising the retirement age, despite protests from organized labor and other groups, is firmly on the American political agenda.

Well, it didn't take very long. All of a sudden, such talk seems to be gaining a bit of traction. In "Actuaries Say Raise Retirement Age for Benefits" the Associated Press details the latest development.

Call it necessary to save Social Security as people live longer Want to keep Social Security from going bankrupt? Make future recipients wait longer for their first benefit check because they probably will live longer anyway, an influential group of actuaries says. The next president and a new Congress will come under increasing pressure to act to fix the Social Security system. Democratic presidential candidate Barack Obama rejects any increase in the retirement age while his GOP rival John McCain opposes tax increases as a possible fix. The American Academy of Actuaries, which advises policymakers on risk and financial security issues, wants any potential solution the White House and lawmakers might consider to include raising the retirement age from the current range of 65-to-67-years-old. The group provided The Associated Press with an advance look Thursday of its recommendations. Current benefits are supplied by payroll taxes from today’s workers, all of whom pay a 6.2 percent Social Security payroll tax on income up to $102,000. Their employers match it, for a total tax of 12.4 percent. The tax applies only to earned income, not to passive income such as dividends and interest. Benefits are projected to exceed the Social Security system’s tax revenues in about nine years. The program’s trustees have said the Social Security trust fund will be depleted by 2041 without changes. A major problem, the actuaries say, is that people are living longer. That means they are drawing more money from the program. When Social Security started in 1935, the average American’s life expectancy was just under 60 years, according to the Social Security Administration. By comparison, people now eligible for Social Security can expect to live on average a little past 76, the agency says, "meaning workers have more time for retirement and more time to collect Social Security." For many years, 65 has been the retirement age to receive full benefits. But under changes in 1983, only people born before Jan. 2, 1938, can collect full benefits at 65. Those born after that date face a gradually rising retirement age for full benefits until it reaches 67. Current estimates show that by 2040, 65-year-old men and women could live at least 18 more years after becoming eligible for full Social Security benefits. "You just can’t have people living longer and longer and longer, and have the program with a frozen normal retirement age of 67. It just doesn’t make sense," said Bruce Schobel, the chairman of an academy task force on retirement security principles. "Eventually people will have a larger and larger proportion of their lives spent in retirement until you reach the point where we just can’t afford it." The academy is not staking out a position on when people should retire and acknowledges that saving Social Security will take more than just raising the retirement age. "All that we’re suggesting is that some increase in the retirement age should be part of any package," Schobel said. Obama already has rejected such advice. "We will not raise the retirement age," Obama said in June at a campaign event in North Carolina. Obama has, however, called for a Social Security payroll tax on incomes above $250,000 a year, compared with the current $102,000 threshold. "Barack Obama is opposed to raising the retirement age. He believes we should strengthen Social Security while protecting the middle-class families that rely on it," said Jason Furman, Obama’s campaign economic policy director. "To that end, he would like to work with Congress on a plan to ensure that people making over $250,000 pay a little more to strengthen this vital program for generations to come." McCain originally said everything was on the table to fix Social Security. He recently has amended that position, saying he would not increase payroll taxes. "I want to look you in the eye: I will not raise taxes or support a tax increase," he told supporters Wednesday. Former Texas Sen. Phil Gramm, who served as a McCain adviser until he resigned earlier this month, told The Washington Times this month that a bipartisan deal to save Social Security might include raising the retirement age to 70 over 30 years.

[July 31, 2008] Not So Benign After All

Although today's weaker-than-expected U.S. gross domestic product announcement raises the prospect that a U.S. recession actually began in 2007 (as many of us already knew), there are still some Pollyanas who believe that because certain other statistics are not so dire, the economy is not really in serious trouble.

Yet if you peek below the surface a bit, as the following article, "A Hidden Toll on Employment: Cut to Part Time," by the New York Times' Peter S. Goodman does, you discover that some of the data that is apparently benign is anything but.

The number of Americans who have seen their full-time jobs chopped to part time because of weak business has swelled to more than 3.7 million— the largest figure since the government began tracking such data more than half a century ago. The loss of pay has become a primary source of pain for millions of American families, reinforcing the downturn gripping the economy. Paychecks are shrinking just as home prices plunge and gas prices soar, furthering the austerity across the nation. "I either stop eating, or stop using anything I can," said Marvin L. Zinn, a clerk at a Walgreens drugstore in St. Joseph, Mich., who has seen his take-home pay drop to about $550 every two weeks from about $650, as his weekly hours have dropped to 37.5 from 44 in recent months. Mr. Zinn has run up nearly $2,000 in credit card debt to buy food. He has put off dental work. He no longer attends church, he said, "because I can’t afford to drive." On the surface, the job market is weak but hardly desperate. Layoffs remain less frequent than in many economic downturns, and the unemployment rate is a relatively modest 5.5 percent. But that figure masks the strains of those who are losing hours or working part time because they cannot find full-time work— a stealth force that is eroding American spending power. All told, people the government classifies as working part time involuntarily— predominantly those who have lost hours or cannot find full-time work— swelled to 5.3 million last month, a jump of greater than 1 million over the last year. These workers now amount to 3.7 percent of all those employed, up from 3 percent a year ago, and the highest level since 1995. "This increase is startling," said Steve Hipple, an economist at the Labor Department. The loss of hours has been affecting men in particular— and Hispanic men more so. Among those who were forced into part-time work from the spring of 2007 to the spring of 2008, 73 percent were men and 35 percent were Hispanic. Some 28 percent of the jobs affected were in construction, 14 percent in retail and 13 percent in professional and business services, according an analysis by Mr. Hipple. "The unemployment rate is giving you a misleading impression of some of the adjustments that are taking place," said John E. Silvia, chief economist of Wachovia in Charlotte. "Hours cut is a big deal. People still have a job, but they are losing substantial income." Many experts see the swift cutback in hours as a precursor of a more painful chapter to come: broader layoffs. Some struggling companies are holding on to workers and cutting shifts while hoping to ride out hard times. If business does not improve, more extreme measures could follow. "The change in working hours is the canary in the coal mine," said Susan J. Lambert of the University of Chicago, a professor of social service administration and an expert in low-wage employment. "First you see hours get short, and eventually more people will get laid off." For the last decade, Ron Temple has loaded and unloaded bags for United Airlines in Denver, earning more than $20 an hour, plus generous health and flight benefits. On July 6, as management grappled with the rising cost of fuel, Mr. Temple and 150 other people in Denver were offered an unpalatable set of options: they could transfer to another city, go on furlough without pay and hope to be rehired, or stay on at reduced hours. Mr. Temple and his wife say they cannot envision living outside Colorado, and they probably could not sell their house. Similar homes are now selling for about $180,000, while they owe the bank $203,000. So Mr. Temple took the third option. He reluctantly traded in his old shift— 3 p.m. to midnight— for a shorter stint from 5:30 p.m. to 10 p.m. He gave up benefits like paid lunches and overtime. His take-home pay shrunk to $570 every two weeks from about $1,350, he said. Mr. Temple’s wife, Ali, works as an aide at a cancer clinic, bringing home nearly $1,000 every two weeks, he said. But collectively, they earn less than half of what they did. Suddenly, they are having trouble making their $1,753 monthly mortgage payment, he said. They are relying on credit cards to pay the bills, running up balances of $2,700 so far. Gone are their dinners at the Outback Steakhouse. Mr. Temple recently bought cheap, generic groceries from a church that sells them to people in need. "That’s the first time in my life I’ve had to do that," he said. "We are cutting back in every way." Mr. Temple has been searching for another job, applying for a cashier’s position at Safeway and a clerk’s job at Home Depot, among others. But the market is lean. "I’ve applied more than 20 times, and I haven’t had a single call back," he said. His search is constrained by the high price of gas. "I can’t afford to go drive my truck around and look for a job," he said. So Mr. Temple has done his search online— until he fell behind on the bills, and the local telephone company cut off Internet service. On a recent day, he bicycled to a Starbucks coffee shop with his laptop for the free connection. The growing ranks of involuntary part-timers reflect the sophisticated fashion through which many American employers have come to manage their payrolls, say experts. In decades past, when business soured, companies tended to resort to mass layoffs, hiring people back when better times returned. But as high technology came to permeate American business, companies have grown reluctant to shed workers. Even the lowest-wage positions in retail, fast food, banking or manufacturing require computer skills and a grasp of a company’s systems. Several months of training may be needed to get a new employee up to speed. "Companies today would rather not go through the process of dumping someone and hiring them back," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. "Firms are going to short shifts rather than just laying people off." More part-time and fewer full-time workers also allows companies to save on health care costs. Only 16 percent of retail workers receive health insurance through their employer, while more than half of full-time workers are covered, according to an analysis by Ms. Lambert, the University of Chicago employment expert. The trend toward cutting hours in a downturn lessens the pain for workers in one regard: it moderates layoffs. Many companies now strive to keep payrolls large enough to allow them to easily adjust to swings in demand, adding working hours without having to hire when business grows. But that also sows vulnerability, heightening the possibility that hours are cut when the economy slows and demand for goods and services dries up. "There’s a lot of people at risk in the economy when they keep the headcount high and they only have so many hours to distribute," Ms. Lambert said. "It really is a trade-off for society." Goodyear Tire has in recent months idled work for a few days at a time at many of it factories, as the company adjusts to weakening demand. At one plant in Gadsden, Ala., workers expect they will soon lose a week’s wages to another slowdown— something Goodyear would neither confirm nor deny. "People are scared," said Dennis Battles, president of the local branch of the United Steelworkers union, which represents about 1,350 workers there. "The cost of gas, the cost of food and everything else is extremely high. It takes every penny you make. And once it starts, when’s it going to quit? What’s going to happen next month?"

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July 31, 2008 Wages, Income Distribution, Wealth and Poverty

The minimum wage in the world's richest country has just been raised by almost 12 percent. That followed a 13.6 percent hike last year and looks like major progress for those at the bottom of the economic ladder. At first sight, at least. Examined more closely, the figures highlight poverty and economic inequality of Third World proportions. The latest increase took effect last week and brought the minimum wage to $6.55 an hour. Adjusted for inflation, this is less than it was in 1964, the year President Lyndon Johnson declared "unconditional war on poverty in America."

Poverty won, as free-market champion Ronald Reagan put it a quarter of a century later.

Then, 13 percent of the U.S. population lived below the official poverty line. In 2006, the most recent year for which the U.S. Census Bureau has statistics, it stood at 12.3 percent, or 36.5 million people. On the other end of the scale, the U.S. economy produced billionaires at a steady pace.

There are 469 of them, by the latest count of Forbes magazine. In 1982, when the magazine started its annual list of the richest Americans, there were just 13 billionaires. Today, the United States has the largest gap between rich and poor of any Western industrialized country. In terms of equitable distribution of income and wealth, the U.S. is closer to Iran, Argentina or Mexico than to Canada or Germany. (That is according to the Gini index, a complex statistical measure of inequality named after Corrado Gini, the Italian economist who devised it in 1912.)

"There has been a massive shift of income from the bottom and middle to the top," says Holly Sklar, director of Business for Shared Prosperity, a network of business owners supporting higher minimum wages. "The richest 1 percent of Americans have increased their share of the nation's income to a higher level than any year since 1928, the eve of the Great Depression." Poverty and inequality are not usually subject of wide debate in the United States but this is an election year which might mark the beginning of a change. A poll this month by TIME magazine and the Rockefeller Foundation showed that 85 percent of Americans are unhappy with the economy and think their country is on the wrong track. TIME termed the percentage unprecedented.

The poll also showed a striking shift of sentiment towards the role of government in solving the country's problems. More than 80 percent favored public works projects to create jobs and 70 percent advocated government programs to help those struggling to survive in a sinking economy marked by falling home prices, foreclosures, and sharply higher prices for fuel and food.

Counter-Reformation?

TIME termed the results "a counterreformation of sorts in a Republican-led era that emphasizes deregulation and self-reliance." Are there parallels between the present and the mood that led to the New Deal social reforms of the 1930s? Some scholars say yes. In the words of Jacob Hacker, a political scientist at Yale University, "we have an economic order that is not well placed to deal with the challenges of the 21st century, just as back then there was a realization that the world had changed but the government hadn't."

No matter who wins on November 4, Democrat Barack Obama or Republican John McCain, it is difficult to see economic gains flowing as freely to the top 1 percent as they did in the eight years of President George W. Bush. Both candidates have announced plans to reform a health care system which has contributed greatly to the economic anxieties reflected by polls. There is a good reason why the Census Bureau's annual report is entitled "Income, Poverty and Health Coverage in the United States."

The number of Americans without health insurance has risen relentlessly since the beginning of the millennium and now stands at 47 million (out of a population of 301 million). More than 22 million hold full-time jobs and for many of them, falling ill can spell financial disaster and a slide from the edge of the middle class to the ranks of what is euphemistically known as "the working poor". That is the label for those working at or near the minimum wage— an estimated two million. Often they work two or three jobs and still can't make it. They include people who are forced to sleep in cars, trailers or shelters.

How miserably the system has failed is highlighted by the large crowds turning up for free weekend clinics run by an organization called Remote Area Medical Volunteer Corps. It was founded in 1985 to bring medical services to the Central Amazon Basin, an area ill-served even by Third World standards. The organization's founder, Stan Brock, calls the clinics "expeditions" to where the needs are greatest. Sixty percent of the expeditions now go not to the Amazon or other Latin American regions but to places in the United States. The most recent expedition, last weekend, was to Wise, in the southwest corner of Virginia.


[July 29, 2008] Time to Move

Yesterday, in "The WSJ on FDIC Insurance," I highlighted a Wall Street Journal article that provided a solid overview of the ins and outs of deposit insurance. But knowing that people are often loathe to take defensive measures until it's too late, I'm sure that some of those who've heard the warnings and who are aware of the system's shortcomings have not yet done what is necessary. Well, Edward Harrison over at Credit Writedowns blog had an interesting post, "Two IndyMac Customers Lost Unsecured Deposits," that will hopefully convince those who've been holding back to get off their behinds and do it— right now.

In further proof that we're back to the Great Depression again, everyone is talking about unsecured bank deposits. Basically, if you have less than $100K at an FDIC institution, you're good to go. If you have more, you'll need to spread the wealth at various institutions. However, what do you do if you're a business and you have payrolls to pay? This story gets to why that's a problem.

Fran Quittel, for instance, owns a small recruiting firm in Emeryville, Calif. She kept her business accounts at IndyMac Bank, including a checking account for receivables and for disbursing payroll, and a savings account. Thanks in part to the timing of the FDIC takeover— at that point, clients had deposited payments into her checking account but her payroll had not yet paid out, plus she was temporarily holding funds to pay into a 401(k)— Quittel lost thousands of dollars in uninsured deposits.

Meanwhile, Andrea Bruno, a San Francisco-based marketing manager for a software company, faces a very different problem. Unrelated to the bank's financial troubles, Bruno contacted IndyMac on Thursday, July 10— the day before the FDIC took over— to close out a Certificate of Deposit that was about to roll over into a new term. Not eager to accept the low interest rate offered on the new CD, she faxed the bank requesting to close the account and have payment mailed to her. Upon hearing of the bank's demise the next day, she figured her assets were safe, given the timing of her request. But on Monday, July 14, she checked her account online and found $14,500 had been shaved off the top. "To my horror there it was with half the amount over $100,000," Bruno said in a telephone interview. Her request had not been honored, and the bank had rolled the money into a new CD— minus half the amount that exceeded FDIC insurance. When she called the bank, customer representatives confirmed her fax was received before the bank failure, but no one seemed able or willing to help her recover her lost funds. The FDIC told her to call the Office of Thrift Supervision, the regulator in charge of handling the bank's customer complaints before the FDIC took over IndyMac. -Market Watch, 28 Jul 2008

No wonder people with unsecured deposits are quietly moving their money out of suspect financial institutions. The next thing you know, people will start stuffing their mattresses again.

[July 29, 2008] Harkening Back to Difficult Times

Market lore has it that when short skirts and revealing outfits are in vogue, economic conditions are poised to become somewhat exuberant. In contrast, when colors are dull and hemlines are falling, it can signal that people are cautious about the outlook. According to the following report from the New York Post's Rebecca Rosenberg, "A Touch of Crash: Depression-Era Chic," the latest fashion trend harkens back to one of the most difficult periods in our nation's past, suggesting that expectations remain, to put it mildly, somewhat downbeat.

The Duds Say It All— And It's Depressing. Taking a cue from the grim economy, this fall's fashions at Banana Republic, Gap and H&M are featuring a distinctly Depression-era trend of cloche hats, pencil skirts, conductor caps and baggy, vintage-style dresses. One of the most popular styles appears to hark back to the impish, newsboy getup of the 1930s: baggy trousers, caps, pinstriped vests, oxford lace-up shoes and utilitarian handbags. "We associate the newsboy look with urban poverty— street kids of the 1930s," said Daniel James Cole, a professor at the Fashion Institute of Technology. "Given that we're in an unstable economy and an uncertain political landscape, it's possible that a retro style has come back as a way to connect with our heritage." Fashion historian Heather Vaughan of the Western Region Costume Society of America said the new look may make economic sense, too. "Even though we're in a recession, people still want interesting clothing," she said. "They're looking for more classic styles and subdued tones that will last a few seasons instead of one." One newsboy-style outfit from The Gap drew mixed reviews from Wall Streeters last week. "It looks manly," said Philipp Sielfeld, 29, of Goldman Sachs. "It reminds me of the little guys selling the newspapers during the Great Depression." Adrien Vanderlinden, 41, loved the look-as-social-commentary. "It's totally appropriate given the pessimistic mood of the economy," the Upper West Side project manager said. "The vest references the three-piece Wall Street suit, the loose pants are like the dropped hemlines of the late '30s, and there's no bling." Al Thompson, 40, a senior employee at a recruiting company, hates the look— it covers far too much for his taste. He also predicts it won't last. "Everything in fashion and economics is cyclical," he said. "This fashion has returned just as we're hitting a point in our economy much like what we faced in the '30s." "Everything goes away and comes back."

[July 28, 2008] The WSJ on FDIC Insurance

I've recently been getting calls from family members and old friends who are worried about what is happening in the banking sector. They want to know what they can do to protect themselves against being blindsided by the unfolding crisis. More often than not, their bankers, brokers, lawyers and other so-called advisors tell them there is little to worry about, but these people are not dumb. They realize that such reassurances— coming from those who didn't see any of the current troubles coming— aren't worth very much.

Instead, they want insights from individuals who have clearly proved that they are ahead of the curve— like yours truly. Yet I wouldn't want to give the impression that I know it all. In fact, a lot of my knowledge comes from a variety of external resources, including the mainstream media. The following article, "A Deposit-Protection Primer," by the Wall Street Journal's Shelly Banjo, is a perfect example of the kinds of helpful information that can be found if people spent a little bit of time looking for it.

Bank Troubles Spur Jitters Among Customers It has been two weeks since IndyMac Bank was seized in the third-largest bank failure in U.S. history, and even much healthier banks still are getting calls from customers worried about the safety of their money. KeyCorp customers "are really trying to understand better what's insured...how you spread accounts," Henry L. Meyer III, the Cleveland-based bank's chief executive, told analysts and investors on a conference call. He made sure to note that "we are not seeing runs [or] walks" on the bank and that KeyCorp's deposits actually grew during the previous week. Still, banking regulators are girding themselves for more bank failures, though far fewer are likely than the 834 that went under from 1990 to 1992. Banks in general are suffering. The combined second-quarter net loss this year was $5.2 billion by the 10 largest U.S. banks and thrifts by deposits, holding about 40% of the nation's total. That compares with profit of $24.4 billion a year earlier. Meanwhile, the same financial giants increased their combined loan-loss provision to $32.5 billion in the latest quarter from $7.6 billion. Here are answers to commonly asked questions by worried bank customers: Question: What causes a bank to fail? Answer: Regulatory bodies decide to close a financial institution when its capital levels fall too low or it can't meet its obligations for the next day. Q: How do customers find out if their bank is at risk? A: One way to track that is via the free Safe & Sound bank-rating feature at Bankrate.com. Bauer Financial issues more detailed bank reports for $10 - $50 at http://www.bankstars.com. But these offer clues, not definitive government judgments. Consumers don't have access to the FDIC's "problem list" of banks. In the first quarter, there were 90 institutions on the list. "Only about 13% fail on any given year," FDIC spokesman Andrew Gray said. [[BUT, IndyMac was NOT on the "problem list!": normxxx]] Q: Are deposits safe? A: The Federal Deposit Insurance Corp. covers individual accounts up to $100,000 per depositor per bank or $250,000 for most retirement accounts (and that includes any accrued interest). Deposits held in the same bank, under additional categories of ownership, such as trusts, may be insured separately. The FDIC doesn't insure money invested in stocks, bonds, mutual funds, life-insurance policies, annuities or municipal securities. FDIC.gov , the FDIC's Web site, has more information, or call its consumer hotline at (877) 275-3342. Q: What about uninsured deposits? A: Amounts over $100,000 may be partially reimbursed after some time and trouble, with the money coming from sales of the failed bank's assets. In general, depositors eventually get 70% to 80% of their funds returned. In some cases, such as IndyMac's, depositors have access to 50% of their uninsured deposits right after the failure. Q: Brokered deposits? A: Deposits held through brokerages are FDIC-insured up to the same amount as funds deposited directly into the bank. But it could take considerably longer to get access to these funds when a bank fails. Bank records show the broker's name on deposits— not the customer's— so it is up to the broker to provide ownership information to the FDIC and then parcel the funds out to customers. Q: How do people find out that their bank is being closed? A: When banks close, which usually happens on a Friday, customers are alerted through the local media and an announcement in the bank window. Banks generally open for business as usual on Monday. Q: What happens to the failed bank's assets? A: Typically all or most assets are acquired by another institution. Customers can decide to stay with the new bank or move their money to other banks. Q: Do customers of the failed bank have access to their money during the transition? A: In most cases customers have access to their insured funds over the weekend and can use ATMs, debit cards and write checks. Sometimes when the bank isn't immediately taken over by another institution, customers can't tap their funds but will receive a check for their insured deposits as early as the Monday after the bank closed. Q: Do customers have access to business accounts for such things as paying employees? A: Payroll accounts are considered part of the business' deposits, insured up to $100,000 maximum per entity. Q: Can depositors move some or all of their funds to another bank? A: They have full access to all insured funds when the bank reopens Monday and can withdraw money. They can move the funds to another bank, but there is no need, the FDIC's Mr. Gray said. In most cases, for certificates of deposit that have not matured yet, customers can take out the money without facing penalties. Q: If customers keep funds in the new bank, will interest rates and terms of loans change? Should they keep making payments on loans? A: Initially, accounts earning interest will continue to do so at the same rates and terms, but after time the new institution may change them. The terms of mortgages, car or other loans are "contracts and won't change," Mr. Gray said. In addition, any electronic transactions and payments from reverse mortgages will continue.

[July 28, 2008] Deflationary Winds Beginning to Gather Strength

I've long argued that the initial phase of the coming unraveling will be accompanied by falling prices for goods of all kind. As economic conditions deteriorate, people (and businesses) will increasingly be looking to sell things to try and raise cash. That includes items they might still wish to enjoy if they could afford to keep them. It includes accumulated treasures (and junk) that might once have been left gathering dust in basements, garages and attics. Objects that might have been passed down to children and grandchildren will also be seen in a new light— what they are worth, right now, to somebody else.

An Associated Press report, "Mainers Selling Off Goods as Economy Tightens," suggests the deflationary winds are beginning to gather strength.

Mary Jane Newell and her husband have sold their boat, their lakeside camp and even her Harry Potter book collection. Now up for sell: Newell's offering her Elvis collectibles on craigslist. What's next? Maybe her Stephen King collection. "I don't think we've ever had it this tight since we had little kids running around, way back in the '60s," said Newell, of Oxford, who's retired along with her husband, Stanley. She's a former nurse; he's a former Bureau of Motor Vehicles office supervisor. The Newells expect their heating bill to triple this winter, and they're not alone in unloading items. Rising fuel prices, higher food costs and concerns about the economy are contributing to a sell-off of goods online, in pawn shops, in consignment shops and in yard sales. In Westbrook, Cathy Haley hoped to pass a diamond engagement ring on to the next generation. She has a secure job as an office manager, but a prolonged child-support dispute and the rising costs of raising her two daughters prompted her to offer the ring on craigslist. The $1,500 she hopes it will fetch will go toward heating oil. "I'm keeping my fingers crossed," she said. The number of customers coming in to sell items at Maine Gold and Silver has been growing since the beginning of the year, said John Colby, vice president and part owner of the South Portland-based business. People tell Colby they're selling items to pay down debt or to make ends meet. "We're hearing heating oil, and the heating oil season hasn't even started. The other day, we heard someone say food," Colby said. Meanwhile, Richard W. Oliver, an appraiser and auctioneer, said he's been receiving more requests for house calls to evaluate antiques and fine art. Oliver, who works out of Wells, believes attitudes about passing items to future generations are changing. The sellers aren't necessarily facing dire financial circumstances, but may want to maintain a certain style of living, he said. "Basically, I think they're rethinking things in the economy and saying, 'I could really use the money now. We need the money to take care of ourselves rather than leaving it to the children.' A lot of that has changed," Oliver said.

July 27, 2008 Lots More Downside for House Prices

Anyone who has been around the financial world for a while knows that when prices swing too far away from where they should be based on fundamentals, they eventually revert back towards equilibrium. However, they usually don't stop there. More often than not, prices end up overshooting in the opposite direction. In other words, a market that soars to euphoric highs— like, for example, U.S. residential real estate did during the first half of this decade— will, at some point, fall to desperation lows.

Given that, I think we can safely assume that the numbers cited in the following Reuters report, "U.S. House Prices Overvalued by up to 20 Percent: IMF Paper", should be seen as a minimum downside projection for home values from this point going forward.

The downward spiral of U.S. housing prices still has a way to go and homes were overvalued by between 8 percent to 20 percent in the first quarter of this year, according to research by an International Monetary Fund economist published on Friday. In his report "What goes up must come down? House price dynamics in the United States," IMF economist Vladimir Klyuev used several economic techniques to determine by how much U.S. home prices are overvalued. Klyuev drew from a government study of single-family home prices to conclude that values were "around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent." His research showed that home prices became considerably overvalued from 2001 and while the housing market has started to correct itself, there is still a long way to go. U.S. policy-makers are now trying to guide the housing market into a soft-landing after a five-year run-up in home values that ended in 2006. The report also said that it is likely home prices will swing well below their equilibrium level before they start to recover. Klyuev's research included data gathered by the U.S. Office of Federal Housing Enterprise Oversight which regulates mortgage-finance companies Fannie Mae and Freddie Mac and collects purchase price data. Klyuev analyzed the dynamics of home prices and found the inventory-to-sales ratio the most important driver of changes in property values in the short run. "Starts in foreclosures, which obviously add to inventory, seem to also exert additional downward pressure on prices," he added. According to the research the bloated inventory-to-sales ratio, high foreclosure rates, and inertia in housing markets imply that recent price declines are likely to continue. The research also considered whether the current fall in U.S. housing prices represented a nationwide bust. "While the national price level is falling on every measure, there is an opinion that this decline might reflect oversized drops in a few isolated markets rather than a countrywide phenomenon," it said.

  M O R E. . .

Normxxx    
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