CityEconomist Comment

3/20/08 Hillary Targets Credit Crisis, Business Week. Sen. Hillary Clinton has been proposing new ways to help homeowners in foreclosure, more aggressively than McCain or Obama.

3/19/08 Orange County Loses $80 Million UK Investment, LA Times. Orange County, California appears to have lost all of an $80 million investment in a complex British fund that went bankrupt last month. The British judge overseeing Whistlejacket Capital Ltd.'s affairs will use what's left to pay off the earliest investors rather than sharing it among all investors, so payments won't get to Orange County, Treasurer Chriss Street said creditors are appealing, but the company has only $1.3 billion in cash and $6.5 billion in notes to pay off. Supervisor John Moorlach says the county is unlikely to be repaid. Orange County put $850 million into structured investment vehicles, 14 percent of its portfolio. Comment: Wouldn't the name "Whistlejacket" be enough of a red flag? Whistle as in whistle your money goodbye? Orange County's speculation in derivatives led it to bankruptcy in 1994. Mark Baldassare argues that California localities have been driven to look aggressively for high yields because of the passage in 1978 of Proposition 13, a constitutional amendment that rolled back property taxes and froze rates for existing homeowners, starving property-tax-dependent localities of funds to pay for services and pensions.

3/19/08 The Fed Is Too Easy on Wall Street, Business Week. "The Federal Reserve continues to bail out major financial institutions without imposing meaningful conditions to improve their conduct and performance," complains Peter Morici, professor at the Smith Business School at the University of Maryland. Here's a staggering figure to contemplate: New York City securities industry firms paid out a total of $137 billion in employee bonuses from 2002 to 2007, according to figures compiled by the NY State Office of the Comptroller. Comment: Laissez-faire in lush times and bailout in bad times is not a coherent government policy. The ending of the Glass-Steagall wall between banks and investment banks should have meant extending regulation to investment banks because it opened up again the potential for investment banks to bring down the commercial banks, as happened through the correspondent banking system in 1929-33.

3/15/08 Debt Reckoning: U.S. Receives Margin Call, WSJ. Long-festering U.S. problems like the nation's persistent current-account deficit are combining with the asset-valuation crisis to magnify the problem for Federal authorities. Comment: A clear summary of how America's triple storm of rising costs from dollar weakness, decline in housing prices and the credit crunch tightening like a noose around overextended financial entities, businesses and individuals.

3/14/08 Bernanke Calls for `Strong Oversight' of All Mortgage Lenders, Bloomberg. Fed Chairman Ben S. Bernanke said today that too many home loans have been ``neither responsible nor prudent'' and called for ``strong oversight'' of different types of mortgage lenders. In prepared remarks for a National Community Reinvestment Coalition conference in Washington, he said: ``the decline in home equity makes it more difficult for struggling homeowners to refinance and reduces the financial incentive of stressed borrowers to remain in their homes.'' Comment: This plan sounds a lot more likely to have an effect and become a reality than Bernanke’s March 4 exhortation to a bankers’ meeting in Orlando that lenders forgive portions of mortgages held by homeowners at risk of default. This practice is called a “short sale” because the sale price falls short of paying off the mortgage and the bank accepts an amount from the seller short of what is owed on the mortgage. The marketplace has been jammed with short sales without Bernanke’s urging, because they hasten the departure of problematic mortgages from a bank’s portfolio.

3/14/08 Inflation Continues High at 4 percent, 3.7 percent in NYC Area, BLS. Comment: The initial reports described the inflation rate as "unchanged" which is misleading. It might imply to some that there was no inflation. In fact the consumer price index (CPI) rose 4 percent from January 2006 to January 2007 nationally, which means that a federal funds target rate of less than 4 percent is generating negative real interest. The outlook is not comfortable, especially when the crude oil price per barrel has risen above $100 a barrel. The New York City area inflation rate has benefited from a decline in the price of gasoline - but how long will that last with crude oil prices going through the $100 threshold?

3/9/08 ‘Shift-and-Shaft’ Federalism, Peter Harkness, Congressional Quarterly Columnist. Twenty years ago, there was a sense of optimism in the states and localities that they could take on new responsibilities for solving national problems. Example: enactment of a national welfare policy overhaul in 1996 based on programs started in Wisconsin and Michigan. But today, the White House intergovernmental office is a purely political operation. Ray Scheppach, the executive director of the National Governors Association, says governors are frustrated with Washington. Don Borut, who runs the National League of Cities, calls the trend a move to “coercive federalism” or “shift-and-shaft federalism”. Comment: The difference between Washington and the states and localities is that Washington can print money, running huge budget deficits year after year. When the music stops, as it has recently, we see more clearly how federal deficits (1) weaken the dollar, (2) destabilize markets, (3) crowd out credit for private purposes and (4) make it harder for states and localities to finance their infrastructure needs. When Washington uses its dollars as incentives, it may be fair enough. But when Washington creates mandates without paying for them, it is unfair and painful.

3/5/08 Kenya: Danger of Rebound Back into Crisis, American Progress. Tribal, social and economic factors are intertwined as Kenya faces the realities of power-sharing. Comment: The rivalries are economic as well as tribal, but in the 45 years since independence Kenya's resources have drifted toward those in power. The resentment by those who have been excluded has been building.

3/3/08 NABE Survey Cites Credit Crisis as Top Economic Threat, Reuters. The combined totals of subprime mortgage defaults and heavy debt are again the top concerns of 259 business economists polled by the National Association for Business Economics (NABE). The poll was conducted in the first half of February and updated a poll in August 2007. More than half, 52 percent, of respondents, said that subprime mortgage defaults and heavy debt were their top concern.compared wth 32 percent in August. At the same time, the third-ranked concern was Inflation, listed by 10 percent or respondents, an incresae from 6 percent in August. Only 9 percent of members who responded said terrorism was now their top concern. Comment: A year ago, terrorism and the Middle East were listed by NABE respondents as their top economic concern (i.e., short-term economic threat). In August that was replaced by the combined threat of subprime loan defaults and excessive indebtedness. Only 20 percent of the the 258 members surveyed in August listed terrorism and the Middle East as their top concern in August, down from 35 percent in March 2007. Meanwhile, a combined total of 32 percent listed subprime and excessive debt - 18 percent listing the subprime debacle as their top concern and 14 percent citing “excessive household and/or corporate debt”. While inflation is listed by only 10 percent of respondents in February 2008, it is significant because the Fed is expected to continue lowering interest rates to maintain orderly markets and battle recession. Lower rates will exacerbate inflationsry pressures.

FEBRUARY 2008
2/29/08 Leveraged Losses: Lessons from the Mortgage Market Meltdown, Greenlaw et al. This new report on the implications of financial market turmoil for central banks confirms the view that current problems in financial markets are concentrated in institutions exposed to mortgage securities. Using several methods, the authors estimate the ultimate losses on these securities at about $400 billion, Comment: This estimate is in line with the $400 billion estimate of subprime losses by Mike Mayo of Deutsche Bank in mid-January and is within the $250-$500 billion range of a November 2007 Royal Bank of Scotland estimate. The UBS Europe estimate of $600 billion in losses is from all credit problems and is not restricted to the mortgage market. The Bank of America has estimated $700 billion of mortgages are "at risk of default", which is not the same as a prediction of required writedowns for financial institutions. 

2/29/08 UBS Global Banking Puts Credit-Crisis Losses at $600 Billion, MarketWatch. Total industry losses from the financial crisis should reach $600 billion, with $350 billion coming from listed banks and brokers, UBS strategist Geraud Charpin said in a note to clients. Comment: This is the largest estimate so far relating to the financial sector's losses. The Royal Bank of Scotland in November had an upper limit of $500 billion. The UBS estimate specifically includes insurance companies. Of the $600 billion, banks and brokers have written off $160 billion, i.e., slightly more than one-fourth of the total estimated damage. The estimated loss is substantially greater than the losses from the S&L crisis in the 1980s. 

2/28/08 Credit Cardholders Bill of Rights: "An Important First Step", Credit Slips. Adam Levitin has a post on behalf of the blog Credit Slips, which is maintained by a group of academics based at the University of Illinois (other universities represented are Georgetown, Harvard, Iowa, Michigan, Ohio) who are concerned about credit and bankruptcy issues. His post is in favor of the Credit Card Bill of Rights, although Levitin notes that the bill has some omissions - "it doesn’t deal with problems of price structure, rewards programs, antitrust, merchant fees, or identity theft prevention" - and "the card industry might well find other ways to extract rents from unwitting cardholders even if the ways enumerated in the bill are shut down." However, Credit Slips concludes that the bill is "an important first step to reining in an industry that has run wild in a regulatory no-man’s land of outdated and threadbare federal laws, preempted state laws, and somnolent consumer protection by federal banking regulators." Comment: A nice piece of writing as well as being an accessible primer on the ways that consumers have been hoodwinked on a grand scale by the ploys and practices of some credit card issuers.

2/28/08 Requiescat in Pace: Former NYC Mayoral Candidate William F. Buckley, Jr., The Guardian. Comment: This obituary is a respectful salute to a conservative who did for conservative American culture what Friedrich von Hayek and Milton Friedman did for libertarianism. Buckley offended Yale but defended Catholicism and formal English. His autobiography describes a prewar childhood and a year at a Catholic prep school (Beaumont) in England right before World War II broke out. Buckley confesses that he dreaded going to Beaumont but when he got there it actually was pleasant.

2/28/08 Bernanke Stokes Inflation Concerns, Bloomberg. Federal Reserve Chairman Ben S. Bernanke's readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand. ``Bernanke has really overweighted the economic risks relative to inflation,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, following the Fed chief's testimony to Congress yesterday. Investors' expectations for inflation over the next 10 years jumped to the highest since June after Bernanke pledged to the House Financial Services Committee to act in a ``timely manner'' to combat ``downside risks'' to growth. A day after wholesale costs were reported rising 7.4 percent in January from a year ago, Bernanke said the price outlook has deteriorated ``slightly.''

2/26/08 Credit Cardholders Bill of Rights. New York Representative Carolyn Maloney recently introduced H.R. 5244, the “Credit Cardholders’ Bill of Rights Act of 2008”. Maloney calls the bill "comprehensive credit card reform legislation" that does away with "abuses that unfairly hurt consumers". Click to Support the Credit Cardholders Bill of Rights.

2/25/08 Anti-War Groups Seek to Make Cost of War an Election Issue. Comment: See my post on this topic. here.

2/25/08 Financial Hypocrisy, Joseph E. Stiglitz. The United States is not following the discipline that it preached to the rest of the world through the IMF. As a result, we have a financial mess at home and abroad.

2/25/08 Use GOLD to Hedge Your Portfolio Against Recession. "Investors are worried about a recession; you should consider GOLD futures/options as a hedge. Talk to the futures experts at XX." Comment: Received an ad for this service in an email. This doesn't make sense. The reason for buying gold or gold shares is worry about inflation, not recession. Just happens we have to worry about both right now.

2/22/08 Rescues for Homeowners in Debt Weighed, NY Times. Not since the Depression has such a large share of Americans been underwater on their mortgages, i.e., owed more on the homes than they are worth - 8.8 million homeowners, or 10.3 percent. [I.e., 10.3 percent of homeowners have mortgages that are upside down - and the figure is three times as high for recently acquired mortgages]. This is more than double the percentage a year ago, estimates Moody’s Economy.com. Administration officials say they still oppose any taxpayer bailout. But Washington is being forced to explore new ideas, among them the idea of a federal mortgage guarantee for troubled borrowers.

2/21/08 Victimizing Borrowers, Knowledge at Wharton. Legislation to curtail predatory lending has been proposed. Three Wharton finance professors think that some state laws aimed at predatory lending probably help. The North Carolina Predatory Lending Law of 1999 is widely considered a model, they say. It applies to mortgages of $300,000 or less that carry a rate of 8 percent above a benchmark U.S. Treasury rate. It prohibits negative amortization, interest-rate increases after a borrower default, balloon payments and other features associated with predatory loans.

2/21/08 California Faces $16 Billion Budget Gap, LA Times. Comment: Will spending cuts be able to close the gap, or will t*x increases be required?

2/20/08 U.S. inflation 0.4 percent seasonally adjusted, month-over-month (see numbers at right on that BLS page - 0.5 percent not seasonally adjusted). The inflation rate is higher than expected. Good commentary at The Big Picture. Stagflation seems to be upon us. (NYC area inflation is below the national pace.)

2/19/08 Kenya Airways Suspends Flights to Paris, Reuters. Bookings from France dry up in response to Kenyan violence and official French displeasure. Comment: Condoleeza Rice indicated U.S. sanctions may follow if Kenyan leaders do not share power.

2/16/08 Out of Kenya's Violence, Rebirth, Christian Science Monitor. The issues at stake are beyond tribal warfare and get to economics. Comment: This is a thoughtful article by a Kenyan who teaches journalism at the University of Connecticut in Storrs, CT.

2/15/08 Comptroller-General David Walker to Leave, CQ. The head of the GAO, David Walker, will be leaving in March to head up a new foundation created by Peter Peterson of Blackstone. Comment: A good leader of GAO, Walker is well qualified to head up a foundation looking at pressing long-term U.S. policy issues, like the costs of Medicare and Social Security.

2/15/08 US Subprime Crisis Worst, Costs $7.7 Trillion, Says BofA, Agence France-Presse. The Bank of America concludes that the subprime credit issues have caused world-wide stock-market values to fall $7.7 trillion since October, in a report issued yesterday. The Bank says that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis and the collapse of hedge fund Long Term Capital Management (LTCM) in 1998. The decline in market cap is 14.7 percent, compared with a similar loss three months later of 13.2 percent after the LTCM crisis, 9.8 percent for Black Monday and 6.1 percent for the Brazil crisis. The losses were also greater than those suffered after the September 11, 2001, terror attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001 and the 1994 Mexican peso crisis.

2/15/08 Municipal Bond Meltdown. Michigan has suspended a state loan program for 8,500 students, and the Port Authority of New York and New Jersey is facing a four-fold jump in interest rates on a loan auction - when an auction fails, the interest rate jumps up to a much higher default rate. The muni bond crisis means that unless something happens cities and states that issue tax-exempt bonds to raise money for infrastructure or student loans could be on hold. Yesterday Gov. Spitzer and NY State's insurance regulator, Eric Dinallo, came to Capitol Hill to sound the alarm. Comment: Historically, General Obligation munis have paid off with an infinitesimal loss rate. Revenue bonds are more risky. It's too bad that MBIA, Ambac and Fitch departed from a good business model (insuring munis) to a bad one (insuring CDOs), which has created the crisis in the muni markets because no one wants to risk their principal and now the insurance can't be counted on. John Mauldin's letter of today has an excellent exposition of the issues.

2/14/08 Comptroller of the Currency Blocked State Efforts to Rein in Predatory Lenders, Gov. Eliot Spitzer Op-Ed, Washington Post. The Governor of NY argues that a politicized Comptroller of the Currency (who charters national banks) blocked state efforts to intervene in overly aggressive (predatory, high-cost, high-risk) lenders.

2/14/08 Chairman Bernanke Urges Congressional Speed. The Fed Chairman would like to shore up the regulatory oversight functions in the mortgage arena. Comment: The horse may be out of the barn, but a new lock will protect the next horse.

2/12/08 Treasury and HUD Expand Default Aid, AP. The Federal rate freeze program has been expanded to active assistance to mortgage holders more than 90 days overdue in their payments. Washington is working with a group of large lenders to intervene so as to prevent foreclosure.

2/7/08 Connecticut Gov. Re-Proposes Property Tax Cap, Hartford Courant. Noting that Connecticut has avoided the budget deficits plaguing 35 other states, Gov. M. Jodi Rell proposed an $18.5 billion spending plan that adds 525 full-time state employees. He called for imposing a property tax cap on cities and towns, a proposal similar to one lawmakers rejected last year.

2/07/08, Winning the Edwards Vote, Common Dreams, Ron Blackwell and Thomas Palley. “... Modernizing financial regulation is another needed measure. The housing bubble and sub-prime mortgage crisis show the financial system is broken. Today, the only instrument of control is the blunderbuss of Federal Reserve interest rate changes that inflict unemployment or inflation. New ideas exist and should be given space through a national financial markets reform commission that airs all views, and not just those of Wall Street.” (Ron Blackwell is Chief Economist of the AFL-CIO. Thomas Palley is former Chief Economist of the U.S.-China Economic and Security Commission.)

2/5/08 Dwindling Dow. Within 5 minutes of the opening bell, the Dow fell 150 points. By the end of the trading day, the Dow was down 370 points to 12,265. The decline has been blamed entirely on the ISM report (see next entry) which suggests that the United States is in a recession.

2/5/08 ISM Non-Manufacturing Business Activity Index Drops to 41.9, Lowest Since October 2001, Institute of Supply Management. The ISM index measures the service economy, which is 68 percent of GDP. This 41.9 reading is the first negative (below 50) number since 2003.

2/5/08 Democrats Push Green Growth, Los Angeles Times. Democrats in Congress are seeking to add tax breaks for alternative-energy investment to the stimulus package.

2/5/08 Florida Fails with Prop 13-Type Proposal but It Will Be Reintroduced, St. Petersburg Times. Backers of a 1.35 percent Florida property tax cap modeled after California's Proposition 13 fail to get enough signatures for the November ballot, but Republican state Sen. Mike Bennett says he will introduce the idea as a bill for the upcoming legislative session.

2/3/08 Jim Rogers Predicts One of Worst Recessions Since the Depression, Fortune. Like Jonah watching Nineveh from a safe distance, Rogers in Singapore predicts that stagflation is a probability for the United States. Comment: Stagflation is a scary scenario, very difficult for Washington to deal with – it is the opposite of the Goldilocks era of the 1990s, with low inflation and low unemployment. If higher oil prices push inflation above 3 percent – as seems likely – then interest rates below 3 percent yield negative real returns, reducing foreign appetites for U.S. debt and raising what Americans have to pay overseas lenders. There may be more 11 percent preferred stock deals for cash-starved financial institutions with White Knight sovereign wealth funds. The gap that the Fed has to steer between the Scylla of inflation and the Charybdis of unemployment narrows to nothing.

2/2/08 City of Springfield Made Whole on $13.9 Million Mortgage Derivative Investment, Springfield (Mass.) Republican. Merrill Lynch agreed that in this case the city of Springfield did not give "express permission" for investing in instruments linked to the subprime mortgage market. The investment had fallen in value to an estimated $1.2 million. Pension fund investment issues.

JANUARY 2008
1/31/08 Brazil Adds Compulsory Deposit Rule for Some Accounts, Bloomberg. Brazil's central bank raised deposit reserve requirements to tighten credit, removing about $23 billion from credit markets. Inflation is near the central bank's 4.5 percent target. The requirement goes after the fastest-growing lending sectors. Banks that receive cash deposits from lease underwriters will have to use a portion of the funds to buy government bonds. Those deposits were previously exempt from compulsory deposit rules. The requirement will begin at 5 percent of deposits in May and climb to 25 percent by January 2009. The outlook for inflation in Latin America's biggest economy has worsened recently. The bank targets an annual inflation rate of 4.5 percent, plus or minus 2 percentage points to accommodate price shocks. Consumer prices (the IPCA-15 index) rose 4.55 percent in the 12 months through mid-January. The central bank said the increase in reserve requirements gives equal treatment for leasing companies' interbank deposits and term deposits, which have a 23 percent reserve requirement. Comment: The Central Bank of Brazil is using a tool – varying reserve requirements - that has been in disuse in the United States. This tool may provide an avenue for something not discussed much yet – how do Senators Clinton and Obama propose to reform the regulation of the financial sector to prevent a recurrence of the subprime meltdown in some new sector (say, commercial real estate or alternative energy)?
1/31/08 Employment Cost Inflation 3.3 Percent, BLS. Employment costs rose 3.3 percent in December year-over-year for the second year in a row. Comment: For an employer, this is a major component of costs. Another sign that it will be hard to keep consumer price inflation below 3 percent.

1/30/08 Nader Warns Bloomberg Not to Run for President, HuffPost. Ralph Nader's advice for Michael Bloomberg: Don't screw up this election - that's my job. As allegedly told to humorist Andy Borowitz.

1/30/08 Fed Cuts Rate by Half-Point, NY Times Online, 4:15 pm. Fed statement: “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households." The statement referred to data showing the housing market continuing to worsen and the job market  “softening.” Comment: At the end of the day, all three major stock market indicators were down - i.e., the FOMC's reduction in the target fed funds rate was fully anticipated. The dollar weakened because lower interest rates in the United States make investments here marginally less attractive than investments in other countries that are paying a higher interest rate
1/30/08 Government Ethics Issues Persist, Washington Post, A13. A new survey concludes only 30 percent of federal workers and 14 percent of state and local government workers believe their agencies have good ethics and compliance programs. One-fifth or more of federal employees surveyed reported seeing each of the following: abusive behavior, safety violations, lying to employees and putting personal interests ahead of the agency’s. Of those who witnessed misconduct, 58 percent did not report it because they did not believe managers would take action, and 30 percent feared they would face retaliation. Only one percent used anonymous hotlines. Comment – The good news: The new survey compares well with one in 2000 in that reports of stealing, bribery, sexual harassment and discrimination have declined. Also, ethics programs seem to work - in government agencies with well-implemented ethics programs and a culture of compliance, reported lapses fell 60 percent and the reporting to management of such lapses  increased 40 percent.

1/23/08 The Nine Leading Candidates on What to Do about the U.S. Economy, NY Times. Clinton, Edwards, Obama and the six Republican candidates. A succinct survey as a starting point for comparing their policy initiatives.

1/22/08 Hillary Clinton's Economic Program, NY Times. Following the practice of the new Democratic Administration in 1993, candidate Hillary Clinton is proposing to raise income taxes for the two highest income-tax brackets to generate about $50 billion in new revenue. She intends if elected to look for ways to reduce or limit corporate executive compensation. 

1/21/08 Signs in Kenya that Killings Were Planned, NY Times. Ethnic violence was on the agenda depending on the outcome of the election.

1/14/08 Clinton, Obama Step Back from Race Flap, AP. Obama: "We share the same goals. We're all Democrats, we all believe in civil rights, we all believe in equal rights." Clinton responded that it is time to seek common ground, "and in that spirit, let's come together, because I want more than anything else to ensure that our family stays together on the front lines of the struggle to expand rights for all Americans."

1/13/08 Daley Confronting $10 Billion Pension Underfunding,Chicago Tribune. If the four pension funds don't build up their revenues and assets, Chicago taxpayers will have to pay in to meet liabilities to former city employees.

1/11/08 Agencies Withdraw Funds from Orange County Treasurer, LA Times. Loss of confidence by four public agencies.

1/10/08 Kenya Loses Tourism, CNN video. Empty deck chairs by Kenya's seaside.

1/08/08 Specter of Economic Collapse in East Africa and Kenya Tourism Industry Braces for Cancellations, The East African. Tourists and business travelers cancel their trips to Kenya. The loss has been put at $1 billion and counting.

1/7/08 RGE Monitor reports on the American Economic Association meetings in New Orleans.

1/4/08 December Unemployment Rises to 5 Percent, BLS. The unemployment rate rose to 5.0 percent in December, while the nation added few (18,000) jobs. “Job growth in several service-providing industries, including professional and technical services, health care, and food services, was largely offset by job losses in construction and manufacturing.”

1/4/08, Obama's Plea for Unity Should Be Heard in Kenya, Huffington Post. Barack Obama's plea for national unity should be heard in Kenya, where long-simmering feuds are boiling over. The incumbent president installed himself imemdiately despite widespread reports of election irregularities.