From Volume 5, Issue Number 12 of EIR Online, Published Mar. 21, 2006

U.S. Economic/Financial News

Seven Years After Deregulation, Electricity Rates Skyrocket in Maryland

Increases of in electricity rates up to 72% can be expected for this summer, according to the Maryland's Public Utilities Commission, various media reported March 16.

Back in 1999, Maryland lawmakers were sold a load of goods about deregulation bringing competition and lower rates. They bought it, and now, with election season upon them, they are scrambling to soften the blow to the electorate before the summer rate hikes give voters a yen for regime change.

Some of the ideas being discussed are: allowing cities and counties to buy power in bulk; demanding the return of $500 million that BG&E customers have paid over six years to "share the burden" of the power company taking on ownership of old coal and nuclear power plants; and the most radical idea—reregulate electricity. The lawmakers do have some leverage over BG&E's parent company, Constellation Energy, which is awaiting approval of a merger with a Florida company. The merger approval could hinge on cutting a deal over rates.

Deregulation of Utilities Now Hitting Home

Two articles appearing on March 15, one in the New York Times, the other in the Baltimore Sun, document how the deregulation of utilities was designed to jack up electricity rates to consumers, cut tax revenues to government, and help line the pockets of the company executives. The monopoly status formerly enjoyed by utilities forced them to charge rates set by state regulators—from buying fuel, to building new power plants, to a virtually guaranteed profit and paying the taxes on the profit. Deregulation allowed companies that own other businesses to acquire utilities. When those other businesses lose money or create artificial losses through tax planning, those losses can be used to offset income earned by the utilities. What is interesting is that it is a scam, but not considered illegal in 26 states.

The classic example of this scam was Enron. Beginning 1997, Enron had collected nearly $900 million from customers of Portland General Electric, which it had acquired to cover income taxes. Enron never paid taxes on their income, because it was sent to the Cayman Islands, where it had created 881 subsidiaries om Bermuda and other tax havens, tax shelters that on paper generated losses for the parent company!

A similar scam has helped to skyrocket the electricity bills in the state of Maryland. When the well-regulated Baltimore Gas and Electricity (BG&E) handed over their utilities on July 1, 2001, to the deregulated Constellation Energy, BG&E customers got nothing in return (see previous item).

Auto Crisis Deepens Under Threats of Strikes and Speculation

General Motors and its machine-tool capacity is now caught between two competing, wildly speculative bidders for its GMAC unit, which may well cause GM to abandon the attempted sale entirely. A group led by Michael Milken's old buddies, the leveraged buy-out, private-equity firm Kohlberg Kravits Roberts, on March 14 submitted a "non-binding bid" for GMAC, as an "alternative" to Cerberus hedge fund's speculative carnival. It has emerged that Cerberus is trying to "parcel out" its purchase among at least two Japanese banks, other Asian credit firms, with those banks in turn farming out their pieces through syndications or other deals with other Japanese regional banks, etc. So GMAC would wind up in a hundred unknown pieces, with a million derivatives contracts. The fate of GMAC, according to the Wall Street Journal March 15, could have "significant impact" on global bond and derivatives-trading markets, where GMAC plays an out-sized role. The mere news of this "coupon-clipping" debacle is worsening GM's bond prices and credit rating, pushing it closer to the edge.

Lyndon LaRouche made a simple and forceful observation on this destructive and wild speculators' Mardi Gras around the GMAC sale. "We need to panic and bankrupt those speculators," LaRouche said. "If the Congressional leaders had balls, like I do, they would say, 'We're taking these auto companies under Congressional protection, and we're going to reorganize them. Not bankrupt them—they're not bankrupt—but reorganize their mission, provide credit and protection for it.' As soon as Congress said that," LaRouche concluded, "there would be a small market panic, and the speculators would take a big collective bath. Then we could apply the 'Enron rule' to Cerberus and their ilk—i.e., prosecute 'em."

Meanwhile, nearly all Delphi "Packard Division" locals, electronics workers represented by the IUE, have now voted overwhelmingly to authorize a strike; UAW leader Ron Gettelfinger said on March 14 that his talks with GM and Delphi were nowhere near any agreement, with Delphi CEO Miller's "D-Day" for dumping union contracts just two weeks away. All Delphi local leaders met in Michigan March 15 to assess prospects.

Delphi Retrenches, Creating Further Contraction in Auto Sector

Delphi Corp., the world's second-largest auto-parts supplier, is itself dependent on a very large network of suppliers. In a cost-cutting, "streamlining" move, Delphi announced the first week in March, that it will slash the number of supplier companies from which it buys from 3,600 down to a "core group" of 750 companies, a reduction of five-sixths. The 2,850 Delphi supplier companies being eliminated, will continue to produce for Delphi under current contracts, but will not be allowed to bid on new business. These 2,850 supplier companies employ between five and 100 workers, or more, each. The March 13 Automotive News reported that, "there will be more losers than winners. As contracts with Delphi expire over the next two years or so, many suppliers will end up in deep financial trouble. Concludes [Delphi purchasing chief Dave] Nelson, 'There's going to be significant fall-out—it's real clear.'"

At the same time, many among these "non-core" 2,850 suppliers, will be paid next to nothing on obligations that Delphi has for goods shipped to Delphi. When Delphi filed Chapter 11 bankruptcy last Oct. 8, it owed all its suppliers about $1 billion. Under bankruptcy rules, Delphi does not have to pay those claims while it reorganizes. Companies that emerge from bankruptcy typically pay only pennies on the dollar for such obligations. This likely would set off a multiplier effect of plant closings.

De-Leveraging of U.S. Housing Bubble Will Cause 'Terrible Shock'

In an article in the March 12 issue of The Nation, entitled, "Leaking Bubble," Doug Henwood writes: "The past several years have seen the most extraordinary boom in the U.S. housing market in history, rivaling the dot-com stock market madness of the late 1990s. In the third quarter of 2005, the average new house sold in the United States cost 4.9 times the average household's yearly income, up from 3.9 times in the late 1990s.... Turnover of new and existing houses in the third quarter of last year was more than 16% of GDP, way above its long-term average of 9 to 10%, and easily beating the levels reached in the housing frenzies of the 1970s and '80s."

Families are buying homes on outrageously risky terms: In 2005, 43% of first-time home buyers "made no down payment at all." The housing bubble has metastasized into the entire U.S. economy, especially as homeowners borrow against the bubble-ized increase in the value of their homes. Henwood writes, "Americans have been using their houses as MasterCards, turning about $726 billion of their home equity into (borrowed) cash between 2001 and 2005. That's a big number, even by the standards of the U.S. economy; it's equal to almost 40% of the growth in personal spending." Moreover, he declared, "Wall Street economists estimate that 40 to 50% of the growth in GDP and employment over the last several years has been driven by the housing boom."

In 2000, when the financial system was threatened with the bursting of the dot-com stock-market boom, Alan Greenspan intentionally fed the housing bubble, by lowering U.S. interest rates to 1%, Henwood noted. However, today mortgage rates are rising; home sales are sagging: "So many households have taken on so much mortgage debt that if prices merely stop rising, they're going to find themselves under water.... The broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock."

In response to the foregoing picture, Lyndon LaRouche stated, "This indicates that the Senate and House have no time to waste on adopting the measures I've proposed. There are those who propose that we wait until after the election to deal with these problems. That is irresponsible."

Treasury Official Moots Derivatives, Hedge-Fund Regulation

Jaws must have dropped during the keynote address at the annual conference of the Institute for International Bankers March 13. There, Treasury Undersecretary for Domestic Finance Randal Quarles, during an otherwise uninteresting speech which included such topics as "Reforming Fannie Mae," let drop, in his concluding section, that the Department was considering looking into whether the growth of certain "sophisticated and complicated financial instruments and vehicles, such as derivatives and hedge funds," might hold a risk for investors and markets, in general.

Quarles did not spell out any specific initiatives, but reiterated, in his best Greenspanese, that, Treasury will now be "focussed on ... understanding whether the growth of certain types of institutions or instruments have materially affected the efficiency with which markets intermediate risk," concluding that, "this is the lens through which we will filter various ideas."

Pace of Plant Closings Exceeds 'Birthrate' for New Factories

Due to globalization and deindustrialization, the rate of factory openings has been falling dramatically since 1998, and last year dropped lower than the pace of plant closings, heightening concerns about the health of our nation's rapidly disappearing manufacturing base, the Wall Street Journal reported March 15. The "birthrate" hit 2.4% in the first quarter of 2005, while closings are around 3.5%. Since 1997, the number of factories has dropped by 10%, to a mere 336,000. Investment in industrial structures, in particular, has plunged by more than 50% since 1998, to $18.7 billion—"just a shadow of what it used to be," observed Global Insight. New plants use cutting-edge technology, the Journal noted, meaning they are crucial to our nation's competitiveness.

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