From Volume 6, Issue 43 of EIR Online, Published Oct. 23, 2007

U.S. Economic/Financial News

Economic Crisis Continues To Unfold

Oct. 20 (EIRNS)—The National League of Cities has issued a "Fiscal Conditions 2007" report in which city financial officers around the country project a collective deficit of 3.1% in their budgets for Fiscal 2008. The budget hole is "a financial strain driven largely by the nation's real estate downturn." In fact, the survey's forecast of an 0.4% growth in inflation-adjusted revenue in 2008, which may be too optimistic if LaRouche's Homeowners and Bank Protection Act is not implemented immediately. Already:

* Cleveland's falling property tax base has reduced its ability to borrow by $10 million, and its building permit revenue by another half million;

* Milwaukee is cutting the manning of fire truck units;

* Chicago Mayor Richard Daley is calling for a 15% property tax hike and talking about selling off parking meter revenues to raise cash; and Cook County officials are preparing to raise sales, gasoline, and parking taxes. Even with all that, Chicago faces a budget deficit in running its metropolitan rail and bus services;

* Palm Beach, Fla. is laying off city employees;

* New York Mayor Michael Bloomberg announced he expects "a slowdown in economic activity [i.e., on Wall Street] and a slowdown in tax revenues";

* Half of the cities in the Midwest reported they were already less able to fund themselves in 2007 than in 2006, although nationally, most city finance officers were expecting the crunch to hit them only in 2008.

Treasury: Dumping of U.S. Investments Began in July

Oct. 17 (EIRNS)—The U.S. Treasury's Oct. 16 report of net investments into/out of U.S. securities in August (Treasury International Capital Statistics, or TICS), was a shock that opened another view of the financial crash underway. Since July, foreign investors, both private and "official" (central banks), have been dumping all dollar investments except for the short-term 30-,60-, and 180-day Treasury Bills, to which they fled for safety when the credit crisis hit. This, after years in which $100 billion/month inflows into U.S. investments from the rest of the world were typical. The reason is simple: The U.S. mortgage-based bubble was where the junk, subprime, high-interest action was for banks and funds worldwide, blowing that bubble to $20 trillion proportions until it collapsed—and everybody had to dump the toxic waste. An accelerating dollar crash and banking collapses are the threatened results.

Royal Bank of Scotland economist Alan Ruskin called the Oct. 16 report "a truly stunning TICS number, the likes of which I have never seen." The Treasury reported that there was a huge net outflow of $163 billion from U.S. securities in August. In July, there had been a fall to $58 billion net inflow—just enough to cover the trade deficit for that month—and that, entirely the result of a rush for the safety of T-bills as mortgage-backed securities, leveraged buyout loans, and other junk securities tanked. In August, U.S. securities being dumped across the board, overwhelmed even the continuing flight into T-bills, which was a net $33 billion. Net foreign private flows, overall were negative $141.9 billion, and net foreign official (central bank) flows were negative $21.1 billion.

Net purchase of long-term U.S. securities were minus $69.3 billion, and every category was dumped—Treasury bonds; bonds of Fannie Mae, Freddie Mac and other government-backed mortgage enterprises, stocks, corporate bonds, real estate trusts.

The shocking August report is not an "aberration" just because the credit crunch intensified in that month; nor is it a "new trend"; but rather a marker of collapse of the entire dollar-based international monetary system, unless it is replaced rapidly by actions of governments to put "firewalls" of protection around their real economies, and create new credit and monetary agreements for investments into productive projects.

Housing Starts Drop to 14-Year Low: 'No Bottom in Sight'

Oct. 17 (EIRNS)—Housing starts in September fell 10.2% to the lowest level since March 1993, the Commerce Department said. Permits for future building declined 7.3%, the biggest drop since January 1995.

GMAC's Residential Capital unit, the second-largest independent U.S. mortgage lender, said it will eliminate another 3,000 jobs, or 25% of its workforce.

The Mortgage Bankers Association (MBA) forecasts that the housing "slowdown" will last until the end of the third quarter of 2008, or even into 2009, if the credit markets don't return to normal functioning. Mortgage originations will fall 18% to the lowest levels since 2000, triggering job losses for at least 30,000 more home finance bankers, according to MBA's chief economist.

But at the same Boston national meeting of the MBA—which was reported to be much more sparsely attended than usual—officials of Freddie and Fannie and CEOs of JPMorgan Chase Global Mortgage and National City Mortgage said the housing market is nowhere near recovery or even stability. "It's going to be a long time before we see it bottom out," said David Lowman, chief executive of Chase's Global Mortgage unit. "There's too much inventory already in the marketplace." They also said no price recovery is likely until 2010.

Fannie Mae executive vice president Thomas Lund said this year's price decline will be 2%, next year's 4% at the median. (On average, the decline is much more than that—for example, DR Horton just reported that its new home sales were down 39% in their fourth quarter, through September, from a year earlier; but its gross income from these sales was down 48%, from $2.5 billion to $1.3 billion.) Paul Bibb, CEO of National City Mortgage, said the price drop "could be quite severe."

Patricia Cook, chief business officer of Freddie Mac, said 2.5 million subprime ARMs will reset at sharply higher rates by the end of 2008—that's 160,000 a month—saying this figure comes from the FDIC, whose chairman Sheila Baer just called on Congress to stop the resets across the board by legislation.

Housing-Related Carnage Continues

Oct. 18 (EIRNS)—The latest reported developments in the economy, stemming from the housing and mortgage crisis:

* The Wall Street Journal reports that Wall Street investment bank Morgan Stanley is laying off 300 bankers, traders, and analysts, mostly in its fixed-income (e.g., mortgage- and other asset-backed securities) business.

* reports that Bank of America, the nation's second-largest bank, reported a profit-decline of 32% in the third quarter due to trading losses, defaults, and writedowns. An investment analyst is quoted that, "The next couple of quarters will be messy for Bank of America. You are only seeing the beginning. The banks will be putting up a lot of money for reserves." BOA announced later in the day, that it will cut back its investment-banking, after having taken about $4 billion in trading losses in the quarter.

* The Washington Times reports that General Motors Acceptance Corporation (GMAC), the former GM finance division now run by Cerberus, is to cut 3,000 jobs in its Residential Capital unit, its mortgage arm.

* The Wall Street Journal reports that the SEC has opened an informal investigation of stock sales by Countrywide Financial's CEO. The mortgage-lender New Century Financial Corp., which filed for bankruptcy earlier this year, is also the subject of an SEC and DOJ investigation concerning accounting and stock sales by senior executives.

* The Financial Times reports that MGIC Investment, the largest U.S. mortgage-insurer, yesterday issued its first quarterly loss in 16 years, and said it would not be profitable in 2008. An analyst is quoted that everything is going wrong: "Delinquencies are up, severities are getting worse. California and Florida are getting weaker by the minute."

* reports that PMI Group, Inc., the second-largest U.S. mortgage-insurer, forecast a third-quarter loss, based on "the continued weak housing and mortgage markets and associated dislocation in the credit derivatives markets."

Electricity Shortages by 2009—Go Nuclear!

Oct. 17 (EIRNS)—Within two to three years, most of United States will fall below the industry-accepted level of reserve generating capacity for electricity, according to the latest report by the North American Electric Reliability Council (NERC). That means more frequent power brownouts and blackouts for most of the country.

Over the next decade, the U.S. and western Canada will require 135,000 megawatts of new generating capacity, NERC reports, even without significant industrial growth which could easily double or triple the requirement. The announcement underscores the need to start now on a crash program to build 6,000 nuclear power plants to meet world needs over the next 50 years. A 135,000 megawatt deficit in generating capacity translates into 135 new 1,000 MW nuclear reactors. Nuclear plants were licensed and built in as little as three years during the high point of Japan's nuclear construction program, but present capabilities are so limited that it will take longer now, especially in the United States. Despite the Bush Administration's pro-nuclear claims, the United States has not brought on line a single new nuclear plant since 1985, while many nations are experiencing a nuclear renaissance.

The only regions of the United States not on NERC's warning map are the southeastern TVA region, where one refurbished nuclear plant came on line last Spring, and another almost completed plant will be finished; and also, Florida. About two-thirds of the 32 new nuclear power plants presently planned are in the Southeast. Whether these ever materialize remains to be seen. NERC, which has sounded an increasingly sharp alarm for ten years about the dangers to the grid of deregulation, also warns that the aging workforce means that 40% of senior electric engineers and supervisors will be eligible to retire in 2009.

All rights reserved © 2007 EIRNS