From Volume 37, Issue 2 of EIR Online, Published Jan. 15, 2010

U.S. Economic/Financial News

The Only Fix for State Budgets Is LaRouche's Recovery Plan

Jan. 3 (EIRNS)—A survey of state budgets by Associated Press makes clear that states will collapse, unless American economist Lyndon LaRouche's Recovery Plan is implemented immediately at the Federal level.

The Center on Budget and Policy Priorities forecasts that state budget shortfalls will reach $180 billion in the fiscal year from July 1, 2010, to June 30, 2011. In fact, in the current fiscal year, states have already closed a $146 billion budget shortfall, but 36 states still face an additional shortfall of $28.2 billion in the year that ends in June. This $174 billion shortfall for the current fiscal year was really far greater, because this year the states received $140 billion in Federal stimulus money, which they will not receive in the 2010-11 fiscal year.

The shortfall results from the full-scale economic collapse in the U.S. Without a recovery, tax revenues will continue to fall, and demands for services like Medicaid, food stamps, and unemployment benefits will increase.

The states have three choices: to commit suicide through brutal cuts, to increase taxes in an economic collapse, or to solve the crisis by organizing for the adoption of LaRouche's Recovery Plan.

Depression 'Bends the Cost Curve' on Health Care

Jan. 5 (EIRNS)—The latest national health-care expenditures report from the Center for Medicare and Medicaid Services (CMMS) published in the journal Health Affairs, shows that health-care spending in the U.S. in 2008 rose at its slowest pace in nearly 50 years. This is hardly a sign of good times, however. The report notes in numerous places that the slowdown was fed by millions of people being dumped from insurance rolls as unemployment skyrocketed.

Thus, health-care spending by corporations grew at a mere 1.2% last year, while growth of spending by households was up by 4.4%. This number was a drop from the 6% growth rate in 2007, and, more significantly, was almost twice the rate of growth of personal income, which was up only 2.7% for the year. Expenditures for "out of pocket" costs and co-pays, for example, were up only 2.7%, less than half the 6% increase in 2007.

Spending on drugs also showed a decrease in rate of growth, being up only 3.2% per capita—i.e., people are increasingly unable to buy their meds. The report suggested fewer new products, safety concerns, and an increasing number of patients that had "foregone some medical treatments," either by not filling prescriptions or splitting pills, offset the industry's efforts to increase prices, which rose 2.5% in 2008 compared to 1.4% in 2007.

Signal Attack on Obama's Foreclosures Mess

Jan. 3 (EIRNS)—The New York Times notably devoted its front-page lead story Jan. 2 to the charge that President Obama's disastrous, year-old "foreclosure mitigation" plan has not only failed, but is worsening the housing price collapse.

The article's new home-loss figures, from Moody's, are shocking. The sum of repossessions in foreclosure, plus abandonment of homes in lieu of foreclosure, plus loss of homes by "short sale," amounted to a total of 1.7 million American homes lost in 2008; 2 million in 2009; and a projected 2.4 million in 2010. This means 6.1 million, or one-eighth of all mortgaged homes in the country, 6,000 homes lost every day for three years.

Economists Mark Zandi of and Kevin Katari of Watershed Asset Management are quoted: "From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances.... Banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses on their books."

On the bank bailout flip-side of Obama's policy, economist Dean Baker catches on to what LaRouche PAC's "Tantamount To Treason" pamphlet laid out 18 months ago: Obama has expanded the size of the government bailout of Fannie Mae and Freddie Mac, from its original $400 billion limit, to no limit. "Now, it's very hard to understand how they [Fannie and Freddie] could incur losses of more than $400 billion," says Baker. "And this raises the question, what exactly are [nationalized] Fannie and Freddie doing? And what I suggest in that piece is that this might be a backdoor TARP. In effect, what Fannie and Freddie could be doing is buying the bad assets—that's what TARP was supposed to do—of banks, and paying too much money for them, in which case you will incur lots of losses. So this could be yet another big gift to the banks."

Meanwhile the Federal Reserve bought $1.111 trillion in such mortgage-backed securities (MBS) during 2009. Since Fannie and Freddie issued only about $250 billion in MBS in 2009, and this was 90% of all MBS issued, the Fed was overwhelmingly ($850 billion worth) buying MBS from banks, which had been on those banks' books since 2006-07, and buying this toxic crap at 100% of the banks' claimed value.

U.S. Public Pensions Facing $2 Trillion Shortfall

Jan. 5 (EIRNS)—A report on this disastrous shortfall, by Orin Kramer, chairman of the New Jersey Investment Council (a division of that state's Treasury Department), is given prominent notice on the front page of the Jan. 5 London Financial Times. Previous estimates of deficits were in the range of $400-500 billion, but they were based on actuarial estimates of values of assets. For the N.J. study, however, Kramer made his calculations based on mark-to-market values—i.e., recognizing that the toxic trash the funds are holding is worthless. The result: "State and local governments are correctly perceived to be in serious difficulty," Kramer said. The FT notes that "a shortfall of that size would force state governments to take politically unpalatable decisions such as pouring more public money into their funds or reducing pension benefits."

Kansas City Fed Prez: End Zero-Interest-Rate Policy

Jan. 7 (EIRNS)—"The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal-funds rate target from zero back to a more normal level, probably between 3.5% and 4.5%, and restore its balance sheet to pre-crisis size and configuration," Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said today in a speech at the Central Exchange there. Hoenig will be a voting member of the Federal Open Market Committee this year. "I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later," he said. Moreover, it would be a clear a mistake to wait to unwind policy until a U.S. economic recovery is clearly in full force, Hoenig said. This would be "short-sighted" and would risk creating conditions leading "to financial excess, economic volatility and even higher unemployment at some point in the future," he said.

All rights reserved © 2010 EIRNS