U.S. Economic/Financial News
N.Y. Fed Boss Warns Against Systemic Threat from Fannie and Freddie
The president of the New York Federal Reserve Bank warned, in a speech March 25, of "very large systemic implications" of the derivatives exposure, and other "financial innovations," at home mortgage giants Fannie Mae and Freddie Mac. Timothy Geithner speaking to the New York Bankers Association, outlined the "Change and Challenges Facing the U.S. Financial System." Although the system "looks reasonably healthy," he said, when evaluated by many conventional measures, and it has "apparent resilience," yet "new challenges" have appeared.
"Among these challenges," he cautioned, "are those that relate to the complexity of financial and operational risk management, concentration in critical markets ... and trend-amplifying market dynamics in times of stress."
He cited the deriviatives market. "A relatively small number of dealers," for example, "account for a very large share of the over-the-counter derivatives business, with higher degrees of concentration in specific markets such as interest-rate options."
Geithner then warned about the housing market. "Two institutions dominate the government securities clearing business. The growth in the size of government-sponsored mortgage entities [Fannie Mae and Freddie Mac] creates a high degree of concentration in a market with very large systemic implications." "Concentration ... necessarily increases the vulnerability of the system to an operational or financial disruption in a single institution," he noted. "Moreover, to the extent that the same set of firms play dominant roles in multiple markets, this concentration can also give rise to linkages between markets ... that could potentially affect how the financial system functions in conditions of acute stress."
In fact, for institutions that hold large amounts of risk, he said, it is "hard to develop a comprehensive picture."
Moreover, such financial instruments "cannot fully insulate the financial system from the effects of large macro-economic shocks," he said. "And they will not by themselves preclude the possibility of failure in a major financial institution or a critical piece of market infrastructure."
His advice? "For these reasons, it is important that those of you who run financial institutions, build in a sufficient cushion against adversity."
As a further warning, he said the U.S. budget deficit represents a risk to the financial system, a risk magnified by the size of the current account deficit and "the unprecedented scale of financing requirements it reflects."
Former Treasury Secretary Fears 'Financial Terror'
Former Clinton Treasury Secretary Larry Summers cautioned that the U.S. financial system is increasingly jeopardized, as mounting debts make America dependent on Asiathrough the use of "financial terror"to fund its spending, Dow Jones reported March 23.
"There is surely something odd about the world's greatest power, being the world's greatest debtor," he said during a speech at the Institute for International Economics. "There is surely a question that must be asked when, in order to finance prevailing levels of consumption, prevailing levels of investment, it is necessary for the United States to be as dependent as it is" on capital flows from Asia and other countries.
Summers blasted the Bush Administration's argument that the record current-account deficit will shrink without destabilizing the U.S. economy. Such an assumption, Summers said, is possible; but, it's a "dangerous mistake" for U.S. policymakers to take it for granted. Summers implied that foreign central banks, which have been buying dollar-denominated assets, will instead dump themtriggering a dollar crash.
"It can be argued ... that the incentive for Japan or China to dump Treasury bills at a rapid rate is not very strong, given the consequences it could have for their own economies," he said. "But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability."
Cheney-Linked Energy Pirate Faces Criminal Indictment
The energy trading unit of the Houston-based Reliant Resources is likely to be indicted, along with several of its employees, on Federal criminal charges by the end of March, for manipulating wholesale prices during the California energy crisis in 2000-2001. The U.S. Attorney's office in the Northern Dristrict of California has a transcript from June of 2000, in which Reliant is discussing shutting down its plants in order to drive prices up.
A Reliant trader is recorded in a conversation with a power-plant operator on June 23, 2000, saying, "[We] started out Monday losing $3 million.... So, then we decided as a group that we were going to make it back up, so we turned like about almost every power plant off. It worked. Prices went back up. Made back about $4 million, actually more than that, $5 million."
Reliant is linked to Vice President Dick Cheney's Energy Task Force, which exonerated energy companies of manipulating prices. Cheney denied that energy traders rigged the deregulated electricity market, in a May 17, 2001 interview on PBS' "Frontline."
Meanwhile, an identical scam by Williams Cos., shutting down a power plant in Southern California for two weeks to inflate prices in June 2000, is documented in a recorded conversation between two of its employees.
Danish Daily Features Phony U.S. Recovery
The March 21 edition of the Danish newspaper Jyllandsposten ran a large article headlined "Recovery for Borrowed $," warning about the skyrocketing deficit of the U.S. debt and even mentions an upcoming "apocalypse." Economic growth has been financed through foreign investment and, what Klaus Justesen states as "the new drug," mortgage refinancing. The former head of the Council of Economic Advisors to President Bill Clinton, and now head of London School of Economics, Laura D'Andrea is quoted saying that if the so-called "recovery" had followed the pattern of previous recoveries, it should already have created 8 million jobs.
Professor Charles Schultze, former CEA head under Jimmy Carter, supports this statement and says that "We have had a large productivity rise, but only a small share of this has gone to the workers."
U.S. Welfare Rolls Dropped as Economy Sank
In a challenge to the economic "axiom" that lowest-wage and last-hired workers are the first to be laid off in an economic downturn, and would therefore presumably show up on the welfare rolls, those rolls have continued to fall during the 2000-2003 U.S. jobs collapse. "One of the great mysteries of social policy in the last few years," a Center for Law and Social Policy lawyer is quoted in the New York Times on March 22, "is why welfare caseloads have stayed essentially flat or declined in much of the country, despite the economic downturn." And despite the increases in homelessness, food-stamp use, demand for winter heating aid, and official poverty during the same years.
The number of families on welfare, which was 5 million in 1995, had fallen to 2.3 million by 2000 due to the Clinton-era "Welfare Reform" which forced heads of households to work. But that number declined further to 2.0 million by 2003, while the economy lost 3 million jobs. One reason is that applying for welfare has become so complex and difficult, that "there are a smaller and smaller number of people poor enough to qualify, even if unemployed. But another reason is labor-recycling to drive down wages, as LaRouche warned against as far back as the 1970s. "Former welfare recipients were entrenched in the workforce" when the mass job loss began in 2000, a senior official at the Illinois Human Services Department is quotedi.e., in this job collapse, they kept their jobs because they were last-hired and lowest-paid, especially in health care. In New York State, welfare rolls have fallen by another 45% since January 2001.
Michigan Governor Offers Band-Aid for Hemorrhaging Jobs
In the face of hundreds of thousands of jobs lost in her state, Michigan Gov. Jennifer Granholm (D) has offered a feel-good gesture to the unemployed and the soon-to-be jobless, by signing two executive directives this week to prohibit state contracts with companies that outsource jobs to foreign countries. While outsourcing is a serious problem (Michigan has lost nearly 300,000 jobs since 2000, of which 170,000 were in manufacturingfor example, an Electrolux plant will ship 2,700 jobs to Mexico next year), band-aid measures will do little to stop the hemorrhaging of jobs. What will, is an FDR-style infrastructure-building policy, like that called for by Lyndon LaRouche.
Yet even Granholm's weak-kneed effort provoked the expected squeal from GOP State Sen. Nancy Cassis, that the directives "will send Michigan down a dangerous, protectionist path."
Credit-Card Delinquency Rate Surges to New Record High
The percentage of credit-card accounts that were 30 days or more past due, shot up to a record-high 4.43% in the fourth quarter of 2003, surpassing the previous record, set in the third quarter, the American Bankers Association reported in its quarterly survey. More and more Americans, both employed and unemployed, are relying on credit cards to meet daily living expenses. "The financial strain is increasing as the time between jobs continues to lengthen," said James Chessen, the association's chief economist. The average duration of joblessness rose to 20.3 weeks in Februarythe highest level in over 20 years, according to figures released by the Bureau of Labor Statistics.
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