From Volume 6, Issue 52 of EIR Online, Published Dec. 25, 2007

U.S. Economic/Financial News

Financial Blowout Item of the Day: Option ARMs

Dec. 22 (EIRNS)—That the Bush plan to aid subprime borrowers, pushed by Treasury Secretary Henry Paulson and the banks, is a bandaid on a hemorrhage, is daily made more clear, as exemplified by a Dec. 22 Wall Street Journal analysis of another segment of the residential mortgage industry which is set to hemorrhage beginning in 2008: option adjustable rate mortgages (option ARMs). Option ARMs are loans that let the borrower initially choose the amount to pay back each month, then reset to higher rates at a later time. Initial rates are often as low as 1%.

According to Erica Sandberg of the Consumer Credit Counseling Service of San Francisco, half the people who call the service about their option ARM loans were planning on refinancing the loans before payments became onerous. The other half did not understand what they were getting into. A lot of the borrowers, unable to pay more, were paying minimal amounts each month as the interest mounted.

Those who have attempted to refinance in recent months have found that the stifling credit crunch in the financial sector, and tighter lending rules since the subprime blowout earlier this year, have made refinancing almost impossible. Hefty pre-payment penalties have also made it expensive, with the end result that many with option ARMs are holding on by their teeth as interest piles up and swells the loan to larger than their home's value at present deflating prices—a sure recipe for foreclosures to follow. Merrill Lynch estimates over $100 billion in losses for option ARMs in 2008, as rates begin to reset at the same time that housing values are plummeting.

Many of these borrowers will not be eligible for help under the very narrow rules of the Bush band-aid plan for aiding subprime borrowers—their credit is too good!

Schwarzenegger To Declare Budget Emergency, Massive Cuts

Dec. 22 (EIRNS)—Gov. Arnold Schwarzenegger dumped a huge lump of coal into the Christmas stockings of Californians yesterday, when he announced that he would declare a "fiscal emergency" on Jan. 10, and that his administration is preparing "deep cuts" in the state budget. The crisis has forced Schwarzenegger to drop his usual optimistic persona, as he told reporters that the situation is "very bleak." With the estimated budget deficit now at $14.5 billion for fiscal year 2008-09, and a shortfall for the remainder of 2007-08 now at over $3.3 billion, department heads of all state agencies are putting together a plan which starts with at least 10% across-the-board cuts.

Those areas bracing for the worst cuts include education, health care, social services, and the penal system. Leaks have been made to prepare people for these cuts, with a figure being floated of $1.4 billion taken out of the education budget, and a proposal to release 22,000 nonviolent prisoners with less than 20 months remaining to their sentence, drawing fire from Republicans.

The dramatic collapse in revenue has hit as the once-powerful agricultural-industrial economy of California has been dismantled, with hundreds of thousand of jobs lost in manufacturing in the last 20 years, replaced by low-wage jobs in services, tourism, and entertainment. With legislators caught up in the phony debate of more cuts versus more taxes, there is little prospect for a solution emerging, unless the courage is found to break the control, by George Shultz and Felix Rohatyn, over the political debate.

Foreclosure Crisis Exacerbates Hunger and Homelessness

Dec. 17 (EIRNS)—A report released this morning by the U.S. Conference of Mayors, found that the major causes of hunger in American cities are poverty, unemployment, and high housing costs.

"The hunger crisis is exacerbated by the recent spike in foreclosures, the increased cost of living in general and increased cost of food," the report states. Sixteen of the 23 cities responding to the mayors' survey reported that requests for emergency food assistance increased during the past year while availability of food assistance is declining. Los Angeles, for example, reported that the 500 food pantries served by its Regional Foodbank need an additional 9.8 million pounds of food annually to meet the current needs, and soup kitchens and shelter programs need an extra 1 million pounds. The shortage of available food means that the city is unable to meet 21% of the demand for food assistance.

Lack of affordable housing is listed as the primary cause of homelessness among families, and ten cities in the mayors' survey responded specifically citing an increase in homelessness among families with children, compared to 2006. Detroit, St. Paul, and Boston reported increases of 15%, 14%, and 13%, respectively. Twelve of the 23 cities reported having to turn people away because of lack of resources, and 15 of the cities predict that requests for emergency shelter will increase in 2008, while all cities expect increases in requests from families with children, and cite the foreclosure crisis as well as other economic factors as the reasons.

Greenspan's Wall of Money Scheme Charges a Deathly Toll

Dec. 17 (EIRNS)—On Dec. 14, for the first time ever, wheat rose as much as 30 cents, or 3.1%, to a price above $10 a bushel. This was double its price from a year ago. The same week, rice also jumped to a record price, as did soybeans and corn. Like wheat, soybeans have also almost doubled in price this year, and, at almost $12 per bushel, are now at the highest price in 34 years. The story of corn, which has been well-told by EIR, began its price climb toward the end of last year, with the onslaught of the ethanol craze.

According to Bloomberg today, as a result of this, processed cereals producers Kellogg and General Mills have already raised prices, while baked goods producer Sara Lee Corp. said it will increase bread prices for the second time in three months. Bloomberg also reports that Japan's biggest maker of soy sauce, Kikkoman Corp., is planning its first price increase in 18 years.

Headlines are filled with justifications, from reduction of land under cultivation to drought in various places around the world. While some of these may be true—those related to a lack of investment in water management infrastructure, for example—one commodities trader got closer to the truth when he noted that "interest rates have been too low for too long," indicating that the "disaster" was more man-made than natural. This trader, who spoke with Bloomberg, targetted former Federal Reserve chairman Alan Greenspan by name, saying that he "kept interest rates way too low," and started something that can't be stopped. "Inflation is starting to take over," he said, "and really, we haven't seen anything yet."

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