International Forecaster Weekly

More Market Infintalism, High Unemployment, Shrinkage

Fed credit report says Americans now borrowing a lot less, Goldman Sachs fingered for causing the economic crisis, personal bankruptcies soar, mortgage market  shrinking,  vacancies grow, tax collections shrink, banks create extraordinary means to keep afloat

Bob Chapman | January 13, 2010

Americans borrowed less for a 10th consecutive month in November with total credit and borrowing on credit cards falling by the largest amounts on records going back nearly seven decades.

The Federal Reserve said yesterday that total borrowing dropped by $17.5 billion in November, a much bigger decline than the $5 billion decrease economists had expected.

November’s $17.5 billion drop in total credit was the biggest amount in dollars terms since records began in 1943.

That represents an 8.5 percent fall from the October borrowing level. That was the biggest percentage drop since total credit declined 9 percent in May 1980.

The borrowing category that includes credit cards fell by $13.7 billion, an all-time record decline in dollar terms. The drop was 18.5 percent from October, the biggest decline in percentage terms since a 29.6 percent plunge in December 1974.

The Fed’s credit report excludes home loans and home equity mortgages, covering only borrowing that is not secured by real estate.

The drop in overall credit for 10 straight months continued a record in terms of consecutive declines, surpassing the mark of seven straight declines set in 1943 and in 1991.

Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported.

“It certainly wouldn’t be difficult to come to that conclusion,” Greenberg is quoted as telling the newspaper.

Greenberg blamed new standards for credit-default swaps - -pushed by Goldman or Deutsche Bank AG, he said -- and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse, the newspaper reported.

“Mr. Greenberg appears to base his views on news reports rather than facts,” Lucas van Praag, a Goldman spokesman, said in an e-mail to Bloomberg News. “It is interesting that he doesn’t mention the devastating conclusions about AIG reached by the company’s own auditors.”

The Federal Reserve will ask a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history.

The U.S. Court of Appeals in Manhattan, after hearing arguments in the case today, will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News.

Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.

“The question is at what point does the government get so involved in the life of the institution that the public has a right to know?” said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit.

The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit.

U.S. investors oppose federal initiatives that would force them to give up control over their 401(k) accounts, the Investment Company Institute said.

Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing a steady payment for life, according to an institute-funded report today.

Federal Reserve officials squabbled about how to proceed with a program of mortgage-backed-securities purchases at their December meeting, with some saying a weak economy could warrant expansion and at least one arguing for scaling back. The minutes show some officials worried the housing recovery could be cut short next year when the Fed stops buying mortgage debt and when other federal support programs expire. Some participants remained concerned about the economy's ability to generate a self-sustaining recovery without government support,’ the minutes of the Dec. 15-16 meeting said. Some officials argued the Fed might need to expand its mortgage-purchase program and extend it beyond the first quarter to keep the recovery going. It goes without saying, if this recovery fails for whatever reason, yeah, they’ll ramp up asset purchases,’ said Alan Levenson, chief fixed-income economist at T. Rowe Price.

Personal bankruptcies soared last year in Western states hit hardest by the real-estate bust.  In states such as California, Arizona and Nevada, where housing prices soared and then collapsed during the past decade, consumer bankruptcy filings rose roughly twice as much as the national average increase of 32%. In Arizona and Nevada, where bankruptcies increased most, filings skyrocketed by 79.6% and 59.5%, respectively. Nearly 6.2% of mortgages in Arizona and 9.4% of mortgages in Nevada were in foreclosure by the end of the third quarter. California saw personal bankruptcy filings rise 58.8% last year. At the end of the third quarter, some 5.8% of loans were in foreclosure there.

Federal Reserve officials discussed whether the economy is strong enough to allow their $1.73 trillion of asset purchases to end in March and differed over the risk of inflation, minutes of their last meeting showed.  A few policy makers said it ‘might become desirable at some point’ to boost or extend securities purchases aimed at lowering mortgage rates.

Morgan Stanley Asia Ltd. Chairman Stephen Roach said U.S. policy makers should start to exit emergency stimulus measures now if the economic recovery is as strong as they say it is.  There is never an easy time to do it, Roach said. The longer they wait, the greater the chance they sow the seeds for the next bubble. So I’m in favor of an early exit strategy.

John Taylor, creator of the so-called Taylor rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.  ‘The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,’ Taylor, a Stanford University economist, said. Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he said the Fed’s monetary policy after the 2001 recession ‘appears to have been reasonably appropriate’ and that better regulation would have been more effective than higher rates in curbing the boom.

As the US Federal Reserve pulls back from the mortgage market, will the government and its proxies, Fannie Mae and Freddie Mac, pick up the baton?  Many investors are looking to Fannie and Freddie to play an expanded role in the market for mortgage-backed securities (MBS) – helping to keep the market liquid and mortgage rates low – as the Fed completes its $1,250bn purchase programme.  This is mitigating concerns, expressed by some Fed officials that the scheduled winding down of Fed purchases of MBS by March 31 could ‘undercut’ a fragile housing recovery.

U.S. apartment vacancies rose to a record 8% in the fourth quarter and rents fell the most in three decades according to Reis Inc.  Asking rents dropped 2.3% from a year earlier to an average of $1,026, the biggest decline since Reis began records in 1980. Never before have we observed rental properties in so much distress, Victor Canalog, Reis’s research director, said.

Office vacancies in the U.S. surged to a 15-year high in the fourth quarter and rents fell the most on record according to Reis Inc.  The vacancy rate climbed to 17% from 14.5% a year earlier.

Vacancies at the largest U.S. shopping centers reached a record 8.8% in the fourth quarter. Reis Inc. said.  Vacancies at smaller neighborhood and community centers increased to 10.6%, the highest level since 1991, from 8.9% a year earlier.

U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said.  Revenue dropped 13.3%, or $80 billion, compared with the same nine months of 2008, to $523 billion, the institute said. Collections in the third quarter alone sank 10.9% to about $162 billion. The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections, Rockefeller analysts Lucy Dadayan and Donald J. Boyd wrote. Budget gaps have opened in 31 states since fiscal year 2010 began, Dadayan and Boyd wrote 2010 is going to be very difficult for the states and the next year is likely to be significantly worse, Rockefeller Deputy Director Robert Ward said.


Manhattan apartment prices fell for a third consecutive quarter as Wall Street job losses drained demand and the decline in co-op and condominium values reached 21 percent since the market peak.  The median price slid 10 percent to $810,000 in the fourth quarter from a year earlier, down from almost $1.03 million in 2008, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said.

The campaign to get Treasury Secretary Timothy Geithner in front of a congressional panel to discuss his relationship with American International Group Inc. in 2008 may have an unlikely supporter: Geithner.

By the looks of it last week, Rep. Darrell Issa (R-Calif.) struck what could have been the most damaging blow to the Treasury Secretary's career since he took office last year. See Bloomberg report on Geithner and AIG.

Issa, who has been critical of Geithner, released emails showing that officials at the regional Fed bank told AIG not to disclose key details of their agreements to make big payouts to banks in late 2008. AIG (AIG 29.23, -0.11, -0.38%) later had to amend its regulatory filings to provide the disclosure. See report on New York Fed and AIG.

Issa fueled the fire by suggesting Geithner -- or his team -- tried to cover up the payments.

"Geithner's team was concerned about the controversy that full disclosure of the payments would create," Issa wrote in the Huffington Post. "So the New York Fed instructed AIG to delete references to the counterparty payment rate from its SEC filing, thus obscuring the full measure of the bailout bonanza made possible by U.S. taxpayers." See Issa commentary on Huffington Post.

The accusation against Geithner not only set off alarms in Congress but in the media. Read commentary on Geithner's role.

News Hub: 4Q Earnings Kicks Off

As fourth quarter earnings season kicks off, the market will be looking for signs that the recession is ending.

That led to Treasury officials and Thomas Baxter Jr., the general counsel of the New York Fed, to come to the Treasury Secretary's defense.

Geithner "played no role in, and had no knowledge of, the disclosure deliberations and communications referenced in those emails," Baxter wrote, throwing the AIG grenade back to Rep. Issa who only was able to say Baxter "raises more questions."

Here's one: Does the congressman have the goods or not?

President Barack Obama plans more economic stimulus measures to bring down the high U.S. unemployment rate, while cutting the bulging budget is a longer-term challenge, a top White House economic aide said on Sunday.

"We are ... talking about actions right now to jump-start job creation," White House Council of Economic Advisers Chairwoman Christina Romer said on CNN's "State of the Union. "You don't get your budget deficit under control at a 10 percent unemployment rate," she said…Congress is considering proposals to help labor markets that include a $155 billion jobs package that has already cleared the House of Representatives.

Romer said more spending will be necessary to sustain a fragile recovery.

"The sense that we need to do more is overwhelming," she said on ABC-TV's "This Week."

Ambrose Evans-Pritchard: America slides deeper into depression as Wall Street revels December was the worst month for US unemployment since the Great Recession began. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism…


Politicians are taking bolder actions to influence monetary policy, signaling that the global financial crisis may end up reining in the independence of many central bank.

That independence is now under threat and is figuring in talks among central bankers gathered in Basel, Switzerland, this week for annual meetings at the Bank for International Settlements. Central banks are vulnerable to political meddling because they became deeply involved in government-led efforts to rescue the global economy.

Central banks also took extraordinary measures on their own. The Federal Reserve bought mortgage- backed securities and took complex derivatives as collateral for loans. The Bank of England essentially printed money when it bought swaths of government bonds. The European Central Bank, the Bank of Japan and others took similar steps.

December Employment Report; let us count the ways.

The ‘real jobs lost’ are 506,000 (NSA) - 661,000 people dropped out of the work force, meaning they have stopped looking for employment. They are no longer counted among the unemployed. Those not in the labor force dropped a whopping 843,000.

The labor force has shrunk by 1.9 million people since May. This keeps the official unemployment rate from being much higher. 2.5 million lack a job but want one; yet they are not counted as unemployed.

The participation rate in the labor force - the portion of adults either working or looking for work – declined to 64.6%, the lowest reading since August 1985.

The household survey showed a decline of 589k in jobs; if the participation rate remained unchanged, the unemployment rate would’ve hit 10.4%. Since July, the participation rate for both men and women has fallen sharply. Nearly 1.3 million people have left the labor force since July.

For men, the rate has declined from 72.0% to 71.0%, a decline of 801,000 men. For women, the rate has fallen from 59.2% to 58.6%, a decline of 491,000 women.

U6 (comprehensive) unemployment hit 17.3%; 17.4% in October is the all-time high.

Employers cut 4.2 million jobs in 2009, but this number will jump when the BLS performs its 824,000 downward revision to NFP in coming months. About 15.3 million people are unemployed

The economy has lost more than 7.2 million jobs since the recession began in December 2007.

The index of the number of firms hiring also backtracked in Dec, falling back to 40.0 from 42.4, but still above 33.8 in October.

The Employment-Population ratio tumbled to 58.2% in December, the lowest level since 1983.

B/D (fictional) jobs are 59k. A record 6.13 million workers have been unemployed for more than 26 weeks (and still want a job). This is a record 4.0% of the civilian workforce. (series started in 1948)

The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year.

The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained.

Senate Democrats, meanwhile, have begun crafting a bill to encourage job creation, which Democratic aides said will likely focus on small business, infrastructure spending and "green" energy. The House passed a $154 billion jobs bill in December.