U.S. Economic/Financial News
Will Corporate Bond Bust Bring the Next Phase-Shift?
Dec. 28 (EIRNS)Multiple sources have told this news service that the collapse of the monetary-financial system will enter a new stage after Jan. 3. New York Times financial columnist Floyd Norris weighs in on the issue today, noting that the corporate bond market was as insane as the subprime binge over the past several years, but far larger. Now that the bond insurance industry is collapsing, according to Ted Seides of Protégé Partners: "The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets." Seides calls the credit default swap (CDS) market an "insurance market with no reserves," and puts the total in CDSs at $45 trillion, noting that this is almost five times the U.S. national debt.
State of Emergency Hits Kentucky
Dec. 28 (EIRNS)The "catastrophic" failure of Bush's economic policies, as Lyndon LaRouche put it on Dec. 27, in reference to California's $14.5 billion revenue shortfall, has claimed another victim. Kentucky's Gov. Steve Beshear announced a $434 million revenue shortfall for this fiscal year, and an additional $500 million for the next, at an emergency press conference at the state capital of Frankfort yesterday. The state's revenue was expected to grow by 4.5%, but instead, revenue growth is at less than 1% for this fiscal year, July 2007 to June 30, 2008.
At least 14 other states have announced revenue shortfalls ranging from $250 million to California's whopping $14.5 billion, since November. Beshear said Kentucky's budgetary crisis is a result of "a national economic downturn; subprime mortgage difficulties affecting our housing industry and durable goods manufacturing; and the lowest employment growth in several years."
Kentucky budget director Mary Lassiter added that it is not "unprecedented" to have a revenue shortfall in December, "but the magnitude is unprecedented." House Speaker Jody Richards (D) told the Courier Journal he thinks this deficit "is the worst that I can remember. It is a function of the economy." Beshear pointed to a $389 million shortfall in the state's Medicaid budget, a third of which is paid out of General Fund revenues, as a key factor.
A Kentucky state legislator told EIR that the deep unemployment, especially among young workers in the far west of the state and the Louisville area, have caused increased demands for Medicaid. Since Bush took office in 2001, the state's unemployment rate grew from 5.2%, peaked at 6.3% in 2003, and has hovered between 5.7% and 6% since 2004.
Bond Insurer ACA Goes Under State Control To Avert Bankruptcy
Dec. 27 (EIRNS)ACA Financial Guaranty Corp., an insurer of corporate bonds, and a unit of ACA Capital, announced in an SEC filing that it had agreed to give control to Maryland state insurance regulators to avert bankruptcy. According to a Nov. 21 press release by the Maryland Insurance Administration, the state's insurance commissioner had called for a "targeted financial examination" of ACA Financial Guaranty to determine its financial exposure to delinquencies and loan defaults in the subprime mortgage loan market, after it had been put on a credit watch by Standard & Poor's.
ACA Financial lost its investment-grade credit rating last week, when S&P took the next step and downgraded its rating to the level of junk. According to Bloomberg.com, S&P's rating cut was triggered by ACA posting a $1.04 billion third-quarter loss in November, after which it had $1.1 billion to cover potential losses of $7.1 billion on the bonds it has insured.
Under the new management arrangements, ACA will seek approval from the Maryland Insurance Administration before pledging or assigning assets, paying dividends or entering into "certain material transactions." In return, the Maryland regulator will hold off proceedings against the company. A Baring Asset Management figure is quoted by Bloomberg, that "It still looks like bankruptcy is inevitable."
Next Year Could Foreclose the Nation
Dec. 26 (EIRNS)The implosion of the housing bubble, unless policies are changed, will be more horrific in 2008 than in 2007, due to an upsurge in the number of Adjustable Rate Mortgages (ARMs) reset to higher interest rates during the January to June period, the inaction-to-date by Congress, and the hyperinflationary effects of the money-pumping by private central banks. Inflection points of the ongoing housing crash in 2007, and projections for 2008:
* Prices of existing U.S. single-family homes tumbled 6.7% during October 2007, compared to October 2006, the tenth straight month of decline, according to data released today by Standard & Poor's Case-Shiller Home Price Composite Index for ten of America's largest cities. The October price index fall exceeded even the previous record 6.3% decline recorded in April 1991. As well, Case-Shiller publishes a composite home price index for 20 American cities. During October, 11 of the cities experienced the biggest monthly price decline since the Great Depression, spearheaded by Miami: -12.4%; Tampa: -11.8%; Detroit: -11.2%; San Diego: -11.1%.
* Fannie Mae, one of the two U.S. secondary mortgage market giants, which had pumped out optimistic predictions earlier this year, now predicts that prices for existing homes will fall an additional 4.5% in 2008, and sales for existing homes will plummet 12%. That would be in addition to the 20.7% plunge in home sales this year (October 2006 to October 2007).
* Lehman Brothers investment bank analysts project that 1 million home mortgage loans will be thrust into default in 2008, compared to 300,000 this year.
U.S. Physical Economy Shows More Signs of Collapse
Dec. 28 (EIRNS)The impact of the global financial crash on the American economy's remaining physical production, is becoming more and more severe because of the lack of any Congressional acknowledgment of that crash, or action to create "firewalls" to protect the real economy.
At least 16 U.S. states have suddenly found themselves in budget crises due to drops in tax revenues, and in two of them, California and Kentucky, the governors have announced they will call "fiscal emergencies." The reasons are spiking unemployment, Medicaid costs, as well as the vaporization of housing-related taxes and fees due to the mortgage meltdown.
As 2007 ended, Ford and Chrysler had placed 26,000 production employees on "temporary layoffs," set to last at least through January, and potentially to become permanent. General Motors, which in 2007 "bought out" 46,000 GM and Delphi workers, announced that it's getting rid of 5,000 more by the buyout route. All three automakers have cut their production for the first quarter of 2008 by another 10% or so, as sales fall. Employment in the auto industry fell by 75,000 during 2007. New unemployment claims have been running at 345,000 per week in December.
According to today's announcement by the Census Bureau, November new home sales fell to a 647,000 annual rate, when only on Sept. 18, the Homebuilders Association warned gloomily that they might fall to 800,000 by the end of the year. So many "pending sales" have been falling through, that previous months' figures have been revised down, to where the sales were already well below the 800,000 rate even in September, when the Homebuilders were making their "forecast." The November sales figure is the lowest for any month in 12 years.
And durable goods orders for the U.S. economy, also announced today by the Commerce Department, are at $207 billion for November, 10% lower than November 2006. This drop is not adjusted for inflation, or for the falling dollar. It's simply the falling economy. The only way to rebuild it, is blocking the crash with the Homeowners and Bank Protection Act and nation-to-nation New Bretton Woods agreements, building new infrastructure as per LaRouche's Economic Recovery Act.