In this issue:

Two Years into the Worst Financial Crash in History

Telecom Meltdown Accelerates

Energy Pirates Join Telecom Meltdown

Wall Street Police Blotter

Even Mass Media Catching On - - To Systemic Nature of Crisis

Journal Moots 'FDR Reflex' in U.S. Population

GE To Cut Turbine Output, Slash Jobs

Housing Bubble: Home Sales Buckle in June


From the Vol.1, no.21 issue of Electronic Intelligence Weekly

U.S. ECONOMIC/FINANCIAL NEWS

Two Years into the Worst Financial Crash in History

This EIW exclusive was contributed by EIR Economics writer John Hoefle.

With the worst financial and economic collapse in history now acknowledged, even in the mass media, it is useful to recall that Lyndon LaRouche told you it was happening, long before it made the pages of the New York Times, and that what is happening is the tragic culmination of a process—economic, political, and cultural—which has been playing out for three decades.

As we go to press, the Dow Jones Industrial Average has dropped 1,677 points (18%) in 11 trading days, falling below the level it hit in the aftermath of Sept. 11, to levels not seen since the panic of 1998. As dramatic as that plunge may be, however, falling markets are but a reflection of a deeper and much more ominous process, the sharp decline of the physical economy of the United States, and the world. The real economy has fallen out from under the markets, which have been artificially propped up by accounting tricks, enormous and unpayable debt loads, and mass delusion on the part of the markets and the public.

Reality is now breaking through the delusion. Some people respond by closing their minds and asserting that the market will come back, "because it always does." A more extreme version of this neurosis is the type who views the market slide as an opportunity to buy, forgetting that the "buy low, sell high" philosophy of J.P. Morgan and his parasitic peers made them rich, not because they could read the markets, but because they could manipulate them. Then there are those who respond to the crisis by reexamining the axioms which caused them to fall under the spell of the delusions, to figure out why Lyndon LaRouche could see so clearly what they did not. It is the latter group upon which the future of mankind depends. - The Shape of Things To Come -

We are now two years into the worst market crash in world history, with the major stock markets already down some 50% from their peaks in 2000. The markets are now back to their 1997-98 levels, but carrying half a decade's more debt, leverage, and speculation. In market terms, we have crossed the peak and are now headed down the back side of a very steep mountain. How far and how fast we fall, is largely a matter of actions taken, or not taken, on fundamental economic policy. As long as the Bush Administration and the Federal Reserve maintain their Hooveresque "the economy is fundamentally sound" stance, we can expect sharp plunges, punctuated by futile attempts to bail out fictitious and unsalvageable market values.

A graphic example of how fast the markets can fall is the sharp plunge in the Dow from a high of 381 in September 1929, to the low 40s in June 1932, a fall of some 90% over two years. The Dow didn't break 100 points again until mid-1933, and did not rise above 300 points until early 1954.

The rise and fall of the Dow since the 1980s bears a striking similarity to the period of the Great Depression, as can be seen in Figure 1. This was produced by matching up the peaks in 1929 and 2000, using weekly closings. The run-up in both periods, reflects the process shown in LaRouche's Typical Collapse Function (Triple Curve), in which financial aggregates rise hyperbolically to the point they become unsustainable, and collapse (Figure 2).

A similar process can be seen in the rise and fall of WorldCom (Figure 3), whose stock soared in the late 1990s, and then plunged back to Earth in the largest bankruptcy filing ever.

This sharp rise-and-fall curve can be seen in numerous other stock-market indices, corporate stock charts, and other economic statistics, though it is often disguised by statistical manipulations and fakery. The pattern can already be seen in the stock prices of the energy pirates and the telecom and computer companies, and is nearly fully formed at semi-industrial companies such as General Electric and some of the big financial institutions. Absent the implementation of LaRouche's emergency policies, it is the shape of things to come for the United States and the world.

The comparison between now and the Great Depression can only be taken so far, however, because the danger is much greater now. Not only is the bubble relatively much larger than it was then (the Dow increasing by a factor of 5 in the two decades leading up to the 1929 peak, versus a factor of 15 in the current period), but a much smaller percentage of the population is engaged in farming and manufacturing, and a much higher percentage lives in cities, where they are much more dependent upon urban services and distribution chains. The population is also culturally less prepared to handle the hardships that would flow from a full-scale economic crash. The potential political and cultural breakdowns following a crash could rapidly lead to a new Dark Age, particularly in the cities. - Vaporization -

The rise and fall of the global stock markets since 1997-98 can be compared to the volcanic eruption of Mount St. Helens, where the top of the mountain simply vaporized; in the case of the market, trillions of dollars of market capital have disappeared. This process is reflected in the Dow Industrials (Figure 4), the S&P 500 (Figure 5), and the Wilshire 5000 (Figure 6), all of which show a similar peaking curve. The process is more pronounced in the S&P 500 and the Wilshire 5000, which are significantly broader indices than the 30-stock Dow.

In recent years, the Dow has become more of a psychological manipulation tool than an economic index, as old-economy companies were cast out and replaced by "New Economy" entertainment, information, and services firms. Today's Dow includes such "industrial" titans as derivatives giants J.P. Morgan Chase and Citigroup; American Express; computer firms Microsoft, Intel, IBM, and HP; Walt Disney Co., Wal-Mart, Home Depot, and McDonald's. Even the firms which do have industrial components have large financial operations; General Electric, for example, makes about half its profit from its financial operations, including a sizable derivatives business.

Because it contains just 30 stocks, the Dow is also relatively easy to manipulate, and the Plunge Protection Team has intervened with increasing frequency when sharp declines threaten to escalate into major panics. Though its actions are semi-secret, the Plunge Team's interventions are easily spotted by the classic "V" pattern in which the market plunges during the morning, then suddenly rebounds sharply during the afternoon.

Such interventions can be effective in dealing with anomalous events within an otherwise sound system, and can even provide a temporary boost during a systemic decline, but no amount of financial stimulus can prevent a systemic collapse when the economic underpinnings of the physical economy have crumbled. There are larger forces at work than can be dealt with by Federal Reserve chairman Alan Greenspan's bubble-blowing apparatus, especially since the money thrown into the bubble is looted from the underlying economy, making the bubble less supportable with every intervention. - Wall of Money -

The nature of Greenspan's dilemma can be seen in the sharp run-up in the markets in the 1997-2000 period, which itself is the result of an attempt to save the system in 1997. In early 1997, British fund manager Tony Dye issued warnings of an imminent disaster in the global derivatives markets, warnings which coincided with reported but downplayed reports of derivatives problems at National Westminster Bank. Dye's warnings echoed those of LaRouche, who had warned since 1993, that derivatives speculation would indeed blow up the system.

In the over-the-counter derivatives markets, it is relatively easy to keep giant derivatives disasters hidden, because no one knows unless the counterparties tell them. Other market participants and the regulators might find out in short order, but the public is rarely told, especially when the problem is serious. Still, actions taken in the wake of a crisis can provide tell-tale signs.

In the case of the derivatives crisis of 1997, the tell-tale sign was the mid-1997 emergence of the so-called "Asian crisis," which was actually a currency-warfare attack on the "Asian Tiger" economies (Malaysia, Philippines, Indonesia, South Korea, etc.) by Anglo-American financial interests. In typical form, the bankers were attempting to postpone their own bankruptcy by stealing from the Asians. This assault continued into 1998, targetting one Tiger after another, generating billions of dollars in loot and sending funds fleeing to the relative safety of the U.S. financial markets. The result can be seen in the rise of U.S. stock markets during the period.

The game came to an abrupt halt in September 1998, when looting-target Russia caught the markets off-guard with a default on its GKO bonds and a devaluation of the ruble. The prospect of a sovereign default—the "debt bomb" policy advocated by LaRouche—sent the financial markets into panic, with investors fleeing speculative paper in favor of more secure U.S. and German government bonds. This, in turn, caused many derivatives speculators to hemorrhage money, with the markets moving in the opposite direction from their bets. Long Term Capital Management, the giant Nobel Laureate hedge fund, went bankrupt and was bailed out by the banks at the urging of the Fed. Many other derivatives players, some considerably bigger than LTCM, were also grievously wounded.

In response, Greenspan and his central banking peers launched what speculator George Soros later called the "wall of money," flooding the markets with liquidity and promises, and a cover-up of the extent of the damage. Only later, would the players admit what LaRouche said publicly at the time: that the global financial system came within a hair of melting down in 1998.

It was this "wall of money" approach, combined with a liquidity injection under the guise of preventing potential Y2K problems and a regulatory blind eye to "creative bookkeeping," which led to the sharp rise in U.S. financial markets from late 1998 into early 2000.

The attempt to bail out the system in 1997 led to the blowup in 1998, at which point another bailout was launched which blew up in 2000. Since then, global markets have plunged, major corporations have collapsed, pensions and retirement funds have evaporated, and the financial system is disintegrating. But don't worry, because a bailout is in the works. After all, the markets always rebound, don't they? - Systemic Crisis -

The U.S. stock market bubble was actually a global phenomenon, financed in part by huge flows of investment capital into the country. Money poured into the United States during the go-go '80s, though that flow ebbed a bit when the U.S. banking system went under after the real-estate market collapsed (the Fed secretly took control of Citicorp and arranged shotgun marriages for the big banks). To save the day, the financiers unleashed the derivatives market, unpayable debt was rolled over, and financial deregulation escalated. Changes in the tax codes allowed money that previously would have been paid in taxes instead to be gambled in the markets, and corporations used money that should have been invested in their business activities to support their stock price. The bubble soared, but the physical economy suffered, as health care, education, transportation, goods production, and research and development were all choked back in order to feed the bubble.

As the bubble grew, the cash poured in, but that process abruptly reversed after the market peaked in 2000 (Figure 7). The decline in U.S. stocks led to a decline in the inflow of foreign capital, which in turn further depressed stocks. This process was ameliorated by the strong dollar, because the rising dollar increased the profits of foreign investors as the markets rose, and reduced their losses as the markets fell. However, in 2002, the weakness of the U.S. economy has caused the dollar to fall, including a sharp fall against the euro (Figure 8).

The process defined by a falling stock market, a falling dollar, and reduced foreign capital inflows spells doom for the U.S. financial bubble, and when the United States falls, the world falls with it. Add to that, the outbreaks of this systemic disease in Japan, Argentina, Brazil, Turkey, and other nations, including growing problems within Europe, and you have a prescription for disaster. - Sinking Banks -

In all the corporate disasters breaking out in the United States, two names keep cropping up with uncanny regularity: J.P. Morgan Chase & Co. and Citigroup. Both were major lenders to Enron, and according to a report by the U.S. Senate Permanent Subcommittee for Investigations, both banks were active participants in Enron's fraud, using offshore affiliates to help Enron disguise loans as energy trades. Both banks lent heavily to the energy-pirate and telecom sectors, and are undoubtedly facing losses in the billions of dollars as those sectors vaporize.

J.P. Morgan Chase is the result of the acquisition of J.P. Morgan & Co. by the bigger Chase Manhattan. The deal, which closed on the last day of 2000, has been an absolute disaster as measured in ordinary—and therefore misleading—market terms. The market capitalization of the combined Morgan Chase is now less than that of Chase alone on the day before the merger, with Morgan (or at least its equivalent value) having simply vaporized (Figure 9). This is not surprising, as it was likely a bankruptcy at Morgan, and perhaps Chase as well, which led to the takeover of the aristocratic Morgan by the commoners at Chase.

The merger bought only a few months more. Indications are that Morgan Chase blew up in mid-2001 and was secretly taken over by the Fed, similar to the way Citigroup's predecessor, Citicorp, was in 1989. During the fourth quarter of 2001, Morgan Chase combined its two lead banks, Chase Manhattan and Morgan Guaranty Trust. As part of that process, $125 billion in assets and $7 trillion in derivatives, simply disappeared from the combined banks' books, suggesting major financial problems. Still, with $24 trillion, Morgan Chase has more derivatives than any other bank in the world, and more than enough to make a spectacular explosion.

Citigroup may be under Fed control as well, as rumors of major derivatives losses circulate. Citigroup is the result of the 1998 takeover of Citicorp by Travelers Insurance, creating what is now the largest bank in the United States, with just over $1 trillion in assets and $9 trillion in derivatives. On July 18, Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, said that he had invested another $500 million in the bank, raising his holding to $10 billion. Alwaleed, a nephew of Saudi King Fahd, obtained his initial stake in the bank shortly after the Fed took it over in 1989 and began arranging a bailout. The latest cash infusion raises suspicion that Alwaleed is performing a similar service for Citigroup.

Not to be left out is Bank of America, whose $620 billion in assets puts it third behind Citigroup's $1 trillion and Morgan Chase's $713 billion. Bank of America's $10 trillion in derivatives puts it solidly on the hot seat in any financial crisis, and it has also loaned heavily to bankrupt companies. Rumors are flying that Bank of America has applied to the Fed for a secret bailout.

If the Fed winds up running the three biggest banks in the country, who's going to bail out the Fed?

Mutual funds, pension funds, and insurance companies are also big holders of stocks and have been hard hit by the decline. There's a lot more damage out there than has been admitted so far, and the hemorrhaging is continuing. - Pompous Pundits -

Those tempted to listen to the siren calls of "recovery" and "sound fundamentals" emanating from the canyons of Wall Street and the nation's capital would do well to recall the comforting assurances given by the pundits and politicians in the period immediately before and just after the crash of 1929:

"Stocks prices have reached what looks like a permanently high plateau.... I expect to see the stock market a good deal higher within a few months," Yale economics professor and President Herbert Hoover adviser Irving Fisher said on Oct. 17, 1929.

"The industrial situation of the United States is absolutely sound," Charles E. Mitchell, chairman of National City Bank of New York (a predecessor of Citigroup), said in early October 1929. "I know of nothing fundamentally wrong with the stock market or with the underlying business and credit structure," Mitchell added on Oct. 22, 1929.

Even after the 13% drop on Black Monday, Oct. 29, 1929, the pundits were urging the public to stay in the market. "This is the time to buy stocks," said market analyst R.W. McNeel on Oct. 30. "This is the time to recall the words of the late J.P. Morgan ... that any man who is bearish on America will go broke.... Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."

"Financial storm definitely passed," banker Bernard Baruch cabled Winston Churchill in mid-November.

"I see nothing in the present situation that is either menacing or warrants pessimism," Treasury Secretary Andrew Mellon announced on the last day of 1929.

"I am convinced we have now passed through the worst ... and shall rapidly recover," President Hoover stated on May 1, 1930.

Telecom Meltdown Accelerates

Reflecting the ongoing collapse of the global financial/monetary system, the telecommunications and energy sectors accelerated in their meltdown, showing the sham of the "new economy" and the lawful demise of the energy pirates along with deregulation.

WorldCom filed the largest-ever U.S. bankruptcy on July 21, reflecting the blowout of the global financial system, with implications for the U.S. government and "digitized" military, banks, state pension funds, the housing bubble in the Washington, D.C. area, and Northern Virginia's "Silicon Valley East." The nation's second largest U.S. long-distance telephone and data-services company, listing $41 billion in total debt, and $107 billion in assets (but which may only be worth $15 billion), dwarfing Enron's $63 billion, filed for Chapter 11 bankruptcy protection in New York, an act which will relieve WorldCom of paying $2 billion in interest payments this year on its debt.

The telecom giant, to keep operating its network, which runs half of the world's Internet traffic, won court approval for a $2-billion "debtor-in-possession" financing line, with an immediate infusion of $750 million, negotiated with Citigroup, J.P. Morgan Chase, and General Electric's financing arm, GE Capital. (Note that J.P. Morgan and Citigroup are among WorldCom's chief creditors.) The trio would be the first to be repaid.

The company plans to hire a "restructuring expert," to emerge from Chapter 11 in about nine to 12 months, with less than a quarter of its $30 billion bond debt load, under a reorganization plan calling for the sale of non-essential assets such as its mobile-phone business, and probably layoffs that have not yet been announced.

WorldCom's creditors are led by J.P. Morgan Chase, trustee for $17.2 billion in bond debt; Mellon Bank, trustee for $6.6 billion; and Citibank, trustee for $3.3 billion.

State pension funds, led by California's Public Employees Retirement System, which filed suit against WorldCom on July 17, have more than $1.6 billion exposure in WorldCom bonds.

Other leaders of the telecom collapse this week:

*AT&T posted a $12.7-billion second-quarter loss, the biggest in at least 22 years, amid falling sales, as the largest U.S. long-distance phone company wrote down the value of its cable-TV assets by $13.1 billion (i.e., they aren't worth as much as originally claimed), the which it plans to sell to Comcast Corp. Sales to residential customers plunged 21.8%, while sales to businesses dropped 3.8%.

*Lucent announced a $7.91-billion third-quarter loss, and will cut 7,000 jobs by the end of December, as sales plunged 50% compared to a year ago. The biggest U.S. telephone-equipment maker also declined to forecast its loss or revenue for the fiscal fourth quarter, citing "intensifying constraints" on capital spending (for equipment and networks). The ninth quarterly loss, included a $5.83-billion non-cash charge due to an accounting rule on its deferred-tax assets, which reduce taxable income in future years.

*Corning posted a $370-million second-quarter loss, as sales plunged 52%, and is now cutting 4,400 jobs, 400 more than announced in April, as the world's biggest maker of optical fiber closes "several" manufacturing and research facilities, expecting third-quarter sales to fall as much as 15%.

*Avaya reported a $37-million third-quarter loss, as sales tumbled 29%, and will cut 3,000 jobs this quarter, as the biggest U.S. maker of office phone equipment slashes capital spending.

*Bellsouth posted a 67% drop in second-quarter profit, amid declining investments and sales, and the biggest local phone company in nine Southeastern states expects 2002 sales to fall, rather than increase.

Energy Pirates Join Telecom Meltdown

Natural gas traders are abandoning beleaguered energy companies Williams Cos. and Dynegy, who supply natural gas to utilities and factories across the nation, amid fears either may soon follow Enron in filing for bankruptcy, after they warned investors of weak earnings.

Houston-based Dynegy, struggling with an estimated 30-40% drop in its estimate of 2002 cash flow, said it is now seeking a financially sound partner, in order to survive. The energy pirate cancelled a $325-million bond offering, because it would not be able to pay the interest premium, after Standard & Poor's downgraded its long-term debt to "junk" status, warning of "tenuous" liquidity and a weakened ability to raise cash.

Tulsa, Oklahoma-based Williams has seen its shares plunge about 80% during the week to near $1, and its credit cut to junk by S&P and Fitch, on the company's forecast of a second-quarter loss, as it plans to sell assets such as pipelines to raise about $3 billion.

Wall Street Police Blotter

Citigroup and J.P. Morgan Chase are being investigated by the Securities and Exchange Commission for helping Enron hide debt. The two largest U.S. banks played a "necessary role" in Enron's fraud, of disguising loans as financing for commodity trades, according to a person familiar with the probe. The energy pirate received more than $4.8 billion from Citigroup and $3.7 billion from J.P. Morgan over six years, through offshore entities, booking the payments as cash flow rather than debt.

SEC investigators are pursuing videotapes of discussions between Citigroup's bankers and traders, on how to make the offshore entities appear independent of Enron.

Federal prosecutors plan to issue indictments against two former WorldCom executives by July 31, for their role in hiding $3.85 billion in losses to make the telecom giant appear profitable. "Indications are that charges," including securities, mail, and wire fraud, "will be filed sometime next week" against former CFO Scott Sullivan and former controller David Myers, according to an unnamed source close to the investigation.

The Department of Justice may also indict WorldCom as a corporate entity, which could drive it out of business.

An indictment of former CEO Bernard Ebbers also is likely.

AOL Time Warner stock tumbled 15% to near four-year lows, as the SEC probes its accounting of advertising deals.

Adelphia Communications founder John Rigas and two sons were indicted for bank fraud, securities fraud, and conspiracy. The criminal complaint, unsealed in Manhattan Federal court, charges former CEO John Rigas and his sons, Michael and Timothy, of using the nation's sixth-largest cable TV operator as if it were their own "personal piggy bank," looting the company of more than $1 billion. Each of the Rigases was released on $10 million bond.

Two other former executives, James R. Brown and Michael C. Mulcahey, were also arrested and named in the complaint.

If convicted, the Adelphia defendants would face at least 15 years in prison.

The Securities and Exchange Commission filed a civil lawsuit in U.S. District Court, seeking restitution and fines, and to bar the defendants from ever heading a company.

AOL Time Warner is facing a "fact-finding" probe by the Securities and Exchange Commission into "unconventional" advertising deals at AOL that inflated revenue by $270 million during 2000-2002, to help meet analyst earnings estimates for three quarters in 2000-2001, as reported in the Washington Post.

Even Mass Media Catching On - - To Systemic Nature of Crisis

In covering the collapse of the telecom sector, Los Angeles Times staff writers Heltzig and Peltz raised questions July 24 about the systemic nature of the economic/financial crisis, and the role of deregulation, which is uncharacteristic of the overall fantasy-ridden nature of the paper's coverage of the ongoing financial meltdown. In the opening paragraph, they write that "attention is turning to whether the root of the disaster lies in the sweeping deregulation set in motion in the mid-1990s that was expected to usher in a golden age of competition.

"Prices would fall, service would improve, and everyone would make more money. Anticipation ran high that the industry was on the verge of explosive growth, fueled by the still-nascent Internet, wireless phones, satellite television, and other telecommunications services that would keep the public in a state of constant communication. Much of that vision was flawed, leading to more than $2 trillion in investment, much of it squandered in ways that may cause lasting economic damage."

After reviewing some of that damage, they add, "The telecom bust adds support to critics' contentions that deregulation has failed to live up to its promise in this industry, as it did in airlines, banking, energy, and cable television.

"In each of those, the original expectations that huge numbers of new companies would increase competition, improve service, and reduce prices have given way to the reality of oligopolies controlling large chunks of the marketplace."

Journal Moots 'FDR Reflex' in U.S. Population

The Wall Street Journal-Europe hinted at a "Roosevelt reflex" among the U.S. population, as it faced a new Hoover-style econonic crisis. This phenomenon was noted, and reported on, on the front page of the WSJE July 24, in a column by Gerald F. Seib and John Harwood, titled "As Their Faith Wanes, Americans Grow Eager for Reform of Markets." Subtitles are: "Poll Reports 70% Distrust Brokers, Corporations; Angry, Not Desperate," and "Glancing Back at the New Deal." The U.S. edition ran the same front-page article, under different headlines. The article begins:

"High-profile companies go bust. Business leaders fall into disrepute. The stock market crumbles. Finally, the political system convulses, rewriting the rules the corporate world must follow.

"All that happened to the U.S. during the early 1930s, when a shattered economy, a devastated stock market and revulsion toward the business class produced sweeping changes in the way business and finance were conducted.

"Now America faces the possibility of a similar wave of reform.... [T]he country is beginning to reappraise the celebration of free-market forces that marked the 1990s. And early political tremors of public opinion hint at greater fallout to come."

The article quotes a WSJ/NBC poll showing that 70% the population doesn't trust the word of stock brokers and corporations. It also quotes AFL-CIO president John Sweeney, saying it is the best chance in years "to fundamentally change the way corporate America works." The authors continue:

"The 2002 market crash could turn into a historic turning point in American politics and regulation if two significant changes occur.

"First, the current crisis of confidence in business and markets would have to turn into a broader economic decline. When Franklin Roosevelt embarked on the New Deal, one in four Americans was out of work—an unemployment rate four times that of today [if only thanks to the ingenuity of the government's statisticians]. The spread of stock ownership means Main Street is feeling Wall Street's pain, but so far, that pain has produced public anger—not desperation.

"Second, the economic shock would have to realign the nation's even balance of political power to give politicians the clear mandate for change that Franklin Roosevelt and his Democratic Party felt. That hasn't happened yet, the WSJ poll shows...."

The new political alignment under FDR produced, "in rapid order, the Securities and Exchange Commission, the Glass-Steagall Act separating the banking and investment businesses, the Utility Holding Company Act restricting the centralization of utility control, and reform of the Federal Reserve. It was the most sweeping change ever in the way America does business, and it created the regulatory framework that still governs business today ignoring that it has been torn apart by the conservative revolution."

GE To Cut Turbine Output, Slash Jobs

General Electric Power Systems announced July 23 it will cut turbine output and axe 2,500 jobs, conforming to its expectations of an 80% drop in gas-turbine shipments over the next two years. The radical reductions are planned for the next nine months, and will end 1,000 jobs in Greenville, S.C.; 1,000 in Schenectady, N.Y.; and 500 elsewhere.

GE Power Systems (based in Atlanta, with 36,500 workers worldwide), the biggest maker of gas turbines, was in on the ground floor of advanced "jet" turbine designs for natural gas-fueled electricity plants—a mode of power generation involving good engineering for a bad downshift of using natural gas, instead of nuclear and high-tech coal, for baseline generation. This was part of the Enron-omics-era of deregulation. Now comes the phaseout of gas-turbine production itself. Earlier in July, Caterpillar Inc., a large maker of construction equipment, and industrial gas turbines, reported a 25% decline in net income (over year earlier) for its second quarter, because of the sharp drop in electric power generation equipment orders. GE said July 23 that it will up output of turbine blades for windmill energy.

Housing Bubble: Home Sales Buckle in June

Sales of existing homes sank 11.7% in June over May, in the largest one-month drop since April 1995. Sales of existing homes make up 85% of the U.S. home market. For the first five months of 2002, sales of existing homes had been going at a record pace, but this trend came to an abrupt halt in June.

In conjunction with Fannie Mae, Federal Reserve Board chairman Alan Greenspan has been pumping money into the housing market, in order to keep the U.S. economy from going into free-fall. Now, Freddie Mac reports, the average rate on a 30-year fixed mortgage has fallen to 6.34%, the lowest it has been in decades. This is to induce households to either purchase homes or refinance the mortgages on their existing homes. Speaking before the Senate Banking Committee July 16, Greenspan boasted that his money-pumping has created "very low levels of mortgage interest rates," which has been instrumental in "buoying spending." Greenspan said, "the very low level of mortgages interest rates ... encouraged households to purchase homes, refinance debt ..., and extract equity from homes to finance expenditures. Fixed-mortgage interest rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well." But were these low interest rates to lose their effectiveness, the housing bubble, and the overall U.S. financial bubble would unravel.

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