In this issue:

House Bill Would Cut Billions from Retirement Plans

Banks' Derivatives Holdings Give Greenspan Jitters

Fed Warns of Inflation, Economic Uncertainty

Number of Long-Term Unemployed Rises to 20-Year High

Planned U.S. Layoffs See Dramatic Rise in April

'Imaginary Income' Inflates Government Figures

NYSE Chairman Richard Grasso's Possible Conflict of Interest Raises Eyebrows

States' 'Rainy Day' Funds Slashed by Half as Economies Sink

States' Jobless Funds Dwindle as More Americans Need Coverage

From Volume 2, Issue Number 19 of Electronic Intelligence Weekly, Published May 13, 2003

U.S. Economic/Financial News

House Bill Would Cut Billions from Retirement Plans

If a bill now before the House of Representatives is adopted, blue-collar workers will be cheated out of a significant amount of the pension funds, according to a report in the New York Times May 6. As part of a larger pension bill pending in the House, a provision based on actuarial data would allow companies to assume that their blue-collar workers will die, on average, sooner than is now assumed by their pension plans—most of which are underfunded. As a result, companies would not have to pay future blue-collar pensions for as long a time as they currently do, thereby lowering the amount of pension money they are required to set aside.

However, the chairman of the actuarial panel has written to the Treasury Department, which regulates pension funds, warning that the panel's data were being misapplied, and could be used in a "curious" and "arbitrary" way. Edwin Hustead, in an interview with the Times, said that the bill would not require companies to include in their pension calculations the data showing that white-collar workers live longer, which would increase pension obligations of unionized companies with mostly white-collar employees.

Moreover, higher-paid workers live longer, whether they are blue-collar or white-collar, and thus require longer pension payouts, he said, but the bill doesn't include this fact. Many auto workers and airline pilots, as well as aerospace engineers, were classified as "blue-collar," but they also are highly paid—and so did not fit the statistical patterns.

Reduced contributions to already underfunded pension plans could also result in even more defaults, jeopardizing retirees.

The United Auto Workers union, whose pension plans are extremely underfunded, wrote a letter in support of the measure.

The new mortality table, devised by the Society of Actuaries during 1994-99 and sent to the American Academy of Actuaries—which rejected the SOA's adjustment for income level—was released in 2000.

In a similar vein, the financially strapped airlines sector is seeking legislation that would exempt them from making, for almost five years, "deficit reduction contributions," which are special accelerated payments that companies are required to make to pension plans that are less than 90% funded on a current-liability basis. The measure, which is supported by the Air Lines Pilots Association, has as yet no named sponsors, and would be attached to an existing bill, to reduce scrutiny.

The austerity provisions typify the accountants' mentality that destroys the basis of true economic profit, human cognition.

Banks' Derivatives Holdings Give Greenspan Jitters

Federal Reserve Board chairman Alan Greenspan warned May 8 of the danger to the global financial system from a default by one of the major derivatives-holding U.S. banks. The concentration of the derivatives market in the hands of a few investment banks "gives me and others some pause," Greenspan told a banking conference (via satellite), organized by the Chicago Federal Reserve Bank. A single dealer (JP Morgan Chase) accounts for about one-third of the global market in both interest-rate and credit derivatives, he said, and a handful of dealers account for more than two-thirds.

"When concentration reaches these kinds of levels," he cautioned, "market participants need to consider the implications of exit by one or more leading dealers.

"Such an event," he warned, "could adversely affect the liquidity of types of derivatives that market participants rely upon for managing the risks of their core business functions.

"If a major dealer exited and other dealers were unwilling to fill the void, the liquidity of the market likely would be impaired," he said.

In case of such a default, counterparties to derivatives contracts held by the dealer, Greenspan warned, would face credit risks. Contracts would have to be unwound, "netting" out the resulting gains and losses. Counterparty exposures have grown so much, even with the already wider use of netting, he said, that participants have used collateral agreements, increasing their funding-liquidity risks.

Greenspan again opposed government regulation of the over-the-counter derivatives market, peddling market discipline through counterparty evaluation and monitoring.

Fed Warns of Inflation, Economic Uncertainty

The Federal Open Market Committee voted unanimously May 6, to keep the Federal funds rate for overnight loans between banks at a 41-year low of 1.25%; but indicated that it may reduce rates in the future, as the "timing and extent" of an economic improvement "remain uncertain," with the possibility of "an unwelcome substantial fall in inflation." The economy is weighted, it warned, "toward weakness over the foreseeable future."

The following day, an op-ed by Robert Samuelson in the Washington Post worried that the U.S. economy is going the way of Japan. "Stubborn Stagnation," Samuelson called it, and fretted over the "baffling twilight zone" of jobs and stock markets falling, low growth, and now, like Japan's ten years of stagnation, "We could slip into the same trap." He admits he has no idea what to do, but points out that both political parties are "using the petty debate over the proposed dividend tax exclusion to avoid the harder questions."

Number of Long-Term Unemployed Rises to 20-Year High

Of the official 8.7 million jobless workers in the United States, almost 2 million have been unemployed for six months or longer, the highest level in two decades, according to the Labor Department's Bureau of Labor Statistics, published in the Washington Post May 8. More than half of unemployed workers have had to postpone medical or dental treatment, while about one-third said they had lost their health insurance, according to a survey released by the National Employment Law Project. And about 25% of the respondents had lost their homes, or been evicted from their apartments.

At the same time, the four-week average of new claims for state unemployment benefits rose by 60,000 over the past 13 weeks, to a one-year high of 446,000 in the week ended May 3. The average number of continuing jobless claims increased over the past four weeks to more than 3.6 million, not including 800,000 workers who are receiving Federal unemployment benefits that expire on May 31, the highest level in six months.

Planned U.S. Layoffs See Dramatic Rise in April

While long-term unemployment hit a 20-year high (see above), new layoffs are rapidly expanding the number of unemployed Americans. Planned U.S. layoffs soared by 71% in April to the highest level since November. Some 40% of the announced job cuts were born by the public sector, amid the blow-out of state and local government budgets. A whopping 146,399 layoffs were announced in April by U.S. employers, compared to 85,396 in March, the employment research firm Challenger, Gray & Christmas reported May 5. Government agencies said they planned to cut 57,927 jobs, the largest one-month total from a single sector since Sept. 11, 2001.

'Imaginary Income' Inflates Government Figures

The government uses "imaginary income" to show rising personal income, wrote New York Post senior columnist John Crudele May 6. The Bureau of Economic Analysis uses "imputations," meaning "the government adds a lot of stuff into its calculations that no sane person would consider income," Crudele writes. Examples of the $84 billion in "income" in 2001, include free checking accounts and imputed income homeowners get from occupying their own houses instead of renting. Even meals served to military personnel are classified as income, to the tune of $11 billion in 2001.

NYSE Chairman Richard Grasso's Possible Conflict of Interest Raises Eyebrows

New York Stock Exchange chairman Richard Grasso's whopping $10-million compensation package was approved by a committee comprised of executives of firms that he is charged with regulating, the New York Post reported May 8. (Perhaps the compensation was payback for the deal Grasso made with the Colombian narcoterrorist FARC a few years ago, which presumably directed the profits from its criminal activities into Wall Street securities.)

The revelation came as Grasso was testifying on Wall Street reform to the Senate Banking Committee, promising to investigate "related areas of misconduct." The lack of transparency about his pay, the Post says, has "corporate governance experts baffled." Three of the committee members are under investigation by the NYSE for trading violations.

States' 'Rainy Day' Funds Slashed by Half as Economies Sink

Among recent stories on the economic blowout hitting American states, is that of the Washington Post May 4: "Rescue's Just Not Part of the Plan," by Michael Powell of the Post's New York bureau. Overall, the states' "rainy day" funds are down from $20 billion to $20. At present, "California faces a $34 billion hole, New York's is $12 billion and President Bush's home state of Texas anticipates a $9.9 billion shortfall through 2005.... But rather than the sort of rescue package much wished for by the states, the Administration is suggesting additional responsibilities. It proposes to replace the $13 billion Section 8 housing voucher program—the country's main form of housing assistance for the poor, with one that the states would run." Also, that the states should pick up the tab for operating intercity Amtrak. Likewise, for additional public-health care for "Bio-Shield," and so on.

"How bad is it out there?" asks the Post. "Forty-nine states operate under balanced budget requirements, and 30 of those states and the District of Columbia are facing budget shortfalls. They have narrowed the gaps by implementing short- or long-term tax increases, laying off personnel, reducing Medicaid eligibility, delaying capital projects, raising college tuition and tapping reserves such as rainy day funds."

In New York State, a $2.7-billion "city-relief" package for New York City was filed in the state legislature May 2, and may be ready for a vote May 5, which involves all kinds of tax fiddles, as does a big budget proposal for the state itself, which Gov. Pataki threatens to veto. As everywhere, the question is, how to restore the economy?

States' Jobless Funds Dwindle as More Americans Need Coverage

The state of Delaware announced it will raise unemployment insurance tax rates from 8.2% to 8.5% for businesses, and at the same time cut benefits paid to unemployed workers, the Delaware News Journal wrote May 8. The increased demand on the fund, due to rising layoffs, has caused the fund to shrink faster than expected. The number of new Delawareans drawing benefits has risen by 27% in the past two years. Advocates for the unemployed agree the taxes should be raised on employers to protect the fund, but not by cutting benefits, "adding to the burden of people out of work."

Business advocates argue that it's not necessary, because Delaware has "the most solvent" unemployment insurance programs in the country, State Rep. William Oberle (R) insisted. Tom MacPherson, director of the state's unemployment fund, agrees that the fund is solvent, but admits that the growing joblessness is stressing state benefit funds across the nation. "This is a national problem," he said, pointing to the fact that Texas has borrowed from the Federal government to rescue its fund and keep it solvent.

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