In this issue:

Greenspan's Double-Bubble Trouble: Housing and Bond Market

Home-Mortgage Refis Crash, Backbone of Consumer Spending

Thousands of Mutual Funds Exposed to Fannie/Freddie Debt

Top Treasury Man Resigns as Financial Blowback Hits Bush Administration

New Market Swindle To Draw 'Patsies' into Tech Stocks

Trade Deficit Rises Again, Despite Crashing Dollar

State Jobless Claims Highest in 20 Years

Pension Swindle Will 'Bail Out' Businesses; Underfund Plans


From Volume 2, Issue Number 28 of Electronic Intelligence Weekly, Published July 15, 2003

U.S. Economic/Financial News

Greenspan's Double-Bubble Trouble: Housing and Bond Market

"Greenspan should quit while he's ahead," after helping create several asset bubbles, writes Christopher Lingle in the Japan Times July 8. Fed Chairman Alan Greenspan's dot.com bubble appeared after he opened up the credit taps in 1998 and "allowed things to really get out of hand." The Fed's money-pumping, along with the subsequent artificially low interest rates, has helped generate a double bubble in the housing and bond markets. If either of these bubbles explodes, warns Lingle, "the U.S. economy could be blown out of the water."

At the same time, Melvyn Krauss, writing in the July 7 Financial Times, says that Greenspan is known as the "double bubble" man who "egged on" the stock market, which crashed in 2000. Then Greenspan inflated a bond-market bubble, with his talk of the Federal Reserve buying bonds under the pretext of deflation. The Fed has now burst the bond bubble, which will cause mortgage rates to jump—threatening Greenspan's housing bubble, Krauss warns.

Home-Mortgage Refis Crash, Backbone of Consumer Spending

During the bond market sell-off of the last two weeks, interest rates on long-term debt, including government bonds and mortgage loans, have risen sharply. As a consequence, mortgage refinancing, hitting a record $1.75 trillion last year, has now suffered its biggest decline since November 2002. According to the Mortgage Bankers Association, refinancing activity fell 21% in the week ended July 5. The panicked Financial Times headlined July 10, "Bond Market Fall Threatens Global Recovery," noting that we have definitely seen the peak of the mortgage refinancing frenzy, which had been a key element in keeping up U.S. consumer spending over the last few years.

Thousands of Mutual Funds Exposed to Fannie/Freddie Debt

Even safe-sounding bond mutual funds are highly exposed to Fannie Mae/Freddie Mac debt, the Wall Street Journal's Aaron Lucchetti reported July 11. In addition to the well-known thousands of mutual funds and other investment portfolios whose names indicate large holdings of mortgage-backed securities and other debt issued by derivatives-laden Fannie Mae and Freddie Mac, many bond funds loaded with the mortgage-finance giants' debt do not give such an indication in their names. According to Morningstar Inc., 182 bond funds (with $180 billion in assets) had more than one-third of their assets in Fannie/Freddie-related debt, as of their latest SEC filings, even though their fund names don't include the words "mortgage," "Fannie," or "Freddie." More than 80 of these funds invested at least 50% of their assets in shaky Fannie/Freddie debt, with 74 using "government" or "Federal" in their fund name—making it appear, however falsely, that the majority of their holdings are in secure U.S. Treasury bonds.

Top Treasury Man Resigns as Financial Blowback Hits Bush Administration

Peter Fisher resigned July 9 as U.S. Treasury Undersecretary for Domestic Finance, effective Oct. 10. Fisher, who as New York Fed executive vice president, had arranged the bailout of the financial system in September 1998, when Long-Term Capital Management went bankrupt, offered his resignation as domestic finance chief, in a letter to President Bush citing family reasons. As Treasury Undersecretary since August 2001, Fisher was involved in efforts to restart bond and stock trading following the Sept. 11 attacks, and also decided to eliminate the 30-year U.S. Treasury bond on Oct. 30, 2001. He also had responsibility for determining the Treasury's policy toward government-sponsored enterprises such as Fannie Mae and Freddie Mac.

The White House said Bush intends to nominate Kenneth Leet, a managing director with Goldman Sachs, to be Fisher's replacement.

According to New York Post economic columnist John Crudele, Fisher was the "life preserver," the guy who would jump in and intervene if the market started to sink. Fisher was the liaison with Wall Street firms, as a top official at the New York Federal Reserve Bank, "swapping" intelligence with traders—"the same thing as inside information," Crudele charged July 10. One rumor was that Fisher, a Democrat, was unhappy because he didn't get the job to head the New York Fed.

Does Fisher's resignation reflect disagreement within the Bush Administration over Greenspan's financial bubble-blowing practices? Stay tuned.

New Market Swindle To Draw 'Patsies' into Tech Stocks

A new swindle is afoot to draw the "patsies" into buying tech stocks as a "bargain"; and the patsies are going to lose again if they fall for it, warns Christopher Byron in the New York Post July 7. There is "a lot of excited 'buy now' table-pounding by people and institutions that have collectively lost trillions in the slide and are desperate to get at least some of it back," he writes. "The patsies in this process always turn out to be the same—the stock market's individual retail investors—and they're being set up for a hosing all over again in the current run-up," which Byron calls "A Ruinous New Rally."

Byron profiles two stocks: Sirius Satellite Radio, whose stock price has gained 150% since January; and Qiao Xing Universal Telephone, a Chinese company, which has soared 400%-plus, when it has not even filed an SEC report for 18 months. Big investors like the Blackstone Group and Loral Space and Communications have dumped their shares in these "bargains," at the same time that small investors have bought the duds. Blackstone sold 57 million shares of Sirius stock, cutting its stake by more than half, while Loral unloaded at least 25% of its stake.

Before joining Rupert Murdoch's Post, Byron, who has penned slanders against economist Lyndon LaRouche, watched his previous employer Worth magazine go bankrupt and fold.

Trade Deficit Rises Again, Despite Crashing Dollar

The U.S. trade deficit rose in May to $41.84 billion—the third-highest ever—despite the crashing dollar, as imports increased faster than exports, according to the Commerce Department July 11. During January-May 2003, the gap between exports and imports of goods and services, swelled to $205 billion, up about 28% from the same period a year earlier. This level corresponds to a whopping annual trade deficit of $492 billion, meaning that the U.S. must borrow this amount from the rest of the world in order to survive.

The goods deficit alone climbed to $46.78 billion in May, the third-highest level on record, despite Administration claims that the falling dollar would cause the gap to shrink. Year-to-date, the goods deficit has grown to $229 billion, about 22% higher than last year—reflecting the inability of the U.S. to produce the basis for its physical existence.

State Jobless Claims Highest in 20 Years

The number of Americans receiving state unemployment benefits jumped to the highest level since February 1983, rising 87,000 to 3.82 million in the week ended June 28, the Labor Department said July 10. The four-week average of new jobless claims rose to 426,750 in the week ended July 4, the 21st straight week over 400,000.

Pension Swindle Will 'Bail Out' Businesses; Underfund Plans

The Bush Administration has proposed a pension swindle that would allow companies to put less money into their retirement plans over the next two years, by changing how firms calculate their pension liabilities. The July 8 Wall Street Journal admits that the proposal "amounts to a bail-out" of major corporations, at least in the short run. Such a change would increase the stress on the pension system in the long run, however, the New York Times noted the same day, as many plans are already seriously underfunded. Companies with insolvent pension plans would be prevented from offering new benefits or lump-sum payouts to retirees.

Under the proposed legislation, companies would base the growth of their pension funds on long-term corporate-bond interest rates, replacing the link to the 30-year Treasury bond, which has a lower interest rate. Using a higher interest rate makes the pension liabilities look smaller. General Motors, for example, calculates that a mere 0.25% increase in the discount rate it applies to future pension obligations, would save it $120 million in pre-tax pension expenses in 2003, and would reduce its total projected pension benefit obligations by $1.8 billion. Since the Administration's proposal would allow corporations to increase the assumed discount rate by as much as 1.50 percentage points by the end of this year, corporations such as GM could thus, by statistical manipulation, lower what they have to pay out on pensions.

After two years, pension obligations would be calculated in a completely new way. Companies with many retirees and older workers—such as auto manufacturers—would see liabilities grow again.

All rights reserved © 2003 EIRNS