In this issue:

'Bubbles' Bernanke: Fed Could Cut Rates to Zero

No Recovery from Money-Pumping: Job Loss Permanent

Journal: Bond Market Crash Threatens Economy

Mis-Fortune 500 Companies Announce Job Cuts

New Report Shows Freddie Mac Flim-Flamming on Earnings

Fannie/Freddie Debt Price Hits Two-Month Low

Michigan Crisis Reflects National Economic Breakdown

State workers are facing $250 million in cuts in their wages and benefits.


From Volume 2, Issue Number 30 of Electronic Intelligence Weekly, Published July 29, 2003

U.S. Economic/Financial News

'Bubbles' Bernanke: Fed Could Cut Rates to Zero

Federal Reserve Governor Ben Bernanke said the central bank would continue its hyperinflationary liquidity pumping. "Monetary ease appears to be indicated for a considerable period," he told the Economics Roundtable of the University of California at San Diego on July 23. The Federal Reserve could either maintain the Federal funds rate at its current level, he said, or cut overnight borrowing costs again. The Fed, he indicated, "should be willing to cut the funds rate to zero, should that prove necessary," ostensibly to prevent a fall in inflation. If the Fed were to do so, he added, it could still use "non-traditional" methods, such as buying long-term bonds.

No Recovery from Money-Pumping: Job Loss Permanent

Pumping money won't lead to economic recovery, since firms are moving factories overseas so that U.S. unemployment will not be cyclical, but permanent, in both manufacturing and the service sector:

* The Wall Street Journal July 21, echoing the National Association of Manufacturers' recent warning, highlights the "historic" shift in the disappearance of U.S. manufacturing jobs, as companies are moving factories abroad. In a front-page article entitled, "Lasting Shift: Laid-Off Factory Workers Find Jobs Are Drying Up for Good," the Journal acknowledges the breakdown of the U.S. manufacturing sector. "While hundreds of factories close in any given year, something historic and fundamentally different is occurring now," it notes, adding that "for manufacturing, this isn't a cyclical downturn." Factory jobs that have moved overseas are unlikely to return to the U.S., it warns, while manufacturing-related jobs have also disappeared.

* There won't be a recovery in the U.S. economy from increasing money funnelled to companies, because any corporate investment will just be to move jobs and production overseas, argues New York Times columnist Louis Uchitelle on July 20. Rosy forecasts of an economic uptick are "detached" from reality, he writes, because the economy has "deviated" from the business cycle, as companies move production abroad, especially to China and India, in order to cut costs.

* U.S. corporations are planning to move an additional 3 million white-collar service-sector jobs, including highly paid positions, to countries such as China and India by 2015, Forrester Research estimates. Two top IBM officials, in a conference call, urged the company to accelerate efforts to move white-collar jobs now done in the U.S., to other countries, including India, in order to reduce costs. Software maker Oracle plans to increase its jobs in India to 6,000 from 3,200.

Ironically, "Increased global trade was supposed to lead to better jobs and higher standards of living," noted Donald Manzullo (R-Ill), at a House Small Business Committee hearing on June 18.

Journal: Bond Market Crash Threatens Economy

Soaring bond yields and rising mortgage rates are already slowing down the housing and mortgage-refinancing boom, which has fuelled consumer spending for the past two years; a sudden further rate rise could have catastrophic consequences for home buying and consumer spending, the Wall Street Journal reported July 24. The boost in rates also saddles debt-laden households with higher interest costs. Higher bond yields could drive down the stock market, if investors move money out of stocks and into government bonds.

In the past month, yields on 10-year Treasury bonds have jumped a full percentage point. Interest rates on 30-year fixed-rate mortgages rose to nearly 6% on July 24, the highest level since January.

Applications to refinance mortgages plummeted by 38% in the week ending July 18, compared to their late-May peak, said the Mortgage Bankers Association of America.

Household debt has risen in the past two years at the fastest pace since the mid-1980s, to 111% of disposable income, the Urinal notes, meaning that "the economy is far more vulnerable to an increase in interest rates than before."

Mis-Fortune 500 Companies Announce Job Cuts

Not even the "blue-blood" corporations are immune from effects of the disintegrating U.S. economy. Some of the latest reports:

* Eastman Kodak will slash 4,500-6,000 jobs this year, in order to cut costs at its struggling photographic film unit, after it said profit plunged by 61% in the second quarter. Jobs will be eliminated in its administrative, manufacturing, and research and development departments, as well as in its consumer imaging and Kodak professional operations. The new job cuts, blamed in part on "persistent economic weakness," come on top of 7,300 jobs cut last year. Since 1998, the photo giant has chopped its workforce by 19%.

* Tool maker Snap-On will eliminate 560 jobs by early 2004, when it closes factories in Kenosha and Mount Carmel, Ill. Production at the two factories, which make hand tools and power tools, will be phased out starting on Oct. 1.

* Software maker Siebel Systems eliminated 490 jobs, as sales fell for the eighth straight quarter, amid weak corporate demand. The company also is moving jobs overseas and consolidating facilities in order to cut costs, warning that "economic conditions continue to be a challenge." Last year Siebel slashed 1,150 jobs, 16% of its workforce.

New Report Shows Freddie Mac Flim-Flamming on Earnings

On July 23, a 107-page report was released by Freddie Mac, after seven months of study by a so-called "independent" investigative team led by law firm Baker Botts, covering ways in which the mortgage lender acted to damp the appearance of volatility, by deferring bubble-high earnings into the future. Besides paperwork and files, the report draws on 11,000 minutes of taped conversations with derivatives traders.

The principal story being reported from the new study, is based on a chain of events in 2001. In summer that year, the company decided that a big surplus of net interest income that was piling up, should be shunted off to be reported in the future, when income would be expected to go down. A series of derivatives deals—"linked swaps"—were entered into, continuing from September through December. By then, $420 million had been shifted into later reporting periods.

Why is this now being scrutinized? A soap opera account is given: In October 2002, two anonymous letters were sent by a Freddie Mac whistle-blower (as yet not named) to the Bank of America and to the SEC, charging flim-flam accounting by Freddie Mac. (In March, Freddie Mac had dumped Arthur Andersen, and hired Price Waterhouse Coopers as its accounting firm, which later claimed Freddie's accounting practices were unorthodox.)

In December 2002, the board of Freddie Mac decided to commission an "outside" investigation of its own accounting practices. It hired Baker Botts, the Schlumberger/Lazard-connected law firm of the Bush League's James A. Baker III. (Recall that Lazard also played a role in the Enron coverup.)

Not being reported in the coverage this week, are some of the outstanding principals active with Freddie Mac during the 2001 infractions, and up to the present time.

In 2001, Citigroup was involved in $204 billion of securities transactions with Freddie Mac, including the notional value of derivatives (according to Freddie Mac's 2002 proxy). Thomas W. Jones, Chief Executive of Global Investment Management and Private Banking for Citigroup, is chairman of Freddie Mac's Audit Committee.

A top Cheney/Halliburton man, David Gribbin, is on the Freddie Mac Board, having been appointed by President Bush earlier this year. Gribbin headed the Washington, D.C. office of Halliburton at the time Cheney ran the company. Prior to Gribbin's appointment, he was involved in lobbying for Freddie Mac, through his firm Clark & Weinstock, for the past five years.

In June 2003, Freddie announced the departure of three top executives, saying that some $6.9 billion in pre-tax profits had been understated in recent years, and things would improve. The latest projection by Freddie Mac officials is that the company will complete its restatement of its financial position by the end of September, though it will not be able to file its 2002 statement with the Securities and Exchange Commission until sometime in 2004.

The report, which EIR has not yet reviewed, reportedly mentions that Freddie needed to set aside earnings for some hard times down the road, which coheres with our suspicion that the current wave of mortgage refinancings is setting Freddie Mac and Fannie Mae up for big losses in the future.

Freddie Mac is the fourth largest financial entity, by assets, in the United States, and directly owns 19% of all the home mortgages in the nation.

Fannie/Freddie Debt Price Hits Two-Month Low

Freddie Mac/Fannie Mae's debt price hit a two-month low on rumors that European central banks had been urged to reduce holding, the Financial Times reported July 22. A sell-off of debt issued by the mortgage finance companies, was triggered by unconfirmed reports that the European Central Bank had recommended central banks cut their substantial holdings.

The falling price of debt would raise the companies' future funding costs, which could increase their financial risk and restrict their ability to purchase more mortgages from banks.

Central banks are big buyers of securities issued by Fannie and Freddie. As of mid-July, $184 billion of agency securities were held in custody accounts, up from $88 billion three years ago.

Michigan Crisis Reflects National Economic Breakdown

Some key parameters, as reported in the Detroit Free Press and the Detroit News July 17:

* The official jobless rate in Michigan stands at 7.2%, which means actual joblessness is far worse. The official number of unemployed is given at 368,000. Over the last 12 months, the number of unemployed has increased by 17%, or 54,000 persons. The auto sector alone has cut 10,000 jobs in Michigan since June 2002.

* Policy reaction? Corporate cuts, cuts, cuts. Ford implemented massive cuts earlier this year, so that it could keep its second-quarter earnings decline to "merely" 27% over the same time year earlier! State government services cut. Some $900 million in cuts throughout state and local governments, and public universities, go into effect with the Sept. 1, 2004 fiscal year. (A $700-million windfall Federal infusion is preventing a budget emergency). But the policy of implementing cuts already mandated for FY 2003 under former Governor Engler is having obvious and drastic impact. For example, as of last February, $4.7 million was cut from many state social aid programs, such as the sweeping elimination of child daycare payments for low-income workers (by raising the income ceiling for who is eligible). An estimated 3,300 households are losing this assistance; hardest hit are low-income families, some of whom now can't afford to work!

The state is raising fees of all kinds, to attempt to plug the unpluggable budget deficit. Hikes cover all range of fees, from state park entry to drivers' licenses, rising from 10% to 75%.

State workers are facing $250 million in cuts in their wages and benefits.

* Detroit Medical Center—the operator of two key city hospitals is facing on shutdown, typifying the emergency status of key service institutions throughout the state. A $50-million emergency infusion was promised by Gov. Jennifer Granholm last week, as a "bridge" to help stabilize the DMC, which is losing $5 million a month. But what happens in five months—the end of the "stabilization" period? No one knows for sure. Meantime, staff are leaving two DMC city facilities—the Detroit Receiving Hospital and the Hutzel Women's Hospital, which are targetted for 1,000 lay-offs, and potential shutdown.

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