In this issue:

U.S. Banks' Derivatives Holdings Soar 30% in One Year

Snow Wants New Regulator for Fannie and Freddie—In Case of Meltdown

'Systemic Problems' in Pension System Pose Serious Risk

Federal Government Borrowing Surged in Second Quarter

Bush Renames 'Bubbles' Bernanke to Fed Governors' Board

U.S. Trade Deficit Hits Over $40 Billion in July

'Don't Blame China' for U.S. Manufacturing Job Losses

'Job-Loss Recovery' Obvious Even to Moonie Times

Machine-Tool Consumption Continues To Plunge

Public Worried More by Health-Care Costs Than Terrorism


From Volume 2, Issue Number 37 of Electronic Intelligence Weekly, Published Sept. 16, 2003

U.S. Economic/Financial News

U.S. Banks' Derivatives Holdings Soar 30% in One Year

As of June 30, U.S. commercial banks held $66.4 trillion in derivatives, up 30.6% from the $50.9 trillion reported one year earlier, according to the FDIC's latest Quarterly Banking Profile. Backing this mass of bets is $7.5 trillion in assets, $4.3 trillion in loans, and $676 billion in equity capital. That means that derivatives are now nine times assets, 15 times loans, and 98 times equity, and a loss equivalent to just 1.02% of total derivatives would wipe out all the equity capital in the banking system. In 1990, by comparison, derivatives were two times assets, three times loans and 31 times equity.

Adding fuel to the fire, the banks are rushing headlong into the real-estate market, increasing their holdings in mortgage-backed securities (MBS) by 25% and mortgages on one-four family houses by 24%, over the past year; the banks now hold $817 billion in MBS and $1.3 trillion in the mortgages. Loans secured by real estate rose 17% year-over-year, to $2.2 trillion. By comparison, loans to individuals rose 5%, farm loans fell 4% and business loans fell 5%.

The number of banks declined to 7,833 in June, compared to 14,496 in 1984.

By counting all this paper as if it were real, the banks reported a record $50 billion in profits in the first half. This brings to mind the case of Enron, which was fifth among all U.S. companies in revenue in 2001, despite the fact that it disintegrated that same year.

Snow Wants New Regulator for Fannie and Freddie—In Case of Meltdown

Treasury Secretary John Snow urged Congress to create a new Federal agency to regulate and supervise Fannie Mae and Freddie Mac, with receivership powers in the event of a meltdown, insisting the companies had outgrown current government oversight. Of the current regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), he said that he "has neither the tools, nor the stature, to deal effectively with the current size, complexity, and importance of these enterprises." He was speaking Sept. 10 before the House Financial Services Committee.

The objective of the new agency, Snow said, would be to foster a "sound and resilient" housing-finance system, including the secondary-mortgage markets. "We need to devote careful attention to the resilience of our system of housing finance," he cautioned.

"It is of central importance," he stressed, that Congress provide the new regulator with a mandate "to oversee the prudential operations [hedging] of the enterprises, and the safety and soundness of their financial activities."

Moreover, the regulator should be given receivership powers in case Fannie and/or Freddie fail, Snow said. The regulator "should have all of the authority necessary to direct the liquidation of assets, and otherwise to direct an orderly wind down," he declared.

He recommended the new agency be moved to the Treasury Department, from the Department of Housing and Urban Development. In addition, the agency should be funded "without going through the appropriations process."

"The Administration's proposal would provide important regulatory enhancements," said OFHEO director Armando Falcon, including "enhanced safety and soundness authority."

Senators Richard Shelby (R-Ala.) and Michael Oxley (R-Ohio), chairmen of the committees that oversee Fannie and Freddie, said, in a joint statement, they would write legislation to create the agency.

On the other hand, the Senate Republican Policy Committee recommended a "greater separation" between the Federal government and the enterprises.

'Systemic Problems' in Pension System Pose Serious Risk

During fiscal 2002, the Pension Benefit Guaranty Corp.'s single-employer insurance program "went from a surplus of $7.7 billion to a deficit of $3.6 billion—a loss of $11.3 billion in just one year ... more than five time larger than any previous one-year loss in the agency's 28-year history," PBGC Executive Director Steven Kandarian told the House Education Committee Sept. 4. "And that deficit has increased to an unaudited $5.7 billion at the end of July," he added. Kandarian cited a recent GAO report which described the single-employer program as "high risk," and said, "GAO points to systemic problems in the private-sector defined-benefit system that pose serious risks to PBGC. For example, active workers made up only 53% of insured participants in 2000, down from 78% in 1980. The airline sector has $26 billion in underfunded pensions, and the agency has been hit with a $3.9 billion claim for Bethlehem Steel, $1.9 billion for LTV, and $1.3 billion for National Steel. From 1975 through 2002, steel has accounted for $9.4 billion (56%) of PBGC claims, airlines $2.8 billion (17%), and all others $4.7 billion (28%).

Federal Government Borrowing Surged in Second Quarter

Federal government debt jumped at a 24% annualized rate in the second quarter, the fastest pace since the first quarter of 1983, according to the Federal Reserve's "Flow of Funds" report, released Sept. 10. In the three-month period, the U.S. Treasury borrowed $222 billion—more than the last three quarters combined. Moreover, this was the highest quarterly level of Federal borrowing, going back to at least 1967.

Meanwhile, household borrowing grew at a 12% annualized pace, the fastest rate since the second quarter of 1987.

Bush Renames 'Bubbles' Bernanke to Fed Governors' Board

President Bush has renominated Federal Reserve Board Governor Ben "Bubbles" Bernanke for a 14-year term, and Vice Chairman Roger Ferguson for a second four-year term. Bernanke, who last week said he would not rule out a further hyperinflationary interest-rate cut, was chosen just last year by Bush to serve out the remaining part of a term set to expire in January 2004.

The widely discredited "Dracula" Greenspan, whom Bush said in April he wanted to continue as Federal Reserve Chairman, welcomed the nominations, praising Bernanke and Ferguson as "exemplary public servants" with "sound judgment."

The nominations require Senate confirmation.

U.S. Trade Deficit Hits Over $40 Billion in July

The U.S. trade deficit grew to $40.3 billion in July, reflecting the destruction of the physical economy. The deficit in goods and services rose $0.3 billion, as imports increased faster than exports, according to a joint report, released Sept. 10, by the U.S. Census Bureau and the Bureau of Economic Analysis, through the Commerce Department. Exports rose to $86.15 billion, while imports increased to $126.47 billion—the highest level ever. For January through July, the overall deficit totalled $285.5 billion, corresponding to an annual deficit of nearly $500 billion.

The physical goods portion, importantly, rose to a $45.3 billion deficit, as imports hit $105.81 billion—the highest level since October 2000. For January-July, the goods deficit was $319.4 billion, up nearly 20% from the same period last year—even as the economy has officially been in a "recovery."

A longer-term perspective, makes clear the destruction of the U.S. productive economy. By 2002, the goods deficit had surged to nearly 2.8 times the level in 1995; and in the first seven months of this year, the deficit has grown by an additional 24%. Historically the most productive nation, the U.S. can no longer create the physical wealth for its existence, as manufacturing has been decimated.

'Don't Blame China' for U.S. Manufacturing Job Losses

Scapegoating China for U.S. manufacturing job losses is "unpersuasive," writes R. Glenn Hubbard, former chair of Bush's Council of Economic Advisers, in a Wall Street Journal op-ed Sept. 9, titled, "Don't Blame the Yuan." The Bush Administration's claim that a revaluation of China's currency would stem U.S. job losses in manufacturing, not only "does not survive careful scrutiny," insists Hubbard. Such pressure is also counterproductive, as it will "divert attention from policies that would actually help" workers who have lost their jobs. The Administration is "tilting at the currency windmill," he adds, in trying to force China to raise the value of the yuan.

Moreover, Hubbard warns, pressure for revaluation, by already bringing "hot money" to China, could trigger "financial instability and a banking crisis" if done suddenly.

Peddling Chinese currency revaluation as a "silver bullet" to stop U.S. manufacturing job losses, he concludes, "risks both unwelcome international consequences and failure to take helpful steps at home."

Hubbard, the main architect of Bush's tax-cut plan, had resigned, effective Feb. 28, as chairman of the White House's Council of Economic Advisers.

'Job-Loss Recovery' Obvious Even to Moonie Times

Even the Moonie-owned Washington Times joined the chorus on Sept. 7, mocking the Bush Administration's claims of positive economic news, citing last week's data on continuing losses of manufacturing jobs. In July, the Times editorial noted, manufacturing jobs fell for the 37th consecutive month. "Compared to the jobless recovery that haunted the previous Bush Administration," the Times editorialized, "the current Bush White House has been confronting a job-loss recovery.... Today there are 10.22 million production workers, the lowest number since April 1941. Never in the 62 subsequent years has production-worker employment fallen below 10 million. But that potentially politically combustible milestone is now well within reach, given the likelihood that the downturn trend in production employment will not be reversed anytime soon."

Ominously for Bush, the editorial concluded with the following: "Should production jobs continue to fall by the monthly average of 61,000 jobs that has prevailed during the 37-month downturn, production employment will fall below 10 million in December, just as the 2004 Presidential campaign begins to heat up."

Machine-Tool Consumption Continues To Plunge

U.S. machine-tool consumption for January-July is down 15.5%, from last year's depression level for the same period—proof of the urgent need for LaRouche's infrastructure-vectored recovery policy. U.S. industry consumed only $157.06 million worth of machine tools in July, down a whopping 33.7% from the previous month, according to a joint report released Sept. 8 by the American Machine Tool Distributors' Association and the Association of Manufacturing Technology. Yet, July's machine-tool consumption was touted as a sign of the mythical "recovery," because it was up 8.2% from the level in July 2002—a near-record low. Moreover, from January to July this year, U.S. machine-tool consumption has fallen by 15.5% compared to the same period in 2002—when it had already plunged by 63% from the level in 1997.

Machine tools, representing the discovery and application of new physical principles, are the means by which mankind alters nature to improve his existence.

Public Worried More by Health-Care Costs Than Terrorism

"Health Premiums, Not Terror, Worry Public," is the headline of a Reuters article reporting on a survey released Sept. 9 by the Kaiser Family Foundation and the Health Research and Educational Trust, which showed that over the past three years, the share of premiums employees pay for family health coverage has increased almost 50%, from $1,169 to $2,412 annually. The typical family health-insurance policy now costs $9,068, with employers paying 73%, on average, and employees paying 27%, Kaiser said. Premiums increased 13.9% in 2003, the seventh straight year of increases and the third consecutive year of double-digit increases. Thirty-three percent of the insured worry that their income might not keep up with health premiums, while only 8% feared being victim of a terrorist attack.

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