Meredith, Can Lehman Survive This?

This is one of those times when you know someone was not prepared for the question they were asked. Here's Maria Bartiromo with Meredith Whitney, executive director of equity research at Oppenheimer, discussing what's in store for the financial sector.

Meredith Whitney Future Of Financials



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Maria Bartiromo:
Meredith, Can Lehman Survive This?

Meredith:
Umm
I
I
I
I umm
I think
I don't know
I don't know

It was a good interview, and also very much out of character for Meredith to be at a loss for words. Play the whole thing. It's a good listen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Schwarzenegger Cuts Wages of 200,000 Workers

Just 11 days ago I wrote Schwarzenegger Needs To Face Reality: California Is Insolvent. Today, Schwarzenegger has decided to act.

In a budget impasse, Schwarzenegger orders cuts amid fiscal crisis.

With California's cash dwindling and legislators still debating a new budget, Gov. Arnold Schwarzenegger eliminated thousands of part-time and temporary state positions Thursday and ordered that 200,000 state workers receive the federal minimum wage.

"Today I am exercising my executive authority to avoid a full-blown crisis and keep our state moving forward," Schwarzenegger said. "This is not an action I take lightly."

Democratic and Republican lawmakers remain divided over how to close a $15.2 billion deficit, with Democrats favoring $8.2 billion in new taxes on corporations and the state's wealthiest residents. Republicans want a spending cap and oppose tax increases.

Schwarzenegger's finance team said of that total, just 10,300 would receive pink slips immediately.

Schwarzenegger also cited a 2003 California Supreme Court ruling allowing him to slash the pay of regular full-time employees when the state lacks a budget. By law, those workers must be paid at least the federal minimum wage of $6.55 an hour and will be reimbursed once a budget is approved.

The first paycheck to be affected by the minimum wage order would be the one state employees receive in early September, but state Controller John Chiang, a Democrat, sent a letter to Schwarzenegger on Thursday saying he will defy the order and issue employees their regular paychecks.

He said the governor's executive order was based on "faulty legal and factual premises." Chiang said the 2003 Supreme Court ruling did not specify the actual amount of the salary his office could pay state employees during a budget impasse.

The controller and the Republican administration also differ over the state's financial condition. Chiang maintains that California has enough money to meet all its expenses through September.

Legal Showdown?

Would Chiang really defy an executive order? It is unlikely to come to that. I expect some sort of resolution before September. Sadly Democrats want to raise taxes. The proper solution is to start firing people in mass. My thoughts from early in the year can be found in Mish's California Budget Proposal.

More recent thoughts can be found in Schwarzenegger To Slash State Workers' Pay Till Budget Passes.

But given that the legislature is extremely unlikely to do anything sensible, I think voters should take matters into their own hands and lower the salary of the Governor, all the state officers, including the state senate and congress. Another idea would be to float a proposition to increase the size of districts and eliminate 3/4 of the state legislators across the board. Something also needs to be done about "free" education and medical services that is causing California to be flooded will illegal aliens.

When push comes to shove there is always unlimited demand for "free" services. California needs to wake up as to what those services are costing. And leave it up to clowns like Chiang whose "solution" is to borrow more money. Sadly that is the mentality of most in Federal government positions as well.

Two days ago New York Governor Warns Of Economic Crisis.

The most stunning thing about Paterson's announcement is how rational it is. He is not begging Washington for handouts, asking for higher taxes, or praying for miracles.

The Right Mindset

• Cutting spending
• Learning to do with less
• Austerity
• Reduce the size of the government workforce
• Reduce property taxes

It will be interesting to Paterson can follow through, but in California, Controller John Chiang has his head buried in the sand. California collectively has its head buried in the sand and that is why it has the biggest statewide budget mess in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Claims at 5-Year High, GDP Revised Lower, Borrowing From Fed Soars

Tomorrow, the Nonfarm Payroll Numbers are out. I made my forecast last night ahead of today's numbers. My predictions can be found in July Payroll Playbook.

Weekly Claims

The Weekly Uninsurance Claims Report for the week ending July 26 is out. It is a disaster.

Seasonally Adjusted Data

In the week ending July 26, the advance figure for seasonally adjusted initial claims was 448,000, an increase of 44,000 from the previous week's revised figure of 404,000. The 4-week moving average was 393,000, an increase of 11,000 from the previous week's revised average of 382,000.

The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending July 19, an increase of 0.2 percentage point from the prior week's unrevised rate of 2.3 percent.

Calculated Risk has some interesting charts in Weekly Claims Hit 5 Year High.

Recession Going To Widen, Deepen

Reality starting to set in: U.S. Recession May Have Begun in Last Quarter of 2007.

The U.S. economy may have slipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened, revised government figures indicated.

The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain, the Commerce Department said today in Washington. Growth for the period from 2005 through 2007 was also trimmed.

"We're in a recession," Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. "It's going to widen, it's going to deepen."

Nine of the 13 quarters under review were revised down, three increased and one was unchanged.

The largest downward revision was for the last three months of 2007, as the previously reported 2.3 percent gain in consumer spending was reduced by more than half, to 1 percent. Americans cut back on the use of electricity and gas as fuel bills soared.

"While everyone focuses on GDP, keep in mind that it is not the only barometer of economic activity," David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York, said in a July 28 note to clients. Growth "is subject to huge historical revisions."

The four other factors that the NBER takes into account, Rosenberg said, peaked between October 2007 and February 2008. The NBER usually declares a recession has started between six to 18 months after it's begun, according to its Web site.

Pollyannas Need To Change Their Tune

All the Pollyannas need to change their tune. I am sticking with the tune I sung in Case for an "L" Shaped Recession.

By the way, that revision was buried on page 11 of the latest Advance GDP numbers out today. The first two quarters of 2008 are positive but I bet those get revised lower down the road. Furthermore, it does not take two consecutive quarters of negative GDP to call a recession as is widely believed.

The National Bureau of Economic Research, the Cambridge, Massachusetts-based arbiter of economic cycles, defines a recession as a "significant" decrease in activity over a sustained period of time. The declines would be visible in GDP, payrolls, production, sales and incomes.

Total Borrowings Of Depository Institutions Soar



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The above Borrow Series Chart thanks to St. Louis Fed

Non-Borrowed Reserves

Following is a chart of Net Free or Borrowed Reserves of Depository Institutions.



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The above NFORBRES Series Chart thanks to St. Louis Fed.

Never before in history have we seen charts like the above. Those are two more indications of an unsound financial system.

If you have not already seen it, I mentioned 25 indications of an unsound financial system in You Know The Banking System Is Unsound When....

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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July Payroll Playbook

The July Employment Report from the BLS will be out on Friday. ADP has released its employment reports for July already. Let's take a look starting with The ADP National Employment Report.

Nonfarm private employment increased 9,000 from June to July 2008 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change in employment from May to June was revised up from a decrease of 79,000 to a decrease of 77,000.

This month’s employment gain was driven by growth in the service-providing sector which advanced 74,000. July employment in the goods-producing sector declined 65,000, while manufacturing employment declined 49,000, marking their twentieth and twenty-third consecutive monthly declines, respectively.

Two sectors of the economy hit hardest by recent problems in mortgage markets have been residential construction and financial activities related to home sales and mortgage lending. Today’s report suggests some lessening of the recent strain on employment in these industries.

In July, construction employment dropped 16,000. Though this was the twentieth consecutive monthly decline, and brings the total decline in construction jobs since the peak in August of 2006 to 350,000, it was one of the smallest declines in recent months. In addition, employment in financial activities rose 4,000 during the month.

Small Business Report

The ADP Small Business Report offers continuing evidence of the weak employment situation. Here are the Nonfarm Private Employment Highlights.

• Total employment: +9,000
• Small businesses: +50,000
• Medium businesses: -9,000
• Large businesses: -32,000
• Goods-producing sector: -65,000
• Service-providing sector: +74,000
• Manufacturing industry: -49,000

Small businesses represent payrolls with 1-49 employees
Medium businesses represent payrolls with 50-499 employees
Large businesses represent payrolls with more than 499 employees

July Is A Revision Month For BLS

Looking ahead to the report on Friday, it important to consider that January and July are revision months for the BLS. Guessing at what the Birth/Death Model revision will be is certainly fraught with danger, but I am going to go out on a limb anyway.

My guess the Birth Death revision will be -425,000 and the actual reported jobs number for July will be -178,000, with unemployment rising to 5.7%. If the jobs number is negative, it would be the 7th consecutive monthly contraction. These are the kind of guesses that can make one look silly but there they are.

I am also anticipating the first outright contraction in the service sector even with the strength that ADP is reporting in small businesses. Whatever that strength is, I expect it to be flooded by losses this month and next given this June 25th report: U.S. Retail Store Closures Are Flirting with Six-Year High.

Bannkrupt home furnishings retailer Linens 'n Things' disclosure this week that it plans to dispose of 120 locations is the latest burst in the retail sector's growing flood of store closings this year that has the industry's real estate disposition firms scrambling.

Home Depot recently said it would shut 15 existing stores this year and reduce the number of new store openings by almost half to 55. Then the Hilco Organization and Gordon Brothers Group, new owners of Sharper Image, announced that they will close all 86 of the chain’s remaining stores. And, Gap Inc. plans to close an unspecified number of stores while downsizing many of its remaining locations.

“You are going to see a lot more closings; we are not even close to the end,” says Graiser. “There are a few thousand more stores” coming on the market.

On top of that report Starbucks recently announced it will cut 600 stores. Looking ahead, note that Bennigan's Is Bankrupt, Faces Chapter 7 Liquidation.

In light of the above, I would expect the treasury market to react favorably to the jobs data (assuming of course my predictions don't look silly on Friday morning).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Credit Crunch Reaches Critical Mass

Some might not recognize it, but Yes Virginia, There Is A Credit Crunch. Let's look at a few examples of the credit crunch in action.

Bloomberg is reporting MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan.

MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 billion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans.

Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.

"Wall Street firms are scrutinizing their extension of credit, particularly to the gaming industry, where the sentiment is pretty weak," said Michael Paladino, an analyst at Fitch Ratings in New York.

Building the 76-acre "city-within-a-city," designed by architects, including Norman Foster and Daniel Liebeskind, is costing Las Vegas-based MGM and Dubai about $100 million each per month, D'Arrigo said in May. MGM and Dubai World will raise at least $3 billion and may increase that to $3.5 billion to fund construction, MGM's Murren said on July 14.

Murren, 46, declined to comment on which banks have signed on for the deal or on its terms.

Title Companies Complain "Banks Deprived Us Of Cash"

Title companies are shutting down in Arizona, California, and Texas. Tonight's story is United Title of Texas shuts down statewide.

United Title of Texas has closed all its offices around the state, including six in the Houston area, because of financial troubles related to its Colorado-based parent company.

"This decision was precipitated by an unexpected, and in our opinion, unwarranted and unjustified act by our syndicate of banks, which deprived us of the cash we needed to sustain and to continue those operations," the Colorado company said in a memo to employees today.

United Title is a subsidiary of Mercury Cos., which owns title agencies in California, Colorado, Texas, Oregon, Nevada and Arizona. Mercury stopped funding operations in Arizona and California, as well.

"We have a lot of closings that are supposed to occur," Hilbun said. "If people miss closing dates, they can lose their loans. The ones today could be in jeopardy."

Earlier today I noted Financial Title Shuts Down. Here is the key snip:

"Financial Title Co., the largest real-estate title agent in Silicon Valley, has shut its doors as part of a closure of multiple offices and title companies by its parent, Mercury Cos. of Colorado. The decision follows a move by Mercury's lenders to pull their line of credit after Mercury failed to meet loan requirements."

We’re Saying No To Almost Everybody

And it was less than two weeks ago, I was reading an article called "What Credit Crunch?" My response can be found in We’re Saying No To Almost Everybody.

Unwarranted and unjustified deprivation of cash sure sounds like a credit crunch to me. Of course, banks would argue their actions were both justified and warranted.

Japanese Exports Hit By US Credit Crunch

Bloomberg is reporting Japan's Bonds May Advance on Economic Outlook.

Japan's factory output dropped 2 percent from May, surpassing a decline of 1.7 percent in a Bloomberg News survey of economists and the jobless rate climbed to 4.1 percent.

The economy probably contracted an annualized 0.4 percent last quarter ended June 30, economists estimate a report to show next month. Japan's biggest export markets have been hit by the credit crunch stemming from the U.S. housing recession, while higher prices at home have made consumers reluctant to spend.

Toyota Motor Corp. and Honda Motor Co., the nation's two largest automakers, this month cut sales forecasts for 2008 as global demand cools.

Mervyn's Seeks Bankruptcy

Yesterday, Mervyn's Filed Bankruptcy in a consumer spending slowdown.

Mervyn's LLC, the 59-year-old department-store chain, joined more than a dozen U.S. retailers that have filed for bankruptcy this year as consumers cut spending in the face of the credit crunch and higher oil prices.

It's the sixth bankruptcy in the past 12 months by a company owned by Sun Capital Partners Inc., a Florida-based investment firm.

Retailers that have sought court protection over the past year include Steve & Barry's LLC, Sharper Image Corp., Shoe Pavilion Inc., Levitz Furniture Inc. and Linens 'n Things Inc. Declining home values, tightening credit and rising energy costs have left U.S. consumers "tapped out," said Martin Bienenstock, a bankruptcy lawyer with Dewey & LeBoeuf in New York.

Sun Capital was part of a private-equity group that bought Mervyn's from Minneapolis-based Target for $1.65 billion in 2004. The Sun Capital holdings that have sought bankruptcy protection are Lillian Vernon Corp., Powermate Corp., Crafts Retail Holding Corp., Wickes Furniture Co. and Jevic Transportation Inc.

One Hell Of String For Sun Capital

Six bankruptcies at Sun Capital is quite the record. I talked about one of them earlier this year in Personal Side of Wickes Furniture Bankruptcy.

Falling Demand For Credit Ratings

In a credit crunch, where there is no intention of buying debt or making corporate loans, one might expect profits at credit rating agencies to fall. Indeed McGraw-Hill Profit Falls 23% as Ratings Demand Slumps.

McGraw-Hill Cos., the owner of Standard & Poor's, said second-quarter profit fell 23 percent as a slump in demand for new debt ratings overshadowed revenue gains in the education and investment services units.

In similar news Moody's Profit Falls Less Than Estimates on Job Cuts.

Moody's Corp.'s second-quarter profit fell less than analysts' estimated after the world's second- largest credit-rating company reduced the workforce and cut compensation to overcome a drop in demand for bond rankings.

Moody's Chief Executive Officer Raymond McDaniel sliced expenses 10 percent by eliminating more than 7.5 percent of the workforce and reducing compensation. Moody's and larger rival Standard & Poor's are finding ways to cut costs as the yearlong credit crunch stifles demand for credit ratings.

"The debt capital market, which is really our core business segment, is going through a very, very difficult time," said Mark Almeida, president of Moody's Analytics, on a management conference call today. "We have a number of customers who are exiting segments of the business and we have had some very large customers go completely out of business."

Credit Crunch Reaches Critical Mass

Businesses do not want to lend, consumers do not want to spend, financing approved projects (even large projects in supposedly "recession-proof" Las Vegas) is difficult. Unemployment is soaring, demand for credit ratings is dropping, there is no driver for jobs, the service sector is shot and that is going to put still more pressure on consumer discretionary spending and business borrowing.

The credit crunch is not only pervasive, it has now reached critical mass where it will start feeding on itself. The Fed is powerless to stop it.

Expect to see corporate bond yields soar and treasury yields to drop as the credit crunch picks up steam. Those looking for inflation can find it in their rear view mirror.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Record Declines In Case-Shiller Home Index

The May S&P/Case-Shiller Home Price Indices are now out.

New York, July 29, 2008 – Data through May 2008, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show annual declines in the prices of existing single family homes across the United States generally continued to worsen in May 2008.

For the second straight month, all 20 MSAs posted annual declines, nine of which are posting record lows and 10 of which are in double-digits. Both the 10-City Composite and the 20-City Composite are reporting record low annual declines.

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Case-Shiller Declines Since Peak

The following charts were produced by my friend "TC" who has been monitoring Case-Shiller Data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller Declines Since Peak Current Data



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Case-Shiller Declines Since Peak Futures Data



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"TC" writes: I've included data available from the CME Futures market so your viewers can see when people are betting the downturn will end and how much lower it will go. The CME Futures market only trades the top 10 cities. The Futures Data shows projected price declines and the projected trough.

"TC" also monitors the California Association of Realtors (C.A.R.) data, and DQNews data. Inquiring minds will wish to take a look at C.A.R. Median Home Prices Down 37.7% In June for a detailed look at California.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Financial Title Shuts Down

The Business Journal is reporting Financial Title Co. shuts down in California.

Financial Title Co., the largest real-estate title agent in Silicon Valley, has shut its doors as part of a closure of multiple offices and title companies by its parent, Mercury Cos. of Colorado.

The decision follows a move by Mercury's lenders to pull their line of credit after Mercury failed to meet loan requirements, according to an e-mail from Jim Hilbun, president of United Title of Texas, which is also owned by Mercury.

"Mercury is closing all of its companies outside of Colorado, which includes Arizona, California, Oregon and Nevada," Hilbun told employees.

Workers were removing items before dawn on Wednesday from Financial Title's Pruneyard office in Campbell. A sign posted on the door said the office was closing and referred inquiries to First American, Financial's title policy underwriter, and to Mercury.

Sources who have spoken to Financial Title employees said the title company began closing its doors in Santa Clara County Tuesday night. Those sources said all employees have lost their jobs, and Financial's underwriter, First American Title Co., has been collecting open escrow files at the closed offices. They also say Financial Chief Executive Officer Ivy Anderson has resigned.

The abrupt move mirrors that of Financial's former sister company, Alliance Title Co., which also closed with almost no notice late last year. Former employees and landlords of Alliance have filed multiple lawsuits alleging they were not paid. Alliance declared Chapter 7 bankruptcy in Northern California federal court June 5.

Examiners representing the California Department of Insurance, which regulates and polices title-policy underwriters and agents, were on hand at all 57 Financial Title offices in the state Wednesday to ensure that escrow funds were properly handled and not stolen or lost, said Darrel Ng, press secretary for the agency.

Escrow Funds

Those examiners cannot ensure anything. All they can do is check whether or not escrow funds were properly handled and not stolen or lost. By the way, money cannot be lost. It can be applied to the wrong account. If I had any escrow funds at Financial Title Co., I would be very concerned right now.

Addendum

The Sacramento Bee is reporting Citrus Heights title firm closes.

Ng said the state has examiners at each of Financial Title's 57 branches. Escrow files have been transferred to First American Title, and "it is our understanding that all escrow funds are intact," he said.

He said homebuyers might "experience a slight delay" in closing purchases and might have to sign additional paperwork because of the transition to First American. Purchasers can call First American at (925) 249-2819.

Employees were directed to call Mercury's Denver headquarters at (303) 572-9090.

Officials at Mercury Companies and Financial Title couldn't be reached for comment today. But, in a memo to employees, an executive with a Mercury subsidiary based in Texas said Mercury is closing all of its operations outside of Colorado because it's "running out of capital to support their operations."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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World Trade Talks Collapse

World trade talks collapse every year, and this year was no exception. What different this year is the accompanying disappointment and acrimonious exchanges between the US, India, and China. Let's follow a few headlines and see how the talks went.

Banana wars

On Thursday, July 17 the EU seeks key deal on fruit trade.

EU Trade Commissioner Peter Mandelson said he would not block compromise proposals on the EU's controversial banana import tariffs. He warned that if others did, then they would "assume a grave responsibility for the failure of the Doha Round".

The WTO has repeatedly ruled in favour of Latin American banana exporters in a long-running dispute with the EU. They argue that the EU's preferential trade accords with poor African, Caribbean and Pacific (ACP) countries are discriminatory.

That anyone would risk a global trade agreement over bananas is pretty absurd in and of itself. However, having banana tariffs in the first place is also absurd. Consumers pay higher prices for bananas and literally no one wins except of course the subsidized banana grower.

EU offers 60% cut in farm tariffs

On Monday, July 21, optimism was running high when the EU offered 60% cut in farm tariffs to cut a deal.

Perhaps portending the eventual collapse "Canada's Trade Minister Michael Fortier said he hoped that any new deal would protect its dairy and poultry farmers from foreign competition."

Hope Springs Eternal On Last Throw Of The Dice

On Saturday, July 26, there was Hope of deal in world trade talks.

"There are still potential potholes in the road...But we are closer to a deal than we have been at any point in the last seven years," Peter Mandelson, EU trade commissioner, said. "What is emerging is a deal that is not perfect, not beautiful, but is good for the global economy and good for development."

The proposed settlement, brokered by Mr Lamy, calls for cutting limits of European farm subsidies by 80% and US payments by 70% to about $14.5bn.

"This is the last throw of the dice" said Peter Mandelson, EU trade commissioner.

Snake Eyes

On Tuesday, July 29, to the disappointment of all, the roll of the dice was snake eyes. The World trade talks end in collapse.

Marathon talks in Geneva aimed at liberalising global trade have collapsed, the head of the World Trade Organisation has said. The main stumbling block was farm import rules, which allow countries to protect poor farmers by imposing a tariff on certain goods in the event of a drop in prices or a surge in imports.

"There's no use beating around the bush, this meeting has collapsed," Mr Lamy said.

Analysts have said that the collapse of the Doha talks could symbolise an end to multilateral trade agreements. Instead, nations may pursue dual agreements with partner nations, preferring to focus on their own requirements rather than a more common negotiating goal.

Trade officials had struck an optimistic tone on Friday, but this evaporated over the weekend amid acrimonious exchanges with the US accusing India and China of blocking progress.

The US said they were being overly protective towards their own farmers and are failing to do enough to open their markets, with US trade representative Susan Schwab calling the stance "blatant protectionism".

"In the face of the global food price crisis, it is ironic that the debate came down to how much and how fast could nations raise their barriers to imports of food," she said.

The acrimony this year seems worse than ever. Repeatedly every country wants complete open access to exports while wanting some tariffs or restrictions on imports. There is plenty of blame that can be placed, especially on US and EU where farm tariffs, agricultural subsidies, and ethanol tariffs drive up costs and result in massive inefficiencies. However, when there was near agreement to end 70%-80% of the tariffs only to see talks collapse, everyone is a loser and everyone is to blame.

The solution is simple. The first country that removes all tariffs regardless of what anyone else does will be a big winner. I have one more point. Trade wars and protectionism are hallmarks of deflationary times. Indeed the Smoot Hawley Tariff Act significantly contributed to the severity of the Great Depression.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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New York Governor Warns Of Economic Crisis

The New York Times is reporting Paterson Warns of Economic Crisis.

In a rare, brief televised address, Gov. David A. Paterson announced on Tuesday afternoon that he would call the Legislature into an emergency session on Aug. 19 to address what he called an economic and budget crisis confronting New York State as a result of plummeting revenues and rising costs.

The new governor avoided any mention of new taxes, instead arguing forcefully for austerity. He said he was calling on the Legislature to reduce the size of the state workforce; cut agency spending; reduce property taxes for homeowners; aid New Yorkers with the soaring costs of home energy; and even consider public-private partnerships that would take over state assets.

“Revenues are dropping dramatically,” the governor added. At the start of May, the state budget office projected a cumulative deficit of $21.5 billion over the next three years. Now, just two months later, that estimate has risen to $26.2 billion — “a staggering 22 percent increase in less than 90 days.”

Mr. Paterson offered another example of the rapid deterioration in the state’s finances. In June 2007, he said, the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. “This June, just a month ago, they sent us $5 million — a 97 percent decrease,” he said.

He vowed, “We will cut spending. Government will learn to do more with less.” He called for help from business and labor leaders and New York’s representatives in Washington to support him.

He added, “It is time for New York and other governments to cut up our credit cards. The era of ‘buy now and pay later, and later’ is over. The faster we address this crisis, the faster and stronger we will emerge from it.”

Era of ‘buy now and pay later, and later’ is over

New York is the second state in five days to declare a fiscal emergency. See Schwarzenegger Announced Intention To Slash State Workers' Pay Till Budget Passes for more on the crisis in California.

The most stunning thing about Paterson's announcement is how rational it is. He is not begging Washington for handouts, asking for higher taxes, or praying for miracles.

This is pretty stunning too: In June 2007, the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. “This June, just a month ago, they sent us $5 million — a 97 percent decrease.”

Unlike Schwarzenegger who has for years resorted to floating bond or proposing various lottery schemes to "fix" the budget, Paterson has the correct solution.

Of course Schwarzenegger has at times vowed to "cut up the credit cards" but in the end has delivered nothing but promises and schemes of floating $500 billion in bonds to "rebuild California the way it needs to be rebuilt".

Can Paterson Deliver?

I hope Patterson can, but the state legislature is likely to resist all the way.

The Right Mindset

• Cutting spending
• Learning to do with less
• Austerity
• Reduce the size of the government workforce
• Reduce property taxes
  

Patterson had the courage to say exactly what I asked Senator Obama to say in Open Letter To Obama. However, saying these things is one thing, and doing them is another.

Regardless, of whether or not all of those things happen, some forced austerity is all but assured. The same goes for California as well.

And the word that describes the process best is the one word nearly everyone is in denial over: deflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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C.A.R. Median Home Prices Down 37.7% In June

The California Association of Realtors® has released its report for March.

Home sales increased 17.5 percent in June in California compared with the same period a year ago, while the median price of an existing home fell 37.7 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

"Sales were driven in part by large shares of deeply discounted distressed sales in many parts of the state," he said. “With lower prices and favorable interest rates, affordability also has improved significantly in recent months, paving the way for many buyers to purchase their first home."

"The significant declines in the median price over the past several months are largely due to a dramatic shift in the sales mix since the onset of the credit crunch and the increase in the share of distressed sales,” said C.A.R. Chief Economist Leslie Appleton-Young. "A year ago, the under $500,000 price range accounted for 40 percent of sales, the middle segment made up about 45 percent, and the over $1 million segment captured 15 percent of the market. As of June 2008, the shares had shifted to 67 percent, 24 percent, and 9 percent, respectively."

Declines From Peak

The following chart is from "TC" who has been monitoring C.A.R. and DQNews data. C.A.R. data contains resale single family residences and new homes. DQNews data contains resale single family residences and new homes.



click on chart for sharper image

"TC" Writes

It should come as no surprise that prices are continuing to head lower out here, but the amount of the drop continues to amaze me. Again, these numbers are directly from the California Realtors so there is certainly no reason for them to fib to the downside.

My quick take from these numbers is that we are finally beginning to near a nominal price bottom in California. Median statewide price drops are now nearing 40% or nearly $230K . Soon enough even the Google millionaires around Santa Clara won't want to overpay.

The big question is what does a "bottom" look like. I think too many envision a bottom consisting of a quick return to rapidly increasing home prices. These individuals are confusing a stock bottom (e.g. 1987) with a housing bottom. Rather than a quick turnaround in my opinion we are likely to see about a 1/2 decade of flat nominal prices (falling real prices) followed by another 1/2 decade of stable real prices (+/- 3% nominal price growth). After that (or around 2020) it's anyone's guess.

I agree with TC on the nature of the flatline bottom, but I think he is at least a couple years early when stating "We are finally beginning to near a nominal price bottom in California."

I think at least one more wave lower is coming when commercial real estate plunges unemployment soars. I expect the recession we are in to be long and deep with a very slow recovery. In April I presented the Case for an "L" Shaped Recession. Recent data solidifies that view.

Case-Shiller data was out today, and it is based on repeat sales, arguably a better way of looking at things vs. median prices. I will have a post from TC on Case-Shiller soon. Thanks TC!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bennigan's Is Bankrupt, Faces Chapter 7 Liquidation

The Wall Street Journal is reporting Bennigan's, Steak & Ale Close, File for Bankruptcy Protection.

National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees.

It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open.

Late Monday, managers at Bennigan's and Steak & Ale were told not to open restaurants the next day, according to two people familiar with the matter. Employees were told there wouldn't be enough money to pay ... Rest By Subscription

Independent Franchise Locations Remain Open

CBS News is reporting Bennigan's Restaurants Shut Down Nationwide.

Customers showing up for lunch at Bennigan's restaurants in Chicago and across the country found quite a surprise Tuesday morning, when all the corporate-owned locations had signs on display reading "closed for business."

As CBS 2's Joanie Lum reports, Bennigan's Grill and Tavern closed all of its corporate-owned locations nationwide after filing for bankruptcy. Independent franchises remain open for business as usual.

The corporate-owned locations comprise about half the entire chain.

Bennigan's spokeswoman Leah Templeton said Bennigan's and Steak & Ale restaurants – both of which are owned by Plano, Texas-based Metromedia Restaurant Group – have filed for bankruptcy, along with the holding company S&A Restaurant Corp.

Chapter 7 filing usually means a company has "major league debt," and it is unlikely that employees would get their last paycheck. He said someone could conceivably buy the assets and reopen the full Bennigan's chain, but that would only be after a long, drawn out court process.

The bankruptcy filing does not affect other two restaurant chains owned by Metromedia, Ponderosa and Bonanza Steakhouse, Templeton said in the statement.

Alphonso Prince, manager of the Bennigan's at 1250 Torrence Ave. in Calumet City, said he was notified of the shutdown at 12:10 a.m. from his area director, who was crying on the telephone. He said there was no forewarning about the shutdown.

"I'm angry," Prince said. "I'm hurt; I'm devastated."

"No blast of e-mails, nothing to say, 'Sorry, we just can't do it anymore,'" Prince continued, "just a phone call from my area director who doesn't know anything, because she just found out. She'd been with the company for 21 years."

No Warning

Here's the deal. People cannot afford to eat out, Bennigan's could not raise prices (if it could have it would have) nor could it lower them to attract business because its debt load was too high. Simply put, Bennigan's was overleveraged with enormous debt and no way to pay it back.

Bankruptcy is going to be the final resting place for many restaurants, small corporations, and even entire malls in the same predicament. Yes, this is deflation at work.

The Shopping Center Economic Model Is History. Expect to see more stories like Macon Mall Faces Foreclosure.

Clearly the problem has spread to restaurants so expect to see more restaurants close without warning. Also, it's very important to remember that it was primarily service jobs that kept this economy running. The service sector is now at long last starting to crumble. Unemployment is poised to soar.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Self-Induced Balance-Sheet Destruction

Signs suggest that the credit crunch is picking up steam. Worried banks are reducing business loans as noted in We’re Saying No To Almost Everybody, and now corporate bonds yields show biggest rise since 2000.

Bondholders are demanding the highest interest rates for Wall Street debt since 2000, threatening the industry's business model of acquiring assets with borrowed money. Lehman (LEH) has seen borrowing costs for its five-year bonds rise to 7.7 percent, up from 5.2 percent six months ago, the biggest jump of the four largest U.S. securities firms, data compiled by Bloomberg show.

"This is almost self-induced balance-sheet destruction," said Joseph Balestrino, a fixed-income strategist at Pittsburgh- based Federated Investors Inc., which manages about $330 billion. "This is far beyond just your basic slowdown."

In some debt maturities, Merrill's bond yields are higher than Lehman's. For instance, Merrill debt that matures in April 2018 yielded 8.15 percent as of July 25, compared with 8.01 percent on Lehman notes that mature on May 2018.

"If you're going to be a big user of capital, then you have to be worried about how you finance your business," said William Cohan, a former investment banker at Lazard Ltd. and JPMorgan Chase & Co. and the author of "The Last Tycoons" about Lazard. "A lot of these guys don't know what to do. They're frozen, and they're just hoping that in time things will get better."

"It's going to be harder and harder for them to borrow long-term in this environment, to pay the spreads that investors are going to want," said David Hendler, an analyst at CreditSights Inc., a research firm in New York. "Can they deal with this type of funding environment?"

Lehman's long-term debt outstanding rose to $128 billion from $123 billion in the first half of fiscal 2008, as the firm cut its dependence on overnight funding, company reports show. Morgan Stanley's long-term borrowings totaled $211 billion on May 31, up from $191 billion at the end of November.

Today, a decade after the Russian government defaulted on bond payments, the country's bonds are yielding less than Lehman's -- meaning investors have more faith in Russia's prospects than in Lehman's future.

Russia's 11 percent BBB+ rated bond that matures in 2018 yields 5.68 percent, two percentage points less than the Lehman 2012 bond that's rated two notches higher by S&P.

"They do have the Fed as a backstop," said Balestrino, whose company owns bonds in Lehman, Morgan Stanley and Goldman Sachs. "In the meantime you probably are setting records in terms of yield spreads."

Record In Yield Spreads Coming

The Fed has circled the wagons but the odds of another huge Bear Stearns type blowup somewhere are strong. And as for this being a record in spreads, I strongly disagree. The record will come when deals can't get done, when this long term debt cannot get rolled over.

Take another look at those Lehman 5 year bonds at 7.7%. If that is what it takes for Lehman, then Ford and GM are in for a world of hurt when they roll their bonds or when they need to raise more capital.

And in spite of the big rally in financials a week or so ago, the corporate bond just market doesn't seem to believe it. If it doesn't buy the story, then why should I?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Paulson's Covered Bond Proposal

Many people are asking about Treasury Secretary Paulson's Covered Bond Plan.

Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.

"We look forward to being leading issuers as the U.S. covered bond market develops," the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds, which detail the types of loans that should go into the securities and how their payments ought to be made.

Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.

"Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing," Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.

Paulson said the four U.S. banks are "ready to go" and that sales by the largest banks can help encourage smaller mortgage lenders to proceed. "Covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions," he said.

Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.

Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.

While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.

The Treasury's guidelines spell out a formal definition for covered bonds. The bonds should have maturities of at least one year and no more than 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80 percent.

First off, I like the idea of covered bonds. Over time they could allow for a somewhat graceful unwinding of Fannie Mae and Freddie Mac. See Nature of the Fannie Mae Bailout for more on this idea.

In addition, forcing banks to keep responsibility for the loans will encourage far sounder lending practices than the current originate and securitize model, especially after the debacle we are in with Alt-A and subprime loans.

However, note that the maximum LTV is 80%. How many people have 20% down payments? The second problem is that banks are capital impaired and selling off assets. How likely is it for those same banks to be taking on additional debt? The answer is not very.

Finally, the credit crunch is not going away anytime soon. The general idea at many banks right now is We’re Saying No To Almost Everybody.

So while covered bonds are a reasonably good idea in a sea of horrid ideas, they simply are not going to do much to alleviate any problems in the mortgage markets, anytime soon. What politicians should do is give this market time to develop but politicians never want to wait.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ratchet Provisions Soak Merrill Lynch, Will Sink WaMu

It was just 5 days ago in Death Spiral Financing at WaMu, Merrill Lynch, Citigroup that I wrote about ratchet provisions and how they would bite companies that agreed to them. Here is the key snip:

The investors in the equity raise would have their investment “protected” by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free.

It doesn’t take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.

As expected, Merrill Lynch needed to raise capital again. And this one hurts because Merrill previously agree to ratchet provisions. Inquiring minds may wish to consider Merrill to Sell $8.5 Billion of Stock, Unload Money-Losing CDOs.

Merrill Lynch & Co., the third biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill's biggest investor by acquiring shares in December, will buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment.

My Comment: That $2.5 billion is because of ratchet provisions. Mother Merrill is really only raising $6 billion.

Almost $19 billion of net losses in the past year forced Merrill Chief Executive Officer John Thain to backtrack from assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O'Neal.

My Comment: The market cap of Merrill Lynch is $23.97 billion. Mother Merrill has raised $30 billion since December. It is taking herculean capital raising efforts to keep the good ship Merrill afloat.

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.

My Comment: Desperate mothers do desperate things, such as provide 75% of the financing to sell CDOs at 22 cents on the dollar.

Thain's Track Record

In December and January after raising $6.6 billion each month Bloomberg quoted Thain "We're very comfortable with our position. We could have raised substantially more money. We turned people away.''

In April he sold $2.55 billion of preferred stock.

On July 17 in a conference call Thain said "We believe that we are in a very comfortable spot in terms of our capital."

Now Thain is back at it again, selling $8.5 billion in stock but only netting $6 billion in cash from it. It will be interesting to see how long it takes before Thain is back at it. One thing we can assume is that this will not be the last time Thain needs to raise cash, no matter what Thain says.

One good thing for Merrill is their Press Release shows Merrill is no longer exposed to those death spiral ratchets.

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.

Washington Mutual Ratchets

A quick check shows WaMu's market cap is $6.71 Billion. It's share price is $3.95. TPG bought $7 billion of stock at $8.75 with a ratchet provision that if WaMu raises more than $500 million in equity, WaMu has to pay TPG the difference. The odds of WaMu not needing to raise capital are slim and none. Washington Mutual is in deep trouble over many things, and those ratchets make matters worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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McCain's son resigns from Silver State Bank board

ReviewJournal is reporting McCain's son resigns from boards of Henderson bank.

Silver State Bancorp, the Henderson-based holding company for the similarly named bank, reported that Andrew McCain, son of Republican presidential candidate John McCain, resigned today from the boards of directors of the bank and bank holding company.

The company cited “personal reasons” for McCain’s resignation, and a Silver State spokesman declined further comment.

Gettin' While The Gettin' Is Good?

I was not even going to report on this until I looked up Silver State Bank on bankrate.com.

Silver State Bank Financial Summary



click on chart for sharper image

Silver State Safe & Sound?



In a word, No.

Notes on Safe & Sound® star ratings, CAEL rating

The most desirable Safe & Sound® CAEL rating is one, the least desirable is five, in accordance with industry standards. Bankrate.com has reversed this order in its graphic rankings for easy visual recognition. The top star rating is five, the lowest star rating is one. Performing institutions will generally receive a rating of 3 or better stars with the majority of banks falling into the 3-4 star range. By contrast, the performing Safe & Sound CAEL range would be 1, 2 and 3 with the majority of institutions falling into the 2 range.

The Street.Com has a bank rating service that they bought from Weiss. However, Silver State Bank was not listed. Furthermore, I could not get that page to work in Firefox. Your results may vary.

Strongest Banks As Of 2008-06-20



click on chart for sharper image

Weakest Banks As Of 2008-06-20



click on chart for sharper image

The above charts of Strongest and Weakest Banks and Thrifts are courtesy of the Street.Com.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Macon Mall Faces Foreclosure

Macon.Com is reporting Macon Mall faces foreclosure.

Foreclosure action has begun against Macon [Georgia] Mall because of nonpayment on a $141.2 million loan, and a new management company has been approved by the court to take control of the 1.4 million-square-foot facility.

"We don't expect any operational interruptions to the mall," said Brooke Houghton, spokeswoman for Chicago-based Jones Lang LaSalle Americas Inc., the court-appointed retail management company now managing Macon Mall. "We don't think there will be any impact on the stores or the customers we serve. We are open and ready for business as usual."

According to court documents, in June 2005 when New Jersey-based The Lightstone Group borrowed $141.2 million, Macon Mall LLC and Burlington Mall LLC in North Carolina were used as collateral for the loan, as well as rents and other income from the properties. The company purchased the two malls about the same time in 2005 for $166 million. The loan currently is held by LaSalle Bank National Association as trustee for a trust that holds and owns a pool of loans including the one for Macon Mall. The trust filed the complaint.

Since the loan was made, Parisians and the Piccadilly Cafeteria have closed at the mall, and Linens-N-Things - part of the mall property, even though it's not inside the main building - is in the process of closing.

In a letter filed in the case, "Dillard's has apparently communicated its intent to close its store location at Macon Mall."

Based on an appraisal "the value of the property has fallen approximately 60 percent since June 30, 2005."

The Shopping Center Economic Model Is History. More mall foreclosures are coming. 50-60% writeoffs will be common, and dozens of already stressed banks will fail as a result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Open Letter To Obama

Dear Senator Obama. The US economy is in the worst economic crisis in decades, arguably since the great depression. Housing is collapsing, state budgets are in shambles, unemployment is soaring, and the US dollar is sinking.

Things are going to get even worse when the commercial real estate bust picks up steam. We have seen six bank failures already this year. There are 90 more banks on the problem list. Many of them will fail.

Meanwhile, Treasury Secretary Paulson and President Bush are both stressing "The U.S. economy is fundamentally strong, diverse and resilient." Indeed, Paulson speaks of the "strong dollar policy" at every opportunity.

The vast majority of citizens in the United States know that the above statements by President Bush and Paulson are lies.

What we really need is for politicians to face the public and state the truth.

The Truth Is Easy To See

• The US can no longer afford to be the world's policeman.
• Congress has been spending beyond its means.
• Deficit spending is cheapening the US dollar.
  
• Cutbacks and sacrifices have to be made.

Interest On The National Debt Is $377 Billion

The national debt as of July 17, 2008 is $9.5 Trillion dollars. Interest for the first nine months of Fiscal Year 2008 as noted in Interest Expense on the Debt Outstanding is $377 billion!

Paulson talks about the "strong fundamentals" of the US dollar. Our entire "Strong Dollar Policy" consists of nothing more than Paulson yapping about the strong dollar. It is an international disgrace. It is sad the Treasury Secretary does not understand that the two biggest factors affecting the US dollar are interest rates differentials and deficit financing.

Our Feds Fund Rate is 2.00% in comparison to 5.00% in the UK and 4.25% in the EU. In regards to the budget deficit, China and Japan have been financing our out of control spending.

Some fundamentals! If Paulson believes what he says, he is not qualified to be Treasury Secretary.

US Banking System Is Unsound

Senator Obama our banking system is unsound. I presented the case in You Know The Banking System Is Unsound When....

I ask you to take the time to read that post. In it, I presented 25 reasons our system is unsound. Here is reason number 25.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

The problem is not bank regulation or lack thereof. The problem is fractional reserve lending accompanied by runaway spending in Congress.

Congress Must Be Held Accountable

Congress must be held accountable for deficit spending. Clearly the Republican plan of reducing taxes, foolishly wasting hundreds of billions in Iraq, and praying for an economic miracle did not work.

Phil Gramm, senator McCain's economic advisor, said we were in a "mental recession". You rightfully blasted him for it, stating "He didn't say this but I guess what he meant was that it's a figment of your imagination, these high gas prices."

Economically, you are calling for another $50 billion dollar spending stimulus. If that fails (which it will) do you want another one, and another one after that? Where does it stop? I am all in favor of returning $50 billion to the taxpayers. I just want to know how we are going to pay for it.

Senator Obama how do you propose we pay for that?

The 100 Year's War

Senator Obama, the entire nation knows we went to war under false pretenses, if not blatant lies. Yet Senator McCain is willing to keep us in Iraq for a hundred more years if necessary. Unfortunately, you have not found the courage to commit to a timetable to pull all of our troops out of Iraq. Senator, the nation is sick of this war. ALL of our troops need to come home. Every one of them.

It is time for someone to stand up and say "This war was a mistake. We are pulling out. And here is the time table in which we are going to do it."

Since that person is not going to be McCain, it better be you.

Everyone I speak to is now unsure of your commitment to get us out of Iraq. Leaving 1/2 or 1/3 of our troops in Iraq is a miserable compromise. Iraq belongs to the Iraqis. Those who fear moral consequences of an exit should look at the moral and economic consequences of keeping our troops in harm's way for another 100 years.

The biggest mistake we can now make in Iraq is prolonging the big mistake we already made.

Horrendous Ethanol Policies

Senator Obama, you support ethanol tariffs and subsidies. These policies are nothing short of an economic disaster. Congress passed a 54 cent tariff on ethanol imports. That tariff is increasing the price of gasoline at the pump.

Is that tariff creating any jobs here? Of course not. Government mandated solutions never work. The US Ethanol Industry Is In Distress. There are "16 Ethanol Plants Filing For Bankruptcy. Many More Will Come." If that is not bad enough, the corn subsidy is uneconomically diverting corn production to ethanol production. This in turn is causing food prices to rise.

So much for government mandated "solutions".

Why We Are In This Mess

Senator Obama, the root cause of this mess is uncontrolled Congressional spending, government sponsorship of GSEs and rating agencies, fractional reserve lending, and the Fed.

The Fed attempting to stave off the last recession slashed interest rates to 1% to bail out their banking buddies in deep trouble over dotcom loans as well as loans to emerging markets. Congress compounded the problem by spending like complete fools. And the Bush Administration with help from Congress was willing to waste billions of dollars we did not have in that hellhole called Iraq.

Finally, SEC sponsorship of the rating agencies led to insane AAA ratings on all sorts of subprime and Alt-A mortgage debt that Wall Street could package and sell to unsuspecting suckers like state pension plans.

Biggest Party Wall Street Ever Had

Paulson called this "The strongest global economy he has ever seen". The reality is throwing money around created "The biggest party Wall Street has ever had". This was an unfounded boom based on low interest rates and cheap credit. Millions of people, sucked in the vortex of this artificial boom, are now being foreclosed on.

And instead of fixing the fundamental problem (The Fed, runaway Congressional spending, governments sponsorship of the GSEs, and government sponsorship of the big 3 rating agencies), you along with most of congress are looking towards more regulation as the solution.

Senator Obama, The Fed IS the problem. Congress IS the problem. Bernanke IS the problem. Fractional Reserve Lending IS the problem. If you do not see the light, YOU are the problem.

The Problem Cannot Be The Solution

If runaway government spending is part of the problem (and it is clear that it is), then it should be equally clear that runaway government spending is NOT the solution. If government sponsorship of the GSE was part of the problem (and it was) then even bigger government sponsorship of the GSEs is not the solution.

The plain fact of the matter is that home prices are still too high. They need to come down. Artificial attempts to force home prices up will drag this economic mess out for a decade longer, just as happened in Japan.

It was a sad day last week when Bernanke said "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market."

With that we lost every semblance of the free market we had left. We now have government sponsorship if not outright nationalization of GSEs.

Senator Obama, do you even remember the Mission Statement of Fannie Mae?

We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae exists to expand affordable housing. Clearly Fannie Mae has failed its core mission. All government sponsored corporations fail their mission. The very nature of promoting housing makes prices go up, until the final blowoff top which we are now on the backside of, having reached Peak Credit.

The US has partied too long and too hard at the federal level, the state level, the corporate level, and the personal level. The cure for a hangover is most emphatically not more booze. The cure for a credit crisis is not more "free money", from either Congress or the Fed.

The Fed Uncertainty Principle

Sadly, we are moving in the wrong direction as predicted by the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Uncertainty Principle Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

The Cure

The only cure for an artificial boom is time and price, in conjunction with sound economic policies.

Senator Obama, you have a chance to make history. Assuming you are elected, you will have the opportunity to do something no President has done for decades: Stand before the American people and tell the plain hard truth.

• The US can no longer afford to be the world's policeman.
• Congress has been spending beyond its means.
• Deficit spending is cheapening the US dollar.
  
• Cutbacks and sacrifices have to be made.

People will understand as long as they are being leveled with.

A New Economic Advisor

Before you can lead the way, you need a new economic advisor, preferably one as Vice President.

One thing is certain: Giving away $50 billion dollars on top of the $150 billion in stimulus Congress already gave away is not going to solve any problems.

If printing money and handing it out solved economic problems, Zimbabwe would be the most economically powerful nation in the world.

Why is it the same solution "free money" is tried over and over and over, when it never works?

The Nation Needs Healing

This war torn, economically tortured country needs heeling. To meet that goal we can no longer afford the same bitter partisanship in Congress that we have seen for what seems like forever.

McCain is unable and unwilling to heal the nation. His willingness to spend another 10 years in Iraq, wasting trillions more dollars at a time the nation is sick of this war, is proof enough.

Senator Obama, you are clearly able to heal the nation, but are you willing? If you can just see fit to have the courage to reach across the aisle you can electrify the nation, re-energize the country based on sound economic free market principles, and minimize the partisan bickering in Congress.

Senator Obama, I ask you to nominate Ron Paul as your Vice President, embrace sound economic policies, and return this country to greatness. If you have the courage to do so, the upcoming election will be the biggest surprise blowout in history. On the other hand, if you stick to policies of giving away "free money" this nation will be in ruins four years from now.

Senator Obama I ask you, "What's it gonna be?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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We’re Saying No To Almost Everybody

Astonishingly I am reading What Credit Crunch? by Robert Higgs on The Beacon.

For months, the news media have been dispensing reports of a “credit crunch.”

If credit were being crunched, one supposes that lenders would be willing to pay higher rates for funds placed at their disposal. Yet six-month certificates of deposit are now yielding less than the rate of inflation—people are paying the banks to take their money! Some credit crunch.

Perhaps someone can enlighten me. I simply don’t understand how we can have a “credit crunch” without substantial increases in real interest rates across the board.

It would help to have an idea of what a credit crunch was and for that matter what inflation is.

Let's start with the latter. Those who do not know what inflation is are advised to read Inflation: What the heck is it? The short version is inflation is a net expansion of money supply and credit while deflation is the opposite.

Now let's tackle the alleged non-existent Credit Crunch.

I find it amazing that anyone cannot sees there is an ongoing credit crunch when Bernanke resorts to an alphabet soup of lending facilities (FAF, PDCF, TSLF) to stimulate lending.

If that was not enough in and of itself, what about Henry Paulson saying Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. For more on this idea please see You Know The Banking System Is Unsound When....

Is it possible to not be in a credit crunch when the mortgage market is not functioning?

Furthermore, mortgage lending standards are tightening, credit card lending standard are tightening, and in fact Bank Credit Is Contracting. How often does that happen?

Worried Banks Sharply Reduce Business Loans

The New York Times is reporting Worried Banks Sharply Reduce Business Loans.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

When Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response.

"The exact words were, ‘We’re saying no to almost everybody,’ " Mr. Greenblatt recalled.

We’re Saying No To Almost Everybody

The above sentence is the very epitome of a credit crunch. Banks do not want to lend to all but the most credit worthy borrowers. However, the most credit worthy borrowers have no need to expand in this environment.

Let's look at another snip from "What Credit Crunch?"

If credit were being crunched, one supposes that lenders would be willing to pay higher rates for funds placed at their disposal. Yet six-month certificates of deposit are now yielding less than the rate of inflation—people are paying the banks to take their money! Some credit crunch: banks and thrift institutions don't even have to pay a positive real rate of interest to attract funds! This situation makes sense only if the world is awash in loanable funds, so much so that people are clamoring to part with their money for less than zero reward.

Perhaps someone can enlighten me. I simply don't understand how we can have a "credit crunch" without substantial increases in real interest rates across the board.

Well lenders are paying above market rates for money. Many banks, especially the unsound ones, are offering 250 basis points or more above treasury rates. On a percentage basis that is an enormous spread.

Furthermore, in a credit crunch, junk yields should rise and they are. In a credit crunch lending standards will tighten and they are. In a credit crunch lenders will "Say No To Almost Everyone" and they are.

Finally, it makes perfect sense for money to be parked in money market funds below the alleged rate of "inflation". I have talked about this on many occasions. The reason M3 has been rising is that corporations have been tapping credit lines, not for expansion, but in case those lines are shut off. Those corporations have been parking that money in institutional money market accounts.

This is not "inflationary" in any way shape or form. Deflation is here and upon us, and some cannot even see there is a credit crunch. It's rather amazing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bank of Canada's Monkey See Monkey Do Policy

The Globe And Mail is reporting the Bank Of Canada to take riskier assets as collateral.

The Bank of Canada says it is prepared to accept some of the riskiest assets on the market, giving it more power to fight the credit crisis. For the first time, the central bank will accept as collateral for emergency loans asset-backed securities of the type at the heart of the crisis of confidence that has seized financial markets for the past year.

Governor Mark Carney revealed yesterday in the Canada Gazette how he intends to use new powers granted him by Finance Minister Jim Flaherty in legislation that cleared Parliament in June. It was left up to Mr. Carney to decide which assets would be acceptable to the central bank.

The change aligns the Bank of Canada with other major central banks, including the U.S. Federal Reserve and the European Central Bank, and clears the way for Mr. Carney to more forcefully attack a problem that he says has subsided in Canada for now.

"This is a positive development as it brings the Bank of Canada's powers more in line with that of its peers, and it reduces the risk of further credit market problems in Canada," said Eric Lascalles, an economist at Toronto-Dominion Bank.

There is no evidence the TAF, PDCF, or TSLF do what they are supposed to do. I talked about this back in April in Failures of the Term Auction Facility.

No one in their right mind should want to replicate the failed policies of Ben Bernanke. Indeed, common sense alone would suggest that any program designed to swap good assets for bad, when they eventually have to be swapped back is an exercise in futility and a waste of time for all involved.

So why is the Canadian Central Bank embarking down the same silly path? The reason is simple. Bureaucrats, being bureaucrats have to do something. It is simply impossible for bureaucrats to do nothing, even when compelling reasons can be given for doing just that: nothing. This concept was explained in Bernanke's, Paulson's, Bair's, and Cox's Next Step,

It's always important to remember that the primary goal of a bureaucrat is to make sure that when the finger is being pointed, that it is pointed at someone else. In that regard, the safe thing to do is what other bureaucrats are doing, whether it makes any sense or not (and sadly it never does). This of course gives all of them cover when the scheme blows sky high, which it will. When it does, the Central Bankers will all get together and say "Everyone else was doing it, who could have possibly known?"

This is of course the exact same kind of "Monkey See Monkey Do" rationale that every bank in the U.S. was using while pursuing subprime loans, Alt-A liar loans, toggle bonds, and all sorts of other harebrained products that any sane person knew would blow sky high and eventually did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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