Economic Potpourri January 11, 2009

The barrage of noteworthy economic news continues into the second week of the new year. Here are a few headline news reports of interest from the past couple days.

Banks may need to raise fresh capital in '09: Whitney

U.S. banks will have to raise fresh capital in 2009, and a sharp increase in credit-rating downgrades on mortgage-related securities will lead to further stresses on the companies' capital, according to prominent banking analyst Meredith Whitney.

"From July 2007 to date, over $5 trillion worth of securities have been downgraded, but our concern here is that the pace of downgrades has only accelerated through 2008," the Oppenheimer analyst wrote in a research note dated January 6.

"Capital ratios will be meaningfully lower in the fourth quarter (of 2008) versus post TARP pro forma levels," she said.

Banks needing capital is precisely why they are not lending as Congress foolishly wants them to.

Traffic fines are going up in Florida

In order to shore up Florida's budget, lawmakers plan to impose higher fines on motorists for all traffic infractions. And discounts for attending traffic school will be a thing of the past.

TALLAHASSEE -- Caught running a red light? You'll pay $208.

Speeding 25 mph over the limit? Get ready to cough up $258.

If you pay a fine late: Tack on an extra $16.

Although they are desperate for cash, Florida legislators have vowed in their special budget-cutting session not to impose new taxes on working people. Instead, they are relying more than ever on lawbreaking motorists.

Lawmakers will impose a new charge of $10 on all traffic infractions ranging from driving with an expired tag to running a stop sign. The state also is eliminating an 18 percent discount available to violators who go to traffic school, and taking away the right of judges to waive fines, regardless of whether the judge makes a finding of guilt.

In some areas, fines and fees will be even higher because counties and cities have the option of imposing additional charges.

The new money, $63 million next year, includes a redirection of court filing fees from the state treasury to the courts. The money is eagerly sought by judges, prosecutors and public defenders and will be directed to the state court system to help avoid layoffs.

Sen. Carey Baker, R-Eustis, predicted that police officers will issue warnings rather than slap wayward motorists with fines they can't afford.

"We'll probably collect less money," Baker said. 'An officer looks at a person and says, `I don't want to write this person a $300 ticket.' I've heard that from individual officers. They make a judgment call."

Dry-cleaning down 20 percent nationwide

The economic downturn has contributed to at least a 20 percent drop in dry-cleaning volume since September, said Alan Spielvogel, director of technical services for the 3,000-member National Drycleaning Association.

The industry was an early indicator in 2008 of broader economic troubles to come. In July, about five months before the the United States was declared officially in a recession, the president of Massachusetts' Dependable Cleaners predicted the economy was headed for trouble.

"I noticed the amount of clothing that hadn't been picked up had grown by 30 percent compared with July 2007," Christa Hagearty said.

South Korean blogger arrested

SEOUL, South Korea – A South Korean blogger pleaded not guilty Saturday to charges that he spread false economic information on the Internet, a news report said, in a case that drew heated debate over freedom of speech.

The blogger, identified only by his surname Park, gained prominence among South Koreans because some of his dire predictions about the global economy, including the collapse of Lehman Brothers, later proved to be correct.

Known widely by his pen name "Minerva," the mythological Greek goddess of wisdom, the 31-year-old Park was accused of spreading false information on an Internet discussion site last month that the government had ordered major financial institutions and trade businesses not to purchase U.S. dollars.

Kim Yong-sang, a judge at the Seoul Central District Court who issued an arrest warrant for Park following Saturday's court hearing, said the case "affected foreign exchange markets and the nation's credibility," Yonhap news agency reported.

Park told the judge he wrote articles to help underprivileged people and did not seek any personal financial gain or harm the public interest, Yonhap said.

Bush Prepares to Ask for Second Tranche of Bailout Funds

Senior Bush administration officials, consulting with the Obama transition team, have prepared a plan to ask lawmakers for the second half of the $700 billion financial rescue package despite intense opposition in Congress, sources familiar with the discussions said.

The initiative could create an unusual political scenario straddling the Bush and Obama administrations. If Congress were to vote down the measure, either President Bush or Obama would have to exercise a veto to get the money.

Obama officials would prefer that Bush exercise any veto rather than leave the new president with the unsavory task of rebuffing his fellow Democrats in Congress to advance a widely unpopular program, sources said. The White House has declined to say publicly whether Bush would be willing to issue the veto.

This is really quite amazing. Obama wants Bush to veto a "widely unpopular program", that in spite of its unpopularity, members of the Bush administration are for. How many ironies are in that?

Housing downturn hits L.A.-area rents

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home.

Nationwide, apartment rents eased 0.1% in the fourth quarter, the first drop since 2002, according to the analysis by research firm Reis Inc.

Los Angeles apartment rents fell 0.7% in the fourth quarter, the first decline since 2001, although overall rents for the year were up slightly over 2007.

So much for the theory that all these foreclosures would lead to a pickup in demand for rentals accompanied by price increases.

Calif. Taxpayers Due Refunds May Get IOUs

If you expect you'll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a "registered warrant." Translation: an IOU.

California is rapidly running out of money. Blame it on the state budget deficit that continues to bleed billions of dollars from California's reserves. Facing inadequate credit to make up the difference, California's Controller John Chiang warns that by the end of February, the nation's most populous state may not be able to pay some of its debts, and instead be reduced to issuing those creditors IOUs.

"My office has projected that, in approximately 60 days, there will be insufficient cash available to meet all expenditures reflected in the 2008-09 Budget Act," stated a Tuesday letter from Controller Chiang to the directors of all state agencies. "To ensure that the State can meet its obligations to schools, debt service, and others entitled to payment under the State Constitution, federal law, or court order. California may begin, as early as February 1, 2009, issuing registered warrants...commonly referred to as IOUs...to individuals and entities in lieu of regular payments."

The Golden State's Golden Buying Opportunity?

Investors are getting used to thinking the unthinkable. From Fannie Mae to Washington Mutual to Bernie Madoff, the impossible -- even the surreal -- has become the new normal.

Yet even by current standards, the fiscal crisis engulfing California looks especially alarming. State revenues have collapsed. Sacramento is paralysed. Some infrastructure projects were put on hold last month. The state comptroller warns he may soon have to start paying bills with IOUs.

No wonder California's bond rating is the lowest of any state. The "general obligation" (or full faith and credit) bonds now yield about three times as much, on one key measure, as equivalent Treasurys. In most markets that would be considered a sign of extreme distress.

Nervous times all round.

I know it seems crazy. But this week, when I spoke to California state treasurer Bill Lockyer, I had to ask: Is California public debt completely safe?

Absolutely, he replied. "The only way we're going to default is if there's a thermonuclear war."

So maybe in this crisis the Golden State is offering a golden buying opportunity - especially for the state's higher income taxpayers. Ten-year Treasurys currently yield about 2.5%. California's general obligation bonds: About 4.2%. And that's exempt from federal income tax. On a taxable equivalent basis, that's like 6.3% for top-rate payers. (Both Treasurys and California munis are exempt from state income tax too)

Has the gap ever been this wide? No.

"Not even close," says Vanguard's Mr. Smith.
The picture is similar for municipals across the country. Panicked investors have dumped everything - and blindly stampeded into Treasurys, driving yields down to absurdly low levels. Meanwhile munis are also under pressure because so many states and cities will have to borrow more.

Yet municipals almost never default. A study by Moody's, dating back to 1970, found that non-junk munis were far safer than even the highest rated corporate bonds.

If you like long term yields at 4.2% buy em. I don't, especially munis.

Citi reaches deal with lawmakers on home loans

Democratic lawmakers have reached a deal with Citigroup Inc. on a plan to let bankruptcy judges alter home loans in an effort to prevent foreclosures and urged other lenders to follow suit.

The lawmakers aim to attach the plan to President-elect Barack Obama's economic stimulus legislation, and said Thursday the change in bankruptcy law could ease the foreclosure crisis that has dragged the economy into the worst recession in decades.

The compromise between Citigroup and Sens. Richard Durbin of Illinois, Charles Schumer and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.

The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis. Consumer advocates and Democrats say it would prod the lending industry to be more aggressive about modifying loans because of the looming threat of having a bankruptcy judge involved.

But the lending industry has battled fiercely against the idea, arguing it would force lenders to hike mortgage rates because they would have to charge more for loans that could be altered later by a judge.

"This would hurt the housing market at the exact time we're trying to stimulate it," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, which represents large banks and insurance companies.

To qualify, borrowers would need to demonstrate that they have asked their lender for a loan modification before filing for bankruptcy.

This is a weird compromise being retroactive only. Citigroup caved in perhaps fearing a complete rewrite of bankruptcy laws under a new Congress. I am opposed to the debt slave provisions of the last bankruptcy reform act under Bush. This is arguably a step in the right direction.

Toyota cut output and now takes aim at pay

Toyota Motor Corp. said Thursday it is negotiating with its workers in Japan to slash salaries as it stops production to adjust to slumping global demand.

Under Japanese law, companies must pay at least 60 percent of the average regular wages during such stoppages, she said.

In a stunning reversal of its previously booming fortunes, Toyota projects that it will sink into its first yearly operating loss in 70 years for the fiscal year ending March 31. And fears are growing about the ripple effects of the U.S. financial crisis to this nation's export-reliant auto industry, including parts makers.

Toyota is shedding 3,000 temporary workers in Japan — about half its domestic temporary workforce — by the end of March.

Pay cuts are not an inflationary thing to say the least.

Oracle India trims salaries with hour-based payments

The world’s second-largest software products company Oracle is understood to have begun linking the payment of its 20,000-odd employees in India with the productive hours they spend in the company. This has resulted in salary cuts, ranging between 10 and 50 per cent across the board.

Company sources explain that if an employee is a billable resource for 15 days a month, he will be paid in full for that period while for the rest of the period, he is paid a “nominal” amount. Replying to an email query, a company spokesperson in India said: “Oracle does not comment on speculation or rumours.”

Recap Of Key Ideas

Falling rents
Falling wages
Falling demand for goods and services
Banks need to raise capital
States issuing IOUs

Think any of this looks like inflationary times? Think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List