Economic Potpourri January 17, 2009

Here are a few headline news reports of interest from the past few days on banks, oil, pensions, bankruptcies, the Vancouver Olympics, dairy industry bailouts, and all sorts of other madness.

FDIC, regulators shut down two banks

The Federal Deposit Insurance Corporation and state regulators on Friday shut down banks in Illinois and Washington - the first bank failures of the year and the 26th and 27th since the start of the current credit crisis.

Berkeley, Ill.-based National Bank of Commerce was shut down and he FDIC said Republic Bank of Chicago will assume all of National Bank of Commerce's deposits. The two locations of National Bank of Commerce will reopen Saturday as branches of Republic Bank, the FDIC said.

The FDIC estimated that the cost of National Commerce Bank's failure to the Deposit Insurance Fund will be $97.1 million.

Also on Friday, the Bank of Clark County, Vancouver, Wash. was shut down and the FDIC was named receiver. The FDIC said Umpqua Bank (UMPQ) , based in Roseville, Ore., will assume the insured deposits.

27 down another hundred or more to go.

Fed May Purchase Treasuries in Days to Ease Credit, UBS Says

The Federal Reserve may purchase Treasuries within the next few days or weeks as it broadens its policy beyond interest rate cuts to ease credit conditions amid the worst recession in 25 years, according to UBS AG.

“Fed officials use every chance they get to highlight Treasury purchases as an important arrow in their quiver,” William O’Donnell, U.S. government bond strategist at UBS Securities LLC in Stamford, Connecticut, wrote in a research report today. “It now appears as if the Fed may use Treasury purchases as a blunt tool to bring loan rates down further. This makes it more likely that Treasury purchases come sooner.”

Fed Chairman Ben S. Bernanke reiterated Jan. 13 that he’s considering buying long-term Treasuries as a way to bring down borrowing rates and unfreeze private credit markets as U.S. economic data and government reports continue to show the recession is deepening.

Americans on bailout: Stop spending

Americans overwhelmingly say federal bailout has not been effective and majority want the government to stop providing money to banks.

The government's financial bailout for troubled banks has not worked so far, a majority of respondents to a national poll say, and six in 10 don't want Washington to spend more money on the rescue.

Sixty-one percent of those questioned in a CNN/Opinion Research Corporation survey released Friday oppose providing more government money in the financial bailout. There are some supporters, however -- 38% said the government should provide more assistance to ailing banks and other financial institutions.

Most of the 1,245 adult Americans who were questioned for the poll were surveyed before Thursday's Senate vote to release the remaining $350 billion in the financial bailout program.

"One reason for the opposition to more money being spent may be that more than eight in 10 said that the first $350 billion of taxpayer money for the bailout didn't work," said CNN Polling Director Keating Holland. "Only 14% say that the money accomplished what it was supposed to do."

Regardless of the apparent public opposition to the bailout, the Senate voted 52 to 42 to release the remaining funds.

The poll also suggests that 50% of those questioned believe Republicans are more responsible for the economic problems facing the country right now. Less than a quarter of the respondents said Democrats are more to blame, and one in five said both parties are equally at fault.

"Democrats may also have recognized that the public still blames the GOP for the bad economy. That suggests that the public may give the Democrats some leeway, at least for now," Holland added.

Those polled have far more common sense than Bush, Obama, Paulson, and Congress.

Largest manufacturer of sign and image products in the U.S. goes bankrupt

The largest manufacturer of sign and image products in the U.S., Knoxville-based ImagePoint Inc., said Friday it will close as soon as pending projects are completed.

The company's 450 employees will be let go as the business shuts down. Of that number, 270 are located in Knoxville, with the rest based in northern Kentucky.

Employee James Martin was shocked by the news. He says he was given a promotion earlier this week.

"It's been very rough because every corner has an emotion behind it. I've been giving out my card telling people to keep in touch, but it's going to take some time to digest this and I'm worried about some people," says Martin.

In a written statement, ImagePoint CEO Jim Martin blamed the economy on the closure. "The automotive and restaurant businesses are facing serious challenges," Martin said. "And these industries represent a major part of ImagePoint's business."

Focusing on autos and restaurants was a serious mistake. They should have focused on making "Going Out Of Business" signs.

Stimulus may bolster dairy industry

A stimulus package may be a lifeline for the nation's economy, but it could be a death sentence for a lot of cows.

Lawmakers are looking for ways to use the forthcoming stimulus bill to help dairy farmers, and the number one priority is to dampen milk supplies and prop up prices. Translation: reduce the nation's dairy herd.

Exactly how Congress will accomplish that remains uncertain. An initial effort to use stimulus money to pay farmers to retire cows failed when House Appropriations Committee Chairman Rep. David R. Obey, D-Wis., objected on the grounds that it violated a promise not to include earmarks in the bill, said Rep. Collin C. Peterson, D-Minn., chairman of the House Agriculture Committee.

Taking milk cows out of production as a way to control milk prices is a controversial approach. The federal government tried that in the 1980s through the whole herd buyout program, and while the policy worked for a time, milk production eventually bounced back and farmers were once again grappling with low milk prices.

The buyout also sent beef prices crashing, as slaughtered cows entered the meat supply.

Here's what needs to be done. Eliminate all price supports. The weak farmers will go out of business and the rest will thrive. Dairy farmers deserve no more support than do sign manufacturers, banks, or the auto industry. Sadly, the government is playing favorites and severely distorting the economy to do so.

State Borrowing Gets Pricey

Greece, Spain and Ireland are having to pay more and more to borrow. Pity their taxpayers.

In Europe, governments have already been borrowing billions more than usual from the debt markets to fund rescue attempts for troubled banks and economies, and some look more at risk than others.

Spreads on government debt from countries that were Europe's most famous economic success stories not long ago -- Greece, Spain and Ireland -- have reached record highs over German bunds in recent weeks on concerns about their public finances. They spiked again on Friday after Ireland nationalized one of its biggest lenders, Ango Irish Bank

"There's not much we can do," said Papanicolaou [head of Greece's Public Debt Management Agency], when asked about his reaction to widening debt spreads, which are essentially a result of the bond market's perceived risk of Greece's ability to pay back its debt. "We just have to convince the market that they are wrong and they overreacted and the spreads are not justified. Let's hope they will change their mind."

Some don't think investors should, though. Chris Pryce, Western Europe director at Fitch Ratings, says the current yield differential between Greek and German bonds reflect a better assessment of the risk. "Previously euro zone investors did not property distinguish the risks in the euro zone. Greek government accounts are pretty appalling. They have the highest debt after Italy." Greece's debt-to-GDP ratio is forecast by Fitch to have hit 92.0% in 2008; Italy's hovers around 100.0%.

Microsoft Ordered to Delete Browser

The European Union said Friday that Microsoft’s practice of selling the Internet Explorer browser together with its Windows operating system violated the union’s antitrust rules.

It ordered the software giant to untie the browser from its operating system in the 27-nation union, enabling makers of rival browsers to compete fairly.

“Microsoft’s tying of Internet Explorer to the Windows operating system harms competition between Web browsers, undermines product innovation and ultimately reduces consumer choice,” the E.U. said in a statement.

It gave Microsoft eight weeks to respond, adding that the company could defend its position in a hearing if it found that useful.

Microsoft issued a statement saying, “We are committed to conducting our business in full compliance with European law.”

Can someone tell me why this matters anymore? The best browsers are free. Microsoft ought to get out of the browser business its browser is so lousy, but even if it did, no one in their right mind would pay for one.

Economy could lose 2M jobs in '09 - report

Conference Board says there's no sign that labor market will improve any time soon.

The nation could lose 2 million more jobs in 2009 after the loss of 2.6 million last year, a business research firm said in an employment report issued Monday.

The forecast came in a report issued by the Conference Board, which said its Employment Trends Index fell 1.6% last month to stand at 99.6.

"The continued deterioration in the Employment Trends Index signals that no turnaround in the labor market is expected in the near future," Conference Board senior economist Gad Levanon said in the report.

The index has declined for 17 straight months, with drops of 1.6% or more over the past six months.

Obama wants to create 4 million jobs but that is over two years. The reality is he cannot create any lasting jobs, but that will not stop him from trying.

FDIC may let banks borrow cheaply for longer

The Federal Deposit Insurance Corp. said Friday it is considering expanding its guarantees for new bank debt, tweaking a popular program that aims to boost lending by letting financial institutions sell debt below market levels.

In a press release announcing another $20 billion in aid to Bank of America (BAC) , the FDIC said the board may soon propose rule changes to its Temporary Liquidity Guarantee Program that would allow banks to sell FDIC-guaranteed debt that matures in up to 10 years.

Currently the agency only backs debt with maturities of three years or fewer.

Under the program, banks can sell their debt backed with the full faith and credit of the United States in exchange for a fee to FDIC. It was created to enable banks to lend more and at better rates to consumers and businesses.

Since this bank debt comes with a government guarantee but carries higher yields than the government's own debt, the new supply has already cut into demand for safe-haven U.S. Treasurys in maturities between three and 10 years, he said.

Right now, banks' 10-year bonds based solely on their own credit are trading at yields around 7%, Jersey said. By comparison, FDIC-backed three-year bonds sold over the last couple months are trading around 1.8%.

The FDIC specified that under the expanded program, the issuance would have to support new consumer lending.

Reports show that consumer credit remains tight, leading some critics of the program to conclude many banks have held onto a lot of their FDIC-backed funding to shore up their balance sheets.

"Banks have been caught between needing to lend and needing capital," said Jason Brady, who helps oversee about $6 billion in fixed-income assets at Thornburg Investment Management. "You can't make a bank lend, but structuring it in a way that lending is guaranteed by the government addresses the problem in a very direct way. It's a good idea."

More questions

The rule change is likely to also specify that the debt is "supported by collateral," the FDIC said. No other details were available, according to an FDIC spokesman.

That would be a big switch from the plan to date, where the debt maturing in up to three years hasn't needed backing by specific collateral.

Under the current program, banks can issue FDIC-backed debt only until June, and may only issue up to 125% of the amount outstanding that matures by then.

That the FDIC wants to extend this program to 10 years is all you need to know to know how messed up everything is. There is no credit thaw. It's all a mirage. The Fed is the lender of only resort and these panic moves prove it.

Economics Bloggers have a long tail

Economics Bloggers have a long tail. It’s a classic Pareto analysis. 20% of the sites attract 80% of the visitors. Using information from Gongol.com and the analysis of the traffic for business and economics web sites we find that Pareto rules yet again.

Click on the Gongol link to see who the top bloggers are.

US petroleum demand in 2008 lowest in 5 years

America's demand for crude oil fell to its lowest level since 2003 last year, as record high prices to start the year and an ailing economy at the end of 2008 combined to sharply curtail consumption, new statistics show.

For all of 2008, U.S. petroleum deliveries -- a measure of demand -- fell 6 percent to 19.4 million barrels a day, with declines for all major products made from crude, according to a report released Thursday by the American Petroleum Institute, the industry's trade association.

Jet fuel deliveries fell 6.1 percent, distillate fuel oil, including diesel, was down 5.8 percent and gasoline deliveries slid 3.3 percent -- the lowest level in five years, API said.

"All told, the magnitude of the drop in U.S. petroleum demand ... was enough to offset the continued demand gains in developing countries around the world," said API statistics manager Ron Planting.

Chávez Lets West Make Oil Bids as Prices Plunge

CARACAS, Venezuela — President Hugo Chávez, buffeted by falling oil prices that threaten to damage his efforts to establish a Socialist-inspired state, is quietly courting Western oil companies once again.

Until recently, Mr. Chávez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with tax authorities and imposing a series of royalties increases.

But faced with the plunge in prices and a decline in domestic production, senior officials have begun soliciting bids from some of the largest Western oil companies in recent weeks — including Chevron, Royal Dutch/Shell and Total of France — promising them access to some of the world’s largest petroleum reserves, according to energy executives and industry consultants here.

Mr. Chávez’s olive branch to Western oil companies comes after he nationalized their oil fields in 2007. Two companies, Exxon Mobil and ConocoPhillips, left Venezuela and are still waging legal battles over lost projects.

But Venezuela may have little choice but to form new ventures with foreign oil companies. Nationalizations in other sectors, like agriculture and steel manufacturing, are fueling capital flight, leaving Venezuela reliant on oil for about 93 percent of its export revenue in 2008, up from 69 percent in 1998 when Mr. Chávez was first elected.

Under the current bidding rules, the onus for financing the new projects lies with the foreign companies, even though Petróleos de Venezuela would maintain control. Banks might balk at such a prospect. Distrust also lingers in dealing with Petróleos de Venezuela.

“An agreement on a piece of paper means nothing in Venezuela because of the way Chávez abruptly changes the rules of the game,” said a Venezuelan oil executive who has had dealings with oil companies from China, Russia and other countries.

“In 10 years, not one major oil project has been built in Venezuela,” said the oilman, who asked not to be identified for fear of retribution. “Chávez has left his so-called strategic partners out to dry, like the Chinese, who have been given the same treatment as Exxon.”

Why should anyone trust Venezuela or Russia?

Quebec promises to guarantee pension plans

QUEBEC — As the global financial crisis jeopardizes the future of private pension plans, the Quebec government is taking the unprecedented move of guaranteeing benefits to pensioners and workers of companies whose plans go bankrupt.

Nearly a million workers and pensioners in Quebec are registered in more than 950 private company pension plans with assets worth about $100-billion. A handful of those pension plans could become insolvent this year if the companies declare bankruptcy, Quebec Employment Minister Sam Hamad said yesterday.

Under a bill tabled yesterday, the Quebec Pension Plan (known as the Régie des rentes du Québec) will take over the management of insolvent pension plans and guarantee retirement income for five years to those who are entitled. If proved successful, the measure could be extended beyond the five years and perhaps become permanent, a senior government official said yesterday. The fund could also be transferred to an insurance company.

All opposition parties and Quebec's major business and labour leaders support the bill. It is expected to be adopted today and will be retroactive to Dec. 31, 2008.

Quebec companies will have 10 years rather than five years to replenish shortfalls in their pension plans. Currently, the market value of the assets of Quebec's private pension plans is 70 per cent of their total solvency liabilities, or what they need to pay out in benefits. This represents a $22-billion shortfall to bring solvency levels up to 100 per cent. Many cash-strapped companies face serious problems in meeting their pension contribution obligations.

The initiative was one of a half dozen economic stimulus measures Premier Jean Charest's newly re-elected government included yesterday in Finance Minister Monique Jérôme-Forget's economic update. Ms. Jérôme-Forget also announced $250-million in refundable tax credits for home renovation projects, a benefit of up to $2,500 for homeowners.

Other measures included a 50-cent increase in the minimum wage to $9 beginning on May 1, and public investments bringing the total amount in infrastructure and energy development projects to $13.9-billion in 2009.

This is one of the dumbest pension proposals to date. Canada should let Quebec go. Who needs it? Maybe it should merge with California. Both seems to have loony ideas. Quefornia any one?

Olympic Sized Depression Hitting Vancouver

The Olympics in Vancouver-Whistler are turning out to be an unmitigated disaster. All of the planning going into the preparations assumed that economic expansion was a given. There was no contingency for a worldwide business slowdown. Surely, the economists they had hired assured them that no such thing had any statistical probability of occurring, and therefore wasn't worth planning for. This arrogance was prevalent regardless of numerous Olympic experiences gone awry over the decades (the Montreal 1976 summer games had debts only repaid 30 years later, in 2006).

I'm guessing the attendance figures the Olympic committee have assumed will also turn out to be wildly optimistic and revenue for the games and small businesses alike will turn out to be far lower than expected.

I'll give my readers two guesses as to who will be paying for this financial disaster, but you'll likely only need one.

That is an extremely well documented post on the Olympic madness in Vancouver. Inquiring minds will want to take a look. I hope Chicago is looking but I am sure its eyes are shut.

Addendum:

Here are a couple of followup comments in response to this post.

On Milk

JA Writes ...
Mish, you lost me right about here: "Here's what needs to be done. Eliminate all price supports. The weak farmers will go out of business and the rest will thrive."

Mish Reply ....
Price supports cause oversupply and ridiculous solutions such as paying farmers to kill cows. The government would then be paying a subsidy for milk while paying a subsidy to kill cows. What can possibly be more insane?

Left alone, farmers would produce the right amount of milk and farmers who could not get by on that price would go out of business.

On Microsoft

David writes ...
It matters greatly from a computing security point of view. Microsoft Internet Explorer is the single greatest facilitator of computer security threats ever. The amount of money spent to remediate the problems it causes is not trivial!

Mish Replies ...
But that is not the problem the EU is addressing. The EU is addressing the non-existent problem of competition. However, it would indeed be a service to humanity if the EU's action led to the demise of IE.

I suspect someone else has already claimed this Law, but if not I introduce: Mish's Law On Fixing A Problem

"Government can only fix a problem by accident, as a lucky side effect of attempting to fix something else. While such instances are extremely rare, they are possible, albeit more so in theory than practice."

It remains to be seen if the EU's intervention actually does any unintentional good or if it causes bigger problems elsewhere such as starting a trade war between the US and EU.

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