Financial Armageddon

Wrong. Wrong. And Wrong.

2008-07-24T17:04:24-04:00

Pollyannaism has been rampant since the financial world first began to unravel more than a year ago.

First there was the asinine belief -- espoused by central bankers and Wall Street "strategists" alike -- that the problems in the subprime credit market would remain "contained." Wrong.

Then TV pundits, ivory tower economists, equity traders and other clueless observers asserted that the government -- the Fed through monetary policy, and legislators by way of fiscal policy -- would somehow manage to save the day. Wrong again.

And finally, the "experts" started arguing that even if things went sour in the U.S., the rest of the world would still manage to keep on truckin', thus muting the impact of any falloff in demand in the world's largest economy. Wrong once more.

In reality, the dominoes have fallen more-or-less as anticipated by those who actually looked at the facts and honestly assessed what they meant before the meltdown started. For this group -- and yes, I include myself -- the developments detailed in the following Reuters report, "Global Credit Crisis Undermining Economy," are not a surprise.

The global credit crisis is continuing to undermine the world economy, putting the squeeze on Japanese exports, unravelling European business confidence and deepening the U.S. housing slump.

Economic data from the United States on Thursday showed the housing market remained weaker than Wall Street's already grim estimations, with existing-home sales tumbling to a 10-year low.

In Europe, key measures of business activity and company sentiment fell more than expected in Germany, France and Italy, as well as in a survey of the 15-nation euro zone.

The Ifo institute's gauge of German business sentiment, based on a survey of about 7,000 companies, suffered its biggest drop since soon after the September 11 attacks on the United States in 2001.

Japanese exports, which are heavily dependent on U.S. demand, shrank in June for the first time in nearly five years and Bank of Japan policy-maker Atsushi Mizuno, said there was a chance that Japan could slip into a recession although he did not expect a deep one.

Thursday's data was also the latest reminder that the malaise in the world's largest economy originated in the U.S. housing market, and the rising inventory of homes for sale does not bode well for the prospects of economic recovery.

"This is not something we are going to snap out of quickly," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati.

U.S. and European stocks fell. The U.S. dollar slid against the Japanese yen but rose against the euro.

Oil prices fell to a 7-week low early Thursday during Asia's trading hours, but by midday in New York, crude had reversed course and turned higher. In volatile early afternoon trading in New York, U.S. crude futures were up $2 at $126.44 a barrel.

Government bond prices jumped in the United States as investors trimmed bets on a near-term rate increase from the Federal Reserve. The 10-year U.S. Treasury note was up 21/32 in price; its yield, which moves in the opposite direction, fell to 4.04 percent from 4.12 percent late on Wednesday. Euro-zone government bond prices also gained.

BAD TIMING IN EUROPE

In the euro zone, signs of weakness could not come at a worse time for the European Central Bank, which raised interest rates earlier this month by a quarter percentage point to 4.25 percent to combat inflation that is double the upper limit of its target and likely to rise further.

Germany's Ifo business climate index dropped to 97.5 in July from 101.2 in June, and was weaker than the 100.0 economists had expected.

If there were not enough gloom for Europe, British retail sales had their biggest monthly fall on record, plunging 3.9 percent and wiping out an almost equally large surge in sales the month before.

Recession risks are rising in Britain, where the housing market is plunging. A Reuters poll of economists on Wednesday put the probability of recession at a significant 40 percent, double where it was at the start of the year.

Spanish unemployment rose to 10.4 percent in the second quarter, much more than expected, as a reeling construction industry eliminated jobs.

In Scandinavia, Danish consumer confidence plunged much more than consensus forecasts to a 16-year low while Swedish unemployment staged an unexpectedly large spike to 8.1 percent in June from 5.9 percent.

CLOUDS OVER JAPAN

Data on Thursday from the world's second-largest economy were also disappointing.

Japanese exports to the United States and the European Union both fell, as did exports to other countries in Asia. That news comes against a backdrop of growing concerns that domestic spending will not be able to carry the torch for the Japanese economy.

In the United States, a surprisingly large number of people sought jobless benefits last week. Some analysts blamed seasonal factors, but the data come in the context of a jobs slump in which employers cut workers for a sixth consecutive month in June.

The Federal Reserve began lowering interest rates quickly after the credit crisis erupted late last year. More recently the U.S. central bank has signalled worries about rising inflation, which could require tighter monetary policy.

Meanwhile, news of further deterioration in the U.S. housing market came a day after the U.S. House of Representatives passed a massive rescue package.

The bill, which is awaiting Senate approval, would let the government extend an emergency lifeline to mortgage finance giants Fannie Mae and Freddie Mac.

Meanwhile, Mexico's annual inflation rose to 5.37 percent in early July, its highest level in more than three years, bolstering expectations that the central bank will raise interest rates to cap soaring food prices.

Underperformer...or Visionary?

2008-07-23T18:13:45-04:00

Time once described Jim Bunning, the Hall-of-Fame pitcher and 76-year old Republican junior senator from Kentucky, as "The Underperformer" because of his lackluster record on Capital Hill.

But consider the following (thanks to Wikipedia):

Bunning was also the only member of the United States Senate Committee on Banking, Housing and Urban Affairs to have opposed Ben Bernanke for Chief of the Federal Reserve. He said it was because he had doubts that he would be any different from Alan Greenspan....

On December 6, 2006, Bunning was one of only two senators...to vote against the confirmation of Robert Gates as Secretary of Defense claiming that 'Mr. Gates has repeatedly criticized our efforts in Iraq and Afghanistan without providing any viable solutions to the problems our troops currently face. We need a secretary of defense to think forward with solutions and not backward on history we cannot change.'

Along with the comments he made today, as reported by Bloomberg in "Fannie, Freddie Rescue Plan May Cost $1 Trillion, Bunning Says," it might also be said that Bunning will eventually be seen as some sort of visionary.

A government rescue of Fannie Mae and Freddie Mac would require taxpayers to pay "way" more than the $25 billion estimated by the Congressional Budget Office, potentially as much as $1 trillion, Senator Jim Bunning said.

Treasury Secretary Henry Paulson "hasn't told us the truth about this bill," Bunning, a Republican from Kentucky, said in an interview with Bloomberg Television today. "Why would you put in a backstop of unlimited amounts of money if you weren't going to need it."

Paulson on July 13 asked Congress for authority to increase credit lines to Washington-based Fannie Mae and McLean, Virginia- based Freddie Mac, buy shares in the firms and give the Federal Reserve a "consultative role" in overseeing their capital requirements. The proposals are meant to restore confidence in the government-sponsored enterprises, which own or guarantee almost half of the $12 trillion of U.S. home loans outstanding.

The House of Representatives is set to vote today on the rescue plan for Fannie Mae and Freddie Mac as part of broader legislation aimed at alleviating the worst housing slump since the Great Depression. Bunning called the plan "horrendous."

"What is good about this bill is the fact that maybe it shores up Fannie and Freddie for a temporary basis," Bunning said. "What it does not do is change the model of Fannie and Freddie. It does not give the regulators the power to make the changes needed in Freddie and Fannie to make them viable entities for the future. That is why I object."

Cash Is King Again

2008-07-22T17:00:21-04:00

"Cash is the lifeblood of any company."

Once upon a time, businesses actually took this principle to heart and sought to maintain a healthy cushion of cash.

However, once Greenspan, et al. managed to convince everybody that such thinking was passe, managers made another decision: "Cash is trash."

Now, though, with credit drying up and conditions deteriorating rapidly, many are (re)learning -- the hard way -- why prudence is a good thing.

For some firms, that message has probably come too late. In "Moody's: More Firms Found with Weakest Liquidity," the Associated Press reveals that the number of companies that now find themselves without an adequate cushion of cash is hitting record levels.

As the credit crunch gripping financial markets has raged over the past year, the number of companies issuing high-risk debt that suffer from very weak liquidity hit a record level last month, Moody's Investors Service said Tuesday.

The credit rating agency said that for the first time since February 2003, its weakest liquidity rating was assigned to 53 companies, or 11 percent of the 490 companies whose bonds are considered higher risk. The percentage is double the level of June 2007, before the credit crisis erupted.

Companies with weak liquidity have less cash and fewer assets that can quickly be turned into cash, potentially affecting their ability to repay debts and heightening the possibility of default.

More companies are "struggling to maintain their liquidity positions" amid a slowdown in consumer spending and spikes in the costs of commodities such as fuel, New York-based Moody's said in a news release.

A Little Glimpse

2008-07-21T20:52:33-04:00

Most people -- apart from young idealists and other naive souls -- have some sense of how things work in Washington: Money talks and everything else walks. Despite all the "rules" that are supposed to keep things fair and honest, a lot goes on and gets done that is clearly not in taxpayers' interests. In a call-a-spade-a-spade editorial, "Fannie and Freddie's Enablers," the Wall Street Journal offers a glimpse of the kinds of shenanigans that have helped transform America's largest mortgage lenders into timebombs-in-the-making.

You'll love this one. In the strange accountability of Washington, the same folks who put taxpayers on the hook for Fannie Mae and Freddie Mac are now demanding ransom to let taxpayers bail them out. It's as if Andy Fastow insisted that Enron shareholders pay his fines after his fraud cost them their life savings.

"I don't know how in good conscience you come up here and ask me to give unlimited lines of credit" to Treasury for Fannie and Freddie without giving Democrats something in return, Senate Banking Chairman Christopher Dodd (D., Conn.) told the Journal last week. Come again? This is the same Chris Dodd who long resisted tougher regulation while more recently handing Fan and Fred even more room to expand their risk-taking.

At a February hearing, he derided critics who he said were "repeatedly raising alarm bells about the risks Fannie and Freddie pose to the financial system." You may also remember Mr. Dodd as the fellow who got a sweetheart mortgage from former Countrywide Financial CEO Angelo Mozilo, who was thick as thieves with Fannie Mae.

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In any other business, Mr. Dodd would be begging forgiveness. But in Washington he now wants the Bush Administration to bow to his political wishes in return for protecting the financial system from the risks that Mr. Dodd long claimed Fan and Fred didn't pose. His demands include nearly $4 billion in Community Development Block Grants that are a payoff to liberal interest groups. He also wants an "affordable housing trust fund" for more such largesse that could take as much as a $1 billion a year out of Fan and Fred even as they struggle to stay solvent.

Meanwhile, another leading cause of this fiasco, House Financial Services Chairman Barney Frank, has his own demands. He wants to increase the size of the loans Fannie and Freddie can purchase and package as mortgage-backed securities (MBSs), which would allow them to grow market share. Earlier this year he pushed for, and got, a temporary increase in the so-called conforming loan limit to $729,250, allowing Fan and Fred to buy and securitize jumbo loans. Now he wants to make that increase permanent.

Behind the scenes, Mr. Frank is also demanding that the new, more powerful regulator for Fan and Fred not get up and running until next year, though the companies are in trouble right now. Like the management of Fan and Fred, he's assuming an Obama Administration will go easier on the mortgage giants than will the Bush Treasury.

We should add that Republicans aren't much better. A few in the Senate -- Richard Shelby, Elizabeth Dole, John Sununu, Mel Martinez -- fought hard to protect taxpayers going back years. But most of the House GOP has long been in Fannie's back pocket. On May 22, 2007, it was Texas Republican Randy Neugebauer who sponsored an amendment to water down systemic risk protections for Fan and Fred. It passed 383 to 36, with 162 Republicans voting with the companies. Now these same Republicans claim to be appalled by this taxpayer rescue. What a spectacle.

The real priority ought to be protecting taxpayers in return for bailing out these vehicles of Capitol Hill privilege. Taxpayers have already coughed up once, in the form of Treasury Secretary Hank Paulson's explicit pledge last week to save the companies and let them tap the Federal Reserve's discount window. Now taxpayers are being asked to pay again, via legislation allowing the government to increase its credit line to the companies and to inject capital if needed to save them from failure.

For all of that, taxpayers have so far received nothing -- no stock warrants, no discipline for the management or shareholders of Fan and Fred, no guarantee that the companies won't pocket this bailout and emerge even more powerful down the road. At least Bear Stearns went out of business when it had to be saved by Uncle Sam.

Instead, taxpayers are being asked to trust that a regulator will do the right thing and impose some discipline on the companies after Mr. Paulson's rescue bill passes. But at the same time, Mr. Paulson is saying that the goal is to preserve Fannie and Freddie "in their current form." That sounds a lot like a get-out-of-bailout-free card.

Perhaps this is part of Mr. Paulson's strategy to get the legislation passed without Fan and Fred opposing it. And in its current form the bill would give a new regulator the power to fire managers and put the companies into receivership in certain circumstances. At a minimum, however, the regulator should be given an explicit command to run down their portfolios of MBSs that have made them such risky monsters. And as the credit markets calm down, the regulator needs to limit their business so private-label mortgage securitization takes a greater role in the market and less risk is concentrated in two giant firms. Mr. Paulson should also support Senator Jim DeMint's proposal to bar the companies from the lobbying and campaign contributions that have allowed them to buy political immunity all these years.

* * *
If Mr. Paulson can't get a regulator who can rein in these two -- and put them into receivership if they require taxpayer money -- he should put the political blame squarely on Fannie and Freddie's enablers in Congress.

They made this mess by creating these beasts that combine private profit with public risk. And they made the mess worse by fighting, over many years and despite accounting fraud, any limits on the ability of the companies to grow with taxpayer subsidies. Mr. Dodd and Congress owe Americans an apology, not more ransom demands.

Paradigm Shift

2008-07-21T18:37:50-04:00

President Harry S. Truman's once said, "It's a recession when your neighbor loses his job; it's a depression when you lose yours." Of course, he was being cynical. In general, a depression is an economic downturn that is deeper and lasts longer than a recession.

But there's more to it. Because recessions tend to be relatively short-lived, many view them as minor stumbling blocks on the way to better times. In other words, the associated travails are to be endured, like a sudden bout of bad weather. People are loathe to make permanent changes in the way they live.

However, once the evidence starts piling up that there is no light at the end of the tunnel, then people start to make structural adjustments in approaches and lifestyles. In a sense, they no longer expect the storm to blow over; they are piling on the coats and heavy clothing and steeling themselves for a harsh northern winter.

In "Americans Make Drastic Changes to their Shopping Habits, But for How Long?" the Associated Press' Anne D'Innocenzio reports on a what could be a seminal shift in attitudes.

Adrienne Radtke plans to keep riding her bike to work even if gas prices drop. Steve Pizzini got rid of his Cadillac Escalade in favor of a 16-year-old Acura and doesn't expect to have another gas-guzzler.

"I had a paradigm shift," said Pizzini, a financial analyst. "I spent the money on a nice car. But to me, it's not worth it. I don't think I will go that route again."

Every economic downturn changes shoppers in some way. But this time, experts say the new behavior — fueled by higher gas and food prices, tightening credit and a slumping housing market — are the most dramatic and widespread that they have seen since the mid-1970s.

So retailers, marketers and investors are all trying to figure out which habits shoppers will keep and which will they drop when the economy recovers. Will the people who switched to store-brand ice cream go back to Breyers or Edy's? Will shoppers return to department stores or keep looking for labels at T.J. Maxx?

"We are looking at stuff that reminds me of the 1970s," said Patricia Edwards of investment manager Wentworth Hauser and Violich. "Americans have seen a huge amount of their balance sheet evaporate. The effects will be more lingering."

Wendy Liebmann, president of WSL Strategic Retail, says people's new spending patterns are forcing companies to change the kinds of products they sell and tweak their marketing to appeal to cost-conscious shoppers. She points to the last big recession of the early 1990s that helped trigger a fundamental shift in retailing as affluent shoppers started buying at discounters as well as upscale stores.

Radtke, 31, who holds down two jobs — at a veterinarian's office and at a flower shop — recently picked up shoe glue to fix the soles of her worn sneakers. She's buying store-label soups and crackers and bought a bike for her commute after not having ridden one for five years.

"We weren't big spenders, but now we are watching our money more," said Radtke, of Manitowoc, Wis., whose husband works in construction. "Even if I fell into a pile of money, I still wouldn't be spending a lot."

According to a survey released Thursday by market research company Nielsen Co., which tracks consumer habits, about two-thirds, or 63 percent, of consumers are cutting spending due to rising gas prices, up 18 percentage points from a year ago.

According to the study, which queried nearly 50,000 consumers by e-mail during the first week of June, 78 percent of them are combining shopping trips and 52 percent are eating out less often. Consumers are also cutting more coupons, doing more of their shopping at supercenters and buying less expensive brands, the survey found.

A rebounding economy may let some consumers revert to their old ways — like people who switched to smaller cars when times were hard in the 1970s but flocked to sport utility vehicles when gas got cheap again. But with more economists believing that the current woes will last well into next year, many think the underlying frugality will linger. Some Americans say their parents or grandparents affected by the Great Depression are still hoarding buttons and squeezing out several soup meals from ham bones.

"I shop cautiously," said Edna Sott, an 88-year-old resident from Berkeley Heights, N.J. "I would say that is a hangover" from the Depression.

Marian Salzman, chief marketing officer for public relations agency Porter Novelli, cites a "Depression mentality" that's making people "rethink their optimism in the economy."

The widening gap between discounters and mall-based apparel sellers was evident in monthly retail sales figures released last week. The International Council of Shopping Centers-UBS tally of 38 stores found that same-store sales at discounters rose 5.1 percent in June and 9 percent at wholesale clubs. Discount giant Wal-Mart Stores Inc. posted a robust 5.8 percent, its best June performance since 2002.

At department stores, though, same-store sales — or those at stores opened at least a year — dropped 4.1 percent.

"People are spending money on food and the products they need to sustain life," said Todd Hale, senior vice president at Nielsen.

He noted sharp declines in visits to clothing, office supply and hardware stores. He also pointed out that sales of store-brand products in grocery items are up 9.1 percent for the year ended April 19, while sales of branded products rose a more modest 3.9 percent. More than half the sales growth from store label grocery items is now from dairy like milk and cheese, an area that has seen soaring inflation.

Liebmann says Americans are trying to take "control of the little things" like mending socks or buying more store-brand food because they can't control the big things like gas and food prices.

Their little changes, though, are forcing some companies to respond in big ways.

Auto executives predict that consumers' newfound appreciation for smaller cars will be permanent, causing major pain at auto plants. Toyota Motor Corp. was among the latest to announce a product overhaul, saying it will shut down truck and SUV production to meet the changing consumer needs.

Pizzini, 29, of Eagleville, Pa., says his elderly Acura gets almost three times as many miles per gallon as the Escalade, whose lease he got out of through a company called LeaseTrader.com. Since last October, LeaseTrader.com has seen a 24 percent increase in the number of people who want to downsize to a smaller car, spokesman John Sternal said.

Fred Clements, executive director of the National Bicycle Dealers' Association, said consumers stung by $4-per-gallon gas are shifting toward utility bikes and away from recreational versions. That's forcing bike shops to change their inventories and offer more training for consumers who may not have ridden a bike in years, he said.

Plenty of stores that have benefited from shoppers' woes are hoping to retain them when the economy rebounds.

Andrea Thomas, executive vice president of private brands at Wal-Mart, thinks that many shoppers will stick with store labels since the quality has improved so much. Overall, Wal-Mart expects to retain the affluent customers when the economy recovers because it has made improvements in its stores and customer service.

Edwards, of Wentworth Hauser and Violich, agrees that new fans of discounters will keep buying at discounters as long the products measure up. And she sees lower-income shoppers switching back to meat from beans and rice before going back to name-brand food.

At the Alexandria Shoe Repair and Leather Service in Virginia, sales have increased 18 percent since February.

"I am seeing a younger crowd who lives in the disposable world," said owner Barbara Steube. "They are learning an economics lesson. They will see the benefit of the savings and how much money they walk away with when they fix their shoes.

The Newly Poor

2008-07-20T10:05:09-04:00

According to the U.S. Census Bureau, approximately 37 million people, or 12.3 percent of the population, were in poverty at the end of 2006. For a family of four, that meant an annual housefold income below $20,614. (as a matter of reference, one person working a 40-hour week and getting paid the current minimum wage, $6.55 per hour, would earn a total of $13,624 over the course of a year).

Since then, of course, circumstances have changed. Based on official data (which likely understates the problem), food prices have risen more rapidly than the overall rate of inflation, while energy prices have soared at a double-digit pace. Meanwhile, real wages have remained relatively stagnant.

Given that the average U.S. household devotes roughly a fifth of total annual expenditures to food and energy, is it any wonder that, as the following report from The Hartford Courant's Alaine Griffin, "Rising Food, Gas Prices Send More To Food Banks," seems to indicate, the ranks of the "newly poor" are growing quickly?

Darlene Larson went to the Portland Food Bank one July morning to donate some clothes, and she left with a shopping cart full of food to share with her 6-year-old son.

Larson, 52, is like a lot of the new clients at Connecticut food banks and pantries these days — familiar faces who used to stop by with donations but are now forced to visit to meet their own needs.

Rising food and gasoline prices are hurting minimum-wage working families who now have to choose between a gallon of milk for the children or gas in the tank to get to their jobs, officials at the food bank say.

And the need is stretching beyond Connecticut's cities and poorer areas to more affluent towns along the shoreline and in the Farmington Valley.

Patty Dowling is the executive director of The Shoreline Soup Kitchens and Pantries, which provides food to 11 shoreline towns including Old Saybrook, Clinton and others along the Route 9 corridor. She said that since January, more than 5,000 people have registered at the pantry — a 40 percent increase over 2007.

"It's difficult to see moms and dads coming in here a lot of times with tears in their eyes saying things like, 'I can't believe I'm here. I used to donate to this pantry. I had a life that meant I didn't need to come here,'" Dowling said.

"Some people think this is unbelievable that it's happening on the shoreline because they have this image of it being a wealthy, well-to-do area. However, it is very expensive to live here."

Dowling describes her new clients as "newly poor" or "people who were making it last year" but fell on hard times because of cost increases for food, gas and utilities. The need becomes even greater when clients become ill, get laid off from their jobs, go through a divorce or lose their homes to foreclosure, food bank officials said.

From January to June, the United Way of Connecticut's 211 information line received 8,359 calls from people looking for help finding free or affordable food, nearly 2,000 more than in the same period last year, said Malia Sieve, director of community results for the 211 line.

"We're finding that this is not just an issue that is facing low-income families," Sieve said. "It's creeping into the middle class."

Food bank officials also are serving families who receive food stamps. Many of those families stop by the pantries at the end of the month when they run out of food.

"It's what all of us are feeling at the grocery store and gas pump," said Nancy Carrington, executive director of the Connecticut Food Bank, which provides food to six of the state's eight counties. "But people who were on the edge before are now being pushed over the edge. It's too much to tolerate."

After her divorce last year, Larson found a job as a modeling teacher and was able to support her young son. Then, Larson's employer cut back her hours to four per week during the slow summer months, leaving her with a $240 monthly paycheck. That, added to the monthly $160 child support and $200 her son receives in disability from his father, covered her monthly $200 rent but left her with $400 to pay the rest of her bills.

Any extras this summer — a water pistol her son saw at the store or a ride to the beach — are not possible, she said.

"I donate what I can now," Larson said while handing over a bag of clothes to Ruth Maio, the executive director of Portland's food bank. "But today, I've got a list of my own."

A morning at the food bank in Portland — a town of about 9,000 residents with a median income of about $65,000 — is a snapshot of what's happening at pantries across the state. Elderly men and women on fixed incomes come in looking for a month's worth of staples. Single mothers with children receive bags of food and are encouraged to sort through a table full of specialty items like organic pasta, gourmet salsas, herbal teas and chunky loaves of bread.

To Larson, the volunteers at the food bank wear many hats. On this day, Maio is a grocer, making sure Larson gets her monthly supply of food. Maio is also a waitress, offering Larson fresh pizza someone brought in for clients, and a personal shopper, outfitting Larson in donated dresses and suits for job interviews Larson — who said she has college degrees in psychology and mathematics — has lined up for the following week.

A purple dress and blue suit with pinstripes make the cut.

"They say dark blue is a good color to wear for an interview. It shows you're responsible," Larson said while modeling the suit for Maio seconds after stepping out of a bathroom at the food bank. Those seated at a table nodded their heads in approval.

"You'd make a good salesperson," Larson said to Maio.

In April, Maio had 156 clients at the food bank. That increased to 195 in May and to 216 in June. For additional help, particularly for the elderly, Maio has signed up with the national Angel Food Ministries, a program that offers a month's worth of food for a single person for $30.

There are no income requirements and anyone can sign up for Angel Ministries, which has 15 host sites across Connecticut. Maio said she's already had 35 applicants.

"I was just so worried about what the fall and winter months would do to our seniors," Maio said.

In Greater Hartford, food bank officials also are getting creative in response to increasing numbers of new clients at pantries "in towns people don't expect," said Gloria J. McAdam, president and chief executive officer for Foodshare Inc., which serves Hartford and Tolland counties.

In Enfield, McAdam said, the number of families served has nearly doubled, from 180 to 300, and the need is up 14 percent in Avon. Manchester's primary social services agency — the Manchester Area Conference of Churches — saw 169 new families in April, a "phenomenal number," McAdam said, because their total caseload is about 1,000.

"And these are families they've never had contact with before," McAdam said.

In response, Foodshare is aggressively seeking donations, which are up by 4 percent, and cutting back in some areas to make up for one of their biggest challenges: the cost to transport food in trucks that run on expensive diesel fuel. The organization has overspent its transportation budget already, she said.

Foodshare is also working with local grocery stores on getting meat donations, an effort that has yielded 200 to 300 pounds of meat for needy families per week, McAdam said.

For years, a small food pantry was all that was needed in Madison — until recently, when volunteers began running out of food as the numbers of those in need seemed to double.

In 2007, there were 335 visits to the pantry, said Wendy Larson, Madison's social services coordinator. Since January, the number of visits is already at 323, with 78 in May alone, she said.

"We were finding that they just couldn't keep it stocked," Larson said of the pantry. Town officials reacted by joining forces with the Connecticut Food Bank, and a local church agreed to provide space for a larger food bank.

Larson said they hope to have the new facility — with more shelf space and refrigerators for perishable food — operating by September. And along with that effort, Larson said she'll continue to educate Madison residents that there are struggling families in their community trying to meet basic needs.

"We need to make our community more aware that it does happen here," Larson said. "And fortunately, we have a generous community. They respond when there's a need."

Democrats and Republicans Alike Have Failed the Nation

2008-07-18T16:59:00-04:00

It's sad, but some people seem to believe that fiscal responsibility is a partisan issue.

The reasoning goes something like this: Since those on the left favor bigger government and increased public spending while those on the right (apparently) don't, the black hole that is our nation's finances is obviously the fault of the Democrats.

Of course, that perspective is clearly wrong in light of the damage that has been done to our long-term fiscal health over the course of the past eight years. From what I can tell, the Republicans have proved beyond a shadow of a doubt that Democrats don't have a lock on profligacy or bad policies.

In reality, both sides are to blame. We are in this mess because Democrats and Republicans alike have failed the nation. They have allowed self-interest and corrupt politics to overshadow their duty as elected representatives -- their duty to taxpayers.

And that is why, as the following San Francisco Chronicle article, "Concern Grows Over a Fiscal Crisis for U.S.," seems to make clear, concerned citizens of all political persuasions are raising the alarm.

As the Bush administration proposes backstopping mortgage giants Fannie Mae and Freddie Mac with a $300 billion line of credit and Congress contemplates another economic stimulus, the question is who will bail out the government?

"People seem to think the government has money," said former U.S. Comptroller General David Walker. "The government doesn't have any money."

A rare consensus has developed across the political spectrum that the government's own fiscal affairs are precarious, with an astonishing $53 trillion in long-term liabilities, according to the Government Accountability Office.

To put that number in human terms, the debt has reached $455,000 per U.S. household. As that debt grows, the United States increasingly relies on foreigners, including China and Middle East oil producers, for financing.

"The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government's finances," said Walker, now head of the Peter G. Peterson Foundation, a group established to raise alarms about the nation's budget. "The difference is that the magnitude of the federal government's financial situation is at least 25 times greater."

Baby Boomers

This year's presidential election coincides with the first retirements of the 78 million people born between 1946 and 1964. The first of this Baby Boom generation may now collect Social Security. In three years, they will join Medicare, the giant health care program whose finances are commonly described as out of control. Medicare accounts for the bulk of the nation's long-term liabilities.

The presidential candidates, Republican John McCain and Democrat Barack Obama, have not addressed what the aging of the Baby Boom generation means for the federal government. Their brief forays - Obama's suggestions to raise the payroll tax on high-income earners to buttress Social Security and McCain's description of Social Security's financing as a disgrace - have been met with furious attacks.

Both promise to spend hundreds of billions of dollars on new tax cuts and spending programs. Their health care proposals concentrate more on expanding access than controlling the soaring costs that are driving the federal budget problems and squeezing workers and businesses.

Health care costs

"Health care costs are just amazing," said John Shoven, director of Stanford University's Institute for Economic Policy Research. Total health care costs now consume 16 percent of the economy and are headed quickly toward 30 percent, Shoven said. "Social Security is a big problem, but it's dwarfed by health care. Even the housing problem is dwarfed by health care."

Just the built-in rise in spending on programs for the elderly will cost about 25 percent of workers' payrolls over the next generation, said Richard Jackson, director of the Global Aging Initiative at the Center for Strategic and International Studies.

Robert Greenstein, director of the liberal Center on Budget and Policy Priorities, agreed that "the nation faces large, persistent, long-term deficits that ultimately risk damage to the economy. We agree that policymakers have to make tough choices soon."

There is consensus, too, on what needs to be done: Cut spending and raise taxes. A bigger problem is how to contain health care costs, but some form of rationing is necessary, experts said.

Only disagreement

The only real disagreement is whether the government's fiscal condition will lead to a financial meltdown, or whether the U.S. economy is strong enough to right itself without a sudden loss of confidence and a flight of foreign capital.

"People on Wall Street think I'm Dr. Doom & Gloom," said Kent Smetters, an economist at the Wharton School of Business at the University of Pennsylvania and a former Bush Treasury official. "I believe we could have a financial crisis like we've seen in South America or Asia. It could easily happen, and under current policy will happen in the United States. People say, 'Gee, give me a date.' Obviously, that's impossible, but the longer we wait, the higher the probability. Could it happen in the next decade? Absolutely."

Alice Rivlin, budget chief in the Clinton administration, discounts the possibility.

"We're a much stronger economy than Argentina," Rivlin said. The government "can handle borrowing in the range that would be necessary in a recession," she said. "What we can't handle is the cumulative long-run obligation."

Financial markets are often fixated on the short-run, and the government's finances are far from transparent. Unlike corporations, the government is not required to state its long-term obligations. Crises of confidence, like today's banking problems, strike suddenly when a tipping point is reached and investors decide to flee.

The government's fiscal problems are "like termites in the house," said Jackson. "You don't notice it until foundations are eroded."

"I had such a frustrating meeting the other day on the Hill, where one staffer said, 'We don't have a problem until Wall Street tells us we have a problem,' " said Maya MacGuineas, head of fiscal policy at the nonpartisan New America Foundation. "By the time the financial markets tell us we've gone too far, it will be too late to fix this in any rational way. We are the toad in boiling water, where it's getting hotter and hotter and nobody's really noticing."

Will they still buy?

The key is whether foreigners will continue to buy U.S. debt. They now hold 45 percent of U.S. Treasury securities, and in all about $11.5 trillion of U.S. public and private debt, say UC Berkeley economists Ashok Bardhan and Dwight Jaffee.

Chinese entities, including sovereign wealth funds that invest government savings overseas, own about 10 percent of U.S. Treasury securities. Even a minor change in China's investment policy could have a major effect on the dollar's value and cause "a sizable increase in interest rates," the economists said.

Still, because of a shortage of creditworthy debt instruments worldwide, and the large role of U.S. institutions in global credit markets, foreigners have little choice but to invest in the United States, they said, predicting "slim chances of abrupt change."

Action needed soon

Whoever's right, all agree that the sooner the problem is tackled, the better. "Like almost any financial problem, if you don't work on it, what happens is it compounds with interest," Shoven said. "There are lots of ways to fix it, and what we pick is none of the above."

The staggering U.S. debt

The federal government's finances are in worse shape than its annual budgets show, because the government is not required to state its long-term obligations, which work out be about $455,000 for every household in the nation.

Breaking down the numbers

Current liability:

Social Security: $6.7 trillion

Medicare: $34.1 trillion

Total long-term government liability: $53 trillion

Source: Government Accountability Office, Long-term Fiscal Outlook, Jan. 2008

Where it goes
U.S. debt held by foreigners as of mid-2007:

-- Foreign holdings of U.S. equities: $5 trillion

-- Foreign holdings of U.S. corporate bonds: $3 trillion

-- Foreign holdings of U.S. Treasury securities: $2 trillion

-- Foreign share of U.S. Treasury securities: 45 percent.

Source: UC Berkeley economists Ashok Bardhan and Dwight Jaffee, YaleGlobal online, April 2008

Broken-Down Superpower

2008-07-17T16:44:22-04:00

It's become something of a sports-world cliché: champion athletes who stick around way past their prime, believing they've still got what it takes to come out on top. Eventually, they end up as pathetic, broken-down figures. Does that describe the world's only superpower? Read the following report by The Guardian's Ashley Seager, "Development: US Fails to Measure Up on 'Human Index'," and decide for yourself.

· Nation slumps from 2nd to 12th in global table
· Richest fifth take home $168,000, poorest $11,000

Despite spending $230m (£115m) an hour on healthcare, Americans live shorter lives than citizens of almost every other developed country. And while it has the second-highest income per head in the world, the United States ranks 42nd in terms of life expectancy.

These are some of the startling conclusions from a major new report which attempts to explain why the world's number-one economy has slipped to 12th place - from 2nd in 1990- in terms of human development.

The American Human Development Report, which applies rankings of health, education and income to the US, paints a surprising picture of a country that spends well over $5bn each day on healthcare - more per person than any other country.

The report, Measure of America, was funded by Oxfam America, the Conrad Hilton Foundation and the Rockefeller Foundation. It shows each of the 11 countries that rank higher than the US in human development has a lower per-capita income.

Those countries score better on the health and knowledge indices that make up the overall human development index (HDI), which is calculated each year by the United Nations Development Programme.

And each has achieved better outcomes in areas such as infant mortality and longevity, with less spending per head.

Japanese, for example, can expect to outlive Americans, on average, by more than four years. In fact, citizens of Israel, Greece, Singapore, Costa Rica, South Korea and every western European and Nordic country save one can expect to live longer than Americans.

There are also wider differences, the report shows. The average Asian woman, for example, lives for almost 89 years, while African-American women live until 76. For men of the same groups, the difference is 14 years.

One of the main problems faced by the US, says the report, is that one in six Americans, or about 47 million people, are not covered by health insurance and so have limited access to healthcare.

As a result, the US is ranked 42nd in global life expectancy and 34th in terms of infants surviving to age one. The US infant mortality rate is on a par with that of Croatia, Cuba, Estonia and Poland. If the US could match top-ranked Sweden, about 20,000 more American babies a year would live to their first birthday.

"Human development is concerned with what I take to be the basic development idea: namely, advancing the richness of human life, rather than the richness of the economy in which human beings live, which is only a part of it," said the Nobel laureate economist Amartya Sen, who developed the HDI in 1990.

"We get in this report ... an evaluation of what the limitations of human development are in the US but also ... how the relative place of America has been slipping in comparison with other countries over recent years."

The US has a higher percentage of children living in poverty than any of the world's richest countries.

In fact, the report shows that 15% of American children - 10.7 million - live in families with incomes of less than $1,500 per month.

It also reveals 14% of the population - some 40 million Americans - lack the literacy skills to perform simple, everyday tasks such as understanding newspaper articles and instruction manuals.

And while in much of Europe, Canada, Japan and Russia, levels of enrolment of three and four-year-olds in pre-school are running at about 75%, in the US it is little more than 50%.

The report not only highlights the differences between the US and other countries, it also picks up on the huge discrepancies between states, the country's 436 congressional districts and between ethnic groups.

"The Measure of America reveals huge gaps among some groups in our country to access opportunity and reach their potential," said the report's co-author, Sarah Burd-Sharps. "Some Americans are living anywhere from 30 to 50 years behind others when it comes to issues we all care about: health, education and standard of living.

"For example, the state human development index shows that people in last-ranked Mississippi are living 30 years behind those in first-ranked Connecticut."

Inequality remains stark. The richest fifth of Americans earn on average $168,170 a year, almost 15 times the average of the lowest fifth, who make do with $11,352.

The US is far behind many other countries in the support given to working families, particularly in terms of family leave, sick leave and childcare. The country has no federally mandated maternity leave.

The US also ranks first among the 30 rich countries of the Organisation of Economic Cooperation and Development in terms of the number of people in prison, both in absolute terms and as a percentage of the total population.

It has 5% of the world's people but 24% of its prisoners.

U.S. News & World Onion?

2008-07-16T20:24:30-04:00

When I first read today's post, "Mental Recession? Maybe. Economic Recession? No," by James Pethokoukis, "money and politics blogger" for U.S. News & World Report's Capital Commerce blog and the assistant managing editor of the magazine's Money & Business section, I thought I was reading a story from The Onion, a satirical (and often entertaining) site that serves up "fake news" as though it was the real thing.

After I went back over what he had to say, I realized that Pethokoukis was dead serious about the notion that the economy is just going through a bit of a rough patch. That is despite the sheer volume of evidence that indicates otherwise. What made it even more interesting, however, was the fact that he quoted Bruce Kasman, JPMorgan's chief economist, to back up his assertions. Mr. Kasman apparently supplied three "reasons" -- all of which are backward-looking or totally bogus -- why this is true.

Well, I did a quick Google search, and found an interesting entry at the Wall Street Journal's Real Time Economics blog, dated March 7th (before the Bear Stearns bailout and the more recent spate of financial market blow-ups). It was entitled "J.P. Morgan: ‘Slouching’ Into a Recession," and it featured some interesting insights from, as Pethokoukis describes him, "one of the "smartest guys I know." Here is what RTE wrote:

Add yet another recession call to the mix. J.P. Morgan Chase says the latest decline in payrolls is enough — combined with drags from housing, credit and energy markets — to indicate the economy has fallen into a recession.

Chief economist Bruce Kasman, in a conference call with clients, said a key question up to now had been whether the weaker economic growth would be accompanied by a change in business and household behavior. The three straight months of private-sector payroll declines sealed the view that the business sector is cutting back, in a way that will build on itself for the next few months, he said.

But instead of a hard “break” into recession, “we’re kind of seeing a slouching,” he said. Consumers haven’t quite retrenched though they face significant drags, he said. Among businesses, the softening in labor demand hasn’t been accompanied by a surge in layoffs, and capital spending has stayed afloat. “It’s not a full-blown breaking in business behavior,” Mr. Kasman said. “What we’re seeing is a real economy that has been dragged down by some substantial forces of weakness. … It’s enough for us to believe first-half growth will be averaging in negative territory.”

The firm’s economists still see a mid-year rebound due to lower interest rates, tax rebate checks and some relief from the credit stress and energy prices. “But mid-year feels an awfully long way off right now,” Mr. Kasman said.

Now read through the Pethokoukis' piece, pasted below. Can you honestly tell me that you don't feel (like I do) that the U.S. News blogger might have a real future ahead of him at the Onion -- or maybe, in stand-up comedy (with Mr. Kasman, perhaps, as his warm-up act)?

One the smartest guys I know is Bruce Kasman over at JPMorgan, and he still doesn't think the economy is going to fall into recession, much a less a severe, 1982-style downturn. (Neither, by the way, does the Fed.) Rather, he sees the economy muddling along with 1 percent GDP growth in the second half. Here are his three reasons:

1) Profit margins at nonfinancial companies remain healthy. "This is a testament to the fact that firms have produced strong productivity gains—estimated to have risen at a 2.5% pace in 1H08."

2) Trade remains strong. "This is related to the decline in the dollar and the composition of US exports which is concentrated in agricultural products, industrial supplies, and capital equipment—items that remain in demand by rapidly growing emerging market economies."

3) Businesses will have to rebuild their inventories. "Apparently, retailers and manufacturers are using the lift to demand from rebate spending and strong exports in 2Q08—in which final sales grew at a faster than 3% clip—to clear their shelves. In addition, the agricultural sector is experiencing a forced inventory drawdown due to floods and bad weather conditions. This destocking is holding back our estimate of 2Q08 growth to 2.2%. But it will add significantly to growth in the coming quarters. It should be noted that only twice in the last three decades—at the end of 2001 and 1982—did firms destock at the pace seen in 1H08. In both these previous cases, a stabilization in stockbuilding contributed more than 1.5 percentage points to growth over the following two quarters."

The Beginning of the End for America's AAA Rating?

2008-07-16T05:50:00-04:00

Over the past three days, the price of a credit default swap (or CDS, a form of "insurance" on creditworthiness) on 10-year U.S. government debt has risen by 8.3 basis points (one-hundreths of a percentage point), or 61 percent, to 21.8 basis points, and is now almost 80% higher than the median value of this CDS since it was first quoted on April 2.

There is no doubt that talk of a bailout of Fannie Mae and Freddie Mac has spurred what could be a short-lived spike. Still, it makes you wonder if the market is starting to price in what many say is inevitable after years of profligacy and failed policies: a credit downgrade for the United States.

(Hat tip Accrued Interest)

Other Issues to Consider

2008-07-15T20:48:28-04:00

When people think about the fallout from high energy prices, they tend to focus on the more obvious concerns. Like individuals who can't afford to drive to work or get to the store. Or businesses that are struggling with higher costs. Or municipalities that are having a hard time covering the cost of fuel for police cars and school buses. But there are also other issues that many might not have considered. In "Thieves Will Steal the Gas from your Tank and Parts, too," the Modesto Bee's Claudia Newcorn writes about one of them.

When I aspirated gasoline, I thought I'd swallowed pure alcohol. It burned on the way down, and I burped the vile taste for days. The doctor said I was lucky I hadn't damaged my esophagus and stomach, and that he was seeing a lot of that.

I'm not talking about now -- I'm talking about 1974 and again in 1980, when the nation fell into gas rationing, and gas wasn't to be had without long lines and restrictions. We lived in Connecticut, where we were allowed to buy gas on alternating days. My mother needed gas for a trip; I was trying to siphon some from my tank to put in hers.

Today, stolen gas stories keep popping up in The Bee. What startles me is how much more drastic the stealing has gotten. People also are puncturing gas tanks to steal gas, sometimes with disastrous consequences.

That didn't happen back when. Locking gas caps were rare, and drivers would simply find their gas cover open and then, checking the fuel gauge, discover they'd been had.

Stealing today extends beyond punctured gas tanks.

A colleague had the catalytic converter literally cut from underneath her SUV. The thieves had slid under, sliced it out and vanished into the night. The auto repair shop told her that they're being sold as scrap or possibly for the precious metals in them. The height of the SUVs and trucks makes them easy targets for such thefts.

Our nation's guzzling of gas has come back to bite us in the backside. As gas prices continue to leap upward and devour our dollars, people in Stanislaus County are losing jobs, retailers have seen a drop in spending, and restaurants are imploding like collapsed souffles.

For all intents and purposes, vehicles have become traveling ATMs for thieves -- a source of gas, metals, DVD players, stuff left in the back seats, and the list goes on. I'm afraid as we sink into a recession -- which I believe our region already has entered -- the situation is likely to get worse, possibly shoving us back to the dubious honor of the nation's car theft capital.

Take a lesson from my colleague: Your only defense is a smart offense.

First, recognize that this is reality. Your vehicle, particularly those high on their tires, are potential targets and should be protected.

Park in your garage if at all possible, or at least in the driveway, and determine how to pull into the driveway to minimize access to your gas tank. Install a motion-detector light over the driveway to help deter would-be thieves. Make sure your insurance covers such thefts as catalytic converters and other parts of your car, to minimize your out-of-pocket expenses if you do get hit. Practice the rule of "don't make it easy to be a victim."

Running Scared

2008-07-15T20:20:56-04:00

Many financial bloggers pay a great deal of attention to data and trends. Yet in my view, the numbers alone aren't enough. Decisions that drive markets and economic activity are made by people. They, in turn, are influenced by experiences, emotions and attitudes, among other things. When people feel good about themselves or are optimistic about the future, they buy or borrow. When they are uncertain or anxious, they sell or save.

Under the circumstances, the following BusinessWeek commentary, "Welcome to the Frozen Economy," by Shoshana Zuboff, author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism, suggests that those who are trying to figure out when a bottom might come by focusing almost exclusively on what the statistics say might be somewhat misguided.

Not since the Depression have financial difficulties so immobilized spending and credit. Listen to the talk at a local diner in Maine

The Polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when "lock-in" notices from the local fuel company arrived. This year's advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many claimed they would never sign the contract. "What's your alternative?" I asked a friend.

"I don't have one," he muttered.

In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food? Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: "When I was a kid, you woke up, went into the bathroom, and broke up the ice in the toilet. Now my kids will have to do the same. America is moving backward."

My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared.

Spending Paralysis

The economic crisis has been triggered by what economists call "structural shifts" in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating a new set of economic conditions that have yet to be named. Call it "the frozen economy."

As pain reaches deep into the daily lives of ordinary Americans—irrespective of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on nonessentials, according to a new survey by Information Resources. But what's nonessential? Heat? Asthma medication? Shoes for your kids? A new yoga mat? At the same time, 57% of Americans interviewed last month by the Survey of Consumer Confidence reported that their financial situation had worsened—the poorest response since 1946, when the survey began. More than two-thirds of gross domestic product depends on consumer spending. But when the grass roots are frozen, nothing can grow.

The statistics tell a dramatic story, but people tell it better. So I went to Moody's Diner to listen.

Comfort Food

Moody's is our sanctuary of sameness, where regulars come for the $3.89 breakfast special—two pancakes, two eggs, two links—and tourists to satisfy a hunger for something that goes beyond food. Built in the 1920s on Maine's principal north-south route, it was a haven for loggers, truckers, and rusticators in an age before cholesterol. Now it's a fold in time. The yellowed linoleum counter, green vinyl swivel seats, scarred wooden booths, and worn tabletops have welcomed countless stacks of blueberry pancakes, thousands of fragrant chicken croquettes with gravy covered mashed potatoes, a sea of shrimp stew, and enough chocolate cream pie to feed a small country.

Moody's welcomes us back to the world of childhood, of Grandma's kitchen, when all was innocence and order. This is no postmodern nostalgic wink, just the healing comfort of a nearly complete absence of change. Only the Support Our Troops in Iraq poster, with photos of local boys, suggests a new century.

At least, that's what I thought until the other day, when I sat down at the counter. Three working men in the booth behind me wondered about alternative energy. Wind? Solar? Pellets? The very notion was mysterious, and it wasn't clear how to figure it out. "We have to do something," they said. "But what?"

Next to me, Shirley and Irene recalled how their parents coped the last time no one could afford heat, during the Great Depression. Back then, three generations moved into Grandma's farmhouse for the winter. "It was the only way they could survive. Now it looks like we may have to do that again." Irene looked dazed. "I feel sick about it. We don't know what to do."

Seventy-three-year old Arlie Fretner sat in his usual spot, the last seat at the counter, with his back to the wall. "I don't know what to do, or what to think, or what direction to go in. It looks like those folks in Washington don't know, either. The whole system has just seized right up. There's nothing I can compare this to, except how my people talked about the Depression."

Running Scared

"What about the next President?" I asked. "Will he be able to help?" They all looked at me with a mix of tenderness and pity, as if I had just spit up on my clean shirt. "The government should assist us," Arlie said, "but we've given up on that. They want to pacify us, not help us."

Robert had been listening quietly. For decades, he taught shop at the local high school and trained many of the skilled carpenters around town. Now he runs a small power-products business and helps out his son's logging operation. Few men are more respected in this community. "People are asking themselves, 'Will things go back to the way they were, or is this a fundamental change?'" he said. "Everything hit us at once. Now we are running scared for the winter. My business is off 75%. People want the products, but they're afraid to make a move, because they have to save everything to heat their homes. We have to choose between heat, gas, food, and medicine. Most of us have never lived through a time like this, where we can't afford the basics of a decent life. It's hard to believe that this is America."

Welcome to the frozen economy, where paralysis reigns at every level. Psychologists have long observed a curvilinear relationship between anxiety and performance. Without anxiety, there is apathy. A good dose of anxiety motivates peak performance. But more anxiety and the whole thing morphs into paralysis. The way I see it, we've blown right past anxiety into brand new territory, where people can't make choices because there aren't any good choices to make. They are paralyzed—frozen in place.

Credit Seizure

Our public and private institutions are facing their own version of this new Big Chill. Treasury Secretary Henry Paulson, speaking in London earlier this month, told his audience that the financial markets had not yet adapted to new circumstances. "Working through the turmoil will take additional time, as markets and financial institutions continue to reassess risk…." They, too, are uncertain where to turn, having seen the Dow's dismal June performance, when it lost the greatest percentage of its value since June 1930.

General Motors (GM) executives, having squandered these past decades on shamelessly obstructing the development of fuel-efficient engines, now see their share price at a 50-year low. Their solution? Lay off other employees…again. No peak performance there.

The G8 leaders appear powerless and irrelevant. At the U.S. Federal Reserve, the curtain has been ripped aside, and the once omniscient Wizard looks startled and uncertain. Keep rates low to support growth? Raise rates and try to stem inflation? You know the banking sector has seized up when federal funds lend at 325 basis points less than a year ago, while 30-year mortgages are two full percentage points higher. Frozen.

Squeezing Budgets

Every aspect of the economy seems to be caught between fiercely opposing forces, leaving no good choices but plenty of ice. Prices are up: Dairy products and bread have jumped 15% over last year, eggs 26.7%, and poultry 73%, according to the Bureau of Labor Statistics. Gasoline is36.7% more than a year ago, according to the Energy Information Administration. Health insurance premiums have increased 91% since 2000, according to the Commonwealth Fund. Meanwhile, real hourly earnings are falling—down 0.8% from a year ago, according to Bloomberg Economic Indicators.

There are more opposing forces: Consumer borrowing is up, while home values have fallen precipitously and mortgage delinquency rates are reaching record levels. The U.S. trade deficit continues to rise, while the cost of shipping a standard container from China has tripled since 2000, and many goods now cost more to transport and distribute than to produce. GDP is rising slightly, but the amount we can afford to buy with what we produce is growing at a pace that's even slower, by a full percentage point, than real GDP, according to the Dallas Fed. Home prices have fallen back, but the Conference Board indicates that the number of people intending to purchase a home in the next six months is at a 25-year low.

Americans are not alone in their shock and bewilderment. Demonstrations and riots over the rising cost of food and fuel are spreading from Asia and Africa across Europe.

Memories of Depression

Civilizations can prosper or decline. This is no coin flip but a consequence of how well societies perceive and adapt to economic, social, and environmental ruptures. In 1980, still in the grip of the last energy crisis, Americans signed on for "Morning in America." The promise of Ronald Reagan's candidacy, and of every President and Congress since, has been to humor our fears with a message of eternal sunshine—that everything is as it has always been. We've been lulled into escapism by opportunistic leaders. We chose to be pacified. Now decades have been lost while we've kept our heads in the sand. Most Americans alive today cannot recall the Depression—the last great shattering of our economic life—and what it felt like to be frozen. Will the economy mark the onset of our lingering decline, or will it finally rally us from denial?

As the economy ices over, the next President will confront a challenge that can be compared only to the one Franklin D. Roosevelt faced nearly 80 years ago. Discontinuous change will require a bold reexamination of our social contract and the rules of wealth creation in a global system. Thawing the frozen economy will entail reinvention of our public and private institutions, especially as they bear on health, education, finance, and energy. These are themes I plan to address in my next columns. In the meantime, here's my advice to the candidates: Start at Moody's Diner. Lose the cameras. Bring a notebook.

'People Should Not Worry' [Uh-Oh...]

2008-07-12T20:47:37-04:00

There are some things you can count on in this world. When a politician says he is "not a crook," you can expect the lawyers will soon come calling. When a policymaker says the "fundamentals are sound," you can be sure that conditions are deteriorating rapidly. And when a regulator says "people should not worry," like FDIC Chairman Sheila Bair did on a conference call following the the fifth U.S. bank failure this year, you know you should be taking a long and hard look at where you keep your money. In "Crisis Deepens as Big Bank Fails," the Wall Street Journal details the latest development in the continuing economic unraveling.

IndyMac Seized In Largest Bust In Two Decades

IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.

The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a "heart attack."

"Would the institution have failed without the deposit run?" Mr. Reich asked reporters. "We'll never know the answer to that question."

Mr. Schumer quickly fired back.

"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Sen. Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

IndyMac had been troubled for months, and investors were concerned about its possible downfall well before Sen. Schumer's comments. It specialized in Alt-A loans, a type of mortgage that can often be offered to borrowers who don't fully document their incomes or assets. The company sold most of the loans it originated, but continued to hold some on its books. As defaults piled up, IndyMac's finances deteriorated.

The bank will be run by the FDIC and reopen Monday. The FDIC typically insures up to $100,000 per depositor. IndyMac had roughly $19 billion of deposits. Nearly $1 billion of those deposits were uninsured, affecting about 10,000 people, the FDIC said.

IndyMac's arc -- rapid growth, followed by an even more rapid descent -- is a microcosm of the mortgage industry. It boomed in the first part of this decade, as investors were willing to fund loans on ever-looser terms, then hit hard times when the housing market began to turn down in late 2006.

Small mortgage lenders started going under quickly, with the number of failures climbing into the hundreds. Now the fallout has spread world-wide, bringing down some of America's largest financial institutions. Bear Stearns Cos., which suffered losses on mortgage-related investments, underwent a meltdown in March and had to be rescued by J.P. Morgan Chase & Co.

Countrywide Financial Corp., at one time the nation's largest mortgage lender, saw its stock price plunge this year and was forced to sell itself to Bank of America Corp. at a firesale price.

IndyMac, in a last-ditch effort to fend off collapse after it failed to raise fresh capital, said this past week it was firing more than half its work force and closing most of its lending operations. While its shares had been tumbling since early 2007, the move was nonetheless jarring for a company that ranked as the ninth-largest U.S. mortgage lender last year in terms of loan volume, according to trade publication Inside Mortgage Finance.

IndyMac is one of the few federally insured banks to fail in recent years. Banking regulators are bulking up their staff of bank examiners and taking a tough approach toward banks that are seen as risky.

Mr. Reich, the thrift regulator, noted that the IndyMac case had some "unique" features, including the involvement of Sen. Schumer and the rapid fall in its deposits. Officials said most of the recent withdrawals came from depositors at branches, rather than those making deposits at IndyMac's online bank.

IndyMac was set up by Countrywide in 1985, but the two companies severed ties in 1997 and became direct competitors. The company's name stands for Independent National Mortgage. It was created to specialize in jumbo mortgages -- those that are too big to be sold to government-backed Fannie Mae and Freddie Mac. In 1997, under the direction of Chief Executive Michael Perry, a protege of Countrywide chief Angelo Mozilo, IndyMac set off on its own.

The company grew quickly, pioneering the issuance of so-called Alt-A mortgages to people with blemished credit histories. The loans have gained notoriety as an example of the type of lax lending that came to characterize much of the mortgage industry.

Early last year, Mr. Perry remained optimistic about IndyMac's future, insisting that the company had the resources to remain independent. At the time, IndyMac's stock was trading for about $45 a share.

But the combination of the frozen credit markets and mounting defaults on IndyMac loans steadily sapped investor confidence in the company. In February, IndyMac reported the first annual loss in its 23-year history. By this week, its shares, which ended last year at less than $7 each, were trading for 28 cents apiece.

The company was desperate for more capital but couldn't find investors willing to put fresh funds into what looked like a crippled institution.

The failure could be felt across the entire banking industry, as the FDIC will likely have to raise insurance assessments for all banks to build up government reserves. "It takes a big chunk out of the FDIC insurance fund," said Chip MacDonald, a banking lawyer at law firm Jones Day. He said that if the FDIC hikes insurance fees, that will add to already-intense pressure on bank profits.

The OTS and FDIC didn't secure any outside firm to acquire the bank's assets. The FDIC will temporarily run the bank through a new bank it has created, called IndyMac Federal Bank, FSB.