Wednesday, October 8, 2008

CRASH TALK

Bloomberg reports that the 2008 drop in the S&P is the worst yearly slump since 1937. The same is true for the Dow.

Michael Zweig, Newsday
- Congress should take $220 billion of the $700 billion it has set aside for the current crisis and apply it to those who need it most: the millions of economically distressed workers across the country who have gotten absolutely nothing from the "rescue package" so far.

A principal justification for bailing out Wall Street was to free up frozen credit markets. This would be important for Main Street, Wall Street told us, because businesses and consumers could borrow again and functioning credit markets would allow the economy to grow. But economic recovery requires more than willing lenders and a ready supply of credit. Recovery requires growing demand for goods and services that would justify taking out the loans that will presumably now be available and generate the new jobs we need.

In a study by Stony Brook University's Center for Study of Working Class Life, we propose a stimulus package that will move our economy toward full employment by channeling the stimulus to financially struggling workers. Our stimulus proposal has three parts:

- Increase funding for existing income-support programs by extending eligibility and increasing payments to recipients. We propose adding $60 billion (about 40 percent of recent expenditures) to the earned income tax credit, unemployment compensation, housing subsidies, food stamps, and school nutrition programs.

- Increase federal aid to the states so they can reverse cuts in their budgets made necessary by deficits arising from the weak economy. These cuts have hit Medicaid particularly hard, and other programs that help economically distressed workers. Some $50 billion sent to the states would relieve their budget shortfalls, restore cuts and send the money back out into the economy.

- Send checks to people. The first stimulus package earlier this year sent money to almost everyone, including people at the upper end of the income distribution, who tend to save the money. Instead, the government should now send an average $2,000 check to each of the 55 million households in the bottom half of the income distribution, those making less than $50,000 a year. These families will spend the money they receive, simultaneously relieving their own economic needs and stimulating the new production and employment required to meet their new demand for goods and services.

Economic stimulus should also come from infrastructure projects. New and repaired bridges, roads, ports and rail lines will provide long-term support for private- sector economic growth once they've been completed, as well as offer short-term stimulus from the jobs and income they generate as they are built. But infrastructure projects take a year or more to begin, so other stimulus measures must come first. As the big projects get started, and as the economy improves from the three elements of this package that can be implemented quickly, payments for income support and subsidies to the states can be reduced.

The most important force that could sink economic recovery despite a stimulus package is the undertow of the millions of home foreclosures we will see in coming months, as the last of the junk mortgages issued into April 2007 reach their two-year reset.

The Hope for Homeowners Act Congress passed in July is woefully inadequate, extending relief to only 400,000 homeowners and offering them only less onerous interest terms if creditors agree. Congress should extend the relief to all who will need it, and allow bankruptcy courts to reduce the value of the mortgages as property values have fallen, requiring banks holding the mortgages to absorb some of the losses as well as the homeowner.

Michael Zweig is a professor of economics and director of the Center for Study of Working Class Life at Stony Brook University

Telegraph, UK - Pakistan facing bankruptcy Pakistan's foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy. Officially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion - enough to buy about 30 days of imports like oil and food. Nine months ago, Pakistan had $16 bn in the coffers. The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.

Dean Baker, Prospect
- I'm waiting to see a reporter write this story, but I'm not holding my breath. The basic point is simple, given a path of future profits, if the stock market is high, it will cost our children and grandchildren much more money to buy a certain share of these future profits than if the market is low. In other words, if the S&P is at 1000, then our children will get much higher returns on their savings than if the S&P is 2000. . . So, the young people out there should be celebrating the plunge in the stock market, except for the relatively small group who were anticipating inheritances from their parents. You can't please everyone.

Washington Post -
The stock market's prolonged tumble has wiped out about $2 trillion in Americans' retirement savings in the past 15 months, a blow that could force workers to stay on the job longer than planned, rein in spending and possibly further stall an economy reliant on consumer dollars, Congress's top budget analyst said yesterday. For many Americans, pensions and 401(k) plans are their only form of savings. The dwindling of these assets -- about a 20 percent decline overall -- is another setback just as many people are grappling with higher gas and food prices, more credit card debt, declining home values and less access to loans.

Washington Post - Joseph Cassano, the financial products manager whose complex investments led to American International Group's near collapse, is receiving $1 million a month in consulting fees. Former chief executive Martin J. Sullivan, whose three-year tenure coincided with much of the company's ill-fated risk-taking, is receiving a $5 million performance bonus.

And just last week, about 70 of the company's top performers were rewarded with a week-long stay at the luxury St. Regis Resort in Monarch Beach, Calif., where they ran up a tab of $440,000. At a House committee hearing yesterday, Rep. Henry A. Waxman (D-Calif.) showed a photograph of the resort, which overlooks the Pacific Ocean, and reported expenses for AIG personnel including $200,000 for rooms, $150,000 for meals and $23,000 for the spa.


"Less than a week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation," Waxman said in kicking off an angry hearing of the House Committee on Oversight and Government Reform.

Wall Street Journal
- The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year. The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall. And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood. About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy. The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Telegraph, UK
- Tycoon Hugh Hefner has been advised to cut back on staff at his multi-million dollar glamour empire as it struggles to cope during the global economic turmoil. The 83-year-old has been told to lay off some of his staff at his Los Angeles and New York offices as soon as this month or go bankrupt. The company has recently seen shares fall from L6.20 to L1.55.

An insider at the company told the Daily Star that bosses had been aware of the worsening situation for "a while. Only the top brass has known for a while how bad things have been for Hef recently.". . .

The news will be another blow to Hefner who recently discovered that two of his "bunnies" may have been cheating on him. Holly Madison, who has previously been named as Hefner's "No.1" girlfriend, is alleged to have had an affair with magician Criss Angel and another bunny, Kendra Wilkinson, is reportedly dating football star Hank Baskett. Playboy spokesman Rob Hillburger denied the rumors, saying: "The rumors that Holly left Hef for Criss Angel are not true. Holly and Kendra are all still living at the Mansion."

DC Examiner
- Pending home sales rose 7 percent from July to August, an unexpected piece of positive news for the battered U.S. housing market. The National Association of Realtors said its seasonally adjusted index of pending sales for existing homes rose to 93 from an upwardly revised July reading of 87. The reading was the highest since June 2007. Home sales are considered pending when the seller has accepted an offer, but the deal has not yet closed. Typically there is a one- to two-month lag before a sale is completed.

Reuters -
U.S. household heating fuel costs will rise 15 percent this winter from last year, the government's top energy forecasting agency said, citing more expensive fuel and the likelihood of much colder weather than last winter. Heating oil and natural gas customers face the steepest price jumps, although double-digit percentage increases also are in store for users of propane and electricity, the Energy Information Administration said in its latest winter forecast.

Adam Hanft, Daily Beast - 237 million prescriptions were written last year for anti-depressants, making them the most prescribed drugs in America. . . There are many who argue that anti-depressants got to #1 status because Big Pharma has spent hundreds of millions to create a nation of psychological hypochondriacs using canny marketing to blur the difference between serious depressive states and merely painful, Billie Holiday-like blues.

But what exactly would turn psychotropic drugs like Prozac and Paxil and Zoloft into a subplot in the subprime mess? It's the biochemistry. Those drugs are SSRIs-serotonin uptake inhibitors-and they spin their mood magic by elevating levels of serotonin in the brain. And serotonin is a neurotransmitter associated with behaviors that might contribute to the temptation of borrowing $501,000 on a $500,000 house.

When I asked Dr. Helen Fisher, a biological anthropologist who studies brain chemistry, if my hypothesis passes the expert smell test, she replied: "I wouldn't at all be surprised if people taking drugs that elevate their levels of serotonin-which blunt the emotions-make some dumb financial decisions. Our emotions evolved, at least in part, to help us monitor our actions. "

Eli Lilly's website offers a different take on what happens when you change the brain's perception of what's real and what isn't:

"Prozac is one of the world's most widely prescribed antidepressants; it has been prescribed for more than 54 million people worldwide. Chances are, someone you know is getting better because of it."

And chances are you also know someone who has a house they can't afford, possibly because of it, too. Christopher Lane, who wrote Shyness: How Normal Behavior Became a Sickness told me at first he was skeptical of my hypothesis. "But as I thought about it, it made sense that drugs could have numbed people to the risks involved-extra serotonin can create a false sense of well-being and present a misleading neural picture to the brain that may be substantially at variance with reality. This may interfere with rational processes.". . .

People on the drugs are removed from the consequences of action, a real disconnection said Charles Barber, author of Comfortably Numb: How Psychiatry is Medicating a Nation. He told me, "There is a theme in the literature about disinhibition, a buffered sense of reality." Dr. Eric Hollander, who is a Professor of Psychiatry, and Director of Clinical Psychopharmacology at Mount Sinai School of Medicine - as well as a practicing psychiatrist - told me, "Without a doubt, SSRIs make people perceive less of a sense of threat, so they are more comfortable with risk."

When I asked him if he has seen patients on these drugs who take financial risks they shouldn't, he said that he sees impulse control problems all the time. . .

Joel Weinberger, who is a Professor at the Derner Institute for Advanced Psychological Studies, Adelphi University, and an expert in unconscious processes, noted that the power of group-think which encourages people to take larger risks was fully operational during the bubble. There were shows on TV like Flip This House. If you were on meds, you might very well have crossed the line into unhealthy risk-taking from the combination of all those social pressures.

And that's just anti-depressants. There is also an enormous, additional population that is on stimulants for ADD, ADHD, and other conditions. The drugs they take-like Ritalin-trigger elevated dopamine, which is a neurotransmitter like serotonin, and is associated with reward-seeking behavior and the search for novelty. Another possible culprit.

I could be wrong about this. And to be fair, some experts I spoke to weren't totally convinced. But there's more than enough to warrant some further investigation. . . Perhaps after a little research, the familiar "Do not operate heavy machine when taking this drug" could become "Do not apply for a home-equity loan when taking this drug."

A new CNN
poll finds 62% of Americans oppose a plan that would all workers to invest a part of their Society Security taxes in the stock market.

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