Friday, October 17, 2008

Single-Family Home Starts in U.S. Fall to 26-Year Low

Single-Family Home Starts in U.S. Fall to 26-Year Low

By Bob Willis

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Housing starts in the U.S. fell more than forecast in September as construction of single-family homes plunged to the lowest level in 26 years, indicating the three-year real-estate slump is intensifying.

Construction of single-family homes dropped 12 percent to a 544,000 annual rate, the Commerce Department said in Washington. Starts on all residential properties, including condominiums, slid to 817,000, below all 74 forecasts in a Bloomberg News survey.

Builders will find it difficult to lure buyers into the market after stock prices plunged this month and banks made it harder to qualify for a mortgage. Declines in construction are likely to continue to hurt economic growth well into 2009, extending the housing slump into a fourth year.

‘‘The full impact from the financial meltdown is yet to come,'' said David Sloan, a senior economist at 4Cast Inc. in New York, whose estimate matched the lowest in the Bloomberg survey. ‘‘Housing will be a drag on growth into the middle of next year. The bottom is now looking further away than it did previously.''

Treasuries climbed, sending benchmark 10-year note yields down to 3.88 percent at 9:31 a.m. in New York, from 3.96 percent late yesterday. The Standard & Poor's 500 Stock Index fell 1.8 percent to 929.86.

Permits Decline

Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981.

Total starts were projected to fall to an 872,000 annual pace, according to the median forecast of the economists polled by Bloomberg News. The reading for August was revised down to 872,000 from a previous estimate of 895,000.

Compared with September 2007, work began on 31 percent fewer properties. Work on multifamily homes, such as townhouses and apartment buildings, climbed 7.5 percent from the prior month to an annual rate of 273,000.

Starts of single-family houses dropped to record lows in three of four regions in September, led by a 24 percent slump in the Midwest.

The biggest housing slump in a generation was showing signs of nearing a bottom when financial markets began to implode in September, leading to the government takeover of mortgage lenders Freddie Mac and Fannie Mae, the failure of banks and a $700 billion government rescue plan this month. Recent events are likely delaying any return to stability.

‘New Nail'

‘‘These things are putting a new nail'' in the housing market's coffin, David Seiders, chief economist at the National Association of Homebuilders, said in an interview on Bloomberg Television yesterday. ‘‘this sort of vicious feedback loop is still in play.''

The National Association of Home Builders/Wells Fargo index of builder confidence decreased in October to its lowest since 1985, the Washington-based association said yesterday.

Combined sales of new and existing homes have fallen 36 percent from their peaks in mid-2005. Home construction has declined 64 percent from a peak in January 2006. The supply of unsold homes on the market remains above 10 months' worth of sales, signaling homebuilding is likely to continue falling.

Home prices in major cities are down an average of 20 percent from mid-2006, after nearly doubling in the prior six years, according to the S&P/Case Shiller index of 20 metropolitan areas.

Prices Drop

Falling prices are contributing to the jump in foreclosures as Americans, trying to refinance adjustable-rate loans, find out they owe more than their homes are worth. The drop in prices also means owners can't tap home equity for extra cash, one reason behind the slowdown in consumer spending.

Homebuilders are still reeling. Lennar Corp., the second- largest U.S. homebuilder, on Sept. 23 reported its sixth straight quarterly loss as potential buyers struggled to get mortgages and rising foreclosures increased the supply of homes on the market.

‘‘The weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards,'' Chief Executive Officer Stuart Miller said in a statement.

How Paulson pressed banks to sign intervention deal

How Paulson pressed banks to sign intervention deal

By Mark Landler and Eric Dash

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The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry Paulson said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard Kovacevich, protested strongly that, unlike his New York rivals, his San Francisco bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine CEOs had signed — setting in motion the largest government intervention in the U.S. banking system since the Depression and retreating from the rescue plan Paulson had fought so hard to get through Congress only two weeks earlier.

No choice

What happened during those 31/2 hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with them.

Paulson announced the plan Tuesday, saying "we regret having to take these actions." Pouring billions of dollars in public money into the banks, he said, was "objectionable," but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion worth of new senior debt issued by banks, as well as insuring $500 billion in deposits in non-interest-bearing accounts, mainly used by businesses.

All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest massive show of government firepower is an abrupt about-face for Paulson, who just days earlier was discouraging the idea of capital injections for banks.

"It was a take it or take it offer," said a person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. "Everyone knew there was only one answer."

Getting to that point, however, necessitated sometimes tense exchanges between Paulson, a former chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark-wood table from him, sipping coffee and Cokes under a soaring rose and sage-colored ceiling. This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.

Personal calls

Paulson began calling the bankers personally Sunday afternoon. Some already were in Washington for a meeting of the International Monetary Fund. The executives did not have an inkling of Paulson's plans. No one expected him to present his plan as an ultimatum. Paulson, according to his own account, presented his case in blunt terms. The nation's largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized.

"I don't think there was any banker in that room who was going to look us in the eye and say they had too much capital," Paulson said. "In a relatively short period of time, people came on board."

The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.

The terms, officials said, were designed not to be punitive.

In the Bay Area, several community banks said they were evaluating the Treasury Department plan.

San Mateo's United American Bank said it's in good shape with capital, but the money might appeal even to banks that are well-capitalized but want to further strengthen their position. "It's relatively inexpensive money,'' said John Schrupp, UAB's president and CEO. "Certainly, it's worth analyzing.''

SVG Financial Group, which operates Silicon Valley Bank, said it is evaluating the Treasury Department's announcement.

Fremont Bank said it doesn't need the money and won't apply for it.

Asian markets plummet amid fears of global recession

Asian markets plummet amid fears of global recession

By Peter Symonds
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Markets throughout Asia plunged yesterday following large losses on Wall Street on Wednesday and growing fears about the impact of a protracted global recession on the region’s economies. The falls abruptly ended the market euphoria earlier in the week, after the announcement of huge bank bailouts in the US and Europe, and sent share values plummetting toward the record lows reached last week.

Japan’s Nikkei 225 led the way with a decline of 11.4 percent—its worst one-day fall since the October 1987 share market crisis. Underscoring its volatility, the Tokyo stock market had rocketted up by a record 14 percent just two days earlier. Last week, share values plunged by 24 percent in five days—the worst weekly performance in the Nikkei’s 50-year history.

Share markets throughout the region followed suit. South Korea’s Kospi lost 9.4 percent and the Australian S&P/ASX index was down 6.7 percent. Hong Kong’s Hang Seng fell by 4.8 percent, but the sub-index covering mainland Chinese companies fell even further. The Shanghai Composite Index dropped by 4.3 percent and the Shenzhen Composite Index by 4.7 percent. The MSCI Asia Pacific Index of share prices across the region fell by 8.5 percent, its biggest drop on record.

Throughout the region, there are deep concerns that export markets in the US and Europe will rapidly shrink as the world economy slows down. The debate is no longer about whether there will be a global recession but rather how long and how deep it will be. Figures released on Wednesday showing a marked monthly decline in consumer spending in the United States—the third in a row—translated into sharply falling shares for Asian exporters.

Takashi Ushio, investment strategy head at Marusan Securities, told Reuters: “There’s a certain degree of panic selling in Tokyo but the sentiment’s different from last week. Last week people were panicking over the financial system, nobody really knew what would happen. But now it’s the real economy.” Yoshinori Nagano, a strategist at Daiwa Asset Management, told Bloomberg.com: “The American spending spree in the past few years has totally evaporated. The earnings outlook for auto manufacturers and electronic makers is particularly harsh.”

Toyota, Japan’s biggest automaker, slumped 9.3 percent and Honda, which makes half its profit in North America, lost 7.9 percent. Mazda fell 4.2 percent, on top of a decline of 9.2 percent on Wednesday. Sony, Japan’s second largest manufacturer of consumer electronics, dived 13 percent. Sharp fell by 11 percent. Nintendo, which generates 90 percent of its revenue from exports, plunged by 10 percent. Steelmakers, shipping companies and corporations trading in commodities were all hard hit. Mitsubishi Corp, which derives half of its profit from commodities, fell by 15 percent, while Mitsui Co plunged by 17 percent.

Japan has already recorded a 3 percent contraction in GDP for the second quarter on an annualised basis with predictions the economy is heading deeper into recession. Taro Saito, a senior economist with NLI Research Institute, told Agence France Presse that Japan’s economy could shrink throughout 2008 as a whole. “That was unthinkable a while ago,” he said.

The relative stability of the Japanese financial system has contributed to a rising yen as investors have sought safe havens. The so-called carry trade—borrowing in Japan where the benchmark interest rate is just 0.5 percent to invest in countries with higher rates—has slumped. But the rise of the yen by 22 percent against the US dollar since late June is hitting exporters hard. Analysts have calculated that Toyota, for instance, loses 35 billion yen ($350 million) for every one yen fall of the US dollar.

Having virtually no room to cut interest rates, the Japanese government has drawn up an $18 billion emergency stimulus package in a bid to halt the slide into recession. In a measure of the fear gripping ruling circles, the opposition dropped its plans to block the measure, which passed yesterday in the upper house as share values plunged. Newly installed Prime Minister Taro Aso expressed the hope that the package would be “effective to a certain degree” but warned that “further steps may be needed”.

China’s slowdown

China is often viewed as the growth engine that will pull the world economy out of recession. But its rapid growth rates are heavily dependent on export markets in the US, Europe and Japan as well as continuing huge inflows of foreign investment. The Wall Street Journal concluded from statistics published by China’s central bank on Tuesday that capital flows into China had “slowed sharply and even reversed in recent months... analysts estimate that anywhere from $10 billion to $25 billion left the country in September, just as the financial crisis intensified.”

China’s growth rates are still predicted to remain at around 8 to 9 percent, down from 10 percent in the second quarter of this year and 12.6 percent a year earlier. However, there are already signs that this slowdown is having a dramatic impact on Chinese manufacturing. China’s customs agency announced on Monday that 52.7 percent of the country’s toy exporting companies—3,631 in all—had ceased operations in the first seven months of the year. Most were small, but this week a major manufacturer, Smart Union, shut its doors, throwing more than 6,000 employees out of work.

The mood was bleak at the Canton Fair, the world’s largest export exposition, which opened on Wednesday. Kevin Cao, export manager for HuangYang Bronze Company, bluntly told the New York Times: “It’s a disaster.” The company has seen its exports of aluminium wire cut by 50 percent and has cut its workforce by a quarter. Other manufacturers reported sharp declines.

While China is still reporting rising exports and large trade surpluses, the New York Times pointed out that when adjusted for inflation and the rising yuan, exports actually shrank by 0.5 percent in August. While inflation figures for September are not yet available, the article predicted that the 21.5 percent rise in exports for September, announced on Monday, was likely to vanish as well.

Any decline in the Chinese growth rate will hit countries throughout the region that rely on exports of commodities and components to China. On the Australian share market, the major mining companies were particularly hard hit—BHP Billiton was down by 13 percent and Rio Tinto by 16 percent—amid fears of falling demand and commodity prices. A slowdown in China will also reverberate in Japan and South Korea, which have profitted through the export of capital goods. China is now the largest export market for both countries.

South Korea has also been badly affected by the global financial crisis. Yesterday, the won plunged by 9.7 percent against the US dollar—its worst one-day fall in a decade—as fears grew over the country’s banking system. South Korean banks have a high ratio of loans to deposits and have been heavily reliant on international borrowing, which has dried up. The international credit rating agency Standard & Poor’s warned this week that it may downgrade seven South Korean banks.

Economic commentators are warning that Asia is by no means safe from the global economic crisis. Recalling the 1997-98 Asian financial crisis, the Economist magazine noted this week: “In many ways the region is far better placed to withstand the present shock. Its banks are stronger, its currency regimes less rigid, its foreign-exchange reserves bigger. On the other hand, a decade of accelerated globalisation has seen every country integrated even more closely into the world economy. None can hope to be immune from a global economic slowdown.

“The region may not face the sort of meltdown experienced at the end of the 1990s. But prospects for growth look much bleaker than they did even a fortnight ago. Exports to rich countries still matter, albeit less than they did. And so does trade finance, which lubricates Asia’s trading machinery. Ships are sitting empty in big Asian ports, their cargoes piled up on the dockside because no bank will guarantee them. Despite strong balance sheets, Asian banks may need more capital if they are to make up a shortage of Western trade credit.”

An editorial in the Financial Times on Wednesday entitled “Stimulating Asia: Those who live by export-led growth can also die by it,” concluded that Asian economies had to make a major readjustment. “Export-led growth has served Asia well and can continue to do so. Export-led growth that relied on the US to run a vast trade deficit was always unsustainable, however, and vulnerable to precisely this kind of reversal.” Like a number of other commentators, the editorial called for measures to encourage greater domestic consumption in Asia as a means of boosting regional and international economic growth.

However, as Ifzal Ali, chief economist of the Asian Development Bank, told the New York Times: “Consumer behaviour cannot be changed by the wave of a wand. Domestic demand-led growth is easier said than done.” Stephen Roach, chairman of Morgan Stanley Asia, has calculated that total personal consumption in China and in India, each with a population of more than a billion, is still behind that of Germany with a population of just 82 million. Moreover, any attempt by the major Asian economies to spend on stimulating domestic consumption may well rebound on the United States, which has relied on the investment of the trade surpluses from Asia to prop up its huge deficits.

Those looking for a ray of economic hope in Asia will be disappointed. It is particularly noteworthy that despite the gathering storm clouds, there have been no displays of regional cooperation. No one has even suggested emergency meetings of the various regional forums—from the Asia Pacific Economic Cooperation (APEC) to the much-vaunted East Asian Summit. South Korea’s appeals to Japan and China for stronger measures to defend Asian currencies have fallen on deaf ears. On Wednesday, Philippine President Gloria Macapagal Arroyo grandly announced that a $10 billion standby fund would be established to assist countries in the region with liquidity problems, only to be undercut by World Bank officials who declared that the plan was not final.

Far from producing greater cooperation, the economic crisis will only sharpen existing tensions in the region and internationally as each government scrambles to defend its own economic interests at the expense of others.

NJ flu-shot mandate for preschoolers draws outcry

NJ flu-shot mandate for preschoolers draws outcry

By DAVID CRARY

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As flu season approaches, many New Jersey parents are furious over a first-in-the-nation requirement that children get a flu shot in order to attend preschools and day-care centers. The decision should be the parents', not the state's, they contend.

Hundreds of parents and other activists rallied outside the New Jersey Statehouse on Thursday, decrying the policy and voicing support for a bill that would allow parents to opt out of mandatory vaccinations for their children.

"This is not an anti-vaccine rally - it's a freedom of choice rally," said one of the organizers, Louise Habakus. "This one-size-fits-all approach is really very anti-American."

New Jersey's policy was approved last December by the state's Public Health Council and is taking effect this fall. Children from 6 months to 5 years old who attend a child-care center or preschool have until Dec. 31 to receive the flu vaccine, along with a pneumococcal vaccine.

The Health Council was acting on the recommendations of the federal Centers for Disease Control and Prevention, which has depicted children under 5 as a group particularly in need of flu shots. But no other state has made the shots mandatory for children of any age.

"Vaccines not only protect the child being vaccinated but also the general community and the most vulnerable individuals within the community," New Jersey's Health Department said in a statement. It has depicted young children as "particularly efficient" in transmitting the flu to others.

Opposition to the policy is vehement. Assemblywoman Charlotte Vandervalk, one of the speakers at the rally, said she now has 34 co-sponsors for a bill that would allow for conscientious objections to mandatory vaccinations.

"The right to informed consent is so basic," she said in an interview. "Parents have a right to decide for their own children what is injected in their bodies."

State policy now allows for medical and religious exemptions to mandatory vaccinations, but Vandervalk said requests for medical exemptions often have been turned down by local health authorities. She said 19 other states allow conscientious exemptions like those envisioned in her bill.

New Jersey's health department has come out strongly against the legislation.

"Broad exemptions to mandatory vaccination weaken the entire compliance and enforcement structure," it said.

The department also contends that New Jersey is particularly vulnerable to vaccine-preventable diseases - with a high population density, a mobile population and many recently arrived immigrants.

"In light of New Jersey's special traits, the highest number of children possible must receive vaccines to protect them and others," the department said.

Several hundred people attended Thursday's rally, some with signs reading, "Mommy knows best."

Among the speakers was Robin Stavola of Colts Neck, N.J., who said her daughter, Holly, died in 2000 at age 5 less than two weeks after receiving eight different vaccines, including a booster shot.

"I am not against vaccines, but I do believe there are too many," she told the crowd.

State health officials and the CDC insist the flu vaccine is safe and effective, but Vandervalk and the parent groups who support her bill contend there has been inadequate research into the vaccine's impact on small children. Critics note that flu vaccines contain trace amounts of thimerosol, a mercury-based preservative; the CDC says there's no convincing evidence these trace amounts cause harm.

More generally, many of the parents mobilizing against the state policy believe various types of vaccine are being overused, resulting in more cases of autism, attention deficit hyperactivity disorder and other neurological problems in children.

"There's not been a response from the government that is credible in terms of doing the scientific research that will screen out vulnerable children," said Barbara Loe Fisher, a speaker at the rally. She is co-founder of the National Vaccine Information Center in Vienna, Va., an advocacy group skeptical of vaccination policies.

"There's an acknowledgment that prescription drugs can cause different reactions in people, but there's a blanket statement by health authorities that we all have to vaccinate, all in the same way," Fisher said.

Fisher is a prominent player in a nationwide movement challenging the scope of vaccination programs. She was harshly critical last year when school officials in Maryland's Prince George's County threatened to impose jail terms and fines on parents whose children didn't get required vaccinations.

Many of the activists in New Jersey accept the need for mandatory vaccinations for certain highly dangerous diseases, such as polio, but argue that the state went too far in requiring flu shots.

"The flu is not a deadly disease," said Barbara Majeski of Princeton, N.J., who does not want her two preschooler sons to get the vaccination.

In fact, flu kills about 36,000 Americans a year and hospitalizes about 200,000. But children make up a small fraction of the victims - 86 died last year, from babies to teens, according to federal figures. Only two flu deaths of children in New Jersey have been recorded since 2004.

"Mother Nature designed our bodies to be able to fight off infections through natural means - you need to be exposed and develop immunity," Majeski said. "We've just gotten a little too overprotective with our children."

Birmingham on the brink of bankruptcy

Birmingham on the brink (of bankruptcy)

With $3.2 billion in debt, the county that is home to Alabama's largest city is about to go bust. How the credit crisis went South.

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Bob Riley wanted to help. It was Sunday, Oct. 5, and the Alabama governor was on the phone with Neel Kashkari, a Treasury Department official who the next day would be named by Treasury Secretary Hank Paulson as interim leader of the government's just-approved $700 billion Troubled Asset Relief Program. But Riley couldn't wait for Kashkari's role to become official. He needed to impress upon the new bailout boss the seriousness of the exploding financial crisis in Jefferson County, home to Birmingham. Riley argued that it was urgent that the federal government come to the aid of his state - now.

As he would describe it in a follow-up letter to Kashkari, the situation in Jefferson County was "the single biggest threat to the municipal bond market today and a poster child for how the subprime mortgage crisis is hurting Main Street America."

For months now, Riley and other civic leaders in Alabama have been battling to avert what appears almost certain - that Jefferson County will file for Chapter 9 protection, in what would be the largest municipal bankruptcy in our nation's history. The county has fallen hopelessly behind on payments to service the $3.2 billion it borrowed - on reckless terms - from Wall Street over the past decade to build a new sewer system. As Fortune went to press, the Jefferson County Commission was days away from a vote that could make the bankruptcy official.

Simply put, municipalities aren't supposed to go bankrupt - and rarely do, at least compared with businesses. According to a study by the law firm Mintz Levin, since the bankruptcy laws were written in 1934, there have been fewer than 600 filings for Chapter 9, which provides for the reorganization of municipalities. That's about how many private sector Chapter 11 filings occur, on average, every two weeks. Local governments using stable tax income to pay off money borrowed at a fixed rate may not be sexy, but over history this arrangement has tended to be a pretty reliable bet.

Every decade or so, something big and scary does happen in the normally staid world of public finance: There was a near miss in the '70s when New York City almost went broke ("Ford to city: drop dead" was the famous headline in the Daily News); in the '80s the Washington Public Power Supply System (or WPPSS; the traders called it "Whoops") defaulted on $2.25 billion in loans when it stopped construction of two nuclear power plants; and California's Orange County went into Chapter 9 in the '90s, after the county treasurer made bad bets on interest rates and lost $1.6 billion.

But the saga of Jefferson County stands apart. Unlike previous municipal meltdowns, it is a financial disaster that was to a large degree invented, packaged, and sold by Wall Street. And there are striking parallels to the wider credit crisis that has enveloped the financial world - with overeager borrowers, willing enablers, and dangerously complex financial instruments.

'Magical stuff'

Why punish yourself, local officials were asked, by paying off high-fixed-rate loans when you can lower your payment with auction-rate and variable-rate securities and hedge your bets with swaps? "Magical stuff," is how David Bronner, CEO of the $35 billion Alabama state pension fund, describes the financing, "You're telling everybody, 'Look how much money you saved,' and you forget the risk side of the equation."

The list of potential losers in the county's bankruptcy includes some of the biggest names in banking - past and present. The county's lead underwriter, which brought to market $2.2 billion in debt, is JPMorgan Chase (JPM, Fortune 500), which, ironically, has been getting a lot of good press lately - including in Fortune - for its survival skills. It's less surprising, perhaps, that two of the county's biggest counterparties in derivatives trades were Bear Stearns and Lehman Brothers.

While Governor Riley scrambles to negotiate a settlement, local officials around the country are watching anxiously to see what will happen if the county does enter Chapter 9. Authorities in Connecticut, Florida, and Nebraska, among other states, have recently cut or delayed new financing. And Vallejo, Calif., defaulted on over $200 million back in May. Jefferson County's bankruptcy would only increase the pressure on an already tight muni market.

A soap opera

In Birmingham, though, the macro issues take a back seat to the local drama. Since April, when the county's credit rating was cut to D, the lowest level, and the crisis escalated, the feuding among the state's economic brain trust has provided a daily soap opera for the papers. That Jefferson County got taken by Wall Street is clear. But as if that wasn't bad enough, there has been plenty of waste and corruption over the years too. There have been 22 indictments, 21 convictions, and one guilty plea so far in an ongoing investigation by federal authorities, and the list keeps growing.

Everyone knows that the ultimate target is Larry Langford, the controversial but as yet unindicted mayor of Birmingham. Langford, who served as president of the Jefferson County Commission when most of the riskiest refinancing was completed, has been accused by the Securities and Exchange Commission of accepting more than $156,000 in cash and benefits from brokers who had business with the county.

To have the city's mayor end up in jail would be embarrassing, sure. But it would be nothing compared to the lasting damage to job creation and economic growth that Birmingham's civic leaders - still fighting the legacy of the city's civil rights battles in the 1960s - fear from a Chapter 9 bankruptcy. Yet despite Governor Riley's efforts, there is a feeling of inevitability about what will happen. "The stench of this is starting to permeate across the whole state," says Bronner. More and more, people just want a resolution.

In the beginning, the people of Jefferson County weren't asking for anything special, just a working sewer system - one that didn't overflow whenever it rained, spilling raw sewage into the creeks that drain the Jones Valley basin where Birmingham lies. Lawsuits by environmentalists forced the issue, and in December 1996, Jefferson County signed a consent decree, agreeing to clean things up within ten years. Early estimates of how much it might cost ranged all the way from $250 million to $1.2 billion. In other words, no one had a clue.

As it happened, even the highest estimates were wildly low. Year by year the project expanded and the budget ballooned. Consider the case of the multimillion-dollar tunneling machine. In the late 1990s, Jefferson County began drilling a sewer tunnel beneath the scenic Cahaba River. But a citizen uproar ensued, and the tunnel was halted halfway through. In the end, county officials had to pay nearly $20 million to extract the machine from the hole and return it to the contractors.

Home Prices Seem Far From Bottom

Home Prices Seem Far From Bottom

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The American housing market, where the global economic crisis began, is far from hitting bottom.

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers.

"The No. 1 thing that drives housing values is incomes," said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. "When incomes fall, demand for housing falls."

Despite the government's move to bolster the banking industry, home loan rates rose again on Tuesday, reflecting concern that the Treasury will borrow heavily to finance the rescue.

On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.

As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.

At the same time, the number of people who are losing jobs or seeing their incomes decline is rising. The unemployment rate has climbed to 6.1 percent, from 4.4 percent at the end of 2007, and wages for those who still have a job have barely kept up with inflation.

In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody's Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com's calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.

The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.

"We are in uncharted waters," said Brian A. Bethune, an economist at Global Insight, a research firm.

Colleen Pestana, a real estate agent in Orange County in California, said many people losing their homes in Southern California used to work at mortgage and real estate companies. Many of them bet heavily on real estate by upgrading to bigger houses every few years. Now, many are losing their homes.

At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind — a frequent occurrence, according to real estate agents and mortgage brokers.

"I am working harder than I have ever had to work to get a deal together and keep it together," said Ms. Pestana, who has been a real estate agent for seven years.

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)

Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.

This month, Fannie and Freddie canceled a fee increase that would have applied to markets where home prices are falling, but the companies still have many other fees in place. In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold.

Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.

In some of those places, price declines are being driven by a sharp increase in sales of foreclosed homes.

Hudson & Marshall, a Dallas-based auctioneer that holds sales for lenders, reports that banks are accepting prices that they refused to consider just 12 months earlier. In a recent auction of 110 foreclosed homes in the Las Vegas area, for instance, the auctioneer's clients accepted 90 percent of the bids submitted by buyers, up from 60 percent a year earlier, said David T. Webb, a co-owner of the company.

Single-family home prices in Las Vegas have already fallen 34 percent from their peak in the summer of 2006, according to the Standard & Poor's Case-Shiller home price index. Prices in San Diego have fallen 31 percent since late 2005.

While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.

"In some areas of California, we are really at appropriate levels," Mr. Leamer said of current home prices. But he added: "The risk is that we are going to get some overshooting, meaning that prices will be lower than they ought to be."

In Florida, Jack McCabe, a real estate consultant, said that while some cities, like Fort Myers, are showing tentative signs of a rebound, others like Miami and Fort Lauderdale are still under pressure. Two homes on his street in Fort Lauderdale that sold for about $730,000 apiece in 2005 recently sold for $400,000 — a 44 percent decline.

"The rocket has run out of fuel, and now it's plunged back down to earth," he said.

Infant Deaths Drop in U.S. ranked 29th lowest in the world

Infant Deaths Drop in U.S., but Rate Is Still High

By Gardiner Harris

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Infant deaths in the United States declined 2 percent in 2006, government researchers reported Wednesday, but the rate still remains well above that of most other industrialized countries and is one of many indicators suggesting that Americans pay more but get less from their health care system.

Infant mortality has long been considered one of the most important indicators of the health of a nation and the quality of its medical system. In 1960, the United States ranked 12th lowest in the world, but by 2004, the latest year for which comparisons were issued by the Centers for Disease Control and Prevention, that ranking had dropped to 29th lowest.

This international gap has widened even though the United States devotes a far greater share of its national wealth to health care than other countries. In 2006, Americans spent $6,714 per capita on health — more than twice the average of other industrialized countries.

Some blame cultural issues like obesity and drug use. Others say that the nation’s decentralized health care system is failing, and some researchers point to troubling trends in preterm births and Caesarean deliveries.

Many agree, however, that the data are a major national concern. More than 28,000 infants under the age of 1 die each year in the United States.

“Infant mortality and our comparison with the rest of the world continue to be an embarrassment to the United States,” said Grace-Marie Turner, president of the Galen Institute, a conservative research organization. “How can we get better outcomes?”

The data, collected by the Centers for Disease Control and Prevention, indicate that the nation’s infant mortality rate has been static for years despite enormous advances in the care given to preterm infants. Two-thirds of the infant deaths are in preterm babies.

In 2006, 6.71 infants died in the United States for every 1,000 live births, a rate little different from the 6.89 rate reported in 2000 or the 6.86 rate of 2005. Twenty-two countries had infant mortality rates in 2004 below 5.0 infant deaths per 1,000 live births, with many Scandinavian and East Asian countries posting rates below 3.5. While there are some differences in the way countries collect these data, those differences cannot explain the relatively low international ranking of the United States, according to researchers at the disease control agency.

Preterm birth is a significant risk factor for infant death. From 2000 to 2005, the percentage of preterm births in the United States jumped 9 percent, to 12.7 percent of all births. The most rapid increase has been among late preterm births, or babies born at 34 to 36 weeks of gestation. Some 92 percent of these increased premature births are by Caesarean section, according to a recent study.

Dr. Alan Fleischman, medical director of the March of Dimes Foundation, said that a growing number of these late preterm births might be induced for reasons of convenience. “Women have always been concerned about the last few weeks of pregnancy as being onerous,” Dr. Fleischman said, “but what we hadn’t realized before is that the risks to the babies of early induction are quite substantial.”

Dr. Mary D’Alton, chairwoman of the department of obstetrics and gynecology at Columbia University, said doctors should not induce labor before 39 weeks of gestation unless there was an urgent medical or obstetrical need. For unknown reasons, the number of preterm births is far higher among African-American women even when those women have access to good medical care, Dr. D’Alton said.

There is some evidence, she said, that steroids given to mothers at risk of giving birth early may help. A trial to test this theory is about to start.

Some economists argue that the disappointing infant mortality figure is one of many health indicators demonstrating that the health care system in the United States, despite its enormous cost, is failing.

Although the United States has relatively good numbers for cancer screening and survival, the nation compares poorly with other countries in many other statistical categories, including life expectancy and preventable deaths from diseases like diabetes, circulatory problems and respiratory issues like asthma.

Ms. Turner blamed socioeconomic factors like obesity, high drug use, violence with guns and car accidents — factors that she said could not be addressed by health reform. Karen Davis, president of the Commonwealth Fund, a nonprofit research organization, agreed that socioeconomic factors played a role but said that the nation’s heavy reliance on the private delivery of care was also to blame.

“We’re spending twice what other countries do,” Ms. Davis said, “and we’re falling further and further behind them in important measures like infant mortality.”

Americans Unwilling to Face Reality

Americans Unwilling to Face Reality

By John R. MacArthur

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It’s not as though no one saw it coming. Here’s the economist Michael Hudson, writing in the May 2006 issue of Harper’s Magazine: “The reality is that, although home ownership may be a wise choice for many people, this particular real-estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests…. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.”

Other commentators, including Warren Buffet, said similar things about the derivatives market. He was prescient, but hardly anybody listened. Americans, perhaps even more than other people, have difficulty embracing the concept of “reality.” In part, this is religious. America remains the land of infinite redemption where any crook can suddenly go straight. In part, it stems from our turbo-charged ethos of capitalism. This has always been the land of get-rich-quick and damn the consequences. We are a nation of fantasists, and things have to get really bad before a politician has the right to trade in hard truth.

I doubt that, even now, things have gotten bad enough. Even with all the frenzied commentary about the credit crisis now choking the media (while the financial geniuses assembled at the corner of Wall and K Streets scramble to save their hides), I’m struck more by what’s not being said than what is. Every day I add to a list of critical omissions from the debate. Where, for example, is the voice of organized labor? In previous generations, we could have expected to see the president of the AFL-CIO or the United Auto Workers on the sets of the major talk shows. Apart from David Brancaccio’s NOW on PBS, I couldn’t find a single TV program that featured what might be called a “labor leader.”

Where are the alternative candidates for president like Ralph Nader and Bob Barr? I was pleased to hear that Nader, a long-time critic of the deregulated economy, was permitted to appear on CNN and The O’Reilly Factor after the second McCain-Obama debate–but the time for that appearance should have been before the House passed the bailout bill.

Why is the heavy financial support for Barack Obama and John McCain from Wall Street off-limits for discussion? It’s unlikely the candidates be asked about that subject in tonight’s debate—the two parties write the rules to discourage tough questions—but some impertinent journalist might speak up. If you can’t get the media-trained Obama to give a straight answer, why not simply present a graphic contrasting Obama’s Reno speech supporting the bailout and Nader’s argument against it?

For that matter, in its recent take-down of Alan Greenspan and Clinton Administration deregulation (including the refusal to regulate derivatives trading), why didn’t The New York Times mention that former Clinton Treasury secretaries Robert Rubin and Lawrence Summers are principal advisers to Obama on the economy? In the same vein, why isn’t Treasury Secretary Henry Paulson, the former CEO of Goldman Sachs, challenged on his slow response to the Fannie Mae and Freddie Mac failures?

The only serious critic I’ve found was interviewed in France’s Le Monde: Columbia finance Prof. Rama Cont argues that six months ago the bailout of the two mortgage agencies would have cost $100 billion instead of an eventual $400 billion to $500 billion. Who pocketed the difference, thanks to Paulson’s “indulgence” of his former colleagues? According to Cont, it was short sellers at Goldman Sachs and hedge funds.

Meanwhile, where are the deep thinkers who might enlighten us in this hour of fear, including Karl Marx? Don’t laugh–Marx had much to say about the so-called “contradictions of capitalism” that bears re-reading today. Nothing he wrote is perfectly applicable to subprime mortgages and the derivatives crapshoot. But Marx’s understanding that unfettered capitalism, while fantastically productive, leads to instability by concentrating wealth in too few hands—that a mass-production/mass-consumption society is fundamentally incompatible with oligarchic control of wealth—is something even Rush Limbaugh could appreciate.

If Marx is too rich for your blood, at least we might hear from John Gray, the renegade former adviser to Margaret Thatcher. Gray is today’s most intelligent critic of globalization and “free trade.” He could explain to a television audience that a great deal of America’s “real economy” (as opposed to an economy based on derivatives trading and shopping at Wal-Mart) has already left the country for cheap-labor locales such the Pearl River Delta, in China, and the south bank of the Rio Grande, never to return. And he could describe the destruction wreaked upon traditional societies that suddenly become host to outsourced American factories. Youngstown and Utica are hurting, to be sure, but it’s no picnic either these days for the working class in Nogales or Dongguan.

Finally, there are the great realist novelists, who often see more clearly than journalists. So far, my Google searches have not picked up any excerpts from Zola’s novel Money being read on the nightly news. In this brilliant chronicle of a speculative stock bubble, launched by a character named Saccard in 1860s Paris, Zola cuts right to the heart of America’s boom-and-bust neurosis: “Wasn’t such great and rapid prosperity the result of the methods for which [Saccard] was now being blamed? All of this came together. If one accepted the success, one had to accept the risks. When you overheat a machine, it sometimes explodes.”

Capitalism Without Capital? By Ron Paul

Capitalism Without Capital?

By Ron Paul

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I
t has been long understood that our federal government is going deeper into debt, consistently raising the debt ceiling and demonstrating no fiscal restraint. In recent years, debt ceiling increases have been placed in “must pass” legislation as a means to guarantee that Republicans as well as Democrats would vote for them when Congress was under Republican control.

We also know our nation’s “negative savings rate” reflects the habits of private citizens, showing those habits to be not tremendously different than the habits of the public sector. Yet, the signs of decline are becoming ever more apparent. So apparent, in fact, that it seems unlikely that bailouts or other gimmicks will have even short-term success. More inflation, and creating moral hazard by bailing out egregious offenders, is a recipe for disaster. These activities can seem to provide some short-term relief, but it seems we are now at a significant crisis point, where monetary policy gimmicks don’t provide the band-aids they did in the past.

Not only is our nation on the verge of bankruptcy, but so are its people and private institutions. We are now repeatedly hearing about businesses “needing to access the credit market to make payroll.” This is an unmistakable sign of more dire consequences ahead for the economy. If businesses must borrow just to make payroll, this is evidence of a severe undercapitalization that cannot be sustained, even for the short run.

Couple these facts with items such as the explosion of the “payday loan” industry and the unmasking of the false sense of economic well-being is nearly complete. These payday loan companies use preferred access to easy credit to inject cash into the hands of the working poor. They are nearly always set up in lower-income neighborhoods. These people, who are struggling to buy food and pay rent, get addicted to the credit drug. Their standard of living is only further depressed by the interest payments on these loans that make them profitable to their providers. Thus, the recipients are left even less capable of paying for items such as food and housing in the long run, without using this credit again and again.

These people are often the very ones being paid by businesses who “borrow to make payroll.” This is the dark underbelly of the fiat money, borrow-and-spend economy this nation has been building. As the government takes over more and more functions of the economy many see the rise of socialism as an antidote to this failure of “capitalism.” However, the fact remains that our economy has been increasingly running on debt, not capital. Capitalism does not exist without capital and debt is not, has never been and will never be a form of capital. Only now are we seeing the more dire implications of an economy without capital.

Dr. Ron Paul is a Republican member of Congress from Texas.