India knows gloablization...and someone has figured out why not to like it

Here's a pretty succinct, eloquent lament from India on what globalization will ultimately mean for that country (not to mention all the rest of us):

Globalization - Plunder Fueled by Greed?
by Aarcee

March 30, 2007




Globalization is touted by some as a win-win arrangement for every country that participates in it and opens it markets. A sweet poison tastes sweet first and kills you later. So, the first taste of Globalization that India had was incredibly sweet. When everyone was so inebriated by the sudden glut of consumer items that had been forbidden in a closed economy, any hint that this glut was going to be harbinger of economic shackles was unwelcome. However, reality has now begun to sink in. I was very delighted to read an article by a reader lamenting the erosion of India’s manufacturing capability by under-priced Chinese imports. I see him as an individual who is among the first few to open his eyes and realize that this sweet potion of Globalization actually does considerable harm!

Yes, now apples from New Zealand, America, Australia and China are available in India. Everyone has a Korean cell phone now. That is the visible carrot. Let’s see where the looming invisible stick is. With the Corporations invading India, the small entrepreneurs is becoming history. Small retailers can not compete with Wal Marts and Reliance Marts. You will see them going out of business one by one. They are screaming, but their cries are being drowned by the cheers of those who are still gloating on the carrots of globalization. Now the fruit seller and vegetable seller goes door to door selling his ware. The huge Marts will in near future buy the produce straight from the farms. So now, the hundreds of small business owners will be replaced by one obscenely wealthy individual who will employ the small farmers as farm workers and pay them ridiculously low wages.

Globalization brings in its wake a perverted kind of capitalism. Capitalism is good when it encourages small entrepreneurs to set up shop and earn a buck. In this 21st century perverted kind of Capitalism, the wealth gets siphoned off to a few ridiculously rich individuals who use privileged accounts in market trading, IPO grabbing and, at worst, Enroning the savings of the middle class.

Fourth quarter corporate profits headed south, like the mortgage market

Although you probably didn't hear this unless you really pay close attention to the financial news, the Commerce Department deported that corporate profits in the fourth quarter of 2006 kind of went south. Except for Wall Street. And domestic corporation operations abroad. Doesn't that sound optimistic?

Well, Paul Kasriel of the Northern Trust Company offers up both the bad news and probably as optimistic a view as you could find from this info:

The fourth-quarter contraction in corporate profits would have been worse had it not been for Wall Street's profits and profits of U.S. corporations earned abroad. Profits of domestic nonfinancial corporations declined 6.63% in the fourth quarter while profits of domestic financial corporations and profits earned from abroad increased 4.32% and 15.90%, respectively. The creation of mortgage-related financial instruments has been a money machine for Wall Street in this expansion. Now that mortgage credit growth is in a steep decline, Wall Street will have to find another money machine. I have complete confidence it will.

Pay particular attention to that "profits earned from abroad increased...15.90%. What do you think happens when the profit center of a corporation moves from the U.S. to its overseas operations? And why do you think such a thing would happen?

And do you share Kasriel's confidence that Wall Street will find another "money machine?" Especially when you realize that much of the previous money machine--mortgage-related financial instruments--is now credited with creating the mortgage default crisis that we now "enjoy?"

We seem to be approaching the end of stage one of globalization. Bet you can't wait to see how good stage two is.

A home is a home is a home; so let's buy the cheaper one

This is probably one result of the foreclosure crisis in sub-prime mortgages, and it sure is interesting: Sales of newly built homes fell by the same exact percentage (3.9%) as sales of existing homes rose, according to Forbes Magazine.

The explanation (a.k.a. "let's take a stab at it"):

David Lereah, the head economist for the National Association of Realtors, said the landscape for the resale market is very different from new-home sales. “There is a recovery in existing home sales, but for new home builders, the market will be very bumpy going forward,” he said. “New-home sales are still in recession, and increased foreclosures and subprime problems will make the next two years difficult.”

New foreclosures and tightening credit standards will lead to a glut in housing and limit potential buyers. According to the report, the number of unsold homes rose to its highest level in 16 years, indicating that prices for new homes will continue to fall as competition tightens.

At the end of February, there were 546,000 houses on the market, translating to an 8.1 months supply— the highest backlog since January 1991.

Calling the subprime crunch “a real negative,” Lereah said from 10% to 25% of subprime borrowers, about 100,000 to 250,000 potential home buyers, will no longer be able to qualify for loans. This is bound to affect prime borrowers, who may postpone purchases because of tighter lending practices, he said. However, the ongoing price correction and low mortgage rates should continue to lure new home buyers and the long-term fundamentals remain solid, Lereah said.

In short, sales of existing homes don't help the construction industry, but sales of new homes do.

Blue Cross of California finds a sly way to profit

What better way to make a profit than to not spend money while collecting money from your customers? Apparently that thought occurred to Blue Cross of California, according to an investigation by the California Department of Managed Health Care

DMHC officials on Thursday informed Blue Cross of their intent to file an accusation against the company and issue a $1 million fine in the case. Under California law, health insurers must prove that members intentionally misrepresented their medical histories on policy applications to cancel policies. State investigators reviewed 90 cases from 2004 to 2006 in which Blue Cross canceled individual health insurance policies and found the company had violated the law in each case. According to state investigators, Blue Cross used computer programs and maintained a department to review the policies of members with chronic illnesses and women who became pregnant to consider cancellation. Blue Cross cancels about 1,000 policies annually in California. WellPoint, the parent company of Blue Cross, cited "factual errors" in the investigation and said the "vast majority" of policies canceled by the company are proper.

The BLS monthly grim reaper report for February

From yesterday's Bureau of Labor Statistics (BLS) report on February's mass layoffs:

In February, employers took 1,280 mass layoff actions, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Each action involved at least 50 persons from a single establishment; the number of workers involved totaled 143,977, on a seasonally adjusted basis. The number of mass layoff events increased by 43 from January, and the number of associated initial claims rose by 17,609. During February, 419 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting in 64,072 initial claims. Compared with the prior month, mass layoff activity in manufacturing increased by 30 events and by 12,931 initial claims.
...
The industry with the highest number of initial claims was temporary help services (with 5,581), followed by automobile manufacturing (5,561), and motorcycle, bicycle, and parts manufacturing (3,043). Together, these three industries accounted for 16 percent of all initial claims due to mass layoffs during the month.
...
Construction accounted for 22 percent of mass layoff events and 15 percent of initial claims in February, largely from specialty trade contractors. Administrative and waste services comprised 12 percent of events and 11 percent of initial claims filed over the month, with the majority of layoffs in temporary help services. Eight percent of all mass layoff events and 7 percent of related initial claims filed were from retail trade, primarily from general merchandise stores. Transportation and warehousing made up 4 percent of events and 5 percent of associated initial claims, primarily from the school and employee bus transportation industry.
...
Among the states, California recorded the highest number of initial claims filed due to mass layoff events in February (19,809), followed by Pennsylvania (10,928), Michigan (6,507), Wisconsin (6,035), and Illinois (4,684). These five states accounted for 58 percent of all mass layoff events and 55 percent of all associated initial claims for unemployment insurance.

In short: another 143,977 jobs waving bye-bye.

Wish someone in America would say this out loud (in public)

The statement:

People in the middle class have long been said to be a robust pillar supporting the socio-economic stability of a country. So, the bigger the middle class, the better our society is. However, the number of those in the middle class here was learned to have declined substantially while those in the upper and lower classes has increased in the last 10 years, according to a report released recently...It makes one wonder whether or not a chronic social state making the rich richer and the poor poorer is being revived. The crumbling of the middle class means nothing other than those in a state of economic hopelessness are increasing. Those driven out of the middle class are set to be deprived of their courage and hope that they would be better off if they work harder.

Who said it?
No, it wasn't a Democratic legislator, or an academic with a conscience, or even an American labor leader.  It's an unbylined editorial in the Korea Times newspaper from South Korea.
Other excerpts:

According to the report, the middle class, which accounted for 55 percent of the total population in 1996, fell to 43 percent last year while those in upper and lower classes that stood at 20 percent and 11 percent, respectively, increased to 25 percent and 20 percent in the same period.
...

Particularly worrisome is the fact that those in the lower class have doubled in the last 10 years. Those driven out of their jobs or the selfemployed suffering from a long business recession are deemed to have fallen out of the middle class. The statistics testify to the worsening income polarization of our society, a phenomenon the current regime has vowed but failed to correct.
...

The recent spiraling of apartment and other real estate prices makes it extremely hard for middle or low-income people to secure their own housing. That has made a growing number of people who can't afford to buy homes regard themselves as economic "losers."
It is simply intolerable for the government to simply let the gap between haves and have-nots continue to grow---even psychologically---because it signifies social injustice in itself and threatens to destabilize society. The only plausible means to redress the situation is to vitalize business activities. A policy putting more emphasis on economic growth than on distribution should be pursued.

The government should realize that supporting the waning middle class is their foremost task because the decline of the middle class is not merely a sign of economic difficulty, but an indication that society's existence might be in danger.

Still waiting for an American paper or other media source to be that direct and honest about the situation.
And, by the way, do you still think that "globalization" is innocuous, that it's effects on America are isolated, that it's anything but a looming threat to what the developed world has long considered to be a healthy society?

Study expects another 1.1 million foreclosures as adjustable rates rise

The $2.2 trillion in adjustable mortgage rate loans issued from 2004 through 2006 will lead, according to a study from First American CoreLogic, which analyzes mortgage risk for the financial services industry, to another 1.1 million mortgage foreclosures as the loan rates rise.

And that may be the good news; as noted in another D4D post, an earlier study predicted 1.5 million foreclosures. But it may also be the bad news; this study doesn't find the problem to be limited to the subprime market.

Excerpts from the story on the prediction of 1.1 million foreclosures:

Recent home buyers, many seduced by too-low-to-last teaser loan rates, are finding that all good things must end. For more than a million, they could end in foreclosure, according to a study released Monday.

Americans borrowed $2.2 trillion from 2004 through 2006 in the form of adjustable loans, which start with low monthly payments that reset to higher rates. As those loans reset, 1.11 million people will lose their homes, according the study by First American CoreLogic, a firm that tracks mortgage risk for the financial services industry.

The figure is significantly less than a widely published number from the Center for Responsible Lending.

As prices appreciated rapidly, buyers turned to adjustable-rate loans that made it easier to afford high-priced homes, at least initially. But a slowdown in the housing market means that buyers who took out the loans as the boom was coming to an end made little or no money off their investments. It's those borrowers who are most likely to wind up in default because they won't be able refinance or sell their homes at a profit to cope with higher monthly payments, the report found.

Unlike a lot of other research about mortgage risk that has roiled Wall Street during the past couple of weeks, the First American report didn't find the problems with risky loans to be limited to subprime borrowers, or people with poor or little credit.

The largest group of loans likely to go into default are those that started with extremely low teaser rates regardless of whether borrowers had high or low credit scores, the report finds.

"This isn't just subprime," said Christopher Thornberg, an economist with the consulting firm Beacon Economics in Los Angeles. "This problem is starting to occur in most of the adjustable- rate mortgages. Even for prime borrowers, we're seeing a big spike in delinquencies among adjustable-rate mortgages."

If you think I'm pessimistic about the mortgage crisis....

I can't hold a candle to Jim Rogers, George Soros's former partner, who now manages commodities funds. According to a Reuters report datelined tomorrow from Moscow:

“You can’t believe how bad it’s going to get before it gets any better,” the prominent U.S. fund manager told Reuters by telephone from New York.

“It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops.

“It is going to be a huge mess,” said Rogers, who has put his $15 million belle epoque mansion on Manhattan’s Upper West Side on the market and is planning to move to Asia.
...
Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown.

“Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history,” Rogers said.

“When markets turn from bubble to reality, a lot of people get burned.”

The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run.

“When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess,” he said.

“Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.

“I’ve sold out of emerging markets except for China,” said Rogers, long a prominent China bull.
...
“This is the end of the liquidity party,” said Rogers. “Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse.”

Your guess is as good as mine whether things will come to that dire an end. But it ain't looking good.

And on it goes...real earnings down

If life feels like it's getting harder, it is...for most of us. From the current BLS release on real earnings:

REAL EARNINGS IN FEBRUARY 2007
Real average weekly earnings fell by 0.3 percent from January to February after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.3 percent decline in average weekly hours and a 0.4 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset
by a 0.4 percent rise in average hourly earnings.

That mortgage default story is looking a whole lot like a snowball

The mortgage default story (see here and here for past D4D stories) gets bigger by the hour. The way the stories keep coming, and spreading from one issue to another, looks a lot like the early part of a snowball rolling quickly down a steep hill.

This afternoon's news included the most recent quarterly survey from the Mortgage Bankers Association which shows:

A record number of homeowners entered foreclosure at the end of last year and more are making late mortgage payments, especially those with high-risk, sub-prime and government-financed loans...

...4.95% of average mortgage loans had late payments, compared to 4.67% the previous quarter and 4.7% a year before. It was the worst showing since spring 2003.

The fraction of mortgages entering foreclosure during the fourth quarter of 2006 climbed to 0.54%, the highest since the association started reporting in 1972. The previous high of 0.50% occurred in the second quarter of 2002 as the country was recovering from a recession....
...Late payments for FHA loans reached a historical high of 13.46% during the fourth quarter last year, up from 12.8% the previous quarter and 13.18% a year before.

And things continue to unravel in the "sub prime" market. In one report:

A board member at battered subprime lender New Century Financial Corp. (NEWC.PK: Quote, Profile , Research) last month sold $2.75 million worth of stock amid a 36 percent plunge in the company's share price, U.S. regulatory filings show.

The director, Michael Sachs, said he was not aware the shares were being sold until after the Feb. 8 transaction was completed, according to a filing with the Securities and Exchange Commission. Since then, lenders have stopped providing funding to New Century, pushing the company toward bankruptcy.

The Feb. 8 sale of 140,000 New Century shares on Sachs' behalf happened on the day after the subprime lender said it found accounting problems and would restate financial results....
The New York Stock Exchange on Monday suspended trading in New Century shares.

Another mortgage lender also publicly announced its troubles, . Accredited Home Lenders, "once considered by analysts as one of the strongest of the sub-prime lenders," now needs to raise serious cash to satisfy

its Wall Street partners [who] have required it to supply $190 million in new capital this year in return for continuing to provide funds for it to lend.

Accredited said it no longer meets the net income requirement its lenders have demanded and can offer no assurance that they will continue to support it. The firm has been struggling to digest its purchase last year of Los Angeles-based sub-prime lender Aames Investment Corp. and has said it may need to record some unexpected expenses as a result of that deal.

Yesterday, Bloomberg reported that:

Mortgage defaults may climb to $225 billion over the next two years compared with about $40 billion annually in 2005 and 2006, according to debt strategists at Lehman Brothers Holdings Inc.

Another Bloomberg report offered up the troubling possibility that:

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.
...
Subprime lenders Ameriquest Mortgage Co. in Irvine, California; Ownit Mortgage Solutions LLC and WMC Mortgage Corp., a subsidiary of General Electric Co., in Woodland Hills, California; Mortgage Lenders Network USA Inc. in Middletown, Connecticut and Fremont General Corp. together have fired more than 5,600 workers in the past year.
...
New Century Financial Corp., the second-largest subprime lender, said today it ran out of cash to pay back creditors who are demanding their money now. The Irvine, California-based company has lost 90 percent of its market value this year and stopped making new subprime loans, prompting speculation it will seek bankruptcy protection. New Century already has cut 300 jobs and its 7,000 remaining employees are waiting to see if the company will survive.
...
Doug Duncan, chief economist of the Washington-based Mortgage Bankers Association, predicted in January that more than 100 home lenders may fail this year.
...
Job Cuts

By the end of this year, job cuts at companies including Benton Harbor, Michigan-based Whirlpool Corp., Masco Corp. of Taylor, Michigan, and St. Louis-based Emerson Electric Co. may exceed the fallout from the 1991 housing slump, said Paul Puryear, managing director at St. Petersburg, Florida-based Raymond James & Associates. The Bureau of Labor Statistics doesn't give data for housing-related job losses.
...
Fraud `Pervasive and Growing'

The Federal Bureau of Investigation says mortgage fraud is "pervasive and growing" and the incidence of such fraud has almost doubled in the past three years.

Last in this parade of actual and potential miseries, three days ago the NY Times reported in a large headline that "Troubles Hit Real Estate at High End." The NYT story includes the info that:

Until now, deep-pocketed Wall Street tycoons and foreign investors benefiting from a weak dollar seemed to be holding up the luxury real estate market even as the low-end fractured. But there are signs that some high-end real estate developers are also being hit by the slowdown.

How's that for bad, worse, and worst news?

Bureau of Labor Statistics Feb. report on jobs & unemployment--what it says and what it ignores

The Bureau of Labor Statistics (BLS) is the agency that issues the monthly reports on jobs, employment & unemployment, wages, and a host of other information on our collective economic health.

In keeping with the cheerleader mentality that views public confidence as more important than the reality on which the confidence is based, the BLS issued its report on February employment, and mainstream publications like the NY Times published stories based on various pieces of that report.

From the report itself (reformatted):

Month to month change for Jan '07 to Feb '07 for:

Civilian Labor force...............-190,000

Employment..........................-38,000

Unemployment.......................-152,000

Not in labor force.................+374,000

So almost 400,000 additional people moved to the category of not in the labor force, while almost 200,000 left the category of in the Civilian Labor Force. Those two numbers alone would indicate that the reported "drop" in unemployment % (from 4.6 to 4.6) is likely to be misleading. Unemployment % is calculated as number of unemployed divided by number in the labor force. Absent the 374,000 who left the labor force, the denominator of the unemployment % calculation would have been larger.

Is it large enough to account for the entire .1% drop in unemployment rate? I'm not sure, but I do know how to use a calculator to see how these civilian labor force changes change some things.

In Feb, there were 6,685,000 unemployed, from a civilian labor force of 153,784,000, or 4.347%

Add back in the 374,000 who left the labor force, and would presumably be unemployed (add the 374,000 to both the number of unemployed and the civilian labor force) and the numbers are:

7,059,000 unemployed out of 154,158,000, or 4.579%.

4.579 minus 4.347 is a reduction of .232%.

Another way of looking at this is that the January figure of not in the labor force of 77,676,000 increased by .481% to get to the Feb total of 78,050,000. That's an increase of almost half of one percent.

None of this is even mentioned in the analytical text accompanying the tables. Not even mentioned.

Compounding the problem, the NY Times report headline emphasizes three things:

1. More finding work in U.S.

2. Jobless rate off (down).

3. 97,000 added to payrolls

An accompanying chart is captioned "Job Growth Remained Healthy in the United States."

The rather odd reporting continues in the Times, which pairs the U.S. economic story with one on Europe, headlined "Jobs Go Begging in Europe.", This is accompanied by a chart which is captioned "Even in Europe, Skilled Labor is Hard to Find" but the chart of the % of European companies estimating that labor availability is limiting their production does not really show any such increase in labor scarcity. It shows the % of companies reporting labor shortages to be roughly the same as in the beginning of 2000 and the end of 2001. Only when compared to 2002-2005 is there an increase in labor scarcity, a fact explained by the drop in labor scarcity from 2002-2005.

The statement of the BLS Deputy Commissioner, which is issued at the same time as the Feb stats, also contributes to the "good news" spin. It says:

"Payroll employment was up by 97,000 over the month, following gains of 226,000 in December and 146,000 in January, as revised." So we've got a "new jobs" 3-month trend line of 226,000 dropping to 146,000 dropping to 97,000. Yet the NYT says "More finding work" and "Job Growth Remained Healthy."

So, unless I'm really missing something here, could someone from the mainstream business press explain to me exactly where the good news was in this monthly report?

Letting Tax Lawyers Write the Tax Rules is Like....Business as Usual for This Crowd

I really thought this might be a joke internet story, until I bought today's NY Times and discovered this piece:

I.R.S. Letting Tax Lawyers Write Rules
By DAVID CAY JOHNSTON
The Internal Revenue Service is asking tax lawyers and accountants who create tax shelters and exploit loopholes to take the lead in writing some of its new tax rules.

The pilot project represents a further expansion of the increasingly common federal government practice of asking outsiders to do more of its work, prompting academics and other critics to complain that the government is going too far.

They worry that having private lawyers and accountants draft tax rules could allow them to subtly skew them in favor of their clients.

“It’s not the fox guarding the hen house; it’s the fox designing the hen house,” said Paul C. Light, a professor of political science at New York University, who studies the federal work force.

Donald L. Korb, the I.R.S. general counsel, defended the plan, saying in an interview that he believed that the pilot project was “not changing this process one iota.”

“We are still getting comments; we are still having hearings,” he said, and I.R.S. lawyers will still review any new rules before they are final.

I love the idiotic "I.R.S. lawyers will still review any new rules before they are final." Yes, I'm sure they will make an effort to do that. But they will be reviewing complicated rules, each of which will affect multiple other rules, and they will be at one hell of a disadvantage in finding any potential disasters tucked away in this mass of barely readable stuff.

Which is a far cry from having the IRS guys write the original proposal, giving them a much firmer grip on what the rules intend to do, and letting the tax shelter guys poke around and criticize. And if you don't think that's a hell of a big difference, just wait until the tax lawyers have written a few new rules and see what the consequences are to the wealthier end of the American spectrum (not to mention the consequences to the public treasury).

But what the hell, this is Bushland Uber Alles, and business as usual, all in one. This is no worse than letting Securities firms write SEC rules, or having student loan companies write new student loan rules, or having energy companies write new energy and pollution rules, and so on. Which has been going on some time now.

And look at how well that has gone.

Mortgage and consumer debt totals; the numbers boggle the brain

Just so you know, here are some figures from the Feb., 2007 Statistical Supplement to the Federal Reserve Bulletin:

1. Total U.S. Mortgage Debt Outstanding (Table 1.54), in millions of dollars

2002-------8,367,310
2003-------9,374,889
2004------10,680,490
2005------12,148,740
2006**----13,033,520
**--Third Quarter

Now remember, those figures are in millions. So the 2006 figure is 13.033 trillion dollars. And the 2006 figure is a full 55.77% higher than the 2002 figure.

2. Total Outstanding Consumer Credit (Table 1.55)

2003-----2,087,784,000,000
2004-----2,202,425,000,000
2005-----2,295,558,000,000
2006**---2,380,924,000,000
**End of October

That's an increase of almost $300 billion from 2003 to Oct. of 2006. And the total in Oct. of 2006, $2.382 trillion, works out to $7,936 for every single one of the U.S.'s estimated 300,000,000 citizens.

Credit card companies squirming before Congress

Another tangible benefit of Congress being in Democratic hands: the Senate Homeland Security and Governmental Affairs' investigative subcommittee spent part of today making the heads of three huge credit card companies squirm with stories and questions about how they operate.

For some reason, they "operate" in a way that makes most consumers squirm and poor. It's nice to see the tables turned if only for a little, public, while. From an AP story in the Raleigh News & Observer:

Executives of three major banks defended their credit card practices as responsible and responsive to consumers' needs in testimony at the hearing of the Senate Homeland Security and Governmental Affairs' investigative subcommittee. Those from Citigroup Inc. and Chase Bank USA said their companies were eliminating some practices - including the one that hit Wesley Wannemacher of Lima, Ohio, with over-limit fees on his Chase card account 47 times although he went over his credit limit only three times.

The interest charges and fees on Wannemacher's account more than tripled his debt despite his having made payments averaging $1,000 a year over six years, noted Sen. Carl Levin, D-Mich., the subcommittee's chairman.
...
Wannemacher used a new Chase card in 2001 and 2002 to pay for expenses mostly related to his wedding. He had $3,200 in purchases, interest charges of $4,900, 47 over-limit charges totaling $1,500, late fees of $1,100, for total charges of $10,700 as of February. He paid $6,300, leaving a $4,400 balance - which Chase agreed to waive after he contacted the subcommittee staff.

"Debt seems to invoke a feeling of hopelessness unlike any other problem I've encountered," Wannemacher testified at the hearing. "When a debtor calls you on the phone and you make a minimum payment, you know that you've made no real progress and that in a month, they will be calling again."

Sen. Norm Coleman of Minnesota, the panel's senior Republican, said high interest rates on credit cards, "hefty fees and crippling penalties impede more and more hard-working families from pursuing their American dream."

The problem is worsened by the "impenetrable" language of credit card disclosures provided to consumers, he said.

While the credit card practices in question are legal, Levin is threatening possible legislation to outlaw them as a spur to the banking industry for voluntary changes.

Senate Banking Committee Chairman Christopher Dodd and other Democratic senators challenged credit card executives at a hearing in January over rising late fees and other penalties and marketing practices they portrayed as predatory. Dodd, D-Conn., said he was putting the industry on notice that if it doesn't improve practices on its own, legislation may be warranted.
...
Citigroup, the nation's largest financial institution, announced last week that it was eliminating the practice of so-called universal default - raising interest rates for card customers because of their failure to pay other creditors on time. In addition, Citigroup said it would eliminate some types of interest rate increases that have been criticized.

Isn't it odd how the Republicans, loudly proclaiming their "family values," managed to ignore this credit card insanity, and the Democrats, reviled by conservatives for their lack of family values, are actually trying to make it a little bit easier for families to survive economically?

Guess it's the difference between viewing "family values" as an abstract philosophical and political issue related to maintaining the place of nuclear family units in the social structure of the world, and viewing "family values" as those real world values that help real world families survive in the real world, regardless of their nuclearity (if it ain't a word, it should be).
.

Another heart warming story of jobs going to India

The official line from the US government and the vast majority of American Business leaders is "outsourcing is good for America." The number of games played to provide evidentiary support for such a notion is truly mind boggling (a subject for another post), but reality keeps raising its ugly little head and whispering "psst, buddy, there go some more jobs."

What's really fascinating is how the business press does back flips to spin a story of jobs going to India rather than the US into a classic feelgood story. Kafka and Orwell could not do a better job of absurdity reported via new speak.

Take this little gem from the Chicago Tribune on how using Indian labor to start a new Information Technology (IT) venture just made the whole startup even more special, spiced up with a few other heartwarming anecdotes about how other white collar jobs, including legal research and basic legal services, are now drifting India-ward (emphasis added):

For starters, firms turn to India
Companies find edge by using full-time outsourced workers

By Ann Meyer
Special to the Tribune
Published March 5, 2007


Entrepreneur Bill Lederer is no stranger to dot-coms, but his latest venture has taken him to a new place--India.

Lederer, the founder of Art.com a decade ago and an investor in several other early dot-coms, is rolling out CompleteLandlord.com and RentSlicer.com, two niche sites that aim to deliver comprehensive listings, legal forms and other information for landlords, property investors and renters. Both are part of Lederer's Socrates Media, financed by Lederer and other local investors.

But this time Lederer is relying on a wholly owned subsidiary in India to keep costs low and service high. The strategy will help make the company profitable sooner, he said.

"If we had gone to do this in only Chicago, it would have cost us considerably more," Lederer said. "We are able to do it faster, cheaper, better."
...
The company's subsidiary in Hyderabad is doing more than IT work. It's involved in accounting, marketing support, editorial, creative services and a customer call center, Lederer said.

"Everything we do in Chicago, they do in India," he said, though strategic decisions and new-product development are concentrated in Chicago.

Lederer started Socrates after acquiring a paper-legal-forms company, Made E-Z, in 2003. He brought it online in 2005 in a brick-to-click model, where landlords' in-store purchases of legal forms were supplemented with services from Socrates.

In December, CompleteLandlord.com launched as a separate Web site. And Lederer is taking a similar approach with RentSlicer.com, which will offer comprehensive listings and information for renters when it is launched next month.
...
Socrates employs 50 workers in India and 15 in Chicago. It started setting up its India team by hiring managers with experience working with American companies, said Bruce Masterson, Socrates' chief operating officer, who formerly ran Reuters North America.
...
CVM Solutions, an Oakbrook Terrace-based provider of supplier diversity data and technology, first outsourced its IT work to a provider in India but later formed a wholly owned subsidiary as its needs grew, said Rajesh Voddiraju, president, technology solutions. Now the company employs 36 people in India, while 46 work in Oakbrook Terrace, he said.

"Having a low-cost arm has helped us grow," he said, noting that the company saves about 70 percent in costs from the India operation.

Legal-services firm Mindcrest, with a headquarters of four in Chicago, wouldn't be in business without a wholly owned subsidiary operating in Mumbai and Pune, India, which employs about 150 Indian workers, most of them lawyers with knowledge of American law, said Ganesh Natarajan, the Chicago attorney who founded the company six years ago with three partners.

Natarajan, who is from Mumbai, saw legal services in India as a natural fit because India is a common-law country and its lawyers are used to researching case law, he said.
...
Mindcrest does not give legal advice but provides basic legal services, such as reviewing documents, drafting contracts and doing research, at savings of 50 percent to 90 percent from U.S. rates, Natarajan said. Most of the firm's clients are law firms, consulting firms and corporations with their own in-house counsel who use Mindcrest to save time and money, he said.

A positive experience using a similar legal services firm, QuisLex, based in New York but with 100 employees in India, gave Socrates the confidence to pursue Indian labor for other aspects of the start-up, Masterson said.

I think we have seen the future, and it doesn't work if you live in America.

And ask yourself, would the trusty old US government bother tracking down these jobs which originated in India, but clearly would have been in the US in decades past, and include them in its very suspect analysis of jobs lost to outsourcing?

I think not. I really, really think not.

Contradictory economic indicators reconciled in the direction of bad

If you remember back to the beginning of the year, there was a lot of ballyhoo about how fast the GDP grew in the 4th Quarter of 2006. Cheerleaders for the business sector used that great news to pooh-pooh the set of troubling indicators announced around the same time, such as falling housing prices.

Well, a few days ago the conflict in indicators sort of got reconciled, and it looks a lot like the falling housing market was closer to reality than the wildly rising GDP, according to this NY Times story from March 1:

The paradox has been solved: the economy was not bounding. The Commerce Department reported yesterday that economic growth inched ahead by 2.2 percent in the fourth quarter of last year, only slightly faster than the 2 percent growth recorded in the third quarter and substantially below the economy’s long-term trend rate of growth

The downward revision, by 1.3 percentage points, in the preliminary estimate of gross domestic product was almost three times the average adjustment since the early 1980s, which is 0.5 percentage point.

Coupled with a 17 percent decline in new-home sales in January and a 7.8 percent drop last month in orders of durable goods like computers and washing machines, the new data indicated the economy was much weaker than it seemed.

“I think we are going to discover that the economy is softer than the Fed thinks,” said Robert Barbera, chief economist at ITG Hoenig.

Mortgage defaults again (and again, and...)

The economic fallout from the wave of mortgage defaults continues to settle over the financial markets.

As the AP reported today:

Banks, Sub-Prime Mortgage Firms Hurt After Disclosure Of Probe At New Century
March 6, 2007

By JOE BEL BRUNO, Associated Press NEW YORK -- Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.

The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as sub-prime lenders, again ravaged stock prices. Financial institutions ranging from Britain's HSBC Holdings PLC to sub-prime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.

The latest to rattle the markets was New Century Financial Corp., the nation's second-largest sub-prime lender. The Irvine, Calif.-based company disclosed a criminal probe into the trading of its securities, and into the lender's accounting procedures.

Already beleaguered investors were swift to react. New Century's shares lost 60 percent on Monday - wiping $532 million from its market value. Wall Street, still wobbly after last week's huge plunge, also punished the rest of an industry blamed for loosening lending standards amid an eroding housing market.

In Connecticut, Middletown-based Mortgage Lenders Network filed for bankruptcy protection last month when its sources of funding disappeared.

"We see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals, including origination volume, pricing, credit, and most importantly, funding," Stifel Nicolaus analyst Christopher Brendler said.

And that ain't all, folks. The sub-prime market re-contracts its obligations to major commercial lending entities, so if the sub-prime market really goes sour, look forward to a domino effect...which appears to have already begun as the story linked above reports:

Concerns about a meltdown at New Century include the possibility it will not be able to meet covenants with major financial backers, the company said. Sub-prime lenders enter into agreements with big banks to finance their operations. These backers require sub-prime lenders to meet minimum financial targets or face breaching loan agreements that would force banks to pull out of the deals.

This dragged down shares of some of the top U.S. banks and investment banks.

Morgan Stanley Inc., which had a 5.5 percent stake in New Century as of Dec. 31, dropped $1.33, or 2 percent, to $72.03. State Street Corp., with a 3.8 percent stake, shed 12 cents, to $64.96. Citigroup Inc., with 3.5 percent stake, traded as low as $49.56 before recovering to post a 27-cent gain, at $50.24.

Other sub-prime lenders also tumbled. Countrywide Financial fell $1.03, or 2.8 percent, to $35.99, and it is down about 14 percent since January. Novastar Financial Inc. shares plunged $2.17, or 30 percent, to $5.07, and are down about 40 percent this year.

Higher U.S. interest rates and a stagnant housing market began to take their toll on borrowers who had been relying on the rising value of real estate markets to help them refinance mortgages.

Last year, 13.5 percent of mortgages originated in the U.S. were sub-prime, according to the Mortgage Bankers Association. This is up from 2.6 percent in 2000. The subprime market accounted for about 20 percent, or $600 billion, of the $3 trillion mortgage market.

The stock market drop last week may or may not turn out to be the beginning of a huge slide--it's hard to tell in an arena that is so cyclical and in which so many factors can produce a given downturn. But the mortgage default phenomenon and its consequences, that's pretty much sure to be a problem. With a capital P.

Those great business ethics on display again

Wall Street Journal and CNBC types love to pretend that private sector ethics are far better than government ethics. If you've been alive and conscious over the last decade, you know that isn't true (they're equally corrupt, and generally run by the same kinds of folks).

Two more examples just hit the fan:

1. Huge insider trading ring broken up:

It started in 2001 with two old friends meeting at the Oyster Bar in the basement of Grand Central Terminal in Manhattan, discussing a $25,000 debt.

It ended yesterday with federal authorities saying that they had exposed one of the most far-reaching insider trading schemes on Wall Street in decades, involving four investment banks and a web of hedge funds, day traders, lawyers and even a few supervisors, who upon discovering evidence of insider trading, blackmailed the traders to keep quiet about it.

Thirteen people were accused yesterday of taking part in the trading ring, including a former Morgan Stanley compliance official, a senior UBS research executive, three employees from Bear Stearns and a Bank of America employee.

Linda C. Thomsen, chief of enforcement at the Securities and Exchange Commission, described the scheme as one of the most “pervasive Wall Street insider trading rings since the days of Ivan Boesky and Dennis Levine.”

Nine of the defendants have been arrested, and four have pleaded guilty to charges ranging from securities fraud, conspiracy to commit securities fraud and bribery. The investigation, conducted by the S.E.C., the Federal Bureau of Investigation, and the office of the United States attorney in Manhattan, has been under way for more than a year and is continuing.

The schemes described by federal authorities were unusual for their breadth and the seniority of the executives involved.

The tactics, however, were all too familiar: Wall Street executives tipping hedge fund traders about potential upgrades or downgrades of stocks, information sure to move a stock’s price; leaking information about pending mergers and acquisitions, and taking kickbacks to get access to hot deals. In the middle, authorities say, was a hedge fund manager looking for an edge.

2. Largest subprime mortgage lender under fed investigation:

Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday.

The company also warned that a delay in filing its financials may put vital financing into jeopardy.

The troubles at New Century are the latest sign of the deterioration in subprime lending — until recently the fastest-growing segment of the mortgage business. The market has been struggling to contain the fallout from rising default rates and weakening home prices. Late last year, some smaller lenders started going out of business and last month several bigger companies, including New Century, started reporting problems.

Another large lender, the Fremont General Corporation, said yesterday that it planned to sell its subprime mortgage business after reaching an agreement with the Federal Deposit Insurance Corporation to restrict its activities in that area. As part of the agreement, Fremont will be able to continue taking deposits.

The investigations into New Century, which is based in Irvine, Calif., and wrote $33.9 billion in mortgages last year, started after the company said on Feb. 7 that it would restate earnings for three quarters, which sparked a huge sell-off in its shares. Yesterday, it said its problems had prevented it from filing its annual report, which was to be released Thursday. The board is conducting an investigation of the accounting problems.

Neither one rises to the level of Enron or Global Crossing fraud, but, come on, business ethics in America in the 21st century? An absolute oxymoron.

Classless society indeed

Remember how America was always portrayed as a classless society? How proud we were that we didn't stratify ourselves by class the way those silly Europeans did?

Well, how does that old concept fit with this, from the Federal Reserve Bank of St. Louis?

Residential neighborhoods throughout the nation's metropolitan areas have become increasingly divided into high-
and low-unemployment sections, and an analysis by an economist with the Federal Reserve Bank of St. Louis suggests that people may be "sorting" themselves by both income and education.
The analysis was conducted by Christopher H. Wheeler, writing in the March/April issue of Review, the Reserve Bank's bimonthly journal of economic and business issues.
...
The rate of unemployment is one of the most basic indicators used to gauge the economy's health. As the economy fluctuates between periods of expansion and recession, corresponding changes in the rate of unemployment are observed.
Between 1980 and 2000, the aggregate national unemployment rate fell from 6.3 percent to 3.9 percent, suggesting that workers in the United States faced better unemployment prospects in 2000 than in 1980.
"Yet, underlying these figures," said Wheeler, "is a trend that is not widely known: Unemployed workers became increasingly concentrated in certain neighborhoods within the nation's metropolitan areas. That is, neighborhoods in the United States became increasingly polarized into two groups: those with high rates of unemployment and those with low rates."

Tell me that this doesn't sound like a damn good beginning toward the stratification of America by class.

Mortgage defaults: "don't worry, be happy" doesn't go very deep

A few weeks ago, the news briefly touched on the rising rate of mortgage defaults in the U.S. (roughly one of every 92 households in America during 2206). Since then, the official government experts and economic gurus have been busy pooh-poohing the significance of this phenomenon--the usual "don't worry, be happy." But if you keep following the story and the comments by these guys when they speak away from the general public eye, you start to see that the pooh-poohing is mostly for consumption by the masses. In front of an audience of other experts you get:

1. This, from a story about a Ben Bernanke speech before the Stanford Institute for Economic Policy Research:

In response to a question after the speech, Bernanke reiterated that the central bank sees no ``spillover'' from rising delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he added.

2. This, from the Chicago Tribune:

Home loan rules studied

Stricter guidelines may cut default rate

...

As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.

Government officials on Friday issued for public comment proposals to address problems that have rattled the mortgage-lending industry and left growing numbers of people in homes they cannot afford.

These measures call on lenders to exercise caution in making such loans and to closely evaluate borrowers' ability to repay them. Other proposals include requiring that such loans be granted only to those who have the ability to make payments for the entire mortgage, rather than just an initial period with a "teaser" rate that later shoots up, typically adding hundreds of dollars to the monthly payment.

Another proposal would ensure that consumers receive enhanced disclosures about their loans, so that fees and rate hikes do not catch them by surprise.

--------------------

Tell me again why the default rate isn't a problem---but the Fed is going to keep a damn close eye on the rate and its consequences, and the federal government itself is getting involved to see what it can do to calm the default rate down.  Nothing like a good fairy tale to get you to sleep so the parade of nightmares can begin.

Now that's a robust economy (isn't it?)

While the media tend to publish the government's own "good news" statistics on the economy without any critical analysis at all, and to reprint verbatim the press releases of the various government officials assigned to the task of keeping Americans' eyes averted from the deteriorating economic structure around them, every once in a while we get a bit of underreported honesty. This is from Investment News:

One in 10 Americans fear losing their job

February 26, 2007
About 10% of Americans responding to a recent public-opinion study feared losing their job in the next year, though most said that they were keeping up financially, according to a report released Friday by the American Enterprise Institute for Public Policy Research in Washington.
But only about half said they thought they had enough money to live comfortably when they retired, according to the report, which was compiled from a variety of public-opinion polls done over the past year.

Health care is the issue Americans are most anxious about, the report found. The report found that 54% of respondents said they were worried that they wouldn’t be able to pay their medical costs if they had a serious illness.

In addition, 20% of people cited in one of the studies said they’d had problems paying medical bills in the previous 12 months.

Since it seems to be mandatory to try to spin all economic news, let me try this:

If you worry that you wouldn't be able to pay your medical bills if you had a serious illness, Good News! You're now part of a solid American mainstream majority. Here's to your health, you're going to need it.