KeNo's Housing and Economic Portal: Monday June 29 Housing and Economic stories

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Europe Fears End of Incentives Will Dent Car Sales - (www.nytimes.com) Cash-for-clunkerprograms end up being like crack cocaine or like taxes. Once you implement on a temporary basis, industry will fight every attempt to end the program. As a cash-for-clunkers program is considered by Congress, European carmakers say they are worried about the impact of weaning themselves off similar incentives when they expire this year. The payments have proved to be a huge success among consumers across Europe since they were introduced in late 2008. In Germany, they have helped increase sales by about 40 percent from a year ago. But for car companies, living without them will not be easy, said Carlos Ghosn, the chief executive of Renault and Nissan and chairman of the European Automobile Manufacturers’ Association. “The incentives have given us some breathing room and obviously we are worried about what happens when they end,” Mr. Ghosn said in an interview in Brussels. “We are worried because we know it will have a negative impact. Hopefully, the economy will have improved enough by then so that the impact will not be too dramatic.” Halting the incentives is proving much more complicated than introducing them. Germany has already extended the deadline of its program once, and French automakers want them to continue beyond their scheduled elimination at the end of 2009. The demand for new cars, however, is not expected to improve by then, leaving automakers wondering how they can tempt consumers to buy cars. While Mr. Ghosn said that the American market could begin recovering by the end of 2009, he asserted that an upswing in Europe would take much longer. “I don’t see any improvement before 2011,” he said. “It would take a miracle for the car industry to see growth in Europe before 2011.”

Obama's Blueprint for Reform Concentrates Still More Power in Hands of the Fed - (Mish at globaleconomicanalysis.blogspot.com) The Washington Post has released a "near final" draft of Obama's financial reform proposals. As expected, the paper whitewashes the role of the Fed and Fractional Reserve Lending as well as the role of unfunded Congressional spending in creating the mess. Instead, Obama's plan gives more power to those responsible for creating the mess. Please consider Obama Blueprint Deepens Federal Role in Markets. The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building. The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post. The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms. It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy. Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans. The government would create a new agency to protect consumers of mortgages, credit cards and other financial products. And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues. "Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right. My Comment: Speed is always important when you are attempting to to set yourself up as prosecutor, judge, and jury. Should anyone actually have the time to dig into the details, the odds are they would find many reasons to not go along.

State tries to reassure bondholders after S&P sounds alarm - (www.latimes.com) California Treasurer Bill Lockyer has insisted all through Sacramento's latest budget crisis that he would never allow the state to renege on what it owes bondholders. Yet when credit-rating firm Standard & Poor’s on Tuesday warned that it might cut California’s credit grade -- which already is the lowest of the 50 states -- S&P flagged at least the possibility of default. In the first paragraph of its statement, S&P says that "although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view." S&P’s language incensed Lockyer’s spokesman, Tom Dresslar. "S&P raises undue alarm about the potential for missed bond payments," he said. "There is zero chance of that happening." Worries about the state’s fiscal fate, combined with an early-June jump in U.S. Treasury bond yields, have driven market prices of the state’s bonds sharply lower since mid-May, sending yields soaring. Tax-free yields on 10-year California general obligation bonds were between 5% and 5.1% on Tuesday, according to several traders. The yield was under 4.4% in mid-May. Despite the market’s jitters, Lockyer has noted many times that payment of interest and principal on the state’s $59 billion in general obligation bond debt is mandated by the state Constitution. Only "thermonuclear war" could interrupt debt repayment, the treasurer has said. In the Constitution, bondholders come second, after education funding. S&P, in its statement Tuesday, estimated that constitutionally required spending on education would be $36 billion in fiscal 2010 (beginning July 1). Principal and interest payments of $5.7 billion in fiscal 2010 then would have to be funded before the state could divert money to other expenses. S&P estimated that, after funding education, the state would have $53 billion in resources to cover the year's debt service. Isn’t that a big-enough chunk of change to make bondholders feel secure? S&P said that although the revenue coverage of the debt service for the year appeared to be significant, the firm was concerned about cash flow -- whether week to week or month to month the state would have the cash needed to make debt payments. "Even if revenue for the year is sufficient to meet high-priority payments for education and debt service, we believe the timing of cash inflows and outflows could cause acute liquidity shortages with the potential to present relatively serious credit concerns," the firm said. Dresslar said that was nonsense, because the state knows when debt payments are coming due and will husband cash accordingly for creditors. "We are not going to miss any payments," he said.

Foreclosure freeze prods banks to modify loans - (www.sfgate.com) California implemented a new foreclosure moratorium on Monday to goad banks into modifying mortgages for struggling homeowners. The California Foreclosure Prevention Act, signed by Gov. Schwarzenegger in February, adds 90 days onto the time period between when homeowners default on a loan and when their home can be repossessed in foreclosure. Banks can avoid the 90-day holdup by having a comprehensive program in place to make mortgages more affordable by reducing the interest rate, extending the loan term, or reducing or deferring some of the principal. Such programs must be approved by regulators. "The goal is to compel banks to do systematic loan modifications across California to reduce our foreclosure rate, which is the highest in the nation," said Assemblyman Ted Lieu, D-Torrance, who wrote the bill. "Until we slow that down, the California economy cannot recover." Experts said the California initiative should complement the Obama administration's foreclosure prevention plan, which offers financial incentives to servicers who complete loan modifications. "This law is most useful as a stick to supplement the Obama administration's carrots to get loan servicers to adopt a much more systematic framework for doing loan modifications," said Paul Leonard, director of the California office in Oakland for the Center for Responsible Lending. "It is a useful nudge to get more servicers to sign contracts to adopt the Obama modification plan." In the past few months, 15 servicers have agreed to implement the Obama plan, according to the Web site MakingHomeAffordable.gov. Government spokesmen have said that about 100,000 homeowners nationwide have been sent offers for trial modifications, a relatively modest number compared with the administration's goal of helping 3 million to 4 million homeowners avoid foreclosure.

‘Buy China’ policy set to raise tensions - (www.ft.com) China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus programme in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world. In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms. The government also said it was launching an investigation in response to complaints from domestic industry associations which accuse local governments of favouring foreign suppliers in procurement related to the country’s Rmb4,000bn ($585bn, €421bn, £356bn) economic stimulus package. “From a domestic political perspective this makes some sense because local governments do tend to favour foreign products in some categories,” Dong Tao, chief China economist for Credit Suisse, said. “But given how important free trade is for China’s economy this is not the right message for them to be sending to the rest of the world right now.” Just a few months ago Beijing was raging against a proposed “Buy American”clause included in the US economic rescue package. “Some countries raised clauses to prioritise the purchase of products of their own countries in their economic stimulus packages,” Yao Jian, a Chinese commerce ministry spokesman, told reporters in February. “We express deep concern about these [measures] ... under the current financial crisis, measures issued by all countries should not cause negative impacts, and especially they should not send out wrong messages.”

For Boomers, recession is redefining retirement - (www.usatoday.com) The “laziest” generation follows the “greatest” generation. They grew up during a time of cultural change, and now are being forced to redefine retirement at midlife. The 77 million Americans in the Baby Boom generation face an economic storm: The Wall Street meltdown trampled their retirement nest eggs more than any other group. After losing jobs during what they thought would be some of their peak earning years, many are struggling to get back into the workforce. Health care costs are rising, and declining home values mean they might not be able to count on home equity to guarantee an easier retirement. "This generation will be sobered by their experience," says John Coyne, president of Brinker Capital, an investment management firm. "They may not have as extravagant a vision of retirement as they did last July." The confluence of events has an even bigger impact on a subset of the Baby Boomers known to analysts as the Sandwich Generation. Those Boomers are putting money toward their children's college education and their aging parents' long-term care, as well as their own retirement savings. The reality is sinking in: Baby Boomers, born from 1946 to 1964, are planning to work longer, save more money and spend less, to reach any semblance of the retirement they once envisioned. According to AARP: •35% of those ages 45 to 54 have stopped putting money into their 401(k), IRA or other retirement accounts. •25% said they have prematurely withdrawn funds from their retirement accounts. •56% have postponed a major purchase. •24% have postponed plans to retire. "Today, I see myself working until I drop," says Kyril Wickenberg, 59, of Savannah, Ga.

California's credit rating may get cut further - (www.latimes.com) California's credit rating, already the lowest of the 50 states, may be cut again, Standard & Poor's warned Tuesday. As the debate over budget cuts drags on in Sacramento, S&P put its "A" grade on the state's $59 billion in general obligation bonds on "negative credit watch," meaning the rating is at risk of a downgrade. Using language that could further spook bond investors, S&P said, "Although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments." The Legislature and Gov. Arnold Schwarzenegger are facing a $24.3-billion budget shortfall, and Controller John Chiang has warned that the state could run short of cash beginning July 28, just one month into fiscal 2010. The Obama administration repeated Tuesday that it wouldn't offer special financial assistance to California. "We'll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they're going to have to solve," White House Press Secretary Robert Gibbs said in Washington. Worries about the state's fiscal fate, combined with an early-June jump in U.S. Treasury bond yields, have pushed market interest rates on the state's outstanding bonds sharply higher since mid-May. Yields on bonds rise as their prices fall. Tax-free yields on 10-year California general obligation bonds were 5% to 5.1% on Tuesday, according to several traders. The yield was under 4.4% in mid-May. A further credit downgrade could spur investors to force the state to pay even higher interest rates when it borrows. Still, California Treasurer Bill Lockyer has insisted all through Sacramento's deepening budget woes that he would never allow the state to renege on what it owes bondholders. S&P's language Tuesday incensed Lockyer's spokesman, Tom Dresslar. "S&P raises undue alarm about the potential for missed bond payments," he said. "There is zero chance of that happening." Payment of interest and principal on the state's general obligation debt is mandated by the state Constitution. S&P, in its statement Tuesday, estimated that constitutionally required spending on education would be $36 billion in fiscal 2010. Under the law, bond principal and interest payments of $5.7 billion for the year then would have to be funded before the state could pay other expenses.

British Airways Asks Staff To Work For Free - (Mish at globaleconomicanalysis.blogspot.com) Inflation is roaring back. Employment is soaring. Businesses are expanding, wage pressures are mounting, and pricing power is so great that British Airways asks staff to work for free. British Airways is asking thousands of its staff to work for free for up to four weeks, spokeswoman Kirsten Millard said Tuesday. In an e-mail to all its staff, the airline offered workers between one and four weeks of unpaid leave -- but with the option to work during this period. British Airways employs just more than 40,000 people in the United Kingdom. Last month, the company posted a record annual loss of £400 million ($656 million). Its chief executive declared at the time there were "absolutely no signs of recovery" in the industry. "I'm 30 years in this business and I've never seen anything like this. This is by far the biggest crisis the industry has ever faced," said Willie Walsh, British Airways' chief executive. A spokesman for one of Britain's biggest unions said its workers could not afford to work for free for a month. In these trying times it's best to be appreciative you have a job, even if you're not paid for it 4 weeks out of the year.