KeNo's Housing and Economic Portal: Sunday June 21 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Fed Would Be Shut Down If It Were Audited, Expert Says - (www.cnbc.com) The Federal Reserve's balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant's Interest Rate Observer, told CNBC. With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview. "If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down," he said. "The Fed is undercapitalized in a way that Citicorp is undercapitalized." Grant said he would support legislation currently making its way through Congress calling for an audit of the Fed. Moreover, he criticized the way the Fed has managed the financial crisis, saying the central bank's target rate should not be around zero. "I think zero is the wrong rate for almost any economy," Grant said, adding the Fed has "embarked on a vast experiment in moral hazard. Interest rates are the traffic signals in a market economy, and everything's green. ... You have to wonder whether these interest rates are the right clearing rate or rather they are the imposition of a central bank." Amid a disparity between analysts predicting there will be no rate hikes soon and the fed funds futures indicating tightening by the end of the year, Grant said he thinks the Fed indeed will begin raising rates as inflation creeps into the picture. Fed funds futures have fully priced in as much as a half-point rise in the target rate from its current range of zero to 0.25 percent. "If the hairs on the back of your neck stand up when there's too much unanimity of opinion, then one begins to worry about this," he said. "The Fed proverbially has been late."

Goldman Sachs CEO Sees Long Recession - (www.cnbc.com) Goldman Sachs CEO Lloyd Blankfein said on Wednesday he believed a current upturn in world markets was probably not a full recovery from crisis and said he expected a further long recession. "I think it's going to be a long proctracted recession," he told an international regulators conference in Tel Aviv. Addressing a current upturn in markets, he said: "There is no reason to think this is it ... So many things have to be sorted out. Why would this be the recovery? "The chances are it's not."

Sign of Times: College Closes Door to Needy Students - (www.cnbc.com) The admissions team at Reed College, known for its free-spirited students, learned in March that the prospective freshman class it had so carefully composed after weeks of reviewing essays, scores and recommendations was unworkable. Money was the problem. Too many of the students needed financial aid, and the college did not have enough. So the director of financial aid gave the team another task: drop more than 100 needy students before sending out acceptances, and substitute those who could pay full freight. The whole idea of excluding a student simply because of money clashed with the college’s ideals, Leslie Limper, the aid director, acknowledged. “None of us are very happy,” she said, adding that Reed did not strike anyone from its list last year and that never before had it needed to weed out so many worthy students. “Sometimes I wonder why I’m still doing this.” That decision was one of several agonizing ones for this small private college, celebrated for its combination of academic rigor and a laid-back approach to education that once attracted Steven P. Jobs, the chief executive of Apple, to study on its leafy campus minutes from downtown. With their endowments ravaged by the financial markets and more students clamoring for assistance, private colleges like Reed are making numerous changes this year in staff, students, tuition and classes that they hope will tide them over without harming their reputations or their educational goals. Reed and others have admitted more students to bolster revenue with larger classes. Many are cutting costs by freezing or reducing salaries, suspending hiring and postponing building maintenance and construction. And the cost of attendance is rising; in Reed’s case, by 3.8 percent, to nearly $50,000 a year for its 1,300 students. But Reed has put off drastic measures like spending more of its endowment, closing some departments or selling some real estate near campus. Instead, college officials are counting on the economy to turn around quickly, as became apparent when they allowed a New York Times reporter to sit in on budget discussions this spring. “Like everybody, we are trying to start by trying to cut the stuff that is least likely to inflict real pain on the program,” said Colin Diver, Reed’s president. When he talks about Reed’s short-term response to the recession, Mr. Diver concedes he is torn, wondering whether a broader reassessment would be in order. Perhaps it would be a good thing, he said, if the recession could refocus college administrators on the quality of higher education, rather than on investments in climbing walls (Reed does not have one) and other “country club” aspects of college life that have fueled an academic arms race reliant on tuition increases and fund-raising.

Las Vegas Hotel Project Files for Bankruptcy - (www.cnbc.com) Fontainebleau Las Vegas has filed for Chapter 11 bankruptcy protection to facilitate its debt restructuring after its lenders terminated their commitments to provide nearly $800 million in construction funding. The company, which had sued its lenders for $3 billion in April for terminating the loan commitment, said it withdrew its $3 billion lawsuit in Las Vegas and refiled the case in the U.S. Bankruptcy Court in the Southern District of Florida. Fontainebleau reached a provisional agreement with a group of its non-defaulting lenders for the use of cash for the bankruptcy case. The $800 million loan was in addition to more than $2 billion in debt and equity that Fontainebleau Las Vegas had already borrowed and invested in the 3,800-room resort, which was 70 percent completed. The company, which is in negotiations to obtain financing to recommence construction at the Las Vegas project, said Fontainebleau Miami Beach was not affected by the filing and would continue to operate as normal. The Las Vegas project is one of several new luxury resorts slated to open on the Strip, where most operators are already struggling, having dropped room rates and other prices in order to attract recession-wary consumers and businesses.

Europe Is Being Held Together With Duct Tape - (www.financial.sense) Among its many other sins, the greenback is a press hog. The world’s reserve currency, loved and loathed as it is, simply gets most of the ink these days. In that light many a U.S.-based commentator, not least your cynical Taipan Daily scribes, have repeatedly waxed eloquent on the long-run death of the dollar. But in our zeal we sometimes forget that, in order for the dollar to die, it has to die relative toother fiat currency offerings... and some of those others are looking pretty sick too. (The main exception, of course, being gold - the one and only “stateless currency” not subject to the whims of a printing press. As Grant’s Interest Rate Observer quips, “Show us a monetary asset whose value is not subject to governmental debasement and we will show you a Krugerrand.”) In short, the dollar is not the only basket case out there. Take the euro, for example. Now there’s a troubled currency if ever one existed. As pollyanna stock market bulls are finding out the hard way, rising interest rates (via falling bond prices) can have ugly consequences. The same is true of a rising currency when coupled with a weak economic backdrop. In this particular case, the stronger the euro gets, the more it cuts into European export sales. At a time when most all of Europe is sick, the economic pain of a too-strong currency becomes intense above a certain threshold. On top of that, various bits of Europe are in the process of blowing up... or falling apart... or both. There is deep trouble brewing in multiple corners of the continent. Let’s take a quick look on a country-by-country basis to see why Europe is being held together with duct tape.

Britain on the Brink: We’ll start with Britain - not an adopter of the euro, but a member of the EU (European Union) nonetheless. Britain has been hurled into political chaos, thanks to an unholy combo of deep financial crisis, explosive Labour Party scandals, and the hapless lame-duck status of embattled Prime Minister Gordon Brown. Cabinet Ministers are resigning left and right in protest as Brown’s popularity plummets, calling for the PM to step down. Election results tallied this week showed the Labour Party (Brown’s party) putting in its worst showing since 1918. Philip Stevens, chief political commentator for the Financial Times, sees an ominous chain of events now set in motion. “Everyone thought the [election] results would be bad,” Stephens reports. “But these [results] are calamitous... the Prime Minister was prepared, if you like, for very bad results. He’s now got to grapple with absolutely terrible results.” If the Brown government fails, Britain will be left rudderless in the midst of the worst fiscal storm in decades. In a worst-case scenario where bad events lead to worse decisions, opines Stephens, the domino chain could even lead to a British exit from the EU. This outbreak of chaos is awful and unsettling for the British economy - and by extension awful and unsettling for Europe. As of this writing, it is not yet clear whether Prime Minister Brown can survive a political coup... or even whether he would be better off resigning, Dick Nixon style, in the interest of sparing greater turmoil.

Latvian Pressure Cooker: Elsewhere in Europe, Latvia, a tiny country of 2.2 million, threatens to unleash havoc on the entire continent. Latvia’s currency, appropriately known as the lat, is officially pegged to the euro. Latvia set up the currency peg to speed up official entry into the EU. But now the fiscal discipline of maintaining the peg is crushing the Latvian economy. At one time, Latvia was an Eastern European tiger, growing by leaps and bounds. But, like many other countries, Latvia found itself badly caught out by the financial crisis. Just when credit lines were needed the most to shore up a cratering home front, Latvia found it suddenly impossible to borrow. Credit was desperately needed. An attempt to issue $100 million worth of lat-denominated bonds resulted in no takers. Normally, a small country with an imploding economy would simply devalue the currency to make exports more competitive. But if Latvia devalues now, all kinds of ugly fallout will follow. For one, the Swedish and Austrian banks that lent heavily to Latvia would take huge, destabilizing losses. Worse, other Eastern European neighbors, like Lithuania and Estonia (and Bulgaria farther south), would see their own currency pegs threatened. And even worse still, a wholesale lat devaluation would crush many Latvian businesses (due to loads of foreign currency-denominated debt on the books) and kill Latvia’s shot at eventual EU acceptance. So, with the help of emergency financing from the IMF and European Union, Latvia has vowed to keep on keeping on. The currency peg will not go undefended. But in order to maintain that peg in the face of economic hardship, Latvia will need to cut wages and spending to the bone. This, too, is dire medicine for a small country struggling under the weight of great debt. Some believe Latvia will be forced to devalue, in spite of all the pain it would cause for both the tiny country itself and many surrounding neighbors. The pressure might just prove too great, as the pressure was too great in 1992 when Britain was forced to devalue the pound and drop out of the European Exchange Rate Mechanism (ERM). In a way, Latvia is damned if it does and damned if it doesn’t. Some argue that the peg must be defended at all costs, lest the whole of Eastern Europe be lost. If Lithuania and Estonia are sucked into a currency pain vortex, the EU could lose its political hold on the region - and Russia could rush in to fill the torment-filled vacuum. It would be so much easier (and simpler) if the value of the euro were to fall from current high levels. This would ease Latvia’s pain, as well as a number of other struggling countries. But there is a huge and intractable obstacle there - Germany.

Germany in a World of Its Own: As the global financial crisis has unfolded, Angela Merkel, the Chancellor of Germany, has been looked on with increasing amounts of admiration and horror, depending on the observer’s vantage point. Those who admire Merkel do so because Germany has appeared to completely go its own way in the midst of turmoil. As other countries have stimulated and relaxed and eased to fight the fires of slowdown, Germany has said “Nein!” to anything that smacks of lax fiscal policy. In a speech last week, Chancellor Merkel even went out of her way to slam the Federal Reserve and the Bank of England, stating plainly that “I view with great skepticism the powers of the Fed... and also how, within Europe, the Bank of England has carved out its own line.” Within the subtle context of diplomacy and statecraft, those are amazingly blunt words. Merkel has all but called the stimulators a bunch of out-of-control fools. Many admire Germany’s fiscal backbone. But others are horrified, and terrified, by Germany’s lack of willingness to show any type of bend or flex in monetary policy. Remember the Latvia problem? Many other rapidly imploding European economies, like those of Ireland and Spain, are also struggling with the weight of a too-strong euro hurting export prospects. But in its zeal for fiscal responsibility, Germany will probably remain steadfast in its opposition to any loosening of the purse strings. The stance is cultural and historical. Having lived through the horror of hyperinflation in the Weimar Republic in the 1920s, Germany emerged from its baptism by fire as a zealous hard-money advocate. Rigid fiscal discipline has been a political rallying cry in Germany ever since. So when Chancellor Merkel takes an especially hard line against the easy-money inflationists, she is doing so with an eye for public approval ratings at home. The trouble is, even Germany can barely afford its own righteousness. The German economy still depends heavily on exports... and so an overly strong euro hurts Deutschland too.

The Rise of the Far Right: Last but not least, a surprising new trend has arisen from the EU-wide elections held in the past few days. “Conservatives raced toward victory in some of Europe's largest economies Sunday,” the Associated Press reports, “as initial results and exit polls showed voters punishing left-leaning parties in European parliament elections in France, Germany and elsewhere.” The rise includes not just the right, but the far right. In Britain, the British National Party - an openly racist party that only admits whites - gained a seat for the first time. In various other countries, openly nationalist parties gained fresh power either for the first time also, or for the first time in quite a long while. “It is not clear why a chunk of the blue-collar working base has swung almost overnight from Left to Right,” says Ambrose Pritchard of the U.K. Telegraph. “But clearly we are seeing the delayed detonation of two political time-bombs: rising unemployment and the growth of immigrant enclaves that resist assimilation.”

OTHER STORIES:

Fiat Closes Chrysler Deal, Names Marchionne CEO - (www.cnbc.com)

Authorities 'Will Fail Us Again:' Black Swan - (www.cnbc.com)

Citi Makes $58 Billion Swap Deal With Government - (www.cnbc.com)

Deficit Breakdown: How the US Got Into This Mess - (www.cnbc.com)

Obama to Appoint Overseer For Executive Pay: Source - (www.cnbc.com)

Rising Mortgage Rates Sap Loan Applications - (www.cnbc.com)

Happy Hour: The New Day Job - (www.cnbc.com)

One Couple, Two Views of Retirement - (www.cnbc.com)

Crude Oil Rises Over $71 on API Stockpile Drop, Weaker Dollar - (www.bloomberg.com)

Gold Advances a Second Day on Weaker Dollar, Inflation Concern - (www.bloomberg.com)

Crude stockpiles plunge as summer driving gears up - (finance.yahoo.com)