KeNo's Housing and Economic Portal: Tuesday July 21 Housing and Economic stories

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White House hit in skirmishes over spending - (www.ft.com) The clashes in Congress on Wednesday over the possibility of a further US fiscal stimulus highlight the political damage Barack Obama’s administration is suffering as unemployment climbs towards 10 per cent in spite of the current $787bn package. Senior administration officials think further stimulus might eventually be needed but they do not want to have this fight now. Both the economics and the politics call for postponing a decision to late this year or early in 2010. By then it will be easier to assess whether further spending is necessary, though the politics may be no easier. While critics on the left now want extra stimulus, the centre of gravity in Congress and in the country appears to be in favour of less deficit-spending. This is “just early skirmishing”, says Tom Gallagher, an analyst at ISI, a broking firm. Brian Gardner, of Keefe, Bruyette & Woods, another broking firm, says: “We think that, unless the economy takes a decided downturn, a second stimulus bill is unlikely. We do not think there is enough support for it.” Nonetheless, the administration wants to keep the door to further stimulus ajar, leading to conflicting signals from Mr Obama, the president, and from Rahm Emmanuel, his White House chief of staff. The administration knows it is on the back foot over the current package, a problem amplified by its initial estimate that the $787bn programme would stop unemployment rising above 8 per cent. This stimulus – criticised at the time by some economists as too small and by others as too tilted towards spending rather than tax cuts – was launched as the economic outlook was deteriorating sharply. It is still too early to assess objectively how much bang the administration is getting for the taxpayers’ buck. A case can be made that the stimulus played an important part in halting economic freefall in spring. Confidence measures bottomed out soon after it was passed. Fast-acting tax breaks and transfer payments largely explain why disposable income rose 2.9 per cent from January to May, even as earned income fell 0.7 per cent, allowing the savings rate to rise without a collapse in spending. The federal administration has handed over $29bn (€20.5bn, £18bn) to the states already – mitigating the fiscal contraction that would otherwise have come from them. But this support may be overwhelmed by the sharper than expected collapse in state revenues. More generally, it is hard for the administration to claim credit for averting catastrophe and merely achieving misery. So officials are focusing on rolling out the second-phase spending side of the stimulus plan in the hope that this will provide visible proof of impact.

States Use Stimulus Money for Short-Term Needs - (Mish at globaleconomicanalysis.blogspot.com) The Government Accountability Office, finds that the $787 billion stimulus package is being used to "cushion" state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems. Gee, who woulda thunk? Please consider States Using Stimulus Money for Short-Term Needs, Audit Shows. Cash-strapped states have used federal stimulus dollars to close short-term budget gaps and avert major tax increases but generally have not directed the money toward long-term expansion, according to a new report. The report released Wednesday by the Government Accountability Office, Congress' investigative arm, found that the $787 billion stimulus package is being used to "cushion" state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems. The Congressional Budget Office estimates that only 10 percent of the Recovery Act funds have been released so far, with about half of the money expected to be spent by October 2010. That dispersed money is being used to prioritize short-term projects and needs over more ambitious goals, the GAO report states. For example, the GAO said about half the money set aside for road and bridge repairs is being used to repave highways, rather than build new infrastructure. And state officials aren't steering the money toward counties that need jobs the most, auditors found. Taxpayers have also recently complained that the federal government has wasted money by advertising stimulus-funded construction projects with road signs which costs between $500 and $1,200 to produce. Interestingly I talked about that very thing the other night on Coast-To-Coast and online in No Amount of Stimulus Will Work. All this talk of multipliers is nonsense. If government spends money in a manner that private industry would not, the multiplier is far less than 1, and perhaps even negative. Case in point: There are numerous road construction and repaving operations where I live. The thing is, most of the roads did not even need repair. Money came in for roads, Obama said use it or lose it, so the roads were "fixed". Now what? They can "fix" every road in the country that does not need fixing and as soon as the roads are fixed, we will be back at square one, in need of still more stimulus, with Krugman whining for still more. There is an economic benefit for fixing roads that genuinely need fixing, however, all that does is push up the curve a bit. Then what? Sign, Sign Everywhere A Sign: On Coast-To-Coast I even mentioned the signs. They are everywhere. In attempting to tell us how they are ~~stimulating the economy~~ wasting money, they are wasting even more of it. Gee, who coulda thunk? The report states that the federal money generally has not prevented state governments from dipping into their rainy-day funds or eliminated the need to take further action to balance future budgets.

The Sad, Suffering Ivy League - (www.vanityfair.com) Nina Munk's story in this month's issue of Vanity Fair makes this much clear: Harvard may be the wealthiest school in the world, but it is suffering from the economic downturn just like the rest of us. So, too, is the rest of the Ivy League. From Yale to Princeton, Columbia to Cornell, budgets are being slashed and construction cranes idled as university investment managers confront their worst losses in a generation. Just the concept of having to balance a budget is a relatively unfamiliar one for many university presidents, who have enjoyed years and years of double-digit investment gains. “Essentially we’ve been in a period of being able to support virtually every good idea that came along,” Yale's president, Richard C. Levin,told the Yale Daily News (where I serve as editor-in-chief when I’m not interning here at VF.com) in December. “That’s historically unprecedented and it was bound to be a finite amount of time where that prevailed.” That time, Levin and his counterparts now know, is over. At Harvard, which lost at least $8 billion in the last six months of 2008, budget cuts have forced the elimination of hot breakfast in undergraduate residences; at Dartmouth, dozens of courses will be scuttled to save money. The bottom line: The Ivy League's gilded age is over. Here's how the Ancient Eight—in order of wealth—are coping with that reality.

Harvard University: President: Drew Gilpin Faust, Years in office: 2, Background: A civil war historian; previously served as dean of Harvard’s Radcliffe Institute for Advanced Study, Endowment (as of June 30, 2008): $36.9 billion (return of 8.6 percent), Decline this year: Officially, projected at 30 percent, though a source told Munk the decline will actually be only 23 to 25 percent, Money-saving measures: 19 percent cut over two years to the budget of the Faculty of Arts of Sciences; 275 layoffs and more than 500 early-retirement buyouts, President's wisdom: “Difficult circumstances have called for difficult decisions across the University.”

Yale University: President: Richard C. Levin, Years in office: 16, Background: An economist; previously served as dean of Yale’s Graduate School of Arts and Sciences, Endowment: $22.9 billion (4.5 percent), Decline this year: 25 percent (projected), Money-saving measures: 7.5 percent across-the-board budget cuts, including some layoffs, President's wisdom: “We’re going to do just fine — this is not the end of the world — but we’ll have to set priorities more carefully.”

Princeton University: President: Shirley Tilghman, Years in office: 8, Background: A molecular biologist; previously served as director of Princeton’s Lewis-Sigler Institute for Integrative Genomics, Endowment: $16.3 billion (5.6 percent), Decline this year: 30 percent (projected), Money-saving measures: Budget cuts of about 7 percent and a freeze on raises for many faculty and staff members, President's wisdom: “We all go to bed at night praying for some miraculous boom.”

Keep an eye on Russia's imploding banks - (www.telegraph.co.uk) Russia is sinking into a swamp of bad loans. The scale of credit rot in the Russian banking system exposed by Fitch Ratings this week is truly staggering. The report is yet another cold douche to those betting that the BRICs (Brazil, Russia, India, and China) can pull us out of our mess. Lenders will need to raise $60bn (£37bn) in fresh capital if the “pessimistic scenario” unfolds. Bad loans could reach 40pc, although analysts are flying blind since bank disclosure “does not always capture all asset quality problems.” Uhhm. The report follows an equally disturbing (if very different) note on the banks in China, where a “margin squeeze” has set off a explosion of unstable loan growth. Some might see as this as `good’, ie stimulatory, but since the liquidity is sloshing around a crushed economy that still lives off deflated US and EU export markets, it is largely leaking into asset speculation. This is much like the US from mid-1928 to late-1929, a strange 15 months, often forgotten. By then the world economy had tipped over. Trade was contracting. Commodity prices were deflating. Yet leveraged funds flooded Wall Street, decoupled from the underlying reality. We all know what happened. The markets buckled for no obvious reason in September 1929, then cratered in October. As for India, excuse me but with a combined budget deficit of 13pc of GDP (including fuel subsidies, which are kept off books) and “real” interest rates of minus 5.5pc, Delhi already has its foot to the floor. India is heading towards a debt compound trap as fast Britain — and there is a shocker. No doubt India and China will thrive in the end, but it is wishful thinking to expect the BRICS to pull the whole global economy out of the debt-leverage dump.

Gamer steals from virtual world to pay real debts - (www.independent.co.uk) Facing real world debts, a trusted figure in a popular online game stole money from the virtual bank he ran and exchanged it for cash through the black market. It happened in EVE Online, where more than 300,000 subscribers pay $15 a month to play. They gain wealth through hard work, manipulating the market, or killing rivals in a distant future where humans have colonized the stars in an online game similar to World of Warcraft and Second Life. EBank, EVE's largest player-run financial institution which has thousands of depositors, is at the center of the scandal. "Basically this character was one of the people that had been running EBank for a while. He took a bunch of (virtual) money out of the bank, and traded it away for real money," said Ned Coker, of the Icelandic company CCP, which developed the game. The CEO of EBank, a 27-year-old Australian tech worker who identified himself only as Richard and used the online name Ricdic, embezzled about 200 billion interstellar kredits, the game's virtual currency. He broke the rules of the game by exchanging the stolen virtual funds for $6,300 Australian ($5,100) with players who preferred to buy virtual money rather than earn it playing the game. "It was a very on the spot decision," the married father of two explained in an interview. He said a spam email for a black market website that traded online money for real cash popped up on his screen, prompting him to exchange the virtual cash for real money to cover a deposit on his house and expenses related to his son's medical problems. "I saw that as an avenue that could be taken, and I decided to skim off the top, you could say, to overcome real life (difficulties)." Word of the theft spread quickly within EVE. Panicked customers started a run on the bank, worried that they would lose the money they had amassed by hunting space pirates or mining asteroids. Ironically, if Ricdic had merely stolen the online money he could have stayed in the game. But exchanging the virtual cash for real dollars broke the rules and CCP banned Richard's EBank accounts. "It unbalances the game," Coker said. Players can only buy virtual money with real money, or use virtual cash to pay for playing time, but they cannot exchange game money for the real thing. "We have never seen ourselves as gods who make the rules of social interaction," said Eyjolfur Gudmundsson, an economics adviser to CCP. "You are able to lose the things you have created. That's what makes the world interesting." Ironically, Richard had built a reputation as one of EVE's few trusted players -- a rare commodity in a game where repeatedly blowing up a violator's spaceship was the only way to enforce some contracts.

Big box closures leave big blight across U.S. - (www.msnbc.msn.com) Hundreds of anxious shoppers watched as city officials used power saws to cut 2-by-4s during Home Depot Inc.’s ribbon-cutting ceremony for its 102,700-square-foot building center in Bismarck. Less than three years later, the home improvement retailer shuttered the underperforming store, leaving a big orange empty eyesore on the outskirts of town. The building, sitting derelict and silent on acres of asphalt, is now listed for sale at $10.5 million. But there’s been little interest in the near windowless warehouse-like building that occupies a lot the size of a dozen football fields. For potential tenants “it’s a hard pitch because for most uses it seems to be a bit of a tough fit,” said Brian Ritter, business development director of the Bismarck-Mandan Development Association. As the recession takes its toll on big-box retailers, more communities across the country are having to confront not just the eyesore of giant empty stores, but also the loss of jobs and tax revenue that follow. Many are trying to find creative uses for those near windowless monoliths. In Minnesota, one became a Spam Museum. In Texas, an indoor go-cart track. In Illinois, a church moved into an empty Wal-Mart. The new tenants, however, often generate less revenue forlocal governments. And with the recent spate of bankruptcies and store closures, including Circuit City and Linens ’N Things, more abandoned buildings will be added to a struggling commercial real estate market. There are already hundreds of empty “ghostboxes” around the country. “There is not a landfill on earth able to handle all the big boxes that we have sitting empty,” says Julia Christensen, author of the book “Big Box Reuse,” who has been studying the trend since 2002. Some have been transformed into museums, community centers, hospitals or schools. Future tenants, however, can be restricted by the former retail chain. “Often, they sign leases that prohibit competitors from moving in there, so they’re willing to pay on an empty building for a long time,” said Christensen, also a visiting professor at Oberlin College in Ohio.