Plan Skirts Housing's Biggest Troubles

Rescue Won't Fix Falling Home Prices, Rising Foreclosures

By MICHAEL CORKERY
September 8, 2008; Page A14

The government takeover of Fannie Mae and Freddie Mac likely will help ease mortgage rates for home buyers, say economists, home builders and housing experts. But it won't cure the housing market's biggest ailments: falling home prices and rising foreclosures.

"This is another marginal step in the right direction," says Richard DeKaser, an economist at National City Corp., a large Cleveland bank. "But it doesn't resolve the glut of homes on the market or remove pressure on prices."

The housing market is stuck in a vicious cycle. It started with an oversupply of homes that eventually caused prices to plummet. Falling prices led to waves of foreclosures, as homeowners ran into problems refinancing their mortgages or selling their houses. Banks are reluctant to lend when home values keep sinking and defaults are rising, curbing housing demand further and fueling more price drops and defaults.

Investors and economists feared that a collapse of Fannie and Freddie would greatly exacerbate the downward spiral by essentially freezing the mortgage market. "The government's move takes that serious disruption to the financial market off the table," says Mark Zandi, chief economist at Moody's Economy.com.

Mr. Zandi says that while the takeover of the mortgage giants won't immediately stop the home-price slide, it should limit price declines to 5% to 10% over the next year, rather than the doomsday scenario of additional declines of 15% to 20% that some economists were predicting if Fannie and Freddie failed or pulled back dramatically....

Mounting Woes Left Officials With Little Room to Maneuver

By DEBORAH SOLOMON, SUDEEP REDDY and SUSANNE CRAIG
September 8, 2008; Page A1

WASHINGTON -- In the end, Fannie Mae and Freddie Mac had no choice.

Summoned to separate meetings on Friday with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.

"We have the grounds to do this on an involuntary basis, and we will go that course if needed," Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.

There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn't survive in their present forms, and that any collapse would be devastating to the economy.

The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyo.; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.

Dozens of bankers and lawyers were involved in the process. One junior banker joked that the round-the-clock schedule was tougher than prison -- at least there, you got three square meals a day.

In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies' regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn't survive as currently structured. No one could say how much money from the Treasury, either via a loan or an equity investment, would be enough to get them through the housing mess. Hence, the need for the government to step in and stabilize what has become a vital cog for the housing and mortgage market.

This account of the government's dramatic decision is based on interviews with government, Wall Street and company officials and others.....

U.S. Seizes Mortgage Giants

U.S. Seizes Mortgage Giants
Government Ousts CEOs of Fannie, Freddie; Promises Up to $200 Billion in Capital
By JAMES R. HAGERTY, RUTH SIMON and DAMIAN PALETTA
September 8, 2008;

In its most dramatic market intervention in years, the U.S. government seized two of the nation's largest financial companies, taking direct responsibility for firms that provide funding for around three-quarters of new home mortgages.

Treasury Secretary Henry Paulson announced plans Sunday to take control of troubled mortgage giants Fannie Mae and Freddie Mac and replace the companies' chief executives....

With that, the U.S. mortgage crisis entered a new and uncharted phase, potentially saddling American taxpayers with billions of dollars in losses from home loans made by the private sector. Bush administration officials argued that the cost of doing nothing would be far greater because of the toll on the economy of falling home prices and defaults in the $11 trillion U.S. mortgage market....

By taking this action, the government has seized control of the vast bulk of the secondary market for home mortgages and will have a more direct responsibility than ever for solving the housing crisis. The intervention also marks the failure of the public-private experiment that was created to boost home ownership among Americans. Fannie and Freddie were created by Congress to help prop up the housing market, and investors have long believed the government would bail the companies out in a crisis. But the companies have long been owned by private shareholders seeking to maximize profits.


The move is also likely to nudge down mortgage rates for consumers, who are facing the worst housing bust since the 1930s. Despite steep interest-rate cuts by the Federal Reserve, the cost of a typical 30-year fixed-rate mortgage has remained well over 6% for most of the past year....

Without government support for the mortgage market, home prices would fall much further, exposing the country as a whole to greater economic strain...

Fiscal Conservatism Helped Louisiana Beat Katrina By BOBBY JINDAL

August 29, 2008; Page A17

Baton Rouge, La.

Three years ago today, Hurricane Katrina battered New Orleans and southeast Louisiana. A few weeks later, Hurricane Rita hit southwest Louisiana, completely demolishing some of our coastal communities. These terrible storms destroyed thousands of small businesses, displaced hundreds of thousands of residents, killed over a thousand people, and caused tens of billions of dollars in property damage.

At the time, many experts predicted Louisiana's economy would never be the same. That's true, though not the way the experts thought: It's getting better.

These storms forced us to rethink our aspirations as a state. We are not just rebuilding the failed institutions of the past -- we are rebuilding smarter.

We streamlined our state recovery processes, cutting red tape, and are pushing federal recovery dollars to local governments to rebuild critical infrastructure, all without forfeiting transparency and accountability. And we continue to focus on helping our hardest-hit communities complete their recovery efforts.

We also moved quickly to increase Louisiana's overall economic competitiveness. Shortly after my inauguration in January, we worked with the state legislature to adopt the strongest governmental ethics laws in the country. Next we eliminated unorthodox business taxes. We also adopted a comprehensive workforce-development reform plan to improve the effectiveness of our community and technical colleges, provide turnkey workforce solutions to expanding and relocating businesses, and ensure that our workforce programs are driven by real business needs.

For the first time in our history, Louisiana has become a hotbed for education innovation. In New Orleans, state and local education leaders are working with national nonprofits and foundations to implement a variety of promising reform efforts, including charter schools and school choice for disadvantaged kids.

While we need to retain and grow our traditional industries, the state also needs to diversify our economy through new, high-growth sectors.

Louisiana is now among the top three states in the country for film productions. We are seeking to match that success in the digital media sector, starting with Electronic Arts -- the world's leading interactive entertainment software company -- which last week announced it will launch its global quality assurance center in partnership with Louisiana State University (LSU).

We are becoming a national leader in the coming global nuclear-energy resurgence, as well. On Tuesday, The Shaw Group and Westinghouse announced that they chose Louisiana for the first manufacturing facility in the U.S. focused on building modular components for new and modified nuclear reactors.

Louisiana is attracting significant investment in mature industry sectors, as well. Albemarle, a Fortune 1,000 specialty chemicals company, recently moved its corporate headquarters to Baton Rouge from Virginia. Edison Chouest Offshore, one of the world's most technologically advanced offshore vessel service companies, recently announced plans to construct a 1,000-job shipyard in Port of Terrebonne, in south Louisiana.

We also have implemented conservative fiscal management practices. For example, a state hiring freeze saved $39 million and led to the elimination of nearly 1,000 state jobs. I vetoed 258 line items in the recently passed state budget, which is more than double the number of vetoes in the past 12 budgets combined. And we ended our state's long-held habit of using one-time revenues to cover recurring expenditures. These efforts helped us to implement the largest personal income tax cut in state history, while freeing up new funds to invest in higher education, transportation, research, health care and coastal restoration.

Thanks in large part to these reforms and our aggressive efforts to attract new business investment, our economy today is strong. Compared to the nation as a whole, Louisiana's economy is growing substantially faster, and our state has considerably lower unemployment levels.

The rest of the country is starting to take notice. Citing strong fiscal management, three major credit-rating agencies -- Moody's, Standard & Poor's, and Fitch -- recently upgraded Louisiana's bond ratings. The Center for Public Integrity noted that Louisiana's new governmental ethics laws regarding legislative disclosure will increase our ranking to first in the country, from 44th. For the first time, U.S. News & World Report ranked LSU in the top tier of its list of America's Best Colleges. And Forbes magazine increased its growth-prospects ranking for Louisiana to 17th from 45th.

Our state has long had a special charm that draws visitors from around the world. Significant policy reforms, conservative fiscal management and targeted investments are now steadily transforming Louisiana into the next great American state for business investment, quality of life and economic opportunity.

Mr. Jindal, a Republican, is the governor of Louisiana.

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Jim Cramer - "It's Armageddon our there!"

I don't like Jim Cramer, but, he is entertaining. This clip is from August 6, 2007. That was about the time when it was becoming clear that significant problems were brewing in the financial markets.

"They know nothing!"

Fed Minutes Show Split on Inflation Risk

By SUDEEP REDDY
August 27, 2008; Page A2

Most Federal Reserve policy makers expect to see weak economic growth and moderating inflation through the end of the year, suggesting little inclination to raise interest rates in the coming months.

In minutes of their August meeting, however, some Fed officials appeared divided over the degree of the inflation threat and the extent to which financial turmoil is weighing on the economy.

Members of the rate-setting Federal Open Market Committee, which left the central bank's interest-rate target unchanged at 2% at its Aug. 5 meeting, continue to expect their next move to be a rate increase, the minutes said. But they remain uncertain about the extent and timing of such an action, indicating they will take their cue from developments in the economy and financial markets....

But policy makers overall disagreed about the extent of the financial stress. Many officials noted the financial system "remained fragile," with some expressing concern about the risk of tighter credit conditions leading to more losses on housing that in turn could lead to still tighter conditions. Other Fed officials "suggested that risks to the financial system had receded," partly because of new Fed lending facilities. Those officials said credit conditions "were broadly consistent with the typical patterns observed during periods of weak growth or recession."

Policy makers appeared to be divided over the inflation threat. Officials overall "expressed significant concerns" about the risk of higher inflation and the chance of higher inflation readings leading to an increase in the public's expectations for inflation.

Some officials believed inflation risks were diminishing with a weaker economy and lower prices for oil and other commodities. Others worried about a reversal in the current trend of energy prices and found businesses being more successful in passing higher costs to consumers. One of those officials, Federal Reserve Bank of Dallas President Richard Fisher, dissented in the 10-1 vote to leave rates unchanged at the August meeting. He preferred a rate increase, saying inflation pressures were a greater risk to the economy even though the financial system remained fragile and the "sluggish" pace of economic growth could weaken further.

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Economy Grew 3.3% in 2nd Quarter, Much Higher Than Initial Reading

Economy Grew 3.3% in 2nd Quarter,
Much Higher Than Initial Reading
By JEFF BATER and BRIAN BLACKSTONE
August 28, 2008 9:22 a.m.

WASHINGTON -- The U.S. economy was much stronger in the spring than first thought because of better exports and less inventory liquidation by businesses, according to a government report that surprised economists.

Gross domestic product rose at a seasonally adjusted 3.3% annual rate April through June, the Commerce Department said Thursday in a new, revised estimate of second-quarter GDP.

Originally, the government had estimated second-quarter 2008 GDP climbed 1.9%. First-quarter GDP increased 0.9%.

Separately, the number of U.S. workers filing new claims for unemployment benefits fell slightly as expected last week but remained at elevated levels consistent with more declines in nonfarm employment. Meanwhile, total continuing claims hit a nearly five-year high, suggesting the weak economy is making it much tougher for the unemployed to find new work.

Corporate profits rose weakly in the second quarter, a sign that rising commodity prices are squeezing businesses. Profits after taxes climbed by 1.0% to $1.361 trillion in the second quarter, after falling by 7.7% in the first quarter. Year over year, profits decreased 5.9% since second-quarter 2007.

Price inflation gauges were basically unchanged in the government's revisions to the economic data.

GDP is a measure of all goods and services produced in the economy. Wall Street was surprised by the adjustment to second-quarter GDP; economists surveyed by Dow Jones Newswires estimated a 2.7% increase....

Second-quarter spending by consumers climbed 1.7%, up from a previously reported 1.5% increase and above the first quarter's 0.9% gain. Spending got a jolt in the spring from federal income-tax rebates given to spur an economy fighting high oil prices and shrinking payrolls. But the last of the checks rolled out in July and the lift given by the stimulus payments will fade, erasing the support to GDP that had been provided during the second quarter.

Consumer spending accounts for about 70% of economic activity. It contributed 1.24 percentage points to GDP in the second quarter; the original estimate was a contribution of 1.08 percentage points....