Weekly Economic Potpourri December 7, 2008

Every week there are a numerous headlines that are worthy of mentioning but I simply run out of time. Here are a few headline news reports of interest from the past week.

Bank of England mulls "nuclear option" of cash injection

In what would be a major departure for British monetary policy, the Bank is considering pressing the button on printing presses by engaging in a so-called policy of quantitative easing. It emerged after the Monetary Policy Committee cut borrowing costs by 1pc to just 2pc - the lowest level since 1951.

In the statement published alongside its decision, the Bank warned that "it was unlikely that a normal volume of [bank] lending would be restored without further measures."

The measures under consideration include direct purchases of assets, such as government debt or commercial investments, by the Bank or the Treasury, as well as expanding the Bank's balance sheet, a means of pumping extra cash into the banking sector.

Sharp drop in Vancouver home sales

The housing market slowed dramatically in Greater Vancouver last month, with the number of existing homes sold falling by 70 per cent from the year before.

Last month, 874 resale homes were sold through the Multiple Listing Service (MLS), compared with 2,883 sales in November, 2007, according to information released yesterday by the Real Estate Board of Greater Vancouver (REBGV).

The benchmark price declined by 13 per cent from May to November, from $568,411 to $495,704. For the 11 months ended in November, prices have fallen by 8.3 per cent. In the past three years, prices are up by 20 per cent, and they are up by 60 per cent over the past five years.

Investors sue Countrywide to force loans purchase

A group of bond investors sued Bank of America (BAC)-owned Countrywide Financial on Monday demanding that Countrywide buy every mortgage loan for which it agrees to reduce payments under a predatory lending settlement deal.

Countrywide and its Bank of America parent would be liable to pay hundreds of trusts a total of about $80 billion for loans it modifies, said lawyers for the plaintiffs who filed the complaint in New York State Supreme Court.

Bank of America said it was "disappointed in this attack on a program intended to keep at risk families in their homes" and help stabilize the housing market.

"Countrywide believes that plaintiffs' lawsuit represents an unlawful effort to assert rights of the trusts," the bank said in a statement. "Accordingly, Countrywide intends to pursue plaintiffs for any and all remedies available to it, including the recovery of its costs incurred in having to defend this improper action."

The lawsuit was filed on behalf of Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC.

The complaint said Countrywide does not plan to bear the $8.4 billion cost of the loan modification but to shift that cost to 374 trusts into which its loans were securitized, harming bond investors.

I believe the bond investors are legally correct and BAC is playing a ridiculous moral sentiment card. Ironically, it is possible that Greenwich Financial Services is better of with work arounds than it would be without them and taking over houses in bankruptcy. What a mess.

Crude Oil Caps Biggest Weekly Drop Since 1991 on Lower Demand

Crude oil fell for a sixth day, capping the biggest weekly drop since the Persian Gulf War in 1991, on concern demand will decline after a report showed U.S. employers cut jobs in November at the fastest pace since 1974.

Oil is down 25 percent since Nov. 28 as the recession deepened in the U.S., Europe and Japan.

�After the jobless number, any bulls that were left in the market will become extinct,� said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. �There are no redeeming features in these numbers.�

Merrill Lynch warns oil prices could fall to $25

Merrill Lynch on Thursday warned that oil prices could fall as low as $25 a barrel in 2009 if the recession hitting the US, Europe and Japan extended to China, the world's engine of commodities demand growth in the last few years.

Francisco Blanch, head of commodities research at Merill Lynch in London, said his main scenario is for oil prices to average $50 a barrel next year, but warned: "A temporary drop below $25 is possible if the global recession extends to China."

Nymex January RBOB unleaded gasoline traded for the first time ever below the $1 gallon mark, although it later recovered to $1.008 a gallon, down 0.3 cents on the day, in spite of news on Wednesday of a 1.6m barrels fall in US petrol stocks, compared with the consensus forecast for a 0.9m barrels increase. Lower consumption pushed gasoline prices down.

I view this a possible contrary indicator, just as calls of $200 or even $300 were a contrary indicator not that long ago. My how oil has crashed and this is the first $25 call I have seen.

I thought oil would fall to $60 or possibly $40 when crude was near $100, but it blasted all the way to $140 on zero fundamentals. At that time I was told oil would never dip below $80 again, and might not even dip below $100 again. Someone told me I was a contrary indicator for pointing out a chart of oil when it fell back to $100.

Well, here we are at $40. Now the calls are for $25. Hmmm. Maybe. Maybe not. If we do see $25 China will likely be in serious economic trouble along with the whole rest of the world.

AIG Lobbied for India Nuke Deal (Really!)

As AIG was on the brink of bankruptcy and facing a government takeover, the insurance giant made sure Congress knew where it stood�on U.S.-India nuclear relations, that is.

AIG deployed its lobbyists to Washington last month to influence a bill that allows U.S. companies to sell nuclear technology to India. Signed by President Bush earlier this month, the bill overturns a 30-year-old ban on such sales imposed after India first developed a nuclear bomb. (Critics complain that the U.S.-India deal undermines non-proliferation efforts.)

Why would AIG care about a U.S.-India nuclear pact at a time when its own existence was uncertain?

�We were looking at this to see if there�s a potential business aspect� for AIG, company spokesman Nick Ashooh said. �We do a lot of business in India.� Ashooh said he was �not sure� if that business included insuring contracts between U.S. military technology companies and their Indian counterparts.

Leading up to and following the government�s bailout of AIG last month, the company�s lobbyists kept busy. (AIG �suspended� its lobbying this week after coming under fire from senators.) Between July and September, the company spent more than $2 million to lobby Congress, the Treasury Department, the Federal Reserve and the White House, records show. (Between April and June, it spent more than $3 million). Apart from its own in-house lobbyists, AIG employed five lobbying firms and 20 lobbyists to influence 20 bills and several other policy matters.

Credit-Card Fees Targeted by Retailers Who Say Banks Overcharge

Retailers such as Target Corp. say banks make so much money from the fees that they give credit cards to people who can�t pay their debts, just as they provided mortgages to homeowners who can�t afford them.

�It�s another version of subprime lending,� said Mallory Duncan, chairman of the Merchants Payment Coalition representing trade groups for 2.7 million gas stations, drug stores, supermarkets and other retailers. �The system should be fixed before we are in a position of having to bail out more banks.�

The merchants want an antitrust exemption so they can band together to negotiate with banks over the so-called interchange fee, usually between 1 and 2 percent of the purchase price, that a retailer�s bank pays the cardholder�s bank each time a customer swipes a credit card. The retailer�s bank then collects the fee from the merchant. Consumers don�t see the charge, which merchants say is built into their prices.

U.K. November House Prices Fall for 13th Month, Nationwide Says

U.K. house prices fell for a 13th month in November as the financial crisis deterred homebuyers and banks rationed mortgages, Nationwide Building Society said.

The average cost of a home slid 0.4 percent from October, when it fell 1.3 percent, the Swindon, England-based mortgage lender said in an e-mailed statement today. Prices dropped 13.9 percent on the year to 158,442 pounds ($241,180).

Consumer spending fell the most since 1995 in the third quarter as unemployment rose and house prices dropped, government data showed yesterday. Bank of England Governor Mervyn King said Nov. 25 that getting banks to lend again ``is more important than anything else at present.''

Obama Plans Largest Building Program Since 1950s

President-elect Barack Obama said he�ll make the �single largest new investment� in roads, bridges and public buildings since the Eisenhower Administration to lift the sagging economy and create jobs.

Obama, in his weekly radio speech today, said his plan to create or preserve 2.5 million jobs will also include making public buildings more energy efficient, repairing schools and modernizing health care with electronic medical records.

�We won�t just throw money at the problem,� he said. �We�ll measure progress by the reforms we make and the results we achieve -- by the jobs we create, by the energy we save, by whether America is more competitive in the world.�

Translation: We are going to throw money at the problem and we will not measure the results.

Lawmakers close to deal on carmaker bailout

Congressional leaders will work through the weekend with the Bush administration to try and reach a final accord to provide emergency financial relief to the Big Three car makers, aides said. A vote on a proposal could come as early as Tuesday.
The Wall Street Journal reported late on Saturday, however, that the talks had hit a snag: Congress and the White House were arguing the role of an "auto czar" who would oversee a restructuring of the industry.

Both sides want such an adviser, the Journal reported. But the administration wants to name the oversight chief immediately, giving President Bush a big say over the industry restructuring, while top Democrats want President-elect Obama to appoint the adviser.

The three companies are asking for a total of $38 billion in loans from the federal government to enable them to survive the current financial meltdown.

Good Lord. We are up to $38 billion now, and have to suffer with an Auto Czar as well.

Bank account set up for dog beaten with hammer

Murphy, the dog who was found beaten with a sledgehammer in a DeKalb County park early this week, is up and around.

The 9-year-old German shepherd mix was able to stand up on his own and spent most of the day Thursday out of his cage, said Stephen Pope, the veterinarian and medical director at Pets Are People Too, in Dunwoody, where Murphy is being treated.

Joseph �Joe� Waters, 48, the man that police said smashed the dog in the head with a sledgehammer, remained in the DeKalb County Jail on a felony count of animal cruelty, according to DeKalb Sheriff�s spokeswoman Mikki Jones. Waters is being held under $25,000 bail.

Murphy, meanwhile, was stretching his legs and even giving staff at the Dunwoody clinic an occasional tail wag. �He is out on his own, seems to be able to see out of his good eye and is recovering nicely,� Pope said.

On Thursday, with offers pouring in to help the dog, Kennedy set up a trust fund to help with the cost. Donors can make a gift at any Wachovia Bank branch, to the Murphy the Dog account, number 1010209642669.

Something for everyone including weekend animal stories.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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