Politics


S&P Lowers Fannie, Freddie Credit Rating-Daily Real Estate News | Tuesday, August 09, 2011

Standard & Poor’s downgraded the credit rating of lenders backed by the federal

government on the heels of the first-ever lowering of the U.S.’s credit rating.

Fannie Mae, Freddie Mac, and other government-backed lenders were lowered one step from AAA to AA+, S&P reported in a statement issued Monday. Some analysts say the downgrade may force home buyers to pay higher mortgage rates.

“The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government,” S&P said in a statement. “Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government.”

The GSEs own or guarantee more than half of U.S. mortgage debt.

Freddie Mac said that the lower debt rating will cause “major disruptions” in its home-lending by possibly reducing the supply of mortgages it can purchase. It said in a Securities and Exchange Commission filing that the lower rating could hamper home prices and even lead to more home-loan defaults on mortgages it guarantees.

Meanwhile, the Federal Housing Finance Agency on Monday assured investors that securities issued by GSEs are sound. “The government commitment to ensure Fannie Mae and Freddie Mac have sufficient capital to meet their obligations, as provided for in the Treasury’s senior preferred stock purchase agreement with each enterprise, remains unaffected by the Standard & Poor’s action,” said Edward DeMarco, FHFA acting director.

Some analysts and lenders have said they don’t see the fallout from the S&P downgrade on the U.S. and other banks as having such a widespread affect. “It’s likely that once the storm passes, you’ll get an increase in mortgage rates because of this, but it won’t be significant,” says Anika Khan, a housing economist at Wells Fargo.

S&P also announced on Monday that it had lowered its credit ratings for 10 of 12 federal home loan banks and federal farm credit banks from AAA to AA+.

Source: “S&P Lowers Fannie, Freddie Citing Reliance on Government,” Bloomberg (Aug. 8, 2011); “S&P Downgrades Fannie and Freddie, Farm Lenders and Bank Debt Backed by U.S. Government,” Associated Press (Aug. 8, 2011); Freddie Mac Reports $4.7B Loss, Says S&P Downgrade Will Disrupt Mortgage Market,” Associated Press (Aug. 8, 2011); and “FHFA Assures Investors After Fannie, Freddie Downgrade,” HousingWire (Aug. 8. 2011)

Read More:
Will the S&P Downgrade Affect Interest Rates?

Will the S&P Downgrade Affect Interest Rates?

Daily Real Estate News | Monday, August 08, 2011

 

Standard & Poor downgraded the U.S.’s credit rating on Friday, despite Congress reaching a deal in the final hours on the debt ceiling crisis last week. And now many of your customers may be asking: What does this mean for interest rates?“The impact on your wallet of the Standard & Poor’s downgrade of the nation’s credit rating is similar to what would happen if your own credit score declined: The cost of borrowing money is likely to go up,” the Washington Post explained in the aftermath of S&P’s decision.

S&P downgraded the U.S.’s top-notch AAA credit rating for the first time in history, moving it down one notch to AA+; the rating reflects a downgrade in S&P’s confidence in the U.S. government’s ability to repay its debts over time. It’s not clear, however, whether S&P’s downgrade will instantly effect rates, analysts say.

The 10-year Treasury note is considered the basis for all other interest rates. And “the downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money,” the Washington Post article notes. “Many consumer loans, such as mortgages, are linked to the yield on Treasurys and therefore would also rise.”

Watch this video with NAR Chief Economist Lawrence Yun for more information.

While consumers who have fixed interest rate mortgages will be immune to any changes in borrowing costs, home buyers shopping for a loan or those with mortgages that fluctuate may see a rise in rates later on, some analysts say.

Mark Vitner, senior economist at Wells Fargo Securities, told the Associated Press that he doesn’t expect the downgrade to drive up interest rates instantly since the economy is still weak and borrowers aren’t competing for money and driving rates higher. However, he expects in three to five years, loan demand will be much higher and then the downgraded credit rating might cause rates to rise.

Analysts are still waiting to see if the other rating agencies, Moody’s and Fitch, follows S&P’s lead in its downgrade of the U.S. credit rating. If so, the aftermath could be much worse, analysts say.

The debt deal reached by Congress last week was expected to save the U.S. from any credit rating downgrade. However, S&P said lawmakers fell short in its deal. Congress’ deal called for $2 trillion in U.S. deficit reduction over the next 10 years; S&P had called for $4 trillion.

Source: “5 Ways the Downgrade in the U.S. Credit Rating Affects You,” The Washington Post (Aug. 8, 2011); Questions and Answers on Standard & Poor’s Downgrading of U.S. Federal Debt,” Associated Press (Aug. 6, 2011); and S&P Downgrade Will Shake Consumer and Business Confidence at a Fragile Time, Economists Say,” Associated Press (Aug. 6, 2011)

Read More

Real Estate OK in Debt Deal But Risks Remain

Commodity prices

Good news bears

Aug 8th 2011, 13:39 by The Economist online

A fall in commodity prices offers some cheer among the market gloom

THE equity markets may be suffering again as investors worry about sovereign debts and a slowing global economy. But the sell-off has also extended into the commodity market, particularly in oil: West Texas intermediate is trading at around $84 a barrel. This is a bearish story that is good news for western consumers. High raw-materials prices acted as a tax rise in the first half of the year; now they are falling the effect will be akin to a tax cut. There is just one caveat. The working assumption is that the recent sharp fall in the oil prices is caused by concerns about a slowing US economy; if it is really due to a sharp slowdown in emerging markets as well, equity markets will really have cause to worry.

Readers’ comments

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Welcome back to Earth !

BRL, you better find a parachute for you…

Deflation, your time has finally come, after 2.5 years of delay

We called it:
http://seekingalpha.com/article/285619-the-debt-downgrade-and-the-summer…

We’re outperforming today as we did all of last week.

I remember in 2008 petroleum peaked in May for their highest price in history. The cause was never explained.

This price exceeded 2004 levels when the Gulf refineries were smashed by a series of Hurricanes notable Katrina and Rita. The prices exceeded the outbreaks of Gulf War 1 and 2 with Iraq and even the 9/11 attacks. The price of oil exceeded Supertankers being attacked by terrorist teams, Iran mining the critical choke point of the Strait of Hormuz where 40% of World travels, Putin’s energy cut offs, or raging piracy off the Somalian coasts.

I want to propose an actor and a plot. Follow the Money. Who has the Wealth and Power and the Means and Motive? The world’s largest exporter of oil is Saudi Arabia.

And in 2008 they saw an opportunity to influence the election of the most powerful office in the world. The Saudis grew tired of Bush and the Republicans. And the Republican Presidential Candidate McCain seem to want to open up a third war front on Iran. The other candidate was named Hussein and may prove to be a tribal brother.

And when your only tool is a hammer, every thing looks like a nail. By reducing oil imports by 5%, the Saudis can affect oil prices world wide instantly and to astonishing effect. The Saudis used their control over oil supply to jigger a shortage, which lead to price spikes 6 months before the election and precipitated the American Great Recession of 2008. John McCain argued their was no recession under Republican leadership and was soundly trounced in the election.

But this Recession snowballed into the Nov 2008 banking crisis, Lehman Bros downfall, the mortgage crisis, AIG insurance crisis, Automaker bankruptcy and the unemployment morass. All because of oil spikes.

An incumbent President’s greatest opponent is the state of the economy in an election year. And the Saudis are again using their hammer this time to LOWER the price of oil to brighten the American economy and re-elect President Obama. We are puppets on a string.

Unfortunately, the law of unintended consequence, the Recession they brought on in 2008 is still around and may be into a double dip. The Saudis are at it again doing their best to suppress the price of oil to promote a recovery.

Surprise, Money is Power! And Economic issues can influence Politics. Strange things happen in election years. Yes, even foreign actors can also pull some stringshmTzic3YT/

Your assertion that the Saudis influenced oil price to rout the Republicans in American presidential election is clever, but simply UNTRUE. The Saudis, or more accurately King Abdullah and the House of Saud, most likely WANTED warmongering hawks in the White House again, so that the US could wipe Iran and its nuclear programmes off the map. Wikileaks showed that King Abdullah, while posturing as an Islamic patriot who wanted the US to moderate its Mideast policies, privately encouraged GWB to attack Iran. This explains the confusion and the disorderliness with which the Saudi diplomatic corps to Washington D.C. have been conducting themselves vis-a-vis the Iranian issue.

And in this day and age, it is unwise to assume that the power to set the price of oil is centralized in Riyadh, Caracas or whatever. Thousands of traders tinker with the price of crude, and other governments can simply flood the market with their strategic oil reserves to drive the price down.

On this blog we publish a new chart or map every working day, highlight our interactive-data features and provide links to interesting sources of data around the we

 

Loan-Limit Deadline Looms

Practitioners are speaking out against proposals in Congress that could potentially devastate sales.

 

July 2011 | By Robert Freedman

 

 

 

 

Vacaville, Calif., is a middle-class outpost on the outskirts of pricey San Francisco and nearby East Bay communities like Walnut Creek. In some parts of the city, homes sell for about $300,000, says local practitioner Jeannette Way, CRS, of Gateway Realty. The vast majority of buyers—up to 90 percent, Way estimates—rely on financing backed by the Federal Housing Administration because the conventional lending market simply isn’t there.But now even FHA lending is at risk because of a proposal floating in the U.S. House of Representatives to change the formula with which loan limits are calculated. It would reset the maximum loan values and could remove the “floor” that keeps FHA limits from dropping to unrealistically low levels—in the case of Vacaville, limits could fall to about $170,000.

“You might as well just wipe the industry away,” says Way, CRS, who also serves as 2011 chair of the NATIONAL ASSOCIATION OF REALTORS®’ Federal Housing Policy Committee. “It just won’t be there anymore.”

Lawmakers are deep into talks about changing limits not just for FHA loans but also for Fannie Mae and Freddie Mac’s conventional conforming loans. Talks are happening now because the current limits expire on Sept. 30, the end of the federal fiscal year.

NAR estimates that reverting to the lower FHA limits on Oct. 1 will impact 612 counties in 40 states and the District of Columbia, with an average loan limit reduction of more than $50,000.

Concern in Moderate Markets, Too

In Plymouth, Mich., not far from Detroit, the area would take a hit similar to what’s expected in Vacaville. “The housing market here would come to a standstill and I’d have to find a new job,” says Claire Williams, ABR, GRI, a practitioner with Remerica Hometown One and 2011 vice chair of the Federal Housing Policy Committee.

In parts of Wayne County, homes cost around $200,000, Williams says. But if the proposal circulating in the House becomes law, the maximum FHA loan amount throughout the county, which includes Detroit, would drop to less than $66,000.

NAR President Ron Phipps has made clear that Realtors® would fight such a drastic drop. “Our housing recovery remains fragile at best,” he said in testimony before the House Financial Services housing subcommittee in May. “Changing the loan limits at this critical time will only restrain liquidity and hamper the recovery.”

Since 2008, the floor has been $271,050 for FHA loans and $417,000 for the government-sponsored enterprises Fannie and Freddie. For expensive areas like San Francisco, loans can go up to $729,750 under the FHA and the GSEs.

It’s the FHA floor of $271,050 that would go away under the House proposal. Loans would be limited to 125 percent of the area median home price, so if the median home price is $175,000, the highest loan the FHA would guarantee would be $218,750. But it gets more complicated than that, because the floor would be calculated based on county rather than metropolitan statistical area.

“Counties across the country would see their loan limits reduced by tens of thousands of dollars,” says Barry Rutenberg, a home builder from Gainesville, Fla., who testified at the same House housing subcommittee hearing as President Phipps.

A Push to Keep Limits As Is

NAR has been fighting for months to retain the existing $417,000 loan limit for Fannie and Freddie loans and the $271,050 limit for FHA loans, along with the higher limits for expensive areas. These limits were enacted two years ago, and were critical in helping to stem the home sales crisis, lawmakers have said. NAR and other groups have rallied around bipartisan legislation written by Reps. Brad Sherman (R-Calif.) and Gary Miller (D-Calif.) to make these limits permanent.

Despite bipartisan support for maintaining stable loan limits, keeping limits where they are will be an uphill battle because of the country’s pressing budget concerns, NAR analysts say. To allay those concerns, industry analysts and academics have made clear that higher limits by themselves don’t cost the government more money than lower limits. In fact, higher loan sizes have actually helped the FHA insurance fund because on a historical basis they’ve performed better than lower-balance loans, according to an internal 2009 FHA audit.

The Cost of Non-Action

If lawmakers fail to act on the Sherman-Miller legislation, and if they don’t pass the House proposal to lower the limits and remove the FHA floor, loan limits for both the FHA and the GSEs would revert to levels that were set in emergency legislation enacted during the financial crisis.

Under those levels, FHA and GSE limits would drop from 125 percent to 115 percent of the area median home price, although limits couldn’t go below the current floors: $417,000 for Fannie- or Freddie-backed loans and $271,050 for the FHA-backed loans. Limits in expensive areas would drop to $625,500 for the FHA and Fannie and Freddie alike.

That’s clearly far better than the House proposal, but NAR will continue to urge lawmakers to support the Sherman-Miller bill. “If Congress does nothing and loan limits revert to the levels in the emergency bill, that’s a far better outcome than other scenarios, including if the FHA floor is removed,” says Way, “especially given the pressure Congress is under to address the federal deficit. But it will still hurt. At least 40 states will see their limits drop, and thousands of households won’t be able to buy. We have to keep fighting to keep loan limits where they are.”

World Debt Guide:  Owe Dear

The Economist online

Our interactive graphic shows how deeply in hock we all are

THE headlines are all about sovereign debt at the moment. But that is only part of the problem. Debt rose across the rich world during the boom, from consumers maxing out credit cards to financial firms taking on more leverage, and the process of reducing it is still at a very early stage.
The interactive graphic above shows the overall debt levels for a wide range of countries, based on data supplied by the McKinsey Global Institute. In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on this map) found the limit in practice when they hit eight-to-ten times GDP.

The debt is also broken down by sector. Note the huge size of Britain’s banks relative to its economy, and the high level of Spanish corporate debt. Note, too, Japan’s vast amount of government debt, not yet a problem but an obvious reason for jitters over the longer term.

Japan has the dubious distinction of topping our sovereign-debt vulnerability ranking below, which orders countries based on their primary budget balance, their debt-to-GDP ratio and the relationship between the yield on their debt and economic growth (if the former is larger than the latter, the debt burden is getting steadily worse). Britain does badly, too, although a tough austerity programme and the long duration of its outstanding debt protect it from a loss of confidence. Here’s the table:

The Fed’s plan of attack

By Kelli Galippo • Jul 21st, 2011 • Category: real estate newsflash

The Federal Reserve (Fed) is ready to dole out additional stimulus if need be ― that includes another round of Treasury bond buying (quantitative easing) or lowering interest rates. In the Fed’s biannual economic report to Congress, they indicated such measures will only be taken if the economy does not significantly improve or if deflation becomes a danger.

Fed representatives believe the second half of 2011 will show signs of an improving economy – more jobs and more sales. In the event they are wrong, stimulus measures are ready to be employed.

first tuesday take: The Fed’s responsibilities are threefold: dispense enough money into circulation, keep the labor market stable and maintain inflation at 2-3%. The efforts thus far to produce a growing jobs market (and thus improve real estate sales of all types) by injecting funds into the banking system through Treasury bond (T-bond) buying have proven less effective than they anticipated.

To complicate matters, 2008 legislation authorized the Fed to pay interest on bank reserves and that return has given lenders incentive to hoard their funds by placing them with the Fed rather than make loans. [For more information regarding the Fed’s purchase of Treasury bonds, see the October 2010 first tuesday article, The Fed purchases Treasuries, fends off deflation and the July 2011 first tuesday article, The Fed’s monetary policy, straight from the horse’s mouth.]

Will another round of Fed T-bond buying get lenders moving? It depends on how confident lenders feel about their pool of potential borrowers compared to the Fed. In the meantime, the Fed must continue monitoring the economy and be prepared to adjust their battle plan accordingly. Dropping interest payments on those 1.8 trillion in bank reserves on deposit with the Fed would quickly get lenders lending. [For more information regarding the Fed’s policies, see the June 2011 first tuesday article, Suspect behavior, why and how the Fed creates a recession.]

Re: “Federal Reserve chief hints at stimulus plan” from Mercury News

– ft

Will Property Tax Increases Stifle Housing?

Daily Real Estate News | Monday, August 01, 2011

 

Despite property depreciation and high foreclosure rates, more county governments nationwide are either planning or have already approved property tax hikes this year.

U.S. markets moving in this direction include Atlanta, Boston, Chicago, and Tucson, along with 35 different municipalities in Utah. Higher tax payments for cash-strapped homeowners, in turn, may generate more foreclosures, while steeper purchase costs could reduce the pool of qualified buyers.

Source: “Will Property Tax Increases Stifle Housing Further?” RealtyBizNews, Donna Robinson (July 31, 2011)

© Copyright 2011 Information Inc.

Read more:

Time to Appeal That Tax Bill?

Deficits

There never was a surplus

Jul 27th 2011

YESTERDAY the White House published a chart that explains how we got from the Clinton administration projection that the government would pay off its entire debt and then build up $2.3 trillion in savings by 2011, to the $10.4 trillion in debt we actually wound up with. Of that $12.7 trillion shift, the Bush tax cuts account for $3 trillion. James Fallows explains: “As the figures demonstrated, the Bush-era tax cuts, extended last year under Obama, were the biggest single policy source of deficit increase over the past ten years. Therefore you can be for reducing deficits, or you can be for preserving the tax cuts, but you cannot rationally be for both.”

I think there’s something else we need to look at in this chart. It’s the very first item at the top of the chart’s right-hand column: the shift in the debt profile that resulted from no policy change at all, but from “Economic and technical changes (eg, lower tax revenues due to recession)”. It’s $3.6 trillion.

In other words, that massive surplus pile of government savings, or sovereign wealth, or whatever you want to call it, simply never existed.* The Clinton administration’s calculations in 2000 that the government would pay off its debt and accumulate savings of $2.3 trillion over the following ten years were wrong. And they were wrong not because of any stupid error or dramatically incorrect theory about the economic world, but simply because they failed to predict that the American economy would experience a financial crisis in 2008, followed by the worst recession since the Great Depression and a historically anaemic recovery. (I assume they failed to predict the 2001 tech-crash recession as well.) The Clinton administration delivered a couple of years of real verifiable budget surpluses in the late 1990s, and if Clintonian levels of taxation and spending had continued, they likely would have generated annual surpluses that would have shrunk the debt by over $2 billion over the decade thereafter. But the forecast that they would have eliminated the debt entirely and replaced it with trillions of dollars in sovereign wealth was a mirage.

This isn’t particularly surprising; we simply don’t know how to make long-term projections about the economy or government revenues that don’t have trillions of dollars worth of error margin on either side. Which is why we need to be careful about budgeting and get our tax rates and our spending more or less in balance over the long term, running surpluses in good years and deficits in bad ones. The Bush tax cuts did the opposite: $3 trillion worth of tax cuts were predicated on the premise that we were returning the people “their” money. As it turned out, the money wasn’t there to return. Even without the tax cuts, the wars, or anything else, the government would have entered 2011 with $1.3 trillion in debt, not $2.3 trillion in savings. Basically, in the grip of careless enthusiasm about the economic future, we borrowed $3 trillion from bond markets and handed it out to citizens in rough proportion to how rich they already were. In the middle of a recovery. This is not a useful thing for the government to do.

* I’ve changed the wording in this paragraph to avoid any potential reader confusion between annual budget surpluses, which Clinton-style budgets would have generated, versus an overall buildup of sovereign wealth rather than debt, which they wouldn’t have. (Incidentally, the fact that we don’t even have a readily available word for a buildup of sovereign wealth in the vocabulary we normally use to talk about the American government seems kind of worth noting.) Additionally, I realise that if we hadn’t had the Bush tax cuts, the entire economic story of the past decade could be different; perhaps we wouldn’t have had the financial crisis. Or maybe we would have anyway. I don’t know, and I think that takes things too far. What I’m trying to say in this post is that when you get a budget forecast that says, hey, over the next ten years we’re going to pay off our entire debt and then some, you shouldn’t go rushing out to spend the money on massive decade-long multi-trillion-dollar tax cuts. Ten-year economic forecasts are not very accurate. Not to mention the fact that your decade-long tax cut will be very hard to repeal at the end of the decade.

Carmakers

The bargaining begins

Jul 26th 2011, 17:55 by P.E. | DETROIT

  • TO BORROW an old baseball cliché, you can’t tell the players without a scorecard, or so it seemed as talks on a new labour contract got under way this week between Chrysler and the United Auto Workers (UAW) union. Negotiators for both sides showed up wearing matching maroon pullovers and there was none of the traditional rhetoric of potential confrontation. Instead of talking about “strike targets,” for example, the UAW’s president, Bob King, has been more likely, lately, to speak of “creative problem-solving.” The American government insisted on a ban on strikes when it gave Chrysler, and its cross-town rival General Motors, billions of dollars of aid in 2009. If the talks between bosses and union leaders reach deadlock, it will go to binding arbitration.

Both sides know that this round of negotiations is anything but business as usual. What happens at the bargaining table over the next six weeks could determine the long-term viability of both the union and Detroit’s Big Three carmakers. The future of all of them was in question just two years ago when Chrysler and GM were forced into Chapter 11 bankruptcy protection, and the third domestic maker, Ford, avoiding that process only by mortgaging its assets. Although the pain was shared widely among stakeholders, workers were especially hard hit, with their union agreeing to a number of concessions that slashed all-in labour costs from around $76 an hour in 2006 to just over $50 today. The UAW reversed decades of tradition and approved a two-tier wage structure in which new hires start at roughly half the pay and benefits of more senior line workers.

That underscores one of the key differences in this year’s round of contract talks. Whereas the negotiations of years past were usually about building wages and benefits, the UAW’s main goal is now simply to hang on to jobs. At Chrysler, for example, the unionised workforce is currently less than a third of what it was a decade ago. The good news for the union is that it has risen by about 2,000, to 23,000, since the maker emerged from Chapter 11 in June 2009.

Less pay, more work
Holding out a carrot, Chrysler says that if the UAW keeps it competitive with the transplants—foreign-owned plants, like the Nissan assembly line in Smyrna, Tennessee, that also pay around $50 an hour—there will be even more work. The maker is looking at more than 300 projects to bring back in house work that it had, over the years, outsourced to suppliers. General Motors will be producing its new Chevrolet Sonic subcompact at a suburban Detroit plant using two-tier workers: the previous Chevy small car had been built in South Korea.

Whereas some American trade unions negotiate cross-industry contracts, the UAW has traditionally had to bargain separately with the domestic carmakers. As always, it hopes that the first agreement it reaches will set a pattern for the rest. However, the Big Three’s management seem less likely to go along with that approach this time, reflecting the increasing differences between the companies.

Ford, in particular, seems ready to press the union for further concessions. Its workers have so far rejected the company’s request to match those accepted by their counterparts at GM and Chrysler. The management of Ford reckon this has left its hourly labour costs several dollars higher than its rivals’. There is no strike ban at Ford, since it did not take federal bail-out money, so there is the potential, in theory, for things to turn nasty. However, Ford has not had a walkout in its American plants since Gerald Ford was in the White House, so the chances of this seem low.

Still fragile
The fragility of Detroit’s Big Three was driven home this week when, on the same day bargaining began, Chrysler and Ford reported lower second-quarter earnings. The numbers were not dire and reflected a variety of factors such as weak spring car sales and some one-off charges. At Ford, these included the cost of scrapping its ailing Mercury brand. Chrysler, meanwhile, would have been more than $180 million in the black but for its decision to pay off its $7.5 billion in American and Canadian government loans six years early, accruing $551 million in non-recurring charges.

The move will save Chrysler significant amounts of money through lower interest rates. It also allowed the maker’s Italian ally, Fiat, to shake off government oversight, and boost its stake in its American partner to 53.5%, a figure it has suggested could soon climb to 70%. Sergio Marchionne, who serves as chief executive of both companies, will shortly announce a streamlining of their worldwide management that will make Fiat/Chrysler look increasingly like a single outfit.

Mr Marchionne also made it clear that even without the government looking over his shoulder. things will not go back to “the days of sin,” when Chrysler, like its rivals, thought any problem could be fixed by tossing more money at it, whether handing out lavish executive bonuses or offering customers huge incentives so factories could keep running despite weak demand. Naturally, Chrysler’s negotiatiors in the union talks will be pushing this theme of austerity. But there seems to be a growing, and welcome, consensus that the best way to motivate workers is to let them share in the industry’s ups, and downs, with an enhanced profit-sharing programme.

Reorganising
An agreement on this could be just what the union needs to go after its top priority other than the contract talks themselves. The UAW’s membership slipped to 323,000 at the end of 2010, down from a 1979 peak of 1.53m. With two minor exceptions, the union has failed to organise workers at the growing number of foreign transplants, which now produce millions of cars, pickups and crossovers annually.

Mr King has warned makers like Toyota, Nissan and Honda that he may call for a global boycott if they continue to resist unionisation efforts, but in the end the UAW’s leader will have to convince workers that it is worth their while signing up and paying their dues. After the huge concessions the UAW has had to make in recent years, employees at the non-union transplants may well wonder what they would gain from joining.

Given all the pressures on both the American Big Three’s management and on the union’s leadership, both sides seem to realise that it is in their interest to work together towards a deal in the coming weeks. The chances of a breakdown, and of a fresh crisis among the carmakers, seem low.

Read on: The car industry’s crisis is over. Its long-term problems are not (Jan 2011)

Dow Plunges Nearly 200 Points as Lawmakers Remain at Odds Over Debt Deal

 

Wednesday, 27 Jul 2011 04:13 PM

 

 
Anxiety about a deadline to raise the nation’s debt ceiling swept across Wall Street on Wednesday and drove the Dow Jones Industrial Average down almost 200 points. With Washington showing no sign it will find a solution, financial planners around the country said their clients were increasingly worried.

The Dow took a sharp drop during the last two hours of trading and closed down for the fourth session in a row. The declines have grown each day. The market turmoil was a sign that consequences of the debt fight were beginning to materialize in earnest.

With six days to go until the Treasury Department’s Tuesday deadline — raise the national borrowing limit or face an unprecedented federal default and unpredictable fallout in the economy — analysts suggested the market would only grow more volatile.

“The longer we go without any type of hope or concrete plans for resolution, the more concerned investors are going to become,” said Channing Smith, a managing director at the financial firm Capital Advisors Inc.
________________________________________________________

‘A Compelling Argument for a Chilling Conclusion’ — S&P
Over one million Americans have heard the evidence for 50% unemployment, 90% stock market crash, and 100% inflation. Be prepared. See the Evidence Now.
_________________________________________________________

While no one was panicking, financial professionals who handle the investment accounts of everyday Americans — college funds, retirement accounts and other nest-eggs — said their customers were growing more worried by the day. One said he had not seen this level of anxiety since the 2008 financial crisis.

“We’re getting a ton of calls,” said Bob Glovsky, president of Mintz Levin Financial Advisors in Boston. “It’s all `What happens if the U.S. defaults? What’s going to happen to me?'”

The Dow finished the day down 198.75 points, at 12,302.55. About half of the decline came between 2 and 4 p.m., when the market closes for the day. It was the worst fall for the Dow since June 1, with 28 of the 30 component stocks losing value.

While the decline was not close to the stomach-churning days of the fall of 2008, when the Dow lurched lower and higher by 700 points some days, there were signs that fear on Wall Street was growing. The Dow fell 43 points Friday, 88 points Monday and 91 points Tuesday, then more than twice that on Wednesday.

“Right now the clouds are gathering,” said Chris Long, a financial planner in Chicago.

Without a deal by Tuesday, the Obama administration has said the government will be unable to pay all its bills, and could miss checks to Social Security recipients, veterans and others who depend on public help. In addition, credit rating agencies could downgrade their assessment of the government’s finances, further unnerving financial markets and perhaps causing interest rates to rise for everyone.

Already, some investors are taking precautions. Richard Shortt, 66, of Somerville, Mass., worries that a default, or even just a downgrade of U.S. debt, could cause bond and stock markets to tumble. Last week he sold about 10 percent of his stock holdings and put the proceeds into a money-market mutual fund.

“It might just be a short-term decline in the markets, but it could last a week or two while this gets resolved,” said Shortt, a semi-retired small business consultant. “If we do get any sort of debt downgrade, even if we avoid a default, that will change the game a bit.”

Financial advisers typically tell their clients not to tinker with their portfolios or try to play a short-term move in the market to their advantage. Of course, leaving investments alone could be a test of patience for the rest of this week.

On Friday afternoon, for example, it’s plausible that Congress could reach a deal in mid-afternoon and send the Dow soaring 300 points in the final hour of trading. It’s also plausible that there’s still no deal and traders decide staying in the market over the weekend is too risky, and send the Dow plunging.

Investors who rode out the financial turbulence in 2008 without rejiggering their portfolios have made up most of their losses. The stock market has almost doubled since its post-meltdown low in March 2009. Many people who withdrew their money from the stock market during the worst haven’t come close to breaking even.

“Trying to adjust to something on a day-to-day basis is how you get hurt,” Glovsky said. “You’ve got to take a long-term approach.”

The memory of the fall of 2008 remains vivid. The Dow plunged 778 points in a single day when Congress surprised investors by rejecting an early version of $700 billion legislation to bail out the nation’s biggest banks.

“We’ve been through this, or something like it,” said Leisa Aiken, a financial planner in Chicago. “I think what we went through in 2008 has toughened clients up a little. They realize that they will get through it if they don’t give in to a knee-jerk reaction.”

This time around, analysts say, the chances of similar turmoil are small but growing. Standard & Poor’s, one of the rating services, has said that “the reverberations of the showdown may be deep and wide — particularly if Washington does not come to a timely agreement on the debt ceiling.”

Bond traders were still betting on a last-minute deal on the debt. The yield on the 10-year Treasury note, which should rise when investors believe there is a greater risk they won’t get their money back, has stayed near 3 percent all month.

Even if Washington sails past the deadline without raising the debt limit, bond traders believe the Obama administration will keep up its interest payments and cut spending on everything else. The resulting shock to the economy and other financial markets would make Treasury bonds a safe place for investors to hide, which could result in lower yields.

For individual investors, experts are cautioning against overreaction.

Financial planner Jim Pearman, a principal in Partners in Financial Planning in Roanoke, Va., said he was telling clients his firm isn’t changing its investments based on a “game of chicken” in Congress.

“You have to make two decisions right when you try to time this thing. One is when you get out, and the other is when you get back in,” he said. “It’s hard to make that. We don’t try.”

One measure of investor concern, the Vix, or volatility index, shot up 14 percent on Wednesday. The tone of the market changed this week, as nervous investors began moving money out of stocks, said Howard Ward, a chief investment officer at asset manager GAMCO.

He said the stock market will likely become more volatile as the weekend nears, and while he said he was not repositioning his portfolio, he admitted: “Right now I’m pretty worried.”

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