Economy -- Feeling The Credit Crunch

November 5, 2007

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Jeremy Richmond, and Ali Frick

ECONOMY

Feeling The Credit Crunch

Charles Prince III resigned yesterday as chairman and CEO of Citigroup, the world's largest bank, after the corporation sustained massive losses due to "large exposure to bad loans." Robert Rubin, who served as Treasury Secretary during the Clinton administration, will take over for Prince to "reassure Wall Street" in the wake of Citigroup's announcement that it will write-down, or acknowledge the depreciation of its assets, by between $8 and $11 billion. This amount comes on top of the $5 billion in losses that Citigroup has already suffered in the subprime mortgage crisis. In return for overseeing Citigroup during a year in which its stock value dropped by 31 percent, Prince will receive a severance package worth an estimated $40 million. Merrill Lynch also announced recently that it was incurring a $7.9 billion, subprime-related write-down. These write-downs -- admissions that banks "woefully overestimated the value of assets on [their] books" -- are evidence of the expanding shadow that the sup-prime mortgage crisis is casting over the economy. Initially thought to be a problem for only a few overly-aggressive hedge funds, the subprime crisis has since spread to the world's largest banks, the American housing market, and gradually, the entire American economy.

THE SUBPRIME'S CRUNCH: Recently, Federal Reserve Chairman Ben Bernanke said that the housing slump will continue be a "significant drag" on U.S. growth. While the United States is not yet in a recession, there are some troubling economic indicators. "Spending on new homes and renovations dropped by 20.1 percent in the third quarter -- the largest decrease in a year, and the seventh quarterly decline in a row." Wage growth remained low, while the amount of debt looming over the average American family has continued to rise. President Bush has pointed to recent job growth as an indicator of a sound economy, however, "job growth is still weak by historical standards and perhaps most importantly, remains concentrated in just a few industries." The subprime housing bust has already lead to massive losses for U.S. home owners, with total losses in "real estate wealth expected to range from $2 trillion to $4 trillion."

ADMINISTRATION'S RESPONSE: Members of the Bush administration have displayed a lack of understanding about the breadth and seriousness of the subprime crisis. There are more than 2.8 million families with mortgages that reset in 2007 or 2008. The average family could see their mortgage payments rise an additional $10,000. When trouble was first noticed in March, Bernake dismissed the potential ramifications of the looming problems: "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." In July, Treasury Secretary Henry Paulson echoed Bernake, saying, "I don't think it [the subprime mess] poses any threat to the overall economy." As recently as September, the Federal Reserve was reporting that "outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited." Yet the massive loses sustained by Citigroup and Merrill Lynch are proof that the affects of the subprime crisis have extended beyond the small group of lenders initially thought to be affected. Paulson recently stepped up the administration's rhetoric, declaring that we must ensure "yesterday's excesses" aren't repeated. Yet during his tenure as CEO of Goldman Sachs, Paulson profited by gorging on subprime bonds. "He should admit to having been involved in creating the problem that we have now," said Rep. Brad Miller (D-NC).

IMPACT ON MINORITIES: While the administration was ignoring the emerging subprime crisis and continuing to claim the economy was strong, large numbers of low-income families and minorities were suffering its affects. "[S]ubprime loans have been particularly prevalent in predominantly black and Hispanic neighborhoods" in recent years. "Nearly half of blacks who bought a house in 2005 or 2006 ended up with a high-interest mortgage, compared with 13 percent of white home buyers, according to an Atlanta Journal-Constitution analysis of federal mortgage data." Correspondingly, "[s]ixty-nine percent of black Americans feel the United States is in a recession, while only 42 percent of white Americans feel the same way." Among black home buyers "making more than $100,000 a year, 41 percent got a subprime mortgage, compared with 7 percent of whites in the same income category." While the subprime crisis has been expanding for more than six months, only in the last few weeks -- as the problem has increasingly afflicted corporate America -- has the administration started to take appropriate steps to remedy the situation.

HUMAN RIGHTS -- RICE'S TOP LEGAL ADVISER REFUSES TO CALL WATERBOARDING TORTURE, EVEN ON U.S. CITIZENS: During a debate on international law at University College London last month, John Bellinger, the senior adviser on international law to Secretary of State Condoleezza Rice, "declined to rule out the use of the interrogation technique known as waterboarding even if it were applied by foreign intelligence services on US citizens." Asked by University College London international law professor Philipe Sands if he could "imagine any circumstances in which the use of water boarding on an American national by a foreign intelligence service could be justified," Bellinger hedged, saying "one would have to apply the facts to the law, the law to the facts, to determine whether any technique, whatever it happened to be, would cause severe physical pain or suffering." Sands reacted with bewilderment, saying "that just strikes me as very curious." Bellinger did acknowledge that the U.S. government's evasiveness on whether waterboarding is torture "makes it very difficult to explain to the world and to provide the important assurance" that America's post-9/11 policies are within the confines of international law.

ENERGY -- CONGRESS LOOKS TO INCREASE STATES' EMERGENCY FUEL FUNDS: As oil prices reach an all-time high and winter approaches, Americans are facing greater difficulty heating their homes. "House and Senate lawmakers are expected to announce today they have agreed in conference committee to raise emergency fuel funds for states to $431 million from $181 million for this fiscal year, which started Oct. 1. ... The funds are part of a $2.1 billion federal program that gives states grants to help supplement the fuel needs of low-income families." Most of the aid is expected to go to New England, where the average cost of heating oil this winter could reach $2,200; comparatively, the average cost between 2000 and 2005 was only $900. The prices have risen quickly. Heating oil prices in Vermont and New Hampshire, for example, "have jumped to $3.07 a gallon from 2.65 in less than a month." Energy costs are ballooning across the board, with gasoline prices surging as well. A Lundberg Survey showed average price per gallon last Friday at $2.96, "up 16 cents from the previous survey two weeks earlier."

ENVIRONMENT -- REPORT ANALYZES NATIONAL SECURITY IMPACTS OF CLIMATE CHANGE: A new report sponsored by the Center for Strategic and International Studies and the Center for a New American Security warns that "climate change could be one of the greatest national security challenges ever faced by U.S. policy makers," in part due to "the threat of dramatic population migrations, wars over water and resources, and a realignment of power among nations." The report "examined three scenarios, ranging from the consequences of an expected temperature increase of 2.5 degrees Fahrenheit by 2040, to the catastrophic implications of a 10-degree rise by the end of the century." A chapter written by John Podesta and Peter Ogden of the Center for American Progress "analyzes the foreign policy and national security implications of the most moderate of these scenarios over a 30-year timeframe," noting heightened risk of state failures, increased U.S. border stress due to effects of climate change in Mexico and Canada, and "strain on the capacity of the United States -- and in particular the U.S. military -- to act as a 'first responder' to international disasters and humanitarian crises."

Sen. Arlen Specter (R-PA), the ranking Republican on the Senate Judiciary Committee, said he would support the nomination of Attorney General nominee Michael Mukasey, despite being "bothered" by Mukasey's refusal to say whether waterboarding is torture.

"Despite their rhetoric about not wanting to hand President Bush another 'blank check' for the Iraq War, Democrats appear poised to give him exactly that -- enough cash to keep the war going full steam for as long as six months, no strings attached," by funding the war "in short bursts."

Premiere Radio Networks, a subsidiary of Clear Channel Communications, is expected to announce that it is extending Glenn Beck's contract, "valued at $50 million over five years." The new contract would make Beck "the third highest-paid talk radio host" after Rush Limbaugh and Sean Hannity.

President Gerald Ford questioned President Bush's warrantless surveillance program, according to journalist Thomas DeFrank. "I would never do it," Ford said. "It surprises me they worry that they think they have to do it. I was dumbfounded when I heard they were. I didn't think it was necessary. Where does he get his advice?"

"Most people are ready to make personal sacrifices to address climate change, according to a BBC poll of 22,000 people in 21 countries. Four out of five people said they were prepared to change their lifestyle - even in the US and China, the world's two biggest emitters of carbon dioxide."

"A medical transport service overcharged the federal government nearly $2 million to evacuate sick or injured people during Hurricanes Katrina and Rita, a government audit found."

And finally: "Every little boy dreams of owning his own real-live fire truck, but only a few -- including Rep. Adam Putnam (R-Fla.) -- ever make the childhood fantasy a reality. Putnam scored a shiny vintage fire engine from none other than Rep. Dennis Hastert (R-Ill.), who apparently decided he no longer needs the antique wheels for parades and campaign events since he'll be retiring soon."

The House's chief administrative officer will "buy credits that will offset the impact of 30,000 tons of carbon belched into the atmosphere by the U.S. Capitol's antiquated, coal-burning power plant every year."

NEW YORK : "New York Mayor Michael Bloomberg on Friday called for a national pollution tax that he said would be the best way to reduce greenhouse-gas emissions and fight global warming."

ENVIRONMENT: "As of last week, 728 mayors...have signed what amounts to a Kyoto Protocol for U.S. municipalities."

CIVIL RIGHTS: States resist federal government's efforts to create national ID card system.

THINK PROGRESS: Bush 41 gets his news from Fox News; warns that more Bushes may run for public office.

BODY POLITIK: Adviser to Secretary of State Condoleezza Rice: Pakistan's crackdown on dissent is a "small favor" that makes "Iraq look pretty good."

AMERICA BLOG: Echoing the right-wing, Pakistani President Pervez Musharraf uses "judicial activism" and the threat of terror attacks to justify suspending the Pakistani constitution and imposing martial law.

DAILY DISH: The Washington Post editorial board wants to exonerate war crimes?

"In the last few weeks, the world has been inspired by the courage of the Burmese people. Ordinary men and women have taken to the streets in peaceful marches to demand their freedom and call for democratic change."
-- President Bush, 10/19/07, referring to Burma's recent anti-democratic crackdown

VERSUS

"Mr. Bush has said nothing in public about General Musharraf's latest action."
-- New York Times, 11/5/07, referring to Pakistan's recent anti-democratic crackdown

Think Progress

Feeling The Credit Crunch

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