CFNAI down to -2.57

The Chicago Fed National Activity Index was −2.57 in September, down from −1.61 in August. Most of the index's decline in September was driven by the steep drop in industrial production, as reflected in the contribution of the production and income category of indicators. However, all four broad categories of indicators made negative contributions to the index in September. 

The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

OFHEO STATEMENT

Sent: Thursday, December 06, 2007 12:04 PM
To: OFHEO-NEWS@LISTS.OFHEO.GOV
Subject: OFHEO STATEMENT

Contact Corinne Russell (202) 414-6921 Stefanie Mullin (202) 414-6376
For Immediate Release December 06, 2007
	STATEMENT OF OFHEO DIRECTOR JAMES B. LOCKHART
“As Director of OFHEO, the regulator of Fannie Mae and Freddie Mac, I believe that the foreclosure prevention initiative announced by President Bush is a major step forward. I thank Secretary Paulson and Jackson and everybody from the private-sector involved. Fannie and Freddie are the largest investors in AAA subprime mortgage backed securities. They hold $160 billion of these securities and they are the major buyers of the refinanced subprime mortgages. This plan is a win-win for homeowners, neighborhoods, investors and the markets. But more has to be done. Fannie Mae and Freddie Mac have played an extremely important role in supporting the mortgage market as all the problems erupted this summer. Since then, they have been buying and securitizing almost $100 billion a month in mortgages. Their market share of all new mortgages has grown from 38 percent last year to over 60 percent. We need to make sure that they will continue supporting the mortgage markets. That is why we need now, as President Bush and the Secretaries have just said, GSE reform to strengthen the regulator of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. For the last six years Congress has been considering GSE reform legislation. Given the problems faced by Fannie Mae and Freddie Mac and the current market conditions, it is time to act to ensure that they will be here to support the mortgage market, especially affordable mortgages for lower income families, now and in the future.” ###
OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

What The Fed Didn't Tell You?

As expected the Fed cut rates by 1/4 of 1%, or 25 basis points, but behind the headlines, the WSJ reported that the Fed pumped in more money into the financial system since the "credit crisis" took hold in August. This injection suggests that lending institutions are still wary to lend as the short-term debt markets are still sluggish (mortgage apps may be up in the past few weeks, but funding sources have dried up, even in commercial where Greenstreet Commercial (8th largest commercial lender) closed operations this past week).

NEW YORK -- The Federal Reserve pumped a total $41 billion to the U.S. financial system in three separate operations Thursday, amounting to the largest injection of funds since the liquidity crisis took hold this summer.

The size of the injection may come as a surprise, coming just a day after the central bank delivered its second consecutive rate cut. Wednesday's 25 basis point cut -- which brings the target rate to 4.5% -- follows a half percentage-point drop in September, which was intended in part to help ease stubbornly high lending rates in the interbank market.

The New York Federal Reserve's Web site announced a one-day repurchase of $12 billion, alongside a $21 billion seven-day, and a $8 billion 14-day operation. The total exceeds the $38 billion injection back in August that marked the largest contribution to the market in a single day since the World Trade Center attacks in 2001.

"This morning's combined RP package of $41 billion is significantly larger than we had expected based on our tentative reserve projections," said Lou Crandall, chief economist with Wrightson ICAP.

Understanding The 2007 Federal Deficit Numbers

One of the more interesting articles today that made me step-back from all of the "doom and gloom" was from economist, Jeff Thredgold, and his weekly assessment of the economy. What was interesting was the fact that the 2007 federal budget deficit, ending September 30th, was $163 billion. So what? Well.. That number represents 1.2% of the GDP for the US, which is HALF the average deficit for the past 40 years. Jeff argues that the tax cuts have increased revenues (a point of contention for any Dem vs. Rep) into the Federal Gov't and significantly decreasing our budget deficit relative to the GDP:

Progress continues to be made in reducing the U.S. government’s income versus spending imbalance, commonly known as the annual budget deficit. Additional progress from this point, however, may be more difficult to come by.

The federal budget deficit for fiscal year 2007, which ended on September 30, registered $163 billion. The number resulted from government spending of a mind-boggling $2.73 trillion ($2,730,000,000,000) versus revenue of $2.57 trillion ($2,570,000,000,000).

One would think that having more than $2.5 trillion to spend over 12 months might be enough…

…not the case

Still, good news saw the deficit decline by 34% versus the $248 billion shortfall of the prior year, and down more sharply versus deficits of $318 billion and $413 billion of the two prior years.

More relevant is the deficit as it relates to the size of the U.S. economy. The $163 billion deficit represented 1.2% of GDP, roughly half the average deficit of the past 40 years.

One would also like to think that recent budget deficits have been declining because members of Congress and the Administration have taken a more responsible approach as to how they spend our money…

…also not the case

American voters removed Republicans from Congressional control last November because they saw too many spending excesses…too many pork barrel spending projects…too much waste.

Democrats took control with promises of greater spending (and pork) transparency…

…what a disappointment!

.. I argue that when you cut tax rates, especially on incomes, capital gains and on dividends, you simply generate more tax revenue. When you boost tax rates, you simply generate less revenue. History is replete with one example after another.

People are intelligent. They make rational decisions as to their investments. For example, they elect to recognize capital gains when tax rates are lower, and sit on possible capital gains when tax rates are higher. The government has never figured this out.

Overall tax revenues climbed by $785 billion since tax rates were cut in 2003, the largest four-year revenue gain ever. Individual tax receipts have jumped more than 46% over the past four years, with the wealthy paying most of the additional taxes.

Doom and Gloom within a month?

On light volume with consumer confidence waning and the Fed minutes indicating that they "might" have known that a credit crunch was coming, the market technicals indicate a continual downturn in the markets. In the news today, National home sales continue to slump; the San Diego housing starts are down 37 percent from last year; another capital management firm must liquidate a multi-billion dollar fund; and, a 21-year veteran of the US Treasury Dept and NASA offered one of the gravest predictions I've seen thus far. Let's hope he's only half right:

On Market Predictions in the Current Chaotic Environment.

by Richard C. Cook

Global Research, August 28, 2007

No one can predict how deep the decline in Western economies that is underway will go, because there is so little transparent information. Within the U.S., the government is hiding the severity of the crisis in order to prevent a collapse of consumer confidence.

Realize that the problem does not lie on the side of production. Global industry has the capacity to produce a huge quantity of goods and services. There is even a glut in some sectors, such as automobiles, textiles, IT, and other consumer products.

Rather the problem, as with the Great Depression, is that purchasing power at the consumer level is lacking. In the U.S., purchasing power, as measured by M1, is already in a recession-level decline. The causes are the high level of consumer debt, high cumulative levels of taxation on the dwindling middle class, and the tragic erosion of wages and salaries from job outsourcing.

In the absence of purchasing power, the Federal Reserve has chosen the strategy of trying to outrun collapse by creating inflation. This is the meaning of the bail-outs that are going on. It’s an attempt to devalue debt at the macro level. It’s a hidden tax on everyone but the super-rich. Everyone else is poorer today than they were yesterday.

How long this can go on is unpredictable. It’s another bubble following on the housing and asset bubbles that are already bursting on a daily basis before our eyes.

I don’t see any responsible analyst who foresees any better outcome than a recession that would see the DJIA at a level of 8000-8500 within a few months. Again, maybe the Fed’s printing presses can hold this level of decline at bay for a while longer, but I doubt it.

There are major players in the markets who see an even steeper decline coming even sooner. Some say as soon as a month.

There is also a real chance of an eventual depression-level contraction. How much of a chance, I don’t know. This conceivably could lead to a total collapse of consumer markets, economic paralysis, and widespread homelessness and starvation. Yes, even in the U.S. Agribusiness, bio-fuel conversion, seedless mega-farming, the disappearance of family farming, and the recent disastrous weather conditions place everyone at risk.

At some point, the federal government, at a minimum, has to step in with New Deal-type relief measures. Whether the Bush administration has that capability is doubtful. Look at New Orleans. They may even try to cover everything up by starting a war against Iran. Are they that crazy? Who can say?

There are also rumors going around that there are plans to allow the markets to be crashed by a terrorist event so as to divert blame. I have gotten no reliable confirmation of these rumors, though there are parties placing what people in the markets are calling “bin Laden”-type bets similar to, but bigger than, the “puts” that were placed before the original 9/11.

These types of bets have been placed in the U.S., European, and Japanese markets that assume a stock market crash of fifty percent within the next five weeks. A report was just carried, I’m told, on CNBC.

Some have said the culprit may be China, but it makes no sense for the Chinese to crash the markets while holding U.S. dollars. Others say it is hedge funds at work to try to drive down the markets in a self-fulfilling prophecy.

But a fifty percent market decline? That’s just not conceivable. Even the hedge funds do not have that much power. The federal plunge protection team—known as the “men in black” by floor traders—would never allow them to do something so disastrous. This has caused some to speculate that the “men in black” are parties to the bets.

These remarks probably give some indication of the chaos going on right now in the U.S. and world economies. The only real solution is a new world financial system based on the concept of credit as a public utility. This is what should be implemented to replace the present system of institutionalized usury.