The Collapse of the U.S. Economy

Pennsylvania State Workers Go Without Pay

July 30, 2009

World Socialist Web Site - More than half of Pennsylvania’s state employees—some 44,000 workers—received only two days pay last Friday for a pay period that normally covers two weeks. Many workers did not receive any pay at all, because deductions for healthcare, dental and other benefits were taken out in full.

This Friday the other 33,000 state workers will receive no money in their paycheck. State employees have been working without pay since July 1 as a result of the inability of Pennsylvania State Legislature and Governor Ed Rendell to reach a budget agreement...

In addition to state employees, vendors also have not been paid. Many vendors provide social services such as foster care, care for the elderly and disabled, as well as health care and other services. Many of these facilities have been forced to ask their workers to work without pay, lay off workers and cut back on services.

Pennsylvania finished the 2008-09 fiscal year June 30 with a $1.7 billion deficit. This was made up with service cuts, the elimination of 800 jobs, the use of reserve funds and loans. This year the state is facing a multi-billion dollar deficit with the governor and state lawmakers putting forward different versions of how to pay for it.

Rendell, a Democrat, has proposed a $28.8 billion dollar budget that cuts funds for state supported universities, libraries, museums, public broadcasting and other services, while providing a paltry $481 million increase for kindergarten through 12th grade education. The increase in education spending would mainly be used by local school districts to offset property tax increases. In addition, Rendell is calling for an increase in the state income tax rate from 3.07 to 3.57 percent. Democrats in the state house have proposed a slightly higher $29.1 billion budget.

Republicans control the State Senate and are opposed to any increase in the state income tax and instead are calling for a $27.1 billion budget, without the additional funding for public education and with even deeper cuts in social services. The Republican budget would cut spending by 3.6 percent and force the layoff of 3,000 state workers. The Democratic plan would lead to a layoff of at least 800 state workers.

While state workers are working without pay, state lawmakers and their aides are still getting paid. Lawmakers, while technically not receiving a salary, are receiving $158-a-day stipends and are able to claim expenses, while their aides are being paid from a fund set up for this purpose...

CIT Group Board OKs Rescue Loan from Bondholders

July 21, 2009

Associated Press - The board of CIT Group Inc., one of the nation’s largest lenders to small and midsize businesses, approved a deal with major bondholders to keep the company out of bankruptcy, said two people briefed on the talks. CIT will receive a rescue loan from key bondholders hoping to keep it alive long enough to restructure its debt, these people said.

The emergency loan would provide temporary financing to CIT so it could launch a debt exchange offer to free itself from upcoming debt maturities. Under the deal, CIT’s main bondholders would give CIT $3 billion at an initial interest rate of about 10.5 percent, according to a New York Times report.

The deal will not necessarily prevent a bankruptcy filing for the ailing firm, but will give it desperately needed breathing room while it attempts to refinance existing debt. CIT has a $1 billion payment due in August.

The Times said the temporary funding would provide CIT time to launch an exchange of outstanding debt for equity. By swapping debt for an equity stake in the company, CIT would no longer have to pay back the debt, which is essentially a loan. Instead, investors would hold an ownership stake in the company.

CIT has been scrambling to raise $2 billion to $4 billion. The New York-based lender received $2.3 billion from the government’s Troubled Asset Relief Program last fall. That money could be lost if CIT files for bankruptcy protection. The lender faces $7.4 billion in debt due in the first quarter of next year.

CIT’s failure could pose a major threat to the economy, industry representatives have warned. A collapse of CIT could cut off financing just as businesses need it most during the ongoing recession. Its failure could force thousands of companies to cut costs or shut down — driving up unemployment and dashing hopes for an economic recovery.
CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.

CIT Clinches $3 Billion Rescue

July 20, 2009

Reuters - CIT Group Inc has clinched $3 billion of emergency financing from bondholders, keeping the struggling lender out of bankruptcy, a person close to the matter said. The rescue from several big bondholders, including Pacific Investment Management Co (Pimco), has been approved by CIT's board and could be announced on Monday, the source said.

A rescue could allow more time for the 101-year-old lender to small and mid-sized businesses to restructure its debt, and preserve the ability of thousands of businesses to obtain cash needed for day-to-day operations.

Yet several analysts and bankers said it might only delay a bankruptcy filing, in light of skittishness among CIT customers and the New York-based company's inability to readily tap capital markets. "The deal is a negative for bondholders as it does not fix the underlying problem and layers in more secured debt," wrote CreditSights Inc analysts Adam Steer and David Hendler. "Without a viable funding model, we believe CIT may still be at risk of filing for bankruptcy..."

The bondholder group includes Pimco, a unit of German insurer Allianz SE, and other large investors, and is expected to provide financing with a 2-1/2-year term, two people familiar with the matter said. This financing would be backed by unsecuritized CIT assets, which probably exceed $10 billion, one of the sources said. An announcement of the rescue had been expected as early as Monday morning but was delayed by regulatory issues, a person familiar with the matter said. The various sources requested anonymity because the rescue talks are private...

CIT had sought emergency federal funding, but talks with the government broke down last week. The Obama administration appeared to draw a line as to how readily it would bail out troubled companies, following several big corporate bailouts over the last year.

Restructuring experts said CIT has some valuable businesses that could be acquired or survive as part of a scaled-down CIT, including its factoring business. Factors buy receivables, or the right to receive money owed, from suppliers at a discount so that those suppliers can continue to have working capital. CIT gets paid back when retailers sell goods, typically within 90 days...

The bondholder rescue could preserve the government's $2.33 billion investment in CIT from the Troubled Asset Relief Program. CIT became eligible for such financing when it became a bank holding company in December.

A rescue "comes as a great relief" for retailers preparing for the back-to-school and holiday shopping seasons, said Tracy Mullin, chief executive of the National Retail Federation.

Problems at CIT mushroomed two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans. Last week's government decision not to provide aid surprised Peek, leading him to seek help from private investors, one of the people familiar with the matter said.

A bankruptcy would make CIT, with $75.7 billion of reported assets, the largest U.S. financial company to go bankrupt since Lehman Brothers Holdings Inc last September.
CIT has about $40 billion of long-term debt, CreditSights said. It has lost close to $3.3 billion since the end of 2007... The company has been scheduled to report second-quarter results on July 23. It was unclear how the bailout talks might affect the timing of that report.

No Rescue for CIT, Taxpayers Lose $2.3 Billion

July 16, 2009

Reuters Blog - CIT Group Inc. has been advised that there is no appreciable likelihood of additional government support being provided over the near term. The company’s Board of Directors and management, in consultation with its advisors, are evaluating alternatives. The company likely has only one alternative… bankruptcy.

With the fall in CIT’s preferred stock, taxpayers’ money is already lost. According to the WSJ:

U.S. Treasury Department officials believe they will lose their entire $2.3 billion investment in CIT Group Inc., a spokeswoman said, which could mark the first loss of public money injected in banks through the Troubled Asset Relief Program.

According to the World Socialist Web Site:

CIT is a New York-based bank that finances nearly one million small and midsize companies in the U.S. The collapse of CIT’s efforts to secure government relief on Wednesday has left the 101-year-old bank teetering on the edge of bankruptcy and threatens a cut-off of funding to retailers and suppliers. That could result in a wave of bankruptcies and closures, leading to tens of thousands of layoffs.

Obama's Health Care Reform Bill Will Destroy U.S. Jobs and Devastate the Economy

July 17, 2009

NaturalNews - If you want to know why U.S. businesses increasingly outsource jobs to other countries, just add up the cost of doing business in America: As an employer, you have to pay not only higher wages than most other countries, but you also have to pay for the lost productivity and missed days due to the astonishingly poor health of the U.S. workforce.

Now, under the new Obama health care reform bill, you'll have to pay an additional eight percent of your payroll as a new tax to cover the costs of Big Government running its new sick-care system where nobody gets healthy, but everybody gets hammered with new taxes.

As a small business owner myself, I can tell you what this will cause in America: A massive shift of jobs out of the U.S. to other countries where health care costs are more reasonable (and the workers are healthier)...

America, on the other hand, runs a disastrously inefficient health care quagmire. The drug companies are paid monopoly prices on their drugs (enforced by the hopelessly corrupt FDA and FTC), doctors and hospitals are paid ridiculously high fees for services that cost a fraction of the price in other countries, the medical malpractice insurance companies collect a huge premium on everything (driving medical service costs ever higher), and the health insurance companies collect their profits on top of the whole cesspool, employing a literal army of paper pushers who sit in busy rooms, thinking of clever ways to deny payment to health care providers who have spent countless hours attempting to comply with complex billing rules.

CBO Chief Says Democrats' Health Care Proposals Lack Necessary Controls on Spending

July 17, 2009

Washington Post - Congress's chief budget analyst delivered a devastating assessment yesterday of the health-care proposals drafted by congressional Democrats, fueling an insurrection among fiscal conservatives in the House and pushing negotiators in the Senate to redouble efforts to draw up a new plan that more effectively restrains federal spending.

Under questioning by members of the Senate Budget Committee, Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, said bills crafted by House leaders and the Senate health committee do not propose "the sort of fundamental changes" necessary to rein in the skyrocketing cost of government health programs, particularly Medicare. On the contrary, Elmendorf said, the measures would pile on an expensive new program to cover the uninsured.

Though President Obama and Democratic leaders have repeatedly pledged to alter the soaring trajectory -- or cost curve -- of federal health spending, the proposals so far would not meet that goal, Elmendorf said, noting, "The curve is being raised." His remarks suggested that rather than averting a looming fiscal crisis, the measures could make the nation's bleak budget outlook even worse.

Elmendorf's blunt language startled lawmakers racing to meet Obama's deadline for approving a bill by the August break. The CBO is the official arbiter of the cost of legislation. Fiscal conservatives in the House said Elmendorf's testimony would galvanize the growing number of Democrats agitating for changes in the more than $1.2 trillion House bill, which aims to cover 97 percent of Americans by 2015...

Although the House plan to cover the uninsured, for example, would add more than $1 trillion to federal health spending over the next decade, according to the CBO, it would trim about $500 billion from existing programs -- increasing federal health spending overall...

Meanwhile, a growing number of physician groups are also objecting to the House package. Although the chief executive of the American Medical Association pledged yesterday to "help build support" for the legislation, as many as 20 state medical societies have drafted a letter to congressional leaders vowing to fight creation of a government-sponsored health insurance program that could compete with private firms.

Paulson Reveals U.S. Concerns of Breakdown in Law and Order

July 17, 2009

The Independent - The Bush administration and Congress discussed the possibility of a breakdown in law and order and the logistics of feeding U.S. citizens if commerce and banking collapsed as a result of last autumn's financial panic, it was disclosed yesterday.

Making his first appearance on Capitol Hill since leaving office, the former Treasury secretary Hank Paulson said it was important at the time not to reveal the extent of officials' concerns, for fear it would "terrify the American people and lead to an even bigger problem."

Mr Paulson testified to the House Oversight Committee on the Bush administration's unpopular $700bn (£426bn) bailout of Wall Street, which was triggered by the failure of Lehman Brothers last September. In the days that followed, a run on some of the safest investment vehicles in the financial markets threatened to make it impossible for people to access their savings.

Paul Kanjorski, a Pennsylvania Democrat, asked Mr Paulson to reveal details of officials' concerns, which were relayed to Congress in hasty conference calls last year. The calls included discussion of law and order and whether it would be possible to feed the American people, and for how long, according to Mr Kanjorski.

"In a world where information can flow, money can move with the speed of light electronically, I looked at the ripple effect, and looked at when a financial system fails, a whole country's economic system can fail," Mr Paulson said. "I believe we could have gone back to the sorts of situations we saw in the Depression. I try not to use hyperbole. It's impossible to prove now since it didn't happen."

The Oversight committee is investigating the takeover of Merrill Lynch by Bank of America, a deal forged in the desperate weekend that Lehman Brothers failed, and which later required government support because of Merrill's spiralling losses.

Mr Paulson defended putting pressure on Bank of America when it had last-minute doubts about the deal in December. Not to have done so could have rekindled the "financial havoc" the bailout had calmed.

California's Crisis Hits Its Prized Universities

July 18, 2009

Time - California's crisis continues while Gov. Arnold Schwarzenegger and legislative leaders inch slowly toward agreement on the deep cuts necessary to close California's massive $26 billion budget shortfall. Now, even as the state continues to pay its bills with IOUs, the University of California, the nation's leading public university, is being forced to cut its budget by $813 million - or 20%. It is highly unlikely that these cuts will be reduced by a budget agreement in Sacramento.

UC Berkeley will see recruitment of faculty drop from the normal 100 positions a year to 10. At 28,000-student UC San Diego, also ranked with Berkeley and UCLA among the world's top 20 research universities, recruitment has been halted. More than 300 UC scientists have issued a white paper warning Schwarzenegger that the sharp reduction endangers the 10-campus system's position as the premier public university in the United States and could have a negative impact on California's future economic growth. According to UC officials, the cut in state funding brings the "amount of state investment in the University down to $2.4 billion - exactly where it was in real dollars a decade ago." During the same time period, spending on state prisons has more than doubled to $11 billion...

Marc Faber: Next Stimulus Will Be Worse (Click for Video)

July 16, 2009

Money News - Some economists think that another bubble is what’s needed to get the economy moving again. Gloom, Boom and Doom publisher Marc Faber said this is ridiculous, and that the Federal Reserve — which he holds responsible for creating the housing bubble — wants to do it all over again. The central bank should not encourage excessive credit growth, Faber tells Moneynews.com’s Dan Mangru in an exclusive interview.

Between 2000 and 2007 the total U.S. credit market debt increased at five times the rate of nominal gross domestic product.

Unfortunately, Faber said, the next bubble is already here. This time it’s government spending and fiscal deficits that Faber thinks will double the government’s debt during the next six years or less.

Health Legislation Might Bar Some from Public Insurance

July 15, 2009

Kaiser Health News - President Barack Obama and leading Democrats have stressed that people who like their employer-sponsored insurance would be able to keep it under a health care overhaul. They haven't emphasized the flip side, however: that people who don't like their coverage might have to keep it.

Under the main Democratic health bills that are being debated in Congress, many people with job-based insurance could find it difficult or impossible to switch to health plans on a new insurance exchange, even if those plans were cheaper or offered better coverage. The restrictions would extend to any government-run plan.

The provisions could change, and there are a few exceptions: Workers would be allowed to buy insurance through the exchange if their job-based coverage gobbled up too much of their incomes or was too skimpy. Also, under the proposal by Democrats in the House of Representatives, people could get insurance through the exchange if they paid their entire premiums, a cost that would be prohibitive for many.

Democratic lawmakers and administration officials say the restrictions are crucial to maintaining a strong employer-based insurance system, which covers 158 million Americans.

Critics argue, however, that the rules run counter to suggestions that a health care overhaul could provide people with a broader choice of insurance options. The restrictions, they say, could be especially unfair to some lower-income workers who are enrolled in costly job-based insurance. Also, they warn that the rules could hurt the proposed public plan by limiting enrollment.

Jonathan Oberlander, an associate professor at the University of North Carolina at Chapel Hill, said, "The rhetoric is that Americans will gain new alternatives, but the reality is that they are putting up firewalls that are going to restrict the access of people with employer-sponsored insurance to the exchange."

One result, he said, is that any public plan would be substantially smaller and less powerful than many backers are envisioning.

James Capretta, a fellow at the Ethics and Public Policy Center, a conservative research center in Washington, said that the government was "essentially telling people you have to take your employer-based plan. . . . I think that's a huge issue."

Most individuals would have to carry insurance or pay fines under the congressional proposals.
Much of the debate is driven by cost. Under the proposals before Congress, people who could go on the exchange include the uninsured, the self-employed and those who aren't offered employer-sponsored coverage. Small businesses also would be allowed to use the exchange.
Most individuals who use the exchange would get government subsidies. Limiting the number of people who could use the exchange, therefore, would hold down the cost.

At a "town hall" meeting on health care July 1, Obama said that any overhaul must "fix what's broken about the system, and that means permanently bringing down costs and giving more choice for everyone."

The exchange, he said, would benefit small businesses and the self-employed, as well as workers at firms that don't provide coverage.

Linda Douglass, the communications director of the White House Office of Health Reform, said that the president "believes that health reform must be built upon our current employer-based system" and the exchange "is there to provide security and affordable options to Americans who don't have those options now."

To prod employers to continue to offer coverage, the bills would require most of them to provide insurance to workers or pay penalties. Employers also would have to meet minimum coverage standards and help workers buy insurance.

As a result, job-based coverage is most likely to be the least expensive option for many people, especially those who don't qualify for government subsidies.

However, those who might get better deals on the exchange would have trouble transferring if they already have employer-sponsored insurance. Under one leading Senate bill, individuals who are offered employer-sponsored coverage could switch to the exchange only if their shares of the premiums exceeded 12.5 percent of their incomes or their plans didn't meet minimum coverage standards.

Under the House Democrats' legislation, workers who are eligible for job-based insurance could go on the exchange only if their costs were more than 11 percent of their incomes. People who were willing to pay their entire premiums, without subsidies, also could enroll through the exchange under the House bill.

Lawmakers and some health care analysts say that legislation has to create barriers around the exchange to protect the stability of the employer-provided insurance market. Without them, younger and healthier employees, they say, might find cheaper options on the exchange, leaving older and sicker workers in their employers' plans — and driving up their costs.

"We are trying to provide as much choice as possible and trying to honor the president's promise to protect the employer-based system so that if people have coverage they like they'll get to keep it," said Sen. Sheldon Whitehouse, D-R.I., a member of the health committee.

Jacob Hacker, a Yale University professor of political science, said the debate reflected "a delicate dance" in which lawmakers were trying to give some people access to the exchange while preserving the employer-based insurance system. "To my mind," he added, the House bill "errs too far on the side of making it hard for workers to obtain coverage through the exchange."

Richard Curtis, the president of the Institute for Health Policy Solutions, a nonprofit research group, said that some lower-income workers with employer-sponsored coverage could wind up paying bigger chunks of their incomes for coverage than those with the same incomes who weren't offered job-based insurance. The reason: The latter group would be able to get subsidized coverage through the exchange.

That sends an unfortunate signal, he said, to people who are struggling to pay for employer-sponsored insurance. "So the message to them is, 'Congratulations . . . so now you get to continue paying several times as much as your next-door neighbor who has access to highly subsidized coverage in the exchange,' " he said. "On its face, it's just not fair."

Democrats’ $540-Billion Tax Hike Will Force People into Government-Run Health Care

July 14, 2009

CNSNews - The Democrats’ proposed $540-billion tax hike to help pay for President Obama’s health care reform plan will boost costs for small businesses and thus force more people into the president’s proposed government-run health insurance program...

Obama Promises Government Health Care in Weeks

July 14, 2009

Bloomberg - President Barack Obama may rely only on Democrats to push health-care legislation through the U.S. Congress if Republican opposition doesn’t yield soon, two of the president’s top advisers said.

“Ultimately, this is not about a process, it’s about results,” David Axelrod, Obama’s senior political strategist, said during an interview in his White House office. “If we’re going to get this thing done, obviously time is a-wasting...”

House Democrats today unveiled legislation totaling about $1 trillion that would expand health care to millions of Americans over the next decade by raising taxes on the wealthiest households. The Senate has yet to agree on a bill as Democratic lawmakers struggle to get Republican support...

Time is running short for the House and Senate to pass the legislation before their August recess, the deadline Obama has set. In entertaining the possibility of a party-line vote on health care, Emanuel cited “reconciliation,” a parliamentary procedure that a dominant party can use to prevent the other party from blocking legislation.

“It’s not the first priority, or the second priority, or the third priority. We think we can get it done without it,” he said...

The White House and Congress are trying to agree on ways to cover the estimated 46 million uninsured Americans and rein in health-care costs.

U.S. Budget Gap Exceeds $1 Trillion

July 14, 2009

Bloomberg - The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion, the first time that the gap for the period surpassed $1 trillion, Treasury figures showed today in Washington...

House Democrats Will Seek Massive $540 Billion Tax Increase

July 13, 2009

CNSNews - House Democrats announced late yesterday that they will seek a massive increase in federal income taxes to help pay for the national health-care reform proposal that President Obama is urging Congress to enact this summer...

Obama Adviser Says U.S. Should Mull Second Stimulus

July 7, 2009

Bloomberg - The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama...

U.S. State Budget Crises Fuel Massive Spending Cuts: Deadlines Threaten Government Shutdowns

July 1, 2009

World Socialist Web Site - State legislatures in many states across the US worked late Tuesday to push through budgets containing massive spending cuts, as five states—California, Arizona, Mississippi, Pennsylvania and Indiana—faced the possibility of at least partial shutdowns if their legislatures were unable to reach agreement.

The overarching theme of this budget scramble is the drive to impose the burden of the budget crises on the backs of the working class and poor. With states’ populations already facing record unemployment levels, state workers are facing wage cuts, mandatory furloughs and layoffs. At the same time, social services—in demand more than ever due to the worsening recession—are being targeted for draconian cuts.

As late as Monday afternoon, 32 of the 46 states whose fiscal year ended midnight Tuesday did not have budgets signed by their governors. States are grappling with deficits totaling a collective $121 billion, and all states but Vermont require that their budgets be balanced.

Personal income tax, which accounts for more than a third of state revenues, dropped by 26 percent in the first four months of 2009, according to the Albany, New York-based Rockefeller Institute of Government.

With consumer spending down significantly, sales tax revenues have also fallen. Many state budget proposals include new sales taxes and increases in existing ones—measures that will disproportionately hit working families and the unemployed already struggling to keep up with the cost of housing, food, medical bills and other basic necessities.

Since 2002, government shutdowns have hit only five states. The current rash of threatened budget crises has been fueled by the deepening recession. “It’s a lot of states that are coming down to the wire,” Todd Haggerty, a research analysis with the National Conference of State Legislatures, told the Los Angeles Times. “It’s far more than we’ve seen in the past, and it’s because of the state of the economy.”

President Obama has made clear that the government will not step in to alleviate the crisis facing the states. In May, Treasury Secretary Timothy Geithner rejected a federal bailout of the largest US state, California, which now faces a $24.3 billion budget deficit. Geithner demanded instead that California and other states “put in place reforms that will restore their creditworthiness.”

With its refusal to take any action to stanch the budget crisis, the Obama administration is signaling that the price of this “creditworthiness” is to be paid by the American population, with a massive drive for cuts in jobs and social services at the local level.

The ruling class is seizing on the budget crisis and its subsequent bloodletting as the model for a permanent reduction in working-class living standards...