October 24, 2007

Today In Bad Economic News...

A significant writedown and a bracingly grim housing forecast has driven the Dow down more than 150 points, slightly up from this morning's nosedive of 200.

AP: "Merrill said it wrote down $7.9 billion in fixed-income instruments called collateralized debt obligations and from defaulting subprime mortgages -- more than the $5 billion writedown the investment bank estimated earlier this month. The result was a net loss for the quarter of $2.3 billion." Merrill Lynch & Co. is the nation's largest investment firm, and its worse-than-expected third-quarter losses bode ill for the rest of the sector as it grapples with an apparently worsening housing implosion.

Lending arms are clamming up to stanch the bleeding of the subprime lending crisis, effectively putting the brakes on the housing market. MarketWatch reports that "sales of existing homes and condos fell 8% in September to the lowest level in at least eight years as inventories of single-family rose to a 20-year high." In other words, there is quite a bit more property out there than there are buyers. Those who are managing to sell are doing so at reduced prices.

While there is some concern that home sales are being "artificially depressed" -- as one analyst put it -- by panic at the credit crunch, the one-two punch of investor losses and credit cutoff for many Americans means a longer-term negative trend.

Wall Street expects the Federal Reserve to cut rates by a quarter-point next week to 4.5 in order to stave off a recession that some analysts believe is now inevitable. Bloomberg News reports that the yield on Treasury two-year notes is at a two-year low, and that investors are now flocking to more secure investments. The Treasury auctioned $20 billion in two-year notes today, and plans to auction $13 billion in five-year notes tomorrow.

The Dow is in for a tough week, as the government's report on new home sales tomorrow is also expected to be grim. The insurance industry is predicting that the roaring brushfires in Southern California will be among the most expensive in history. Meanwhile, oil prices are up on a surprising drop in U.S. stockpiles ahead of the home heating season.

OMB Director Jim Nussle dismissed worries about recession in an interview on CNBC today, but said that the economic slowdown was negatively impacting federal revenue, MarketWatch reports. CNBC's Web site promises a transcript later today of the roundtable with President Bush's economic team.

Polls show financial anxiety and pessimism on the rise among Americans, despite the overall health of the economy. A new report brings more negative news for those struggling most: The rate of student loan defaults are significantly higher than previously thought. Nearly 10 percent of borrowers default on their loans within the first four years after graduation, according to independent think tank Education Sector's analysis of government-compiled statistics. In September, Education Secretary Margaret Spellings announced that the default rate was 4.6 percent.

BusinessWeek asked for and did not receive official comment on the disparity. Not surprisingly, the odds of default grow with the size of the loan. A report from the College Board released on Monday found that tuition costs were outpacing inflation and, consequently, available federal aid. The price tag of enrollment at a four-year private institution jumped 6.3 percent to $23,712.

Rising costs have created a boom in the largely unregulated private lending sector. As more graduates enter the workforce already saddled with five-figure debt, momentum has grown in states and in Congress to avert a widespread financial crisis among the nation's youngest workers.

"Once the economy starts to slow, you're going to see a large increase of these people in bankruptcy court," Robert Manning, a professor at Rochester Institute of Technology, told AP.

Education Sector also found wide disparities on racial lines among defaulters. Black students were five times more likely to default on loans than their white counterparts, and nine times more likely than their Asian counterparts, BusinessWeek reports.

Posted at 2:21 PM
Posted to: Bush Administration, Economy, Education
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