US Defaulting thread...

[ThatDamnGood]

Jail for Unpaid Debt a Reality in Six States (Strategic Default Pushback Watch) naked capitalism


Monday, June 14, 2010
Jail for Unpaid Debt a Reality in Six States (Strategic Default Pushback Watch)

On Friday, I put up a short post alerting readers to a PR campaign apparently just getting off the runway to impress the average American of his moral obligation to honor his debts. The rise of strategic defaults (and perhaps even more important, the increasingly positive coverage it is getting in the media and the blogosphere) is generating heartburn among the banking classes.

One of the tidbits we pointed to was a YouTube snippet of Peterson Institute spokesman David Walker speaking fondly of debtors’ prison and the need to “hold people accountable when they do imprudent things.” A couple of readers complained that I was being unfair, while others said they’d be happy to see the return of debtors’ prison as long at the executives at the TBTF banks were at the head of the queue.

Be careful what you wish for. Reader bill clued us in that people who fall behind on debt payments are being incarcerated in six states. While this is generally short-term, it is nevertheless a troubling development, since these are all involve private contracts and look to be an abuse of the court system. From the Minneapolis-St. Paul Star Tribune:

It’s not a crime to owe money, and debtors’ prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts. In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.

Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.

Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.

In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man “to indefinite incarceration” until he came up with $300 toward a lumber yard debt.

“The law enforcement system has unwittingly become a tool of the debt collectors,” said Michael Kinkley, an attorney in Spokane, Wash., who has represented arrested debtors. “The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it.”

How often are debtors arrested across the country? No one can say. No national statistics are kept, and the practice is largely unnoticed outside legal circles. “My suspicion is the debt collection industry does not want the world to know these arrests are happening, because the practice would be widely condemned,” said Robert Hobbs, deputy director of the National Consumer Law Center in Boston.

Debt collectors defend the practice, saying phone calls, letters and legal actions aren’t always enough to get people to pay…..

Taxpayers foot the bill for arresting and jailing debtors. In many cases, Minnesota judges set bail at the amount owed.

In Minnesota, judges have issued arrest warrants for people who owe as little as $85 — less than half the cost of housing an inmate overnight. Debtors targeted for arrest owed a median of $3,512 in 2009, up from $2,201 five years ago.

Those jailed for debts may be the least able to pay….

The laws allowing for the arrest of someone for an unpaid debt are not new.

What is new is the rise of well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect.

Three debt buyers — Unifund CCR Partners, Portfolio Recovery Associates Inc. and Debt Equities LLC — accounted for 15 percent of all debt-related arrest warrants issued in Minnesota since 2005, court data show. The debt buyers also file tens of thousands of other collection actions in the state, seeking court orders to make people pay.

The debts — often five or six years old — are purchased from companies like cellphone providers and credit card issuers, and cost a few cents on the dollar. Using automated dialing equipment and teams of lawyers, the debt-buyer firms try to collect the debt, plus interest and fees. A firm aims to collect at least twice what it paid for the debt to cover costs. Anything beyond that is profit….

Todd Lansky, chief operating officer at Resurgence Financial LLC, a Northbrook, Ill.-based debt buyer, said firms like his operate within the law, which says people who ignore court orders can be arrested for contempt…

Few debtors realize they can land in jail simply for ignoring debt-collection legal matters. Debtors also may not recognize the names of companies seeking to collect old debts. Some people are contacted by three or four firms as delinquent debts are bought and sold multiple times after the original creditor writes off the account….

A year ago, Legal Aid attorneys proposed a change in state law that would have required law enforcement officials to let debtors fill out financial disclosure forms when they are apprehended rather than book them into jail. No legislator introduced the measure…

One afternoon last spring, Deborah Poplawski, 38, of Minneapolis was digging in her purse for coins to feed a downtown parking meter when she saw the flashing lights of a Minneapolis police squad car behind her. Poplawski, a restaurant cook, assumed she had parked illegally. Instead, she was headed to jail over a $250 credit card debt.

Less than a month earlier, she learned by chance from an employment counselor that she had an outstanding warrant. Debt Equities, a Golden Valley debt buyer, had sued her, but she says nobody served her with court documents. Thanks to interest and fees, Poplawski was now on the hook for $1,138….

She spent nearly 25 hours at the Hennepin County jail….

The next day, Poplawski appeared before a Hennepin County district judge. He told her to fill out the form listing her assets and bank account, and released her. Several weeks later, Debt Equities used this information to seize funds from her bank account. The firm didn’t return repeated calls seeking a comment.

“We hear every day about how there’s no money for public services,” Poplawski said. “But it seems like the collectors have found a way to get the police to do their work.”

Yves here. The story has many examples of people who were jailed, and more detail on the debt collectors.

 

[below_freezing]

the US economy is just a ponzi scheme bubble. people are betting their money in for a return before the whole thing collapses, and everyone knows it. soon there will be capital flight from the US, hyperinflation, collapse of the US economy, overthrow of the US government and civil war. Just need 1 perturbation to shake investor confidence.

 

[ThatDamnGood]

They start out broke, like country like graduate.
They cannot but default.

is-the-college-debt-bubble-ready-to-explode: Personal Finance News from Yahoo! Finance

Kelli Space, 23, graduated from Northeastern University in 2009 with a bachelor's in sociology — and a whopping $200,000 in student loan debt. Space, who lives with her parents and works full-time, put up a Web site called TwoHundredThou.com soliciting donations to help meet her debt obligation, which is $891 a month. That number jumps to $1,600 next November.

In creating the site, Space, of course is hoping to ease her financial burden, but it's "mainly to inform others on the dangers of how quickly student loans add up," she said. So far she's raised $6,671.56, according to her site.

Space is just one example — albeit an extreme one — of a student loan bubble that may be about to burst. Over the last decade, private lenders, abetted by college financial aid offices, eagerly handed young people hundreds of thousands of dollars to earn bachelor's degrees. As a result of easy credit, declining grants and soaring tuitions, more than two-thirds of students graduated with debt in 2008 — up from 45 percent in 1993. The average debt load is $24,000, according to the Project on Student Debt.

In some respects, the student loan crisis looks remarkably like the subprime mortgage crisis. First, outstanding student loan debt has ballooned: It grew roughly four-fold in the last decade to $833 billion as of June — surpassing outstanding credit-card debt for the first time.

Secondly, defaults have soared amid a difficult job market. In 2008, the most recent year for which data are available, nearly 3.4 million borrowers began repayment, and more than 238,000 defaulted on their loans. The number of loans that went into forbearance or deferment (when borrowers receive temporary relief from payments) rose to 22 percent in 2007, from 10 percent a decade earlier, according to The Chronicle of Higher Education. Over a 15-year period, default rates range from 20 percent for federal loans to 40 percent on loans to students who attend for-profit schools, The Chronicle found.

Just as lenders offered easy no-money-down mortgages to unqualified borrowers during the housing boom, private student loan firms offered instant online approval for up to 100 percent of college costs to students, in some cases for four consecutive years. In early 2007, half of loans made by Sallie Mae, one of the industry's biggest players, were to students with no co-signers, according to Mark Kantrowitz, founder of informational Web site finaid.org.

As tuition costs have outpaced the caps on federal loans, more families have turned to private loans, which carry higher interest rates and stricter repayment rules. Last year private lenders supplied about $10 billion in loans (compared with $100 billion in federal loans). A study by the College Board found about a third of graduates in 2007-2008 had private loans. About two dozen private lenders offer student loans, and their business is growing at 25 percent annually, after a temporary decline amid the recent credit crisis, according to finaid.org.

Space, for instance, took out $12,000 in federal loans and borrowed $189,000 from private lender Sallie Mae. In an email interview, Space said she spent the money on tuition and room and board for four years; two summer semesters; a three-month study abroad program in Ireland; and books for three semesters. Some $20,000 of her debt is accrued interest. (Interest rates on her loans range from 3 percent to 9 percent.)

Space worked throughout high school and college at restaurants, retail stores and a nonprofit firm. But her savings dissipated quickly at Northeastern, where annual costs are $49,452. She's now looking for a second, part-time job. (Northeastern officials did not respond to an interview request.)

You'd think would-be borrowers would understand the impact of borrowing that much for college, but Space says that's not the case. "I think it is essential for young people to have someone sit down and explain how [loans] affect your credit, how much the debt will be with interest, and how this will truly change life later on. Many people say loaded things, like, 'go to the best school you can get into,' or 'student loans are considered good debt.' Solely following this advice led me to the place I'm at today," she said in an email.

A Sallie Mae spokeswoman said she couldn't comment on Space's situation, but called that level of borrowing "extremely rare." Sallie Mae requires its private student loans to be certified by the school's financial aid office to ensure that the amount borrowed is no more than the cost of attendance, less any other financial aid received. She added that Sallie Mae reviews the applicant's and co-signer's financial situation before approving a loan.

But Kantrowitz says Sallie Mae forked over a shocking amount of money. "To borrow $50,000 in the first year of college is already excessive. But where was the (lending) rationality in the second year when the student was borrowing another $50,000?" says Kantrowitz, adding that students who must borrow more than $10,000 a year for an undergraduate education should find a cheaper school, or start at community college.

Zac Bissonnette, a senior at the University of Massachusetts and author of the new book "Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents," agrees that there's plenty of blame to go around.

"It's profoundly stupid, but at the same time it takes a village to screw up that bad," he says. "I support the personal responsibility argument, but if you're 18 and the first person in your family to go to college, how can people absolve the college or the lender of responsibility?"

While the housing collapse's impact was wide-ranging — wreaking havoc on a multitude of industries and market participants — the primary losers in this debacle are the borrowers. Lenders can't repossess a college degree, and changes to the bankruptcy law in 1984 and 2005 mean borrowers can't charge off their obligations the way they can shed credit-card, mortgage or even gambling debt when they file for bankruptcy. (Just 29 of the 72,000 borrowers in bankruptcy in 2008 were able to prove "undue hardship" and have their student loans discharged, according to Kantrowitz.)

On the upside, federal student loans carry some consumer protections: lower interest rates; payment forbearance or deferment in the event of unemployment; income-based repayment programs; and forgiveness programs for public service careers. But the government will garnish the wages, income tax refunds and social security and disability checks of defaulters. Private loan terms are more treacherous, with fewer options for payment deferral, and fees and penalties for missing payments. Lenders can also get a court order to garnish wages. For its part, Sallie Mae says it has set up customized workouts for thousands of financially distressed customers.

"With this kind of debt on your credit record, you won't be able to get a car loan or a mortgage, and you'll have difficulty renting an apartment," says Kantrowitz. Some borrowers have lost jobs because the collection agencies called them at work illegally. Indebted grads are also less likely to go to graduate school, and delay getting married, having children and saving for retirement.

Kantrowitz says he doesn't think the student loan industry will implode, but its "cascading effect" on household finances and the U.S. economy will become noticeable by the year 2020. That's why he and educators, as well as some lenders, support legislation to reform bankruptcy laws.

In April, the Private Student Loan Bankruptcy Fairness Act of 2010 was introduced in the House of Representatives and The Fairness for Struggling Students Act was introduced in the Senate. Both would modify the bankruptcy law to allow certain educational debts to be eliminated. (Borrowers would still be on the hook for federal loans, which are funded by taxpayer dollars.)

"There are some people who go to school and live a very high lifestyle and graduate with a lot of debt, who could potentially attempt to get the debt discharged right after they get a job," says Kantrowitz. "But the bankruptcy code has enough anti-abuse provisions, and judges have enough discretion, that they could prevent someone from doing that."

The upshot would likely be tighter borrowing standards and higher interest rates to reflect the additional risk, making loans less accessible to low-income households.

Meanwhile, securitization of student loans throws a twist into potential legislation. In May, Standard & Poor's came out with a report suggesting that restoring bankruptcy protection would have a negative impact on the private loan asset-backed securities market, although it called the magnitude of the impact "uncertain."

Kantrowitz, however, says the effect would be minimal: "In aggregate, we're talking about $1 billion a year — but relative to all the lending that goes on, it's not that much."

As for Space, she says she is determined to pay off her debt and regrets the path she took to get her degree: "Everyone from Barack Obama to Bill Gates keeps pushing a college education as the way to secure one's economic future. That is a view that should be heavily qualified."

 

[ThatDamnGood]

Ignored in US MSM and by Americans with full bellies who come here and spread lies.

 

[ThatDamnGood]

Unfortunately, Chinese media dun cover this and others because of US appeasers unlike in Russia.

'American Dream' withers as tent cities mushroom in promised land - International Business Times

The nation that once gloated over its ability to feed the entire world is seeing an explosion of poverty: The number of people surviving on food stamps is rising as biting unemployment refuses to abate, personal incomes have been falling while the debt bubble is inflating with each passing day and, in a more startling representation of the grim reality, tent cities are mushrooming as more and more people are pushed out of their ‘underwater’ homes.

"Homelessness is skyrocketing, tent cities are popping up everywhere and countless numbers of American families are experiencing the soul-crushing despair that comes from desperately trying to hang on for month after month after
month", writes Michael Snyder in Daily Markets website.

Snyder narrates the woeful tale of people who once had stable careers and were part of the ‘American Dream’ ending up in tent cities after their houses were gone and life’s saving exhausted. Some battle it out in scrap yards while others, afflicted with illnesses, have no hope of getting medical aid.

And the whole misery is not just a product of the recession which followed the credit crunch, experts say.

The root of the troubles goes a long way back indeed, starting from the waning of the nation's industrial might, the closing down of factories and the slow and steady disintegration of the American middle class which started over a generation ago.

"The United States has lost approximately 42,400 factories since 2001. The greatest economic machine in the history of the world is literally having its guts ripped out, and most of you kept voting in jokers who supported all of this deindustrialization," writes Snyder.

America is hurting everywhere -- from a Himalayan debt bubble to ballooning trade deficit, and from skyrocketing overseas military spending which is supposed to keep the show of strength from unraveling to the diminishing ability to influence global financial policy making.

"In 1985, the U.S. trade deficit with China was 6 million dollars for the entire year. In the month of August alone, the U.S. trade deficit with China was over 28 billion." Yet the U.S. efforts at G-20 to get trade surplus countries to agree to a plan to rebalance their economies came to naught.

As American wealth flows to those trade surplus economies every month, efforts to boost domestic jobs are failing flat out. As many 1.41 million Americans filed for personal bankruptcy in 2009, a 32 percent increase over 2008.

And the number of homes taken over by banks touched a new record in September when it crossed the 100,000 mark for the first time. The number of homeless people is rising at a staggering pace.

"If you really want to see some soul-crushing desperation, go check out the flood tunnels under the city of Las Vegas. But do not do this alone – it is very dangerous down there. Today, there are hordes of “tunnel people” who call those dark tunnels home. Nobody knows for sure how many people are down there (some people say that it is well into the thousands), but everyone agrees that the number is rapidly growing.

"But in many major U.S. cities there are no flood tunnels to go to. Instead, in many areas of the United States huge tent cities have sprouted," writes Snyder.

The crisis could worsen over time. Moody's Economy.com, chief economist Mark Zandi estimated earlier this year that
roughly 15 million American homeowners owe the bank more than their home is worth. The alarming fact is fact many homes are worth only half of their mortgages.

It's not just homes that the poor are deprived of, but food as well, according to recent reports.

A new report by the US Department of Agriculture (USDA) said a staggering 15 percent of US households, or 17.4 million families, were too poor to buy adequate food last year. More than 42 million Americans are now on food stamps, meaning they will not be able to buy food if the government did not give aid.

The report showed the number of families classified as “food insecure” has more than tripled since 2006.

“Virtually the sole cause of food insecurity in America—the largest producer of agricultural and food products on the planet—is lack of money. The poverty rate has risen sharply over the past three years, with an estimated 50 million people living below the official poverty line, which grossly underestimates the income needed for basic necessities,” points out Patrick Martin from the Centre for Research on Globalization.

However, he also says the USDA report on poverty did not make the front pages of mainstream newspapers. He says the news was relegated to inside pages in the Washington Post, while there was nothing in the New York Times.

"In a society which took seriously the value of human life and the future of its children, the spectacle of 50 million people at risk of hunger, including 17 million children, would be a social emergency. Given that the United States once boasted of its ability to feed the planet, the indifference to the growth of hunger at home is a national scandal," writes Martin.

But in reality the society has been changing too, shedding its reputation for being equitable and egalitarian.

Studies have shown that the fabled American middle class has been shrinking for a long time, and the annual incomes of the bottom 90 per cent of the U.S. households have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. Meanwhile, the income of the top one percent has tripled.

"From foreclosures to unemployment to household debt to bankruptcies, the American middle class is under assault -- and America is in danger of becoming a Third World nation," Arianna Huffington wrote in Huffington Post in August.

To cap it all, there is apparently a policy paralysis that could worsen the plight of the afflicted people, experts say.

"Now, because of the horrific hole that our politicians have dug for us, we are faced with some heartbreaking choices. For example, right now the U.S. Congress is deciding whether or not to extend long-term unemployment benefits for the nation’s jobless. Extending those benefits through the end of February would add another $12.5 billion to the U.S. national debt. But not doing it would cut off the only lifeline that many Americans have just in time for the holidays," writes Snyder

 

[ThatDamnGood]

http://www.reuters.com/article/idUSTRE6B26BR20101203?WT.tsrc=Social%20Media&WT.z_smid=twtr-reuters_biz&WT.z_smid_dest=Twitter

Euro at session peak vs dollar on Bernanke QE report

NEW YORK | Fri Dec 3, 2010 4:43pm EST

NEW YORK (Reuters) - The euro rose to a session peak against the dollar in late afternoon New York trade on Friday after a report on the CBS website that Federal Reserve Chairman Ben Bernanke did not rule out buying more than $600 billion of bonds in further quantitative easing.

 

[gambit]

the US economy is just a ponzi scheme bubble. people are betting their money in for a return before the whole thing collapses, and everyone knows it. soon there will be capital flight from the US, hyperinflation, collapse of the US economy, overthrow of the US government and civil war. Just need 1 perturbation to shake investor confidence.

Really...???

Igor Panarin - Wikipedia, the free encyclopedia

Prediction of the USA's collapse in 2010

In the summer of 1998,[34] based on classified data about the state of the U.S. economy and society[35] supplied to him by fellow FAPSI analysts,[5] Panarin forecast the probable disintegration of the USA into six parts in 2010 (at the end of June – start of July 2010, as he specified on 10 December 2008),[36] following a civil war triggered by mass immigration, economic decline, and moral degradation. He forecast financial and demographic changes provoking a political crisis in which wealthier states will withhold funds from the federal government, effectively seceding from the Union, leading to social unrest, civil war, national division, and intervention of foreign powers.[5] Panarin sees the task of the world elite as not letting the USA follow the Yugoslavian model of disintegration; it is desirable that it follows the Czechoslovakian model of disintegration so that everything goes calmly and peacefully.

We are now a couple weeks away from 2011 and for me a bonus is on the way. Signs are not good that Obama and his fellow socialists/communists will be in power after 2012. In 2011, you will eat these words, just as Panarin is doing right now...

 

[ThatDamnGood]

http://www.nytimes.com/2010/12/05/us/politics/05states.html?_r=1&pagewanted=1

Mounting Debts by States Stoke Fears of Crisis
By MICHAEL COOPER and MARY WILLIAMS WALSH

¶ The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.

¶ While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.

¶ “It seems to me that crying wolf is probably a good thing to do at this point,” said Felix Rohatyn, the financier who helped save New York City from bankruptcy in the 1970s.

¶ Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.

¶ Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.

¶ But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

¶ Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.

¶ Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate.

¶ “I don’t like to play the scared rabbit, but I just don’t see where the end of this is,” he added.

¶ Resorting to Fiscal Tricks

¶ As the downturn has ground on, some of the worst-hit cities and states have resorted to fiscal sleight of hand to stay afloat, helping them close yawning budget gaps each year, but often at great future cost.

¶ Few workers with neglected 401(k) retirement accounts would risk taking out second mortgages to invest in stocks, gambling that the investment gains would be enough to build bigger nest eggs and repay the loans.

¶ But that is just what Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.

¶ It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs.

¶ But it is the short-term budget woes that nearly all states are facing that are preoccupying elected officials.

¶ Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with i.o.u.’s last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring.

¶ Now, just as the downturn has driven up demand for state assistance, many states are cutting back.

¶ The demand for food stamps has been rising significantly in Idaho, but tight budgets led the state to close nearly a third of the field offices of the state’s Department of Health and Welfare, which take applications for them. As states have cut aid to cities, many have resorted to previously unthinkable cuts, laying off police officers and closing firehouses.

¶ Those cuts in aid to cities and counties, which are expected to continue, are one reason some analysts say cities are at greater risk of bankruptcy or are being placed under outside oversight.

¶ Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.

¶ This time is expected to be no different. The federal stimulus money increased the federal share of state budgets to over a third last year, from just over a quarter in 2008, according to a report issued last week by the National Governors Association and the National Association of State Budget Officers. That money is set to run out next summer. Tax collections, meanwhile, are not expected to return to their pre-recession levels for another year or two, given that the housing market and broader economy remain weak and that unemployment remains high.

¶ Scott D. Pattison, the budget association’s director, said that for states, next year could be “the worst year of this four- or five-year downturn period.”

¶ And few expect the federal government to offer more direct aid to states, at least in the short term. Many members of the new Republican majority in the House campaigned against the stimulus, and Washington is debating the recommendations of a debt-reduction commission.

¶ So some states are essentially borrowing to pay their operating costs, adding new debts that are not always clearly disclosed.

¶ Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.

¶ Many governments are delaying payments to their pension funds, which will eventually need to be made, along with the high interest — usually around 8 percent — that the funds are expected to earn each year.

¶ New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christie deferred paying the $3.1 billion that was due to the pension funds this year.

¶ It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.

¶ State and local pensions — another form of promised debt, guaranteed in some states by their constitutions — face hidden shortfalls of as much as $3.5 trillion by some calculations. And the health benefits that state and large local governments have promised their retirees going forward could cost more than $530 billion, according to the Government Accountability Office.

¶ “Most financial crises happen in unpredictable ways, and they hit you when you’re not looking,” said Jerome H. Powell, a visiting scholar at the Bipartisan Policy Center who was an under secretary of the Treasury for finance during the bailout of the savings and loan industry in the early 1990s. “This one isn’t like that. You can see it coming. It would be sinful not to do something about this while there’s a chance.”

¶ So far, investors have bought states’ bonds eagerly, on the widespread understanding that states and cities almost never default. But in recent weeks the demand has diminished sharply. Last month, mutual funds that invest in municipal bonds reported a big sell-off — a bigger one-week sell-off, in fact, than they had when the financial markets melted down in 2008. And hedge funds are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.

¶ Of course, not all states are in as dire straits as Illinois or California. And the credit-rating agencies say that the risk of default is small. States and cities typically make a priority of repaying their bond holders, even before paying for essential services. Standard & Poor’s issued a report this month saying that the crises that states and municipalities were facing were “more about tough decisions than potential defaults.”

¶ Change in Ratings

¶ The credit ratings of a number of local governments have improved this year, not because their finances have strengthened somewhat, but because the ratings agencies have changed the way they analyze governments.

¶ The new higher ratings, which lower the cost of borrowing, emphasize the fact that municipal defaults have been much rarer than corporate defaults.

¶ This October, Moody’s issued a report explaining why it now rates all 50 states, even Illinois, as better credit risks than a vast majority of American non-financial companies.

¶ One reason: the belief that the federal government is more likely to bail out a teetering state than a bankrupt company.

¶ “The federal government has broadly channeled cash to all state governments during recent recessions and provided support to individual states following natural disasters,” Moody’s explained, adding that there was no way of being sure how Washington would respond to a bond default by a state, since it had not happened since the 1930s.

¶ But some analysts fear the ratings are too sanguine, recalling that the ratings agencies also dismissed the possibility that a subprime crisis was brewing. While most agree that defaults are unlikely, they fear that as states struggle with their growing debts, investors could decide not to buy the debt of the weakest state or local governments.

¶ That would force a crisis, since states cannot operate if they cannot borrow. Such a crisis could then spread to healthier states, making it more expensive for them to borrow, if Europe is an example.

¶ Meredith Whitney, a bank analyst who was among the first to warn of the impact the subprime mortgage meltdown would have on banks, is warning that she sees similar problems with state and local government finances.

¶ “The state situation reminded me so much of the banks, pre-crisis,” she said this fall on CNBC.

¶ There are eerie similarities between the subprime debt crisis and the looming municipal debt woes. Among them:

¶ ¶Just as housing was once considered a sure bet — prices would never fall all across the country at the same time, conventional wisdom suggested — municipal bonds have long been considered an investment safe enough for grandmothers, because states could always raise taxes to pay their bondholders. Now that proposition is being tested. Harrisburg, the capital of Pennsylvania, considered bankruptcy this year because it faced $68 million in debt payments related to a failed incinerator, which is more than the city’s entire annual budget. But officials there have resisted raising taxes.

¶ ¶Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance at Northwestern University, and Robert Novy-Marx, an assistant professor of finance at the University of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.

¶ ¶The states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists, reminding some analysts of the lead up to the subprime crisis.

¶ Now states are bracing for more painful cuts, more layoffs, more tax increases, more battles with public employee unions, more requests to bail out cities. And in the long term, as cities and states try to keep up on their debts, the very nature of government could change as they have less money left over to pay for the services they have long provided.

¶ Richard Ravitch, the lieutenant governor of New York, is among those warning that states are on an unsustainable path, and that their disclosures of pension and health care obligations are often misleading. And he worries how long it can last.

¶“They didn’t do it with bad motives,” he said. “Ninety-five percent of them didn’t understand what they were doing. They did it because it was easier than taxing people or cutting benefits. We’re getting closer and closer to the point where we can’t do that anymore. I don’t know where that is, but I know we’re close.”

 

[ThatDamnGood]

70% of US economy is consumer spending...
bye bye Ms American Pie...
I drove my Chevy into Afghanistan and ...

YouTube - Stress & Worry: American Dream is 'to pay my rent'

 

[below_freezing]

as 70% of the US GDP is just spending, that means the real value of their economy and its production is 70% lower than reported. It seems the case that US economy is just a bloated sack with less substance than our economy!

 

[ThatDamnGood]

as 70% of the US GDP is just spending, that means the real value of their economy and its production is 70% lower than reported. It seems the case that US economy is just a bloated sack with less substance than our economy!

US GDP/GNP is for reference only.

 

[ThatDamnGood]

Guest Post: From Bad To Worse: The Economy Today, And Tomorrow | zero hedge

Anything to avoid the word “inflation”, and most especially the word “hyperinflation”. The problem with the demand argument is that while there is growing need for materials in places like China, this is certainly not at all the driving force behind the explosion in prices. A good way to gage this is by examining the BDI (Baltic Dry Index).

The BDI measures the cost of shipping raw materials across the ocean as well as the amount of goods being shipped. It is one of the few economic indicators that cannot be manipulated by international banks or governments. A dramatic drop in the BDI shows a sharp decrease in demand for global shipping and thus reveals a slowdown in the overall economy. This is exactly what occurred at the beginning of the credit crisis in 2007-2008. However, the BDI can also be measured in comparison with the values of stocks and commodities. Under normal conditions of supply and demand, if the BDI were to drop (or deflate), then the value of most stocks and goods should also drop. This has not been the case, as the below graphs illustrate:

BDI vs. S&P 500

BDI vs. CRB Index

BDI vs. Gold

BDI vs. Copper

BDI vs. Soy

Now, there have been small deviations in the past between stocks and commodities versus the BDI, but usually it is the BDI which leads the deviation, and not the commodities. As the final year of every graph shows, there has been a significant decoupling of the price of stocks and goods when compared with the amount of shipping of those goods. To put it simply; demand is low, all over the world, yet prices continue to climb skyward at an incredible pace. This suggests to me that we are seeing the beginning of hyperinflation, mostly in the U.S., and in no way a recovery.

 

[below_freezing]

definitely saw hyperinflation; it's happening everywhere actually. we've been hit hard in some sectors especially vegetables. decoupling from the USD is vital, or we'll die to the US's inflation. Thanks for the introduction to BDI, very useful information.

 

[ThatDamnGood]

More crap. The devil is always in the details.

The Fed has already been bailing out the states... and with as usual, exceptional american ingenuity to conceal it while giving the appearance that the american states have been able to hold it together on their own. Exceptional MOFOs tactics. Wonder if Zhongguo stats game have achieve US levels of sophistication.

Then there is the use of 'NGOs' like Moodys, S&P etc to destabilise its own allies in the EU to make the dollar look good.

Faros Special Report On The Severe Consequences Of The "Build America Bond" Program Expiration | zero hedge

Today's tax compromise in the US extended all expiring Bush tax cuts by two years. The story though does not end here. The most important thing missing from the tax extension was the expected extension of the Build America Bond program. The Build America Bond program has been the municipal market's saviour over the past 18 months. Since their introduction in April 2009 more than 174 Bio USD of taxable securities have been sold by municipalities backed by the program, one where the US pays 35% of the interest due on the debt.

This week we learned that the New York State Pension Plan is facing a 70 Bio USD deficit; in addition, New York State decided they would hold back 2 Bio USD from New York City. We also noted that the State of California issued a State of Fiscal Emergency at a time when their expenses will out-pace their revenues over the next 18 months by around 26 Bio USD. Governor Schwarzenegger stated that "There is no money, except when the economy comes back." We do not see the economy coming back soon.

Last week Sheila Bair, the Chair of the Federal Deposits Insurance Corp. wrote in an editorial in the Washington Post that "relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in US government obligations." Explaining that the US needs to cut its debt or the next financial crisis may start in the US. Today's tax-cut extension does not help.

 

[ThatDamnGood]

Still on track for dollar hegemony end in 2012/2013.

U.S. fiscal health worse than Europe's: China adviser | Reuters

U.S. fiscal health worse than Europe's: China adviser
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3:35pm EST

BEIJING (Reuters) - The U.S. dollar will be a safe investment for the next six to 12 months because global markets are focused on the euro zone's troubles but America's fiscal health is worse than Europe's, an adviser to the Chinese central bank said on Wednesday.

Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.

"For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans.

"But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines."

U.S. Treasury prices fell sharply for a second day on Wednesday as the proposed tax deal sparked concerns over the government's ability to service its massive debt burden. Moody's Investors Service said it is worried the tax cuts could become permanent, hurting U.S. finances and credit ratings in the long run.

In Europe, Ireland's parliament passed the first in a series of resolutions underpinning its 2011 austerity budget on Tuesday, marking the first step in a lengthy approval process. But investors are now worried that the region's debt crisis could engulf Portugal next, or Spain.

China has a big stake in the performance of dollar assets. The country holds the world's biggest stock pile of foreign exchange reserves at $2.64 trillion and an estimated two-thirds of that is invested in dollar assets, including U.S. Treasuries.

The State Administration of Foreign Exchange (SAFE), an arm of the central bank, is responsible for managing the reserves.

Li was speaking on the sidelines of a financial forum in Beijing. He sits on the monetary policy committee of the central bank but does not have real influence on key decisions on interest rates and the yuan.

ROBUST CHINA GROWTH

China's annual economic growth will exceed 9.5 percent in 2011 and will remain above 9 percent through the coming decade, Li told the forum.

The long-term growth outlook would be underpinned by the need to continue investing in infrastructure, he said.

"China has a vast domestic demand that is untapped, and that's the fundamental difference between China now and Japan in 1985," Li told a forum.

In addition, China would have to spend a lot on "low carbon" industries, lending more support for the economy, he said.

Li also predicted that global commodities prices, including oil, would rise sharply next year.

Speculation about a Chinese interest rate rise in the coming days has intensified after an official newspaper flagged the chances of an imminent move amid expectations of rising inflation in November.

Asked whether the central bank should raise interest rates, Li said it should take steps to protect depositors.

Concerns about hot money inflows would be a factor when the central bank starts considering whether to raise interest rates, he added.