economics

Fannie Mae, the government-sponsored lending giant, posted an unexpectedly large $2.2-billion loss in the 2008's first quarter.

How could one be less optimistic than a Wall Street housing analyst? Ask Fannie Mae, which just told analysts they'd strayed a little too far onto the sunny side. Expected to lose 81 cents a share on its gigantic portfolio of mortgages and securities, today the institution announced it had lost $2.57 a share, thanks to plummeting house prices and soaring delinquencies. Markets were taken aback. Fannie Mae, along with brother institution Freddie Mac, buys more than 75% of the mortgages in the United States. When it sneezes, your house gets double pneumonia.

Congress grills pharmaceutical firm Baxter International and the Food and Drug Administration about tainted drugs that killed 81.

For those scared or curious enough to pay attention, this week's hearings offered a jarring look at how globalization is affecting the medicines we take. True, some testimony was predictable: the FDA denied that it could have averted the tragedy with an earlier (and required) inspection of the suspect Chinese factory; Baxter's CEO played the victim card, claiming that his firm's heparin, an anticoagulant, was the target of a deliberate adulteration scheme. (The Chinese government, meanwhile, argued that the faulty ingredients weren't to blame for the deaths.) But the statement of David Nelson, the senior investigator of the committee holding the hearings, sandblasts the varnish off such evasions, especially Baxter's dubious behavior, and is worth a read.

Citigroup posted a $5.1-billion loss and announced 9000 layoffs.

Analysts call it a "kitchen sink quarter." Companies in shell-shocked industries write down everything that even looks like it might go wrong, clearing the balance sheet for future growth. For banking, that quarter was supposed to be the end of last year. Friday's earning report from Citibank, however, indicates that some in the industry might still have faulty plumbing yet to expose. After giant write-downs last quarter, Citibank again announced it needed to revalue its assets sharply downward. The financial giant took massive write-downs across multiple business lines, pushing revenue into negative territory and causing its second consecutive quarterly loss. The bank has now written down almost $40 billion due to the credit crunch.

John McCain sketched out his economic agenda in an address at Pittsburgh's Carnegie Mellon University.

McCain's speech reads like an attempt to unify a divided party by offering every faction something to make them happy. For the GOP's supply-siders and business interests, there are promises to extend the Bush tax cuts and slash corporate rates. For moderate Republicans clinging to seats in Democratic states, there's a pledge to cut the Alternative Minimum Tax, which hits upper-middle class Blue Staters hardest. For free traders, there's a shout-out to the Colombian Free Trade Agreement; for flat-tax obsessives, there's a call for an alternative tax-filing option, featuring just two brackets instead of four or five. For deficit hawks and porkbusters, there's a promise to veto any bill with earmarks, an attack on corporate welfare, and a call for a one-year freeze in discretionary spending and a top-to-bottom review of every agency's budget. For entitlement reformers, there's a call to means-test the prescription drugs benefit. There's even something for the small band of conservatives (this writer among them) who have been agitating for a distinctively pro-family economic agenda, in the form of a pledge to double the tax exemption for dependents, from $3500 to $7000.

Unemployment jumped last month from 4.8% to 5.1%, as payrolls shed 80,000 jobs -- further evidence that the country is headed into recession, if it is not there already.

Should the government extend unemployment benefits? It usually doesn't, except in a recession, to cushion the impact on vulnerable households. With the labor market headed south, Congressional Democrats have brought up the possibility once again. President Bush, who wanted the focus kept on tax rebates, is still demurring, and on Tuesday, he asked Congress to give the existing stimulus package time to work.

Treasury Secretary Henry Paulson's plan to reform the nation's financial regulatory system has been greeted with skepticism.

I'm not an expert in financial markets, so I don't pretend to know enough to evaluate whether Paulson's massive reorganization of the nation's financial regulatory apparatus is, on balance, helpful. But I do know this: Paulson and his White House sponsors are deaf and blind to politics.

Stocks leaped on Monday on news that for the first time in seven months, the number of homes sold in the United States rose.

The National Association of Realtors has suggested that the improvement shows a stabilizing market. But as traders like to say, even a dead cat will bounce if you drop it from high enough. As of February the median home price had fallen by 8.2% year-on-year, the largest decline on record. Of course a few bargain-hunters have ventured back into the fray.

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As the economy turns toward recession, the candidates are revising their plans and messages.

The economy writ large -- the crisis in the financial markets, the panics and contagion, the lockdown of the lending markets, et. al. -- will be the totalizing narrative of the next six months in our politics, policy, government and society. When a new president takes over, the Federal Reserve may have run out of basis points to cut. Inflation will be higher. The credit markets will still be in capital preservation mode, trying to conserve all the cash they can. So businesses won't be able to invest. Consumer spending will be negligible. Containing the crisis -- to the extent that fiscal policy and the moral suasion of the executive can contain the crisis -- will be extraordinarily difficult, and it will be the defining problem of the next president's first term. MORE

Investment firm Bear Stearns ran out of money, and the Federal Reserve stepped in to save it from ruin.

Bear Stearns, the smallest of New York's bulge bracket banks, has been the hardest hit by the subprime crisis, and speculation about its balance sheet has been floating for months. Liquidity problems in credit markets have made things worse. This week, worries turned to fears, as rumors made other financial institutions reluctant to do business with the ailing bank. In finance, expectations -- even false ones -- can rapidly become realities: If no one will loan you money or trade with you because your firm might go under, your firm will go under. MORE

Newly released letters reveal that Abraham Lincoln considered trying to halt the war by buying slaves from the South for $400 apiece.

It would have been a pricey time for Lincoln to go bullish. At the time of the Civil War, one slave cost as much as five oxen. Nowadays in India, it's down to about five slaves per one ox, the result of a long decline in the price of human chattel.

European governments have begun a search for tax-evaders sheltering funds in Liechtenstein.

Since Germany revealed that it had bought, for $5 million, the names of 1400 tax evaders sheltering income in Liechtenstein, the hunt has been on for tax evaders on both sides of the Atlantic.  The thing has all the ingredients of a reasonably entertaining caper film.  A disgruntled ex-employee seeking to use confidential banking records as a bargaining chip against the government of Liechtenstein.  Secret databases passed from government to government.  Wealthy scofflaws scrambling for cover.
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Home Depot reports that 4th quarter earnings fell 27% year-on-year, and the company said it was forecasting a decline in sales of 4-5%. This was sharply lower than expectations.

The drop reflects a broader trend in the housing market.  The Office of Federal Housing Enterprise Oversight (Ofheo) just reported that home prices fell 1.3% between the third and fourth quarters of 2007.  At that, they may be a trifle optimistic.  The other major housing tracker, the S&P/Case-Shiller Index, estimated that they fell 2.1% in the same period.  The full year drop was 9.1% -- the largest drop on record.

The market, oddly, doesn't seem to care.  Home Depot shares actually rose slightly, to close at 28.83.  The dark days in the home improvement industry are forcing change on a company grown complacent during the house-flipping mania.  And there's still the hope, however wan, that lower interest rates will stop the market's free fall.

On Sunday, Gordon Brown announced that his government would nationalize Northern Rock, a bank with a history of betting on risky mortgages.

Britain's "New" Labor is looking elderly these days.  The word "nationalization" has brought back echoes of the "old," quasi-socialist Labor movement, supposedly vanquished thoroughly and finally by Thatcher. 

But this is hardly a second red revolution.  A bank run forced the government's hand.  The government guaranteed Northern Rock's deposits to keep panicky depositors from pulling out and tipping the bank into insolvency.  Unable to find a buyer willing to assume the considerable downside risk, the government had little alternative to outright nationalization.  The government plans to operate the bank at arm's length.

This sticky situation may offer the best argument for American style deposit insurance.  Complaints that deposit insurance encourages both banks and depositors to behave irresponsibly are common.  But though these guarantees are expensive and economically distorting, they may be comparatively cheap if they insure against boondoggles like the Northern Rock fiasco.

Economists debate how we should think about inequality. Should we focus on income, wealth, or consumption?

After W. Michael Cox and Richard Alm of the Federal Reserve Bank of Dallas published a short piece on inequality in the New York Times, economists led by Paul Krugman charged them of using misleading numbers to present a rosy picture of the lives of America's working poor. For Cox and Alm, the relevant inequalities are inequalities in consumption, and they note that inequality in consumption is far less extreme than inequality in income. By extension, the same is true of wealth. Say it's true, for the sake of argument, Cox and Alm are right: that in terms of consumption, today's poor are far better off than the poor of thirty years ago, and that they aren't that much worse off than the rich when it comes to the quantity and quality of their consumption. It remains true that wealth translates into political power and that political power allows some individuals to entrench their power, political, economic, and cultural. So even if it is silly to argue that poor Americans are among the wretched of the Earth, the real danger could be that the rich are becoming a cosseted, self-dealing elite that uses the state to insulate itself from robust competition.

Four undersea telecommunications cables were severed, causing sharp slowdowns in internet access across the Middle East and India.

For many of us the internet is like oxygen: we don't think about it until our high-speed connections fail us, at which point it is all we can think about. Pity the unfortunate Arabs and Indians who were impacted by the cut cables, particularly those working in offshore call centers and other businesses that depend on them to make a living. We've long known that this infrastructure is vulnerable, but it took real economic pain to drive the point home. The Saudis and the UAE have signed a deal on a new telecommunications cable, one that will make sabotage rather more difficult. But it's worth noting that Arab states have done a far more effective job of crippling the internet than any would-be saboteurs. A few years back, Jonathan Zittrain and Ben Edelman of Harvard Law School prepared a comprehensive review of websites banned by Saudi authorities. Though the blacklist has certainly changed since, rest assured there is still a powerful censor who is deciding what Saudis can and cannot learn about marijuana seeds and Queer Christians.