As the budget crisis deepens, state employees are fighting each other for survival. Potshots are thrown between management vs. non-management, union vs. non-union, teachers vs. everyone else. In addition, governors want $1 trillion out of a total package of $850 billion Congress is likely to send to Obama to sign. The math does not add up.

There is other noteworthy economic news of interest. Here are a few headline news reports of interest from the past couple days.

California Employees fight each other as budget crisis deepens

State workers donned their rhetorical boxing gloves in 2008 and slugged it out – with each other.

Online, state workers defended themselves from attacks by private-sector workers and jabbed the governor (not so affectionately referred to as GAS) for wanting to furlough or lay off workers. And they attacked each other. ….

You’d think that state workers would pull together in tough times. Strength in numbers and all that.

But the opposite almost always happens when members of a large bureaucracy, be it public or private, feel threatened, said Todd Dewett, a group behavior expert at Wright State University in Dayton, Ohio.

“The notion of what constitutes productive behavior gets shaken,” Dewett said. “So as California’s financial pie shrinks, rivalries among state workers become more fierce.”

Weakened leadership widens those divisions. Disenchanted members will freelance to protect their interests, Dewett said. And many public employees feel as if their team is losing right now.

Legislators and the governor agree that state education funding will have to be cut as part of any budget fix, something the teachers’ lobby would have blocked in years past. The once-feared correctional officers union has gone two years without a negotiated contract. Negotiators haven’t made much progress in labor talks covering another 170,000 unionized state workers. Most contracts expired last June.

And true to human nature, state workers fought with each other. Sound the bell for another round in 2009.

Click on the link to see the amount of bickering. It’s quite interesting.

Treasury Defends Its Actions to an Oversight Panel

Responding to a congressional panel’s attack, the Treasury Dept. says it’s responded effectively to the financial crisis. That won’t be the last word.

Early on the afternoon of Dec. 31, just as many Americans were beginning to tune out and focus on New Year’s Eve celebrations, the Treasury Dept. issued its response to a blistering Dec. 10 report from the congressional panel established to oversee the agency’s actions.

The 13-page Treasury report broke no new ground, strongly echoing recent comments and testimony from Treasury Secretary Henry Paulson and Neel Kashkari, his deputy managing the crisis response. At the same time, it sidestepped some of the most pointed questions and observations raised by the Congressional Oversight Panel in its initial report. In that report, the COP criticized the Treasury for failing to monitor what the banks and others actually did with billions of dollars in federal funds they had received, and questioned whether the Treasury had an overarching strategy or could show concrete results.

In its response, the Treasury effectively responded that it knows what it’s doing, things could have been a lot worse, its efforts should improve matters in time, and the programs are working even if results are difficult to measure. …

Central to many of the agency’s answers in the report—and echoing Paulson and Kashkari in recent weeks—is the argument that, without Treasury’s actions, worse could have happened: “The most important evidence that our strategy is working is that Treasury’s actions, in combination with other actions, stemmed a series of financial institution failures,” the report says. In other words, Treasury seems to be saying, Citigroup (C) teetered on the brink even after receiving an initial $25 billion capital infusion from the Treasury; but after a second bailout, it survived.

Government aid could save U.S. newspapers

Connecticut lawmaker Frank Nicastro sees saving the local newspaper as his duty. But others think he and his colleagues are setting a worrisome precedent for government involvement in the U.S. press.

Nicastro represents Connecticut’s 79th assembly district, which includes Bristol, a city of about 61,000 people outside Hartford, the state capital. Its paper, The Bristol Press, may fold within days, along with The Herald in nearby New Britain.

That is because publisher Journal Register, in danger of being crushed under hundreds of millions of dollars of debt, says it cannot afford to keep them open anymore.

Nicastro and fellow legislators want the papers to survive, and petitioned the state government to do something about it. “The media is a vitally important part of America,” he said, particularly local papers that cover news ignored by big papers and television and radio stations.

To some experts, that sounds like a bailout, a word that resurfaced this year after the U.S. government agreed to give hundreds of billions of dollars to the automobile and financial sectors.

Many media experts predict that 2009 will be the year that newspapers of all sizes will falter and die, a threat long predicted but rarely taken seriously until the credit crunch blossomed into a full-fledged financial meltdown.

Some papers no longer print daily, and some not at all.

“The whole idea of the First Amendment and separating media and giving them freedom of control from the government is sacrosanct,” said Digby Solomon, publisher of Tribune Co’s Daily Press in Newport News, Virginia.

Note the insanity. Government sponsorship of papers is supposed to keep a free press.

SEC Said to Examine More Ponzi Schemes After Madoff

U.S. regulators working to untangle Bernard Madoff’s alleged $50 billion Ponzi scheme are probing other money managers suspected of using similar tactics, two people with knowledge of the inquiries said.

The U.S. Securities and Exchange Commission is pursuing at least one case in which investors may have been cheated out of as much as $1 billion, according to a person, who declined to name the manager and asked not to be identified because the probe isn’t public.

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators as recently as last month sought more investors.

The new cases “signal it’s become an enforcement priority,” said University of Rochester President Joel Seligman, who wrote a history book on the SEC. After Madoff’s alleged fraud “you’ve got to check hard and see if there is more like it in the marketplace.”

The House Financial Services Committee at a Jan. 5 meeting will examine regulatory efforts to catch investment scams and scrutinize how Madoff’s alleged conduct avoided detection for years. SEC Chairman Christopher Cox said Dec. 16 that the agency failed to act on “credible, specific” allegations about Madoff dating back at least to 1999.

Obama Moves to Counter China in Space With Pentagon-NASA Link

President-elect Barack Obama will probably tear down long-standing barriers between the U.S.’s civilian and military space programs to speed up a mission to the moon amid the prospect of a new space race with China.

Obama’s transition team is considering a collaboration between the Defense Department and the National Aeronautics and Space Administration because military rockets may be cheaper and ready sooner than the space agency’s planned launch vehicle, which isn’t slated to fly until 2015, according to people who’ve discussed the idea with the Obama team.

The potential change comes as Pentagon concerns are rising over China’s space ambitions because of what is perceived as an eventual threat to U.S. defense satellites, the lofty battlefield eyes of the military.

China, which destroyed one of its aging satellites in a surprise missile test in 2007, is making strides in its spaceflight program. The military-run effort carried out a first spacewalk in September and aims to land a robotic rover on the moon in 2012, with a human mission several years later.

Obama has said the Pentagon’s space program — which spent about $22 billion in fiscal year 2008, almost a third more than NASA’s budget — could be tapped to speed the civilian agency toward its goals as the recession pressures federal spending.

NASA faces a five-year gap between the retirement of the space shuttle in 2010 and the first launch of Orion, the six-person craft that will carry astronauts to the International Space Station and eventually the moon. Obama has said he would like to narrow that gap, during which the U.S. will pay Russia to ferry astronauts to the station.

We went from no program to a man on the moon in 7 years. Now with a complete program in place and having been to the moon already, it is going to take another 7 years to get back there. How much did it cost to put a man on the moon the first time? How much will it cost this time?

Chrysler gets $4bn emergency loan

The huge American carmaker Chrysler has received a $4bn (£2.75bn) emergency loan from the US government in a deal to help it stave off collapse.

It is part of a $13.4bn rescue package approved last month by Washington for Chrysler and its rival General Motors. Both companies said they needed the money to pay suppliers at a time of plunging sales and credit concerns.

They were promised bail-out funds on condition that they restructure and prove their viability by 31 March. “This initial loan will allow the company to continue an orderly restructuring,” Chrysler Chief Executive Bob Nardelli said in a statement.

Fannie says IndyMac has $1 bln in mortgage obligations

Fannie Mae, the largest U.S. home funding company, believes that failed mortgage lender IndyMac has obligations to repurchase around $1 billion of home mortgages that failed to meet Fannie’s standards, the Wall Street Journal said, citing people familiar with the situation.

Banks that sell loans to Fannie or its smaller rival, Freddie Mac, must make “representations and warranties” that those loans meet certain quality standards, the paper said. If not, the lenders can be forced to buy the loans back, the paper reported on its website late on Thursday.

A spokesman for Fannie told the paper the company is working with the Federal Deposit Insurance Corp (FDIC) to resolve the issue.

Once Burned, Twice Shy: Pension Funds

After suffering through 2008, some big pension funds are having second thoughts about their exposure to private-equity firms, hedge funds and other nontraditional investments.

Across the U.S., pension-fund managers and investment officers have been scrutinizing their asset allocations, especially toward alternative investments. In addition to wilted returns, pension funds are leery because some hedge funds have made it hard to cash out, including by postponing redemption requests from investors.

Other pension funds that barreled into private equity have been crunched by capital calls, or demands to deliver cash that are often conditions of investment with private-equity firms. While those obligations aren’t a surprise, many pension funds expected to offset the payments with returns from other private-equity investments. Such gains have been rare.

“What we saw as an asset before, we now see as a liability,” says Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System, the country’s second-largest public pension fund by assets.

About 14% of Calstrs’s roughly $129 billion in assets are in private equity. The pension fund will review those holdings as part of a broader asset-allocation review in February.

It is doubtful that retirement behemoths with billions in assets will retreat completely from alternative investments, partly because returns should improve once the economy pulls out of the recession. Still, some pension funds are likely to reduce their positions or put the brakes on plans to invest more. Other funds feel compelled to hoard cash to compensate for the lack of liquidity.

Group Unlocks Apple’s New iPhone

A band of independent programmers says it has “unlocked” the latest generation of Apple Inc.’s iPhones so the devices can be used on unauthorized wireless networks, in a move that could threaten Apple’s carrier partners.

Since the original iPhone was launched in June 2007, Apple has struck partnerships with wireless carriers world-wide, such as AT&T; Inc. in the U.S. and France Telecom SA’s Orange unit. Under the agreements, the iPhone can generally be used only by subscribers to those carriers.

But on Wednesday, a group called the iPhone Dev Team released a free piece of software called “yellowsn0w” that unlocks the iPhone 3G. The software lets users reprogram the phones so they can work on any wireless network based on the same technical standard.

Several users said they successfully installed the software on their iPhone 3Gs and were able to make calls on non-authorized networks.

The development could lead to a loss in revenue for Apple’s wireless partners. International travelers would be able to buy airtime for their iPhones on local wireless networks when they travel abroad, so they don’t have to incur steep roaming charges.

U.S. governors seek $1 trillion federal assistance

Governors of five U.S. states urged the federal government to provide $1 trillion in aid to the country’s 50 states to help pay for education, welfare and infrastructure as states struggle with steep budget deficits amid a deepening recession.

The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin — all Democrats — said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues.

Gov. David Paterson of New York said 43 states now have budget deficits totaling some $100 billion as tax revenues plunge.

“It’s clear that the federal government needs to step in and jump-start the economy,” said Gov. Deval Patrick of Massachusetts.

The latest package calls for $350 billion to create jobs by building or repairing roads, bridges and other public works; $250 billion to maintain education; and another $250 billion in “counter-cyclical” spending such as extending unemployment benefits and food stamps, which are typically a responsibility of the states.

The remainder would be used to fund middle-class tax cuts, stimulate the embattled housing market, and stem the tide of home foreclosures through a loan-modification program.

Gov. Jon Corzine of New Jersey said he hoped some of the $700 billion authorized by Congress in the Troubled Asset Relief Program would be available to help the housing market.

Obama: Country needs economic stimulus plan

President-elect Barack Obama urged congressional leaders Saturday to move quickly on an economic recovery plan, even as some Republicans are saying they want more time to review the details.

Obama said Congress should pass an American Recovery and Reinvestment Plan designed to create 3 million jobs. The Democratic president-elect hasn’t announced a final price tag on it, but aides said the cost could be as high as $775 billion.

“For too many families, this new year brings new unease and uncertainty as bills pile up, debts continue to mount and parents worry that their children won’t have the same opportunities they had,” Obama said in an address taped Friday and distributed on radio and posted on YouTube Saturday morning.

The nation’s economy remains the top challenge facing Obama when he takes office on Jan. 20. The Federal Reserve estimated that lenders were on track to initiate 2.25 million foreclosures this year, more than doubling the annual pace before the crisis set in. One in 10 U.S. homeowners is delinquent on mortgage payments or in foreclosure.

Obama aides had hoped to have an economic plan approved by the House and Senate before Obama takes office. That timeline, though, appears unlikely as time is running out and Republicans have urged a delay to review the plans. Sen. Mitch McConnell, the Republicans’ top official, said the plan needs time so that “every dollar needs to be spent wisely and not wasted in the rush to get it spent.”

Congressional aides briefed on the measure say it’s likely to blend tax cuts of $500 to $1,000 for middle-class individuals and couples with about $200 billion to help revenue-starved states with their Medicaid programs and other operating costs.

A large portion of the measure will go toward infrastructure projects, blending old-fashioned brick and mortar programs such as road and bridge repairs and water projects with new programs such as research and development on energy efficiency and an expensive rebuilding of the information technology system for health care.

“Economists from across the political spectrum agree that if we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment and the American dream slipping further and further out of reach,” Obama said.

Obama needs a lesson in economics. Everyone in his administration needs a lesson in economics. Everyone in the Bush administration needed a lesson in economics, as does and did every member in Congress.

American dreams are not founded on unsound spending. And as far as states go, it appears they are going to get only $200 billion of the $1 trillion they want. That is not going to be enough to stop massive layoffs. As a side note, reflect on the fact that the word only is in front of $200 billion. That number at one time would have been shocking. Now $200 billion does not raise an eyebrow.

However, we still need to put that $850 billion package in perspective.

Close to $8 trillion in wealth has been wiped out by this bear market and more is coming. Credit balances on the books of banks and corporations is extremely suspect, at best. Unemployment is likely headed to 9% if not 11% by the time the economy bottoms, and housing is unlikely to bottom for several more years.

Consumers are retrenching and will stay retrenched. Boomers headed into retirement need to draw on savings as opposed to accumulate them. No matter how one slices this, it is damn hard to get hyperinflation or even a significant amount of inflation out of this mess. Credit is being destroyed faster than any proposed stimulus.

Mike “Mish” Shedlock
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