August 15 2009: Kash für Klunkers

Carl Mydans Summertime August 1936
Scenes at the auto trailer camp. Dennis Port, Mass.

Ilargi: For a long time this spring, we witnessed a seemingly neverending barrage of seemingly smart people proclaiming that European countries, in particular Germany, were damning themselves into a bottomless Teutonic hell pit by not following the American and British example of seemingly bottomless Keynesian stimulus packages. Two voices stood out more in the choir than others, though there were many. The first one, Paul Krugman, has simply never seen a stimulus he didn't like. The second, Ambrose Evans-Pritchard at the Telegraph, used his long and winding tirades to create the picture that continental Europe was much worse off then Britain.

So when the news came out this week that Germany and France had posted positive GDP numbers, you would have thought it was crow-eating time for both "expert" analysts. I haven't seen Krugman address the issue at all, which is a bit odd all by itself, and Ambrose, well, let's just say he doesn’t give up easily. Under the title "Keynes rescues France and Germany", he now manages to make himself believe that the two countries are doing relatively well because they DID enact the very crass Keynesian stimulus programs that not so long ago he accused them of refusing to deliver.

Anyone who's followed what German Chancellor Merkel and Finance Minister Steinbrück have said on the subject knows that they haven’t changed their views in the meantime. Nor have they announced any such program. Not to be outsmarted by such details, Ambrose cites a "researcher" who implies that the Germans (and French) have introduced sly, secret and hidden stimulus measures: "Germany has relied on more crass Keynesianism than it lets on". Not that there's any proof of this, at least not in Ambrose's article, but hey, if you claim they do it in secret, who needs proof?

Yes, Germany was way ahead of the US in a Kash für Klunkers deal. But that has a total value of only $7 billion, and not all has even yet been spent. Yes, Germany takes much better care of people who lose their jobs than the US does, as does France. Not only when it comes to handing them money, but also in retraining and other job-finding assistance programs. But these are examples of policies that have been in place for decades, so they certainly don’t come under the moniker “Crass Keynesianism".

In short, Ambrose is full of it when it comes to this particular topic, and it would look good on him if he would simply admit he's been way out of line for quite a while, and there comes a time to stop digging. The same goes for Paul Krugman.

What I wrote at the time Ambrose and Krugman were fomenting on and on about the deep abyss Merkel was throwing her country into, was that there is simply not one single example in history that proves that such stimulus packages are effective. It's all based on theory, particularly on trying to figure out what the opposite is of Federal Reserve policies in the 1930's. Since those policies are perceived as failures, doing everything the Fed did not back then, must work, or so goes the mantra.

Still, to use all the big words these people have used in order to justify measures that are 100% unproven always struck me as at the very least lacking in a healthy dose of humility. They were, so to speak, sentencing Merkel and Sarkozy before they had had their day in court. There was no proof available beforehand whether the Anglo crass measures or the continental European more hands-off approach would work out best. This week's numbers seem to indicate that the non-Keynesian ideas may have been just as good as the crass ones, if not downright better.

Which is not to say the Europe is out of its hole, not at all. Germany and France's neighbors like Holland and Spain issued gruesome figures this week, and in my view they all have a long way down ahead of them. Germany's manufacturing base, which far outshines that of the US today, will still depend on export markets to survive, and with credit rapidly disappearing worldwide, those markets are set to keep on shrinking for the foreseeable future.

One thing has become obvious, though, by now. Blind reliance on unproven models such as those advocated by Keynes and his modern-day disciples is not by definiton the best or only way to go. It may still turn out to be a preferable approach, it's just that there still is no proof of that. On the contrary, there are clear signs it may very well not be the best.

Apart from that, I could make a pretty solid case that all the trillions of dollars in US and UK crass stimulus have bought is a summer of feeling good. It takes just a fleeting glance at housing and job markets in both countries to move into the fall with very serious questions and concerns. Their real economies haven't improved, they've just kept right on sinking. The stock markets are up and many banks are still alive. But stocks can be sold off in a matter of days, and banks can't continue forever issuing profit numbers that don't include the losses festering on their books.

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Keynes rescues France and Germany; Club Med lost

New geographical divide on the cards as twin motors of Euroland crawl out of recession but southern states remain in the wreckage.

Crass Keynesianism has done its job. A blast of fiscal stimulus and "cash-for-clunker" schemes have lifted France and Germany from the depths of recession. The twin motors of Europe each eked out 0.3pc growth in the second quarter, much to the consternation of their own governments and the International Monetary Fund. The eurozone as a whole shrank 0.1pc.

Christine Lagarde, the French finance minister, interrupted her holiday to announce that "France was finally coming out of the red". Her country has been cushioned by its big state sector and well-regulated banks. Growth may have been lifted by a bumper crop of Airbus jets, meeting old orders, so caution is in order. Airbus will trim its A320 lines in October. "It is too early to declare victory," said Marc Touati, from Global Equities. The Teutonic comeback is true to character. Germany is highly geared to the global cycle. It plunged harder than any other rich country bar Japan as the crisis hit, largely because demand for the "big ticket" machinery that drives its export industry imploded. It is now rebounding with similar vigour. Germany's superb companies are the first to benefit as China and the Middle East return to life.

The question is whether this adds up to much more than a restocking rally for a couple of quarters after the waterfall collapse over the winter – as occurred in Japan's Lost Decade, or in the 1930s. Within a few months the "sugar rush" of fiscal stimulus in Europe, the US, China, and Japan will be wearing off. Charles Dumas from Lombard Street Research said Germany has relied on more crass Keynesianism than it lets on. "They have had a budget stimulus, car subsidies, and they're paying people without jobs [Kurzarbeit]. This is all to the good, but it doesn't in any way create the foundations for a new growth story."

The DIW Institute in Berlin expects unemployment to rise by another million to 4.5m next year as job subsidies expire and companies are forced to slash labour – as they must, since over-capacity is at a post-war high. Mass lay-offs will deliver a fresh hammer blow to retail demand. While any sign of recovery is welcome, there is a sting in the tail of yesterday's data. The eurozone's "Club Med" remains mired in slump and likely to slip further behind if recovery gathers steam. Italy shrank 0.5pc, and has now suffered seven quarters of contraction. Spain shrank by 0.9pc.

David Marsh, author of The Euro: The Politics of the New Global Currency, said this North-South chasm will test the European Central Bank's ability to manage a one-size-fits-all policy for Euroland. "The moment of truth will come when German recovery leads to a rise in interest rates, and that may come sooner than people think," he said. "Germany will emerge from this crisis more competitive. It has used recession to make its companies fitter, while the South has been losing competitiveness steadily. I would be particularly worried about the situation in Italy, where lack of leadership is frightening." Italy is moving disturbingly close to a debt compound trap as tax revenues slide. The Italian treasury has revised the country's expected debt in 2010 from 101pc of GDP to 120pc since the crisis began.

Julian Callow, from Barclays Capital, said unit labour costs have risen 28pc in Italy and 27pc in Spain compared to Germany since the launch of the euro. It will be a Sisyphean task for the Club Med states to claw back parity unless Germany is willing to ease the adjustment by tolerating some degree of inflation. There are no signs of that. German prices have fallen 0.7pc over the last year. "Italy and Spain are really in a trap here," he said. Spain's crisis is more immediate. Unemployment has reached 18.1pc. Deflation is setting in after a 1.4pc fall in prices over the last year, raising the risk of debt suffocation.

For the eurozone as a whole, it is far from clear whether the banking crisis has been resolved. Credit to households and businesses has contracted since February: the M3 "broad" money supply has been flat. M3 stagnation can be an early warning of trouble to come a few months later, though in this case the ECB thinks the data had been distorted by emergency policies. Not all experts agree. Professor Tim Congdon, from International Monetary Research, described the money figures as "horrifying". The Federal Association of German Banks says there is a "real danger" of a fresh credit crunch over the next 18 months as default rates creep up and corporate downgrades force lenders to set aside greater reserves.

US and UK banks took much of their punishment early because they were heavily exposed to debt securities that collapsed almost instantly when the storm hit. European banks are likely to suffer later in the cycle. Their style of lending usually means that losses are not crystallised until defaults occur. The ECB says eurozone lenders may have to write down a further €203bn (£175bn) in bad debts by late 2010. Berlin has refused to conduct an open stress test on its banks, raising suspicions that it is brushing problems under the carpet until the elections in September. We will find out soon enough if that is true.

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Will Germany Beat the U.S. to Recovery?

The race to economic health pits export-driven economies with strong social-assistance programs against those that count on consumer spending

It has been a rhetorical battle of Anglo-Saxon vs. Continental capitalism. Since the onset of the economic crisis, German leaders have scored political points by railing against the flaws of the U.S. and British economic systems, even as counterparts such as U.S. President Barack Obama and U.K. Prime Minister Gordon Brown pressed for bigger economic stimulus packages. Just this month, German Economics Minister Peer Steinbrück warned that the "casino capitalism" practiced in overseas financial centers will resume without stronger regulation.

On Aug. 13 the Continental gang got a bit more to crow about. Data released that day showed that France and Germany both posted surprising 0.3% economic growth in the second quarter, even as U.S. gross domestic product slipped 1% and Britain's sagged 3.2% over the same period. It was a vote of confidence in the Continental model, suggesting that the more traditional, consensual, and export-driven German economy—Europe's largest—could be better positioned for economic recovery.

Of course, one quarter's growth rate doesn't provide a complete picture—and it's too early to tell how each economy will fare once recovery has set in. But the unexpectedly faster European turnaround only deepens the debate over the merits of different economic models. Could export-driven economies with considerable social-assistance programs be in a better position to bounce back than those, such as America's, that rely heavily on services and consumer spending?

Not surprisingly, economists don't share a consensus on the answers. But many point to several factors that helped Germany return to growth in the second quarter. One is the success of the government's €2,500 ($3,540) cash-for-clunkers subsidy (Abwrackprämie) for trading in old cars for new, more fuel-efficient ones. The program stimulated considerable demand in new car sales. Another is the oft-cited "automatic stabilizers" in the German economy, including more generous support for the jobless and government subsidies for workers whose hours have been cut. Analysts say this "Kurzarbeit" program has prevented hundreds of thousands of job losses this year.

A recovery in China and the developing world also stands to benefit Germany, whose economy relies heavily on exports. German second-quarter growth was already helped by exports to non-Japan Asia, especially China, says Thomas Mayer, chief European economist for Deutsche Bank in London. That bodes well for the country's economic model, he says: "Germany's export model has been sustained for the last few decades and will probably remain in place for the future."

Indeed, amid an overall revival in global trade, "European economies are in a better position to recover," says Martin Lueck, an economist at UBS. "In the U.S., everything hinges on the consumer. As long as the savings rate keeps rising, house prices falling, and employment weakening, there is very little leeway for the consumer [sector] to recover." However, Lueck sees the most critical split occurring not between countries or economic regions but rather between economic classes. "If you draw a line dividing the winners and losers [of the past 20 years], it is not between U.S. or U.K. economic systems and Europe's, but rather the owners of capital vs. the owners of work. The losers are the owners of work in all parts of the world, particularly Western countries. The winners have been the owners of capital."

That's why, in spite of the good news about the second quarter, doubts persist about sustaining the recovery in Germany and the rest of Europe next year. Stimulus measures, including Germany's cash-for-clunkers program, will expire in 2010, when new car sales could fall again. Some analysts say Germany's temporary assistance to workers, which allows them to stay employed, may have merely delayed layoffs and that unemployment will rise again by the end of the year. And European banks still aren't lending at previous levels as they work to rebuild capital.

So while Germany will likely hold on to its export-powered economic model, analysts say the global slowdown won't allow it to regain the strength it once had. "An export-led economy is of course reliant on growth elsewhere, and if major export partners suffer, Germany will suffer, too," says Natascha Gewaltig, director of European economics at consultancy Action Economics. "The road of the German economy to pre-crisis levels remains long and winding," wrote UniCredit economists Alexander Koch and Andreas Rees in a research note. Dirk Schumacher, senior European economist for Goldman Sachs, suggests that Germans will have to start consuming more so their economy doesn't rely too heavily on exports. "A global imbalance means it's not just one country's problem," says Schumacher. "Every country needs to take a deep look and see what needs to change."

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Enjoy eurozone's fragile stabilisation while it lasts

The eurozone economy is stabilising. While the first estimate of the region's GDP in the second quarter showed a tiny 0.1pc decline, there were increases of 0.3pc in both Germany and France. But cheers should be muted. Sure, positive surprises are welcome after many months of deterioration. The consensus expectation of eurozone GDP change for 2009 moved from 0.5pc growth last October to a 4.2pc decline in June, before improving to a 4pc decline in July, according to research boutique Consensus Forecasts. Expectations are likely to become less negative once again.

If this recession were to follow the recent historical pattern, the forecasts would soon be moving up dramatically. In the four downturns since 1974, eurozone GDP declined an average of 1.1pc, followed by an average 4.7pc cumulative growth in the two years following the trough, according to BNP Paribas. The shrinkage this time has been 5pc, suggesting near double-digit percentage growth rates during the recovery. Some economists are already talking about such a v-shaped recovery in the eurozone and around the world. But this time could well be different - and more difficult.

To start, the recession has hit so much of the world that few countries can rely on sustained export growth to pull them out of trouble. That is especially true of eurozone members, since their currency is expensive and demand for capital goods - the region's strong point - won't return in strength until a global recovery is well established. The main challenge to growth, though, is financial. A still crippled global credit system will keep consumers and businesses cautious. The end of preternaturally low policy interest rates and frighteningly high government deficits isn't yet in sight, but the transition to normality could easily go wrong.

The relevant precedents are both discouraging. Japan, which resembles the eurozone in its savings culture and ageing population, has never fully recovered from the excesses of the 1980s. And the US central bank's attempt to keep a non-inflationary recovery on track with a tightening in 1936 caused a recessionary relapse. Enjoy the good news while it lasts. There are reasons to suppose it may not last that long.

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Amazing German Machines May Lead Europe Out of Recession

Germany's heavy reliance on exports caused serious problems for the country when the global economic crisis dried up orders. However, its obsession with manufacturing could soon help drive growth. By merging electronics and mechanics, German factories could drive the Continent's revival. Metal banging never really went out of style in Germany -- and that may be a good thing. The nation clung stubbornly to manufacturing in recent years as the US focused on faster-growth industries such as software and e-commerce. Workshops and factories still account for a quarter of Germany's gross domestic product and 30 percent of jobs, vs. 21 percent of employment in the US.

Now that capability could help drive a European economic revival. As China, India, Brazil, and other developing countries recover more quickly than developed countries, they'll need the specialized manufacturing systems that come mainly from Germany and a few other countries such as Denmark, the leader in wind power, or Italy, famous for its textile machinery. Much of the momentum for growth lies in a key shift in German factories, where companies have increasingly integrated information technology with old-fashioned mechanical engineering. They haven't had a choice, either -- high labor costs and high taxes mean European companies couldn't compete otherwise.

"German companies have to be very innovative to survive," says Peter-Michael Synek, whose job at the German Engineering Federation is to promote "mechatronics," the science of integrating electronic and mechanical components. As a result, Europe is producing machines packed with computing power. Siemens recently unveiled a driver-less forklift that uses lasers to find its way around factories. Kuka, a German manufacturer of industrial robots for the car industry, has moved into the entertainment business with so-called RoboCoasters. Customers at Legoland in Denmark and other amusement parks now sit in seats attached to giant robot arms that hurl them in unpredictable directions. And the Lely Group of the Netherlands has invented a machine that milks cows without human intervention.

Lely has already sold some 7,000 of its robot milkers worldwide. Cows learn to sidle up to the $300,000 (€210,187)-plus devices on their own when their udders feel full, letting themselves in and out of a special stall to do so. For the first time since man domesticated animals, farmers don't have to rise before dawn to milk the herd. Jutta Schemmerling, who owns a farm with 90 cows in the town of Ober-Mörlen north of Frankfurt, says she has more time to spend with her seven-year-old son since installing two Lely robot milkers last year. "It makes a difference in the quality of life," she says.

German expertise in high-tech machinery has allowed some sectors to defy the global downturn. Even as oversupply and plunging prices have cast a shadow over the solar power industry worldwide, German makers of machines used to produce solar power components reported a 60 percent sales increase in the first quarter of 2009 compared with a year earlier.

The explanation for this gravity-defying performance was simple. Companies such as China's Asia Silicon, which makes refined silicon for solar cells, are aiming to cut production costs. So they're ordering advanced machines or even entire production lines from companies such as Centrotherm Photovoltaics, based in the German town of Blaubeuren. Centrotherm, which builds machines that reduce the raw material needed to make a solar cell, nearly doubled sales in the first quarter, to $185 million, thanks in part to a big order from Asia Silicon.

Germany's reliance on factory machinery and other capital goods for export is not always an advantage. Manufacturers slashed purchases of these items because of the financial crisis, with orders for all categories of German machinery sinking 65 percent in the second quarter of 2009 compared with a year earlier. And while the country's manufacturers are famous for identifying a niche -- and then dominating it -- that focus also makes them vulnerable. "The specialization level of German manufacturing is one of the main reasons why contraction in output is so significant," says Silvio Peruzzo, euro area economist at the Royal Bank of Scotland.

Also, Germany's excessive bureaucracy and the low rate of startups may chip away at its competitive edge, says Dietmar Harhoff, a professor at the Institute for Innovation Research, Technology Management & Entrepreneurship at Ludwig-Maximilians University in Munich. But for now, he says, "there is a good prospect that Germany's strengths will pull the [European] economy out of the mess we're in."

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Deflation, not inflation, is the economy's swine flu; QE is its Tamiflu

Fundamentalist view: our series in which a leading fund manager or expert at making money grow explains why savers and investors should see things their way. In the traditional Irish ballad Finnegan's Wake, a corpse is brought back to life after being splashed with whiskey. Of late, the Bank of England has been doing a lot of splashing too, not with whiskey but with cash. Having cut interest rates to their lowest level in 300 years, it is now pouring £150bn into financial markets, a sum that is more than 12pc of GDP.

Many fear this printing of money will prove highly inflationary and point to the green shoots of recovery as supporting evidence. In their view, not only is Tim Finnegan's corpse awake, it will soon be jigging. And, therefore, an inflationary shock lies around the corner. Could they be right? Or do the green shoots spring from arid soil? Despite the worst recession in generations, inflation has remained stubbornly high. In the City, the yield on 10-year government bonds has risen steadily since the Budget, in anticipation of massive borrowing and higher inflationary pressures.

Meanwhile, the broad-based recovery in the price of oil, industrial metals and other commodities could be indicative of economic recovery and of inflationary pressures. Such behaviour would be entirely normal if the prospects were for a typical "V-shaped" economic recovery. In which case, stock markets ought to be rallying. And indeed they have. In spite of the general economic gloom at the beginning of March, we saw one of the most substantial equity market rallies in recent years. Indeed, it looked more like a relief rally. Relief that a collapse of the global financial sector was no longer a threat. Relief that the economy was contracting less sharply than before. Relief that the Chinese economy had picked up.

To this we would say that, in their early stages, all recoveries look "V-shaped" and markets discount near-term expectations. It is what happens later that is important. Credit is the oxygen that an economy requires for healthy growth. Yet the global banking crisis has left many banks strapped for cash. Indeed, many banks appear unwilling or unable to lend to even the safest businesses. How, then, will they cope with the likely demand for credit in a typical upturn? The answer is that they won't. That's one reason why a "V-shaped" recovery is unlikely.

Here is another. If the price of a barrel of oil has to rise to $100 or higher in order to complete new cities in Saudi Arabia and the Gulf states, then the West could be in for another oil shock. High oil prices, if sustained, choke off growth. The credit-crisis-induced rise in bad debts means banks must now shrink their balance sheets. This reduces their ability to lend. Although such action may be sensible for each individual bank, in aggregate it risks pushing the economy into a deflationary spiral. Thus, the quantitative easing policies of British and US central banks are designed not so much to stimulate the economy for its own sake as to step into the breach.

The truth is that inflation, as driven by quantitative easing, is only a threat because deflation is an even bigger threat. Deflation, not inflation, is the swine flu that risks infecting the economy; quantitative easing is its Tamiflu. Because, for central banks, the risks are not symmetrical. Inflation at 5pc is much easier to deal with than deflation of 5pc. Because many companies need to use much of their lower disposable income to service debts, dividends are suffering. Marks & Spencer reduced its dividend by 33pc, BT by 59pc. Indeed, the pressure on British companies to lower or cut dividends, especially those with large debts, is at its most severe since the end of the First World War.

So why invest in dividend-paying companies when it is the low-yielding, highly indebted companies that are driving the stock market higher? Part of the answer is access to capital, which has become much harder to obtain. Companies that have supercharged their earnings with debt must eventually renew that debt. The problem is that banks are not lending. Although businesses with strong balance sheets have been able to raise fresh loans in the market, weaker companies have had to ask shareholders for capital. This has hit their share prices. In a deflationary environment, a strong balance sheet, with little debt, is an advantage.

The next deflationary scare might already be on its way. If Latvia's euro-linked currency peg breaks, the collateral damage may cause widespread problems for European banks. We believe this is not yet an environment for an inflationary surge but may be a time to consider lowly valued shares in world-class companies with good prospects that pay attractive, sustainable dividends.

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Europe and US still at risk from deflation trap

The developed world has not shaken off the risk of sliding into a deflation trap, experts warned after new figures showed that prices in both the eurozone and the US are falling. Consumer prices in America slipped by 2.1pc in the year to July, according to official data released yesterday. It coincided with Eurostat figures showing that the eurozone's consumer price index dropped by 0.7pc in the past year, compared with deflation of 0.1pc in June.

The figures underline concerns that despite the sharp rebound in a variety of economic indicators, and despite news that France and Germany have both now pulled out of recession, the threat posed by deflation has not yet been extinguished. Indeed, the fall in consumer prices over the past year in the US represents the biggest such drop since January 1950, and means that the country has now been in deflation for eight months. Gabriel Stein, of Lombard Street Research, said: "Ultimately, US consumer prices will not rise on a sustained basis until the negative output gap has closed and a positive output gap opened instead. At some stage, this will happen. But not for some time."

The price figures, which showed that despite the annual fall prices were flat on the month, coincided with data showing that US consumers' confidence has slid yet further amid worries about the state of the jobs market and wages. The University of Michigan consumer sentiment barometer dropped from 66 points to 63.2 this month – the lowest since March, from 66 in July. The measure reached a three-decade low of 55.3 in November. The Labor Department said its consumer price index was unchanged from June as forecast, and dropped by 2.1pc – the most in six decades – from July 2008. Economists had expected the index to rise to around 69.

Chris Rupkey, of Bank of Tokyo-Mitsubishi UFJ, said: "If consumers are lacking confidence, then they will not be able to help us spend our way out of this long, dark recession. Households are still concerned about the jobs outlook, and certainly, Fed policy is also gearing off of the labour markets as no Fed has lifted interest rates while the unemployment rate is rising." However, there was brighter news from the manufacturing sector, as separate figures showed that industrial production rose for the first time in nine months. Output rose by 0.5pc last month, following a 0.4pc fall in June. The White House's so-called "cash-for-clunkers" incentive scheme to encourage homeowners to replace their old cars with new models is also thought to have helped

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Worrying About Deflation
German Consumer Prices Fall For First Time in 22 Years

Latest figures confirm the first annual decline in Germany's consumer price index in decades. For some, the deflationary figures raise the specter of the Great Depression. Others say the decline will only be short term. This week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years. The country's Federal Statistics Office released figures showing that consumer prices had dropped 0.5 percent in July compared to the same time last year. This is the first annual decrease since March 1987, before the reunification of Germany.

Meanwhile another indicator of price movements, wholesale prices, also dropped -- by 10.6 percent in July year-on-year, the biggest fall since the data began to be compiled in 1968. This leaves Germany with minor deflation - the country's inflation rate made headlines when it went to zero in May, it then climbed up to 0.1 percent in June before dropping again in July. The price drops, which were larger than expected, can be blamed on the fact that the price of crude oil has almost halved over the past year, going from around $147 a barrel to around $65 -- this also happened in 1987, the last time Germany saw this kind of deflation.

The drops are also explained by a fall in food prices, which had been experiencing a global high and which are now between 1.2 percent and 3.3 percent lower than in July 2008. Additionally the current recession is also responsible for Germany's deflationary situation -- an oversupply of goods and services, a looming credit crunch, worsening unemployment, shrinking national growth rates and, generally, weaker economic activity all play a part.

Deflation can be of concern to an economy. A little short-term deflation is generally considered relatively harmless by economists -- in fact, it can even stimulate the economy because consumers, encouraged by lower prices, are likely to spend more. However if it goes on long term it can lead to a worsening downward spiral of declining demand and increasing unemployment such as that seen during the Great Depression of the 1930s.

The same deflationary trend has been seen in other European Union states. But fortunately, most analysts are predicting that Europe's deflation won't last long. "We expect the current episode of extremely low or negative inflation rates to be short-lived," said Jean-Claude Trichet, president of the European Central Bank, in a statement released earlier this month. The inflation rate preferred by the European Central Bank, the body charged with keeping the euro zone currency stable, sits at around or just below 2 percent. And although Germany's current deflation may go on for several months longer, other recent data has shown that markets are slowly recovering.

Factors that could worsen deflation rates are the feared credit crunch and a rise in unemployment, both of which would mean less money circulating in the economy. So far the most noticeable effect of the recent deflationary figures has been on the euro's exchange rate. Because Germany is the largest economy in the euro zone, the country's inflation indicators have had a significant effect on the currency, which fell to a two-week low against the dollar and also dropped against the pound.

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Colonial, Major Bank, Fails in South

Colonial's Assets Sold to Rival in 6th-Largest Collapse on Record; Blow to FDIC

Regulators seized Colonial Bank on Friday after reaching a deal to sell its branches, deposits and most of its assets to rival BB&T Corp. in the sixth-largest bank failure in U.S. history. The demise of Colonial, a regional bank based in Montgomery, Ala., with assets of $25 billion and 346 branches in five states, signals an ominous phase in the nation's banking crisis. Even as some large institutions show signs of stabilizing, a slew of regional lenders remain on the ropes. And regulators appear to be giving up hope that some of them can be saved.

Colonial, a unit of Colonial BancGroup Inc., is the largest bank to fail since Washington Mutual Inc.'s banking operations collapsed last September and were sold to J.P. Morgan Chase & Co. Colonial's slide came largely as a result of aggressive real-estate lending in Florida and other frothy markets. The company had been teetering for months, but federal and state regulators gave it time to try to secure a financial lifeline from outside investors or another bank. Those prospects dimmed in recent weeks. A planned deal between Colonial and a Florida mortgage company unraveled amid a federal criminal investigation. Colonial said last week that the Justice Department is investigating one of its lending units and related accounting irregularities. That prompted federal regulators to start shopping Colonial to potential buyers, according to people familiar with the situation.

Aside from BB&T, a regional bank in Winston-Salem, N.C., that has avoided the brunt of the financial crisis, bidders for Colonial were scarce, even though the Federal Deposit Insurance Corp. offered to shield buyers from some potential losses, according to a person involved in the talks. "No one wanted to touch this thing," said Morgan Keegan & Co. analyst Bob Patten. The FDIC agreed to share losses with BB&T on $15 billion of the $22 billion in assets included in the deal. Colonial's inability to find a buyer, and the limited interest in the FDIC auction, is a reminder of the industry's lingering troubles, experts say. Colonial, founded in 1981 by Alabama real-estate developer Robert E. Lowder, for years had a coveted franchise. But the severity of the losses facing the bank scared away several buyers, according to the person familiar with the talks.

Colonial's collapse will cost the FDIC's dwindling deposit-insurance fund an estimated $2.8 billion, the agency said. The fund stood at just $13 billion as of March. "Our industry-funded reserves have covered all losses to date," FDIC Chairman Sheila Bair said on Friday. In another sign that the pace of failures is accelerating, the Office of Thrift Supervision on Friday seized Dwelling House Savings and Loan Association, the 73rd collapse of a U.S. bank so far this year. The tiny Pittsburgh thrift's deposits and some of its assets were sold to PNC Financial Services Group Inc.

To help stop the bleeding, federal officials are discussing ways to relieve banks of some of their bad assets, such as troubled real-estate loans. One plan under discussion, referred to within the government as "Spinco," would allow banks to spin off bad assets into a separate entity, which would be owned by existing bank shareholders, according to people familiar with the plans. The new entity would have an FDIC guarantee that would enable it to raise money. The plan is in early stages of discussion, these people say.

BB&T, which recently repaid the $3.1 billion capital infusion it got under the federal Troubled Asset Relief Program, has been growing through a string of acquisitions. The Colonial acquisition is one of BB&T's biggest ever. BB&T will pick up hundreds of branches in Texas and throughout the southern U.S.. As Colonial's chairman and CEO, Mr. Lowder, 67 years old, repeatedly rebuffed overtures from potential suitors, pushing Colonial to keep growing. He orchestrated 68 acquisitions in five states. And he focused on real-estate lending such as residential mortgages and construction projects. Even when the real-estate boom seemed to be ending, and regulators were warning banks to scale back on such lending, Mr. Lowder forged ahead.

"We've always been a real-estate bank," he said in a 2006 interview. "We understand real-estate lending. For us, we think it's a good, safe market to be in." Mr. Lowder developed a reputation on Wall Street for being involved in every corner of the bank. Senior executives addressed him as Mr. Lowder. "It was a very old-school type of banking model where the CEO really ran things and there wasn't a whole lot of debate," says Kevin Fitzsimmons, a banking analyst with Sandler O'Neill & Partners.

As he was building the bank, Mr. Lowder was pursuing other interests that made him a major figure in Alabama, particularly at his alma mater, Auburn University. As a trustee there since 1983, appointed by Gov. George Wallace, he wielded considerable clout, particularly in the university's vaunted football program. In the mid-1990s, he won a fierce legal and political campaign against Alabama's governor and state lawmakers to retain his seat on Auburn's board. ESPN in 2006 named him the most powerful booster in college sports.

Ever since the banking crisis erupted, Colonial has been regarded as a potential casualty as swelling loan defaults depleted its capital buffers. Efforts by Mr. Lowder's team to stabilize the bank repeatedly fell short. In June, Mr. Lowder announced he was retiring, handing the reins to two of the bank's longtime directors. Mr. Lowder couldn't be reached for comment on Friday. Colonial's downfall illustrates the problems with the current patchwork bank-regulatory system. In 2008, Colonial's primary regulator, the Office of the Comptroller of the Currency, began raising concerns about the bank's commercial-real-estate portfolio. That June, Colonial said it was ditching its OCC charter, opting instead for state regulation in Alabama.

Last fall, despite the worries of some federal regulators about the bank's troubles, the Treasury Department granted Colonial preliminary approval to receive taxpayer funds through TARP. The $550 million in bailout cash it was slated to get was conditioned on Colonial raising at least $300 million of capital from private investors. That was a tall order, given the bank's woes. Earlier this year, Colonial lined up a capital injection from Florida mortgage lender Taylor, Bean & Whitaker Mortgage Corp. that would have required the company to yet again switch its main regulator, this time to the federal Office of Thrift Supervision.

But that deal fell apart this summer after Colonial and Taylor Bean were raided by federal agents as part of a criminal probe. Taylor Bean has since been forced to shut down. Meanwhile, the inspector general of TARP has asked for an investigation of how Colonial was approved for the funds. The FDIC, Federal Reserve Bank of Atlanta, and state of Alabama all slapped Colonial with severe restrictions this year. But by that time, many of the bank's problems were beyond repair.

Federal bank regulators recently began working on a private agreement to prohibit any bank with significant problems from switching charters to escape tough regulation. The Obama administration's proposed overhaul of banking rules would try to make this impossible. At a Colonial branch in Atlanta on Friday afternoon, customers came and went with no indication that BB&T already had dispatched employees to Colonial markets to prepare for the takeover. "It's business as usual," said Brian Rouse, an assistant bank manager, adding that customers could deposit and withdraw funds normally. There were no long lines inside the branch, an automated-teller machine or drive-through.

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Colonial, 4 other banks fail

Late Friday, the FDIC also said that four other banks had failed. Outside of Colonial, the largest collapse of the day was Community Bank of Nevada in Las Vegas, which went under with assets of $1.52 billion and total deposits of about $1.38 billion. Its failure will cost the FDIC's Deposit Insurance Fund an estimated $781.5 million

The Nevada bank did not find a buyer, leaving the FDIC in control of its assets. The agency immediately created a new institution, the Deposit Insurance National Bank of Las Vegas, which will remain open for approximately 30 days to allow depositors access to their insured deposits and give them time to open accounts at other insured institutions. Banking activities, such as direct deposit, writing checks, and using ATM and debit cards, will continue normally through the transition.

Dwelling House Savings and Loan Association in Pittsburgh closed its door for the last time Friday. The FDIC said PNC Bank will assume control of its assets. It was the first Pennsylvania bank to fail this year. As of March 31, Dwelling House held assets worth $13.4 million and total deposits of $13.8 million. The FDIC estimates that this closure will cost the its insurance fund $6.8 million. MidFirst Bank of Oklahoma City assumed all deposits of two failed Arizona banks, Union Bank in Gilbert and Community Bank of Arizona in Phoenix. Community Bank of Arizona had assets of $158.5 million and total deposits of approximately $143.8 million. Union Bank had assets of $124 million and total deposits of approximately $112 million.

The two failures, the first in Arizona this year, will together cost the FDIC's insurance fund around $86.5 million. The 77 bank failures so far in 2009 has more than tripled last year's total of 25. 

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FDIC chief says parts of regulatory plan won't fly

Federal Deposit Insurance Corp. Chairman Sheila Bair is pushing back against key pillars of the Obama administration's financial overhaul plan, saying they wouldn't survive in Congress and calling her own alternatives more viable. In an interview with The Associated Press, Bair said Congress won't approve two major parts of the package: Expanding the Federal Reserve's authority to regulate the largest financial companies and giving a proposed new consumer protection agency examination and enforcement powers over banks. Such authority now belongs to her agency and other bank regulators.

"There's a lot of resistance from a lot of different quarters to a lot of the things the administration has submitted," Bair told the AP Thursday. "That is a reality the administration needs to deal with." Bair said alternatives she has backed would "provide a framework that can actually get through Congress." Her ideas include empowering a new agency to protect consumers from abusive mortgage and credit card products — but having bank supervisors enforce those rules. She said she supports "90 percent" of what the administration has proposed. But on giving the new agency enforcement powers, she said, "I just don't think that works."

Bair's statements highlight Treasury's uphill struggle to sell the administration's proposed financial overhaul to Congress and the public. Since the plan was rolled out in June, industry groups have balked at rules they say will burden companies and raise borrowers' costs. Bank industry lobbyists are leading the charge against major parts of the plan. Congress has objected to concentrating more power in the Fed. Critics say the central bank failed to properly use its consumer protection authority before the crisis erupted. Bair and other federal regulators have voiced their own opposition to parts of the plan, in what some Obama administration officials have dismissed as efforts to protect their turf.

Fed Chairman Ben Bernanke has questioned the need to create a consumer financial agency that would strip the central bank of some of its duties. Bernanke has said he thinks oversight of consumer protection should stay with the Fed. In response to such resistance, Treasury Secretary Tim Geithner has angrily demanded that regulators line up behind the plan — even though Treasury has no authority over independent agencies such as the FDIC, the Fed and the Securities and Exchange Commission. Bair says she's raising legitimate policy questions. As head of an independent regulatory agency, she said she has a duty to tell Congress her opinion.

Amid concerns the plan is faltering, top Treasury officials have defended it in a series of interviews this week. They have insisted the plan is on track and have played down differences among regulators. In the interview, Bair said "there's a lot more congeniality and conversation and exchange of views than the press gives us credit for." "It would be great for everybody to be in line on all of this, and eventually we will be, but part of that really is and should be the legislative process," Bair said.

In a separate interview, Deputy Treasury Secretary Neal Wolin told the AP, "What's important is, at the end of the day, that we all keep our eyes on the prize, make sure we're all pointed toward comprehensive reform of the financial services sector." He said it's not surprising "that in understandable Washington style, (regulators) defend their own institutions." He said Bair's view that the administration plan can't pass Congress could become "a self-fulfilling prophecy." Bair countered that dismissing the different views she and other regulators have aired isn't "helpful." "I think there are basic, fundamental policy issues here that need to be looked at," she said. Her objections relate to the administration's plans for a new Consumer Financial Protection Agency, with authority to make and enforce rules for financial products.

The Fed now has authority to make those rules. Bank regulators, including the Fed, FDIC and Office of the Comptroller of the Currency, enforce them. Wolin said this structure has led to uneven enforcement of rules intended to protect consumers from predatory lending and other abuses. "It is important that there be one institution that has as its focus consumer protection ... and that the rule-writing and supervision and enforcement for consumer protection be done all in one place," he said. But Bair said it is vital for bank regulators to maintain oversight over both consumer issues, and bank safety and stability. "It is interrelated in a way that is very, very difficult to tease out," she said.

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Ilargi: Very interesting from Reggie Middleton. Loss rates 4 times higher than in Fed calculations, that's quite a feat. I left in the Elizabeth Warren video, though I posted it a few days ago. It's a must see. I left out the multitude of tables Middleton closes the article with. Click the title to go to the original.

Fact, Fiction, Farce and Lies! What happened to the Bank Bears?
by Reggie Middleton

I have some good news and some bad news. The good news is that that market neutral strategy illustrated through the blog research is working like a charm (I will be posting some results soon). The market has been on a massive bullish tear, to the dismay of market bears. Well, the new strategy works and it allows us to profit from both bullish and bearish moves. I have transformed my personal portfolio to the market neutral strategy. The bad news is that the problems that caused those of us who know how to count to be bearish are still abound and have apparently been conspired into the bin of ignorance.

 Accounting boards, banks, media and sell side analysts in general appear content to ignore the facts, change the way we count losses (after all, losses are,,, well,,, losses. Right???!!!), and generally sweep the banking problems under the rug in anticipation of bubbling our way out of the problem or at least concealing it long enough through accounting shenanigans to allow accounting profits to somehow paper over economic losses. Good luck with that. Underlying fundamentals are still deteriorating, albeit potentially at a slower pace, as share prices are literally flying through the roof. Those who are in the market and are bullish or not market neutral are, in my opinion, playing with fire. It is gambling to buy stock just because the stocks prices are going up. I know it feels good when the prices go higher after you buy the stock, but the underlying fundamentals are atrocious and if one were to get caught in a nasty correction, one could not have said it was "impossible to see coming".  This is exactly the same scenario that played out in the dot.com bubble. Bulls were justified because share prices went higher, not because underlying values increased. When reality hit (and it always does hit, that's whey they call it reality) folks were literally wiped out.

I will anecdotally illustrate some of that fire investors are playing with in the banking sector. While I was browsing through the extremely interesting, if not controversial Zerohedge.com blog, I came across this video of Elizabeth Warren, who heads the Congressional Oversight Committee's investigation of the banks. I will like my readers to listen to it then continue reading this post.

 

Visit msnbc.com for Breaking News, World News, and News about the Economy

Wells Fargo and over $100 billion of economic losses????

 In the case of Wells Fargo, we have applied high LTV ARM loss rates to calculate the losses on HELOCs (which comprises of total 1-4 family junior lien mortgages and line of credit) since the direct HELOC data was not available for WFC. The total losses in these loans are expected to skyrocket as can be seen from the raw, and unbiased NY Fed and FDIC call sheet data (see The Re-Release of the Open Source Mortgage Default Model and Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets). It is a small wonder why the Treasury failed to use this government data to run the bank stress tests, for if they did the outcome would have been far different, and decidedly much more negative. We have taken a conservative approach in valuing the loan losses due to which the total loan losses in the HELOCs alone would be 56.4% or US$62.1 billion.

We have segregated the total HELOC loans as owner occupied and non-owner occupied based on the proportion mentioned in the FDIC data derived spreadsheet for each respective states. Than, applying the default rate assumption made in this sheet for High Risk ARM (owner occupied - 65% & non-owner occupied - 95%) we calculated the total default rate for each state.

Further, we applied the recovery rate based on the current LTV to arrive at the total charge-off in the next two years.

The total losses are expected to jump to US$187.4 billion in the adverse case in the coming two years. Wells Fargo's current Tangible Common Equity (TCE) stands at 3.28%, which is significantly lower than the prescribed limit of 4%. According to our estimate, the bank's TCE would fall to 1.56% at the end of 2010 after adjusting for accounting and economic losses. Considering the massive anticipated losses in the next two years, Wells Fargo's capital would fall short by US$34.3 billion and not US$13.7 billion as shown by the SCAP result (see America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario, Welcome to the Big Bank Bamboozle!, and The Real Stress Test Results) to maintain a TCE ratio of 4% in the pessimistic case. As Wells Fargo has raised US$8.6 billion capital it would still be required to raise additional US$25.65 billion as a safeguard against a deeper economic downturn or a recovery marred by another negative dip, OR a recovery hampered by lingering unemployment OR a recovery contrained by floundering property sector OR a recovery pulled down by mediocre growth. 

Here is the Wells Fargo Eyles test, Texas Ratio and Tangible Equity trends using FDIC and NY Fed data as fed though our forensic model, incorporating off balance sheet entity risk.

  Click graphic to enlarge


 


Wells share price is up nearly 400% since March while nearly every compreshensive credit metric (if calculated using real, unbiased data in a real, unbiased fashion) forecasts a very, very different outcome.











Federal Reserve Vs Our Computation - Loan Loss Estimates

Our Analysis

Methodology to compute loan loss rate: Real estate 1-4 family mortgage loans

Real estate 1-4 family mortgage loans comprise prime loans and Alt-A loans. Since the complete breakdown of loans into prime and Alt-A is not known for Wells Fargo, we have assumed the default rate of Alt-A loans in the US. Thereafter, we adjusted this default rate to factor in the prime real estate 1-4 family mortgage loans. We computed the net loss rate for two years (2009 and 2010) based on the Alt-A default rate to arrive at the overall default rate. We then applied the recovery rates, based on the decline in the housing prices and LTV, to calculate the total loss rate. We assumed the loss rate to be 20% lower than the loss rate of the Alt-A loan in each state as some proportion of the loans could be prime loans. The S&P Case-Shiller Index has declined around 18.9%, 29.3% and 29.2% since 2005, 2006 and 2007, respectively, as majority of these loan value have been wiped out completely due to the severe correction in prices while the LTV still remains very high. Based on the current LTV, we have assumed the recovery rate to derive the loss rate for 2009 and 2010.

The total impaired loans would thus have a loss rate of 31.2% in the coming two years while loss rate in the real estate 1-4 family first mortgage would be 20.1%. The Federal Reserve loss rate of 7-8.5% is far too optimistic to give a true picture.  

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Loophole in government program to buy toxic securities could cost taxpayers

Without safeguards, traders in the $40-billion program could use inside information to profit -- and any losses would be largely borne by taxpayers.

A controversial $40-billion government program to buy toxic securities from ailing banks has a flaw that law enforcement and financial experts say could allow traders to illegally profit from inside information. Critics of the program say that without adequate safeguards, traders could use the tens of billions of dollars provided by the government to manipulate prices and exploit the price swings in other trades. Because the government is providing 75% of the program's money -- $30 billion -- the manipulations could lead to significant losses by taxpayers.

"It is a conflict by design," said Neal Barofsky, the special inspector general for the banking rescue program who has urged tighter controls on the nine trading firms selected to participate. The Treasury Department, which is in charge of the program, says it intends to closely monitor trading activity to prevent illegal insider trading and profiteering at the expense of the public interest. But Barofsky said the government probably stands little chance of beating Wall Street at its own game.

"The Treasury cannot possibly match wits with the innovation and aggressiveness of Wall Street," he said. "If you give them a set of rules and there are technicalities and legal loopholes and things we haven't thought of, they are going to find that out, not because they are bad, but because that is what they are supposed to do. They are supposed to seek out profits at all costs." The program, known as the Public Private Investment Partnership, or PPIP, allows the nine investment firms to use the government money and $10 billion in private funds to buy up toxic securities held by banks.

The firms, chosen last month from a field of about 100 applicants, have already begun assembling pools of private investors to buy the securities, composed of troubled mortgages that have festered on banks' ledger books and hampered their return to health. The toxic securities, which could total $2 trillion, plummeted in value during last fall's credit crisis and became virtually impossible to sell because of uncertainty over their worth. Under the government's plan, traders would jump-start the market by making offers to banks for the securities, thereby setting fair prices for the securities and trading them on the open market. Sales could begin as soon as this month.

The chosen investment firms could earn large profits or bonuses on those trades, but their risk of losses is largely borne by the taxpayers, who are putting up most of the money. The danger is that traders in the government program could wield enormous influence in the market -- and there are no explicit restrictions on how they could use that influence to profit inside deals of their own. For example, a trader could privately buy up groups of toxic mortgages on the cheap then later drive up the price by purchasing similar mortgages using government money. The practice, known as "front running," could be technically illegal, but the firms are not barred from coming into the program with such securities and then trading them, Barofsky said.

"If being a trader in the program gives you information that enables you to do trades on the side, that isn't going to go over very well with the public," said Lynn Turner, former chief accountant at the Securities and Exchange Commission. "The inspector general is right."

The practice of using side deals strikes many experts as a return to what created the financial crisis in the first place. During the Wall Street boom years, massive profits were made by companies trading in unregulated side deals, while ordinary investors earned a fraction of those profits in regulated markets. Now, the Treasury Department seems to be explicitly creating its own miniature version of that system, said Mark Sunshine, senior consultant at First Capital, a commercial lender based in Florida. "[President] Obama has not required any tougher rules in the PPIP program at a time when he wants tougher rules," Sunshine said.

Barofsky said a simple solution would be to construct a "wall" between traders in the public program and those in other parts of the firms, thus preventing the manipulation of prices with inside information. But while the Treasury Department is still finalizing its rules for the program, it has rejected the wall, saying it would dissuade veteran traders from joining because they would be barred from making other trades. The program would be left with junior traders -- the only staff members that investment companies would be willing to isolate from their main businesses.

In a letter to the inspector general, Treasury officials said that investment firms privately told the department that they would not get involved in the program if there was an attempt to wall it off. The Times asked all nine firms about their current trading practices in mortgage-backed securities and their plans for internal controls once trading begins using taxpayer money. The firms declined to answer all of the questions, including identifying who would lead their trading teams.

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Race is on as U.S. home buyer tax credit nears end

Samantha Kielar is scrambling to find a house in Colorado before the doors slam shut on an $8,000 first-time buyer's tax credit she needs for her downpayment or home repairs. The clock is ticking fast. Qualified borrowers need to have house offers accepted by the end of September to assure lenders enough time to beat the November 30 federal deadline to close deals, industry executives said.

"I am willing to settle for something" to finish buying quickly, said 20-year old Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot "is speeding up the process," she said, adding that "$8,000 could help remodel the house, redo carpets and cabinets." For loans backed by the Federal Housing Administration (FHA), which require a minimum 3.5 percent downpayment, the $8,000 can be also be applied upfront toward the purchase rather than later on tax returns like other mortgages.

The National Association of Realtors projects 350,000 additional first-time buyers will own homes thanks to the tax credit, said spokesman Walter Malony. First-time buyers are injecting life into the most severely battered housing market since the Great Depression. Home sales have risen for three straight months, a ray of hope after three years of tumbling sales that swept prices down more than 30 percent on average and drove record foreclosures. The state of housing is critical to the overall economy. While stabilizing, housing is unlikely to quickly recover as long as unemployment stays at the highest rate in more than a quarter century, most economists agree.

But various federal stimulus offers, mortgage rates that sank to record lows in April and pockets of economic strength make home buying more fathomable. Odete Gomes, a 30-year old women's wholesale clothing buyer in New York City living with her parents and six-year old son, said the soon expiring tax credit "kicked me in the butt to not lose this opportunity" to buy her first home. "Especially now with the government helping you a little bit, you just gotta go for it," she said.

Average 30-year home loan rates of 5.29 percent in the past week were above the all-time low of 4.78 percent set in April, but much lower than 6.52 percent a year ago, said home funding company Freddie Mac. Rigid credit standards will prevent the type of wholesale lending that fueled a record home sales and price spree early this decade. Still, distressed prices, plenty of available properties and low borrowing costs should keep housing from falling apart anew once the home buyer credit disappears, said Gregory Miller, chief economist at SunTrust Bank in Atlanta.

"These programs are giving housing a boost," he said. "When the tax credit expires, the housing market should have even more legs under it" and gain traction on affordability. "Housing is on a sustainable path," Miller added. "We have those who wanted to buy before but couldn't afford the price, and those who would have bought before but couldn't sell the existing house. Both of those groups are lined up to buy now." The real estate industry is making a full-court press to get the Obama administration to extend the program, though health care and other priorities may derail those efforts.

Realtors said many borrowers remain unaware of the credit and its expiration date. "There needs to be an extra rush by buyers, because the transactions need to close by November 30 and that will put some types of transactions in peril," said Sherry Chris, president and chief executive of Better Homes and Gardens Real Estate in Parsippany, New Jersey. Once aware, some potential first-time buyers, who tend to be younger and have less savings, will be unable to clean up their credit enough to get loans approved for the deadline. Documentation has intensified since the financial crisis spawned by massive losses on loans made when standards were lax. The process has been prolonged as a result.

Gomes, who with a friend is buying a new $280,000 home in Newburgh, New York with an FHA loan, has an estimated closing date of September 30, almost two months from purchase commitment. Some transactions, including foreclosures and short-sales, take much longer to complete. Property owners are also expected to sweeten offers to lure potential buyers to capitalize on demand spurred by the tax credit in its final stages. "It wouldn't surprise me if sellers started coming out of the woodwork and began to offer incentives and began to become a little more proactive in selling their homes," Chris said.

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'Fastest Dying Cities' Meet for a Lively Talk

Here's an idea for saving Rust Belt cities: Tell bloggers and radio stations to stop calling your town a basket case. That was one suggestion from representatives of eight of the 10 cities labeled last year as America's fastest dying. They met at the Dayton Convention Center last weekend to swap ideas about how to halt the long skid that's turned cities like Detroit, Cleveland and Buffalo, N.Y., into shorthand for dystopia. The city representatives lunched on $6 sloppy Joes and commiserated through Power Point strategy sessions: Lure back former residents, entice entrepreneurs and artists, convert blighted pockets into parkland.

What emerged was a sense of desperation over the difficulty of rebounding from both real problems -- declining populations, dwindling tax bases -- and perceived woes. Valarie McCall expressed frustration at marketing a city that still echoed the image of the polluted Cuyahoga River catching fire. "That was 1969," said Ms. McCall, Cleveland's chief of governmental affairs. "Come on, I wasn't even born then." Last year, Forbes.com used long-term trends of unemployment, population loss and economic output to devise a list of "America's Fastest Dying Cities." A few months later, Peter Benkendorf was eating chicken tacos when he hatched the idea for the symposium.

Mr. Benkendorf, a 47-year-old Dayton resident, said he was angry the article ignored efforts by the cities to attract small businesses and entrepreneurs. He thinks these cities are poised for reinvention. "For a long time, people thought granddaddy was going to come back and make everything all right again," said Mr. Benkendorf, referring to the manufacturers that decades ago built the economies of cities like Dayton. "People have begun to realize that's not going to happen."

Mr. Benkendorf, who directs an arts program affiliated with the University of Dayton, named the symposium, "Ten Living Cities." Dayton skeptics called it "Deathfest." One was college student Joe Sack, 22. "It's like a gambling addict [trying] to help an alcoholic," he said while at work in a coffee shop. "It's hard to see what they can learn from each other." Dayton, which has a population of 155,000, has since 1970 has lost more than 1,000 manufacturing jobs a year and a third of its residents. NCR -- the cash-register and ATM maker -- once employed more than 20,000 here. This summer the company said it would move its headquarters and 1,000 jobs to Georgia.

The cities' meeting began Saturday with Forbes reporter Joshua Zumbrun telling the city representatives and about 100 visitors that his story was among his most popular. Then he apologized for any hurt feelings. Representatives of Dayton, Detroit, Cleveland, Buffalo; Canton and Youngstown, Ohio; Flint, Mich.; and Charleston, W.Va., took turns talking about their plans. There was little discussion of how cities might pay for the initiatives. Dayton Mayor Rhine McLin ran to the podium for her talk. "If you look under the surface, you will see that we are developing a boutique city," she said. She didn't elaborate on what she meant.

But the city is working with hospitals, universities and a U.S. Air Force base to rebuild neighborhoods. About 500 abandoned structures will be razed this year with $3.5 million in federal stimulus money. Neighbors can annex the empty lots or the city will plant prairie grass and call them parks, said John Gower, Dayton's director of planning and community development. "We can't go back and recreate the neighborhoods of the 1950s and 1960s, but we have a huge opportunity to create a new form for our cities," Mr. Gower said. "People want to live in beautiful places near green space."

In a historic reversal, the cities are embracing plans that emphasize growing smaller. In Buffalo, where more than a third of the students drop out of high school, Michael Gainer, executive director of Buffalo ReUse, is putting young people to work dismantling some of the thousands of abandoned homes and selling the scrap materials. A councilman from Charleston described how the city lured "The Worlds Strongest Man Competition." It was shown several times on ESPN, she said. Matt Bach, public relations manager for Flint's convention and visitors bureau, said the image most closely linked to Flint was a scene from Michael Moore's 1989 documentary "Roger and Me": a woman skinning a rabbit to make a fur coat. The Dayton audience groaned in sympathy.

Mr. Bach described how he is fighting back. After a Canadian radio station aired a "This Ain't Flint" campaign to cheer up listeners depressed about Ottawa's economy, Mr. Bach orchestrated a letter-writing and email effort to stop the ads. The station awarded Flint more than $60,000 in free radio time that Flint used to air spots about vacationing in Michigan. Youngstown Mayor Jay Williams talked of helping startup companies. This month, his city was named by Entrepreneur Magazine as one of the 10 best in the U.S. to start a business.

Mr. Williams, a tall 37-year-old with a background in banking, argued that some who have moved out of Youngstown may consider moving back. A University of Pittsburgh demographer is tracking former residents with the idea of telling them about the city's new direction. "We don't want to force anything on them," said John Slanina, a Youngstown native working on the project. "But we want people to know, 'Hey, Youngstown is changing, take a look.'" Mr. Slanina said he's optimistic about the future of his hometown. But for now he lives in Columbus, Ohio, and has no plans to move back.

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