Week in Finance 10/12 - 10/17

Fairfax County’s Budget

Fairfax County is implementing cost cutting measures to handle the, ever bleaker, outlook of this year’s revenues. The county will ask employees to all take one, unpaid, day off in January, it has suspended construction projects, it has suspended the purchase of new county vehicles, and will vote in the near future about whether to withdraw $25 million from its reserves, money tapped in time of financial need. Fairfax county officials are also considering a reduction in campus police officers.

County officials are projecting a $58.2 million shortcoming in projected budget revenues and up to $500 million in 2010. The budget crunch is exacerbated by the cut in funding from the Virginia to local muncipalities.

The board of supervisors is currently conducting a thorough review of county assets and reevaluating their revenue projections. The county will hold town hall meetings in which officials will solicit the views and feedback from concerned citizens.

Virginia’s Economy

The ripple effect from the national budget crisis hit home this week with an announcement by Virginia Governor Tim Kaine that there would be major cuts in the state budget. The state will be short by almost $1 billion this year, requiring the downsizing of 570 government jobs, postponement of employee raises, and a hiring freeze on over 800 employment positions with the state. The cuts will also include cuts for college funding.

Virginia Lieutenant Governor, Bill Bolling, announced that he would work closely with governor Kaine to balance the budget.

“These are challenging economic times for Virginia, with the Commonwealth facing a potential budget shortfall of $2B to $3B in the remaining months of the current biennium… I applaud the Governor for his commitment to bring the budget into balance through spending reductions and not higher taxes. While we can discuss where and how these spending reductions should be made, I am committed to working with the Governor to reduce the budget where necessary, while preserving to the greatest extent possible the core services of state government. This will not be an easy task, but it is a necessary task. When times get tough families and businesses must tightened their budgets and spend within their means, and state government should do the same,” said Bolling through a press release on his website.
The Virginia Small Business Financing Authority announced Wednesday, Oct. 16, that it will work with banks to help preserve Virginia’s jobs. VSBFA will give support in the form of guarantees or portfolio insurance to banks that restructure existing loans for qualified businesses.

The Housing Market

Stocks continued their downward turn as companies earning reports showed less than adequate performance and the housing profile from September showed construction nearly ground to halt. Housing starts fell from 872,000 to 817,000. Those were the same numbers reflected by the commerce department when the U.S. market was going through a housing price readjustment back in 1991.

Housing prices are set to fall steadily through 2009 and in to the indefinite future according to economists. It seems to be caused be a domino effect: banks and homeowners bet that the price of housing would continually rise—that’s logical, a rising population requires more housing, more construction, and great real estate investment—but defaults on mortgages rose simultaneously making banks with large reserves in mortgaged backed securities more and more insolvent.

Interest rates on mortgages continue to rise, reflecting fears that the Treasury will have to borrow heavily to finance the banking sector rescue. Unoccupied home numbers are as high as they were fifty years ago. Unemployment is on the rise while those who retain their jobs have seen wage increases barely commensurate with inflation making people wary about purchasing new homes.

Oil

Prices fell below $70 a barrel for crude oil for the first time in 14 months making gas prices for the consumer more affordable. The price drop caused Organization for Petroleum Exporting Countries to call an emergency meeting to discuss the price drop after months of rising prices. It has been a more than $40 a barrel price drop in the past three weeks. OPEC was created in 1960 as a cartel that would consort to raise oil revenues. It meets periodically to adjust production to prop up prices or keep them from collapsing.

OPEC is expected to curb production of oil in order to blunt the sharp fall of prices. Many of the oil producing nations that comprise OPEC require high oil revenues to balance their national budgets.

Some economists view the drop in oil prices as a stimulus for unstable economies, making it cheaper for consumers to fill up at the gas tank, keep the extra cash, and spend it elsewhere. Some economists predict that oil prices will drop below $50 a barrel in the coming months. The drop in price will lower gas prices this winter. Drop and oil prices and market indicators that inflation will remain steady could all have been contributing factors to the markets rebound of 400 points on Thursday, Oct 17.

The Bailout

Bush defended federal intervention in the financial markets at a press conference on Friday, Oct 17th. He claimed that the bail out package was necessary to stave off a wider scale financial meltdown but would take time to fully take effect.

Federal intervention began back when Countrywide announced that a large portion of its holdings were in high risk subprime mortgages. At that time the Federal Reserve brokered an agreement between major banks and Countrywide. The larger banks would absorb the sub-prime mortgages at a reduced cost to lessen the liability acquired on their balance sheets.

On Sept. 7 the government extended $200 billion to Fannie Mae and Freddie Mac, purchasing unsecured debt and keeping the organizations solvent. Freddie Mac and Fannie Mae either own or back $5 trillion in mortgage debt, half of the countries total mortgage debt.

Later in the month, the government was unmoved by cries of help from Lehman Brothers trading company.

The government took a 79.9% stake in insurance company AIG, through two extensions of credit, $85 billion on Sept. 26 and $37.8 billion on Oct. 8 for a total of $122.8 billion.

Bush emphasized in the press conference that government intervention would not be a nationalization of the banking system but simply a tax payer investment in the banking system.


Source Data: The Washington Post, The New York Times, The Fairfax Times, and other wire sources.