US losing influence, housing starts, and the next Iceland

Here are some interesting stories I collected this week.

US surrenders power to appoint World Bank president
The US is to lose its power to appoint the president of the World Bank after the UK’s development secretary, Douglas Alexander, brokered a deal to throw open the post to candidates from any country.

Backed by European governments and developing countries, Alexander overcame resistance from the US and Japan to secure a reform he described last night as "a significant step forward".

My Comment:  This may not seem like much, but symbolically it is huge.  The World Bank wields enormous influence, and for Europe, et al., to demand, and receive, the right to fill the post speaks volumes about US prestige and power at this time.  

Banks borrow record $437.5 billion per day from Fed
NEW YORK (Reuters) – Financial institutions ran to their lender of last resort for record amounts of cash in the latest week, under extreme pressure from the worst global financial crisis in a generation, Federal Reserve data showed on Thursday.

Banks and dealers’ overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week’s $420.16 billion per day.

My Comment:   This requires a small bit of explanation.  This does not mean that banks took out another $400+ billion each day.  It means that the total amount they had outstanding from the Fed averaged  $437.53 billion.  This is like your average credit card bill for the month.  Still, it speaks volumes about where we are in this crisis.  Also, banks can quickly become addicted to new forms of credit, so watching how the Fed tries to undo this growing dependence on official money will be something to keep a very close eye on.

Housing starts fall 6% to 17-year low in September
WASHINGTON (MarketWatch) – Construction of new homes dwindled to a 17-year low in September as home builders sought to reduce the number of unsold homes in an elusive quest to find the bottom of the historic housing collapse.

Housing starts were off 31% in the past year and were down more than 60% from the peak in early 2006. In the past year, permits for single-family homes have dropped 39%, single-family starts have fallen 42%, and single-family completions have sunk 27%.

My Comment:   This is where the real economy lives – over in the housing markets.  There, the data is not only consistently bad, but it is still accelerating to the downside.  Even as far as the housing starts have dropped, builders are still building at a rate to complete more than 800,000 new units over the next year.

Yet vacant houses and now even vacant apartments are starting to accumulate as people move into dwellings with each other in a bid to save money.  Builders are still building at a rate that is far too fast for the current economic reality.  Look for more banks to get saddled with more defaulting construction loans as builders fail to sell these new units.

Ukraine – the Next Iceland
Ukraine emerged yesterday as the winner of the title "the next Iceland", with the International Monetary Fund offering the former Soviet republic up to $14bn (£8bn) to shore up its financial system. An IMF delegation landed in the country on Wednesday to try to stabilise the country’s battered banking sector and ailing currency, hit hard by the global financial crisis. The central bank was forced to impose restrictions on deposit withdrawals and lending after panicked savers rushed to empty their accounts, draining the banking system of more than $1.3bn. The authorities also had to rescue two key banks and battle a sharp fall in the currency as the stock market plunged.

Ukraine emerged as the biggest crisis after Hungary agreed to borrow up to €5bn from the European Central Bank. Capital Economics warned that there were risks for a swathe of emerging European economies in the Baltics and the Balkans, including Lithuania and Latvia.

Their problem is that they have been living beyond their means by borrowing to finance increases in their standard of living.

My Comment:   Trouble starts at the periphery and works its way in.  This is how I see the financial world. First there was the sovereign default of Iceland, a tiny country with an outsized banking system.  Now we find the Ukraine in the same difficulty, with the Baltics apparently not far behind.  

Still, I marveled at that quaint last sentence.  How could such a thing be a problem?  The more the US borrows beyond its means, the stronger its currency seems to grow.   At least lately.

In all seriousness now, I will note that what is true for the Ukraine will prove, someday, to be equally true for the US and for Europe.  Eventually, living beyond your means catches up with you.  Always; no exceptions.