Last Week in Finance

By Broadside News Editor Noah Martin

Fairfax County’s Budget
Fairfax County is implementing cost cutting measures to handle the ever worsening 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, 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 into during times 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 by 2010. The budget crunch is exacerbated by the cut in funding from the state level to local municipalities.
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 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 fall 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. The cuts will also affect college funding.

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 units. 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 into the future according to economists. It seems to be caused by 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. 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 United States Treasury will have to borrow heavily to finance the banking sector rescue. Unoccupied home numbers are as high as they were 50 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 the Organization for Petroleum Exporting Countries to call an emergency meeting to discuss the price drop after months of rising prices. There has been a more than $40 a barrel price drop in the past three weeks.

OPEC is expected to curb production of oil in order to hault the sharp fall in 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.

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

Federal intervention began back when lender giant 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 own or back $5 trillion in mortgage debt, half of the countries total mortgage debt.

Later in September, 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.

Information compiled from The New York Times, The Washington Post, CNN.com, and other wire sources.