Bernanke: Economy Faces 'Numerous Difficulties'

 CBS News Interactive: Eye On The Economy

WASHINGTON (AP) Federal Reserve Chairman Ben Bernanke told Congress Tuesday the fragile economy is facing "numerous difficulties" including persistent strains in financial markets, rising joblessness and housing problems - despite the Fed's aggressive interest rate reductions and other fortifying steps.

At the same time, Bernanke, testifying before the Senate Banking Committee, sounded another warning that rising prices for energy and food are elevating inflation risks.

The situation, he said, poses "significant challenges" for Fed policymakers as they try to chart the best course for keeping the economy growing, while making sure inflation doesn't dangerously flare up. All the economy's problems, including slumping home values, which threaten to make people feel less wealthy and less inclined to spend in the months ahead, represent "significant downside risks" to economic growth.

Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.

On Wall Street, stocks tumbled. The Dow Jones industrials were down nearly 200 points in morning trading.

Inflation has remained high and "seems likely to move temporarily higher in the near term," he warned.

Indeed, before Bernanke delivered his twice-a-year comprehensive economic assessment to Congress, the Labor Department reported wholesale prices jumped 1.8 percent in June. That left inflation rising over the past year at the fastest pace in more than a quarter-century.

"Given the high degree of uncertainty" about the Fed's economic outlook, Fed policymakers will need to carefully assess incoming information about inflation and economic growth, he said.

The Fed in June signaled an end to its nearly year long rate-cutting campaign because of growing concerns about inflation. Bernanke kept up his tough anti-inflation talk on Tuesday but stressed many other problems that could short circuit economic growth. He seemed to be keeping his options open in terms of rates. Given all the risky cross currents, economists believe the Fed will leave rates alone when they meet on Aug. 5.

Righting wobbly financial markets is key to getting the economy back on track, he said.

"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.

Bernanke's testimony comes just two days after the Fed and the Treasury Department came to the rescue of mortgage giants Fannie Mae and Freddie Mac, offering to throw them a financial lifeline.

The companies hold or guarantee more than $5 trillion in mortgages - almost half of the nation's total. The Bush administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans.

The pledges of aid have raised concerns about the government's role in such financial problems and the risk to taxpayers.

Strengthening regulatory oversight of Fannie and Freddie, Bernanke said, is "job one." Congress is moving ahead on a broad housing rescue package that includes provisions to tighten regulation over the two companies. Bernanke said legislative efforts to help stabilize the housing market - the biggest threat to the economy - are of vital importance.

Bernanke, in the first day of back-to-back appearances on Capitol Hill, said investors are nervous in general because of the cloudy outlook for the economy and credit conditions, feeding a vicious cycle that can be hard to break.

"Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy and thus for credit quality, remains uncertain."

The Fannie and Freddie troubles came on the heels of the failure of IndyMac, a big bank. "Its failure ... was inevitable," Bernanke said because the bank was weighted down by low-quality mortgages. "All banks are being challenged by credit conditions now," he said, adding that the Fed is keeping close tabs on the nation's banking sector.

And, earlier this year, a run on investment bank Bear Stearns pushed the company to the edge of bankruptcy and into a take over by JPMorgan Chase, which was backed financially by the Fed. That was a controversial move that prompted critics to call it a government bailout, putting taxpayers money at risk.

The Fed, in new projections, now believes inflation will be higher this year than previously thought, with prices rising as high as 4.2 percent under one inflation measure.

Growth for the year will be sluggish - at best 1.6 percent growth - but not as bad as previously forecast, helped by the government's $168 billion stimulus, including rebates. The unemployment rate, which could rise as high as 5.7 percent this year, is the same as earlier projections.

© 2008 The Associated Press. All Rights Reserved.

 

Midwest Airline Plans To File For Bankruptcy

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July 13, 2008 12:29 p.m. EST

Milwaukee, WI (AHN) - Midwest Airlines is planning to file for bankruptcy, according to its pilots.

This developed after collective bargaining agreement negotiations failed between pilots and the management of the U.S. airline.

According to Milwaukee Journal Sentinel reports, pilots were disappointed with Midwest as the carrier was not bargaining in good faith. The airline plans to have a better deal through a bankruptcy filing, the pilots said, which will impact "several millions of dollars" in wages and benefits.

But airline officials downplayed the accusations. Midwest said in a statement that it is "continuing to talk with the union despite claims to the contrary."

"We have been open and transparent in providing information, financial and otherwise, and believe strongly that our proposals are fair and equitable," it added.

A bankruptcy filing would enable Midwest to negotiate new labor contracts with its union, and re-negotiate debt with its lenders and creditors.

Foreclosures More Than Double In 2Q

 CBS News Interactive: Eye On The Economy

NEW YORK (AP) The number of households facing the foreclosure process more than doubled in the second quarter compared to a year ago, according to data released Friday.

Nationwide, 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S. households, Irvine, Calif.-based RealtyTrac Inc. said.

Soft housing sales, declining home values, tighter lending standards and a sluggish U.S. economy have left strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan.

Foreclosure filings increased year-over-year in all but two states, North Dakota and Alaska.

Nevada, California, Arizona, and Florida continued to clock in the highest foreclosure rates. One in every 43 Nevada households received a filing during the quarter.

Cities in California and Florida accounted for 16 of the worst 20 metro foreclosure rates. Stockton, Calif., had the worst rate, with one in every 25 homes in the town receiving a foreclosure filing. That's nearly seven times the national average.

RealtyTrac monitors default notices, auction sale notices and bank repossessions. Banks took back more than 222,000 properties nationwide in the second quarter, the company said. Bank repossessions accounted for 30 percent of total foreclosure activity, up from 24 percent in the previous quarter.

Economists estimated 2.5 million homes nationwide will enter the foreclosure process this year, up from about 1.5 million in 2007.

© 2008 The Associated Press. All Rights Reserved

Ha, those kids can go enlist in the Army. That is what always happens in an economic downturn. Happened to me in 82.

AirTran to shrink Atlanta hub

Airline posts $13.5M loss in second quarter

By KELLY YAMANOUCHI
The Atlanta Journal-Constitution
Published on: 07/29/08

AirTran Airways plans to shrink its Atlanta hub as high oil costs put pressure on the airline, the company's executives said Tuesday.

High oil prices mean it makes less sense to fly "lower-yielding leisure customers," AirTran's Chief Financial Officer Arne Haak said during an investor conference call. "This will result in our Atlanta hub getting smaller."

The Orlando-based airline has rapidly grown its Atlanta hub in recent years, bringing in more price competition against market leader Delta Air Lines.

"We created the market in Atlanta for low fares, for close-in regional business fares," AirTran Chief Executive Bob Fornaro said during the conference call. "Quite frankly, those average prices need to come up." When prices go up, the market will contract, and Fornaro said the number of flights AirTran has this summer is "too much."

Aside from cutting back in Atlanta, the airline also expects to close more operations in other cities it serves.

Fornaro also said that mechanics represented by the Teamsters have voted against a proposed pay cut. AirTran announced earlier this month that it plans to cut employee pay by 5 percent to 15 percent.

"Over time we will go back again to the Teamsters," Fornaro said. Haak said if the airline is not successful in cutting pay, it will need to reduce its fleet further, "and that will result in more terminations."

AirTran reported Tuesday that it lost $13.5 million in the second quarter and will cut flight capacity by 7 percent to 8 percent in the last four months of this year and by 4 percent to 8 percent in 2009 steeper cuts than previously planned. Fornaro hopes to increase that capacity cut to as much as 10 percent, depending on how many planes the airline can sell off. The company also is deferring deliveries of four more aircraft from Boeing for a total of 22 deferrals.

Though the airline is cutting back its operations, Fornaro said the airline may consider adding international routes such as to Cancun or to places in the Caribbean.

During the investor conference call on the airline's financial results, Fornaro said, "Clearly we are disappointed."

The company's second-quarter loss is equivalent to 12 cents per share. That compares to a profit of $42.1 million, or 42 cents per share, a year earlier, according to AirTran.

The airline's plans for additional capacity cuts come as airlines across the industry shrink to cope with high fuel costs. AirTran had previously planned to cut capacity by 5 percent instead of earlier plans to grow 10 percent.

The company also said it has negotiated an extension of its credit card processing agreement through Dec. 31, 2009, and agreed to a requirement by the credit card processor to hold back cash. The company said it now has a commitment for a line of credit of up to $150 million to cover part of the credit card processors' potential hold-back requirements. Hold-back requirements have contributed to problems for other airlines, including Denver-based Frontier Airlines, an AirTran partner. Frontier filed for Chapter 11 bankruptcy protection in April.

AirTran said its revenues in the second quarter ended June 30 were $693.4 million. That's up 13 percent from $613.5 million in the year-ago quarter. But its operating expenses were $738.9 million, up 37.9 percent from $535.7 million a year earlier.

It sucks that airlines like Midwest and Frontier are in such trouble, from what I read Midwest is a good airline. When they are gone all we will left with is large airlines that like usair and united that provide shitty service and try an nickle and dime everything. I guess hindsight is 20/20 but it looks like Midwest should have just let Airtran have their way with them.

Rumor has it he has been schooling in the Frank Lorenzo School of union busting.