Wednesday, October 13, 2010

Today's Best Reads

1--Economist Joseph Stiglitz warns of malaise “with no end in sight”, Paul Mitchell, WSWS

Excerpt: Writing in last week’s Sunday Telegraph, leading economist Joseph Stiglitz warned that the world economy faces a “Japanese-style malaise, with no end in sight.” What makes matters worse, he adds, is that Japan’s “lost decade” of low growth was accompanied by low unemployment and high “social cohesion”—unlike now....

Writing in last week’s Sunday Telegraph, leading economist Joseph Stiglitz warned that the world economy faces a “Japanese-style malaise, with no end in sight.” What makes matters worse, he adds, is that Japan’s “lost decade” of low growth was accompanied by low unemployment and high “social cohesion”—unlike now.

2--China Foreign-Exchange Reserves Jump to $2.65 Trillion, Bloomberg

Excerpt: China’s foreign-exchange reserves, the world’s largest, surged by a record to $2.65 trillion at the end of September, adding fuel to complaints that the nation’s curbs on gains in the yuan are undermining the global recovery.

Currency holdings rose about $194 billion in the third quarter, today’s statement from the People’s Bank of China showed. September exports were the second-highest on record at $145 billion, a separate customs bureau report showed.

“With hostilities in the currency war already declared, a record increase in FX reserves in the third quarter and a near record haul for exporters in September hangs a target around the neck of China’s exchange rate regime,” said Tom Orlik, a Beijing-based analyst for Stone & McCarthy Research Associates who formerly worked for the U.K. Treasury. (China's currency strategy sets the stage for Fed's quantitative easing)

3--Americans See Children's Future Dim in Poll as 50% Pessimistic, Bloomberg

Americans are responding to the tough times by conserving cash and making do with less over the past couple of years, according to the poll.

Almost half say they’ve started using coupons and changed where they shop for groceries and other household items to save money. Forty-four percent have cut regular household expenses, such as cable television, telephone or Internet service. Fifty- four percent have put off a major needed purchase, such as a car, started doing some chores or home repairs on their own, or figured out ways to drive less. In all, 85 percent say they have taken some step to cut costs.

Blaming Wall Street

Wall Street financial firms and the mortgage industry get the most blame for the country’s economic weakness. More than three-quarters of the 1,000 Americans polled say the former has hurt the economy, while more than 80 percent fault the latter. Former President George W. Bush also comes in for criticism, with three times as many people saying he hurt the economy as those who believe he helped it.

Americans overwhelmingly want the wealthy to carry more of the burden of putting the government’s fiscal house in order. Sixty-five percent say lawmakers should consider raising taxes on the rich back to where they were 10 years ago.

4--Securitization Flaws May Lead Investors to Fight Mortgage Deals, Bloomberg

Excerpt: Potential paperwork errors on as much as $1.34 trillion of securitized home mortgages may give investors an opening to back out of deals, threatening to unnerve financial markets, according to Joshua Rosner, managing director at Graham Fisher & Co.

Some loans to borrowers with poor credit before 2007 may not have been transferred to mortgage trusts in the manner required by their pooling and servicing agreements. That raises questions about the ownership of the loans and may allow investors to force lenders to buy back the securities, Rosner wrote yesterday in a note to clients.

The failure to include MBS trust names on documents and to properly assign loans to the trust may encourage MBS holders to challenge the entire securitization, rather than press lenders to take back individual loans that were fraudulently issued, according to Rosner, whose firm advises investors and regulators. That could set off legal fights over almost all subprime MBS sold to investors.

“If plaintiffs bring suit it could rock the market,” Rosner, 44, said in a telephone interview. “If courts allowed those suits to proceed it would well feel much like 2008,” when the bankruptcy of Lehman Brothers Holdings Inc. led to the biggest market collapse since the Great Depression, he said. (Could they really add loans to a trust without signatures?)

5--Number of European Banks Using Fed USD Swap Facility Increases By 100% In Prior Week, zero hedge

Excerpt: Something odd happened today when the ECB disclosed the number of banks using the Fed's USD swap facility - it increased by 100%. And granted it was an increase from one bank to two banks, but still. As we have been highlighting for over a month, one bank had for five weeks in a row been responsible for borrowing $60 million from the Fed using the ECB as an intermediary, paying roughly 1.19% for the privilege, implying it had been constantly locked out of the USD interbank market. Today, bank #2 joins in, this time for a much more substantial amount of half a billion dollars. (The Fed secretly provides liquidity to EU banks to forestall another Lehman and make conditions look better than they really are.)

6--Foreclosure Fraud: It's Worse Than You Think, Diana Olick, CNBC

Excerpt: The real issue is ownership of these loans and who has the right to foreclose....

The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts....

The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper. But Prof. Levin tells me that's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.

So with the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:

The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring. (Good summary of a complex problem)

7--Why printing money makes sense, Dean Baker, The Guardian

The basic problem we face is a lack of demand. Note that this is the exact opposite of the deficit fixation – budget deficits are a problem when we have too much demand.

To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.

What would be the effect of this counterfeiting scam on the economy?

In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy – or the counterfeiter was caught.

In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.

8-- Deep Poverty Reaches Record High Nationwide, offthechartsblog.com

Excerpt: The poverty line is the income level below which a family is considered poor. Last year it was roughly $22,000 for a family of four. When we say “deep poverty” here, we mean annual income below half the poverty line. For example, an individual who brings home less than about $5,500 per year is living in deep poverty. And a family of four is living in deep poverty if they are earning less than $11,000 a year.

Since the start of the recession began three years ago, the number of people in deep poverty has risen 22 percent. In fact, the number and percentage of people in deep poverty hit a record high in 2009, with the data going back to 1975. Nineteen million people were living in deep poverty in 2009, up 2 million from 2008.

9--CHRIS WHALEN DESCRIBES WHY 2011 COULD MAKE 2008 LOOK LIKE A CAKEWALK, Pragmatic Capitalism

Excerpt: Whalen-- The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.

Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.

The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007‐2009 period only means that this process is going to occur over next three to five years –whether we like it or not. The issue is recognizing existing losses ‐‐ not if a loss occurred.

Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re‐creation of RFC‐type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

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