Thursday, October 21, 2010

Today's Best Reads

1--U.S. wants G20 commitment to let currencies rise, Reuters

Excerpt: The United States wants the Group of 20 countries to reduce global economic imbalances by committing to curb trade surpluses or deficits and by letting currencies rise more freely, a senior U.S. official said on Wednesday.

Ahead of weekend meetings of G20 finance ministers in Gyeongju, South Korea, the Treasury Department official made clear Washington wants currency values to be a focal point and sees current account levels as a vital part of the discussion.

China wasn't mentioned by name but Beijing's practice of managing the value of its yuan has angered the United States, which argues the currency's low value is fostering global currency tensions. (Expect a China/US clash this weekend)

2--The Wars of Austerity, Robert Skidelsy, Project Syndicate

Excerpt: I have become increasingly less hopeful about prospects for a rapid recovery from the global recession. Coordinated fiscal expansion ($5 trillion) by the world’s leading governments arrested the downward slide, but failed to produce a healthy rebound....

There are two reasons to be pessimistic. The first reason is the premature withdrawal of the “stimulus” measures agreed upon by the G-20 in London in April 2009. All the main countries are now committed to slashing their budget deficits.

The second reason is that nothing has been done to address the problem of current-account imbalances. Indeed, the talk nowadays of currency wars leading to trade wars is reminiscent of the disastrous experience of the 1930’s.

The problem of current-account imbalances is closely linked to the existence of a world savings glut. One part of the world, led by China, earns more than it spends, whereas another part, notably the United States, spends more than it earns. Provided the surplus countries invest in the deficit countries, these imbalances pose no macroeconomic problem. (Great stuff)

3--New York Fed Faces `Inherent Conflict' in Mortgage Buybacks, Bloomberg

Excerpt: The Federal Reserve Bank of New York’s effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.

The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., joined a bondholder group including Pacific Investment Management Co. that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities, people familiar with the matter said this week...

The Fed has no choice except to shield the assets it acquired as it stepped in to prevent a collapse of the financial system, said Joseph Mason, a finance professor at Louisiana State University in Baton Rouge.

“The New York Fed is, acting along with other institutional holders, trying to preserve the value of their securities holdings,” Mason said. “To act otherwise would be inappropriate and would be viewed as a waste of the government’s money that was invested in this bailout.” (More "extend and pretend". The assets are worth mere pennies on the dollar)

4--Banks Face Two-Front War on Bad Mortgages, Foreclosures, Bloomberg

Excerpt: Shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion.

While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks. Bank of America alone said this week that pending claims jumped 71 percent from a year ago to $12.9 billion of loans.

“It’s going to be trench warfare with years of lawyering,” Christopher Whalen, managing director of Institutional Risk Analytics, said in a telephone interview from White Plains, New York. “The banks can’t afford to lose.

5--Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy, Democracy Now

Excerpt: JOSEPH STIGLITZ: My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn’t understand economics. And let me be very clear about this. If we don’t stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments—investments in education, technology, infrastructure—you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments...

AMY GOODMAN: How much do you think a stimulus should be in this country?

JOSEPH STIGLITZ: Well, I think we really need $400, $500 billion a year. Part of the reason why we should try to keep those kinds of numbers in mind is to realize that we have a federal system, about a third of all spending is at the state and local level, and the states have balanced budget frameworks, which mean when the revenues go down, they have to cut back spending or raise taxes, which is very difficult in the current environment. And their revenues are going down. They depend very heavily on property taxes. Values of real estate have gone down 30, 40 percent, in some places 50 percent. And the result of this is that we’re laying off teachers. We’re laying off basic—those who provide basic services. So, while the government is coming to the end—the federal government is coming to the end of the stimulus, the states are retracting. We saw that in the September numbers on jobs. Sixty-seven thousand private-sector jobs were created—not enough for the new entrants in the labor force, less than half the amount we needed. But we lost, in total, 95,000 jobs. In other words, there was about a 140,000 loss in the public sector, predictable—I talk about that in my book—predictable, unless we find some ways of making up for their shortfall....it is the responsibility of state, of the government, to maintain the economy at full employment. And we recognized that in the Full Employment Act of 1946. Unfortunately, we are not living up to the commitment we made in 1946 to maintain the economy at full employment. We have, as I said, one out of six workers who are unemployed.

6--What Clayton Knew, Elliot Spitzer, Slate

Excerpt: Since the early days of the current economic cataclysm, I have believed that we would, with some investigation, find the Rosetta stone that would demonstrate that the banks knew that the toxic mortgages they were packaging were, in fact, not viable financial instruments.

Some of these documents have emerged, and they tell quite a fascinating and appalling tale: These documents, from Clayton Holdings, a due diligence company retained by the banks, reveal that Clayton, after analyzing more than 900,000 mortgages, told the banks that about 30 percent of the loans being packaged into securitized products did not satisfy the banks' own underwriting standards. This meant that the securitized products were almost bound to blow up.

So what did the banks do? They essentially ignored this information. We all know why: The process of securitization shifted the risk to others, and the banks were making too much money by continuing to push the deals through the pipeline. But the critical aspect to this information is that it puts to rest the banks' argument that they merely fell into the same econometric mistake that others had made in believing that the housing market was bound to keep rising. It wasn't just that the banks were wrong about their forecast of the housing market; it is that they intentionally ignored critical information given to them by the very people who were supposed to perform due diligence. And then they apparently withheld from investors that critical information about the quality of the bonds they were selling. (Must read)

7--Nine Stories The Press Is Underreporting -- Fraud, Fraud And More Fraud, Huffington Post

The ongoing massive cover up of losses on bad assets, particularly by the “too big to fail” institutions... Those institutions, along with Federal Reserve Board Chairman Ben Bernanke and Congress (at the behest of the Chamber of Commerce and with no opposition from the Obama administration) in April 2009 forced the Financial Accounting Standards Board (FASB) to change the rules so that the banks do not have to recognize their losses unless and until they sell the bad assets....

The repayment of TARP funds does not mean the banks are healthy. Their asset values are often grossly inflated, which means their net worth is grossly inflated.

The accounting lies are stalling the recovery. Markets cannot clear promptly when one creates an incentive to hold massively overvalued assets for years.

The losses are still there, but the taxpayers are on the hook via Fannie and Freddie and the Fed (which has taken over a trillion dollars in toxic collateral at grossly inflated values).

8--Europe Seen Avoiding Keynes’s Cure for Recession, Landon Thomas, New York Times

Excerpt: George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle classes because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit....

Across Europe, where the threat of a double-dip recession remains palpable, what is most surprising is not simply that governments from Germany to Greece are slashing public outlays but that the debate hinges more on how fast to do so....

Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But even as students and workers in France clash with the police and block fuel shipments to protest a rise in the retirement age, the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances.

“Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully.

“Europe obviously thinks it can focus on sound finances while the U.S. manages world demand,” he said in a telephone interview, “but unfortunately we are not doing that.”


9--Three Things to Do When Clarence Thomas’s Wife Calls You, Andy Borowitz, The New Yorker

Excerpt: Like many Americans, over the past several years I have been the recipient of multiple unwelcome voicemails from the wife of Supreme Court Justice Clarence Thomas. These calls have come in the middle of the night, at the crack of dawn, even at the dinner hour favored by telemarketers. Regardless of the time of day, all of these voicemails have one thing in common: she always sounds like she’s drunk-dialing me, except she appears to be completely sober.

I know what you’re saying: “It’ll never happen to me. Virginia Thomas doesn’t even have my phone number!” Well, that’s what I thought, and several years of trauma counseling later, I’ve come to realize (the hard way) what a fool’s paradise I was living in. Consider this: according to a recent study, the odds of Virginia Thomas leaving a threatening voicemail for you are higher than those of Christine O’Donnell correctly identifying the First Amendment. With those grim statistics in mind, here are three simple steps you can take if and when Mrs. Clarence Thomas calls:

1. Start apologizing the moment you hear her voice. Remember, like a bear at a campsite, Virginia Thomas does not want to eat you, she’s only after your food, and in this case, your apology is the only thing protecting you from Mrs. Thomas mauling you to death. If apologizing does not work, clap your hands loudly into the receiver in the hopes of scaring her away.

2. When she says, “This is Virginia Thomas,” reply, “No, this is Virginia Thomas. Who’s calling? Wait a minute—is that you, Anita Hill?” When she denies being Anita Hill (and she will), say, “There you go again, with your infernal lies. This is like Clarence’s confirmation hearings all over again. You disgust me, Anita Hill.” With any luck, accusing her of being Anita Hill will disorient her long enough for you to summon help.

3. Get in the habit of answering your phone, “Long Dong Silver residence.”

One final note: if you get a call in the middle of the night and there is silence on the other end, that is not Virginia Thomas. That is Clarence Thomas.

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