Monday, October 25, 2010

Today's Best Reads

1--Why the Fed Wants a Tad More Inflation, Wall Street Journal

Excerpt: In September, the Fed's policy committee said it was prepared to take new steps to invigorate the economy—likely large new purchases of U.S. Treasury bonds. The reason, it explained, is this: "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability." Huh?...

"The Fed wants to bring purchases forward in time to increase demand today," said Marvin Goodfriend, a former Richmond Federal Reserve Bank economist now at Carnegie Mellon's Tepper School of Business. Americans have been lectured for years to save more, and they are doing so; the Fed essentially is saying, 'Don't do too much of that right now, please.' ...

When inflation gets too low, an economy risks slipping into deflation, or falling wages and prices. That could be especially hard on individuals and businesses carrying heavy debt loads.

2-- Why Easier Money Won't Work , Joseph Stiglitz, Wall Street Journal

Excerpt: The Federal Reserve, having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the problem, now wants to make a contribution to preventing the economy from sinking into a Japanese-style malaise. How? As Chairman Ben Bernanke announced last week, through large-scale purchases of U.S. Treasurys—called quantitative easing, or QE.

The Fed is right to be worried.

If high unemployment continues, America faces the risk of losing human capital as the skills of the unemployed erode. It will then become increasingly difficult to bring the unemployment rate down to anywhere near the levels that prevailed in the mid- and late 1990s, and the higher unemployment rate and lower output will make the current pessimistic budget projections of the Congressional Budget Office and the Office of Management and Budget look rosy.

3--Will US consumer debt reduction cripple the recovery, McKinsey Global Institute

Excerpt: "Must read" report on consumer deleveraging

4--Reducing household financial leverage: the easy way and the hard way, Rebecca Wilder , Angry Bear

Excerpt: What differentiates this recovery from every other cycle since 1929 is the lingering debt deflationary pressures. There is a very large overhang of U.S. household financial leverage that’s going down one of two ways: the easy way, through nominal income growth, or the hard way, by default. Unfortunately, the hard way is rearing its ugly head.

1. If there is no income growth, then households must manually pay down debt at the cost of current consumption. The consumption decline drags the economy, and some default results.

2. If income growth is positive, then the degree to which households must pay down debt at the cost of current consumption will depend on the pace of income generation. This is the most macroeconomically-benign scenario.

3. If income growth is negative, i.e., deflation, then real debt burden rises. 30-yr mortgage payments, for example, are fixed in nominal terms and become more difficult to meet as income declines. In this case, widespread default is likely.

5--Chicago Fed: Economic activity slowed further in September, Calculated Risk

Excerpt: Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.58 in September from –0.49 in August.
The index’s three-month moving average, CFNAI-MA3, ticked down to –0.33 in September from –0.32 in August. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. (The post-stimulus slowdown begins)

6--The market is facing major headwinds, Credit Writedowns

Excerpt: The Fed’s acknowledgment that the economy is in trouble is again highlighted by the latest Beige Book released yesterday. The following are some excerpts from the report:

"National economic activity continued to rise, albeit at a modest pace..consumer spending was steady to up slightly, but consumers remained price-sensitive, and purchases were mostly limited to necessities and non-discretionary items..Housing markets remained weak..Most reports suggested overall home sales were sluggish or declining..Home inventories were elevated or rising..Conditions in the commercial real estate market were subdued, and construction was expected to remain weak.Reports suggested that rental rates continued to decline for most commercial property types..industry contacts appeared to believe that the commercial real estate and construction sectors would remain weak for some time..Hiring remained limited, with many firms reluctant to add to permanent payrolls, given economic softness..Future capital spending plans appeared to be limited"

7--A Far Away Country Of Which We Know Nothing, Paul Krugman, New York Times

Excerpt: I’ve been getting a lot of correspondence lately that runs something like this:

You’re an idiot. Give me one example in all of history of a country that spent its way out of a depressed economy

Ahem. There’s this country — people may not have heard of it — called the United States of America. (Must see chart)

8--Fiscal obsessions, Paul Krugman, New York Times

Excerpt: What Munchau doesn’t say, but I suspect he understands, is that this is in large part an extension of the case of the boy with a hammer, for whom everything is a nail. Bankers and economists love, just love, being fiscal scolds; deficits are something they understand, plus denouncing deficits is an easy way to sound all moral and responsible. Rather than facing up to the complexities of our current problems — how do you get out of a liquidity trap? how do you rein in shadow banking? — many Very Serious People would much rather lecture governments on the evils of red ink.

One thing that was very obvious from where I sit was the sheer joy the Greek crisis created for the VSPs. Here, at last, was their kind of issue. And this was one main reason they were so eager to Hellenize everything in sight. There has, I can assure you, been much disappointment over the failure of US interest rates to spike.

9--Real estate agents surveyed say distressed home sales nearly half of market, Housingwire

Excerpt: Distressed home sales took up 47.5% of the total home purchases in September, up from 45.7% in August and 44.8% a year ago, according to a survey of more than 3,000 real estate agents.

Campbell Surveys and Inside Mortgage Finance tapped a network of agents across the country to determine home sales and mortgage patterns. In September, distressed properties, or those sold that have been foreclosed on or in the foreclosure process, were taking more and more of the market share as first-time homebuyer activity continues to slow.

For 2009 and into 2010, the amount of first-time homebuyers and REO levels were parallel, but since the tax credit expired in April, this demand has dropped from as high as 42.4% in June to 34.4% in September.

Without the government-induced demand, the housing recovery has been put on hold, according to Thomas Popik, research director for Campbell.

"Current homeowners sell a home when they buy a home, resulting in no net take-up. Likewise, many investors buy, rehab and sell, providing no take-up," Popik said. "In contrast, first-time homebuyers absorb excess housing stock. However, in recent months, they have been able to play this role less frequently because of restricted financing."

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