Tuesday, November 30, 2010

Today's Links

1--Food Banks Bracing For End Of Extended Unemployment Benefits, Huffington Post

Excerpt: Two federal programs -- Emergency Unemployment Compensation and Extended Benefits, which together provide up to 73 weeks of jobless aid on top of 26 weeks of state aid -- are set to begin to expire this week because Congress has not reauthorized them. According to the Labor Department, two million long-term unemployed will be dropped from the programs by the end of December if Congress does not act.

Congress allowed benefits to lapse twice for a brief time earlier this year, and once for a long time, when 2.5 million had their benefits interrupted for nearly two months over the summer....

The Congressional Budget Office recently reported that extended unemployment benefits prevented record poverty in 2009 and were used mostly by middle-class Americans. Households with total income more than twice the poverty threshold received 70 percent of the $120 billion the federal government spent on unemployment benefits last year. Part of the reason is that the benefits themselves push families into higher-income groups.

A study released by Feeding America this year found that of the 37 million people served by its member food banks, 70 percent came from households with incomes below the poverty line. The study found that 5.7 million people received emergency food assistance in 2009, a 27 percent increase from 2006.

2--Obama seeks to freeze government workers pay, but gains nothing, EPI

Excerpt: In the context of the deficit, Obama will get chump change from freezing federal pay, and will only enlarge the degree to which federal pay lags that of the private sector (a gap of 22%, according to the federal pay agent’s report.

This is another example of the administration’s tendency to bargain with itself rather than Republicans, and in the process reinforces conservative myths, in this case the myth that federal workers are overpaid. Such a policy also ignores the fact that deficit reduction and loss of pay at a time when the unemployment rate remains above 9% will only weaken a too-weak recovery. --Lawrence Mishel

3--Japan, South Korea factory output slumps as inventory rebuild slows, Reuters

Excerpt: Japanese companies cut production for the fifth month and by the biggest margin since February 2009, while South Korea's industrial output fell for the third month in a row, disappointing markets which had bet on a rebound.

"The inventory rebuilding cycle after the recession has come to an end, and what we're left with is final domestic demand, which isn't doing that well across the globe," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

Economists had long expected Asia and the world economy would slow in the second half of this year and early in 2011 as the rebuilding of inventories that had been depleted during the recession was drawing to an end and the effects of stimulus packages were wearing off.

4--Investors start to dump Spanish bonds, Bloomberg

Excerpt: Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.

“There’s a universal dumping of Spain going on,” said Andrea Williams, who helps manage about 623 million pounds ($968 million), including shares in Banco Santander SA, at Royal London Asset Management. “The fear is that Portugal, Spain and Italy are now in line after what happened in Ireland.”...

“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”

5--Putin's call to end dollar hegemony, credit writedowns

Excerpt: (Video) Russia and Germany should increase their economic co-operation. This is the message Russian Prime Minister Vladimir Putin delivered to some of Germany’s top business leaders in Berlin. Putin went so far as to suggest a Russian-EU free trade zone "from Lisbon to Vladivostok." The under-current from Putin’s remarks has much to do with anti-US Dollar sentiment because he said specifically that having the U.S. dollar as the sole reserve currency "is definitely something negative."

Putin is serious about ditching the dollar. But will this gain any traction? RT video below. Watch the last portion as well in which Max Keiser says the re-emergence of Germany as a super power is the trend to watch.

6--Insolvent – Greece, Ireland, Portugal and probably Spain, FT. Alphaville

Excerpt: Former FT blogger Willem, ‘Maverecon’, Buiter has lost none of his power to shock....Buiter claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised.

At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad....

Buiter: in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose).

In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign.

7--Number of the Week: 492 Days From Default to Foreclosure, Wall Street Journal

Excerpt: 492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.

8--The great "dollar crash" fiasco, Pragmatic Capitalism

Excerpt: “If my theories prove correct it is likely that the dollar is well oversold and equities have become overextended on false hopes of a Fed driven economic recovery. This means the market is excessively concerned about inflation and we are likely to move closer towards our economic reality of disinflation with a higher risk of deflation than high inflation. If this is correct it means there is a fairly sizable air pocket beneath risk assets currently. Warren Buffett once said it is better to be greedy when others are fearful and fearful when others are greedy. I am currently fearful.”

Since then we’ve seen a 7%+ move in the trade weighted dollar and the smallest 12 month increase in the history of the CPI report. In other words, inflation remains non-existent. For the minority who understood how QE was actually going to impact the economy this was an obvious inefficiency at work (yes Eugene Fama, you are still wrong and this was real-time evidence of it). QE2 wasn’t inflationary and it never was going to be inflationary because it merely alters the term structure of outstanding government debt and nothing more. It is not money printing.

This was just one more opportunity for the fear mongering hyperinflationists to latch onto something. Even as Ben Bernanke himself explained that he was not printing money we continued to see aspiring Presidential candidates, talking heads and even bunny rabbits explain to millions how the Fed was destroying the value of the dollars in our pockets. This was not only irresponsible, but entirely wrong. QE2 is not inflationary in the least bit. It does not help the US government spend in the future. It will not cause a dollar crash. It’s just an asset swap. It’s an unusual form of the standard monetary operations that the Federal Reserve always performs. But monetary policy during a balance sheet recession becomes a blunt instrument. QE2 is perhaps the most misunderstood and irrelevant policy the Fed has ever embarked upon. Or as I prefer to call it – the greatest monetary non-event.

9--A bit of truth on North Korea, Jimmy Carter, Washington Post

Excerpt: Nearly eight years ago, I wrote on this page about how in June 1994 President Kim Il Sung expelled International Atomic Energy Agency (IAEA) inspectors and proclaimed that spent fuel rods could be reprocessed into plutonium. Kim threatened to destroy Seoul if increasingly severe sanctions were imposed on his nation.

Desiring to resolve the crisis through direct talks with the United States, Kim invited me to Pyongyang to discuss the outstanding issues. With approval from President Bill Clinton, I went, and reported the positive results of these one-on-one discussions to the White House. Direct negotiations ensued in Geneva between a U.S. special envoy and a North Korean delegation, resulting in an "agreed framework" that stopped North Korea's fuel-cell reprocessing and restored IAEA inspection for eight years. ...

Sporadic negotiations over the next few years among North Korea, the United States, South Korea, Japan, China and Russia (the six parties) produced, in September 2005, an agreement that reaffirmed the basic premises of the 1994 accord. Its text included denuclearization of the Korean Peninsula, a pledge of non-aggression by the United States and steps to evolve a permanent peace agreement to replace the U.S.-North Korean-Chinese cease-fire that has been in effect since July 1953. Unfortunately, no substantive progress has been made since 2005, and the overall situation has been clouded by North Korea's development and testing of nuclear devices and medium- and long-range missiles, and military encounters with South Korea.

Monday, November 29, 2010

Hammering Ireland


The terms of the EU/IMF's €85 billion ($113 billion) bailout for Ireland are much worse than analysts had anticipated. Ireland will be required to use its National Pension Reserve Fund (NPRF) to shore up its insolvent banks and to maintain government operations. At the same time, senior debt-holders will not share any of the losses brought on by the banks reckless lending. According to Bloomberg News, "Prime Minister Brian Cowen told reporters there had been no support in talks to ask senior bondholders to lose part of their stake on loans made to Ireland's debt-crippled banks." Thus, 100 percent of the EU/IMF's €85 billion "Financial Rescue Package" will be paid for by Irish taxpayers.

This is a very bad deal. Irish workers have already endured nearly 3 years of depression-type conditions with shrinking wages, soaring unemployment and dwindling home equity. Now Brussels is taking aim at pensioners to save bondholders in Berlin and Paris from any losses on their bad bets. And that's not all. Here's an excerpt from the government's statement:

"The facility will include up to €35 billion to support the banking system; €10 billion for the immediate recapitalisation and the remaining €25 billion will be provided on a contingency basis. Up to €50 billion to cover the financing of the State.....If drawn down in total today, the combined annual average interest rate would be of the order of 5.8% per annum."

This is nothing but extortion. If Ireland wants to put its banks on solid footing, there's a way to do it that doesn't involve years of debt-slavery for its people. The government can underwrite the banks with a €10 billion loan from the Pension Reserve Fund that will guarantee deposits while the banks are nationalized and restructured. It is an excruciating process, but it's been done many times before. Ireland does not have to accept indentured servitude if it chooses not to.

And why would the government even consider paying an interest rate of 5.8% per annum? Interest rates should be the same as they are for the banks; 1 percent. Should a sovereign nation get a worse interest rate than a crooked banker who ripped off millions of investors?

Besides, Ireland is in the drivers seat. It's Ireland that should be making the demands, not the IMF or the EU. After all, the government currently owes the European Central Bank more than €130 billion. If the ECB wants to get its money back, it should be flexible about the conditions. Otherwise, Ireland can simply cut off negotiations and let the ECB hire a collection agency. See what good it does them.

Here's more from the government's statement:

"The Programme for Support lays out a detailed timetable for the implementation of the measures contained in the National Recovery Plan....The Programme has two parts – the first part deals with bank restructuring and reorganisation and the second part deals with fiscal policy and structural reform."

(Note--Bank restructuring is a moot point. Ireland can use its own national pension fund to guarantee deposits and underwrite loans.)

"The Programme endorses the structural reforms contained in the Plan which will underpin a return to sustainable economic growth over the coming years....The Programme endorses the Irish Government’s budgetary adjustment Plan of €15 billion over the next four years, and the commitment for a substantial €6 billion frontloading of this plan in 2011....The adjustment will be made up of €10 billion in expenditure savings and €5 billion in taxes...."

In other words, more penance for the victims. More belt-tightening, higher unemployment, more foreclosures, fewer social services, slower growth, and an ever-deepening slump. And for what? To be a member-in-good-standing in Brussel's Banktopia?

German chancellor Angela Merkel had been pressing other EU leaders to create a framework in which senior debt-holders would share losses with taxpayers in the future. On Sunday, Eurogroup Ministers announced the creation of a European Stability Mechanism (ESM) which was designed to address Merkel's concerns. It works like this: If a member state appears to be insolvent, then they must agree to a "restructuring plan" that may involve haircuts for bondholders. So far, so good, only that's not the way the ESM will work. Here's an excerpt from the Statement by the Eurogroup which explains why:

"This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut) in the event that the debtor is unable to pay......We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013." Statement by the Eurogroup, Financial Times)

So, an insolvent country (like Ireland) would need to get "majority" approval before it could declare bankruptcy. How's that going to work if the other countries are only interested in protecting their own bondholders? Surely, they would block the process.

Jean-Claude Juncker, the head of the Eurogroup, more or less admitted that the ESM was a fraud when he said that "private creditors would be forced to take losses only if ministers agreed unanimously that the country had run out of money." (Bloomberg) There's no way that German government officials would allow a country like Ireland to declare bankruptcy if its own banks stood to lose billions of dollars. (which they would)

This should remove any doubt about whose interests are really served by the Eurogroup.

Prime Minsiter Brian Cowen has sold out Ireland bigtime. The so called "rescue package" should have been rejected outright. It merely provides shady bankers with more money for speculation while condemning the rest of the population to years of grinding poverty and high unemployment. It's a "lose-lose" situation. Here's a blurp from a post titled "Ireland is Bankrupt...letter from an Irish citizen" which seems to sum up the mood pretty well:

"It doesn't matter that we struggled for 800 years to achieve independence, that millions died in the process; it doesn't matter that the folk memory of harsher times is still very much alive; none of this mattered to the few generations that have dismantled our country institution by institution and thrown the Irish people to the wolves..... Our political system is in ruins. The people have lost all faith in their elected representatives. They feel that welfare for the wealthy, bailouts for crooked corporations and rewards instead of punishments for embezzlement and thievery is the rule of the land. ... Our independent republic is less than a century old and already it's in smithereens -- we're in the gutter and being dictated to by the UK, Germany, France and the IMF. Mr. Ajai Chopra is our new vice-chancellor, our new Taoiseach, our new overlord and big boss and we've just been recolonized, first by our own brood of inbred gangsters and now by international bankers....

...But the blame game serves no useful purpose now: we're all fucked." (Ireland is Bankrupt...a letter from an Irish citizen", angrybearblog.com)

Today's Links

1--Portugal, Spain in crosshairs as Ireland bailed out, Reuters

Excerpt: The European Union's bailout of Ireland is unlikely to halt expectations that the euro zone debt crisis will spread to Portugal, or provide reassurance that a firewall can be built around Spain.

Europe's debt contagion has moved on from Greece to consume Ireland in a matter of months, even though Ireland had complained it was not like Greece and did not need help to sort out its bad banks or a gaping budget deficit.

"I think it is almost impossible now to stop the contagion," said Mark Grant, managing director of corporate syndicate and structured debt products at Southwest Securities in Florida.

2--The Definitive Unwrapping Of The "Irish Package", zero hedge

Excerpt: The program envisages that €35bn will be earmarked for Ireland’s local banks and €50bn for the budgetary requirements of the sovereign.

Of the €35bn for the banks, € 10bn will constitute an immediate injection in banks capital above and beyond what the government has already committed. The remaining €25bn will be provided on a contingent basis in 2011 after new stress tests and liquidity assessment conducted by the Central Bank of Ireland.

The aim of the program is the ‘a recapitalisation, fundamental downsizing, restructuring and re-organisation of the banking sector. To this aim, banks will be required to run down non-core assets, securitize and or sell portfolios or divisions with credit enhancement provided by the State, if needed....

While there is no final word on bondholder participation in the bank recapitalization plans, we believe that forced loss absorption for senior lenders is unlikely given the statements released today....The budget vote on December 7 is still in the balance but, in our view, is likely to be passed.

3--Should we sting our saviours? (Ireland's chance to go nuclear), Independent

Excerpt: A debate has already opened on the merits of a default or a devaluation. After all, our credibility is already shot, our credit rating was downgraded again last week, we are reduced to begging to the lender of last resort. What have we got to lose?

... We could press the nuclear button....Europe and the IMF should be told that we will not be discarded to the rubbish heap of history; that if their terms condemn us to a decade of poverty, we will walk. We must not underestimate the fear in Europe of the damage that an Irish default could cause. If they impose terms on us that would take us down the road to inevitable bankruptcy, we might as well default now as default later.

Desperation may be the only ace left in our hands. But it is a card we should be prepared to play.....Walking is an option.

4--New home sales: Down 80% from the boom, CNN Money

Excerpt: Home builders had another dismal sales month in October, falling to just one-fifth of the sales rate during the boom five years ago.

New home sales dropped to an annual pace of just 283,000, according to the Commerce Department. That was down 8.1% from a slow September and 28.5% from 12 months ago when the annualized sales rate was at 430,000.

"The new home market delivered another turkey of a performance last month," said Mike Larson, a housing market analyst with Weiss Research. "Sales fell sharply across most of the country."

Sales are off nearly 80% from the housing boom peak pace of 1.4 million, set in July 2005. Sales have remained near historic lows this year despite very attractive mortgage interest rates that slash the monthly costs of homeownership.

The Commerce Department also revised August sales figures downward to 275,000, which represents the record low point for new homes sales since it started tracking figures in 1963.

5--Rich Americans Ditch Home Ownership For Renting, Diana Olick, CNBC

Excerpt: “More affluent Americans are opting to rent as oppose to buy,” says Jack McCabe, an independent real estate analyst and CEO of McCabe Research and Consulting in Deerfield Beach, Fla. “Within the last year, so many people have seen their family and friends get burned in real estate. They don’t see it as being a risk free investment as they used to.”

And they're paying top dollar to rent. ...

In Manhattan the demand for high-end rentals has never been hotter. In the third quarter of 2010 there were 200 new leases signed for rentals charging $10,000 a month and up, more than double the 89 leases signed the year before, according to Jonathan Miller, CEO and president of New York City-based real estate appraisal and consulting firm Miller Samuel....

“The cachet that came with owning seems to be gone now," he says.

6--Demonstrators in Ireland denounce austerity cuts, WSWS

Excerpt: Michelle, a housewife, said, “I’m here today because I’m really angry that our government has sold us out, although I know they sold us out a long time ago. But today the bribers have become the oppressors and they are looking to turn Ireland into a third world country. I’m not having it. I’m not having my children starving on the streets because of the greed and corruption in the Irish government.

“Any time the IMF has gone into any country—look at Argentina—they turned people that had plenty into people that were starving. They gave away our oil, same as Fianna Fail gave away our gas field. I’m not putting up with it. I’m going to refuse to pay car tax, the TV licence, credit bills… The elite are driving the poor poorer, they want masters and peasants and I am not going to be anybody’s peasant.”...

Joe Smith, an environmental academic at Trinity, said, “I think the economic crisis in Ireland has been devolved by the global market and policies are being dictated by international market forces. This is going to end with a devastated and depleted country. Public sector workers are paying for the crisis caused by a carve-up between the bankers and the property developers. There will be fewer public workers, lower wages. I think it’s terrible that the Irish government’s hands are so constrained by the international system of finance, but they also helped cause it and are complicit in it, particularly with regard to the initial crisis.”...

“They are going after the people who are least able to afford it—the middle class and the lower class. They are asking us to pay a heavy price for their mischief, but they should set an example and take a big pay cut or contribute more. Hard working middle-class and working-class people, who are struggling to put bread on the table, should be able to breathe freely, and have some sort of arrangement to override this debt, which is going to go on for another 50 years.”

7--The Spanish Prisoner, Paul Krugman, New York Times

Excerpt: Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst... And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs.

But unlike America, Spain is on the edge of a debt crisis. ... Why is Spain in so much trouble? In a word, it’s the euro. .....

Through the good years,... the Spanish government appeared to be a model of both fiscal and financial responsibility... But ... prices and wages rose more rapidly in Spain than in the rest of Europe... And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.

Now what? If Spain still had its own currency, like the United States ... it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors.

8--Lessons From the Recovery Stage of the 1930s, David Wessel, Wall Street Journal

Excerpt: Avoiding a double-dip recession in the context of fiscal consolidation following a serious financial crisis is not a done deal unless central banks can keep real, or inflation-adjusted, interest rates low, according to economists gathered Monday at London’s Chatham House....

Not only is quantitative easing likely to be an important underpinning for fiscal consolidation but it also may be appropriate to revise inflation targets of central banks upwards.

–In 1931 and 1932, the British government, alarmed by deteriorating public finance, acted to over-ride the “automatic stabilizers” through deflationary budgets, which hit the economy hard. This mistake was not repeated by the outgoing Labour administration in the present crisis with the inevitable result that public borrowing rose very rapidly. This should not be seen as a failure but an appropriate response to the financial crisis.

–Leaving the “golden fetters” of a fixed exchange rate system was a key to recovery in the U.S. and the U.K. in the 1930s. This classic escape route is denied to today’s members of the euro zone, in the absence of which the prospects for economies like Greece look bleak indeed.

–Fiscal policy did not fail in the 1930s. Rather it was not really tried until very late in the day in the context of rearmament. The New Deal in the U..S was certainly not a Keynesian policy package.

–The 2009 U.S. stimulus package led to federal deficits as a share of GDP that are nearly twice as high as any peace-time deficits in U.S. history. The deficit response looks like the type of Keynesian response one might have expected for the Great Depression, while the response in the 1930s looked more like the type of response one would have anticipated to the modern recession.

9--The housing problem in 3 pictures, Pragmatic Capitalism

Excerpt: We’ve seen clear evidence in recent weeks that the housing double dip is in process. Price declines have varied depending on different reports with the prices of new homes reported as low as -13% year over year. The problems in housing remain entirely intact and as I’ve repeatedly stated over the course of the housing crisis it remains a problem of supply and demand.

If you’re attempting to visualize the problems in the housing market look no further than the following three charts (via Mortgage News Daily): (Take a look at the charts)

Saturday, November 27, 2010

Memo to Ireland: "Tell the EU and IMF to Shove It!"


Imagine that Yasser Arafat had succeeded in ending Israeli occupation and establishing a Palestinian state in the West Bank and Gaza. Now imagine that 10 or 15 years later, new Palestinian president, Mahmoud Abbas, agreed to hand over control of his country's budget to the IMF so his people's future would be controlled by outsiders. Do you think Palestinians would praise Abbas as a patriot or denounce him as a traitor?

Irish Prime Minister Brian Cowen is Mahmoud Abbas. He's caved in to the demands of foreign capital and transferred control over the nation's budget to the EU and the IMF. Here's an excerpt from a November 24, article in Reuters:

"Ireland's teetering government will announce plans on Wednesday to cut welfare spending sharply and raise taxes to help pay for the country's catastrophic banking crisis and meet the terms of an international bailout.

The four-year plan to save 15 billion euros is a condition for an EU/IMF rescue under negotiation for a country long feted as a model of economic development that has become the latest casualty in the euro zone's emergency ward.

Prime Minister Brian Cowen told parliament no final figure had been agreed for financial assistance, "but an amount of the order of 85 billion (euros) has been discussed.

The finance ministry said the austerity plan would be published at 1400 GMT and posted on the official government website." (Reuters)

This is a black day for Ireland. The Irish people will now face a decade or more of grinding poverty and depression thanks to their venal leaders. As soon as the ink dries on the IMF loans, the second occupation of Ireland will begin, only this time there won't be armored cars and Paramilitaries in fatigues, but nerdy-looking bureaucrats trained in the art of spreading misery. In fact, the loans haven't even been signed yet, and already IMF officials are urging the government to cut jobless benefits and the minimum wage. They're literally champing at the bit. They just can't wait to get their hands on the budget and start slashing away.

And don't believe the hype about European unity or saving Ireland. My ass. This is about bailing out the banks. The bondholders get a free ride while workers get kicked to the curb. Here's a clip from the Financial Times that spells it out in black and white:

"According to data compiled by the Bank of International Settlements, the three largest creditors to the Irish economy at the end of June...were Germany to the tune of €109bn, the UK at €100bn and France at €40bn. These sums amount to 2 per cent of France’s gross domestic product, 4.5 per cent of Germany’s GDP, and 7 per cent of British GDP."

See? Another bank bailout. Ireland is being asked to cut to social services, slash wages, renegotiate contracts, and dismantle the welfare state so that undercapitalized banks in France and Germany can get their pound of flesh. But, why? They're the ones who bought the bonds. No one put a gun to their head. They knew they could lose money if Irish banks went south. That's the risk they took. "You pays your money, and you takes your chances." Right? That's how capitalism works.

Not any more, it doesn't. Not while Cowen's in charge, at least. The Irish PM has decided to bail them out; make all the bondholders "whole again." But who made Cowen God? Who gave Cowen the right to hand over his country to the IMF?

No one. Cowen is a rogue agent kowtowing to international capital. After he finishes his work in Ireland, he'll probably join globalist Tony Blair on the French Riviera for a little hobnobbing with the tuxedo crowd.

It's revealing to watch the way Cowen works, as though the interests of foreign bankers mean more to him than those of his own people. For example, the Green Party withdrew from the government last night calling for new elections, but even though the government is in a shambles, the slippery Taoiseach wants to stay in power long enough to push through a new 4-year budget that will leave Irish workers on the brink of destitution. Who is Cowen working for anyway?

This is from the Irish Times:

"Opposition parties have today stepped up pressure on the Government as it seeks to push ahead with passing next month's budget.

Fine Gael again called for an immediate general election and said the four-year budgetary plan should only be implemented by a Government which has a proper mandate....

"What is best for the country is that the negotiation about a programme for four years be done by a government which has four years to serve, that has a mandate from the public so that it has the authority and the credibility to not only develop and negotiate it but to implement it. I think that is in Ireland's best interest," he said. ("Opposition steps up pressure", Charlie Taylor, Irish Times)

The prospective belt-tightening measures will include the firing of 28,000 public employees, a boost in property taxes, a 10 percent cut in welfare benefits, and higher taxes on low-wage workers. Cowen believes that taxing low income families is preferable to making billionaire bondholders eat their losses. The whole thing stinks to high-heaven.

Is there a way out for Ireland? Economist Mark Weisbrot thinks so. Here's what he thinks should happen:

"The European authorities and IMF can loan Ireland any funds needed in the next year or two at very low interest rates....Once these borrowing needs are guaranteed, Ireland would not have to worry about spikes in its borrowing costs like the one that provoked the current crisis....The European authorities could scrap their pro-cyclical conditions and, instead, allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF... calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs."

It's all de rigeur for the IMF. It wouldn't be an IMF program unless someone was starving. That's the benchmark for success.

Ireland doesn't need structural adjustment programs that shrink GDP, dismantle popular social programs and strip wealth from workers when low interest funding and fiscal stimulus can bring the economy back to life. This is politics not economics. The EU and IMF are using the crisis to push through their own agenda. Their real goal is to crush the unions, shred the social safety net, and roll back the gains of the Progressive Era.

The Irish people are left with no choice but to resist. Presently the Cowen government is collapsing. Bravo. Now it's off to the barricades to see if the damage can be undone. Ireland needs to withdraw from the EU and start fresh. It'll be a bumpy road at first, but there's no other way. Economist Dean Baker sums it up like this in an article in The Guardian. Here's what he said:

"Even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt....Like Ireland, Argentina had also been a poster child of the neoliberal crew before it ran into difficulties.

But the IMF can turn quickly. Its austerity programme lowered GDP by almost 10% and pushed the unemployment rate well into the double digits. By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt.

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009."

The Irish people didn't struggle through centuries of famine and foreign occupation so they could be debt-peons in the EU's corporate Uberstate. Like Sinn Fein president Gerry Adams said, "We don't need anyone coming in to run the place for us. We can run it ourselves." Right. Tell the EU plutocrats to take their Utopian Bankstate and shove it.

Today's Links

1---Manning the Barricades, The Economist Intelligence Unit, March 2009

Note: Still the best analysis of the financial crisis to date. (and it was written back in 2009!)

Excerpt: The credit crunch is dragging down the global economy and raising political tensions.

Collapsing credit has plunged the world economy into the deepest recession in more than 70 years. What began as a property bubble in the US has spread rapidly as troubled banks have stopped lending and consumers and businesses have stopped spending. As demand in the US and Europe evaporates, once- thriving emerging markets are losing their best customers and biggest investors. An increasingly synchronised global economy will contract in 2009 for the first time since World War II.

Eighteen months after it began, this economic chain reaction—from banks to markets to consumers to companies—is entering a new phase. Economic pain, reflected in millions of lost jobs and destroyed savings, has entered the political realm, causing some governments to collapse and threatening others. The risk of political instability is leading to a wave of trade protectionism, which is rippling across the globe. It was just such a political response in the 1930s, exemplified by America's infamous Smoot-Hawley tariffs, that deepened and prolonged the Great Depression.....

Scenario 3: The alternative risk scenario (10% probability)

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless...

The current financial and economic crisis was caused by decisions that contributed to the build-up of large economic imbalances—most importantly, in the US current account. Under our alternative risk scenario, the external imbalance is corrected through sharp currency movements; the dollar depreciates to US$2:€1 for a sustained period, overshooting temporarily to an even weaker level. The depreciation occurs relatively quickly, in a period of less than a year....

A successive series of expensive fiscal stimulus packages scares holders of US treasuries and other assets affected by the US fiscal position. Although the US avoids default, the country’s sovereign credit rating comes under increasing pressure, the more so as the administration fails to deal with long-term fiscal challenges such as Social Security and Medicare. Spooked investors leave the US for other assets, sinking the dollar on their way out. (A bleak but thoroughly realistic scenario for the dollar.) (Reprinted by permission)

2--Eating the Irish, Paul Krugman, New York Times

Excerpt: Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses,... the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts... — ... those spending cuts have caused a severe recession...

But there is no alternative, say the serious people: all of this is necessary to restore confidence. Strange to say, however, confidence is not improving. On the contrary: investors have noticed that ... austerity measures are depressing the Irish economy — and are fleeing...

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

3--The Retreat of Macroeconomic Policy, Bradford DeLong, Project Syndicate

Excerpt: For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue....

Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?

It is now clear that the right-wing opponents to the Obama administration’s policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.

Today, the flow of economy-wide spending is low. ... Yet..., here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

4--Income, Spending, and Saving All Rose in October, The Atlantic

Excerpt: Americans got another good economic report this week about personal income, spending and saving. They all increased, according to the Bureau of Economic Analysis. Additionally, the income numbers since April were revised mostly upward. These statistics strengthen the argument that the U.S. economy continues to recover.

Just 0.8% saving growth isn't much to brag about, but it certainly beats September's 4.7% decline. Americans aren't as interested in saving recently as they were a year or two ago. Over the past six months average saving declined by nearly 1%.

Although less saving is a bad thing from the standpoint of Americans strengthening their balance sheets, there's a silver lining. If Americans are saving less as incomes rise, then this implies that they're becoming comfortable spending more. For firms to ramp up hiring, they must sense renewed consumer demand, and less saving appears to indicate that Americans they are consuming more goods and services.

5--Foreclosed Homes May Flood Spanish Market as Banks Offload Unwanted Assets, Bloomberg

Excerpt: The number of foreclosed homes for sale in Spain may triple next year as new accounting rules prompt lenders to dump their depreciating assets, according to the co-founder of a website that advertises repossessed properties.

About 100,000 houses and apartments owned by banks are now on the market, Fernando Acuna said in an interview. A quarter of them are listed on the website operated by his Madrid-based company, Pisos Embargados de Bancos, on behalf of 25 banks....

Property values will fall 20 percent over the next five years, Rodriguez y Rodriguez de Acuna estimates. Most of the declines will come in 2011, he said. Since the Spanish market’s peak in April 2007, home prices have dropped 22.5 percent, according to a survey by real-estate website Fotocasa.es and IESE Business School.

5--Deals, Tradition Lure Shoppers On Black Friday, Wall Street Journal

Excerpt:Shoppers across the nation lined up in the predawn chill for $198 flat-screen TVs, low-cost laptops and other bargains as Black Friday signaled the traditional start of the holiday shopping season--and offered retailers hope that this Christmas will be merrier than the last two.

"We're off to a strong start," said Jerry Storch, chairman and chief executive of Toys "R" Us Inc. He said that most Toys "R" Us locations across the country reported more customers than last year waiting for the stores to open. About 138 million Americans are expected to go shopping this weekend......

Still, there were many reminders that the economy remains weak and that consumers are adhering to their budgets and shopping lists for loved ones. For those consumers, no personal luxuries were indulged.

6--Shadow banks, shadow sovereigns, FT. Alphaville

Excerpt: This is not your usual sovereign contagion post.

We’ve argued once before that Ireland’s failed bondholder bailout has unleashed contagion that does not just threaten the eurozone. Sudden illiquidity could also strike banking systems across the core, returning markets to volatility last seen during the late-2008 crisis....

It’s practically a truism these days that a modern European sovereign default would be vastly larger in terms of size of debt, and much more legally complex than the Russian or Argentine restructuring that once held the records. Even without considering any tricky shadow bank connections. (The likelihood of a domino effect is great)

7--The Instability of Moderation, Paul Krugman, New York Times

Excerpt: The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention....

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

When monetarism failed – fighting words, but you know, it really did — it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.....

the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

8--The Korean crisis and the threat of a wider war, WSWS

Excerpt: The potential for a catastrophic confrontation on the Korean peninsula is high. It is difficult to imagine another armed confrontation not provoking a major retaliation by the South Korean military.

What makes the situation all the more fraught with danger is the way in which it is being exploited by Washington to pursue its own strategic aims in the region, particularly vis-à-vis China.

US officials have acknowledged that the dispatch of the USS Washington and its accompanying destroyers and other escort ships to the Yellow Sea is aimed as much, if not more, at China as at North Korea.

“Mr. Obama’s decision to accelerate the deployment of an American aircraft carrier group to the region is intended to prod the Chinese,” the New York Times reported Thursday. “American officials hope that by presenting Beijing with an unpalatable result—the expansion of American maneuvers off its shores—China will decide that pressing North Korea is the lesser of two evils."

9--New Evidence Proves First Flag Made By Betsy Ross Actually Shirt For Gay Friend, The Onion

Excerpt: PHILADELPHIA—Historians at the University of Pennsylvania announced the discovery this week of a personal diary from the late 18th century that reveals the first U.S. flag sewed by Betsy Ross was originally intended as a shirt for her flamboyant gay friend Nathaniel.

"This has completely upended the accepted narrative behind the first American flag," said historian Kenneth Atwood, who led the team of scholars analyzing the long-forgotten journal of prominent Philadelphia homosexual Nathaniel Linsley. "Now we can say with certainty that our nation's most enduring symbol of freedom, strength, and prosperity is actually just the result of Nathaniel's desire for a sassy, tight-fitting top."...

"Thanks to the chance discovery of this diary, we now know that Nathaniel Linsley, a homosexual man, is the true father of the American flag," Atwood said. "And from now on, when we look up at Old Glory flying proudly above, we'll see the very same red, white, and blue that he wore tightly across his chest more than two centuries ago."

"Though, lamentably," Atwood added, "without the pricey sequin overlay he so desperately wanted.

Thursday, November 25, 2010

Today's links

1--Weekly Initial Unemployment Claims decrease sharply, Calculated risk

Excerpt: In the week ending Nov. 20, the advance figure for seasonally adjusted initial claims was 407,000, a decrease of 34,000 from the previous week's revised figure of 441,000. The 4-week moving average was 436,000, a decrease of 7,500 from the previous week's revised average of 443,500....

The four-week average of weekly unemployment claims decreased this week by 7,500 to 436,000. This is the lowest level for the 4-week moving average since August 2008. This decline is good news.

2--Credit rating agency reform: The best action is no action, Housingwire

Excerpt: n a strange turn of events, the Securities and Exchange Commission Tuesday extended its no-action position against the credit rating agencies.

It's strange, because it seems regulators are struck with an acute case of amnesia. And honestly, it's not such a bad infliction.

The SEC is currently reinventing itself as a regulator with some serious enforcement behind it, most notably in the Goldman Sachs $550 million levy. However, the message is now that the rating agencies, which largely escaped massive scrutiny under Dodd-Frank, are not only vital to the securitization process, but able to self-improve and self-regulate.

To be clear, the markets are all for no action against the credit rating agencies. The SEC announcement removes an element of uncertainty from asset-backed securitizations.

3--Devaluing History, Paul Krugman, New York Times

Excerpt: Menzie Chinn goes after Paul Ryan’s challenge: “Name me a nation in history that has prospered by devaluing its currency.” But why go back to the 1930s?

How about:

-Britain, which recovered strongly from its early 90s doldrums after it devalued the pound against the mark in 1992. (At the time, some wags suggested putting a statue of George Soros in Trafalgar Square.)

- Sweden, which recovered from its early 90s banking crisis with an export boom, driven by a devalued kronor.

- South Korea, which roared back from the 1997-1998 crisis with an export boom, driven by a depreciated won.

- Argentina, which roared back from its 2002 crisis with an export boom, driven by a depreciated peso.

And more. The truth is that every recovery from financial crisis I know of since World War II was driven by currency depreciation. In fact, that’s the biggest reason for pessimism now: because of the global scope of this crisis, the usual exit is blocked.

Now, I’m sure that the goldbugs will come up with ways to explain away all of these events. But at that point we’re not learning from history; on the face of it, history seems to suggest many cases of countries prospering through devaluation.

4--Iceland vs. Ireland, paul Krugman, New York Times

Excerpt:...at this point Iceland actually looks a bit better than Ireland....The IMF’s latest report on Iceland is remarkably chipper:

Under the recovery program, Iceland’s recession has been shallower than expected, and no worse than in less hard-hit countries. At the same time, the krona has stabilized at a competitive level, inflation has come down from 18 to under 5 percent, and CDS spreads have dropped from around 1000 to about 300 basis points. Current account deficits have unwound, and international reserves have been built up, while private sector bankruptcies have led to a marked decline in external debt, to around 300 percent of GDP....

What’s going on here? In a nutshell, Ireland has been orthodox and responsible — guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring — notice that wonderful line from the IMF, above, about how “private sector bankruptcies have led to a marked decline in external debt”. Bankrupting yourself to recovery! Seriously.

And guess what: heterodoxy is working a whole lot better than orthodoxy.

5--"Effects of the Financial Crisis and Great Recession on American Households", Michael Hurd and Susann Rohwedder, NBER

Excerpt: Conclusions The economic problems leading to the recession began with a housing price bubble in many parts of the country and a coincident stock market bubble. These problems evolved into the financial crisis. ...

According to our measures almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure. Additionally economic preparation for retirement, which is hard to measure, has undoubtedly been affected. Many people approaching retirement suffered substantial losses in their retirement accounts: indeed in the November 2008 survey, 25% of respondents aged 50-59 reported they had lost more than 35% of their retirement savings, and some of them locked in their losses prior to the partial recovery in the stock market by selling out. Some persons retired unexpectedly early because of unemployment, leading to a reduction of economic resources in retirement which will be felt throughout their retirement years. Some younger workers who have suffered unemployment will not reach their expected level of lifetime earnings and will have reduced resources in retirement as well as during their working years.

Spending has been approximately constant since it reached its minimum in about November, 2009. Short-run expectations of stock market gains and housing prices gains have recovered somewhat, yet are still rather pessimistic; and, possibly more telling, longer-term expectations for those price increases have declined substantially and have shown no signs of recovery. The implication is that long-run expectations have become pessimistic relative to short-run expectations.

Expectations about unemployment have improved somewhat from their low point in May 2009 but they remain high: they predict that about 18% of workers will experience unemployment over a 12 month period. Despite the public discussion of the necessity to work longer, expectations about working to age 62 among those not currently working declined by 10 percentage points. In our view this decline reflects long-term pessimism about the likelihood of a successful job search.

The recession officially ended in June 2009. A main component of that judgment is that the economy is no longer declining. According to our data the economic situation of the typical household is no longer worsening which is consistent with the end of the recession defined as negative change. However, when defined in terms of levels rather than rates of change, from the point of view of the typical household the Great Recession is not over.

6--Kucinich Calls QE2 Hearing, Wall Street Journal

Excerpt: Rep. Dennis Kucinich, a consistant critic of the Federal Reserve, has scheduled a hearing next week to investigate the central bank’s latest round of debt buying, giving the Ohio Democrat an official forum to assail a policy backed by President Barack Obama

The hearing will examine the Fed’s decision earlier this month to buy up to $600 billion in long-term Treasury debt “in light of massive unemployment and the seeming inability of government to invest in infrastructure or to intervene to stop the loss of jobs,” according to a Kucinich press release.

Next week’s hearing presents Republicans on the Oversight and Government Reform Committee with a platform to further politicize an issue that has become a talking point for GOP leaders and presidential hopefuls alike.

7--HAMPing Europe's periphery, Paul Krugman, New York Times

Excerpt: The markets don’t seem impressed by the Irish bailout — nor should they be. As I read it, European policy makers are still — still! — viewing the crisis as a confidence problem, not a fundamental problem.

The basic situation is that given the cost of rescuing Ireland’s banks, and the damage harsh austerity is inflicting on Ireland’s economy, investors are understandably skeptical that the Irish government will actually be able to meet its commitments. That’s why rates are high — to compensate for a possible default.

Now, this process is self-reinforcing: higher rates make it even harder to meet Ireland’s commitments, which leads to still higher rates, and so on. The European bailout basically short-circuits this vicious circle.

But the bailout will only work if the vicious circle is at the heart of the story — as opposed to being a symptom of the fundamental unsustainability of the austerity-and-full-repayment strategy. That is, it will work only if Ireland is the fundamentally sound victim of a self-fulfilling panic. And that’s a hard claim to make.

What would Ireland (and Greece, and Portugal, and …) need if the problem is not essentially one of confidence and liquidity? Actual debt relief. Yet that is not on the table.

8--Here comes the quantitative tightening, FT Alphaville

Excerpt: Conclusion--Global imbalances still pose significant risks to the global economy. The unwinding of global imbalances is therefore one of the major challenges on the global policy agenda. It is a joint task of surplus and deficit, of advanced and emerging economies....

Mr. Bernanke should also ask himself what would happen to American standards of living were the Chinese, Arabs, the Germans and the rest to take him at his word.

If this meant they were henceforth to use their surplus dollars directly for consumption, rather than channelling them toward the kind of unthinking vendor finance which has helped suppress world prices for so long, with money already so easy, his country would face an inflationary wave which its hollowed out industries could not easily expand to counter.

If America is being ‘impoverished’ under present policies it is because their settings encourage it to consume too much of its precious capital. Given this premise, we cannot expect that same capital to materialize instantly and to begin pouring out a plethora of cheap goods the moment the external tap is turned off.

Nor is it certain — as the argument implicitly assumes — that (outside the farm belt, at least) the extra spending would find its way into US cash registers instead of being shared out between the great producing nations themselves in a kind of BMW-for-oil-for-plasma-TV triangular trade.

9--First a Hand on Your Crotch, Next a Boot in Your Face, Michael Scott, Counterpunch

Excerpt:If the American public does not stand up and oppose the TSA enforced false choice between potentially dangerous irradiating body scanners or what amounts to federally mandated sexual harassment, then the Republic is almost certainly lost.(1) In the cause of fighting the 'war on terror,' the evisceration of the Bill of Rights will have finally been achieved. Americans must draw the proverbial line in the sand over this issue. The body scans and the invasive pat downs violate the fourth amendment. Despite the statements issued by the TSA, American citizens do not cede their constitutional rights when they buy a plane ticket or enter an airport....

Since 9/11, we have given up many of our rights and our government has condoned practices like torture, legalized assassination, kidnapping, indefinite detention without access to council or trial – all in the name of keeping us 'safe' and 'free'. We have adopted practices and behaviors that we used to abhor in other nations and regimes. These practices, as demonstrated by the TSA, have nothing to do with keeping us safe or free – quite the opposite....

The TSA and DHS may have done the country a favor by implementing such draconian and unconstitutional practices. They might just make us remember what the US once stood for and what a monumental accomplishment our Bill of Rights is for all of humanity. They might have reminded some of us what is worth fighting for and what it really means to be free. Freedom most certainly does not mean that when you enter an airport, that you are the prisoner of the TSA and subject to the whims of often poorly trained 'agents' on a power trip. Freedom does not mean being forced to stand by as your child has a stranger rub his or her hands all over him or her. Freedom does not mean that we must submit to dehumanizing searches in the name of safety. Our forefathers and all those men and women deployed around the world in the armed services did not and are not fighting for the right of a government agency to force Americans in to making a false choice between passing through a radiating naked body scan or being felt up.

Bernanke vs. Keynes

Investment drives the economy. It creates jobs, builds factories, develops technology, and stimulates growth. When investment falls, spending slows, unemployment rises, and the economy languishes in persistent stagnation.

Currently, businesses are sitting on nearly $2 trillion because business leaders cannot find profitable outlets for investment. Consumers and households are unable to spend at precrisis levels because much of their personal wealth was wiped out when the housing bubble burst. So, spending is down and borrowing is flat. The lack of demand has widened the output gap and kept unemployment unusually high.

At the same time, retail investors continue to exit the markets. Last week marked "the 29th consecutive week of domestic fund outflows." (zero hedge) Investors have been drawing-down their investments ever since the May "Flash Crash" when the stock market plunged nearly 1,000 points in a matter of minutes. The credibility of the equities markets has been severely damaged by high-frequency traders who use supercomputers to get an edge over "mom and pop" investors. Consider this: "70% of the stocks that are traded are held for just 11 seconds". Many retail investors believe he market is rigged which is why they continue to leave.

Even though investment is weak, the markets have continued to climb higher due to the Fed's zero rates and the speculative activities of high-frequency players. Regrettably, the uptick in equities has had no discernible effect on the real economy which--most people believe-- is still mired in a recession.

The stock market is an important gauge of economic vitality. When stocks soar, the public becomes more optimistic and confidence grows. When confidence grows, consumers are more apt to spend which boosts demand. Here's what British economist John Maynard Keynes had to say on the topic:

"The state of confidence, as they term it, is a matter to which practical men always pay the closest attention. But economists have not analyzed it carefully."

Fed chairman Ben Bernanke's efforts to restore droopy confidence have fallen short because he has taken the approach of a technician rather than a psychologist. Quantitative easing (QE) does not address the fears that people have regarding investment. Rather, it's an attempt to push down long-term interest rates in the hope that it will lead to another credit expansion. But that assumes that the obstacle to investment is interest rates and not something more elusive, like fear or uncertainty. This is the basic flaw in Bernanke's approach, he doesn't see that investment requires confidence in one's long-term expectations and that those expectations dampen when markets are in turmoil and outcomes are affected more by policy than fundamentals. When that happens, uncertainty grows and investors pull back. Here's an excerpt from Robert Skidelsy's "The Remedist" (in the NY Times) which sheds a bit of light on the question of uncertainty:

"Keynes created an economics whose starting point was that not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty, and this made disaster an ever-present possibility, not a once-in-a-lifetime “shock.” Investment was more an act of faith than a scientific calculation of probabilities."

Central bankers generally ignore the psychological aspects of investing preferring to operate according to their own models. But confidence matters. It's Bernanke's job to restore confidence through regulation, price stability and job-generating monetary policy. But bond yields suggest that the Fed chairman has failed in this regard. In fact, Treasury yields indicate that investors are clinging to cash (and cash equivalents) as ferociously today as the day Lehman Brothers collapsed 2 years ago. Bernanke hasn't restored confidence at all.

Quantitative easing is just more of the same; more fiddling with the financial plumbing instead of striking at the heart of the problem. Bernanke plans to purchase nearly $900 billion in US Treasuries from the banks (Note--$300 billion will come from the proceeds of maturing mortgage-backed securities) to push down long-term interest rates and (hopefully) stimulate additional spending. But more than 90% of the Fed's purchases will be short-dated maturities. (6 month, 2-year, 5-year, 7-year, 10-year) Why? Because Bernanke wants to push investors into riskier assets, like stocks. It's the Fed's version of social engineering, like zapping lab-rats onto the flywheel to earn their kernel of corn. This isn't the role of the central bank. Bernanke should stick to his mandate of "price stability and full employment".

So, how much effect does confidence have on the economy? Here's an excerpt from an article in the Wall Street Journal that deals with the topic:

'Sylvain Leduc, a research analyst at the Federal Reserve Bank of San Francisco, measured confidence by using surveys of economists’ forecasts from 1960 to 2009. An improvement in forecasts suggested respondents were more confident about the economy’s future. He measured economic activity by the jobless and inflation rates.

What Leduc found was that current confidence does indeed have an impact of future activity to a significant extent. For example, when the survey forecasts became more optimistic, the unemployment rate was more than one percentage point lower a year later....

Leduc noted that historically after an increase in confidence, monetary policy becomes more restrictive as short-term interest rates rise.....A wave of pessimism means more of an accommodative stance.

Consequently, the lack of optimism in the U.S. is another argument for why monetary policy will stay accommodative for a very long time." ("Confidence Affects the Business Cycle, Study Finds", Kathleen Madigan, Wall Street Journal)

Confidence shapes one's view of the future, just as one's expectations of the future effects his willingness to invest. But confidence does not exist in a vacuum, it requires particular conditions to thrive, the most important of which is low unemployment. The greatest source of uncertainty and insecurity is joblessness. Give a man a job and his view of the future immediately brightens. Confidence and employment go hand-in-hand. High unemployment means falling confidence, sluggish spending, flagging investment and slow growth.

Neither Bernanke nor President Barack Obama seem to understand the connection between unemployment and confidence. Instead, Obama thinks that the "shellacking" the Dems just got in the midterm elections was the result of a failed public relations strategy. "We just didn't get our message across", they think. But the real issue was jobs, not "messaging". The administration has made no attempt to reduce unemployment since congress passed Obama's $787 billion fiscal stimulus. Voters had no choice but to remove incumbents and give someone else a chance. The GOP won by default, there was no "mandate".

With unemployment still hovering at nearly 10 percent and underemployment at 17 percent, public confidence is at its nadir and the economy is still stuck in a near-depression. Bond yields are low because people are hanging on to risk free assets for "dear life". Savings are being stuffed into mattresses or government insured CDs that earn less than 1 percent per anum. Keynes explored why people hang on to their money when times are uncertain and here's what he found:

"The desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.” The same reliance on “conventional” thinking that leads investors to spend profligately at certain times leads them to be highly cautious at others. Even a relatively weak dollar may, at moments of high uncertainty, seem more “secure” than any other asset....

It is this flight into cash that makes interest rate policy an uncertain agent of recovery. If managers of banks and companies hold pessimistic views about the future, they will raise the price they charge for “giving up liquidity,” even though the central bank might be flooding the economy with cash. That is why Keynes did not think cutting the central bank’s interest rate would necessarily — and certainly not quickly — lower the interest rates charged on different types of loans. This was his main argument for the use of government stimulus to fight a depression. There was only one sure way to get an increase in spending in the face of an extreme private-sector reluctance to spend, and that was for the government to spend the money itself." ("John Maynard Keynes", Robert Skidelsky, New York Times)

Repeat: "It is this flight into cash that makes interest rate policy an uncertain agent of recovery."

Keynes was familiar with quantitative easing (although it was called something else at the time) and supported it as part of a larger monetary/fiscal strategy. But QE won't work by itself. The transmission mechanism (the banks) for implementing policy is broken, which means that stimulus must bypass the normal channels and go directly to the source---consumers, workers and households. There's no need to nibble at the edges of the problem with fancy asset shuffling operations (QE) that achieve nothing. Economists know what to do already. Fiscal remedies have been used for over a half century and they work just fine. The point is to increase government deficits enough to put people back to work. That's what builds confidence, boosts investment, stimulates spending, and puts the economy back on track.

Wednesday, November 24, 2010

Today's Links

1--Ireland: The Rise & the Crash, Ian Jack, The New York Review of Books

Excerpt: In 2006, at the height of the boom, construction accounted for almost a quarter of Ireland’s GDP and occupied a fifth of the workforce. Thousands of workers came from the poorer regions of Europe to meet the demand; Ireland, one of the great historical sources of emigration, became a net importer of labor. The migrants rented houses built by an earlier wave of migrants, while they built more houses that their employers hoped would be occupied by the next wave. The increase in debt was terrifying, or should have been (the taoiseach or prime minister, Bertie Ahern, cheerfully remarked, “The boom is getting boomier”). Bank lending for construction and real estate rose from €5.5 billion in 1999 to €96.2 billion in 2007—an increase of 1,730 percent—while house prices doubled in the six years to 2006. Estates for commuters now spread a long way out from Dublin. It cost more to service a mortgage on a house in a muddy field two hours’ drive from the city’s center, remote from shops and schools, than to pay rent for similar accommodation in a desirable part of the city. And on such mortgages the average Dublin couple spent a third of its income.

There had been warnings. As early as August 2000, well before the peak, a report from the IMF concluded that there hadn’t been “a single experience of price inflation on the scale of Ireland’s which did not end in prices falling.” In 2006, Professor Morgan Kelly of University College Dublin said there could be no “soft landing” for property values that had risen so much more steeply than incomes. Nobody wanted to listen. Prime Minister Ahern mocked Kelly as a moaner, and the press tended to take Ahern’s side. More remarkable, as O’Toole writes, was how few mainstream economists came to Kelly’s defense:

Every historically literate economist knew for sure that the Irish property boom was going to crash…. Yet the overwhelming majority of Irish economists either contented themselves with timid and carefully couched murmurs of unease, or, in the case of most of those who worked for stockbrokers, banks, and building societies and who dominated media discussion of the issue, joined in the reassurances about soft landings....

The dead beast, in short, was the price Ireland paid for its haste and greed. All across the country empty houses stand as its memorial, waiting among the poor fields for tenants and new beginnings. (a great read)

2--SETTING THE RECORD STRAIGHT … AGAIN, Breakfast with Rosie, David Rosenberg, Gluskin Sheff

The equity market certainly did turn in a surprisingly vigorous rally in the past few months but it would be a mistake to relate this to any real fundamental improvement in the economic backdrop. As we will likely see in today’s FOMC minutes, the Fed is yet again going to take a knife to its growth and inflation forecast as it has done with regularity over the past eight months.

To be sure, the double-dip has been avoided for now, but what is interesting is that nobody really believed in that scenario back in the summer, nor was any Wall Street research department calling for such even though for a time the risks were rising. The bottom in the equity market rally came, not on a piece of data towards the end of August, but on the back of the comments from Ben Bernanke in Jackson Hole that another round of quantitative easing was coming our way. This is why the rally ended, not on any particular piece of economic data, but right after the FOMC meeting a few weeks ago — a classic case of buying the rumour and then selling the fact. This is how markets often work since so much perception and psychology is involved.

For all the talk of economic improvement, the number of data points that were positive since the market bottomed in late August has been exactly equal to the number of negative data points....

Compensation per hour is declining and unit labour costs have fallen nearly 2% in the past year, which has been a major underpinning for profit margins, to be sure. How long the productivity miracle can last is anyone’s guess, but the excess slack in the labour market will linger on. What kept the consumer alive through all this was the massive help from Uncle Sam, but that is now coming to an end, which in turn will have some negative impact on domestic demand and revenue growth for the business sector. So, the combination of strong ex-U.S. growth and sustained solid productivity gains are going to be needed more than ever in order for the string of profits-surpassing-expectations to be extended into 2011.

So, yes, profits have come in just fine despite one of the weakest recoveries on record, but to some extent, much of this has already been priced in.

3--What the Republicans really want, John Berry, The Fiscal Times

Just before the mid-term elections, Senate Minority Leader Mitch McConnell candidly told the National Journal, "The single most important thing we want to achieve is for President Obama to be a one-term president." If that means doing nothing to help 15 million Americans searching for work who can't find it, too bad. If that means blocking ratification of a nuclear arms control treaty with Russia that's wholeheartedly backed by all the top U.S. military leaders as needed for national security, so be it. If that means stone-walling efforts to stimulate the economy with business tax cuts, or blocking extension of expiring jobless benefits, that's the way the cookie crumbles. If that means changing the law to direct the Federal Reserve to stop paying attention to unemployment and focus solely on inflation in its monetary policy decisions, we’ll ignore the fact that core inflation is the lowest in half a century.

In short, congressional Republicans don't want conditions in the United States to improve on any front before the 2012 elections. It's also clear they have no intention of cooperating with the president on any of the myriad problems facing the country. This was particularly evident when McConnell and John Boehner, incoming speaker of the newly Republican House of Representatives, said they were too busy to meet with Obama at the White House.

4--Yuan begins trading against the rouble, China Daily

Excerpt: China started allowing the yuan to trade against the Russian rouble in the interbank market from Monday as policymakers promote the currency's use in global trade and finance.

The move will help "facilitate bilateral trade between China and Russia and help develop yuan trade settlements," according to a statement published on the website of the China Foreign Exchange Trade System (CFETS), a subsidiary of the People's Bank of China.

"The pace of internationalizing the yuan is accelerating," said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp, the country's second-largest lender.

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was "worried" about holdings of assets denominated in the greenback. Purchases of US currency to contain yuan gains contributed to a $194 billion increase in the nation's foreign-exchange reserves in the third quarter, boosting the total to a record $2.65 trillion.

5--Ireland's Cowen May Be Asked to Resign by Own Party, Bloomberg

Excerpt: Irish Prime Minister Brian Cowen may be asked to resign by some members of his Fianna Fail party as the parliament prepares to pass the country’s 2011 budget, a lawmaker in the party said.

“Tonight I’ll be telling him that I’ve lost confidence in you, the public has lost confidence in you and for the sake of the country and the party, give us an indication when you will resign and let us select somebody to lead us into the next election,” Noel O’Flynn told Bloomberg News in Dublin today. “Several members will stand up and ask him to go after the budget” on Dec. 7.

6--Bankers dictate brutal cuts as part of EU-IMF bailout of Ireland, WSWS

Excerpt: The Irish government, led by Brian Cowen, has now conceded to the concerted international campaign. Of the €90 billion total, €15 billion is to go immediately to restock Irish banks, with the remainder earmarked to cover Ireland’s annual budget deficit of €19 billion for the next three years. Most of this will find its way into the coffers of the banks and ultimately to the international financial institutions that hold Ireland’s debts.

According to a report on the BBC web site, the deal does not require Ireland’s senior creditors to take any losses....

The bailouts of Greece and now Ireland mean effectively that both countries have yielded control of their economies and budgetary policy to non-elected experts from the European Union and the IMF....

Over the past year Ireland has already introduced the most comprehensive package of social and welfare cuts in Western Europe. As a result, wage levels in the country have already plummeted by 20 percent. Now the EU and IMF are demanding another round of draconian measures, which will have devastating consequences for the Irish population.

7--CoreLogic: Shadow Housing Inventory pushes total unsold inventory to 6.3 million units, Calculated Risk

Excerpt: CoreLogic estimates shadow inventory, sometimes called pending supply, by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.

According to CoreLogic, the visible supply of unsold inventory was 4.2 million units in August 2010, the same as the previous year. The visible inventory measures the unsold inventory of new and existing homes that were on the market. The visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales during the last few months.

The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago. Although it can vary and it depends on the market and real estate cycle, typically a reading of six to seven months is considered normal so the current total months’ supply is roughly three times the normal rate.
Mark Fleming, chief economist for CoreLogic commented, “The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

8--With New Power, GOP goes after Elizabeth Warren, Wall Street Journal

Excerpt: House Republican lawmakers fired the opening salvo Monday in a war they plan against the Consumer Financial Protection Bureau created by this year's overhaul of financial regulations....

The lawmakers wrote that the agency warrants "rigorous" oversight by the inspectors general because it will play a significant role in credit availability for consumers and small businesses. GOP lawmakers have also sent letters to regulators on the legal bills incurred by former executives of government-controlled mortgage finance giants Fannie Mae and Freddie Mac and the economic impact of the financial-overhaul rules being written by the Securities and Exchange Commission.

The letters are the strongest signals yet of how the new House Republican majority plans to use its oversight powers to hobble elements of the Obama agenda...

Among the issues the inspectors general have been asked to investigate is the power Ms. Warren enjoys in her temporary post, as well as how much authority the bureau has to write rules before it has a full-time director.

9--FOMC Minutes: Fed Is Now Openly Targeting A (Much) Lower Dollar, zero hedge

Excerpt: "Several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation—an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets.....

Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate." (The Fed knew that QE would weaken dollar)

Tuesday, November 23, 2010

Today's Links

1--U.S. nearing end of major Wall Street insider-trading probe, Washington Post

Excerpt:Federal prosecutors in New York are in the advanced stages of an extensive insider-trading investigation that could lead to criminal charges against Wall Street traders and executives, federal law enforcement officials said Saturday. Authorities had been preparing to file charges in the probe within weeks, but that timetable could be accelerated after an article about the investigation appeared in the Wall Street Journal on Saturday, the officials said.

The investigation, conducted by the U.S. Attorney's Office in Manhattan and the FBI, has been underway for several years and extends far beyond Wall Street to financial offices across the country, the paper reported. Officials would not discuss specific companies or individuals under scrutiny or provide further details. The Securities and Exchange Commission is conducting a parallel civil probe, officials said.

The Journal reported that authorities are investigating bankers at Goldman Sachs in particular who may have given confidential information about health-care mergers to certain investors. Goldman is the top provider of investment banking services in health-care deals. A Goldman spokesman declined to comment.

2--What's Really Behind Bernanke's Easing?, Andy Kessler, Wall Street Journal

Excerpt: I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks....

Before growth can occur, however, we have to fix what caused a recession in the first place. Often that means drawing down inventory that built up in the last boom, or tightening credit to whip inflation, as then-Fed Chairman Paul Volcker did in 1981. In late 2010, though, we still have banks overstuffed with toxic real estate loans and derivatives. But what about the trillion in bank reserves sitting at the Fed and earning 0.25% interest? Why isn't it being lent out? Perhaps because it's needed to offset unrealized losses on these fouled loans...

Mr. Bernanke is clearly buying time with our dollars. If real estate drops, we're back to September 2008 in a hurry. On Wednesday, the Fed announced that all 19 banks that underwent stress tests in 2009 need to pass another one. This suggests central bankers are nervous about real-estate loans and derivatives on bank balance sheets. In 2009, even with TARP money injected directly into their balance sheets, banks faced a $75 billion capital shortfall. Mr. Bernanke orchestrated a stock market rally so they could sell equity for much needed capital.

3--Ireland should 'do an Argentina', Dean Baker, The Guardian

Excerpt: The Irish people expected to pay in austerity cuts for their banks' sins have another option. Reject the ECB and IMF, ditch the euro.....

The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem...... Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning....

... even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt....Like Ireland, Argentina had also been a poster child of the neoliberal crew before it ran into difficulties.

But the IMF can turn quickly. Its austerity programme lowered GDP by almost 10% and pushed the unemployment rate well into the double digits. By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt.

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009.

4--There will be blood, Paul Krugman, New york times

Excerpt: Thus on the same day that Mr. Simpson rejoiced in the prospect of chaos, Ben Bernanke, the Federal Reserve chairman, appealed for help in confronting mass unemployment. He asked for “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits.”

(But) Republicans are trying to bully the Fed itself into giving up completely on trying to reduce unemployment.

And on matters fiscal, the G.O.P. program is to do almost exactly the opposite of what Mr. Bernanke called for. ... in particular, Republicans are blocking an extension of unemployment benefits — an action that will both cause immense hardship and drain purchasing power from an already sputtering economy. But there’s no point appealing to the better angels of their nature; America just doesn’t work that way anymore.

My sense is that most Americans still don’t understand this reality. They still imagine that when push comes to shove, our politicians will come together to do what’s necessary. But that was another country.

5--Japan's QE experiment, Wall Street journal

Excerpt: Japan's experience offers a case study in the possibilities and limits of quantitative easing, in which a central bank effectively prints money to spur economic activity.

The BOJ began doing quantitative easing in 2001. It had become clear that pushing interest rates down near zero for an extended period had failed to get the economy moving. After five years of gradually expanding its bond purchases, the bank dropped the effort in 2006.

At first, it appeared the program had succeeded in stabilizing the economy and halting the slide in prices. But deflation returned with a vengeance over the past two years, putting the Bank of Japan back on the spot.

So why didn't quantitative easing work in Japan?

6--Portugal's ticking timebomb, Ambrose_Evans Pritchard

Excerpt: Portugal will have a current account deficit of 10.3pc of GDP this year, 8.8pc in 2011, and 8.0pc in 2012, according to the OECD. That is to say, Portugal will be unable to pay its way in the world by a huge margin even after draconian austerity.

This is the worst profile in Europe. It requires a drip-feed of external funding that can be shut off at any moment, and undoubtedly will be unless the global economy goes full throttle into another boom. Or as the IMF puts it, "the longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive"....

Private debt is one of the highest in the world at 239pc (Deutsche Bank data), and the events of the last two years have taught us that private excess lands on the taxpayer one way or another in a crisis. A chunk of this is owed to foreigners, and must be rolled over....

The eurozone will face its moment of existential danger the day that Portugal is forced to tap the EU bail-out fund. A third rescue in months will push the combined bill towards €300bn (£257bn) and risk exhausting the political capital of EMU, leaving little left for Spain even if the European Financial Stability Facility can in theory handle one more domino.

7-- Ireland To Spend More Than 50% Of GDP To Bailout Banks (But Bank Bondholders Will Not Lose A Dime!), The Daily Bail

Excerpt: If you add together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP.

In Ireland, some would also include in the cost of the rescue the further 25% of GDP that is being provided to the banks in form of state-backed bonds, as payment for the toxic loans they've transferred to the banking rescue fund, the National Asset Management Agency. In other words, more than 50% of Irish GDP has been devoted to keeping its banks afloat....

there is a strong argument that since Irish taxpayers are incurring huge and rising losses to clear up this mess, the pain should be shared with all the guilty parties, who surely include the sophisticated financial professionals at foreign banks that foolishly provided Irish banks with the means to mortgage an entire economy.

8--There is another way for bullied Ireland, Mark Weisbrot, The Guardian

Excerpt: Is there an alternative? Yes... the European authorities and IMF can loan Ireland any funds needed in the next year or two at very low interest rates. We are talking about some 80-90bn euros over the next three years, out of a 750bn euro fund.

Once these borrowing needs are guaranteed, Ireland would not have to worry about spikes in its borrowing costs like the one that provoked the current crisis, in which interest rates on their 10-year bonds shot up from 6 to 9% in a matter of weeks....The European authorities could scrap their pro-cyclical conditions and, instead, allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF, in its July 2010 Article IV consultation with the Irish government, calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs.

9--Banks force FASB to loosen accounting rules, Floyd Norris, New York Times

Excerpt: The arguments over the use of market value — or fair value, as the accounting rules characterize the numbers — have polarized accounting debates. Banks complained bitterly that the limited rules forcing the use of market value for some assets contributed to the financial crisis, first by exaggerating their wealth as prices rose and then by making them appear worse than they really were when market prices plunged to unreasonably low levels....

The first assault by banks on fair value was aimed at preventing them from having to recognize such distressed prices as being fair, and they largely succeeded in that as both boards hurriedly put out advice under political pressure. The American board acted after Mr. Herz was called to a Congressional hearing and was berated by legislators from both parties....

The American board put forth a stronger and more comprehensive proposal. That proposed rule would allow banks to keep losses from falling loan values off their income statements, but the banks would be forced to show market-value numbers prominently. Banks, and their regulators, complained loudly....there is little doubt that the actual value of an asset, not what was paid for it, is usually more relevant in evaluating the financial health of a company.

Robert H. Herz, the chairman of the American group since 2002, stepped down at the beginning of this month...Mr. Herz told me this week that his decision to step down was not forced, but it appeared to have cleared the way for the board to soften its proposal....

Arthur Levitt, a former chairman of the S.E.C., said in an interview this week that he feared “independent standard setting is in greater jeopardy than at any time since the F.A.S.B. was formed.” He added, “I don’t see any power at all on the side of fair value. Because of the power of the banks and the actions of the Congress, the battle is well on its way to being decided.”

10--Credit Raters lobby to avoid new regulations, Wall Street Journal

Excerpt: Though many U.S. banks suffered losses on mortgage-related deals blessed by ratings firms before the crisis erupted, some financial institutions have been lobbying against a provision in the Dodd-Frank financial-regulation law passed in July that bans the use of ratings in federal agencies' rules...

Regulators want what some call a "simple" solution that allows large and small banks to comply without overburdening financial institutions or creating an oversight nightmare for regulators. A person who attended the meeting said that no clear consensus emerged. ...

The looming U.S. prohibition on the use of ratings to assess banks' risks contrasts with the more cautious approach of global banking regulators....The leading ratings firms were a prime target of lawmakers drafting the Dodd-Frank legislation. The companies were criticized as catering to investment banks and issuers to secure a steady flow of business at the expense of exercising independent judgment about risks of bonds backed by mortgages...Regulators have until July to strip all references to credit ratings from rules for assessing whether banks hold sufficient capital....

Short of such an amendment, some industry officials hope regulators could find creative ways to essentially bypass the ban. "Ultimately, the regulators have a lot of latitude to allow ratings to continue to be used, just not required to be used," says Tom Deutsch, executive director of the American Securitization Forum, a securitization-industry trade group.