Tuesday, November 2, 2010

Today's Best Reads

1--Number of the Week: 107 Months to Clear Banks’ Housing Backlog, Mark Whitehouse, Wall Street Journal

Excerpt: 107: How many months it would take to sell banks’ current and shadow inventory of foreclosed homes.

Banks’ vast pile of foreclosed homes doesn’t appear to be diminishing. That’s a troubling sign for the future of the housing market.

Back in April, this column tallied up all the foreclosed homes sitting in banks’ inventory, as well as the “shadow” inventory of homes in the foreclosure process or on which owners had missed at least two mortgage payments. At the time, we reported that at the current rate of sales, it would take 103 months to unload it all.

Over the past six months, that number has actually risen. Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.

2--Thirty-Three Hour Race May Induce ECB Surrender, Bloomberg

Excerpt: On Nov. 3 at about 2:15 p.m. in Washington, the Fed will release its policy decision.(on QE2) About 18 hours later, at noon in London (8 a.m. in New York and Washington), the U.K. central bank will announce its move. The ECB will go public with its decision 45 minutes later, at 1:45 p.m. in Frankfurt (8:45 a.m. in New York). The Bank of Japan concludes its talks on Nov. 5 at about noon local time (11 p.m. in New York).

Since Bernanke said Aug. 27 that his central bank was prepared to add stimulus if necessary, the Standard & Poor’s 500 Index has gained 14 percent, while the dollar has declined about 7 percent against a basket of six currencies. This may constrain initial market reaction to a Fed announcement of so-called quantitative easing, said Keith Hembre, Minneapolis-based chief economist at U.S. Bancorp’s FAF Advisors Inc., which oversees $86 billion.

Fed Computer Model

A 1 percentage point fall in the federal funds rate results in an 8.8 percent rise in stock prices and a 2.2 percent decline in the dollar’s exchange-rate value, according to a 1999 Fed study based on an internal computer simulation. Hembre said he’d be surprised if the model has changed much since then.

3--Why Growth Still Feels Like a Recession, Dean Baker, counterpunch

Excerpt: But the actual picture is even worse. Most of this growth was driven by the inventory cycle as firms went from running down their inventories to rebuilding them. If inventory fluctuations are pulled out, growth in demand averaged just 1.1 percent over the four quarters after the end of the recession. Final demand growth was down to just 0.6 percent in the most recent quarter.

This is cause for serious concern. Inventories grew at the second-fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

This should have people very concerned – and very angry. Just to add enough jobs to keep the unemployment rate constant, the economy has to grow at a 2.5 percent rate. In the absence of some unexpected change in policy, we will not see the economy growing at this pace any time soon, which means that the unemployment rate will be rising. We can expect it to cross 10 percent in the not-distant future and likely to remain in double-digit levels through most of 2011.

4--E.U. Rift on Plan for Handling Crises, New York Times

Excerpt: ...economically-strong countries, like Germany, that insist private bond holders should share the pain of any future restructuring, and weaker ones like Spain — backed by the President of the European Central Bank — who worry that such rules could set off a fresh market panic....

Determined to build the principle of moral hazard into the new system, Germany, Europe’s biggest economy, is actively pushing for a system that would involve bondholders, therefore unleashing the markets in hopes they would help to exert pressure on more spendthrift nations. But how to construct such a system without scaring investors away from debt issued by weaker nations in the short and medium term — thereby risking the stability of the euro — has emerged as an acute problem.

“The president of the European Central Bank has the view that he wants to do everything to ensure that markets take a calm view of the euro zone,” Mrs. Merkel said. “We are also interested in that, but we also have to keep in mind our people, who have a justified desire to see that it’s not just taxpayers who are on the hook, but also private investors.”

“I don’t quite share Jean-Claude Trichet’s concern,” she added

5--QEII: Even if Real Rates Fall and Expected Inflation Increases, Will Firms and Households be Induced to Increase Consumption and Investment?, Economist's View

Excerpt: It seems to me that everyone fighting today over whether QEII will work are worried about whether the Fed can affect real rates, but are forgetting about the second step in the process. Once real rates rates fall, firms and households then have to be induced to borrow more, then consume or invest (I'm including the response to expected inflation in this). Even if we manage to change real rates, and I have never quarreled with the Fed's ability to do this (though the extent depends upon their ability to affect expectations), why do people think it will bring about a strong consumption and investment response in the current environment? As Paul Krugman notes today, firms are already sitting on mountains of low opportunity cash and they aren't investing, and loans to consumers are already pretty cheap and they aren't increasing their consumption [Update: Or maybe you are hoping for a boom in exports as other countries allow the dollar to depreciate against their currency?]. Can the Fed create a enough expected of inflation (which it would have to validate later, or it will lose credibility and this will never work again) to change the behavior of firms and consumers enough to really matter?

6--Indiana Beefing Up Security At Unemployment Offices Ahead Of Holidays, Huffington Post

Excerpt: The Indiana Department of Workforce Development is beefing up its security ahead of the holidays, when officials expect a seasonal surge in unemployment claims and extra stress for long-term jobless who might miss benefits because of Congress.

If Congress doesn't reauthorize extended unemployment insurance, which expires at the end of November, the National Employment Law Project estimates that two million people will prematurely miss checks by the end of December.

"There's obviously increasing stress, especially among the long-term unemployed, and also the upcoming expiration of these federal extensions will add additional stress," department spokesman Marc Lotter told HuffPost.

Lotter said the agency is putting armed guards at each of the 36 WorkOne Centers that process unemployment benefits across the state

7--Germany draws a line in the sand on eurozone bailouts, naked capitalism

Excerpt: The “cure” may be worse than the disease. After implementing austerity measures, Ireland’s nominal gross domestic product (”GDP”) has fallen by nearly 20%. The budget deficit as a percentage of GDP has doubled to 14% from 7% Government debt as a percentage of GDP has increased to 64% from 44% at the start of the crisis. It is forecast to go to over 100% having been around 25% during the boom years. The cost of bailing out Ireland’s banking system has risen and may reach 20-30% of its GDP. Ireland’s credit rating has fallen.

In late September 2010, Ireland announced that in the second quarter the economy contracted by 1.2%, against expectations for 0.4% growth raising renewed concerns about European sovereign risk. Similar scenarios are playing out in Spain and Portugal....

Bondholders will discover burden-sharing. Debt relief will be enforced, either by interest holidays or haircuts on the value of the bonds. Investors will pay the price for failing to grasp the mechanical and obvious point that currency unions do not eliminate risk: they switch it from exchange risk to default risk…

“We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers,” said German Chancellor Angela Merkel.

Or in the words of Bundesbank chief Axel Weber: “Next time there is a problem, (bondholders) should be part of the solution rather than part of the problem. So far the only ones who have paid for the solution are the taxpayers.” (Germany restores moral hazard)

8--Bank analyst Christopher Whalen, managing director of Institutional Risk Analytics says-- the major banks have only worked through one-fourth of foreclosures, Housingwire

Excerpt: "The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses," Whalen said.

He added that both President George W. Bush and Barack Obama have failed to restructure the largest banks between 2008 and 2009, which means the process will be done over the next three to five years "whether we like it or not."

As a result, Whalen said, the U.S. economy can expect depressed growth and continued elevated unemployment levels.

"The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses.," Whalen added. "The latter course condemns Americans to years of economic malaise and further job losses."

9--If I Were Bernanke, Paul Krugman, New York Times

Excerpt: What I’d do if I were really in charge of the Fed, however, is the same thing I advocated for Japan way back when: announce a fairly high inflation target over an extended period, and commit to meeting that target.

What am I talking about? Something like a commitment to achieve 5 percent annual inflation over the next 5 years — or, perhaps better, to hit a price level 28 percent higher at the end of 2015 than the level today. (Compounding) Crucially, this target would have to be non-contingent — not something you’ll call off if the economy recovers. Why? Because the point is to move expectations, and that means locking in the price rise whatever happens.

It’s also crucial to understand that a half-hearted version of this policy won’t work. If you say, well, 5 percent sounds like a lot, maybe let’s just shoot for 2.5, you wouldn’t reduce real rates enough to get to full employment even if people believed you — and because you wouldn’t hit full employment, you wouldn’t manage to deliver the inflation, so people won’t believe you. Similarly, targeting nominal GDP growth at some normal rate won’t work — you have to get people to believe in a period of way above normal price and GDP growth, or the whole thing falls flat.

As I wrote way back, the Fed needs to credibly promise to be irresponsible

10--Personal income falls in September, CNN money.com

Excerpt: Personal income registered an unexpected dip in September, while spending by individuals grew at a slower rate than expected, according to data released by the federal government Monday.

Personal income fell 0.1%, the Commerce Department said. The drop in personal income was a sharp reversal from a revised 0.4% increase registered in August.

According to the Commerce Department, spending by individuals increased by 0.2%....

Hoyt pointed to a steep decline in government social benefits as another reason for the drop in spending by consumers. Those payments decreased by $21.5 billion in September, the result of unemployment compensation legislation, according to Commerce Department....."These are payments that tend to get spent," Hoyt said.

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