Monday, November 8, 2010

Today's Links

1--If you thought the bank bailout was bad, wait until the mortgage defaults hit home, The Irish Times

Excerpt: THE BIG PICTURE: Ireland is effectively insolvent – the next crisis will be mass home mortgage default, writes MORGAN KELLY

SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover....

September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State. (Must read)

2--G20 showdown likely over US Federal Reserve's quantitative easing, UK Guardian

Excerpt: President Barack Obama can expect a rough ride at the G20 summit in South Korea this week after China and Germany denounced proposals by the Federal Reserve to flood the US economy with cheap money....

German chancellor Angela Merkel, whose government warned last week that the Fed's quantitative easing programme would "create extra problems for the world", is one of several important figures expected to line up against the US at the summit in South Korea.

China and Brazil, like Germany, have accumulated large trade surpluses this year, and want an explanation for the unilateral decision to use cheap funds to lower long-term interest rates.

Stephen Lewis, chief economist at Monument Securities, argued the Fed's move to increase QE was misguided and created more tensions than it resolved.

He said: "Clueless is apt when applied to a cadre of policymakers whose devotion to text-book solutions is leading, seemingly inexorably, to a rupture in global monetary relations. The Fed's current policy is based on the same presumption as its policy in the decade prior to 2007, that the smart thing to do is to filch an advantage that has not been earned. But the G20 meeting next week is shaping up as a showdown that could shake the Bernanke Fed's complacency."

3--GOP: There'll be no compromise on tax cuts, McClatchy

Excerpt: Republicans leader in both the House and the Senate said Sunday there would be no compromise with Democrats on whether to extend Bush-era tax cuts for the nation's wealthiest taxpayers.

President Barack Obama has said he wants to extend the tax cuts for taxpayers with a combined annual income of less than $250,000, but that the cuts should be eliminated for people making more than that. He's suggested there might be room for compromise in discussions with Republicans on other tax issues.

But both Rep. Eric Cantor, R-Va., who's expected to become the majority leader in the House when the new Congress is sworn in next year, and Senate Minority Leader Mitch McConnell said on Sunday news programs that they'd insist on an extension of the tax cuts for wealthy. McConnell said that higher taxes on upper income earners would harm small businesses.

4--Bubble, Crash, Bubble, Crash, Bubble..., John P. Hussman, Hussman Funds

Excerpt: It is difficult to interpret Bernanke’s defense of QE2 as anything else but an attempt to replace the recent bubble with yet another – to drive already overvalued risky assets to further overvaluation in hopes that consumers will view the “wealth” as permanent. The problem here is that unlike housing, which consumers had viewed as immune from major price declines, investors have observed two separate stock market plunges of over 50% each, within the past decade alone. While investors have obviously demonstrated an aptitude for ignoring risk over short periods of time, it is a simple fact that raising the price of a risky asset comes at the sacrifice of lower long-term returns, except when there is a proportional increase in the long-term stream cash flows that can be expected from the security.

As a result of Bernanke’s actions, investors now own higher priced securities that can be expected to deliver commensurately lower long-term returns, leaving their lifetime “wealth” unaffected, but exposing them to enormous risk of price declines over the intermediate (2-5 year) horizon. This is not a basis on which consumers are likely to shift their spending patterns….

To a large extent, the Fed has assumed the role of creating financial bubbles because we have allowed it. The proper role of the Federal Reserve, and where its actions can be clearly effective, is to provide liquidity to the banking system in periods of financial stress or constraint, by replacing Treasury bonds held by the public with currency and bank reserves. But to expect the Fed to somehow bring about full employment is misguided. To believe that changing the mix of government liabilities in the economy (monetary policy) is a more important determinant of inflation than the total quantity of those liabilities (fiscal policy) is equally misguided…

5--Consumer Credit Increases, Wall Street Journal

Excerpt: Americans boosted borrowing for the first time in eight months in September, the Federal Reserve said Friday, but credit-card debt continues to decline.

Consumer credit outstanding grew a seasonally adjusted 1.1% in September, or $2.1 billion, to $2.412 trillion, according to the latest report from the Fed....

The latest report shows that in September households increased their use of nonrevolving credit, such as car, tuition, vacation and boat loans. Nonrevolving credit grew by $10.4 billion to $1.598 trillion.

Revolving debt, which mainly reflects credit-card financing, slid $8.3 billion to $813.9 billion. That follows an unrevised $5 billion fall in August. Credit card debt has been falling for more than a year and last increased in August 2008. The September decrease in revolving credit is the 25th consecutive.

Overall consumer credit levels have been driven downward partly by creditors increasingly giving up hopes cash-strapped consumers facing a tough job market will repay debts they took on during better times.

6--In U.S., 14% Rely on Food Stamps, Wall Street Journal

Excerpt: Food stamp recipients ticked up in August, children consumed millions of free lunches and nearly five million low-income mothers tapped into a government nutrition program for women and young children.

Some 42,389,619 Americans received food stamps in August, a 17% rise from the same time a year ago, according to the U.S. Department of Agriculture, which tracks the data. That number is up 58.5% from August 2007, before the recession began....

Food stamps have become a lifeline for workers who have lost their jobs, particularly among the growing share of unemployed Americans who have also exhausted their unemployment benefits. Lines at grocers at midnight on the first of the month have signaled that, in many cases, those benefits aren’t tiding families over and they run out before their next check kicks in.

Even during the summer children returned to schools to take advantage of free lunch programs where they were available. Nearly 195 million lunches were dished out in August and 58.9% of them were free. Another 8.4% were available at reduced prices. That number will surge when the fall data are released because children will be back in school. Last September, for example, more than 590 million lunches were served, nearly 64% of which were free or reduced price.

7--Housing market gridlock must be swiftly resolved, Gillian Tett, financial times

Excerpt: This is damaging for banks: the Royal Bank of Scotland estimates that US banks face $4.3bn bills to settle looming fines, $25bn losses from being forced to purchase faulty loans from investors and $13bn of costs from buying loans from government entities. Others estimate the hit to be more than $100bn. But to my mind, the more interesting impact of the saga may lie in the subtle realm of psychology and price expectations. As the robo-signer scandal grows, it is forcing banks to suspend foreclosures. Thus, whereas a foreclosure used to take six months, in places such as Florida, 50 per cent of delinquent borrowers are still living in their homes after two years.

This pattern prompts many civil groups and some politicians to cheer. But it is also delaying any sense of resolution to the housing woes. After all, nobody knows whether those delinquent borrowers in Florida, say, will eventually be turfed out, when that decision might occur, what that foreclosed house might eventually be sold for, or if it will be sold at all. There is, in other words, gridlock. The size of this is certainly not trivial: some 6.7m homes are deemed to be delinquent, or (supposedly) in a state of foreclosure. And with that much of the market now sitting in limbo, this could potentially have a subtly corrosive impact on price attitudes.

Think about what happened in the 1990s in Japan. Back then (when I was working in Tokyo as a journalist), the Japanese financial system was plagued with bad loans, which the banks and politicians refused to acknowledge or deal with. At the time, many policymakers argued that this policy of forbearance was essential to prevent a damaging property price crash. But while forbearance did avoid any sudden, dramatic plunge in prices, in its place it created a climate of deeply ingrained cynicism and unease.

By the late 1990s, most investors and consumers knew that the Japanese banks were sitting on toxic waste; they also suspected that prices were being artificially propped up. And while nobody could quantify the scale of that quasi subsidy, there was a gnawing suspicion that prices might fall in the future if (or when) more bad news emerged. The consequence was a mood of corrosive distrust and unease, which was hard to articulate or measure but which fostered a deflationary mindset.

8--The rest of the world goes West when America prints more money, Telegraph

Excerpt: Last Wednesday was a hinge point in history. The United States decided to drop all pretence of being interested in leading – or even being part of – a coordinated global policy response to the most serious economic crisis in more than 70 years....

America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago.

The Federal Reserve's words may have been anodyne. "We will adjust the programme as needed to best foster maximum employment and price stability," said the US central bank's Open Market Committee. But by announcing another round of "quantitative easing", America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too....

Up until now, the rest of the world has been willing to tolerate unprecedented money-printing by the US – and the UK for that matter. QE has been used to help various financial institutions avoid facing up to their losses, while covertly recapitalising Western banks that are, to all intents and purposes, insolvent. Money-printing has also pumped up equity prices. After the latest Fed-induced "sugar rush", the FTSE global all-share index hit a two-year high.

With QE money having been used to purchase Treasury bills and gilts, as well as dodgy mortgage-backed securities, it has also allowed certain governments to keep spending....

So, in other words, QE has benefited some pretty formidable interest groups – insolvent banks, public sector unions and cowardly politicians. No wonder us long-standing critics of the policy have been dismissed as "inflation nutters" and "cranks". (Must read)

9--Real Disposable Income Shrank Last Quarter, Jed Graham,

Excerpt: Sagging government support, falling interest rates and higher tax payments conspired to turn real disposable income growth upside down in the third quarter.

After rising at a 4.6% annual rate in the second quarter, real disposable income in September fell 0.9% from June at an annualized rate.

Personal income data from the Commerce Department out Monday reflect a near-stalemate between private-sector growth and public-sector drag. In September, wage and salary payments fell slightly as government pay cuts of $4.8 billion offset modest private-sector gains of $3.3 billion.

On top of that, jobless benefits continued to decline as more people exhausted their 99 weeks of emergency benefits. In September, the government doled out $120.7 billion in jobless benefits, down from $136.1 billion in June....Austere budgeting at the federal level amid continued cuts at the state level could jeopardize the ability of the private sector to win this tug of war.

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