Tuesday, November 9, 2010

Today's Links

1--Americans say: "We want to be more like Sweden", LA Times

Excerpt: The gap between rich and poor in the U.S. is bigger than at any time since the 1920s. Is that really what most Americans want?

The gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s — just before the Depression. According to an analysis this year by Edward Wolff of New York University, the top 20% of wealthy individuals own about 85% of the wealth, while the bottom 40% own very near 0%. Many in that bottom 40% not only have no assets, they have negative net wealth.

A gap this pronounced raises the politically divisive question of whether there is a need for wealth redistribution in the United States....

When we asked respondents to tell us what their ideal distribution of wealth was, things got even more interesting: Americans wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme.

But was there consensus among Americans about their ideal country? Importantly, the answer was an unequivocal "yes." While liberals and the poor favored slightly more equal distributions than conservatives and the wealthy, a large majority of every group we surveyed — from the poorest to the richest, from the most conservative to the most liberal — agreed that the current level of wealth inequality was too high and wanted a more equitable distribution of wealth. In fact, Americans reported wanting to live in a country that looks more like Sweden than the United States....(Americans) seem to favor policies that involve taking from the rich and giving to the poor.

2--The Man Who Called the Financial Crisis—70 Years Early, Wall Street Journal

Excerpt: The seeds of today's problem were planted long ago, and its forgotten history holds important lessons. In 1936, as part of reforms under the new Banking Act, the U.S. government mandated that federally regulated banks could no longer hold securities that weren't rated investment-grade by at least two ratings firms.

To determine how to implement the new policy, the government launched a massive project—with experts from the Federal Deposit Insurance Corp., the National Bureau of Economic Research and the Works Progress Administration—to study how credit ratings should be used.

Mr. Palyi, then teaching at the University of Chicago, was a vocal skeptic from the outset. Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default.

The record was so unreliable that it would be "still more responsible," Mr. Palyi growled, to "stop the publication of ratings altogether." He was especially troubled that the new banking rules switched the responsibility for credit safety from bankers—and even bank regulators—to ratings firms.

"From there," he warned, it "will have to be shifted again—to someone else," presumably taxpayers. Liquidity, Mr. Palyi argued, was being replaced by what he scornfully called "shiftability," a new kind of risk that could someday "be magnified into catastrophic dimensions."

3--Fed: Banks expect tight lending standards for foreseeable future, Calculated Risk

Excerpt: From the Federal Reserve The October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices

The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses. ... However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future....For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future.

4--China's record trade surplus rankles Washington, Bloomberg

Excerpt: China may report its second-largest monthly trade surplus of the year, indicating little lasting shift so far in addressing the imbalances in global spending and capital flows set to dominate a summit of the Group of 20.

The $25 billion median forecast of 27 economists for October compares with a $16.9 billion excess of exports over imports in September. The yuan rose the most since a peg against the dollar was scrapped in July 2005 today, on speculation the central bank will permit faster appreciation before G-20 leaders meet Nov. 11-12 in Seoul. The trade report is due tomorrow....

“Another big trade surplus is only going to cause the U.S. Congress to intensify calls for the yuan to appreciate,” said Tim Condon, ING Groep NV’s head of Asian research, who worked at the World Bank from 1987 to 1996.

China needs to shift toward services and consumption and away from dependence on exports, industry and investment, according to the Washington-based World Bank.

Global imbalances “and the tensions they create cast a shadow over the global outlook,” the development finance agency said. “The combination of large current-account surpluses in some countries, including China, and large current-account deficits in other countries, notably the U.S., poses financial and economic risks, including from possible tension and contentious policy responses to them.”

5--High-Frequency Traders Lobby, Donate to Head Off U.S. Rules, Bloomberg

Excerpt: The high-frequency trading industry is stepping out of the shadows in Washington.

Closely held companies with undisclosed profits and obscure names like Getco LLC, Hard Eight Futures LLC and Quantlab Financial LLC, are beginning to act more like Wall Street banks, cutting checks to politicians, forming trade groups and hiring lobbyists and ex-regulators. They’re looking to fend off tighter rules and appease lawmakers who say the firms disadvantage small investors and contribute to wild swings in stock prices.

The SEC and members of Congress already were examining the business when the May 6 market plunge temporarily wiped out $862 billion of share value in 20 minutes. Although an investigation by regulators didn’t put direct blame on high-frequency firms, the volatility of stock prices focused more attention in Washington on their operations.

“Those with powerful computers are able to use them to their own financial advantage,” Senator Carl Levin, a Michigan Democrat, said Sept. 28 on the Senate floor. “Those who exploit our markets to the detriment of long-term investors and the real economy will not be able to do so without a battle from the Senate.”

6--NY Fed: Continued Decline in Consumer Debt, Calculated Risk

Excerpt: From the NY Fed: Q3 Report on Household Debt and Credit Shows Continued Decline in Consumer Debt:

The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts.

Additionally, this quarter’s supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.

Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. These unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.

“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

7--America will survive the errors of Ben Bernanke's trigger-happy Federal Reserve, Ambrose_Evans Pritchard, Telegraph

Excerpt: ...after leading America and the world into calamity with this seductive mischief – which overlooked the well-documented risks of credit seizures once a debt bubble pops – we are now told by Bernanke that the purpose of printing more money is to push up house prices and feed Wall Street.

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,” he wrote in the Washington Post. So there we have it, the `Bernanke Put’ in open daylight, the affirmation of asymmetric monetary policy. Let booms run unchecked: shield investors from loss when things go wrong....

The M2 money supply – which contracted in March and April – is now growing at an 8pc rate. Narrow M1 is rising at 15pc. Money velocity has sprung back to life, and is accelerating. Bank credit is expanding again. Non-farm payrolls jumped 151,000 in October.

8--Obama claims the right to assassinate American citizens without judicial review, antiwar.com

Excerpt: The Obama Administration’s Justice Department today argued that the court system has absolutely no legal authority to be “looking over the shoulder” of President Obama when he decides to assassinate American citizens, insisting those are “the very core powers of the president as commander in chief.”

The comments were made to US District Judge John Bates during a case brought by Nasser al-Awlaki seeking to prevent the president from assassinating his son, New Mexico cleric Anwar al-Awlaki, despite not having charged him with any actual crimes.

"If the Constitution means anything, it surely means that the president does not have unreviewable authority to summarily execute any American whom he concludes is an enemy of the state,” insisted Jameel Jaffer, the ACLU legal director who presented the case against the killings.

Former official Dennis Blair announced in April that the administration had approved Awlaki’s assassination, and officials have since defended the planned killing, saying it would be irresponsible not to assassinate the outspoken critic of US policy

9--Home prices continue to plunge in October, Pragmatic Capitalism

Excerpt: Clear Capital released their monthly Home Data Index Report today and it showed continued deterioration in national home prices. Prices are now off -6.8% from their August peak. It looks to me like the housing double dip is here and Ben Bernanke rolled out QE2 just in time to prepare for massive MBS purchases in 2011 when the banks hit another rough patch (via MarketWire):

“Although nationally, price trends are showing significant decreases, it is critical for policy makers, investors, and other users of home price data to understand that price dynamics at local levels differ significantly from the macro trends,” said Dr. Alex Villacorta, Senior Statistician, Clear Capital. “Our Home Data Index is unique in its ability to provide timely insight across price tiers — at both national and local levels.”

“For example, all six major metropolitan areas in California are out-performing both national and West region numbers in terms of yearly gains,” added Villacorta. “Conversely, four of the top markets in Florida are either in or very near double-dip territory, even though national prices remain nearly eight percent above 2009 lows. So, while national home price trends gauge overall home price movement, regional, metro and local housing markets will continue to respond differently to distressed inventories and national policy.”

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