Monday, November 15, 2010

Today's Links

1--Europe stumbles blindly towards its 1931 moment, Ambrose_Evans Pritchard, Telegraph

Excerpt:Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.

If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.

“Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece.

2--The 27th consecutive week of domestic fund outflows, zero hedge

Excerpt: This is the 27th consecutive week of domestic fund outflows, commencing with the May flash crash, and resulting in $85 billion in retail outflow YTD. It appears that neither circuit breakers, nor the Bernanke put have made any impression on investors, who continue to prove that the general American public (with a little guidance) is smarter than what the government, the Chairman, and the CNBC production crew give it credit for

3--Federal spending is a necessity, Joseph Stiglitz, LA Times

Excerpt: The only solution to our current economic doldrums is large government spending. And if the spending is focused on high-return investments (in education, technology and infrastructure), the nation's debt-to-GDP ratio will actually be lowered. The question isn't whether we can afford to make these investments; we can't afford not to.

Even then, robust recovery won't happen until we write down the debts of the 1 in 4 homes whose mortgages are underwater, in a homeowner's chapter 11 program. We have allowed overburdened corporations a fresh start; why not poor Americans?

Nor will a robust recovery return until we get our dysfunctional financial system doing what it should be doing: providing credit, managing risk, running an efficient electronic payments system. The deservedly hated "bailout" may have kept the financial system from collapsing, but it also extended the government's safety mainly to rich and powerful banks. Smaller banks, focused on actually providing credit to small businesses, the lifeblood of any economy, were allowed to die. The Dodd-Frank regulatory bill was a step in the right direction, but it was a small step, with neither carrots nor sticks to ensure that banks go back to doing "boring" banking. They still are likely to make more money from credit schemes and predatory lending, from writing derivatives and credit default swaps (which may be viewed as gambling or insurance products but aren't regulated as either and are underwritten by taxpayers), and by imposing a tax on every credit and debit card transaction at a rate determined not by competitive forces but the exertion of monopoly power.

4--Large deficits remain essential, Robert Pollin, LA Times

Excerpt: Austerity is not a solution. The federal government's deficit spending over the past two years succeeded in averting a 1930s-style depression. Large deficits are still needed now to prevent the economy's rickety floor from collapsing. Are the deficit hawks really prepared, for example, to preside over mass layoffs of teachers, nurses and police officers that would result without continued large-scale federal support for state and local governments?

Credit must be channeled to small business. Credit markets remain locked up, especially for small businesses, while banks are holding an unprecedented $1.1 trillion in cash reserves. The Federal Reserve's new "quantitative easing" is a halfway solution. It directly reduces interest rates for longer-term U.S. Treasury bonds only. It will not be effective at lowering interest rates and risks for private borrowers and lenders.

Two initiatives -- one carrot and one stick -- can deliver lower rates and risks to businesses. The carrot is an expansion of existing federal loan guarantees by $300 billion, which would roughly double what's annually available now. Small businesses should be the primary beneficiaries. The stick is a 1% to 2% tax on the excess cash reserves now held by banks, to push them to become more bullish on loans for job-creating investments.

These measures could generate about 3 million jobs as the $300 billion in loan guarantees turns into new business investments. Job creation would be significantly higher if a large proportion of the spending were for green activities such as retrofitting buildings to make them energy-efficient. Job creation per dollar of green investments is about 50% greater than the economy-wide average. The total costs for the program -- mostly from loan defaults -- would almost certainly be well below 1% of the federal budget.

5--Grim foreclosure predictions from the Fed, Xinhua

Excerpt: The U.S. Federal Reserve's projections remain very grim for the foreseeable future, as it expected about 2.25 million foreclosure filings this year and again next year, and about 2 million more in 2012, Fed Governor Sarah Raskin said on Friday....

Fed figures showed that the number of foreclosures initiated on residential properties had soared from about one million in 2006, the year that house prices peaked, to 2.8 million last year.

There were 1.2 million foreclosure filings in just the first half of this year. In addition, right now nearly 5 million loans were somewhere in the foreclosure process, or were 90 days or more past due and hence at serious risk for a foreclosure filing, she said at the National Consumer Law Center's Consumer Rights Litigation Conference held in Boston, Massachusetts.

6--Ireland Talks With EU as Germany Pushes It to Take Bailout, Bloomberg

Excerpt: Ireland is in talks with European officials about current “market conditions” as Germany pushes it to accept a bailout and help reverse a bond sell-off among the euro-region’s deficit-laden nations.

“Ongoing contacts continue at official level with international colleagues in light of current market conditions,” a Finance Ministry spokesman said in an email late yesterday. “Ireland has made no application for external support” and the government is “fully funded till well into 2011,” the spokesman said....

Borrowing from the ECB by lenders in Ireland rose 7.3 percent to 130 billion euros as of Oct. 29, about 80 percent of gross domestic product.

A request for aid may total about 80 billion euros ($110 billion) between 2011 and 2013, according to Barclays Capital. French Finance Minister Christine Lagarde said today on France Info radio no aid request has been made....Bundesbank President Axel Weber has called for ending the ECB’s emergency bond-buying program, which has benefited deficit-laden countries such as Ireland, Portugal and Greece.

The risk for the ECB is that buying those bonds could eventually hurt the central bank’s balance sheet, damaging its independence.

7--Attack on QE2 from the right, Wall Street Journal

Excerpt: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment....

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

8--€1,650bn of pain for Europe’s peripherals, Credit Suisse says, FT Alphaville

Excerpt: Want an interesting estimate for the cost of fixing peripheral Europe?

Credit Suisse’s Andrew Garthwaite & Co. are here to serve.

They reckon that total bank losses in Spain, Greece, Ireland and Portugal have so far been about €140bn — or 8 per cent of GDP. If you compare those with the same figures for historical banking crises, Credit Suisse estimates peripherals still have about €350bn of additional costs to go through, or 22 per cent of their GDP....

We think the key to the situation is Spain. Spain is key, given that it accounts for 11% of Euro-area GDP (65% larger than Portugal, Ireland and Greece) and that there are $876bn of foreign bank assets in Spain according to the BIS (75% of which are accounted for by European banks, with 40% – around $340bn – held by German and French banks alone). We note that recently CDS spreads have risen to previous peak (with bond spreads not far behind)....

Could core Europe walk away from peripheral Europe? We think the chance of this is zero. The issue is that already core Europe has, on the BIS data, about $700bn of assets in peripheral European debt. Moreover, the ECB holds $71bn of peripheral European government debt directly – and most of the ECB repo financing to European peripheral banks (€322bn, equal to 20% of their GDP) is secured against domestic government bonds. (A third of the cost of recapitalisation the ECB would have to be met by the Bundesbank). This means that – apart from other economic and political issues – there is a huge direct cost for core Europe if there were significant defaults in the periphery. The indirect costs of a failure of the monetary union would be even greater, namely the loss of a single market, with the newly established Deutsche Mark appreciating 20% hitting German exports, the probable erection of trade barriers etc.

9--Bombs Away: Afghan Air War Peaks With 1,000 Strikes in October,

Excerpt: The U.S. and its allies have unleashed a massive air campaign in Afghanistan, launching missiles and bombs from the sky at a rate rarely seen since the war’s earliest days. In October alone, NATO planes fired their weapons on 1,000 separate missions, U.S. Air Force statistics provided to Danger Room show. Since Gen. David Petraeus took command of the war effort in late June, coalition aircraft have flown 2,600 attack sorties. That’s 50% more than they did during the same period in 2009. Not surprisingly, civilian casualties are on the rise, as well.

NATO officials say the increase in air attacks is simply a natural outgrowth of a more aggressive campaign to push militants out of their strongholds in southern Afghanistan. “Simply put, our air strikes have increased because our operations have increased. We’ve made a concentrated effort in the south to clear out the insurgency and therefore have increased our number of troops on the ground and aircraft to support them in this effort,” Lt. Nicole Schwegman, a NATO spokesperson, tells Danger Room.

On the other hand, some outside observers believe the strikes are part of an attempt to soften up the insurgency before negotiations with them begin in earnest. But one thing is clear: it’s a strategy Petraeus has used before. Once he took over the Iraq war effort, air strikes jumped nearly sevenfold.

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