Friday, November 19, 2010

Today's links

1--It’s time for a wider European policy debate, Mohamed El-Erian, Reuters

Excerpt: It is safe to say that there is broad agreement on what is most desirable for solving the Irish crisis — namely a mix of domestic policies and external financing finely calibrated to enable the country to grow strongly, create jobs, stabilize the banks, and overcome large and mounting indebtedness.

Unfortunately, what is most desirable is not feasible given the path Europe is embarked on; and, to make things even more complicated, what appears feasible to Europe is not necessarily desirable. As a result, Ireland finds itself stuck in an unstable muddled-middle. It can’t get ahead of the crisis; it is far from a first best solution; and it confronts choices that are painful to implement and uncertain in outcome....

Inevitably, these alternatives will push national and regional policymakers out of their comfort zone. In a wider policy debate, debt restructuring would be considered as a possible pre-emptive option rather than a disorderly inevitability; though it would be given to the possibility of the weakest Euro-zone members taking a type of sabbatical from the club and rejoining on a stronger and more sustainable basis.

2--Debt, deleveraging, and the liquidity trap, Paul Krugman, VOX

Excerpt: In the current policy debate, debt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics. Households borrowed too much, say many people; now you want the government to borrow even more?

What's wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn't matter who owes the money. Yet that can't be right; if it were, debt wouldn't be a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that's not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person's liability is another person's asset.

It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn't created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. This becomes very clear in our analysis. In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.

In short, one gains a much clearer view of the problems now facing the world, and their potential solutions, if one takes the role of debt and the constraints faced by debtors seriously. And yes, this analysis does suggest that the current conventional wisdom about what policymakers should be doing is almost completely wrong.

3-- Bailing out Ireland, bailing out banks, FT Alphaville

Excerpt: Irish bank funding from the ECB increased sharply by €11bn in October (Chart 1)[below, click to enlarge]. This means that domestically-focused Irish banks are likely now funding around 12% of their balance sheets at the ECB....

Other Assets’ rose by €7bn in September and €13bn in October. That probably means that Anglo (and/or possibly other banks) have borrowed an additional €20bn from the Irish Central Bank in the past two months. If all changes in ‘Other Assets’ since June reflect increased borrowing from the Special Liquidity Facility, Irish banks are now funding around 16% of their balance sheets at central banks (see Chart 1), only slightly less than Greek banks.

As Lorcan points out, Anglo alone can’t have had that many bonds to repo with the central bank in October. So it’s then highly likely that other Irish banks are indeed involved. And being equated with Greek banks is not a good place to be.

Leaving a big, fat Irish bank-shaped question-mark over any bailout for Ireland or its government bonds.

4--Shorting Fiscal Consolidation, Robert J. Shiller, Commentary, Project Syndicate

Excerpt: Low long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them. This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education. ...

Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.

It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it.

5--QE2 as Self-Inflicted Wound, Peter Lee, Counterpunch

Excerpt: The United States, as issuer of the world's de facto reserve currency, has certain responsibilities. We're pretty much allowed to print as much currency as we want to cover our deficit. In return, pretty much everybody else gets to have a trade surplus with us (not just China and OPEC; the EU, Japan, South Korea, etc.)....

The flip side is we're not supposed to dump liquidity in the global market and put appreciative pressure on everybody's currency just because Congress can't pass a stimulus package. And, most importantly, we don't do it unilaterally. Clearly, the United States wants to get out of the "engine of the world economy" business.

It could be reasonably argued--and I think President Obama is obliquely making the case-- that our trade partners should suck it up and let our exporters make a few billion dollars of hay overseas as partial repayment for the fifty years we've put in as the world's last-resort purchaser of underwear, cars, and crappy toys.

....beyond devaluing our currency, the United States has conceded that it is out of the stimulus business. We're not going to grow the pie. We're going to fight with everybody--the EU, Japan, etc. as well as China--to get a bigger slice....But it looks like QE2 was a self-inflicted wound, born of domestic political and economic calculations that gave inadequate weight to its global impact.

6--What Is a Family?, Catherine Rampell, New York Times

Excerpt: “The Decline of Marriage and Rise of New Families,” a new report from Pew Research Center released today. I hope Pew continues to ask this particular question in the future. It’ll be interesting to see how the evolving definitions of such social terms affect how Americans think about the social safety net and related economy policies.

The Pew report, which is worth checking out in full, also has data and survey results on the rising age at first marriage (for men, 28.1 years in 2009); the record share of adults who are not married (52 percent in 2008); and attitudes toward breadwinning and marriage, to name a few highlights.

7--A Debtcropper Society, Matt Stoller, New deal 2.0

Excerpt: Today, we are in the midst of creating a second sharecropper society. I first heard the term “slaves to the bank” from a constituent fighting a fraudulent foreclosure. The details aren’t so important — this couple had been illegally placed in a predatory loan — but at one point, the wife explained that she and her husband were so scared they would have “given their first born to the bank to keep their home”. That was fear speaking, total unadulterated panic. And as we watch debt-holders use the ornaments of fear, such a loan sharking company that set up fake courts to convince debtors they were losing cases, we should recognize that what the creditor class wants is what they’ve always wanted: total dominance of our culture.

Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages. All of these are hard to pay back, often bringing with them impenetrable contracts and illegal fees. Credit card debt is difficult to discharge in bankruptcy and a default on a home loan can leave you homeless. A student loan debt is literally a claim against a life — you cannot discharge it in bankruptcy, and if you die, your parents are obligated to pay it. If the banks have their way, mortgages and deficiency judgments will follow you around forever, as they do in Spain.

Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights. Think about this when you hear the calls from ex-Morgan Stanley banker and current World Bank President Robert Zoellick and his nebulous mutterings pining for the gold standard. Or when you hear Warren Buffett partner Charlie Munger talk about how the bailouts of the wealthy were patriotic, but we mustn’t bail out homeowners for fear of ‘moral hazard’. Or when you hear Pete Peterson Foundation President and former Comptroller General David Walker yearn nostalgically for debtor’s prisons.

8--Bullish Sentiment Sees Largest Drop in Nearly Two Years, Bespoke Investment Group

Excerpt: Less than 24 hours after asking whether investors were 'all in' on this market, today's weekly survey of bullish sentiment from the American Association of Individual Investors (AAII) showed that investors can't get out fast enough. After hitting a high of 57.6% last week, this week's bullish sentiment saw its largest one-week decline since January 2009. It now sits at its lowest point since early September when the S&P 500 was struggling to get over 1,100.

These large swings in bullish sentiment once again highlight the 'drive by' mentality and lack of conviction that investors have in the current market environment. When the headlines are positive, investors get bullish, but the slightest hint of any negative news sends investors scurrying for cover.

9--Poll: US Support for Afghan War Plummets, antiwar.com

Excerpt: Though a number of other polls have been showing popular opinion squarely against the Afghan War for awhile now, the well-respected Qunnipiac University poll had shown stubborn, albeit dwindling, support for the conflict through September.

But in a dramatic shift the new Qunnipiac poll also shows a firm majority of Americans, 50-44, opposing the wisdom of the conflict in general. Perhaps even more telling, the split amongst military families is a virtual dead heat, with 49-47 support. In general military families have overwhelmingly believed in the general concept of the mission, if they have not always agreed on tactics.

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