Wednesday, December 1, 2010

Today's Links

1--Volcker Says Dollar's Role in Danger as U.S. Influence Declines, Bloomberg

Excerpt: Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said...

“The growing sense around much of the world is that we have lost both relative economic strength and more important, we have lost a coherent successful governing model to be emulated by the rest of the world,” Volcker said. “Instead, we’re faced with broken financial markets, underperformance of our economy and a fractious political climate.”

2--Case-Shiller: Broad-based Declines in Home Prices in Q3, Calculated Risk

Excerpt: From S&P--Broad-based Declines in Home Prices in the 3rd Quarter of 2010

Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices ... show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.

Prices are now falling - and falling just about everywhere. And it appears there are more price declines coming (based on inventory levels and anecdotal reports).

3--Obama Turns On The Base -- Freezes Federal Pay

Excerpt: There are rules of politics, and then there are laws. One of the latter, often attributed both to Texas football coach Darrell Royal but which dates to at least the 1920s, is just seven words: "Dance with the one that brung ya." There are other ways of saying it of course: Don't forget where you came from; don't cross the base; don't piss off the money people.

But alas, that is just what Obama did today, in the first of several moves to get out ahead of the new Republican majority in the House....

The public employee unions the biggest institutional backers of the Democratic Party. They write huge checks, and they expect payback. Twelve of the top 21 institutional campaign donors tracked by the Center for Responsive Politics from 1989 to 2010 are labor unions, and almost all of that money goes to Democrats. Just a couple weeks ago, in a meeting behind closed doors with White House aides, Gerald McEntee of the American Federation of State Local and Municipal Employees, had tried to throw down a gauntlet, declaring "We went out on a limb. . . You need to protect us." [Update: The American Federation of Government Employees, the largest federal union, wins the outrage statement game, calling the President's decision both "a superficial panic reaction" and "political scapegoating."]

Today, with Obama publicly spurning their advances, they barely moderated their responses. AFL-CIO President Richard Trumka released a tart statement: "Today's announcement of a two-year pay freeze for federal workers is bad for the middle class, bad for the economy and bad for business. No one is served by our government participating in a 'race to the bottom' in wages." The head of the National Federation of Federal Employees, William Dougan, declared himself "deeply disappointed."

4--CBO: Up to 3.6 Million People Owe Their Jobs to the Recovery Act,

Excerpt: A new Congressional Budget Office analysis finds that the 2009 Recovery Act(ARRA) is continuing to save jobs and protect the economy from what would have been a much deeper recession. As we describe in an updated analysis, in the third quarter of 2010 the Recovery Act

a-- increased the number of people employed by between 1.4 million and 3.6 million,

b-- increased real GDP by between 1.4 percent and 4.1 percent

c--boosted the number of “full-time-equivalent” jobs by between 2.0 million and 5.2 million, both by saving jobs and by boosting the number of hours worked. (Without the Recovery Act, many full-time workers would have been reduced to part-time status and fewer would have worked overtime.)

5--Learned Helplessness, Paul Krugman, New York Times

Excerpt: This WSJ article about economists in search of a model takes it as given that all our models have failed completely in the crisis — which is a gross exaggeration.

It’s true that if you bought completely into rational-expectations macroeconomics, the crisis in the economy should be causing a crisis in your faith ... But those of us who hadn’t forgotten Keynes, who paid attention to things like Japan’s lost decade and developing-country financial crises, aren’t feeling all that at sea.

More specifically, we knew all about liquidity traps, and had at least thought about balance-sheet crises, a decade ago. Remember, I wrote the first edition of The Return of Depression Economics in 1999. The world we’re now in isn’t that different from the world I suspected, back then, we’d find ourselves in.

6--In Ireland, Dangers Still Loom, Simon Johnson and Peter Boone, New York Times

Excerpt: (from the archive) Europe’s headache remains large, and this should concern all of us. Just look at Ireland to see how misunderstood and immediate the remaining dangers are. Ireland’s difficulties arose because of a huge property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today, roughly one-third of the loans on the balance sheets of major banks are nonperforming or “under surveillance”; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.

The government responded to this with what are currently regarded as “standard” policies in Europe and the United States. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe’s next Greece. In the last few weeks, the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25 percent risk that Ireland will default within five years.....

Ireland, simply put, appears insolvent under plausible possibilities with current policies....

7--Instant view: Sept home prices fall faster than expected, Reuters

Excerpt: Prices of single-family homes in September fell more than twice as fast as expected from the prior month, while prices compared to a year earlier rose more slowly than forecast, according a widely watched index of U.S. home prices released on Tuesday.

KEY POINTS: * The Standard & Poor's/Case-Shiller composite index of 20 metropolitan areas declined 0.8 percent in September from August on a seasonally adjusted basis. * Economists polled by Reuters had expected a decline of 0.3 percent. * S&P, which publishes the indexes, also said home prices in the 20 cities index rose 0.6 percent from September 2009, slower than the 1.1 percent expected...

"The home prices indexes were soft and weaker than expected. The housing market still faces a lot of headwinds and with the supply of properties still on the market, prices are still under pressure. It will probably take stronger sales and potentially a lot more time to work through the problems."

8--When the Bubble Burst, Dean Baker,

Excerpt: I see the collapse of an $8 trillion housing bubble that was driving the economy. The collapse of this bubble cost us more than $1.2 trillion in annual private sector demand (@ 9 percent of GDP). The financial crisis was good entertainment, but secondary. There is nothing in our economist's bag of tricks that gives us an easy mechanism for replacing 9 percent of GDP quickly, which leaves me wondering what the reality grasping Mr. DeLong been smoking?

The story of the bubble is painful, yet simple. Beginning in the mid-90s nationwide house prices diverged from a 100-year long trend. By the peak of the bubble in 2006, house prices were more than 70 percent above their trend level. This created more than $8 trillion in housing bubble wealth.

When the bubble burst, consumption predictably plummeted. Throw in another $6 trillion in lost stock wealth and we get a decline of $600 billion to $800 billion in consumption. (The stock wealth effect is estimated at 3-4 cents on the dollar.)

The end of the bubble driven construction boom did not just cause residential construction to revert to its normal level. The huge overbuilding of the bubble years meant that there was an enormous oversupply of housing. Residential construction has fallen back by more than 3.0 percentage points of GDP or close to $500 billion a year. There was a follow-on bubble in non-residential construction which has also burst. Add in the loss of another $100-$200 billion in annual demand from non-residential construction.

9--Will Ireland Default? Ask Belgium, The Baseline Scenario

Excerpt: On the face of it, Ireland seems poised on the brink of default....So why not restructure some of this debt, particularly as much of what the government will owe is actually debt taken on by overgrown and careless Irish banks?...

The most obvious answer is: Ireland’s European partners do not want this to happen, because it would expose the really bad decisions made by pan-European banks and their regulators over the last decade and create potential fiscal risks in other euro-zone countries....

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. British banks are owed $131 billion, or about 5 percent of Britain’s G.D.P. French banks are owed $43.5 billion, which is approaching 2 percent of French G.D.P. But the eye-catching numbers are for Belgium, which is owed $29 billion – in the relatively small Belgian economy, this accounts for around 5 percent of G.D.P....

Eventually, Ireland will need to restructure its debts. How soon and how completely it does this will have major implications for the rest of Europe.

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