Friday, December 3, 2010

Today's Links

1--Letter from Dublin, Kevin O' Rourke,

Excerpt: (Today's "must read") It is one thing to know that someone you love is terminally ill; their death still comes as a shock.

I certainly don’t want to compare the arrival of the EU-IMF team in Dublin last week to a bereavement. But I was surprised at how upsetting I found it, given that it came as no surprise. It had been clear for a long time that the blanket guarantee given to the liabilities of Ireland’s rotten banks, in September 2008, had saddled the State with a debt that was too big for it to handle. Ten successive quarters of declining real GNP, and one attempt too many to draw a line under the losses of our banks, made our exclusion from international capital markets inevitable. But to know something is one thing; to see it actually happen is something entirely different....

"nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach....

Swapping debt for equity in a coordinated fashion across Europe would show ordinary people that Europe is on their side; but like the PLO of old, the European Union never misses an opportunity to miss an opportunity. It could have provided a means of kick-starting a new post-crisis growth strategy based on investment in the infrastructures we will need in the future; instead it has transformed itself into a mechanism for forcing pro-cyclical adjustment onto countries that are already sinking. It could have led the way in reining in an out-of-control financial sector; instead it now embodies the discredited principle that banks must never, ever, default on their creditors, no matter how insolvent they may be....

the fundamental problem is that Ireland is insolvent, the smart thing to do is to tackle our debt burden head-on, but the Europeans have vetoed this stage, the country needs radical change that can give people a sense of hope. There is a huge desire for such change, but no coherent vehicle to translate that desire into action.

2--The Euro at Mid-Crisis, Kenneth Rogoff, Projet Syndicate

Excerpt: he Portuguese rightly argue that their situation is not as dire as that of Greece... But Portugal’s debt levels are still highly problematic by historical benchmarks... Portugal will likely seek help sooner rather than later.

Spain is a more difficult case. The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater. The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt. Here again, history gives no cause for optimism. It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse.

But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries...

3--Homes Prices are Plunging: the price of a median home fell 13.6 percent in October, Dean Baker, CEPR

Excerpt: Yesterday's Case-Shiller data showed that house prices in its 20-City index fell 0.7 percent in September. This would be an 8.5 percent annual rate of decline, which would imply the loss of more than $1 trillion in housing wealth over the course of the year.

The data for the bottom third of the housing market looked even worse. Prices for homes in this segment of the market had a 2.6 percent one-month decline in both Seattle and Boston. They fell by 3.4 percent in Phoenix and 3.7 percent in Portland. Prices for homes in the bottom tier fell by 3.9 percent in both Tampa and Chicago. They fell by 7.0 percent in Atlanta and 7.4 percent in Minneapolis.

...the Census Bureau released data on new home sales prices for October last Wednesday. This release reflects much more up-to-date data since it is based on contract prices. The Case-Shiller index is a 3-month average that is based on closings, which typically occur 6-8 weeks after a contract is signed. The report showed that the price of a median home fell 13.6 percent in October hitting its lowest nominal level in 7 years.

4--Imminent Eurozone Default: How Likely?, Simon Johnson, The Baseline Scenario

Excerpt: As for the resources needed to “bail out” countries now facing market pressure, the IMF and EU combined definitely have enough money in hand to help with Portugal and Spain – if this becomes necessary. But they do not have enough funding currently to deal with Italy, Belgium and other larger countries (if there is a sequence of crises in the year ahead).

The IMF can, in principle, raise further resources beyond what it already has in hand; its membership (and effective owners) includes almost all countries in the world. IMF resources are shrouded in jargon; here is a relatively clear recent statement – bottom line: the IMF has no more than $1 trillion, but in terms of usable cash, the experts start to look pale as you discuss committing more than $500bn.

But in the US this would involve a very awkward conversation with the Republican House of Representatives, among others....There are definitely elements of a panic at work but keep in mind one important point – such runs can become self-fulfilling, i.e., they create the exact conditions that started people worrying in the first place.

5--Senate GOP pledges to block all bills until tax dispute resolved, CNN

Excerpt: Senate Republicans promised Wednesday to block legislative action on every issue being considered by the lame-duck Congress until the dispute over extending the Bush-era tax cuts is resolved and an extension of current government funding is approved.

All 42 Senate Republicans signed a letter to Senate Majority Leader Harry Reid, D-Nevada, vowing to prevent a vote on "any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers."

"With little time left in this congressional session, legislative scheduling should be focused on these critical priorities. While there are other items that might ultimately be worthy of the Senate's attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike," the letter said.

The 2001 and 2003 tax cuts enacted by former President George W. Bush will expire after December 31 if Congress fails to reach an agreement on their extension. Top Democrats and Republicans disagree sharply over whether the current tax rates should be extended just for families earning $250,000 or under per year or for everyone regardless of income.

6--Distressed Homes in U.S. Sell at Biggest Discount in Five Years, Bloomberg

Excerpt: U.S. homes in the foreclosure process sold for about 32 percent less than non-distressed properties in the third quarter, the biggest discount in five years, as buyer demand slumped, according to RealtyTrac Inc.

The average discount for bank-owned real estate, residences in default or those scheduled for auction rose from 29 percent a year earlier, RealtyTrac said in a report today. A quarter of all U.S. transactions involved those types of homes, according to the Irvine, California-based data seller.

Sales of foreclosure properties plunged 31 percent as the end of a buyer tax credit reduced purchases overall, RealtyTrac said. The decline came before loan servicers including Bank of America Corp. and JPMorgan Chase & Co. halted some home seizures amid claims that employees processed thousands of documents without verifying them, a practice known as robo-signing.

“The foreclosure-processing controversy, which was brought to light at the very end of the third quarter, could chill demand even further,” James J. Saccacio, chief executive officer of RealtyTrac, said in the report.

7--Fed Created Conflicts in Improvising Financial System Rescue, Bloomberg

Excerpt: ...after the Lehman Brothers bankruptcy filing panicked investors, who pulled $230 billion from money-market accounts. The $62.5 billion Reserve Primary Fund, which held $785 million of loans to Lehman Brothers, became the biggest money-market fund and the first in 14 years to “break the buck,” meaning the value of a share fell below $1 and investors faced losses.

Money funds were the main buyers of commercial paper. During the panic, they had to sell off assets to pay investors who demanded their money back. That meant they couldn’t buy the commercial paper that corporations needed to pay for things such as payroll and utility bills. In less than a day, the credit crunch had spread to industrial companies.

By Wednesday, Sept. 17, officials at the Fed and the Treasury Department were focused on finding a solution for money funds, says Phill Swagel, who was assistant Treasury secretary for economic policy....While the AMLF helped stabilize money funds, they didn’t start buying commercial paper again. That left issuers without their biggest group of customers and unable to roll over short- term debt as it matured. At 5:45 p.m. on Monday, Sept. 15, GE Chief Executive Officer Jeffrey R. Immelt met for half an hour with Treasury Secretary Henry M. Paulson Jr. in the secretary’s office, according to Paulson’s schedule....

...Less than a month later, the Fed created a bailout of the commercial paper market. A special entity called CPFF LLC, funded by the Fed, bought commercial paper from companies, including GE, the biggest issuer in the world. GE tapped the facility 12 times for $16.1 billion, the Fed disclosed this week. (The chronology here won't mean much to most people, but it proves that the Fed intentionally waited to create the CPFF so market stress (Libor) would soar so Bernanke and Paulson could blackmail congress with $700 billion TARP bailout)..

Firms helping to price hard-to-sell assets could overvalue them to raise the value of their own assets or those of their clients, said Michael Smallberg, an investigator with the Project on Government Oversight, an independent Washington watchdog group. (The stench of corruption is truly breathtaking)

8--Unemployment edges upward to 9.8%, zero hedge

Excerpt: Private payrolls +50K on expectations of +160K! Retail Manufacturing payrolls plunge 13K on expectations of +5K. Previous revised down to -7K. As Zero Hedge expected the ADP was totally and completely off. And so the myth of the recovery can suck it.

From the report:

The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today. Temporary help services and health care continued to add jobs over the month, while employment fell in retail trade. Employment in most major industries changed little in November.

And the bad news continues: Average Hourly Earnings M/M at 0.0% on expectations of 0.2%. But please keep buying those iPads with Fed money.

And more bad news: Labor Force Participation does not move up one bit, remaining flat at 64.5% contrary to expectations that people would start coming back to the work force.

9--Mounting calls for 'nuclear response' to save monetary union, Ambrose_Evans Pritchard, Telegraph

Excerpt: Spain's former leader Felipe Gonzalez warned that unless the European Central Bank steps into the market with mass bond purchases, the EMU system will lurch from one emergency to the next until it blows up....

Arturo de Frias, from Evolution Securities, said the eurozone will have to move rapidly to some sort of fiscal union to prevent an EMU-break up and massive losses on €1.2 trillion of debt lent by northern banks to the southern states.

"Our gut feeling, we are now witnessing one of the biggest tug-of-war games ever: a 'European Union bond' is needed in order to save the euro."

"Angela Merkel will not sign on the dotted line until there is a lot of blood in the bond markets and she is seen as having absolutely no choice. The market will keep selling until the yields of Spanish and Italian bonds (and perhaps Belgian and French also) reach sufficiently horrendous levels. The question is: what is the 'sufficiently horrendous' trigger level: 6pc yield for Spain? Or 7pc? Perhaps 8pc?" he said.

Fiscal union - with a euro-bond, de facto EU treasury, and debt union - is a vast political step. There is no popular support in Germany for what amounts to the end of the nation state, and Mrs Merkel has not made any move to prepare the ground. It would require a fresh EU treaty, agreed by all EU members.

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