Monday, December 6, 2010

Today's Links

1--It’s the Big Questions That Slow Growth, Christina Romer, NY Times

Excerpt: The deepest and most destructive uncertainty we face centers on the overall health of the economy and its prospects for growth. ... Because we are in largely uncharted territory, figuring out how and when the economy will recover is much harder than usual. ...

How do we resolve uncertainty about future growth? The Federal Reserve, Congress and the president need to reaffirm that they will do whatever it takes to restore the economy to full health. They could take a lesson from President Franklin D. Roosevelt, who declared in his 1933 inaugural address that he would treat the task of putting people back to work “as we would treat the emergency of a war.”

They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high.

2--ECB bows to German veto on mass bond purchases, Ambrose-Evans Pritchard, Telegraph

Excerpt: Mr Trichet said there had been no decision to step up purchases of peripheral bonds to a whole new level – the so-called "nuclear option" – despite the potentially dangerous rise in Spanish, Italian, Belgian and even French yields over the past three weeks. ...

Some credit market analysts had speculated that the ECB might launch a blitz of €1 trillion to €2 trillion of debt purchases, but this was never likely at this stage. Such action is anathema to Germany....

ulian Callow from Barclays said the ECB is caught between irreconcilable pressures from Germany and Europe's high-debt states. "The ECB has to be very careful. The more bonds it buys from the eurozone periphery, the more clearly they are circumventing the EU's 'no bail-out' clause. This is unconstitutional in Germany, which is why the EU had to come up with the complicated arrangement of a bail-out fund working with the IMF," he said....

What is at stake politically for Germany is whether the ECB will remain faithful to the legacy of the Bundesbank. The German nation gave up its Deutschmark and agreed to share its admired monetary regime under an unspoken but sacred contract that the euro would never lead to disorder or inflation. To breach this contract is to risk a powerful German backlash.

3--The Fed Should End QE2 And Stop Issuing Bonds Instead, Randall Wray,

Excerpt: So now we are in act two: QE2. Now the Fed will focus its attention entirely on purchases of longer term treasuries. Again, this seems to be predicated on two faulty propositions. First, if a trillion dollars of excess reserves won't do it, then let's give them another $600 billion.

Just what was that definition of insanity? Oh, right, if something does not work, keep doing it over and over. The second proposition is that this will lower long term rates. Ok, based on the NYFed's estimates, the additional purchases might lower long term yields on treasuries by 18 basis points.

It is hard to see that as a useful goal even if it might be achieved. But if Bernanke's goal were to lower long term yields, the most efficient and surest way to do that is to simply announce a target rate—say, 2% on 10 year treasuries—and then start buying them until the yield drops to the target.

Actually, it would almost certainly drop there before any purchase were made. Who wants to bet against the Fed? It has got its “checkbook” in hand, and as Bernanke has testified, it can buy as many assets it wants through keystrokes.

What exactly is QE2? The Treasury is running a large budget deficit, that will reach perhaps $1.4 trillion this year. Like the Fed, it spends through keystrokes, simultaneously crediting the demand deposit of some recipient, and also the bank reserves of the recipient's bank. So, the deficit creates reserves exactly dollar for dollar--$1.4 trillion this year.

4--The Fed becomes central bank to the world, Bloomberg

Excerpt: Federal Reserve data showing UBS AG and Barclays Plc ranked among the top users of $3.3 trillion from emergency programs is stoking debate on whether U.S. regulators bear responsibility for aiding other nations’ banks....

The growth of the U.S. mortgage-backed securities market and the dollar’s status as the world’s reserve currency enticed overseas banks such as Zurich-based UBS to buy assets in the country before 2008. They paid for the holdings with U.S. dollars, and when funding seized up, the Federal Reserve refused to take the risk that European firms would unload the assets and further depress markets for housing-related investments....

“Things would have been worse if they hadn’t lent to foreigners,” said Perry Mehrling, senior fellow at the Morin Center for Banking and Financial Law at Boston University and author of “The New Lombard Street: How the Fed became the Dealer of Last Resort.” “We’re finally getting to understand the role of the Fed in the world.”...

U.S. Representative Mike Pence, an Indiana Republican, said he planned to introduce a “European Bailout Protection Act” to restrict the flow of International Monetary Fund loans to European countries. He said he was responding to reports that U.S. officials might bolster a European fund designed to deal with this year’s debt crisis, which has spread from Greece to Ireland.

5-- IMF Eliminates Borrowing Cap On Rescue Facility In Anticipation Of Europe Crisis 2.0; US Prepares To Print Fresh Trillions In "Rescue" Linen, zero hedge

Excerpt: the IMF has as of today extended the duration of its existing Flexible Credit Line (FCL) to two years, concurrently removing the borrowing cap on this facility, which previously stood at 1000 percent of a member’s IMF quota, in essence making the FCL a limitless credit facility, to be used to rescue whomever, at the sole discretion of the IMF's overlords....

the IMF is introducing a brand new credit facility, the Precautionary Credit Line (PCL), which will be geared for members with "sound policies [which just happen to need an unlimited source of rescue funding] who nevertheless may not meet the FCL’s high qualification requirements." In other words everyone. In yet other words, the IMF as of today, has a limitless facility to bail out anyone in the world, without a maximum bound in how much is lendable....

“These decisions expand and reinforce the IMF’s crisis-prevention toolkit and mark an important step in our ongoing work with our membership to strengthen the global financial safety net. The enhanced Flexible Credit Line and new Precautionary Credit Line will enable the Fund to help its members protect themselves against excessive market volatility,” said IMF Managing Director Dominique Strauss-Kahn....

Mr. Strauss-Kahn added that “the revamped financing toolkit rewards countries that implement strong policies. We expect that the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”

6--Disinflation Confirmed, Paul Krugman, New York Times

Excerpt: One of the things you often hear is the claim that statistics showing falling inflation are just about housing. The San Francisco Fed has done the homework: the same downward trend is there if you purge housing from the core index---(chart)

...the big point is the downward sweep since the slump began. Disinflation is underway, with deflation a real eventual possibility.

7--Housing outlook darkens with price drops up to 10% expected, Housingwire

Excerpt: Mark Zandi, chief economist at Moody's Analytics, told HousingWire that he expects home prices to be depressed during 2011 and into 2012. He is anticipating a 5% to 10% decline in prices until mid-2011. "We won't see modest growth until 2012," he said.

Zandi also believes that demand and supply for homes are bottoming out, though an increase in distressed sales will continue to drag values....

Hedge fund founder Greg Lippmann also believes a 10% drop is likely, but said the mortgage market will do fine with such a drop, according to a Bloomberg report. Lippmann is a founder of hedge fund LibreMax Capital and a former Deutsche Bank AG trader who gained fame for his bets against subprime-mortgage securities.

8--Still no strength in this rebound, James Hamilton, Econbrowser

Excerpt: The brightest economic indicators continue to come from surveys of managers. The ISM manufacturing PMI held up at 56.6 for November. Any reading above 50 signifies that more responders reported improving conditions than reported deterioration, and a reading this high suggests manufacturing continues to do quite well. ISM nonmanufacturing PMI was also at a very healthy 55.....

A more troubling important economic summary is the Chicago Fed National Activity Index. Its 3-month average continued its recent slide, falling to -0.46 for October....

...that was also the message from Friday's very disappointing labor report from BLS, whose establishment survey implied that seasonally adjusted nonfarm payrolls increased by an anemic 39,000 jobs in November. The separate and somewhat noisier household survey was even more troubling, suggesting that 173,000 fewer Americans were working in November compared to October, bringing the unemployment rate up to 9.8%. Payrolls processed by ADP added to a mixed picture with a cheerier estimate of a net gain of 93,000 in private-sector employment. Whatever you make of this, it certainly provides no confirmation of the notion that we have turned the corner in terms of employment growth.

Altogether, I think this leaves us where we've been for some time now-- the economy is growing, but painfully slowly.

9--The Cold War In The European Core: Luxembourg Wants Eurozone Bonds; Germany Says Drop Dead, zero hedge

Excerpt: Last night, in a less than surprising Op-ed in the FT, Jean-Claude Juncker and Giulio Tremonti, prime minister and treasury minister of Luxembourg and Italy’s minister of economy and finance respectively, once again floated the idea that the time has come for a joint European bond issuance mechanism, because apparently lack of individual monetary policy is not enough, European countries now have to surrender their fiscal decision making to a bunch of dogmatic bureaucrats in Brussels. The desperate duo, which knows all too well, that they could well be next on the bond vigilantes radar, write: " The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state." We ridiculed the idea last night, noting that this proposal would only happen over Germany's dead body, which already sees as contributing far too much to keeping the European experiment alive and getting only dirty looks from its voters. Today, Germany steps up and confirms: "Germany on Monday rejected the idea of increasing the size of the European Union's safety net and ruled out a proposal to issue a joint euro zone bond." And additionally recent pressure to hike the rescue fund by the IMF and internally were also promptly shut down by Germany, which as we pointed out last week threatened to pull out of the Euro if the political wrangling by pathological liars such as the Greek elite continued: "We see no reason at all at the moment for an increase in the size of the euro rescue shield -- no reason at all." Which means that with no recourse to do anything structural, the ECB is back to buying up Portuguese bonds in a fake bid to create a sense of normalcy in the bond market, which everyone with half a brain knows will collapse the second the ECB pulls out or runs out of paper.

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