Tuesday, December 7, 2010

Today's Links

1--Alternatives to Austerity, by Joseph E. Stiglitz, Commentary, Project Syndicate

Excerpt: In the US..., any deficit-reduction agenda has to be set in the context of what happened over the last decade: a massive increase in defense expenditures...; growth in inequality...; underinvestment in the public sector, including in infrastructure...; and growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies...

As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. ... Second, military expenditures must be cut... Following this is the need to eliminate corporate welfare... Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. ... Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade....

There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.

2--Your Underwater Mortgage Needs a Blow-Up Raft, Caroline Baum, Caroline Baum, Bloomberg

Excerpt: The Fed is trying offset this poverty effect with a second round of quantitative easing designed to improve financial conditions and lift stock prices, among other things. When asset prices rise, people feel wealthier, even though their gains are unrealized, and they spend more....

To date the wealth effect in stocks hasn’t been large enough to offset the potent poverty effect in real estate. Owners’ equity in household real estate, or the value of assets minus liabilities, fell from a peak of $13.1 trillion in 2005 to a low of $5.9 trillion in the first quarter of 2009, according to the Fed’s Flow of Funds report. That’s a whopping 55 percent decline in four years. By the second quarter of 2010, owners’ equity had climbed back to $7 trillion....

A number of commentators have suggested the Fed’s real target in creating higher inflation is house prices....Higher inflation would help underwater homeowners in two ways. By raising home prices, it would increase owners’ equity. At the same time, inflation would ease the mortgage burden because borrowers are paying interest and principal in dollars that are worth less.

3---Europe Update: The launch of "E-Bonds"?, Calculated risk

Excerpt: The European finance ministers meet this week in Brussels. Some ministers are pushing to increase the bailout fund and others are arguing for "E-bonds" - joint European government bonds. Although the key 10-year bond yields fell sharply last week (Ireland, Portugal, Spain), the crisis is far from over. A couple of articles:

From Stephen Castle at the NY Times: Pressure Rises to Bolster European Bailout Fund

European finance ministers are under mounting pressure to significantly increase the €750 billion rescue fund for the currency union when they meet Monday. ... Didier Reynders, the Belgian finance minister, suggested over the weekend that the fund ... will have to be increased when it is made permanent after 2013, and that it may make little sense to wait until then to do it.

From the Financial Times: Europe’s leaders at odds over bond plan

Jean-Claude Juncker, Luxembourg’s prime minister who also chairs meetings of eurozone finance ministers, and Giulio Tremonti, Italy’s finance minister, argue in Monday’s Financial Times that the launch of “E-bonds” would send a clear message to financial markets and European citizens about the “the irreversibility of the euro”.

4--Germany rejects calls for larger rescue fund and "E-Bonds", Calculated Risk

Excerpt: The European finance ministers are meeting today in Brussels. As we discussed over the weekend, some ministers are pushing to increase the bailout fund and others are arguing for "E-bonds" - joint European government bonds. As expected, Germany reject both suggestions ...

From the Irish Times: Germany rejects calls over debt fund

German Chancellor Angela Merkel said she saw no need to increase the size of the bailout mechanism.

Mrs Merkel also said the European Union treaty did not allow for issuing common bonds, which would anyway reduce the element of competition and the interest rate incentive for fiscal good behavior.

The German view is the higher spreads are the penalty for bad behavior.

The key 10-year bond yields fell sharply last week (Ireland, Portugal, Spain), but are up slightly today.

5--Let’s Not Make a Deal, Paul Krugman, New York Times

Excerpt: Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010....

Bear in mind that Republicans want to make those tax cuts permanent. ... America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. ...—... the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare...

Last but not least: if Democrats give in to the blackmailers now, they’ll just face more demands in the future. As long as Republicans believe that Mr. Obama will do anything to avoid short-term pain, they’ll have every incentive to keep taking hostages. If the president will endanger America’s fiscal future to avoid a tax increase, what will he give to avoid a government shutdown?

6--Trade Does Not Equal Jobs, Paul Krugman, New York Times

Excerpt: One thing I’m hearing, now that all hope of useful fiscal policy is gone, is the idea that trade can be a driver of recovery — that stuff like the South Korea trade agreement can serve as a form of macro policy.

Um, no. Our macro problem is insufficient spending on U.S.-produced goods and services...

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

7--E-Bonds would end the crisis, Jean-Claude Juncker and Giulio Tremonti, eurointelligence.com

Excerpt: Writing in today’s Financial Times, Jean-Claude Juncker and Giulio Tremonti are making a specific proposal for a single European bond, to be issued a European Debt Agency (EDA). Each country can issue European bonds up to 40% of GDP – thus well within the Maastricht reference rate of 60%. It would create, over time, a sovereign bond market of similar size to the US treasury market. As a first step, the EDA would finance 50% of member states’ debt issues – but this can be raised to 100% during crises.

The clou of this proposal is the mechanism of the switch between national and European bonds. This is the built-in default mechanism. The EDA could offer countries in trouble the possibility to switch national bonds for E-bonds at a discount, whose size depends on the degree of market stress. That would overcome the problem that secondary market in many EU sovereign bonds are not sufficient liquid during crises. It is worth reading the proposal in full – because it is worked out in detail.

Germany opposes the idea totally – at least so far (the proposal contains some sweeteners that make the idea more attractive for Germany – a relatively low debt-to-GDP ceiling, and the discount option). Wolfgang Schauble said E-bonds would require significant changes to the European treaties (which is true). He said the key to the euro’s survival was not the E-bonds, but fiscal discipline.

8-- Fannie and Freddie's secret bank bailout, Henry Blodgett, businessinsider.com

Excerpt: Fannie and Freddie are just taking over for TARP as a huge, covert bank bailout. (Economist Dean) Baker and Fusion IQ's Barry Ritholtz are convinced the government is effectively sponsoring a backdoor bailout of the banks via the GSEs. "This is a conscious, willful decision," says Ritholtz, author of The Big Picture blog and Bailout Nation. "Fannie And Freddie act as a conduit for taking all this junk off the banks' balance sheets."

And Congress is along for the ride, says Baker. "To some extent the wool's been pulled over their eyes but I'd just say it's willingly. They just don't want to deal with it right now," he notes. The fear is cutting off aid to Fannie and Freddie could kill the housing industry. In the first quarter, the government backed more than 96% of all residential mortgages.

Whatever the reason, taxpayers will continue to pay the price. Ritholtz estimates Freddie and Fannie could easily cost us $400 billion combined; judging by the continued carnage "maybe that's way on the low side?" he concedes.

9--A stimulus driven recovery, Pragmatic Capitalism

Excerpt: The latest from the non-partisan CBO shows that the stimulus continued to positively impact the economy in 2010:

“In an updated report on the American Recovery and Reinvestment Act of 2009, the CBO said that the legislation will increase the budget deficit by $814 billion from 2009-2019, compared with an original estimate of $787 billion. “By CBO’s estimate, close to half of that impact occurred in fiscal year 2010, and about 70% of ARRA’s budgetary impact was realized by the close of that fiscal year,” the report said.

The CBO estimates that the expenditures had a big impact on the economy, though the benefits have likely peaked. For the third quarter it says the stimulus added between 1.4 and 4.1 percentage points to growth and reduced the unemployment rate by between 0.8 and two percentage points. The benefits from the stimulus are expected to wane for the rest of this year and through 2011 and 2012.

CBO slightly lowered some of its estimates of the impact of the stimulus from a previous report prepared in August. That was mostly due to the timing of expenditures and no amount changed by more than 0.1.”

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