Thursday, December 9, 2010

Today's Links

1---Secret GOP plan: Push states to declare bankruptcy and smash unions, James Pethokoukis, Reuters

Excerpt: Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion. (Must read)

2--U.S. 30-year mortgage rates jump, Reuters

Excerpt: Interest rates on U.S. 30-year fixed-rate mortgages jumped on Tuesday as Treasury bonds sold off, real estate website said.

Rates on 30-year fixed mortgages, the most widely used loan, were 4.78 percent Tuesday afternoon, up from 4.67 percent at the same time Monday, according to, which is based in Charlotte, North Carolina.

That is also up sharply from a week earlier when the national average, with one point, was 4.57 percent. (More pain for housing)

3--Majority opposes extension of Bush tax cuts, Bloomberg

Excerpt: Americans don’t approve of keeping the breaks for upper-income taxpayers that are part of the deal President Barack Obama brokered with congressional Republicans, a Bloomberg National Poll shows.

The survey, conducted before, during and after the tax negotiations, shows that only a third support keeping the lower rates for the highest earners, and less than half of those respondents say the breaks for the wealthy should last for a shorter period than cuts for the middle class. Overall, two- thirds of those polled favor a permanent extension of the lower rates for the middle class.

More than a fourth say all the tax cuts should be allowed to expire Dec. 31, as scheduled.

The agreement Obama announced Dec. 6 would temporarily sustain the tax cuts for all income levels. The president said the compromise was needed to break a deadlock with congressional Republicans who vowed to block tax cuts for middle-income Americans if those for individuals earning more than $200,000 and couples earning more than $250,000 weren’t extended, too....

Widening Income Gap

Poll respondent Vicky Vasconi Hale, 51, of San Jose, California, says she disagrees with the president because the agreement will widen the gap between the rich and poor.

“We used to have three income levels: poverty or lower income, middle class and high income,” says Vasconi Hale, a Democrat who ran a clothing business and is now unemployed. “The middle class is gone.”

4--Fannie and Freddie discuss reducing mortgage balances with U.S. government, Huffington Post

Excerpt: Fannie Mae and Freddie Mac are in discussions with U.S. government officials to join government programs aimed at reducing mortgage balances where borrowers owe more than the values of their homes, the Wall Street Journal reported on Tuesday citing people familiar with the situation.

The paper reported that Fannie Mae and Freddie Mac have been highly reluctant to reduce mortgage balances, especially for borrowers who are still making payments.

The report also said the government is pressuring both mortgage companies to join a program run by the Federal Housing Administration that allows banks and other creditors, which agree to write down mortgages, to hand off the reduced loans to the FHA.

5--A Crisis in Remission, Nomi Prins, New York Times

Excerpt: In late 2008, we saw how quickly a flawed system can cease to function under the weight of its own negligence. We witnessed how expansively our government jumped to its aid, and how in the process, the Fed subsidized and approved mergers that made the biggest banks even bigger.

Bank of America and its new ward, Merrill Lynch, dipped into one of the Fed’s cookie jars 444 times for funds representing $2.7 trillion dollars of survival money flow. To assume that merging risky entities results in less overall risk defies logic. Yet, here we are.

This bailout cycle will repeat because there exists no political will to make the big banks smaller or to cordon them into risky vs. less-risky, consumer-oriented components, as the Glass-Steagall Act of 1933 achieved. Before Glass Steagall was repealed in 1999, the top five banks held 19.5 percent of national consumer deposits. Today,they hold 40 percent.

Similarly, the group’s assets represent 48 percent of total assets, up from 26 percent 10 years ago. They aren’t just bigger in size, but more dangerously, in complexity. The many conflicting businesses residing under one roof are all entitled to implicit federal backing and obfuscate and exacerbate overall risk. This is a problem throughout the globe, not just in the U.S., though it is more acute here.

Glass-Steagall was designed to prohibit the risk of speculative, bonus-driven practices from eradicating the hard-earned money of ordinary citizens. By not allowing our riskiest banks to go bankrupt when they were at the financial abyss, and not deconstructing their merged nature, while following a policy of pumping up asset and Treasury prices, we have already failed to stop the next stage of this crisis.

6--Ice And Fire Update, Paul Krugman, New York Times

Iceland is growing again. Of the excessive peripherals — Ireland, Iceland, Latvia, Estonia — Iceland had by far the biggest excesses, with a totally ludicrous buildup of debt. Yet through the magic of default and devaluation, it’s actually doing better than the other three.

One of the remarkable things about the crisis of the past three years is that it has ended up strengthening the political hand of hard-money, austerity-imposing orthodoxy — yet the reality is that heterodoxy has worked much better in practice.

7--Consumer credit increases in October, Pragmatic Capitalism

Excerpt: Consumer credit increased $3.4B in October to the best levels since July 2008. The 1.75% year over year expansion is the second consecutive month of gains. Revolving credit declined 8.4% for the 26th straight month while non-revolving credit increased 6.8%. This was driven primarily by new auto loans and student loans. Has the U.S. consumer stopped de-leveraging?

8--Food Stamp Rolls Continue to Rise, Wall Street Journal

Excerpt: More people tapped food stamps to pay for groceries in September as the recession and lackluster recovery have prompted more Americans to turn to government safety net programs to make ends meet.

Some 42.9 million people collected food stamps last month, up 1.2% from the prior month and 16.2% higher than the same time a year ago, according to the U.S. Department of Agriculture.

Nationwide 14% of the population relied on food stamps as of September but in some states the percentage was much higher. In Washington, D.C., Mississippi and Tennessee – the states with the largest share of citizens receiving benefits – more than a fifth of the population in each was collecting food stamps.

9--Menacing North Korea: How South Korea is Raising the Risk of War, Gregory Elich, Counterpunch

Excerpt: By the end of December, South Korea plans to hold another round of artillery drills on islands lying in disputed waters, including, dismayingly enough, Yeonpyeong Island. Nothing could be calculated to be more provoking under the circumstances. In preparation for the response to the drills that are expected from North Korea, island defenses are being beefed up. South Korea has added multiple rocket launchers, howitzers, missile systems and advanced precision-guided artillery to the Yeonpyeong arsenal. (14)

According to a South Korean official, "We decided to stage the same kind of fire drill as the one we carried out on the island on November 23 to display our determination." (15)

The new drills appear calculated to provoke a conflict, and this time South Korea is intent on an asymmetrical response. The military is revising its rules of engagement so as to jettison concerns about starting a wider conflict. If former Defense Minister Kim Tae-young is to believed, if there is another North Korean strike, then warships and fighter jets of both South Korea and the U.S. will launch attacks on the North. (16)

Incoming Defense Minister Kim Kwan-jin is if anything even more determined to fan the flames of conflict into a wider conflagration. The South Korean military will immediately launch "psychological warfare," including, presumably, loudspeaker broadcasts across the border. The North has promised to target loudspeakers if they are put in operation, and that would in turn provide the pretext for the South Korean military to launch combat operations. If there is another exchange of fire with the North, Kim announced, "We will definitely air raid North Korea." All combat forces available would be mobilized, he promised. The newly minted rules of engagement are also going to permit "preemptive" strikes on North Korea based on the presumption of a possible attack. In other words, if North Korea fails to provide a pretext for military action, the Lee Administration can attack the North without provocation, if it chooses to do so.

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