Friday, December 10, 2010

Today's Links

1--Majority of Americans Say Fed Should Be Reined In or Abolished, Poll Shows, Bloomberg

Excerpt: A majority of Americans are dissatisfied with the nation’s independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright, a poll shows.

The Bloomberg National Poll underlines the extent to which the central bank’s standing has suffered as it has come under fire in Congress, first from Democrats for regulatory lapses before the financial crisis and then from Republicans for failing to revive an economy in which the jobless rate hovers near 10 percent. Voters from both parties have criticized the Fed’s $3.3 trillion in aid to the financial system.

Americans across the political spectrum say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo.

2--Europe’s Inevitable Haircut, Barry Eichengreen, Project Syndicate

Excerpt: The crisis countries have, in fact, shown remarkable resolve in implementing painful cuts. But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched.

This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks. This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression.

So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.

3--What's really behind the uptick in consumer credit, Pragmatic Capitalism

Excerpt: Yesterday saw the federal reserve’s... release on consumer credit. some have noted the rebound in consumer credit off the worst months of 2009 with a measure of hope regarding consumer balance sheets. And indeed yesterday’s headline showed further improvement, making for a positive three-month average change in overall consumer credit outstanding.

But there’s a fly in the ointment, it would seem. one of the sticking points of the release to me was the massive growth in “student loans” — running at over 80% year-on-year, an expansion of a very material $120bn. This is a stock, not a flow, and the idea that the amount of outstanding sallie mae loans had nearly doubled in a year is silly. so the question became what was driving the anomaly?

The Federal Family Education Loan program (FFEL) allows private financial institutions to provide students with loans, but the government assumes the risk of default, and pays the financial fees while the student attends college. This amounts to privatized gains combined with socialized loans. The CBO found that compared to the William D. Ford Federal Direct Loan program, an alternative system in which the government just directly provides students with loans, FFEL loans cost the government 10 to 20 percent more (PDF). Eliminating the unjustified subsidies and government financial backing for the FFEL program by expanding the existing direct loan program is projected to save $67 billion over the next decade.

Under the FFEL program, financial institutions like Sallie Mae, Bank of America, National Education Loan Network (NELNET) JPMorgan Chase, Wachovia, and Wells Fargo would originate these FFEL loans with students, and then sell them on the secondary credit market. In 2008, the credit market dried up, and the private lenders had nowhere to sell these government guaranteed loans. So, the government stepped in to buy up these loans and protect a program that was already a massively wasteful corporate boondoggle....

This purchase program — which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be — was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. (the reporting of the actual purchases is here.)

In other words, what is being included in the g.19 as an expansion of student loans (and thereby consumer credit) is really in fact a bailout of several large banks and finance companies stuck with immovable loans....What the g.19 is giving evidence of is a renewed deceleration in consumer debt levels (that is, faster deleveraging) which should negatively impact aggregate demand....The administration must know as well as anyone that the roll-off of stimulus measures will be subtracting from GDP in coming quarters if they are not sustained; and that, if that roll-off is paired with a renewed deleveraging impulse, a powerful recession is all too likely. From a starting point economy that, as measured by per capita real final sales, hasn’t really recovered at all, such an outcome could be politically, economically and spiritually devastating.

4--Demand for U.S. Cash Surges, Wall Street Journal

Excerpt: The drubbing delivered to the dollar on foreign exchange markets over recent months obscures the fact that global demand for U.S. currency, in its elemental form of cash, has been growing at a strong rate....

The world-wide interest in holding cold, hard dollars is driven substantially by fear. The surging demand for cash has happened despite broad worries about the dollar’s value at a time of U.S. economic malaise and radical monetary-easing measures by the Fed. The cash surge is largely separate from the central bank’s liquidity providing market interventions. Demand for cash has increased even as the dollar has had a rough few months relative to other major currencies, and as some investors have flooded into gold out of fear that the greenback will lose its value....

Gauging currency-in-circulation levels and demand for cash is a tricky affair, muddled substantially by how much American paper money is outside the country–some $366 billion in cash, according to central bank data from the second quarter.

5--Consumer deleveraging continues, The Big Picture

Excerpt: The Fed released its report on consumer credit, and it comes as no surprise that revolving credit eased for the 26th consecutive month as consumers continue to shed credit — either by paying it down or, in some cases, walking away from it. From a high of $973.6 billion in August 2008, revolving credit has contracted by $173.1 billion to $800.5 billion (a level last seen six years ago, in December 2004). It is an annualized rate of decline of about 17.75%. Nonrevolving credit has been flatlining over the same period.

6--"The Sorrow and the Self-Pity", Paul Krugman, New York Times via Economist's View

Excerpt: Let me add that Obama has never, as far as I can recall, pointed out that these horrible tax increases on the rich the GOP warns about would bring rates back to what they were under Bill Clinton — a time of enormous prosperity. But then, Obama has always had a weirdly hard time making the case that the Clinton economy refuted Reaganism.

Add in the White House’s repeated validations of the right-wing position on the evils of public spending, from the spending freeze to the pay freeze, the appointment of a conservative Democrat and a paleo-conservative Republican to head the debt commission, etc. — and now Obama expects trust and praise from progressives?

What’s particularly striking is that Obama seems passionate about denouncing his progressive critics, even as he has nice words for the people who have spent two years trying to destroy him.

So look: there’s a policy issue here, and it’s a tough one; you trade off the stimulus Obama extracted now for the increased likelihood that low taxes for the rich will be made permanent, crippling policy for decades to come. But there’s also a character issue: what we really don’t need right now is a president who blames everyone but himself, and seems more concerned with self-justification than with sustaining the alliances he needs.

7--Home prices set to fall hard, Bloomberg

Excerpt: U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow Inc., a closely held provider of home price data.

This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company said today in a statement.

The drop in home values pushed more buyers underwater, meaning they owe more on their mortgages than their homes are worth, Zillow said. The percentage of homeowners with so-called negative equity reached 23.2 percent in the third quarter, up from 21.8 percent at the end of 2009.

“With foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief,” Stan Humphries, Zillow’s chief economist, said in the statement. “Government incentives can only temporarily hold back the tide.” ...

As many as 8 million homes are in default or foreclosure and may be offered for sale, known as shadow inventory, according to Morgan Stanley. The looming supply will combine with tight credit and questions about housing-finance regulation to reduce prices 6 percent to 11 percent from current levels, the analysts said.

8--Wall Street's Worst at Least Can Do the Math, Jonathan Weil, Bloomberg

Excerpt: When I asked the task force’s executive director, Robb Adkins why the government hadn’t prosecuted any senior executives from companies at the heart of the financial crisis, he said: “Where there is wrongdoing we will bring charges, but beyond that I just can’t comment.”

By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.

It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.

Operation Broken Trust may be a fitting name. Unfortunately it’s for all the wrong reasons. The public already knows not to trust the government. Flimflam P.R. stunts such as this one at least offer us a useful reminder of why.

9--31 Consecutive Outflows From Domestic Equity Funds, zero hedge

Excerpt: Last week equity domestic funds saw outflows of $1,801MM, which is the 31st consecutive outflow and yet more confirmation that retail is done with stocks. Oddly enough, or not really as everyone by now knows who the only remaining buyers are, as the overlay shows, despite $93 billion of outflows, the stock market is at 2010 highs, courtesy of the Federal Reserve. And contrary to the myth, after a brief respite, the inflows in credit have resumed.

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