Wednesday, December 15, 2010

Today's Links

1--Defaults Account for Most of Pared Down Debt, Wall Street Journal

Excerpt: 0.08% — The annual rate at which U.S. consumers have pared down their debts since mid-2008, not counting defaults. U.S. consumers might not be quite as virtuous as they seem.

The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. That’s an annualized decline of about 2.3%, which is pretty impressive given the fact that such debts grew at an annualized rate in excess of 10% over the previous decade.

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.

2--Retail Sales Make Fourth Quarter Look Stronger, Wall Street Journal

Excerpt: The Commerce Department reported Tuesday that retail sales increased by 0.8% last month, rising to the highest level since November 2007 and the fifth straight monthly gain. Meanwhile, sales in October surged 1.7%, revised up from a previously estimated 1.2% increase. That spells better news for fourth-quarter gross domestic product growth.

In the most recent Wall Street Journal forecasting survey, conducted last week, the 55 economists on average expected GDP to grow 2.6% at a seasonally adjusted annual rate in the fourth quarter from the third. But on the back of today’s retail report and a strong increase in October exports reported Friday, many are revising their estimates to more than 3%. Of seven revised forecasts, the average expected fourth-quarter growth forecast is now 3.3%, compared to 2.6% before the retail release....

But not everyone is convinced. “The holiday shopping season appears to have got off to a very good start,” said Paul Dales of Capital Economics. “But without a meaningful acceleration in real income growth, this tentative consumer revival cannot last.”

3--Does Economic Inequality Cause Crises?, Edward L Glaeser, New york Times

Excerpt: Why might widening inequality lead to a banking crisis? The Nobel Laureate Joseph Stiglitz’s theory is that “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.” This “flood of liquidity” then “contributed to the reckless leverage and risk-taking that underlay this crisis,” he asserts.

Jean-Paul Fitoussi and Francesco Saraceno have made similar arguments. A related view, called the Stiglitz hypothesis, by Sir Anthony Atkinson and Salvatore Morelli, is that “in the face of stagnating real incomes, households in the lower part of the distribution borrowed to maintain a rising standard of living,” and “this borrowing later proved unsustainable, leading to default and pressure on over-extended financial institutions.”

Another view, associated with Raghuram Rajan, former chief economist of the International Monetary Fund, is that “the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households.”...

Professors Atkinson and Morelli’s international data also suggests little regular connection between inequality and crises. Looking at 25 countries over a century, they find 10 cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality. Moreover, “the Gini coefficient was higher to a salient extent in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified,” they found.

This is hardly an overwhelming correlation. When inequality and crises do go together, it is quite possible that the asset bubble is causing inequality rather than the reverse. The great stock market boom of the 1920s and the housing boom of the 2000s made many rich people even richer, and that certainly helped inequality increase.

4--The Fed's Policy Is Working, Jeremy Siegel, Wall Street Journal

Excerpt: The recent surge in long-term Treasury yields has led many to say that the Fed's second round of quantitative easing is a failure. The critics predict that QE2 may end up hurting rather than helping the economic recovery, as higher rates nip in the bud any rebound in the housing market and dampen capital spending. But the rise in long-term Treasury rates does not signal that the Fed's policy has backfired. It is a sign that the Fed's policy is succeeding.

Long-term Treasury rates are influenced positively by economic growth—which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity—and by inflationary expectations. Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields.

The Fed's QE2 program has raised expectations of growth and inflation, sending long-term Treasury rates up. It has also lowered risk aversion, which implies rising long-term rates. The evidence for a decline in risk aversion among investors is the shrinkage in the spreads between Treasury and other fixed-income securities, the strong performance of the stock market, and the decline in VIX, the indicator of future stock-market volatility. This means that expectations of accelerating economic growth—and a reduction in the fear of a double-dip recession—are the driving forces behind the rise in rates....

The combined impact of the tax cuts and the Fed's QE2 policy will continue to stimulate the economy and send long-term interest rates higher. For this reason, it is likely that the Fed will not complete all of its purchases by the middle of next year. It may instead begin the process of draining reserves and raising short-term rates much earlier than most forecasters now anticipate. But monetary tightening will only begin if the pace of the economic recovery accelerates significantly next year, which I believe is increasingly likely.

5--Big numbers from the BIS, FT.Alphaville

Excerpt: $2,281bn — Foreign exposures to Greece, Ireland, Portugal and Spain.

$107bn — Decline in foreign exposure to the above between April and June.

$81.1bn — German loans to Spanish banks at the end of Q2.

For perusal on an otherwise quiet Monday — the latest quarterly report from the Bank for International Settlements. It’s chock-full of detail about European exposure to so-called Club Med country debt and banks. Which will probably raise hackles about accuracy/interpretation, but nevertheless be a talking point for markets.....For context, the ECB has purchased at least $70bn of government debt since it started its bond-buying Securities Markets Programme in the spring

6--Fed's Cure Could Worsen Disease, Kelly Evans, Wall Street Journal

Excerpt:Tuesday, as expected, the Federal Reserve reiterated its bond-buying pledge. That likely will keep investors drooling over the potential for strong growth and stock-market gains next year. Yet that very optimism threatens to undermine the central bank chairman's ability to reflate the economy.

The latest trouble is emanating from bond markets, whose forward-looking nature typically provides the economy with "automatic stabilizers." That is, when growth looks weaker, long Treasury yields fall. That, in turn, makes mortgages cheaper, underpinning house prices, encouraging refinancing and equity withdrawal, and helping to boost consumer spending.

Now, that positive feedback loop threatens to work in reverse. In essence, the bond market is acting as an "automatic destabilizer." Sharply higher expectations for growth have helped lift 10-year-bond yields from about 2.4% to more than 3.4% in the past three months, causing mortgage rates to also jump. That comes right as the housing market, which remains the Achilles' heel of the U.S. economy, risks a second leg down with prices falling anew.

7--As Rates Increase, Fed's Resolve Likely to Rise, Too , Kelly Evans, Wall Street Journal

Excerpt: Of course, the Federal Reserve's latest round of policy easing is working. Haven't you seen the stock market lately?

Fed policy makers meeting Tuesday aren't explicitly mandated with boosting share prices. But it clearly is one desired outcome of their estimated $900 billion bond-purchase plan, known as quantitative easing, or QE.

After all, they can't really claim anymore that their efforts will drive down borrowing rates. They have been rising. The U.S. dollar, too, is up about 5% in the past six weeks against a basket of other major currencies. Certainly, these things are happening largely because investors have become more optimistic about U.S. growth prospects....

The hope is that easy monetary policy will keep juicing asset prices and nurture the fledgling economic recovery. The 19% gain in the S&P 500-stock index since its Aug. 25 trough helped add $1.2 trillion to household net worth during the third quarter. Yet a smooth continuation of that trend is hardly guaranteed. Meanwhile, the jump in mortgage rates threatens to kill off a recovery in the very market, housing, that needs one the most.

8--What's Causing U.S. Personal Spending to Drop: Job Losses, Fear or Both?, Paul Solman, PBS

Excerpt: in a consumption-driven economy, the data are sobering. According to the Bureau of Labor Statistics, "personal consumption expenditures" rose at an annual rate of 3 percent from 1988 to 2008, but are expected to grow at 2.5 percent in the decade that ends in 2018. A half-percent decline might not seem like much, but look at it like this: a drop from 3 to 2.5 is actually a decline of 16.7 percent (.5 as a percentage of 3) or one-sixth in simple fractions.

There's a debate, sparked by the very knowledgeable economics journalist Michael Mandel, about how much of GDP is actually "personal consumption." The usual number is 70 percent. Mandel says that if you take away government transfers, like Medicare spending, the number is closer to 40 percent.

But even at only 40 percent of GDP, that's close to $6 trillion. If you cut $6 trillion by one-sixth, that's a $1 trillion loss: a 6-7 percent decline in economic activity, year-to-year.

As Mandel himself wrote a few months ago: "Consumer spending today is lower than it was at the beginning of the recession, outside of education, healthcare and housing. What's more, the growth rate has been on a steady downward trend.

What does this all mean? Just as the government-supported health and education sectors have been the main source of new jobs since 2000, so has health and education (and housing) been the main support for consumer spending."

9--Holbrooke’s Legacy, Justin Raimondo,

Excerpt: “Kosovo’s prime minister is the head of a “mafia-like” Albanian group responsible for smuggling weapons, drugs and human organs through eastern Europe, according to a Council of Europe inquiry report on organized crime.

“Hashim Thaçi is identified as “the boss” of a network that began operating criminal rackets in the run-up to the 1999 Kosovo war, and has held powerful sway over the country’s government since.

“The report of the two-year inquiry, which cites FBI and other intelligence sources, has been obtained by the Guardian. It names Thaçi as having over the last decade exerted ‘violent control’ over the heroin trade.”

It was Holbrooke, one of the chief architects of the Kosovo war, who midwifed the KLA regime in Kosovo, and created a gangster state. When Strobe Talbott, then acting Secretary of State, called him for his recommendation on the Kosovo “crisis,” Holbrooke replied:

“You put us down as unanimously asking for bombing. Put us down as people who want bombing for peace. Strobe, this is very important. This is a critical moment for us personally. A responsibility of the nation. And the right thing to do. If the negotiations fail because of the bombing, so be it. Bombing is the right thing to do.”

It was under the Clintons, and Holbrooke, that the US first embarked on its post-cold war crusade to inflict righteousness on the world’s peoples and export “democracy” at gunpoint....

Holbrooke, and the Clintons, weren’t interested in anyone’s professional military judgment: they wanted Serb blood. Holbrooke pushed back, hard, and demanded more intrusive and intense bombing raids. Smith told him he didn’t take orders from either Holbrooke or his military aide, Wesley Clark, but from NATO headquarters. Holbrooke went directly to the President, and the rest is some pretty bloody and shameful history....

“Legal proceedings began in a Pristina district court today into a case of alleged organ trafficking discovered by police in 2008. That case – in which organs are said to have been taken from impoverished victims at a clinic known as Medicus – is said by the report to be linked to Kosovo Liberation Army (KLA) organ harvesting in 2000.”

This ghoulish regime is the legacy of Richard Holbrooke, and, indeed, of the bloody “humanitarian” interventionists of the Clinton era, who are, today, running our foreign policy. Kosovo is a nightmarish society in which human vampires, aided and abetted by the US-installed-and-supported “government,” tear out their victims’ organs and sell them on the open market. During the US-supported war of “liberation,” KLA units captured Serbs, spirited them across the border to Albania, and harvested their organs, the inquiry revealed. Also exposed: “Prime Minister” Thaci is the “boss” at the center of Europe’s vast heroin smuggling trade.

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