Saturday, December 4, 2010

Weekend Links

1--The Fed's Bailout Files, Wall Street Journal

Excerpt: Lender of last resort indeed. The Federal Reserve pulled back the curtain yesterday on its emergency lending during the financial panic of 2008 and 2009, and the game to play at home with the kids is: Who didn't get a bailout? .....

We learn, for example, that the cream of Wall Street received even more multibillion-dollar assistance than previously advertised by either the banks or the Fed. Goldman Sachs used the Primary Dealer Credit Facility 85 times to the tune of nearly $600 billion. Even in Washington, that's still a lot of money. Morgan Stanley used the same overnight lending program 212 times from March 2008 to March 2009. This news makes it impossible to argue that either bank would have survived the storm without the Fed's cash.

The same goes for General Electric, which from late October to late November 2008 tapped the Fed's Commercial Paper Funding Facility 12 times for more than $15 billion. Thanks to the FDIC's debt-guarantee program, GE also sold $60 billion of government-guaranteed debt (with a balance left of $55 billion). The company finished a close second to Citigroup as the heaviest user of that program from November 2008 to July 2009. GE is lucky it was too big to fail, or it might have failed as smaller business lender CIT did...

Fed officials were crowing yesterday that it hasn't lost a dime so far on this lending, which reached $3.3 trillion at its peak. The Fed could still lose money on some of the assets it guaranteed from the likes of Bear Stearns, or from the low quality mortgage-backed securities it also bought during the crisis and is still holding.


2--The corporate takeover of American schools, The guardian

Excerpt: The trend for appointing CEOs to the top jobs is symptomatic of a declining commitment to public education and social justice.

The messages coming from state education in the US, then, are that government has failed and that only the private sector can save us. But is that message accurate?

The corporate push to take over state education is, in fact, masking the failures of corporate America. And, in turn, this masks the fact that America has failed state education, rather than state education failing America.....

The Joseph Rowntree Foundation has shown that only 14% of pupil achievement can be attributed to the quality of the school; 86% of that achievement is driven by factors outside of education. David Berliner has also established six out-of-school factors that overwhelm the effectiveness of education against poverty and expanding social inequities.

In the US, achievement gaps and failure in state schools reflect larger inequalities in society, as well as dysfunction in corporate, consumer culture. The schools did not cause those gaps or failures – although it is true that, far too often, they perpetuate the social stratification. And the evidence shows that schools alone will never be able to overcome powerful social forces.

The real failure, which is the message being ignored here, is that one of the wealthiest countries in the world refuses to face the inequities of its economic system, a system that permits more than 20% of its children to live in poverty and to languish in schools that America has clearly decided to abandon, along with its democratic principles.


3--Will it work? No. What can Ireland do? Remove the bank guarantee and default, Irish Times

Excerpt: In the last few weeks, the toxic force of the debt crisis has become all too apparent. The financial markets push up interest rates, the economy slows, asset prices fall, the health of the banking sector deteriorates further, more recapitalisation is needed, the deficit increases further, interest rates move higher, contagion spreads horizontally to other European bond markets, and vertically to other parts of the domestic financial market....Any stabilisation plan will have to work in such a mad world....

What should be done now? My ideal solution – from the perspective of the euro zone – would be a common bond to cover all sovereign debt to be followed by the establishment of a small fiscal union; furthermore, banks should be taken out of the hands of national governments and put under the wings of the European Financial Stability Facility. That would clearly solve the problem.

If this is not going to happen, what can Ireland do unilaterally now? Is its game over?

I would advise the following course of action.

First, Ireland should revoke the full guarantee of the banking system, and convert senior and subordinate bondholders into equity holders.


4--Money for Nothing, MSNBC

Excerpt: (short video) Financial analyst Chris Whalen explains how Fed gave out nearly a trillion dollars to unregulated financial institutions and corporations to prevent a systemwide meltdown


5--The cause of Ireland's crisis, The Socialist Worker

Excerpt: When U.S. investment in manufacturing began to decline after 2001, the Celtic Tiger was sustained by a huge property boom. Fifteen percent of the workforce was employed in building and one-fifth of all state revenues were derived from property taxes. It was a form of bubble economics that was directly copied from the U.S., with an emphasis on low taxes, light regulation and total reverence for market forces.

To sustain that boom, the Irish banks borrowed about €450 billion ($594 billion) from European banks. The figure is staggering because it is three times the size of the Irish economy....

Behind the scenes, the European Central Bank stepped in and poured in €110 billion ($145 billion), mainly because it was concerned that if the Irish banks went bankrupt, they would pull down their European counterparts. However, that figure represents one-fifth of their total bailout fund for Europe itself--and there was very little security in Irish banks.


6--Obama's Debt Commission fails to win support, Bloomberg

Excerpt: President Barack Obama’s debt commission rejected a $3.8 trillion budget-cutting plan as members from both parties opposed its mix of tax increases and spending cuts in programs such as Social Security and Medicare.

The seven votes against the plan were enough to sink it, even though 11 of the 18 members voted in favor, because 14 were needed to forward the proposal to Congress for consideration....

The spotlight now shifts to the White House, where Obama must decide how much of the report to incorporate into his February budget request. “We simply cannot allow our nation to be dragged down by our debt,” he said in a statement issued during a trip to Afghanistan....

The rejected proposal would have reduced the annual deficit to about $400 billion in 2015, from this year’s $1.3 trillion, and begin reducing the debt.


7--White House says Unemployment Expiration Threatens Recovery, Wall Street Journal

Excerpt: Not extending jobless benefits would result in two million people losing coverage in December alone and could cost 600,000 jobs over the next year because of a drop in consumption, according to a report released Thursday by President Barack Obama’s Council of Economic Advisers.

Austan Goolsbee, who chairs the council, said that not extending jobless benefits would be “fairly damaging on our nascent recovery.”

Jobless benefits, which generally come in the form of weekly checks of several hundred dollars, are used as a safety net during shaky economic times. Goolsbee said that not extending them now, when the unemployment rate is “extremely high,” would be unprecedented.

Republicans in Congress have said they want any extension, which would cost billions of dollars, to be paid for in other areas of the budget. Goolsbee said moving money from one area of the budget would limit the impact of getting money in the hands of the unemployed. About 14 million people have been helped by jobless benefits as of October 2010.


8--Spain and Ireland turn to privatization, Telegraph

Excerpt: The Spanish government is looking at auctioning stakes in its national lottery operator and airports, while Ireland will look at privatisations in its electricity and gas sectors as part of a joint European Union and IMF bail-out package agreed on Sunday.

News of the privatisation plans came as it emerged that the eurozone bail-out fund will next month begin issuing debt on behalf of embattled member states. Any bonds sold would be the first issued in the name of all currency pact members.


9--US housing--Double dipping, The economist

Excerpt: America's house prices are falling again

THERE was further gloomy news for America's homeowners as national house prices dipped in the three months to September. The S&P/Case-Shiller index, released on November 30th, fell by 1.5% from the same period in 2009 and by 2% from the previous quarter. The end of the government's tax incentives and ongoing foreclosures are contributing factors. The index is now back at 2003 levels. Prices in the ten big cities are 2.6% higher on a quarterly basis than a year ago, but the same downwards trend is evident there too. Indeed the broader 20-city gauge, which began in 2000 and is not shown here, rose by only 1.8% on a year earlier.


10--4 million workers will lose benefits even if Congress passes extension, Huffington Post

Excerpt: Even as Congress debates whether to extend emergency unemployment checks for more than 6 million Americans who are approaching the 99-week limit, some four million others are facing the certain end of their benefits over the next year, unless an entirely new program is crafted.

This is the sobering conclusion of a report released by the President's Council of Economic Advisers on Thursday. The study forecast that the exhaustion of unemployment benefits for so many will curb spending power enough to significantly impede an already weak economic recovery.

The typical household now receiving emergency unemployment benefits would see their income fall by a third should they lose their checks, according to the report. Among the roughly 40 percent of households in which the person receiving a check is the sole breadwinner, income would fall by 90 percent.

The existing emergency unemployment program, which extends benefits for nearly two years, expired on Wednesday. Without an agreement to extend the program, the economy will lose about 600,000 jobs, as the spending enabled by continued unemployment checks ceases. National economic output--which expanded at an annual pace of 2.5 percent during the summer months--would fall off by 0.6 percent.


11--What Ben Bernanke May Be Thinking, Wall Street Journal

Excerpt: Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth. The banks are on the other side of this crunch, holding overvalued mortgage assets. This fuels doubt about the balance sheets of the big banks.

Consider what happened during the Great Depression. Housing investment plummeted steadily from 1926 to 1933. New housing expenditures started to recover in 1934, buoyed perhaps by Congress's creation of the Home Owners Loan Corporation (HOLC). This agency bought underwater home mortgages and reissued them at values that were based on prevailing home prices.

This experience was not forgotten: In September 2008, then-Sen. Hillary Clinton proposed reviving HOLC, and Sen. John McCain offered the same proposal in the second presidential debate of October 2008. This fledgling bipartisan movement failed to attain traction.

Yet both proposals recognized an important principle: A solution to the negative-equity problem in the housing market would also reboot bank balance sheets and enable new lending to be resumed. By implication it would allow home prices to return to their long-lost equilibrium. Three birds with one stone....

perhaps the Bernanke message here is for the banks to deploy those excess reserves to reset the value of their loan assets to current housing prices. They could do so by issuing new mortgages with lower principal amounts. While they would take short-term losses, this action could allay doubts about the value of the assets on bank balance sheets and would help the balance sheets of homeowners as well. (Behold! The next bailout revealed)

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