Saturday, December 18, 2010

Weekend Links

1--A Survival Strategy for the Eurozone, Nouriel Roubini, Project Syndicate

Excerpt: The first institutional reform takes the form of a larger envelope of official resources, which would mean a quasi-fiscal union. Official resources currently are sufficient to bail out Greece, Ireland, and Portugal, but not to prevent a self-fulfilling run on the short-term sovereign and financial liabilities of Spain and other potentially distressed eurozone members.

So, even if these countries were to implement the necessary fiscal and structural reforms, an increase of official resources would nonetheless be needed. Because nervous investors don’t want to be last in line in case of a run, a disorderly rush to the exits is likely when official resources are insufficient.

Short of full fiscal unification – or a variant of it in the form of eurozone bonds – this increase in official resources would occur through a much-enlarged European Financial Stability Facility and a much greater commitment by the European Central Bank to long-term bond purchases and liquidity operations to support banks. Since quasi-fiscal union implies that the eurozone’s core economies could end up systematically bailing out those on the periphery, only a formal loss of fiscal sovereignty – a credible commitment by the peripheral countries to medium- and long-term fiscal discipline – could overcome the current political resistance of Germany and others.

But even a larger envelope of official resources is not sufficient to stem the insolvency problems of Greece, Ireland, and, possibly, Portugal and Spain. Thus, a second set of policies and institutional reforms requires that all unsecured creditors of banks and other financial institutions need to be “treated” – that is, they must accept losses (or “haircuts”) on their claims. This is needed to prevent even more private debt being put on government balance sheets, causing a fiscal blowout. If orderly treatment of unsecured senior creditors requires a new cross-border regime to close down insolvent European banks, such a regime should be implemented without delay.

2--Banks Push Fed to Curb Borrowers' Right to Rescind Mortgages, Bloomberg

Excerpt: Mortgage firms are pressing the Federal Reserve to curb homeowners’ right to invalidate loans based on flawed documents -- a right consumer groups say is one of the few weapons borrowers have to battle unfair lending.

Consumer groups and industry lawyers say a rule under consideration by the central bank would make it harder for borrowers to exercise their right of “rescission,” which forces a lender to relinquish a lien on a mortgaged property. They said the number of rescissions has grown in recent years as a result of the foreclosure crisis and allegations that mortgage documents were fabricated or processed improperly....

Since the financial crisis began, the Fed has come under criticism for having failed to meet its existing legal mandate to protect consumers from deceptive mortgages and other financial products. That track record was one reason behind Congress’s push to create an independent consumer agency.

“I cannot understand why the Fed is rushing through this voluntary gift to the banks unless the Fed is afraid that if it doesn’t curtail the rights of rescission now, it will never happen,” said Kathleen Engel, a professor at Suffolk University Law School in Boston.

The right of rescission was established by the 1968 Truth in Lending Act. Borrowers who can show a material misstatement in loan documents have three years to issue a rescission notice to the lender, who must revoke its lien on the property.

3--Our Dickensian Economy, Alan Blinder, Wall Street Journal

Excerpt: The national unemployment rate stands at a horrifying 9.8%. But unemployment is 15.7% among high-school dropouts, and an astonishing 42% of all unemployed workers have been jobless for more than six months. At press time, Congress appeared poised to pass a package of tax cuts that offers 19% of its benefits to the richest 1% of taxpayers. Earlier this month, the president's deficit commission proposed a comprehensive deficit-reduction plan with many virtues. But it included, among other things, a corporate income-tax cut for the haves and Social Security benefit cuts for the middle class....

Jobs. Our biggest problem today is the shortage of jobs. Payroll employment fell an astonishing 8.4 million from its December 2007 peak to its December 2009 trough and has gained back less than a million of those jobs so far. With the working-age population increasing by almost 8 million over that period, the unemployed today number almost 15 million....

Wages. When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that's right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

• Taxes. We often hear that the top 1% of income-tax payers pay about 40% of all the income taxes. Sounds like Robin Hood is on the job. But that's just income taxes. Did you know that the payroll tax (the people's tax) now brings in about 96% as much revenue as the personal income tax (the rich man's tax)? As recently as 2000, it brought in just 65% as much. Yes, taxpaying has been radically democratized. Yet the drumbeat from the right continues: We must remove the oppressive yoke of taxation from the backs of the haves, and put it on the backs of the . . . Well, they usually don't finish the sentence. But someone must pay the bills...

4--European Central Bank arms itself for Spanish crisis, Ambrose-Evans Pritchard, Telegraph

Excerpt: The ECB said it would raise its subscribed capital by €5bn (£4.2bn) to €10.76bn, the first increase since the launch of the monetary union.

"Basically they are insuring themselves in case they have to step up bond purchases, and that probably implies Spain," said Julian Callow from Barclays Capital. "They have to be ready to dig the fire-break early on this because Spain is too large to handle, and there is risk of contagion to Italy." ...

The ECB has so far bought €71bn of Greek, Irish, and Portuguese bonds in a bid to cap yields, but this was done against Bundesbank objections, and may breach EU treaty law. Jean-Claude Trichet, the ECB's president, is irked that the bank is having to shoulder the burden of propping up the EMU periphery, blurring the lines between fiscal and monetary policy. Critics in Germany say the ECB is turning into a "bad bank" for toxic debts. ...

A report by Goldman Sachs said EMU states hold $760bn (£487bn) of Spanish debt securities, on top of other loans, or
three-quarters of all foreign holdings. "Debt sustainability in the European periphery is to a very large extent a domestic problem for the eurozone," it said.

France has $252bn, Germany $212bn, Luxembourg $77bn, Ireland $62bn, The Netherlands $61bn, and Belgium $48bn. Outside EMU, Britain has $69bn and the US $26bn.

5--Keeping the Good News in Perspective, New York Times

Excerpt: Yes, the latest data has been good. But the economy remains both weak and vulnerable. The notion that a couple of weeks of decent news should cause the Fed to proclaim victory and halt its campaign to lift growth — a notion you’re starting to hear — seems misplaced.

Here’s the thoughtful Bernard Baumohl, chief global economist of the Economic Outlook Group, in a note to clients:

"Clearly, the economy continues to move in the right direction. What troubles me is that the Federal Reserve doesn’t fully realize the nuanced relationship it has with the bond market as this critical
stage in the recovery….

[I]f the declarative goal of the Fed is to use the $600 billion in QE2 simply to lower the unemployment rate even as an economic recovery is underway, then it risks agitating the bond market who fear the central bank may overshoot by adding yet more money when the financial system is already flooded with excess reserves. Such anxieties will drive market rates higher, raise the cost of capital, and ultimately undermining the Fed’s own goals."

These are legitimate concerns. As Mr. Bauhmol suggests, the Fed needs to make sure that bond investors know it stands ready to withdraw its support for the economy — and let interest rates rise — as soon as the recovery seems assured. Otherwise, the bond market will get spooked about inflation and send long-term rates up on its own, thereby putting the recovery at risk.

But there are no free lunches here.

6--Euro Defaults Need to Be Carried Out Quickly, Elena Carletti, Bloomberg

Excerpt: The recent proposal by France and Germany on sovereign defaults stressed the importance of collective-action clauses in euro-area debt contracts. These clauses, which make debt restructuring faster by forcing minority bondholders to accept the terms agreed to by a majority of creditors, are no doubt important to include, but are a distraction from what is likely to be the main issue, namely financial stability. ....

A sovereign default would need to be done very quickly, otherwise it would trigger enormous capital flows in the euro area from countries perceived to be weak to those seen as strong, such as Germany. It would be hard to stop this kind of occurrence in anticipation of a default, let alone if the bankruptcy process were to take a minimum of six months, as some legal experts have suggested for Greece. ...

But for debt issued by larger and greatly indebted countries, such as Spain, it is more dangerous. There is so much Spanish debt around that, if widely held, a default could bring down the entire euro-area banking system....

There would certainly be messy details, but the great advantage would be for the defaulting government to regain control of monetary policy and potentially be able to guarantee the banking system. There would be inflation, but this, together with the devaluation of the local currency, would help the country to grow by boosting exports. A few years after a sovereign nation has brought its budget deficit and debt under control, it could reapply to join the euro

7--Fred Barnes lays out the GOP strategy, Wall Street Journal

Excerpt: The Republicans' strategy is to use the House as a battering ram to force their proposals and ideas to the top of Washington's list of priorities. By passing spending cuts—a new one every week—and curbs on government activism, the goal is to put Democrats and the president on the defensive.

"They're going to vote against everything," says Ohio's Rep. Jim Jordan, head of the Republican Study Committee, the influential group of House conservatives. "Democrats are going to be the party of no." And they're going have a lot to say no to....

Mr. Upton has already talked to governors about turning Medicaid over to the states. He says $180 billion can be saved by giving governors the flexibility to alter Medicaid's rules, and by changing federal funding into block grants. Mr. Upton intends to have what he calls "top-flight governors," including Chris Christie of New Jersey, testify on Medicaid at a series of committee hearings.

That's not all. He told me he wants to subject the Patient Protection and Affordable Care Act, aka ObamaCare, to "heavy-duty oversight." Mr. Upton wants to trim the income ceiling for both Medicaid eligibility (now 133% of the poverty level) and S-chip, the health-insurance subsidy for children (currently $88,000).

The Ways and Means Committee—whose new chairman is Michigan's Dave Camp—shares jurisdiction with Energy and Commerce over health care, including Medicare. In 2009 and 2010, it held no hearings on ObamaCare. That will change in 2011. Another member of the committee is Mr. Ryan, who challenged Mr. Obama face-to-face on health care at the nationally televised White House summit last February....

The House Appropriations Committee will be the first to act. Its task, Mr. Ryan told me, is to offer "rescissions," or cuts, in the current 2011 budget. To prove their seriousness about reining in spending, House Republicans will vote first on a 5% decrease in funding for congressional operations, the speaker's office included. That vote will be followed by one to repeal ObamaCare. Both are expected to pass the House.

8--Number of the Week: Using Cash Piles to Buy Shares, Wall Street Journal

Excerpt: $92 billion: How much companies spent on their own shares in the third quarter of 2010.

U.S. companies are finally finding a use for some of the nearly $2 trillion in cash sitting on their balance sheets. In the three months ended September, they spent a seasonally adjusted $92 billion on share buybacks, up 71% from the previous quarter and the highest level since the beginning of 2008, according to the Federal Reserve.

Buybacks can be a good signal, suggesting that company executives believe their stock is worth more than what the market is offering. In this case, though, the buybacks more likely reflect companies’ solution to a dilemma: How to keep boosting earnings per share at a time when earnings aren’t likely to rise as fast as they have been.

9--Labor Market Stagnant in Most U.S. States, Wall Street Journal

Excerpt: Unemployment rates were little changed in most states in November, as employment was stagnant in most of the U.S.

The Labor Department reported that 21 states and Washington DC experienced jobless-rate increases in November from October, while the rate fell in 15 regions and was unchanged in 14. In all, 13 states had rates above or equal to the 9.8% national figure released earlier this month.

Nevada remained the state with the highest unemployment rate in the nation — 14.3% — nearly two percentage points higher than the 12.4% recorded in Michigan and California, tied for second place....

Overall, employment dropped in 28 states, while increasing in 20 and Washington D.C. Twenty-two states still have higher or equal unemployment rates this November compared to a year ago.

10--Disintegrated Wall of Worry, Mark Hulbert, Marketwatch

Excerpt: The Wall of Worry that existed as recently as earlier this month has now largely disintegrated — and given way to the veritable Slope of Hope on which market declines typically thrive....

The HNNSI currently stands at 73.3%, which is disturbingly high. The only other occasions this year when this sentiment benchmark got any higher were early November and late April/early May. Both occasions turned out to accompany stock market highs — and in the earlier case came immediately before the infamous Flash Crash and severe May-June correction....

Needless to say, the disturbingly high levels of bullishness that exist today don’t necessarily doom the market. Ned Davis, for one, is giving the rally the benefit of the doubt until it reverses direction, and he is therefore rated moderately bullish.

Still, it can’t be good news for the bulls that the sentiment winds are no longer blowing in the rally’s sails — especially in light of the news I reported earlier this week that corporate insiders are now favoring the sell side at a rate last seen in early 2007.

11--Ireland’s threat to the IMF, FT.Alphaville

Excerpt: However, while the IMF is senior to all other creditors, Irish public and private debtors have a lot of creditors, as made clear in the section of the IMF report dealing with credit risk:

Ireland’s external debt is the highest of recent exceptional access cases, with private sector debt accounting for the largest share. Ireland’s total external debt is projected at over 1000 percent of GDP at end-2010… While a substantial portion of gross debt is accounted for by the liabilities of International Financial Sector Center (IFSC) participants, which do not reflect Irish risk, excluding an estimate of the bank component of this IFSC debt would still leave total external debt at almost 800 percent of GDP, with banks’ external liabilities accounting for about half… At end-2010, Ireland’s total stock of private short-term external debt is projected at approximately 370 percent of GDP, of which about a fifth consists of banks’ repos with the ECB....

Which leads to prompt closing sentences like these in the report:

The impact of the proposed extended arrangement on the Fund’s liquidity and credit risk exposure is very substantial…

The proposed arrangement would reduce Fund liquidity significantly…

There are significant risks to the program that could affect Ireland’s capacity to repay the Fund…

…Overall, the proposed access would entail substantial risks to the Fund.

12---Opportunities in Detroit?, Angry Bear

Excerpt: Detroit has lost about 60% of its population since the 1950s peak of about 2 million.

About 50 square miles of Detroit is so thinly populated that the Mayor wants to pay for people to move to more densely populated neighborhoods so the area can be abandoned for municipal services. No trash pick up, no police patrols. The first and second ring of suburbs are facing much of the same plight, and some may be headed for bankruptcy..

One idea for reclamation is urban farming, but that assumes people will not move into Detroit any time soon....So does the 50 square miles provide us with an opportunity? New neighborhoods? New types of communities? A special immigration zone? Homesteading by young people? Entrepreneurial zones? If so, where do we get the money (Detroit and Michigan both being in various stages of broke)? Who leads the charge?

This is a country full of smart people. We should be able to think of something creative here.

13--Bill Richardson made some 'proposals' to North Korea, Korea Times

Excerpt: (The Obama administration refuses to admit it is carrying out bilateral talks with NK) Bill Richardson, the New Mexico governor who is currently visiting North Korea, reportedly made some proposals to North Korea, amid high tensions on the Korean Peninsula as South Korea plans a live-fire drill.

According to CNN, Richardson met with North Korea’s top nuclear negotiator Kim Kye-gwan for one and a half hours and said he would expect the current tension would lessen if his proposals are accepted by North Korea, Yonhap said.

Richardson didn’t disclose what the “proposals” were....Richardson sees the current inter-Korean situation as the most serious crisis since the Korean War, the report said...."There's enormous potential for miscalculation," he said, according to Reuters.

Richardson also urged the North to show restraint and allow contentious military exercises by the South to go ahead, said Reuters.

14-- History is repeating itself in Afghanistan, Patrick Cockburn, The Independent

Excerpt: During the mid-1960s, America's goal during a crucial stage in the Vietnam war
was to defeat the enemy militarily. But it had no realistic political strategy to underpin the goal, and it was this which ultimately led to failure.

America's strategy in Afghanistan is now suffering from a similar weakness. Barack Obama made the edgy claim this week that the US army is stabilising the military situation, but neither he nor his national security advisers show any signs of understanding the speed at which,politically, the US is losing ground.

Again and again in Kabul one hears Afghans say that the Taliban may not be liked, but that the Afghan government and its US allies are increasingly distrusted, even hated, by the mass of the population. It is this rapidly increasing disaffection, underestimated by foreign governments, that enables a maximum of 25,000 Taliban to hold their own against 140,000 US-led foreign troops in addition to the Afghan government's army and police. Instead of giving priority to seeking a feasible political approach, the current US strategy is to eliminate the Taliban as an effective military organisation. American generals claim they are beginning to turn the tide by an offensive against enemy strongholds in southern Afghanistan and through the systematic killing of local Taliban commanders by US special forces....

The current US policy would only work if it did not matter what ordinary Afghans think. But all the evidence since 2001 is that it matters a great deal. The resurrection of the Taliban was not inevitable and was largely provoked by the takeover of local administration by former warlords and militia leaders. The wholesale alienation of much of the population is even more recent and enables the Taliban to withstand the heavy casualties they undoubtedly suffer from the US-led night raids or air strikes.

15--North Korea says situation could 'explode', ABC News

Excerpt: North Korea says the situation on the Korean peninsula will "explode" if South Korea goes ahead with a planned live-fire artillery exercise on a border island.

The North rained a deadly bombardment on Yeonpyeong island after a similar drill last month. It has threatened a deadlier attack if the one-day drill which was scheduled sometime between December 18 and 21 goes ahead.

A foreign ministry statement, quoted by the official news agency, accused US troops - some 20 of whom who will take part in the drill - of providing a "human shield" for the upcoming exercise, but repeated threats to attack it.

"The US Department of State sent a threatening message to the DPRK (North Korea), urging it not to forget there are Americans and foreign reporters on the island. The US is providing even 'a human shield'," the statement said.

Pyongyang disputes the Yellow Sea border drawn after the 1950-53 war and claims the waters around Yeonpyeong and other South Korean frontline islands as its own maritime territory.

It says the last drill, on November 23, dropped shells into its waters.

Hours later that day, the North's bombardment killed two marines and two civilians on Yeonpyeong and damaged dozens of homes.

The upcoming exercise, which would violate the North's waters, "would make it impossible to prevent the situation on the Korean peninsula from exploding and escape its ensuing disaster", the North said.

It said its military has already threatened "decisive and merciless punishment" for such an action and "does not make an empty talk".

No comments:

Post a Comment