Wednesday, September 29, 2010

Article du Jour: Foreclosure Funny Business

By Dean Baker, counterpunch.org

Excerpt: Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine print provision that we overlooked. Sometimes begging by good customers can win forbearance, but usually we are held to the written terms of the contract no matter how buried or convoluted the clause in question may be.

That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property. (Read more)

Today's Best Reads

1--Economics Is not a Morality Play, Paul Krugman, New York Times

Excerpt: But maybe this is an opportunity to reiterate a point I try to make now and then: economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well....

The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.

2--Fed's Lockhart: The Approaching Monetary Policy Decision Dilemma, calculated risk

Excerpt: The circumstances of weak recovery, persistent unemployment, dangerously low inflation, and the policy interest rate (the primary tool of modern monetary policy) at the zero lower bound present a tough analytical challenge.
...
If action is taken by the Fed, a clear option is to grow the size of the balance sheet since the policy interest rate, for all practical purposes, cannot go any lower. Growth of the balance sheet would be accomplished by a second round of asset purchases (probably Treasury bills and notes) paid for by newly created money. The technical term for this policy is "quantitative easing," and the prospect of more of this approach is being referred to as QE2.

3--Shadow Banks Pose Major Threat to Financial Stability, Mark Thoma, Fiscal Times

Excerpt: The problem is not the traditional type of bank runs your grandparents might have told you about. Rather, modern bank runs occur in the shadow banking system. The shadow banking system includes major investment banks, money market mutual funds such as Fidelity, Vanguard and Schwab, and securities dealers such as those that can be found at JP Morgan, Bank of America and Citigroup.

These banks, which control trillions of dollars in assets – money market mutual funds alone were worth $3.8 trillion in 2008 — serve as intermediaries between borrowers and lenders, and hence function like traditional banks, but they are not subject to the regulations that exist in the traditional sector to protect against problems such as bank runs.

A bank run within the shadow banking sector was at the heart of the 2008 financial meltdown that led to one of the worst recessions in U.S. history, and it’s a problem that could happen again if we don’t take steps to prevent it.

4--Consumer Confidence Index Slips Lower, New York Times

Excerpt: September consumer confidence in the United States slipped to its lowest levels since February, driven by a deteriorating labor market and business conditions, according to a private report released Tuesday.

5--Pledge to America: Short-term Fiscal Restraint and Long-term Fiscal Folly, Michael Ettlinger and Michael Linden, econoblogspot

Excerpt: The “Pledge to America” budget would mean $11.1 trillion in deficits over the next 10 years. By 2020, the federal budget deficit would be 6.3 percent of gross domestic product, the federal debt would exceed 93 percent of GDP, and interest payments on the debt would be more than $1 trillion a year. The budget deficit would be about $200 billion larger in 2020 under the “Pledge to America” plan than it would be under President Barack Obama’s budget, and over the next 10 years deficits would be $1.5 trillion higher than under the president’s budget. The substantial increase in deficits under the “Pledge to America” budget are due to the significant tax cuts that come from extending all expiring tax provisions and the implementation of several new tax cuts.

6--Bank of England’s Posen: Central Banks Should Do More — A Lot More, Wall Street Journal

Excerpt: “In every major country, actual output has fallen so much versus where trend growth would have put us, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation,” he said....

The risks posed by doing too little monetary easing far exceed risks posed by doing too much, he argued, making a case for looking beyond the economic metrics: “There are… some very serious risks if we make policy errors by tightening prematurely, or even if we loosen insufficiently. Those risks are not primarily the potential for a double-dip recession or even of temporary measured deflation. While bad, those situations would still be within the range of short-term cyclical developments, and could be weighed against simple inflationary pressures from monetary policy trying to stimulate too much. The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them.”

7--We can only cut debt by borrowing, Martin Wolf, Financial Times

Excerpt: My conclusion, then, is the exact opposite of the conventional wisdom with which I began: the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage. The economy, as a whole, cannot de-leverage in any other way, other than via accelerated mass bankruptcy, which would certainly deepen the recession, if not create a depression. If the government tried to eliminate its deficit over night, it would have to drive the private sector back towards balance (or achieved a massive shift in the external balance very swiftly). In the context of excessive debt, that is only going to happen if private sector incomes are so squeezed that paying down their debt is no longer feasible. But in this situation, mass bankruptcy and a slump again becomes a likely outcome....

In short, not only can we deal with the private sector debt overhang by increasing the fiscal deficit, but we must do so. It is the only way of avoiding a deep slump and the immense disruption of mass bankruptcy. But this is not to preclude debt restructuring, as well. It is important to develop ways to restructure private debt, too. But, for this to happen, we must be prepared to impose more losses on financial intermediaries and so on their creditors.

Analysis of the economy is not the same thing as analysing a single household. What is true of the latter is not true of the former. The unwillingness to recognise this truth will lead to serious policy mistakes. (Bravo)

8--Most Americans Don’t Think Recession Is Over, Catherine Rampell, New York Times

Excerpt: Nearly three-fourths of Americans — 74 percent — say the economy is still in a recession. That’s a slight improvement from December, when 84 percent of those polled said they believed the economy was in a a recession, but it still discouraging.

9--The former guerrilla set to be the world's most powerful woman, Hugh O'Shaughnessy, The Independent

Excerpt: The world's most powerful woman will start coming into her own next weekend. Stocky and forceful at 63, this former leader of the resistance to a Western-backed military dictatorship (which tortured her) is preparing to take her place as President of Brazil.

As head of state, president Dilma Rousseff would outrank Angela Merkel, Germany's Chancellor, and Hillary Clinton, the US Secretary of State: her enormous country of 200 million people is revelling in its new oil wealth. Brazil's growth rate, rivalling China's, is one that Europe and Washington can only envy.

Tuesday, September 28, 2010

Article du Jour: Scientists, Secrets and Wall Street's Lost $4 Trillion

By Pam Martens, counterpunch.org

Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole.

What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price.

Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday. The big firms lean on their brokers to turn their clients’ money over to impersonal “money managers” who use incomprehensible computerized risk modeling to manage the life savings of people they’ve never met. The business motivation for this was that the earnings of the big firms would not be dependent on the brokers’ inconsistent commission streams from trading by replacing them with a steady annual stream of money management fees. These huge pools of consolidated money have now joined the huge pools of hedge fund and proprietary trading monies, leaving small investors at the mercy of giant “pools,” the exact same word that dominated investigations after the 1929 crash. (Those intensive Senate investigations of the early 30s that turned up corruption at the highest echelons of Wall Street are also so yesterday.)

Taking the human relationship, and human brain, out of investing for others and turning it over to computer formulas has produced stark results: a lost decade of retirement savings for most Americans; a multi-trillion dollar collapse of the financial system; a taxpayer bailout of the most incompetent and negligent firms in finance; the greatest wealth transfer to the top 1 percent in the history of the country -- which has contributed to 43.6 million people in America, including one in every five children, living below the poverty level. (Read more)

Today's Best Reads

1--Shut Down the Fed (Part II), Ambrose Evans Pritchard, Telegraph

Excerpt: The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped. (The usually persuasive Pritchard succumbs to hysteria)

2--More on QE2 and the Fed's monetary endgame, zero hedge

Excerpt: QE1 did little to expand lending, though QE1 likely did prevent even further declines in lending. However, QE alone appears incapable of leading to expanding lending as the problems today shift from one of supply to one of demand.

Even as banks have eased underwriting standards, the demand for loans remains low.

And this leads to our final cost analysis on QE2. Where confidence stands as the key issue for the economy, expanding QE2 may end up doing more damage than good as the confidence loss from a Fed indicating its fears of deflation through expansion of QE2 as well as the follow on loss of confidence from the diminishing impact of further QE leads to a loss in confidence whose costs outweigh those of the benefits of further reductions in long term rates.

3--How Americans' Love Affair with Debt Has Grown, Daniel Indiviglio, The Atlantic

Excerpt: This chart should be startling. It shows that total debt has increased from around $1,186 per person in 1948 to $10,168 in 2010. And remember, that's using 2010 dollars -- and it doesn't include real estate debt either like mortgages or home equity loans. This debt includes credit cards, auto loans, student loans, personal loans, and other non-real estate consumer debt. ...

What we're seeing here is a correction. Credit can't simply grow indefinitely, but must find a healthy equilibrium. It had clearly been extended too far prior to the crisis, and both banks and consumers are now pulling back. But wherever it finally settles will still likely be far greater than the amount of credit per capita prior to 1990 -- unless we are in a drastic and prolonged period of shrinking credit.

4--Income Gap Widens: Census Finds Record Gap Between Rich And Poor , Huffington Post

Excerpt: The top-earning 20 percent of Americans – those making more than $100,000 each year – received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line, according to newly released census figures. That ratio of 14.5-to-1 was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968.... The U.S. also has the greatest disparity among Western industrialized nations.

At the top, the wealthiest 5 percent of Americans, who earn more than $180,000, added slightly to their annual incomes last year, census data show. Families at the $50,000 median level slipped lower. (Say "goodbye" to the middle class)

5--Fed Mulls New Bond Approach, Jon Hilsenrath, Wall Street Journal

Excerpt: Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds....

In March 2009, the Fed said it would buy $1.7 trillion worth of Treasury and mortgage-backed securities over a six to nine month period—known inside the Fed as the "shock and awe" approach.


Under the alternative approach gaining favor inside the Fed, it would announce purchases of a much smaller amount for some brief period and leave open the question of whether it would do more, a decision that would turn on how the economy is doing. This would give officials more flexibility in the face of an uncertain recovery. ("Baby steps" won't work. QE should be accompanied by fiscal stimulus, perhaps, a cut in payroll taxes)

6--Rising doubts about the eurobailout, naked capitalism

Excerpt: no country would ever want to borrow from the EFSF, unless it was absolutely unavoidable…

The second is that the overall amount for lending is significantly reduced....

And finally, the whole edifice would collapse if France was downgraded. This is a non-zero probability event, to put it mildly. Without France, Germany would be the sole pillar of the system, a role Germany would probably not accept.

Having looked at this in some detail, I find it hard to conceive of a situation where a country would both borrow from the EFSF (Emergency fund) and live happily ever after. (Gloomy, but thorough)

7--The great income shift, Richard Thaler, economist's view

Excerpt: Fully two-thirds of the income gains in the last economic expansion (2001-2007) flowed to just the top 1 percent. This is not a healthy sign for a society. As Professor Thaler urges, we need to decide whether we want to promote still-greater inequality (by extending the high-income tax cuts) or lean against this trend. Each year the average millionaire gets about $125,000 from the Bush tax cuts, according to the Urban-Brookings Tax Policy Center. Now seems to be a good time to say enough is enough. (The wealth continues to flow upward)

8--U.S. Consumer Confidence Fell More Than Forecast, Bloomberg

Excerpt: Confidence among U.S. consumers fell in September to the lowest level in seven months as Americans became more pessimistic about the labor market.

An unemployment rate that’s forecast to exceed 9 percent through 2011 points to limited income gains, making it less likely Americans will boost their spending, which accounts for about 70 percent of the economy. The report underscores the view of Federal Reserve policy makers that the recovery is “likely to be modest” in coming months.

“Consumers are pretty pessimistic and they certainly are worried about jobs,” said David Sloan, a senior economist at 4Cast Inc. in New York. “Consumer spending is growing at a slow pace. Consumers are facing considerable headwinds.”

9--Why America Cannot Win in Afghanistan, Bonnie Faulkner interview with General Hamid Gul, Global Research (Today's "must read")

Excerpt: The Afghan government is a corrupt government; the Communist government was not corrupt. But this government is a highly corrupt government. Karzai’s government is gangsters government, it is Mafia government. Karzai’s own half-brother, Ahmed Wali Karzai, who is located in Kandahar, he is on the Governor’s council, or probably Governor himself, he is known to be the biggest drug baron. And the drug trade is going on like never before, and I’ll give you some figures of what is the situation on the drug front. Before the Taliban ruled, the men, the Mujahedin, were fighting among themselves, after the Soviet evacuation of Afghanistan. The volume of opium, raw opium, that was produced by Afghanistan was 4,500 tons. In the last year of Taliban rule it dropped down to 50 tons a year, 50 tons only, and that, too, in territories which were not under the control of the Taliban. So much so that the Drug Enforcement Agency of America, through Christina Rocco, who was then the Assistant Secretary of State, gave a prize of $41 million, it is on record, to the Taliban government, even though the Taliban government was under sanction. But the Drug Enforcement Agency thought it fit, that they had done such wonderful work, that they would give them a prize, $41 million. With sanctions on them I don’t know if they were ever paid or not; I think they were probably paid, and accepted by the Taliban at that time.



Now, at this time last year, the opium production in Afghanistan is a record 6,200 tons. Which caters to more than 90 percent of the world’s entire need. Previously, we know that these big drug caches and consignments that were caught in Pakistan, but of late there have been no such catches in Pakistan. So if there is a record level of production of opium in Afghanistan, it is going out to somewhere. After all, it is not being used in Afghanistan. How is it going? It’s not going through Iran, it is not going through Pakistan. Some of it is going to the Central Asian republics. But most of it is being directly flown – now this is very alarming – directly flown from Afghanistan to Europe as well as to America. And, I don’t know, I am not yet sure, that military aircraft are used for it or not, but I am sure the people, bigwigs up there, who are not interested in stopping the drug trade, they are involved in it. Who are those people? That is something that is for the American journalists, because unfortunately this term, “embedded journalism,” it is such a despicable term, to begin with, and it’s such a horrible concept, that truth can never come out. So, let’s first of all, America, allow free journalism to cover Afghanistan, and then they will know what all is happening.

Monday, September 27, 2010

Article du Jour: Structure of Excuses

By Paul Krugman, New York Times

Excerpt: " I’ve been looking at what self-proclaimed experts were saying about unemployment during the Great Depression; it was almost identical to what Very Serious People are saying now. Unemployment cannot be brought down rapidly, declared one 1935 analysis, because the work force is “unadaptable and untrained. It cannot respond to the opportunities which industry may offer.” A few years later, a large defense buildup finally provided a fiscal stimulus adequate to the economy’s needs — and suddenly industry was eager to employ those “unadaptable and untrained” workers.

But now, as then, powerful forces are ideologically opposed to ... government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society. ...

We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve. As I said, structural unemployment isn’t a real problem, it’s an excuse — a reason not to act on America’s problems at a time when action is desperately needed. (read more)

Today's Best Reads

1--Housing Prediction: Bottom in 2014, Then a Decade of Stagnation, Charles Hugh Smith, of two minds

Excerpt: We all know the story of the Great Housing Bubble: low interest rates, disavowal of risk management, subprime loans to unqualified buyers and investor wariness after the dot-com stock market crash all led to a massive sustained surge in home buying.In the early 1990s, home sales averaged about 4 million a year. By the mid-2000s, that number had nearly doubled to 7 million sales a year...

At this point, the guessing game moves from "when will housing bottom?" to "how much further will housing decline?" Some analysts are staking out future drops in the neighborhood of 5 to 8 percent, but bubbles tend to fully retrace to their starting point, and then dip another 10% just for good measure.

2--Gold is the final refuge against universal currency debasement, Ambrose Evans Pritchard, Telegraph

Excerpt: States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.

3--Risk of trade war rises as key US committee backs tariffs on China, Telegraph

Looming trade war with China (excerpt): The adoption of the measure by the Ways and Means Committee on Friday means it will now be voted on by the House of Representatives on Wednesday.

"China's exchange-rate policy has a major impact on American businesses, and Americans jobs, which is what this is all about," said Sander Levin, a Democrat from Michigan and chairman of the committee....

According to the bill's supporters, a properly valued yuan would move jobs back to the US as exports from China become more expensive. The Peterson Institute for International Economics in Washington argues up to 500,000 American jobs could be created.

4--Wall Street knew its mortgage securities were subpar, Shahien Nasiripour, Huffington Post

Excerpt: During a little-noticed hearing this week in Sacramento, Calif., a firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along.

Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages.

Wall Street firms knew they were buying lead yet passed it off as gold to investors who had no knowledge of the alchemy behind the scenes.

5--The second leg down in housing, The Alliance group

Excerpt: In 1992, some 4 million homes per year were being purchased. A decade later, that number had risen 25% to 5 million. A mere 3 years later, annual sales were 7 million units — a 40% increase....

From 1977 to 2010, the median U.S. home price was 4.1 times median household income. But as the charts indicate, home prices are still above that mean. Same with home prices relative to rentals, or housing value as percentage of GDP...

Without....the heavy hand of the government intervening, the residential real estate market is will soon experience what price discovery is all about.

6--Bernanke and QE2, Calculated Risk

Excerpt: ...historically quantitative easing has led to increases in asset prices in the short term. This is why I've been noting in the comments that "bad economic news" is perhaps "good stock market news" - since investors are now anticipating QE2 to be announced as early as November 3rd barring a sudden improvement in the news flow.

Although there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears QE2 might arrive as early as November.

7--Raters ignored proof of unsafe loans, Gretchen Morgenstern, New York Times

Excerpt: As the mortgage market grew frothy in 2006 ... ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission. ...

... almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service. “We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” ... But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street. “If any one of them would have adopted it,” he testified, “they would have lost market share.”

8-- Republican Economics as Social Darwinism, Robert Reich, economist's view

Excerpt: Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama’s smaller deal health-care law. The issue isn’t just economic. We’re back to tough love. The basic idea is force people to live with the consequences of whatever happens to them. In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society....

This defies economic logic. When consumers aren’t spending, businesses aren’t investing and exports can’t possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.

9--Morning cup of coffee, Housingwire

Excerpt: Sales of distressed properties will peak in 2011 at 2.3 million transactions before falling to more normal levels at 850,000 in 2016...

Because lenders are transferring more of the shadow inventory of foreclosed and defaulted mortgages into real property ready for the market, analysts at John Burns estimate these properties will account for more than 40% of the all resale activity through 2012.

Many market analysts have predicted home sales and prices to trend downward again without the homebuyer tax credit. How fast and deep the market falls depends on how financial institutions manage the flow of these foreclosed and REO homes onto the market.

According to John Burns, a typical market shoulders 6% to 7% of distressed sales taking up the resale market. "We are closely tracking an increase in REO activity this year, which will result in a peak for distressed sales next year. This forecast significantly impacts our belief that prices will fall 8% to 11% through 2012," according to the report. (Prices set to fall)

Sunday, September 26, 2010

Today's Best Reads

1--Americans Vastly Underestimate Wealth Inequality, Support 'More Equal Distribution Of Wealth': Study, Huffington Post

Excerpt: Americans vastly underestimate the degree of wealth inequality in America, and we believe that the distribution should be far more equitable than it actually is, according to a new study.

Or, as the study's authors put it: "All demographic groups -- even those not usually associated with wealth redistribution such as Republicans and the wealthy -- desired a more equal distribution of wealth than the status quo." (Yup)

2--Obama coddles the banksters, Doug Henwood, LBO news from Doug Henwood

Excerpt: In internal administration battles, Geithner “successfully fought against” stricter rules on executive pay, and beat back the attempts to replace top management.

Of course, to say that Geithner won these battles is to say that Obama agreed with him. Once again, the embodiment of hope and change went with the status quo when he didn’t really have to. There would have been little political price to pay for putting the screws to the banksters.

And it looks like the Treasury and the Fed will pump up some $250-500 billion to help hedge funds buy bad assets – with the FDIC guaranteeing the buyers against losses....At this point, the only thing that makes any sense is to nationalize the weakest banks, kick out management, wipe out the shareholders, clear the decks, and start over with a tightly regulated system. This isn’t even all that radical a position anymore – and it may be inevitable, if these sick and devious “public-private partnership” schemes don’t work out, which seems likely. (Good stuff)

3--So, how did the Bush tax cuts work out for the economy? David Cay, economist's view

Excerpt: Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels...Average incomes fell. Average taxpayer income was down $3,512, or 5.7 percent, in 2008 compared with 2000, President Bush's own benchmark year for his promises of prosperity through tax cuts. ...

The tax cuts cost $1.8 trillion in the first eight years, according to an analysis by the Tax Policy Center, whose reliability the last administration went out of its way to praise.

Examining performance against the promises, what do we find? Overwhelming evidence that the tax cuts of 2001 and 2003 made us much worse off.

4--Liberal blogger directly confronts David Axelrod, accuses White House of "hippie punching", Washington Post

Excerpt: Top Obama adviser David Axelrod got an earful of the liberal blogosphere's anger at the White House moments ago, when a blogger on a conference call directly called out Axelrod over White House criticism of the left, accusing the administration of "hippie punching."

"We're the girl you'll take under the bleachers but you won't be seen with in the light of day," the blogger, Susan Madrak of Crooks and Liars, pointedly told Axelrod on the call, which was organzied for liberal bloggers and progressive media. (Uh oh. The base is starting to growl)

5--Obama invokes 'state secrets' claim to dismiss suit against targeting of U.S. citizen al-Aulaqi, Washington Post

Excerpt: The Obama administration urged a federal judge early Saturday to dismiss a lawsuit over its targeting of a U.S. citizen for killing overseas, saying that the case would reveal state secrets.

Government lawyers called the state-secrets argument a last resort to toss out the case, and it seems likely to revive a debate over the reach of a president's powers in the global war against al-Qaeda. (Obama defends the president's right to kill US citizens.)

6--The Way Out of the Slump, Paul Krugman and Robin Wells, New York Review of Books

Excerpt: Koo argues that today, with the world as a whole in balance-sheet recession, the governments of major economies need precisely to run large fiscal deficits, and to continue doing so until the private sector is ready to spend again. Only then, with the economy no longer dependent on government support, would it be appropriate to shift to deficit reduction.

But can governments really continue to borrow and spend? Yes, says Koo: like the world Keynes saw in the 1930s, today’s world is awash in savings with nowhere to go:

Even in low-savings countries such as the US and the UK, the current recession is the result of the private sector saving more at a time when there are not enough borrowers to go around. In other words, the savings necessary to finance deficit spending are actually generated domestically. Nor is there any risk of crowding out—financial institutions are happy to lend the $100 to the last borrower standing…. (Yes, this is a repeat. But the point needs to be made again and again)

7--Guns Drawn, FBI Raids Peace Activist's Apartment, (Interviews with victims of FBI raids.)


8--A proposal to repair the US mortgage mess, William Wheaton, VOX

Excerpt: "Consider the dilemma of an owner whose original house and loan were established at $100,000, but whose house is currently worth only $60,000. The loan is thus 40% underwater. When restructured, the loan would be divided into a $60,000 traditional mortgage and a claim of, for example, 50% of the future appreciation – capped at $40,000. The borrower’s payments would fall by 40% but later when they moved and the property sold for, say $90,000, they would surrender $15,000 of the sales proceeds. The lender might even recover all its money if farther into the future the property sold for $140,000. The owner’s gain in this case would be reduced from $80,000 to $40,000. Since the claim is in “current” dollars, inflation alone holds out the prospect for eventual loan recovery." (A bad deal for homeowners overall)

9--The mega payoff of increased immigration is lost on the pols, Ezra Klein, Washington Post

Excerpt: I have a plan that will raise wages, lower prices, increase the nation's stock of scientists and engineers, and maybe even create the next Google. Better yet, this plan won't cost the government a dime. In fact, it'll save money. A lot of money. But few politicians are going to want to touch it.

Here's the plan: More immigration. A pathway to legal status for undocumented immigrants. And a recognition that immigration policy is economic policy and needs to be thought of as such.

See what I meant about politicians not liking it?

Economists will tell you that immigrants raise wages for native-born Americans. They'll tell you that they make things cheaper for us to buy here, and that if we didn't have immigrants for some of these jobs, the jobs would move to other countries. (Behold, the voice of sanity)

Saturday, September 25, 2010

Today's article du jour: Volcker's mislabeled "Blistering Speech"

By Yves Smith, naked capitalism

Excerpt: The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government...

The reason Volcker’s speech was greeted with overdone enthusiasm is that Americans are fed such a steady diet of propaganda by the officialdom that anything that bears some resemblance to observable reality is bracing by mere virtue of contrast. Think of Bernanke’s freakish calm (he looks medicated to me, although he apparently isn’t) and well honed ability to give testimony remarkably devoid of content, or Geithner’s bobbing and weaving when under the spotlight. But this circling of the wagons fools no one; indeed, Obama’s weak poll ratings and the success of the Tea Party show that polished story lines have not dispelled well warranted public anger against the banks and their enablers.

Note also the timing of this episode. This sort of talk, no matter how tame compared to what really ought and needs to be said, could have had a real impact while the financial regulatory reform negotiations were on. Volcker is virtually the only public figure with the stature to carry real weight in disputing the sort of palaver trotted out by the banksters in defense of their pet desires. But he was kept on a short leash by the Obama administration, apparently tasked only to defend the so-called Volcker rule, which was meant to get banks out of the proprietary trading business but was watered down to a considerable degree. But that simply confirms what we already know too well: that even Volcker’s modest reform ideas were more than what the bank-friendly Administration was prepared to support. (Read more)

Today's Best Reads

1--FBI Launching Mass Raids of Antiwar, antiwar.com

Excerpt: The FBI is confirming that this morning they began a number of “raids” against the homes of antiwar activists, claiming that they are “seeking evidence relating to activities concerning the material support of terrorism.”

2--It Is Official: The US Is A Police State, Paul Craig Roberts, antiwar.com

Excerpt: Antiwar activist Mick Kelly, whose home was raided, sees the FBI raids as harassment to intimidate those who organize war protests. I wonder if Kelly is underestimating the threat. The FBI’s own words clearly indicate that the federal police agency and the judges who signed the warrants do not regard antiwar protesters as Americans exercising their Constitutional rights, but as unpatriotic elements offering material support to terrorism.

3--War on depression, The Economist (wonkish)

Excerpt: We document that the American economy went to war starting in June 1940, fully 18 months before Pearl Harbor..... By July 1941, the American economy was in a state of perceived national emergency. (Fiscal multipliers lifted the economy out of Depression)

4--Fixing Europe's single currency, The Economist

Long Excerpt: When the euro was being designed, its creators decided, in effect, not to rely on market discipline alone. They assumed that without rules fiscal laxity by one member would impose costs on all. One concern was that deficits would boost spending and so put upward pressure on inflation, and thus on the zone’s interest rates. Another, chiefly German, worry was that unchecked deficits would build pressure on the ECB to monetise public debts. A related German nightmare, that countries with sound finances would be forced to bail out the profligate, came true....

In contrast, the problems that arose because different economies responded differently to the zone’s common monetary policy were underestimated. The sudden drop in real interest rates on joining the euro in Greece, Ireland and Spain fuelled huge spending booms. (Portugal had enjoyed its growth spurt in the late 1990s in anticipation of euro membership.) Rampant domestic demand pushed up unit-wage costs relative to those in the rest of the euro area, notably in Germany, hurting export competitiveness (see chart 2) and producing big current-account deficits....

The euro allowed these internal imbalances to grow unchecked and now stands in the way of a speedy adjustment, because euro-area countries whose wages are out of whack with their peers’ cannot devalue...(Excellent summary of the euro-woes. Remedy--A centralized fiscal authority?)

5--August New Home Sales Were The Second-Worst Month On Record, Huffington Post

Excerpt: Last month's new home sales were unchanged from a month earlier at a seasonally adjusted annual sales pace of 288,000, the Commerce Department said Friday. Sales were down by 29 percent from the same month a year earlier. (Prices gotta fall to move the backlog. There's no other way)

6--The Credit Meltdown and the Shadow Banking System: What Basel III Missed, Ellen Brown, Huffington Post

Excerpt: Holding loans on the balance sheets of banks is not profitable. . . . This is why the parallel or shadow banking system developed. If an industry is not profitable, the owners exit the industry by not investing; they invest elsewhere. Regulators can make banks do things, like hold more capital, but they cannot prevent exit if banking is not profitable. 'Exit' means that the regulated banking sector shrinks, as bank equity holders refuse to invest more equity. (Required reading for anyone interested in the mess that collapsed the financial system)

7--Bernanke: Efforts Failed to Produce Recovery With 'Sufficient Vigor', Wall Street Journal

Excerpt: "Although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment," Bernanke told a conference at the Ivy League university where he taught from 1985 to 2002. (Bernanke prepares the markets for a second round of bond purchases--quantitative easing)

8--Arsenal of Recovery, Paul Krugman, New York Times

Excerpt: periods of war or preparation for war are, in practice, the only really clear-cut cases we have of big increases in government spending in the face of a depressed economy. The New Deal pursued only half-hearted expansions, leading to Cary Brown’s famous conclusion that fiscal policy failed to produce recovery because it “was not tried”. The Obama fiscal stimulus more or less evaporates when you look at it closely, and take state and local cutbacks into account; basically, all it did was to keep overall fiscal policy from being outright contractionary.

But in the prewar buildup you had a clear-cut expansion of federal spending on the order of 14 percent of GDP. That’s a real experiment with the economy. And the results were clearly Keynesian. (Fiscal policy works)

8--Default Is In Our Stars, Paul Krugman, New York Times

Excerpt: So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt. (A double-shot of Krugman)

9--Structural Failure, Paul Krugman, New York Times

Excerpt: Basic textbook macro tells you how to distinguish between slumps brought on by supply shocks and those brought on by demand shocks: look at inflation. If you have stagflation, rising unemployment combined with accelerating inflation, that’s the signature of a supply shock; if you have unemployment with disinflation, that’s the signature of a demand shock. And guess what we see?...

I really don’t think there’s any way to make sense of the fuss about structural unemployment unless you posit that a lot of influential people are looking for reasons not to act... What the economy needs is more demand; provide that, and you’ll be amazed at how many willing, productive workers there are, currently sitting idle. (A Three-fer for Krugman)

Friday, September 24, 2010

Article du Jour: Downhill with the GOP

By Paul Krugman, New York Times

Excerpt: On Thursday, House Republicans released their “Pledge to America,” supposedly outlining their policy agenda. In essence, what they say is, “Deficits are a terrible thing. Let’s make them much bigger.” The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which ... would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration’s tax proposals.

True, the document talks about the need to cut spending. But as far as I can see, there’s only one specific cut proposed — canceling the rest of the Troubled Asset Relief Program, which Republicans claim (implausibly) would save $16 billion. That’s less than half of 1 percent of the budget cost of those tax cuts. As for the rest, everything must be cut, in ways not specified — “except for common-sense exceptions for seniors, veterans, and our troops.” In other words, Social Security, Medicare and the defense budget are off-limits.

So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid... No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress.”

The “pledge,” then, is nonsense. ... So how did we get to the point where one of our two major political parties isn’t even trying to make sense? (Read more)

Today's Best Reads

1--Replacing Summers: Think Policy, Not Politico, Zach Carter, Huffington Post

Excerpt: So who should Obama name to take Summers' place? Joseph Stiglitz. His intellectual qualifications cannot be impugned -- he is a Nobel Prize-winner whose academic work is revered on both the left and right. But his policy acumen is equally proven -- he has been chief economist for the World Bank, and Chairman of President Bill Clinton's Council of Economic Advisers. (Bravo)

2--August home sales rebound will be short lived, John Prior, Housingwire

Excerpt: If (Fannie and Freddie) flood the market, prices could drop 10% to 15% below the trough seen in 2009, dragging not only house prices but the entire economy back into a recession. If these companies continue to manage REO to a trickle, Eddins expects flattened prices for years to come.

3--The Way Out of the Slump, Paul Krugman and Robin Wells, NYRB

Excerpt: "Most of the time, we count on central banks to engineer economic recovery following a slump, much as they did after the 2001 recession. Normally, when recession strikes, the Fed, the European Central Bank, or the Bank of England cuts the short-term interest rates it controls; market-determined longer-term rates fall in sympathy; and the private sector responds by borrowing and spending more.

The sheer severity of the slump after the 2008 housing bust means, however, that this normal response falls far short of what’s needed."

4--How to Lose Over a Million Jobs, Huffington Post

Excerpt: (The Republican plan would) would reduce funding for domestic programs--which include investments in infrastructure, education, and research--by 22.7%, while extending the Bush tax cuts for top earners....Reduce the deficit by less than 5.5% in 2011.... The net job impact of the Boehner plan would be an estimated employment reduction of over 1 million jobs. (The GOP plan is a bust)

5--Larry Summers replacement: "No More Rubinites!", Huffington Post

Excerpt: A key lieutenant to Rubin after the former Goldman Sachs head and Citigroup chairman became Treasury Secretary under Clinton, Summers eventually succeeded him in that post. Together, the two men advocated for the repeal of Glass-Steagall, a Depression-era law that separated commercial banking activities from investment banking, and fought to deregulate the derivatives market. They aggressively fought back against other regulators who wished to rein in risky derivatives activities. During this administration, Summers fought back against against more aggressive financial reform measures, people familiar with the discussions say.

6--Paul Volcker slams broken financial system, Huffington Post

Excerpt: Volcker called for "structural changes in markets and market regulation."
Investment banks, he said, have become "trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn't easily be managed by the old supervisory system."

7--Downhill with the GOP, Paul Krugman, New York Times

8--Why backstopping repo is a bad idea, Yves Smith, naked capitalism

Intro (wonkish): The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for “sale with agreement to repurchase.” The problem with her analysis is that her proposal treats symptoms rather than the underlying ailment. It would amount to yet another sop to already heavily subsidized big dealer firms.

9--Weekly unemployment claims increase, calculated risk from the DOL

Summary: In the week ending Sept. 18, the advance figure for seasonally adjusted initial claims was 465,000, an increase of 12,000 from the previous week's revised figure of 453,000. The 4-week moving average was 463,250, a decrease of 3,250 from the previous week's revised average of 466,500. (More blood on the tracks)

Thursday, September 23, 2010

Article du Jour: Why We Don't Need to Pay Down the National Debt

By James Galbraith, The Atlantic

Excerpt: Since 1960, three times our leaders have tried to balance the budget and so reduce the debt. Each time, in 1969, 1980, and again in 2000, guess what happened? Recession. Why? Because running a budget surplus means draining funds from private businesses and families. The textbooks used to call this "fiscal drag." It just isn't smart....(Read more)

Today's Best Reads

1--Ireland leads the way back to recession, BBC

2--Obama Homeowner Program Hits 10-Month Low As Prices Drop And Foreclosures Surge, Huffington Post

Excerpt: Just over 33,000 homeowners had their monthly mortgage payments reduced in August for the next five years as part of the administration's Home Affordable Modification Program, Treasury Department data released Wednesday show. Obama promised in 2009 that some 3 to 4 million homeowners would be helped. About 449,000 borrowers have thus far received mortgage modifications.

The program, sold as a $50-billion effort, is unlikely to spend that much helping delinquent homeowners keep their homes. Nearly one and a half years into the program, only 1 percent of that money has been spent.

3--The GOP's Bad Idea, Ezra Klein, economist's view

Excerpt: Their policy agenda is detailed and specific -- a decision they will almost certainly come to regret. Because when you get past the adjectives and soaring language, the talk of inalienable rights and constitutional guarantees, you're left with a set of hard promises that will increase the deficit by trillions of dollars, take health-care insurance away from tens of millions of people, create a level of policy uncertainty businesses have never previously known, and suck demand out of an economy that's already got too little of it. (Are you surprised?)

4--Renewed Asset Purchases a Fraught Endeavor for Fed, Wall Street Journal

Excerpt: Despite all these challenges, it’s clear which way the Fed is leaning, and many top economists are moving into the camp that considers this action likely. The question now is figuring out what will make the Fed swing into action. (More QE on the way)

5--“The Giant Elephant in The Room”, Larry Doyle, Sense on Cents

Excerpt: We don’t have the money in the economy to successfully write down these loans,” Sanders said. “If we force the banks to write them down, the banks will become insolvent and come back to the federal government for additional bailout money, which means the taxpayers get stuck.” (Yes, the banks are still broke.)

6--Yep, Mutual Fund Investors Still Fleeing U.S. Stocks, Wall Street Journal

Excerpt: Small investors, as measured by mutual-fund flows, seem down for the count when it comes to U.S. stocks. For 17 consecutive weeks, U.S. stock funds have experienced combined withdrawals of nearly $50 billion, according to the Investment Company Institute. (Retail investors are still leaving in droves)

7--Lehman's "Black Hole", Yves Smith, Naked capitalism

Excerpt: The explanation used to deter further inquiry is that the damage ballooned because Lehman suffered a “disorderly collapse.” But the problem with this tidy account is that the maximum amount attributed to the impact of market upheaval was $75 billion. So not only were Lehman’s books cooked, but Repo 105 and the disorderly fail are insufficient explanation. There’s a great deal of other accounting fraud that has not come to light.

Where are the investigations and prosecutions? Lehman is an obvious example of massive chicanery, yet no action is being taken. If that isn’t a green light for future crooks, I don’t know what is.

8--KFC pays college women for ad space on buns, USA Today (No comment)

9--Why We Don't Need to Pay Down the National Debt, James Galbraith, The Atlantic

Wednesday, September 22, 2010

Article du Jour: The Recession and the Housing Drag

By Mort Zukerman, Wall Street Journal

A decent house has long been a symbol of middle-class American family life. Practically, it has been a secure shelter for the children and provided access to a good public education. And financially, it has been regarded as a safe store of value, a shield against the vagaries of the economy and a long-term retirement asset.

All that seems a distant memory for the millions of American families who must confront the decline in the value of their homes. The pressure to meet mortgage payments on properties that have lost value has been especially shocking for those who have lost their jobs in the Great Recession. Their houses have become a ball and chain, restricting their ability to seek employment elsewhere. They cannot afford to abandon the remaining equity they have in their houses—and they can't sell in this miserable market.

New home sales, pending home sales, and mortgage applications are down to a 13-year low, despite long-term mortgage rates that plummeted recently to an average 4.3% before rising slightly. New home prices have fallen by an average of 30%. According to David Rosenberg, chief economist at Gluskin Sheff, this has reduced home occupancy cost to 15% of family incomes, down from the conventional 25%.

The fall in house prices has eaten away at the equity Americans have in their homes. About 11 million residential properties have mortgage balances that exceed the home's value, notes Mr. Rosenberg. And given the total inventory of homes and the shadow inventory of 3.7 million empty (foreclosed) homes, he notes that prices might fall another 5% to 10%. That would leave an estimated 40% of American homeowners with mortgages in excess of the value of their homes.

Disappearing equity invites strategic defaults. Homeowners with negative equity are tempted simply to mail in their keys to their friendly lender even if they can afford the mortgage payment. Yet banks don't want to take the deflated properties onto their books because they will then have to declare a financial loss and still have to worry about maintaining the properties. Little wonder, according to Mr. Rosenberg, that foreclosure has not been enforced on a quarter of the people who haven't made a single mortgage payment in the last two years.

A staggering eight million home loans are in some state of delinquency, default or foreclosure, Alan Abelson reported in Barron's in July. He noted that another eight million homeowners are estimated to have mortgages representing 95% or more of the value of their homes, leaving them with 5% or less equity in their homes and thus vulnerable to further price declines.

The pace of foreclosures slowed briefly thanks to loan modifications by the Home Affordable Modification Program and other government efforts. But the programs have not been working as hoped—it's been reported that half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50%.

While the foreclosure pipeline remains clogged, as it unclogs a new wave of homes will wash into the market and precipitate additional downward pressure on prices. The number of foreclosed homes put on the market by banks will be a more powerful influence on the further decline of home prices than either consumer demand or interest rates.

A well-balanced housing market has a supply of about five to six months. These days the inventory backlog has surged to about a 12½ months' supply. This explains why average sale prices have been declining for so many months. The high end of the market, in particular, is under great pressure.

The mortgage market is also deeply troubled. Conventional lenders now insist on a substantial down payment and impose other more stringent financial requirements. Household formation (marriages) is also shrinking now, down to an annual rate of about 600,000, compared to net household formation in excess of a million annually during the bubble years.

The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.

This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and every recession since. In the past, residential construction preceded the recovery in the larger economy. This time a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings and current spending.

Every further 1% decline in home prices today lowers household wealth by approximately $170 billion, according to Goldman Sachs. For each dollar lost in housing wealth, Goldman Sachs estimates that consumption is lowered by 5 cents. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over five million jobs in residential construction.

That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3% of GDP at its recent peak in 2005 and 2006 but has fallen to 2.4% this year, according to economist A. Gary Shilling. This is significant if you recognize that a 3% top-to-bottom decline in real GDP constitutes a serious recession.

There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.

Quote du jour: From Christopher Whalen

Into the Meat-grinder: "The erosion of the profitability of the U.S. banking industry over the past two years under the glorious Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and Republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble....

The economic carnage that will causes these losses.... is going to represent the worst economic contraction since WWI... And frankly nothing that either the Fed or Treasury does in the near-term can change this basic economic fact of restructuring. Banks... can impose moratoriums and issue press releases, but the losses remain. It is only a question of when they are recognized." (Read more at Institutional Risk Analyst)

Tuesday, September 21, 2010

Today's Best Reads

1--China's Currency and the Trade Deficit, Dean Baker, CEPR

Excerpt: "If the value of the yuan rises relative to the dollar, then these imports would be more expensive in the United States, making people here more likely to buy domestically produced goods. This will help the U.S. trade balance" (China's cheating hurts US workers)

2--How Large a Debt Level Is "Worrisome?, Dean Baker, CEPR

Excerpt: "financial markets do not find the government debt the least bit worrisome. They are willing to buy long-term government debt at interest rates below 3.0 percent.

The debt also need pose no burden in future years. There is no reason why the Federal Reserve Board cannot simply buy and hold the bonds issued to finance the debt. In this situation, the debt accrued in these years will impose no additional future tax burden. The interest on the debt will be paid to the Fed, which will then rebate it to the Treasury." (Baker nails it again)

3--Would a real Dr. change the treatment?, Barry Ritholtz, The Big Picture

Quote: "My last cynical comment of the morning is this, the Fed is punishing creditors and savers thru the desire to inflate in order to bail out overleveraged borrowers." (Good, short rant bashing Bernanke)

4--Summers plans to leave, Yves Smith, naked capitalism

Excerpt: "As much as some will be pleased to see Larry gone (he was a leading advocate of bank-friendly policies), his replacement is certain not to represent a change in philosophy. In fact, one of the ideas being mooted is to install an “ambassador” the business community because it is allegedly up in arms with Obama." (Don't get yer hopes up)

5--Housing isn’t close to stabilizing, Marketwatch

Excerpt: "...Adding all of these together, we come up with a total of roughly 6.97 million residences that are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk." (Very bleak)

6--The Recession and the Housing Drag, Mort Zukerman, Wall Street Journal

Excerpt: "A staggering eight million home loans are in some state of delinquency, default or foreclosure, Alan Abelson reported in Barron's in July. He noted that another eight million homeowners are estimated to have mortgages representing 95% or more of the value of their homes, leaving them with 5% or less equity in their homes and thus vulnerable to further price declines." (More dire news on housing)

7--Fiscal policy is deadlocked, Robert Reich

Quote: "What’s the answer? Reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain linking pay to per-capita productivity."

8--Fannie Freddie Further, Paul Krugman, New York Times (Krugman proves that Fannie and Freddie did not create the bubble. It was not the result of liberal programs or government "run amok" as right wingers like to opine)

Quote: "During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in... The real question is, who was financing the bubble — and it wasn’t GSEs."

9--Twenty-First Century Energy Superpower, Michael Klare, znet

Excerpt: On July 20th, the chief economist of the International Energy Agency (IEA), Fatih Birol, told the Wall Street Journal that China had overtaken the United States to become the world’s number one energy consumer......China’s decisions on energy preferences will largely determine whether China and the United States can avoid becoming embroiled in a global struggle over imported oil and whether the world will escape catastrophic climate change....

It is not hard, then, to picture a future moment when the United States and China are locked in a global struggle over the world’s remaining supplies of oil. Indeed, many in official Washington believe that such a collision is nearly inevitable.

Article du Jour: What You Don't Understand About the Stimulus

by Derek Thompson, The Atlantic

The $862 billion American Recovery and Reinvestment Act (aka The Recovery Act, aka The Stimulus, aka Obamanomics) was supposed to cut short the recession and create millions of jobs when the president signed it in early 2009. A year and a half later, stimulus is a dirty word, and two-thirds of Americans think the bill did nothing to help the economy, or worse.

Some of the anti-stimulus fever is understandable, and some of it is a misunderstanding. We were promised 8 percent unemployment with the stimulus, and we got 10 percent. That's frustrating. But it's also frustrating that plenty of smart people claim that the stimulus was all about government creating new powers, when it was overwhelmingly about helping states and families do old things, like pay teachers and credit card bill. (Read more)

Today's Best Reads

Quote of the day---"The U.S. economic situation “is obviously unsustainable, and the concerted attempt to suspend disbelief is playing increasingly poorly abroad,” says poll respondent Eric Kraus, chief strategist for Otkritie Brokerage House in Moscow. “One can delay, but no one can forestall the unwind of a multidecade credit bubble.” Bloomberg

1--Double dip or global deflation?, Christopher Whalen, Reuters
Excerpt: Earlier this week in a research note for the IRA Advisory Service, we reported that some of the leading experts in the housing sector believe that the U.S. is less than 25% through the restructuring of defaulted loans on commercial and residential real estate, and that the backlog is growing. Last week at the AmeriCatalyst conference held in Austin, TX, Laurie Goodman from Amherst Securities predicted that one in five U.S. households remains at risk of foreclosure. If this prediction turns out to be correct, the optimistic view of the U.S. economy and banking sector must be radically revised — and soon.

Just as the housing sector and the related debt was the driver of the U.S. economy over the past several decades, I believe that the deflation of the housing market could spell an equally drastic period of shrinkage in economic activity in the U.S. and around the world.

2--America Needs Jobs' Idea No. 1: A Payroll Tax Holiday, Dan Froomkin, Huffington Post

3--15 Shocking Poverty Statistics, The Economic Collapse

4--Deleveraging with a twist, Steve Keen, naked capitalism

Excerpt: The finance sector exists to create debt, and the only way it can do that is by encouraging the rest of the economy to take it on. If they were funding productive investments with this money, there wouldn’t be a crisis in the first place—and debt levels would be much lower, compared to GDP, than they are today. Instead they have enticed us into debt to speculate on rising asset prices, and the only way they can expand debt again is to re-ignite bubbles in the share and property markets once more...

Here’s where the level of debt (when compared to income) matters, as opposed to its rate of change: reigniting these bubbles is easy when debt to GDP levels are low. But reigniting them when debt to income levels are astronomical is next to impossible. Speculators have to be encouraged to take on a level of debt whose servicing consumes a dangerously high proportion of their income, in the belief that rising asset prices will let them repay that debt with a profit in the near future.

With the debt to GDP levels for all non-government sectors of the American economy at unprecedented levels, the prospect that any sector can be enticed to take on yet more debt is remote. Deleveraging is America’s future.

5--Is the US in worse shape than Japan during the "lost decade"?, Washington's blog

6--Obama Raises Prospects of New Economic Team, Wall Street Journal

Excerpt: Asked about the future of his economic team, the president praised Treasury Secretary Tim Geithner and National Economic Council Chairman Larry Summers, but he said: “I have not made any determinations about personnel. I think Larry Summers and Tim Geithner have done an outstanding job, as have my whole economic team. This is tough, the work that they do. They’ve been at it for two years. And, you know, they’re going to have a whole range of decisions about family that’ll factor into this as well.”

7--What You Don't Understand About the Stimulus, Derek Thompson, The Atlantic

Excerpt: If the Recovery Act failed to stimulate Americans' confidence, it's because it replaced more things than it built. It filled the crater left by the financial crisis. By and large, it succeeded. But its success has been nearly invisible. After all, a filled hole looks like nothing at all.

8--Monetary policy and aggregate demand, Marshall Auerback, credit writedowns

9--(It's over) The Great Recession was so 2009, FT. Alphaville

Monday, September 20, 2010

Today's Best Reads

1--Bond Markets Get Riskier, Mark Gongloff and Carrick Mollencamp, Wall Street Journal

Excerpt: "Bondholders got burned" buying deals in 2005 through 2007 because indentures, or the contracts that govern the bonds, didn't protect them, said Adam Cohen, founder of Covenant Review LLC, a New York credit research firm. "They said 'never again,' but now in a hot bond market, people are buying into those covenant loopholes all over again, and they're going to get burned again."

While most analysts don't think the bond market is in a bubble, they are seeing a repeat of some behavior from the last run-up. "In 2001-2003, clients were desperate for yield and were willing to invest in stuff you could tell was risky because it promised a higher return," says George Feiger, CEO of Contango Capital Advisors. "You see the same pressure today."

2--The Case for a Housing Bottom in 2013-14, Charles Hugh Smith, Daily Finance (Another "must read" from CHS)

3--Did France cause the Great Depression?, Douglas Irwin, VOX

Excerpt: A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened US monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7% in 1926 to 27% in 1932. It suggests that France’s policies directly account for about half of the 30% deflation experienced in 1930 and 1931.

4--Financial Innovation and the Distribution of Wealth and Income, Margaret M. Blair, SSRN

Abstract: Now that Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators promulgating the rules under this new bill must tackle a major problem that the reform bill addresses only indirectly. This is the problem of excessive “leverage” – financing with too much debt. Leverage permeates the modern financial system. Leverage makes the system too large, in the sense that large parts of the system operate outside the reach of regulators, and the system has a tendency to create vastly too much money and credit, thereby causing asset bubbles. Asset bubbles create the illusion that the financial sector is adding substantially more value to the global economy than it really is, and expose the rest of the economy to too much risk. Moreover, too much of society’s resources go to compensate the people in the system who are causing this to happen.

5--Lessons from the great Depression, Euro Intelligence

6--There is No Evidence for the "Structural Unemployment" Story, Dean Baker, CEPR (Baker is "right again")

7--The Stagnating Labor Market, Mike Konczal, naked capitalism

Excerpt:Everywhere we look, across occupations and sectors, people with the skills to work their jobs are more likely to be working part-time for economic reasons in 2010 than they were before the recession. This is a story of aggregate demand, not a story of skills mismatch...

If the issues of long term unemployment and the large number of people dropping out of the labor force are not addressed soon then what is an aggregate demand problem can become a structural problem through hysteresis effects. Officials need to act in a bold and imaginative manner to repair the labor markets dysfunctions-much as Roosevelt did-or risk entrenching the social misery that engulfs many Americans today.

8--"Manufacturing Consent" through polling, Yves Smith, naked capitalism

Excerpt: It’s not generally well understood the extent to which the polling industry is, largely knowingly, producing ‘results’ which significantly overstate right-wing biases.

9--Ally's GMAC Mortgage Halts Home Foreclosures in 23 States, Bloomberg (comment: Wanna bet GMAC can't take the losses?)

Excerpt: GMAC Mortgage ranked fourth among U.S. home-loan originators in the first six months of this year, with $26 billion of mortgages, according to industry newsletter Inside Mortgage Finance. Wells Fargo & Co. ranked first, with $160 billion, and Citigroup Inc. was fifth, with $25 billion.

Sunday, September 19, 2010

Article du jour: Defaults Account for Most of Pared Down Debt

Mark Whitehouse, Wall Street Journal

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. (Read more)

Today's Best Reads

1--Poll: Vast Majority Opposes Attack on Iran, Daniel Tenzer, Raw Story (Two-thirds want US to be neutral in Israeli-Palestinian conflict)

2--Defaults Account for Most of Pared Down Debt, Mark Whitehorse, Wall Street Journal (Americans are NOT deleveraging, but defaulting)

3--Reality Check: Iran is Not a Nuclear Threat, Scott Horton, The Christian Science Monitor (Just the facts)

4--Companies Still Hoarding Tons of Cash, Catherine Rampell, New York Times
Excerpt: "The Fed’s quarterly Flow of Funds report, released today with data for the second quarter of 2010, found that total credit grew for the first time in over a year, mainly because the federal government increased its borrowing. Consumers, however, continue to deleverage: Net household sector borrowing has fallen for eight consecutive quarters."

5--Americans' Net Worth Tanked In Second Quarter, Erasing This Year's Gains, Shahien Nasiripour, Huffington Post
Excerpt: "Americans' net worth plunged in the second quarter of this year, new data from the Federal Reserve show, erasing the gains of the previous two quarters and adding evidence to the argument that the economy has entered a double-dip recession."

6-- Household Net Worth off $12.3 Trillion from Peak, calculated risk
Excerpt: According to the Fed, household net worth is now off $12.3 Trillion from the peak in 2007, but up $4.7 trillion from the trough in Q1 2009. (Ouch!)

7--Shadow Banking and Financial Regulation, Morgan Ricks, The Harvard Law School Forum on corporate governance and financial regulation (Great summary of shadow banking)

Excerpt: The term “shadow banking” suggests something mysterious or elusive, but the reality is rather mundane. As used herein, “shadow banking” refers simply to maturity transformation—the funding of pools of longer-term financial assets with short-term (that is, money-market) liabilities—that takes place outside the terms of the banking social contract. A non-exhaustive list of shadow banking institutions would include: repo-financed dealer firms; [3] securities lenders; structured investment vehicles (SIVs); asset-backed commercial paper (ABCP) conduits; some varieties of credit-oriented hedge fund; and, most importantly, money market mutual funds, which absorb other forms of short-term credit and transform them into true demand obligations.

These institutions share a common feature: They obtain financing at short duration through the money markets, and they invest these funds in longer-term financial assets. This activity is the essence of “banking,” and the short-term financing sources on which it relies are the functional equivalent of bank deposits. The quantity of uninsured short-term liabilities issued by financial firms is the most meaningful measure of shadow banking. And, by this measure, shadow banking came to far surpass depository banking in its aggregate scale."

8--The U.S. Can Unilaterally Lower the Value of the Dollar, Dean Baker, CEPR (Let the currency war begin)

9--How a touch of inflation could boost the economy, Neil Irwin, Washington Post

Ouote: The dip in annual inflation excluding energy below 1 percent "shows that the economy is just one modest contraction away from dipping into a Japan-like deflation,

Saturday, September 18, 2010

Today's Best Reads

1--Gallup Finds U.S. Unemployment at Highest Level Since May, Gallup

2--Household Net Worth Plunges By Most Since Q4 2008, As Government Borrowing Surges, zero hedge

3--Lost Decade for Family Income, Wall Street Journal
The Bush years were the worst ever

4--Bracing For Peak Oil Production By Decade's End, Forbes

5--The great debt drag, The Economist
Excerpt: "How long will deleveraging take? In a recent paper Carmen Reinhart of the University of Maryland and her husband Vincent Reinhart of the American Enterprise Institute looked at 15 crises since 1977. They estimate that on average deleveraging lasted seven years, during which growth was a percentage point lower than in the decade before a crisis. If America follows this pattern, its GDP will grow by 2.4% for the next four to seven years. Because that roughly equals potential, job creation should only just match population growth: the unemployment rate won’t fall." (principle reduction and much more)

6--Taming the banks, The Economist

7--Ireland/Spain Update, Paul Krugman (No rewards for Ireland's austerity)

Friday, September 17, 2010

Today's Best Reads

1--Poverty Rate Rises To 14.3 Percent In 2009, Arthur Delaney, Huffington Post

2--Will Basel III’s Capital Requirements Make the Financial System Safer?, Mark Thoma, Moneywatch (Are we doomed? Yes)

3--The Tax Cut Racket, Paul Krugman, New York Times
Excerpt: "Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea... So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up. What kind of political party would engage in that kind of brinksmanship?"

4--Some unsolicited advice for regulators, Economics of Contempt (Tip: "Put simply: You need to get in the banks’ face")

5--What America needs is a payroll tax cut, Nouriel Roubini, Washington Post
Excerpt: "Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do." Hooray for Roubini

6--Fiscal Policy Choices in Uncertain Times, CBO Director's Blog
Excerpt: "In summary, the economic recovery will probably proceed at a modest pace—leaving total output well below its sustainable level, and the unemployment rate well above its sustainable level, for a number of years. In CBO’s judgment, the available monetary and fiscal tools, if applied at sufficient scale, would improve economic conditions during the next few years—though with costs and risks in the medium and long term. Policymakers need to address those trade-offs."

7--Are banks really private enterprise? Yves Smith, naked capitalism
Excerpt: "We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world."

8--Regulators to Target 'Window Dressing', Michael Rapoport, Wall Street Journal
Repo 105 redux--banks move leverage off their balance sheets before quarterly reports

9--GREEK DEFAULT: IT’S ONLY A MATTER OF TIME, Pragmatic Capitalism