Saturday, October 30, 2010

Today's Best Reads--Weekend Edition

1--25th Sequential Stock Fund Outflow, $81 Billion Year To Date, zero hedge

Excerpt: Today, Investment Company Institute (ICI) reported the 25th outflow in a row. Total YTD money redeemed is now $81 billion. From the market bottom in July, all the way to the current 2010 highs, the market has seen $51 billion in 16 sequential outflows. So to recap: mutual funds are not buying, pensions are not buying, retail is no longer even remotely interested in touching stocks... yet the market surge won't end. Some 2010 market highs money can't buy. For everything else, there's Bernanke Card. It is clear now that in the Fed's pursuit of chasing the "wealth effect" of the 1,000 or so remaining traders, logic will simply not stand in the way. (Retail investors no longer trust US markets. They are withdrawing their money and exiting)

2--Insider Selling To Buying Update: 2,019 To 1, zero hedge

Excerpt: Just when everyone thought we may see some moderation in the wholesale dumping of equities by those who actually know what their companies are worth better than moronic stock pumpers on stations that are rapidly losing their viewership, here come the same insiders and pull the rug right from underneath the latest batch of hot potato recipients... last week ... selling outpaced buying on the S&P by a factor of 2,018. Insiders in Oracle, GameStop, Google, CSX and General Mills appear to be particularly partial to the new black. Something tells us CNBC will not pick up this particular piece of news.

3--Goldman Advises Clients To Front Run The Fed Via POMO, zero hedge

Excerpt: After a few months of breaking down what the simplest trade in the world is, that would be frontrunning the Fed for the cheap seats, Zero Hedge is happy to advise our readers that finally Goldman Sachs itself has capitulated and is now indirectly telling its clients to frontrun Ben Bernanke via POMO. No complicated value investor nonsense, no pair trades, no cap structure arbitrage, no hedging, no levered beta plays. Buy ahead of POMO. Sell. Rinse. Repeat.

From a GS distribution to clients:

"On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%. in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%. the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market's performance on the 19 non-OMO days: +70bps."

And there you have it - the top in frontrunning the Federal Reserve is now in. (Truly amazing. The Fed buys Treasuries and--presto--the market goes up)

4--Junk Bond Sales Set October Record; Mortgage Bonds Rally: Credit Markets, Bloomberg

Excerpt: Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.

Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin.

Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. (The Fed is pushing investors into risky assets by keeping interest rates low)

5--Double Dip Delayed, Not Derailed; Understanding Consumer Spending, Mish's Global Economic trend Analysis

Excerpt: (From David Rosenberg's "Breakfast with Dave")U.S. REAL FINAL SALES 60 BASIS POINTS SHY OF DOUBLE-DIPPING

The major problem in the third quarter report was the split between inventories and real final sales.... If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain....

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery....Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.

6--A big smooch for the stimulus bill, Salon

Excerpt: From Santa Cruz, Calif., with love: A demonstration of how government can create demand. (An outstanding 2 minute video on how Obama's stimulus really worked for small business startups. Why isn't the Democratic party using this to get votes in the midterms?)

7--Foreclosuregate Explained: Big Banks on the Brink, Truthout

Excerpt:In the wake of mounting public outrage, attorneys general of 50 states and the District of Columbia have launched a joint investigation into what financial writers are calling "Foreclosuregate." Industry spokespersons have downplayed the controversy surrounding foreclosure mills and "robo-signers."...."The bottom line is not that those properties won't be repossessed. They simply won't be repossessed as quickly," said Rick Sharge, vice president of RealtyTrac. But others predict that if GMAC and Bank of America stick to their guns, they just might go down in smoke....

"When they tried to industrialize the loan securitization market, which is really what they did, they tried to automate everything they could. They started digitizing loan documents and shredding originals.... and, of course what that means is, we have no clue who owns what," foreclosure expert Walter Hackett told PBS "Newshour."...

One foreclosure expert estimates that just 6 to 7 percent of the loans made in the last three years can produce properly recorded title transfers from borrower to final lender..... On many mortgages, the loan owner's name was routinely left blank, the titles never recorded and title transfer fees not paid.

"This is not simply a glitch in paperwork," wrote Iowa Attorney General Tom Miller, who is heading up the states' joint investigation into the mortgage paper fraud mess.

"This was an industry wide scheme designed to defraud homeowners," Florida attorney Peter Ticktin told The Associated Press.

They hired foreclosure mills to retroactively produce documents showing the chain of ownership ended with them. In many cases, foreclosure mills provided affidavits of lost mortgage notes attempting to prove banks' control of mortgages in hopes of winning a favorable judgment.

Banks are in a big pickle. If they can prove they own the title to properties they want to foreclose on, they are liable to the IRS for unpaid taxes and penalties. If they don't, the are liable to be sued by bond holders for lack of due diligence in the bundled mortgages they sold to investors. (Must read)

8--Desperate Measures, The New Republic

Excerpt: Still, a deal on infrastructure spending may not be entirely out of reach, at least if the White House is ruthless enough. One idea along these lines comes care of David Shulman, a senior economist at UCLA’s Anderson Forecast center. Shulman proposes a several-hundred-billion dollar infrastructure package in which the administration agrees to suspend Davis-Bacon, the law requiring contractors for government-funded construction projects to pay locally prevailing wages, as deemed by the Labor Department. (while gutting environmental laws)...

Launch a massive, unilateral homeowner bailout. ...By far the biggest source of household debt is, of course, houses. Mortgages represent about three-quarters of the total, according to the most recent numbers from the New York Fed—or about $9 trillion out of $12 trillion. If the government were able to slice $1 trillion off of this sum, it could dramatically accelerate the timeline for consumers to resume their spending.....The good news is that the administration could do it without congressional approval. Fannie Mae and Freddie Mac basically have an unlimited credit line with the U.S. Treasury, and the government has controlled Fannie and Freddie since it seized them in 2008.... Fannie and Freddie eat the whole cost themselves, or do they split the losses with banks? Etc., etc. But the bottom line is that it can be done. (GOP "wish list")

9--Tax Shortfalls Spur New Fear on Europe’s Recovery Bid, New York Times

Excerpt: With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. As a result, countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year by impatient bond investors.

Greece, for one, looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union that amounted to more than $150 billion, according to a person briefed on the matter but not authorized to speak about it....

But after the latest upward revision in Greece’s 2009 deficit — to about 15.5 percent from 13.5 percent of output — the miss has spurred investor fears that the Greek government will be unable to close the gap and that Greece may ultimately be forced to restructure its mountain of debt with foreign investors.

As word seeped into the market on Wednesday, Greek 10-year bond yields jumped to 10.3 percent, from 9.3 percent.....

In Ireland, which is expecting its third consecutive year of economic contraction this year, the government says it will need an additional 15 billion euros in budget cuts to reduce its deficit from 32 percent of gross domestic product to 3 percent by 2014.

And in Portugal, the government is struggling to meet its deficit target of 9 percent of output as the economy continues to weaken.

Spain also faces a difficult task in slicing its deficit to 6 percent next year, from 11 percent last year, in the face of a slumping economy. (Austerity programs are failing everywhere. Keynes still "Rules")

10--Cheap Debt Fuels Private-Equity Revival, New York Times

Excerpt: The Blackstone Group and the Carlyle Group demonstrated on Thursday that the private-equity industry is thriving amid a weak economy.....cheap corporate debt is fueling the recovery of the private-equity business. While it remains difficult to get a mortgage to buy a home or to get a loan to finance a small business, yield-starved investors are creating a robust market for corporate bonds and loans.

Private-equity firms are seizing upon the corporate-debt boom in myriad ways. For the debt-heavy companies they already own, Blackstone and Carlyle are improving their balance sheets through aggressive refinancing. Corporate loans are now available to do multibillion-dollar buyouts, too, but the easy lending environment has created fierce competition for takeover targets, driving up prices. The corporate loan market “is almost hard to believe,” Mr. James of Blackstone said.

Private equity’s outlook is certainly brighter today than it was one year ago. Buyout firms have made $173 billion worth of deals so far this year, up 95 percent from last year, according to data from Thomson Reuters. (The parasites are back in full-force, thanks to the Fed's low interest rates. Onward to Bubbleland!)

11-The Moral Equivalent of Stagflation, Paul Krugman, New York Times

Excerpt: So what’s the parallel with the Nipponization of the U.S. economy? Well, like the stagflation of the 1970s, our current predicament was predicted well in advance. Liquidity-trap theorists...told you what would happen if the economy suffered a sufficiently severe negative shock, one that pushed us up against the zero lower bound. We predicted, specifically, that:

1. Increases in the monetary base would fail to increase broad monetary aggregates, let alone boost the economy
2. Despite large monetary base expansion, the economy would slide toward deflation, not inflation
3. Despite large budget deficits, interest rates would stay low, because short-term rates would stay pinned at zero...

Everything that has happened these past two years has fit that basic model; meanwhile, those who failed to accept the implications of the liquidity trap have been wrong over and over again.

But here’s the thing: I see no signs of a rethink among most players. The slide toward deflation despite huge increases in the monetary base hasn’t shaken either the paleomonetarists who still predict hyperinflation or the it’s-all-the-Fed’s-fault crowd.

12-Eurozone worries rising, Naked Capitalism

Excerpt: Irish bonds declined this week, pushing the extra yield that investors demand to hold the nation’s 10-year debt instead of benchmark German bunds to within two basis points of a euro- era record yesterday. The so-called spread widened 20 basis points in the week to 425 basis points. The Portuguese 10-year spread over bunds widened to as much as 355 basis points yesterday from 339 basis points at the end of last week...

Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can’t find investors willing to buy their bonds.

Lenders from those three nations took 61 percent of the loans supplied by the European Central Bank at the end of September, up from 51 percent the previous month, data from their respective central banks show. Overall, the region’s banks cut their funding to 514.1 billion euros ($716 billion), the least since Lehman Brothers Holdings Inc.’s collapse in September 2008, according to ECB figures.

Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA have sold new debt since regulators stress-tested 91 of the region’s lenders in a bid to rebuild confidence in their creditworthiness. By contrast, bonds of all lenders in Portugal, Ireland and Greece are trading as though junk rated, as are a third of banks in Spain, according to data compiled by Bank of America Corp. Their struggle to sell debt will make it harder for the ECB to curb loans to banks on Europe’s periphery. (Bloomberg) (The EU's problems persist although mainly out of the mainstream news)

Friday, October 29, 2010

Today's article du jour: Beyond Keynes and Hayek

By Meghnad Desai and Robert Skidelsky, The Guardian

We must be in a jittery state for a slowdown in the rate of growth to be hailed as a triumph of recovery. The fact is no firm momentum of recovery exists. Take your pick of the forecasts. We might manage 1.8% this year at best, 1.6% next year. The comprehensive spending review has laid down a path for real-terms cuts in public spending over the four years to 2014-15 and the elimination of deficit over the same period. The capital budget is projected to decline by 46% in real terms. The government is hoping that deficit reduction will by itself "crowd in" private investment that is not there right now. In the meantime we expect the Bank of England to do some more quantitative easing, keeping short run interest rates low.

Many are urging a Keynesian boost to deficit spending to revive the economy and/or avoid double-dip recession. We assume that this is unlikely either because experience shows that the multipliers are low and the government believes the markets have no appetite for a big deficit-spending financed fiscal reflation; or because the government thinks the present crisis is not a Keynesian one induced by insufficient demand, and hence a fiscal boost could be counter-productive.

It would also seem that quantitative easing has not had a stimulating effect on the economy. Wherever the money has gone, it is not into the real economy. A similar situation prevails in the US where, as Alan Greenspan pointed out in the Financial Times of 6 October, corporates are using the money supply to buy liquid assets rather than "real" investments.

Consumers are also not spending but saving to deleverage, and even so consumer indebtedness is still dire. Much more deleveraging will have to be done before the negative wealth effect will vanish and spending resume.

This is very much what Hayek's theory leads one to expect. The crisis, he says, occurs because there has been a long run of cheap credit resulting in malinvestments, like today's sub-prime mortgages. Expectations of lending banks change, we have a reversal of cheap credit and the boom collapses.

Hayek's account of crisis origins can be made consistent with Keynes's if one takes the world economy as a whole. For Keynes the crisis is caused by an excess of saving over investment. A contemporary Keynesian would say that one part of the world, led by China, earns more than it spends, and another part, notably the US, spends more than it earns. Cheap credit in the west was the "correct" response to the flood of saving from the east. But because there were insufficient outlets for "real" investment in countries like the US that already had abundant capital, cheap money led exactly to a Hayekian crisis: a credit boom leading to malinvestments that ended in bust.

The essential point is that both Hayekians and Keynesians believe that once the economy has collapsed, recovery takes a long time. Hayek believed that recovery from the crisis caused by over-consumption and under-saving has to run its course, and cannot be speeded up by a Keynesian fiscal or monetary stimulus. It requires time before consumers recover from their undersaving and business gains confidence that profitability has been restored. Keynesians believe that, once aggregate demand has subsided, a fiscal and monetary boost is the only way to get the economy growing again.

If we don't want to wait for Hayekian "natural forces", but at the same time recognise that orthodox Keynesian fiscal policy and monetary stimulus (if it works) will only recreate the old unsound structure of production, is there a way of speeding up recovery? (Read whole article)

Today's Best Reads

1--Japan 'Totally Behind' in Fighting Deflation as Fed Gears Up, Bloomberg

Excerpt: Government reports today reinforced signs of a worsening economy that indicate the Bank of Japan needs to do more, with September consumer prices and industrial production sliding more than forecast. Japan’s inflation-linked bonds signal investors don’t anticipate the nation will end deflation, with prices seen falling an average of about 0.78 percent in the next eight years.

“Japan will likely need ‘helicopter money drops’ to ensure a full escape from the Great Deflation,” Citigroup Inc. Chief Economist Willem Buiter and analysts including Tokyo-based Kiichi Murashima wrote in a note to clients yesterday. Asset purchases of “100 trillion would be more appropriate,” they said. (With no sustained commitment to fiscal stimulus, Japan continues its fight with deflation)

2--Channeling Milton Friedman, David Wessel, Wall Street Journal

Excerpt: Friedman would have scoffed at the notion that the Fed is out of ammunition. He believed in the potency of "quantitative easing," or QE—printing money to buy bonds.

"The Bank of Japan can buy government bonds on the open market…" he wrote in 1998. "Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately." (Would Friedman oppose QE?)

3--Foreclosure Freeze Cuts Sales, Supply in Hardest-Hit States, Bloomberg

Excerpt: U.S. home foreclosure sales are slowing in the states hardest-hit by the real estate crash as banks review their practices and delay seizures.

In Arizona, California and Nevada, foreclosure auctions on courthouse steps, known as trustee sales, are down 42 percent since Sept. 20, according to ForeclosureRadar, a real estate tracking service in Discovery Bay, California. In Florida’s Miami-Dade and Broward counties, fewer foreclosures have led to 18 percent declines this month in the number of repossessed homes listed for sale, said Ron Shuffield of Esslinger, Wooten, Maxwell Inc., a realty firm based in Coral Gables, Florida.

In a real estate market where as many as 7 million homes face foreclosure or have already been seized by lenders, according to Zillow Inc., a clog in the pipeline may delay a housing recovery, which won’t occur until home prices stop falling. That could in turn postpone a U.S. economic recovery. Distressed properties accounted for 31 percent of all U.S. home sales last month, RealtyTrac Inc. said Oct. 14.

4--Testimony of Katherine Porter Before the Congressional Oversight Panel Hearing on the TARP Foreclosure Mitigation Program, Mish's global economic trend analysis

Excerpt: Flawed foreclosures

Robo-signing is only one of a number of alleged deficiencies in foreclosure practices. Several courts have determined that there were serious deficiencies in the foreclosure process.

The concern being raised is that during the securitization process that the transfers from originator to sponsor to depositor to trust... were not performed or were not performed correctly. A related issue is whether the physical paperwork or electronic records can be located and are accurate. These records are needed to sort out whether the transfers were completed and valid.

... the note must be negotiated (if a negotiable instrument) or endorsed (if bearer paper) and that the mortgage must be assigned to each party in the securitization process. The latter issue implicates MERS, the Mortgage Electronic Recording System and whether its efforts to declare itself the nominee for the mortgagee and not make public recordation of the assignments are valid. Others believe that the primary issue is whether the note was transferred correctly, on the theory that the “mortgage follows the note” (but it is not clear whether the same rules applies for a deed of trust). But even here, there is disagreement on whether the transfer of the notes needed to have occurred individually, by endorsement (negotiable instrument) or by transfer of possession (bearer paper), or whether the pooling and servicing agreement somehow suffices to effectuate the transfer of the notes to the trust.

The implications of problems with transfer are serious. If the trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification.... Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation. (Foreclosure crisis in a nutshell)

5--ECB bought Irish bonds, traders say, Independent

Excerpt: The European Central Bank bought Irish bonds today, according to three traders and strategists with knowledge of the transactions.

The ECB purchased debt maturing between 2011 and 2020, one of the traders said, under condition of anonymity because the deals are confidential. ...The ECB began the program on May 10 to stabilise markets rocked by the region’s sovereign-debt crisis.

The purchases were part of a European Union-led push to rescue the euro, which fell to a four-year low on June 7 after Greece’s near default raised concern that some nations in the region would struggle to finance their budget deficits. (Trichet operates behind the scenes to prop up EU banking system)

6--The Fed's impending blunder, Ambrose-Evans Pritchard, Telegraph

Excerpt: “Each big inflation – whether the early 1920s in Germany, or the Korean and Vietnam wars in the US – starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a “psychological and spontaneous reason” , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.”

“Velocity took an almost right-angle turn upward in the summer of 1922,” said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to “smell a government rat”.

7--Lower housing prices may be here to stay, Las Vegas Review Journal

Excerpt: The collapse in housing prices over the last four years is not simply a blip in the market, but a fundamental resetting of values underlined by high unemployment, slower income growth and a more conservative consumer who'll be more likely to rent than buy, said Alan Mallach, nonresident senior fellow for Brookings' Metropolitan Policy Program.

Household formation is slowing, leaving less demand for home construction, Mallach said during a Brookings' lecture series at the University of Nevada, Las Vegas.
Households increased by an average of 1.12 million a year from 2000 to 2005, but that average dropped to 631,000 a year from 2005 to 2009. Household formation won't be more than 800,000 to 900,000 a year, he said.

"It's going to be single people, senior citizens and immigrants, so there's going to be less demand for high-end homes," Mallach said

8--New Home Sales Stuck at Rock-Bottom, Wall Street Journal

Excerpt: September’s new-home sales climbed 6.6% from a month earlier to a seasonally adjusted annual rate of 307,000 the Commerce Department said Wednesday. When compared to a year earlier, the rate tumbled 21.5%. September saw the fourth-worst monthly reading since 1963, though these statistics are notoriously prone to later revisions.

Regardless, sales “remained stuck at near rock-bottom levels,” said Patrick Newport, an economist with IHS Global Insight.

Builders face continued headwinds including elevated unemployment — a figure some expect to climb into the new year — and depressed housing values. Home prices, already down dramatically from the peak, slipped in August, according to the S&P Case-Shiller home-price indexes covering major metro areas.

Meanwhile, some banks have suspended the foreclosure process in recent weeks, which threatens to keep the glut of foreclosed homes on the market and further delay recovery.

9--Q3 Advance Report: Real Annualized GDP Grew at 2.0%, Calculated Risk

Excerpt: "The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first."

Without the boost in inventories, GDP would have been barely positive in Q3.

"Real personal consumption expenditures increased 2.6 percent in the third quarter, compared with an increase of 2.2 percent in the second."

This was a little stronger than expected, and PCE will probably slow over the next couple of quarters.

Investment: Nonresidential structures increased 3.9 percent, equipment and software increased 12.0 percent and real residential fixed investment decreased 29.1 percent.

As expected, residential investment declined sharply after the Q2 tax credit boost.

Overall this was a weak report and will not derail QE2 next Wednesday (further easing from the Fed).

Thursday, October 28, 2010

Today's Best Reads

1--Only $4.2 billion To Buy This Election? Robert Reich.org

Excerpt: Anyone who doubts the corrupting effect has not been paying attention. Our elected representatives have been acutely sensitive to the needs of Wall Street bankers, hedge-fund managers, and the executives of big pharma, big oil, and the largest health insurance companies. This is not because these individuals and interests are particularly worthy or specially deserving. It is because they are effectively bribing elected officials with their donations. Such donations are not made out of charitable impulse. They are calculated investments no less carefully considered than investments in particular shares of stock. They are shares in our democracy.

2--Mad Fed should beware of "unquantifiable" outcomes, Mark Gilbert, Bloomberg

Excerpt: “Nobody understands QE,” says Fred Goodwin, a strategist at Nomura International in London. “We have no idea how inflationary it really is. A patient juiced up on QE wants to party and it does not matter what anyone says. Don’t worry about what central banks are worried about; worry about unintended consequences.”

The Fed’s role as buyer of first resort has completely distorted the government-bond market. An innocuous report in the Wall Street Journal yesterday said the Fed would avoid the “shock and awe” tactic used in the initial $2 trillion buying spree and limit itself to “a few hundred billion dollars.” This managed to drive the 10-year Treasury yield up by 10 basis points to a five-week high of 2.7 percent.

...central banks are now one-trick ponies, stuck in a financial groundhog day with no fresh ideas. Their willingness to sacrifice their principles not only undermines their hard-won independence, it also allows their political masters to avoid the hard work of structural reform that might generate a genuine recovery. Instead, we are relying on transfusions of artificial central-bank liquidity.

3--Night of the Living Fed, Marketwatch

Excerpt: Grantham is especially harsh with former Fed Chairman Greenspan. “The net effect of deliberately encouraging the start of asset bubbles — particularly in the case of housing — and then neglecting them and leaving them to burst, created the worst domestic and global recession since 1932,” Grantham said.

“Capitalism has been manipulated far more, and more dangerously, by the last two Republican-appointed Fed bosses than everything else added together,” Grantham added. “It is naive, if fashionable, to blame the rather current lame Administration for all of our problems. They inherited a cake already baked, or better, ‘half-baked,’ and the master bakers were the current and former Fed bosses.”

4--Rainy-Day Funds Account For Half Of Big Banks' Earnings, Marshall Eckblad, Dow Jones News

Excerpt: Call it steroids for bank profits....The biggest U.S. banks virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they'd set aside to cover loan losses.

There are 18 commercial banks in the U.S. with at least $50 billion in assets, and together they earned an adjusted $16.8 billion in the third quarter. Of those profits, nearly half, or 48%, were from drawing down what bankers call loan-loss reserves, according to an analysis by Dow Jones Newswires....

Lenders are likely to disclose more releases from reserves for quarters to come. The reason: American banks set aside so much capital for loan losses during the financial crisis that they still hold bigger reserves than at any other time in modern history, according to Moody's Investors Service Inc.

"Going back to 1948, banks' reserves, as measured by total loans outstanding, are at the highest levels we've ever seen," said Gerard Cassidy, analyst at RBC Capital Markets.

At the heart of the issue is a set of arcane corporate governance accounting rules that call for banks to release loan-loss reserves as soon as they don't expect to need them, even against the protest of some bank officials...

For borrowers looking for capital, the shrinking loan-loss reserves at banks also show how lenders have pulled back from loans to riskier borrowers in the wake of the financial crisis

5--(Milton) Friedman On Japan, Paul Krugman, New York Times

Excerpt: (Friedman)“The Bank of Japan can buy government bonds on the open market…” he wrote in 1998. “Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

Krugman--Well, they did that: staring in 2000, the BOJ nearly doubled monetary base over a period of 3 years...And the money just sat there. Banks did not, in fact, expand loans. In fact, Japan’s experience is a key element of the case against monetarism. Just printing notes does not work when you’re in a liquidity trap.

6--A New Normal for Monetary Policy?, John Taylor's blog

A year and a half ago when the Fed’s extraordinary quantitative easing (QE) was shifting from emergency liquidity programs to large scale asset purchases, we convened a conference at Stanford’s Hoover Institution to discuss the shift. Jim Hamilton, of UC San Diego, in his talk Concerns about the Fed's New Balance Sheet and Peter Fisher of Blackrock in his talk The Market View expressed serious concerns about the extraordinary policies and the use of the Fed’s balance sheet to finance them. Don Kohn, then Fed Vice-Chair, attended and defended the Fed’s position

One concern expressed at the time (March 2009) was that such extraordinary measures would become a "new normal" for monetary policy, in which the Fed would not restrict its massive doses of QE to times of panics and other emergencies. Such a new normal would likely breed uncertainty and reduce the Fed’s independence, eventually leading to economic instability and inflation. I put it this way in my paper in the book, Road Ahead for the Fed, which came out of the conference:

“The danger I see is that as the recovery begins, or after we are a couple of years into it, people may feel that it’s not fast enough, or there is an unpleasant pause. Either could generate heavy pressure on the Fed to intervene…. Why would such interventions only take place in times of crisis? Why wouldn’t future Fed officials use them to try to make economic expansions stronger or to assist certain sectors and industries for other reasons?”

Many Fed officials dismissed the concerns about such a scenario, saying that the crisis was unique. Yet this is exactly the scenario that is now playing out. Sure enough, the recovery paused, and lo and behold, there is a QE2 in the works.

7--The Election: The Dangers of Gridlock in Economic Policy, Mark Thoma, Moneywatch

Excerpt: I have been a asked on several occasions how the election might impact the economy. I have three big concerns.

The first is that we will be gripped by the austerity movement that has captured Europe and that, as a result, we will withdraw stimulus too soon. Republicans have been promoting policies to reduce the deficit for some time now, spending cuts in particular are on the agenda. Many among the Republican leadership would have canceled the remaining stimulus already, including extensions to unemployment insurance, if they were in control....

I expect that we will have a slow, agonizing recovery, particularly for employment. I do not expect a double dip, but it’s not out of the question by any means, and we need to be ready in case it happens. Unfortunately, the election is likely to bring gridlock and it’s doubtful that Congress will be able to act in response to a second downturn.

8--Greek yields soar, The Big Picture

Excerpt: Greek 10-year bonds tumbled for a third consecutive day; yield jumped 58 bips 10.34% according to Bloomberg.

The EU revised Greek budget deficit above 15% of GDP. In a leading contender for understatement of the year, Finance Minister George Papaconstantinou said the nation had serious tax compliance issues.

Thus, the ongoing European drama between Greek tax scofflaws, German Industrial financiers, England/Ireland recession continues to play out — pressuring futures, widening spreads, and to leading towards the eventual denouement. Its hard to see how Greece avoids a Restructuring — which, truth be told, is merely a polite word for Default.....I place the survival of the EU in its current form at 50/50 . . .

9--Male castration: The easiest way to live to 100?, The Week

Excerpt: It's well known that women outlive men by about five to six years, says Thomas Kirkwood in Scientific American. But the reasons why have long been murky.....

In fact, high levels of testosterone, which boost male fertility, are quite bad for long-term survival. ... As many dog and cat owners can attest, neutered male animals often live longer than their intact counterparts. Indeed, the evidence supports the notion that male castration might be the ticket to a longer life.

Might the same be true of humans?... The historical record is not good enough to determine if eunuchs tend to outlive normal healthy men, but some sad records suggest that they do. A number of years ago castration of men in institutions for the mentally disturbed was surprisingly commonplace. In one study of several hundred men at an unnamed institution in Kansas, the castrated men were found to live on average 14 years longer than their uncastrated counterparts. (Hmmmm)

Wednesday, October 27, 2010

Today's article du jour: An Economic Disaster

By DEAN BAKER, Counterpunch

The economy is a goddamn disaster and President Obama deserves much of the blame. Sorry, I am not on the Dems' payroll so I couldn't contain myself when I read Bernard Avishai's trashing of Paul Krugman.

Avishai's basic narrative is about 150 percent wrong. He describes the differences between Krugman and the Obama Administration as "small." Right, and it depends on what your definition of "is" is.

Let's pick just a few of these differences.

Krugman loudly and clearly complained that the stimulus package was too small from the onset. Avishai tells us that the brilliant political strategists in the Obama Administration calculated the maximum amount that they could get through Congress and adjusted their request accordingly.

Perhaps this is true; perhaps there is no way that Obama could have gotten another dime out of Congress. But every person who knows economics knew that the stimulus was less than half the size it should have been. Given this, why on Earth did Obama and his minions start running around with their talk of "green shoots of recovery," instead of laying the groundwork for more stimulus?

The line the day after the stimulus passed should have been: "This is a good start, but we lost $1.2 trillion in annual demand from the private sector because of the collapse of the housing bubble. The net stimulus from the government sector will be $150 billion a year ($300 billion from the federal government, minus $150 billion in cutbacks at the state and local level). Since $1.2 trillion in lost demand from the private sector is much larger than our $150 billion net stimulus from the public sector, we can't expect to get back on our feet without doing more."

Would Obama have been able to prod Congress for more stimulus by telling the truth? Who knows, but at least then he would be putting forward a coherent story on the economy.

What is his story now? He has managed to completely discredit the idea of stimulus even to millions of Democrats when this is the only force that can be counted on to restore the economy to full employment any time soon.(Read the whole article)

Today's Best Reads

1--Too Little, Tim Duy, Fed Watch

Excerpt: Federal Reserve policymakers must be pleased with themselves. Market participants have fallen in line like lemmings off a cliff pursuing the obvious trades as the excitement over quantitative easing builds. Equities, bonds, commodities are all up. Dollar is down. Perhaps more importantly, measured inflation expectations have trended higher. Psychology is a powerful thing. Like leverage.

But like leverage, psychology can turn against you. The psychology of market participants forms on the back of expectations, which in this case is for the Fed to announce a significant expansion of the balance sheet on November 3. If the Wall Street Journal is correct, the Fed is poised to disappoint those expectations with an announcement of "a few billion dollars over several months." This looks like a clear effort to temper expectations....

Bottom Line: Right now... The US economy is operating below potential to the tune of about a trillion dollars give or take. The Obama Administration is poised to turn its attention to deficit reduction, seemingly oblivious to the historical errors of Japanese fiscal policy, not to mention the US experience in the Great Depression. For better or worse, that leaves monetary policy to bear the burden. But the Federal Reserve is signaling they are poised to deliver far less than necessary to meet expectations, expectations that already were likely overly optimistic. Truly, it boggles the mind, and suggests that Bernanke is far more worried about the specter of inflation than the real pain of unemployment.

2--"Scary New Wage Data", David Cay Johnson, Economist's View

Excerpt: Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold. ...

Measured in 2009 dollars, total wages fell to just above $5.9 trillion, down $215 billion from the previous year. Compared with 2007, when the economy peaked, total wages were down $313 billion or 5 percent in real terms.

The number of Americans with any wages in 2009 fell by more than 4.5 million compared with the previous year. Because the population grew by about 1 percent, the number of idle hands and minds grew by 6 million.

The median wage declined by the same ratio, down $159 to $26,261, meaning half of all workers made $505 a week or less. Significantly, the 2009 median wage was $37 less than in 2000. (Wages are shrinking--except for earners on the top)

3--Case-Shiller: Home Price declines widespread in August, Calculated Risk

Excerpt: From S&P: Home Prices Increases Slow Down in August:

Data through August 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show a deceleration in the annual growth rates in 17 of the 20 MSAs and the 10- and 20-City Composites in August compared to what was reported for July 2010. The 10-City Composite was up 2.6% and the 20-City Composite was up 1.7% from their levels in August 2009. Home prices decreased in 15 of the 20 MSAs and both Composites in August from their July levels.

4--Do Investors Expect Too Much From Bernanke?, Paul Krugman, New York Times

Excerpt: Financial markets seem convinced that quantitative easing will be highly effective at solving at least one problem: inflation running well below the Fed’s 2-percent-or-so target. The chart above shows the difference between interest rates on 5-year inflation-protected bonds (which are now negative) and rates on unprotected bonds; implicitly, the market forecast of inflation over the next five years has risen half a point.

But I really don’t understand this. Granted that QE2 will probably have some positive effect, hopefully bigger than analysis based on the debt-maturity equivalence suggests. Still, the prospect remains that we’ll face multiple years of high unemployment — or, if you prefer, a protracted large output gap (PLOG). And history is clear on what that means: declining inflation:...My guess, then, is that the markets are overreacting; they’re thinking, “The Fed is printing money!”, while forgetting that this ultimately matters, even for inflation, only to the extent that it seriously reduces unemployment.

5--Debt sales highlight abnormal conditions, Financial Times

Excerpt: The Fed has been sending the message that its cheque book is ready and it will do what it takes to reflate the economy,” said Jan Loeys, head of global asset allocation at JPMorgan Chase. “What no one knows is whether inflation will start to show in two weeks or two years.” Mr Loeys added: “We are seeing longer-term thinking clients becoming increasingly wary of bonds and hedging against inflation. Shorter-term thinkers are still willing to still buy bonds, on the presumption that they are nimble enough to get out when inflation comes to push yields up.” Long-term institutional buyers purchased 39 per cent of the $10bn Tips sale, up from an average share of 30 per cent for the prior six Tips sales....

Expectations for inflation over the next five years – based on comparing Treasury yields and those for Tips – have risen as high as 1.75 per cent this month, up from 1.13 per cent in August...(This will not end well)

6--Shape-Shifting Deficit Hawks, Baseline Scenario

Excerpt: 1. The traditional view. Large fiscal deficits will cause high interest rates, large government debts, and inflation.

“2. Declining business confidence is the real danger. Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence. When business confidence is low, the economy is highly vulnerable to small changes in conditions, what some economists call ‘non-linearities.’

“3. Fiscal stimulus policies never work. New Classical economists, Robert Barro most notably, have long argued that the multiplier for fiscal stimulus policies is zero or thereabouts.

“4. A long-term fiscal train-wreck is coming. Regardless of short-term considerations, we are courting disaster in the long-run with structural deficits that the recession has only worsened. (Simon Johnson refutes deficit hawk's arguments one-by-one)

7--Is there a bubble in the bond market, VoxEU

Excerpt: The yields on government bonds are at their lowest levels since the depths of the financial crisis in late 2008. On Monday 18 October, the yield on 10-year Treasury notes hit 2.52%, down from 3.85% at the beginning of the year. This movement is huge by the standards of the Treasury market. An investment in 10-year Treasury notes has returned about 11.4% this year.

The stock-bond correlation implies that investors currently view government bonds as a hedge against the possibility of deflation and low growth. Though they may be uncertain about the direction of inflation over the next five years, investors appear to believe that any increase in inflation will likely be accompanied by growth, making it less painful for their portfolios.

In evaluating the current level of bond prices, the critical question is whether investors are correct. If inflation will indeed be accompanied by growth, then nominal bonds should carry a negative inflation risk premium and correspondingly high prices. However, it is also possible that the economy could enter a period of stagflation with high inflation and low growth. In this case, investors should be charging a higher inflation risk premium, and bond prices should be lower today...

8--Economy is running out of gas, Rex Nutting, Marketwatch

Excerpt: In his latest forecast, Levy argues that deleveraging by consumers, banks, businesses, and state and local governments continues to hobble the economy. Balance sheets remain bloated by historic standards, which means the private sector will be saving more and spending less, probably for years to come. Federal government deficits made up for those private-sector savings, but only for a while.

Corporate profits were also bolstered by cost-cutting, especially by firing workers and cutting back the hours of the survivors. But in the aggregate, such tactics can’t be sustained, because reduced compensation across the whole economy ends up depressing corporate revenue. After all, consumer demand is dependent mostly on what consumers earn on the job.

Businesses aren’t investing, not because they don’t have the capital, but because they don’t see the demand coming back soon.

“Net fixed investment, normally the most important profit source, remains less than 2% of GDP (the postwar range until the last recession was about 4%-10%) with limited prospects for improvement in the year ahead,” Levy wrote. “Deep problems mar the outlook for investment in commercial and residential structures, while overcapacity and slow topline growth expectations limit the potential of the present spurt in capital equipment outlays.” (Lots more)

9--Arundhati Roy faces arrest over Kashmir remark, Guardian

Excerpt: The Booker prize-winning novelist and human rights campaigner Arundhati Roy is facing the threat of arrest after claiming that the disputed territory of Kashmir was not an integral part of India.

India's home ministry is reported to have told police in Delhi that a case of sedition may be registered against Roy and the Kashmiri separatist leader Syed Ali Shah Geelani for remarks they made at the weekend.

Under section 124A of the Indian penal code, those convicted of sedition face punishment ranging from a fine to life imprisonment.

Roy, who won the Booker in 1997 for The God of Small Things, is a controversial figure in India for her championing of politically sensitive causes. She has divided opinion by speaking out in support of the Naxalite insurgency and for casting doubt on Pakistan's involvement in the 2008 Mumbai attacks.

"Threatening me with legal action is meant to frighten the civil rights groups and young journalists into keeping quiet. But I think it will have the opposite effect. I think the government is mature enough to understand that it's too late to put the lid on now," Roy said.

"Pity the nation that has to silence its writers for speaking their minds. Pity the nation that needs to jail those who ask for justice, while communal killers, mass murderers, corporate scamsters, looters, rapists, and those who prey on the poorest of the poor roam free."

Tuesday, October 26, 2010

Today's article du jour: Our Fiscal Policy Paradox

By Alan S. Blinder, Wall Street Journal

The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens.

To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve.....

There are plenty of powerful weapons left in the fiscal-policy arsenal. But Congress is tied up in partisan knots that will probably get worse after the election. On the other hand, the Fed stands ready—indeed, seems eager—to act. But it has already deployed its most powerful weapons, leaving only weak ones. That's the paradox. ....

The government could hire people directly onto public payrolls, as Roosevelt did with the Civilian Conservation Corps and the Works Progress Administration. These days, many of the new hires would wind up on state and local, rather than federal, payrolls. But the federal government can still foot the bill.....

But many of us worry that this second round of quantitative easing will not be powerful enough to move our $15 trillion economy much....

In a more rational world, it wouldn't be this way. Fiscal policy, which packs the power, would be doing the heavy lifting—by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don't live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that's the Federal Reserve. The fiscal army is AWOL. (Read the whole article)

Today's Best Reads

1--Deleveraging, Yglesias, Think Progress

Excerpt: The fundamental issue here is that middle class households have no choice but to deleverage and pay down their debts......

This is where there’s a role for short-term debt-financed government activities. (ed note: fiscal stimulus) Such activities both provide income to households, facilitating a speedier deleveraging process, and also provide some assurance to businesses that there will be demand in the form of government purchases. That, in turn, should spur further business investment which will provide additional income to households further speeding the deleveraging process. When household deleveraging is done, it would be necessary to reverse course and reduce public debts. But by maintaining a decent pace of GDP growth during the process we can ensure that public debt is paid down from a relatively strong economic base. (Excellent summary of the need for stimulus while households reduce their debts)

2--Romer: Now Isn’t the Time to Cut the Deficit, Economist's View

Excerpt: Make no mistake: persistent large budget deficits are a significant problem. ... And our projected long-run deficits are simply unsustainable. So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.

Now is not the time. Unemployment is still near 10 percent in the United States and in Europe... Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

3--The Final End of Bretton Woods 2?, Tim Duy, Fed Watch

Excerpt: after two years of scrambling to find the right mix of policies... the US economy remains mired at a suboptimal level as stimulus flows out beyond US borders.

...an excessively high dollar is the explanation for the simultaneous existence of a sizable current account deficit and excessive unemployment....

Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $). That mean that the increase in imports was 87.5% of the increase in domestic demand.

To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new "freshwater" theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately. (Recessions are caused by lack of demand, but imports are hurting demand for US products thus keeping unemployment high)

If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US.

4--Bernanke Leaps into a Liquidity Trap, John Hussman, Hussman Funds

Excerpt: the precise level of long-term interest rates is not the main constraint on borrowing here. The key issues are the rational desire to reduce debt loads, and the inadequacy of profitable investment opportunities in an economy flooded with excess capacity....

One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it.

You can see why monetary base manipulations have so little effect on GDP by examining U.S. data since 1947. Expand the quantity of base money, and it turns out that velocity falls in nearly direct proportion....One wonders why anyone expects quantitative easing in the U.S. to be any less futile than it was in Japan.

Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long..... The Fed is not helping the economy - it is encouraging a bubble in risky assets. (Hussman dissects QE. Sheer brilliance)

5--Roubini: States Are Doomed, CNBC

Excerpt: Municipal debt is up to 20% of GDP, (Roubini) told me exclusively. And unfunded liabilities of state and local pension funds? Those are as high as $3 trillion — another 20% of GDP. So, basically, get ready — especially in Q1 when states can no longer use federal money to plug their budget holes.

“The issue is whether the Federal government will bail out state and local governments with a federal guarantee of their debt,” Roubini told me, likening the scenario to the money received by Greece and to be generalized to other Eurozone members in trouble via the new European "stabilization fund."

6--Slump in household spending highlights the effect of austerity measures on consumers, UK Telegraph

Excerpt: The Government's plans to return Britain to growth have been dealt a severe blow after it emerged that household spending fell in October at its fastest pace since January while debt levels are on the rise for the first time in nine months.

Shrinking incomes drove the cuts to household spending and also appeared to be the trigger for the first increase in debt in nine months, according to the Household Finance Index....

Economists expect growth to keep slowing into next year, amid fiscal austerity measures and a weakening outlook for exports as global demand softens....If third-quarter GDP disappoints, it will cast further doubt on the ability of the Coalition to force through fiscal tightening without throwing the economy back into recession, analysts at Capital Economics warned. (British "deficit hawks" are about to be derailed by reality)

7--Pimco's El-Erian: Expects Greece Will Default In 3 Years, Wall Street Journal

Excerpt: Greece is likely to default, and it will be to the country's and the European Union's benefits, said El-Erian, speaking at the Buttonwood Gathering in New York.

Without an orderly restructuring, he said, Greece's economy could spiral into a lost decade of high unemployment and low growth as seen in Asia and Latin America in the past. That is because the fiscal plan imposed by the International Monetary Fund and EU for Greece's bailout to adjust its debt to GDP ratio will require enormous growth sacrifices, and yet see the country's debt rise further into the future.

8--The U.K. Swallows Austerity So We Don't Have To, Dean Baker, Huffington Post

Excerpt: The U.K. is jumping out front to lay off public sector workers, raise taxes, and cut government programs and supports across the board. It is doing this at a time when the economy has nearly 8 percent unemployment and considerably excess capacity in almost every sector of its economy.

This drive to austerity comes at a time when the short-term rate set by the Bank of England is 0.5 percent and the rate on 10-year bonds is just 3.0 percent. The timing is also perfectly wrong in that most of the U.K.'s major trading partners are also suffering from weak economies and therefore unlikely to provide strong export markets. Nor are they likely to tolerate a substantial devaluation of the pound against their currency....

Turning to the business side of the story, demand growth is generally the most important determinant of investment. Demand growth is almost certain to slow precipitously in the context of the sharp cuts being put forward by the government. If firms are not investing now, it is hard to believe that they will invest more when the economy weakens, no matter how excited they might be over the prospect of lower budget deficits. (Brits leaders pave the way to Depression)

9--Aftermath–Six Questions for Nir Rosen, Scott Horton, Harpers Magazine

Excerpt: I don’t think the Middle East should be viewed through the prism of alleged American “interests.” And I don’t think imposing its will on weaker countries increases American security. Even the weak find ways to resist. America is more insecure when it creates more enemies it didn’t need to have and meddles with the internal affairs of other countries. Certainly the Middle East was more stable before the war. America’s security posture in the Middle East involves colonial and post-colonial relations. American influence there is embattled and changing. The war in Iraq may come to be seen as a turning point, part of a decline in American influence in the region. But there are other things happening at the same time. The Saudi regime is unsustainable and the Egyptian regime is disintegrating. These two countries are pillars of the American regional architecture. And the third pillar, Israel, is not viable in its current form as an increasingly rogue apartheid Jewish state. Finally, the American military is exhausted and losing its conventional skills after nearly ten years of occupation while the power of asymmetrical tactics against a conventional behemoth has been demonstrated.

The irrational American response after September 11 reduced the gap in power and influence between the United States and other regional or global actors. The neoconservative notion that we were at the end of history and the United States could maintain its triumph by any means necessary was proven to be folly. America’s excessive use of force actually weakened its position in the region. Had America paid attention to the people, it might have produced polices that were good for the region and not based on some misguided notion of America’s interests in the region. The United States will now seek to withdraw from the region while avoiding the impression that it has been defeated. But one of the tragedies of American engagement in the Middle East today is that its conduct is regularly driven by efforts not to do the right thing, but to avoid the appearance of defeat. (Excellent interview with "unembedded" journalist Nir Rosen)

Monday, October 25, 2010

Today's article du jour: Falling into the Chasm

By Paul Krugman, New York Times

Excerpt: The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task. ... If you look back..., economies that have experienced a severe financial crisis generally don’t heal quickly. ... And that has been true even when, as in the case of Sweden, the government moved quickly and decisively to fix the banking system.

To avoid this fate, America needed a much stronger program than what it actually got — a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level. ...

Could the administration have gotten a bigger stimulus through Congress? Even if it couldn’t, would it have been better off making the case for a bigger plan, rather than pretending that what it got was just right? We’ll never know.

What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act:... But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed. (Read more)

Today's Best Reads

1--Why the Fed Wants a Tad More Inflation, Wall Street Journal

Excerpt: In September, the Fed's policy committee said it was prepared to take new steps to invigorate the economy—likely large new purchases of U.S. Treasury bonds. The reason, it explained, is this: "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability." Huh?...

"The Fed wants to bring purchases forward in time to increase demand today," said Marvin Goodfriend, a former Richmond Federal Reserve Bank economist now at Carnegie Mellon's Tepper School of Business. Americans have been lectured for years to save more, and they are doing so; the Fed essentially is saying, 'Don't do too much of that right now, please.' ...

When inflation gets too low, an economy risks slipping into deflation, or falling wages and prices. That could be especially hard on individuals and businesses carrying heavy debt loads.

2-- Why Easier Money Won't Work , Joseph Stiglitz, Wall Street Journal

Excerpt: The Federal Reserve, having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the problem, now wants to make a contribution to preventing the economy from sinking into a Japanese-style malaise. How? As Chairman Ben Bernanke announced last week, through large-scale purchases of U.S. Treasurys—called quantitative easing, or QE.

The Fed is right to be worried.

If high unemployment continues, America faces the risk of losing human capital as the skills of the unemployed erode. It will then become increasingly difficult to bring the unemployment rate down to anywhere near the levels that prevailed in the mid- and late 1990s, and the higher unemployment rate and lower output will make the current pessimistic budget projections of the Congressional Budget Office and the Office of Management and Budget look rosy.

3--Will US consumer debt reduction cripple the recovery, McKinsey Global Institute

Excerpt: "Must read" report on consumer deleveraging

4--Reducing household financial leverage: the easy way and the hard way, Rebecca Wilder , Angry Bear

Excerpt: What differentiates this recovery from every other cycle since 1929 is the lingering debt deflationary pressures. There is a very large overhang of U.S. household financial leverage that’s going down one of two ways: the easy way, through nominal income growth, or the hard way, by default. Unfortunately, the hard way is rearing its ugly head.

1. If there is no income growth, then households must manually pay down debt at the cost of current consumption. The consumption decline drags the economy, and some default results.

2. If income growth is positive, then the degree to which households must pay down debt at the cost of current consumption will depend on the pace of income generation. This is the most macroeconomically-benign scenario.

3. If income growth is negative, i.e., deflation, then real debt burden rises. 30-yr mortgage payments, for example, are fixed in nominal terms and become more difficult to meet as income declines. In this case, widespread default is likely.

5--Chicago Fed: Economic activity slowed further in September, Calculated Risk

Excerpt: Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.58 in September from –0.49 in August.
...
The index’s three-month moving average, CFNAI-MA3, ticked down to –0.33 in September from –0.32 in August. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. (The post-stimulus slowdown begins)

6--The market is facing major headwinds, Credit Writedowns

Excerpt: The Fed’s acknowledgment that the economy is in trouble is again highlighted by the latest Beige Book released yesterday. The following are some excerpts from the report:

"National economic activity continued to rise, albeit at a modest pace..consumer spending was steady to up slightly, but consumers remained price-sensitive, and purchases were mostly limited to necessities and non-discretionary items..Housing markets remained weak..Most reports suggested overall home sales were sluggish or declining..Home inventories were elevated or rising..Conditions in the commercial real estate market were subdued, and construction was expected to remain weak.Reports suggested that rental rates continued to decline for most commercial property types..industry contacts appeared to believe that the commercial real estate and construction sectors would remain weak for some time..Hiring remained limited, with many firms reluctant to add to permanent payrolls, given economic softness..Future capital spending plans appeared to be limited"

7--A Far Away Country Of Which We Know Nothing, Paul Krugman, New York Times

Excerpt: I’ve been getting a lot of correspondence lately that runs something like this:

You’re an idiot. Give me one example in all of history of a country that spent its way out of a depressed economy

Ahem. There’s this country — people may not have heard of it — called the United States of America. (Must see chart)

8--Fiscal obsessions, Paul Krugman, New York Times

Excerpt: What Munchau doesn’t say, but I suspect he understands, is that this is in large part an extension of the case of the boy with a hammer, for whom everything is a nail. Bankers and economists love, just love, being fiscal scolds; deficits are something they understand, plus denouncing deficits is an easy way to sound all moral and responsible. Rather than facing up to the complexities of our current problems — how do you get out of a liquidity trap? how do you rein in shadow banking? — many Very Serious People would much rather lecture governments on the evils of red ink.

One thing that was very obvious from where I sit was the sheer joy the Greek crisis created for the VSPs. Here, at last, was their kind of issue. And this was one main reason they were so eager to Hellenize everything in sight. There has, I can assure you, been much disappointment over the failure of US interest rates to spike.

9--Real estate agents surveyed say distressed home sales nearly half of market, Housingwire

Excerpt: Distressed home sales took up 47.5% of the total home purchases in September, up from 45.7% in August and 44.8% a year ago, according to a survey of more than 3,000 real estate agents.

Campbell Surveys and Inside Mortgage Finance tapped a network of agents across the country to determine home sales and mortgage patterns. In September, distressed properties, or those sold that have been foreclosed on or in the foreclosure process, were taking more and more of the market share as first-time homebuyer activity continues to slow.

For 2009 and into 2010, the amount of first-time homebuyers and REO levels were parallel, but since the tax credit expired in April, this demand has dropped from as high as 42.4% in June to 34.4% in September.

Without the government-induced demand, the housing recovery has been put on hold, according to Thomas Popik, research director for Campbell.

"Current homeowners sell a home when they buy a home, resulting in no net take-up. Likewise, many investors buy, rehab and sell, providing no take-up," Popik said. "In contrast, first-time homebuyers absorb excess housing stock. However, in recent months, they have been able to play this role less frequently because of restricted financing."

Saturday, October 23, 2010

Article du Jour: England's Recovery Plan is Bollocks

By Marshall Auerback, The Daily Beast



Those searching for a panacea for our economic troubles shouldn’t be tempted by U.K.-style fiscal austerity. Their staggering new spending cuts defy historical wisdom—and are already hurting their economy, says Marshall Auerback.

The philosophy underlying the British government’s huge new spending cuts—namely, that fiscal austerity is good for growth—is spreading across the United States. Governments are increasingly being bullied into adopting austerity measures, apparently thinking they will help their economies grow, and if the recent polls for the midterm elections are anything to go by, this philosophy is likely to predominate in the new Congress. But an embrace of U.K.-style austerity will almost certainly ensure a major relapse for the U.S. economy.

The fiscal austerity measures announced by the British government this week, the largest since World War II, with welfare, councils, and police budgets all hit, follow on from earlier cuts made when the new leadership took power back in June. Then, pay for almost all government workers frozen for two years; now, as many as 500,000 public sector jobs are likely to be lost. Even the queen has taken a hit, as Chancellor of the Exchequer George Osborne has frozen government funding for her household and staff....

That weak business confidence is not a surprise. Companies will not increase production or build new capacity while the state of future aggregate demand remains uncertain. They do not want to hold unsold inventories.

What drives production and employment growth is aggregate demand growth. Implementing fiscal austerity undermines the very foundation of this growth. The report makes this result clear: “Currently the U.K. economy is running at more than 4 percent below pre-recession levels. The public-sector cuts outlined by the new government and consequent reduction in public-sector demand will have a significant downward effect on growth, constraining take up of spare capacity as the private sector recovers.” (Read more)

Today's Best Reads

1--Bob Janjuah Is Back, And Asks "Has Anything Changed?", zero hedge

Excerpt: ..."We are broadly positive, on a three-month basis, that the market will continue to run with the trends since early September. Namely, pro-risk, pro-policy and pro-policymaker, with a firm belief that the Fed can and will create broad-based inflation and maybe also some growth. On a six-month basis our major concern is that market sentiment will abruptly and completely flip. Why? Because by then we think it should become clear that current policy settings are not working (in terms of driving sustainable real economy growth and sustained real estate appreciation), that „more of the same policy? will be seen as non-credible, and because we will likely be pretty much out of any other policy options. Over the next three months we think the risk reward will become increasingly supportive of an asset allocation and trading strategy that looks to pre-position for this turnaround in market sentiment."

2--Introducing Kevin Gaynor (Bob Janjuah's partner)"Bigger fall" ahead, zero hedge

Excerpt: We see the fact the Fed is acting early as good news in the general scheme of things, i.e. we welcome more policy rather than less. Or to put it another way, asset reflation is much more acceptable than asset price deflation....

So, the world looks to be a better place for now. But it seems to us that rather than solving the underlying final demand issues in the leveraged western economies, this approach just moves the dénouement down the road. And there are, to use the polite economics word, externalities to the Fed’s action which at the very least increase the political tensions around a genuine attempt to rebalance. We think on balance that this sets us up for a bigger fall than otherwise six months out.

3--US mortgage crisis: The case for public ownership, World Socialist Web Site

Excerpt:In the face of mounting evidence of systematic fraud by leading US banks in the foreclosure and eviction of millions of families from their homes, the Obama administration continues to oppose a moratorium on foreclosures. It is instead running political interference for the Wall Street firms implicated in the scandal....

The position of the Obama administration flies in the face of elementary legal principles and the due process rights of homeowners. It is likely that millions of documents are missing, forged, or of otherwise dubious validity. In an unknown number of foreclosure cases the financial entity with a legal claim to the home is simply not known. As a result, banks are foreclosing on properties to which they have no legal title.

The Obama administration all but openly asserts that the “recovery” in housing depends on driving homeowners who cannot afford their mortgage payments out of their houses...The legal and due process issues raised by the mortgage foreclosure scandal, and, more importantly, the underlying social issue—the right to housing—cannot be resolved without overturning the entire framework of private ownership and the subordination of housing to the profit drive of banks and corporations.

4--Foreclose on the foreclosure fraudsters, Randall Wray and William Black, Huffington Post

Excerpt: The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers' trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional "income" and "capital" at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.

The inflated asset values allow the Fed and the administration to ignore the Fed's massive loss exposure and allow Treasury to spread propaganda claiming that TARP resolved all the problems -- at virtually no cost. Donovan claims that we have held the elite frauds accountable -- but we have done the opposite. We have made the CEOs of the largest financial firms -- typically already among the 500 wealthiest Americans -- even wealthier. We have rewarded fraud, incompetence, and venality by our most powerful elites.

Ambac's investigation found that 97% of the Countrywide loans reviewed by Ambac were had false reps and warranties. Countrywide also engaged in widespread foreclosure fraud.....The financial media treats Bank of America as if it were a legitimate bank rather than a "vector" spreading the mortgage fraud epidemic throughout much of the Western world.

5--How American Income Inequality Hit Levels Not Seen Since The Depression, Huffington Post

Excerpt: America has one of the largest wealth gaps among advanced economies. Based on an inequality measure known as the Gini coefficient, the United States ranks on a par with developing countries such as Ivory Coast, Jamaica and Malaysia, according to the CIA World Factbook.

His research with co-author Thomas Piketty shows the top 1 percentile of households took home 23.5 percent of income in 2007, the largest share since 1928, but that slipped back to 20.9 percent in 2008. (Unlike Census, Saez relies on IRS tax data, which is released with a two-year lag, so he does not yet have figures for 2009.)

"There may be demand for private jets and yachts, but you need a healthy middle-income group (to drive consumption of basic goods)," he said. "In the golden age of capitalism, in the 1950s and 60s, everyone shared in income growth."

6--Report: 1.2 Million Workers could lose Unemployment Benefits next month, Calculated Risk

Excerpt: A new analysis released by the National Employment Law Project today reveals that 1.2 million workers will be cut off of federal jobless benefits by year’s end if Congress fails to renew the federal emergency extensions that expire on November 30th.
...
Of the 1.2 million workers at risk of losing federal benefits, 387,000 are workers who were recently laid-off and are now receiving the six months (26 weeks) of regular state benefits. After exhausting state benefits, these workers would be left to fend for themselves in a job market with just one job opening for every five unemployed workers and an unemployment rate that has exceeded nine percent for 17 months in a row—with no federal unemployment assistance whatsoever.

7--Clear Capital™ Reports Sudden and Dramatic Drop in U.S. Home Prices, Calculated risk

“Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.

... if previous correlations between the Clear Capital and S&P/Case-Shiller indices continue as expected, the next two months will show a similar downward trend in S&P/Case Shiller numbers.

8--How To Think About QE2, Paul Krugman, New York Times

Excerpt: So, here it is: in effect, QE2 amounts to a decision by the US government to shorten the maturity of its outstanding debt, paying off long-term bonds while borrowing short-term. This should drive down long-term interest rates. But how much?

...What happens when the Fed buys long-term government securities? If we consider the Fed and Treasury as a consolidated entity — which, for fiscal purposes, they are — then what happens is that some long-term federal debt is taken off the market, and paid for by issuing more short-term debt in the form of monetary base. It’s just as if Treasury sold 3-month T-bills and used the proceeds to buy back 10-year bonds.

So the question to ask is, how much do we think federal management of its maturity structure matters for the real economy? I think if you put it that way, most people wouldn’t be terribly optimistic.

9--70% of all stock market trades are held for an average of 11 seconds, Washington's blog

Excerpt: As the New York Times dealbook noted in May:

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said

The fact that the vast majority of stock market trades are held for 11 seconds shows that the stock market is not a real market with real traders governed by the law of supply and demand, and that there is no real price discovery.

Friday, October 22, 2010

Today's Best Reads

1--Geithner calls for reducing trade imbalances, Calculated Risk

Excerpt: From a letter .S. Treasury Secretary Timothy Geithner sent to his G-20 counterparts:

“First, G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G-20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance.

Conversely, G-20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand....(Geithner politely informs China that currency manipulation will no longer be tolerated)

2--British fashion victims, Paul Krugman, New York Times

Excerpt: The ... British government seems determined to ignore the lessons of history. Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits... But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack...

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. (The Brits have created the perfect lab experiment which will prove that Keynes was right after all)

3--The tax cut that failed, Ezra Klein, Washington Post

Excerpt: This is a great opening line by Michael Cooper: "What if a president cut Americans’ income taxes by $116 billion and nobody noticed?"

It happened, of course. But the nobody noticing was by design. The Making Work Pay tax credit was built for stealth. Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks. The hope was that they would spend it, and it would thus do more to stimulate the economy.

4--Not letting it happen here--Japan's "lost decade", Modeled Behavior

Excerpt: This is not just sub-prime, this is not just housing. This will get much worse before it gets better.”...The reason I point this out is that the basic path of the recession was totally foreseeable if you paid attention to the incoming data on liquidity demand.

This is key because we are now engaged in a great debate on how to get out of this crisis. I maintain that the type of analysis that foresaw a crisis of this exact nature coming should be given extra weight....

Please, lets not get hung up on whether tax cuts are an excuse to hand out money to the rich. We can cut payroll taxes. We can even provide a payroll tax credit where you get back the first 5000 your family paid in payroll taxes.

I am indifferent to the structure. What matters is that we get funds into the hands of consumers. What matters is that we end the liquidity crisis and reverse the upward trend in unemployment.

5--What should replace Bretton Woods 2?, The Economist

Excerpt: Some suggest that world in which the dollar's role is balanced by other reserve currencies would be more stable. Here's Yang Yao:

In the end, a solution to replace the so-called “Bretton Woods 2” that may naturally emerge from the current world order is the competition, and hopefully cooperation, among several major currencies. Besides the dollar, the euro has played a significant role in global trade and finance. The Japanese yen and the British pound are also around although they have not reached significant primacy. The Chinese yuan may take some share if the Chinese authorities open up the country’s capital account. Currencies in other emerging markets also have hope. The competition among several major currencies will help preventing liquidity from concentrating in a few countries and will constrain irresponsible behaviour in the management of individual currencies.

On top of that, some binding multilateral mechanism is needed to coordinate the exchange rates among the major currencies, especially in bad times. The G20 is a potential venue for such a mechanism. However, the current floating system is inadequate for this mechanism to function; it gives a “legitimate” reason for the US to dump its domestic problems to the rest of the world by devaluing the dollar.

6--As Dollar’s Value Falls, Currency Conflicts Rise, New York Times

Excerpt: Even as Washington chides Beijing over the renminbi, critics accuse the United States and other rich nations of waging an international currency war that harks to the protectionist policies of the 1930s, when nations looked out for themselves rather than working together.

“Today, there is a risk that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices, as countries increasingly go it alone,” Dominique Strauss-Kahn, managing director of the International Monetary Fund, said during a speech in Shanghai this week. “This,” he said, “will surely make everybody worse off.”

The abrupt decline in the dollar — by about 10 percent since early June against major currencies — is upsetting the delicate balance of world economies still recovering from the shocks of the financial crisis.

7--Jobless benefits about to crash, politico.com

Excerpt: With no end in sight to the nation’s high unemployment, the government program to help the jobless is heading for a crash....

The program, which splits funding with the states, is financed through federal and state taxes paid by both employers and employees. Like other forms of insurance, the idea is that the revenue builds up in the good times and is drawn down in bad. The federal government makes up for any temporary shortfall in a bad recession, with loans to the states that have typically been paid back quickly when surpluses return during economic recoveries.

The problem really started after the 1991 recession, when a “jobless recovery” failed to generate the typical unemployment insurance surpluses, leaving states playing catch-up. Another jobless recovery after the 2001 recession set states back further...If nothing is done, current law will require the states to either dramatically cut benefits or dramatically increase taxes, at a time when they are facing larger budget crises that are forcing huge cuts and giant tax increases already

8--Handoff, or Fumble, Noam Scheiber, The New Republic

Excerpt: The question—really more like a nagging terror—is whether something has happened since the recent financial crisis to fundamentally change the way consumers behave, rendering the administration’s model moot. As it happens, there’s a school of wonks that worries this is the case. The godfather of this group is a Japanese economist named Richard Koo, whose framework for thinking about this appears in a book he modestly titled The Holy Grail of Macroeconomics. (Paul Krugman, among others, has identified himself with some of Koo’s ideas.)

Koo’s view is that consumers and businesses who take on enormous debt during a bubble abruptly shift gears once the bubble bursts, spending very little while they pay off loans. Moreover, this stinginess continues until the process of debt-repayment (economists call it “deleveraging”) is complete, creating a huge drain on the economy. In the case of Japan, whose real estate and stock markets collapsed in the early ’90s, this took over a decade. During that time, Koo argues, the only force propping up the economy was massive amounts of government stimulus. He tells a similar story about the Great Depression.

Whereas Carroll assumes people base their saving decisions on the same factors both before and after the crisis, Koo says the way they make decisions beforehand tells you little about their behavior afterward. The crash doesn’t just pummel the value of their assets (like housing). It creates a kind of psychological trauma that preoccupies them with paying down debt before they can think about borrowing again. If you accept Koo’s premise, the data of the last 40 years is of little help in guiding us through the current situation. The episodes we’re talking about—Koo calls them “balance-sheet recessions”—simply didn’t happen at any point in that time-frame.

9--Why French Protestors Have It Right, Mark Weisbrot, counterpunch

Excerpt: France’s retirement age was last set in 1983. Since then, GDP per person has increased by 45 percent. The increase in life expectancy is very small by comparison. The number of workers per retiree declined from 4.4 in 1983 to 3.5 in 2010. But the growth of national income was vastly more than enough to compensate for the demographic changes, including the change in life expectancy. The situation is similar going forward: the growth in national income over the next 30 or 40 years will be much more than sufficient to pay for the increases in pension costs due to demographic changes, while still allowing future generations to enjoy much higher living standards than people today. It is simply a social choice as to how many years people want to live in retirement and how they want to pay for it.

If the French want to keep the retirement age as is, there are plenty of ways to finance future pension costs without necessarily raising the retirement age. One of them, which has support among the French left – and which Sarkozy claims to support at the international level -- would be a tax on financial transactions. Such a “speculation tax” could raise billions of dollars of revenue – as it currently does in the U.K. – while simultaneously discouraging speculative trading in financial assets and derivatives. The French unions and protesters are demanding that the government consider some of these more progressive alternatives.

It is therefore perfectly reasonable to expect that as life expectancy increases, workers should be able to spend more of the lives in retirement. And that is what most French citizens expect.