Monday, January 31, 2011

Today's links

1--Banks get the green-light to cook the books, Wall Street Journal

Excerpt: The banks got what they wanted. Accounting rule makers on Tuesday dropped a plan to require banks to value loans using market prices.

That means investors will remain reliant on banks' own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital. Taxpayers, who as a result were called upon to bail out numerous institutions, also are left more vulnerable.

The Financial Accounting Standards Board's original proposal, put forward last spring, had called for banks to reflect market values in the total worth of their assets, which would affect their equity....Banks generally oppose the use of market prices because, they say, it makes their results more volatile. Their intense lobbying efforts against the proposal likely got a leg up after FASB Chairman Robert Herz, who had supported the plan, unexpectedly departed in August. FASB cited strong opposition it received in public comments in changing course.

Its decision means banks largely will continue to value loans as they do today, basing values on their original cost less a reserve to reflect the possibility of loss. FASB has yet to decide if the market value for loans will be disclosed on the balance sheet or buried in the footnotes, as they are now.

2--Banks grip on prime shadow inventory growing: Morgan Stanley, Housingwire

Excerpt: Whether they like it or not, the nation's banks control most of the country's shadow inventory, according to a report Friday from Morgan Stanley.

Even more, properties in imminent default are typically cheaper homes with prime mortgages. ...The shadow inventory, they say, is the biggest problem for average Americans living in the nation's major cities.

And, what's more, the homes are more and more being controlled by the banks, as opposed to Fannie Mae, Freddie Mac or private securitization trusts....

Of the shadow inventory, 75% are valued below $250,000, showing that McMansions have a small share of delinquencies....Further, the shadow inventory is growing across all of the United States. The analyst expect that more than 8 million liquidations are in order over the next five years before housing stabilizes.

"While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country," said the analysts.

3--Hedge Fund Guy's New Best Friend Is Water, Mark Gilbert, Bloomberg

Excerpt: Water is set to become hedge-fund guy’s new best friend forever....More than 100 executives, including national presidents, gathered at the World Economic Forum’s annual meeting in Davos, Switzerland, yesterday to discuss water. There are enough hedge- fund hangers-on at the conference to suspect that at least some wangled an invite.

“Water is going to shape the path of economic growth in the countries in which we work,” says Rachel Kyte, a vice- president at the International Finance Corp., the World Bank’s private-investment arm. The IFC is embarked on “a data-driven exercise which can put investable propositions in front of private-sector leaders.” ...

“A rapidly rising global population and growing prosperity are putting unsustainable pressures on resources,” the WEF said in its 2011 report on global risks. “Demand for water, food and energy is expected to rise by 30 to 50 percent in the next two decades, while economic disparities incentivize short-term responses in production and consumption that undermine long-term sustainability. Shortages could cause social and political instability, geopolitical conflict and irreparable environmental damage.”

I asked Kyte of the IFC whether she was concerned about speculators getting involved in the nascent water industry. Her response didn’t exactly fill me with confidence.

“We see increased interest across the full spectrum of financiers, from commercial banks to private equity,” she replied. “There are the normal barriers to investment: country risk, foreign exchange risk, technology risk. Most investors need instruments and intermediation to get into the business. So we have to provide tools, finding ways to share risk to get private finance involved.”

4--Conservative Austerity Idea Is Failing, David Blanchflower, Bloomberg

Excerpt: Sorry, fiscal austerity doesn’t work. For evidence, look no further than the U.K....There is little historical precedent in the real world, though lots of fantasizing in the made-up world of economic theorists, to suggest that fiscal austerity works. The best example of austerity’s failure is the double-dip that occurred in the late 1930s in the U.S., when spending was reduced too soon in a nascent recovery. In contrast, the U.K. didn’t have a double-dip because it was engaging in classic Keynesian spending as it began re- arming.

Claims are often made that there are examples where fiscal austerity has worked. But it turns out that this is generally due to the monetary stimulus that accompanied it, as in the U.K. under Margaret Thatcher in the 1980s. The most frequently cited example is Canada, but it was able to cut interest rates while at the same time benefiting from the Clinton boom of the 1990s....

Fiscal austerity has already been started in Greece, Ireland, Spain and Portugal, and this seems to be pushing all of them back into recession. Over the last four quarters, growth in Greece was negative and falling, and bond investors are once more demanding sky-high returns to compensate their risk. The excuse in these countries was that they have little choice because they are stuck in the European monetary union and don’t have the ability to depreciate their exchange rate.

5----Residential Investment near record low as Percent of GDP, Calculated risk

Excerpt: Residential Investment (RI) increased slightly in Q4, but as a percent of GDP, RI is near a post-war low at 2.24% - essentially unchanged from Q3.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units.

6--National Average: 492 Days From Default to Foreclosure, The Wall Street Journal

Excerpt: 492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

7--Inside Obamanomics, Ismael Hossein-Zadeh, Counterpunch

Excerpt: Since there was no compelling grassroots pressure in response to either the First Great Depression of 1873-97 or the long recession of the 1970s, crisis management policies in both instances were decisively of the Neoliberal, supply-side type: suppression of trade unions and curtailment of wages and benefits; promotion of mergers, concentrated industries and big business; extensive deregulations and generous corporate welfare plans; in short, huge transfers of income from labor to capital. Likewise, a glaring lack of grassroots resistance in the face of the current long recession has allowed the ruling kleptocracy (both in the US and beyond) to adopt similarly brutal austerity policies that are gradually reviving financial/corporate profitability at the expense of the poor and working people. (Somethings never change)

8--The truth about the Palesitinian-Israeli peace talks revealed by Wikileaks, Aljazeera

Excerpt: After days of furiously shooting the messenger, (in truth, simply making public a privately held belief), the Palestinian Authority may, finally, be seeing the real value of the Palestinian Papers.

Talking to the Guardian, the P.A.'s Saeb Erekat nails the key issue:

"What should be taken from these documents is that Palestinian negotiators have consistently come to the table in complete seriousness and in good faith, and that we have only been met by rejection on the other end,"

No denying there are still serious questions to be asked about the whole process and the way the PA has dealt with the negotiations, (and indeed with their own constituents,) but the bottom line is surely this:

"Conventional wisdom, supported by the press, has allowed Israel to promote the idea that it has always lacked a partner. If it has not been before, it should now be painfully obvious that the very opposite is true. It is Palestinians who have lacked, and who continue to lack, a serious partner for peace."

Until now, the media has uniformly interpreted these papers as evidence of failure on the Palestinian side; perhaps that focus might now switch to what the paper's reveal about Israel's role in all of this.

Particularly revealing in the whole process has been this one quote from Tzipi Livni, that seems to sum up the past few decades:

“Israel takes more land [so] that the Palestinian state will be impossible . . . the Israel policy is to take more and more land day after day and that at the end of the day we’ll say that is impossible, we already have the land and we cannot create the state”. She conceded that it had been “the policy of the government for a really long time”.

9--Immelt, GE Capital, and the Financialization of Manufacturing, Rortybomb

Excerpt: GE Capital, the major subsidiary of GE, is a major shadow bank. It used GE’s high-quality credit rating to become a major player in the capital markets, much in the same way AIG FP used the boring insurance high credit rating. GE Capital was the single largest issuer of commercial paper going into the financial crisis.

GE Capital received major bailouts during the crisis, including having the FDIC guarantee more than $50 billion dollars of unsecured debt that was issued. To put that in perspective, only about $24 billion of GE Capital’s funding comes through deposits, allowing a shadow bank with massive unsecured debt obligations and only a small depository base to be carried through the financial panic....

GE has been at the forefront of blurring a “financial services”-centric model of business onto the remains of a hollowed out manufacturing base, one kept in a minimal state just strong enough to qualify for high credit scoring. Marcy Wheeler has written about how that manufacturing part of the company is driven by outsourcing. In his recent, excellent book Cornered, Barry Lynn talks about how GE’s manufacturing business model becomes focus on business lines with government buyers (defense) and with government regulators and industry standard setters that can be worked (health care). They use the ratings agencies to only look at those business lines when determining the ratings they get, and lever up in the shadow banking network off that. Success!

Friday, January 28, 2011

Today's links

1-- FCIC Insiders Say Report Gives Wall Street a Free Pass, Simply Sought to Validate Conventional Wisdom About Crisis, Naked Capitalism

From the very outset, the Financial Crisis Inquiry Commission was set up to fail......So with expectations for the FCIC low, recent reports that the panel urged various prosecutors to launch criminal probes were a hopeful sign that the commission might nevertheless come out with some important findings. But correspondence from insiders in the last few days suggests otherwise. One, for instance, wrote, “I’m still in the process of getting the stink out of my clothes.”

These ideologically-neutral sources close to the investigation depict the commissioners as having pre-conceived narratives and of fitting various tidbits unearthed during the investigation into these frameworks, with the majority focusing more on the problems caused by deregulation and the failure of the authorities to use even the powers they had, while the minority assigns blame to government meddling, particularly housing-friendly policies.....

These insiders see both sides as wrong, and want to encourage investigative reporters to challenge both the majority and dissenting accounts. They contend that both versions help perpetuate the myth that Wall Street was as much a victim of the crisis as anyone else.

One of these sources sent this document in an effort to question the notion that any of the reports coming out of the FCIC were the result of a fact-based investigative process, meaning operating in an objective manner, scouring information to see which theories or storylines seemed most consistent with what had been unearthed. As you will see, he makes clear that he regards all of the FCIC narratives as falling well short in explaining the crisis....

The Commission was able to do comparatively little in the way of forensic work; the bulk of its effort was devoted to the hearings, which delivered relatively little in the way of new insight

As indicated above, the FCIC report is guilty of “drunk under the streetlight” behavior, of trying to fit its story to already known or easily found information. Even though the report makes extensive use of salacious extracts from e-mails, the insiders content that none of these information in these e-mails illuminates information critical to the crisis trajectory.

As a result, the report underplays or completely misses the real drivers of the crisis. Specifically, it gives short shrift to the obvious epicenters:

– How a previously benign securitization process allowed for the creation and sale of bad mortgages on a widespread basis

– How inadequate disclosure as alleged in a number of recently filed big lawsuits allowed mortgage backed bonds that contained many loans that fell below the underwriters’ promised standards to be sold to investors

– How a shadow banking system ballooned with products increasingly based on dubious financial instruments

– How CDOs that were devised by subprime shorts, most importantly the hedge fund Magnetar, drove the demand for the worst sort of subprime loans, extended the toxic phase of the subprime bubble well past its sell-by date

– How the dealer banks knowingly created toxic products, and via flawed risk management processes, allowed traders to retain significant portions of them via strategies that amounted to gaming of the banks’ bonus systems...

As FCIC commissioner Peter Walliston observes:

Like Congress and the Obama administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis…The Commission did not seriously investigate any other cause and did not effectively connect the factors it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally fails to show how practices that had gone on for many years suddenly caused a worldwide financial crisis. In the end, the majority’s report turned out to be a just-so story about the financial crisis, rather than a report on what caused the financial crisis…..

From the beginning, the Commission’s investigation was limited to validating the standard narrative about the financial crisis—that it was caused by deregulation or lack of regulation, weak risk management, predatory lending, unregulated derivatives, and greed on Wall Street. Other hypotheses were either never considered or were treated only superficially. In criticizing the Commission, this statement is not intended to criticize the staff, who worked diligently and effectively under difficult circumstances and did extraordinarily fine work in the limited areas they were directed to cover. The Commission’s failures were failures of management.

By having the FCIC validate widely accepted, superficial, and ultimately inadequate explanations of the crisis, the Obama administration continues in its policy of looking forward rather than back, when looking back is the foundation of any serious scientific, investigative, or prosecutorial process. The odds are high that the media and the public at large will mistake the extensive use of anecdote in the FCIC report for accuracy and completeness. As with so many accounts of the crisis, the artful use of detail will yet again have the effect of diverting attention from the true drivers of the crisis and thus leave Wall Street free to devise new ways to wreck the economy for fun and profit.

2--Sarkozy mauls JP Morgan's Dimon in Davos brouhaha, Reuters

Excerpt: French President Nicolas Sarkozy clashed with the head of U.S. bank JP Morgan Chase (JPM.N) at the Davos forum on Thursday, telling him bankers had done things which defied common sense....

But when he rose at a later session of the World Economic Forum to ask Sarkozy to get the G20 to avoid overregulation of banks, the French president launched into a broadside accusing financiers of behaviour that he said had caused the crisis.

"The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything," Sarkozy said to Dimon. "It caused a lot of anger."... "The world was stupefied to see one of five biggest U.S. banks collapse like a house of cards," he told a plenary session of the Davos Forum.

"We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense. That's what happened."

The United States government spent hundred of billions of dollars of public money to bail out financial institutions, after the dramatic failure of Lehman Brothers in 2008, through the controversial Troubled Asset Relief Program (TARP). "Not all banks needed that TARP. Not all banks would have failed," Dimon said at the earlier session. "A lot of banks were stabilising the problem -- JP Morgan bought Bear Stearns because the U.S. asked us to."

However, Federal Reserve Chairman Ben Bernanke told a U.S. investigative panel last year that the credit crisis surpassed the Great Depression of the 1930s in severity and put 12 of the 13 most important U.S. financial firms at risk of failure.

"If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure," he said in comments disclosed earlier on Thursday.

"Even Goldman Sachs (GS.N), we thought there was a real chance that they would go under," he said....

Sarkozy said bankers were wrong to resist tough rules. "There is an ocean between flexibility and the scandal we saw," he said. "So if people present me as obsessed with regulation, it's because there is a need for regulation.

"I don't contest the principle of securitisation, but when one offshore country guaranteed 700 times its GDP, are we in the market economy or in a madhouse?"

3--Financial Crisis Inquiry Commission report, Calculated Risk

Excerpt: Here are the conclusions.

• We conclude this financial crisis was avoidable. ...

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. ... Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.

This is absolutely correct. In 2005 I was calling regulators and I was told they were very concerned - and several people told me confidentially that the political appointees were blocking all efforts to tighten standards - and one person told me "Greenspan is throwing his body in front of all efforts to tighten standards".

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. ...

• We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis. ...

• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. ...

• We conclude there was a systemic breakdown in accountability and ethics....

• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. ...

• We conclude over-the-counter derivatives contributed significantly to this crisis. ...

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction." (many mea culpas)

4--Global food prices and inflation targeting, VOX

Excerpt: Rising food prices once again pose central banks a tricky question. How far should they ignore food price inflation? This column suggests that food tends to have stronger predictive power on global inflation cycles than oil. The problem is more severe in emerging markets where consumption basket weights for food are two or three times larger than in rich nations. Central banks should pay close attention....

* Following a steep acceleration initiated last summer, global food prices (as measured by the IMF global food price index) rose by 21% in the year leading up to November 2010 (latest available figure).
* Global average food prices are now back to their pre-crisis peak, despite a collapse in the wake of the 2008/09 financial crisis,

Coupled with the most recent round of weather setbacks and slashes in key crop forecasts worldwide, there is little hope that such inflationary pressures will abate. If anything, the US and EU economic recovery will exacerbate them....

With food typically weighing 20% to 50% in national consumption baskets in developing countries, as opposed to 12% to 15% in core advanced countries (see Table 1), this “decoupling” in the inflation outlook is hardly surprising. But it does not make the issue of global food inflation any less critical looking forward....

every single inflation upturn over the past four decades has been preceded (with a one to two-year lag) by an uptick in world food prices; this causality relation is confirmed by formal econometric tests. To be sure, one could arguably blame such past slippages on the looser monetary regimes of the 1970s and 1980s. Yet, later experience indicates that this transmission mechanism remains quite alive in the more recent era of inflation targeting too....n short, there is substantial evidence – both recent and well-past – that food prices lurk behind large international swings in inflation rates.

5---Rich Rest Up as Markets Forget Crisis Lessons, Susan Antilla, Bloomberg

Excerpt: Investor protection is out. Remember all the talk about making the markets safe for investors? Well, get over it. Dodd-Frank instructed the Securities and Exchange Commission to set up five new offices, including one to handle whistleblower cases, and a committee to represent the interests of investors on issues like fees and disclosure. But on Dec. 2, the agency put those efforts on hold because of “budget uncertainty.”

A frozen budget has also forced the SEC to scale back its plans to get up to speed with the dynamics that resulted in the so-called flash crash on May 6, 2010, when the Dow Jones Industrial Average fell almost 1,000 points in a matter of minutes. The agency had planned to hire five math whizzes acquainted with the sorts of financial algorithms involved in the instant meltdown. Instead, it’s settled for one.

-- Pandering to business is in. Darrell Issa, the car- alarm millionaire twice accused of auto theft (both charges were dropped), and now the California Republican who is chairman of the House Oversight and Government Reform Committee, sent letters to 150 companies and business trade groups in December asking them which regulations and rules might be restraining job growth. He didn’t really have to ask, because we all know that the answer, of course, is: “All of them.”

6---Wage Inflation Rampant In China As More Provinces Plan Minimum Salary Hikes, zero hedge

Excerpt: Several days ago we highlighted that wage inflation in China spreading after Shanghai announced it would hike minimum salaries by 10%. Today, through Global Times we learn that this is just the beginning. Or the continuation rather: it seems that 30 provinces had already hiked minimum wages in 2010: "By the end of 2010, 30 provincial-level regions had raised the standard for the minimum wage, with an average increase of 22.8 percent year-on-year., Yin Chengji, spokesman for the Ministry of Human Resources and Social Security (MHRSS), said Tuesday.

According to him, 29 provinces have issued the guideline for the minimum wages, and the benchmark line grew about 2 percent. In Shanghai, the local minimum wage was the highest nationwide, totaling 1,120 yuan ($170.2) per month." And 2011 will be even worse: " Also, according to a China Business News (CBN) report Tuesday, in 2011, many areas would continue to raise the standard. A Xinhua News Agency report Wednesday revealed that northern Chinese city of Tianjin is considering raising the minimum working wage by 16 percent this year amid rising inflationary pressure and labor shortages." We are confident America's workers will be delighted to know that Bernanke's massively destructive monetary policies are finally resulting in higher salaries... In China. But wait: this also means US consumer purchasing power is about collapse as since very soon all imported Made in China trinkets are about to get far more expensive as already razor thin margined China producers scramble to raise costs to their primary export market.

7---Banking `Toxic Cocktail' Is Too Big to Forget: Simon Johnson, Bloomberg

Excerpt: ...the very effectiveness of Treasury actions and statements in late 2008 and early 2009 had undeniable side effects, “by effectively guaranteeing these institutions against failure, they encouraged future high-risk behavior by insulating the risk-takers who had profited so greatly in the run-up to the crisis from the consequences of failure.”

And this encouragement isn’t abstract or hard to quantify. It gives “an unwarranted competitive advantage, in the form of enhanced credit ratings and access to cheaper capital and credit, to institutions perceived by the market as having an implicit Government guarantee.”

Of course, the Dodd-Frank financial-reform legislation was supposed to end too big to fail in some meaningful sense. But Barofsky is skeptical -- and with good reason. Our largest banks are now bigger, in dollar terms, relative to the financial system, and relative to the economy, than they were before 2008. So how does that make it easier to let them fail?

Big Gets Bigger

At the end of the third quarter of 2010, by my calculation, the assets of our largest six bank holding companies were valued at about 64 percent of gross domestic product -- compared with about 56 percent before the crisis and about 15 percent in 1995. Barofsky quotes Thomas Hoenig, president of the Kansas City Federal Reserve, who uses similar numbers and draws the same conclusion: The big banks have undoubtedly become bigger.

8----Fed Watch: The “Recalculating” Debate, Tim Duy, via Economist's View

Excerpt: Supporting sufficient aggregate demand to maintain full employment looks to have required supporting relative levels of net worth well above a decades-long baseline. And pushing net worth to those levels was a consequence of asset price bubbles. Hence, it appears that the demand generated by that wealth was “fake.” Moreover, that “fake” demand arguably induced a supply side effect by pushing capital first into information technology and then into housing. To be sure, ultimately the impacts of such capital misallocations will fade away. Information technology depreciated rapidly, and the excess housing stock will eventually be absorbed by a growing population. It is not quite obvious, however, why this adjustment needs to extend to such a large portion of the workforce. The answer, I think, is not the housing adjustment itself, but the loss of general demand precipitated by the housing decline and subsequent balance sheet malaise.

The wealth-supported demand surely was not “fake,” as real goods and services were indeed purchased. But it was ephemeral, evaporating with the popping of bubbles. So it should be of little surprise the Federal Reserve is viewed by some as doing nothing more than supporting another round of “fake” demand. Fed officials probably compound this problem by citing the stock market increase as evidence that QE2 is working. Via the Wall Street Journal:

In recent weeks, the Federal Reserve has been turning to an unusual metric to prove the potency of its bond-buying program: the stock market.

Comments from Fed Chairman Ben Bernanke and other officials, as well as research by the central bank, cite rising stock prices as a sign that the central bank’s $600 billion bond-buying program is working to bolster the economy.

Of course, it is perfectly reasonable for officials to note that high equity prices signal improving economic prospects, the latter a consequence of their policy stance. Some, however, may interpret this as further evidence that the Fed is simply trying to create another asset price bubble, which will, if history is any guide, will also prove to be fleeting. The resulting aggregate demand will then be viewed as “fake.” In this light, the Federal Reserve is not really fixing anything, just papering over the underlying problem.

9--Stop the Austerity Craze, Mark Ames,

Excerpt: Now, at last, the same austerity programs that have led to massacres, wars, pain and catastrophe all over the world are finally coming home to the very people and country they were intended to poison all along.

Why now, you ask? Why, after all the economic destruction and inequality that resulted from decades of deregulation, privatization, slashing taxes on the rich, and relentless bashing of evil big-government—why would we adopt a far more purified, radical version of the same disastrous free-market program? Why would we have to take more pain medicine from the same people who already poisoned us?

Simple: Because we’re weakened from having our wells poisoned by free-market, libertarian ideology over the past three decades. We’re weaker, poorer, we’ve turned against the unions and the government, the only two potential sources of counter-power to billionaires and corporations — what predator wouldn’t move in for the kill at this very moment? Now’s the perfect time to take everything that Austrian economics has to offer to its practitioners. Plundering the weak and shooting them in their heads when they resist — that’s the definition of courage to America’s degenerate ruling class.

10---New-home sales in 2010 fall to lowest in 47 years, AP via

Excerpt: Buyers purchased the fewest number of new homes last year on records going back 47 years.

Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

.... economists say it could be years before sales rise to a healthy rate of 600,000 units a year.

"The percentage rise in sales looks impressive but 10 percent of next-to-nothing is still next-to-nothing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, referencing the December increase. "New home sales are bouncing around the bottom and we see no clear upward trend in the data yet."

11-- Ian Fraser: Is the House of Lords’ Crisis Inquiry Putting the FCIC to Shame?
Naked Capitalism

Excerpt: The many inquiries into the financial crisis have turned over plenty of stones but have failed to find any smoking guns. But the House of Lords economic affairs committee’s inquiry “Auditors: market concentration and their role” is making strides in identifying and maybe rooting out the accounting shenanigans that lay at the heart of the crisis.

At a recent session of the HoL inquiry, UK-based investors said that IFRS (international financial reporting standards) had encouraged imprudent, reckless and even illegal behavior by UK and Irish banks, enabling them to deceive investors, boost executive bonuses and ultimately destroy their institutions at taxpayers’ expense. (See text pages 72-73 of this report for a fuller explanation of the shortcomings of IFRS)

The investors told the Lords – who included the former UK chancellor Lord Lawson – that IFRS had enabled bank boards and auditors to present their institutions as massively profitable, when in fact they were barely profitable or even loss-making — and all in ways that auditors could invariably claim “complied with the standards”.

In turn this enabled the banks to make imprudent payouts to executives (in the shape of bonuses) and to shareholders (in the shape of dividends) which in truth they could not afford to make.....IFRS’s biggest flaw, however, is that it gave bank managements and their auditors too much latitude in the valuation of assets, which in the upcycle created an illusion of capital strength and egged managements to indulge in more and more poor quality lending, creating a Ponzi-like scenario in the frothiest market sectors. It also enabled bank managements to make ludicrously low provisions for bad debts.

Thursday, January 27, 2011

Today's links

1-- Bankers Kill Off Mark-To-Market For Good, zero hedge

Excerpt: From the Wall Street Journal--The Financial Accounting Standards Board preliminary vote would allow banks to continue valuing many of their loans at amortized cost, an adjusted version of their original cost, as they do now. That backtracks on an FASB proposal last May to expand fair value to bank loans. The reversal is a victory for the banking industry, which says it would have hurt lending and unfairly reduce banks' book value. Supporters of the FASB fair-value proposal say it would have improved transparency and unmasked potential weakness at banks....

FASB changed direction on how to value loans because of "strong signals from the board's constituents," FASB Chairman Leslie Seidman said during a webcast Tuesday. She also noted that some loans—including those that banks trade actively instead of retaining in order to collect the payments on them—will have to be valued at market prices....

At some large banks, their loans' fair value is billions of dollars less than their carrying amount.

That would dramatically reduce their shareholder equity—or assets minus liabilities—if the loans had to be carried at fair value.

Investors have said fair-value information is important to them even if they don't think it should be the criteria for valuing loans on the balance sheet, FASB members said.

2---The Competition Myth, Paul Krugman, New York Times via economist's View

Excerpt: Meet the new buzzword, same as the old buzzword. In advance of the State of the Union, President Obama has telegraphed his main theme: competitiveness....

It’s true that we’d have more jobs if we exported more and imported less. But ... ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete... The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.

My guess is that we’re mainly talking about packaging here. ... But even if he proposes good policies, the fact that Mr. Obama feels the need to wrap these policies in bad metaphors is a sad commentary on the state of our discourse.

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. ... For whatever reason, however, the teachable moment came and went with nothing learned.

3--The Fed's new policy tools, Econbrowser

Excerpt: The Fed has therefore been trying to find other ways to stimulate the economy by buying longer term assets. Hess Chung and colleagues expressed the idea this way:

A primary objective of large-scale asset purchases is to put additional downward pressure on longer-term yields at a time when short-term interest rates have already fallen to their effective lower bound. Because of spillover effects on other financial markets, such a reduction in longer-term yields should lead to more accommodative financial conditions overall, thereby helping to stimulate real activity and to check undesirable disinflationary pressures through a variety of channels, including reduced borrowing costs, higher stock valuations, and a lower foreign exchange value of the dollar. In many ways, this transmission mechanism is similar to the standard one involved in conventional monetary policy, which primarily operates through the influence on long-term yields of changes to the current and expected future path of the federal funds rate. ...

But even if one is unconvinced that the Fed was able through these actions to provide the significant benefits claimed in the above analysis, there is another channel discussed by Chung and coauthors which may have been one of the most important ways in which QE2 was beneficial:

Finally, the Federal Reserve's asset purchase program could potentially have stimulated real activity by changing public perceptions about the likely longer stance of monetary policy, conventional and unconventional; for example, it may have led market participants to expect that the FOMC would respond more aggressively to high unemployment and undesirably low inflation than was previously thought. In a similar vein, initiation of the program may have diminished public perceptions of the likelihood of extreme tail events, such as deflation, potentially lowering risk premiums and increasing household and business confidence, thereby raising agents' willingness to spend.

Whatever else you may say, QE2 did seem to have an effect on public perceptions. And that has always been one of the most important elements of the conduct of conventional monetary policy as well.

4--The pluses and minuses of reluctant consumers, Macroblog

Excerpt: As to the first part of the equation—an increase in saving by U.S. consumers—Atlanta Fed President Dennis Lockhart offered this yesterday in remarks prepared for the Atlanta Rotary Club:

"Households have been actively deleveraging—that is, working down debt levels and saving more of their income. The savings rate has increased from a little over 1 percent in 2005 to more than 5 percent currently.

"Consumer debt as a percent of disposable income has declined markedly over the past three years after rising steadily since the 1980s. Most nonmortgage consumer debt reduction has been in credit card balances. As consumers have reduced their debt, the share of income used to service financial obligations has fallen sharply to the lowest level in a decade.

"Consumer action to reduce debt is not the whole deleveraging story. In the numbers, the decline in overall household indebtedness has been highly affected by bank write-offs. Also, banks' stricter underwriting requirements for new consumer debt have contributed to runoff.

"I expect the phenomenon of household deleveraging to continue."...

"Finally, I acknowledge the potential that economic performance this year could surprise me on the upside. Businesses, for example, are sitting on lots of cash. Cash accumulation is not something that can continue forever, particularly in the case of public companies. It may not take much weakening of headwinds to unleash some of the economic forces that thus far have been bottled up."

5--Mortgage applications tumble 12.9% as refinancing activity falls 15.3%, Housingwire

Excerpt: The level of mortgage applications took a turn for the worse last week, as refinancing activity declined significantly.

The Mortgage Bankers Association said its market composite index decreased 12.9% on a seasonally adjusted basis for the week ended Jan. 21. Unadjusted, the index fell 12% from the prior week. The MBA said results don't include an adjustment for last Monday's Martin Luther King Jr. holiday.

After rising for three weeks, the number of refinancing applications fell 15.3% last week to the lowest point in 12 months, according to the MBA. And purchase applications didn't fare any better dropping 8.7% to the lowest point since October.

6--Failure to end "too big to fail" could trigger next financial crisis: SIGTARP, Housingwire

Excerpt: Institutions and their leaders that survived the financial crisis through government bailouts are encouraged to pursue the same sort of behavior that could trigger the next financial crisis, the Special Inspector General for the Troubled Asset Relief Program said in a report due to Congress Wednesday.

But even if regulators can successfully implement strong enough provisions under the Dodd-Frank Act to thwart companies growing "too big to fail," the ultimate success of the legislation will ultimately hinge on market perception, according to the report.

"As long as the relevant actors (executives, rating agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist," SIGTARP said.....

Kansas City Federal Reserve Bank President Thomas Hoenig reported in December that the five largest financial institutions have grown 20% since TARP was enacted. Even more staggering, these companies control $8.6 trillion in financial assets, the equivalent to 60% of the gross domestic product....."Thus far, the Dodd-Frank Act appears not to have solved the perception problem," SIGTARP concluded. "The largest institutions continue to enjoy access to cheaper credit based on the existence of the implicit government guarantee against failure. … The ultimate cost of TARP will remain unknown until the next financial crisis occurs."

7--BP Accused by Lawyers of Breaking Racketeering Law in Spill, Bloomberg

Excerpt: BP was accused by oil-spill victims’ lawyers of breaking civil racketeering law by engaging in acts that led to the worst such disaster in U.S. history.

“BP engaged in a pattern of fraudulent conduct directed at regulators from the inception of the Macondo project, continuing through and after the spill and to this day,” victims’ lawyers Stephen Herman and James Roy, said yesterday in a court filing in New Orleans. “BP’s fraudulent actions and omissions were part of a broader pattern of unlawful conduct that it has employed over the years to place profits over safety.”...

In another development yesterday, Mississippi Attorney General Jim Hood asked the judge overseeing oil-spill litigation against London-based BP to take an oversight role to “correct deficiencies” in the $20 billion spill-claims fund run by Kenneth Feinberg....

Critics contend Feinberg has delayed or denied claims without adequate explanation and established protocols that encourage cash-strapped claimants to accept small, quick payments to avoid years of litigation.

RICO Filing

Herman and Roy claimed in yesterday’s 93-page RICO filing that BP knowingly broke U.S. environmental laws, skirted federal rules on offshore oil and gas extraction, and misrepresented its ability to stop and clean up a deepwater spill....

The explosion and spill “were foreshadowed by a string of disastrous incidents and near misses in BP’s operations on land and at sea,” the attorneys said. “BP has, since at least 2001, used this enterprise to conduct the related acts of mail and wire fraud comprising the pattern of racketeering.”...

BP was “on notice” of flaws with the rig’s blowout preventer, alarm systems, ballast systems and other “significant deficiencies” after a September 2009 company audit of the Deepwater Horizon found 390 overdue maintenance jobs, many of which were of high priority, the lawyers said.

They also claim BP well managers intentionally misrepresented portions of the Macondo well-drilling plan to regulators and misled spill responders on the best methods for stopping the underwater gusher, which released more than 4.1 million barrels of crude into the Gulf of Mexico.

8--Fed Watch: Inevitable Inflation Fears, Tim Duy, via Economist's View

Excerpt: If inflation abroad is a problem, it is not because the Federal Reserve has set rates too low, but because emerging markets been unwilling to allow their currencies to appreciate sufficiently against the Dollar. See, for example, recent Dollar buying on the part of Brazil. See also Paul Krugman, who illustrates the clear difference in emerging and developed nation industrial production trends. Again, if inflation abroad is a problem, it is one that emerging markets need to tackle themselves.

Expect global tensions to continue building as emerging markets fight the Fed. While the Fed may identify higher commodity prices as a potential concern, policymakers are not likely to reverse course and tighten policy unless higher commodity prices push through to core inflation. Such an outcome appears unlikely given persistently high unemployment. Consider too that the likely outcome of rising commodity prices is to slow US growth, thereby decreasing the odds of pass-through to core.

I have said this before – I do not see how this ends well. Given that the Fed is not likely to back down from this fight, emerging markets need to put the brakes on their internal inflation issues, the sooner the better. Otherwise they will be facing pain of a real inflation crisis, one that requires stepping on the brakes even harder. How this story unfolds this year will determine of the global economy can transition to a sustainable, balanced growth trajectory, or plunges into yet another of the seemingly all-too-frequent crises.

9--Modern-day slaves' story repeats daily in plain sight, Miami Herald

Excerpt: For up to 16 hours daily, they worked at posh country clubs across South Florida, then returned to deceptively quiet houses in Boca Raton where they were captives -- and in the most dreadful cases, fed rotten chicken and vegetables, forced to drink muriatic acid and repeatedly denied medical help.

The 39 servers, lured to the United States by the cliché of a decent dollar and a promising next chapter, instead became imported modern-day slaves two continents away from their homeland. Their story repeats in plain sight most every day in South Florida: barely paid -- or unpaid -- people forced to toil in fields, work as domestics in hotels and restaurants or in the sex industry, an outsized regional problem authorities are emphasizing in January, Human Trafficking Awareness Month.

``This is organized crime where humans are used as products. We are talking about selling a person over and over and making large sums of money,'' says Carmen Pino, U.S. Immigration and Customs Enforcement Homeland Security Investigations Assistant Special Agent in Charge. ``What people need to realize is that human trafficking is happening here, it's a big problem. It could be happening in the restaurant where you eat, at your nail salon, in your neighborhood. It's not just something that happens in foreign countries.''

While difficult to pluck the numbers from a landscape of silence and fear, federal, state and local authorities know South Florida is among the nation's three top capitals of human trafficking, a $36 billion industry defined as the recruitment and harboring of a person for labor or services through force, fraud or coercion.

Wednesday, January 26, 2011

Today's links

1--Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’, By James Crotty, PERI, U of Mass. Amherst

Abstract: The main thesis of this paper is that the ultimate cause of the current global financial crisis is to be found in the deeply flawed institutions and practices of what is often referred to as the New Financial Architecture (NFA) – a globally integrated system of giant bank conglomerates and the so-called ‘shadow banking system’ of investment banks, hedge funds and bank-created Special Investment Vehicles. The institutions are either lightly and badly regulated or not regulated at all, an arrangement defended by and celebrated in the dominant financial economics theoretical paradigm – the theory of efficient capital markets. The NFA has generated a series of ever-bigger financial crises that have been met by larger and larger government bailouts. After a brief review of the historical evolution of the NFA, the paper analyses its structural flaws. The problems discussed in order are: 1) the theoretical foundation of the NFA – the theory of efficient capital markets – is very weak and the celebratory narrative of the NFA accepted by regulators is seriously misleading; 2) widespread perverse incentives embedded in the NFA generated excessive risk-taking throughout financial markets; 3) mortgage-backed securities central to the boom were so complex and nontransparent that they could not possibly be priced correctly; their prices were bound to collapse once the excessive optimism of the boom faded; 4) contrary to the narrative, excessive risk built up in giant banks during the boom; and 5) the NFA generated high leverage and high systemic risk, with channels of contagion that transmitted problems in the US subprime mortgage market around the world. Understanding the profound problems of the NFA is a necessary step toward the creation of a new and improved set of financial institutions and practices likely to achieve core policy objectives such as faster real sector growth with lower inequality.

2--Financial Crisis Was Avoidable, Inquiry Finds, New York Times

Excerpt: The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”...

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.” ...The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

The report does knock down — at least partly — several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.

3--U.S. Home Prices Slump Again, Hitting New Lows, New York Times

Excerpt: A new slide in housing prices has begun in earnest, with averages in major cities across the country falling to their lowest point in many years.

Prices in 20 major metropolitan areas slid 1 percent in November from October, according to the Standard & Poor’s Case-Shiller Home Price Index released Tuesday. The index has fallen 1.6 percent from a year ago.

Nine of the 20 cities in the index sank in November to new lows for this economic cycle: Chicago; Las Vegas; Detroit; Atlanta; Seattle; Charlotte, N.C.; Miami; Tampa; Fla.; and Portland, Ore. Only a handful of places — essentially, California and the District of Columbia — went counter to the trend and had rising prices over the last year.

Whether the long-predicted double dip is looming or has already arrived is a quibble of semantics.....analysts said the declines would continue, even if not as sharply as in 2007 and 2008. “The enormous supply overhang of existing homes — particularly factoring in all those in foreclosure or soon to be — promises to keep pressure on prices for some time,” said Joshua Shapiro, the chief United States economist of MFR Inc.

4--Richard Koo On The Weakest Links In The Bernank's QEasy Logic, zero hedge

Excerpt: Richard Koo--"The Beige Book also noted that US households and businesses continue to deleverage, creating a situation in which banks’ preferred customers are not interested in borrowing. This is also identical to the situation in Japan more than a decade ago.

Banks hurt by the crash in commercial real estate are naturally reluctant to lend more to the sector, but potential borrowers in other sectors are not interested in borrowing despite current low interest rates. This has arrested growth in banks’ loan books—including consumer loans.

The implication is that during the Christmas shopping season consumers paid for their purchases with cash instead of credit. This reflects changes in the US credit card market and also suggests that US households are beginning to emerge from their dependence on debt.

If US households were to begin consuming only what they can afford without relying on debt, it would represent a sea change and would also be a first step on the path to a sounder US economy.

However, in that case, GDP and demand for commercial real estate would be unlikely to grow substantially amid modest growth in employment and incomes. Continued private sector deleveraging also means the government will need to continue generating demand for some time."....

The Fed’s zero-interest-rate policy and quantitative easing will have almost no effect as long as the private sector continues to deleverage and demand for loans remains weak. No matter how much the monetary authorities ease policy, money will not start flowing and the money supply will not increase without private-sector borrowers.

5--Fed to Pursue QE Even as Business Lending Gains, Bloomberg

Excerpt: The Federal Reserve will probably push forward with $600 billion in securities purchases even as the biggest jump in business loans in more than two years adds to signs the U.S. economy is gaining strength.

Commercial and industrial loans increased at an annual rate of 7.6 percent last month, the largest gain since October 2008, according to Fed data. Total bank credit has risen in three of the past six months as business loans cushioned against declines in real estate and consumer credit.

Fed Chairman Ben S. Bernanke and his fellow policy makers will probably note improvements in the economy such as higher consumer spending in a statement to be released tomorrow, former Fed governor Lyle Gramley said. Encouraging signs like firmer bank credit are unlikely to prompt a reduction in stimulus so long as growth remains weak and unemployment persists near 10 percent, he said.

“The Fed is not ready to let up on its accelerator,” said Gramley, senior economic adviser for Potomac Research Group in Washington. “They are going to be impressed with the fact the economy has gained some momentum, but there are still strong headwinds to growth, and bank lending is quite modest.”...

Since reducing its target federal funds rate to near zero in December 2008, the central bank has used its balance sheet as a monetary policy tool. Its assets have tripled to $2.43 trillion from $873 billion in February 2008.... Treasury yields have risen amid signs of a stronger economy. The yield on the 10-year note increased to 3.36 percent at 1:11 p.m. today in New York from 2.57 percent after the Nov. 3 FOMC meeting, when the asset purchases were announced.

Yields have increased because of “a stronger economy and better expectations,” Bernanke said at a forum in Arlington, Virginia on Jan. 13.

Jim Comiskey, a senior market strategist at Lind-Waldock in Chicago, disputed that view, saying yields have risen on concern that Fed bond purchases will stoke inflation.

“The market is scared about the inflationary impact of what the Fed is currently doing,” Comiskey said.

6--Shadow inventory threatens housing recovery, CNN Money via

Excerpt: There is a growing glut of foreclosed homes threatening to hit the market over the next couple of years, potentially delaying any recovery.

There were 1.7 million homes either owned by the bank or in some stage of foreclosure at the end of the third quarter of 2010, according to a recent report by Standard & Poor's. It would take 44 months, at the current rate of sales, to sell them off -- a 25% increase from the beginning of 2010. (S&P does not count home loans backed by Fannie Mae and Freddie Mac.)...

Data through Sept. 30 from the Mortgage Bankers Association, which tracks about 80% of the market, suggests there are more than 2 million Americans seriously delinquent on their mortgages and another 2 million bank-owned homes. Plus, RealtyTrac reported last week that a million homes were repossessed in 2010

Westerback said the biggest contributor to the longer shadow inventory is that banks are taking far longer to foreclose on homes than they once did.

7--FBI looks into bid rigging at courthouse auctions, SFGate via

Excerpt: Foreclosure auctions take place every weekday on the steps of courthouses throughout California. Now the FBI is investigating whether some real estate speculators are illegally rigging bids for these sales.

"Last week, the FBI conducted interviews and executed search warrants through the entire Bay Area as part of a long-term investigation of anti-competitive practices at trustee sales of foreclosed homes," said bureau spokeswoman Julie Sohn.

The probe is shaking up the tight-knit world of investors who bid at these auctions. The issue, sources say, is that some participants allegedly pay others to refrain from bidding on certain properties to keep their prices low....

"If you start to bid, there are about five guys who work together and who box you in," said the man, who asked not to be named for fear of retribution. "One guy came up to bid who clearly was not part of that crew. The guys were bidding. At some point, (their ringleader) turned to (the outsider) and said, 'You must really like this property. It must be really important to you.' He had a piece of paper in his hand; he showed it to the guy. The guy nodded OK and then disappeared into the building."

The man said he was positive that the outsider was being paid off not to bid, although he did not witness money changing hands.

8--Case-Shiller: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows in November, Calculated Risk

Excerpt: From S&P: U.S. Home Prices Keep Weakening as Eight Cities Reach New Lows

Data through November 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 compared to what was reported for October 2010. The 10-City Composite was down 0.4% and the 20-City Composite fell 1.6% from their November 2009 levels. Home prices fell in 19 of 20 MSAs and both Composites in November from their October levels. In November, only four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. The Composite indices remain above their spring 2009 lows; however, eight markets – Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices peaked in 2006 and 2007, meaning that average home prices in those markets have fallen even further than the lows set in the spring of 2009....

The Composite 20 index is off 30.9% from the peak, and down 0.5% in November (SA)....Prices are now falling - and falling just about everywhere. As S&P noted "eight markets – Atlanta, Charlotte, Detroit, Las Vegas, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices peaked in 2006 and 2007". Both composite indices are still slightly above the post-bubble low.

9--MBA: Mortgage Purchase Applications lowest since last October, Calculated risk

Excerpt: The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 15.3 percent from the previous week and reached its lowest level since January 2010. The seasonally adjusted Purchase Index decreased 8.7 percent from one week earlier. The Purchase Index is at its lowest level since October 2010....

The four-week moving average of the purchase index suggests weak existing home sales through the first few months of 2011.

10--19--Treasurys Throw the Recovery a Curve, Kelly Evans, Wall Street Journal

Excerpt: Treasurys may be signaling trouble....The market is behaving in ways that suggest investors are starting to fret over the potential for stagflation in the U.S....Consider the Treasury "yield curve." It refers to the difference between short-term and long-term interest rates on U.S. Treasury debt.

Typically, as the economy is expanding, this curve has an upward slope, and is usually at its steepest during the earliest stages of a recovery.

Eventually, investors anticipate the Fed will begin raising interest rates to stave off inflation. That tends to lift short-term rates, compress long-term ones, and generally flatten the curve, or even invert it if investors expect the outcome could be recession....Lately, with the U.S. growth outlook improving, the slope of the curve hasn't started flattening, as might be expected at this point in the recovery. Instead, it has gotten steeper.

Earlier this week, the spread between two-year and 30-year Treasury yields hit a record-wide four percentage points, notes RBS Securities. At the same time, the implied annual inflation rate over a five-to-10 year horizon, based on Treasury yields, has moved up above 3% and towards levels last seen before the Fed's previous rate-rise cycle began in mid-2004.

Investors, in other words, don't expect the Fed to be as aggressive as in the past in raising rates—even as they see inflation on the rise.

"I think the Fed's credibility is in question here," says Priya Misra, head of rates strategy at Bank of America Merrill Lynch.

Or perhaps investors simply realize the Fed has put itself between a rock and a hard place. The U.S. unemployment rate is currently 9.4%, after all. It was at 5.6% in June 2004.

Tuesday, January 25, 2011

Today's links

1--HOT: Fed Hides Major Accounting Change,

Excerpt: Reuters has a very hot story out tonight on an accounting change the Fed snuck into a regular weekly report. It will move off its balance sheet any bad debt the Fed may have purchased from Goldman Sachs, or anybody else for that matter. Here's Reuters via CNBC (My emphasis):

Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

But they are averting asking the Treasury for money in the future by an accounting gimmick that will simply dump the debt off its own balance sheet and onto that of the Treasury. More from Reuters:

[According to]Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey, "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability...

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer....

Bottom line: We all knew the Fed was going to have to do some kind of monkey business to deal with all the junk securities it purchased, here it is: Negative liabilities. Yes, only at your local Fed.

2--Low Interest Rates and Optimism About the Economy Did Not Lure Homebuyers in December, Dean Baker, CEPR

Excerpt: The Post reported on the better than expected numbers on existing home sales reported for December. It told readers that:

"Low interest rates, relatively affordable prices and tentative optimism about the economy helped lure buyers in December."

Actually, the data on existing home sales reports on closed sales in December. It generally takes 6-8 weeks between when a house contract is signed and when the sales are closed. This means that the December data reflect attitudes in October and early November, not December.

3--2010 a ‘disappointing’ year for housing, Lanser on Real Estate

Excerpt: Are banks holding back on foreclosing?

Krueger: I was one of those instigators of this hypothesis. It’s not easy to prove. Looking at the data and at the decline in notices of default and in foreclosures, one has to come to the conclusion that that banks are — I wouldn’t call it a sinister ‘holding back.’ You could give it a nicer sounding name and call it ‘inventory management.’

This is something that every business does when there’s a fluctuation in demand or a fluctuation in supply, and it’s normal behavior. This behavior was made possible by pressure from the public, pressure from the government, pressure from state and local government to ease off on the foreclosure process to protect local communities.

But it also makes sense from the point of view of banks to manage this because it stabilizes home prices. And if you need anything right now in California and in the nation, it’s a sense of stabilization and a sense of normalcy, particularly when that can be combined with a sense that the economy seems to be turning around, it seems to be sustainable and even the job numbers are beginning to improve.

All of this together will restore consumer confidence and a period of consumer consumption and, to some degree, even the animal spirits of the entrepreneurs and business people. (G.U. Krueger is chief economist and founder of, which bills itself as a research firm for investors, developers and government agencies.)

4---Car Dealers Roll Out Cheap Financing, Wall Street Journal

Excerpt: It sounds like a bad commercial for a local car dealership: "These rates are so low, we're barely making money!" But more than three years after the recession threw car sales into a tailspin, many dealers have started offering loans at interest rates so low they don't make much of a profit -- and that's turning conventional car-buying wisdom on its head....

Some dealers are offering loans at or near 0%. And unlike past low-interest financing offers, these rates are increasingly available on longer loans for a wider variety of cars, including luxury vehicles and across popular brands like Toyota ( TM: 82.01, -1.35, -1.61% ) and Honda....

Typically when dealers offer a loan, they do so at a rate several percentage points higher than what a bank or credit union might offer. The dealer isn't lending his own money, he's just a middleman -- the money for the loan comes from the lending arm of the dealer's associated automaker. And everybody makes money.

But now dealers are offering interest rates that are 0% or close to it -- for less than what it costs a financing arm to raise capital to lend. In this case, the dealer is not making money, and, because the automakers subsidize the loans to help dealers move cars that aren't selling, the automakers are losing money. On average, automakers lost $2,139 for each car they helped finance in 2010, slightly less than the $2,229 they lost per car in 2009, according to

5---China's banking crisis, Michael Pettis, Credit Writedowns

Excerpt: ....the cost of cleaning up the last banking crisis was very high, much higher than simply calculating the explicit cost of recapitalizing the banks by direct and indirect equity infusions, and so will the cost of the next one be. The combination of implicit debt forgiveness and the wide spread between the lending and deposit rate has been a very large transfer of wealth from household depositors to banks and borrowers. This transfer is, effectively, a large hidden tax on household income, and it is this transfer that cleaned up the last banking mess..

It is not at all surprising, then, that over the past decade growth in China’s gross domestic product, powered by very cheap lending rates, has substantially exceeded the growth in household income, which was held back by this large hidden tax. It is also not at all surprising that household consumption has declined over the decade as a share of gross national product from a very low 45 percent at the beginning of the decade to an astonishingly low 36 percent last year.

This is how China’s last banking crisis was resolved. It did not result in a collapse in the banking system, but it nonetheless came with a heavy cost. The banking crisis in China resulted in a collapse (and there is no other word for it) in household consumption as a share of the economy.

This is why the People’s Bank of China is so worried about another surge in non-performing loans. The idea that China can simply grow its way effortlessly out of its loan problem is widespread but wrong. If the household sector is forced once again to clean up a banking mess, this will make China even more reliant for growth on the trade surplus and on investment.

Remember that there is no such thing as a painless banking crisis and anyone who suggests otherwise should not be taken very seriously. There is always a significant cost, and the cost is almost always borne one way or the other by the household sector. In China, with its already too-low household consumption, it will be very risky to force households to clean up yet another surge in non-performing loans. It would only make it more difficult than ever for China to achieve the rebalancing its economy so urgently needs.

6---Obama Picks Jeffrey Immelt, GE CEO, To Run New Jobs-Focused Panel As GE Sends Jobs Overseas, Pays Little In Taxes, Huffington Post

Excerpt: Jeffrey R. Immelt, the chairman and chief executive of General Electric Co. tapped by President Barack Obama as his next top outside economic adviser, will be asked to guide the White House as it attempts to jump-start lackluster job creation and spur a muddled recovery.

Immelt's firm stands as Exhibit A of a successful and profitable corporate America standing at the forefront of the recovery. It also represents the archetypal company that's hoarding cash, sending jobs overseas, relying on taxpayer bailouts and paying less taxes than envisioned.

The move is the latest salvo in the White House's continued aggressive and very public outreach to corporate America. Earlier this month, Obama appointed a top executive at JPMorgan Chase as his chief of staff, and this week he granted a longtime wish of business interests by promising to review federal regulations perceived as onerous.

Immelt's appointment raises fresh questions about Obama's courtship and future policy proposals. Firms like GE say good jobs will come from lower taxes and less regulation. Immelt told analysts Friday that he'll focus on tax policy and regulation, among other topics.

7---The problem is "demand" not deficits, Mike Konczal, Rortybomb

Excerpt: Atif Mian and Amir Sufi have recently written an economic letter for the Federal Reserve Bank of San Francisco, Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery:, where they find:

Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.

The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.

I’m going to write more about this later, but it’s amazing how locked in the “supply-side” logic is with our opinion leaders, even when dealing with our current recession. The article spends a lot of time with the Chamber of Commerce and Obama dealing with business leaders, with the idea that Obama needs to get business confidence back. It doesn’t mention that the number one self-reported problem facing small businesses, by a mile, is poor sales. The article is really stuck on the idea that the problem must be the deficit, or the “populist” tone Obama has taken with Wall Street, or the financial reform bill, not depressed consumer spending....

Embedded in that assumption is that the only thing that would hold back a full employment economy is government action; deregulate enough, and supply will create its own demand. It’s too bad that doesn’t describe our situation.

8--Balance Sheet Recessions, Mark Thoma, Economist's View

Excerpt: ...a financial collapse brought about by bad loans is particularly severe. The present recession is an example of this, and policy has done a good job of preventing even worse problems from developing by rebuilding financial sector balance sheets through the bank bailout and other means.

But household balance sheets have not received as much attention. We could have helped households rebuild their balance sheets, and this would have helped banks by lowering the default rate on loans. Instead, we left households to mostly solve their problems on their own, and then helped banks when households could not repay what they owed.

When a balance sheet recession hits, one of the keys to a quick recovery is to use the federal government’s balance sheet as a means of offsetting the deterioration in the private sector’s financial position. But we shouldn’t just focus on banks. Household balance sheet problems are every bit as severe, and in total every bit as systemically important as the balance sheet problems of banks. We’ll recover faster from balance sheet recessions if we pay attention to all private sector balance sheets instead of focusing mainly on the problems of banks.

The perception that the government bailed out undeserving wealthy bankers while leaving households to fend for themselves is a big part of the backlash against the policies put into place to help with the recession. That perception is correct, for the most part, and it will stand in the way of repeating this policy the next time there is a financial collapse. When the next balance sheet recession hits, and another one will hit no matter how hard we try to avoid it, we need to do a better job of helping households. Not only is this good economics – we will recover faster with this policy – the politics of helping households are far superior to those associated with bailing out banks.

Balance sheet recessions take a large toll on the finances of banks, households, and state and local governments, and policymakers – fiscal policymakers in particular – must do a better job of taking such factors into account as they respond to downturns in the economy.

9--Why Aristide Should be Allowed to Return to Haiti, Mark Weisbrot,

Excerpt: Haiti's infamous dictator "Baby Doc" Duvalier, returned to his country this week, while the country's first elected President, Jean-Bertrand Aristide, is kept out. These two facts really say everything about Washington's policy toward Haiti and our government's respect for democracy in that country and in the region....

Wikileaks cables released in the last week show that Washington put pressure on Brazil, which is heading up the United Nations forces that are occupying Haiti, not only to keep Aristide out of the country but to keep him from having any political influence from exile.

Who is this dangerous man that Washington fears so much? Here is how the Washington Post editorial board described Aristide's first term, back in 1996:

"Elected overwhelmingly, ousted by a coup and reseated by American troops, the populist ex-priest abolished the repressive army, virtually ended human rights violations, mostly kept his promise to promote reconciliation, ran ragged but fair elections and, though he had the popular support to ignore it, honored his pledge to step down at the end of his term. A formidable record."...

Aristide is still alive, in forced exile in South Africa. He remains the most popular political leader in Haiti, and seven years is not enough to erase his memory from Haitian consciousness. Sooner or later, he will be back.

Friday, January 21, 2011

Today's links

1--Irish government falls and calls 11 March poll, The Independent

Excerpt: The Irish Government collapsed yesterday, with multiple ministerial resignations propelling Prime Minister Brian Cowen into setting 11 March as the date for a general election. His Fianna Fail party, which dominates the government, is widely expected to be largely wiped out in the contest, since under the Cowen leadership it has slumped to unprecedented depths in opinion polls. ...

The election was precipitated during a day of turmoil after the small Green party, which has kept Fianna Fail in power, called for a contest in March. Four Fianna Fail ministers, plus a long-time supporter, then announced their resignations. In what is viewed in Dublin as an extraordinary move, Mr Cowen then redistributed their portfolios with some of his remaining ministers taking on extra responsibilities. Mary Hanafin, for example, has become Minister for Trade, Enterprise, Innovation, Tourism, Culture and Sport.

Mr Cowen has clung to power with great determination but these and other recent blows are combining to pry his tenacious fingers from the levers of power....His administration was forced to turn to the IMF and EU for a bailout because it could not cope with Ireland's economic woes. Mr Cowen suffered much self-inflicted damage when, until the last moment, he maintained that no such bailout was being sought, cementing his reputation as Ireland's great non-communicator.

2--ECB: Crisis Had Lasting Effect on Growth Potential, Wall Street Journal

Excerpt: In its latest monthly bulletin, the European Central Bank warns that the financial crisis could have a lasting effect on the euro bloc’s potential output, and warned that potential economic growth is unlikely to return to its pre-crisis path for many years.

“It is likely that the financial crisis has led to a one-off permanent loss in the level of potential output, owing to the economic effects of the downsizing of some sectors, such as the financial and construction sectors, following their disproportionate expansion during the boom,” the ECB wrote in its January bulletin....

Citing estimates by the International Monetary Fund, Organization for Economic Co-operation and Development and European Commission, the ECB said potential growth in the euro zone was about 1.9% from 2000 to 2007. It fell to 0.9% from 2008 to 2010, the ECB said. For comparison’s sake, the U.S. is estimated to have had a 2.5% growth potential from 2000 to 2007, the ECB said, and 1.8% from 2008 to 2010.

The ECB takes a grim view on where the euro zone goes from here. Even assuming pre-crisis contributions from technological change and capital accumulation, the damping effect of ageing and a projected decline in the working-age population “yields an estimated rate of growth as low as 1.25% for the euro area in 2020,” the ECB says.

“Thus, even without incorporating any lasting negative impact of the latest economic downturn on potential output growth rates, the impact of an ageing population will significantly reduce potential output growth in the euro area in the long run if no economic reforms take place,” the ECB says.

3--How the financial elite have dismantled the American middle class,

Excerpt: The top 1 percent share of wealth at levels not seen since the Great Depression. Goldman Sachs offering average bonuses of $430,000 while a record 43,200,000 Americans receive food stamps....

The U.S. economy is now operating like a finely tuned engine bent on dismantling the middle class and protecting the tiny elites in our nation that have learned to manipulate both political parties to their financial benefit. This did not occur over night but started in the 1970s when the U.S. government and investment banks juiced up the nation with deficit and debt spending. A single family cannot go into debt for a very long time without consequences but a rising housing market hid much of the inequality developing in our system for a very long time. It was an illusion of stability. The top 1 percent in our nation now control 43 percent of all financial wealth. ...

These are levels not seen since the years before the Great Depression consumed the global economy. The fact of the matter is the top 1 percent has massively gained in real financial terms because of political maneuvering and selling out the middle class. Since these people protect their wealth through investment banks and tax breaks politicians have not dared touch these sacred cows or even asking banks to pay for their decades of personal irresponsible lending. In the end the elite have created a system where the working and middle class are paying for their own demise.

4--An Economic Philosophy That Has Completely Failed', William Black, Huffington Post

Excerpt: I get President Obama's "regulatory review" plan, I really do. His game plan is a straight steal from President Clinton's strategy after the Republican's 1994 congressional triumph. Clinton's strategy was to steal the Republican Party's play book. I know that Clinton's strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton's offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.

The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born's efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem -- they were wrong and Levitt and Born were right. Rubin and Summers weren't slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton's brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance. ...

Effective financial regulation is essential to protect honest firms and consumers from the frauds -- it is distinctly positive sum. The primary purpose of financial regulation is to limit fraud. President Obama, Summers, and OMB do not understand this fundamental aspect of financial regulation -- limiting fraud.

5--Eat-What-You-Kill Brokers Starved as Banks Gorge on Bailout Cash, Bloomberg

Excerpt: Bond-trading boutiques are being squeezed out of the market as Wall Street’s biggest banks recover from the financial crisis that caused almost $2 trillion in losses worldwide....

Banks that dominated debt trading before the credit crisis have recovered their market share after $12.8 trillion of government bailouts healed credit markets and cut profit margins by more than 80 percent. Traders who joined smaller firms are abandoning so-called eat-what-you-kill, or commission-based, pay in search of guaranteed compensation.

“People who went into this expected that the banks would take two to three years to come back; they turned that around in six to nine months,” said John Purcell, who left BTIG in June, 17 months after joining the firm in New York to help lead its expansion into fixed income. “The practical realities of competing in an environment where the banks not only are applying capital again, but are also aggressively hiring and writing some good contracts, just made it more difficult.”

6--OPEC Pressured to Lift Output as African, Asian Oil Tops $100, Bloomberg

Excerpt: OPEC is facing growing calls to boost oil production as crude prices in Asia and Africa surpass $100 a barrel for the first time in two years.

Nigeria’s Bonny Light grade, from which traders gauge the cost of West African oil, rose to $100.12 a barrel on Jan. 17, passing $100 for the first time since October 2008, according to data compiled by Bloomberg. Malaysia’s Tapis and Indonesia’s Minas breached that level a week ago, trading at $103.36 and $103.21, respectively today.

The International Energy Agency, an adviser to consuming nations, said Jan. 18 that “three-digit oil prices risk damaging” the economic recovery, signaling that the Organization of Petroleum Exporting Countries should raise output. OPEC responded the same day by saying that global supplies are sufficient to meet demand.

With “some Asian crudes well above $100 a barrel, the risks of OPEC acting must be higher,” said Lawrence Eagles, New York-based head of oil research at JPMorgan Chase & Co. “We would not be surprised to see the public rhetoric from consuming countries accelerate in the coming weeks. Behind the scenes pressure will no doubt be mounting in parallel.”

7--Obama to Push Congress to Curb Debt, Boost Competitiveness, Bloomberg

Excerpt: President Barack Obama plans to mark the beginning of a politically divided Congress with a State of the Union speech stressing shared responsibility for reining in the deficit and boosting the country’s capacity to compete with foreign economic rivals, according to two Democratic officials.

Obama will seek to use the nationally televised Jan. 25 address to pivot from the response to the financial crisis that occupied much of the first two years of his presidency to a vision of how to meet longer-range economic challenges, the White House has told congressional allies....

“The most important contest we face is not between Democrats and Republicans,” Obama said in that speech. “It’s between America and our economic competitors all around the world.” ...

A call to promote greater accountability in the educational system,...overhauling the tax system,...and cuts to Social Security benefits...(all framed in a "fighting unemployment" theme)

Despite the longest stretch of unemployment rates above 9 percent since monthly records began in 1948, American businesses and investors have prospered since Obama took office. The Standard & Poor’s 500 Index has risen more than 50 percent since his inauguration, and U.S. corporate profits reached a record in the third quarter of 2010. ...Obama’s job-approval ratings have been climbing since the November election. In a Wall Street Journal/NBC News poll taken Jan. 13-17, after his speech at a memorial service in Tucson, Arizona, urging a more civil political discourse, his job approval reached 53 percent. Among independents, positive views of his performance surpassed negative views for the first time since August 2009.

8--Inflation in China, Dr. Ed's Blog

Excerpt: China’s CPI inflation rate was 4.6% on a y/y basis during December, down a tad from 5.1% in November. In the US, the CPI inflation rate remained subdued at 1.5% during December. The CPI for food is soaring in China, rising 9.6% y/y in December, while it was up just 1.5% in the US during December. Excluding food, the CPI rates of inflation in China and the US are closer at 2.1% and 1.5% in December, respectively.

China’s global outreach program is clearly motivated by the nation’s desperate need for more food, energy, and industrial commodities. With such a large motivated buyer in the market, it’s no wonder that commodity prices are soaring, and should continue to do so this year. The Chinese are bound to counter Washington’s demands for a stronger currency by complaining that the Fed’s QE-2.0 program is boosting commodity prices. Nice try. The fact is that China’s inflation problem is homegrown. No one does quantitative easing better than the Chinese. As I’ve noted previously, over the past two years through November, China’s international reserves, bank reserves, and M1 are up 47.6%, 51.9%, and 57.1%

9--Fed Touts Market Gains to Sell QE 2, Wall Street Journal

Excerpt: In recent weeks, the Federal Reserve has been turning to an unusual metric to prove the potency of its bond-buying program: the stock market.

Comments from Fed Chairman Ben Bernanke and other officials, as well as research by the central bank, cite rising stock prices as a sign that the central bank’s $600 billion bond-buying program is working to bolster the economy.

The focus on stocks puts the Fed in an unusual position, given that equity moves haven’t usually been a focus of the monetary-policy process. The shift could be benign, or a sign of trouble.

On the positive side, central-bank policy may indeed be lifting stocks, which should in turn make many households more wealthy and willing to spend, thus boosting growth. On the downside, the gains could be the only thing policy makers can hang their hat on while they pursue a controversial policy.

But since the current round of Treasury purchases started late last year, it’s been a different story. Yields are up, making borrowing more expensive, not less. That’s happened even as Fed bond buying gobbles up nearly all net new issuance of Treasury debt.

That has Fed officials explaining the success of their program in different ways. Mr. Bernanke was asked on Jan. 13 how he knew the bond-buying program was working when yields were rising. He noted in video from CNBC that Fed policies “have contributed to a stronger stock market just as they did in March of “09,” when the Fed last bought bonds. He then pointed to large gains in stock indexes like the S&P 500 and Russell 2000 as evidence that current policy is having a positive influence on the economy.

Meanwhile, a paper published recently by the Federal Reserve Bank of San Francisco assessed the impact of Fed bond buying. “Lower long-term interest rates, coupled with higher stock market valuations and a lower foreign exchange value of the dollar, provide a considerable stimulus to real activity over time,” the paper’s authors wrote.

Fed officials “may feel a little more need to…justify what they are doing” in light of the grief they’ve gotten over the bond buying, said James Hamilton, an economics professor at the University of California San Diego. He also said Fed officials should be somewhat heartened by rising bond yields, as they reflect a market adjustment to a better outlook, along with higher inflation expectations. Those are both welcome, and directly related to the Fed’s action, the economist said.

That explanation for higher yields has been endorsed by some Fed officials. It remains to be seen how central the stock-market story will be for the Fed when the recovery—as many expect—picks up steam.