Monday, January 3, 2011

Today's Links

1--Deep Hole Economics, Paul Krugman, New York Times via Economist's View

Excerpt: If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.

Why do I need to point this out? ... What particularly concerns me is the risk ... that policy makers will look at a few favorable economic indicators, decide that they no longer need to promote recovery, and take steps that send us sliding right back to the bottom. ...

Jobs, not G.D.P. numbers, are what matter to American families. And when you start from an unemployment rate of almost 10 percent, the arithmetic of job creation — the amount of growth you need to get back to a tolerable jobs picture — is daunting....

So what can be done to accelerate this all-too-slow process of healing? A rational political system would long since have created a 21st-century version of the Works Progress Administration — we’d be putting the unemployed to work doing what needs to be done, repairing and improving our fraying infrastructure. ...


2--New Year’s Hope against Hope, Joseph E. Stiglitz, Project Syndicate via Economist's View

Excerpt: ... Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put,... should innocent victims and those who gained nothing from fake prosperity really be made to pay even more? ...

Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. It will eventually happen. But delay is very costly – and largely unnecessary. Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs...

So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.

3--The Irish Crisis, ERIC TOUSSAINT, Counterpunch

Excerpt: For a decade, Ireland was heralded by the most ardent partisans of neo-liberal capitalism as a model to be imitated. The Celtic Tiger had a higher growth rate than the European average. Tax rate on companies had been reduced to 12.5%[2] and the rate actually paid by TNCs that had set up business there was between 3 and 4% - a CEO's dream! Ireland's budget deficit was nil in 2007, as was its unemployment rate in 2008. In this earthly paradise, everybody seemed to benefit. Workers had jobs (though often highly precarious), their families were busy consuming, benefiting as they were from the prevailing abundance, and both local and foreign capitalists were enjoying inordinate returns....

What could not possibly happen in such a fairytale world then happened: in September-October 2008 the card castle collapsed and the real estate and financial bubbles burst. Companies closed down or left the country, unemployment rose from 0% in 2008 to 14% in early 2010. The number of families unable to repay their creditors swiftly increased too. The whole Irish banking system teetered on the edge of bankruptcy and a panic-stricken government blindly guaranteed bank deposits for EU480 billion (that is, about three times an Irish GDP of 168 billion). It nationalized the Allied Irish Bank, the main source of financing for real estate loans, with a transfusion of EU48.5 billion (about 30% of GDP).

Exports slowed down. State revenues declined. The budget deficit rose from 14% of GDP in 2009 to 32% in 2010 (more than half of this due to the massive support given to the banks: 46 billion in equity and 31 billion in purchases of toxic assets).

At the end of 2010 the European bail-out plan with IMF participation amounted to EU85 billion in loans (including 22.5 billion from the IMF) and it is already clear that it will not be enough. In exchange, a radical cure was enforced upon the Celtic Tiger in the form of a drastic austerity plan that heavily affects households' purchasing power, with a resultant decrease in consumption, in public expenditure on welfare, in civil servants' salaries, in infrastructure investments (to facilitate debt repayment), and in tax revenues.

4--State and Local Government budget cuts: A 2011 Theme, Calculated Risk

Excerpt: From the NY Times: Cuomo Plans One-Year Freeze on State Workers’ Pay

Gov. Andrew M. Cuomo will seek a one-year salary freeze for state workers as part of an emergency financial plan he will lay out in his State of the State address on Wednesday, senior administration officials said.

... the immediate budget savings from the freeze would be relatively modest — between $200 million and $400 million against a projected deficit in excess of $9 billion.

5--Bernanke's Greatest Hits, Dean Baker, CEPR

Excerpt: 7/1/05 – Interview on CNBC

INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

6--Bernanke: He Didn't Just Miss the Housing Bubble, Dean Baker, American Prospect

Excerpt: First, he misled Congress last fall to help gain quick approval of the TARP. He told Congress that the commercial paper market was shutting down, so that non-financial corporations could not raise the money needed to pay their bills and meet their payrolls. In fact, the Fed had the ability to prevent a shutdown of the commercial paper market by directly buying commercial paper. Bernanke announced plans to establish a special lending facility to buy commercial paper the weekend after Congress approved the TARP.

Bernanke has also chose to keep all of the Fed's lending secret. While anyone can go to the Treasury's website and find out which banks received money from the TARP and under what terms, Bernanke has refused to make information on Fed's lending available even to members of the relevant congressional oversight committees.

Finally, Bernanke has allowed the distinction between commercial and investment banking to be obliterated. After Goldman Sachs became a bank holding company, Bernanke has allowed it to continue to operate as an investment bank. This means that it has effectively gambled with the FDIC's insurance fund money. Even proponents of the repeal of Glass Steagall insisted that they would never allow this sort of mixture of government insured deposits and speculative investment banking.

7--S&P revises shadow inventory timeline upward, again, Housingwire

Excerpt: The ratings agency now estimates it will take 44 months — up 10% percent from an estimate made just three months ago — to clear the so-called shadow inventory of homes in distress or foreclosure, but not yet on the resale market. Some markets are significantly more impaired when compared to others, the agency concluded.

In September, Standard & Poor's estimated it would take 40 months.

"Our recent estimates of months to clear have increased primarily as a result of the deceleration of the distressed property liquidation rate rather than a rise in overall distressed property levels," according to analysts in a research report emailed to HousingWire....

"Almost 80% of the loans modified or cured for the first time during first-quarter 2008 re-defaulted within the first year of modification, compared with 50%-55% of those modified or cured in third-quarter 2009," analysts said.....

We estimate that it will take nearly 10 years to clear the inventory in the New York MSA at the current liquidation rate," the Standard & Poor's analysts write....The revised numbers from Standard & Poor's reflect the fact that banks and thrifts foreclosed on 382,000 homes in the third quarter. This represents a 31.2% spike from the previous quarter, according to the Office of the Comptroller of the Currency.

8--U.K. Think Tank Sees 20% Chance Of Euro’s Survival, Wall Street Journal

Excerpt: Europe’s common currency, battered for more than a year by a sovereign debt crisis, is unlikely to survive the next decade in its current form, the Center for Economics and Business Research warned Friday.

In a list of top 10 predictions for 2011, the CEBR, a U.K.-based think-tank, gave the euro a slim one-in-five chance of being preserved in its present incarnation as the legal tender for the 16 nation currency bloc. That number will increase to 17 on Monday, when Estonia accedes to the euro zone.

The organization sees brewing debt problems in Spain and Italy as the catalyst for a new downturn. While economists have long warned that Spain and Portugal are two of the most vulnerable economies in the euro zone, Italy’s heavy debt load — approximately 115% of GDP — and sluggish growth have made some analysts wary about the country’s long-term prospects.

9--Albert Edwards, SocGen bear, takes a bite out of China, Guardian

Excerpt: There is an air of optimism among investors and a confidence among economists that a much feared double-dip recession has been avoided. A tough moment, then, to be bearish?

Not for Albert Edwards, the best known and longest-standing bear in the City. He has seen nothing to dent his Ice Age thesis – the term he coined as long ago as 1996 to describe the relative decline of equities versus bonds. He thinks there may still be another Japanese-style economic "lost decade" to endure. "Big structural bear markets take 19 years on average and have four recessions," he says. "We've had two."

Edwards is thus sticking to two eye-catching predictions. Stock markets will revisit their March 2009 lows (3512 for the FTSE 100). And, despite the hints in recent months of a return of inflation, gilt yields will fall below 2% (from 3.5% today) as deflationary forces reassert themselves. Oh, and for good measure, prepare for the hard landing in China and the crash in commodity prices....

....what happens is that housing and credit bubble goes out of control," argues Edwards. "You tap your foot on the brakes and the whole thing starts crashing and you can't control it on the downside," he says. "China is exactly the same. It had a very good crisis in 2007, opened the credit floodgates, got a house price bubble going, and they're now trying to tap their foot on the brakes."

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