Wednesday, January 5, 2011

Today's Links

1--California or bust, Reuters

Excerpt: The public schools are a sign of the grim position the Golden State finds itself in as a new governor takes office -- self-proclaimed skinflint Jerry Brown, a Democrat with a long history in California politics.

Just a few decades ago, the state's public school system was the envy of the nation, and California -- with its sunny weather, laid back lifestyle, stunning landscape and booming motion picture, technology and manufacturing industries -- was both an economic engine of U.S. prosperity and the ultimate symbol of The American Dream.

Today, the image of California is one of brokenness. Its $1.7 trillion economy is clawing its way out of a recession that crippled its housing market, sent unemployment marching into the double digits and depleted its coffers.

The state also faces a budget shortfall over the next 18 months of more than $25 billion. Efforts by California lawmakers to plug similarly-sized holes in the budget over the last few years have been unprecedented, epic and tortuous.

Californians' faith in government is in the dumps, and even insiders see the state's future as murky and unstable. "It is a land of dreams and occasional nightmares," California's state treasurer, Bill Lockyer, said.

2--Declining home values leave owners where they were a decade ago, via

Excerpt: Ten years ago, buying a house was considered a good investment. Fast-forward to today and many who were banking on a hefty return on that investment find themselves back where they started when it comes to the value of their homes.

“Then there was a built-in theory that prices would never go down,” said David Tufts, president of the Marketing Directors, a condo sales and marketing firm. “Now we know that’s not true.”

The National Association of Realtors recently reported the median sale price had fallen 16 percent since November 2009. The S&P Case-Shiller Index released last week shows home sale prices have reverted to what they were 10 years ago.

3--How I Missed the `Housing Recovery' of 2010, Bloomberg

Excerpt: ...What housing recovery? If there is, or was, one, it is nowhere to be found in the data. Homebuilder sentiment, new home sales and single-family housing starts, which, in that order, lead the complex of residential real estate indicators, are bumping along the bottom. There was no recovery to stall.

There was a brief incentive-driven pick-up in sales in 2009 and the first half of 2010 that faded the minute the home purchase tax credit expired....

The demand curve is downward sloping. What that means is demand for any good or service isn’t fixed. It depends on the price....The point at which consumers wish to buy what producers want to sell is called the equilibrium price, which isn’t fixed and responds to changes in market conditions, technology, the population, incomes or the prices of other goods and services....

Supply Glut

The U.S. just experienced the biggest speculative boom/bust in housing in history, a massive outward shift in the supply curve. Anyone expecting home prices to rise in the face of a glut of unsold homes is counting on either an act of God to destroy huge swaths of the housing stock (a shift back in the supply curve) or an influx of new immigrants needing shelter (a shift out in the demand curve.) Neither is likely, although acts of God are notoriously hard to predict.

4--Overheating East to falter before the bankrupt West recovers, Ambrose-Evans Pritchard, Telegraph

Excerpt: This bear is not for turning.....

Policy levers in the US, Europe, and Japan remain set on uber-stimulus with the fiscal pedal pressed to the floor and rates near zero everywhere, yet OECD industrial output has not regained the peaks of 2007-2008 by a wide margin. Leading indicators are tipping over again. We are one shock away from a liquidity trap....

Dangerously high budget deficits of 6pc, 8pc, or 10pc of GDP in countries with dangerously high public debts near 100pc may have prevented an acute depression, but they have not prevented the weakest rebound since World War Two, and they cannot continue, whatever the assurances of New Keynesians and pied pipers of debt...

Ben Bernanke made a fatal error by launching QE2 too early, with an incoherent justification, by dribs and drabs for fine-tuning purposes. The QE card cannot easily be played a third time. If he now tries to print money on a nuclear scale to crush all resistance and hold down Treasury yields, he risks exhausting Chinese patience and invites the wrath the Tea Party Congress.

Alas, my neck-sticking predictions for 2011 must be as grim as ever. This does not exclude further bear rallies over the Spring on Wall Street and Euro-bourses as institutional mammoths seek to extract themselves from bonds.

5--Fed Moves To Gut Predatory Lending Regulation, Zach Carter, Huffington Post

Excerpt: The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.

The regulation would severely limit a practice called "rescission," used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank's ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal -- the original amount of money extended by the bank -- but can't be kicked out of the house.

Under the Fed's new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose -- that means borrowers could still lose their homes, even in cases where banks have broken the law.

Unsurprisingly, banks support the move, but consumer advocates say this would essentially make rescission worthless to borrowers.

6--Drinking Austerity Kool-Aid in 2011, Marsahll Auerback, Huffington Post

Excerpt: Finally, there is the odious problem of political corruption, which manifests itself in many forms, but most recently through the cynical revolving door policy between Wall Street and government. Peter Orszag's move to Citi after spending months launching broadsides against Social Security from his perch at OMB and then the NYTimes goes beyond cynicism. Nobody expects a former government official to live like a monk after spending time in public service. But the idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution and then, less than two years after his administration took office, would take a job that (a) exemplifies the growing disparities the administration says it's trying to correct and (b) unavoidably call on knowledge and contacts he developed while serving at OMB is sickening in the extreme. That his successor also comes from Citi simply perpetuates the incredulity. All this, under an ostensibly "progressive" Democratic administration.

The revolving door between Wall Street and Washington calls attention to the rotten heart at the core of the American polity today -- what James Galbraith has felicitously termed "the predator state". The state has become too weak and therefore remains another instrument of corporate predation. The revolving door policy (eagerly embraced by this president, much like his predecessors) perpetuates the problem because it enhances the dominance of the so-called "FIRE" (finance, insurance, real estate) sector of the economy. The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. Its revenue takes the form of what classical economists called "economic rent," a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as "capital" gains. Its ethos consists largely of denuding the state of any provision of public goods, privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of credit cards or the credit needed to get by. It's a zero-sum economic activity. One party's gain (that of Wall Street usually) is another's loss. It looks like we'll have much more of the same as we enter into 2011.

7--FOMC Minutes: Economic improvement "not sufficient" for QE2 changes, Calculated Risk

Excerpt: From the December 14, 2010 FOMC meeting. These are probably the key sentences:

While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment. Members emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program.

And on the outlook:

Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment. However, they held a range of views about the risks to that outlook. A few mentioned the possibility that growth could pick up more rapidly than expected, particularly in light of the very accommodative stance of monetary policy currently in place. It was noted that such an acceleration would likely be accompanied by significantly more rapid growth in bank lending and in the monetary aggregates, suggesting that such indicators might prove to be useful sources of information. Others pointed to downside risks to growth. One common concern was that the housing sector could weaken further in light of the considerable supply of houses either on the market or likely to come to market. Another concern was the ongoing deterioration in the fiscal position of U.S. states and localities, which could lead to sharp cuts in spending and increases in taxes. In addition, participants expressed concerns about a possible worsening of the banking and financial strains in Europe, which could spill over to U.S. financial markets and institutions, and so to the broader U.S. economy.....

8--Facing a Marked Global Reversal, Joseph Stiglitz, Financial Times via Economist's View

Excerpt: 2011 will be a hard year for globalisation. ... America’s quantitative easing is now viewed as an update of the policies that marked the Great Depression. The world is waking up to the way exchange rates can be used in self-promotion at the expense of others...

Such beggar-thy-neighbor policies didn’t work in 1930s, because countries responded in kind. Today the same will happen. Indeed, emerging markets are already responding... The result? More uncertainty in financial markets, greater fragmentation of capital markets, and a marked reversal in globalisation.

Globalisation’s cheerleaders will thus face an increasingly hard time, as the boom in Asia is seen to come at the expense of jobs elsewhere. .. Those Americans and Europeans who risk losing their jobs will be especially vocal in protest. ...

9--Some Observations on the Ongoing Crisis: Causes and Opportunity Cost Again, Menzie Chinn, Econbrowser

Excerpt: the originating entities for these subprime mortgages were not Fannie Mae and Freddie Mac, by large, but rather the banks that the Federal government refused to let state agencies regulate. Or the ones the Treasury's OTS itself failed to regulate. To refresh memories, consider this article from December 18, 2007 NYT:

WASHINGTON-- Until the boom in subprime mortgages turned into a national nightmare this summer, the few people who tried to warn federal banking officials might as well have been talking to themselves.

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of "best practices" and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

"He never gave us a good reason, but he didn't want to do it," Mr. Gnaizda said last week. "He just wasn't interested."

Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry's excesses. Both the Fed and the Bush administration placed a higher priority on promoting "financial innovation" and what President Bush has called the "ownership society."...

On Tuesday, under a new chairman, the Federal Reserve will try to make up for lost ground by proposing new restrictions on subprime mortgages, invoking its authority under the 13-year-old Home Ownership Equity and Protection Act. Fed officials are expected to demand that lenders document a person’s income and ability to repay the loan, and they may well restrict practices that make it hard for borrowers to see hidden fees or refinance with cheaper mortgages.

It is an action that people like Mr. Gramlich and Ms. Bair advocated for years with little success. But it will have little impact on many existing subprime lenders, because most have either gone out of business or stopped making subprime loans months ago....

The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks.

Virtually every federal bank regulator was loathe to impose speed limits on a booming industry. But the regulators were also fragmented among an alphabet soup of agencies with splintered and confusing jurisdictions. Perhaps the biggest complication was that many mortgage lenders did not fall under any agency's authority at all.

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