Monday, January 10, 2011

Today's Links

1----Europe unveils sweeping plans to govern reckless banks, Ambrose-Evans Pritchard, Telegraph

Excerpt: Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance. The European Commission’s "Framework for Bank Recovery and Resolution" draws on Scandinavia’s hard-line approach during their banking crises in the early 1990s. The goal is to end the pattern of moral hazard and mispricing of risk that generated Europe’s debt woes.

"Banks will fail in the future and must be able to do so without bringing down the whole financial system," said Michel Barnier, the internal market commissioner Mr Barnier’s consultation paper will lead to a "legislative proposal for a harmonized EU regime" as soon as this summer, with an insolvency structure in place by 2012. The final phase will be the creation of a European Resolution Authority by 2014, adding a fourth pillar to the EU’s new architecture of financial regulation. EU "authorities" typically have their own permanent staff and powers to override national bodies.

The document said regulators should be given "statutory power" to write down senior bank debt, by any amount necessary, or to convert debt into equity. "Such a power would only apply to new debt (or existing debt contracts renewed or rolled over) after entry into force of the power." Worries over the exact shape of the bondholder haircuts caused credit default swaps on senior European bank debt to rise sharply earlier in the day, with the Markit iTraxx Senior Financials index rising 16 basis points to 196.

2--Money market freezes and central banks, VOX

Excerpt: During the global crisis central banks have undertaken unconventional measures that some commentators claim go beyond their mandate. This column focuses on central banks intervening in the money markets as a middle man. It argues that such actions can be welfare improving, but are unlikely to be fiscally neutral, thus raising questions about whether they should be left to a central bank.

During the peak of the crisis in autumn 2008, spreads in money markets rose sharply and volumes contracted, forcing many banks into difficulties with their standard liquidity management and refinancing strategies. Central banks reacted by taking deposits from some banks (via deposit facilities and excess reserve accounts) and lending directly to other banks (via various lending facilities) at much larger scale than in normal times. What some observers and policymakers thought to be a short-term measure has since become an important structural element of public policy during this long crisis. The lending facilities of the ECB, for instance, are still heavily used by many banks, including most troubled Irish banks and several Spanish savings banks.1 Arguably, this lending offers a crucial source of funds for financial institutions which, due to perceptions about their credit risk, would find it difficult to cover their refinancing needs in the market.Is this type of replacement of the money market trade just an unconventional tool of monetary policy? Is it large-scale long-horizon version of standard lending of last resort? Is it consistent with a strict price stability mandate? Does it have fiscal dimensions that would recommend counting with the explicit backing of governments and parliaments? In his analysis of the US experience, Goodfriend (2011) defends that several instances of unconventional monetary policy should be more properly called “credit policy” so as to explicitly acknowledge their potentially significant fiscal implications....

...we examine a model in which concerns about counterparty risk can create money market freezes.... The analysis provides a clear rationale for a government supported replacement of the malfunctioning money market, but also makes clear that the institution performing such a replacement is very likely to be exposed to credit losses. If it is a central bank using extended deposit and lending facilities.... the corresponding central bank should take action with the explicit budgetary backing... from the relevant fiscal authorities.

3---Loan Growth in U.S. Looks to Course Anew, Kelly Evans, Wall Street Journal

Excerpt: Until recently, the best that could be said of lending to U.S. businesses was that the declines were slowing. Lately, though, weekly commercial- and industrial-loan growth is back in positive territory for the first time since the financial crisis hit in late 2008.

Gains, admittedly, are small. The total value of commercial and industrial loans outstanding is up only 2% from its late September nadir to a level of about $1.24 trillion as of year-end, according to seasonally adjusted Federal Reserve data. And the increase is at an early stage, adding greater significance to the latest figures due to be released by the Fed Friday. If the positive trend continues, it could presage a significant pickup in hiring...

Granted, it is true that the recent increase has been more pronounced at large banks that typically lend to bigger and often more-internationally oriented companies. But loan growth at smaller lenders is starting to show some signs of life, even if it isn't as marked as it is at bigger rivals.

This suggests that small businesses may be ready finally to share in the recovery and gradually add jobs.....While corporate lending is on the rise, real-estate loans, which account for more than half of total bank lending, continue to decline.

4--Pinching Pennies, and the Recovery, in D.C., Kelly Evans, Wall Street Journal

Excerpt: Investors by now are familiar with the big risks for 2011: falling home prices, Europe's sovereign-debt crisis, a hard landing in China. As the nation's 112th Congress convenes Wednesday, they perhaps should add another to the list: polarized U.S. politics.

That wasn't the worry last month when the president and Congress compromised to pass an $858 billion package of tax cuts and extensions. The agreement helped shift fiscal policy from being a drag on growth in 2011 to being roughly neutral. Psychologically, it also lifted the veil of "uncertainty" about which businesses had chronically complained.

But market cheers could soon give way to jeers. The ambitious, penny-pinching new Congress—where Republicans have control of the House of Representatives—is on a mission to reduce government spending. Long-term, any austerity push could help the U.S. avoid a Europe-style debt crisis. But not before it could have a dampening effect on growth...

Just as important, the new Congress will be unlikely to help states and localities fill their yawning budget holes as their new fiscal years loom. For states alone, the shortfall is estimated at $140 billion for fiscal 2012. They, unlike the federal government, are required by law to balance their budgets. That doesn't bode well for public-sector workers and broader consumer spending.

This may keep growth from rising much above 3% in 2011. If so, Congress, which helped last month to fan the flames of the stock-market rally, could start starving it of oxygen.

5--The shape of the recovery, The New York Fed

Excerpt: Of particular note, house prices increased moderately early last year, but resumed their decline as the year came to a close. In October, the CoreLogic national house price index was down 3.9 percent from a year earlier (Chart 5). House price declines were reported in all but 11 states. House prices in Arizona and Florida, two of the housing boom states, declined by 8 percent. Distressed sales as a fraction of all repeat-sales increased to more than 40 percent after having declined into the low 30s earlier in the year. Some housing economists are forecasting house prices to fall by 10 percent or more this year.

The growing inventory of defaulted mortgages continues to weigh down any recovery in the housing market. According to the most recent Mortgage Metric Report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, there were 598,000 newly initiated foreclosures in the third quarter of 2010.1 This inflow of new foreclosures exceeded the outflow due to completed foreclosures and properties sold through short sales and deeds in lieu. As a result, the foreclosure pipeline increased to 1.9 million mortgages—double the level from a year earlier (Chart 6). Efforts to modify mortgages have not managed to prevent the foreclosure pipeline from increasing. As a consequence, distressed sales are expected to grow even further over the coming year.

The combination of declining house prices and increasing delays in the foreclosure process will put upward pressure on default rates as well as losses on defaulted mortgages. CoreLogic estimates that in the third quarter of 2010 there were 10.8 million borrowers in negative equity where the balance on the mortgage exceeds the current value of the property. They estimated that there were an additional 2.4 million borrowers estimated to be in “near negative equity” where the borrower has less than 5 percent equity remaining. Declining house prices will push these near negative equity borrowers into negative equity. This increases the risk that these borrowers will default on their mortgages either out of necessity—say as the result of a job loss—or out of choice, which is called strategic default as borrowers determine that there is little economic advantage to keep paying the mortgage. Longer delays in the foreclosure process further increase the incentive for a borrower to strategically default by extending the period of time that they can live “rent free” in the house. In addition, declining house prices increase the expected losses on those mortgages that do default.

Problems in housing markets can impact economic growth. Housing directly effects growth through incentives for builders to build new houses. Housing starts will likely remain depressed as long as house prices are declining. Falling house prices can also negatively impact consumption growth to the extent that homeowners increase their savings in an effort to offset declines in their housing wealth.

6--Venezuela’s Chavez Suggests Stone, Penn and Chomsky For US Envoy, Wall Street Journal

Excerpt: CARACAS–Venezuelan President Hugo Chavez said he would like to see director Oliver Stone, actor Sean Penn, activist Noam Chomsky or former president Bill Clinton be named the U.S. ambassador to the South American country, adding a lighthearted spin to the recent diplomatic spat between the two nations.

The socialist leader’s comments came after the U.S. last week revoked the visa of Venezuela’s envoy to Washington. The move was in reaction to Chavez’s refusal to accept Larry Palmer, President Barack Obama’s nominee for ambassador to Venezuela, after he made unflattering comments about the country.

“I hope they nominated Oliver Stone,” Chavez said jokingly Tuesday night. “I’ll offer a candidate…Sean Penn, or Chomsky. We have many friends over there. Bill Clinton!” Chavez said, throwing out names of candidates he would like to see.

7--Food Stamps Used by Record 43.2 Million in October, USDA Reports, Bloomberg

Excerpt: The number of Americans receiving food stamps rose to a record 43.2 million in October as the jobless rate stayed near a 27-year high, the government said.

Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 15 percent from a year earlier and increased 0.7 percent from September, the U.S. Department of Agriculture said today in a statement on its website. Participation has set records for 23 straight months.

An average of 43.3 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates.

8---In Black America, The Depression Rolls On, Huffington Post

Excerpt: The latest snapshot of the American job market, released by the Labor Department on Friday, confirms what most ordinary people already knew without need of a government report: Little is improving quickly or broadly enough to dislodge the anxiety that has taken up long-term residence in many communities.

Among white people, the unemployment rate dropped in December to 8.5 percent -- hardly acceptable, but manageable were the government spending more to expand a fraying social safety net and generate jobs. For black Americans, the unemployment rate was 15.8 percent....

"Can you imagine any other group at that level of unemployment and the media dismissing it as not important?" the Rev. Jesse Jackson asked during an interview this week.

He described deteriorating inner-city, predominantly-black communities in Chicago and Detroit. In New York, a recent study found that more than one-third of African-American men aged 16 to 24 were unemployed between early 2009 and the middle of last year.

9--Obama Signs Law Blocking Gitmo Closure,

Excerpt: According to his official statement, even though he has “consistently opposed” the effort to block the closure (which is a flat out lie, because his administration has praised previous Congressional efforts which also did that), he signed the bill because of how important he thinks his assorted 2011 wars are, and the bill also includes some (though not all) of the funding for those wars....

Obama went on to insist that prosecutions in federal court, which the bill blocks, are a “powerful tool” for the administration. Though he initially halted military tribunals and promised to move forward with such prosecutions, he has since restarted the tribunals and openly insists a number of the detainees will be held forever and never charged with anything at all. The White House insists it “regrets” that move too, but is also doing it anyhow.

Though the administration has repeatedly insisted that they are “determined’ to closing the detention center, the president has made absolutely no serious efforts to do so in over a year, and has repeatedly signed executive orders and bills which would make the eventual closure even more difficult. It seems difficult then to take his “objections” as anything more than a political bone thrown to supporters who voted for him in the hopes that he would follow through with his pledge to close the facility.

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