1--Could the U.S. central bank go broke?, Reuters
Excerpt: The U.S. Federal Reserve's journey to the outer limits of monetary policy is raising concerns about how hard it will be to withdraw trillions of dollars in stimulus from the banking system when the time is right.
While that day seems distant now, some economists and market analysts have even begun pondering the unthinkable: could the vaunted Fed, the world's most powerful central bank, become insolvent?...
But the Fed's newfangled policy steps and the potential for credit losses raises, for some experts, the prospect that the Treasury may actually be forced to "recapitalize" the Fed -- economist-speak for what others might call a bail-out.
That would be a strange role reversal given the Fed's efforts to ease monetary policy by buying the Treasury's debt, and it could raise a political firestorm from lawmakers who believed all along the Fed was putting taxpayer money at risk....
"What would the international reaction be if the Fed suddenly had to go and be recapitalized?" said Bob Eisenbeis, chief monetary economist at Cumberland Advisors and a former head of research at the Atlanta Fed. "I don't think that would bode well for Treasuries, or for the dollar, or anything else. It would be embarrassing."
2--Central bank urges China to cut U.S. debt holdings, Reuters
Excerpt: China should further diversify its huge foreign exchange reserves away from U.S. government debt to reduce its risk exposure, a central bank official said in comments published on Monday.
"We should change the single-currency focus on buying U.S. Treasuries and adopt a more diversified structure for foreign exchange reserves to reduce risk," Xu Nuojin, deputy-director of the People's Bank of China in Guangzhou, was quoted as saying by the Securities Times.
China should channel more of its foreign exchange reserves into resources and equities, Xu said.
Analysts estimate that about two-thirds of the reserves, which hit a record $2.65 trillion at the end of September, are parked in dollar assets, although the currency composition is a state secret.
3--A House Is Not a Home, Doug Kass, The Street via patrick.net
Excerpt: The latest sword placed in the heart of the housing market occurred on Friday with the first high court ruling against banks and in favor of homeowners in Massachusetts, which ruled that there was no legal right to foreclose because assignment was not done properly -- again, questioning the integrity of the home title chain, the legal right to have foreclosed on 3 million homes since 2007 and the right to foreclose on another 8 million homes that are currently in the distressed/foreclosed pipeline.
"In addition to this verdict's immediate impact, it brings about death by a thousand cuts ... the litigation phase of the foreclosure crisis is going to get out of control. Homeowners, originators, underwriters, trustees, servicers, title companies, MI firms and everybody else involved in the origination, funding, securitization, servicing and insuring spaces will be suing everybody else. Multiple, big cases will come from state AG's, and class action suits will be announced daily."-- Mark Hanson
Massive legal confusion and uncertainty now surrounds the housing market, and with the recent rise in interest (and mortgage) rates, how anyone can make an optimistic housing forecast (or any forecast at all!) is beyond me.
For housing, it's (very) different this time.
4--Group: Exclude Foreclosure Protection From New Mortgage Rules, Wall Street Journal
Excerpt: Protections for homeowners facing foreclosure should be excluded from mortgage-lending rules being developed by federal bank regulators, an industry group said Monday.
The Mortgage Bankers Association said in a letter to regulators that the two issues should be considered separately. Combining them “runs the risk of giving short-shrift to two highly complex and critically important issues,” wrote John Courson, the group’s president.
Federal regulators have been working on defining which home loans are considered safe enough to be exempt from a new requirement that issuers of mortgage-backed securities hold on to 5% of the risk.
The Federal Deposit Insurance Corp. has been arguing that these so-called risk-retention rules should also contain standards for mortgage-servicing companies, which collect home-loan payments and distribute them to investors. It has been battling behind the scenes with the Federal Reserve and Office of the Comptroller of the Currency, which question whether those standards should be included.
Mortgage servicers have been plagued with problems and are under federal scrutiny after revelations that several companies used “robo-signers” to process foreclosure documents without having employees reading them.
5--Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal, Firedoglake
Excerpt: Between California and Illinois, you’re looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren’t just extensions of current law in the tax cut deal.
That’s not a commentary on how the tax cut deal could have ended state budget crises (although an innovative policy solution could have at least put that in motion and at lesat begun to set up some counter-cyclical fund so states don’t have to contract during recessions). It’s more a commentary on how economic forecasters assumed major growth from this tax cut deal, even though it’s almost entirely composed of poor stimulus and would be overwhelmed by budget cuts at the state and probably federal level. Austan Goolsbee likes to talk up the stimulative power of that tax cut deal, but he’s looking at it in a vacuum. Fiscal policy in 2011 and 2012 is still very likely to be contractionary, and nobody in Washington is arguing for that to change. Vain hopes of “stimulus” seem very odd, in this context.
6--Explaining Recent Trends in Household Saving, Econbrowser
Excerpt: From Reuven Glick and Kevin Lansing, Consumers and the Economy: Household Credit and Personal Saving:
In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.
Obviously, with consumption accounting for 70% or so of GDP, the trajectory of consumption is key to determining growth (as well as to the US current account balance).  Glick and Lansing observe:
... most empirical studies seek to explain movements in the saving rate using movements in the ratio of household net worth to personal disposable income. However, some studies have shown that the behavior of consumption, and by extension saving, is also strongly associated with changes in credit growth. Bacchetta and Gerlach (1997) and Ludvigson (1999) find that credit growth has a significant positive impact on consumption growth in the United States and other countries. In these studies, changes in credit growth can be interpreted as capturing changes in lending practices or other factors that affect consumer access to borrowed money. ...
The authors compare the predictions of their model, incorporating this credit channel, against those of a standard net worth based model (that is, using household net worth to disposable income as a determinant). The credit variable is the change in the "measure of credit availability constructed from the Federal Reserve Board Senior Loan Officer Opinion Survey..."
The adjusted R-squareds are 90% vs. 73% for the more restricted model. Thus the evolution of ease of access to credit is going to be key, going forward, to understanding the path of consumption.
7--Lower Wages for workers who lost jobs, Calculated Risk
Excerpt: From Sudeep Reddy at the WSJ: Downturn's Ugly Trademark: Steep, Lasting Drop in Wages
Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.
The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. "The deeper the recession, the lower the wage you're going to get in the next job and the lower the quality of your next job," he says.
Even for those who can find work, the impact of the great recession lingers ...
Note: Wages are typically sticky downward for those workers who do not lose their jobs - but for those who lose their jobs, wages can fall sharply when they eventually find new work (this happened in the early '80s too).
8--The Dollar: Dominant no more?, Barry Eichengreen, Vox EU via Economist's View
Excerpt: The one thing that could jeopardize the dollar’s dominance would be significant economic mismanagement in the US. And significant economic mismanagement is not something that can be ruled out.
The Congress and Administration have shown no willingness to take the hard decisions needed to close the budget gap. The Republicans have made themselves the party of no new taxes and mythical spending cuts. The Democrats are unable to articulate an alternative. 2011 will see another $1 trillion deficit. It is hard to imagine that 2012, an election year, will be any different. And the situation only deteriorates after that as the baby boomers retire and health care and pension costs explode.
We know just how these kind of fiscal crises play out, Europe having graciously reminded us. Previously sanguine investors wake up one morning to the fact that holding dollars is risky. They fear that the US government, unable to square the budgetary circle, will impose a withholding tax on treasury bond interest – on treasury bond interest to foreigners in particular. Bond spreads will shoot up. The dollar will tank with the rush out of the greenback.
The impact on the international system would not be pretty. The Canadian and Australian dollar exchange rates would shoot through the roof. A suddenly strong euro would nip Europe’s recovery in the bid and plunge its economy back into turmoil. Emerging markets like China, reluctant to see their exchange rates move, would see a sharp acceleration of inflation and respond with even more distortionary controls.
With exorbitant privilege comes exorbitant responsibility. Responsibility for preventing the international monetary and financial system from descending into chaos rests with the US. How much time does it have? Currency crises generally occur right before or after election.
9--The Student Loan Debt Bubble, Alan Nasser and Kelly Norman, Counterpunch
Excerpt: There is about $830 billion in total outstanding federal and private student-loan debt. Only 40 percent of that debt is actively being repaid. The rest is in default, or in deferment (when a student requests temporary postponement of payment because of economic hardship), which means payments and interest are halted, or in forbearance. Interest on government loans is suspended during deferment, but continues to accrue on private loans.
Of course the usual suspects are among the top private lenders: Citigroup, Wells Fargo and JP Morgan-Chase....
Financial Aid and Subprime Lending
A higher percentage of students enrolled at private, for-profit ("proprietary") schools hold education debt (96 percent) than students at public colleges and universities or students attending private non-profits.
Two out of every five students enrolled at proprietary schools are in default on their education loans 15 years after the loans were issued.
In spite of this high extended default rate, for-profit colleges are in no danger of losing their access to federal financial aid because, as we have seen, the Department of Education does not record defaults after the first two years of repayment.
Nor have the disturbing findings of recent Congressional hearings on the recruitment techniques of proprietary colleges jeopardized these schools'
access to federal funds. The hearings displayed footage from an undercover investigation showing admissions staff at proprietary schools using recruitment techniques explicitly forbidden by the National Association of College Admissions Counselors. Admissions and enrollment employees are also shown misrepresenting the costs of an education, the graduation and employment rates of students, and the accreditation status of institutions.
These deceptions increase the likelihood that graduates of for-profits will have special difficulties repaying their loans, since the majority enrolled at these schools are low-income students. (Forbes magazine, Oct. 26, 2010, "When For-Profits Target Low-Income Students", Arnold L. Mitchem)
A credit score is not required for federal loan eligibility. Neither is information regarding income, assets, or employment. Borrowing is still encouraged in the face of strong evidence that the likelihood of default is high.
Loaning money to anyone without prime qualifications was "subprime lending" during the ballooning of the housing bubble, when banks were enticing otherwise ineligible candidates to buy houses they could not afford.
Shouldn't easy lending without adequate credit checks to college students with insecure credit also be considered "subprime lending"?
Apart from stimulus funding, overall government student aid is disproportionately aimed at those attending proprietary schools. Nearly 25 percent of federal financial aid is spent on students attending for-profit colleges, even though these colleges enroll less than 10 percent of the nation's college students.
The Education Department reports that 43 percent of those who default on student loans attended for-profit schools, even though only 26 percent of borrowers attended such schools. Many of those who attended for-profits don't earn enough to repay their loans. It's not uncommon for a student who either paid out of pocket or took out a loan for a $30,000 degree to find herself stuck in a $22,000 a year job. This only adds insult to injury: a Government Accounting Office study reports that "A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value. However, the same certificate from a local community college cost $520.00." (GAO, "For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices", Nov. 30, 2010...
Paying back student loans out of low income and over a long period of time can rule out the possibility of making other financial investments required for the vanishing American Dream, such as buying a house, or saving for retirement or for one's children's education....
Credit card and even gambling debts can be discharged in bankruptcy. But ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens.