Thursday, January 20, 2011

Today's links

1--Blaming Regulation, Peter Goodman, Huffington Post

Excerpt: Two years after inheriting the worst economic disaster since the Great Depression, President Barack Obama has settled on an unhelpful new explanation for his failure to restore jobs: A surplus of suffocating regulations.

In an op-ed published in Tuesday's Wall Street Journal, the president decries how regulations have sometimes "gotten out of balance, placing unreasonable burdens on business -- burdens that have stifled innovation and have had a chilling effect on growth and jobs."...

t wasn't too many regulations that trashed the economy. It was not enough rules -- a deficit that owes in large part to the efforts of many of the people Obama has leaned on in putting together his economic policies.

Robert Rubin, who helped Obama during his transition and remains a conspicuous influence at his Treasury Department, persuaded President Bill Clinton to roll back regulations on derivatives, the complex investments at the center of the financial crisis of 2008. Rubin's protégé, Larry Summers -- who recently left the White House, where he oversaw Obama's economic policy -- aided in that effort. Summers and Rubin both played key roles in dismantling the Depression-era walls between Wall Street trading and ordinary banking. These policies enabled a gambling mentality to capture Wall Street, perverting and rerouting the flows of money that are crucial to a healthy real economy.

A host of banking regulators allowed lenders to pump excessive amounts of speculative capital into mortgage markets and complicated derivatives trades while setting aside little in reserve. When crisis struck -- as it inevitably does in any market-oriented economy -- it was huge enough to take down the real economy.

2---Global food prices hit record high, WSWS

Excerpt: Food prices have hit record highs due to a string of crop failures together with an upsurge in speculation, resulting in rising living costs.

The UN’s Food and Agriculture Organization recently announced that the food price index has now broken a previous record set in 2008, when food prices nearly doubled over the course of 18 months, leading to popular upheavals in dozens of countries.

Rising food prices, which have shot up 25 percent in the past year, have precipitated riots and demonstrations in Tunisia, Morocco, Algeria, Jordan, Mozambique and Yemen in recent weeks.

Skyrocketing costs were a contributing factor in the popular upsurge in Tunisia that toppled the dictatorship of Zine El Abidine Ben Ali last week. In Algeria, at least three people have been killed in clashes with police after the government slashed food subsidies.

Over the past year, the commodity food price index for corn has risen 52 percent, for wheat 49 percent and for soybeans 28 percent. Non-staple cash crops have also risen dramatically, with coffee up by 53 percent and cotton 119 percent....

The sharp rise in food prices is partly attributable to a bad crop year, exacerbated by a series of natural disasters. Droughts in Argentina and Russia, both major food producers, have decreased output, while recent floods in Brazil and Australia have completely wiped out some crops....

The US Commodity Futures Trading Committee proposed limits last week on the size of commodity bets taken by speculators, as part of the Dodd-Frank financial reform bill. The proposal, which amounts to little more than a public relations exercise, will be voted on after a two-month “comment period.” Two of the four commissioners who voted in favor of the proposal have indicated that they would not vote to put the measure into law, meaning that it will never come into existence....

Speculation, which has played a major role in rising food prices, is itself dependent on the supply of ready cash. Thus, a major reason for the surge in global prices is to be found in the Obama Administration’s monetary policy. The US has kept the federal funds interest rate, the rate at which banks charge each other for loans, as close to zero as possible. At the same time, it has undertaken unprecedented moves, called “quantitative easing,” to expand the money supply even further. These measures, which come on top of the vast government bailout that transferred trillions of dollars into US finance companies, have served to flood the market with cash, fueling speculation.

3--Get Ready For Another Housing Crash, CNBC via

Excerpt: The best evidence that we're headed for a double-dip in housing is the quality of the mortgages during the recent period in which the housing market seemed to improve in many areas.

In the Freddie Mac review of Citigroup’s performing loans that I mentioned earlier today, the portion rated as “Not Acceptable Quality” was as high as 32 percent in the fourth quarter of 2009....Now there have been indications in the past that a mini-housing bubble was being built during that period. The Federal Housing Authority, for instance, was backing some very questionable loans. The home-buyer tax credit was allowing individuals to buy loans with no money down. All the bad practices of the 2005-2007 bubble seemed to be back again.

And now we know that this perception was correct. Mortgage quality had fallen off a cliff....What does this mean for housing? It implies that home prices may be due for a another crash, as lenders try to avoid incurring losses from mortgage put-backs by raising credit quality once again. Much of the supposed health of the housing market may have been just another easy money illusion.

4--Breaking News: Ibanez Foreclosure Ruling Upheld: An Indictment Of The Securitized Mortgage System, via

Excerpt: The SJC's ruling can be summed up by Justice Cordy's concurring opinion:

"The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court's opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated."

The Court's ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it's become much more complicated with the proliferation of mortgage backed securities (MBS's) -which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage "in blank" - meaning without specifying to whom the mortgage would be assigned until after the fact - does not constitute a proper assignment, at least in Massachusetts.

5--Real Estate Outlook: Double-Dip on the Horizon?, via

Excerpt: Is the housing market poised for a double dip in house values? Corelogic reports that as of November, home values were down 5 percent from the same time the year before.

CoreLogic Chief Economist Mark Fleming says, "We're continuing to see the influence of seasonal declines that typically depress home prices during the latter part of the year, but the fact that the rate of decline increased for November is indicative of the uphill battle we're facing with the housing recovery."

Steep declines were seen in multiple locales across the nation. Idaho saw home values fall 13.5 percent. reports that the "decline in home values from the national peak in June 2006 officially surpassed the magnitude of declines experienced during the Great Depression, falling 26 percent from peak levels."

Also troublesome is the monthly pace at which homes values are now declining. In November the rate rose to 0.78 percent.

According to Zillow, "We're still seeing significant weakness in the lowest home value tier, particularly with the expiration of the Federal home buyer tax credits. ... Weakness in the bottom tier of homes naturally translate into the higher tiers as these homeowners become exposed to negative equity (and thus are removed from the demand equation altogether) or have less money to spend buying their next home."

6--U.S. Factories Buck Decline, Wall Street Journal

Excerpt: U.S. manufacturing, viewed as a lost cause by many Americans, has begun creating more jobs than it eliminates for the first time in more than a decade.

As the economy recovered and big companies began upgrading old factories or building new ones, the number of manufacturing jobs in the U.S. last year grew 1.2%, or 136,000, the first increase since 1997, government data show. That total will grow again this year, according to economists at IHS Global Insight and Moody's Analytics.

After a steep slump during the recession, manufacturing is "the shining star of this recovery," says Thomas Runiewicz, an economist at IHS. He expects total U.S. manufacturing jobs this year to rise to about 12 million. Currently, manufacturing jobs account for about 9% of all U.S. nonfarm jobs; the average pay for those jobs is roughly $22 an hour, or nearly twice the average for service jobs, according to government data....

"Manufacturing is going to be a significant source of job growth over the next decade," says Mark Zandi, chief economist at Moody's Analytics. He says U.S. manufacturers that survived the brutal 2008-09 recession are now very competitive, with much lower labor costs and debt burdens, and so can afford to expand. While they will keep building factories overseas to address demand in emerging markets, they also will invest in U.S. plants, Mr. Zandi says. He expects manufacturing job growth to average about 2% a year through 2015.....All of this doesn't herald a miracle recovery for manufacturing, which accounted for 11% of U.S. economic output in 2009, down from 27% in 1950.

7--FRBSF Economic Letter: Household Debt and the Weak U.S. Recovery, via Economist's View

Excerpt: Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery, by Atif Mian and Amir Sufi, FRBSF Economic Letter:

The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.

One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history. The thin blue line in Figure 1 plots the ratio of household debt to income for the U.S. economy over time, where income is measured as compensation and wages. After a steady increase from 1950 to 2001, the household debt-to-income ratio skyrocketed from 2001 to 2007 by more than it had in the prior 45 years....

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......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....

Our view is that the depth and length of the current recession relative to previous recessions is closely linked to the tremendous rise in household debt that preceded it.

8--How much are gasoline prices weighing on consumers?, Econbrowser

Excerpt: On Friday Reuters reported:

Rising gasoline prices beat down U.S. consumer sentiment in early January, overshadowing an improved job outlook and passage of temporary federal tax breaks, a survey released on Friday showed. A year-end surge in gasoline prices ratcheted up consumer inflation expectations to their highest in more than two years, according to the latest data from Thomson Reuters and the University of Michigan. The surveys' preliminary January reading on the overall consumer sentiment slipped to 72.7, below 74.5 in December. It fell short of a 75.4 reading predicted by economists polled recently by Reuters.

The correlation between consumer sentiment and gasoline prices is reasonably strong....increases in gasoline prices are usually accompanied by a drop in consumer sentiment.... A 10 cent per gallon increase in gasoline prices shaves a half point from the consumer sentiment index....

The average real U.S. gasoline price increased from $2.73/gallon in September to $3.08 so far in January. If you dynamically simulate the above equation, you end up predicting a cumulative effect of rising gasoline prices over the last 3 months of a little more than a 2 point drop in consumer sentiment. In other words, if gas prices had not risen, we might have expected to see consumer sentiment about two points higher than it currently is.

All of which is consistent with the assessment I offered last month. Rising oil prices are not enough to derail the recovery, but they are perhaps starting to have some effects.

9--Tunisia’s “unity” government fractures as protests continue, WSWS

Excerpt: With each day that passes, the underlying social contradictions within the so-called “Jasmine Revolution” become more apparent. One of the most important observations on the mass protests in Tunisia was made by David D. Kirkpatrick in the New York Times. He wrote, “In the streets, the Tunisian revolution continued to evolve. It began in the hard-pressed provinces with demands for more jobs, especially for Tunisia’s soaring number of young college graduates, nearly a third of whom are estimated to be unemployed or seriously underemployed. It spread to the workers, small business owners and the coastal professional class as a revolt mainly against the flagrant corruption associated with Mr. Ben Ali’s family....

The danger that such a genuinely popular insurgency might spread beyond Tunisia is the central concern of the imperialist powers and the Arab regimes alike.

So far, this has not materialised. But protesters in Egypt, Algeria and Mauritania have emulated the self-immolation protest that initially spurred on the mass protests in Tunisia.

In Egypt yesterday, a man set fire to himself in Cairo—the third in just two days, and the second that day.

One day earlier, protesters in Mauritania and Algeria set themselves alight. Four people have attempted self-immolation in Algeria since the Tunisian revolt began.

The Arab League meets today in Sharm El-Sheikh, Egypt, with the stated purpose of discussing trade and development. Its real agenda has been set in Tunisia. Yesterday, Kuwait’s Mohammad al-Sabah told a preparatory meeting of foreign ministers, “The Arab world is witnessing today unprecedented political developments and real challenges in the sphere of Arab national security… Countries disintegrate, people conduct uprisings... and the Arab citizen asks: Can the current Arab regime meet these challenges dynamically?”

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