Friday, January 21, 2011

Today's links

1--Irish government falls and calls 11 March poll, The Independent

Excerpt: The Irish Government collapsed yesterday, with multiple ministerial resignations propelling Prime Minister Brian Cowen into setting 11 March as the date for a general election. His Fianna Fail party, which dominates the government, is widely expected to be largely wiped out in the contest, since under the Cowen leadership it has slumped to unprecedented depths in opinion polls. ...

The election was precipitated during a day of turmoil after the small Green party, which has kept Fianna Fail in power, called for a contest in March. Four Fianna Fail ministers, plus a long-time supporter, then announced their resignations. In what is viewed in Dublin as an extraordinary move, Mr Cowen then redistributed their portfolios with some of his remaining ministers taking on extra responsibilities. Mary Hanafin, for example, has become Minister for Trade, Enterprise, Innovation, Tourism, Culture and Sport.

Mr Cowen has clung to power with great determination but these and other recent blows are combining to pry his tenacious fingers from the levers of power....His administration was forced to turn to the IMF and EU for a bailout because it could not cope with Ireland's economic woes. Mr Cowen suffered much self-inflicted damage when, until the last moment, he maintained that no such bailout was being sought, cementing his reputation as Ireland's great non-communicator.

2--ECB: Crisis Had Lasting Effect on Growth Potential, Wall Street Journal

Excerpt: In its latest monthly bulletin, the European Central Bank warns that the financial crisis could have a lasting effect on the euro bloc’s potential output, and warned that potential economic growth is unlikely to return to its pre-crisis path for many years.

“It is likely that the financial crisis has led to a one-off permanent loss in the level of potential output, owing to the economic effects of the downsizing of some sectors, such as the financial and construction sectors, following their disproportionate expansion during the boom,” the ECB wrote in its January bulletin....

Citing estimates by the International Monetary Fund, Organization for Economic Co-operation and Development and European Commission, the ECB said potential growth in the euro zone was about 1.9% from 2000 to 2007. It fell to 0.9% from 2008 to 2010, the ECB said. For comparison’s sake, the U.S. is estimated to have had a 2.5% growth potential from 2000 to 2007, the ECB said, and 1.8% from 2008 to 2010.

The ECB takes a grim view on where the euro zone goes from here. Even assuming pre-crisis contributions from technological change and capital accumulation, the damping effect of ageing and a projected decline in the working-age population “yields an estimated rate of growth as low as 1.25% for the euro area in 2020,” the ECB says.

“Thus, even without incorporating any lasting negative impact of the latest economic downturn on potential output growth rates, the impact of an ageing population will significantly reduce potential output growth in the euro area in the long run if no economic reforms take place,” the ECB says.

3--How the financial elite have dismantled the American middle class,

Excerpt: The top 1 percent share of wealth at levels not seen since the Great Depression. Goldman Sachs offering average bonuses of $430,000 while a record 43,200,000 Americans receive food stamps....

The U.S. economy is now operating like a finely tuned engine bent on dismantling the middle class and protecting the tiny elites in our nation that have learned to manipulate both political parties to their financial benefit. This did not occur over night but started in the 1970s when the U.S. government and investment banks juiced up the nation with deficit and debt spending. A single family cannot go into debt for a very long time without consequences but a rising housing market hid much of the inequality developing in our system for a very long time. It was an illusion of stability. The top 1 percent in our nation now control 43 percent of all financial wealth. ...

These are levels not seen since the years before the Great Depression consumed the global economy. The fact of the matter is the top 1 percent has massively gained in real financial terms because of political maneuvering and selling out the middle class. Since these people protect their wealth through investment banks and tax breaks politicians have not dared touch these sacred cows or even asking banks to pay for their decades of personal irresponsible lending. In the end the elite have created a system where the working and middle class are paying for their own demise.

4--An Economic Philosophy That Has Completely Failed', William Black, Huffington Post

Excerpt: I get President Obama's "regulatory review" plan, I really do. His game plan is a straight steal from President Clinton's strategy after the Republican's 1994 congressional triumph. Clinton's strategy was to steal the Republican Party's play book. I know that Clinton's strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton's offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.

The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born's efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem -- they were wrong and Levitt and Born were right. Rubin and Summers weren't slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton's brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance. ...

Effective financial regulation is essential to protect honest firms and consumers from the frauds -- it is distinctly positive sum. The primary purpose of financial regulation is to limit fraud. President Obama, Summers, and OMB do not understand this fundamental aspect of financial regulation -- limiting fraud.

5--Eat-What-You-Kill Brokers Starved as Banks Gorge on Bailout Cash, Bloomberg

Excerpt: Bond-trading boutiques are being squeezed out of the market as Wall Street’s biggest banks recover from the financial crisis that caused almost $2 trillion in losses worldwide....

Banks that dominated debt trading before the credit crisis have recovered their market share after $12.8 trillion of government bailouts healed credit markets and cut profit margins by more than 80 percent. Traders who joined smaller firms are abandoning so-called eat-what-you-kill, or commission-based, pay in search of guaranteed compensation.

“People who went into this expected that the banks would take two to three years to come back; they turned that around in six to nine months,” said John Purcell, who left BTIG in June, 17 months after joining the firm in New York to help lead its expansion into fixed income. “The practical realities of competing in an environment where the banks not only are applying capital again, but are also aggressively hiring and writing some good contracts, just made it more difficult.”

6--OPEC Pressured to Lift Output as African, Asian Oil Tops $100, Bloomberg

Excerpt: OPEC is facing growing calls to boost oil production as crude prices in Asia and Africa surpass $100 a barrel for the first time in two years.

Nigeria’s Bonny Light grade, from which traders gauge the cost of West African oil, rose to $100.12 a barrel on Jan. 17, passing $100 for the first time since October 2008, according to data compiled by Bloomberg. Malaysia’s Tapis and Indonesia’s Minas breached that level a week ago, trading at $103.36 and $103.21, respectively today.

The International Energy Agency, an adviser to consuming nations, said Jan. 18 that “three-digit oil prices risk damaging” the economic recovery, signaling that the Organization of Petroleum Exporting Countries should raise output. OPEC responded the same day by saying that global supplies are sufficient to meet demand.

With “some Asian crudes well above $100 a barrel, the risks of OPEC acting must be higher,” said Lawrence Eagles, New York-based head of oil research at JPMorgan Chase & Co. “We would not be surprised to see the public rhetoric from consuming countries accelerate in the coming weeks. Behind the scenes pressure will no doubt be mounting in parallel.”

7--Obama to Push Congress to Curb Debt, Boost Competitiveness, Bloomberg

Excerpt: President Barack Obama plans to mark the beginning of a politically divided Congress with a State of the Union speech stressing shared responsibility for reining in the deficit and boosting the country’s capacity to compete with foreign economic rivals, according to two Democratic officials.

Obama will seek to use the nationally televised Jan. 25 address to pivot from the response to the financial crisis that occupied much of the first two years of his presidency to a vision of how to meet longer-range economic challenges, the White House has told congressional allies....

“The most important contest we face is not between Democrats and Republicans,” Obama said in that speech. “It’s between America and our economic competitors all around the world.” ...

A call to promote greater accountability in the educational system,...overhauling the tax system,...and cuts to Social Security benefits...(all framed in a "fighting unemployment" theme)

Despite the longest stretch of unemployment rates above 9 percent since monthly records began in 1948, American businesses and investors have prospered since Obama took office. The Standard & Poor’s 500 Index has risen more than 50 percent since his inauguration, and U.S. corporate profits reached a record in the third quarter of 2010. ...Obama’s job-approval ratings have been climbing since the November election. In a Wall Street Journal/NBC News poll taken Jan. 13-17, after his speech at a memorial service in Tucson, Arizona, urging a more civil political discourse, his job approval reached 53 percent. Among independents, positive views of his performance surpassed negative views for the first time since August 2009.

8--Inflation in China, Dr. Ed's Blog

Excerpt: China’s CPI inflation rate was 4.6% on a y/y basis during December, down a tad from 5.1% in November. In the US, the CPI inflation rate remained subdued at 1.5% during December. The CPI for food is soaring in China, rising 9.6% y/y in December, while it was up just 1.5% in the US during December. Excluding food, the CPI rates of inflation in China and the US are closer at 2.1% and 1.5% in December, respectively.

China’s global outreach program is clearly motivated by the nation’s desperate need for more food, energy, and industrial commodities. With such a large motivated buyer in the market, it’s no wonder that commodity prices are soaring, and should continue to do so this year. The Chinese are bound to counter Washington’s demands for a stronger currency by complaining that the Fed’s QE-2.0 program is boosting commodity prices. Nice try. The fact is that China’s inflation problem is homegrown. No one does quantitative easing better than the Chinese. As I’ve noted previously, over the past two years through November, China’s international reserves, bank reserves, and M1 are up 47.6%, 51.9%, and 57.1%

9--Fed Touts Market Gains to Sell QE 2, Wall Street Journal

Excerpt: In recent weeks, the Federal Reserve has been turning to an unusual metric to prove the potency of its bond-buying program: the stock market.

Comments from Fed Chairman Ben Bernanke and other officials, as well as research by the central bank, cite rising stock prices as a sign that the central bank’s $600 billion bond-buying program is working to bolster the economy.

The focus on stocks puts the Fed in an unusual position, given that equity moves haven’t usually been a focus of the monetary-policy process. The shift could be benign, or a sign of trouble.

On the positive side, central-bank policy may indeed be lifting stocks, which should in turn make many households more wealthy and willing to spend, thus boosting growth. On the downside, the gains could be the only thing policy makers can hang their hat on while they pursue a controversial policy.

But since the current round of Treasury purchases started late last year, it’s been a different story. Yields are up, making borrowing more expensive, not less. That’s happened even as Fed bond buying gobbles up nearly all net new issuance of Treasury debt.

That has Fed officials explaining the success of their program in different ways. Mr. Bernanke was asked on Jan. 13 how he knew the bond-buying program was working when yields were rising. He noted in video from CNBC that Fed policies “have contributed to a stronger stock market just as they did in March of “09,” when the Fed last bought bonds. He then pointed to large gains in stock indexes like the S&P 500 and Russell 2000 as evidence that current policy is having a positive influence on the economy.

Meanwhile, a paper published recently by the Federal Reserve Bank of San Francisco assessed the impact of Fed bond buying. “Lower long-term interest rates, coupled with higher stock market valuations and a lower foreign exchange value of the dollar, provide a considerable stimulus to real activity over time,” the paper’s authors wrote.

Fed officials “may feel a little more need to…justify what they are doing” in light of the grief they’ve gotten over the bond buying, said James Hamilton, an economics professor at the University of California San Diego. He also said Fed officials should be somewhat heartened by rising bond yields, as they reflect a market adjustment to a better outlook, along with higher inflation expectations. Those are both welcome, and directly related to the Fed’s action, the economist said.

That explanation for higher yields has been endorsed by some Fed officials. It remains to be seen how central the stock-market story will be for the Fed when the recovery—as many expect—picks up steam.

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