Tuesday, January 25, 2011

Today's links

1--HOT: Fed Hides Major Accounting Change, economicpolicyjournal.com

Excerpt: Reuters has a very hot story out tonight on an accounting change the Fed snuck into a regular weekly report. It will move off its balance sheet any bad debt the Fed may have purchased from Goldman Sachs, or anybody else for that matter. Here's Reuters via CNBC (My emphasis):

Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

But they are averting asking the Treasury for money in the future by an accounting gimmick that will simply dump the debt off its own balance sheet and onto that of the Treasury. More from Reuters:

[According to]Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey, "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability...

"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer....

Bottom line: We all knew the Fed was going to have to do some kind of monkey business to deal with all the junk securities it purchased, here it is: Negative liabilities. Yes, only at your local Fed.

2--Low Interest Rates and Optimism About the Economy Did Not Lure Homebuyers in December, Dean Baker, CEPR

Excerpt: The Post reported on the better than expected numbers on existing home sales reported for December. It told readers that:

"Low interest rates, relatively affordable prices and tentative optimism about the economy helped lure buyers in December."

Actually, the data on existing home sales reports on closed sales in December. It generally takes 6-8 weeks between when a house contract is signed and when the sales are closed. This means that the December data reflect attitudes in October and early November, not December.

3--2010 a ‘disappointing’ year for housing, Lanser on Real Estate

Excerpt: Are banks holding back on foreclosing?

Krueger: I was one of those instigators of this hypothesis. It’s not easy to prove. Looking at the data and at the decline in notices of default and in foreclosures, one has to come to the conclusion that that banks are — I wouldn’t call it a sinister ‘holding back.’ You could give it a nicer sounding name and call it ‘inventory management.’

This is something that every business does when there’s a fluctuation in demand or a fluctuation in supply, and it’s normal behavior. This behavior was made possible by pressure from the public, pressure from the government, pressure from state and local government to ease off on the foreclosure process to protect local communities.

But it also makes sense from the point of view of banks to manage this because it stabilizes home prices. And if you need anything right now in California and in the nation, it’s a sense of stabilization and a sense of normalcy, particularly when that can be combined with a sense that the economy seems to be turning around, it seems to be sustainable and even the job numbers are beginning to improve.

All of this together will restore consumer confidence and a period of consumer consumption and, to some degree, even the animal spirits of the entrepreneurs and business people. (G.U. Krueger is chief economist and founder of HousingEcon.com, which bills itself as a research firm for investors, developers and government agencies.)

4---Car Dealers Roll Out Cheap Financing, Wall Street Journal

Excerpt: It sounds like a bad commercial for a local car dealership: "These rates are so low, we're barely making money!" But more than three years after the recession threw car sales into a tailspin, many dealers have started offering loans at interest rates so low they don't make much of a profit -- and that's turning conventional car-buying wisdom on its head....

Some dealers are offering loans at or near 0%. And unlike past low-interest financing offers, these rates are increasingly available on longer loans for a wider variety of cars, including luxury vehicles and across popular brands like Toyota ( TM: 82.01, -1.35, -1.61% ) and Honda....

Typically when dealers offer a loan, they do so at a rate several percentage points higher than what a bank or credit union might offer. The dealer isn't lending his own money, he's just a middleman -- the money for the loan comes from the lending arm of the dealer's associated automaker. And everybody makes money.

But now dealers are offering interest rates that are 0% or close to it -- for less than what it costs a financing arm to raise capital to lend. In this case, the dealer is not making money, and, because the automakers subsidize the loans to help dealers move cars that aren't selling, the automakers are losing money. On average, automakers lost $2,139 for each car they helped finance in 2010, slightly less than the $2,229 they lost per car in 2009, according to Edmunds.com.

5---China's banking crisis, Michael Pettis, Credit Writedowns

Excerpt: ....the cost of cleaning up the last banking crisis was very high, much higher than simply calculating the explicit cost of recapitalizing the banks by direct and indirect equity infusions, and so will the cost of the next one be. The combination of implicit debt forgiveness and the wide spread between the lending and deposit rate has been a very large transfer of wealth from household depositors to banks and borrowers. This transfer is, effectively, a large hidden tax on household income, and it is this transfer that cleaned up the last banking mess..

It is not at all surprising, then, that over the past decade growth in China’s gross domestic product, powered by very cheap lending rates, has substantially exceeded the growth in household income, which was held back by this large hidden tax. It is also not at all surprising that household consumption has declined over the decade as a share of gross national product from a very low 45 percent at the beginning of the decade to an astonishingly low 36 percent last year.

This is how China’s last banking crisis was resolved. It did not result in a collapse in the banking system, but it nonetheless came with a heavy cost. The banking crisis in China resulted in a collapse (and there is no other word for it) in household consumption as a share of the economy.

This is why the People’s Bank of China is so worried about another surge in non-performing loans. The idea that China can simply grow its way effortlessly out of its loan problem is widespread but wrong. If the household sector is forced once again to clean up a banking mess, this will make China even more reliant for growth on the trade surplus and on investment.

Remember that there is no such thing as a painless banking crisis and anyone who suggests otherwise should not be taken very seriously. There is always a significant cost, and the cost is almost always borne one way or the other by the household sector. In China, with its already too-low household consumption, it will be very risky to force households to clean up yet another surge in non-performing loans. It would only make it more difficult than ever for China to achieve the rebalancing its economy so urgently needs.

6---Obama Picks Jeffrey Immelt, GE CEO, To Run New Jobs-Focused Panel As GE Sends Jobs Overseas, Pays Little In Taxes, Huffington Post

Excerpt: Jeffrey R. Immelt, the chairman and chief executive of General Electric Co. tapped by President Barack Obama as his next top outside economic adviser, will be asked to guide the White House as it attempts to jump-start lackluster job creation and spur a muddled recovery.

Immelt's firm stands as Exhibit A of a successful and profitable corporate America standing at the forefront of the recovery. It also represents the archetypal company that's hoarding cash, sending jobs overseas, relying on taxpayer bailouts and paying less taxes than envisioned.

The move is the latest salvo in the White House's continued aggressive and very public outreach to corporate America. Earlier this month, Obama appointed a top executive at JPMorgan Chase as his chief of staff, and this week he granted a longtime wish of business interests by promising to review federal regulations perceived as onerous.

Immelt's appointment raises fresh questions about Obama's courtship and future policy proposals. Firms like GE say good jobs will come from lower taxes and less regulation. Immelt told analysts Friday that he'll focus on tax policy and regulation, among other topics.

7---The problem is "demand" not deficits, Mike Konczal, Rortybomb

Excerpt: Atif Mian and Amir Sufi have recently written an economic letter for the Federal Reserve Bank of San Francisco, Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery:, where they find:

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. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. 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.

I’m going to write more about this later, but it’s amazing how locked in the “supply-side” logic is with our opinion leaders, even when dealing with our current recession. The article spends a lot of time with the Chamber of Commerce and Obama dealing with business leaders, with the idea that Obama needs to get business confidence back. It doesn’t mention that the number one self-reported problem facing small businesses, by a mile, is poor sales. The article is really stuck on the idea that the problem must be the deficit, or the “populist” tone Obama has taken with Wall Street, or the financial reform bill, not depressed consumer spending....

Embedded in that assumption is that the only thing that would hold back a full employment economy is government action; deregulate enough, and supply will create its own demand. It’s too bad that doesn’t describe our situation.

8--Balance Sheet Recessions, Mark Thoma, Economist's View

Excerpt: ...a financial collapse brought about by bad loans is particularly severe. The present recession is an example of this, and policy has done a good job of preventing even worse problems from developing by rebuilding financial sector balance sheets through the bank bailout and other means.

But household balance sheets have not received as much attention. We could have helped households rebuild their balance sheets, and this would have helped banks by lowering the default rate on loans. Instead, we left households to mostly solve their problems on their own, and then helped banks when households could not repay what they owed.

When a balance sheet recession hits, one of the keys to a quick recovery is to use the federal government’s balance sheet as a means of offsetting the deterioration in the private sector’s financial position. But we shouldn’t just focus on banks. Household balance sheet problems are every bit as severe, and in total every bit as systemically important as the balance sheet problems of banks. We’ll recover faster from balance sheet recessions if we pay attention to all private sector balance sheets instead of focusing mainly on the problems of banks.

The perception that the government bailed out undeserving wealthy bankers while leaving households to fend for themselves is a big part of the backlash against the policies put into place to help with the recession. That perception is correct, for the most part, and it will stand in the way of repeating this policy the next time there is a financial collapse. When the next balance sheet recession hits, and another one will hit no matter how hard we try to avoid it, we need to do a better job of helping households. Not only is this good economics – we will recover faster with this policy – the politics of helping households are far superior to those associated with bailing out banks.

Balance sheet recessions take a large toll on the finances of banks, households, and state and local governments, and policymakers – fiscal policymakers in particular – must do a better job of taking such factors into account as they respond to downturns in the economy.

9--Why Aristide Should be Allowed to Return to Haiti, Mark Weisbrot, counterpunch.org

Excerpt: Haiti's infamous dictator "Baby Doc" Duvalier, returned to his country this week, while the country's first elected President, Jean-Bertrand Aristide, is kept out. These two facts really say everything about Washington's policy toward Haiti and our government's respect for democracy in that country and in the region....

Wikileaks cables released in the last week show that Washington put pressure on Brazil, which is heading up the United Nations forces that are occupying Haiti, not only to keep Aristide out of the country but to keep him from having any political influence from exile.

Who is this dangerous man that Washington fears so much? Here is how the Washington Post editorial board described Aristide's first term, back in 1996:

"Elected overwhelmingly, ousted by a coup and reseated by American troops, the populist ex-priest abolished the repressive army, virtually ended human rights violations, mostly kept his promise to promote reconciliation, ran ragged but fair elections and, though he had the popular support to ignore it, honored his pledge to step down at the end of his term. A formidable record."...

Aristide is still alive, in forced exile in South Africa. He remains the most popular political leader in Haiti, and seven years is not enough to erase his memory from Haitian consciousness. Sooner or later, he will be back.

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