Monday, February 14, 2011

Today's links

1---Fed, Main Street Differ on US Inflation View, CNBC

Excerpt: In congressional testimony on Wednesday, Federal Reserve Chairman Ben Bernanke said "overall inflation is still quite low and longer-term inflation expectations have remained stable."

That may come as a surprise to anybody who is planning to buy a tank of gasoline, a hamburger, or a washing-machine....Commodity prices, as measured by the Reuters-Jefferies CRB index [.CRB 337.78 -2.17 (-0.64%) ], are up 27.5 percent since the end of June and at their highest since the economic meltdown in 2008, as supplies of copper, heat and other goods are stretched by demand from emerging markets grows....

So why the disconnect between consumers and executives and the Fed?

It is because the Fed's top officials, including Bernanke, look at the economy through a prism that compares how fast the economy would grow if firing on all cylinders versus its pace when sputtering.

Seen that way, there is a wide gap between the current state of the economy and its potential, as measured by the job market. About 8 million jobs were lost during the recession and about 13.9 million Americans are unemployed.

The jobless rate, at 9 percent, is well above the 5 percent to 6 percent level most policy-makers consider full employment....

The Fed's preferred measure of inflation, the personal consumption expenditures index, rose a modest 1.2 percent in the 12 months to December, the most recent data shows. Core inflation, which strips out food and energy costs and which the Fed believes is a better indicator of where inflation is heading, has been near five-decade lows.

2--Obama Calls For End Of Fannie Mae, Freddie Mac, Huffington Post

Excerpt: The Obama administration outlined three options Friday to change the way home loans are financed, calling for the slow death of mortgage giants Fannie Mae and Freddie Mac and jumpstarting the debate over the future role of government in helping borrowers secure mortgages.

If implemented, the proposals would likely make it more expensive for borrowers to buy a home and thus restrict the availability of mortgages. It also marks a significant departure from past government policies, which treated homeownership in America as a virtual right....

The first option outlined in the report calls for a private system in which lenders and investors fund new mortgages, with a limited role for existing federal agencies to subsidize home loans for the poor and other special groups, like veterans. The second proposal calls for much of the same, but it includes a government backstop for mortgages during times of market stress. If credit markets froze -- like they did at the height of the crisis -- the government would step in and guarantee new home loans. The third option outlines a much broader government role. Under this alternative, taxpayers would insure securities backed by home loans, which is what Fannie and Freddie already do....

Along with federal agencies, taxpayer-owned behemoths Fannie Mae and Freddie Mac guarantee more than nine of every 10 new mortgages. They were effectively nationalized in 2008. Delinquencies on home loans they back have thus far cost taxpayers more than $150 billion. Their regulator, the Federal Housing Finance Agency, estimates Fannie and Freddie could need up to $363 billion in taxpayer cash through 2013, it said in an October report....But while the administration wants to decrease government's role in funding home loans, it wants to increase federal subsidies for rental housing.

"The report's takeaway message is that the U.S. housing finance system is likely to undergo major changes going forward, and with the likely outcome being a significantly smaller role for the U.S. government," analysts at research firm CreditSights said in a note.

The reality is Democrats want continued government support of mortgages backing securities....A fully privatized system would lead to higher costs for mortgages...

3--Unemployment Solidifies Position as Most Important Problem, Gallup

Excerpt: Thirty-five percent of Americans name unemployment as the most important problem facing the U.S., the highest percentage since the economic slowdown began and higher than at any point since October 1983 (41%). Unemployment is the most important problem for the second month in a row, with the economy ranking second and healthcare third.

From the beginning of the economic slowdown through 2009, mentions of "the economy" in general were consistently the top issue. In the past year, as the government's unemployment rate has stayed in the 9% range, the economy and specific mentions of unemployment have traded the top spot several times. This month, mentions of unemployment increased to 35%, and it now leads mentions of the economy by a significant margin.

4--The war on state workers intensifies, Econbrowser

Excerpt: This caught my eye. From Chicago Tribune:

MADISON, Wis. — Gov. Scott Walker says the Wisconsin National Guard is prepared to respond wherever is necessary in the wake of his announcement that he wants to take away nearly all collective bargaining rights from state employees.

Walker said Friday that he hasn't called the Guard into action, but he has briefed them and other state agencies in preparation of any problems that could result in a disruption of state services, like staffing at prisons.

From The Isthmus:

The Wisconsin National Guard has not been activated but it is on alert.

"Plan for the worst, expect the best," Gov. Scott Walker explained to a jam-packed press conference this morning in the State Capitol.

It was the official roll-out of his broad rollback of collective bargaining rights for unionized government employees, part of his budget repair bill, seeking to resolve a $150 million shortfall in the next five months.

Walker said he was well aware that "some union leaders will try to incite their members."

The governor has contingency plans to take over the prisons, undoubtedly using the National Guard. Plans are also in place to staff intensive care facilities, should those employees walk out.

These contingency plans have been in the works "for months," Walker said this morning.

5--The Keynesian Moment Passes, Rick A. Kuhn,

Excerpt: The fundamental problem is not dealing with short-term movements in effective demand. It is declining profit rates.

As the value of machinery and equipment grows, compared to outlays on employing workers who create new wealth, there is a long term tendency for the rate of profit to fall. This tendency can be offset in various ways. Companies can squeeze more work out of employees or gain access to cheaper raw materials and other inputs. Businesses that have bought assets at a discount during an economic crisis can achieve a higher rate of profit than the previous, but now bankrupt, owners of the very same productive resources. Governments can reduce taxes on profits in the form of the revenue of corporations or wealthy individuals. An individual firm can boost its own profits by investing in new, more efficient technologies than its rivals use, although this also reduces profit rates across the industry.

Low profit rates in productive enterprises led to a spectacular rise in the financial gambling that creates no new value and simply redistributes wealth to those who are lucky or who have inside knowledge. This speculation gave rise to the Global Financial Crisis. It was intensified, but not caused, by the lax regulation of banks, hedge funds and other enterprises that have no interest in the creation of real, let alone useful, commodities. They traded and still trade in exotic securities, like credit default swaps and collateralised debt obligations, as well as, currencies and vital commodities, like oil, food and minerals, leading to wild fluctuations in prices....

Obama's recent 'State of the Union' address was a further step in his migration to neo-liberal policies, designed to raise profits at workers' expense. He had already extended George Bush the Lesser's tax cuts for the rich and announced a two year freeze on federal public servants' salaries. In a bid for partnership with the Republicans who have won control of Congress, Obama now wants to 'lower the corporate tax rate for the first time in 25 years without adding to our deficit', while committing to hold discretionary spending steady for five years, that is to reduce it in real terms, and foreshadowing cuts in health and welfare outlays too.

The social democrat Gillard and the 'liberal' Obama are intoning the same dirge about budget deficits as the conservative Merkel, Sarkozy and Abbott, and the gnomes of the European Central Bank and International Monetary Fund.

Underpinning the reversion to neo-liberal policies is the reality that capitalism depends on profits extracted from workers and that squeezing more out of workers is crucial to restoring the profit rates upon which capitalist growth depends.

Across the developed world, governments are cutting public spending, raising the age at which people are eligible for pensions and targeting wages. The Keynesian vision is evaporating.

Keynes is literally and metaphorically dead. And neo-liberal ideas are zombies, still walking and spreading misery, like the system they justify.

On the other hand, the Arab revolution spreading out from Tunisia raises demands that are not only democratic but also economic and social. These and the capacity of ordinary people for mass organisation and initiative demonstrated by the upsurges, suggest the possibility of a world that is not geared to profit-making or based on national or workplace dictatorships.

6--IMF calls for dollar alternative, CNN Money

Excerpt: The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.....SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs

While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar....

7--A G-Zero World, Nouriel Roubini, Project syndicate

Excerpt: We live in a world where, in theory, global economic and political governance is in the hands of the G-20. In practice, however, there is no global leadership and severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food and global security. Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games. So ours is, in essence, a G-Zero world...

This power vacuum has reinforced the absence of leadership on global economic and political governance within the G-20 since it succeeded the G-7 at the onset of the recent economic and financial crisis. Indeed, with the exception of the London summit in April 2009, when a consensus was reached on joint monetary and fiscal stimulus, the G-20 has become just another bureaucratic forum where much is discussed, but little is agreed upon....

In short, for the first time since the end of World War II, no country or strong alliance of countries has the political will and economic leverage to secure its goals on the global stage. This vacuum may encourage, as in previous historical periods, the ambitious and the aggressive to seek their own advantage.

In such a world, the absence of a high-level agreement on creating a new collective-security system – focused on economics rather than military power – is not merely irresponsible, but dangerous. A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security.

8---Number of the Week: Government’s Overwhelming Role in Mortgages, Wall Street Journal

Excerpt: 92% — The share of new mortgage loans backed by the U.S. government

One of the most crucial issues in safeguarding the U.S. against another financial disaster is figuring out what to do with Fannie Mae and Freddie Mac, the giant mortgage firms the government bailed out in the midst of the financial crisis. Given how deeply the government has waded into the mortgage market, it won’t be an easy task.

Fannie alone ranks as the world’s largest bank by assets, while Freddie is in the top ten. The firms’ subsidized mortgages encourage Americans to take on a lot of debt. Their balance sheets, consisting of long-term investments financed with short-term borrowing, make them highly susceptible to sudden credit freezes. Their government ownership means taxpayers stand to lose tens of billions of dollars if the firms get into trouble again....

Loans bought or guaranteed by Fannie, Freddie and other state entities accounted for 92% of all mortgage loans made in September, according to the latest data from research firm LPS Applied Analytics.

9--Robert Brenner: A Marxist explanation for the current capitalist economic crisis, International Journal of Socialist review

Excerpt: Seongjin Jeong: Most media and analysts label the current crisis as a ``financial crisis''. Do you agree with this characterization?

Robert Brenner: It's understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure. But the difficulty is that they have not gone any deeper. From US Treasury Secretary Henry Paulson and US Federal Reserve chair Ben Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector. At the same time, they assert that the underlying real economy is strong, the so-called fundamentals in good shape.

This could not be more misleading. The basic source of today's crisis is the declining vitality of the advanced economies since 1973 and, especially, since 2000. Economic performance in the US, western Europe and Japan has steadily deteriorated, business cycle by business cycle in terms of every standard macroeconomic indicator -- GDP, investment, real wages and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was by far the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in US peacetime history.

How would you explain the long-term weakening of the real economy since 1973, what you call in your work ``the long downturn’’?

What mainly accounts for it is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries.

What happened was that one after another new manufacturing powers entered the world market --Germany and Japan, the northeast Asian newly indistrialising countries (NICs), the South East Asian ``Tigers'' and, finally, the Chinese leviathan.

These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and in that way profits. The corporations that experienced the squeeze on their profits did not, moreover, meekly leave their industries. They tried to hold their place by falling back on their capacity for innovation, speeding up investment in new technologies.

But of course this only made overcapacity worse. Due to the fall in their rate of return, capitalists were getting smaller surpluses from their investments. They therefore had no choice but to slow down the growth of plant and equipment and employment. At the same time, in order to restore profitability, they held down employees' compensation, while governments reduced the growth of social expenditures.

But the consequence of all these cutbacks in spending has been a long-term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy’s long term weakness.

The crisis was actually triggered by the bursting of the historic housing bubble, which had been expanding for a full decade. What is your view of its significance?

The housing bubble needs to be understood in relation to the succession of asset price bubbles that the economy has experienced since the middle 1990s, and especially role of the US Federal Reserve in nurturing those bubbles. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing.

In effect, in order stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the US and Europe, led by the US administration of US President Bill Clinton, famously tried to break their addiction to debt by moving together toward balanced budgets. The idea was to let the free market govern the economy. But, because profitability had still not recovered, the reduction in deficits delivered a big shock to demand, and helped bring about the worst recessions and slowest growth of the postwar era between 1991 and 1995.

To get the economy expanding again, US authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy.

So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalised by state policy makers and regulators -- first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s.

You were prophetic in forecasting the current crisis as well as the 2001 recession. What is your outlook for the global economy? Will it worsen, or will it recover before the end of 2009? Do you expect that the current crisis will be as severe as the Great Depression?

The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing.

Economic forecasters have underestimated how had bad it is because they have overestimated the strength of the real economy and failed to take into account the extent of its dependence upon a build up of debt that relied on asset price bubbles. In the US, during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plant and equipment was about a third off the previous the postwar low. Real wages were basically flat. There was no increase in median family income for the first time since WWII. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices.

Economic performance was this weak, even despite the enormous stimulus from the housing bubble and the Bush administration's huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was therefore to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. (pure gold)

10-- GSE Headfake: Yet More Looting Branded as “Reform”, Naked Capitalism

Excerpt: But the biggest failing is the continued massive subsidies to the banks, particularly in the housing arena, with a lack of accountability not only for past messes but ongoing train wrecks. Financial firms continue to benefit from heroic efforts to prop up asset prices as a way to preserve the banks from realizing additional losses. For instance, the Fed continues to present quantitative easing as beneficial, when it has in fact done more for the banks than the real economy. And other subsidies are not as widely recognized. From banking expert Chris Whalen:

Much of this increase in the size of Fannie’s balance sheet is repurchased defaulted loans from securitization trusts, grim evidence of the generosity of Secretary Geithner in letting Bank of America (”BAC”/Q3 2010 Stress Rating: “C”) off the hook for mere single digit billions in terms of loan repurchase liabilities. The taxpayer will have to pay the cost of this gift to BAC shareholders, with interest. But excluding this inflow of financial detrius, the balance sheets of the zombie GSEs would be shrinking on ebbing industry new loan origination volume.

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