1--Wisconsin Power Play, Paul Krugman, New York Times
Excerpt: Why bust the unions? As I said, it has nothing to do with helping Wisconsin deal with its current fiscal crisis. Nor is it likely to help the state’s budget prospects even in the long run: contrary to what you may have heard, public-sector workers in Wisconsin and elsewhere are paid somewhat less than private-sector workers with comparable qualifications, so there’s not much room for further pay squeezes.
So it’s not about the budget; it’s about the power.
In principle, every American citizen has an equal say in our political process. In practice, of course, some of us are more equal than others. Billionaires can field armies of lobbyists; they can finance think tanks that put the desired spin on policy issues; they can funnel cash to politicians with sympathetic views (as the Koch brothers did in the case of Mr. Walker). On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.
Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. And unions are among the most important of these institutions....
The fiscal crisis in Wisconsin, as in other states, was largely caused by the increasing power of America’s oligarchy. After all, it was superwealthy players, not the general public, who pushed for financial deregulation and thereby set the stage for the economic crisis of 2008-9, a crisis whose aftermath is the main reason for the current budget crunch. And now the political right is trying to exploit that very crisis, using it to remove one of the few remaining checks on oligarchic influence.
So will the attack on unions succeed? I don’t know. But anyone who cares about retaining government of the people by the people should hope that it doesn’t.
2--Number of the Week: The Perils of Inequality, Wall Street Journal
Excerpt: 364% — Difference in the hourly earnings of high-paid and low-paid employees
US consumers are in a much better financial situation than they were just a couple years ago. But the poor and middle class still have at least one big incentive to get into trouble again: The growing challenge of catching up to the rich.
Various economists, most notably Raghuram Rajan of the University of Chicago, have stressed the pivotal role income inequality played in the financial crisis. Poorer Americans’ debt troubles, the logic goes, stemmed in part from their efforts to bridge the gap with the rich by borrowing money. A flood of cash from China, together with enterprising bankers and mortgage subsidies from the U.S. government, created the perfect environment for those efforts to get out of control.
Now U.S. consumers have managed to shed a lot of their debt. They’ve done so at great cost to the economy, which has swallowed hundreds of billions of dollars in bad loans. As of September 2010, total household debt stood at 118% of disposable income, down from a peak of 130% three years earlier. Much of that has shifted to the government, which has seen its debt to the public rise to 61% of GDP, from 36%, over the same period.
The inequality, though, hasn’t gone away. Rather, it’s hitting new records. As the economy bottomed out in 2009, the hourly wage of employees in the 90th pay percentile—those whose wage exceeded that of 90% of the working population—stood at $38.50, according to a new study by the Congressional Budget Office. That’s 364% more than the $8.30 an hour earned by those in the 10th percentile. A decade earlier, the difference was 332%, adjusted for inflation. The difference is more pronounced for men than women, at 383% versus 319%.....
To be sure, it’s not as easy to get into debt trouble as it was before the crisis. Banks are more careful, and subprime lending has all but disappeared (with the notable exception of the booming junk-bond market). But the Federal Reserve is trying as hard as it can to get people borrowing again. And in some areas, people are beginning to rack up debt: In the last three months of 2010, credit-card balances rose at an annualized rate of 2.7%, the highest since mid-2008. As of December, margin debt in the stock market was also at its highest level since mid-2008.
Let’s hope recent history doesn’t repeat itself.
3--Bernanke Warns of Money-Flow Imbalances Between Nations, Bloomberg
Excerpt: As the global economy recovers from the recession, imbalances in flows of money between nations could pose new threats to financial stability and the recovery if unchecked, the Federal Reserve chairman, Ben S. Bernanke, said Friday.
At a central banking conference before a meeting here of the Group of 20, Mr. Bernanke said that while the global financial crisis was receding, “capital flows are once again posing challenges for international macroeconomic and financial stability.” He added, “They reflect the two-speed nature of the global recovery as emerging market growth far outstrips growth in advanced economies.”
Mr. Bernanke called on countries that export more than they import to allow their currencies to reflect its overall economic performance, and urged those with large trade deficits to increase their savings and put their fiscal policies on more sustainable path.
Mr. Bernanke did not mention China in his remarks, although they appeared to be a veiled reference to Beijing’s policy of keeping its currency, the renminbi, artificially low to gain a trade advantage. As Mr. Bernanke delivered his remarks, the Chinese central bank governor, Zhou Xiaochuan, appeared on the same stage...
“Spillovers can go both ways,” Mr. Bernanke said. “Resurgent demand in the emerging markets has contributed significantly to the sharp recent run-up in global commodity prices.”
Mr. Zhou later appeared to concede the point, to a degree. He noted that Chinese exporters complain that they would all go out of businesses if the government were to allow the renminbi to rise by 3 percent. “But then that happens and then they survive,” he said. In fact, he added, “they have room to improve and survive.”
Policy makers in advanced economies have been calling on China to stoke demand from within its own country to even out its trade dominance. Mr. Zhou said China was working on that. “One day we’ll have a domestic market too, depending on price elasticity.” he said.
4---G20 Paris: Bernanke defends easy money policy and calls for currency reform, The Telegraph
Excerpt: "Capital flows are once again posing some notable challenges for international macroeconomic and financial stability," he said in remarks prepared for delivery to a Banque de France event in Paris.
Many emerging nations blame loose monetary policy in the developed world for creating a rush of "hot" money that is destabilising their economies by inflating commodity prices and stoking inflation....
"Countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports," he said....
"Global imbalances contributed to the financial crisis and a rebalancing of global demand is the key to a sustainable recovery," Mr King said in a speech he is to deliver in Paris.
Mr King said that while financial regulation can help deal with global imbalances, it has limitations. He said there needed to be an agreement on spending and exchange rates.
Without co-operation it will be "only a matter of time before one or more countries resort to protectionism" as the only way to counter these imbalances.
"If we, collectively, do not deal with these problems at best we will have a weak world recovery and at worst we will sow the seeds of the next financial crisis," he said.
"That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences."
5--High interest payments threaten Portugal, euro, USA Today
Excerpt: Portugal's financial agony deepened Friday, threatening to pitch Europe into a new round of economic turmoil over its debt crisis. The country's borrowing costs are punishingly high, with the interest rate on its 10-year bonds holding above 7% for a 10th session Friday.
As Portugal — one of the smallest and frailest in the 17-nation eurozone — runs out of options, its leaders are pressing fellow European nations to adopt new crisis management measures at a summit next month, ahead of a euro4.5 billion ($6.13 billion) debt repayment that falls due for Portugal in April.
Yet the broad consensus in markets is that Portugal is doomed to become the third member of Europe's bailout club, after Greece and Ireland, partly because the continent's paymaster Germany doesn't want the issue to fester much longer.
Another bailout for a eurozone member is sure to further undermine market confidence in the fiscal soundness of the single currency bloc and carry severe consequences for other vulnerable — and much bigger — countries such as Spain, Belgium and Italy.
6---Looks Like Banks Lose on Risk Plea, Floyd Norris, New York Times
Excerpt: When the mortgage securitization market collapsed amid a flood of defaults and foreclosures — many of them on loans that should not have been made — the cry arose for lenders to have “skin in the game.” To properly align incentives, the argument went, those who make loans must suffer if the loan goes bad.
That principle was enacted by Congress last year in the Dodd-Frank law, but the mortgage industry managed to persuade legislators to insert an ill-defined loophole that would allow at least some mortgage loans — and perhaps nearly all of them — to escape the requirement that banks retain at least 5 percent of the risk.
Now it is up to an unwieldy council of regulators to set the parameters of that loophole. They will do that by defining the term “qualified residential mortgage.” If a loan is a Q.R.M., as bankers now refer to such loans, then it can be sold to investors without the lender retaining any risk.
Much of the banking industry has been pushing for an expansive definition that would leave few, if any, conventional loans subject to the skin-in-the-game requirement. To hear them tell it, there is virtually no way that any bank would make a mortgage loan at a reasonable rate if it had to share in any losses.
“The potential impact on the availability of credit stemming from the Q.R.M. risk-retention exemption cannot be overestimated,” John A. Courson, the president of the Mortgage Bankers Association, wrote in a letter to regulators.
“Few loans to ordinary customers are likely to be made outside the Q.R.M. construct; the loans that are made will be costlier and likely to be made only to more affluent customers.”
In other words, Congress did not know what it was doing when it mandated the retention of risk, and the regulators should spare us such folly....
One provision likely to set off controversy is a limit on how that 20 percent down payment is obtained. The buyer would have to put up at least half of it — 10 percent of the purchase price — from his or her own holdings. The rest could be a gift, from parents, for instance, but it could not come from seller concessions or from borrowing. Mortgage insurance would not enable a nonqualifying loan to become qualifying...
One reason some lenders oppose skin in the game is that they do not have enough capital to cushion the additional risk. Those not affiliated with depository institutions are not used to keeping loans on their books, and a requirement that they do so could reduce the amount of competition....The law says banks should keep a 5 percent stake, but it does not say how that should be calculated.
It seems likely that the regulators will mandate some form of “vertical” share, meaning the lender would keep at least a 5 percent share of every tranche in the securitization. A “horizontal” share — in which the lender would suffer the first 5 percent of losses — has some advocates. But there are concerns that ways could be found to structure deals so that such a “loss” was illusory because it would come out of profits that were not expected to be earned in the first place....
None of this is made any easier by the fact there seems to be nothing except peer pressure to force any regulator to accept a rule favored by the other regulators.
Once a proposal is released, it will be open for comment, and there is likely to be fierce lobbying. Many banks will take the position that excluding any loan from the definition of a Q.R.M. is tantamount to denying a mortgage to a borrower who needs such a loan, and will warn that restricting credit in that way could further devastate the housing market.
On that position, they may have some allies. A joint letter to regulators from groups of banks, home builders, real estate agents and consumer groups warns that “a Q.R.M. definition that is too narrow would prohibit many first-time homebuyers from buying a home, especially if the definition includes an excessively high minimum down payment requirement.”
7---Banks Find Loophole on Capital Rule, Wall Street Journal
Excerpt: Some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.
In November, Barclays PLC quietly changed the legal classification of the U.K. bank's main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.
The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.
"It's just not worth it to have all that capital trapped" in the holding company, said a New York lawyer who is advising banks on how to restructure....
Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.
Last summer's Dodd-Frank law beefed up rules governing the quantity and types of capital banks must keep to protect themselves from potential losses. The provision also closed a loophole that allowed foreign banks to run their U.S. subsidiaries with thinner capital buffers than those of their local rivals.
For example, Barclays Group US Inc., the U.K. bank's Delaware-based holding company, had a Tier 1 leverage ratio of just 1.37% as of Sept. 30. That put the holding company below almost all its peers of similar size, which had an average ratio of 9.13%, according to Federal Reserve data.
U.S. bank-holding companies generally must have Tier 1 ratios of at least 4% to be considered well-capitalized by federal regulators....
8---Blame the Community Reinvestment Act: Wrong!, The Big Picture
Excerpt: As the FCIC staff reports released so far in the run up to the final report have demonstrated, the primary fuel of the financial crisis was a hands-off approach to regulation. This ideologically driven lack of regulatory oversight allowed tremendous growth of the “shadow banking system,” a largely unregulated web of complex financial transactions that essentially served the same functions as the existing banking system—attracting short-term funds from those seeking safe, liquid investments and using these to finance long-term loans, particularly residential mortgages—but without government oversight to ensure that these activities were being done safely and soundly.
As the FCIC staff reports demonstrate fairly conclusively, it was the shadow banking system’s unregulated private securitization of mortgages that caused the financial crisis, not affordable housing policies. The FCIC staff has done an excellent job of compiling the facts, and we encourage you to check out the FCIC’s comprehensive reports to date. In our view, below are their most persuasive arguments.
Look at the market share
The market activities of the relevant parties clearly show the problem with the argument made by the minority FCIC members. The market shares of Fannie Mae, Freddie Mac, and CRA-regulated lending institutions dropped tremendously during the housing bubble. Meanwhile, the market share of private mortgage securitization, which the FCIC majority largely blames for the crisis, and which the FCIC minority completely ignores, grew in lockstep with the rise of the housing bubble.
The relative market share of Fannie Mae and Freddie Mac dropped fairly dramatically during the 2000s bubble, from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent at the height of the bubble in 2005 and 2006. Notably, this decline occurred contemporaneously with the unsupported rise in housing prices and the deterioration in underwriting standards that virtually all observers blame for the collapse of the housing markets.
Similarly, the market share of financial institutions for which CRA applied has been steadily declining since 1977, when CRA was passed. CRA-regulated institutions, primarily banks and thrifts, accounted for only 28 percent of all mortgages originated in 2006 (the height of the bubble), a significant decline from their share in the late 1990s and early 2000s. As with Fannie and Freddie, this market share drop occurred in lockstep with the rise of the housing bubble.
In contrast, the market share of private mortgage securitization, a pillar of the “shadow banking system” that was not backed by the federal government and not regulated for safety and soundness in the way that Fannie, Freddie, and regulated banks and thrifts were, rose sharply and contemporaneously with the rise of the housing bubble. In 2002, the share of mortgages originated by private securitization was just over 10 percent of the total market. Over the next four years, this share grew rapidly, accounting for nearly 40 percent of all mortgage originations by 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006.
Look at the default rates
Equally conclusive are the default rates of mortgages originated for these various lending channels. If the conservative view was correct, one would expect to see mortgages originated for Fannie and Freddie securitization, as well as those originated for purposes of CRA, to default at higher rates, since these were the loans directly subject to affordable housing policies. In fact, we see quite the opposite, as these loans have performed exponentially better than those originated for private securitization, which the FCIC Republicans ignore.
Mortgages originated for private securitization defaulted at much higher rates than those originated for Fannie and Freddie securitization, even when controlling for all other factors (such as the fact that Fannie and Freddie securitized virtually no subprime loans). Overall, private securitization mortgages defaulted at more than six times the rate of those originated for Fannie and Freddie securitization.
Similarly, mortgages originated for CRA purposes have performed at much higher rates than loans originated for private securitization, going into foreclosure 60 percent less often than loans originated by independent mortgage companies that were key to providing the mortgages needed to supply private securitization.
But even if these facts didn’t exist, the FCIC Republican narrative fails miserably in explaining the financial crisis. To illustrate why it fails, let’s perform a simple thought experiment our colleague Matthew Yglesias has suggested: Let us suppose that the GOP’s argument is correct, and that government affordable housing policies were 100 percent responsible for the housing bubble and the flood of unsustainable mortgages that were originated during the 2000s.
How could the FCIC Republican argument possibly explain the analogous housing and financial bubbles that occurred contemporaneously in other countries such as Iceland, Ireland, the United Kingdom, and Denmark, which did not have Fannie or Freddie Mac or CRA? The FCIC majority argument has a plausible and compelling explanation for the global credit bubble—that an unregulated and overleveraged shadow banking system systematically underpriced credit risk. The FCIC Republican minority has no explanation for these contemporaneous bubble-bust cycles that occurred in other countries.
Or consider that a virtually identical bubble occurred in the U.S. commercial real estate mortgage market. There is no government policy FCIC Republicans can point to that encouraged lenders to loosen underwriting standards for malls or office buildings. (see graph)
What’s more, this commercial real estate had a large exposure to private securitization, as did credit card debt, student loans, and auto loans, all of which experienced bubble-bust cycles that were similar to that which happened in residential real estate.
Moreover, the FCIC minority narrative fails to explain the huge private-sector demand for subprime and Alt-A mortgages, or the mortgage-backed securities created out of these mortgages. The crux of the FCIC Republican argument is the affordable housing goals and CRA created the demand for risky subprime and Alt-A mortgages, which in turn created the huge demand for the private mortgage-backed securities that led to the 2000s housing bubble.
But this ignores the huge existing demand for private mortgage-backed securities. Even after Fannie and Freddie plunged into the market for these mortgage-backed securities, they never accounted for more than a fraction of the demand for these securities. (see graph)
Instead, the common thread was under-regulation at every level of the financial system leading to a general real estate bubble. The bursting of the bubble first in the subprime home mortgage market was a symptom of just how little consumer protection was left, as federal regulators told state authorities who tried to stop more abusive mortgage companies to stand down due to federal preemption doctrines.
David Abromowitz is a Senior Fellow at the Center for American Progress. David Min is Associate Director for Financial Markets Policy at the Center.
9----JPMorgan: Banks added MBS, munis in 4Q while dumping Treasurys, agency debt, Housingwire
Excerpt: The securities portfolios of banks rose by 3% in the fourth quarter, as the lenders added mortgage-backed securities and municipal bonds while shedding Treasurys, agency debt and asset-backed securities.
Amy Hsi of JPMorgan Securities Inc. said MBS holdings at domestic banks rose by more than $50 billion last year with all the activity in the second half and essentially evenly split between the third quarter and fourth quarter. The level of residential mortgages increased by more than $10 billion in the fourth quarter, she said....
Total deposits at all American banks climbed 2% during the fourth quarter to $7.4 trillion, according to JPMorgan Securities.
"Some growth in loan holdings could indicate that securities purchases could be lower; however, we find that historically securities purchases continued to grow for some time after loan growth picks up," JPMorgan analyst Hsi said in the financial services giant's weekly note on securitized products.
10---Large housing inventories to be sold at deep discounts in 2011: DBRS, Housingwire
Excerpt: Foreclosure filings and completed foreclosures will reach record levels this year, after lenders exhaust alternatives such as mortgage modifications, according to DBRS.
Analysts expect increased losses to residential mortgage-backed securities, as a result, because large inventories of foreclosed homes will be sold at deep discounts. The ratings agency also expects the federal government to continue calling for large-scale loan modifications in 2011. This will now affect loans such as option adjustable-rate mortgages because most of the delinquent subprime mortgages have already been modified.
DBRS projects delinquency trends to continue climbing this year, as negative home equity persists, home prices remain down, unemployment stays high, and many borrowers have trouble refinancing due to tightened underwriting standards.
Analysts said the number of REO properties could double over the next 12 months to 4 million from 2 million, and it will take at least one to two years to sell those homes, further hindering recovery. DBRS said servicers may turn to short sales and some government programs more often this year to sell these distressed properties.
11---Even with bank-constricted pipeline, some foreclosures auctions rise, Housingwire
Excerpt: Foreclosures in some markets are on the rise, according to one survey of courthouse auctions. However, the numbers do not indicate a peak in foreclosure sales has been reached.
"Despite months of slow sales, we've simply returned to prior levels, which to me indicates banks remain reluctant to aggressively foreclose despite the time it takes to foreclose being at or near record levels," said Sean O'Toole, founder and CEO of ForeclosureRadar. "And large inventories of properties [are] still scheduled for foreclosure sale."
Foreclosure auction sales grew as much as 50% in some states during January as foreclosure moratoriums came to an end, sending hundreds of distressed properties back to the auction block, foreclosure data firm said Tuesday.
"While the increase is significant, we've seen larger surges after moratoriums or delays have played out in the past," said O'Toole in an email. "For example in California after the delays caused by Senate Bill 1137 we saw a surge in Notice of Default filings that far eclipsed any prior period. That is not the case here."...
California — one of the state's hit the hardest by unemployment and falling real estate prices during the recession — saw its back-to-bank foreclosure sales jump 51.1% between December and January. Sales of foreclosed homes to third parties in California also rose 52.8%.