Tuesday, February 22, 2011

Today's links

1---Wall Street's 'Buy Everything' Sentiment Continues, Reuters

Investors will continue to ride the speediest rally in U.S. stocks since the Great Depression despite growing concerns that the market is overbought and due for a correction. Wall Street posted its third consecutive week of gains with the S&P 500 now up 6.8 percent for the year and more than 20 percent in just six months.

"I've never seen a market like this," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, a market watcher for 35 years. "I'm showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in."...

The driving force behind the rally is the money that poured into riskier assets like stocks in the last quarter of 2010 after the U.S. Federal Reserve pledged to keep interest rates low....

On Thursday, the volume was the second-lowest of the year at 6.7 billion shares, and Monday's session was the lowest of the year with a mere 6.6 billion shares.

"This is a sign that the market is tired, and unless we see an uptick in this volume," the level of investor anxiety will not retreat, Detrick said. U.S. markets are closed on Monday for the Presidents Day holiday.

2--- Willie Sutton Wept, Paul Krugman, New York Times via Economist's View

Excerpt: There are three things you need to know about the current budget debate. First, it’s essentially fraudulent. Second, most people posing as deficit hawks are faking it. Third, while President Obama hasn’t fully avoided the fraudulence,... he deserves much more credit for fiscal responsibility than he’s getting.

About the fraudulence: Last month, Howard Gleckman of the Tax Policy Center described the president as the “anti-Willie Sutton” ... because ... Mr. Obama has lately been going where the money isn’t, making a big deal out of a freeze on nonsecurity discretionary spending, which accounts for only 12 percent of the budget.

But that’s what everyone does. House Republicans ... focus solely on that same small budget sliver. ...

The whole budget debate, then, is a sham. House Republicans, in particular, are literally stealing food from the mouths of babes — nutritional aid to pregnant women and very young children is one of the items on their cutting block — so they can pose, falsely, as deficit hawks.

What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue....

This brings me to the seventh word of my summary of the real fiscal issues: if you’re serious about the deficit, you should be willing to consider ... higher taxes. True, higher taxes aren’t popular, but neither are cuts in government programs. So we should add to the roster of fundamentally unserious people anyone who talks about the deficit — as most of our prominent deficit scolds do — as if it were purely a spending issue.

The bottom line, then, is that while the budget is all over the news, we’re not having a real debate; it’s all sound, fury, and posturing... And we shouldn’t indulge ... politicians by pretending otherwise.

3---The Republican Strategy, Robert Reich's blog

Excerpt: The Republican strategy is to split the vast middle and working class – pitting unionized workers against non-unionized, public-sector workers against non-public, older workers within sight of Medicare and Social Security against younger workers who don’t believe these programs will be there for them, and the poor against the working middle class.

By splitting working America along these lines, Republicans want Americans to believe that we can no longer afford to do what we need to do as a nation. They hope to deflect attention from the increasing share of total income and wealth going to the richest 1 percent while the jobs and wages of everyone else languish.

Republicans would rather no one notice their campaign to shrink the pie even further with additional tax cuts for the rich – making the Bush tax cuts permanent, further reducing the estate tax, and allowing the wealthy to shift ever more of their income into capital gains taxed at 15 percent....

The second part of the Republican strategy is being played out on the state level where public employees are being blamed for state budget crises. Unions didn’t cause these budget crises — state revenues dropped because of the Great Recession — but Republicans view them as opportunities to gut public employee unions, starting with teachers...

The demonizing of public employees is not only based on the lie that they’ve caused these budget crises, but it’s also premised on a second lie: that public employees earn more than private-sector workers. They don’t, when you take account of their education. In fact over the last fifteen years the pay of public-sector workers, including teachers, has dropped relative to private-sector employees with the same level of education – even including health and retirement benefits. Moreover, most public employees don’t have generous pensions. After a career with annual pay averaging less than $45,000, the typical newly-retired public employee receives a pension of $19,000 a year...

The strategy as a whole

These three aspects of the Republican strategy – a federal budget battle to shrink government, focused on programs the vast middle class depends on; state efforts to undermine public employees, whom the middle class depends on; and a Supreme Court dedicated to bending the Constitution to enlarge and entrench the political power of the wealthy – fit perfectly together.

They pit average working Americans against one another, distract attention from the almost unprecedented concentration of wealth and power at the top, and conceal Republican plans to further enlarge and entrench that wealth and power.

4---Weber: Currency Union Damaged, Wall Street Journal

Excerpt: The financial rescues of Greece and Ireland have damaged the foundations of Europe’s currency union, Deutsche Bundesbank President Axel Weber said Monday.

In a speech to an audience of academics and business representatives in Duesseldorf, Weber said it was essential not to let the deals that have been made to keep financial stability in the euro zone become the norm.

“We have to strengthen the foundations again,” he said.

Returning to a theme already made earlier Monday in the Bundesbank’s monthly report for February, Weber warned against measures that buy time in the short term but which encourage moral hazard in the longer term by creating false incentives for states.

“All too often, short-term, ad hoc decisions are taken that are counter-productive in the medium term,” Weber said.

He included in this category the proposal now circulating among euro-zone governments to allow the European Financial Stability Facility to buy the bonds of financially troubled states on the open market, or from the ECB. The ECB has spent over EUR77 billion in supporting the government debt markets of Greece, Ireland and, most recently, Portugal.

“The European Union mustn’t become a transfer union,” Weber said, arguing that the tendency of all such measures was to put extra burdens on the taxpayers of other countries in the euro zone.

5--A Full Frontal View of the World’s Uneven Monetary Policy, Wall Street Journal

Excerpt: Just how raggedly uneven the outlook for the world’s major central banks is was on full display Friday.

Financial markets saw China’s central bank tighten margin requirements for the second time in this still-young year to cool its overheating economy, amid hawkish talk from some central bankers in Europe. Meanwhile, Federal Reserve chief Ben Bernanke went to Paris to tell the world’s central banks not to blame the U.S. central bank if their economies are overheating.

Of course, the idea of a multispeed recovery and divergent policy outlook isn’t new. But the issue lately has been burning more brightly as commodity prices have surged. They are rising because emerging markets such as China’s and Brazil’s are growing very robustly, and rising incomes are boosting demand for food and energy items. Officials in those nations argue that the Fed’s cheap-money policies are creating too much liquidity and driving unsustainable amounts of capital into their nations. Put another way, U.S. monetary policy is the primary source of their woes.

Price jumps in food and energy are, indeed, rattling U.S. consumers, although Fed officials have scrambled to say that underlying price trends remain too weak, a view supported by the data. Meanwhile, some European Central Bank officials are talking tougher about the outlook because they pay more attention to overall inflation measures, which give greater evidence to commodities, relative to their U.S. central-banker counterparts....

Kansas City Fed President Thomas Hoenig–who has for some time now been the chief internal critic of central-bank policy–warned the U.S. Senate Thursday that “history has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand-and-supply conditions.”

Added Hoenig: “My nagging concern remains that current distortions in financial markets are increasing the risk that imbalances in asset markets will catch agriculture–and the U.S. economy more generally–by surprise once again.”

If agricultural land prices prove to be a bubble, it would show the U.S. economy’s potential to surprise. But it would also be somewhat ironic if a bubble formed in mid-western farmland prices due to Fed policy and surging emerging-market demand inadequately tempered by local central banks. The jury thus far remains out.

6----The Bernanke Put and trouble in the commodities markets, Pragmatic Capitalsim

Excerpt: The Fed has not been shy about taking credit for the recent equity price increases. They claim that this so-called “wealth effect” will spill over into the real economy and create a “virtuous cycle” where nominal wealth creation leads to real wealth creation (they have that part backwards – real wealth creation leads to nominal wealth creation, but who needs facts anymore?). But the Fed has also been quick to claim no part in the recent commodity price spike (also no mention of the continuing house price declines, but again, who needs all the facts when you can better prove your point by leaving most of the facts out of the equation?).

I have claimed that the Bernanke Put is a direct cause of a severe psychological imbalance in the market where investors begin to act irrationally based on false promises made by the Fed. The truth is, the Fed’s ability to influence the real fundamental economy via QE is limited (this has become abundantly clear when one actually studies the intended transmission mechanisms of QE), however, they are having a powerful impact on market psychology. This is where many economists lose sight of the forest for the trees. They entirely ignore the human reaction to policy measures. And in an environment where the Fed is maintaining low rates and literally telling people that they will keep “asset prices higher than they otherwise would be” it is simply foolish to believe that they are not inducing some level of speculation in various markets.

he recent bout of inflation in China and the floods in Australia have laid the perfect foundation for a fundamentally driven rally in many commodities. Add in the Fed’s direct message to buy risk assets and you have all the ingredients for rampant speculation. To believe that this speculation is stopping at equities is naive at best....

It’s time for the Fed to take responsibility not only for the equity rally, but also the rise in commodity prices. Perhaps more importantly, it is time for the Fed to admit that it is having a highly destructive impact on market psychology and is only helping to fuel a speculative frenzy that is likely to increase price instability and market disequilibrium.

QE has failed to generate any sort of job growth in the USA. There are now signs that it is creating severe price instability in many markets. Therefore this policy measure is counterproductive to both of the Fed’s mandates. It’s time to reconsider Fed policy and whether this approach is appropriate in the current environment. To me, it is clear that it is not.

7--For-profit colleges can continue to rip-off students, says Congress, Huffington Post

Excerpt: A bipartisan House group voted on Friday to block the Obama administration from cracking down on career college programs that leave students with debt they can't repay.

The House budget amendment, proposed by Rep. John Kline, R-Minn., and approved 289-136, would prevent the Department of Education from publishing long-discussed consumer protection rules that would regulate for-profit colleges and some community college programs.

Known as the "gainful employment" rule, the hotly debated regulation would gauge whether students at such programs are able to repay their student loans and can attain salaries that don't bury them under unmanageable debts. Programs that fail to meet certain student debt targets could lose access to federal higher education grant and loan dollars -- revenue that is crucial to the survival of the for-profit college industry.

The measure is still far from becoming reality, as the House budget bill will face a major uphill battle in the Senate, and the threat of a veto from President Obama. But the vote is indicative of the growing political influence of the for-profit education industry on both sides of the aisle in Congress.

More than 50 Democrats in the House joined Republicans in opposing one of the Obama administration's key higher education reform proposals.

Industry representatives applauded the vote, saying the regulation would "cost in excess of 100,000 jobs and deny a pathway to employment for more than 1.5 million students, disproportionately affecting minorities and women," according to a statement from the Coalition for Educational Success, an industry group representing some of the largest publicly traded for-profit education companies.

Individual programs -- not entire schools -- could be subject to sanctions. The Department of Education estimates that if the rules go through, about 16 percent of for-profit programs could lose access to federal higher education dollars.
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For-profit colleges are facing increased public scrutiny amid a bevy of data that shows students at such schools take on much more debt and default on federal student loans at much higher rates than other college students.

Average tuition at for-profit schools is nearly twice that of the in-state tuition at four-year public colleges, and more than five times the average tuition at community colleges, according to a Senate report released last year. And recently released data from the Department of Education show that a quarter of all students enrolled at for-profit schools defaulted on federal student loans within three years -- more than double the rate of students at non-profit institutions....

Rep. George Miller, D-Calif., the ranking Democrat on the House Education and the Workforce Committee, who opposed the amendment, said the vote would "shut down work on protecting students from financial exploitation."

8---Republicans warn against rolling out Dodd-Frank in haste, Housingwire

Excerpt: Republican lawmakers fired off a letter to federal regulators this week, warning the agencies about the dangers of hurriedly implementing mortgage finance reforms outlined in the Dodd-Frank reform act.

Sen. Richard Shelby (R-Ala.), a ranking member of the Senate Committee on Banking, Housing, and Urban Affairs, signed the letter with several other Republican lawmakers. "We are concerned regulators are not allowing adequate time for meaningful public comment on the proposed rules," the policy makers wrote....

"The rules adopted under the Dodd-Frank Act will have a long-term effect on economic growth; they will affect how consumers and businesses obtain credit, allocate capital and manage risk," the lawmakers said.

The Dodd-Frank Act, which will impact everything from mortgage underwriting standards to lender capitalization requirements, has already been challenged by the business community.

National Association of Realtors President Ron Phipps has been active in encouraging Congress to reduce heightened underwriting standards in the mortgage industry to support home sales.

9-- Yves Smith from Econned: Pins the financial crisis on shadow banking, naked capitalism

Excerpt: "At the same time, other data do lend support to the notion that the shadow banking system was the main culprit in the meltdown. Bank lending has contracted far less than its murky twin. Although global corporate lending did fall from its peak of $2 trillion in 2007 to $1.5 trillion in 2008, that level was on par with 2006. Between the second and third quarter of 2008, U.S. bank credit increased 1%, and between the third and fourth quarter, banking industry consultants Oliver Wyman estimated that it contracted by 0.5%.

By contrast, while $1.8 trillion of asset-backed bonds were issued in 2006, only $200 billion were floated in 2008, and issuance through mid-2009 was “minimal.” Similarly, Credit Suisse pegs the contraction in “shadow money” in private debt securities since 2007 at $3.6 trillion, or 38%, due primarily to the substantial increase in repo haircuts, plus a dearth of new issues and a fall in prices."...

But of course, the Fed has to continue to assert that its super low rates really have no distorting effect on the wider world. The learned blindness is truly astonishing. Anyone with an operating brain cell can see that the object of Fed policy is to blow a new asset bubble to create a wealth effect to stimulate demand (or more accurately to prop up asset prices, and since the Fed has said it does not believe in asset bubbles, it won’t recognize it has created one till after the fact). And as we have also said repeatedly, the Japanese demonstrated in the late 1980s when they explicitly tried to create a bubble to stimulate domestic spending, that the end result is a financial crisis and a bad economic hangover.

So it does not take much in the way of imagination to see that goosing assets prices in thing you’d like to stabilize, like US housing and stocks, is going to leak into all sorts of other markets, like commodities. But the Fed is insistent on dodging responsibility for its past mistakes as well as its current actions.

10---The struggle of Wisconsin workers enters a new stage, World Socialist Web Site

Excerpt: The virtual disappearance of strikes from American life coincided with an explosive growth of social inequality and a vast transfer of wealth from the working class to the richest one percent of society.

Social tensions have now reached a breaking point. Two and half years since the eruption of the financial crisis, more than 26 million workers cannot find a full-time job. State governments, under both Democrats and Republicans, are responding to budget deficits by closing schools, libraries, clinics and other public facilities, and carrying out attacks on state and municipal employees.

Meanwhile, Wall Street share values have fully recovered since the crash of 2008 and the corporations and their top executives are richer than ever. President Obama has refused to provide a penny of relief to workers losing their jobs, homes and life savings. Instead he has outlined plans to slash a trillion dollars from vitally needed social services, to pay for the bailout of Wall Street, the extension of the Bush era tax cuts for the rich and the Pentagon war machine. And this is only the beginning.

The emergence of open class conflict is exposing myths propagated by the political establishment. Among these is the supposed mass support for the “Tea Party.” Largely a media creation, fueled by millions of dollars from corporate billionaires, the Tea Party backers of Governor Walker could muster no more than a small crowd of demoralized supporters in Madison Saturday. The overwhelming popular sentiment, expressed by nearly everyone one encountered in the city, was support for the protests....

Workers are fighting for their very livelihoods. They cannot live with what amounts to a 20 percent pay cut and devastating cuts in public education and state universities for their children.

This collision between the working class and the trade unions and the Democratic Party is developing quickly. Already on Sunday a mass meeting of 3,000 teachers in Madison rejected efforts by union officials to end their job action and order them back to work today.

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