Friday, February 11, 2011

Weekend links

1--Obama's Big Budget Cut Proposals Target The Poor, Huffington Post

Excerpt: ...the White House is targeting programs in the $4 trillion budget that benefit low-income Americans. It's a sop to moderates and conservatives, and it's likely to infuriate voters who put President Barack Obama in the White House.

In the past week, the Obama administration has signaled that it will propose significant cuts to community service block grants and an energy assistance program that helps poor people stay warm in the winter and cool in the summer.

A White House source familiar with the budget process told HuffPost that the president will propose cutting $2.5 billion from the Low Income Home Energy Assistance Program, or LIHEAP, which received $5.1 billion in federal funds in 2009. That program distributes money to states, which then distribute it to social service agencies to help families heat or cool their homes.

The National Energy Assistance Directors' Association, a group that represents state aid officials in Washington, said Wednesday that the bad economy has forced more low-income households to rely on LIHEAP. About 8.3 million households used it in fiscal 2010, up from 7.7 million and 5.8 million during the previous two years, and the association expects eligible applications to rise to 8.9 million this year. NEADA director Mark Wolfe told HuffPost that the administration's proposal would cut off 3.5 million households.

"It's just a cruel proposal," Wolfe said. "What this would do is take some of the most vulnerable families in the country off energy assistance."

2--U.S. Home Values Lost $798 Billion Last Quarter, Nearly $10 Trillion Destroyed Since Peak, Business Insider via the Automatic Earth

Excerpt: The total value of U.S. homes dropped another $798 billion last quarter, according to numbers out from Zillow.

The average home is down 27 percent from peak. This puts the total loss from the housing crash at an incredible $9.8 trillion.

3--Easy Money Is Bringing Buyouts Back to Life, Bloomberg via the Automatic Earth

Excerpt: In February 2009, Wall Street was betting that some highly indebted companies taken private by the likes of Blackstone Group, Kohlberg Kravis Roberts, and other buyout firms weren't going to make it. Credit- default swaps (CDS)—instruments that pay off when borrowers can't meet their obligations—were priced at a level that implied a 99.8 percent chance of debt default for Clear Channel Communications, Univision Communications, Freescale Semiconductor, and the former Harrah's Entertainment (now Caesars Entertainment). The thinking was that with credit markets frozen, those companies would not be able to borrow the money they needed to refinance loans and bonds as they came due.....

Two years later, as the economy recovers and access to debt markets opens for even the least creditworthy companies, the story is different....

What happened? As the Federal Reserve holds benchmark interest rates near zero to stimulate the economy, the companies are finding that investors are increasingly willing to lend them money to refinance their buyout-related loans and bonds. "You have a lot of money searching for yield, and when that happens a lot of folks can get money regardless of the situation of their balance sheet and income statement," says Lon Erickson, a money manager who helps oversee $9 billion of fixed-income assets for Thornburg Investment Management in Santa Fe, N.M....

With previous buyouts back from the dead, the world's largest private equity funds are planning a new round of takeovers. KKR is seeking to raise $8 billion to $10 billion for a new fund. In an interview with Bloomberg TV at the World Economic Forum in Davos, Switzerland, Blackstone co-founder Stephen A. Schwarzman said that there is capital to fund leveraged buyouts of as much as $10 billion as debt becomes more available.

"We're all absolutely shocked at how fast leverage snapped back from where we were, say, two years ago," says William G. Welnhofer, a managing director at Robert W. Baird & Co. in Chicago. "I don't think anyone who's honest would have expected such a move."

4---The Federal Reserve's latest quantitative easing may lead to disaster, The Guardian

Excerpt: QE2...will also exacerbate the already serious global tensions over exchange rates. While highly critical of China's manipulation of the yuan, the Fed is itself using QE to drive down the value of the dollar.

America's rivals are going to see their competitive position eroded by higher commodity prices and a higher exchange, unless they either implement their own QE programmes, impose capital controls or raise tariff barriers. It is little wonder that Pascal Lamy, the director-general of the World Trade Organisation, has been raising the spectre of a return to tit-for-tat protectionism....

Indeed, the US bears the hallmarks of what Keynes described as a liquidity trap, the point where neither ultra-low bank rate nor quantitative easing can persuade consumers or businesses to part with their cash. Trying to use monetary policy in these circumstances, he said, was like pushing on a piece of string; a better idea would be for governments to do the investing themselves through public works schemes.

But this is not going to happen. Policy makers had a brief flirtation with Keynes back in the winter of 2008-09, but are now intent on cutting deficits and balancing budgets....

The nightmare scenario, therefore, is that the Fed creates the conditions for the deflation it dreads. It is creating money to pay off its debts. It is knowingly debauching the currency. And it is fanning the flames of protectionism. The danger is that higher inflation pricks the bubble in the bond market, leading to a collapse in the dollar. Financial markets then tumble, the banks are plunged into fresh crisis, confidence collapses, and activity nosedives.

It's a rerun of 2008-09, in other words, only worse because deflation is a reality, fiscal policy is shunned and international co-operation has been replaced by mutual suspicion and perhaps even outright hostility.

5---Republican Threat to Cut SEC Funding May Delay Fiduciary Rules, Bloomberg

Excerpt: Republicans in the U.S. Congress may withhold funds from the Securities and Exchange Commission, delaying a new standard for brokers and registered investment advisers, said Representative Barney Frank.

The SEC’s potential budget shortfall “will have the effect of either delaying or slowing down at best” fiduciary rulemaking, Frank of Massachusetts, the senior Democrat on the Financial Services Committee, said in a telephone interview. The agency was asked by Congress to look at the effectiveness of existing rules governing brokers and investment advisers as part of the Dodd-Frank financial services overhaul law enacted July 21.

Without money for staff to help implement a common standard and follow up on complaints, the SEC won’t be able to enforce it, said Frank, a coauthor of the legislation. The SEC, which can make the rules without additional Congressional approval, recommended in a staff report delivered to Congress Jan. 21 that brokers and registered investment advisers who give personalized investment advice follow a uniform fiduciary standard.....

“Unfortunately, we’ve been operating under a continuing resolution that has hampered our ability to do what investors and capital markets deserve,” SEC Chairman Mary Schapiro said in a Feb. 4 speech in Washington. “It is a strain that will intensify the longer the budget remains at existing levels.”...

“The SEC is empowered, but the congressional budgetary authority has real teeth,” said Rudy Adolf, chief executive officer of New York-based Focus Financial Partners, a group of registered investment advisers with more than $40 billion in assets. “There’s no question that Congress has the power to undermine whatever is being done.”

6---Greece should restructure debt, says Brussels think tank, via the Automatic Earth

Excerpt: A leading Brussels think tank has recommended that Greece should restructure its public debt as soon as possible, and that this should be one of the main elements of a comprehensive response to the eurozone crisis to be agreed by European Union leaders when they meet next month.

In a policy brief published on Monday, the Bruegel think tank argues that Greece is "clearly on the verge of insolvency" and that the swift restructuring of its debt, with creditors accepting a 30 percent "haircut," should form part of a three-pronged strategy that includes the strengthening of the eurozone banking system and policies to foster greater growth in member states with weak economies.

The Greek government has consistently denied that it intends to restructure its debt but Bruegel’s most optimistic forecast indicates that with Greece’s debt-to-GDP ratio scheduled to reach 150 percent this year, an adjustment of "frightening magnitude" in the country’s growth rate and cost of borrowing would be needed to avoid restructuring.

"If you look at realistic scenarios and at history, then it’s very unlikely that Greece can avoid restructuring its debt," Zsolt Darvas, one of the report’s co-authors, told Kathimerini English Edition. "It would be a very sad end to the first decade of the euro area but if something is not sustainable and you try to muddle through then the outcome could be worse for everyone involved, including the Greek government, the Greek people, Greek banks and creditors. "So it would be preferable to have a solution that is still difficult but in which most players would benefit."

7---House Republicans Seek to Cut Funds for Environment, Energy, Health Care, Bloomberg

Excerpt: House Republicans want to reduce the U.S. deficit by ending more than 60 programs, including President Barack Obama’s high-speed rail initiative, and cutting funds for the environment, energy, health care and law enforcement....

Republicans propose ending funds for the public service AmeriCorps, the Corporation for Public Broadcasting and a program that provides contraceptives to low-income families. The Environmental Protection Agency’s budget would be cut by 16 percent below what Obama has requested.

“We will respond to the millions of Americans who have called on this Congress to rein in spending to help our economy grow,” House Appropriations Committee Chairman Hal Rogers, a Kentucky Republican, said in a statement. He also said, “Every dollar we cut has a constituency, an industry, an association or individual citizens who will disagree.”...

The Republican plan would cut funding to the National Institutes of Health, which includes the National Cancer Institute and other research facilities, by $1 billion, or 3.1 percent. The Centers for Disease Control and Prevention, the agency responsible for tracking disease outbreaks, would get a reduction of $755 million, or about 12 percent.

Job-training programs would be cut by $2 billion. Funds for a program that helps low-income families heat and cool their homes would decrease by $400 million.

8---How to Reduce Unemployment and Revive the Economy, Mark Weisbrot,

Excerpt: As President Obama begins the second half of his term with a campaign for "jobs and competitiveness," we would do well to consider how he might achieve these worthy goals. It is jobs that matter most to the vast majority of Americans, and unemployment remains at 9.4 percent – about double its pre-recession level. This is a terrible punishment to inflict on millions of Americans who did nothing to deserve it. It will cause long-term and even permanent damage to many of the unemployed and their children.

What can the government do to relieve this suffering? One relatively simple measure is to subsidize employers who are willing to reduce hours rather than lay people off. Germany has demonstrated the success of this approach in the last couple of years. Unemployment in Germany was 7.4 percent just before their recession began in the third quarter of 2008. Today it is 6.7 percent. And Germany had a much steeper decline in output than we did.

The idea is straightforward: employers who are faced with reduced demand can either lay off workers or reduce hours. If they reduce hours for any worker, the government in Germany puts up 60 percent of the lost pay for these reduced hours. The worker keeps her job, with reduced hours but the pay is not reduced nearly as much....

My colleague Dean Baker estimates that this program can create three million jobs at a cost of $68 billion. That is less than one-tenth of our bloated Pentagon budget. Imagine a national poll where voters were to choose between continuing to occupy Afghanistan versus creating three million jobs? (Actually about 4.6 million jobs if we really get out of there). A no-brainer.

9--Obama tells corporate leaders US will be “best place to do business”, World socialist Web site

Excerpt: President Obama spoke at the US Chamber of Commerce in Washington, DC Monday, assuring the crowd of top executives that his administration was committed to making “America the best place to do business.” In his remarks, he outlined a vision in which social programs are cut to the bone in order to tailor the government entirely to the profit interests of US corporations.

The speech was billed as rapprochement with the nation’s largest business-lobbying group, which had aggressively opposed the administration’s health care plan and financial regulatory policies. Whatever small differences there had been, the president told his well-heeled audience, his administration was fully committed to boosting the “competitiveness” of corporate America by eliminating regulations and taxes and providing one incentive after the other.

The speech was remarkable only in so far as it underscored the nakedness of the Obama administration’s servitude to the corporate elite. It was the president’s latest in a series of moves even further to the right since the Democratic debacle in last year’s midterm elections. Recent measures included the agreement on extending Bush-era tax cuts for the rich, the appointment of JP Morgan Chase executive William Daley as Obama’s chief of staff, and the president’s executive order to review all regulations that could adversely affect big business.

With more than 25 million Americans without a job or being forced to work part-time, and levels of social distress not seen since the Great Depression, Obama hailed the success of American “capitalism,” which produced “ingenious entrepreneurs” like those in the room.....

In fact, the plan to transform America into an export platform is predicated on closing the wage gap between US workers and their brutally exploited counterparts in Asia and Latin America.

The government would be refashioned in accordance with the needs of big business, the president added. This included promoting research and development that companies find too costly to do themselves; upgrading “transportation and communications networks so you can move goods and information more quickly and cheaply;” and “knocking down barriers that make it harder for you to compete, from the tax code to the regulatory system.”

10---3.9 Million Americans Ran Out Of Unemployment Benefits In 2010, Huffington Post

Excerpt: Last year, 3.9 million Americans ran out of unemployment insurance benefits, according to a new analysis provided to HuffPost by the National Employment Law Project.

Those 3.9 million are not necessarily still unemployed, and not all of them are necessarily "99ers" -- people who exhausted the maximum 99 weeks of benefits currently available in 25 states -- but the number offers a dramatic reminder that the longest-ever unemployment lifeline is still not long enough for some Americans to climb out of the deepest jobs hole since the Great Depression.

"These numbers demonstrate the grave nature of the long-term unemployment crisis and should lead all lawmakers to realize that it is imperative to put partisan fights aside and concentrate on job-creation efforts that are targeted to the longest of the long-term unemployed," NELP lobbyist Judy Conti said.

The Congressional Research Service has estimated that as of October, roughly 1.4 million Americans have been unemployed for 99 weeks or longer, a tenfold increase from three years ago.

In December, the White House estimated that another 4 million would exhaust their unemployment benefits during the course of 2011.

11--Wall Street Justice Means Nobody Gets Pinched, Jonathan Weil, Bloomberg

Excerpt: Imagine that: A fraud without fraudsters. To believe the SEC, this is exactly what happened at General Electric Co.

It’s been 18 months since GE paid a $50 million fine to settle the SEC’s claims that it had resorted to accounting fraud to avoid missing Wall Street analysts’ earnings predictions back in 2002 and 2003. At the time the deal was disclosed, the SEC said it had concluded its investigation with respect to GE, which neither admitted nor denied the commission’s allegations.....

The SEC accused GE of committing fraud with scienter --that is, with intent or knowledge of wrongdoing -- in violation of section 10(b) of the Securities Exchange Act of 1934. There’s no more serious claim in the SEC’s arsenal. Yet somehow the SEC couldn’t finger a single person at GE who violated any rules at all, much less anyone who committed fraud deliberately....

The message for investors is equally troubling. It makes no sense that GE could have defrauded its shareholders unless some living, breathing people committed the same violations. So either the wrongdoers got off scot free, or the SEC shouldn’t have brought the case it did against the company.

This isn’t enforcement. It’s a charade.

12--Stiglitz Expects 2 Million U.S. Foreclosures This Year, Bloomberg

Excerpt: Nobel Prize-winning economist Joseph Stiglitz said another 2 million foreclosures are expected in the U.S. this year, adding to the 7 million that have occurred since the economic crisis of 2008.

“U.S. foreclosures are continuing apace,” Stiglitz told a conference near Port Louis, the capital of Mauritius, today. “A quarter of U.S. homes are underwater.”...

About 15.7 million homeowners had negative equity, also known as being underwater, at the end of the year, up from 13.9 million in the previous three months, the Seattle-based real estate information company said. The total represented 27 percent of mortgaged single-family homes, the highest in Zillow data dating to the first quarter of 2009.

“Americans today are worse off than they were 10 to 12 years ago,” Stiglitz said. At the same time, the U.S. faces “increasing inequality”, with the “upper 1 percent controlling 40 percent of wealth. Instead of trickle down, it has trickled up.”...

The booming economies of Asia are “too small to be the engine of recovery for the U.S. and Europe,” Stiglitz said. “They cannot make up for the deficiency.”

13---The truth about the financial crisis, The Big Picture

Excerpt: Myth 3: The financial crisis was brought about because government (under the Community Reinvestment Act, a law enacted in 1977 to prevent banks from refusing to extend loans to creditworthy borrowers in particular neighborhoods) forced banks loan to poor people.

Reality 3: No. Both the Report and the Thomas Dissent reject this myth, with Wallison the lone proponent of this shaky story.

* The Report notes that “The CRA requires banks and savings and loans to lend, invest, and provide services to the communities from which they take deposits, consistent with bank safety and soundness.” Further, it concludes that: The “CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.” (emphasis added).

* The Thomas Dissent also explicitly states that the Community Reinvestment Act was not a significant cause.

* The Wallison dissent singles out US government housing policy, including the CRA as the sin qua non of the financial crisis. As a fellow at the conservative think tank, the American Enterprise Institute, and a long-time dedicated proponent of deregulation, he came into his position as a Commissioner predisposed to this viewpoint and came out still holding it, notwithstanding all the evidence presented to the contrary.

14---Saudi oil reserves may be overstated by 40%, Econbrowser

Excerpt: Stuart Staniford calls attention to this story from the Guardian:

The U.S. fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels-- nearly 40%.

15---The Slow Recovery of Labor Markets, Economist's View

Excerpt: Ben Bernanke characterizes the unemployment problem:

... As Bernanke sees it, 2.5% gains in gross domestic product are needed simply to create the needed level of economic activity that will absorb new entrants to the labor force. If the 3.2% GDP rate seen for the final quarter of last year were sustained, it would take a decade to bring today’s 9% unemployment rate down to the 5% to 6% range central bankers consider normal. Bernanke said if the economy were to average an “ambitious” 4.5% GDP rate, the natural unemployment rate could be achieved within three to four years...

Stuart also notes that in his own independent forensic analysis conducted in May 2007 (to which we called the attention of Econbrowser readers at the time), he estimated that remaining reserves in Ghawar (by far the Saudis' biggest and most important oil field) were overstated by 40%.

16--Mortgage Rates Jump to 10-Month High, Wall Street Journal

Excerpt: The average rate on 30-year fixed-rate mortgages jumped to its highest level since April of last year, after positive economic reports caused long-term bond yields to rise.

Rates slumped through most of last year as yields on Treasurys declined amid economic uncertainty. But yields have been on the rise recently, prompting mortgage rates to head back up. The rates generally track the yields, which move inversely to Treasury prices.

"Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week," said Freddie Mac Chief Economist Frank Nothaft.

The 30-year fixed-rate mortgage averaged 5.05% for the week ending Feb. 10, up from 4.81% last week and 4.97% a year ago, according to Freddie Mac's weekly survey of conforming mortgage rates.

Rates on 15-year fixed-rate mortgages also jumped, averaging 4.29%, up from 4.08% last week. The mortgage averaged 4.34% a year ago.

17--Food Stamps: JPMorgan & Banking Industry Profit From Misery, New Deal 2.0

Excerpt: You might think that if you’re on food stamps, big banks won’t be very interested in you. What could they possibly want with someone who’s struggling just to put food on the table? But it turns out that you’re actually part of a profitable business for big bank JPMorgan. While the money to pay for the stamps comes from the government, the technology to access it lies in private hands. Food stamps used to be literally stamps — that is, pieces of paper — but in this day and age paper is so old fashioned. Now you get your food stamps with a debit card, and JPMorgan knows all about creating plastic credit products.

As the head of this division at JPMorgan, Christopher Paton, told Bloomberg, “They act and feel very much like a debit card. A lot of stores increasingly take food stamps.” What convenience! And Paton points out that his bank is the largest processor of food stamps in the country. These are boom times for such services — a new report from the US Department of Agriculture reports that 43.6 million Americans are now using food stamps, nearly 14% of the population, which is a record number. Paton notes this trend himself: “Volumes have gone through the roof in the last couple of years,” he says. “This business is a very important business to JPMorgan in terms of its size and scale.” And the numbers bear him out. According to the company’s most recent quarterly filing with the SEC, the Treasury & Securities Services segment, which is the division that includes the food stamp business, was up 2% in the last three months of last quarter and brought in $5.47 billion in net revenue for most of 2010.

18--Why Another Financial Crash is Certain,

Excerpt: "Between 2002 and early 2008, roughly $1.4 trillion worth of sub-prime loans were originated by now-fallen lenders like New Century Financial. If such loans were our only problem, the theoretical solution would have involved the government subsidizing these mortgages for the maximum cost of $1.4 trillion. However, according to Thomson Reuters, nearly $14 trillion worth of complex-securitized products were created, predominantly on top of them, precisely because leveraged funds abetted every step of their production and dispersion. Thus, at the height of federal payouts in July 2009, the government had put up $17.5 trillion to support Wall Street's pyramid Ponzi system, not $1.4 trillion." ("Shadow Banking", Nomi Prins, The American Prospect)

19--Jean-Bertrand Aristide will return to Haiti, The Guardian

Excerpt: Haiti is occupied, and although the troops wear blue helmets, everyone knows that Washington calls the shots. On 28 November an election was held in which the country's most popular political party was excluded; but still the results of the first round of the election were not quite right. The Organisation of American States (OAS) – under direction from Washington – then changed the results to eliminate the government's candidate from the second round. To force the government to accept the OAS rewrite of the results, Haiti was threatened with a cut-off of aid flows – and, according to multiple sources, President René Préval was threatened with being forcibly flown out of the country, as happened to President Jean-Bertrand Aristide in 2004.

This week Aristide has been issued a diplomatic passport by the government, and is preparing to return from exile in South Africa. But Washington does not agree, as US State Department spokesman PJ Crowley made clear. He was also asked if his government had pressured either the Haitian or South African governments to prevent Aristide's return. He refused to answer: I take that as a "yes".

The US has been the prime cause of instability in Haiti, not only over the last two centuries, but the last two decades. Although Haiti is a small and poor country, Washington still cares very much about who is running it – and as leaked WikiLeaks cables recently demonstrated, they want a government that is in line with their foreign policy for the region.

In 1991, Aristide – Haiti's first democratically elected president – was overthrown after just seven months in office. The officers who carried out the coup and established the military government, killing thousands of innocent Haitians, were subsequently revealed to be in the pay of the US Central Intelligence Agency.

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