Friday, February 18, 2011

Weekend links

1---How the middle class became the underclass, yahoo finance

Excerpt: Are you better off than your parents?

Probably not if you're in the middle class....Incomes for 90% of Americans have been stuck in neutral, and it's not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed.

In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.

Meanwhile, the richest 1% of Americans -- those making $380,000 or more -- have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust. Experts point to some of the usual suspects -- like technology and globalization -- to explain the widening gap between the haves and have-nots.

But there's more to the story....A real drag on the middle class

One major pull on the working man was the decline of unions and other labor protections, said Bill Rodgers, a former chief economist for the Labor Department, now a professor at Rutgers University.

Because of deals struck through collective bargaining, union workers have traditionally earned 15% to 20% more than their non-union counterparts, Rodgers said.

But union membership has declined rapidly over the past 30 years. In 1983, union workers made up about 20% of the workforce. In 2010, they represented less than 12%. (Hat tip, Megan W-K)

2---'Toxic' Securities Turn Lucrative for Banks, Wall Street Journal

Excerpt: Investment banks and hedge funds are once again making money from a sector that was defunct only 18 months ago: U.S. mortgage-backed securities, the loan products that spread the credit crunch throughout the world.

Only two years later, and despite the fact that many U.S. cities are on the edge of bankruptcy, these securities have turned into one of the most lucrative profit areas for banks, such as Credit Suisse Group, UBS AG or Société Générale SA.

On Wednesday, SocGen said a recovery in the U.S. mortgage market helped the bank turn its toxic-unit losses into a profit in the fourth quarter. The bank's legacy assets—or securities backed by bad loans or mortgage packages—made a profit of €113 million ($153.3 million) in the fourth quarter, compared with a loss of €776m over the same period last year.

"The residential and commercial real estate mortgage-backed securities markets have been doing better even if property prices are still at a low level —the price of [commercial mortgage-backed securities] and [residential mortgage-backed securities] have overall improved," said Michel Péretié, CEO of Société Générale Corporate & Investment Banking....

"In large part, the buoyancy comes from government support for the U.S. mortgage market, both for agency securities backed by the government and also for deals which don't have direct government backing," said Deepak Narula, a former Lehman Brothers Holdings mortgage-bond trader, who now runs New York-based hedge fund Metacapital Management. "The successful attempts by the central bank to bring down mortgage rates, along with many other programs aimed at reviving housing have also helped."

Some U.S. mortgage loan prices have almost doubled since 2008, when they plunged following the collapse of Lehman Brothers and credit markets came to a halt. Hedge funds investing in global mortgage products have gained 22% in 2010, according to the HFN mortgages index...Investors are after the strong yields of between 6% and 8% offered by the securities—much higher than other credit investments such as the 2.3% yield offered by the benchmark five-year U.S. Treasury bonds..

The changes under consideration could result in higher guarantee fees, more stringent credit guidelines and lower loan limits. This may result in higher mortgage rates, translating into higher refinancing costs to the homeowner, and therefore, causing the value of existing securities to appreciate.....Banks have also rushed to issue securities backed by commercial real-estate loans, charging investors a fee for bundling the mortgage packages together and selling them in pieces. Earlier this year, Deutsche Bank AG and UBS sold $2.2 billion worth of bonds backed by commercial property throughout the US, according to Bloomberg.

3--A Standard-of-Living Shock Is the Danger, Kelly Evans, Wall Street Journal

Excerpt: The threat of inflation is real. It is just a different threat than many realize.

Pick any U.S. price gauge, from import to producer prices or the consumer-price index due out Thursday, and it is generally on the rise. It is important to note, though, what is fueling the gains: a jump in prices of commodities such as oil, crops, metals and other raw materials. These have risen due to strong global demand, particularly in emerging markets, and pockets of reduced supply.

U.S. businesses have found it difficult in many cases to raise prices to cover the increased costs, a reminder of the financial pressure many middle- and lower-income Americans still face. Better economic growth this year should allow companies to pass along some of the higher costs. That is why "core" consumer prices excluding food and energy—the Federal Reserve's preferred inflation gauge—are probably headed higher. This will likely stop the Fed from extending its latest bout of buying government bonds.

As long as it doesn't spark another recession, however, such a tightening of monetary policy isn't likely to crush commodity prices. That underscores the global power shift away from rich but stagnating industrialized nations toward faster-growing, emerging ones.

For the U.S., the danger isn't necessarily an inflationary outbreak—marked by an upward wage-price spiral—so much as a standard-of-living shock...The credit boom, along with stock and housing bubbles, helped boost living standards for a time, but wasn't sustainable. A firmer economic footing requires steady job creation and rising wages, which remain elusive. The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.

This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now.

The real risk is that the U.S. faces a poverty cycle rather than an inflationary one.

4--U.S. Loans in Foreclosure Tie Record; Lenders Delay Seizures, Bloomberg

Excerpt: A record share of U.S. mortgages were in the foreclosure process at the end of 2010, matching the all-time high, as lenders and servicers delayed home seizures to investigate charges of improper documentation.

... The combined share of foreclosures and loans with overdue payments was 14 percent, or about one in every seven mortgages....Foreclosures are depressing property values and discouraging buyers who don’t want to make a deal if they think prices have further to fall. The S&P/Case-Shiller index of home values in 20 cities dropped 1.6 percent in November from a year earlier, the biggest 12-month decrease since December 2009....

At the end of last year about 15.7 million mortgaged single-family homes, or 27 percent, had negative equity, according to Zillow Inc., a Seattle-based real estate information company. It was the highest share in data going back to the first quarter of 2009.

5----Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently, Robert Reich, via Economist's View

Excerpt: Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)

Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. ... So what did Greenspan’s commission fail to see coming? Inequality.

Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That ... Greenspan Commission’s fixes ... assumed that ... the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. ...

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Presto. Social Security’s long-term ... problem would be solved.

So there’s no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.

6----Dems Fight To Protect For-Profit Colleges From Disclosure Rules, TPM

Excerpt: There's a fight brewing between Democrats over whether to allow the government to crack down on for-profit colleges and universities.

The Department of Education is tired of federally subsidized student loans going to shady for-profit colleges that have poor track records of getting the students who do graduates good work -- often leaving them stuck with mountains of debt. To curb this phenomenon, the agency has been moving along with a new regulation they call the "Gainful Employment" rule.

Under "Gainful Employment" rules, for profit schools would have to show that their students can find work without getting stuck with unreasonable debt in order to qualify for federal loans.

But behind the scenes, a bipartisan bloc of House members see things differently. They say the rule would reach too far and clamp down on institutions that do a decent job of educating and preparing students. But they want to tie the Department of Education's hands completely, and block the funds they'd need to implement the rules at all....

One aide with the Congressional Black Caucus put it more bluntly. "It's disgusting to see Democrats, especially members of the CBC, actively shilling for an industry that disproportionately preys on low-income and minority students."

7-----Republicans Gear Up For Fight Over Consumer Financial Protection Bureau, TPM

Excerpt: A House Republican on the Financial Services committee has introduced legislation that would make it easier for Congress to hamstring, or defund, the newly created Consumer Financial Protection Bureau.

Once fully erected, the Bureau will be housed within the Federal Reserve and be guaranteed a percentage of the Fed's budget, with the option of asking Congress for more money. Rep. Randy Neugebauer (R-TX) proposes keeping it in the Department of Treasury, where Congress would have complete control over its purse strings.

In a brief interview Tuesday, Neugebauer was pretty candid about this.

"Moving it on budget over to the Treasury where it's subject to appropriations, we can have some say-so on how big this organization gets and some of their activities," Neugebauer said. The goal, he said, is to enhance oversight, and limit the agency's size. "When it resides in the Fed, then, we really don't have that opportunity."

He expects the House to pass his legislation if and when the proper vehicle arrives, and brushes of criticism that this is a backdoor effort to defund the bureau entirely....."Many of those who have opposed the CFPB are still trying to chip away at its independence by subjecting it entirely to Congressional appropriations without any dedicated funding from the Federal Reserve," Warren told the Consumer's Union Tuesday. "Politicizing the funding of bank supervision would be a dangerous precedent, and it would deprive the CFPB of the predictable funding it will need to examine large and powerful banks consistently and to provide a level playing field with their nonbank competitors."

8----Forces Behind the Egyptian Revolution, Michael Collins, The Economic Populist

Excerpt: "Egypt began a series of reforms in the 1990's that stacked the deck against workers and farmers. The government sold off the large state enterprises. New owners had little incentive to keep people in jobs or jobs in Egypt. The government enacted new measures to protect large farmers, with peasant farmers left on their own.

When conservative Prime Minister, Ahmed Nafiz, took power in 2004, the situation became desperate. With the help of a new anti labor law, pressure mounted on Egypt's industrial workers. The ETUF had little to offer in support and frequently overruled the votes to strike of local chapters....

The same labor movement that staged the 2006 strike and a follow up in 2007, called for a national strike on April 6, 2008 to raise the nation's minimum wage and protest high food prices. Mubarak's government sent in police who took over the factory in hopes of preventing the strike. Conflict broke out with violence on the part of police toward the union members calling for the strike. Police arrested workers. Trials, convictions and prison sentences followed quickly. Other members continued to protest.

An Egyptian writer noted, "In the 6 April uprising, the demands of the workers and the general population overlapped. People called for lower food prices as workers called for a minimum wage."

In addition, the April 6 Youth Movement emerged as a key player advancing the aims of the national strike. This is the same organization that has been central to rallying crowds throughout the country."

9---Consumer Prices Rise 0.4% in January, Core Ticks Up, The Atlantic

Excerpt: The Federal Reserve's November credit expansion policy, meant to increase inflation, may be working. In January, for the second month straight, the consumer price index grew by 0.4%, according to the Bureau of Labor Statistics. But more importantly, core CPI, which excludes food and energy, ticked up slightly to 0.2% last month. These changes are small, but taken together with additional inflation data they appear to suggest that prices have begun rising....

As you can see, two months straight at 0.4% is a pretty significant new trend. But much of this is due to food and energy. Their prices rose by 0.5% and 2.1% during January, respectively. When you take out those volatile factors, the picture changes. ...

To be sure, a 0.2% rise isn't exactly hyperinflation, but it does appear to demonstrate that core prices are rising faster than they had been since October 2009. Some of those increases in energy costs firms have been facing may finally be translating into higher prices across other goods as well.

The increase in core CPI looks more significant if you take it together with yesterday's news that core producer prices rose by 0.5% -- the most since October 2008. Since consumer prices should lag producer prices, this implies that we could see higher across-the-board prices for consumers in the months to come.

10---Gallup Finds U.S. Unemployment Up to 10.0% in Mid-February, Gallup

Excerpt: Unemployment, as measured by Gallup without seasonal adjustment, hit 10.0% in mid-February -- up from 9.8% at the end of January. The percentage of part-time workers who want full-time work worsened considerably in mid-February, increasing to 9.6% of the workforce from 9.1% in January.

Underemployment Surges in Mid-February

Underemployment, in which Gallup combines part-time workers wanting full-time work with the U.S. unemployment rate, surged in mid-February to 19.6% -- mostly as a result of the sharp increase in those working part time but wanting full-time work. Underemployment now stands at basically the same place as it did a year ago (19.8%).

The unemployment rate in mid-February is 0.8 percentage points lower than it was at this time a year ago, compared with a 1.1-point improvement at the end of January. This suggests that jobs are less available now than they were in January.

More troubling, however, is the surge in underemployment. On this broader basis, current job conditions are barely improved from what they were at this time last year. Essentially, what has happened over the past year is that some people who were unemployed got part-time jobs but are still looking for full-time work. This is not much to show for a year in which many macro-economic indicators showed improvement.

This is likely why Gallup's self-reported spending remains stuck in "new normal" even as consumer optimism continues to hit new highs. Jobs remain the key to getting the U.S. economy moving, and mid-February underemployment results suggest little or no progress is being made in that regard.

11--WikiLeaks: China Flexed Its Muscles Using U.S. Treasuries, Huffington Post

Excerpt: Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China's growing influence as America's largest creditor.

As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms -- from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.

The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S.Treasury Department. In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.....

The cables also indicate a high level of confidence among the Americans that China can't entirely stop buying U.S. debt, a sentiment shared by most economists who describe the dynamic as a form of mutually assured financial destruction.

But the cables do show that China can and will pull back, with financial repercussions. In the spring of 2009, with U.S.-China financial tensions running especially high, China's Treasury holdings fell to around $764 billion, down from nearly $900 billion. In July, after tensions between the two nations mostly subsided, its holdings rose to a record $940 billion.

During the financial turmoil, the cables show that Beijing also shifted its portfolio away from longer-term Treasury notes, which helped drive up America's long-term borrowing costs.

1 comment:

  1. There is an interesting debate in the blogosphere exploring the reasons for the persistent high unemployment rates in the US and elsewhere. Conservatives lay the blame on the structural skills mismatch and argue that this cannot be resolved through any stimulus spending measures. Liberals claim that the massive slump in aggregate demand from the boom, means that there are massive idling resources which can be brought to work with an appropriately structured stimulus program.

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