Thursday, March 31, 2011

Today's links

1--LPS' Mortgage Monitor Report Shows Enormous Backlog of Foreclosures; Option ARM Foreclosure Rate Higher Than Subprime Foreclosures Ever Reached, Lender Processing Service

Excerpt: The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values.

February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached. In addition, deterioration continues in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.

The data also showed that banks’ modification efforts have begun to pay off, as 22 percent of loans that were 90+ days delinquent 12 months ago are now current. Timelines continue to extend, with the average U.S. loan in foreclosure now having been delinquent for a record 537 days, and a full 30 percent of loans in foreclosure have not made a payment in over two years.

2--How low will prices go?, Diana Olick, CNBC

Excerpt: Did I say double dip? Well I'm not the only one.

Today's home price report from S&P Case Shiller proves the point. Remember, this report is based on the sale prices of transactions that closed in January, but it is also a three month running average. That means that at least two thirds of the price deals were struck in October and November, when mortgage rates were at historic lows, providing more purchasing power; they only began spiking in December.

So prices in the top twenty U.S. Markets were down 3.1% in January, year over year, and the slide is accelerating. Eleven of the top twenty hit new price lows on the index. Only San Diego and Washington, DC are showing annual improvements with San Diego just barely out of the red.

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says Standard and Poors' David M. Blitzer. "The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."...

Here's one thing we know for sure: Foreclosure inventory volume is outpacing foreclosure sales, and foreclosure sales are already more than one third of the market right now. Distressed properties sell at a big discount, pushing prices down all around them. Banks are pushing to get rid of foreclosed properties now, and pushing to get borrowers in the process out of the process before the state attorneys general and federal regulators come down with some kind of painful settlement. That's more inventory, as consumer confidence continues to fall. You tell me where prices are headed...

3--Friedrich Hayek, Zombie, Paul Krugman, New York Times

Excerpt: Brad DeLong directs us to a 1932 letter by Friedrich Hayek and others arguing that (a) deficits somehow caused the Great Depression (b) deficit spending would drive up interest rates and make the Depression worse.

Truly, nothing ever changes. The insistence that big deficits somehow caused the crisis even thought they actually didn’t appear until after the crisis was well underway — and were clearly caused by the crisis, not the other way around — prefigures the debate in Europe, in which everyone declares that fiscal irresponsibility is the core issue even though both Ireland and Spain had low debt and budget surpluses on the eve of crisis.

And Hayek’s prediction that deficits would drive up interest rates despite high unemployment was, of course, totally wrong. (see chart)

What’s terrifying is the fact that, as Brad notes, the arguments of today’s pain caucus are exactly the same as those Hayek was making in 1932, except that they’re less well expressed. And they’re sticking with their doctrine even though the economic story — deficits mainly the result of the slump, not the cause, and interest rates not rising in the face of those slump-caused deficits — is playing out the same way.

4--The Exceptional Mr. Greenspan, Paul Krugman

Excerpt: Alan Greenspan continues his efforts to cement his reputation as the worst ex-Fed chairman in history; in today’s FT, he comes out for a repeal of financial regulations designed to prevent a repeat of the crisis for which he, more than any other individual, bears personal responsibility.

To be honest, I didn’t know quite how to respond; I was, very nearly, left speechless by the lack of self-awareness on display. But Henry Farrell shows us the way, pointing out that Greenspan’s piece contains this remarkable passage:

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

Henry then asks readers to chime in with other uses of the “with notably rate exceptions” phrase. Among the entries:

With notably rare exceptions, Newt Gingrich is a loyal and faithful husband.

With notably rare exceptions, Japanese nuclear reactors have been secure from earthquakes.

5--Libyan Rebel Council Forms Oil Company to Replace Qaddafi’s, bloomberg

Excerpt: Libyan rebels in Benghazi said they have created a new national oil company to replace the corporation controlled by leader Muammar Qaddafi whose assets were frozen by the United Nations Security Council.

The Transitional National Council released a statement announcing the decision made at a March 19 meeting to establish the “Libyan Oil Company as supervisory authority on oil production and policies in the country, based temporarily in Benghazi, and the appointment of an interim director general” of the company.

The Council also said it “designated the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya and the appointment of a governor to the Central Bank of Libya, with a temporary headquarters in Benghazi.”

The Security Council adopted a resolution on March 17 that froze the foreign assets of the Libyan National Oil Corp. and the Central Bank of Libya, both described in the text as “a potential source of funding” for Qaddafi’s regime.

Libya holds Africa’s largest oil reserve.

6--CoreLogic: Shadow Inventory Declines Slightly, Calculated Risk

Excerpt: CoreLogic ... reported today that the current residential shadow inventory as of January 2011 declined to 1.8 million units, representing a nine months’ supply. This is down slightly from 2.0 million units, also a nine
months’ supply, from a year ago.

CoreLogic estimates current shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLS) that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory.
Of the 1.8-million unit current shadow inventory supply, 870,000 units are seriously delinquent (4.2 months’ supply), 445,000 are in some stage of foreclosure (2.1 months’ supply) and 470,000 are already in REO (2.2 months’ supply).....

This report provides a couple of key numbers: 1) there are 1.8 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale, and 2) there are about 2 million current negative equity loans that are more than 50 percent “upside down”.

7--Consumption spending slowing down, James Hamilton, Econbrowser

Excerpt: Guess what: rising energy prices are taking a toll on consumers.

On Monday the Bureau of Economic Analysis released details on personal consumption expenditures for February, allowing us to update our graph of how big a share energy is in American budgets. A 6% expenditure share marked the point at which we started to see significant consumption responses a few years ago. The share in February is essentially there (5.98%, to be exact), the highest it's been since October 2008. For poorer households, energy's budget bite is a significantly larger percentage.

Not surprisingly, overall spending on other items is slowing down. Real personal consumption expenditures grew at a 3% annual rate in February after falling slightly in January. Bill McBride (and you know I don't like to argue with him) thinks this means real consumption spending for 2011:Q1 may only grow at a 1.4% annual rate. That's less than half the rate that many analysts had been anticipating prior to Monday's data.

You probably also know that gasoline prices have been climbing from their average values in February.

8--Core Inflation: Much Ado About Nothing, David Beckworth, Macro and other market musings

Excerpt: Ryan Avent is right that we should not get worked up over the possibility that U.S. core inflation appears to have bottomed out. A potential turn around in core inflation does not negate that fact that the demand for money remains elevated and is hampering a robust recovery in nominal spending. In addition, forward-looking measures of inflation indicate that long-term inflation expectations remain below the Fed's implicit 2% inflation target as seen in the figure below--see chart...

Between the elevated demand for money and below-target inflation expectations, it is hard to see why one should get excited about the recent activity in core inflation. These developments, if anything, indicate that monetary policy may still be too tight.

9--As Obama and Congress fiddle, America liquidates housing sector, Christopher Whalen, Reuters

Excerpt: In many ways, the current national policy mix of more regulation, decreased government subsidies and, to add further urgency, a shrinking banking system, is the perfect storm for the housing, which is now down six months in a row. Despite my long-held desire to see market-based reform in the US housing sector, I think all parties need to be aware of the precarious situation facing the American economy and banks as home prices collapse for lack of credit.

The slide in home prices and receding bank lending footprint is one of the reasons why at my firm we have begun to talk about putting aside structural reform of the housing sector this year and instead increasing the size of the loans guaranteed by the government, even while raising the cost of such “g fees” as they are called by housing market mavens. Without credit, the real estate sector is left with a cash market liquidation with grave implications for financial intermediaries and investors.

We wrote this week in The Institutional Risk Analyst, “Wanted: Private Investors Seeking First Loss Exposure on RMBS, March 28, 2011,” about some of the details of the secondary mortgage market. In simple terms, there is about $11 trillion in financing behind the real estate sector: $4.4 trillion in the portfolios of banks, $5.5 trillion in agency securitizations guaranteed by Uncle Sam, and $2 trillion or so in private label securities.

In order to believe the claims of my conservative friends about “reform” of government agencies like Fannie Mae and Freddie Mac you must believe that some of the $5.5 trillion in no-risk agency securities is going to be willing to migrate into the bucket of private label securities, where investors take actual credit risk. It is unlikely that we are going to see any significant increase in the private market home loans unless interest rates rise significantly.

The net, net here is that the available pool of credit available for the housing sector is shrinking and thus prices must also decline to adjust for that supply of credit. This fact of continued decline in home prices is going to have a chilling effect....

I estimate that Fannie and Freddie alone are hiding $200 billion worth of bad loans on their books simply because there is no market for these foreclosed homes. Ditto for the largest servicer banks such as Wells Fargo, Bank of America, JPMorgan Chase and Citigroup. To clean up this mess with finality is going to cost $1 trillion or so in round numbers. But nobody in Washington wants to go there.

The Obama Administration and the Congress need to put aside their respective fantasy world views and focus on the horrible economic reality ongoing in the housing and banking sectors. It may be that the degree of self-delusion in Washington has reached the point that only another financial catastrophe can wake us from out collective distraction. But if President Obama really believes he can win reelection with housing prices falling from now till November 2012, then perhaps those who liken him to Louis XIV are right.

Wednesday, March 30, 2011

Today's links

1--Suicide squads' paid huge sums amid fresh fears for nuclear site, Telegraph

Excerpt: The radioactive core in one reactor at Fukushima's beleaguered nuclear power plant appeared to have melted through the bottom of its containment vessel, an expert warned yesterday, sparking fears that workers would not be able to save the reactor and that radioactive gases could soon be released into the atmosphere.

Richard Lahey, who was a head of reactor safety research at General Electric when the company installed the units at Fukushima, said the workers, who have been pumping water into the three reactors in an attempt to keep the fuel rods from melting, had effectively lost their battle. "The core has melted through the bottom of the pressure vessel in unit two, and at least some of it is down on the floor of the drywell," he said.

The damning analysis came as it emerged that workers at Japan's stricken nuclear plant are reportedly being offered huge sums to brave high radiation in an attempt to bring its overheated reactors under control. The plant's operator, the Tokyo Electric Power Company, is hoping to stop a spreading contamination crisis which could see another 130,000 people forced to leave their homes....

State broadcaster NHK said underground tunnels linked to reactors 1, 2 and 3 are flooded with water containing radiation measured in some spots at a highly dangerous 1,000 millisieverts an hour. Workers in protective gear are shoring up the tunnel shafts with sandbags to stop the water – which reportedly contains concentrations of long-lived caesium-137 – from seeping into the sea about 55 to 70 metres away.

Japan's Nuclear Safety Agency said that the plutonium was "not at levels harmful to human health", but the government's top spokesman Yukio Edano called the situation "very grave", and confirmed fears that at least one reactor had suffered a partial meltdown.

2--BP Managers Said to Face U.S. Manslaughter Charges Review, Bloomberg

Excerpt: Federal prosecutors are considering whether to pursue manslaughter charges against BP Plc (BP/) managers for decisions made before the Gulf of Mexico oil well explosion last year that killed 11 workers and caused the biggest offshore spill in U.S. history, according to three people familiar with the matter.

U.S. investigators also are examining statements made by leaders of the companies involved in the spill -- including former BP Chief Executive Officer Tony Hayward -- during congressional hearings last year to determine whether their testimony was at odds with what they knew, one of the people said. All three spoke on condition they not be named because they weren’t authorized to discuss the case publicly.

Charging individuals would be significant to environmental- safety cases because it might change behavior, said Jane Barrett, a law professor at the University of Maryland.

“They typically don’t prosecute employees of large corporations,” said Barrett, who spent 20 years prosecuting environmental crimes at the federal and state levels. “You’ve got to prosecute the individuals in order to maximize, and not lose, the deterrent effect.” ....The manslaughter investigation is focusing on decisions by BP managers leading up to the explosion that may have sacrificed safety in favor of speed and cost savings, one of the people said....

The decisions included moving ahead with operations without the recommended equipment, failing to run a test to ensure the well’s stability, and misreading the results of other tests.

3--Fed Presidents Support Completion of Bond-Buying Program, Bloomberg

Excerpt: Two Federal Reserve regional bank presidents voiced support for the completion of the central bank’s $600 billion Treasury securities-purchase program through June, saying it’s too soon to remove stimulus from the economy.

Boston Fed President Eric Rosengren said yesterday that high unemployment and low core inflation mean record monetary support is still necessary. Chicago Fed President Charles Evans said he believes data suggesting a more sustainable recovery won’t prompt an alteration in the bond-purchase program.

“It could be that $600 billion is just about the right number,” Evans told reporters before a speech in Columbia, South Carolina. “I won’t be surprised if that in fact is the decision. I still think it is a high hurdle to stop short of $600 billion. So far I haven’t seen it.”

Their remarks highlight the difference of views that has emerged since the Fed’s March 15 meeting, when policy makers kept in place the plan to buy bonds while concluding the recovery is on “a firmer footing” and the labor market is “improving gradually.”...

4--13% of all U.S. homes are vacant, CNN Money

Excerpt: High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it's only getting worse: The national vacancy rate crept up to just over 13% according to last week's decennial census report. That's up from 12.1% in 2007.

"More vacant homes equal more downward pressure on home prices," said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

5--Republicans for Environmental Progress: An Endangered Species, by J.S. via Economist's View

Excerpt: The modern Republican Party has absolutely no affirmative environmental agenda whatsoever, and goes so far as to contest the entire rationale for continued environmental progress. Ironically, this extremely reactionary environmental agenda is coming at a time when the ideas that Republicans once championed are now widely accepted as the best ways to structure environmental policy. ...

I have been involved in environmental policy for almost 20 years and have never seen anything like the current Republican assault on the environment. It is truly astounding. To be clear, the Republicans leading this charge against environmental progress are in no way following conservative principles―they are doing the exact opposite. ...

There is absolutely nothing “free market” about letting polluters trash the environment for free. In fact, this fits the definition of a market failure, not a well-functioning capitalist system. What the Republicans are currently practicing is crony capitalism of the worst kind: rewarding industry at the expense of the public interest and future generations.

It is the Republican rank and file who should be the most offended by these policies. Public opinion polls consistently show that both Democrats and Republicans care deeply about the environment, and support clean energy policies and strong environmental safeguards. Unfortunately, the once proud environmental ethic of the Republican Party has been snuffed out by a small group of radical Tea Party extremists who are deeply confused both about true conservative principles and the proper role of government in society. And once moderate Republicans who supported sensible environmental policies are nowhere to be seen. Until true conservatives retake the Republican Party we will be left doing little more than damage control, and the chances of a new comprehensive affirmative environmental agenda are slim to none.

6--Quick PCE Notes, Tim Duy, Fed Watch via Economist's View

Excerpt: The February Personal Income and Outlays report revealed the drag of higher food and energy costs as a 0.3 percent gain in nominal disposable personal income was knocked back to a 0.1 percent loss in real terms. Similarly, the 0.7 percent gain in nominal spending turned into a just 0.3 percent real gain. While better than the flat reading in January, the relatively weak performance of PCE this quarter will lead analysts to knock down Q1 growth forecasts. I try not to read too much into any one quarter, and tend to view the consumer slowdown in light of the acceleration at the end of last year. Overall, the trend in PCE growth since the middle of last year is consistent with annual gains of around 3% a year. The footing is firming, and it is sustainable, but it is still far short of what is needed to rapidly return consumption to its pre-recession trend....

The new normal, it seems. On one hand, I have a preference for steady growth over recession and stagnation. On the other, the gap between the new trend and old shown by the green and red lines at least partially reflects the lack of job opportunities for the nation’s unemployed – and few are expecting that situation to change dramatically this year....

Given that spending accelerated faster than income, the saving rate by definition fell, although it continues to hover around the 6% mark. The higher saving rate provides some cushion for higher food and energy prices, allowing households to absorb and adapt to these price gains without an abrupt change in behavior. ...

From the most recent FOMC statement:

The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

Again, see the commodity chart above. Core inflation has remained remarkably stable during the past decade despite the instability of commodity prices. This suggests that overall monetary policy has not been far off the mark.....

Bottom Line: Try to look through the data to spot underlying trends; this is what the Fed is doing, and it will lead them to complete the current round of asset purchases. Watch energy prices closely, keep an eye on the other risks (Europe, Japan, etc) while awaiting the next big test - the exit of the Fed from large scale asset purchases. The economy stumbled last year when the Fed shifted to neutral. Coincidence, or should have been expected given that housing would not rebound and fiscal stimulus would fade? We will have another test of the importance of the Fed lifeline in the second half of this year.

7--More Profits, Fewer Jobs, Annie Lowrey, Slate

Excerpt: On Friday the federal government released the latest chapter of a year-old economic mystery: If you're a corporation, the economy is great. If you're a worker, the economy is still pretty horrible. According to the Bureau of Economic Analysis, real corporate profits neared an all-time high in the last three months of 2010, with companies raking in an annualized $1.68 trillion in pre-tax operating profits. (After tax, that comes to $1.25 trillion, about equal to the GDP of India.) The Federal Reserve estimates that companies are sitting on about $1.9 trillion. At the same time, unemployment remains at 8.9 percent, and job growth is still anemic....

How can the corporate economy be so profitable while the jobs economy remains so weak? Part of the answer lies in improved productivity. When the recession hit, businesses fired millions of workers then asked the rest to make up the difference—and, in many cases, they did. Productivity increased 3.9 percent in 2010, while labor costs fell. To simplify: Businesses paid fewer workers to do more. In addition, big corporations found customers overseas. Americans might not be ready to spend just yet, but consumers in Asia and elsewhere are—exports climbed 21 percent to $1.28 trillion in 2010....

But in the last quarter of 2010, the story was all about Wall Street. Profits actually decreased a bit at nonfinancial firms. But companies like investment banks and insurers saw profits climb to an annualized $426.5 billion. The financial sector now accounts for about 30 percent of the economy's overall operating profits....

Still, record-high profits do not necessarily translate into improvements in the economy—as the country's 14 million jobless workers would be (not so) happy to tell you. For the past year, companies have hesitated to spend all of that cash, worried about a lack of good investment opportunities and fearful about demand. The upside is that it seems they are beginning to spend down their $1.9 trillion pile. The downside is that it does not seem that it will be to the immediate benefit of American workers.

There are a few ways big businesses are starting to tap their cash reserves. For one, a number of companies have increased buy-backs of their own shares. Bloomberg reports that companies listed in the Standard & Poors 500 have approved $149.8 billion in buy-backs in the past three months—about 50 percent more than they did in the first three months of 2010. Second, the big corporate piles of cash have set off a flurry of mergers and acquisitions....Finally, a number of companies have used or are planning on using their excess cash to bump up their dividend payments, giving investors a portion of the profits.

Buy-backs and dividend payments might make investors wealthier, and that has a positive impact on the economy. But it does not translate into jobs, at least not quickly. Plus, mergers often bring layoffs. In other words, corporate America isn't using its historic horde of cash in ways that will immediately benefit working America—meaning the long slog is not looking like it will get any shorter.

8--There is no US federal debt crisis, Francis Bator, Financial Times

Excerpt: Fiscal prudence matters. But the helter skelter rush to cut this year’s and next year’s budget deficits is high-priced folly. For want of enough spending overall by households, businesses and government taken together, i.e., for want of enough buying, a huge amount of production capacity is standing idle, producing nothing. 13.7m unemployed workers — four for every job that is vacant — are searching for jobs instead of working and earning income. At the same time, states and local governments, forced by shrunken revenues and shrinking federal subsidies to curtail their spending, are shutting health centres, allowing roads and bridges to crumble, and laying off nurses, firemen and teachers.

With all that spare capacity, why are businesses not hiring more workers and increasing production? Because their sales people are telling them that there would be no buyers. Debt-burdened households, deficit plagued governments and businesses with a lot of their plant and machines standing idle, are simply not spending enough overall to buy all the goods and services that businesses are easily capable of producing. A trillion dollar per annum shortfall in buying is keeping production by most industries below 2007 levels and the unemployment rate near 9 per cent. And with Treasury bill rates near zero — and core wage-price inflation below target — the Federal Reserve is almost if not quite out of ammunition.

If anyone tells you that cutbacks in this year’s and next year’s federal spending will encourage enough additional private spending to make up the difference — never mind narrow the inherited trillion dollar output and jobs gap — look him hard in the eye and ask him if he’d really bet his children’s tuition money on that proposition. It’s nonsense. Reduced sales to government and lower transfer payments from government, therefore less spendable private income, and more jobless workers and idle factories, will be more likely to cause both households and businesses to reduce their spending.....

As to the Chinese, frightened by what rapid yuan appreciation would do to their export-addicted economy, they have been, as Paul Krugman put it, pumping out yuan, buying up dollars. How likely is it that they’ll risk harming their own economy by reversing course abruptly? A gradual reversal calibrated to facilitate an orderly, collaboratively managed dollar depreciation is of course precisely what’s needed.

That said, we must of course be ready to cope with a disorderly, speculation-driven depreciation, however unlikely. The Federal Reserve and the Treasury are no doubt keeping their contingency plans current. But as Ben Bernanke, Federal Reserve chairman, and Tim Geithner, Treasury secretary, know better than almost anyone (and as I remember from ancient but close, direct involvement) sensible policy aimed at safeguarding the real economy can prevent really serious harm. Fear of bond market hysterics need not and should not rule America’s fiscal choices.....

While there is no federal debt crisis (as distinct from a governance crisis and a tax-phobia crisis,) we do need a credible multi-year budget plan soon that would over time hold the debt/GDP ratio in check. For the near term, the plan should allow for a one-time fiscal boost in case the recovery remains anemic. (must read)

9--Massive Setback for Merkel, Der Spiegel

Excerpt: It is being hailed as the start of a new political era in Germany. The Green Party looks set to appoint its first state governor after Sunday's election in the state of Baden-W├╝rttemberg. The result is a huge setback for Chancellor Angela Merkel.

The Fukushima disaster has had, and will have, many consequences around the world. One of the more unlikely, however, appears to be the results of Sunday's election in the southwestern German state of Baden-W├╝rttemberg, where skepticism about nuclear power helped propel the Green Party to a historic victory over Angela Merkel's conservative Christian Democratic Union (CDU).

The Greens doubled their share of the vote to 24.2 percent, according to preliminary results released by the state electoral commission. They are now likely to govern the state in a coalition with the center-left Social Democratic Party (SPD), which secured 23.1 percent of the vote, down 2 percent from the last election in 2006. In what would be a first for Germany, the Greens, as the senior partner in the coalition, will likely appoint the state governor.

The Green's leading candidate, Winfried Kretschmann, talked of a "historic electoral victory," while national Green Party co-leader Claudia Roth described the result as "the start of a new political era."...

Setback for Merkel

The conservatives had already been suffering in the polls, but the Fukushima disaster effectively turned the state election into a referendum on nuclear power, dealing a blow to the CDU and boosting the fortunes of the anti-nuclear Greens. The debate damaged incumbent CDU Governor Stefan Mappus, who had in the past been a vocal supporter of nuclear power. Merkel's political U-turn on atomic energy in the wake of the catastrophe in Japan also appears to have backfired. Voters apparently saw her sudden decision to temporarily take a number of older reactors off the grid as blatant electioneering....

Sunday's result is a huge setback for Angela Merkel, whose CDU ruled the state for almost six decades. The result further reduces the number of seats the CDU and FDP have in the Bundesrat -- Germany's upper legislative chamber, which represents the interests of the states -- and will make it even harder for the national government to pass certain legislation.

10--Bank of America set to write down principal on California mortgages, Housingwire

Excerpt: Bank of America will begin a new pilot program in the next few weeks, allowing some California homeowners to receive a principal writedown on their mortgage.

The program will be funded from the $699.6 million the California Housing Finance Agency received from Treasury Department's Hardest Hit Fund last year. A spokesperson for the CalHFA said there is no set amount of loans BofA is targeting, but the bank will be soliciting eligible homeowners soon. CalHFA has not given BofA a limit to the funding "unless they blow us out of the water," the spokesperson said.

CalHFA is in talks with other lenders and servicers, but they did confirm that Guild Mortgage Company will also participate in the program.

"We're really excited to get the program going," the CalHFA spokesperson said.

Rebecca Mairone, the new national mortgage outreach executive at BofA, said in an interview with HousingWire Monday that it would soon begin the California initiative as well as several other states that received Hardest Hit Funds.

Earlier in March, BofA announced it was sending letters to Arizona homeowners regarding possible principal writedowns under Hardest Hit Fund programs. Through that program, BofA said it was targeting 8,000 households.

Ally Financial agreed last week to participate in another principal-writedown program in Michigan, again using the Hardest Hit Fund.

11--Is inflation causing Americans to stop spending, Time

Excerpt: The BEA releases its own measure of inflation called the Personal Consumption Expenditures Index. It is less well known than the popular Consumer Price Index, but some members of the Federal Reserve think it is a more accurate measure of inflation than the CPI. Well the PCE index rose 0.4% in February, that was the largest monthly increase for that figure in two and a half years.

The result is that when you adjust for inflation, personal income appears to be falling, down 1%. And that strong spending rebound we were seeing a few months ago? Well, again adjust for inflation, and that seems to be disappearing as well. Here's what the popular economics blog Calculated Risk had to say (note when economists say "real" that means they are adjusting for inflation):

Even though PCE growth was at expectations, real PCE was low - and this suggests analysts will downgrade their forecasts for Q1 GDP. Using the two month estimate for PCE growth (averaging the growth of January and February over the first two months of the previous quarter) suggests PCE growth of around 1.4% in Q1 (down sharply from 4.0% in Q4).

So is inflation the thing that will get consumers to finally close their wallets? The thing is inflation is actually a two-edged sword when it comes to consumption. When inflation rises quickly, that can hurt confidence in the economy and as long as prices are rising faster than incomes (which usually happens when inflation really takes off) that can cause people to conserve their dollars. But if inflation is too low, that can hurt spending as well.

Here's the thing: Inflation is part of recoveries. As the economy starts to grow faster, that boosts demand and with it prices tend to rise as well. This happens in every recovery. And it is a hump that every recovery has to get over. If prices start to rise faster than the economy, then recoveries fail. But that doesn't usually happen. This time around the usually weak job growth has people concerned that rising prices will overtake the recovery. For now that doesn't look likely. Even with February's 0.4% jump in inflation as measured by the PCE, prices are still only up 1.6% in the past 12 months. (And that is actually less than the CPI's jump in the past month of 2.1%.) Real GDP, by comparison, rose nearly 3% in 2010. So, for now, inflation seems unlikely to derail the recovery. But if prices continue to rise like they did in February we might have a problem. Stay tuned.

Tuesday, March 29, 2011

Today's links

1--Income Gains Not Lifting All Boats, Kelly Evans, Wall Street Journal

Excerpt: Stronger income growth isn't yet broad enough to overcome lingering economic decay.

The Commerce Department on Monday is due with figures expected to show personal incomes, before tax and unadjusted for inflation, rising about 5% in February from a year earlier. That is an encouraging start; this time last year the increase was below 3%. Yet a closer look shows a troubling decline in wage-based income over the years and offers less reason for cheer.

Consider that back in 1970, wages, salaries and employee benefits accounted for about three-quarters of total U.S. personal income as measured by Commerce. Dividend, interest and rental income contributed about 14%, while government-backed benefits, including disability, unemployment and welfare, were less than 8% of the total.

That changed in the ensuing decades as government programs expanded, the population aged and wealth disparities increased. By 2005, salaries, wages and benefits were about 67% of the total. In 2010, they dropped to 64%. Meanwhile, the shares of total income from dividend, interest and rental income and, especially, government benefit payments increased.

So any headline income growth today would be more welcome if the underlying sources of those gains were getting healthier, too. Specifically, that means a drop in the share of government-backed payments from roughly 18% today back toward the single-digit levels four decades ago, with wage income picking up the slack.

Unfortunately, the dwindling share of wage income fits with the broader erosion of the U.S. middle class. Roughly 40% of consumer spending these days is generated by the upper fifth of households. UniCredit economist Harm Bandholz notes that the share of U.S. consumption financed by labor income has steadily declined to about 61% today from 85% in 1970.

And other recent events only make things worse. Rising gas prices already have offset about 60% of the benefit from this year's payroll tax cut, according to Barclays Capital, and generally fall hardest on those who can least afford them. Rising stock prices and dividend growth support overall incomes and spending, though that is again to the benefit of better-off households.

It's clear by now that the financial crisis did little to check widening income inequality in the U.S. And for those at the bottom, the recession continues.

2--A Housing Market Cycle Different From Others, Floyd Norris, New York Times

Excerpt: The sales rate for existing homes — about 4.9 million over the last 12 months — is virtually the same as in mid-1999. Yet sales of newly built single-family homes have plunged to the lowest levels seen since the government began collecting statistics on such sales in 1963. The Census Bureau reported this week that only 17,000 new homes were sold in February, for an annual rate of 250,000 after taking seasonal factors into account. Both of those numbers are the lowest on record.

The February sales pace was undoubtedly depressed by harsh weather in the Northeast, and a rebound in March or April is possible. But the total number of homes sold over the 12-month period — 349,000 — is lower than in any comparable period.

As a result, this cycle has been very different from previous ones. Home sales plunged in the early 1980s, when a combination of severe recession and high interest rates devastated the housing business, and they also suffered in 1990 and 1991, another recessionary period. But in each of those recessions, sales of new and existing homes declined at about the same pace.

It was decreased demand that hurt sales in previous downturns. Now demand is down, in part because some would-be buyers cannot qualify for mortgages that would have been available during the boom. But oversupply is also a major problem now.

Too many houses were built in many areas during the boom, and now housing starts have plunged, as can be seen in the bottom chart. There are fewer newly built homes available, and in some areas, buyers complain that builders have not been willing to cut prices to meet the prices available on used homes in the same area.

But there is a large number of used homes available. The National Association of Realtors estimates that almost two of every five used homes sold in February were on the market because the previous owner was in trouble. It says 26 percent of sales were from foreclosures, and an additional 13 percent were “short sales,” in which the lender agrees to allow the homeowner to sell the home for less than the outstanding balance of the loan. Sellers often have little say in the timing of such sales, and are in a poor bargaining position.

The percentage of forced sales rose to nearly half of all sales in early 2009, at the height of the credit crisis, but fell to around 30 percent as the economy began to improve and banks imposed moratoriums on foreclosures. Now it is on the rise again, producing new pressures on prices and increased competition for home builders still trying to sell homes built in more optimistic times.

3--Maestro Nurtures a New Too-Big-to Fail Crisis, Simon Johnson, Bloomberg

Excerpt: In the last decade of his watch, combined assets in the largest six bank holding companies rose from 17 percent of U.S. gross domestic product to more than 50 percent (this measure now stands at 62 percent). As Fed chairman, Greenspan presided over the demise of the last vestiges of restrictions on megabanks. The Fed implicitly blessed the build-up of concentrated risks in the form of over-the-counter derivatives such as credit-default swaps, which figured in the failures of both Bear Stearns Cos. and Lehman Brothers Holdings Inc.

This wasn’t all the Fed’s doing. The Securities and Exchange Commission was also complicit and the Treasury Department, under Robert Rubin and Larry Summers, in some instances led the charge. But Greenspan was a leading proponent of the view that if someone powerful in finance wanted to do something, that must be OK. This isn’t a view that anyone generally holds for other sectors. Even pro-business advocates say excessive concentration in one industry is bad for society and for business....

The heyday of the real free-market Greenspan was in the first months of the credit crisis in 2008. “If they’re too big to fail, they’re too big,” was his catchphrase. At that moment, he cut through the fog of crisis and articulated an impressively bipartisan view.

Many thinkers, such as Allan Meltzer (from the right) and Joseph Stiglitz (from the left), agreed with Greenspan on this and probably only this. Kansas City Federal Reserve President Thomas Hoenig and Democratic Senator Sherrod Brown were also in accord. Eugene Fama, a finance professor at the University of Chicago and the father of the efficient-markets doctrine, said on CNBC last year that “too big to fail” is “perverting activities and incentives,” giving big financial firms “a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside.”

4--CEOs Tap Record Cash for Dividends as M&A Picks Up, Bloomberg

Excerpt: U.S. executives are starting to spend the record $940 billion in cash they built up after the credit crisis, just in time for annual shareholder meetings.

Takeovers topped $256 billion this quarter, the most since the collapse of Lehman Brothers Holdings Inc. in September 2008, according to data compiled by Bloomberg. Standard & Poor’s 500 Index companies authorized 38 percent more buybacks in 2011 than a year earlier and dividends may increase to a record $31.07 a share in 2013, data compiled by Birinyi Associates Inc. and Bloomberg show.

Chief executive officers are looking for ways to increase investor returns after posting the biggest gain in profits since 1988 by relying on near-zero Federal Reserve interest rates and cost cuts that have kept the unemployment rate near a 26-year high. More than 139 companies in the U.S. equity benchmark index are preparing for shareholder meetings in the next two months after the S&P 500 almost doubled in the past two years and as profits approach a record.

“Shareholders have raised the bar,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $45 billion. “Companies are going to have to find ways to generate more return,” he said. “The idea of sitting on idle cash in a zero interest rate environment is increasingly viewed as a nonviable option.”...

Companies in the S&P 500 have been piling up money for two years as per-share profit jumped 36 percent in 2010, the most in more than two decades, data compiled by Bloomberg show. The world’s largest economy is forecast to expand 3.1 percent this year, the fastest annual pace since 2005, based on the median estimate from 68 economists surveyed by Bloomberg....

Companies including Limited Brands Inc., owner of the Victoria’s Secret chain, are relying on debt to reward shareholders. The drop in borrowing costs to a three-year low has given executives the incentive to sell bonds and use the proceeds to repurchase stock and pay dividends.... “Companies can do some long-term damage to themselves by levering up to buy back stock just because they’re bullish on their stock when the market isn’t. Sometimes the market has it right and companies have it wrong.”

S&P 500 companies have approved $149.8 billion in share repurchases in the past three months, exceeding the $125 billion for all of 2009 and the $108.3 billion announced during the first three months of 2010, data from Westport, Connecticut- based Birinyi Associates show....

“Having this much cash on the balance sheet earning essentially nothing is hurting companies’ numbers, it’s hurting their return on equity, it’s hurting their ability to provide income in the long run for investors,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “If they can’t find something better to do with it than leave it as cash, the best thing is to return it to shareholders.”

5--Companies Lift Spending as U.S. Productivity Bypasses Jobs, Bloomberg

Excerpt: Corporate investment will rise 11 percent this year as sales pick up, following a 15 percent gain in 2010, according to “Man vs. Machine,” a Feb. 2 report from Bank of America Merrill Lynch. Employment will grow just 1.7 percent, after a 0.7 percent increase last year, the study projects.

Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases are powerful spurs for capital spending, says Neil Dutta, the Bank of America economist who wrote the report. The job market lacks such drivers and will form a “mediocre” underpinning for household spending, the biggest part of gross domestic product, he said.

“Machines have the upper hand,” Dutta said in a telephone interview from New York. “You see this huge pickup in capital spending, but there isn’t a meaningful increase in employment; it’s being grudgingly pulled along. The consumer is not going to perform the way people expect.”

The Institute for Supply Management’s manufacturing index has risen for seven consecutive months, surging in February to the highest level since May 2004. While the labor market is “improving gradually,” unemployment remains “elevated,” according to the Federal Reserve. The jobless rate may hold at 8.9 percent in March for a second month, the lowest since April 2009, based on the median forecast in a Bloomberg News survey ahead of Labor Department figures due April 1....

Even if payrolls rise more than economists’ median estimates of 195,000 this month, that’s “nowhere near the kind of growth we need to see,” said Heidi Shierholz, an economist at the Washington-based Economic Policy Institute. “We’re still near the bottom of a very deep jobs hole from which we’re just starting to climb out.” More than 8 million positions were cut as a result of the recession that began in December 2007....

Rising Productivity

This helps explain why productivity last year climbed 3.9 percent, the most since 2002, while labor costs fell 1.5 percent after a 1.6 percent drop in 2009, the first back-to-back declines since 1962-63, government data showed.

“At this point, productivity growth is bad news for employment, though in the long term it’s good for the economy,” Shierholz said. “The need to do more to create jobs is an open and shut case, but politically, it’s not going to happen.” The debate in Congress has shifted to the deficit, so “the job- market recovery is going to be a long slog.” ...

While the tax bill President Barack Obama signed Dec. 17 allows businesses to write off 100 percent of some purchases in 2011, there’s no similar incentive to speed up hiring. The Fed’s commitment to keep its benchmark interest rate near zero for an extended period also facilitates lower-cost financing for machines.

The administration’s goal to double overseas sales of American-made goods is another plus for investment over hiring, Dutta said, since the U.S. export sector is capital intensive rather than labor intensive....

rising sales are causing companies to rebuild inventories after slashing them by a record amount during the recession, which ended June 2009. There’s plenty of room to expand: Machinery and software assets are growing at the slowest pace since World War II, and capital expenses as a share of GDP still are below pre-slump levels.

6--Woes deepen over radioactive water at nuke plant, sea contamination, Kyodo News

Excerpt: Adding to the woes is the increasing level of contamination in the sea near the plant, although Nishiyama reiterated there is no need for health concerns so far because fishing would not be conducted in the evacuation-designated area within 20 kilometers of the plant and radioactive materials ''will be significantly diluted'' by the time they are consumed by marine species and then by people.

Radioactive iodine-131 at a concentration 1,850.5 times the legal limit was detected in a seawater sample taken Saturday around 330 meters south of the plant, near a drainage outlet of the four troubled reactors, compared with 1,250.8 times the limit found Friday, the agency said.

Nishiyama told a press conference in the morning that he cannot deny the possibility that radioactive materials are continuing to be released into the sea. He said later that the water found at the basement of the turbine buildings is unlikely to have flowed into the sea, causing contamination.

OSAKA: The operator of Japan's Fukushima nuclear plant has detected radioactive iodine 1,150 times the legal limit in water 30 metres (100 feet) from reactors 5 and 6, the nuclear safety agency said Monday....

On Sunday, levels of radioactive iodine some 1,850 times the legal limit were reported a few hundred metres (yards) offshore, up from 1,250 times the limit on Saturday, but officials ruled out an immediate threat to marine life or to seafood safety.

7--Personal income grows in February, Calculated Risk

Excerpt: The BEA released the Personal Income and Outlays report for January:

Personal income increased $38.1 billion, or 0.3 percent ... Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, in contrast to a decrease of less than 0.1 percent in January.

8-- American Thought Police, Paul Krugman, New York Times

Excerpt: Recently William Cronon, a historian who teaches at the University of Wisconsin, decided to weigh in on his state’s political turmoil. He started a blog... Then he published an opinion piece in The Times, suggesting that Wisconsin’s Republican governor has turned his back on the state’s long tradition of “neighborliness, decency and mutual respect.”

So what was the G.O.P.’s response? A demand for copies of all e-mails sent to or from Mr. Cronon’s university mail account containing any of a wide range of terms, including the word “Republican” and the names of a number of Republican politicians ...

The Cronon affair, then, is one more indicator of just how reflexively vindictive, how un-American, one of our two great political parties has become.

The demand for Mr. Cronon’s correspondence has obvious parallels with the ongoing smear campaign against climate science and climate scientists, which has lately relied heavily on supposedly damaging quotations found in e-mail records. ...

9--Stocks Shining as Bonds Lose Luster, Wall Street Journal

Excerpt: The U.S. stock market has powered back in the face of major global uncertainty. It may have bond investors to thank for that.

Money managers and advisers say there has been a steady undercurrent of cash heading out of bonds and into equities. While there remains unease about U.S. fiscal policy, with the Federal Reserve having pinned interest rates essentially at zero for so long, investors are capitulating and moving into stocks.

"We're in the early innings of a big asset allocation shift," says Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.

That, some suggest, is what helped stocks rally last week despite spreading political turmoil in the Middle East, sustained higher oil prices, the ongoing nuclear crisis in Japan and looming problems for Portugal....

By pumping cash into the financial system, the Fed was aiming to force investors to move into riskier investments, such as stocks, that could eventually feed through into the broader economy.

"It's a desire of the Fed to push money out of shorter-term riskless instruments and into riskier things, like stocks," says G. Scott Clemons, chief investment strategist for Brown Brothers Harriman.

According to the ICI, the amount of money in money-market funds has come down steadily over the past four weeks, from $2.75 trillion at the beginning of March to $2.73 trillion last week. Much of that money is likely to be flowing into the equity markets, say those who watch fund flows.

After a 24% jump in the Dow between the end of August and mid-February, many investors were waiting for a pullback before jumping into stocks.

For some, that point came in mid-March and, in particular, on March 16, when the Dow fell by as much as 300 points amid fears of a nuclear meltdown in Japan. In the days since, the market has moved higher as investors bet the worst was over in Japan and the Middle East. They also figured those events would have relatively little impact on the U.S. economy.

10--Libya. The Observer debate: Is it right to be intervening in Libya's struggle for freedom?, Dennis Kucinich, The Observer

Excerpt: On November 2, 2010 France and Great Britain signed a mutual defence treaty , which included joint participation in "Southern Mistral" (, a series of war games outlined in the bilateral agreement. Southern Mistral involved a long-range conventional air attack, called Southern Storm, against a dictatorship in a fictitious southern country called Southland. The joint military air strike was authorised by a pretend United Nations Security Council Resolution. The "Composite Air Operations" were planned for the period of 21-25 March, 2011. On 20 March, 2011, the United States joined France and Great Britain in an air attack against Gaddafi's Libya, pursuant to UN Security Council resolution 1973.

Have the scheduled war games simply been postponed, or are they actually under way after months of planning, under the name of Operation Odyssey Dawn? Were opposition forces in Libya informed by the US, the UK or France about the existence of Southern Mistral/Southern Storm, which may have encouraged them to violence leading to greater repression and a humanitarian crisis? In short was this war against Gaddafi's Libya planned or a spontaneous response to the great suffering which Gaddafi was visiting upon his opposition?

Members of the United States Congress are wondering how much planning time it took for our own government, in concert with the UK and France, to line up 10 votes in the Security Council and gain the support of the Arab League and Nato, and then launch an attack on Libya without observing the constitutional requirement of congressional authorisation....

This war is wrong on so many fronts. The initial stated purpose, protecting Libyan civilians, will soon evaporate as it becomes clear that the war has accelerated casualties and enlarged a humanitarian crisis. Debates over the morality of intervention will give way to a desperate search for answers as to how and when do we get out, and how and why did we get in.

11--Like The Phoenix, U.S. Finance Profits Soar, Wall Street Journal

Excerpt: Not too long ago, during the depths of the global crisis, the finance industry was on the brink of collapse. How times have changed.

Friday’s revisions to U.S. gross domestic product contained news on fourth-quarter profits. Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector.

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

The profit resurgence also calls into questions the lobbying going on in Washington about financial reform. Banks and Wall Street firms argue that any new regulation will hold down their profits. That’s because some profits now accruing to the finance sector will shift to others.

Monday, March 28, 2011

Today's links

1--Worse Is Better, Paul Krugman, New York Times

Excerpt: Wow. The GOP prescription for higher employment is actually quite spectacular — it’s a thing of many levels, an ignorance wrapped in a fallacy.

The idea is this: we’ll lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment.

So, for this to work you first have to have a downward-sloping demand for labor as a function of the nominal wage rate. There’s no reason to believe that’s the case: in a liquidity trap, falling wages probably reduce the demand for labor, because they worsen the burden of debt.

And even if you somehow bypass this objection, the argument is still nonsense: it says that by reducing demand, you cut the price, which increases demand, which means that you end up selling more than before. Um, no — that’s the kind of answer that, in Econ 101, has you suggesting that the student get special tutoring.

Given all that, it’s hardly worth mentioning that they’re appealing to the thoroughly refuted doctrine of expansionary austerity.

2--Fannie Report Warned of Foreclosure Problems in 2006, Wall Street journal

Excerpt: Fannie Mae was warned in a 2006 internal report of abuses in the way lenders and their law firms handled foreclosures, long before regulators launched investigations into the mortgage industry's practices.

The report said foreclosure attorneys in Florida had "routinely made" false statements in court in an effort to more quickly process foreclosures and raised questions about whether some mortgage servicers or another entity had the legal standing to foreclose.

The report found no evidence that borrowers were improperly placed in foreclosure....

In recent months, federal and state officials have initiated probes into whether banks and foreclosure law firms improperly seized homes by using fraudulent or incomplete paperwork. Some U.S. banks temporarily froze foreclosures to review their processes and now face the prospect of a multibillion-dollar settlement with federal and state officials. Fannie Mae severed ties with two Florida law firms in the past six months due to concerns about how the firms pursued foreclosures in Florida courts.

State and federal officials are seeking to establish new rules for the industry. The report could add ammunition to those calling for stronger regulation of mortgage servicers....

At the time of the report, foreclosures nationally stood at relatively low levels. The report didn't identify the practice of "robo-signing" that initially sparked the foreclosure-document inquiries last fall. Robo-signing occurs when affidavits are signed without someone fully reviewing underlying documentation.

But the report raised other red flags that have roiled the industry, including improper legal filings by foreclosure attorneys and questionable practices surrounding the Mortgage Electronic Registration Systems, an electronic-lien registry set up by the mortgage industry to reduce paperwork and lower costs.

Fannie's legal department suspected that in order to reduce time-consuming efforts to track down documents, "foreclosure attorneys may be taking short cuts by misrepresenting that [original loan documents] are lost," the report said. Fannie hadn't authorized such conduct. The Fannie spokeswoman said the company began requiring Florida law firms to notify Fannie about every filing of a "lost-note" affidavit in 2006.

Fannie officials also told investigators that the company had opted against performing regular reviews of its foreclosure attorneys because the company's lawyers felt the firm would be better insulated from responsibility for misconduct. The report said the approach was under review at the time.

3--Will Home Builders Trip in a Double-Dip?, Kelly Evans, Wall Street Journal

Excerpt: The double-dip in housing may partly stem from the disappearance of first-time buyers.

Housing markets have been looking pretty grim lately. This week alone, data showed the pace of new-home sales fell to a near 50-year low in February while sales of previously owned homes also slumped. The median sales price of a new home is back to 2003 levels. The uptick in activity last year spurred by the first-time home-buyer tax credit, in other words, was a head-fake.....

Entry-level demand is a soft spot in the current market. First-time buyers on average accounted for just 31% of home-buying activity in January and February, according to the National Association of Realtors—well below the 40% historical average.

While houses today are more affordable, tight financing, negative attitudes about housing and concern about falling prices are hampering demand. And even if the labor market's gradual rebound has unleashed some pent-up housing demand, it has largely flowed to the rental sector, notes Reis economist Ryan Severino.

4--Household Balance Sheets and the Recovery, Timothy Bianco and Filippo Occhino, Cleveland Fed

Excerpt: Falling home and financial asset prices have combined to weaken the average household’s balance sheet, and this has helped to slow down the current recovery. We examine the role that household balance sheets have typically played in postwar business cycles and assess their importance in explaining why some recoveries, including the current one, have been weaker than others.

The slow pace of the current recovery has been a source of concern for some time. Whereas real GDP growth after severe recessions has generally been very strong, that has not been the case during the current recovery, which followed the worst postwar recession. This time around, it took three years for real GDP to return to where it was just before the start of the recession.

One factor behind the slow recovery has been the weakness of household balance sheets. During the financial crisis, the values of real estate assets and financial assets plunged, lowering household net worth and raising leverage. To repair their balance sheets, households have been increasing their saving rate, raising the average from its pre-recession level of around 2 percent to its current level above 5 percent. This deleveraging process has slowed consumption and, as a result, the recovery....


By using fairly conventional methods and assumptions, we have unveiled some general patterns. We have found that weak household balance sheets have been an important factor behind the slower recoveries, especially the current one. One reason is that balance sheet shocks, which tend to have a delayed and persistent effect on economic activity, have played a greater role in the cycles associated with the slower recoveries. Another reason is that since about 1985, balance sheets have deteriorated more in response to adverse macroeconomic shocks than they used to, and as a result they have amplified and propagated the direct contractionary effects of the shocks....

... While households have been saving at a high rate to repair their balance sheets for some time, there have been signs that this deleveraging process has attenuated: Household leverage has come down from its peak and the saving rate has leveled out. These signs may point to a stronger pick-up of consumption and a more robust recovery.

5--QE2's effect on commodity prices; The debate continues, FT.Alphaville

Excerpt: ...Strong demand in emerging markets is clearly playing a central role in pushing up prices for a whole range of fuel and non-fuel commodities. But in its rush to downplay the inflation threat and exculpate the Federal Reserve from charges it is responsible for rising raw material prices, the SF Fed and other policymakers, including Bernanke, are presenting an oversimplified and potentially misleading view of how commodity prices behave...

In contrast to FedViews, there are strong and credible arguments linking rising commodity prices in part to cheap money policies favoured by the Fed (through a combination of excess liquidity, impact on expectations, and the export of excessively loose monetary policy to emerging markets via the system of fixed exchange rates).

Global commodity inflation may or may not feed through into consumer prices (the degree of pass through has surprised Britain’s central bank but seems modest in the United States, at least so far). Some degree of commodity-driven inflation may be beneficial, according to those who worry more about deflation and unemployment.

There are legitimate discussions to be held about pass-through rates and the nature of output gaps. But the question of commodity prices and monetary policy needs to be discussed with much more frankness than the Fed has managed so far....

World production rose 18.5 percent between January 2009 and January 2011, according to the CPB measure. But non-energy commodity prices soared 72 percent over the same period, according to the CRB total return index.

FedViews is taking a short-term view of commodity prices and production that fails to account for longer-term trends. If the graph is corrected to show longer time series for both production and prices it becomes apparent there is no close correlation. Between January 1994 and July 2008, world industrial production rose 72 percent but commodity prices increased 176 percent (Chart 3).....

FedViews concludes “Global commodity prices have followed global economic activity as measured by world industrial production … Commodity price swings have a direct impact on headline inflation … [but] have had only a small effect on underlying inflation”.

Unfortunately, the chart is profoundly misleading.....In the Fed’s illustration, commodity prices appear to move closely in line with world industrial production. Both vary by about the same amount. If anything non-energy commodity prices have risen slightly less than would be expected given the big increase in industrial production between 2000 and H1 2008, and then again since 2009.

But that is an illusion produced by the choice of different scales for the two series, which produces a pleasing graph but grossly distorts reality. If the graph is corrected to show both series on the same scale it is immediately apparent commodity prices have been far more volatile than industrial production and consumption (Chart 2).

6--Truth, Propaganda and Media Manipulation, Global Research

Excerpt: The mainstream media is the most obvious in its inherent bias and manipulation. The mainstream media is owned directly by large multinational corporations, and through their boards of directors are connected with a plethora of other major global corporations and elite interests. An example of these connections can be seen through the board of Time Warner.

Time Warner owns Time Magazine, HBO, Warner Bros., and CNN, among many others. The board of directors includes individuals past or presently affiliated with: the Council on Foreign Relations, the IMF, the Rockefeller Brothers Fund, Warburg Pincus, Phillip Morris, and AMR Corporation, among many others.

Two of the most “esteemed” sources of news in the U.S. are the New York Times (referred to as “the paper of record”) and the Washington Post. The New York Times has on its board people who are past or presently affiliated with: Schering-Plough International (pharmaceuticals), the John D. and Catherine T. MacArthur Foundation, Chevron Corporation, Wesco Financial Corporation, Kohlberg & Company, The Charles Schwab Corporation, eBay Inc., Xerox, IBM, Ford Motor Company, Eli Lilly & Company, among others. Hardly a bastion of impartiality.

And the same could be said for the Washington Post, which has on its board: Lee Bollinger, the President of Columbia University and Chairman of the Federal Reserve Bank of New York; Warren Buffett, billionaire financial investor, Chairman and CEO of Berkshire Hathaway; and individuals associated with (past or presently): the Coca-Cola Company, New York University, Conservation International, the Council on Foreign Relations, Xerox, Catalyst, Johnson & Johnson, Target Corporation, RAND Corporation, General Motors, and the Business Council, among others.

It is also important to address how the mainstream media is intertwined, often covertly and secretly, with the government. Carl Bernstein, one of the two Washington Post reporters who covered the Watergate scandal, revealed that there were over 400 American journalists who had “secretly carried out assignments for the Central Intelligence Agency.” Interestingly, “the use of journalists has been among the most productive means of intelligence-gathering employed by the CIA.” Among organizations which cooperated with the CIA were the "American Broadcasting Company, the National Broadcasting Company, the Associated Press, United Press International, Reuters, Hearst Newspapers, Scripps-Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald-Tribune."

By far the most valuable of these associations, according to CIA officials, have been with the New York Times, CBS and Time Inc. The CIA even ran a training program “to teach its agents to be journalists,” who were “then placed in major news organizations with help from management.”

These types of relationships have continued in the decades since, although perhaps more covertly and quietly than before. For example, it was revealed in 2000 that during the NATO bombing of Kosovo, “several officers from the US Army's 4th Psychological Operations (PSYOPS) Group at Ft. Bragg worked in the news division at CNN's Atlanta headquarters.” This same Army Psyop outfit had “planted stories in the U.S. media supporting the Reagan Administration's Central America policies,” which was described by the Miami Herald as a “vast psychological warfare operation of the kind the military conducts to influence a population in enemy territory.” These Army PSYOP officers also worked at National Public Radio (NPR) at the same time. The US military has, in fact, had a strong relationship with CNN.

7--Bank of America Divides Itself Into ‘Good Bank/Bad Bank’, FedupUSA

Excerpt: Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit...

So half of what they have is trash? Looks that way.

Oh, and it’s about a trillion in assets too.

The obvious question is “how much are they worth?” Looks like roughly $300 billion of it is on the bank’s balance sheet, and the rest serviced for someone else. These are loans that are either delinquent or likely to become delinquent.

What’s recovery on that portfolio? We have no idea, really. But it’s important, because while the bank has $148 billion in market capitalization it is (like most banks) negative on cash-to-debt, which means the hit on that passel of “assets” is rather critical to forward valuations.

The stock is up big today, almost 4.5%. On this announcement? Well, not entirely. The CEO thinks they’ll have a “normalized” earnings rate that is in the nosebleed territory, but of course “normalized” earnings may be more of a dream than a reality. First, you have to get rid of all those bad loans, and someone has to eat that loss.

For the securitized stuff that they service, they’re not likely to lose much – the servicing contracts pretty much guarantee it. But when it comes to the loans on their actual balance sheet the questions are far more complex. There, it all comes down to recovery value, and if that $300 billion is only worth half that, well……

The Market-Ticker

Just wait, somehow, this new ‘Bad Bank’ will become the taxpayer’s burden. Just wait for the bailout. It’s coming.

8--A Parallel Universe, Murray Dobbin, Counterpunch

Excerpt: The cancer stage of capitalism, according to philosopher John McMurtry, is that stage in which the system's social immune system comes under attack and is systematically weakened by the newly dominant financial sector of the economy. The social immune system (Medicare, labor legislation, public education, environmental protection, labour laws) protects citizens from the pathologies inherent in the competitive and unequal system of capital accumulation. As they erode, more and more of a nation's capital is diverted to the financial industry, which makes money from money rather than from productive activity.

McMurtry writes: "Indicative of the classic pattern of cancer mutation is... systemic intolerance of bearing the costs of maintaining social and environmental carrying and defense capacities, and its rapidly escalating, autonomous self-multiplication that is no longer subordinated to any requirement of life-organization."...

Through control and strategic use of the media and the establishment of think tanks, the right has been able to turn the role of the economy on its head. In the so-called golden age of capitalism of the '60s and most of the '70s, the political question was always how could the economy serve the country/nation/society/families. In short, the economy was secondary to these institutions and integrated with them into a nation. It wasn't abstract and it wasn't decoupled from society.

Every politician talked about "full employment" even if they didn't believe in it because that was a social objective that no politician could ignore. But I cannot recall hearing or seeing that phrase in print even once in the past 10 years, maybe more.

We are now 20 years into an era where the question "Is it good for the economy?" is on the lips of virtually every politician. Canadian bureaucrats at international meetings no longer refer to Canada and other nations as countries. They refer to them as "economies." It is a fundamental change in language that has infected our governing institutions and helped justify the now constricted economic role of governments: they just need to get out of the way of business through deregulation, privatization and tax cuts.

Sacrifice all for 'the economy'

The abstract economy is now the dominant institution and everything else has to be sacrificed for it. Of course, when you deconstruct what the economy means in this cultural context, it is nothing more or less than the largest corporations, with the financial sector being dominant. While the government has abandoned full employment (and workers' interests) as a goal, it has replaced it with an obsession with any level of inflation over two per cent. Why? Because the rich will fight to the death against anything that reduces their wealth and that is what inflation does.

The current concern over unemployment is a temporary phenomenon, created by an almost unprecedented economic crisis. And the propaganda machine is working full time to convince us the recovery is in place.

Until we reverse this heightened status of the economy as a separate entity, which can act with impunity against the interests of every other institution, including democracy, that parallel universe of the really critical issues we face will be almost impossible to engage. Environmental degradation, unfettered and unregulated growth, the obscene gap between rich and poor -- these are all now the purview of "the economy."

Until we take control of it, these issues will remain beyond our grasp.

9--Thoughts on the ending of QE2, Pragmatic Capitalism

Excerpt: The following are some goods thoughts from Glenview Capital regarding QE2 and lessons from QE1:

The first lesson we should take from 2010 is to respect the end of quantitative easing, either as an actual or psychological calendar event that could trigger a change in liquidity and economic activity. There are three reasons we should be concerned about the end of QE2 and the unlikelihood of QE3:

1) QE2 is set to expire in June, and it took seven months last time before a new round of quantitative easing was enacted. Thus, it seems reasonable to expect QE2 to lapse, particularly as the economy has rebounded and deflation seems contained as a risk (see #2).

.... we will be closely watching liquidity and economic conditions as the first elements of the unprecedented level of global monetary stimulus are withdrawn.

Second, we believe that the markets are next going to deal with the economic ball bouncing off the “right gutter” of inflationary pressures in early 2011. We already have seen extreme spikes in food and textile commodities, and since late August, the price of oil has risen 50% as a result of global demand and Middle East turmoil. Interest rates on the US 10-year Treasury bond rose over 100bps from the early October lows and, as described above, the tone and tenor of Central Bank commentary are now more weighted towards the risks of inflation.

Finally, it appears that the practical implications of a rising federal deficit ($1.3 trillion) in the US and a renewed emphasis on deficit reduction in Congress (not only the “Tea Party” but across both major parties) will likely slow the growth of both Federal and State/Local spending that has played such a key role in reinforcing the economy to prevent a double-dip recession. This is playing out in state legislatures in Wisconsin and New Jersey, in the President’s budget that calls for reductions in discretionary spending, and in the debates this month about extending the debt ceiling to accommodate additional federal deficits.

Taken together, these factors pose a complex scenario for our relatively simple and straightforward gutter guard scenario: just as the ball seems to be bouncing off the inflation gutter guard, both Congress and the Fed seem to be removing the left gutter guard. This is of course logical – if we want to fight inflation, we should first stop fueling it. However, it does beg the question – if the contemporaneous removal of extraordinary monetary and fiscal stimulus through the expiration of QE2 and a move to a more balanced budget does in fact slow the economy, will there be sufficient time, will and resources to re-establish a left gutter? Such is the danger of a zero interest rate policy, as it gives you little incremental room to provide incremental stimulus.

10--Commodity prices and world demand, Pragmatic Capitalism

Excerpt: There’s this chart going around courtesy of the San Francisco Fed that supposedly shows how commodity prices are not being at all influenced by Fed policy and speculators. In short, it shows a near perfect correlation between world industrial production and commodity prices. might think: “gee, this really is entirely fundamentally driven and the Fed is having zero impact on everything”. But when one looks at the chart closely you notice that the scales are entirely manipulated to give the appearance of a close correlation...

All of the sudden it looks like commodities and world industrial production have little to no correlation. What’s the conclusion? Don’t believe everything you see – especially when it comes from an outfit whose job it is to protect Fed policy at any cost.

Of course, this doesn’t mean that all of the conclusions based on the original chart are wrong. Indeed, demand really is having an important impact on prices. And the arguments about the Fed “money printing” not leading to commodity inflation are all true – as I’ve shown in detail the Fed isn’t really flooding the economy with money. More importantly, the arguments backing the China + “money printing” + growth = commodity boom, are likely all close to spot on. But to trot out this chart as a defense for the Fed and conclude that speculation is playing no role in the current run-up in commodities is sheer nonsense. Especially when we have visual proof that speculators are hoarding commodities due to their belief in future higher prices….The Fed is intentionally manipulating investor expectations of inflation and it is working. Whether it is having a positive or negative impact on the economy is the real meat of the debate and that’s for another discussion.

11--Losing Our Way, Bob Herbert, New York Times

Excerpt: Through much of the post-World War II era, income distribution was far more equitable, with the top 10 percent of families accounting for just a third of average income growth, and the bottom 90 percent receiving two-thirds. That seems like ancient history now.

The current maldistribution of wealth is also scandalous. In 2009, the richest 5 percent claimed 63.5 percent of the nation’s wealth. The overwhelming majority, the bottom 80 percent, collectively held just 12.8 percent.

This inequality, in which an enormous segment of the population struggles while the fortunate few ride the gravy train, is a world-class recipe for social unrest. Downward mobility is an ever-shortening fuse leading to profound consequences.

A stark example of the fundamental unfairness that is now so widespread was in The New York Times on Friday under the headline: “G.E.’s Strategies Let It Avoid Taxes Altogether.” Despite profits of $14.2 billion — $5.1 billion from its operations in the United States — General Electric did not have to pay any U.S. taxes last year.

As The Times’s David Kocieniewski reported, “Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.”

G.E. is the nation’s largest corporation. Its chief executive, Jeffrey Immelt, is the leader of President Obama’s Council on Jobs and Competitiveness. You can understand how ordinary workers might look at this cozy corporate-government arrangement and conclude that it is not fully committed to the best interests of working people.

Overwhelming imbalances in wealth and income inevitably result in enormous imbalances of political power. So the corporations and the very wealthy continue to do well. The employment crisis never gets addressed. The wars never end. And nation-building never gets a foothold here at home.

New ideas and new leadership have seldom been more urgently needed.

Friday, March 25, 2011

Weekend links

1-- The Austerity Delusion, Paul Krugman, New York Times

Excerpt: Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.

It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe. ...

Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating...: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.

So jobs now, deficits later was and is the right strategy. Unfortunately, it’s a strategy that has been abandoned...

2--Phase Shift: The Next Leg Down in House Prices, Charles Hugh Smith, of two minds

Excerpt: There are too many houses and not many buyers. The demographics are this: Baby Boomers are trying to sell to cash out or move, and the impoverished generations behind them cannot afford bubble-era prices. Just because prices have retreated to 2002 levels doesn't mean they're cheap--2002 was already a bubble, as you can see in the chart.

The Federal-supported "recovery" is in trouble, politically and financially. As long as the nation obeys the whip of the Fed and allows it to print $1 trillion to buy Treasury debt every year, then the travesty of a mockery of a sham can continue. But as I noted yesterday, this policy is destroying the dollar and the purchasing power of households. That game cannot run for long without political pushback. Saving the "too big to fail" banks and the Financial Plutocracy might be Item #1 on the Fed's list, but it ranks decidedly lower on voters' agendas.

Every investor who bought with cash because "this is the bottom" will 1) be underwater and anxious to sell and 2) be out of cash, having bet their capital playing "catch the falling knife" with real estate valuations. Sorry, cash buyers: the knife is still falling.

3--Housing raises US recession alert, Reuters

Excerpt: “We continue to believe that this dip in housing will translate into a double dip on the overall U.S. economy, further rolling forward any stimulus-exit plans set by the Fed, and setting the stage for an announcement of QE3 in July,” said said Douglas Borthwick of Faros Trading. “Jobs and housing remain the focus for the Fed, and both areas continue to face severe difficulties.”

The problems lie not just with new homes. The overall picture is of a housing market slouching its way into a double-dip slump.

Sales of existing homes also fell last month, by a less precipitous 9.6 percent, down 2.8 percent from a year ago.

Prices of existing homes, unsurprisingly, are falling as well, down 0.3 percent in January nationwide, according to the FHFA, the third straight monthly fall....

At a paper delivered at the central banking conference in Jackson Hole, Wyoming, in 2007 entitled “Housing IS the business cycle”, UCLA professor Edward Leamer argued that residential investment plays a key role in US recessions. He demonstrated that 8 out of 10 postwar recessions were foreshadowed by serious and sustained problems with housing, at least as of 2007.

Counting the most recent recession we can now call that 9 out of 11, with a good shot shortly at 10 out of 12.

“Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession,” Leamer wrote.

4--The Imaginary World in Which Washington Lives, Dean Baker, Truthout

Excerpt: Politicians routinely make similarly absurd statements about Social Security, implying that the program and the country are about to go broke. Of course, both claims are obviously untrue. According to the Social Security trustees, the program can pay all scheduled benefits for the next 26 years with no changes whatsoever and, even after that date, can always pay close to 80 percent of scheduled benefits. Instead of our children being broke, average wages are projected to be more than 40 percent higher in 2040 than they are today.

This means that, when a politician whines about Social Security or the country going broke, the correct response from a reporter should be, "Congressman, you know that the program is fine for more than a quarter century into the future," or, "Congressman, you know that our children and grandchildren will on average be far richer than we are today."

Unfortunately, you won't hear reporters making these corrections either. Fortunately, there are groups like Social Security Works, the Campaign for America's Future and Institute for Women's Policy Research that do correct bad reporting on Social Security, so there is at least some limit to how bad it can get.

However, the country is unlikely to see competent reporting on these and other topics that are central to national political debates until new media outlets, like Truthout, The Huffington Post and ProPublica, mature further and displace the traditional outlets.

5--The road to fiscal crisis, Simon Johnson, Project Syndicate

Excerpt: The insight of Admati and her collaborators is simple and very powerful. Higher leverage allows bankers to earn more money, but it can easily become excessive for shareholders – because it makes the banks more vulnerable to collapse – and it is terrible for taxpayers and all citizens, as they face massive downside costs. In the US, the costs include more than eight million jobs lost since 2007, an increase in government debt relative to GDP of around 40% (mostly due to lost tax revenue), and much more.

Mervyn King, a former academic who is currently Governor of the Bank of England, and his colleagues have a vivid name for the toxic cocktail that results: “doom loop.” The idea is that every time the financial system is in trouble, it receives a great deal of support from central banks and government budgets. This limits losses to stockholders and completely protects almost all creditors.

As a result, banks have even stronger incentives to resume heavy borrowing (as Admati argues), and, as rising asset prices lift the economy in the recovery phase, it becomes possible for them to borrow even more (as Bernanke knows). But what this really amounts to is taking on more risk, typically in an unregulated, unsupervised way – and with very little effective governance within the banks themselves (again, Admati explains why bank executives like it this way).

The Bernanke-Admati-King view suggests that the Washington Fiscal Consensus is seriously deficient. The US and global economy will recover, to be sure. But that recovery will be just another phase in the boom-bust-bailout cycle.

America’s too-big-to-fail banks are well on their way to becoming too big to save. That point will be reached when saving the big banks, protecting their creditors, and stabilizing the economy plunges the US government so deeply into debt that its solvency is called into question, interest rates rise sharply, and a fiscal crisis erupts.

In other words, the “doom loop” isn’t really a loop at all. It does end eventually, as it has – just for starters – in Iceland, Ireland, and Greece.

6--Rights are curtailed for terror suspects, Wall Street journal

Excerpt: New rules allow investigators to hold domestic-terror suspects longer than others without giving them a Miranda warning, significantly expanding exceptions to the instructions that have governed the handling of criminal suspects for more than four decades.

The move is one of the Obama administration's most significant revisions to rules governing the investigation of terror suspects in the U.S. And it potentially opens a new political tussle over national security policy, as the administration marks another step back from pre-election criticism of unorthodox counterterror methods....

Before becoming president, Mr. Obama had criticized the Bush administration for going outside traditional criminal procedures to deal with terror suspects, and for bypassing Congress in making rules to handle detainees after 9/11. He has since embraced many of the same policies while devising additional ones—to the disappointment of civil-liberties groups that championed his election. In recent weeks, the administration formalized procedures for indefinitely detaining some suspects at Guantanamo Bay, Cuba, allowing for periodic reviews of those deemed too dangerous to set free.

The Bush administration, in the aftermath of 9/11, chose to bypass the Miranda issue altogether as it crafted a military-detention system that fell outside the rules that govern civilians. Under Mr. Bush, the government used Miranda in multiple terror cases. But Mr. Bush also ordered the detention of two people in a military brig as "enemy combatants." The government eventually moved both suspects—Jose Padilla, a U.S. citizen, and Ali al-Marri, a Qatari man—into the federal criminal-justice system after facing legal challenges. In other cases, it processed suspects through the civilian system.

7--Morgan Stanley's liquidity pool, Economics of contempt

Excerpt: It’s now official: the week of September 15, 2008 was a really bad week to work in Morgan Stanley’s prime brokerage. And the next week wasn’t so hot either. Various internal documents released with the FCIC report provide a fairly detailed picture of Morgan Stanley’s liquidity position during the crisis, and it’s not pretty. Prime brokers like Morgan Stanley relied heavily on customer cash held in prime brokerage accounts (known as “free credits”) to fund themselves. So when hedge funds all pulled their cash from Morgan Stanley’s prime brokerage after Lehman failed, that had a direct effect on Morgan Stanley’s liquidity pool.

On one day alone (Wednesday, September 17th), Morgan Stanley’s prime brokerage lost $36.6 billion in free credits. That’s $36.6 billion instantly gone from the firm’s liquidity pool. To add insult to injury, that same day, prime brokerage customers also withdrew $12.3 billion of excess margin, which dealers also count toward their liquidity pool. For the week, Morgan Stanley’s prime brokerage lost an amazing $86.5 billion in liquidity. And the next week, they suffered an additional $43.3 billion of outflows, for a two-week total of $129.8 billion. That’s a hell of a fortnight!

Overall, Morgan Stanley’s liquidity pool was falling by tens of billions per day — the firm was basically imploding. Without the government bailout, it’s pretty clear that they wouldn’t have lasted another week.

8-- Matt Stoller: The Federal Reserve’s Wheezy Independence Takes Another Hit, naked capitalism

Excerpt: During the discussion of Dodd-Frank, Congress deliberated without knowing that the Federal Reserve had extended $9 trillion to various banks, foreign central banks, corporations, and hedge funds, often collateralized by junk. That’s roughly $30,000 of lending for every American. Shouldn’t Congress have known that Harley Davidson and McDonald’s were making payroll with Federal Reserve loans (or perhaps just getting access to cheap working capital unavailable to normal corporations)? That seems like a useful testament to the fragility of our financial system, something to know about before engaging in supposedly wholesale reform.

More to the point, there is now an explicit two-tiered monetary system, where elites can borrow against junk collateral under difficult circumstances, while ordinary people face foreclosure and bankruptcy should they encounter liquidity or solvency problems....

As emergency lending information is released, one can almost hear the laughter from big banks executives. They won, or so they think. Yet, the reputational damage from the crisis to Wall Street is at this point enormous, both within banks and among the public at large. The specific documents released over Bear Stearns will probably show what we already know – excessive deference to banking interests.

The situation right now feels depressing. Wall Street mega-banks, and the Federal Reserve officials in charge during the collapse, are more powerful than ever. Ultimately, the consent of the governed does actually matter. Markets do not work when there is effectively no rule of law, or rigged rules. That is what we may be seeing in housing, with cultural shifts away from home-buying. The next crisis, and it is coming, will see wholesale reform of the Federal Reserve and the banking system. The public has noticed that the arguments from big banks are both untrue and self-serving, and that the Federal Reserve’s vaunted independence is simply more of the same.

The Fed and the concentrated banking interests took advantage of a deference to authority and a reservoir of trust that the public had in the system. That trust was key to achieving what they needed. But it is now tapped out. And the next time that consent is necessary, it just won’t be there

9--The Gap Between New and Existing Home Sales: Adjusting to the Bubble, Dean Baker, CEPR

Excerpt: In his blog today, Floyd Norris notes an unprecedented divergence between the trends in existing home sales and new home sales. He points out that existing home sales have held up reasonably well, while new home sales are down by more than 75 percent from their bubble peak.

While this is largely true (Core Logic and real estate analyst Keith Jurow have noted an upward bias in the realtors' data on existing home sales) this gap is also entirely predictable given the rise and fall of the housing bubble. New homes are the mechanism that adjusts supply and demand. When prices went through the roof during the run-up of the bubble, builders rushed to build new homes so that they could profit from the extraordinarily high prices. As a result, we had near record rates of new construction from 2002-2006.

However, once the bubble burst and prices began to tumble, there was little reason to build new homes. A large supply of homes for sale and falling prices, makes building new homes an unprofitable venture. The price that builders can expect to receive is on average more than 30 percent less than it was at the peak of the bubble and they are likely to have to wait a long period of time before they can even make a sale.

For this reason, it should not be surprising that new home sales have fallen by much more than existing home sales following the collapse of the bubble. They will presumably rise back to a more normal level in the next two or three years, which is likely to mean at least a 100 percent increase from the February level. At that point, we will again be building homes fast enough to replace worn out structures and to meet the needs of a growing population.

10--The Old Bill; Stopping quantitative easing may be harder than starting it, The Economist

Excerpt: BILL GROSS is the most famous and experienced bond-fund manager in the world. So when he says PIMCO’s Total Return, the $237 billion fund which he manages, is avoiding Treasury bonds, investors should take notice.

Mr Gross is particularly worried about the effect of quantitative easing (QE) by the Federal Reserve, the second round of which is due to expire in June. He has described this process, whereby the Fed creates money to buy both mortgage-backed securities and Treasury bonds, as a form of pyramid or Ponzi scheme.

PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases, with foreigners buying the other 30%. “Who will buy Treasuries when the Fed doesn’t?” asks Mr Gross, adding that the danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation. ...

Nevertheless, it is legitimate to worry whether getting out of a QE programme will be as easy as getting into it. (This problem also faces the Bank of England and the European Central Bank.) It is not simply a matter of ceasing to buy bonds. Unless they want to end up with a permanently bigger balance-sheet, central banks must offload those bonds they have already bought.

It is no answer to say that the programme will wind itself up naturally as the bonds mature. Unless the government concerned is running a surplus by that stage (dream on), maturing bonds need to be refinanced. So the private sector will have to absorb not only that year’s financing programme but the surplus offloaded by the central bank. This is no small matter. The Fed has an asset pile of some $2.6 trillion, of which just under half is Treasuries.

Herein lies the rub. In what circumstances would investors be most keen to buy more government bonds? When the economy is struggling. But central banks will be highly unlikely to reverse QE at that stage. In any case, cynics suspect the problem with QE is that there may never be a moment when central banks feel confident enough to unwind it. After all, American GDP grew by a respectable 2.8% last year and growth of more than 3% is forecast for this year. Yet this week’s Fed policy meeting indicated that the second round of QE would still be completed.

As the programme has evolved so have the justifications for QE. In testimony to Congress on March 1st, Ben Bernanke, the Fed’s chairman, cited the evidence of its success: “Equity prices have risen significantly, volatility in the equity market has fallen, corporate-bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen to historically more normal levels. Yields on five- to ten-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.”

11--The Fed Places Stock in the Bull Market, Kelly Evans, Wall Street Journal

Excerpt: When it comes to the U.S. stock market, what goes up apparently must not come down.

That at least is how the Federal Reserve seems to approach monetary policy these days. Officials are famously leery of intervening when the stock market looks frothy (or irrationally exuberant), but not when it is sinking. The stock market's swoon last summer, after all, helped prompt the Fed's current bout of government-bond buying.

As the June 30 end date for that $600 billion program looms, Fed officials have so far made it pretty clear they want to wrap it up as planned. Should a change be in store, they will have to start laying the groundwork pretty soon, lest markets be taken by surprise. That is why Fed watchers will be paying particularly close attention to speeches in coming weeks, especially comments from Chairman Ben Bernanke....

Quite simply, the market has become a key Fed tool in boosting growth and (at least in theory) in generating jobs in the short term.

Indeed, home prices are falling again, gas prices rising and many households remain cut off from credit or wary of using it like they did to fuel spending during the boom. "You simply cannot afford to have home prices and equity prices slump together for any length of time," says Moody's Capital Markets Chief Economist John Lonski, or growth prospects would quickly sour.

Yet it is hardly encouraging that the U.S. economy is now more reliant than ever on the stock market. For one, the immediate benefits from share appreciation largely flow to well-off households and exacerbate income inequality. The correlation between household net worth and consumer spending is twice as strong as it was in the 1990s. That makes any market disruptions even more of a threat to growth.

It also makes the chance of renewed Fed action more likely should markets fall hard after June. With stocks once again buoyant, the Fed may not be able to stomach watching them sink.

12--Default or not to default? Now that's a no-brainer, The Independent

Excerpt: Let us never forget that the actions of 100 people or so at the top of Irish banks have brought this country to the point of financial ruin.

Now, in isolation, the country's fiscal deficit (forecasted to be €12bn this year) is problematic but manageable, but when added to the colossal burden of the banking losses, Ireland can no longer keep its head above water.

Leading Trinity College economist Philip Lane said it was now questionable whet- her we could sustain this debt mountain.

"Is the size of the bank debt big enough so that the sovereign debt becomes unsustainable?" Lane said. "I think everyone would agree, it's a very close call at this stage."

Others have gone further. Richard Portes of the London Business School said: "Based on current government policies, I find it very difficult to see how Ireland can meet the sovereign obligations it has incurred in the medium-to- long term. The simple dynamics of debt require there needs to be growth if a country is to break out of this debt trap. And that is not going to happen if Ireland is to continue on this path of fiscal austerity. If you continue on this path it will ultimately lead to a sovereign default."

To my mind, the question is no longer whether Ireland should default but a question of when. We won't have a choice.

Former NTMA boss, Dr Michael Somers, said Ireland was now caught in a classic debt spiral.

"There is no way we will ever pay this stuff back, it will just be refinanced. The awful thing is that I know there are figures going around showing virtually no growth for the next three years and you ask yourself what comes after that, further tax hikes and you ask yourself how are we ever going to get out of this. We are in a downward spiral," he said. ...

Let me be clear. Any debt owed by the State for the keeping of the lights on, keeping doctors and nurses working in our hospitals and teachers in our schools must be met and honoured in full.

But, Ireland must now tell those who gambled on our banks that they must take a hit. On that portion of the debt, €22bn in unguaranteed stuff and a further €60bn-plus of other bank-related stuff, Ireland must inflict losses on the investors who took a punt and failed.

It's like the old saying, if you owe the banks €40,000 they have you by the balls, if you owe them €40m, you have them by the balls. This is how Ireland needs to start dealing with the ECB.

13--A Looming Disaster: Europe, Newsweek

Excerpt: While the world has been transfixed with Japan, Europe has been struggling to avoid another financial crisis. On any Richter scale of economic threats, this may ultimately count more than Japan’s grim tragedy. One reason is size. Europe represents about 20 percent of the world economy; Japan’s share is about 6 percent. Another is that Japan may recover faster than is now imagined; that happened after the 1995 Kobe earthquake. But it’s hard to discuss the “world economic crisis” in the past tense as long as Europe’s debt problem festers—and it does.

Just last week, European leaders were putting the finishing touches on a plan to enlarge a bailout fund from an effective size of roughly €250 billion (about $350 billion) to €440 billion ($615 billion) and eventually to €500 billion ($700 billion). By lending to stricken debtor nations, the fund would aim to prevent them from defaulting on their government bonds, which could have ruinous repercussions. Banks could suffer huge losses on their bond portfolios; investors could panic and dump all European bonds; Europe and the world could relapse into recession.

Unfortunately, the odds of success are no better than 50–50.

Europe must do something. Greece and Ireland are already in receivership. There are worries about Portugal and Spain; Moody’s recently downgraded both, though Spain’s rating is still high. The trouble is that the sponsors of the bailout fund are themselves big debtors. In 2010, Italy’s debt burden (the ratio of its government debt to its economy, or gross domestic product) was 131 percent; that exceeded Spain’s debt ratio of 72 percent. Debt ratios were high even for France (92 percent) and Germany (80 percent).

14--Higher Inflation Expectations Are Spreading, Wall Street Journal

Excerpt: The Federal Reserve expects higher price pressures to be “transitory.” But other economic players aren’t so sure.

A new survey of finance professionals done by J.P. Morgan shows core inflation expectations are rising around the world.

In the U.S. specifically, the mean response is that core inflation, as measured by the consumer price index excluding food and energy, will be running 1.8% a year from now. That is up from 1.4% when the survey was last done in November and up from February’s actual reading of 1.1%. The survey polled about 750 respondents, with about 40% from North America.

The report notes the recent jump in oil prices and the longer-running increase in commodity prices may be skewing responses. But the report notes core inflation rates have already been rising in the U.S. and the U.K.

The complication for the outlook is that investors think higher headline inflation will hang around in the medium term, defined as two to five years from now. When asked about medium-term inflation, the mean answer called for a 2.9% U.S. inflation rate.

Sixty-one percent of those surveyed think inflation will be running above the Fed’s target, generally thought to be around 2%. Of those respondents, 12% thought inflation would be “significantly” above target.

The sentiment among finance professionals echoes inflation concerns coming from the U.S. household sector. The preliminary March consumer survey done by Thomson Reuters/University of Michigan shows consumers think top-line inflation will be a rapid 4.6% a year from now and 3.2% five years from now.

Rising inflation expectations complicate Fed policy. Central bankers have set “stable inflation expectations” as one criterion for keeping interest rates exceptionally low “for an extended period,” as the March 15 policy statement said.

The danger to the outlook is that rising expectations could mean higher wages and prices will be incorporated into union contracts and buying contracts leading to higher actual inflation.

15---Student loans: debt, defaults and delinquents, FT.Alphaville

Excerpt: According to new provisional data from the US Department of Education assembled by the Chronicle of Higher Education, 39 colleges, mostly “proprietary”, have average loan default rates of above 40 per cent within three years of repayment. Around one third-of these are in the Everest network, though coding issues make it difficult to work out the spread across different campuses....

The CHE has a full table of results (subscription only), but here are its average default rates by sector:

For the public institutions analyzed, the two-year rate was 6 percent and the three-year rate was 10.8 percent; for private institutions, the two-year rate was 3.7 percent and the three-year rate was 7.1 percent; and for the for-profit colleges, the two-year rate was 11.3 percent and the three-year rate was 24 percent.

Why the big jump in default rates between two year and three years after graduation? The CHE suggests that it is because for-profit colleges, keen not to lose their access to federal aid, actively monitor their graduates and encourage them to make their payments those first two years — CHE refers to it as “demand management”....

Now, the years 2005-9 were unusual for many reasons, and of course there are perfectly healthy reasons (continuing study for example) for postponing repayments. But having only one-third of student borrowers follow the “normal” path of repayment still seems a bit low....

An op-ed in Sunday’s Boston Globe underplayed the for-profit problems but got its main point spot on:

With all of the energy expended taking sides — for or against regulations, short sellers, private equity, and Goldman Sachs — lost in the discussion is the precarious state of America’s education debt. Since 2003, the total debt burden from education loans to private and public institutions has grown 18 percent per year and now stands at over $500 billion. By contrast, mortgage and credit card debt has fallen over the past three years.

At the housing bubble peak, the mantra was “homeownership at any cost.’’ Here, it seems to be “higher education at any cost.’’

16--Stock Market In A State Of Denial, Comstock Partners Inc

Excerpt: the so-called strengthening recovery that supposedly more than offsets all of the above is highly fragile and subject to reversal. The second dip in housing that we have expected is now upon us. House prices are falling and inventories are extremely high while close to a quarter of homes with mortgages are underwater. The further dip in prices will put even more mortgages underwater, leading to even more foreclosures and an undermining of consumer net worth, confidence and spending. Real wages have decreased in four of the last five months and even new orders for durable goods, a precursor for capex, has weakened in the last two months.

In addition let's not overlook the point that QE2, which is pouring about $3.5 billion into the economy every weekday, is due to end on June 30th, and is unlikely to be extended. Both the economy and the market slowed significantly after the conclusion of QE1 and came back only with the announcement of QE2. At that point monetary policy becomes a headwind instead of tailwind at a time when political pressures are reining in fiscal policy as well.

In sum investors are in a state of denial similar to when they denied the dot-com boom was a serious problem in early 2000, or that subprime mortgages were a problem in 2007. This is typical of investor behavior at tops in all publically traded markets over hundreds of years, and human behavior is not likely to suddenly change now.

17---Wikileaks: Lebanon's leaders conspired with Israel to bomb Lebanon, Angry Arab

Excerpt: The the most damning Wikileak on Lebanon thus far.

"Jumblatt noted the heavy destruction of Lebanese
infrastructure but bemoaned the irony that Hizballah's
BEIRUT 00002403 003 OF 003

military infrastructure had not been seriously touched.
Jumblatt explained that although March 14 must call for a
cease-fire in public, it is hoping that Israel continues its
military operations until it destroys Hizballah's military
capabilities. "If there is a cease-fire now, Hizballah
wins," said Jumblatt. "We don't want it to stop," Hamadeh
chimed in. Hizballah has been stockpiling arms for years and
its arsenal is well-hidden and protected somewhere in the
Biqa Valley. Jumblatt marveled at the cleverness of the
Iranians in supplying Hizballah with the anti-ship missile
that hit an Israeli gunboat.

8. (C/NF) Responding to Jumblatt's complain that Israel is
hitting targets that hurt the GOL while leaving Hizballah
strategically strong, the Ambassador asked Jumblatt what
Israel should do to cause serious damage to Hizballah.
Jumblatt replied that Israel is still in the mindset of
fighting classic battles with Arab armies. "You can't win
this kind of war with zero dead," he said. Jumblatt finally
said what he meant; Israel will have to invade southern
Lebanon. Israel must be careful to avoid massacres, but it
should clear Hizballah out of southern Lebanon. Then the LAF
can replace the IDF once a cease-fire is reached. A defeat
of Hizballah by Israel would be a defeat of Syrian and
Iranian influence in Lebanon, Hamadeh added. For emphasis,
Jumblatt said that the only two outcomes are total defeat or
total success for Hizballah.
9. (C/NF) Hamadeh said that an Israeli invasion would give
Siniora more ammunition to deal with Hizballah's arms.
Jumblatt thought the crisis could end in an armistice
agreement like after the 1973 war. A buffer zone in the
south could then be created."

March 14 clowns upset that Israeli humiliatingly rushed out of Lebanon
"Jumblatt thought that the Israelis were in "too much of a hurry to leave," for, once the Israelis are out of Lebanon, in his view, a major pressure point on Hizballah is removed. In Jumblatt's view, Hizballah is not in the mood right now to attack the IDF, even inside Lebanon, but having the Israelis inside is an embarrassment to Hizballah. "We can ask, 'why is Israel occupying part of Lebanon?'" Jumblatt explained. The Israelis no longer seemed insistent on waiting until the arrival of an expanded UNIFIL, Hamadeh said, describing a briefing he had received from the Lebanese general who had participated in an IDF-UNIFIL-LAF meeting in Naqoura earlier that day. Hamadeh said that many Israelis had already departed Lebanon and wanted to begin a more formal handover to UNIFIL as early as 8/16, well before any new UNIFIL troops would be ready to go. "How is it that Israel can insist on a new multinational force, but then they end up just leaving the same old UNIFIL to take over?" Khoury asked

How March 14 received the news of Israeli humiliation in 2006
"The ebullient mood on the streets outside Hamadeh's seaview apartment contributed to the unrelentingly bleak mood of the March 14 figures inside, as other March 14 politicians called Hamadeh, Jumblatt, and Khoury intermittently throughout the evening to express fear -- and, in a few cases, a desire to quit Lebanon altogether

This is how the US and French colonial ambassadors issue orders to their tools in March 14
"Emie and Ambassador Feltman prodded the Lebanese on a "moment of truth" regarding Hizballah's arms, but Hamadeh, Jumblatt, and Khoury thought that provoking that moment of truth now would hand Hizballah a clear victory. "We need to wait at least until 'the celebrations' are over," Jumblatt said