Wednesday, March 2, 2011

Today's links

1---U.S. Economic Confidence Down Sharply in Last Two Weeks, Gallup

Excerpt: Americans have become much less confident in the U.S. economy over the past two weeks, with Gallup's Economic Confidence Index falling from -18 to -30 during that span. The -18 Index score from two weeks ago was the most positive Gallup had measured in the last three years.

Gallup's latest weekly update suggests consumer confidence has fallen back to where it was in early December.

The slump in confidence is likely tied to gas prices, which have risen sharply amid growing political instability in the Middle East, most notably in Libya. The U.S. Department of Energy reported an increase in gas prices from an average $3.14 per gallon nationwide during the week ending Feb. 14 to $3.38 this past week. In addition, news media focus on the challenges governments are having in passing budgets may also affect Americans' perceptions of the economy.

Gallup's Economic Confidence Index comprises two measures -- one assessing consumers' views of current economic conditions and another measuring their perceptions of whether the economy is getting better or worse. Both components are more negative than they were two weeks ago, but most of the change has come from increasingly pessimistic expectations about the economy's direction.

All key demographic and attitudinal subgroups are less confident now than in mid-February. The drop is slightly greater among Democrats, who were in positive territory two weeks ago, than among Republicans. Younger adults, Democrats, and higher socioeconomic status respondents remain relatively more confident than other subgroups....

The short-term prospects for a turnaround in consumer confidence do not appear great, with gas prices likely to continue to rise, with state and federal governments facing increasingly difficult budget situations, and unemployment remaining high.

2--- Pain without Purpose, Brad DeLong, Project Syndicate via Economist's View

Excerpt: Today, we face a nominal demand shortfall of 8% relative to the pre-recession trend, no signs of gathering inflation, and unemployment rates ... at least three percentage points higher than any credible estimate of the sustainable rate. And yet,... somehow,... cures are now off the table. There is no likelihood of reforms of Wall Street and Canary Wharf aimed at diminishing the likelihood and severity of any future financial panic, and no likelihood of government intervention to restore the normal flow of risky finance through the banking system. Nor is there any political pressure to expand or even extend the anemic government stimulus measures that have been undertaken.

Meanwhile, the European Central Bank is actively looking for ways to shrink the supply of financial assets that it provides to the private sector, and the US Federal Reserve is under pressure to do the same. In both cases, it is claimed that further expansionary asset-provision policies run the risk of igniting inflation.

Yet no likelihood of inflation can be seen when tracking price indexes or financial-market readings of forecast expectations. And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.

Nevertheless,... you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.


3--Inflation Theorists, Paul Krugman, New York Times

Excerpt: Christy Romer has a piece framing the inflation debate in terms of “empiricists” versus “theorists”. I’d say she’s being too nice.

I mean, yes, there are theoretical models in which monetary expansion translates immediately into sudden inflation. But these same models also say, essentially, that what we’re experiencing now — a prolonged period of high unemployment in which wage growth has slowed, but wages haven’t plunged — couldn’t happen. So to believe the inflation scare stories you have to be not just a theorist but a theorist who believes his theories, not his own lying eyes.

And really, I don’t think the inflation hawks are relying on models. They’re going with their gut: eek! inflation! money printing! eeevil! This is not a rational discussion.

4--Bernanke Warns on Debt-Limit ‘Chaos’, Wall Street Journal

Excerpt: U.S. Federal Reserve Chairman Ben Bernanke warned Congress could create financial and economic “chaos” if lawmakers bind together raising the short-term debt limit to fund the federal government with fundamental fiscal restructuring....

Major budget restructuring, particularly targeting entitlements such as healthcare, poses a monumental political hurdle. Bernanke said tying the two issues together would raise the risk that the U.S. wouldn’t subsequently be able to raise the debt level and therefore default on its debt. That, he said, would cause a financial crisis and “real chaos.”

“It would be extremely dangerous and likely recovery-ending event,” Bernanke later added.

“For a very long time afterwards, the U.S. would have to pay higher interest rates in the market and that would make our deficit problems even more intractable,” he said.

First, the Fed chief said a new financial crisis would be created as firms that rely on receiving interest and principle from the government are unable to make their own payments. “That would probably cascade through the financial markets,” he said.

Then, there would be a “massive loss of confidence” in U.S. Treasury securities, the deepest, most liquid market in the world.

Bernanke said even if the U.S. failed to meet its debt payment deadline for 20 minutes and the government avoided the most serious harmful impacts, the interest rates the U.S. pays on its debt would still likely rise with the perception of higher riskiness and uncertainty associated with funding the government.

“Broadly speaking…it would be a very, very bad outcome for the U.S. economy,” he said.

5--Global Imbalances without Tears, Kenneth Rogoff, Project Syndicate

Excerpt: with policymakers and pundits railing against sustained oversized trade imbalances, we need to recognize that the real problems are rooted in excessive concentrations of debt. If G-20 governments stood back and asked themselves how to channel a much larger share of the imbalances into equity-like instruments, the global financial system that emerged just might be a lot more robust than the crisis-prone system that we have now.

Unfortunately, we are very far from the idealized world in which financial markets efficiently share risk. Of the roughly $200 trillion in global financial assets today, almost three-quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities. The derivatives market certainly helps spread risk more widely than this superficial calculation implies, but the basic point stands....

A better approach would be to create a mechanism for orchestrating orderly sovereign default, both to minimize damage when crises do occur, and to discourage lenders from assuming that taxpayers’ money will solve all major problems. The IMF proposed exactly such a mechanism in 2001, and a similar idea has been discussed more recently for the eurozone. Unfortunately, however, ideas for debt-restructuring mechanisms remain just that: purely theoretical constructs.

In the meantime, the IMF and the G-20 can help by finding better ways to assess the vulnerability of each country’s financial structure – no easy task, given governments’ immense cleverness when it comes to cooking their books....

Of course, even if the composition of international capital flows can be changed, there are still many good reasons to try to reduce global imbalances. An asset diet rich in equities and direct investment and low in debt cannot substitute for other elements of fiscal and financial health. But our current unwholesome asset diet is an important component of risk, one that has received far too little attention in the policy debate.

6---Global Economy? 23 Facts Which Prove That Globalism Is Pushing The Standard Of Living Of The Middle Class Down To Third World Levels, Courtesy of Michael Snyder at Economic Collapse, zero hedge

Excerpt: A one world labor pool means that the standard of living for the U.S. middle class will continue falling toward the standard of living in the third world....The truth is that the global economy is bad for America. The following are 23 facts which prove that globalism is pushing the standard of living of the middle class down to third world levels....

#1 From December 2000 to December 2010, the U.S. ran a total trade deficit of 6.1 trillion dollars.

#2 The U.S. trade deficit was about 33 percent larger in 2010 than it was in 2009.

#3 The U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.

#4 The U.S. economy is rapidly trading high wage jobs for low wage jobs. According to a new report from the National Employment Law Project, higher wage industries accounted for 40 percent of the job losses over the past 12 months but only 14 percent of the job growth. Lower wage industries accounted for just 23 percent of the job losses over the past 12 months and a whopping 49 percent of the job growth.

#5 Between December 2000 and December 2010, 38 percent of the manufacturing jobs in Ohio were lost, 42 percent of the manufacturing jobs in North Carolina were lost and 48 percent of the manufacturing jobs in Michigan were lost....

#15 Wages for workers in China are incredibly low. For example, one facility in the city of Longhua that makes iPods employs approximately 200,000 workers. These workers put in endless 15-hour days but they only make about $50 per month....

By merging our labor pool with the rest of the world, we have also merged our standard of living with the rest of the world. High unemployment is rapidly becoming "the new normal" in America, and wages are going to continue to decline in many, many industries.

7---Lord, Make Us Thrifty, but Not Yet, Catherine Rampell, New York Times

Excerpt: Following up on my earlier post on the fall in American consumer spending: The flip side of the declining spending numbers is that the personal savings rate increased in January. Households had a saving rate of 5.8 percent (measured as the share of disposable income not spent), up from 5.4 percent in December.

Isn’t that a good thing, you might ask? Don’t we want Americans to start budgeting more responsibly?

In the long term, yes: it would benefit the economy to be less dependent on consumer spending and more reliant on exports. That requires a higher saving rate, at least to the levels seen before the credit bubble.

But as St. Augustine of Hippo might say, Lord, make us thrifty, but not yet. In other words, we want Americans to start saving more in the future — that is, sometime after the economy has fully recovered. In the near term, though, businesses need consumer spending, not saving, to help them grow and eventually hire.

And this was the exact calculus behind the temporary payroll tax cut: to get consumers to pick up the pace of spending in the near-term only.

One month’s worth of data does not a bulletproof verdict make, but the policy does not look promising.

8---EU Raises 2011 Growth Forecast, Sees Inflation Accelerating, Bloomberg

Excerpt: The European Commission raised its economic-growth forecast for 2011 and said higher oil and commodity prices will keep inflation above the European Central Bank’s limit for most of the year.

Gross domestic product in the euro region may increase 1.6 percent in 2011, above an earlier forecast of 1.5 percent growth, the Brussels-based commission said in a report published today. Inflation will average 2.2 percent this year, the agency forecast, up from a November estimate of 1.8 percent.

“While exports should continue supporting the recovery, a rebalancing of growth toward domestic demand is expected for 2011, resulting in more sustainable growth,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in the report. “Despite the recent relative calm in the financial markets, the situation has not yet fully normalized.”...

“The industry in Europe’s core economies is doing very well if you look at orders, world trade and air and sea cargo figures,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam. “But the increased oil price and higher inflation will lower purchasing power and since consumers are already facing austerity measures, this holds back consumption growth.”

9--Survey: Gloomy Views Persist on Housing, Economy, Wall Street Journal

Excerpt: The number of Americans who believe that buying a home is a safe investment continues to fall, according to a new survey on housing attitudes from Fannie Mae.

Just 64% of respondents said they believe a home is a safe investment, down from 70% one year ago and 83% in December 2003.

The survey found that more Americans say it’s a bad time to sell a house, and fewer Americans say it’s a good time to buy. Still, the share of respondents who believe home prices will stay flat or increase over the next year (78%) posted a slight increase from one year ago (73%)....

The economy: The survey found that Americans’ gloomy views on the economy were essentially unchanged from one year ago, with almost two-thirds saying that the economy is on the wrong track. While 19% of people said their income had increased significantly in the past year, some 34% said that expenses had increased significantly. “That to me is a signal of the difficulty that the economy has in growing robustly,” said Duncan.

Mortgages: Nearly three-quarters of respondents said they thought it would be harder to get a mortgage in the future, up from just over two-thirds one year ago.

Meanwhile, the number of delinquent borrowers that said they have thought about defaulting on their mortgage fell slightly, to 31% from 39% one year ago; the number that said they had “seriously considered” defaulting fell to 19% from 25%.

10--Behind a Rise in Auto Sales, Easier Credit, Eric Dash, New York Times

Excerpt: Detroit is crowing that the auto industry is back, but so far, at least, it is a success story built as much on a revival in lending as on the development of desirable cars. Sales of new cars rose 11 percent, to around 11.4 million, in 2010 and are off to an even stronger start this year, according to Autodata, an industry research service. Sales of used cars have been similarly robust.

After radically scaling back auto lending during the financial crisis, banks and the lending arms of the automakers have started to issue loans more aggressively. Borrowers of all types are now finding it much easier to obtain a loan compared with a few months ago. Even car buyers with tarnished credit histories are getting financing, in some cases without making a down payment. More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60 percent increase from the year before, according to CNW Marketing Research.

The revival of auto lending is emblematic of an increased appetite for risk in the American economy. Consumers, showing renewed confidence in the recovery, are opening their wallets again after putting off car purchases during the recession. Banks, flush with deposits to lend out, have eased their standards for extending credit. And investors, who fled from the bond market during the throes of the crisis, are starting to snap up higher-risk debt as they seek higher yields.

Wall Street’s loan packaging business has once again become a crucial engine for supplying money to auto and credit card lenders — and it is happening much faster than most economists had predicted. Nobody is suggesting an imminent return to the heady, reckless days of the housing boom, and any one of a number of factors — like the recent surge in oil and commodities prices — could set the recovery off track. But the gradual expansion of credit in virtually every area except real estate is an important sign that the American economy is returning to health....

Kevin Lauterbach, 29, an operations manager from Coral Springs, Fla., said he was surprised that so many lenders were willing to give him a loan when he went shopping for a new car in December. Although he had worked hard to repair a mildly damaged credit score, several major lenders rejected his application for a new credit card a few months earlier. But five banks offered to help him finance a car, all with no money down.

Mr. Lauterbach eventually locked in a 4.75 percent rate on a $19,000 loan from City County Credit Union of Fort Lauderdale to cover the cost of a 2008 Jeep Liberty. The 72-month loan requires payments of $150 every two weeks. "My credit wasn’t great, and what I had been hearing is that credit is tight right now," he said. "But it wasn’t really as difficult as I was anticipating."

For the auto industry, the surge in sales represents a remarkable reversal. Only two years ago, Detroit’s Big Three automakers were in such dire condition that they took more than $87 billion in federal aid; Chrysler and General Motors required Chapter 11 bankruptcy protection to turn themselves around, with the government’s help. The Obama administration provided other forms of assistance as well. It engineered the rescues of the CIT Group, a major lender to auto dealerships and parts suppliers, and also bailed out the troubled auto finance companies Chrysler Financial and GMAC, now known as Ally Financial.

Just as crucial, economists say, was the administration’s effort to lure private investors back into what was once a $100 billion-a-year bond market for auto finance companies, according to Deutsche Bank Securities. That market had all but dried up by the end of 2008. The federal program provided more than $11.7 billion in below-market financing to dozens of private investors — a group that included hedge funds like FrontPoint Partners, money managers like BlackRock and Pimco, and even a retirement fund operated by the City of Bristol, Conn. — to encourage them to resume buying bonds backed by auto loans....

Several factors contributed to the quick recovery of auto lending. Both banks and auto lenders can reap large profits on new loans, since interest rates near zero have kept the cost of their funds extremely low. Auto lending was also largely unaffected by the Dodd-Frank Act and other regulations, which reduced the fees that banks could charge for services like credit cards and overdraft protection.

In addition, auto lenders, unlike home lenders, have long issued loans expecting that the vehicle will start to lose value as soon as it is driven off the lot. That helped them avoid the costly mistakes of mortgage lenders, who underwrote loans during the boom on the belief that prices would keep going up. In fact, auto loans fared better than almost any other loan category during the crisis....

As the economic recovery gathered steam, domestic auto lenders like GMAC and Chrysler Financial flooded back into the business in the fall. That lured traditional banks like Bank of America, Banco Santander, Capital One, JPMorgan Chase, TD Bank and Wells Fargo back in a bigger way, and helped prop up lending for used vehicles.

Dealers say the frenzied competition has made it possible for weaker borrowers — those denied credit even six months earlier — to finally obtain loans. AutoNation, for example, said that approvals for subprime customers reached 38 percent in the fourth quarter of 2010, compared with 18 percent a year earlier, amid only a modest increase in applications. Over all, lending to subprime borrowers has risen to about 38 percent of the auto finance market, although it is still well below its precrisis highs when it made up nearly half of all loans, according to credit bureau data from Experian.

"The biggest improvement started in December," said Rick Flick, who runs Ford and Chevrolet dealerships in the New Orleans area. "The banks are getting aggressive again. They are calling us and asking why aren’t we sending them more business."

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