Monday, March 7, 2011

Today's links

1--Survey: Small Business hiring plans increased in February, Calculated Risk

Excerpt: The National Federation of Independent Business (NFIB) will release their February survey on Tuesday, but here is a pre-release of the employment data ... from NFIB: Positive Trend in Job Growth

“February brought us good news on the jobs front: The trend for job creation is, at last, decidedly positive. While job creation reports have been improving for almost two years, they have consistently been negative or near zero, indicating that employment at the nation’s small firms was still contracting, albeit at slower and slower rates. But this month’s reading confirms that we are moving in the right direction. Equally important, small firms’ plans to hire have been consistently positive for the past five consecutive months.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. With the high percentage of real estate (including small construction companies), small businesses will be slow to recover this cycle.

2--The Real News on Jobs, Robert Reich's blog

Excerpt: Are we making progress on the jobs front? The Bureau of Labor Statistics reports 192,000 new jobs in Februrary (220,000 new jobs in the private sector and a drop in government employment), and a drop in the overall unemployment rate from 9 to 8.9 percent.

We’re heading in the right direction but far too slowly to make a real dent in unemployment. To get the unemployment rate down to 6 percent by 2014 we’d need over 300,000 new jobs a month, every month, between now and then.

Overall, the number of unemployed Americans – 13.7 million – is about the same as it was last month. The number working part time who’d rather be working full time – 8.3 million – is also about the same.

But to get to the most important trend you have to dig under the job numbers and look at what kind of new jobs are being created. That’s where the big problem lies.

The National Employment Law Project did just that. Its new data brief shows that most of the new jobs created since February 2010 (about 1.26 million) pay significantly lower wages than the jobs lost (8.4 million) between January 2008 and February 2010.

While the biggest losses were higher-wage jobs paying an average of $19.05 to $31.40 an hour, the biggest gains have been lower-wage jobs paying an average of $9.03 to $12.91 an hour.

In other words, the big news isn’t jobs. It’s wages.

3--Commercial Real Estate Breathes Life Into a Moribund Market, New York Times

Excerpt: A crucial part of the securitization market — the Wall Street credit machine that helped set off the financial crisis — is kicking back into gear.

In the last few weeks, a number of big banks have successfully bundled and sold new securities backed by commercial real estate loans. Morgan Stanley and Bank of America completed a $1.55 billion deal last month that included office and retail properties. So far this year, financial firms have sold about $5 billion of commercial mortgage-backed securities, almost as much as was done in all of 2010.

More deals are in the works. JPMorgan Chase, for example is in the process of selling a $1.5 billion commercial mortgage-backed security. If the pace continues, the volume of these sales could hit $45 billion this year, according to JPMorgan....

Other sectors of this market, including car loans and collateralized loan obligations, are also showing signs of life. But the recovery is being led by commercial real estate, which did not reach the lows that experts expected....

Some on Wall Street, however, are raising warning flags about the new crop of C.M.B.S. deals. The rating agency Standard & Poor’s says that some of the new deals are becoming increasingly complex and underwriting standard have loosened.

“We have seen some examples where appraisals/valuations look quite aggressive to us, especially given the downward property price movements over the past few years,” the agency said in a recent report titled “15 months Later… The Caution Flag is Out for C.M.B.S. 2.0.”...

But with investors nervously on the sidelines, the government started a series of initiatives to help kick-start lending, including the Term Asset-Backed Securities Loan Facility. Under the program, which was expanded to include commercial mortgage-backed securities, the Federal Reserve lent money to big investors willing to buy such securities. The shopping center owner Developers Diversified Realty Corporation hired Goldman Sachs to prepare one loan backed by 28 properties — worth about $400 million — through the Fed’s program.

“TALF really helped the markets to recover,” said Mike Millette, who is responsible for the structured finance group at Goldman Sachs. “It did what it needed to do and then disappeared.”

4---Yellen Places Blame for Crisis on Developing Countries, U.S. — Not Fed, Wall Street Journal

Excerpt: Federal Reserve Vice Chairman Janet Yellen apportions blame for the financial crisis between the U.S. and those parts of the developing world that run large trade surpluses (i.e. China). The developing world created an excess of cash, and the developed world misspent it, she says in comments at a Banque of France symposium in Paris.

Here’s her take on why the developing world is to blame:

“Strong capital outflows from countries with chronic current account surpluses–in part reflecting heavily managed exchange rates, reserve accumulation, and other shortcomings in the operation of the international monetary system–put downward pressure on real interest rates, in turn boosting asset prices (particularly for housing) and enhancing the availability of credit. These developments contributed significantly to the buildup of financial imbalances.”

And here’s what the U.S. did wrong:

“Had the additional domestic credit associated with these capital inflows been used effectively, the imbalances need not have led to financial ruin. In the United States and other countries with current account deficits, however, borrowing too often supported excessive spending on housing and consumption, rather than financing productive investment. Most important, declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased use of opaque financial products, and more-general inadequacies in risk management by private financial institutions helped foster a dangerous and unsustainable credit boom. With the financial system evolving rapidly, supervisors and regulators, both in the United States and in many other countries, failed to recognize and address the mounting vulnerabilities. In short, these failures rooted in the financial system interacted with weaknesses in the global monetary system to create stresses and instabilities that eventually triggered–and amplified—the recent financial crisis and subsequent recession.”

5--Financialization and our increasingly unstable economy, Pragmatic Capitalism

Excerpt: A combination of flawed economic theory and greed have combined to create the beast that we now call a “functioning” economy. The worst part of it all is that President Obama, who vowed change, has done almost nothing to fix any of it and in fact continues most of the policies that helped get us here in the first place....

No, it’s most certainly not a coincidence. Marks goes on to argue that the markets and regulations will never be perfect so our economy will continue to be imperfect. It’s a rather defeatist and general attitude if you ask me. I think there are fairly basic rules that can and should be implemented that limit the potential outlier events from occurring. For instance, collateral on OTC derivatives would have substantially reduced the risks at the investment banks. Leverage limits. Higher capital standards. How about requiring down payments on homes? These are simple rules that eliminate the potential for some of the incredible risks we’ve seen over the last 25 years.

I am not an advocate of highly strict rules, just common sense rules. The fact that the NINJA loan ever even came into existence is a clear sign that allowing the markets to regulate themselves is bordering on insanity. Such lack of rules in capitalism is guaranteed to result in putting greed before rationality. I don’t want to contain capitalism. But I do want to keep it from destroying itself. That is the path we are on and the increasing instability upon which we build each recovery is a clear example….

In the movie, a prominent paper is mentioned written by Raghuram Rajan, a professor of Economics at the Chicago School. He shows how the financialization of the US economy is creating an increasingly unstable economy. Make no mistake, markets are not self regulating. This nonsense that government should never oversee the free market is disastrous policy that is driven by a misguided and dogmatic political perspective and a purely greed driven banking system.

6--Workers Not Benefiting From Productivity Gains, Wall Street Journal

Excerpt: 0.3% — Increase in U.S. hourly wages, adjusted for inflation, since the economic recovery began. The labor market may be improving, but U.S. workers have yet to share much in the productivity and profits they’ve helped generate during the recovery.

From mid-2009 through the end of 2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947.

To some extent, it stands to reason that workers would do poorly in the early stages of a recovery. Unemployment is high, so they have little bargaining power. But that’s not what has happened during most of the recoveries of the last 60 years. Workers typically received at least half of productivity gains in the form of higher wages. Only in the recovery from the deep recession of the early 1980s, when inflation-adjusted hourly wages fell 0.4%, did workers do worse than they have in this recovery. Back then, though, inflation was much higher: In nominal terms, wages rose 5.7%, compared to 3.1% now.

To be sure, wages are expected to rise a bit faster this year. And to the extent that raises remain small, they help insulate the economy from the kind of spiraling wage and price increases that typically lead to runaway inflation.

But that might not be much consolation on payday, particularly with the price of regular gasoline near $3.50 a gallon.

7--Rapid Jobless Drop May Accelerate Tighter Monetary Policy, Wall Street Journal

Excerpt: The startlingly quick pace with which the unemployment rate has fallen is raising questions whether the labor market could soon reach levels that may start to generate inflation and alter the monetary policy outlook.

Over the last few months, the unemployment rate has plunged at a rate hard to reconcile with the level of monthly payroll growth. This rapid descent comes at a time where some in the Federal Reserve have also revised up their estimation of the unemployment rate which, once crossed, starts to generate price pressures.

The 8.9% unemployment rate reported by the government Friday moves the economy ever closer to the so-called natural unemployment rate. While many economists don’t expect this rate of decline to continue, they also didn’t expect what’s happened thus far, so for whatever reason, the economy may be facing a development that could change the monetary policy outlook in big ways....

Jim O’Sullivan of MF Global is optimistic about the jobs market and thinks recent data have been understating the pace of job gains. When it comes to the unemployment rate, “at this point, it may be a case of the unemployment rate not coming down as fast,” he explained.

If so, that would most likely keep the Fed on the path of easy monetary policy for some time to come, as underlying inflation stays low in the absence of any real force to drive up wages, the most influential force on price pressures. But if what’s been seen so far continues to happen, it could be a game changer for monetary policy, and accelerate the time schedule for some form of monetary policy tightening.

“These sort of numbers raise the possibly the Fed may have to move more quickly,” O’Sullivan said. “It’s not inconceivable they’d be moving in the fourth quarter” with some sort of action, although it’s unlikely, he said.

8--The ECB tightens the noose, The Economist

Excerpt: THE blogger Kantoos has put together a nice illustration of why European Central Bank President Jean-Claude Trichet's decision to begin tightening monetary policy (and the market reaction to his comments yesterday indicate that the tightening has already begun) is such a bad idea. (see graph)

The two upward sloping lines are actual nominal GDP (or total spending or aggregate demand) and the nominal GDP trend. The green line is the departure of actual NGDP from trend. And what we observe is that total spending dropped substantially during the recession, then resumed growing at a pace below trend, such that catch-up would occur approximately never. And amid this state of affairs the ECB is now tightening. Despite the ongoing debt crisis and despite austerity across the euro zone. Kantoos writes:

There are no words I could publicly use to describe this failure of monetary policy.

I'm sure that leaders in Greece, Ireland, Portugal, and Spain are thinking the same thing.

Kantoos makes one other point that's close to my heart: if you want to return to normal, hawkish policy as quickly as possible, the best strategy is to make policy as aggressively expansionary as possible. Sweden's central bank adopted a strongly expansionary policy, actually using a negative interest rate, and the Swedish economy is now roaring ahead. And now the Swedish central bank is tightening, appropriately. Many people want America's government to rein in its fiscal deficits and are upset by the fact that government bond yields remain low. Former Budget Office head Peter Orszag argued against QE2 on the grounds that Fed efforts to bring long-term interest rates down a few basis points would reduce the perceived bond market pressure on Congress. But that small difference in rates is nothing compared to the jump that will occur when the private sector's demand for credit grows strongly. And the best way to return to that world is by making monetary policy appropriately accommodative.

The faster you get out of the hole, the sooner you can go back to worrying about the stuff you normally worry about (the things central bankers positively relish worrying about). But Mr Trichet has opted instead to grab a shovel and start digging. And he will place the euro zone under extraordinary pressure as a result.

9---Global forces driving Middle East uprisings, WSWS

Excerpt: A recent study by staff at the United Nations Children’s Fund (UNICEF) found that the number of futures and options traded globally on commodity exchanges quadrupled between 2005 and 2010, with trading in food accounting for a “small but fast-growing share.” Increased speculation has helped to fuel price hikes. A Food and Agriculture Organization (FAO) price index for an international food commodity basket comprising dairy, meat, sugar, cereals and oilseeds jumped by more than 30 percent between June and December last year. The price of cereals, a food staple that accounts for more than two-thirds of dietary calories in many developing countries, jumped by “a staggering 57 percent over the same period.”

The study found that food prices did not subside markedly after their peak in 2007-2008, and in November 2010 were about 55 percent higher, on average, compared to May 2007. The report pointed to one of the key factors driving the uprisings. “Since 2008,” it noted, “poor households have exhausted coping strategies, such as eating fewer meals, cutting health expenditures, increasing debt and working longer hours in the informal sector, and their capacity for resilience is very limited in 2011.”

Rising food prices and inflation generated by the crisis of global capitalism have already had explosive consequences in the Middle East. They threaten even more far-reaching consequences in China. Here, the regime lives in daily fear of an eruption of the working class, far larger than that which developed in response to the inflation of the late 1980s and led to the Tienanmen Square massacre in June 1989.

10--From the archive: Predatory Lenders Partner in Crime, Eliot Spitzer, Washington Post

Excerpt: Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

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