Tuesday, March 22, 2011

Today's links

1--This Is What Class War Looks Like: A National Campaign, State by State, Daily Kos

Excerpt: The wealthiest 5% of Americans control 72% of America's financial wealth. The bottom 80% control only 7% of the nation's financial wealth. The richest 400 Americans have more combined wealth than the poorer HALF of all Americans. That means 400 people have more wealth than 150,000,000 people combined. American corporations saw record profits in 2010. Nearly 80% of all economic gains made in the past thirty years have gone to the richest 1%. In the 1970s, the average CEO made 30 times what an hourly worker made. Today, a CEO makes 300 times what an hourly worker makes....

2--Is the Treasury undermining QE?, Greg Ip, The Economist

Excerpt: Lou Crandall of Wrightson, my go-to man on these matters, tells me that since QE2 began on November 12, the Fed has bought $440 billion of Treasury notes and bonds. Since November 1, however, Treasury’s total issuance of such paper has been $533 billion, so the public’s holdings of long-term debt have on net risen. Mr Swanson’s findings suggest that Treasury’s debt managers are working at cross purposes to QE.

When I put this to Mr Crandall, his response was: “[T]hank God they are. The worst thing they could do would be to further undermine confidence by allowing their rollover risk to rise. Showing a commitment to prudent finance is part of what you need to do if you are going to run a deficit of 10% of GDP.” Rollover risk refers to the threat that a spike in interest rates would sharply elevate debt-service costs as short-term debt matured, or worse, that the government could be locked out of the markets (Greek style) if no buyers showed up.

But I suspect this is a narrow view. The rollover risk the Treasury sheds by issuing more long-term bonds is absorbed by the Fed as it buys those bonds. Should short-term rates rise suddenly, the Fed will absorb market losses on its bond holdings, and future interest income (which it repays to Treasury as seigniorage) will be lower since it will have fewer maturing short-term holdings to reinvest at higher rates. Moreover, the presence of the Fed as the buyer of last resort of Treasury debt makes a Greek-style lock-out of financial markets pretty unlikely. The best argument in favour of keeping Treasury out of the QE business is that it avoids commingling the responsibilities of the fiscal and monetary authorities. On the other hand, that didn’t seem to bother anyone during Operation Twist.

3-- The Forgotten Millions, Paul Krugman, New York Times via Economist's View

Excerpt: More than three years after we entered the worst economic slump since the 1930s, a strange and disturbing thing has happened to our political discourse: Washington has lost interest in the unemployed. ...

So one-sixth of America’s workers — all those who can’t find any job or are stuck with part-time work when they want a full-time job — have, in effect, been abandoned..., we’re well on the way to creating a permanent underclass of the jobless.

Why doesn’t Washington care? ... At this point,... polls indicate that voters still care much more about jobs than they do about the budget deficit. So it’s quite remarkable that inside the Beltway, it’s just the opposite....

So who pays the price for this unfortunate bipartisanship? The increasingly hopeless unemployed, of course. And the worst hit will be young workers —... young Americans who graduated during the severe recession of the early 1980s suffered permanent damage to their earnings. ...

So the next time you hear some Republican declaring that he’s concerned about deficits because he cares about his children — or, for that matter, the next time you hear Mr. Obama talk about winning the future — you should remember that the clear and present danger to the prospects of young Americans isn’t the deficit. It’s the absence of jobs.

But, as I said, these days Washington doesn’t seem to care about any of that. And you have to wonder what it will take to get politicians caring again about America’s forgotten millions.

4--Portugal yields rise, government warns of political crisis, Reuters

Excerpt: Portugal's government blamed higher rates paid at a debt auction on Wednesday on the opposition's refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout.

Pressure on Lisbon mounted after Moody's rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces in riding out its debt crisis.

The yield on 1 billion euros ($1.40 billion) of 12-month treasury bills rose to 4.331 percent at the auction, compared with 4.057 percent two weeks ago.

Spain, by contrast, obtained lower yields at a T-bill auction on Tuesday and is viewed as less and less likely to need an EU/IMF bailout following a surprisingly strong package of debt measures agreed by euro zone leaders last weekend.

The worsening financing situation for Portugal -- which many economists say is the next likely euro zone country to need a bailout after Greece and Ireland -- suggests the deal to boost the euro zone rescue fund may have come too late for it.

Portugal's plight has become yet more complicated by the fact that the main opposition Social Democrats have refused to back the government's latest austerity plans, which are aimed to ensure the country meets its budget goals.

"Failure to approve the new measures in the budget plan would push the country to external help," Finance Minister Fernando Teixeira dos Santos told parliament's budget committee. "Current market conditions are unsustainable in the medium- and long-term."

A Reuters poll of 45 economists found a 60 percent chance that Portugal will need a bailout like Greece and Ireland, with the expectation that it will happen by June.

5--Decrease In Credit Card Debt All Down To Write-Offs, Report Says, Huffington Post

Excerpt: Credit card debt fell last year only because of consumer defaults and bank write-offs, a new study argues.

In 2010, U.S. credit card debt dropped to the lowest level in eight years, according to credit reporting agency TransUnion. But there is more evidence Americans may have taken on more credit card debt than they paid off.

A study by Cardhub.com of Federal Reserve data found that last year, while banks wrote off a total of $75 billion in credit card debt, the level of the debt only declined by around $67 billion. This, according to Cardhub, suggests that the "entire decrease [in overall debt] is the direct result of Americans defaulting on their debt."

"The widely-held belief is that consumers have been paying down debt," said Odysseas Papadimitriou, CEO of CardHub.com. But, he said, as the pressures of the recession eased for some and consumer confidence improved, so did spending. Last year, for the first time since 2008, figures from the Federal Reserve also showed showed Americans accumulating more debt.

Some economists insist, despite the wave of defaults and write-offs, many Americans are more wary of paying with plastic.

"Charge-offs are part of the picture, there's no doubt about that" said Gregory Daco, economist at IHS Global Insight. "But there has been a change in attitudes to credit, and paying it off," he added, quoting a report by the Federal Reserve Bank of New York, which found the way people used credit cards had changed significantly.

"A lot of people are taking on less debt and paying off existing balances," Daco added.

Many Americans spent beyond their means in the lead-up to the financial crisis tapping the rising value of homes, stock portfolios and east credit. As the recession deepened and unemployment grew, millions of Americans found themselves struggling to pay off their balances. In 2009, as the recession was ending, consumers paid off $10 billion in debt.

6-- The War on Warren, Paul Krugman, New York Times via Economist's View

Excerpt: Last week, at a House hearing on financial institutions and consumer credit, Republicans lined up to grill and attack Elizabeth Warren, the law professor ... in charge of setting up the new Consumer Financial Protection Bureau. Ostensibly, they believed that Ms. Warren had overstepped her legal authority by helping state attorneys general put together a proposed settlement with mortgage servicers, who are charged with a number of abuses.

But the accusations made no sense. Since when is it illegal for a federal official to talk with state officials, giving them the benefit of her expertise? ...

Republicans were clearly ... hoping that if they threw enough mud, some of it would stick. For people like Ms. Warren — people who warned that we were heading for a debt crisis before it happened — threaten ... attempts by conservatives to sustain their antiregulation dogma. Such people must therefore be demonized, using whatever tools are at hand.

Let me expand on that for a moment. ... Ms. Warren’s prescience and her role in shaping financial reform legislation — not to mention her effective performance running the Congressional panel exercising oversight over federal financial bailouts —... is ... the reason she’s being attacked so fiercely. Nothing could be worse, from the point of view of bankers and the politicians who serve them, than to have consumers protected by someone who knows what she’s doing and has the personal credibility to stand up to pressure.

7--Europe Re-divided, George Soros, project Syndicate

Excerpt: Germany blames the crisis on the countries that have lost competitiveness and run up their debts. Consequently, Germany places all the burden of adjustment on debtor countries. But this ignores Germany’s major share of responsibility for the currency and banking crises, if not for the sovereign-debt crisis.

When the euro was introduced, it was expected to bring about convergence among eurozone economies. Instead, it brought about divergence. The European Central Bank treated all member countries’ sovereign debt as essentially riskless, and accepted their government bonds at its discount window on equal terms. This induced banks that were obliged to hold riskless assets in order to meet their liquidity requirements to earn a few extra basis points by loading up on the weaker countries’ sovereign debt.

This lowered interest rates in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) and inflated housing bubbles just as reunification costs were forcing Germany to tighten its belt. This caused both the divergence in competitiveness and the banking crisis in Europe, which affected German banks more than others.

In fact, Germany has been bailing out the heavily indebted countries as a way of protecting its own banking system. For example, Ireland’s massive sovereign debt arose because eurozone authorities, intent on saving the banking system, forced the Irish to nationalize their banks as a condition for keeping them afloat. Thus, because the arrangements imposed by Germany protect the banking system by treating outstanding sovereign debt as sacrosanct, debtor countries must bear the entire burden of adjustment.

This is reminiscent of the international banking crisis of 1982, when the World Bank and the International Monetary Fund lent debtor countries enough money to service their debts until banks could build up sufficient reserves to exchange their bad debts for Brady Bonds in 1989. That meant a “lost decade” for Latin America’s economies. Indeed, the current arrangements penalize debtor countries even more than in the 1980’s, because they will have to pay hefty risk premiums after 2013.

8--Yakuza to the Rescue; Japan's Mafia steps up relief program, The Daily Beast

Excerpt: Even Japan’s infamous mafia groups are helping out with the relief efforts and showing a strain of civic duty. Jake Adelstein reports on why the police don’t want you to know about it. Plus, more coverage of Japan’s crisis.

The worst of times sometimes brings out the best in people, even in Japan’s “losers” a.k.a. the Japanese mafia, the yakuza. Hours after the first shock waves hit, two of the largest crime groups went into action, opening their offices to those stranded in Tokyo, and shipping food, water, and blankets to the devastated areas in two-ton trucks and whatever vehicles they could get moving. The day after the earthquake the Inagawa-kai (the third largest organized crime group in Japan which was founded in 1948) sent twenty-five four-ton trucks filled with paper diapers, instant ramen, batteries, flashlights, drinks, and the essentials of daily life to the Tohoku region. An executive in Sumiyoshi-kai, the second-largest crime group, even offered refuge to members of the foreign community—something unheard of in a still slightly xenophobic nation, especially amongst the right-wing yakuza. The Yamaguchi-gumi, Japan’s largest crime group, under the leadership of Tadashi Irie, has also opened its offices across the country to the public and been sending truckloads of supplies, but very quietly and without any fanfare.

9--El-Erian: Will there be a QE3?, Mohamed El Erian, zero hedge

Excerpt: Who is going to buy Treasuries when QE2 ends in June? Will the Fed do it again?

El Erian: It is not clear to us who will step in after June 30th when QE2 formally ends; and this is a challenge both for policymakers and for current valuations in some market segments.

At current yield levels, we do not see sufficient demand coming in to offset what the Fed has been buying, be it from domestic sources or purchases from other countries. Meanwhile, on the supply side, we expect the Treasury to continue with its heavy issuance program.

At this juncture, the Fed is minimizing the problem by noting that “stocks” matter more than “flows”. In other words, since the Fed has effectively taken out a significant amount of Treasuries from the marketplace (and they will not be selling them), other participants have no choice but to buy the new supply. However, as others also suspect, we think that it is much more complicated than that. And recall that the FED has little history to guide its thinking here.

In response to your question on whether the Fed “will do it again,” let us suppose for the sake of discussion that the economy weakens and Treasury yields spike as we get close to the June 30th expiration of QE2 and/or in its immediate aftermath.

Some will undoubtedly call either for a QE3 or for the extension of QE2. Others will warn against this type of “active inertia” in policymaking, noting that the repeated use of such an instrument will likely shift further the balance of outcomes away from “benefits” and towards what Chairman Bernanke, in his August 2011 Jackson Hole speech, correctly labeled as “costs and risks”. And remember, these costs and risks – or what at PIMCO we have analyzed as collateral damage and unintended consequences – have consequential economic, financial, and political elements that play out both domestically and abroad.

Taking all this into account, our inclination is that the hurdle rate for introducing a QE3 will prove to be very high, and rightly so.

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