Wednesday, March 23, 2011

Today's links

1----Fed Will Release Bank Loan Data as Top Court Rejects Appeal, Bloomberg

Excerpt: The Federal Reserve will disclose details of emergency loans it made to banks in 2008, after the U.S. Supreme Court rejected an industry appeal that aimed to shield the records from public view.

The justices today left intact a court order that gives the Fed five days to release the records, sought by Bloomberg News’s parent company, Bloomberg LP. The Clearing House Association LLC, a group of the nation’s largest commercial banks, had asked the Supreme Court to intervene.

“The board will fully comply with the court’s decision and is preparing to make the information available,” said David Skidmore, a spokesman for the Fed.

The order marks the first time a court has forced the Fed to reveal the names of banks that borrowed from its oldest lending program, the 98-year-old discount window. The disclosures, together with details of six bailout programs released by the central bank in December under a congressional mandate, would give taxpayers insight into the Fed’s unprecedented $3.5 trillion effort to stem the 2008 financial panic.

“I can’t recall that the Fed was ever sued and forced to release information” in its 98-year history, said Allan H. Meltzer, the author of three books on the U.S central bank and a professor at Carnegie Mellon University in Pittsburgh.

2--Have Consumers Been Deleveraging?, New York Fed

Excerpt: Since its peak in summer 2008, U.S. consumers’ indebtedness has fallen by more than a trillion dollars. Over roughly the same period, charge-offs—the removal of obligations from consumers’ credit reports because of defaults—have risen sharply, especially on loans secured by houses, which make up about 80 percent of consumer liabilities. An important question for gauging the behavior of U.S. consumers is how to interpret these two trends. Is the reduction in debts entirely attributable to defaults, or are consumers actively reducing their debts? In this post, we demonstrate that a significant part of the debt reduction was produced by consumers borrowing less and paying off debt more quickly—a process often called deleveraging....

Taken together, the new mortgage and non-mortgage credit data we have at the New York Fed indicate that consumers have changed their behavior in ways not limited to missing payments and defaulting more often. Between 2000 and 2007, consumers’ borrowing added an annual average of about $330 billion to the cash they could spend; by 2009, consumers were diverting $150 billion away from potential spending in order to reduce the debts they had built up. This represents a remarkable $480 billion reversal in cash flow in just two years.

We care about this change in behavior because it affects American families’ balance sheets and because it affects macroeconomic patterns like those that we track as part of our policy responsibilities here at the New York Fed. The switch toward paying down debt is probably reflected in restrained growth in aggregate consumption in the United States. But the link between debt paydown and spending is complicated, depending among other factors on exactly who is paying down and who is increasing debt, a point emphasized by a recent working paper from Gauti Eggertsson and Paul Krugman.

So, U.S. consumers have been deleveraging. Holding aside defaults, they have indeed been reducing their debts at a pace not seen over the last ten years. A remaining issue is whether this deleveraging is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior. There is evidence on both sides of this question. For example, the Fed’s Senior Loan Officer Opinion Survey indicates that credit standards were tight through much of 2007-10. On the other hand, the reduction in housing and stock values over the same period may have led families to want to reduce their debts, in an effort to restore their net worth. We hope to discuss these questions in more detail in later posts.

3--Insights on Interest Rates: Why Treasury Bonds Are No Longer the Market Bellwether, Money Morning

Excerpt: With the Federal Funds Rate, policymakers at the U.S. Federal Reserve would indicate precisely what they wanted the overnight lending rate between big banks to be. And the prices of U.S. Treasury securities of all maturities fell in line like obedient soldiers.

But things have changed.

Forget about watching the Fed Funds Rate now. That central bank benchmark has ranged between 0.00% and 0.25% for a couple of years now. Going forward, i t's not going to be an indicator of interest-rate movement, because it's not going to change much.

Sure the Fed wants it there. But more to the point, the Fed Funds Rate remains in that range because all the too-big-to-fail (TBTF) banks like Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) are far bigger now, are lending less, and have huge excess reserves on which they'd love to earn an overnight profit. So for now and for the foreseeable future, they'll be plenty to lend between giant "TBTF" club members.

And t hanks to its "quantitative-easing" (QE) strategy, the Fed is essentially monetizing the U.S. Treasury's debt by buying in the secondary market from primary dealers like Goldman Sachs Group Inc. (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) the equivalent of every new issue that comes to market.

The net result: There's no real gauge of demand because the Federal Reserve has hijacked the free market.

4--The Metric You Should Be Watching But Aren’t, David Beckworth, The Money Pit

Excerpt: I recently made the case that money demand remains elevated and continues to be a drag on the economy. The flow of funds data for 2010:Q4 supports this conclusion. This data shows that the share of nonfinancial private sector assets in liquid form remains relatively high. Households and firms continue to hold significantly more liquid assets than they did prior to the recession. The good news is that it the share of liquid assets dropped slightly in Q4. Presumably, the share of liquid assets continued to decline in early 2011 though recent global events may change that.

...the greater the demand for liquid assets the greater the fall in spending and money velocity....This liquid share seems to provide a good indicator of whether there remains an excess money demand problem that is preventing a robust recovery. This, then, is the metric you should be watching but aren’t. Until it falls further we can expect nominal spending to remain sluggish.

5--A Shift in the Balance of Debt Obligations, Floyd Norris, New York Times

Excerpt: FOR years, the American financial sector borrowed and borrowed. Its obligations rose even more rapidly than consumers’. Both sectors were far more aggressive borrowers than the federal government.

Now that has reversed. The Federal Reserve reported this month that the outstanding debts of both the financial sector and households fell in 2010, as they had in 2009.

When financial sector debt was increasing — it rose faster than the debt of any other sector for nine consecutive years beginning in 1993, and then again in 2007 as the financial crisis was just beginning — much of the change represented the growth of financial engineering. Putting a bunch of mortgages into a securitization creates debt as large as all of the mortgage loans that are included. If a collateralized debt obligation is then created and backed by parts of previous securitizations, more debt is created.

Increasing debt levels in the financial sector did not set off alarms before the crisis. Adair Turner, the chairman of Britain’s Financial Services Authority, noted at a conference sponsored by the International Monetary Fund last week that “the dominant conventional wisdom” was that “this increase was increasing financial stability because it was dispersing risks efficiently into the balance sheets of those best placed to manage that risk.”

It turned out that was not the case. The risk had not been dispersed, only increased.

When the underlying debtor — the homeowner in the above example — got into trouble, the effect could be felt by owners of numerous securities, not just by the original lender.

Over the last two years, financial sector debt fell by nearly 9 percent each year, for a total reduction of $2.9 trillion. To put that figure in perspective, it is more than the entire financial sector debt that was outstanding in 1990, the beginning point for the accompanying charts. ...

Over those same two years, federal debt grew by $3 trillion. Much of that increase was caused by the mess created by the overleveraged financial sector.

Household debt — including mortgages and credit cards, as well as things like car loans and student loans — has now declined in three successive years. Again, part of that is the writing off of bad loans and another part is a reduction in actual borrowings.

The figures come from the Fed’s quarterly flow of funds statement, which covers the final three months of 2010. Other data indicates that consumers are still cutting credit card debt but that there has been an increase in borrowing for cars and other items financed with consumer loans.

The Fed’s data, going back to 1953, indicates there had never been a single year before 2008 when household debt fell. Financial sector debt fell in 1954, but rose every year thereafter until 2009.

6--Beyond Austerity, William Mitchell, The Nation

Excerpt: What began as a problem of unsustainable private debt growth, driven by an out-of-control financial sector aided and abetted by government deregulation, has mysteriously morphed into an alleged sovereign debt crisis. As private spending collapsed in 2007–08, budget deficits (public spending minus taxes) rose to bridge the gap. Now conservatives, some of whom were direct beneficiaries of bailout packages in the early days of the crisis, tell us that our governments are bankrupt, that our grandchildren are being enslaved by rising public debt burdens and that hyperinflation is imminent. Governments are being pressured to cut deficits despite strong evidence that public stimulus has been the major source of economic growth during the crisis and that private spending remains subdued.

Austerity will worsen the crisis, because it is built on a lie. Public deficits do not cause inflation, nor do they impose crippling debt burdens on our children and grandchildren. Deficits do not cause interest rates to rise, choking private spending. Governments cannot run out of money. The greatest lie—endlessly repeated by neoliberal economists and uncritically echoed by the mainstream media—is the claim that if governments cut their spending, the private sector will “crowd in” to fill the gap. British Prime Minister David Cameron’s austerity campaign and President Obama’s foreshadowed budget cuts are built around these lies....

How Did We Get Here?

The Great Depression taught us that without government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment. The Hooverian orthodoxy of balanced budgets, tried during the 1930s, failed. Full employment came only with the onset of World War II, as governments used deficit spending to prosecute the war effort. The challenge was how to maintain this full employment during peacetime.

Western governments realized that with deficit spending supplementing private demand, they could ensure that all workers who wanted to work could find jobs. All political persuasions accepted this commitment to full employment as the collective responsibility of society. As a result, very low levels of unemployment in most Western nations persisted until the mid-1970s...

Fiscal policy (spending tax revenues to achieve social aims) was actively used during the full-employment era, with monetary policy (the government’s power to set interest rates) being considered less effective. The neoliberal assault on the use of fiscal policy began in the ’70s, with the rise of monetarism. Politicians seized on the ideas of Milton Friedman to claim that their sole objective should be to control the money supply in order to manage inflation. Although various experiments at controlling the money supply failed dismally in the ’80s (remember Reaganomics?), the dominance of monetary policy in mainstream economics was complete. Fiscal policy was demonized as being inflationary and its use eschewed, depriving liberally inclined governments of the tools to advance a more progressive agenda....

Deficits will drive up interest rates! That’s funny, since deficits have risen sharply in recent years but interest rates have remained close to zero. Japan has been running large deficits since its property market collapsed in the early 1990s and has maintained zero interest rates and low inflation ever since. The neoliberal lie forgets to mention that the central bank sets interest rates, not the market. What neoliberals don’t tell you is that when government deficits stimulate growth, savings also grow as a result of higher incomes. So the claim that private and public borrowers compete for a finite pool of savings is a lie. Far from taking funds away from private investors, deficits expand the pool of available savings. Neoliberals also lie about the way banks work. Any credit-worthy private borrower can get credit from banks. Bank loans create deposits, which can be drawn down when banks make loans to borrowers. Yes, banks need reserves to back their loans, but they also know that the central bank will always supply those reserves should the banks fail to attract the necessary funds from other sources. So private borrowing is not constrained by existing savings. Borrowing typically increases income, which increases savings....

Finally, the size of the deficit should never be the concern of policy. Fiscal sustainability is being defined by the austerity myth in terms of some arbitrary financial ratio (public debt to GDP, etc.). But actually deficits should be whatever is required to maintain overall spending at the level consistent with full employment. No more, no less. Fiscal sustainability is about fulfilling the government’s responsibility to maintain an inclusive society in which everyone who wants to work can....

Typically, capitalist economies require continuous public deficits to support growth and allow private debt levels to be sustainable. We lost that balance in the period leading up to the crisis. That point has to become a central tenet of the progressive fight back.....With some well-known exceptions (for example, Joseph Stiglitz, Paul Krugman and William Greider), progressives think that advocating fiscal constraint makes them appear responsible. What they fail to see is that their economic stance largely undermines their capacity to pursue enlightened social and environmental policies....

As long as private spending is subdued, the greatest need is to expand budget deficits. That’s the only way the advanced economies will drive growth fast enough to absorb the huge pool of unemployed. Inflation is low, and there is considerable slack in the economy, which can be brought back into productive use by further government stimulus. The current obsession with inflation control and austerity (using unemployment to discipline wage demands) is very costly.

In advocating further fiscal stimulus, I would use the increased public spending to directly target job creation. I would introduce an open-ended public employment program—a Job Guarantee—that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment. These jobs would “hire off the bottom,” in the sense that minimum wages are not in competition with the market-sector wage structure. By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilization by “hiring off the top” (making purchases at market prices and competing for resources with all other demand elements). Job Guarantee workers would enjoy stable incomes, and their increased spending would boost confidence throughout the economy and underpin a private-spending recovery. There is no reason the government could not afford this program.

In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming. The trick was found in the rise of “financial engineering,” which pushed ever increasing debt onto the household sector. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments—while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.

7--Here comes $4 gas, Calculated Risk

Excerpt: From Eric Wolff at the North County Times: Analysts see gas headed back to $4 a gallon

The average gas price may reach $4 a gallon by Thursday in San Diego County, and Riverside-San Bernardino counties won't be far behind, gasoline analysts said.

The average price Monday for a gallon of regular unleaded was $3.955 in Riverside and San Bernardino counties and $3.977 in San Diego County, according to AAA. Both prices exceeded the price of gas at this point in 2008, when gas prices peaked in June at $4.63.

California has higher gasoline prices than most of the U.S. - and San Diego is usually near the top in California - but prices are moving higher for everyone (although still below $4 per gallon for most)

8--Work of Depressions Watch, Paul Krugman, New york Times

Excerpt: Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?

The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place....

The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people? If the problem is lack of skill, then highly skilled workers — such as recent college graduates — should be doing well. If the problem is too many carpenters in Nevada, then non-carpenters somewhere else must be doing well. Who? Where?

Well, if there are such people, they’re doing a very good job of hiding.

This is a demand-side slump; the evidence is grossly inconsistent with any other story.

9--It's not structural unemployment, it's the corporate saving glut, Angry Bear

Excerpt: I'd argue that the fiscal deficit is simply the consequence of corporate America's excess saving: the corporate saving glut - no I didn't mean the 'global saving glut'. Furthermore, the corporate saving glut is manifesting itself into the labor market, creating high and persistent unemployment. Some economists are wrongly referring to this as higher structural unemployment.

Exhibit 1: The 3-sector financial balance model demonstrates that elevated excess private saving (firms and households) keeps the government deficit in the red....

The excess saving rate for the public sector, external sector, and household sector is constructed using the Federal Reserve's Flow of Funds accounts as: (Gross Saving - Gross Investment)/GDP. The excess corporate saving rate is the residual of the Current Account (external saving) net of government and household excess saving. If the corporate excess saving rate is positive, then investment spending falls short of asset purchases (financial or tangible).

* In Q4 2010, the household excess saving rate dropped to +3.5% of GDP
* In Q4 2010, the government excess saving rate dropped to -10.4% of GDP
* In Q4 2010, the current account deficit dropped to -3% of GDP
* In Q4 2010, the corporate excess saving rate jumped to 3.9% of GDP - this is the Corporate Saving Glut because while firms are investing, they're saving more, thereby breaking the positive feedback loop. (See chart)

The positive feedback loop remains broken: higher demand increases sales rates, revenues and production which grows firm profits that are translated into wage and income gains, only to drive demand further upward. It's broken right between 'grows firm profits' and 'translated into wage and income gains'.

The funny thing is, too, that economists sell this broken feedback loop as rising structural unemployment. Actually, unemployment is not structurally higher, it's that when firms do not reinvest corporate profits, the lack of income flow manifests itself into the unemployment rate.

Exhibits 2 and 3. It's not structural unemployment, it's the corporate saving glut!

No comments:

Post a Comment