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.

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