Friday, April 29, 2011

Weekend Links

1--Residential Investment and Non-Residential investment in Structures at Record Lows as Percent of GDP, Calculated Risk

Excerpt: Residential Investment (RI) decreased in Q1, and as a percent of GDP, RI is at a post-war record low at 2.21%.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units....

I expect RI to increase in 2011 and add to both GDP and employment growth - for the first time since 2005 (even with the weak start in Q1).

Non-residential investment in structures is at a record low of 2.48% of GDP, and will probably stayed depressed for some time. I expect non-residential investment in structures to bottom later this year, but the recovery will be very sluggish for some time with the high vacancy rates for offices and malls.

2--Wall Street's biggest bear turns bullish, Pragmatic Capitalism

Excerpt: After trying to call the top in equities every other week for the last two years, David Rosenberg has finally thrown in the towel on the bearish calls. In his Wednesday research report he detailed why he believes equities have achieved a “holy grail” and should continue to move higher:

“On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail yesterday – both in level terms and with respect to the change. This is not throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint….

…All that said, we had a breakout to new highs yesterday and this time, the volume rose on the major exchanges, not to mention rising above the 50 DMA on the Nasdaq, which is a clear sign that the big boys are putting money to work. This market continues to impressively climb a wall of worry. Market internals are too strong to ignore right now – the NYSE advancers beat decliners by a 3 to 1 ratio yesterday; the Dow transports soared 1.9%; and the small caps beat their major benchmarks. My overall macro concerns have not gone away, but these market facts on the ground are tough to ignore.”

3--One Million Exhausted Jobless Benefits in Past Year, Wall Street Journal

Excerpt: Roughly one million people were unable to find work after exhausting their unemployment benefits over the past year, new data released Thursday by the Labor Department suggests.

The back-of-the-envelope datapoint is yet another sign that the labor market remains weak, economists said.

About 8.2 million idled workers were receiving unemployment benefits as of the week ended April 9, the Labor Department said in its weekly jobless claims report. That compares to about 10.5 million individuals at the same time last year, a decline of roughly 2.3 million people.

Since the federal government estimates that the economy created 1.3 million jobs during the 12 months ended in March, economists said that slightly less people probably fell through the cracks and couldn’t find employment.

“That leaves, roughly speaking, about one million people who have exhausted their unemployment benefits and have very likely not yet found a job,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York.

4--More Than Half Still Say U.S. Is in Recession or Depression, Gallup

Excerpt: More than half of Americans (55%) describe the U.S. economy as being in a recession or depression, even as the Federal Open Market Committee (FOMC) reports that "the economic recovery is proceeding at a moderate pace." Another 16% of Americans say the economy is "slowing down," and 27% believe it is growing....


Although economists announced that the recession ended in mid-2009, more than half of Americans still don't agree. These ratings are consistent with Gallup's mid-April findings that 47% of Americans rate the economy "poor" and 19.2% report being underemployed.

It also seems likely that most Americans would not agree with the FOMC's assessment of the current economic recovery. Nor does it seem likely that -- given surging gas and food prices -- most would agree with the Committee that "longer-term inflation expectations have remained stable and measures of underlying inflation are subdued."

Although the FOMC seems to perceive current economic conditions differently than most Americans, it does say it needs to "promote a stronger pace of economic recovery" by continuing its aggressive monetary policy, often referred to as "quantitative easing," through June. On the other hand, in the press conference after the FOMC's April meeting -- the first ever by a Fed chairman -- Ben Bernanke said that, "the trade-offs are getting less attractive at this point," meaning it is getting harder to aggressively add liquidity to stimulate stronger economic growth while avoiding inflation.

In another possible disconnect with monetary policymakers, many Americans may not see the trade-off Bernanke suggests between promoting a stronger economy and experiencing higher inflation. Right now, prices are soaring, yet the latest Gallup Daily tracking data show that 67% of Americans say the economy is "getting worse."

5--Bad Numbers, New York Times

Excerpt: It would be comforting to believe that housing-market distress represents a normal, if painful, correction after a period of excess. But all housing trends — in prices, sales, construction and foreclosures — indicate a market that is likely to decline even more, and far more than is needed to erase the artificial gains of the bubble.

High postbubble unemployment coupled with falling home equity will lead to more defaults and foreclosures. The resulting downward pull on prices will probably not be offset by adequate demand because potential buyers will be afraid they are still buying high in a declining market. Rather than a virtuous self-correcting cycle, the housing market is caught in a negative self-reinforcing one.

The best response would be for government to adopt policies to attack joblessness and foreclosures, including public investment in infrastructure and high-technology manufacturing and a renewed emphasis on negotiating new loan terms for homeowners whose homes have declined in value. Unfortunately, Washington is moving in the opposite direction on the mistaken belief that cutting budget deficits and leaving wounded markets to their own devices will somehow spur the economy.

6--Economy in U.S. Grew 1.8% in First Quarter, Less Than Forecast, Bloomberg

Excerpt: The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.

Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the last three months of 2010, the Commerce Department said today in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey.

To keep spurring the expansion, Federal Reserve policy makers said yesterday they’ll complete their $600 billion round of stimulus through June. While slower than the previous three months, a reflection of higher gasoline prices, consumer spending climbed more than projected in the first quarter.

“2011 began on a sour note,” Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. “The disappointing first quarter will be short-lived and the recovery will accelerate through the remainder of this year.”

6--China Property Slowdown Poses Growth Risks, World Bank Says, Businessweek

Excerpt: China’s real-estate market is a “particular source of risk” to growth given the importance of property construction to the world’s second-biggest economy, the World Bank said.

“Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets,” the Washington-based lender said in its China Quarterly Update released in Beijing today. “A property downturn could affect the finances of local governments which do a lot of the infrastructure investment.”

Regulators told China’s banks last week to conduct more stress tests on their real-estate lending as the government steps up efforts to curb surging housing prices. A potential rise in bad debts on property loans and credit to local government financing vehicles risks triggering another state- funded bailout, Fitch Ratings said this month.

“With tension between the underlying upward housing price pressure and the policy objective to contain price rises, interaction between the market and policy measures could lead to a more abrupt than planned downturn in the real-estate market,” according to the report....

Hot Money

China’s foreign-currency reserves rose by $197 billion in the first quarter, the second-highest on record, boosting its total holdings to more than $3 trillion even as the nation reported a trade deficit in the Jan. to March period.

7--Weekly Initial Unemployment Claims increase, 4-Week average over 400,000, Calculated Risk

Excerpt: The DOL reports on weekly unemployment insurance claims:

In the week ending April 23, the advance figure for seasonally adjusted initial claims was 429,000, an increase of 25,000 from the previous week's revised figure of 404,000. The 4-week moving average was 408,500, an increase of 9,250 from the previous week's revised average of 399,250.

Weekly claims have increased over the last few weeks, and this is the first time the four-week average was above 400,000 in two months.

8--A few takeaways from Bernanke Press Briefing, Calculated Risk

Excerpt: When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. And, as I was indicating earlier, I think that even purely from an employment perspective that if inflation were to become unmoored - inflation expectations were to rise significantly - that the cost of that in terms of employment loss in the future if we had to respond to that would be quite significant." This sounds like QE3 is unlikely unless the economy slows sharply (or inflation falls).

• Bernanke noted that an early exit step would be to stop reinvesting maturing securities. This suggests that the Fed will continue to reinvest maturing securities after QE2 ends in June.

9--Tim Duy: Very High Bar for QE3, Calculated Risk

Excerpt: From Professor Tim Duy: Very High Bar for QE3

Apparently the threat of headline deflation off the table, Bernanke is not inclined to pursue sustained easing despite low core inflation and high unemployment. Again, I am not entirely surprised, except that Bernanke appear to suggest we are much closer to an inflation tipping point than I would expect. He could have tempered these comments with a more forceful discussion of labor costs, but did not. It seems clear these comments were intended to calm the non-existent bond market vigilantes, but is it consistent with the outlook? Arguably, no. For what it’s worth, I think Bernanke appeared most uncomfortable during this portion of the conference.

Bottom Line: When I look at the revisions to the Fed’s outlook and listen to Bernanke, I get the sense that the basic Fed policy is summarized as follows: “The economic situation continues to fall short of that consistent with the dual mandate, we have the tools to address that deviation, but will take no additional action because some people in the Middle East are seeking democracy.”

The Fed's forecasts for inflation and the unemployment rate would seem to suggest more QE, but I think Tim Duy's assessment is correct: Bernanke has set the bar very high for QE3. And the odds of more fiscal policy aimed at the unemployed are zero.

10--Ducking the jobs question, Economist's View

Excerpt: The Fed’s dual mandate requires it to pursue both full employment and price stability. Currently, however, the Fed is falling short on both of these goals.

Employment is far below its full employment level, and inflation is running below the Fed’s preferred range of 1.5 to 2.0 percent. Inflation is expected to rise a bit in the short-run due to rising commodity prices, but the Fed says it expects commodity price increases to be transitory.

Thus, none of the Fed’s forecasts show any long-run concern about inflation at all. The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why the Fed isn’t doing more to help with the employment problem? Why not a third round of quantitative easing?

.... The Fed first began seeing “green shoots” in April of 2009, a full two years ago. At every step since, the Fed has used the prospect of better times just around the corner as a reason to downplay the benefits of further easing.

But the growth of the green shoots has been stunted, or they have wilted away entirely. In retrospect, more aggressive action by the Fed was warranted in every instance..... the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.

11--How Asia Copes with America’s Zombie Consumers, Stephen Roach, Project Syndicate

Excerpt: Asia needs a new consumer. A post-crisis generation of “zombie consumers” in the United States is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers.

But the most prominent zombie may well be a broad cross-section of American consumers who are still suffering from the ravages of the Great Recession. Afflicted by historically high unemployment, massive under-employment, and relatively stagnant real wages, while burdened with underwater mortgages, excessive debt, and subpar saving, US consumers are stretched as never before....

Notwithstanding government life-support initiatives, US consumers seem headed for years of retrenchment. Consumption’s share of US GDP currently stands at a sharply elevated 70%. While that’s down from the high of 71.3% in early 2009, it remains fully four percentage points above the 66% norm that prevailed in the final quarter of the twentieth century....

It (Asia) should start by looking in the mirror. For developing Asia as a whole, internal private consumption currently stands at a record low of just 45% of GDP – down ten percentage points from the 55% share prevailing as recently as 2002...

Nowhere is that more evident than in China. With private consumption having fallen to a record low of 35% of GDP in 2008 (fully ten percentage points below the Asian norm), China faces major rebalancing imperatives – all the more urgent if post-crisis consumption growth in the West remains weak.

12--Dollar Doldrums, The Big Picture

Excerpt: The US$ index is down for an 8th straight day with gold rising to another record high. This is becoming an unfortunate broken record but the pace of declines have picked up as it’s down 3% over these 8 days. Bernanke yesterday said maintaining the purchasing power of the $ is a Fed goal by keeping inflation in check. Here is the report card on that using the CPI: since Bernanke took office on Feb 1, 2006, the purchasing power of the US$ is down 11%, it’s down 21% over the past 10 yrs, down 82% since the gold standard was ended in 1971 and down 91% since 1920.

13--Obama's MexicoGate, Laura Carlsen, Counterpunch

Excerpt: A secret operation to run guns across the border to Mexican drug cartels — overseen by U.S. government agents — threatens to become a major scandal for the Obama administration.

The operation, called "Fast and Furious," was run out of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) office in Phoenix, Arizona. ATF sanctioned the purchase of weapons in U.S. gun shops and tracked the smuggling route to the Mexican border. Reportedly, more than 2,500 firearms were sold to straw buyers who then handed off the weapons to gunrunners under the nose of ATF.

But once across the border, the agency seemed to lose track of the weapons. Hundreds of AK-47s and Barrett .50 caliber rifles — favorites of warring drug cartels —made it easily into the hands of some of Mexico's most ruthless crime organizations....

...the director of the ATF Mexico office, Darren Gil, told CBS that he began to receive disturbing reports of an unusually high number of Phoenix-area guns showing up in Mexican cartel violence. When he began asking questions, Gil discovered that his team had been blocked from computer access to information on Fast and Furious.

Gil questioned officials at U.S. headquarters who told him they were under direct orders from the Department of Justice and that he should say nothing to the Mexican government about the program.

14--Jobless claims rose 6% last week, Housingwire

Excerpt: Initial jobless claims climbed 6% last week to the highest level since the end of January.

The Labor Department said the seasonally adjusted figure of actual initial claims for the week ended April 23 rose by 25,000 to 429,000. Initial claims for the prior week were 404,000, which was revised upward a by 1,000. The Labor Department said unadjusted claims normally fall by about 18,500 during the week that includes the Good Friday holiday, when markets are closed. But unadjusted claims rose by 3,500 last week, according to Bloomberg.

New claims remained higher than 400,000 for the third consecutive week. Most economists believe claims lower than that indicate the economy is expanding and jobs growth is strengthening.

15--Mexican Narco-Trafficker’s Revelation Exposes Drug War’s Duplicity, narcosphere

Excerpt: A high-level player with one of the most notorious narco-trafficking organizations in Mexico, the Sinaloa “cartel,” claims that he has been working with the U.S. government for years, according to pleadings filed recently in federal court in Chicago.

That player, Jesus Vicente Zambada Niebla, is the son of Ismael “El Mayo” Zambada Garcia — one of the purported top leaders of the Sinaloa drug-trafficking organization. Zambada Niebla was arrested in Mexico in March 2009 and last February extradited to the United States to stand trial on narco-trafficking-related charges.

The indictment pending against Zambada Niebla claims he served as the “logistical coordinator” for the “cartel,” helping to oversee an operation that imported into the U.S. “multi-ton quantities of cocaine … using various means, including but not limited to, Boeing 747 cargo aircraft, private aircraft … buses, rail cars, tractor trailers, and automobiles.”

16--Wal-Mart: Our shoppers are 'running out of money', CNN Money

Excerpt: -- Wal-Mart's core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

"We're seeing core consumers under a lot of pressure," Duke said at an event in New York. "There's no doubt that rising fuel prices are having an impact."

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they're "running out of money" at a faster clip, he said.

"Purchases are really dropping off by the end of the month even more than last year," Duke said. "This end-of-month [purchases] cycle is growing to be a concern.

17---The Housing Bubble Broke the Middle Class, Charles Hugh Smith, of two minds via

Excerpt: The bursting of the housing bubble wiped out half of the net worth of the Mortgaged Middle Class.

On the face of it, American households were not that affected by the bursting of the housing bubble. If we look at the Fed Flow of Funds report, the Balance Sheet of Households and Nonprofit Organizations, we find that net worth only declined by about 11% ($7.3 trillion) from 2007 to 2010: a $2.9 trillion decline in financial assets and a $4.9 trillion decline in tangible assets, i.e. real estate and consumer durable goods....

Calculated another way: household real estate is worth $16.4 trillion, and there is $10 trillion in outstanding mortgage debt, so total equity is $6.4 trillion. One-third of homes are owned free and clear, so one-third of $16.4 trillion is $5.4 trillion. $6.4 trillion - $5.4 trillion = $1 trillion in equity spread over 35 million homes.

That's not much--roughly 1.8% of all household net worth.

The family house was the traditional foundation of household wealth. As for all those trillions in financial wealth--as we all know, 83% is owned by the top 10%. ...

Before the housing bubble, households owed about $5 trillion in mortgages. The housing bubble came along, introducing the fantasy of home-as-ATM-cash-withdrawal-machine, and mortgages ballooned to over $10 trillion.

Back at the top of the bubble, the middle class had $6 trillion more assets on the books. Considering the Mortgaged Middle Class now owns about $6 trillion in net assets, then the bursting of the housing bubble caused their net worth to drop by 50%.

Thursday, April 28, 2011

Grand Theft Benny

It's the biggest flim-flam in the nation's history. But, thanks to Vermont Senator Bernie Sanders, the scam has been exposed and the public can now get a good look at the type of swindle that passes as monetary policy.

Here's the scoop: When Fed chairman Ben Bernanke initiated the first round of Quantitative Easing (QE), the stated goal was to revive the flagging housing market by purchasing $1.25 trillion in mortgage-backed securities (MBS) from the country's biggest banks. The policy was a ripoff from the get go. No one wanted these mortgage stinkbombs that were stitched together from subprime loans to unqualified applicants. But because the banks were already busted--and because the $700 billion TARP was barely enough to keep the ventilator running until the next bailout came through-- the Fed helped to conceal its real objectives behind an elaborate PR smokescreen. In truth, the Fed must have colluded with the banks to move the toxic assets off their books (and onto the Fed's balance sheet) with the proviso that the banks withhold foreclosed homes from the market.

Sounds pretty fishy, eh?

By keeping the extra homes off-market, supply went down, demand went up (slightly), and housing showed signs of a rebound. The withholding of supply was synchronized with the Firsttime Homebuyers credit, which provided an $8,000 subsidy to new home buyers. This pumped up housing sales and further concealed what was really taking place, which was a gigantic transferal of public wealth to the banks in exchange for putrid assets that no one wanted. Naturally, the process kept the market from correcting and added vast numbers of foreclosed homes to the shadow inventory.

During this same period, the Fed worked out an agreement with Congress to pay the banks interest on the reserves it created at the banks. (Note: The MBS were exchanged for reserves) At the time, many experts questioned the wisdom of the Fed's plan saying that the reserves would not lead to another credit expansion. And they were right, too. In fact, it didn't stop the slide in housing either which resumed with gusto as soon as QE ended and the banks started dumping more foreclosed homes onto the market.

So, why would the Fed add more than a trillion dollars in reserves to the banking system if it really served no earthly purpose? Was it just so the banks would be able to earn interest on those reserves? Surely, that wouldn't be nearly enough to remove the ocean of red ink on their balance sheets. So, what was Bernanke really up to?

On Tuesday, Senator Bernie Sanders office released a report titled "Banks Play Shell Game with Taxpayer Dollars" that sheds a bit light on the shady ways the Fed conducts its business. Sanders "found numerous instances during the financial crisis of 2008 and 2009 when banks took near zero-interest funds from the Federal Reserve and then loaned money back to the federal government on sweetheart terms for the banks."

So, now we have irrefutable proof that the Fed was simply handing out money to the banks. More importantly, the report shows that this was not just a few isolated incidents, but a pattern of abuse that increased as the needs of the banks became more pressing. In other words, giving away money became policy. Is it any wonder why the Fed has fought so ferociously to prevent an audit of its books?

From Sander's report: "The banks pocketed interest on government securities that paid rates up to 12 times greater than the Fed’s rock bottom interest charges, according to a Congressional Research Service analysis conducted for Sanders."

Are you kidding me; 12 times more than what the Fed was getting in return?

That's larceny, my friend. Grand larceny.

More from the Sanders report: “This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks,” Sanders said. “Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities.”

And, what they didn't lend back to Uncle Sam at a hefty rate of interest, they plunked into equities to ignite Bernanke's Stock Market Blastoff, the final phase of bubblemania.

So, let's use an analogy to explain what the Fed was doing: Imagine that you provide your son, Kirby, with a weekly allowance of $50. And Kirby--showing an uncanny aptitude for career banking--says, "Dad, I'd like to loan this money back to you at 10% per annum." Would that be a good deal for you, Dad, or would dearest Kirby be taking you to the cleaners?

That's what Bernanke was doing "at rates up to 12 times greater than the Fed’s rock bottom interest charges." So--the question is-- if Bernanke was already involved in this type of hanky-panky, what would keep him from raising the stakes a bit and really putting his friends back in the clover? Honor? Integrity?

Not likely.

What I'd like to know is whether the Fed has been creating reserves at the banks, that the banks have (then) converted into government bonds (USTs) and sold back to the Fed during QE2? In other words, is this another circular trade (like we see in the Sanders report) that's only purpose is to funnel more money to the banks?

And--if that's NOT the case-- then where did the banks come up with $600 billion in US Treasuries that they just sold to the Fed? After all, in testimony before the Financial Crisis Inquiry Commission (FCIC), Bernanke admitted that 12 of the 13 biggest banks in the country were underwater after Lehman Brothers defaulted. If that's true, then where did they get the $600 billion in Treasuries?

It's not a question of whether the Fed has been abusing its power. It's just a matter of "how much".

Today's links

1--Home Prices Falling in Most Major U.S. Cities, Fiscal times

Excerpt: Home prices are falling in most major U.S. cities, and at least 10 major markets are at their lowest point since the housing bubble burst.

The Standard & Poor's/Case-Shiller 20-city index showed home prices declined in 19 metro areas from January to February and 11 markets experienced faster price declines compared with the previous month.

The index, which was released Tuesday, fell for the seventh straight month. It is slightly above the level hit in April 2009, the lowest point since the bubble burst. Analysts expect the March index will fall past the low point.

High unemployment, stricter lending rules and fears that prices will fall further are among the reasons why few people are buying and selling homes. A record number of foreclosures are forcing down home prices in most metro areas, and prices are expected to keep falling through this year.

"There is evidence that potential sellers are holding their properties off the market, waiting for housing prices to stop falling," said Bricklin Dwyer, an analyst at BNP Paribas.

2--Banks Play Shell Game with Taxpayer Dollars, Senator Bernie Sanders

Excerpt: The Federal Reserve propped up banks with big infusions of cash during the depths of the financial crisis in 2008 and 2009. Banks that took billions of dollars from the Fed then turned around and loaned money back to the federal government. It was a sweet deal for the bankers. They received interest payments on the government securities that were up to 12 times greater than the Fed's rock bottom rates, according to a Congressional Research Service analysis conducted for Sen. Bernie Sanders.

"This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks," Sanders said. "Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities."

At the time, the Fed claimed banks needed the emergency loans to provide credit to small- and medium-sized businesses that desperately needed money to create jobs or to prevent layoffs.

"Instead of using this money to reinvest in the productive economy, however, it appears that JPMorgan Chase, Citigroup, and Bank of America used a large portion of these near-zero-interest loans to buy U.S. government securities and earn a higher interest rate at the same time, providing free money to some of the largest financial institutions in this country," Sanders said.

3--The financial tipping point of peak debt, My Budget 360

Excerpt: Total credit market debt owed increased from $28 trillion in 2001 to over $52 trillion in 2011. Household debt contracting while Fed juices up the banking sector with more debt....

The mosaic of tools used for this financial crisis would have worked if the problems we faced were merely issues of confidence. Of course the problems were very real and dealt with more than just perception and instead of confronting the reality of an over leveraged debt addicted machine we have only stepped on the accelerator. Yet this time instead of credit flowing to households for added game rooms or a trip to Hawaii credit is being extended to Wall Street courtesy of the Federal Reserve. Total credit market debt owed jumped from $28 trillion in 2001 to over $52 trillion today. During this time GDP went from $10 trillion to $14 trillion. You do the math where the growth is occurring.....

For the first time in record keeping history have we seen total household debt contract. Yet think of how flawed our system was when we had American households in debt to $14 trillion while annual GDP was at $14 trillion. Much of the debt was linked to homes, cars, and consumer spending that really didn’t create anything long term for our economy. All the while banks were enjoying the system taking their cut at every turn....

The stock market is up nearly 100 percent since the March 2009 lows. Yet households are still mired in debt, wage growth is non-existent, and there is little sense of protection of a stable middle class in America anymore. The market is still over burdened by too much debt and banks are still seeking out new and innovative ways to speculate and siphon out real wealth from the global economy. It would be one thing if they did this with their own money but they are doing it with the aid of the Federal Reserve. Make no mistake, the Fed has become a dumping ground for bad bets from banks over the last decade...

Now think if you had the power to move over your mortgage, credit card debt, student loans, and any other debt you had into a “bad bank” for the moment. Not only can you move this debt, you now have access to loans at near zero percent and can invest anywhere you want. Sounds like a good deal right? Well this is essentially the deal the financial sector is getting and why the stock market has recently boomed. Banks at their core should serve as the grease that makes the real economy go around. Today they are the economy and the government for that matter and the fact that the total credit market debt owed is $52 trillion is simply stunning.

4--The Mess in Europe, John Mauldin, The Big Picture

Excerpt: The disconnect in Europe just gets worse and worse, as I sadly predicted at least a few years ago, and have made a big deal out of over the last year, with the very pointed note that a European banking crisis is the #1 monster in my worry closet. Today, within 15 minutes of each other, I ran across the following three notes, from Zero Hedge, the London Telegraph, and the Financial Times, with a quote from Bloomberg as well. Read them all. And then try and figure out how they can all get what they want. There are going to be tears and lots of them somewhere. Greek three-year rates are now at 21%. And so I decided to link these three short pieces into your Outside the Box this week. To kick things off, a few teaser quotes and observations:

“On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.

“‘A restructuring would be short-sighted and bring considerable drawbacks,’ he told ZDF, the German broadcaster. ‘In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy.’” (From the Telegraph, with more below.)

“There is ‘no painless way’ for countries that sought aid to reduce debt, while a restructuring may cut off the respective country from the financial markets for an unforeseeable time, Stark was quoted as saying. The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full,’ the central banker was quoted as saying. Stark did not refer to a specific country.” (Bloomberg)

Let me repeat a phrase here: “The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full.’”

But in a well-done column from Zero Hedge, which discusses a controversial Citibank report, we learn that, “In addition, no country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?” Athens has said it will also implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1pc of GDP by 2015. The plans have sparked a fresh wave of anger in Greece and more threats of strikes and marches from trade unions.

But the Greeks are not the only ones who are unhappy. I wrote about the Finns last week. Now we jump to a marvelous Wolfgang Münchau piece from the Financial Times (, which gives us additional insight and points out that the Germans are getting rancorous. A quote from this must-read piece: “A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.”

5--EU Poised for Greece Crisis Talks, Telegraph

Excerpt: A delegation of leading European and international monetary officials are planning a crisis summit in Athens in May amid growing fears that Greece may default on its sovereign debt. Senior officials from the European Union, the European Central Bank and the International Monetary Fund are expected to make a “lightning visit” for two days to ensure Greece can meet plans to cut its deficit by €24bn (£21bn). The trip is being planned for May 9, although insiders said this could be brought forward to May 5....

European officials are determined to avoid the need for Greece to change the terms of its debt repayments. On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.

“A restructuring would be short-sighted and bring considerable drawbacks,” he told ZDF, the German broadcaster. “In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy.”

6--The eurozone’s quack solutions will be no cure, The Financial Times via The Big Picture

Excerpt: I was uncharacteristically optimistic last week, and had planned to end my informal series on eurozone crisis resolution with a benign scenario. The eurozone would survive in one piece; there would be no blood on the streets, just a once-and-for-all, albeit reluctant, bail-out, accompanied by a limited fiscal union. But as several readers have pointed out, my scenario is prone to a very large accident. I accept that point. Last week, we caught a glimpse of how such an accident may come about. My benign scenario looks a lot less certain today than it did a week ago.

The week began with the strong showing of two parties in the Finnish election, which are advocating a partial Portuguese debt default as a condition for a rescue package. The results triggered a renewed outbreak of the financial crisis, as eurozone spreads rose to near record levels once again.

The most disturbing news, however, was a revolt within Angela Merkel’s increasingly fragile coalition. It looks as though the German chancellor is on the verge of losing her majority over the domestic legislation of the European Stability Mechanism (ESM), the long-term financial umbrella for the eurozone. She may have to rely on the opposition to ratify the ESM, which may come at a heavy political cost. The Bundestag already postponed the vote on the ESM until the autumn, hoping to keep it clear from the controversial decision to pass the Portuguese rescue programme in May.....

On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper.

A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.

7--The wageless recovery, Robert Reich's blog

Excerpt: This week’s biggest economic show occurs tomorrow (Wednesday) when Fed chair Ben Bernanke steps in front of the cameras for the Fed’s first-ever news conference. The question on everyone’s mind: Will the Fed signal it’s now more worried about inflation than recession?

Much of Wall Street thinks inflation is now the biggest threat to the US economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession.

The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones.

The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking.

Add to this the continuing decline in the value of the biggest asset most people own – their homes – and what do you get? Consumers who won’t and can’t buy enough to keep the economy going. That spells recession.

Why doesn’t Wall Street get it? For one thing, because lenders always worry more about inflation than borrowers – and, in general, the wealthier members of a society tend to lend their money to people who are poorer than they are.

But Wall Street’s inflation fears are also being stoked by several specifics.

First are price upswings in food and energy. The Street doesn’t seem to understand that when most peoples’ wages are dropping, additional dollars they spend on groceries and at the gas pump means fewer dollars they have left to spend in the rest of the economy. Rather than cause inflation, this is likely to lead to more job losses....

America’s jobless recovery is becoming a wageless recovery. That puts the odds of another recession greater than the risk of inflation. Wall Street and its representatives in Washington don’t understand – or don’t want to.

8--What Happens if the Debt Ceiling Isn’t Raised, New York Times

Excerpt: Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis. It is impossible to know the full impact of such a crisis on overall economic growth and on Treasury’s financing costs. However, the lessons from the recent crisis suggest that several damaging consequences will likely result, ultimately raising Treasury’s long-term funding costs and increasing the burden on the American taxpayer. These consequences stem from five developments that could likely occur if Treasury were to default on its obligations as a result of a failure to raise the debt limit in a timely manner....

...a default by the U.S. Treasury, or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating....

...the financial crisis you warned of in your April 4th Letter to Congress could trigger a run on money market funds, as was the case in September 2008 after the Lehman failure. In the event of a Treasury default, I think it is likely that at least one fund would be forced to halt redemptions or conceivably “break the buck.” Since money fund investors are primarily focused on overnight liquidity, even a single fund halting redemptions would likely cause a broader run on money funds. Such a run would spark a severe crisis, disrupting markets and ultimately necessitating the same kind of backstops that Treasury and the Federal Reserve initiated in the aftermath of the 2008 crisis. Such further increases in Treasury’s off-balance-sheet commitments are likely to be viewed negatively by investors and ratings agencies, which will potentially put further downgrade pressure on U.S. sovereign ratings....

Fourth, a Treasury default could severely disrupt the $4 trillion Treasury financing market, which could sharply raise borrowing rates for some market participants and possibly lead to another acute deleveraging event. Because Treasuries have historically been viewed as the world’s safest asset, they are the most widely-used collateral in the world and underpin large parts of the financing markets. A default could trigger a wave of margin calls and a widening of haircuts on collateral, which in turn could lead to deleveraging and a sharp drop in lending.

Fifth, the rise in borrowing costs and contraction of credit that would occur as a result of this deleveraging event would have damaging consequences for the still-fragile recovery of our economy....

Finally, I would emphasize that because the long-term risks from a default are so large, a prolonged delay in raising the debt ceiling may negatively impact markets well before a default actually occurs. This is because investors will likely undertake risk-management actions in preparation for a potential default. For example, borrowers who rely on short-term funding markets, including the GSEs, may attempt to pre-fund themselves or hold excess liquidity through July, distorting money market rates. Additional effects could include large auction concessions, especially if Treasury were forced to delay auctions for cash management purposes. I would also expect to see weaker demand for Treasury securities as uncertainty increases on whether the debt limit will be raised. Both of these effects would negatively impact Treasury’s borrowing costs.

9--A Fistful of Dollars: Lobbying and the Financial Crisis, Deniz Igan, Prachi Mishra, and Thierry Tressel, Research Department, IMF

Excerpt: Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and mortgage lending activities to answer this question. We find that lobbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing
originations of mortgages. Moreover, delinquency rates in 2008 were higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during the rescue of Bear Stearns and the collapse of Lehman Brothers, but positive abnormal returns when the bailout was announced. Finally, we find a higher bailout probability for lobbying lenders. These findings suggest that lending by politically active lenders played a role in accumulation of risks and thus contributed to the financial crisis....

We find that faster relative growth of mortgage loans by lobbying lenders during 2000-06 was associated with higher delinquency rates in 2008. We also carry out an event study during key episodes of the financial crisis to assess whether the stocks of lobbying lenders performed differently from those of other financial institutions. We find that lobbying lenders experienced negative abnormal stock returns at the time of the failures of Bear Stearns and Lehman Brothers, but positive abnormal returns around the announcement of the bailout program. Finally, we examine the determinants of how bailout funds were distributed and find
that being a lobbying lender was associated with a higher probability of being a recipient of these funds....


This paper studies the relationship between lobbying by financial institutions and mortgage lending during 2000-07. To the best of our knowledge, this is the first study documenting how lobbying may have contributed to the accumulation of risks leading the way to the current financial crisis. We carefully construct a database at the lender level combining information on loan characteristics and lobbying expenditures on laws and regulations related to mortgage lending and securitization. We show that lenders that lobby more intensively on these specific
issues engaged in riskier lending practices ex ante, suffered from worse outcomes ex post, and benefited more from the bailout program.

While pinning down precisely the motivation for lobbying is difficult, our analysis suggests that the political influence of the financial industry contributed to the financial crisis by allowing risk accumulation. Therefore, it provides some support to the view that the prevention of future crises might require a closer monitoring of lobbying activities by the financial industry and weakening of their political influence.

10--Is the Shadow Banking System making a comeback?, Reuters

Excerpt: Other good/bad signs. With a big hat tip to Northern Trust Chief Economist (and fellow Floridian) Paul Kasriel, you really have to watch real bank credit. On that score, just as with bank excess reserves at the Fed, it’s hard to see how Bernanke needs to get worried. The pace of lending has barely crept back up to the LOWS seen during the past two recessions and is already showing some signs of peaking out. Hardly inflationary. The conspiracy theorists out there assume QE2 means money heading straight into everything from onshore Chinese equities to every commodity on the earth, even though the U.S. money multiplier is all but broken. Emerging market demand for commodities should not be miscontrued with inflation from a Federal Reserve program (QE2) to stir bank lending that is hardly working. For better or worse, the U.S. economy needs a revival of the securitization market. And that ultimately implies something of a revival of the Shadow Banking System.

Wednesday, April 27, 2011

Today's links

1--Deficit Fever, Dean Baker, Counterpunch

Excerpt: We already knew that the folks involved in debating and designing economic policy had a weak understanding of economics, that is why they couldn't see the $8 trillion housing bubble that wrecked the economy, but now it seems that they are breaking their ties to reality altogether. The country is still smoldering in the wreckage of the collapsed housing bubble, but the victims have left the policy debate altogether.

Twenty-five million people are unemployed, underemployed or out of the workforce altogether, but that's not on anyone's agenda. Millions of homeowners are underwater in their mortgage and facing the loss of their homes, that's also not on anyone's agenda. Tens of millions of baby boomers are at the edge of retirement and have just lost their life savings. This also is not on anyone's agenda.

Deficit-cutting fever is the current craze in the nation's capital. But even here there is little tie to reality. House budget committee chairman Paul Ryan put out a budget that proposes that in 2050 we will be spending less on defense, domestic discretionary and various non-medical entitlements together than we spend on defense today. And most of the punditry praise its seriousness. Meanwhile, the Progressive Caucus, the largest single bloc in Congress, proposes a way to get to a balanced budget by 2021, and it is virtually ignored.

2--New Home Sales in March at 300 Thousand SAAR, Record low for March, Calculated Risk

Excerpt: Sales of new single-family houses in March 2011 were at a seasonally adjusted annual rate of 300,000 ... This is 11.1 percent (±21.7%)* above the revised February rate of 270,000, but is 21.9 percent (±10.3%) below the March 2010 estimate of 384,000....

Months of supply decreased to 7.3 in March from 8.2 months in February. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal)....

In March 2011 (red column), 29 thousand new homes were sold (NSA). This is a new record low for the month of March.

The previous record low for March was 31 thousand in 2009. The high was 127 thousand in 2005.

3--Fed Searches for Next Step, Wall Street Journal

Excerpt: Starting essentially last year on Aug. 27—the day Fed Chairman Ben Bernanke laid the groundwork for QE2—investors have flocked to riskier investments. Since Aug. 26 the Standard & Poor's 500-stock index has gained 28%. Smaller, generally riskier stocks have done even better, with the small-company Russell 2000 Index gaining 41%. It stands just 1.15 shy of its all-time high set in 2007.

Corporate bonds have rallied and commodity prices have risen sharply, too. Gold is up 22% since Aug. 26 and silver is up 143%, both hitting nominal record highs. Even subprime mortgage securities, which were largely blamed for causing the financial crisis, are back in demand.

The biggest loser has been the U.S. dollar, the consequence of the Fed essentially printing more of them to buy bonds. The Fed's index of the value of the dollar against a broad basket of currencies is down 7.9% since Aug. 26.

4--Dollar Tumbles With US Monetary, Fiscal Policy In Focus, Wall Street Journal

Excerpt: The dollar fell to multi-year lows against most major currencies Thursday, undermined by an unpalatable mix of loose U.S. monetary policy and a fiscal imbalance that made investors reluctant to hold the battered greenback.

Reverberations from Standard & Poor's downward revision on Monday of the U.S. government's ratings outlook continued to dominate market sentiment. Investors' antipathy toward the U.S. currency intensified after S&P warned that the U.S. could lose its coveted AAA-rating.

But the primary negative for the dollar has been the Federal Reserve's loose monetary policy. In a market where investors are gravitating to higher-yielding assets, the dollar has been jettisoned by traders who appear more comfortable holding euros--even though Europe is struggling to contain a debt crisis that has raged on for nearly two years.

"The driver is (U.S.) monetary policy and the subtext is fiscal policy. We know there's a train-wreck coming and it makes people uneasy," said Andrew Busch, global currency strategist at BMO Capital Markets.

"The main driver is interest rate differentials, and the glaring fact is that the Fed remains on hold with extremely easy monetary policy...while other nations raise interest rates."....

Against a basket of major currencies, the dollar tumbled to its weakest trough since August 2008.

In an environment where investors' ardor for riskier assets has continued unabated, there are signs that at least some investors see risks ahead. The safe-haven Swiss franc is soaring, as is the price of gold--traditionally a safe-haven for nervous buyers.

5--WSJ: Fund Giants Take Competing Stands On US Bond Outlook, Wall Street Journal

Excerpt: The 10-year note's yield has already risen to 3.4%, from 2.62% on the day QE2 was announced last November. Thirty-year mortgage rates, which track 10-year note yields closely, have risen to 4.8% from 4.24% last November, doing little to help a struggling housing market.

The direction of interest rates after the Fed ends its bond-buying program is crucial for the economy. The issue will be in sharp focus this week, when Fed policy makers hold a two-day policy meeting, starting Tuesday, to discuss their efforts to steer the economy between the shoals of recession and inflation.

They face an economy that has shown signs of losing momentum in recent months, with first-quarter economic growth now widely believed to be less than 2% annualized.

At the same time, soaring commodity prices have raised inflation alarms. The spread between short-term and long-term interest rates has widened, and demand for inflation-protected securities has picked up, suggesting inflation concern is rising among investors.

The Fed's policy makers this week will likely vow to stick to their plan to end the purchases of Treasurys by the end of June.

But that's where the certainty ends.

One yardstick for the immediate future of Treasury yields after QE2 could be QE1, which included a $1.25 trillion Fed buying spree of mortgage bonds from late 2008 to March 2010.

The mortgage-bond market felt barely a ripple when the Fed stopped buying. Treasurys, some observers reason, may follow the same path....

What worries some is that the Fed has been buying almost all of the Treasurys the government has been issuing on a regular basis.

So far the Fed has bought $548 billion worth of Treasurys under QE2, according to a Barclays Capital tally, with maturities ranging from 1 1/2 to 30 years, and inflation-protected securities as well. The buying has made up more than 85% of the net $638 billion of bonds the government sold between November and March.

6--Dollar's Decline Speeds Up, With Risks for U.S, Wall Street Journal

Excerpt: This past the week, the dollar, as measured by the index that tracks it against a basket of currencies, hit its lowest point since the 2008 financial crisis. Before the crisis began, the dollar had lost more than 40% of its value against the basket during a steady six-year decline, driven by many of the same factors bedeviling the currency today. The dollar is 5% away from its all-time low, hit in March 2008, as tracked by the dollar index, which dates back to 1971.

The dollar's weakness is even more striking in the face of the struggles facing the European Union and Japan, the U.S. currency's biggest rivals. Expectations are growing that Greece, which required a bailout from other euro-zone countries in 2010, will in coming months be forced to restructure its debt obligations. That could inflict losses on banks across Europe holding those bonds—an event that might be seen as a negative for the euro.

Japan is struggling to recover from the earthquake and subsequent nuclear disaster. The economic toll from the tragedy now looks as if it may play out for months. The biggest beneficiaries have been gold, which crossed $1,500 an ounce for the first time this week, and other commodities.

7--Case Schiller: Double dip almost here, The Big Picture

Excerpt: Today, the S&P Case Shiller NSA 20 checked in at 139.27; the previous post-bubble low is 139.26.

Here’s the release:

“Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10-City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels. Washington D.C. was the only market to post a year-over-year gain with an annual growth rate of +2.7%. Ten of the 11 cities that made new lows in January 2011 saw new lows again in February 2011. With an index level of 139.27, the 20-City Composite is virtually back to its April 2009 trough value (139.26); the 10-City Composite is 1.5% above its low.”

8--Why rising money supply has not sparked inflation, Paul Krugman, New York Times

Excerpt: Not all readers of this blog have been reading it consistently for the past few years, and as I read some of the comments it’s clear that many people don’t know where I’m coming from on macro issues. So it may be worth reiterating a point I’ve made before — that I’ve actually been very consistent on this stuff, and that there’s a simple model underlying almost everything I write about macro.

My view is that we had a deleveraging shock that landed us in a liquidity trap — a situation in which short-term nominal interest rates are close to zero, so that conventional monetary policy has no traction.

And I had worked out the implications of a liquidity trap long ago. In a liquidity trap even large increases in the monetary base aren’t inflationary; even large government deficits don’t drive up interest rates.

What’s striking to me is the way people who reject this framework keep inventing special reasons to explain why things aren’t going the way they “should” — e.g., it’s QE2 that’s holding down those interest rates, so just you wait, or the surge in commodity prices (driven by growth in emerging markets) is a harbinger of huge inflation here, never mind the flatness of wages. But as I see it, things have gone pretty much the way a model that we had before the crisis said they would.

9--David Stockman: The middle class is dying, Tech Ticker, Yahoo Finance

Excerpt: (video) November's job report was disappointing; 9.8% unemployment is nothing to applaud. Economic bulls, however, contend a recovery never occurs in a straight line, and point to the 11 consecutive months of private sector job creation.

David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, isn't one of them. Stockman believes severe structural problems in the job market will continue to haunt the U.S. economy.

Stockman is most concerned with the middle class. "For the last decade we have lost 10% of the middle income economy and so far, in this, alleged recovery we've not replaced one of this 6.5 million [middle class jobs] we've lost," he tells Aaron at last week's Minyanville holiday party.

Most of the job gains come from temporary or entry level jobs, he says. But, without rejuvenation in the "base of the economy...where the high paying jobs exist" the economy will continue to struggle with "very, very slow growth."

"We've got a real income distribution problem in this economy," argues Stockman, "and it's getting worse, not better."

10--The Confidence Fairy Has Taken a Leave of Absence, Paul Krugman, New York Times

Excerpt: Was it only last June when Alan Reynolds was holding Ireland up as a role model, not just for troubled European economies, but for the United States? Yes, it was:

“The Irish approach to tackling the recent recession,” investment adviser Michael Johnston said, “was vastly different than the strategies implemented by the U.S. and much of the rest of the developed world. Most governments cranked the printing presses into high gear and began injecting round after round of capital into the global economy. Ireland went the opposite direction, imposing draconian budget cuts and reeling in government spending.”

The Irish approach worked in 1987-89 — and it’s working now.

This is a lesson that Washington should learn sooner rather than later. (see chart of skyrocketing 10-year Irish bond)

11--Guantánamo Bay files: Al-Qaida assassin 'worked for MI6', The Guardian via Information Clearinghouse

Excerpt: An al-Qaida operative accused of bombing two Christian churches and a luxury hotel in Pakistan in 2002 was at the same time working for British intelligence, according to secret files on detainees who were shipped to the US military's Guantánamo Bay prison camp.

Adil Hadi al Jazairi Bin Hamlili, an Algerian citizen described as a "facilitator, courier, kidnapper, and assassin for al-Qaida", was detained in Pakistan in 2003 and later sent to Guantánamo Bay.

But according to Hamlili's Guantánamo "assessment" file, one of 759 individual dossiers obtained by the Guardian, US interrogators were convinced that he was simultaneously acting as an informer for British and Canadian intelligence.

After his capture in June 2003 Hamlili was transferred to Bagram detention centre, north of Kabul, where he underwent numerous "custodial interviews" with CIA personnel.

They found him "to have withheld important information from the Canadian Secret Intelligence Service and British Secret Intelligence Service … and to be a threat to US and allied personnel in Afghanistan and Pakistan".

Hyperinflation? No Way

Hyperinflation? No Way
The Federal Reserve is not going to push the economy into Zimbabwean hyperinflation. That's pure bunkum. The Fed's plan is to weaken the dollar to boost exports and to force China to let its currency appreciate to its fair-market value. The policy should help to lower the US's bulging current account deficit. By purchasing $600 billion in US Treasuries (QE2), the Fed effectively reduces the supply of risk-free assets, which sends investors into riskier assets like stocks and commodities. Is there an element of class warfare in the policy?

You bet there is. It's a direct subsidy to the investment class while workers are left to face higher prices on everything from gasoline to corn flakes. It's a royal screwjob. But while Ben Bernanke may be a prevaricating class warrior and a charlatan, he's not insane. He's not going to print the country into Wiemar-type oblivion or shower the nation with increasingly-worthless greenbacks like they were confetti. That's just baseless scaremongering.

While rising headline inflation (gas and food) is painful for workers and people on fixed income, it actually intensifies the downturn by diverting money from other areas of consumption. So, discretionary spending falls and the economy begins to contract. It's more proof that we're in a Depression. And, yet, every day more ominous-sounding articles pop up warning of "The End of America" or "Gold to Soar to $10,000 per ounce" or some other such nonsense. It's ridiculous. Gloom and Doom has become a cottage industry employing a thriving class of worrywarts who all preach from the very same songbook.

Memo to Inflationists: The economy is dead. Not moving. Not breathing. Dead. Yes, the Fed can tie QE strings around the hands and feet and make them move like a marionette, but it's all make-believe. Without the props and the support-system, the economy would drop to its knees, gasp for air, and expire. Dead.

Have you noticed that 1st Quarter GDP has been revised-down to 2 percent and could be headed lower still? (Maybe even negative!) Have you noticed that unemployment is stuck at 8.8 percent and underemployment at 16.2 percent with more people falling off the rolls and into abject poverty every day? Did you see that manufacturing is starting to slip and "the production index, a key measure of state manufacturing conditions, fell from 24 to 8, indicating slower growth in output." Do you realize that the downturn in housing is getting more ferocious even after falling steadily for 5 years straight? Have you considered the fact that the government and Fed have pumped trillions of dollars of monetary and fiscal stimulus into the financial system with just about nothing to show for it? And, do you know why? Because we're in a Depression, that's why.

It's ridiculous to wail about "money supply" when velocity is zilch. It's pointless to crybaby over "bank reserves" when people are broke. It's crazy to yelp about "printing presses" when lending is down, credit is contracting and the economy is mired in the most vicious slump in 80 years. We're in a liquidity trap where normal monetary policy doesn't work. Keynes figured it out more than 60 years ago, but since Bernanke is so much smarter than Keynes, we get to relearn it all over again. Now that QE2 is ending, the verdict is in. And what have we learned? That monetary policy doesn't work in a liquidity trap. Keynes was right, after all.

The hullabaloo about inflation is vastly overdone. China's not going to dump its $3 trillion stockpile of mainly USD and US Treasuries. Who started that cockamamie story? China's doing everything it can just to keep its currency cheap just so to keep its people working. Are they suddenly going to do an about-face and commit economic harikari just to strike a blow against Uncle Sam? No way.

And, now the naysayers are worried that no one will buy Treasuries when QE2 ends in June. It's a possibility, but is it likely? Here's a blurp from the Wall Street Journal that mulls over what will happen in June:

"The direction of interest rates after the Fed ends its bond-buying program is crucial for the economy. The issue will be in sharp focus this week, when Fed policy makers hold a two-day policy meeting, starting Tuesday, to discuss their efforts to steer the economy between the shoals of recession and inflation.

They face an economy that has shown signs of losing momentum in recent months, with first-quarter economic growth now widely believed to be less than 2% annualized....

One yardstick for the immediate future of Treasury yields after QE2 could be QE1, which included a $1.25 trillion Fed buying spree of mortgage bonds from late 2008 to March 2010. The mortgage-bond market felt barely a ripple when the Fed stopped buying. Treasurys, some observers reason, may follow the same path.

Treasury yields "moved up significantly at the onset of QE1 but then fell precipitously when it ended," Mr. Rieder says. "So it's not a given that Treasury yields will rise this time either." ("Fund Giants Take Competing Stands On US Bond Outlook", Wall Street Journal)

True, that doesn't guarantee that yields won't rise when QE2 ends, but how high can they go when the economy is still stuck in the mud?

Not very high. And, who's going to buy Treasuries when the economy is "losing momentum"? The same people who always buy them when the economy starts to crater; investors looking for a "safe harbor" from falling stocks or deflation. Don't worry, there will be buyers. It's just a matter of price.

So, forget about inflation. It just diverts attention from the real issue, which is finding a way to dig out of the mess we're in and put people back to work. QE2 has been a total flop; we know that now. It's time to return to traditional fiscal policies that have a proven track record of success.

Tuesday, April 26, 2011

Today's links

1--Bill Gross Battles Dealers on Outlook as Treasuries Gain, Bussinessweek

Excerpt: Yields on 10-year notes ended last week at 3.39 percent, down from this year’s high of 3.77 percent on Feb. 9, even as Standard & Poor’s cut its outlook for the U.S.’s top AAA credit rating to “negative” from “stable.” S&P said the move indicates a one-in-three chance of a downgrade.

‘Significant Demand’

“What’s telling is the significant volume of buying when 10-year yields were above 3.50 percent and 30-year bond yields were around 4.65 percent,” said William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. “There’s still significant demand for long-end Treasury paper at those levels and I don’t think Bill Gross is going to make that demand disappear.”

Demand at Treasury auctions has risen to record levels this year, with investors submitting $3 in orders for every $1 of debt offered, data compiled by Bloomberg show....

‘Easier’ Policy

“Increased downgrade risk doesn’t necessarily imply increased Treasury yields,” Goldman Sachs economists led by Jan Hatzius in New York wrote in an April 19 report. “A significant push toward fiscal austerity would lead to lower growth and lower growth would lead to easier monetary policy for longer.”

2--ECB-forced 'run on our banks' led to bailout, Telegraph

Excerpt: Professor O'Callaghan said: "A systemic run on Irish banks was the cause of the November crisis and that it probably resulted from public musings by ECB members on the need to curtail liquidity support to banks."....

....on Thursday, November 18, Mr Honohan appeared on RTE Radio One's Morning Ireland programme to state frankly that there would be an aid package amounting to tens of billions of euro.

This intervention came, he said, when he learned the night before that an editorial was to appear in the Financial Times newspaper "saying effectively that people should be planning on bank runs".

He was concerned about the possible effect it would have on financial stability and said he needed to provide reassurance. Asked if he had consulted the Government on the radio appearance, he said: "No, I operate an independent role here."

By that point, dozens of officials from the EC-IMF-ECB were in Dublin and the formal application for assistance was made three days later on Sunday, November 21.

Mr Lenihan also gave a graphic description of his feelings when the bailout talks were concluded. "I've a very vivid memory of going to Brussels on the final Monday to sign the agreement and being on my own at the airport and looking at the snow gradually thawing and thinking to myself, this is terrible. No Irish minister has ever had to do this before."

3--China must watch for rising U.S. Treasury yields, Reuters

Excerpt: The S&P cautionary note had little impact on Treasury purchases by foreign central banks, which continued to grow in the week ended April 20. The Fed said its holdings of U.S. securities kept for overseas central banks rose $14.09 billion during the week to stand at $3.423 trillion.

Due in part to its size, the U.S. Treasury market is deemed to be among the safest in the world as it allows investors to buy and sell without prices swinging too much.

But the gigantic-and-growing market is also a sign of poor U.S. fiscal health. U.S. government debt is expected to hit its $14.3 trillion ceiling as early as May.

China owned $1.154 trillion in U.S. government debt in February, U.S. data showed.

4--Builders of New Homes Seeing No Sign of Recovery, New York Times via

Excerpt: Sales of new single-family homes in February were down more than 80 percent from the 2005 peak, far exceeding the 28 percent drop in existing home sales. New single-family sales are now lower than at any point since the data was first collected in 1963, when the nation had 120 million fewer residents.

Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. That often means buying a home out of foreclosure from a bank.

Four out of 10 sales of existing homes are foreclosures or otherwise distressed properties. Builders like Mr. Meier who specialize in putting up entire neighborhoods on a city’s outskirts — Richmond is some 50 miles northwest of downtown Chicago — cannot compete despite chopping prices....

Construction of new single-family homes usually surges after a recession because of lower rates and pent-up demand. But the Census Bureau said this week that while multi-unit construction had picked up strongly in the last year, single-family home construction fell 21 percent to an annual rate of 422,000. One consequence of the anemic pace: more than 1.4 million residential construction jobs have been lost in the last five years.

5--Home buyers try to beat "jumbo" loans squeeze, Reuters

Excerpt: Beginning on October 1, the government will dial back on the size of mortgages it guarantees in high-cost areas like San Francisco, New York and Washington.

After that, the maximum loan amount that Fannie Mae and Freddie Mac will back is scheduled to drop from $729,750 to $625,500. And that may make mortgages more expensive or harder to get for buyers like the Schreibers, who are shopping in the $700,000 range and would prefer to make a downpayment of 10 percent or less....

"For people planning on exiting the market altogether (such as retirees), that is a compelling proposition," says Stan Humphries, chief economist at Zillow. Home sellers may have to be patient to get the price they want. The curbs on government-backed loans could, at the margin, reduce the available pool of buyers, he said.


Anybody who wants a government-backed mortgage for a $1-million home after October 1 may have to come up with a $370,000 downpayment instead of $270,000, says Rob Chrisman, an independent mortgage banking consultant from San Rafael, California.

6--March Survey: Almost half of housing market is now distressed properties, Calculated Risk

Excerpt: From Campbell/Inside Mortgage Finance HousingPulse: HousingPulse Distressed Property Index Rises for Month; Homebuyer Traffic Flattens

The HousingPulse Distressed Property Index (DPI), a key indicator of the health of the U.S. housing market, rose to 48.6 percent in March – the second highest level seen in the past 12 months.
The HousingPulse DTI indicated that nearly half of the housing market is now distressed properties. This trend is likely to continue as a backlog of foreclosures and mortgage defaults make their way through the housing pipeline.
Survey respondents reported mixed opinions on traffic for the winter and spring housing market. “January, February and March sales were characterized by a wait and see attitude of buyers.
[S]hort sales boomed in the month of March and the proportion of damaged REO fell. Short sales rose from 17.0% in February to a record-high 19.6% in March. Damaged REO fell from 14.9% in February to 12.0% in March.

This fits with other data showing a high level of distressed properties, and this suggests further declines in the repeat transaction house price indexes.

7--Let's take a hike, Paul Krugman, New York Times via Economist's View

Excerpt: The ... only major budget proposal out there offering a plausible path to balancing the budget ... includes significant tax increases: the “People’s Budget” from the Congressional Progressive Caucus ... is projected to yield a balanced budget by 2021 ... without dismantling ... Social Security,... Medicare and Medicaid.

But if the progressive proposal has all these virtues, why isn’t it getting anywhere near as much attention as the much less serious Ryan proposal? ...

The answer, I’m sorry to say, is the insincerity of many if not most self-proclaimed deficit hawks. To the extent that they care about the deficit..., it takes second place to their desire to do precisely what the People’s Budget avoids doing, namely, tear up our current social contract, turning the clock back 80 years under the guise of necessity. They don’t want to be told that such a radical turn to the right is not, in fact, necessary.

But, it isn’t, as the progressive budget proposal shows. We do need to bring the deficit down, although we aren’t facing an immediate crisis. How we go about stemming the tide of red ink is, however, a choice — and by making tax increases part of the solution, we can avoid savaging the poor and undermining the security of the middle class.

8--The QE2 Snafu, Pragmatic Capitalism

Excerpt: The mainstream media is beginning to size-up the results of QE2. And apparently it’s looking it was all a great big monetary non-event. This is what I said before QE2 even started, however, it looks like the damage has already been done. QE2 didn’t monetize anything. It didn’t cause the money supply to explode. It didn’t really do anything except cause a great deal of confusion and generate an enormous amount of speculation in financial markets that now appears to be contributing to turmoil and strife around the globe. But the misconceptions continue....

They’re right that QE2 has been a disappointment. And most certainly a monetary non-event, however, there is substantial evidence now showing that QE2′s one targeted goal – increasing inflation expectations – is working via the exact wrong channels by contributing to the surge in commodity prices. So while it’s been a monetary non-event it’s been a substantial economic event...... And now that it’s becoming clear that QE2 didn’t contribute positively to economic growth these same economists are changing their tune to give the appearance that QE is not a flawed policy, but that it was merely implemented incorrectly. This is sheer nonsense.

When I first discussed QE last August and why it would not contribute positively to economic growth I described how QE was akin to an apple salesman who can’t sell enough apples. So, instead of altering price he merely alters the number of apples on the shelves. Altering reserve balances at banks is perfectly analogous. Giving the banks more reserves does nothing because banks are never reserve constrained. But now all of the experts are trying to convince us that QE just wasn’t tried hard enough! If only the apple salesman had put more apples on the shelves – then his sales would have improved! No, that’s not how monetary policy works. And as I’ve said for many many months now, this obsession with size is entirely misguided. QE2 isn’t about size. It is about price.

9--Geezer Uprising, Dave Lindorff, Counterpunch

Excerpt: I am 62 and have just reached the age where I could apply for Social Security retirement benefits. Of course, I'd be crazy to do that and collect some $700 a month for the rest of my life, when I could keep working and wait until I'm 70 and get $2000 a month.

But the point is, I've arrived. I'm a "senior." And now I'm paying a lot more attention to what the Right and its paymaster, the corporate lobby, are trying to do, not just to my retirement plan (which is Social Security. period), but also to Medicare, the program upon which my medical care will depend once my wife decides to retire from her university job....

But here's the thing. The reason these parties and lobbies are trying so hard now to use the recession and the national deficit as cover to decimate and destroy these two proven and critically important social programs into which all working Americans have been paying all our working lives, is that they realize what most 50 and 60-something Americans haven't realized yet: that we are about to become the most powerful political force in the country, and that we are certainly going to demand both an excellent government Medicare program, and a decent retirement program.

The way I see it, we in the Baby Boom generation--those people born between 1946 and about 1964--are just starting to hit retirement age. In another 10 years, we will become a political force twice as powerful and certainly more than twice as noisy and demanding as the current senior lobby. We can either wait until then, after they have successfully gutted the two programs we depend on, making it so we have to fight to recreate or restore them, or we can start organizing now to defend and improve them, and save ourselves a whole lot of trouble.

So here's my proposal.

Let's start building a coalition of Baby Boomers, working through every conceivable organization--labor unions, churches, veterans organizations, alumni organizations, political chapters, etc.--with one goal: Defending and improving Social Security and Medicare....

Poll after poll shows that Americans love Medicare. It's a program that works, that only spends 1% of funds on administration (compared to almost 30% for the private medical system), and that has vastly improved the health of older Americans since it went into effect in 1965. It's a program that actually is very similar to what all Canadians have (which is a program they also call Medicare), but here in the US you have to be either over 65 or permanently disabled in order to qualify.

10--Wall Street speculators send food prices soaring, MSNBC via Information Clearinghouse---video

11--Taliban Jailbreak, New York Times

Excerpt: KANDAHAR, Afghanistan — Taliban leaders carried out an audacious plot on Monday to free nearly 500 fighters from southern Afghanistan’s largest prison, leading them through a tunnel dug over more than five months and equipped with electricity and air pipes, which suggested that the insurgents remained formidable and wily opponents despite recent setbacks....

Of the 488 men who escaped, fewer than 20 were from the criminal section of the prison; the rest were security detainees believed to be Taliban fighters and commanders.

An escapee, who asked not to be identified, said that among those freed were two shadow governors and 14 shadow district governors. The Taliban have a shadow government that has varying influence in different provinces.

Monday, April 25, 2011


The New York Times is bit late to the party but, better late than never, right?

Times economics writer Binyamin Applebaum has just discovered that the Fed's bond buying program--aka QE2--has lit a firecracker under stocks but done zilch for the real economy. Applebaum--who apparently never trolls the econo-blogs to expand his understanding of what's going on in the world of finance-- is "shocked" that Bernanke's $600 billion "credit easing" strategy has turned out to be an utter boondoggle that's had no measurable impact on output, unemployment or growth. Who could've known? But let's let Applebaum speak for himself:

"The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs...

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?” ("Stimulus by Fed is Disappointing, say Economists", Binyamin Applebaum, New York Times)

Correction: The $600 billion in Treasury securities was never intended "to push private dollars into investments that create jobs," as Applebaum opines. That's baloney. There have been numerous studies which have shown that QE has little to no effect on employment. (Note--A study by Macroeconomic Advisors states that an additional $1.5 trillion in bond purchase would only reduce unemployment by two-tenths of 1 percent.) Bernanke is familiar with these studies, which means that the real objective was something else entirely. But just to provide a bit of context, here's a clip from a Washington Post op-ed that Bernanke wrote just prior to the launching of QE2 in November 2010. Judge for yourself whether the man can be trusted or not.

From the Washington Post:

"The Federal Reserve's objectives ---- are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.....Low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.....the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation." ("What the Fed did and why: supporting the recovery and sustaining price stability", Ben Bernanke, Washington Post)

By my count, Bernanke mentions employment/unemployment 5 times in the first 3 paragraphs alone. But QE2 has done nothing to reduce unemployment. The only reason unemployment has dipped at all, is because more workers are falling off the unemployment rolls. Is Bernanke taking credit for the people who now live under freeway off-ramps or forage for their meals in dumpsters?

And QE2 hasn't improved bank lending either; that's another fabrication propagated by the financial media. Just check out the Fed's own stats; it's all there in black and white. (Total Loans and Leases at Commercial Banks (LOANS) FRB of St. Louis) Total borrowing at commercial banks continues to decline as it has since the bubble burst in 2008. Also total "consumer credit outstanding" has decreased from that same period. (Ho hum)

Sure, it's boring, but think about it for a minute: Didn't we just fork over $3 trillion to the banks, so they'd start lending again? And, have they?


So, let's review: The banks were given $700 billion when the TARP bailout was enacted. Then they were given $1.25 trillion more in the first round of quantitative easing (QE) where the Fed purchased the banks toxic mortgage-backed securities (MBS) and agency debt. They were given another $900 billion in QE2, in which the Fed exchanged $600 bil in reserves for US treasuries and another $300 bil in recycled proceeds from maturing MBS. So, altogether the banks have been given roughly $3 trillion, not a penny of which has benefited US taxpayers, increased demand, or strengthened the recovery. In fact--as we pointed out earlier--the money has not even increased lending which was the stated objective. (along with lowering unemployment)

So, we've been fleeced, right?

Imagine if that same $3 trillion had been given to smaller banks with the proviso that they temporarily drop interest rates on credit cards to 5 percent for (let's say) two years. Of course, the banks would still make boatloads of money because they borrow from the Fed at zero. (0.25%). But think of how much activity that would create if people could borrow at 5% instead of 18%. Most likely, it would lead to another credit expansion.

But, that's not going to happen because the banks want to borrow money from depositors (you and me) at 0.50% (1-year CD) and then rent it back at 18% (via credit cards), that way they can leverage their gambling operations in the equities markets and still hand out multi-million bonuses to their top predators.

Oh, yeah, and if those gambling operations go belly-up; guess who's on the hook?

You and me. And, if you can't pay, no problem; they'll just subtract it from your Social Security.

Is this the crookedest system you've ever seen?

So, let's cut to the chase; what is QE2 really all about?

It's obvious; it's about pumping up stock prices; there's nothing more to it. It's Bubblenomics 101.

Look, even the NY Times is willing to admit it's a farce, and that's quite a concession. But Bernanke is sticking with his story despite the mountain of evidence to the contrary. Why? Because the Fed is is the policy arm of the banking industry and Bernanke is their chief lobbyist. It's that simple. And, his job is to funnel more free capital to his loafer moneybags friends who hate work. That's it. It's not complicated. So, they make up some goofy story about "lowering unemployment" or "increasing lending" and try to hide what they're doing behind a name that sounds "way too smart" for the average guy to understand. "Quantitative Flim-flam" is what it should be called; One-part junk economics and 99% unalloyed hogwash.

Get the picture? What the Fed is doing has a long pedigree; it's called cornhole the taxpayer, and no one does it with such virtuosity and deftness as Ben Bernanke. He's a real pro.

And, one last thing: Bernanke and Co. know the real condition of the economy. They're not fools. They know that each business cycle is weaker than the last, providing fewer jobs, more slack in the economy, and more anemic growth. They know it, just as they know that mature capitalist economies drift inexorably towards stagnation, which is why the capital accumulation process must be endlessly tweaked to maintain profitability for the "lucky few". So, while at one time, the US produced precision widgets and eye-popping techno-gadgetry; the focus has since shifted to ever-wackier debt-instruments and computerized high-speed trading to fatten the bottom line. Because that's where the real gravy is.

QE2 fits perfectly in this new paradigm of profit-extraction via maximizing debt and goosing the markets. It's a sign that the folks at the Central Bank have completely abandoned the traditional ways of boosting earnings and moved on to Plan B, which involves cannibalizing the system and devouring the society to further enrich the illustrious 1 percent.

So, forget about the "self sustaining recovery". Fed policy has nothing to do with rebuilding the economy and putting people back to work. It's just one big shakedown. They grab you by the ankles, turn you upside-down, and shake. And, when the last copper penny hits the pavement, "PLING" they'll move on to China.