Tuesday, April 12, 2011

Today's links

1--New home sales are at lowest level in almost 50 years, AP

Excerpt: Home construction in the United States is all but coming to a halt.

Americans are on track to buy fewer new homes than in any year since the government began keeping data almost a half-century ago. Sales are just half the pace of 1963 — even though there are 120 million more people in the U.S.

The sliding sales show how far the housing market has fallen since the bubble burst four years ago. And they're a blow to the economic recovery as it draws strength from other places.

Diminished sales have driven the median price of a new home down to about $202,000, the lowest since 2003. If the sluggish sales continue, analysts say, small homebuilders will fold, meaning less competition as the market improves and higher prices later.

"The longer it goes on, the more builders will drift away from the industry altogether," said Paul Ashworth, chief U.S. economist of Capital Economics.

Ashworth noted that a surge in foreclosures is forcing down prices for previously occupied homes even faster than they're falling for new homes. As a result, new homes are less attractive to buyers.

"That's not going to change for at least another year or two," Ashworth said. "Under these conditions, you can't really see homebuilders willing to ramp up, and that's bad for buyers."

Sales of new homes plunged in February to an annual rate of 250,000, the Commerce Department said Wednesday. It was the third straight monthly drop. The pace is far below the pace economists say is healthy, about 700,000 a year.

2--Celebrating Defeat, Paul Krugman, New York Times

Excerpt: Ezra Klein gets this right, I think: it’s one thing for Obama to decide that it was better to give in to Republican hostage-taking than draw a line in the sand; it’s another for him to celebrate the result. Yet that’s just what he did. More than that, he has now completely accepted the Republican frame that spending cuts right now are what America needs.

It’s worth noting that this follows just a few months after another big concession, in which he gave in to Republican demands for tax cuts. The net effect of these two sets of concessions is, of course, a substantial increase in the deficit.

I also think that Ezra is right that the Obama people are counting on a growing economy to pull them through. In fact, I think that’s been their strategy since the January 2010 State of the Union, when Obama shifted his focus from any effort to boost the economy and started talking about spending freezes. The judgment was apparently that it was OK to move policy in the wrong direction, because the economy was strong enough to weather the shock, and that it was more important to look centrist than to defend good policy.

Of course, that didn’t work out too well last year, did it?

3--$3 Trillion Here, $3 Trillion There, Paul Krugman, New York Times

Excerpt: OK, $2.9 trillion. Anyway, pretty soon you’ll be talking about real money.

Richard Rubin and Stephen Sloan direct us to a new Tax Policy Center assessment of the tax cuts in the Ryan plan (all, repeat all, of which go to top incomes and corporations) which has been posted but not yet advertised on the TPC home page — you have to know that it’s there.

The people at TPC are careful to say that this is not a full assessment of the Ryan plan, because

The proposed resolution includes measures to broaden the individual and corporate tax bases, but lacks sufficient detail for an estimate including those provisions.

I’ll say. In fact, the proposal says it will broaden the tax base, but says nothing whatsoever about how. And it would take an awful lot of broadening to make up for the revenue losses, which are estimated at $2.9 trillion...

Looking at this massive tax cut — NOT taken account of in the CBO estimates — might almost make you think that (a) the Ryan plan would actually increase the deficit and (b) the whole goal is not to reduce the deficit, but to transfer income upward. In fact, it so happens that the estimated cost of those tax cuts is almost exactly equal to the proposed cuts to Medicaid, food stamps, and other programs helping lower-income Americans.

But none of that can be true. After all, the guy has won an award for fiscal responsibility.

4--Jobless Rate Is Not the New Normal, Christina Romer, New York Times

Excerpt: Before the recent recession, in the view of many economists, the lowest sustainable rate of unemployment... — a level known as the normal or natural rate of unemployment — was around 5 percent.

The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? ...

This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March.

Fortunately, there is a more compelling explanation. Strong evidence suggests that the natural rate of unemployment actually hasn’t risen very much. Instead, the elevated unemployment rate appears to reflect mainly cyclical factors,... the consequence of low demand. ...

This diagnosis suggests that the appropriate remedy is to stimulate demand. In February, I suggested a number of steps the Federal Reserve could take. Some additional fiscal measures would also be useful. ... Given the severity of the long-run budget problem, short-run fiscal stimulus should only be undertaken as part of a comprehensive package ... providing reassurance that the United States will remain solvent over the long haul.

Regardless of the cause of extended high unemployment, it is a disaster for families, the economy and government budgets. Thus, if I am wrong, and more unemployment is structural than the current evidence suggests, this is no excuse for washing our hands of the problem. Only the nature of the needed policy response would change. Instead of focusing on increasing demand, we would need policies to help workers and jobs find one another, measures to move workers to where the jobs are (or vice versa), training programs, and better education.

And even though today’s unemployment appears mainly cyclical, it could turn structural. The longer that unemployment remains high for cyclical reasons, the more likely that job prospects for unemployed workers will be permanently damaged. ... Getting cyclical unemployment down quickly is the surest way to prevent that from happening...

5--Does Fed intervention cause low-volume rallies, The Big Picture

Excerpt: Michael Santoli’s column this weekend in Barron’s had a fascinating combination of quotes. Mike put together a series of dots. I want to take a shot today at connecting them.

Consider these three ideas:

1. Louise Yamada, longtime technical analyst: “Volume is the weapon of the bull, historically, and is generally essential to push the market higher.”

2. Jeff deGraaf, Renaissance Macro Research: Prior low-volume rallies — 1987, late 1998, 2003 rebound — started on low volumes: “We do not believe that volume over the last two weeks is an ample excuse to stay away from equities. In fact, when volume begins to pick up meaningfully . . . it’s often close to a cyclical [market] peak in need of a consolidation.”

3. Michael Santoli, Barron’s: “It’s yet another way that the market feels like it’s in the low-volume, Fed-medicated, range-trading, easy-corporate-credit, buyout-happy days of the middle part of the last decade.”


What these three comments hint at, but don’t precisely conclude, is that Fed induced rallies tend to be liquidity, not conviction driven. Thus, the anemic volume.

Look at the low volume moves off of the lows that DeGraaf mentioned: 1987, 1998, and 2003; Add to that the fading volume since early 2009. All 4 of these years had major Federal Reserve interventions via a combination of rate changes along with the occasional increases in money supply and/or bond purchases.

Hence, the upward drift on pathetic volume is a function of the Fed, and the network of banks (fractional lending), brokers (margin), hedge funds (leverage) and clearing houses (all of the above) to their clients who ultimately thrive on easy money.

At least, that is my thesis for the ongoing levitation. I have not run the numbers across every major (or minor) rally where the Fed is active. But I have a sneaking suspicion we might a degree of correlation. (and I doubt anyone can seriously argue a lack of causation).

6--Another look at consumer credit, The Big Picture

Excerpt: The Fed released its G.19 report on Consumer Credit last Thursday, and it stirred some optimism (see also here):

The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth — as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.

I respectfully beg to differ. While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed. (chart)

But let’s take a look at exactly how much the TOTALGOV (i.e. Student loan) series is goosing non-revolving credit (chart) It is, quite literally, a reverse cliff-dive.

In short, fade the notion that consumer credit is experiencing some sort of credit renaissance and that happy days are here again.

7--CHART: As Services For Main Street Are Gutted, Richest Pay Lowest Taxes In A Generation, Think Progress

Excerpt: Last night President Obama and congressional negotiators cut a deal to keep the government running, cutting “$38.5 billion under current funding levels, per Republican demands,” and $78 billion below what Obama called for in his initial 2011 budget.

Yet as Republicans and Democrats continue to battle over the deficit within a political framing that includes taking aim at Pell Grants for low-income students — which Obama preemptively proposed to cut, calling summer grants “too expensive,” while Republicans want far deeper cuts than that — Head Start funding, and other programs from Main Street Americans, there is one group of Americans that seems to be getting away without having any sacrifices demanded of them: the very richest.

As this chart from from Wealth for the Common Good shows, the top 400 taxpayers — who have more wealth than half of all Americans combined — are paying lower taxes than they have in a generation, as their tax responsibilities have slowly collapsed since the New Deal era as working families have been asked to pay more and more: (chart)

There have been a handful of proposals by congressional progressives to once again put requiring more sacrifice from the luckiest among us back on the table. The Congressional Progressive Caucus recently unveiled a “People’s Budget” that would boost taxes on the wealthiest Americans, returning them to levels closer to where they were under Ronald Reagan’s first term — hardly socialism.

Yet these proposals have yet to gain steam, and the budget debate in Washington appears to revolve completely around cutting spending for Main Street Americans who’ve already been asked to pay too much during the recession. That’s why there’s a Main Street Movement demanding fair sacrifice and standing up for the great American middle class. Whether it succeeds may determine the fate of most hard-working Americans for a generation to come.

8--Student Loan Defaults On The Rise, Daily News Pulse

Excerpt: College may the best years of your life, or it better be, if you’re going to be paying off or defaulting on those student loans well into mid-life. According to a new survey from the Institute for Higher Education Policy, only 37% of students pay back their loans on time; about ¼ of them need to postpone payments to avoid delinquency; and 2 out of every 5 are delinquent at some point in the first five years of repaying the loans. The numbers show education is a priority for Americans—at an estimated $896 billion, total student debt amounts to more than Americans’ credit-card debt—but as the average loan continues to rise ($24,000 last year) along with default rates, how can students know how to weigh the importance of a college education with mounting debt? The Department of Education has proposed regulations to would cut off federal aid to programs whose students graduate with high debt-to-income ratios at for-profit colleges, but what advice should students heed in the meantime?

Perhaps it is time for the federal government to use its considerable financial leverage to ensure that its money goes where most students and parents assume it does — to education. We could argue about what the right ratio of instructional investment vs. other expenditures should be but at Bridgepoint, it would surely force a change of priorities to the benefit of its students. In 2009, Bridgepoint, according to data presented in the HELP Committee hearing, took in $336 million in federal aid, which constituted 86 percent of the company’s total revenue. An analysis of the company’s spending in 2010 shows that thirty percent of those revenues go to profit, 30 percent to marketing, and only 40 percent goes to cover everything else including executive compensation. It’s no wonder the company has so little left for instruction.

9--Budget Bill Won't Block Rules on 'Gainful Employment', insidehighered.com

The Obama administration and Senate Democrats have rebuffed an effort by Congressional Republicans to use pending budget legislation to hamper the Education Department's ability to implement regulations requiring for-profit colleges and other vocational programs to ensure that their students are prepared for "gainful employment." Few details are available at this point about the compromise reached late Friday night between the White House and Congressional negotiators over a spending bill for the rest of the 2011 fiscal year; it is not entirely clear, for instance, how the legislation will affect federal student aid and research programs, although a post on the White House blog said the deal maintained the maximum Pell Grant at $5,550. The post also says that the deal will force the White House to abandon its effort to "double the funding of key research and development agencies," but still permits "strong investments in National Institute of Standards and Technology, National Science Foundation and the Office of Science."

But a spokesman for Senate Majority Leader Harry Reid of Nevada confirmed Sunday that the legislation would not contain a provision sought by a group of House members that would bar the Education Department from using any of its fiscal 2011 funds to carry out the controversial gainful employment rules, a new version of which the department is poised to release. The measure would have effectively delayed implementation of the regulations until October at the earliest. Opponents of the measure urged members Saturday to continue to push for the provision, but the Reid spokesman said it was dead.

The gainful employment provision was one of 66 "policy riders" that House Republicans sought to attach to the 2011 budget legislation, "and this was one they pushed for," the spokesman said. "But Sen. Reid and the White House firmly said no."

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