Thursday, April 28, 2011

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 M√ľnchau 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.

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