Tuesday, May 17, 2011

Today's links

1--Letter from the Secretary of the Treasury Timothy Geithner to Senator Michael Bennet, Dept of the US Treasury

Excerpt: "The unique role of Treasuries securities in the global financial system means that the consequences of default would be particularly severe. Treasuries securities are a key holding on the balance sheets of virtually every major insurance company, bank, money market fund, and pension fund in the world. They are also widely used as collateral by financial institutions to meet their day-to-day cash-flow needs in the short-term financing market....

"A default on Treasury debt could lead to concerns about the solvency of the investment funds and financial institutions that hold Treasury securities in their portfolios, which could cause a run on money market mutual funds and the broader financial system--similar to what occurred in the wake of the collapse of Lehman Brothers. As the recent financial crisis demonstrated, a sudden and severe blow to confidence in the financial markets can spark a panic that threatens the health of our entire global economy and the jobs of millions of Americans....

"Treasuries securities enjoy their unique role in the global financial system precisely because they are viewed as a risk-free asset....A default would call into question the status of Treasuries securities as a cornerstone of the financial system, potentially squandering this unique role and the economic benefits that come with it."

2-- America Held Hostage, Paul Krugman, New York Times

Excerpt: Six months ago President Obama faced a hostage situation. Republicans threatened to block an extension of middle-class tax cuts unless Mr. Obama gave in and extended tax cuts for the rich too. And the president essentially folded...

Now, predictably, the hostage-takers are back: blackmail worked well last December, so why not try it again? This time House Republicans say they will refuse to raise the debt ceiling — a step that could inflict major economic damage — unless Mr. Obama agrees to large spending cuts, even as they rule out any tax increase whatsoever. And the question becomes what, if anything, will get the president to say no. ...

So what will happen if the ceiling isn’t raised? It has become fashionable on the right to assert that it would be no big deal. ... But ... they’re almost surely wrong...

For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills... So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt? ... At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.

3--NY Fed: manufacturing starting to ease, Pragmatic Capitalism

Excerpt: This morning’s Empire State Manufacturing Survey continued to show growth, however, missed expectations by a wide margin. The headline came in at 11.88 versus expectations of 20. Any reading over 0 is indicative of growth so the region is still consistent with a growing economy. The NY Fed provides some details on the report:

“The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in May, but at a slower pace than in April. The general business conditions index fell ten points to 11.9. The new orders index declined fi ve points to 17.2, and the shipments index slipped three points to 25.8. The inventories index climbed to 10.8, its highest level in a year. The prices paid index rose to 69.9, its highest level since mid-2008, while the prices received index held fi rm at 28.0. Future indexes continued to convey a high level of optimism about the six-month outlook, although prices are widely expected to rise.”

4--‘Class Warfare', Paul Krugman, New York Times

Excerpt: Aha. Paul Ryan is whining about people playing the class warfare card. That, folks, is the sound of desperation.

Actually, for the most part critics of his plan haven’t focused on the distributional issues so much as on the nonsense he’s talking; they’ve been playing the arithmetic card, not the class warfare card. But yes, the Ryan plan does impose huge sacrifice on the poor and the middle class, while cutting taxes on the rich and corporations.

And this is, of course, the game conservatives have played over and over again since Reagan. Without exception, their policy proposals call for sacrifice on the part of most people, but lavish tax cuts on high incomes — and when you point this out, they yell “class warfare”.

Again, the big problem with the Ryan plan isn’t the unfairness — although there’s plenty of that. It’s the fact that the plan is a fraud.

5--No Guarantee Debt-Ceiling Deal Will Get Done, Wall Street Journal

Excerpt: A split among economists over whether a debt ceiling vote should be tied to spending cuts highlights the risk of overconfidence, despite a consensus opinion in the latest Journal survey that the ceiling will be raised before an August deadline.

The problem with games of chicken is that occasionally they result in collisions,” said David Wyss, chief economist of Standard & Poor’s Corp., referring to the political tussle over increasing the amount the U.S. can borrow. If a deal isn’t reached “the bond market is going to react badly, the question is how badly.” He also noted the efforts to avoid a technical default by cutting government payments elsewhere could have negative implications for the economy.

By a 9-1 margin the economists expect a deal will be reached to raise the debt ceiling by August. However, of the 46 economists who answered the question (nine survey participants chose not to respond to the query), 23 said the the vote should be tied to spending cuts, while the other 23 thought linking the two is a mistake.

Half of the respondents preferred the issue be dealt with in the budget process when the year’s spending plans are decided. The amount of debt the U.S. needs to take on is a result of that process. “Congress needs to stop monkeying around with politics and separate this debate from the larger deficit reduction problem,” said Diane Swonk of Mesirow Financial.

But others felt the high stakes of a debt ceiling vote are the only way to achieve concessions. “The federal government needs to shrink, and Democrats won’t agree to it unless pressured,” said Stephen Stanley of Pierpont Securities.

6--No bail for IMF bailout lord, FT.Alphaville

Excerpt: Dominique Strauss-Kahn was remanded in custody on Monday by a New York court. From the FT: "The head of the International Monetary Fund was appearing in a Manhattan court on Monday to face a complaint over an alleged sexual assault on a maid at a hotel in the city. More…Dominique Strauss-Kahn was remanded in custody on Monday by a New York court.

From the FT: The head of the International Monatery Fund was appearing in a Manhattan court on Monday to face a complaint over an alleged sexual assault on a maid at a hotel in the city.

Mr Strauss-Kahn’s defence attorneys countered the remand request by seeking for him to be released on $1m bail. But Judge Melissa Jackson said he would be remanded in custody until May 20.

The FT adds that there could be a second investigation:

It emerged on Monday that Mr Strauss-Kahn is facing a possible second investigation into claims of sex crimes after a lawyer acting for a French woman said his client was likely to make a complaint over an alleged sexual assault by the International Monetary Fund chief in 2002. NY proescutors said they would be looking into such allegations.

Predictions that Strauss-Kahn would be treated lightly, either on the charge count or on bail conditions, were wrong.

7--Greece Pressed by EU to Sell Assets to Win More Aid, Bloomberg

Excerpt: European finance ministers stepped up the pressure on Greece to sell assets and deepen spending cuts to win an increase of its 110 billion-euro ($156 billion) aid package and more time to repay the loans.

In deliberations clouded by the absence of International Monetary Fund Managing Director Dominique Strauss-Kahn, Europe’s rich countries tied extra money to pledges by Greece to reap more revenue at home and weighed whether to make bondholders share the pain.

“Greece also has a huge privatization potential and the Greeks should help themselves before calling for more money,” Austrian Finance Minister Maria Fekter told reporters before a euro crisis meeting in Brussels today.

Greek bonds fell after the euro area’s economic powerhouses put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high-deficit countries on the continent’s periphery.

8--A Loan and a Prayer, Nouriel Roubini and Stephen Mihm, Project Syndicate

Excerpt: reece is clearly insolvent. Even with a draconian austerity package, totaling 10% of GDP, its public debt would rise to 160% of GDP. Portugal – where growth has been stagnant for a decade – is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency. In Ireland and Spain, transferring the banking system’s huge losses to the government’s balance sheet – on top of already-escalating public debt – will eventually lead to sovereign insolvency.

The official approach, Plan A, has been to pretend that these economies suffer a liquidity crunch, not a solvency problem, and that the provision of bailout loans – together with fiscal austerity and structural reforms – can restore debt sustainability and market access. This “extend and pretend” or “lend and pray” approach is bound to fail, because, unfortunately, most of the options that indebted countries have used in the past to extricate themselves from excessive debt are not feasible...

To restore growth, these countries must also regain competitiveness by achieving a real depreciation of their currency, thus turning trade deficits into surpluses. But a rising euro – pushed higher by excessively early monetary tightening by the ECB – implies more real appreciation, further undermining competitiveness.

The German solution to this conundrum – keeping wage growth below that of productivity, thereby reducing unit labor costs – took more than a decade to yield results. If the PIIGS started that process today, the benefits would be too long in coming to restore competitiveness and growth.

The last option – deflation of wages and prices – to reduce costs, achieve a real depreciation, and restore competitiveness is associated with ever-deepening recession. The real depreciation necessary to restore external balance would drive the real value of euro debts even higher, making them even more unsustainable.

Lowering private and public consumption in order to boost private savings, and implementing fiscal austerity to reduce private and public debts, aren’t options, either. The private sector can spend less and save more, but this would entail an immediate cost known as Keynes’ paradox of thrift: declining economic output and rising debt as a share of GDP. Recent studies by the IMF and others suggest that raising taxes, cutting subsidies, and reducing government spending – even inefficient spending – would stifle growth in the short term, exacerbating the underlying debt problem.

If the PIIGS can’t inflate, grow, devalue, or save their way out of their problems, Plan A is either failing or is bound to fail. The only alternative is to shift quickly to Plan B – an orderly restructuring and reduction of the debts of these countries’ governments, households, and banks.

9--I.M.F. Warns Europe's Debt Crisis Could Still Spread, Reuters

Excerpt: Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.

The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatizations. “Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.

Finance ministers of the 17-nation single currency area are set to approve a €78 billion, or $111 billion, rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package. But markets are increasingly concerned that Greece may never be able to pay back its €327 billion debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.

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