Wednesday, May 18, 2011

Today's links

1--New York Investigates Banks’ Role in Fiscal Crisis, New York Times

Excerpt: The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses...

But even more questions have been raised in private lawsuits filed against the banks by investors and others who say they were victimized by questionable securitization practices. Some litigants have contended, for example, that the banks dumped loans they knew to be troubled into securities and then misled investors about the quality of those underlying mortgages when selling the investments.

The possibility has also been raised that the banks did not disclose to mortgage insurers the risks in the instruments they were agreeing to insure against default. Another potential area of inquiry — the billions of dollars in credit extended by Wall Street to aggressive mortgage lenders that allowed them to continue making questionable loans far longer than they otherwise could have done.

2--Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers, Huffington Post

Excerpt: A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.

The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.

The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges.

The federal audits mark the latest fallout from the national foreclosure crisis that followed the end of a long-running housing bubble. Amid reports last year that many large lenders improperly accelerated foreclosure proceedings by failing to amass required paperwork, the federal agencies launched their own probes.

The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

Two of the firms, including Bank of America, refused to cooperate with the investigations, according to the sources. The audit on Bank of America finds that the company -- the nation’s largest handler of home loans -- failed to correct faulty foreclosure practices even after imposing a moratorium that lifted last October. Back then, the bank said it was resuming foreclosures, having satisfied itself that prior problems had been solved.

3--Strauss-Kahn and the IMF, Dean Baker, Counterpunch

Excerpt: Those who hoped for serious reform of the International Monetary Fund have to be very disappointed by the allegations of sexual assault against its director, Dominique Strauss-Kahn. If the charges prove true, this will end Strauss-Kahn's efforts at reforming an institution that is badly in need of reform....

Dominique Strauss-Kahn tried to shake up this institution. He brought in Olivier Blanchard from MIT, one of the world's most prominent macroeconomists, as the IMF's chief economist. He gave Blanchard a free rein, which he quickly used to harshly criticize the orthodoxy within the IMF.

Last fall, the IMF published a study in its World Economic Outlook that showed that fiscal austerity in the wake of the economic crisis would further contract demand and raise unemployment. This reversed the institution's historic role; the IMF officially became a voice for expansion and employment rather than contraction and austerity.

Of course the story at the country level was often quite different. The teams that imposed specific terms for IMF support are well entrenched. Their plans for "internal devaluations" (declining wages and prices) in countries like Estonia and Latvia pushed their unemployment rates to nearly 20 percent. Getting the country-level teams in line with any new thinking at the top was likely to be a long and difficult process even in the best of circumstances.

If the charges against Mr. Strauss-Kahn hold up, then he will not be around to carry this effort forward. As far as for what the future holds, his interim successor, John Lipsky, was a former vice president at J.P. Morgan. This could mean that the whole world will suffer for Mr. Strauss-Kahn's criminal conduct.

4-- Housing Starts decline in April, Calculated Risk

Excerpt: Total housing starts were at 523 thousand (SAAR) in April, down 10.6% from the revised March rate of 585 thousand. ...

Housing Starts:
Privately-owned housing starts in April were at a seasonally adjusted annual rate of 523,000. This is 10.6 percent (±13.0%)* below the revised March estimate of 585 000 and is 23 9 percent (±7 0%) below the revised April 2010 rate of 687 000....

This was well below expectations of 570 thousand starts in April. I'll have more on starts later ... I expect starts to stay low until more of the excess inventory of existing homes is absorbed.

5--The Battle is Squared, and Why We Need Budget Jujitsu, Robert reich's blog

Excerpt: Technically, the federal government has now reached the limit of its capacity to borrow money. Raising the debt ceiling used to be a technical adjustment, made almost automatically. Now it’s a political football.

Democrats should never have agreed to linking it to an agreement on the long-term budget deficit.

But now that the debt ceiling is in play, there’s no end to what the radical right will demand. John Boehner is already using the classic “they’re making me” move, seemingly helpless in the face of Tea Party storm troopers who refuse to raise the ceiling unless they get their way. Their way is reactionary and regressive – eviscerating Medicare, cutting Medicaid and programs for the poor, slashing education and infrastructure, and using most of the savings to reduce taxes on the rich.

If the only issue were cutting the federal deficit by four or five trillion dollars over the next ten years, the President and Democrats wouldn’t have to cave in to this extortion....

The message from the “People’s Party” should be unconditional: No cuts in Medicare and Medicaid or Social Security. More spending on education and infrastructure. Pay for it and reduce the long-term budget deficit by cutting military spending and raising taxes on the rich. The People’s Budget is the template.

6--Bond market optimism should scare us, The Economist

Excerpt: TODAY, Treasury reached its debt ceiling and began emergency manoeuvres to gain a few months before running out of borrowing room. Most everyone agrees that failure to raise the debt ceiling before that happens would be a calamity. Tim Geithner, the Treasury secretary, has just warned for the umpteenth time that it would lead to “ catastrophic far-reaching damage”, sending interest rates skyrocketing and unleashing chaos on the American economy and the financial system.

Oddly, one particularly influential group of observers isn’t the slightest bit worried: the people who buy bonds. If they were worried America won’t repay the principal and interest, they’d demand higher interest rates as compensation. In fact, the opposite has happened. In a little over a month, as the White House and Republicans have dug in over the issue, the yield on the 10-year Treasury bond has fallen to just 3.15% today from 3.6% a little over a month ago.

What seems nonsensical makes perfect, and worrying, sense if you understand how this debate is likely to play out....

Some people, most recently Stan Druckenmiller, a legendary hedge fund manager, have said a “technical default”—that is, a few days’ delay in the payment of our interest while politicians negotiate—is no big deal. Maybe so for a buy and hold investor. But Treasury debt underpins a vast and complex web of financial relationships around the world which would all be thrown out of whack by even a technical default. It would also undermine the federal guarantee that backstops borrowing throughout the economy, from federal deposit insurance to the bonds backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration.

These implications are so awful that the bond market assumes, almost certainly correctly, that Mr Geithner would not allow them to happen. It is far more likely that Treasury would delay other payments first, as Bill Clinton threatened to do, with Social Security cheques, in 1996.

What would that imply? At present, federal spending equals about 24% of GDP and revenue around 15%. The difference, 9%, is the deficit. Barring the federal government from ever raising the debt ceiling would in essence force it to balance its budget immediately, as states, which are constitutionally barred from running deficits, must do. And here’s the thing: there are some in the Republican party, like Michele Bachmann, who would welcome that. This means it can’t be ruled out.

To balance the budget would mean cutting spending by more than a third, immediately, that is by the economic equivalent of 9% of GDP. What would be the consequences (assuming it lasted more than a few days)? By way of comparison, GDP fell by 4.1% over the course of the 2007-2009 recession, the worst of the post-war period. If prolonged, the result would almost certainly be a severe recession and a further fall in inflation. This would be great for bonds, but it would be a calamity for the economy and workers. That’s why the fact that bonds aren’t worried should worry the rest of us.

7--Ezra Klein Gets It half Right on the Dollar, Dean Baker, CEPR

Excerpt: Ezra Klein makes the case that the United States needs a weaker dollar in order to increase net exports and move towards more balanced trade. (Former Senator Ernest Hollings referred to the weaker dollar as a "competitive" dollar.) However it wrongly thinks the need is temporary and that China' currency policy is the sole problem....

Rubin instead insisted that the United States wanted a high dollar. He put muscle behind this view in 1997 East Asian financial crisis. He used the Treasury Department's control over the IMF to force the crisis countries to repay their debts in full, instead of allowing for defaults and write-downs. The repayment was financed by a massive boost in exports from the region. This was made possible by sharply lower values of their currencies against the dollar. In other words, the value of the dollar rose.

The harsh conditions imposed by the IMF in the East Asian crisis led countries throughout the developing world to begin to accumulate reserves on a massive basis in order to avoid ever being forced to deal with the IMF. This meant deliberately depressing the value of their currency against the dollar.

The huge U.S. trade deficit in the late 90s and the last decade was a major source of the imbalances of these years. A trade deficit logically implies (i.e. there is no damn way around it) either a large budget deficit or negative private savings, or some combination.

In the late 90s, the country had a budget surplus, but negative private savings. This was the result of the stock bubble. The wealth created by that bubble led to a consumption boom which pushed savings rates to levels that were at the time record lows.

After the stock bubble collapsed, the budget deficit returned. While the deficit fell back to more normal levels in 2006 and 2007, this was associated with private savings again becoming highly negative as the household saving rate fell to near zero in the years 2004-2007. The culprit in this case was the wealth created by the housing bubble.

Klein misses this story. The over-valued dollar is not a side-bar, nor is China a lonely culprit in this story. The over-valued dollar is central to any understanding of the U.S. economy over the last 15 years.

8--Do Do That Voodoo, Paul Krugman, New York Times

Excerpt: So Paul Ryan gave his big speech defending his plan — and demonstrated, in case you were wondering, that there’s no there there (and there never was).

Remember how everyone declared that Ryan was a serious person, truly willing to face up to our deficit problem? Well, now he’s out there denouncing the way “the budget debate has degenerated into a game of green-eyeshade arithmetic” — in other words, enough with all these numbers. And his answer to the deficit now is that we have to grow our way out.

There’s a name for that: voodoo economics.

And in fact almost his whole speech was standard supply-side boilerplate. Low taxes are the secret to growth, nobody ever solved a deficit problem by raising taxes (Clinton, anyone?). He even denounced austerity. The only original things he had to say, if you can call them that, involved health care costs and monetary policy.

On health care costs, he declared that “Our plan is to give seniors the power to deny business to inefficient providers.” Remember, what the plan actually does is hand out vouchers whose value will fall well short of the cost of coverage. So how much power do those Americans who can’t afford decent health insurance have right now in their dealings with providers? If you think people who don’t get coverage through their employers have the upper hand, you believe that the Ryan plan is empowering.

9--An Ominous-Looking Market Top, Comstock Partners

Excerpt: Underlying all of the specific problems is the massive debt, both government and household, built up over the last few decades, but particularly the most recent one. Household debt has averaged about 55% of GDP over the last 60 years, but recently peaked at 98%, and is now still at 91%. As a percent of disposable personal income, household debt has averaged 75% with a recent top of 130% and is currently at 117%. Similarly, government debt has averaged 66% of GDP and is now at a peak of 108%, as government debt has recently risen more than private debt has dropped. The need to cut back on debt will inhibit economic growth for many years to come.

... QE2 is ending on June 30th. The program will, by that time, have pumped $600 billion into the economy, meeting Chairmen Bernanke's stated goal of jump-starting the stock market. The end of the program is a defacto tightening of monetary policy. While the Fed's balance sheet won't be reduced anytime soon, the key point is that it won't be increasing by an average of $3.8 billion a day as it has since mid-November.

... Fiscal policy is about to tighten as well. This is obviously what the ongoing discussions in Washington are all about. The fact is, that one way or another, both sides are more or less in agreement that the Federal deficit has to be reduced. So, whatever the merits, both monetary and fiscal policy will be less easy in the period ahead. That is a headwind against economic growth and the stock market....

The economic recovery appears unsustainable without additional government stimulus, which is politically off the table. Household savings rates have to move higher in order to deleverage debt at a time when only reduced savings rates can induce stronger consumer spending. Home foreclosures in the pipeline are enormous. This will add to already bloated inventories and sink home prices by another 15% to 20%. Almost a quarter of all homes with mortgages are underwater, and this number will rise more as prices drop.

All in all, both fundamental and technical factors point to a coming major decline in stock prices at a time when the majority is still bullish and---contrary to conventional wisdom--- market valuations are historically high.

10--The virtual casino, Pragmatic Capitalsim

Excerpt: Saying that we at M&T feel that we have put the worst effects of the financial crisis behind us should not be understood as meaning that the financial services industry broadly defined has returned to a safe and sustainable condition—one in which it plays its traditional central role of providing the oxygen of credit to American commerce...... even as the financial crisis slowly recedes, our overall financial services industry continues to be characterized by attributes which contributed to that crisis—characteristics which distinguish it from traditional banking, which impose burdens on those banks (such as M&T) that pursue a traditional approach and which pose significant risks to the long-term health of the American economy.

Specifically, I am concerned about a powerful combination of factors: increased concentration in the financial services sector, where profits are driven by how well one trades rather than the prudent extension of credit that furthers commerce... a government regulatory regime which both enables what I have described as this “virtual casino” to continue, notwithstanding its role in precipitating the financial crisis—and which, by not recognizing the difference between Main Street and Wall Street banks, financially burdens the “real economy.”

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