Friday, May 13, 2011

Weekend Links

1--Stiglitz Warns Austerity Kills Jobs, Brings Decline, Bloomberg

Excerpt: Austerity measures “don’t work” and prevent countries from creating jobs needed to generate economic growth, said Nobel Prize winning economist Joseph Stiglitz.

“Austerity is an experiment that has been tried before with the same results,” Stiglitz said today in a speech in Copenhagen. Cutting budgets in low-growth cycles leads to higher unemployment and hampers recovery, he said.

Greece, Ireland and Portugal are under pressure to push through austerity measures that have sparked anti-government protests and general strikes as the three euro members struggle to comply with the terms of their bailout programs. The budget cuts have failed to persuade most investors the countries will avoid a default, a Bloomberg Global Poll published today showed.

Europe’s leaders are gripped by “deficit fetishism,” Stiglitz said. Austerity “doesn’t work, it does not led to more efficient, faster growing economies,” said Stiglitz, a professor at Columbia University in New York who won the Nobel Prize for economics in 2001.

2--Retail Sales increased 0.5% in April, Calculated risk

Excerpt: On a monthly basis, retail sales increased 0.5% from March to April (seasonally adjusted, after revisions), and sales were up 7.6% from April 2010.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $389.4 billion, an increase of 0.5 percent (±0.5%) from the previous month, and 7.6 percent (±0.7%) above April 2010.

This was below expectations for a 0.6% increase. Retail sales ex-autos were up 0.6%; at expectations of a 0.6% increase.

Retail sales ex-gasoline were only up 0.2% in April - and this shows the impact of higher gasoline prices.

3--Geithner Agrees to Increase U.S. Indebtedness to China In Exchange for Higher Profits for the Financial Industry, Dean Baker, CEPR

Excerpt: This is what the Washington Post reported in an article on a set of agreements negotiated by Treasury Secretary Timothy Geithner and the Chinese government, although it did not explain this point to readers. The article told readers that:

"The agreement included action on some long-standing issues — including initial moves by China toward opening its financial sector by allowing U.S. and other foreign firms to sell auto insurance, sell mutual funds and other investments, and underwrite corporate bonds."....

When Secretary Geithner or other U.S. officials negotiate with the Chinese government they place priorities on their agenda items. Obviously Mr. Geithner placed a greater priority on gaining increased access for the financial industry (i.e. the big Wall Street banks) than he did on lowering the value of the dollar and reducing foreign borrowing.

4--Insights on Stimulus, Thanks to the Mafia, New York Times

Excerpt: It is hard to prove that a burst of public spending can stimulate economic activity. Governments generally try the experiment in response to a downturn, and who is to say how quickly an economy would have recovered?

Believers in stimulus have pressed their case in recent years by examining changes in public spending that are unrelated to broader economic cycles.

Say, for example, in Italy, where the national government freezes spending on local projects when provincial officials are found to have Mafia ties.

That’s right, search engines: This blog post is about the Mafia.

A new paper by three Italian professors finds that freezes in government spending in response to public corruption do have a significant impact. For every $1 the government doesn’t spend, economic activity shrinks by as much as $2.

The paper was brought to my attention by Greg Ip of The Economist, who says it provides evidence that government spending can stimulate growth. Of course, it only demonstrates directly that cutting government spending can reduce economic activity. But happily, that point is more relevant to this political moment, as Democrats and Republicans decide just how much to cut federal spending.

5--Notes on the Commodity Plunge, Paul Krugman, New York Times

Excerpt: Commodity prices are down again today, undoing the mini-rally earlier in the week. Overall, we have still retraced only part of the big rise since last summer. Still, many people seem shocked to discover that commodity prices can go down as well as up.

A few thoughts:

1. Volatile prices are volatile. This is why you don’t want monetary policy to respond to commodity prices, or indeed to any price index strongly affected by commodity prices. What if the Fed had raised rates out of inflation fear because commodity prices were rising, even though core prices and wages weren’t; would it now go sharply into reverse?

2. I haven’t seen this pointed out, but inflation expectations, at least as measured by spreads against inflation-protected bonds, have dropped sharply over the past few days. Was this because some investors really believed that rising commodity prices were a harbinger of higher underlying inflation? Or was it because expectations of growth were marked down, leading both to commodity decline and to lower inflation expectations? I don’t know.

6--Wholesale Prices in U.S. Rise, Led by Food, Energy, Bloomberg

Excerpt: Wholesale costs in the U.S. rose more than forecast in April, led by higher prices for food and fuel.

The 0.8 percent increase in the producer-price index compares with the 0.6 percent median estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The core measure, which excludes volatile food and energy costs, climbed 0.3 percent, more than projected.

Rising costs may lead businesses such as Whole Foods Market Inc. (WFMI) to increase prices, boosting the cost of living for American consumers. At the same time, Federal Reserve Chairman Ben S. Bernanke said he expects commodity prices to moderate.

“Inflation really shouldn’t be much of a concern beyond food and energy prices, and that’s going to be more of a near- term phenomenon,” said Sean Incremona, a senior economist at 4Cast Inc. in New York who accurately forecast the gains. “The core is very gradually moving higher, but it doesn’t look to be running away anytime soon.”

7--A note on trade, Tim Duy, Economist's View

Excerpt: Policy in China needs to tighten to stave off actual inflation. Optimally, Chinese policy steps, such as allowing the renminbi to rise at a faster rate, would shift demand internally toward consumption and away from the investment and export industries, effectively allowing US production to satisfy Chinese demand. This week's US-China talks give room for optimism on this issue. This is a reasonable policy path for other emerging markets as well and, in my opinion, the only win-win path. Still, it is not guaranteed that such a transition can occur smoothly, especially if inflation is already deeply embedded in the Chinese economy. A messy transition could slow global growth and put upward pressure on the dollar.

It is not clear that Europe, either the UK or Euro region, needs higher rates, but instead are being pulled in the trap of tightening policy in the face of a temporary commodity price shock. And it certainly seems clear that Ireland, Greece, and Portugal will be even more challenged to achieve fiscal and economic stability, guaranteeing a default or that euphemism for default, restructuring. The combination of higher interest rates and financial crisis should also prove to be dollar positive, thereby slowing the path toward rebalancing.

Of course, as Avent also notes, a complete rebalancing in which the overall US trade deficit falls to zero seems like an overwhelming challenge in the face of the US propensity for imported oil. Perhaps a more manageable trade deficit in non-petroleum products is the best we can hope for at this point.

8--Fed Watch: The Fed and Asset Prices, Economist's View

Excerpt: Bernanke was just trying to justify a failed policy, go back to the Chairman’s February 8 speech. First he lays out the expected outcomes from the decision to expand the balance sheet:

Although large-scale purchases of longer-term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways. Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates, which, in turn, reduces the current level of longer-term interest rates and contributes to an easing in broader financial conditions. These changes, by reducing borrowing costs and raising asset prices, bolster household and business spending and thus increase economic activity. By comparison, the Federal Reserve's purchases of longer-term securities have not affected very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates. By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby supporting the economic recovery.

Next, he confirms those outcomes:

A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation ... has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.

Note also that this was not the first time Bernanke cited stock prices as evidence that monetary policy was effective. From April 7, 2010:

Overall, the policy actions implemented over the past two and a half years by the Federal Reserve and other agencies in the United States and abroad have helped stabilize key global financial markets: Short-term funding markets are essentially back to normal, corporate bond issuance has been strong, and stock prices have partially recovered….

9--Consumer Comfort Declines as Gas Prices Climb, Bloomberg

Excerpt: Consumer confidence fell to a six- week low as the costliest gasoline in almost three years worsened Americans’ perceptions of their finances.

The Bloomberg Consumer Comfort Index dropped to minus 46.9 in the period to May 8, the worst reading since March, from the prior week’s minus 46.2. Across regions, sentiment suffered the most in the West, where fuel prices exceed the national average.

Households paid almost $4 a gallon at the pump last week, the most since July 2008. While retailers like Macy’s Inc. (M) have yet to be hurt by waning confidence, a bigger pickup in jobs and lower energy expenses would help ensure consumer spending, which accounts for about 70 percent of the economy, will hold up.

“Consumers will likely need to observe a steady descent in the cost of fuel before sentiment will see a sustainable increase,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. Higher energy bills are a “reminder for beleaguered consumers day to day of what has been a difficult economic recovery.”

10--The destabilizing force of misguided market intervention, Pragmatic Capitalism

Excerpt: In his Financial Instability Hypothesis, Hyman Minsky described how a process of Ponzi finance can result in increased financial instability:

“over a protracted period of good times, capitalist economies tend to move from a financial structuredominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently,units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”

The recent downturn in commodities is interesting for several reasons. None more so than the fact that investors are now beginning to notice that the price increases have been driven in large part by speculation generated by QE2. Regular readers are well aware of this fact, however, much of the investment world has been basing their commodity thesis on booming global economies, myths of money printing, misguided fears of hyperinflation and not the primary driver – financialization.

As the Bank Of Japan recently pointed out, there has been a substantial speculative premium in many commodities. In many ways this is reminiscent of 2008 when the Fed was seen as creating inflation, however, what lurked beneath the surface was disastrous deflation. While this environment isn’t nearly as susceptible to collapse, we are still at risk of a major dislocation due to the Fed’s severely misguided policy of QE2 and the market’s dramatic misinterpretation of it.....

The risk the Fed creates, when they intervene in markets in this manner, is that they generate the risk of a major dislocation in the markets that feeds over into the real economy. When you create an implicit guarantee and speculators take you at your word they are more likely to generate a destabilizing pricing environment. This was recently seen in silver prices where the inflation bandwagon has run full speed off the tracks and now real silver producers are being forced to deal in a market that is entirely unstable and unpredictable.

When the Fed intervened via QE2 they were not really altering the economy in any meaningful way. This asset swap did not change net financial assets. It did not create more money. It did not result in any stimulus. All it really did was bolster asset prices via the psychological routes. In essence, the Fed was trying to create nominal wealth with the hope that this would translate into real wealth. This can all be proven now by looking at lending data, falling GDP, the stagnant money supply, and exploding margin debt at the NYSE. So, the Fed goes into the market and tells everyone to buy risk assets. Don’t fight the Fed, right? And they didn’t. But focusing on nominal wealth creates the risk that the cart will come before the horse, ie, prices will substantially outpace fundamentals and create a destabilizing market environment.

11-- On Housing, There Will Be More Lean Years Ahead, Wall Street Journal

Perhaps with some poetic justice, this is the inverse of the situation in the early 2000s, after the collapse of the tech-stock bubble. Then we had an industrial recession and the deflationary pressure from past euphoric overinvestment. Japanese-style deflation was feared and widely discussed. And an answer was found by the Federal Reserve: A housing boom could balance the effects of the industrial recession.

This was the Greenspan Gamble, which intentionally fostered a boom in housing in the 2000s to counter the drag in the aftermath of the 1990s equity bubble. Then-Fed Chairman Alan Greenspan explained to Congress in 2002 that the negative wealth effect from the losses in the stock market was being offset by the positive wealth effect of the rise in housing prices. So it was, at that point. But the desired housing boom grew into another massive bubble.

We now have the Bernanke Gamble to foster high prices for debt and equity securities, thus a positive wealth effect to offset the negative wealth effect of the huge losses in real estate and real-estate debt. Fed Chairman Ben Bernanke's gamble is being wagered on a long period of zero short-term interest rates and by the remarkable expansion of the Fed's own balance sheet, including the purchase of about $1 trillion in mortgage debt—making the Fed, in a sense, the largest savings and loan in the world....

Will it work? Perhaps. But large unrealized losses still need to be realized and swallowed. We will continue to move sluggishly through an extended period of negotiating how these losses will be distributed. Who will take the hit? Delinquent borrowers, banks, investors (domestic and foreign), the government and government-sponsored entities, and the strapped deposit insurance fund are all involved in these contentious negotiations.

The negotiations also involve the role of Fannie Mae and Freddie Mac, which although hopelessly insolvent and having their losses paid for by taxpayers, are nonetheless funding the majority of new mortgage loans with government-backed debt. Their supporters want to continue having them fund mortgages as big as $729,750 to help prop up high-end housing prices. Opponents like me point out that this prevents the necessary return of private capital to mortgage finance.

12--Investors See Stocks Retreating as Yields Increase in Poll on QE2, Bloomberg

Excerpt: Investors say U.S. stocks and Treasuries will decline and the dollar will strengthen after the Federal Reserve completes a $600 billion stimulus program in June, a Bloomberg poll found.

Fifty-four percent of respondents say the 10-year Treasury yield will climb, while pluralities of 43 percent see the Standard & Poor’s 500 Index falling and the U.S. Dollar Index gaining, according to a quarterly global poll of 1,263 Bloomberg customers who are investors, traders or analysts conducted May 9-10. The proportion of respondents saying the Fed’s bond purchases are reducing unemployment and boosting growth rose to 35 percent from 27 percent in January’s poll.

The results highlight the divergence of views provoked by Fed Chairman Ben S. Bernanke’s record monetary stimulus. While respondents say Bernanke’s crisis-management compares favorably with other central bankers, a majority say U.S. monetary policy is now too loose. About one third say the bond purchases, dubbed QE2 for the second round of so-called quantitative easing, risk runaway inflation, and another quarter say they aren’t helping the economy enough.

“The recent rally in stocks is a direct result of QE2,” said Joseph Russo, 43, managing director and co-head of capital markets at RAIT Securities in New York, who took part in the survey. “As the stimulus money is removed from the system, the result will be lower stocks worldwide and an international flight to quality.”

13--House Financial Services Committee approves bills to reform CFPB, Housingwire

Excerpt: Consumers groups oppose the bills, as they believe the legislation threatens the agency's oversight and aims to weaken the CFPB.
Pamela Banks, senior policy counsel for Consumers Union, said the legislation undermines the CFPB's ability to rein in abusive financial practices such as hidden bank fees, shady loans and other financial ripoffs.

"Congress shouldn't put this new consumer watchdog on a short leash," Banks said with regard to the bills. "American families have already paid a steep price for years of lax federal oversight of abusive financial practices."

14--Bachus bill would install commission, not director at CFPB, Housingwire

Excerpt: But in a hearing Wednesday, Warren said the CFPB will not be the most powerful agency in the U.S.

The Financial Oversight Stability Council, which will be a mix of other regulators, will have the ability to override any rule the CFPB writes. And because the bureau cannot set its own budget and must go to Congress for any additional funds it needs, it will be one of the most accountable agencies in government, Warren said.

15--A CFPB deadlock is forming, Housingwire

Excerpt: Elizabeth Warren, the special adviser to the Treasury Department in charge of building the CFPB, said the bills were merely attempts by Republicans to water down the agency. Republicans maintain the CFPB has too much power, according to guidelines, and necessary checks and balances need to be put in place.

Analysts at the Washington think tank MFGlobal said there is little chance of any bill to pass the Senate before the 2012 election.

"The one wild card is Thursday’s threat by Senate Republicans to block any CFPB director unless the banking regulators get the power to void CFPB rules," MFGlobal said.

16--Seniors, Guns and Money, Paul Krugman, New York Times

Excerpt: ....the truth is that older Americans really should fear Republican budget ideas... Given the realities of the federal budget, a party insisting that tax increases of any kind are off the table — as John Boehner, the speaker of the House, says they are — is, necessarily, a party demanding savage cuts in programs that serve older Americans. ...

The great bulk of federal spending that isn’t either defense-related or interest on the debt goes to Social Security, Medicare and Medicaid. The first two programs specifically serve seniors. And while Medicaid is often thought of as a poverty program, these days it’s largely about providing nursing care...

So when people like Mr. Boehner reject out of hand any increase in taxes, they are, in effect, declaring that they won’t preserve programs benefiting older Americans in anything like their current form. It’s just a matter of arithmetic.

Which brings me back to those Republican freshmen. Last year, older voters, who split their vote almost evenly between the parties in 2008, swung overwhelmingly to the G.O.P., as Republicans posed successfully as defenders of Medicare. Now Democrats are pointing out that the G.O.P., far from defending Medicare, is actually trying to dismantle the program. So you can see why those Republican freshmen are nervous.

But the Democrats aren’t engaging in scare tactics, they’re simply telling the truth.

17--The myth that banks are solvent, Marshall Auerback, Credit Writedowns

Excerpt: The whole boom of the last 25 years was predicated on financial deregulation, massive fraud, and a huge build up of private debt as a consequence of inadequate fiscal policy to generate full employment and rising incomes. Growth was based on household borrowing and the continuation of negative saving trends (that is, household deficit spending). A good place to start recovery efforts, therefore, would be to change this method of economic growth by promoting employment, rather than capitulating to the siren songs of the bankers whose recklessness got us into this mess.

In a much saner world, we would be in the midst of a government-led investment push, much like the Space Race or the Manhattan Project, to drive new energy technologies forward by scaling up production and innovation, both apt to lower unit cost points. There would also be a concerted effort to establish the new infrastructure required. (After all, highways were constructed in part for national defense purposes, and railroads and canals had their share of public subsidization.) But with the ease of capture so visible, no such effort led by the government could be trusted enough to be supported, especially by a citizenry that has become one of fragmented (and anxious) consumers. Deficit austerians in government fail to understand that a budget deficit is essential for stable economic growth if the contribution of net exports (the difference between exports and imports) is not strong enough to sustain domestic demand while the private domestic sector is trying to save.

We need to put an end to these ridiculous policy responses. We not only require substantially increased supervision and regulation of the financial sector, but must also put a stop to the practices that brought on the crisis in the first place. If left alone to deal with the current problems, market mechanisms will push management and owners of insolvent institutions to ramp up losses and engage in yet more fraudulent accounting, leading to an even bigger crash down the road.
The myth the banks are solvent

18--CPI rundown, Bloomberg

Excerpt: The consumer-price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed today in Washington. Excluding volatile food and energy, the so-called core gauge rose 0.2 percent, also as projected.

Prices increased 3.2 percent in the 12 months ended April, the biggest gain since October 2008. The core CPI rose 1.3 percent from April 2010, the most since February 2010.

The price increases caused wages to drop after adjusting for inflation. Real hourly pay fell 0.3 percent on average in April, the fifth decrease in the past six months, a separate report from the Labor Department showed. They were down 1.2 percent over the past 12 months, the biggest 12-month drop since September 2008...

The CPI is the broadest of three monthly price gauges from the Labor Department, because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Energy costs increased 2.2 percent from a month earlier, and have climbed at a 39 percent annual rate so far this year, today’s report showed. Gasoline prices increased 3.3 percent from the prior month.
Food costs rose 0.4 percent in April...

Commodities excluding food and fuel climbed 0.4 percent in April, the biggest advance since October 2009, showing cost increases are broadening.
The core rate was pushed up by increases in new and used automobiles and medical care, which rose 0.4 percent. A 0.4 percent drop in tobacco products, the biggest since April 2007, prevented core prices from climbing even more.

19--Former Head of Galaxy Securities Sentenced to Death for Accepting Bribes, Economic Observer

Excerpt: Xiao Shiqing the former Chairman of Galaxy Securities, one of China's largest and oldest securities firms, was handed a death sentence with a two-year reprieve after the Henan Province Higher People's Court found him guilty of accepting approximately 15.46 million yuan in bribes and making about 100 million yuan from insider trading.

Xiao was reportedly sentenced at the end of April, but media reports only emerged earlier today.

Xiao Shiqing, had also previously served as vice director of a department within the China Securities Regulatory Commission responsible for supervising listed companies.

Caijing reported that Xiao's case is related to that of Wang Yi, the former vice president of the China Development Bank, who was sentenced to death, also with a 2-year reprieve, in April last year on charges of accepting almost 12 million yuan in bribes between Nov 1999 and Feb 2008. Wang Yi had also previously served as vice president of the China Securities Regulatory Commission (CSRC).

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