1--Number of the Week: Average Household Still Needs to Trim $26,172 in Debt, Wall Street Journal
Excerpt: $26,172: Amount of debt the average U.S. household would need to cut to bring balance sheets back to 1990s levels.
Americans have made progress in paring back their debt, partly by cutting their credit-card use and mostly by walking away from mortgages and other loans. But they still have a long way to go.
In the first quarter, households owed $13.3 trillion, an amount equal to 18.4% of total household assets, including stock portfolios, savings and homes, according to the Federal Reserve‘s flow of funds report. That was down from 21.7% two years earlier but still well above the 14.4% level that prevailed in the 1990s. That suggests household balance sheets don’t have nearly enough cushioning against financial shocks, like job loss and illness, as they should.
To get back to 14.4%, households would have to shed a combined $2.9 trillion of debt. In other words, either people cut their credit cards up like crazy, or they keep putting their keys in the mailbox and walking away.
Another way: Increase household assets by $20.4 trillion — a 30% gain that would all but wipe out real estate losses and take the stock market to a new all-time high. History suggests that day will eventually come, but given the current state of the financial and housing markets, it seems unlikely to come quickly.
2---How to avoid stumbling into our own lost decade, Financial Times via zero hedge
Excerpt: A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire. When demand is constraining an economy, there is little to be gained from increasing potential supply. In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained....
The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of payroll from 2 to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.
At the same time we should recognise that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10 year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.
3--When Will Obama Sound the Alarm About Jobs?, New Deal 2.0
Excerpt: Economist Andrew Sum and his group at Northeastern have done a close-up analysis of job and wage data. There has never been an economic recovery since World War II nearly as bad as this one.
Yes, there has been GDP growth, but it has almost all gone to profits, not pay. By most measures, there are still fewer jobs today than there were at the bottom of the recession. Just as disturbing, there has been no increase in wages. There are many measures of wages and salaries, but Sum and his group found that average hourly earnings of all private sector wage and salary workers were unchanged over the seven-quarter recovery. The typical or median full-time worker lost ground over this period. Hours worked grew only slightly.
And as we all know, unemployment remains very high at 9.1 percent. Underemployment — those unable to find full-time work when they want it — has about doubled, growing from 4 million to 8 million American workers....
For the first time in more than sixty years, aggregate wages and salaries adjusted for inflation did not rise after seven quarters of recovery. What did rise was corporate profits — and sharply. Here’s the stunner, as Sum calculates: Pre-tax corporate profits in 2010 dollars rose by $464 billion and real wage and salaries in 2010 dollars fell by $22 billion.
4--Balance sheet recession continues, Pragmatic Capitalism
Excerpt: This may very well be the most important data point that we are currently receiving every quarter. Yesterday’s Z1 released by the Federal Reserve showed a continuing decline in household credit. The latest reading showed a -2% decline in total household debt growth versus last year. The Fed summarized the data:
“Household debt declined at an annual rate of 2 percent in the first quarter; it has contracted in each quarter since the first quarter of 2008. Home mortgage debt fell at an annual rate of 3½ percent in the first quarter, ¾ percentage point more than the decline posted last year. Consumer credit rose 2½ percent at an annual rate in the first quarter, the second consecutive quarterly increase.”
Being a consumer driven economy this decline in debt remains the most important component of our economic plight. As I’ve previously explained, the collapse in consumer debt has been the primary cause of weak economic growth. Consumers took on excessive debt levels during the housing boom and when housing prices collapsed their balance sheets were turned upside down. Consumers were left with excessive debt, collapsing aggregate incomes and a subsequent balance sheet recession. The overall result is that consumers are still working to pay down this debt and remain in saving mode as opposed to debt accumulation and spending mode.
This is a highly unusual event that has only been seen on rare occasion in developed economies over the last 100 years. As this process occurs there is only one entity that can help to stabilize the economy – the US Federal government. As we know from the sectoral balances, when the private sector is in saving mode and not spending mode (due to debt reduction) and the current account remains in deficit, there is only one sector that can offset this weakness in an attempt to create economic growth. That is the public sector. Thus far, we’ve managed to fend off the austerity chatter, however, the risks appear to be on the rise as government officials become convinced that the United States is bankrupt (something that is fundamentally impossible).
5--Will Greece make it through its economic woe?, Aljazeera
Excerpt: Greece has bought some time with a new package of financial support, but the country is not yet out of the woods. It remains to be seen whether the souped-up austerity policies that Prime Minister George Papandreou's government has promised will prove to be politically acceptable and sustainable......
Will Greece be an Argentina or a Latvia? The economics is not encouraging. Unless the Greek economy recovers, taking on new debt is a temporary palliative that will require even more austerity down the line. And, as long as domestic demand remains depressed, structural reforms - privatisation and liberalisation of labour markets and professional services - are unlikely to deliver the needed growth.
As the experiences of interwar Britain - and, more recently, of Argentina and Latvia - show, it is the politics that ultimately determines the outcome. For the Greek program to have any chance, the Papandreou government must mount a monumental effort to convince its domestic constituents that economic pain is the price they are paying for a brighter future - and not just a means to satisfy external creditors.
6--Top 5 charts on the Bush Tax Cuts, Off The Charts
Excerpt: On the tenth anniversary of the 2001 tax-cut law, we’ve assembled five charts that show how the tax cuts have affected the deficit, the economy, and people’s incomes — and why letting them expire on schedule should be front and center during deficit-reduction negotiations. (you gotta see these charts)
7--Maiden Lane Sales Trigger Stampede to Dump Risk: Credit Markets, Bloomberg
Excerpt: Federal Reserve auctions of mortgage securities that the central bank assumed in the rescue of American International Group Inc. are fueling a selloff in credit markets as Wall Street rushes to hedge against losses on stockpiled debt.
Declines in credit-default swaps indexes used to protect against losses on subprime housing debt and commercial mortgages accelerated this month, reaching almost 20 percent in the past five weeks as the cost of the insurance climbs, according to Markit Group Ltd. The plunge this week started infecting everything from junk bonds to the debt of financial companies....
“The manner in which the sale of the Maiden Lane II portfolio has been conducted put the market in a vulnerable state,” said Bryan Whalen, the co-head of mortgage-backed bonds at Los Angeles-based TCW Group Inc., which oversees $120 billion in assets. Falling mortgage swap indexes and bond prices are “reflective of levered money, dealers especially, taking risk off the table, which is feeding on itself,” he said.
The drop in the mortgage-bond markets began spilling over to corporate credit, which already had started to weaken from the deteriorating economic picture and disagreement among European leaders over who should bear the burden of rescuing deficit-plagued governments including Greece.
8--Squatter Nation: 5 years with no mortgage payment, CNN Money
Excerpt: Some 4.2 million mortgage borrowers are either seriously delinquent or have had their cases referred to lawyers to pursue foreclosure auctions, according to LPS Applied Analytics. Of those, two-thirds have made no payments at all for at least a year, and nearly one-third have gone more than two years.
These cases can go on and on. Nationwide, it takes an average of 565 days to foreclose on borrowers in default from their first missed payments to the final auction. In New York, the average is 800 days and in Florida, where the "robo-signing" issue is particularly combative, it's 807.
If they want to fight evictions hard, borrowers can remain in their homes even longer while their cases are being worked through.
9--How to Kill a Dollar, Barry Eichengreen, Project Syndicate
Excerpt: Some critics object that a collapse of US Treasuries and a dollar crash are not the same. The dollar, they observe, is the funding currency for banks around the world. When banks borrow on the wholesale money market to finance their investments, they borrow in dollars. Thus, when volatility spikes and liquidity dries up, those same banks scramble for dollars. Indeed, even when problems originate in the US, the dollar strengthens. We saw this in the summer of 2007, when the subprime crisis erupted, and again in 2008, following the collapse of Lehman Brothers.
In the short run, then, a US Treasury market crisis might lead to some knee-jerk appreciation of the dollar. But with evidence of deep problems in US financial markets, global banks would start looking for other ways to finance themselves. The period of dollar strength would be brief.
The result would be the Fed’s worst nightmare. With Treasury yields spiking and economic activity collapsing, the Fed would want to cut interest rates and flood the markets with liquidity. But a sharply lower dollar would, at the same time, mean sharply higher inflation, requiring it to tighten policy. Caught on the horns of this dilemma, the Fed could do nothing to solve America’s problems.
Bernanke regularly warns of the dire consequences of not facing the country’s fiscal problems head-on. Congress, indeed everyone in America, should take him seriously.
10--US border agents help Mexico drug trade, Press TV
Excerpt: US border guards have reportedly received cash and sexual favors from Mexican drug cartels in return for turning a blind eye to the smuggling of drugs into the US.
According to acting inspector general of the Department of Homeland Security Charles Edwards, American border agents protect or escort traffickers, and allow contraband as well as unauthorized immigrants through inspection lanes, CNN reported on Friday.
The agents even leak sensitive information to drug trafficking groups.
Edwards cited the brutal Zetas drug gang as one of the leaders "involved increasingly in systematic corruption."
At least 127 US Customs and Border Protection (CBP) employees have been arrested or indicted for acts of corruption since October 2004, according to the Department of Homeland Security Commissioner Alan Bersin.
Bersin pointed out that the rapid hiring spree pursued by CBP has come at the cost of hiring less qualified agents.
"The accelerated hiring pace under which we operated between 2006 and 2008 -- and, frankly, mistakes from which we are learning -- exposed critical organizational and individual vulnerabilities within CBP," he said.