Monday, June 20, 2011

Today's links

1--US Foreclosures: Kicking the Can Down the Road…, Big Picture

Excerpt: Today’s WTF data point is how long it will take to work through the backlog of foreclosures at the current pace:

“In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

2--Strength of the Recovery: Robert Shiller Is Alarmed, Grasping reality with both hands

Excerpt: Bradley Davis reports:

Shiller Sees ‘Substantial’ Probability of Recession: “Forecasting models would say no” on the question of whether the U.S. will face a double-dip, Shiller said. “But I’m seeing signs that encourage me to worry about that.” Shiller, who is one of the two men behind the S&P Case-Shiller home-price index, said home prices could still decline despite being lower than where they were more than five years ago. The summer season could see a pickup in prices, he said, but “I still worry about the general downtrend.”

“There might be a turnaround if psychology changes,” he said. But “I fear that it may just continue down.

“It just doesn’t look good,” he said in an interview with The Wall Street Journal...

I am not sure why he is alarmed in spite of forecasting models' non-pessimism. So let me tell you why I am alarmed.

One way to think of large-scale forecasting models is that they are essentially vector autoregressions surrounded by a shell of behavioral equations and accounting relationships. The purpose of the equations and relationships is to trigger alarm bells in your mind when you look at the vector autoregression forecast--and then decide whether or not you want to incorporate an add factor. This methodology does, I think, work pretty well for forecasting: it works much better than a poke in the eye with a sharp stick, for example.

But the underlying VAR correlations still largely come from an age of inflation-fighting recessions and rapid bounce-back. Thus that is an input to what the markets are forecasting. And is that input still valid for today?

That is why I am alarmed.

3--MR. KEYNES AND THE MODERNS, Paul Krugman, Prepared for the Cambridge conference commemorating the 75th anniversary of the publication of The General Theory of Employment, Interest, and Money

Excerpt: ...in 1998 I was, I think, among the first prominent economists to give voice to the notion that Japan’s experience – deflation that stubbornly refused to go away, despite what looked like very loose monetary policy – was a warning signal. The kind of economic trap Keynes wrote about in 1936 was not, it turned out, a myth or a historical curiosity, it was something that could and did happen in the modern world. And now, of course, we have all turned Japanese; if we are not literally experiencing deflation, we are nonetheless facing the same apparent impotence of monetary policy that Japan was already facing in 1998. And the thought that the United States, the UK, and the eurozone may be facing lost decades due to persistently inadequate demand now seems all too real....

Which brings me back to the argument that government borrowing under current conditions will drive up interest rates and impede recovery. What anyone who understood Keynes should realize is that as long as output is depressed, there is no reason increased government borrowing need drive rates up; it’s just making use of some of those excess potential savings – and it therefore helps the economy recover. To be sure, sufficiently large government borrowing could use up all the excess savings, and push rates up – but to do that the government borrowing would have to be large enough to restore full employment!...

But what of those who cling to the view that government borrowing must drive up rates, never mind all this hocus-pocus? Well, we’ve has as close to a controlled experiment as you ever get in macroeconomics. Figure 7 shows U.S. federal debt held by the public, which has risen around $4 trillion since the economy entered liquidity-trap conditions. And Figure 8 shows 10-year interest rates, which have actually declined. (Long rates aren’t zero because the market expects the Fed funds rate to rise at some point, although that date keeps being pushed further into the future.)....

So those who were absolutely certain that large borrowing would push up interest rates even in the face of a depressed economy fell into the very fallacy Keynes went to great lengths to refute. And once again, I’ve made that point using very old-fashioned analysis – the kind of analysis many economist no longer learn. New Keynesian models, properly understood, could with greater difficulty get you to the same result. But how many people properly understand these models?...

4--The collateral crunch, FT Alphaville

Excerpt: It gets less attention than its credit-denominated relative, but the 2008 financial crisis actually sprung from a massive ‘collateral crunch’ within the shadow banking system.

Read Manmohan Singh on rehypothecation, or try to get your hands on Matt King’s seminal ‘Are the brokers broken?’ note. The Citigroup credit analyst warned just two weeks before Lehman’s collapse that “brokers’ and banks’ gross usage of repo, revealed in footnotes of 10-Qs, far exceeds that which shows up on balance sheet. Although in principle much of this is for clients (mostly hedge funds) it still makes their business as a whole much more dependent on the continued availability of repo funding than might otherwise be appreciated.”

No kidding. In 2008, the use of so-called toxic assets to secure repo funding very suddenly became unacceptable to other banks, causing financial meltdown....

Now we have that emphasis on the safest of collateral assets — government bonds, and especially US Treasuries. Some $4,000bn of these are currently used in the repo market, according to JPMorgan. Presumably, what you wouldn’t want is any further reduction in the amount of decent, liquid collateral available to a still nervous-financial system.

On that note — here’s a nice tidbit from Monday’s Financial Times:

Some of Wall Street’s biggest banks are preparing to cut their use of US Treasuries in August as a precaution against any turbulence that could follow if warring Republicans and Democrats fail to increase soon the US debt ceiling, a senior bank chief said.

One strategy, which bank executives only agreed to discuss without attribution due to the political sensitivities related to discussing Treasury debt, is to have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasuries....

Now go back to that UST point, specifically.

JP Morgan managing director Matthew Zames warned back in April that:

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 leveraging and a sharp drop in lending.

Shades of 2008, that.

5--World economy slides deeper into slump, WSWS

Excerpt: Two-and-a-half years after the financial crash of September 2008 and two years after the official end of the US recession, it is clear that none of the underlying problems that plunged the world economy into the deepest slump since the 1930s have been resolved. On the contrary, the anemic economic recovery is faltering, growth rates are slowing in most of the world, and the financial system is once again teetering on the edge of the abyss.

The renewed rise in unemployment in the US, accompanied by further declines in home prices and sales and a retrenchment in manufacturing, is the sharpest expression of a global trend. The World Bank’s latest Global Economic Prospects report, issued June 7, forecasts slower economic growth for every region of the world except sub-Saharan Africa for this year and the next. The bank estimates that the world economy will expand by a mere 3.2 percent this year, dramatically lower than the modest 3.8 percent rate for 2010.

The US economy is expected to grow a dismal 2.6 percent this year and remain below 3 percent at least through 2013. It takes a sustained growth rate of at least 3 percent to make a dent in the near-double-digit official US unemployment rate.

6--IMF Sounds Warning About Global Economy, Truthdig

Excerpt: Three years into the Great Recession, the outlook is wobbly in the eurozone, according to the International Monetary Fund. France and Germany are doing well enough to offset some of the economic problems plaguing their neighbors, but in a networked world, nations’ fates are intertwined—so what happens in the U.S. and Japan also affects European countries, and vice versa. —KA

BBC: "The International Monetary Fund has warned that the risks facing the world economy have increased.

The fund said it was concerned about the continuing Greek debt crisis, the arguments over US deficit plans and the need to curb growth in Asia.

But it said it expected global growth to remain on track, though it lowered its forecasts for the US and UK.

The IMF predicted that the world economy would grow at a rate of 4.3% in 2011 and 4.5% in 2012.

The fund called for greater political leadership in dealing with the eurozone debt crisis and the budget crisis in the US.

"You cannot afford to have a world economy where these important decisions are postponed, because you're really playing with fire," said Jose Vinals, director of the IMF monetary and capital markets department.

The IMF's latest forecasts came as it updated its assessments of financial stability, country finances and the global economy. Its last review was in April."

7--Greek Protesters Are Better Economists Than the European Authorities, Mark Weisbrot

Excerpt: Imagine that in the worst year of our recent recession, the United States government decided to reduce its federal budget deficit by more than $800 billion dollars – cutting spending and raising taxes to meet this goal. Imagine that, as a result of these measures, the economy worsened and unemployment soared to more than 16 percent, and then the president pledged another $400 billion in spending cuts and tax increases this year. What do you think would be the public reaction?

It would probably be similar to what we are seeing in Greece today, including mass demonstrations and riots, because that is what the Greek government has done. The above numbers are simply adjusted for the relative size of the two economies. Of course the U.S. government would never dare to do what the Greek government has done – recall that the budget battle in April that had House Republicans threatening to shut down the government resulted in spending cuts of just $38 billion.

What makes the Greek public even angrier is that their collective punishment is being meted out by foreign powers – the European Commission, European Central Bank (ECB), and the International Monetary Fund (IMF). This highlights perhaps the biggest problem of unaccountable, right-wing, supra-national institutions. Greece would not be going through this if it were not a member of a currency union. If it had leaders that were stupid enough to massively cut spending and raise taxes during a recession, those government officials would be replaced. And then a new government would do what the vast majority of governments in the world did during the world recession of 2009 – the opposite, i.e. deploy an economic stimulus, or what economists call counter-cyclical policies.

8--Full Meltdown: Fukushima Called the 'Biggest Industrial Catastrophe in the History of Mankind', Dahr Jamail, Alternet

Excerpt: "Fukushima is the biggest industrial catastrophe in the history of mankind," Arnold Gundersen, a former nuclear industry senior vice president, told Al Jazeera.

Japan's 9.0 earthquake on March 11 caused a massive tsunami that crippled the cooling systems at the Tokyo Electric Power Company's (TEPCO) nuclear plant in Fukushima, Japan. It also led to hydrogen explosions and reactor meltdowns that forced evacuations of those living within a 20km radius of the plant.

Gundersen, a licensed reactor operator with 39 years of nuclear power engineering experience, managing and coordinating projects at 70 nuclear power plants around the US, says the Fukushima nuclear plant likely has more exposed reactor cores than commonly believed.

"Fukushima has three nuclear reactors exposed and four fuel cores exposed," he said, "You probably have the equivalent of 20 nuclear reactor cores because of the fuel cores, and they are all in desperate need of being cooled, and there is no means to cool them effectively."...

"We have 20 nuclear cores exposed, the fuel pools have several cores each, that is 20 times the potential to be released than Chernobyl," said Gundersen. "The data I'm seeing shows that we are finding hot spots further away than we had from Chernobyl, and the amount of radiation in many of them was the amount that caused areas to be declared no-man's-land for Chernobyl. We are seeing square kilometres being found 60 to 70 kilometres away from the reactor. You can't clean all this up. We still have radioactive wild boar in Germany, 30 years after Chernobyl."

9--Baum: Soft Patch 2, Not QE2, Is Main Influence on Rates, Bloomberg

Excerpt: When it began, some thought it might not run its course. Now that it’s ending, there are those who think another installment is needed. The “it,” of course, is the Federal Reserve’s second round of large-scale asset purchases, better known as quantitative easing.

The lender of last resort will single-handedly have accounted for more than 80 percent of the Treasury’s coupon issuance from November through the end of June: $773 billion of an expected $946 billion of new cash raised through note and bond sales, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

What happens when that big buyer says adios? Prices should fall, or in this case, yields should rise, right? At least that’s what happens in a free market....

Fed’s Long Shadow

The farther out the curve you go, the smaller the Fed’s influence. But it never totally disappears. That’s because what the Fed is expected to do with the funds rate has a lot to do with the determination of the yield on notes and bonds. As long as investors expect the benchmark interest rate to stay at zero for “an extended period,” as promised by the Fed, and as long as they see no risk of higher inflation from holding it there, long-term interest rates are unlikely to move higher, QE2 or no QE2.

Remember, Treasury yields rose from the inception of the Fed’s $600 billion asset purchase program in November until early February amid signs that the economy was improving. Some Fed district bank presidents, who tend to be inflation hawks, questioned the necessity and advisability of expanding the already bloated balance sheet. Soaring food and energy prices pushed the consumer price index higher. Inflation was going to be the next big worry, which led investors to anticipate a rate increase later this year, reflected in fed funds futures contracts.

Fed chief Ben S. Bernanke claimed that absent the Fed’s purchases, the backup in yields from about 2.4 percent to 3.75 percent on the 10-year note would have been greater.

10--Banks Holding Record $1.45 Trillion to Buy Treasuries as Savings Top Loans, Bloomberg

Excerpt: Savings Increase

In the decade before credit markets seized up in 2008, U.S. deposits exceeded loans by an average of about $100 billion, Fed data show. The worst recession since the 1930s led consumers to trim household debt to $13.3 trillion from the peak of $13.9 trillion in 2008, and increase savings to 4.9 percent of incomes from 1.7 percent in 2007, Fed and government data show.

Banks pared lending amid more than $2 trillion in losses and writedowns, according to data compiled by Bloomberg. Instead of making loans, financial institutions have put more cash into Treasuries and government-related debt, boosting holdings to $1.68 trillion from $1.08 trillion in early 2008, Fed data show.

Yields on 10-year Treasuries -- the benchmark for everything from corporate bonds to mortgage rates -- have fallen to less than 3 percent from the average of 6.79 percent over the past 30 years even though the amount of marketable U.S. government debt outstanding has risen to $9.26 trillion from $4.34 trillion in 2007, Treasury Department data show....

“U.S. home prices won’t rebound unless household debt” is reduced, Kato said. “As long as the situation remains the same, bank lending won’t grow. U.S. banks will tighten criteria for borrowers.”

House prices in 20 U.S. cities are 14 percent below the average of the past decade, according to the S&P/Case-Shiller index of property values. The gauge dropped in March to the lowest level since 2003. Japan’s land prices are still at less than half the level of two decades ago.

Japan has endured two decades of economic stagnation with nominal gross domestic product about the same as it was in 1991. Government debt is projected to reach 219 percent of GDP next year, the Organization for Economic Cooperation and Development estimates. That compares with about 59 percent in the U.S., government data show.
BOJ Nullified

The economy has struggled to recover even though the BOJ buys government securities monthly to lower borrowing costs and stimulate the economy. The efforts have been nullified as banks use BOJ funds to buy bonds rather than lend.

11--Europe Fails to Agree on Greek Aid Payout, Bloomberg

Excerpt: European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition.

On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.

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