Tuesday, June 21, 2011

Today's links

1--More Homes Listed and Lingering, Data Show, Wall Street Journal

Excerpt: More homes hit the market in May but asking prices dropped, providing further evidence of a disappointing run for the spring sales season.

Data from Realtor.com show that the number of homes listed for sale increased by 3.5% in May, the largest monthly increase of the year, to around 2.34 million listings. While more sellers typically list their homes for sale in the spring, inventories were down 14.3% from one year ago, when home-buyer tax credits had temporarily boosted home prices....

The S&P/Case-Shiller index showed that home prices fell in March to their lowest level since home prices first began their downward slide nearly five years ago.

2--Housing Crash Imminent, auburnjournal.com

Excerpt: I have been writing about housings downturn for sometime and housing has been trending downward for the last 57 months straight. Even with all the government support, various moratoriums, delays, refinances, loan reworks and a plethora of other gadgetry the trend still remains.

Now I am ready to call a crash. But before I get to that specific information lets look at some recent data.

In a normal RE market distressed sales made up about 2% of total sales the remaining could be broken out into new homes and organic resales. Today we have anything but a normal market. Just released for Sacramento RE in May 2011, 65.6% of all resales (single family homes and condos) were distressed sales. This is down from 66.8% in April but this is a very high percentage of distressed sales for May. A full two thirds of the market IS DISTRESSED sales in the Sacramento region. For the state it is over 45%. Foreclosures are selling for over 30 percent price reductions and in many areas including California foreclosures are a large part of the market.

A high level of distressed sales suggests falling prices. Some have tried to spin it that distressed and conventional are two different worlds, they are not. Home sales are set by the buyer, not the seller. The seller can set any price they want but reality is the DISTRESSED MARKET IS THE MARKET and anyone wanting to sell must compete in that market.

3--How the Fed Could Set Off a New Recession, The Fiscal Times

Excerpt: Until recently, it seemed unlikely that we were headed for a double-dip recession. We were clearly looking at a very slow recovery, especially for employment, but there was little reason to worry about a second recession.

Now widespread weakness in recent economic data makes a double dip much more likely. In May, just 54,000 jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, and growth in manufacturing slowed sharply. Meanwhile, house prices continue to decline to new post-bubble lows, home sales have slowed, claims for unemployment insurance have risen, and consumer sentiment has weakened. Both stimulus spending and QE2 are coming to an end, state and local budgets are still a problem, and corporate bond issuance “fell to its slowest pace of the year.” The fall in investment activity is particularly worrisome because business investment has been growing at near pre-recession rates and has been a key factor in bringing about the moderate output growth we’ve experienced recently. If business investment falls off, it’s hard to see what will replace it.

The recent data is not the only reason I’ve changed my mind about the possibility of a double dip. When the recession started, I was certain we wouldn’t repeat the mistakes of the past. One mistake in particular looms large right now, the deficit reduction and interest rate increases that sent the economy into a tailspin in 1937-38. Many people do not realize that there were two recessions within the Great Depression. The first, which came in 1929, is well known. This recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation – again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates, and the result was a second recession in 1937-38. This mistake prolonged the economy’s troubles considerably, and in part was why this became the “Great” Depression.

4-- Get It Over With, Dani Rodrik, Economist's View

Excerpt: When Argentina defaulted on its debt a decade ago, the country became a pariah in the eyes of foreign bankers and bondholders and was shut off from international financial markets. Yet its economy recovered quickly and experienced rapid growth thanks to a large boost in external competitiveness provided by a vastly depreciated currency. The lesson is that default can be the better option when the alternative is years of continued austerity.

In the case of Greece, this scenario is greatly complicated by the country’s membership in the euro zone. Greece would have to exit the euro zone to be able to engineer a currency depreciation. Since this is something for which euro zone rules do not make any allowance, a unilateral exit will unleash huge uncertainty about the rules of the game. And a Greek default will almost certainly be considered a hostile act by Greece’s European partners – never mind that German and other euro zone banks were equally at fault for having over-lent to the Greek government.

Unfortunately, the current strategy seems destined to force Greece to this outcome. It is predicated on protecting German and other European creditors and bondholders while Greek workers, retirees and taxpayer pay the bill. This makes no sense economically, and will not work politically.

One way or another, Germany, France and other euro zone creditor countries are on the hook. If Greece eventually defaults, they will have to pay for their banks’ mistakes. It would be far better for them -- and for the future of the euro zone -- if this reality were recognized quickly. A coordinated, agreed-upon reworking of the rules will not be easy. But it will do less damage than insisting on politically unsustainable levels of austerity and having default and exit from the euro zone forced on the Greek government by protests on the streets.

5--Many Cities Face a Long Wait for Jobs to Return, New York Times

Excerpt: Two years into a fitful recovery, unemployed Americans are getting painfully accustomed to the notion that it will take years to bring back the jobs eviscerated by the financial crisis.

In some regions, those years are in danger of turning into a decade. According to a report to be released Monday, nearly 50 metropolitan regions — or more than one out of seven — are unlikely to bring back all the jobs lost in the recession until after 2020....

According to the mayors’ report, which was compiled by IHS Global Insight, the nation’s 363 metropolitan statistical areas tracked by the Labor Department will generate enough jobs to get back to only the prerecession peak of employment in the first half of 2014, a dreary forecast that poses an increasing political challenge to the Obama administration. The areas lost 7.3 million total jobs during the recession from a peak of 118.3 million in the first quarter of 2008.

The report notes that metro regions account for about 86 percent of all jobs.

“It is striking, it’s sobering and it’s a call to action,” said Antonio R. Villaraigosa, mayor of Los Angeles and the president of the Conference of Mayors. Mr. Villaraigosa suggested that the federal government invest in infrastructure as well as work force training. The mayors’ report projected that the Los Angeles region, which lost 537,100 jobs during the downturn, would not gain them back before 2018.

6--Our Lost Decade Relationship, Paul Krugman, New York Times

Excerpt: Clive Crook argues that we’re flirting with the possibility of a lost decade. I disagree — the flirting took place three years ago. The lost decade question now isn’t whether our flirtation with a lost decade will turn into something serious; it’s whether the torrid affair we’re now having with the potential for a lost decade can somehow be broken up.

Step back from the short-term news flow, and look at my favorite indicator these days, the employment-population ratio: (chart) What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.

I’d say that the burden of proof right now is on those who claim that we aren’t on track for a lost decade.

7--Overly Swift Spending Cuts Scarier Than Temporary Default, Economist Argues, Steve Goldstein, Wall Street Journal

Excerpt: Bank reserves swelling and commodity prices surging — that’s the situation that the U.S. economy is now confronting. But it also was the case back in 1937. And that’s what worries Ethan Harris, North American economist at Bank of America Merrill Lynch.

He fears, now like then, that tightening of monetary and fiscal policy could cause a recession, so much so that he thinks a temporary default on U.S. Treasury obligations may be preferable to overly swift spending cuts.

His view stands at odds with the rest of Wall Street, which has frequently communicated to congressional Republicans as well as the White House their desire to see the $14.3 trillion debt ceiling increased.

They fear a temporary default could disrupt the $4 trillion Treasury financing market, could spark a run on money-market funds and increase mortgage rates.
It’s also at odds from the broader public: 70% say a default would be bad for the economy, and 56% say failure to cut spending is worse, according to a telephone survey from Rasmussen Reports of likely U.S. voters.

8--A Cautionary Tale of Three Fiscal Crises, Simon Johnson, Bloomberg

Excerpt: In today’s world, there are three kinds of fiscal crises brought on by too much government spending, and three kinds of responses. We can call them the nightmare scenario, the preemptive experiment and the head-in- the-sand model. ...

The U.S. should take this opportunity to start gradual fiscal consolidation, not Greek-style spending cuts that would contract the economy and push up government debt relative to GDP. A path slower than Britain’s would be entirely reasonable, restricting future spending increases and allowing revenue to rise as the economy recovers. A credible deficit reduction plan should lower long-term interest rates.

The danger in the U.S. is complacency masquerading as fiery fiscal rhetoric. The debt limit debate so far has not contributed anything to fiscal stability. The spending limits on the table are largely meaningless. Ruling out tax increases makes international investors roll their eyes.

The U.S. could do a preemptive, and relatively gentle, fiscal adjustment. Or it could wait for the nightmare scenario, when markets eventually turn against it. At the moment, the politicians just wait.

9--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: The point then is that there’s an excess supply of desired savings at the zero interest rate that’s the lowest achievable. A zero-lower-bound economy is, fundamentally, an economy suffering from an excess of desired saving over desired investment.

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....

If much of our public debate over fiscal policy has involved reinventing the same fallacies Keynes refuted in 1936, the same can be said of debates over international financial policy. Consider the claim, made by almost everyone, that given its large budget deficits the United States desperately needs continuing inflows of capital from China and other emerging markets. Even very good economists fall into this trap. Just last week Ken Rogoff declared that ―loans from emerging economies are keeping the debt-challenged United States economy on life support.

Um, no: inflows of capital from other nations simply add to the already excessive supply of U.S. savings relative to investment demand. These inflows of capital have as their counterpart a trade deficit that makes America worse off, not better off; if the Chinese, in a huff, stopped buying Treasuries they would be doing us a favor. And the fact that top officials and highly regarded economists don’t get this, 75 years after the General Theory, represents a sad case of intellectual regression.....

A prolonged focus on banking issues could have distracted from that central point. Indeed, I would argue that something very like that kind of distraction occurred in economic discussion of Japan in the 1990s: all too many analyses focused on zombie banks and all that, and too few people realized that Japan’s liquidity trap was both more fundamental and more ominous in its implications for economic policy elsewhere than one would recognize if it was diagnosed solely as a banking problem....

As you can see, there have been two great financial disruptions in modern American history, the first associated with the banking crisis of 1930-31, the second with the shadow banking crisis of 2008....

Like many others, I’ve turned to debt levels as a key part of the story – specifically, the surge in household debt that began in the early 1980s, accelerated drastically after 2002, and finally went into reverse after the financial crisis struck.

In recent work I’ve done with Gauti Eggertsson (Eggertsson and Krugman 2010), we’ve tried to put debt into a New Keynesian framework. The key insight is that while debt does not make the world poorer – one person’s liability is another person’s asset – it can be a source of contractionary pressure if there’s an abrupt tightening of credit standards, if levels of leverage that were considered acceptable in the past are suddenly deemed unacceptable thanks to some kind of shock such as, well, a financial crisis. In that case debtors are faced with the necessity of deleveraging, forcing them to slash spending, while creditors face no comparable need to spend more. Such a situation can push an economy up against the zero lower bound and keep it there for an extended period....

The argument for expansionary policy is then one of practicality: it’s easier to push AD up instead, using monetary policy. Indeed, in simple post-Keynesian models it does all boil down to M/w, the ratio of the money supply to the wage rate.

But this presupposes, first, that a rise in the real quantity of money is actually expansionary, which is normally true, but highly dubious if an economy is up against the zero lower bound...

But this presupposes, first, that a rise in the real quantity of money is actually expansionary, which is normally true, but highly dubious if an economy is up against the zero lower bound. If changes in M/P don’t matter, then the aggregate demand curve becomes vertical – or worse.

For if there are spending-constrained debtors with debts specified in nominal terms – as there are in today’s world! – a fall in wages, leading to a fall in the general price level, worsens the real burden of debt and actually has a contractionary effect on the economy....

The reason this is relevant is concern about rising public debt. I constantly encounter the argument that our crisis was brought on by too much debt – which is largely my view as well – followed by the insistence that the solution can’t possibly involve even more debt.
Once you think about this argument, however, you realize that it implicitly assumes that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset....

The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can – and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve...

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

When monetarism failed – fighting words, but you know, it really did — it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles......

Last but not least, there is financial instability. As I see it, the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression....

And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response.

So the era of the Samuelsonian synthesis was, I suspect, doomed to come to a nasty end. And the result is the wreckage we see all around us.

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