Saturday, June 25, 2011

Weekend links

1--Obama Allies Call for Broad Jobs Plan, Bloomberg

Excerpt: Two years after the recession ended, almost 14 million Americans are out of work, including more than 6 million who have been jobless for at least six months. Job seekers outnumber available jobs by more than four-to-one.

Yet most of the political urgency in Washington is focused on the national debt, not on the shortage of work.

Now, some of President Barack Obama’s staunchest supporters -- including congressional Democrats, union leaders, and former administration economists Lawrence Summers and Christina Romer - - are calling for new government initiatives to drive down the nation’s 9.1 percent unemployment rate. ...

Even with the clamor, the president hasn’t presented a comprehensive plan to provide work for the bulk of the unemployed anytime soon. The jobless rate won’t fall below 8 percent until 2013, according to the median forecast of 65 economists surveyed by Bloomberg. After an $830 billion stimulus program failed to cut unemployment as much as the administration had predicted, and with Republicans poised to block new spending, Obama has few major policy options left.

2--Democracy vs Mythology: The Battle in Syntagma Square, Sturdyblog

Excerpt: I have never been more desperate to explain and more hopeful for your understanding of any single fact than this: The protests in Greece concern all of you directly.

What is going on in Athens at the moment is resistance against an invasion; an invasion as brutal as that against Poland in 1939. The invading army wears suits instead of uniforms and holds laptops instead of guns, but make no mistake – the attack on our sovereignty is as violent and thorough. Private wealth interests are dictating policy to a sovereign nation, which is expressly and directly against its national interest. Ignore it at your peril. Say to yourselves, if you wish, that perhaps it will stop there. That perhaps the bailiffs will not go after the Portugal and Ireland next. And then Spain and the UK. But it is already beginning to happen. This is why you cannot afford to ignore these events....

The first bail-out was designed to help Greek people, but unfortunately failed. It was not. The first bail-out was designed to stabilise and buy time for the Eurozone. It was designed to avoid another Lehman-Bros-type market shock, at a time when financial institutions were too weak to withstand it. In the words of BBC economist Stephanie Flanders: “Put it another way: Greece looks less able to repay than it did a year ago – while the system as a whole looks in better shape to withstand a default… From their perspective, buying time has worked for the eurozone. It just hasn’t been working out so well for Greece.” If the bail-out were designed to help Greece get out of debt, then France and Germany would not have insisted on future multi-billion military contracts. As Daniel Cohn-Bendit, the MEP and leader of the Green group in the European Parliament, explained: “In the past three months we have forced Greece to confirm several billion dollars in arms contracts. French frigates that the Greeks will have to buy for 2.5 billion euros. Helicopters, planes, German submarines.”

The second bail-out is designed to help Greek people and will definitely succeed. I watched as Merkel and Sarkozy made their joint statement yesterday. It was dotted with phrases like “Markets are worried”, “Investors need reassurance” and packed with the technical language of monetarism. It sounded like a set of engineers making minor adjustments to an unmanned probe about to be launched into space. It was utterly devoid of any sense that at the centre of what was being discussed was the proposed extent of misery, poverty, pain and even death that a sovereign European partner, an entire nation was to endure. In fact most commentators agree, that this second package is designed to do exactly what the first one did: buy more time for the banks, at considerable expense to the Greek people. There is no chance of Greece ever being able to repay its debt – default is inevitable. It is simply servicing interest and will continue to do so in perpetuity.

And the biggest myth of them all: Greeks are protesting because they want the bail-out but not the austerity that goes with it. This is a fundamental untruth. Greeks are protesting because they do not want the bail-out at all. They have already accepted cuts which would be unfathomable in the UK – think of what Cameron is doing and multiply it by ten. Benefits have not been paid in over six months. Basic salaries have been cut to 550 Euros (£440) a month.

3--Why Fed policy is paralyzed, Credit Writedowns

Excerpt: Here's all you need to know about the current paralysis of Fed monetary policy. The FOMC is officially forecasting an unemployment rate of 7.8%-to-8.2% by the end of 2012----3 ½ years into the "recovery"---and has decided it cannot do anything about it.

The Fed has used all of the conventional tools in its toolbox as well as some that aren't so conventional. It has kept interest rates near zero for an extended period and bought over $2 trillion in mortgages, ballooning its balance sheet to $2.8 trillion from some $800 billion in December 2007. It has also had massive help from fiscal policy including TARP, the stimulus program and numerous other policy initiatives. Despite this herculean effort the economic recovery has been by far the slowest since the great depression, and even that rate has recently diminished to a point where the Fed had to reduce its GDP growth estimates not only for 2011, but 2012 as well.

The Fed's ability to ease monetary policy any further is severely limited. Interest rates obviously cannot be reduced. The second round of quantitative easing will end as scheduled on June 30th and the Fed will not renew it---at least not anytime soon. Compared to last year when QE2 began, the rate of inflation has moved a bit higher and the imminent threat of deflation has receded. They will, however, keep reinvesting the principal of maturing securities in order to maintain the current balance sheet. Since the balance sheet will not be reduced, the end of QE2 is not generally regarded as a tightening of policy. It is well to keep in mind, however, that the average $3.8 billion that the program pumped into the economy every day will come to sudden halt. Therefore, although the end of QE2 is not an "official" tightening it may well have a similar effect.

4--Of Wealth and Incomes; Why Americans are so unhappy with this economic recovery, Wall Street Jornal

Excerpt: Mr. Bernanke was right about stock prices, which as the nearby chart shows (via the S&P 500) began a steady climb following the chairman's QE2 announcement at Jackson Hole at the end of last August. Mr. Bernanke was attempting to promote what economists call "wealth effects," or an increase in spending that accompanies an increase in perceived wealth. Watching their assets rise in value, the argument goes, Americans will consume and invest more.

At least until the recent market correction, this part of Mr. Bernanke's strategy seemed to be going well. If you owned stocks, you had reason to feel better about the economy and your own financial circumstances.

The problem is that monetary policy is not a laser-guided missile. The Fed can create new dollars, but it can't determine where those dollars will flow in a global economy that still runs mostly on a dollar standard. And with QE2 piling on near-zero rates, dollars flooded into assets other than stocks. In particular, they flowed into emerging markets like China and Brazil and into commodities nearly across the board. The nearby chart also shows the trend in oil prices as one example of the commodity price move.

One result has been a sharp increase in food and energy prices that took gasoline up to $4 a gallon. These have produced what economists call "income effects," or a change in consumption resulting from a change in real income. People who pay $4 for gasoline, or $30 more for groceries, have less money to spend on other goods. They also tend to feel poorer, which can influence their overall confidence in the economy.

One big difference is who feels these effects. The wealth effects have helped everyone but especially the affluent. The income effects have been felt most acutely by the poor and middle classes for whom food and energy are a much higher proportion of income. QE2 and near-zero interest rates have been a boon for bankers and hedge funds. They haven't been so great for suburban families who commute to work and haul their kids to football and music practice. The monetary policy so favored by liberal economists and the White House has actively favored the wealthy over the middle class.

Could these income effects have also hurt economic growth by offsetting the wealth effects that Mr. Bernanke likes to take credit for? Mr. Bernanke concedes that oil prices are one of the "headwinds" that have hurt the recovery, so even he is admitting the possibility. The Fed blames rising oil prices on global demand and Middle East turmoil, which have played a role. But we don't think Mr. Bernanke can take credit for one set of rising asset prices but dodge all responsibility for another.

Meanwhile, the flood of dollars into emerging economies has led to inflation and property bubbles that have caused other central banks to raise interest rates or otherwise try to slow economic growth. Since these economies were leading the world out of recession, their slowdown has hurt growth in the U.S. too.

Of late, both stock and oil prices have fallen, no doubt reflecting this slower economic growth and perhaps the end of QE2. Yesterday, the White House tried to reduce oil prices further by orchestrating a world-wide release of strategic oil stockpiles. (See below.) These lower prices will flow to business and consumers, and perhaps they will help Americans feel less gloomy and cause them to spend more once again.

It was interesting to hear Mr. Bernanke say, during his press conference this week, that "as the price of oil declines"—almost as if he knew the oil stockpile release was coming. Mr. Bernanke has predicted that the oil price rise would be "temporary," so he has a reputational stake in seeing them fall as much as the Obama Administration has a political stake.

The larger economic lesson here concerns the sources of long-term growth and the limits of monetary policy. Easy money can help in a crisis, and it can raise asset prices for a while. But it cannot create a durable recovery, and to the extent it leads to bubbles and higher prices it undermines future growth and erodes middle-class incomes.

5--Mort Zuckerman: "Why the Jobs Situation Is Worse Than It Looks", Forbes via Zero Hedge

Excerpt: The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment.

The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America's greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million.

The most recent statistics are unsettling and dismaying, despite the increase of 54,000 jobs in the May numbers. Nonagricultural full-time employment actually fell by 142,000, on top of the 291,000 decline the preceding month. Half of the new jobs created are in temporary help agencies, as firms resist hiring full-time workers.

Today, over 14 million people are unemployed. We now have more idle men and women than at any time since the Great Depression....

The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income...

Clearly, the Great American Job Machine is breaking down, and roadside assistance is not on the horizon. In the second half of this year (and thereafter?), we will be without the monetary and fiscal steroids. Nor does anyone know what will happen to long-term interest rates when the Federal Reserve ends its $600 billion quantitative easing support of the capital markets. Inventory levels are at their highest since September 2006; new order bookings are at the lowest levels since September 2009. Since home equity has long been the largest asset on the balance sheet of the average American family, all home­owners are suffering from housing prices that have, on average, declined 33 percent (compare that to the Great Depression drop of 31 percent).

No wonder the general economic mood is one of alarm. The Conference Board measure of U.S. consumer confidence slumped to 60.8 percent in May, down from 66 percent in April and well below the average of 73 in past recessions, never mind the 100-plus numbers in good times. Never before has confidence been this low in the 23rd month of a recovery. Gluskin Sheff's Rosenberg captured it perfectly: We may well be in the midst of a "modern depression."

6--The Balance Sheet Recession, Credit Writedowns

Excerpt: The Balance Sheet Recession

Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade. He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts. And the three D’s come into play: a downturn leads to debt deflation, deleveraging, and ultimately depression. The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.

Secular inflation will be non-existent

Therefore, the problem is a lack of demand for loans not a lack of supply. The Federal Reserve can print all the money it wants. But, if there is little demand for more indebtedness, it is not going to have the desired effect of permanently reflating the economy – although it can create bubbles.

The corollary of this is that inflation will be non-existent on a secular basis. For the increase in liquidity to feed into consumer price inflation, people have to actually buy more stuff. And that’s not what happens in a balance sheet recession because people are concentrated on reducing debt and increasing savings.

-Weak consumer spending will last for years, Aug 2009

For his part, the father of the Balance Sheet Recession theorem Richard Koo says QE2 drove speculation, but what about the real economy? His view is that monetary policy can aid speculative sentiment with residual feed through into the real economy but that it is largely impotent in a balance sheet recession. Only fiscal policy will have any measurable impact in driving the underlying demand side factors holding the economy back.

7--Euro Crisis Has Decimated Greek Private Sector, Der Speigel

Excerpt: Consumption has plunged in Greece and so too have the profits of several small and mid-sized companies in the country. Many say that the government isn't doing enough to help -- and a new round of austerity could make the situation even worse....

The culprit is easy to find. The Greek private sector, which accounted for 97 percent of JEPA's orders three years ago, has collapsed . Back then, the company had business from banks, hotels and restaurants. "The private sector was going well," says Papagrigorakis. But then the Greek state was plunged into financial disaster . And now the government , as so often in the past 30 years, is making a terrible mistake, Papagrigorakis says. "Instead of shrinking the public sector, it is raising taxes."...

Papagrigorakis hardly cares what move the government makes next. They should just go ahead and raise taxes, he says with a bitter laugh. "I don't really care about taxation," he says, "as long as we're not making any profits anyway."

8--As Greece Ponders Default, Lessons From Argentina, New York Times

Excerpt: ...In 2003 Néstor Kirchner was elected to succeed the interim president, Mr. Duhalde. Mr. Kirchner embarked on a new economic model — one that his wife, Argentina’s current president, Cristina Fernández de Kirchner, continues to follow today. Its pillars are sustaining a weak currency to foster exports and discourage imports, and maintaining fiscal and trade surpluses that can be tapped for financing government and paying down debt.

Aiding this strategy has been the rising global prices of agricultural commodities. For Argentina, a major soybean producer, the commodity wave has been a godsend. Soybean prices have risen from $200 a ton in 2003 to about $500 a ton today....

The Argentine government waited until 2005, when its economy was already in recovery, to conduct the first of two debt restructurings. Nongovernment foreign investors — the biggest included pension funds from Italy, Japan and the United States — took haircuts costing them two-thirds of their investments.

Notably, the one creditor that was paid back in full — in 2006 — was the International Monetary Fund, to which Argentina owed $9.8 billion dating to the 1990s....

In the end, Argentina may have one more lesson to teach Greece: the danger of fatalism.

“A lot of people were saying that Argentina would never recover, that the peso would never regain value, that this country was damned,” said Mr. Kerner, the analyst. “And it didn’t happen.”

9--Matt Stoller: Who Wants Keep the War on Drugs Going AND Put You in Debtor’s Prison?, Naked Capitalism

Excerpt: More than a third of all states allow debtors “who can’t or won’t pay their debts” to be jailed. In 2010, according to the Wall Street Journal, judges have issued 5,000 such warrants. What is behind the increased pressure to incarcerate people with debts? Is it a desire to force debt payment? Or is it part of a new structure where incarceration is becoming increasingly the default tool to address any and all social problems?

Consider a different example that has nothing to do with debts. Earlier this year, a Pennsylvania judge was convicted of racketeering, of taking bribes from parties of interest in his cases. It was a fairly routine case of bribery, with one significant exception. The party making the payoffs was a builder and operator of youth prisons, and the judge was rewarding him by sending lots of kids to his prisons.

Welcome to the for-profit prison industry. It’s an industry that wants people in jail, because jail is their product. And they have shareholder expectations to meet....

Now the War on Drugs is a substantial part of the prison-industrial complex.

The War on Drugs and this new prison industry is a template for where we seem to be heading as a culture. In the last ten years or so, a disturbing part of the system has metastasized into the system itself. As our financial system has increasingly and more overtly dominated the very structure of the country, freedom itself is being commoditized.

Debtor’s prison are making a comeback because of the debt collection industry. Elites like former Comptroller David Walker are waxing nostalgically for more punitive measures in the face of a population that simply cannot pay its debts. The for-profit prison industry fits right in to this trend, both in terms of the financialization of the industry itself and the increased market for “beds” sought by for-profit prison lobbyists in terms of harsher prison sentences.

Trying to end the war on drugs and stopping the incarceration of undocumented workers should move up the priority list. Once it becomes profitable to put people into steel cages, then it becomes profitable for judges to sell children in some creepy bizarro 21st century version of Oliver Twist. And if you think the housing bubble was bad because it misallocated resources, or foreclosure fraud is bad because it allows powerful actors to seize property based on raw power, then imagine what could happen if the logic of the for-profit prison system met the same type of leveraged financial hurricane.

10--'Lebanon's Che Guevara', Aljazeera

Excerpt: "Praise to God … who chose a martyr from my family, bestowing upon us the gift of martyrdom, and including us in the community of the Holy Martyrs' families." Thus Sayyed Hassan celebrated the killing by Israel of his eldest son Hadi in combat in September 1997.

In that same speech, Nasrallah expressed relief at Hadi's martyrdom for putting him and his family on equal with all other parents who lost their sons in the fight against Israel.

This is a story worth recounting, for two reasons. Firstly, Sayyed Nasrallah strikes a chord with his Arab constituency for having always acted, thought, and spoken as one of them. He knew poverty; he saw action in the battlefield; and he consistently commits himself to the ideals he has preached.

The other reason, and specifically in relation to the cast of leadership Arab revolution is sweeping away, Nasrallah stands out: the privileges accrued by Arab leaders, their families, sons and daughters - from Libya to Syria - are never tolerated by Hezbollah.

Hadi Nasrallah was neither a Saif Gaddafi nor a Gamal Mubarak; and Nasrallah's cousin, Hashim Safi Al-Din, assigned to the command of the Southern Lebanon region since November 2010, is no Rami Makhlouf, Syria's corrupt billionaire.

'Oracle of the oppressed'

For me two leitmotifs explain Hezbollah: "deprivation" and "resistance". They go hand in hand. They set people like Ragheb Harb, and before him Musa Al-Sadr, who engineered Shia empowerment, on a fascinating course of political history: resistance within against "deprivation" or hirman, and against occupation.

Hezbollah's 1985 first political manifesto, The Open Letter, ["al-Risalah al-Maftuhah"], resonates with Che-Khomeini rhetoric: the language of "world imperialism" mixed with meaning about "the oppressed", "down-trodden", "justice", "self-determination" and "liberty".

The sea of people I saw in August 2006 that came to greet and listen to Nasrallah after the 34-day war with Israel related to these messages. They still do. Many more do the same from Rabat to Sana'a.....

Inspired by Imam Khomeini, Nasrallah modernised Hezbollah and articulated a political project, which embodied empowerment, transforming Ashura and the entirety of the Karabala imaginary into a potent inventory for re-inventing not only the political, but also Shia identity in Lebanon.

Hezbollah and Syria's Revolution

Heralded by millions of Muslim fans as "the mastermind of the resistance" - or "the Muslim Che Guevara" - while demonised by the US Congress and Israel as a "terrorist", Nasrallah's rhetoric vis-à-vis the Syrian regime makes him an oddity in two ways.

Firstly, resistance is not divisible. Resistance is resistance, whether deployed against a colonial oppressor or against the indigenous oppressor, occupying, in this instance, the Arab state.

The same goes for freedom; it is not divisible. Resistance in the quest for freedom applies to the occupied Lebanese and Palestinian as much as to the oppressed Syrian or Yemeni.

Nasrallah was among the first to lend support to Arab revolutions in Egypt and Tunisia, and later to the down-trodden protesting against marginalisation in Bahrain. Withholding support for the uprising in Syria - because the regime supports muqawamah and opposes imperialism - is speaking with two tongues vis-à-vis Arab revolution.

11--Money market fund madness, The Big Picture

Excerpt: Here is Randall Forsyth in this morning’s Barron’s

“RETURN-FREE RISK.” That’s just one of the turns of phrase that Jim Grant has tossed off over the years as editor of the invaluable Grant’s Interest Observer and as Barron’s most illustrious alum.

The term could well apply to major money-market funds, which provide yields barely visible to the naked eye but could suffer collateral damage from any potential fallout from a possible default by Greece. Grant was way out ahead of the crowd by pointing out in his latest issue, dated June 17, that the five largest money funds, Fidelity Cash Reserves (FDRXX), Vanguard Reserve Prime (VMRXX), Fidelity Institutional Money Market Market Portfolio (FNSXX), Fidelity Institutional Prime Money Market Portfolio (FIPXX) and BlackRock Liquidity TempFund (TMPXX) held an average of 41% of their assets in European banks’ short-term debt. Fitch Ratings added in a report last week that the top 10 money funds, with assets of $755 billion, had about half their assets in European bank liabilities.

It’s doubtful that any money-fund holder has forgotten the aftermath of the Lehman Brothers bankruptcy in 2008, which caused The Reserve Fund, a pioneer in the field, to “break the buck” — have its net-asset value fall below $1 a share — owing to its holding of Lehman commercial paper. Since the crisis, the Securities and Exchange Commission has mandated money funds hold at least 10% of their assets in paper that can be converted into cash in one day and 30% in paper due in 60 days or less (or redeemable within seven days).

European Central Bank President Jean-Claude Trichet last week declared the financial risk situation was “code red.” That was his characterization of an assessment by Europe’s new risk monitor, the European Systemic Risk Board, that the highly interconnected financial system inside and outside the European Union means debt woes of several countries could spread rapidly if conditions worsen, the Associated Press reported.

Given that, money funds with European exposure and yielding about 0.01% would seem the very embodiment of return-free risk. But it seems the generals have prepared well for the last war, so 2008-style runs aren’t likely.

12--–Serial disappointment, The Economist

Excerpt: Mr Bernanke does not need lessons about the painful deleveraging that follows crises. His pioneering work with Mark Gertler on the Great Depression introduced the “financial accelerator”, the mechanism by which collapsing net worth crushes the real economy. This concept has been rechristened the “balance sheet recession” by Richard Koo. Stephen Gordon admits he is new to the term and notes (with some nice charts contrasting America with Canada) “it’s not pretty”. (HT to Mark Thoma). Yet until now Mr Bernanke seemed to think America had learned enough from both the 1930s and Japan to avoid either experience. Reminded by a reporter for Yomiuri Shimbun that he used to castigate Japan for its lost decade, Mr Bernanke ruefully replied, “I'm a little bit more sympathetic to central bankers now than I was 10 years ago”.

He did, however, make the important point that he stands by his view of a decade ago that the Bank of Japan then, and the Fed now, could, if it wanted, prevent deflation, both through the direct effect of monetary policy and its impact on expectations....

Mr Koo has argued that quantitative easing cannot help in a balance sheet recession; only fiscal policy can. Does Mr Bernanke secretly agree? He may believe as strongly as he did a decade ago that sufficiently aggressive monetary policy can prevent deflation, but not that it can create enough demand to restore full employment. This does not rule out QE3; it only means it will be pursued with less hope about the results than a year ago.

13--Guest Contribution: What Happens if U.S. Defaults?, Wall Street Journal

Excerpt: The U.S. occupies a special place in global finance. The symbiotic relationship between the U.S. dollar as a reserve currency and the U.S. Treasury market’s monopolistic position as the safest, most liquid bond market in the world has served this country well. This unique position has allowed the U.S. to exercise significant authority in the global economy and enhanced its standing as a world power. Even a temporary default would eliminate the safe and liquid nature of the U.S. Treasury market, harming this country’s ability to exercise its power, to the detriment of the U.S. and the global economy.

The main impact on markets would come from sharply reduced liquidity in the U.S. Treasury market, as financial firms’ procedures and systems would be tested by the world’s largest debt market being in default. Given the existing legal contracts, trading agreements, and trading systems with which firms operate, could U.S. Treasurys be held or purchased or used as collateral? The aftermath of the failure of Lehman Brothers should be a reminder that the financial system’s “plumbing” matters. All the legal commitments and limitations in a complex financial system mean a shock from an event that is viewed as inconceivable – such as a U.S. Treasury default – can cause the system to stall. The impact of a U.S. Treasury default could make us nostalgic for the market conditions that existed immediately after the failure of Lehman Brothers.

14--Survey: Banks Easing Lending Standards, but Not for Consumers, Wall Street journal

Excerpt: Conducted by the Office of the Comptroller of the Currency, the survey covered 54 national banks, including the 14 largest banks overseen by the agency, and covered loans representing about 94% of all loans in the national banking system. Underwriting standards easing particularly in commercial products, and most of the highest share of easing was done by large banks, the survey showed.

But don’t get too excited. Tightening continued in areas that most impact the average American consumer thanks to continued economic uncertainty. Loan portfolios that experienced the most tightening in standards over the last year include credit card, home equity, commercial and residential construction and residential real estate loans. “The health of the economy” was a key factor in tightening, according to OCC examiners.....

The report says that the greatest continuing credit risk in banks continues to be real-estate values given that many banks still hold a high volume of these in their portfolios. Banks that are holding a lot of credit-card loans are also experiencing a lot of risk because of the struggling economy and high unemployment rate, the report said.

Even where underwriting standards tightened, banks still tightened standards far less than previous years. Overall, only 7% of banks reported easing retail loan underwriting standards, while 63% said underwriting was unchanged and 30% tightened standards. Yet in the previous three years’ reports, 68%, 83% and 74% of banks respectively reported tightening underwriting for retail products....

Real estate remains problematic across the board. Among commercial products, commercial real estate loans saw some of the most pronounced tightening and these loans remain “a primary concern of examiners, given the current economic environment and some banks’ significant concentrations relative to their capital.” On the residential side, 40% of banks continued to tighten mortgage lending standards, while 52% left them unchanged after several years of tightening.

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