Friday, July 29, 2011

Weekend links

1--China Regulator Targets Nonbank Entities, Wall Street Journal

Excerpt: China's banking regulator warned that it intends to tighten its control over nonbank financial institutions, an effort to shore up tight monetary policy even as companies and savers embrace alternative financial services in an effort to boost returns.

In a statement Wednesday, the China Banking Regulatory Commission said it would "prevent various loans from improperly flowing into the property market" and crack down on illegal practices in the wealth-management field, including banks purchasing each other's wealth-management products or investing client funds in other banks' wealth-management products.

2--When Will Residential Construction Rebound?, William Hedberg and John Krainer, FRBSF Economic Letter via Economist's View

Excerpt: Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines....

The paper notes that price adjustment alone is not enough, "a significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed."...An implication of this research is that polices that help homeowners escape foreclosure would speed the recovery of the housing market.

3--Debt Ceiling Consequences, Angry Bear

Excerpt: If the debt ceiling is not raised at some point the US government will be unable to meet all of its obligations.

I assume that they will make their interest payments and bond redemptions on schedule and the shortfall will be in paying social secutiry, medicare, military and other obligations. This will naturally impact aggregrate demand and generate a significant negative impact on the economy. Given the severe weakness in the economy this shock most likely would tilt the economy into a recession.

This is rather straight forward analysis, but the more severe situation would be the consequences of the government failing to redeem T bonds and/or T bills or failing to make an interest payment of these debt obligations.

Large business and financial institutions do not leave large sums sitting around not earning interest. For the most part firms invest idle balances in T bills. This reached the point long ago where banks introduced sweep accounts where they will go through a firms deposits late in the day and sweep their balance out and invest them in T bills overnight. This is where the risk free instrument comes to play a major role in the financial system and the economy. In many ways the risk free investment of T bills are like the oil in an engine. It provides the buffer or lubrication in the financial system that allow the various moving parts of the economy to move freely and not rub against each other. If the risk free instrument of the T bill is removed from the system there is nothing around of sufficient size to provide the lubrication that the system requires. Thus, if firms no longer have T bills or risk free instruments to invest in there is a danger that the financial system will seize up like an engine without oil. It becomes a question of confidence and we could quickly have a repeat of something like what happened in 2008 after Lehman Brothers went bankrupt and lenders pulled in their horns and refused to lend to otherwise good credits. This is why those claiming that the US defaulting on its debts would not have severe and wide-ranging consequences are completely wrong. It is why some of the largest financial institutions are already starting to take measures to protect themselves against this possibility.

4-- Policy Paralysis on Both Sides of the Atlantic, Credit Writedowns

Excerpt: The market’s anxiety over the implications of potential US downgrade (and a catastrophic default) has reached a new phase, as the self-reinforcement of negative sentiment has led to renewed spike in EZ periphery yields. EZ jitters kept the EUR defensive throughout the night, but it was a sharp rise in Italian refinancing costs at today's auction that fueled accelerated safe haven activity. As a result, EUR/CHF fell sharply to 1.142 lows and was the catalyst for the nearly 0.5% loss in the EUR/USD. Sterling was also heavy around 1.630 on dollar repositioning, while more weak UK data reinforced underlying difficulties in the UK economy. Surprisingly, the dollar bloc continues to maintain an overall supportive tone, with the NZD the best performer in the G10 on the day after the RBNZ likely signaled a move in September. Global stocks remain on offer, with both Asian and Europeans stocks declining for the second consecutive day amid the sharp deterioration in sentiment. Elsewhere, oil prices found a modicum of support after the threat of supply disruption fueled a rebound to $97.43.

Price action in the FX markets has taken a decisive turn from the beginning of the week as dollar diversification had dominated market actions earlier this week. And now investor’s fear over the impact of a looming US downgrade (and a potential default) on financial balance sheets and riskier assets has now taken the upper hand, boosting the dollar. In short, asset markets have shifted from broad dollar diversification to “risk off” again. At the same time, the combination of “risk off” and the renewed fears about the funding situation in the euro zone periphery following this week’s lukewarm bond auctions in Italy and Spain have continued to weigh on the euro....

Meanwhile, the mid-year review of the China Banking Regulatory Commission (CBRC), the country’s banking watch dog, was released yesterday. Chairman Liu Mingkang made headlines by focusing on the risks associated with funding vehicles. He urged banks not to extend loans or rollover debt instead of settling their obligations. He also discussed the illegal flow of loans into the housing market through individual loans and mortgages for commercial property, but pushed for a greater emphasis on social housing.

5--Ratings agencies, The prime enabler of the credit crisis, The Big Picture

Excerpt: How did a bunch of unelected corporate suits get the power to wreck the global economy?

Yesterday, I taped an interview with Canadian TV, where the question of the rating agencies came up.

I stated my long held views about them: That they were a prime enabler of the credit crisis; that they were one of the most corrupt institutions in the United States, and had sold their ratings to the highest bidder. That their senior executives were criminally liable and deserved jail time. That S&P, Moody’s and Fitch themselves deserved to be executed — the same corporate death penalty that Arthur Anderson received. I stated I was perplexed as to why they were not put down like rabid dogs.

So with that modest position, you can imagine how pleased I was to see Zachary Karabell’s piece this morning in the Daily Beast:

“As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+.

How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it . . .

Yet here they are again, threatening to downgrade the debt of the United States—potentially costing taxpayers hundreds of billions, again, in the form of higher interest payments—because they don’t like the messiness of the political process and they don’t approve of the level of debt relative to GDP, so said David Beers of S&P.

But, really—and I mean this in the most respectful way—who the hell is David Beers and who elected him to be the arbiter of the American financial system?”

This issue here is not the debt ceiling or the ongoing deficits — but rather, yet another corporate criminal allowed to roam free.

The entire piece is well worth your time to read.

6--What Happens to U.S. Companies’ Ratings if Treasury Debt Is Downgraded?, Wall Street Journal

Excerpt: A reader asks a good question prompted by today’s Capital column on the impact of a downgrade of the U.S. Treasury debt by Standard & Poor’s: If the U.S. loses its AAA rating, will U.S. companies automatically be downgraded too?

The short answer: No, nothing automatic.

The longer one: It depends.

Here’s S&P on the subject: “Generally a chance in the credit rating or outlook on a sovereign issuer doesn’t necessarily lead to a change in ratings or outlooks on similar rated non-financial corporate borrowers in that country.” S&P hasn’t altered the rating or the outlook for the four remaining AAA non-financial U.S. corporate borrowers: Automatic Data Processing, ExxonMobil, Johnson & Johnson and Microsoft.

“However, the ratings assigned to corporate borrowers may be affected by the U.S. debt debate, depending on the depth and length of the standoff,” S&P added. Failure to raise the debt ceiling “especially if a delay persists long enough that the Treasury defaults on any of its obligations” would be a bigger deal, both for the economy and for corporate borrowers — and thus for corporate credit ratings.

S&P says that if Congress raises the debt ceiling, and S&P drops the U.S. government to AA because the deal doesn’t include sufficient long-term deficit reduction, the rating agency doesn’t anticipate “significant market disruptions.”

7--As U.S. Debt Impasse Continues, Risks Loom in Repo Market, Wall Street Journal

Excerpt: The unique role that Treasury bonds play in short-term funding markets underscores the systemic risks to the broader economy should the U.S. default or lose its top credit rating.

The key concern is that Treasury bonds might no longer be considered top-quality collateral in repurchase agreement markets—better known as repo— thereby choking a primary channel of short-term funding for banks. That in turn could push investors such as U.S. money funds to cut lending to banks, stifling liquidity and pushing up the cost of funding.

Repo, which grew to become the so-called shadow banking system, is often regarded as the oil that lubricates the economy. Higher borrowing costs would have a broad impact, hurting everything from consumer borrowing to corporate finances.....There are about $3.94 trillion in Treasurys used as collateral for repos, according to data from J.P. Morgan. Another report from Bank of America Merrill Lynch says that roughly 74% of primary dealer repo financing—about $2.1 trillion—involves Treasury collateral.

If the debt ceiling is not raised in time and the U.S. is forced to default, the impact on repos would be profound as the value of the collateral outstanding would immediately be put into question.

"A sharp repricing of this collateral in response to a Treasury default would likely increase haircuts, potentially leading to significant margin calls, some forced deleveraging and a decline in lending capacity in financial markets," said market strategists from J.P. Morgan in a research note.

8--Richard Koo explains balance sheet recession, The Big Picture

9--So we All Agree! The Real Problem is monopoly capital, Smirking Chimp

Excerpt: ....French begins his argument by taking note of the very same phenomenon that is more commonly stressed by the Left;

"Last year ended up being a blockbuster for global mergers and acquisitions, with the total number of deals and values both rising by over 20 percent for 2010, hitting $2.4 trillion. Private equity buyouts meanwhile rose 7.2 percent, marking the strongest year for buyouts since 2007. Activity in M&A more than doubled in Australia; the Asia-Pacific region saw M&A deal value reach its highest value on record; and M&A deals also jumped 37 percent in Europe...But of all regions, it was the emerging markets (EM) that posted the most impressive year. In 2010, the EM group saw 2,763 deals, worth approximately $557 billion. That marked a 20 percent increase in deal volume and a nearly 60 percent jump in total deal value."....

The Monthly Review editors also acknowledge the very same M&A trends as does French;

"...[there has been] record annual levels of global mergers and acquisitions up through 2007 (reaching an all-time high of $4.38 trillion), and in vast increases in foreign direct investment (FDI), which is rising much faster than world income. Thus FDI inward stock grew from 7 percent of world GDP in 1980 to around 30 percent in 2009, with the pace accelerating in the late 1990s."

One immediately apparent difference in views however, is that the MR editors relate increased M&A activity and financial speculation to the rise of globalization which every rational observer agrees was generated by greater capitalist profit seeking, not government policy...

....Inequality, in all its ugliness, is, if anything, deeper and more entrenched. Today the richest 2 percent of adult individuals own more than half of global wealth, with the richest 1 percent accounting for 40 percent of total global assets...The supreme irony of the internationalization of monopoly capital is that this entire thrust toward monopolistic multinational-corporate development has been aided and abetted at every turn by neoliberal ideology, rooted in the “free market” economics of Hayek and Friedman."....

And it is here that our argument comes full circle. Everyone from Marginalists to Marxists recognizes the increased growth of monopoly capital or what Marx called "the concentration and centralization of capital" which he attributed to "capital's laws of motion". The absence of price competition under these conditions leads capitalists to save their profit margins through cost cutting rather than price adjustments to clear markets of excess output. Such cost cutting results in suppressing demand through labor saving technology and inflexible price levels. This shifts profit seeking surplus into financial investment where consumer demand is less relevant. Barry Finger, a socialist critic of the MR school, gives a nonetheless cogent description of its main argument.

"...monopoly capital is able, through its market power, to alter the rate of exploitation, the rate at which value is divided and redistributed to capital, by operating below full capacity. This creates market shortages, artificially raising prices above the limits that might otherwise competitively prevail in the absence of monopoly restrictions on potential competition. These barriers to entry are due not to collusion as such, but rather to the prohibitively high cost of entry at the necessary scale of production needed to force prices down...The consequence, according to Baran and Sweezy, is the generation of a mass of surplus-value that cannot be readily recycled. There is no reason to build additional productive capacity when the key to monopoly profits resides in withholding production. The system therefore suffers from stagnation, a permanent difficulty in recycling its “surplus” (the preferred term in Monopoly Capital) by means of additional capital formation. In this unique sense, monopoly capitalism is said to suffer from chronic overaccumulation, which it attempts to counteract through a multiplicity of waste generating activities that absorb the surplus without arresting the central dynamic of overaccumulation.

10--Cowboy Capitalism and the State, 4ss

11--Default Worries Dry Up Lending, Wall Street Journal

Excerpt: Rising signs of strain emerged across financial markets on Thursday as investors pulled out billions of cash out of money-market funds, in turn driving the funds to rein in lending in short-term markets.

Financial markets have become increasingly alarmed at the deepening divide in Washington and the potential that the U.S. could be downgraded by credit-rating agencies or, worse, default on its debt.

Banks, meanwhile, are scrambling to design emergency plans to avoid a trading logjam in the huge markets for Treasurys and short-term funding facilities if Congress fails to raise the U.S. borrowing limits by next Tuesday's deadline.

Thursday, July 28, 2011

Today's links

1--BofA Donates Then Demolishes Houses to Cut Glut, Bloomberg

Excerpt: Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are either conducting or considering their own programs.

Disposing of repossessed homes is one of the biggest headaches for lenders in the U.S., where 1,679,125 houses, or one in every 77, were in some stage of foreclosure as of June, according to research firm RealtyTrac Inc. of Irvine, California. The prospect of those properties flooding the market has depressed prices and driven off buyers concerned that housing values will keep dropping.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works with lenders, government officials and homeowners to salvage vacant homes. “The best thing we can do to stabilize the market is to get the garbage off.”

Donating a house may create an income-tax deduction, said Robert Willens, an independent accounting analyst based in New York. A bank might deduct as much as the fair market value if a home wasn’t acquired with the explicit intent of knocking it down, he said.

2--Hurtling toward economic chaos, Mike Davis, LA Times

Excerpt: China, of course, now holds up the world, but the question is: For how much longer? Officially, the People's Republic of China is in the midst of an epochal transition from an export-based economy to a consumer-based one. The ultimate goal of which is not only to turn the average Chinese into a suburban motorist but to break the perverse dependency that ties that country's growth to an American trade deficit Beijing must, in turn, finance to keep the yuan from appreciating.

Unfortunately for the Chinese, and possibly the world, that country's planned consumer boom is quickly morphing into a dangerous real estate bubble. China has caught the Dubai virus and now, every city there with more than 1 million inhabitants (at least 160 at last count) aspires to brand itself with a Rem Koolhaas skyscraper or a destination mega-mall. The result has been an orgy of overconstruction.

Despite the reassuring image of omniscient Beijing mandarins in cool control of the financial system, China actually seems to be functioning more like 160 iterations of "Boardwalk Empire," in which big-city political bosses and allied private developers are able to forge their own backdoor deals with giant state banks.

In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Moody's Investors Service reported this month that the Chinese banking system was concealing $500 billion in problematic loans, mainly for municipal vanity projects. Another rating service warned that nonperforming loans could constitute as much as 30% of bank portfolios.

Real estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.

So, will Chengdu become the next Orlando, Fla., or China Construction Bank the next Lehman Bros.?

3--Watchdog Sees Financial Weak Spots, Wall Street Journal

Excerpt: Federal officials said the U.S. financial system remains vulnerable to shocks and called for better protection in several areas that exacerbated the 2008 financial crisis.

The Financial Stability Oversight Council, a new body created by last year's Dodd-Frank financial law, said several areas could pose broad risk to the financial system, including a $2.7 trillion short-term funding market used by Wall Street firms and money-market mutual funds. It also warned the U.S. faces risk related to Europe's debt crisis and said U.S. financial institutions need to improve their balance sheets to protect against potential losses.

The FSOC, in an annual report required by Congress, said it "cannot predict the precise threats that may face the financial system" and warned regulators must meet assumptions of market stability with "a heavy dose of skepticism."...

In particular, the FSOC said weaknesses exist in the "triparty repo" market, in which banks make and receive short-term loans on a day-to-day basis. The repo market temporarily froze during the financial crisis, drying up a key source of funding for many Wall Street firms. The FSOC said critical overhauls are needed, including strengthening the collateral practices backing the securities that are being loaned and borrowed...

Regulators also warned risks still exist in money-market funds, which are used by individuals and corporations as a low-risk place for parking cash. To increase stability and reduce the funds' "susceptibility to runs," the FSOC recommended that the Securities and Exchange Commission consider changes such as moving to a floating share price, instead of a fixed $1 price, and imposing capital buffers to absorb losses.

During the crisis, one money fund, Reserve Primary Fund, "broke the buck," or saw its share price fall below the stable $1 that money funds aim to maintain. The U.S. ultimately stepped in to guarantee money-market mutual funds.

The report also reiterated a call for national mortgage servicing standards, saying the industry was ill-prepared to handle the "rapid increase in defaults and foreclosures" related to the housing bust. The problems are now subject to settlement talks among banks and officials on the federal and state level.

4--Alternatives to USAAA, equities edition, FT.Alphaville

Excerpt: The search for the elusive US-AAA alternative continues.

As Nomura’s Charles St-Arnaud and Lefteris Farmakis already pointed out on Wednesday, there’s not really all that many options left.

Though Credit Suisse’s global equity strategy team seems to have one idea. Invest in companies which are currently perceived to be safer than sovereigns.

As they wrote on Wednesday:

Worries about the US public finances, will likely bring investors to focus on ultra-safe equities: companies with a CDS spreads [sic] below that of G7 sovereigns, yet offering dividend yields above government bond yields....

Regardless of the outcome of the negotiations over the debt ceiling, we think investors should focus on ultra-safe corporates (those that offer a CDS spread below that of the average G7 sovereign in combination with a dividend yield above the average G7 government bond yield). To the extent that the debt ceiling negotiation in the US and the worries about peripheral Europe drive home the uncertain outlook for government finances, the strong financial position of these corporates will appear increasingly attractive.

While a US default is definitely not their central scenario (they see a rise in the ceiling by August 2), in the unthinkable event it does happen, here’s how they see the situation playing out:

If the US does default, there are massive ramifications. According to Credit Suisse chief economist Neal Soss, the repo market would probably cease to work. It is hard to imagine money market funds operating under this scenario. The inter-bank market would freeze up. The fallout would be far worse than after the Lehman’s default. Back then, the US government could at least spend and do the ‘right thing’, while now the only back-stop would be the Fed.

Into a default, the US would have to balance its primary balance and that alone would require fiscal tightening of 8% of GDP, on IMF data. If the US defaulted, then others could follow (Portugal, Ireland, Greece). There would be a very big decline in US GDP (5% is quite possible). Lastly, it would be horrible to think of what happens to the dollar if the Fed hint that they would offset the growth damage of default and subsequent fiscal tightening with QE 3.

5--Alternatives to the USAAA – there’s not much, FT. Alphaville

Excerpt: Still seeking something else to buy should the US be downgraded after its debt ceiling folly?

The world’s pool of AAA-rated material is rapidly dwindling, and any destruction of the US triple-A will mean it shrinks even further. According to Nomura’s Charles St-Arnaud and Lefteris Farmakis, US Treasuries are by far the largest pool of investable AAA-rated assets with $11,151bn outstanding....

(The reason the remaining AAA-pile is so low, is because it’s by no means clear what will happen to the almost $6,000bn-sized heap of agency Mortgage-Backed Securities (MBS). These are backed by a stream of future cash flows, but their triple-A is also largely derived from a US government guarantee.)

Anyway, the most obvious substitution would be to switch into other AAA-rated government debt. Germany is the next biggest available pool, with about $1,720bn worth of outstanding Bunds. Though Germany is not without its own, eurozone-sized debt problems and contingent liabilities...

One wonders how the financial world will react to that shrinking pool of AAA, which they’ve essentially been able to use as risk-free credit. Will they simply adapt to a world with fewer ‘safe’ securities?

Or will they somehow seek or encourage a new crop of triple-A assets to be grown?

6--Obamageddon Coming to a City near you?, The American Interest

Excerpt: The 21st century urban crisis has five main features: the devastating impact of what for most Blacks is a still-deepening recession; the unfolding effects of the fiscal crisis meshed with the decline of the blue social model; competition for jobs, resources and power between African Americans and mostly Spanish speaking immigrants; the increased fragmentation and disintegration of Black political leadership; and the contrast between the high hopes of 2008 and the grim realities that have come clear since.

“Devastating” is an overused word when it comes to unemployment and the inner city, but the Department of Labor’s latest report (Black Employment in the Recovery) * tells an eye-popping story of failure and decline....Now for the bad. Blacks are more likely to be unemployed than whites (16 percent Black unemployment rate vs. 8.7 percent for whites), they stay unemployed for longer when they lose their jobs, and they are more likely to be unemployed for the long term. The states where unemployment rates for African Americans are relatively low are states where not many African Americans live: Alaska (5.4 percent Black unemployment), Wyoming (6.2 percent), Idaho (8.0 percent), Hawaii (9.6 percent) and (at 10.3 percent) New Hampshire. Except for Hawaii all are generally conservative, low-tax states. The states with the highest unemployment rates for African Americans are staunchly blue: Wisconsin (25 percent), Michigan (23.9 percent), Minnesota (22 percent), Maine (21.4 percent) and Washington (21.4 percent)....

As government resources dry up, competition between different groups for what remains will intensify. Tension between African Americans and Hispanics is already high in some cities. There is nothing pathological about this tension or peculiar to the two groups: American cities have been battlegrounds of ethnic politics for 150 years. But fights over shrinking pies are nastier than fights over growing ones. Whether Republicans or Democrats control Washington and most state capitals in the coming years, discretionary spending at all level of government is almost certain to shrink, leaving immigrants and urban Blacks in a zero-sum scramble for what’s left.....

If we add to this the mounting frustration among many young and poor Blacks (and not only them) about the failure of “hope and change” to make their lives better in any way, we have an explosive mix. Conditions are bad, leadership struggles to rise to the times, hope has soured into disillusion. It now looks increasingly likely that the recovery will continue to move slowly everywhere and especially slowly for Blacks. Out of frustration and economic need, Black politics will shift away from establishment liberalism toward more left wing or Black nationalist options even as whites continue moving toward the right. If that is where we are headed, then President Obama’s election will look to many angry young Blacks less like a milestone for Black America and more like proof that ordinary politics cannot change their lives. The establishment leaders who urge them to keep calm and be patient will not have their confidence or trust.

Worst case, some very hot times could loom not too far ahead.

Dr Tim Morgan, global head of research at Tullett Prebon, has been honing his argument that there is far too much private debt still weighing on the UK. Honing it into a view that further growth will be stifled under this weight, and that this will perforce undermine the government’s attempts to reduce public borrowing. Cue massive sovereign crisis.

It’s not a cheery view. But one of Morgan’s starting points rings familiar on another topic — the AAA bubble. As Morgan argues:

What really happened in 2008… was less a matter of intervention per se but of government stepping in to sustain the aggregate level of borrowing once mortgage and credit expansion collapsed. The expedient of replacing private with public borrowing was always time-limited and has now reached end-point, but there has been no recovery at all in private borrowing.

7--The Biggest Driver in the Deficit Battle: Standard & Poor’s, Robert Reich via Economist's View

Excerpt: ...All of America’s big credit-rating agencies — Moody’s, Fitch, and Standard & Poor’s — have warned they might cut America’s credit rating if a deal isn’t reached soon to raise the debt ceiling. ... But Standard & Poor’s has gone a step further: It... insists any deal must also ... reduce the nation’s long-term budget deficit by $4 trillion — something neither Harry Reid’s nor John Boehner’s plans do.

If Standard & Poor’s downgrades America’s debt, the other two big credit-raters are likely to follow. The result: You’ll be paying higher interest on ... every ... penny you borrow. ... In other words, Standard & Poor’s is threatening that if the ten-year budget deficit isn’t cut by $4 trillion..., you’ll pay more – even if the debt ceiling is lifted next week.

With Republicans in the majority in the House, there’s no way to lop $4 trillion of the budget without harming Social Security, Medicare, and Medicaid, as well as education, Pell grants, healthcare, highways and bridges, and everything else the middle class and poor rely on.
And you thought Republicans were the only extortionists around.

Who is Standard & Poor’s to tell America how much debt it has to shed in order to keep its credit rating?

Standard & Poor’s didn’t exactly distinguish itself prior to Wall Street’s financial meltdown... Had they done their job and warned investors how much risk Wall Street was taking on,... taxpayers wouldn’t have had to bail out Wall Street; millions ... would ... be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus...; and far more tax revenue would now be pouring into the Treasury... In other words, had Standard & Poor’s done its job, today’s budget deficit would be far smaller.

And where was Standard & Poor’s (and the two others) during the George W. Bush administration – when W. turned a ... budget surplus ... into a gaping deficit? Standard & Poor didn’t object to Bush’s giant tax cuts for the wealthy. Nor did it raise a warning about his huge Medicare drug benefit (i.e., corporate welfare for Big Pharma), or his decision to fight two expensive wars without paying for them. ...

So why has Standard & Poor’s decided now’s the time to crack down on the federal budget — when it gave free passes to Wall Street’s risky securities and George W. Bush’s giant tax cuts ... thereby contributing to the very crisis it's now demanding be addressed?

Could it have anything to do with the fact that the Street pays Standard & Poor’s bills?
Is there any evidence that ratings agencies are influenced by the fact that Wall Street pays their bills?:

8--Read China's Lips, Stephen Roach, Project Syndicate

Excerpt: The Chinese have long admired America’s economic dynamism. But they have lost confidence in America’s government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.

Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”

China is no innocent bystander in America’s race to the abyss. In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.

Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.

Those days are raising the consumption share of its GDP, China will also absorb much of its surplus saving. That could bring its current account into balance – or even into slight deficit – by 2015. That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets.

So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets?

China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.

9--What's Wrong With America's Job Engine?, Wall Street Journal

Excerpt: Over the past 10 years:

• The U.S. economy's output of goods and services has expanded 19%.

• Nonfinancial corporate profits have risen 85%.

• The labor force has grown by 10.1 million.

• But the number of private-sector jobs has fallen by nearly two million.

• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

What's wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: "Sales have come back, but people have not.''

That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.

Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring....

Executives call it "structural cost reduction" or "flexibility." Northwestern University economist Robert Gordon calls it the rise of "the disposable worker," shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree....

In the most recent recession and the previous two—in 1990-91 and 2001—employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire. As a result, the "jobless recovery" has become the norm....

In a survey of 2,000 companies earlier this year, McKinsey Global Institute, the think tank arm of the big consulting firm, found 58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more "outsourced or offshored" workers....

Hal Sirkin of Boston Consulting Group says rising wages in China are dulling its edge as a low-wage nirvana. In 2000, wages of Chinese production workers averaged 3% of what their American counterparts made. Today, they are at 9%. BCG expects the figure to reach 17% by 2015. Mr. Sirkin predicts that will prompt some manufacturers to move jobs back to the U.S.

How many? He is still working on an estimate. But one thing is clear, though, "These are $15-an-hour jobs," he says, "not $30-an-hour jobs."

10--UPS: Asian growth is slowing, Pragmatic Capitalism

Excerpt: The macroeconomic thesis remains relatively simple in my opinion. The USA and most of Europe are in balance sheet recessions. This means that the private sector is likely to remain sluggish which will result in slow growth. Thus far, deficit spending in the USA is allowing consumers to muddle through. Austerity in Europe is depressing many of their economies. Emerging markets are relatively healthy on the other hand and have served as a crutch for the rest of the world. This has been particularly important for corporate profits where the combination of cost cuts, slow domestic growth and high international growth is creating healthy profits.

The major risks to the downside in this scenario are a worsening crisis in Europe, austerity in the USA and a slow-down in China. Europe has kicked the can once again with their most recent bailout package. This means Europe is going to remain weak as austerity takes hold. The USA is not headed into full-blown austerity yet, but the end of the fiscal stimulus combined with the possibility of harsh budget cuts stemming from the debt ceiling debates should put downside pressure on the US economy in the coming year. Still, with double digit deficits the private sector should be able to muddle through. Emerging markets are the real key here and according to UPS and their latest earnings report the picture is becoming more precarious.

Below are some snippets from this morning’s conference call:

“The current forecast call for second half GDP growth of more than 3%. Given all the uncertainty that exists in the U.S. economy, it could end up being anywhere from 1.5% to 3.5%. Bottom line, economic growth expectations have slowed from where they were at the start of 2011. ”

…Despite slowing economic growth expectations, I’m encouraged by the progress we are making.”

…Now let’s turn to the International segment. Revenue was up more than 13% on strong volume growth of 6.2%. Export volumes increased over 8% with growth around the world. Europe and China continued their momentum of solid growth, although we did see slowing in the rest of Asia.”

…Given the softness in the U.S. economy, we expect third quarter volume growth to be slow and operating margins to be similar to last year. In the fourth quarter, we expect year-over-year operating margin expansion. In International, we expect second half operating profit growth of mid-to upper teens, compared to last year as the impact of our hedging programs is mostly behind us. The Supply Chain and Freight segment will continue to see the margin expansion and revenue growth, as we expect to experience operating profit growth in Freight and strong operating margins in Forwarding.

To wrap this up, as Scott indicated, economic conditions have slowed since we last provided guidance. A good example, U.S. GDP growth expectation for 2011 was at 3.1%. It was revised downward to 2.9% and now sits at 2.5%.”

So, for now, if UPS is our guide (and they’re a pretty good one), we can expect more of the sluggish growth that we’ve been seeing although the slow-down risk in Asia appears to be gaining some momentum.

11--The New Normal, Smirking Chimp

Excerpt: What's caused this problem is lack of effective consumer demand for goods and services due to falling average real incomes over the past thirty years. Debt served to both delay the crisis and make it worse than it would otherwise be once it arrived. But even debt is not the real problem. Debt, both public and private, is due to a three decade long surge in borrowing. This is due to the fact that capitalists refuse to pay both growing real wages and higher taxes. The end result was an overgrown financial sector which, though profitable for Wall Street until the recent crash, began to feed on American society. Now the proverbial chickens have come home to roost.

The problem is that only the working and middle classes are suffering for the crimes of the super rich who are hypocritically blaming the victims for their alleged "excess consumption" and "addiction to debt" as if the much higher corporate debt and the unsustainable, levels of leveraged financial investment that existed for a decade before the current recession began aren't a far worse problem. Surely, Wall Street was much more culpable for the current economic crisis. Keynes's notion of "the paradox of thrift" shows that while changing our consumption habits may be very good for the environment it won't help economic recovery. The far right doesn't get it and thus their ill conceived policies generate high levels of chronic unemployment, especially long term unemployment. Such high levels of chronic joblessness over longer and longer time spans may become "the new normal". During the latest recession, record numbers of people were unemployed for twenty seven weeks or more despite an overall moderation in the growth of the US workforce.

Consumerism isn't the problem; consumer spending hit an historic post-1980 low in the second quarter of 2009 before rising again briefly the following year. It is now set to fall once again as the decline in housing and auto sales slows the economy even further cutting short a brief and shallow recovery.

13--Cowboy Capitalism and the State, 4ss

Wednesday, July 27, 2011

Today's links

1--Home Prices in 20 U.S. Cities Fell 4.5% in Year to May, Case-Shiller Says, Bloomberg

Excerpt: Home prices in 20 U.S. cities dropped in the year ended May by the most in 18 months, adding to evidence the housing market is struggling.

The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent from May 2010, the group said today in New York. The decline matched the median forecast of 32 economists surveyed by Bloomberg News.

A pipeline of foreclosures and uneven demand will keep prices from rising this year, discouraging new-home construction and delaying a rebound in housing. Shrinking home equity and an unemployment rate at 9.2 percent are weighing on consumer spending, which accounts for about 70 percent of the economy.

“Home prices will remain depressed through most of this year, like the housing sector itself,” Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, said before the report. “Foreclosures are definitely a huge issue. The overhang of unsold homes will take longer to clear as the job market is very soft.”

2--Feel the Austerity, Streetlight blog

Excerpt: The Cameron government's austerity plan in the UK is near its one-year anniversary, and its effects continue to exactly match the prediction that any decent Macro 101 student could provide as the correct answer to a final exam question:

UK GDP figures show slower growth of 0.2%

Growth in the UK economy slowed in the three months to 30 June, partly because of the extra bank holiday in April. Gross Domestic Product (GDP) grew by 0.2% in the second quarter, according to the Office for National Statistics, down from 0.5% in the previous quarter....

But shadow chancellor Ed Balls said that the slowdown was a serious problem for the government and it should take steps to boost growth.

"These figures show that last year's recovery has been recklessly choked off by George Osborne's VAT rise and spending review," he said. "The economy has effectively flat-lined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down."...

It's not mysterious: when you raise taxes and cut government spending, growth slows. And when you do that during a very fragile and weak recovery, you can push your economy back into recession, or at best, choke off growth almonst completely. That's exactly why, as has been extensively written about both here and elsewhere, austerity during a time of economic weakness is not a good way to beat a budget deficit, and will be largely self-defeating.

3--Vicious Cycles: Why Washington is About to Make the Jobs Crisis Worse, Robert Reich's blog

Excerpt: The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.

Yet the parallel universe called Washington is moving in exactly the opposite direction. Republicans are proposing to cut the budget deficit this year and next, which will result in more job losses. And Democrats, from the President on down, seem unable or unwilling to present a bold jobs plan to reverse the vicious cycle of unemployment. Instead, they’re busily playing “I can cut the deficit more than you” — trying to hold their Democratic base by calling for $1 of tax increases (mostly on the wealthy) for every $3 of spending cuts.

All of this is making the vicious economic cycle worse — and creating a vicious political cycle to accompany it.

4--Massachusetts Attorney General Signals Likelihood of Nixing “50 State” Mortgage Settlement, Naked Capitalism

Excerpt: The market-moving stories, namely the US debt ceiling drama and the rolling Greek/Eurozone mess, are crowding out anything other than tragedies (the Norway bombing, Chinese train wrecks) and good old fashioned high profile prurient interest (DSK and the Murdochs).

Let’s briefly cover an important development in the US mortgage saga. I’m told that the Department of Justice is putting the thumbscrews on state attorneys general to sign a mortgage settlement deal this week (how exactly the DoJ can pressure state officials is beyond me, since the Feds typically ignore state investigations until they look like they are about to be end run, but hopefully readers can enlighten me). New York and Delaware, as we already indicated, are out via having launched their own investigations, as is Nevada (ground zero of the mortgage mess) and likely California. We’ve been told Arizona was out a while ago, but haven’t gotten confirmation that that is still true.

We are also told the banks are pressing (as we predicted) for a very broad release, and the announcement today from Martha Coakley, the Massachusetts state AG, strongly suggests she is another dissenter. Per Bloomberg:

The banks in settlement talks with state and federal officials are seeking broad releases to protect them from legal claims. Massachusetts Attorney General Martha Coakley said yesterday she won’t support an agreement that includes releases for securitization of mortgages and conduct related to a database of mortgages known as MERS.

“Massachusetts will not sign on to any global agreement with the banks if it includes a comprehensive liability release regarding securitization and the MERS conduct,” Coakley wrote to the Norfolk County register of deeds in Dedham, Massachusetts. “These investigations must continue.” The registry keeps real estate records.

5--More Americans unhappy with Obama on economy, jobs, Washington Post

More than a third of Americans now believe that President Obama’s policies are hurting the economy, and confidence in his ability to create jobs is sharply eroding among his base, according to a new Washington Post-ABC News poll.

But Americans’ discontent does not stop there. The survey also found that Americans harbor negative feelings toward congressional Republicans. Roughly as many people blame Republican policies for the poor economy as they do Obama. But 65 percent disapprove of the GOP’s handling of jobs, compared to 52 percent for the president.

The dissatisfaction is fueled by the fact that many Americans continue to see little relief from the pain of a recession that technically ended two years ago. Ninety percent of those surveyed said the economy is not doing well, and four out of five report that jobs are difficult to find. In interviews, several people said that they feel abandoned by both parties, particularly as debates over the debt ceiling gridlock Washington.

“What I’ve realized is it doesn’t matter if you’re Republican or Democrat anymore,” said Joey Wakim, 21, a used car salesman from Allentown, Pa. “We just want somebody who’s gonna get things right.”

6--New Court Filing Reveals How the 2004 Ohio Presidential Election Was Hacked, Truthout

Excerpt: A new filing in the King Lincoln Bronzeville v. Blackwell case includes a copy of the Ohio Secretary of State election production system configuration that was in use in Ohio's 2004 presidential election when there was a sudden and unexpected shift in votes for George W. Bush.

The filing also includes the revealing deposition of the late Michael Connell. Connell served as the IT guru for the Bush family and Karl Rove. Connell ran the private IT firm GovTech that created the controversial system that transferred Ohio's vote count late on election night 2004 to a partisan Republican server site in Chattanooga, Tennessee owned by SmarTech. That is when the vote shift happened, not predicted by the exit polls, that led to Bush's unexpected victory. Connell died a month and a half after giving this deposition in a suspicious small plane crash....

Spoonamore concluded from the architectural maps of the Ohio 2004 election reporting system that, "SmarTech was a man in the middle. In my opinion they were not designed as a mirror, they were designed specifically to be a man in the middle."

A "man in the middle" is a deliberate computer hacking setup, which allows a third party to sit in between computer transmissions and illegally alter the data. A mirror site, by contrast, is designed as a backup site in case the main computer configuration fails.....

Spoonamore also swore that "...the architecture further confirms how this election was stolen. The computer system and SmarTech had the correct placement, connectivity, and computer experts necessary to change the election in any manner desired by the controllers of the SmarTech computers."

Project Censored named the outsourcing of Ohio's 2004 election votes to SmarTech in Chattanooga, Tennessee to a company owned by Republican partisans as one of the most censored stories in the world.

In the Connell deposition, plaintiffs' attorneys questioned Connell regarding gwb43, a website that was live on election night operating out of the White House and tied directly into SmarTech's server stacks in Chattanooga, Tennessee which contained Ohio's 2004 presidential election results....

Bob Magnan, a state IT specialist for the secretary of state during the 2004 election, agreed that there was no failover scenario. Magnan said he was unexpectedly sent home at 9 p.m. on election night and private contractors ran the system for Blackwell.

7-- Worse Than Hoover, Marshall Auerback:, Naked Capitalism

Excerpt: But what is this President’s ideal? The only time in our national discussions where Mr. Obama has evinced any kind of passion has been during the debt ceiling negotiations. He has, since the inception of his presidency, elevated budget deficit reductions and the “reform” of entitlements as major transformational goals of his Presidency (rather than seeing deficit reduction as a by-product of economic growth). As early as January 2009, before his inauguration (but after the election, of course), then President-elect Obama pledged to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery could not be attained unless the government finally got control over its most costly entitlement programs (

In essence, the debt ceiling dispute is not forcing a compromise on this President, but is instead is viewed by him as a golden opportunity to do what he’s always wanted to do. That also explains why he won’t ask for a clean vote on the debt ceiling, why he has ignored the coin seignorage option, and why he has persistently avoided the gambit of challenging its constitutionality via the 14th amendment, even though his Democrat predecessor has already suggested that this is precisely what he would do: Bill Clinton asserted last week that he would use the constitutional option to raise the debt ceiling and dare Congress to stop him (

And to what end? Neither he, nor the Congress appear to recognize the downward acceleration in GDP triggered when the spending limits are reached if the automatic stabilizers are disabled because they are no longer funded as a consequence of the debt ceiling limitations (again, a LEGAL, rather than operational constraint – the debt ceiling reflects an UNWILLINGNESS to pay, rather than an INABILITY to pay).

So spending will be further cut, debt deflation dynamics will intensify, sales will go down more, more jobs will be lost, and tax revenues will collapse even further. Which will set the whole process off again: more spending is cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working. All are radically underestimating the speed and extent of the subsequent damage.

Unlike President Hoover, who inherited the foundations of a huge credit bubble from the 1920s and found himself overwhelmed by it, this President is worse. He is, through his actions, creating the conditions for a second Great Depression because of his misconceived belief that too much government spending “crowds out” private investment, and takes dollars out of the economy when it borrows. And therefore, goes the perverse logic, when the government stops borrowing to spend, the economy will have those dollars to replace the lost federal spending.

And so after the initial fall, Obama believes, it will all come back that much stronger.

Except, that as my friend Warren Mosler insists, he is dead wrong, and therefore we are all dead ducks.....Obama is in fact tearing apart most of the foundations which were tentatively initiated under Hoover, but which came to full fruition under FDR. If he continues down this ruinous path, $150 billion/month in spending will be cut. Such economic thinking isn’t worthy of Mellon, let alone Herbert Hoover.

8--Debt ceiling negotiations lead to fascism?, Naked Capitalism

Excerpt: ....Ryan Grim explains what it really means in the Huffington Post (hat tip Guy S):

Debt ceiling negotiators think they’ve hit on a solution to address the debt ceiling impasse and the public’s unwillingness to let go of benefits such as Medicare and Social Security that have been earned over a lifetime of work: Create a new Congress.

This “Super Congress,” composed of members of both chambers and both parties, isn’t mentioned anywhere in the Constitution, but would be granted extraordinary new powers. Under a plan put forth by Senate Minority Leader Mitch McConnell (R-Ky.) and his counterpart Majority Leader Harry Reid (D-Nev.), legislation to lift the debt ceiling would be accompanied by the creation of a 12-member panel made up of 12 lawmakers — six from each chamber and six from each party.

Legislation approved by the Super Congress — which some on Capitol Hill are calling the “super committee” — would then be fast-tracked through both chambers, where it couldn’t be amended by simple, regular lawmakers, who’d have the ability only to cast an up or down vote. With the weight of both leaderships behind it, a product originated by the Super Congress would have a strong chance of moving through the little Congress and quickly becoming law. A Super Congress would be less accountable than the system that exists today, and would find it easier to strip the public of popular benefits. Negotiators are currently considering cutting the mortgage deduction and tax credits for retirement savings, for instance, extremely popular policies that would be difficult to slice up using the traditional legislative process.

House Speaker John Boehner (R-Ohio) has made a Super Congress a central part of his last-minute proposal.

The Tea Partiers make a fetish of invoking the Constitution when it suits them but will happily run roughshod over it when it conflicts with their pet wishes. Not that they are singularly guilty in this conspiracy against the public-at-large, but their faux holier-than-thou/populist pretense while aligning themselves with an elite power grab is particularly nausea-inducing.

I hate using the word “fascism” because overuse has weakened its bite, but trumped-up threat by trumped up threat, our government is moving relentlessly in that direction.

9--FDR Speech 1936, Jesse's Cafe American

Excerpt: We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master.

10---I'm starting to think that the Left might actually be right, Telegraph

Excerpt: It has taken me more than 30 years as a journalist to ask myself this question, but this week I find that I must: is the Left right after all? You see, one of the great arguments of the Left is that what the Right calls “the free market” is actually a set-up.

The rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour. The freedom that results applies only to them. The many simply have to work harder, in conditions that grow ever more insecure, to enrich the few. Democratic politics, which purports to enrich the many, is actually in the pocket of those bankers, media barons and other moguls who run and own everything....

...when the banks that look after our money take it away, lose it and then, because of government guarantee, are not punished themselves, something much worse happens. It turns out – as the Left always claims – that a system purporting to advance the many has been perverted in order to enrich the few. The global banking system is an adventure playground for the participants, complete with spongy, health-and-safety approved flooring so that they bounce when they fall off. The role of the rest of us is simply to pay.

This column’s mantra about the credit crunch is that Everything Is Different Now. One thing that is different is that people in general have lost faith in the free-market, Western, democratic order. They have not yet, thank God, transferred their faith, as they did in the 1930s, to totalitarianism. They merely feel gloomy and suspicious. But they ask the simple question, “What's in it for me?”, and they do not hear a good answer....

As for the plight of the eurozone, this could have been designed by a Left-wing propagandist as a satire of how money-power works. A single currency is created. A single bank controls it. No democratic institution with any authority watches over it, and when the zone’s borrowings run into trouble, elected governments must submit to almost any indignity rather than let bankers get hurt. What about the workers? They must lose their jobs in Porto and Piraeus and Punchestown and Poggibonsi so that bankers in Frankfurt and bureaucrats in Brussels may sleep easily in their beds.

11--Swift U.S. action on debt needed in global interest: IMF, Reuters

Excerpt: An IMF official, briefing reporters by telephone, said that if the United States' AAA debt rating -- regarded as the gold standard for creditworthiness -- was downgraded it could be "extremely damaging" for the U.S. and world economy.

The IMF official said that, since such a downgrade would be precedent-setting, it was impossible to predict with certainty the impact, but it would certainly drive interest rates up.

While underlining the urgency of reaching a debt-reducing agreement, the IMF also cautioned that an "excessively large upfront fiscal adjustment" should be avoided because that would further dampen domestic demand and slow growth.

"With a still-wide output gap and downside risks to the outlook, especially potential spillovers from European financial markets, directors called for a cautious approach to unwinding macroeconomic support," the IMF said.

12--Republican Leaders Voted for U.S. Debt Drivers, Bloomberg

Excerpt: House Speaker John Boehner often attacks the spendthrift ways of Washington.
“In Washington, more spending and more debt is business as usual,” the Republican leader from Ohio said in a televised address yesterday amid debate over the U.S. debt. “I’ve got news for Washington - those days are over.”

Yet the speaker, House Majority Leader Eric Cantor, House Budget Chairman Paul Ryan and Senate Minority Leader Mitch McConnell all voted for major drivers of the nation’s debt during the past decade: Wars in Afghanistan and Iraq, the 2001 and 2003 Bush tax cuts and Medicare prescription drug benefits. They also voted for the Troubled Asset Relief Program, or TARP, that rescued financial institutions and the auto industry.

Together, a Bloomberg News analysis shows, these initiatives added $3.4 trillion to the nation’s accumulated debt and to its current annual budget deficit of $1.5 trillion.

Tuesday, July 26, 2011

Today's links

1--China's spectacular real estate bubble is about to go pop, Telegraph

Excerpt: Little noticed amid the furore of the euro crisis, HSBC’S preliminary survey of China’s factories, published this week, indicated manufacturing activity in the world’s second-biggest economy actually declined in July from the month before, the first such contraction in a year. The HSBC purchasing managers index for China has been falling for months now, indicating a protracted fall off in growth as the Chinese authorities act to rein in rampant inflation.

House prices look like being a major victim of this slowdown. Up to a point, this is deliberate policy for China. With the example of the Western property bubble, which ended very badly indeed, serving as a salutary reminder of the dangers of unchecked real estate prices, the Chinese authorities have taken a number of steps to cool the country’s overheated housing market. And it is working; residential property prices have risen on average by “only” 7pc over the last year, and transaction volumes are lower.

But here’s the problem. Residential and commercial property development have been such a big component of growth in recent years that anything that damages the property market risks upsetting the entire apple cart. Nobody can forecast with any certainty when the crash will come, but come it will. You cannot cram that much development into such a short space of time without there eventually being a correction.

And when it comes, its knock on consequences are going to be extreme, possibly just as seismic as the rolling series of banking crises we’ve had here in the west.

2--Even before a budget cuts, US households looking vulnerable, Credit Writedowns

Excerpt: Economists at the Northeastern University in Boston recently found that corporate profits captured 88% of the entire US economy’s income growth between the second quarter of 2009 and the fourth quarter of 2010, with workers taking just 1% of the increase. Recent Department of Labour data showed unit labour costs edged up 0.7% in the year to March though not enough to make up for a 2.9% fall in the previous 12 months. Northeastern economics professor Andrew Sum says the mismatch is “historically unprecedented” and bodes ill for future growth, especially given many companies are sitting on their cash rather than investing it. “Workers have no money, no purchasing power, so that’s why consumption is not moving”. By sitting on their profits firms are acting like earners “who take their money and stuff it in the mattress. That’s happening across the economy”. This means that US growth is either financed by debt (mainly Federal debt) as household income is not keeping pace with GDP growth, or secondly by exports which makes H2 potentially vulnerable to a slowdown as the international markets start to slow.

3--Wall Street analysts and economists have this recession recovery wrong, Barry Ritholtz, Washigton Post

Excerpt: In a nation of 307 million people with about 145 million workers, we have to gain about 150,000 new hires a month to maintain steady employment rates. So 18,000 new monthly jobs misses the mark by a wide margin.

Why have analysts and economists on Wall Street gotten this so wrong? In a word: context. Most are looking at the wrong data set, using the post-World War II recession recoveries as their frame of reference.

History suggests the correct frame of reference is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery. These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.

Fortunately, a few economists have figured this out and provide some insight into what we should expect. Among the most prescient are professors Carmen M. Reinhart and Kenneth S. Rogoff. Back in January 2008 (!), they published a paper warning that the U.S. subprime mortgage debacle was turning into a full-blown credit crisis. Looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977) — the professors warned that we should expect a prolonged slump. These other crises had a number of surprisingly consistent elements:

First, asset market collapses were prolonged and deep. Real housing prices declined an average of 35 percent over six years, while equity prices collapsed an average of 55 percent. Those numbers were stunningly close to what occurred in the U.S. crisis of 2007-09.

Second, they’ve noted that the aftermaths of banking crises “are associated with profound declines in employment.” They found that following a crisis, the average increase in the unemployment rate was 7 percentage points over four years. U.S. unemployment climbed 6 percentage points (from about 4 percent to about 10 percent), while the broadest measure of joblessness gained over 7 percentage points (from about 9 percent to about 16 percent). Again, they were right on the money.

Third, the professors warned that “government debt tends to explode, rising an average of 86 percent.” Surprisingly, the primary cause is not the costs of bailing out the banking system, but the “inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged contractions.” They also warned that “ambitious countercyclical fiscal policies aimed at mitigating the downturn” also tend to be costly.

Hmmm, plummeting tax revenues just as the government tries to stimulate the economy . . . does any of this sound familiar? It should.

4--Europe's ideologues took the whole world to the brink of disaster, Ambrose-Evans Pritchard, Telegraph

Excerpt: Clause 7 of the Brussels accord states that Europe's bail-out fund (EFSF) will have powers to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments" in any EMU country, opening the way for a `Euro-TARP' to rescue banks. The German bloc can henceforth blanket the entire South with its AAA rating, if it dares.

This is the start of a liability union and a proto EU Treasury, the "collectionization of risk" that Dr Merkel has battled against for months. Italy and Spain can breathe easier. Europe can hope to muddle through the summer. Armageddon is postponed again.

Dr Merkel denies that Germany has crossed the line towards shared fiscal destiny. Berlin retains a veto on use of the EFSF. "As I understand it, a transfer union would be automotic subsidies," she said.

To the extent that Germany does have a meaningful veto, then the deal agreed on Thursday will inevitably be tested by markets. Investors will want to know whether she can secure Bundestag approval for the colossal sums needed to make the EFSF credible. Mrs Merkel cannot hve it both ways....

Europe is advancing "with big strides towards an uncontrolled transfer union. Budgetary power must not under any circumstances be exercised without democratic legitimacy."...

Europe's leaders have at least stopped imposing 1930s debt deflation and depression on the rescued trio of Greece, Portugal, and Ireland. There is a genuine switch from austerity to growth. The penal loan rate has been cut to 3.5pc, with a Marshall Plan for good measure. These countries are no longer condemned to a certain death spiral.

Ireland can hope to stabilize its debt trajectory. With a fat trade surplus, it has every chance of pulling through. The policy of "internal devaluation" within EMU through wage deflation may in this particular case work, thanks to flexible labour markets....

Angela Merkel said Europe's leaders had finally tackled the "root problem". They did no such thing. The root problem is that vastly disparate nations with different growth rates, productivity patterns, debt structures, sensitivity to interest rates, legal systems, wage bargaining practices, and inflation proclivities, were meshed together by Hegelian politicians acting against the warnings of the Bundesbank and the European Commission's economists.....

One "solution" to this root problem is for the Geman bloc to pay subsidies to the South equal in scale to Versailles reparations, for decades. This is where fiscal union ultimately leads. Or Germania can opt for an orderly departure from monetary union before sinking deeper into this morass. Take your pick.

5--The Fed Audit: "U.S. provided a whopping $16 trillion in secret loans to bail out US and foreign banks", Global Research

Excerpt: The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

6--The age of Hicks, Paul Krugman, New York Times

Excerpt: let me use this as an occasion to make again a point I’ve made a number of times, this time slightly differently: what we’ve seen in the Lesser Depression is a spectacular vindication of one approach to macroeconomics, namely the modified Keynesianism of John Hicks. (Decent summary here.) What I and others have done on the liquidity trap can basically be viewed as elaborating and providing firmer foundations for the basic Hicks framework.

The real test of an economic model (or any model) is how it performs out of sample, that is, under conditions different from the usual. Hicksian theory makes two assertions that are very much at odds with what conventional wisdom suggests:

1. It says that once adverse demand shocks have pushed the economy into a liquidity trap, even very large increases in the monetary base — the sum of currency and bank reserves, which is what the Fed controls — will be basically sterile, leading neither to a boom nor to inflation.

2. It also says that under these conditions even large government borrowing will not crowd out private investment, and will not drive up interest rates.

3--Only Certainty in Impact of U.S. Default Is More Uncertainty, Kathleen Madigan, Wall Street Journal

Excerpt: Yes, the sun will rise if the U.S. debt ceiling isn’t lifted. But the ensuing day will bring chaos to financial markets and the economy.

Even as they expect a resolution, economists are sorting out the fallout from a failure to raise the debt ceiling and the subsequent downgrade to the Treasury’s credit rating. The problem is — with no past to point to — ideas of the consequences are mostly “guesstimates.”

“There is little precedent to turn to for an indication of how markets and the economy might react to a downgrade,” write economists at Wells Fargo Securities.

Clearly, a sustained federal shutdown would cut gross domestic product growth. If Washington could only spend current revenues, it would subtract about $100 billion in economic output just in August, say most economists. What’s unclear is the negative multiplier impact on the private economy. It depends on what bills aren’t paid: no Medicare payments will hit hospitals, shutting down federal parks will hurt consumer spending and jobs.

7--S&P: Shadow inventory slowing recovery, Housingwiire

Excerpt: Although the drop in default rates shows promise, the amount of shadow inventory still creates a dark loom over the future of housing prices, according to latest results from Standard & Poor's U.S. Residential Performance Index.

The shadow inventory of unresolved distressed properties is currently at an estimated $405 billion, representation four years of housing inventory and one-third of the outstanding U.S. non-agency residential mortgage debt.

The report states that full recovery will only occur once the supply of distressed properties shrinks to less than a quarter of the current volume.

The bigger drag will be uncertainty. “Worries over the intractable politics of deficit reduction and raising the federal debt ceiling have cast a pall over the economy,” note economists at IHS Global Insight.

8--- US data, US economy, Rebecca Wilder, Angry Bear

Excerpt: Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion.

Economists have put their 'hope' into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we're talking about jobs and the welfare of American families here.

I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving.

First, the bellwether of the state of the US labor market - weekly initial unemployment claims - continues to disappoint. In the week ending July 16, seasonally adjusted initial claims increased 10,000 to 408,000. The 4-week moving average was 421,250, which is just 19,000 below its May peak of 440,250. This week's report fell on the BLS' survey week, so the July employment report is likely to be another weak one

9---How the deficit got this big, New York Times

Excerpt: With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here — from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions....

Despite what antigovernment conservatives say, non-
defense discretionary spending on areas like foreign aid, education and food safety was not a driving factor in creating the deficits. In fact, such spending, accounting for only 15 percent of the budget, has been basically flat as a share of the economy for decades. Cutting it simply will not fill the deficit hole.

A few lessons can be drawn from the numbers. First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. Government has to spur demand and create jobs in a deep downturn, even though doing so worsens the deficit in the short run. Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.

In future decades, when rising health costs with an aging population hit the budget in full force, deficits are projected to be far deeper than they are now. Effective health care reform, and a willingness to pay more taxes, will be the biggest factors in controlling those deficits.

Monday, July 25, 2011

Today's links

1--Corporations Ripe for Buybacks, Bloomberg

Excerpt: Corporations are facing “ripe” conditions for buying back shares, pursuing mergers and acquisitions and increasing debt after hoarding cash since 2009, said Barclays Capital’s Jeffrey Meli.

“Conditions will be ripe once macro-volatility settles down in the third quarter for corporations to start getting more aggressive with their balance sheets,” Meli, head of credit strategy at the firm in New York, said today in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” “Some of the lessons from 2009 in terms of needing to hoard cash, needing to run very conservative balance sheets, are starting to fade.”

Executives are signaling that they’re gaining enough confidence in the economic recovery to begin deploying some of the record $1.9 trillion in cash they amassed after the 2008 credit crisis. The level of acquisitions and share buybacks, which slowed in the second quarter amid Europe’s sovereign debt crisis and slower-than-expected growth in the U.S., is set to increase through September, Meli said.

“With all-in yields lower, with corporate performance continuing to be strong, the shareholder-friendly activity, M&A and generic re-leveraging will start to increase again” as long as the U.S. resolves its debt ceiling impasse and stability in Europe takes hold, he said....

Since the end of 2010, 53 percent of non-financial companies in Barclays Capital’s U.S. Credit Corporate index have increased total debt, with less than 40 percent reducing, Barclays strategists wrote in a June 3 research note.

2--The Lesser Depression, Paul Krugman, New York Times via economist's view

Excerpt: These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.

We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse. ...

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable..., the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe. ...

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

3--Wall Street and the debt ceiling: Unthinkable?, The Economist

Excerpt: Some fear that a default could cause a 2008-style crunch in repo markets, with the raising of “haircuts” on Treasuries leading to margin calls. The reality would be more complicated. For one thing, it’s not clear that there is a viable alternative as the “risk-free” benchmark. One banker jokes that AAA-rated Johnson & Johnson is “not quite as liquid”. In a flight to safety triggered by a default, much of the money bailing out of risky assets could end up in Treasury debt. Increased demand for collateral to secure loans could even push up its price.

Then there is the impact of a ratings downgrade. Money-market funds, which hold $684 billion of government and agency securities, are allowed to hold government paper that has been downgraded a notch. Other investors, such as some insurers, can only hold top-rated securities but their investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm. There’s a surprise.

4--Deficit Deal Could Derail Growth, Credit Writedowns

Excerpt: To understand the current state of the economy we again repeat our long-standing view that the main reason why the current recovery is so weak is the lack of consumer ability to spend as households build up their savings and pare down debt after decades of using excessive credit. We have published a number of comments showing how key economic series have undergone the worst declines and the weakest recoveries in the post-war period (see archives). An excellent article in last Sunday's New York Times by David Leonhardt, based on a New York Federal Reserve Bank, explains the nature of the decline in terms of discretionary consumer spending. This is consumer spending excluding outlays on such necessary items such as food, housing and healthcare.

According to the article discretionary spending never fell more than 3% per capita in any recession of the past 50 years, but is now down 7%. As an example the auto industry, even in this year of recovery is on pace to sell 28% fewer vehicles than ten years ago in 2001 when the economy was in recession. Oven and stove sales are at the lowest level since 1992. The article repeats our long-held contention that business is not hiring because of slack consumer demand since households are facing a sharp downturn in wealth and historically high debts. Since 1980 spending has significantly exceeded income and consumers compensated by reducing savings and running up debt through credit cards, mortgages, home equity loans and cash-out refinancing that used the run-up in home prices. Now those sources of cash are gone and consumers are forced to limit spending.

The weak economic recovery was spurred by the most massive government stimulation in history, both fiscal and monetary. However even this weak recovery has faltered in the first half of the year despite QE2 and some fiscal stimulation. Now QE2 has ended while the fiscal stimulus has gradually been turning into restrain.

5--Goldman Sachs Lowers estimate of Excess Vacant Housing Supply, Calculated Risk

Excerpt: The current number of excess vacant housing units is a key piece of data for the housing market. Unfortunately available data is inconsistent.

Today Goldman Sachs lowered their estimate of the excess supply.
While the decennial census data are from the largest sample, we do not believe it is appropriate to ignore the other sources. ...

With the 2010 Census results in hand, we would now say that excess vacancies in the housing market are 1.5 to 3.5 million units—a wide range, reflecting discrepancies in the available data.

Clearly though, the census results suggest the risks to our previous estimate of 3.5 million units are to the downside. ... [A]t the current rate of housing production and with household growth of one million per year, it would take 5.1 years to clear 3.5 million units of excess inventory, but only 2.2 years to clear 1.5 million units of excess inventory.
A range of 2.2 years to 5.1 years to clear the excess inventory? We need better data!

6--Government Considers Ways to Rent Foreclosed Homes, Wall Street Journal

Excerpt: The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter.

While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.

Trimming the glut of unsold foreclosed homes on the market is "worth looking at," said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

7--Social Security: Still solvent after all these years, Robert Reich's blog

Excerpt: The very idea that Social Security might be on the chopping block in order to pay the ransom Republicans are demanding reveals both the cravenness of their demands and the callowness of the opposition to those demands.

In a former life I was a trustee of the Social Security trust fund. So let me set the record straight.

Social Security isn’t responsible for the federal deficit. Just the opposite. Until last year Social Security took in more payroll taxes than it paid out in benefits. It lent the surpluses to the rest of the government.

Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.

8--Jobless Rates Rise in Most U.S. States, Wall Street Journal

Excerpt: The unemployment rate increased in 28 states in June, reflecting the nationwide increase to 9.2% from 9.1% over the month, the Labor Department said. Some 14 states saw their unemployment rate hold steady while eight logged decreases.

The U.S. economy added a paltry 18,000 jobs in June, as measured by a separate national survey, and an average of just 21,500 over the past two months – a disappointing result that has raised big questions about the sustainability of the nation’s economic recovery. The regional unemployment data show that the states that were hardest hit by the recession continue to have the toughest road in recovery....

Though unemployment rates rose in 28 states, the number of people employed fell in just 24 of 50 U.S. states during June. The biggest decrease in payroll employment occurred in Tennessee, shedding 16,900 jobs, the Labor Department said in new figures Friday. Missouri followed with 15,700 jobs lost and Virginia payrolls fell by 14,600. Twenty-six states saw payrolls increase, led by Texas and California. Unemployment rates can rise despite increases in payrolls when they are offset by a larger number of unemployed people and shifting labor force. Some big companies have announced job cuts. This week, weapons supplier Lockheed Martin made a voluntary-layoff offer to about 6,500 U.S.-based employees.

9--Felix TV: The triple-A bond chart, Felix Salmon

Excerpt: Must see TV --Triple A explosion: the real risks

10--States negotiating immunity for banks over foreclosures, Reuters

Excerpt: State attorneys general are negotiating to give major banks wide immunity over irregularities in handling foreclosures, even as evidence has emerged that banks are continuing to file questionable documents.

A coalition of all 50 states' attorneys general has been negotiating settlements with five of the biggest U.S. banks that would include payment of up to $25 billion in penalties and commitments to follow new rules. In exchange, the banks would get immunity from civil lawsuits by the states, as well as similar guarantees by the Justice Department and Department of Housing and Urban Development, which have participated in the talks.

State and federal officials declined to say if any form of immunity from criminal prosecution also is under discussion. The banks involved in the talks are Bank of America, Wells Fargo, CitiGroup, JPMorgan Chase and Ally Financial.

Reuters reported Monday that major banks and other loan servicers have continued to file questionable documents in foreclosure cases. These include false mortgage assignments, and promissory notes with suspect or missing "endorsements," which prove ownership. The Reuters report also showed continued "robo-signing," in which lenders' employees or outside contractors churn out reams of documents without fully understanding their content. The report turned up several cases involving individuals who were publicly identified as robo-signers months ago.

Reuters found that such activity has continued even after 14 major mortgage lenders signed settlements with federal bank regulators promising to halt such practices and give remediation to some homeowners who were harmed.

11--CNN Poll: Drop in liberal support pushes Obama approval rating down, CNN

Excerpt: President Barack Obama's approval rating is down to 45 percent, driven in part by growing dissatisfaction on the left with the president's track record in office, according to a new national survey.

A CNN/ORC International Poll also indicates that the Republican "brand" is taking a beating in the minds of Americans.
According to the poll, the president's 45 percent approval rating is down three points from June. Fifty-four percent of people questioned disapprove of how Obama's handling his duties, up six points from last month. His 54 percent disapproval rating ties the all-time high in CNN polling that the president initially reached just before last year's midterm elections.

"But drill down into that number and you'll see signs of a stirring discontent on the left," says CNN Polling Director Keating Holland. "Thirty-eight percent say they disapprove because President Obama has been too liberal, but 13 percent say they disapprove of Obama because he has not been liberal enough - nearly double what it was in May, when the question was last asked, and the first time that number has hit double digits in Obama's presidency."

Obama's approval rating among liberals has dropped to 71 percent, the lowest point in his presidency. And the number of Democrats who want the party to renominate Obama next year, now at 77 percent, is relatively robust by historical standards but is also down a bit since June.

12--Matt Stoller: Dodd-Frank Made No Structural Changes to Banking System, Naked Capitalism

Excerpt: .....After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a “solution”. It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.

And mostly, that’s what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that’s because Obama’s Treasury Secretary already had the answers to these questions.
The one dangling thread, and this is what worries the administration, is the housing market. But we’ll save that problem for another day.

Looking at that figure another way, roughly one in four Americans who disapprove of the president say they feel that way because he's not been liberal enough.

13--Should You Get Only $7000 if Wells Stole Your House? Naked Capitalism

Excerpt: If you are a too big to fail bank like Wells Fargo, the wages of crime look awfully good. RIp off as many as 10,000 people to the point where they lose their homes and your good friend the Fed will let you off the hook for somewhere between $1000 and $20,000 per house. And as we’ll discuss in due course, this deal isn’t just bad for the abused homeowners, it’s also bad for investors and sets a terrible precedent, which means its impact extends well beyond the perhaps 10,000 immediate casualties.

Oh, and how much does the Fed think you should be paid if you were foreclosed upon thanks to Wells? Per the settlement document:

if, primarily as a result of the additional payment obligation on the loan resulting from the altered or falsified documents, on or before the date of this Order, the borrower’s home was foreclosed on or the borrower sold the home in a short sale, Administrator A shall provide an additional amount up to $7,000 in appropriate remedial compensation to reimburse the borrower for any expenses attributable to the foreclosure or short sale;

In other words, as Adam Levitin noted, all the loss of your home is worth according to the Fed is your moving costs and maybe a month or two of rent.....

...We’ve commented repeatedly on this blog as to how Wells continues to maintain that it is a cleaner institution than other mortgage originators and servicers, when the evidence shows there is no basis for its claims. Indeed, Wells is the Lehman of the big four banks, proportionately more heavily exposed to residential real estate than the rest, and particularly aggressive in its accounting (it has been engaging in highly visible underreserving for loan losses since early 2009). As we’ve said before, if Bank of America starts to look like it is in serious trouble, Wells is next in line. And it couldn’t happen to a more deserving bunch.

14--More on the debt ceiling deadline, Naked Capitalism

Excerpt: the average person loses out no matter what happens. Budget trimming in a weak economy will assure flagging growth or a contraction next year. If you have any doubts, debt to GDP ratios have worsened in the European countries that have put on the austerity hair shirt. Cutting Social Security and Medicare is not popular and not necessary (even Ron Paul, who favors extremely aggressive budget measures, pointedly avoided advocating cuts to Medicare and Social Security in an interview today; as we and many others have noted, Medicare is not a “Medicare” problem but a health care cost problem, which the Obama “reforms” will only make worse).

So it isn’t clear why Democrats should sign an Obama suicide pact. Market upheaval, of course, would hit big donors worse than ordinary voters, which is presumably why it should be avoided at all costs. Yet it was the Blue Dog corporate Democrats, and not the progressives, that took it in the chin in the midterms.

The fact that Obama is regularly being compared to Herbert Hoover and now Nixon should give him pause; it’s an indication that he is vulnerable. A bit of upheaval and discomfit to the moneyed classes might be the best thing that could happen to Obama in the very unlikely event Democratic Congressmen prove to be as difficult as their Republican counterparts. But I suspect he’ll get his way and perpetuate the now well honed practice of using crises, whether real or not, to transfer more income to the top of the food chain.

15--Brazil Shouldn't Play Junior Partner to the US, The Occupation of Haiti Must End, Mark Weisbrot, Counterpunch

Excerpt: U.S. diplomatic cables now released from Wikileaks make it clearer than ever before that foreign troops occupying Haiti for more than seven years have no legitimate reason to be there; that this a U.S. occupation, as much as in Iraq or Afghanistan; that it is part of a decades-long U.S. strategy to deny Haitians the right to democracy and self-determination; and that the Latin American governments supplying troops – including Brazil – are getting tired of participating.

One leaked U.S. document shows how the United States tried to force Haiti to reject $100 million in aid per year – the equivalent of 50 billion reais in Brazil's economy – because it came from Venezuela. Because Haiti's president, Préval, understandably refused to do this, the U.S. government turned against him. As a result, Washington reversed the results of Haiti's first round presidential election in November 2010, to eliminate Préval's favored candidate from the second round. This was done through manipulation of the Organization of American States (OAS), and through open threats to cut off post-earthquake aid to the desperately poor country if they did not accept the change of results. All of this is well-documented.

16--Obama's plan to gut Social Security, Glenn Greenwald, Guardian via Information Clearinghouse

Excerpt: in 2009, clear signs emerged that President Obama was eager to achieve what his right-predecessor could not: cut social security. Before he was even inaugurated, Obama echoed the right's manipulative rhetorical tactic: that (along with Medicare) the programme was in crisis and producing "red ink as far as the eye can see." President-elect Obama thus vowed that these crown jewels of his party since the New Deal would be, as Politico reported, a "central part" of his efforts to reduce the deficit.

The next month, his top economic adviser, the Wall Street-friendly Larry Summers, also vowed specific benefit cuts to Time magazine. He then stacked his "deficit commission" with long-time advocates of social security cuts.

Many progressives, ebullient over the election of a Democratic president, chose to ignore these preliminary signs, unwilling to believe that their own party's leader was as devoted as he claimed to attacking the social safety net. But some were more realistic. The popular liberal blogger and economist Duncan "Atrios" Black, who was one of the leaders of the campaign against Bush's privatisation scheme, vowed in response to these early reports:

The left ... will create an epic 360-degree shitstorm if Obama and the Dems decide that cutting social security benefits is a good idea.

Fast forward to 2011: it is now beyond dispute that President Obama not only favours, but is the leading force in Washington pushing for, serious benefit cuts to both social security and Medicare.

This week, even as GOP leaders offered schemes to raise the debt ceiling with no cuts, the White House expressed support for the Senate's so-called "gang of six" plan that includes substantial cuts in those programmes.

The same Democratic president who supported the transfer of $700bn to bail out Wall Street banks, who earlier this year signed an extension of Bush's massive tax cuts for the wealthy, and who has escalated America's bankruptcy-inducing posture of Endless War, is now trying to reduce the debt by cutting benefits for America's most vulnerable – at the exact time that economic insecurity and income inequality are at all-time highs.....

Obama has continued Bush/Cheney terrorism policies – once viciously denounced by Democrats – of indefinite detention, renditions, secret prisons by proxy, and sweeping secrecy doctrines.

He has gone further than his predecessor by waging an unprecedented war on whistleblowers, seizing the power to assassinate U.S. citizens without due process far from any battlefield, massively escalating drone attacks in multiple nations, and asserting the authority to unilaterally prosecute a war (in Libya) even in defiance of a Congressional vote against authorising the war.

And now he is devoting all of his presidential power to cutting the entitlement programmes that have been the defining hallmark of the Democratic party since Franklin Roosevelt's New Deal. The silence from progressive partisans is defeaning – and depressing, though sadly predictable.

17--Fear in today’s markets shows failure of Dodd-Frank, Repowatch

Excerpt: If the financial crisis in 2007-2008 was fundamentally about mortgages, as many believe, why are we facing a similar financial crisis today?

Here’s the answer: The fundamental problem three years ago was not mortgages. It was the repurchase market and credit default swaps.

Mortgages were simply the collateral on the repurchase market and the instruments being insured by the swaps. Any other collateral, any other instrument, could have caused the same problem. Today it’s Greek and U.S. debt.

The Dodd-Frank Act tried to deal with credit default swaps. It did almost nothing to fix the repurchase market. The act’s failure to stop runs on the shadow banking system, where repos are the main financing, leaves us as vulnerable to a credit panic as we were in 2007.