Tuesday, July 5, 2011

Today's links

1--Corporate Cash Con, Paul Krugman, New York Times via economist's view

Excerpt: U.S. corporations are supposed to pay taxes on the profits of their overseas subsidiaries — but only when those profits are transferred back to the parent company. Now there’s a move afoot — driven, of course, by a major lobbying campaign — to offer an amnesty under which companies could move funds back while paying hardly any taxes. And even some Democrats are supporting this idea, claiming that it would create jobs
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As opponents of this plan point out, we’ve already seen this movie: A similar tax holiday was offered in 2004, with a similar sales pitch. And it was a total failure. ... And this time around the circumstances are even worse. Think about it:... it’s widely understood that corporations are already sitting on large amounts of cash that they aren’t investing in their own businesses..., why would giving them a tax break that adds to this pile of cash do anything to accelerate recovery?

Lack of corporate cash is not the problem facing America. Big business already has the money it needs to expand; what it lacks is a reason to expand with consumers still on the ropes and the government slashing spending.

What our economy needs is direct job creation by the government and mortgage-debt relief for stressed consumers. What it very much does not need is a transfer of billions of dollars to corporations that have no intention of hiring anyone except more lobbyists.

2--Erring on the side of incaution, Economist

Excerpt: I've been trying to think of a situation in which a country like America—rich, with good institutions and able to borrow in its own currency—has dangerously overstimulated its economy. When has a country like America and in America's position opted to do too much fiscally or monetarily, such that it found itself in a dangerous and irreversibly inflationary situation? There aren't that many data points, but I don't believe there's been such a case. Mr Summers is right; the risk to doing too much was minimal, while the risk to doing too little was significant. There was a strong case for policymakers to say, look, we'll continue to act until we've solved the problem or markets demand that we stop. Would there be the potential for waste and inefficiency in this approach? Absolutely. There is no question that more government involvement in the economy would have generated some misallocation of resources. At the same time, America has come nowhere close to making all of the positive return public investments available. And the real economic cost of the presdent sustained, long-term employment is frightfully high. Stimulus sceptics have not demonstrated, haven't come close really, that stimulus can't raise employment or that increased employment wouldn't be preferable to the status quo.

There is uncertainty over the precise way stimulus can work and over the multiplier associated with expansionary fiscal policy. This is not an exact science. But it's difficult to avoid the conclusion that the balance of risks weighed strongly in favour of more action....

There's a lot that economists can't say with great certainty where stimulus is concerned. The profession will be wrestling with questions about macroeconomic stability policy for years to come. But I hope some academics will also focus their attention on the institutional shortcomings that contributed to such incautious timidity in America's government and elsewhere. All throughout this crisis, American officials played it safe, and in doing so they almost certainly made the economic situation more painful than it needed to be. Four years since the recession began and two years into recovery, they still haven't learned their lessons.

3--Shadow banking and leaking SIVs, VOX

Excerpt: In the aftermath of the global crisis and as the turmoil in the sovereign debt market continues, this column argues that policymakers need to get the shadow-banking sector in order if they are to restore confidence in global markets.

The decimation of shadow banking that began in summer 2007 set in motion the crisis that has since engulfed the global economy. A much-maligned culprit in this process has been the shadow-banking sector. Despite significant shrinkage due to the crisis, shadow banking still represented, in 2010, more than half of outstanding liabilities in the global financial system (Pozsar et al. 2010). Given the crucial role played by securitisation within shadow banking, it is perhaps unsurprising that both the IMF (2009) and the Financial Stability Board (2009) believe that a less fitful and more confident return of securitisation is the key to a sustainable global recovery.

The structured investment vehicle (SIV) was the shadow bank par excellence. It played the important intermediation role of channelling savings in money market funds, petrodollars, and global trade surpluses to financial institutions and originators of securitised assets across the globe (Tabe 2010). A successful re-launch of securitisation will require SIV-like real money investors to assume the risks erstwhile held by this market segment.

Few were familiar with the $400 billion, 20-year old SIV sector in summer 2007 when it gained notoriety for sudden defaults and multi-notch downgrades by credit rating agencies.
SIVs were hybrid companies that combined features of traditional banking, hedge funds, and securitisation. They borrowed short mainly from money-market funds, and lent long to banks and securitisation issuers, employing leverage to amplify profitability. They issued long-dated hybrid capital comparable to bank subordinated debt. Like securitisation transactions, they were bankruptcy-remote and operated under tight limits.

Forced liquidations and lawsuits followed vehicle collapses. Entire portfolios were offloaded in fire sales that generated losses of 60%-95% for senior investors. ...SIVs were a product of the liquidity bubble that began engulfing the credit markets some 20 years before their demise. This period happens to coincide with the sector's lifespan. Trade surpluses from savings economies and petrodollars from oil-producing nations led to a significant reduction in the global cost of credit. Ordinarily risk-averse investors in search of high-yielding products settled on SIV paper as an attractive alternative to US Treasuries....

Financial regulators permitted bank, insurance company, pension, and hedge-fund sponsors to establish SIV “mini-banks” without ensuring that they maintain sufficient capital or back-stop liquidity in the event of a run....

Lessons learned include the tightening of regulation governing the sponsorship of off-balance-sheet structures and the sizing of their capital and liquidity needs. These require that regulators adopt a more proactive, dampening role in the wild swings from exuberance to despair that are so characteristic of the financial markets. Discussions around contingent capital and similar products suggest regulators have embraced that dampening role and moved away from the prevailing pre-crisis philosophy of minimal regulation.

Lessons learned also include closer supervision of shadow banks, more skin-in-the-game for their sponsors, in-house retention of risk-analytics capabilities by investors, and less reliance on credit-rating agencies....These measures should help restore confidence in rating agencies and the global financial system, an outcome more urgently required given on-going turmoil in the sovereign debt market.

4--The Community Re-investment Act (CRA)did NOT cause the housing bubble, Dean Baker, CEPR

Excerpt: It really is incredible to see such a concerted effort to rewrite history in front of our faces. There is not much ambiguity in the story of the housing bubble. The private financial sector went nuts. They made a fortune issuing bad and often fraudulent loans which they could quickly resell in the secondary market. The big actors in the junk market were the private issuers like Goldman Sachs, Citigroup, and Lehman Brothers. However, George Will and Co. are determined to blame this disaster on government "compassion" for low-income families....

The first culprit is the Community Re-investment Act (CRA). Supposedly the government forced banks to make loans against their will to low-income families who did not qualify for their mortgages. This one is wrong at every step. First, the biggest actors in the subprime market were mortgage banks like Ameriquest and Countrywide. For the most part these companies raised their money on Wall Street, they did not take checking and savings deposits. This means that they were not covered by the CRA.

Let's try that again so that even George Will might understand it. Most of the worst actors in the subprime market were not covered by the CRA. The CRA had as much to do with them as it does with Google or Boeing.

The second CRA problem is many of the worst loans would not have been covered even if the institution was. Many of the worst loans were made to finance homes purchased in newly created exurbs. The CRA is about having banks make loans in inner city areas where they take deposits. So we have the wrong location and wrong institutions for the George Will story.

Step 3, the big subprime issuers (Ameriquest, Countrywide, New Century, IndyMac) were making money hand over fist on their subprime mortgages. Their profits and stock prices soared in the peak years of the housing bubble. Does George Will think that bankers need government bureaucrats to tell them to make money?What sort of free market believer is he?

Finally, the CRA has no enforcement power. In the worst case the government tells you that you have been a bad boy. If a bank wants to merge, they may be forced to pledge to do better in the merged company.

5--Why bond yields won't rise, Bloomberg

Excerpt: Discovering the Limit

At the end of 2008, as the economy collapsed and the pace of net Treasury debt increases quintupled, it seemed we were about to discover that limit. I presumed we had a little time for expansionary fiscal policy to boost the economy -- a year, maybe 18 months -- before the bond-market vigilantes would arrive. They would demand higher interest rates on Treasury bonds, which would begin seriously crowding out the benefits of fiscal stimulus. The U.S. government would have to react, pivoting from fighting joblessness, via deficit spending, to reassuring the bond market via long-run tax increases and spending cuts to Medicare and Medicaid.

But it didn’t happen in 2009. It didn’t happen in 2010. And it isn’t happening in 2011. There are no signs from asset prices that the market is betting heavily that it will happen in 2012. Looking at the yield curve, it appears the market intends to swallow every single bond that the Treasury will issue in the foreseeable future -- and at high prices. The prices of inflation-protected bonds suggest that the market expects the new Treasury issues to be devoured without any acceleration in inflation.

Keynes Disciple

Although I worked for three years in the Clinton Treasury Department, and am a card-carrying member of the economist guild, I predicted none of this. Like most of my peers, I was wrong. Yet the most interesting thing is that I could have -- should have -- been right. I had read economist John Hicks; I just didn’t quite believe him....

Little Difference

But when rates become so low that there’s little difference between cash and short-term government bonds, open-market operations cease having an effect; they simply swap one zero- yielding government asset for another, with their hunger to hold more safe, liquid assets unsatisfied.
This is the liquidity trap.

In this situation we need deficit spending. The government spends and borrows, creating more of the safe, cashlike assets that private investors want. As these bonds hit the market, people who otherwise would have socked their money away in cash -- diminishing monetary velocity and slowing spending -- buy bonds instead. A large, timely government deficit thus short- circuits the adjustment mechanism, avoiding the collapse in monetary velocity.

Hicks’s conclusion: As long as output remains depressed and there is slack in the economy, printing more bonds will have negligible effect in increasing interest rates.

6--Stock Buybacks vs Insider Buying: 70:1 Ratio, The Big Picture

Excerpt: TrimTabs seems to have some ugly Insider Buying data that supports their bearish views.

Biderman observes that while US firms spent $124 billion in stock buybacks in Q2, insiders bought less than $2 billion of company stock with their own money. That 70:1 ratio is a sharp contrast between “what insiders are doing with their own money and what they’re doing with the money of the companies they manage.”

At the 30 firms with the biggest buybacks in 2011, over $168 billion was spent purchasing shares, while there was zero insider buying at 24 of these firms amounting to less than $10 million. Cherry picking aside, that is still a ratio of 16,800:1.

I have not crunched the numbers to see exactly how probative extreme Insider Buying (or the lack thereof) is to future market performance. But it is an intriguing data point that may be worth noting.

7--Why are stocks rising, The Big Picture

Excerpt: With 6 of the past 7 weeks in the red, the markets have managed to string together a series of winning days. Daily gains both this week and last have ranged between 0.50% and 1.25%. Indeed, the Dow’s gains on Monday and Tuesday represent the first consecutive triple digit gain for the Industrials since December 1- 2, 2010. This was the fourth triple digit rally since the April 29th highs.

Are we making a major turn? Has psychology become so bad its a contrary indicator? Has the 200 day moving average proved to be inviolable?

Perhaps any of those explanations might prove to be the case, although I have my suspicions otherwise. I suspect it is simply a case of funds marking up stocks into the close of the 2nd quarter.

What data supports this thesis? I would point to 2 things: Psychology and Trading Volume. Most metrics are showing psychology is either neutral or optimistic. This tends to be supportive of a short term trading bounce, and not a longer-lasting rally.

Second, the volume has been anemic, even by the unusually low levels we have seen all year. The overall volume on Monday was well below the 30-day average on both NYSE and Nasdaq. Tuesday was even lower. Rallies on increasingly lighter volume are not signs of aggressive institutional buying. Rather, it supports the Window dressing thesis.

8--What history teaches us about the welfare state, Francois Furstenberg, Washington Post:

Excerpt: Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873... For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt... Until the 1930s, it would be known as the Great Depression. ...

As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle.

Neither political party offered genuine solutions. ... With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard...: “hard money” policies that favored Eastern financiers over indebted farmers and workers.

I don't know how close we are to the boiling point, the point where people become willing to go on strike, sabotage production, etc., etc. in protest over intolerable levels of inequality in the distribution of the nation's output. But I fear we are closer to that point than we think, and attempts to dismantle the welfare state will make the tipping point come sooner rather than later.

9--Debt-laden Greece finds no buyers in 'fire sale' of national assets, Rupert Neate - Guardian

Excerpt: While Greece erupted in protest again, representatives of the country's government were at Claridge's hotel trying to drum up international investors' interest in a "fire sale" of its national assets.

Up for sale are 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece's national lottery. George Christodoulakis, Greece's special secretary for asset restructuring and privatisations, said the sell-off would raise €50bn (£44bn) to help pay back the country's €110bn bailout debt....

Christodoulakis denied that the hastily arranged sell-off was a fire sale, preferring to describe it as a "professionally managed privatisation plan". "We may sell them cheaper than [during normal conditions] but we will devote the funds to buying back debt, that means we are going to buy it back when it is cheaper." When a fellow Greek interrupted to say the sell-off was "destroying our country", Christodoulakis said there was "no point crying over spilt milk" and told his countryman to "try and be optimistic".

10--U.S. Consumer Confidence Falls to Seven-Month Low, Bloomberg

Excerpt: Consumer confidence dropped to a seven-month low in June as Americans grew concerned about the outlook for jobs and wages. The Conference Board’s sentiment index decreased to 58.5 from a revised 61.7 in May that was higher than previously estimated, figures from the New York-based private research group showed today. Home prices fell in the year ended in April by the most in 17 months, another report showed.

Unemployment hovering around 9 percent, deterioration in the housing market and a drop in share prices may restrain Americans’ sentiment, raising the risk that the biggest part of the economy will stagnate. The Federal Reserve last week kept in place record monetary stimulus to help nurture the expansion through what it views is a "temporary" slowdown.

"We have a fairly weak economy with little to no job growth," said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "With consumers so worried about their job prospects, I’m not so sure that we can count on demand picking up. The housing market is dead in the water."

11--The serious questions raised by the Dominique Strauss-Kahn affair, WSWS

Excerpt: The arrest of French financier and politician Dominique Strauss-Kahn in New York City on sexual assault charges and his continued imprisonment is a disturbing event with far-reaching implications.

Strauss-Kahn is the managing director of the International Monetary Fund (IMF), perhaps the most powerful global capitalist financial institution, and a prominent figure in the French Socialist Party, one of that country’s leading big business parties. He was expected to announce soon his candidacy for the presidency in 2012, and polls in France had him leading his rivals, President Nicolas Sarkozy and extreme right-winger Marine Le Pen of the National Front.

In his class position, privilege and social outlook, Strauss-Kahn stands for everything the World Socialist Web Site opposes. But he is also a human being who is entitled to democratic rights, which include legal due process and the presumption of innocence until proven guilty. Judging from the treatment of Strauss-Kahn since his arrest and the coverage of this event in the American media, this presumption does not exist.

Neither we nor anyone else—outside the accused and the accuser (and, perhaps, other interested and unnamed parties)—know exactly what went on in Strauss-Kahn’s suite at the Sofitel Hotel in Manhattan on Sunday. Whatever information the public possesses has emerged courtesy of the New York City Police Department, the alleged victim’s lawyer, and the mass media. None of these can be considered reliable sources.

As of yet, no one has heard Mr. Strauss-Kahn’s side of the story. Rather, he has been subjected to a calculated process of humiliation and dehumanization—such as the disgusting “perp walk”—whose obvious purpose is to convict the accused in the public’s mind even before an indictment has been handed down.

Rape is an execrable crime and anyone who is found guilty of this offense must be held accountable. However, it is a fact, shameful and undeniable, that allegations of sexual misconduct have been used relentlessly, and not only in the United States, to destroy targeted individuals. The case of WikiLeaks founder Julian Assange comes most immediately to mind....

The Strauss-Kahn affair raises critical questions. The World Socialist Web Site insists on the presumption of innocence and other fundamental democratic rights. There is no credible reason why he should not be released on bail. Those on the political left who foolishly believe that Strauss-Kahn’s fate is a matter of indifference—or should even be welcomed as just punishment for his personal wealth and political sins—understand nothing of the importance of democratic rights. It is worth pointing out, moreover, that socialist convictions are not based on small-minded vengefulness.

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