Thursday, July 7, 2011

Today's links

1--The Ideological Crisis of Western Capitalism, Joseph Stiglitz, Project Syndicate

Excerpt: I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish.

In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than carefully balancing the benefits of each government expenditure program with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer – not allowing the national debt to increase forces expenditures to be limited to taxes....

The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract. Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.....

Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn’t, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous – even if the major emerging-market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.

2--The Armageddon Caucus, Paul Krugman, New York Times

Excerpt: In general I’m not big on worrying about how we’re setting ourselves up for the next crisis; after all, we’re nowhere near done with the current crisis. Yet it is worth noting that current trends in our policy and political discourse, in addition to blocking efforts to promote recovery, is also setting the stage for a much worse crisis further down the line.

Consider a question some of us ponder now and then: this was bad, but it wasn’t a full replay of the Great Depression. Why?

I think we know the answer:

1. Central banks intervened massively to provide liquidity, preventing a replay of the 1931 global banking crisis. They were able to do this because, as an interesting paper I missed (pdf) points out, they weren’t constrained by the gold standard.

2. Although there wasn’t much effective discretionary stimulus, automatic stabilizers that didn’t exist in 1931 did a lot to cushion the economy....So it wasn’t just the fact that taxes fell while spending didn’t; the safety net programs also kicked in (and were about the only thing that did).

So consider, now, what’s going on politically. Gold bugs have taken over the GOP; even if they can’t reimpose the gold standard, they will make it very hard for future Bernankes to do even as much as the current one did to fight the crisis. And there’s a big push on not just to downsize government, but to convert federal programs like Medicaid and unemployment insurance into block grants,more or less ensuring that they will be cut rather than expanding in a slump.

In short, what we now have is a political drive that will, in effect, undo all those institutional changes that prevented the Great Recession into turning into another Great Depression.

3--Murdoch Gets Dangerous for Cameron, Bloomberg

Excerpt: For three decades, Britain’s powerful have sought close relations with Rupert Murdoch and his newspapers. Now politicians, police and businesses are all finding that closeness is becoming dangerous.
News International said late yesterday it will investigate allegations its News of the World tabloid hacked the phones of relatives of dead soldiers, after reports that the voicemail of murder and terror victims was intercepted. J Sainsbury Plc (SBRY) and Mitsubishi Motors Corp. joined companies pulling advertising. Senior policemen who dined editors of the paper now have 45 detectives investigating it.

As Murdoch’s News Corp. attempts to win approval for buying British Sky Broadcasting Group Plc (BSY), politicians are questioning the extent of his power. Prime Minister David Cameron is under pressure for hiring a former editor of the News of The World who had already resigned over phone-hacking. The police must now deal with allegations the newspaper made payments to officers....

“We have let one man have far too great a sway over our national life,” Labour lawmaker Chris Bryant told Parliament in London in an emergency debate yesterday. “Murdoch is not resident here, does not pay tax here. No other country would allow one man to garner four national newspapers, the second largest broadcaster, a monopoly on sports rights and first-view movies.”...

Another Labour lawmaker, Tom Watson, demanded action against James Murdoch, Rupert’s 38-year-old son, who runs News Corp.’s European operations.
‘Cover-Up’
Watson referred to the News of the World’s statement to a parliamentary committee in 2009 that James Murdoch had approved a 700,000-pound payment to a phone-hacking victim that was accompanied by a non-disclosure agreement. The company had been trying to organize a “cover-up,” the lawmaker said.
“It is clear now that he personally, and without board approval, authorized money to be paid by his company to silence people who’d been hacked,” Watson said. “This is nothing short of an attempt to pervert the course of justice.”

Hacking involves dialing into someone else’s mobile phone and then listening to the owner’s voicemail after obtaining the access code by guesswork or otherwise.

4--The next, worst financial crisis, Marketwatch

Excerpt: Stocks are skyrocketing again. The Standard & Poor’s 500 Index SPX +0.10% has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s. But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment....

The derivatives time bomb is bigger than ever — and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times....

The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”?...

We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all. No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.

... The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job — astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.

5--Private sector loans, not Fannie or Freddie, triggered crisis, McClatchy

Excerpt: Federal Reserve Board data show that:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday....

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve....(more about the CRA, also)

6-- In debt talks, Obama offers Social Security cuts, Washington Post via Economist's View

Excerpt: President Obama is pressing congressional leaders to consider a far-reaching debt-reduction plan that would force Democrats to accept major changes to Social Security and Medicare in exchange for Republican support for fresh tax revenue.

At a meeting with top House and Senate leaders set for Thursday morning, Obama plans to argue that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers should seize the moment to take dramatic action.

As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending. ...

Rather than roughly $2 trillion in savings, the White House is now seeking a plan that would slash more than $4 trillion from annual budget deficits over the next decade...

That would ... put Obama and GOP leaders at odds with major factions of their own parties. ... It is not clear whether that argument can prevail on Capitol Hill. ...

Yes, we have issues to address with the growth of health care costs, but I hope people realize that the hole in the budget caused by the Bush tax cuts alone is larger than the projected Social Security shortfall.

7--Fed Releases More Details on Its Effort to Bail Out Lehman and Other Dealers, Naked Capitalism

Excerpt: The Fed, though lack of interest and unwarranted confidence that primary dealers could manage themselves, abandoned its exams of them in the 1990s. And the fact, as the Wall Street Journal mentions, foreign banks also fed at this trough:

Goldman’s loan of $15 billion at an interest rate of 1.16% on Dec. 9, 2008 , was the largest 28-day loan from the Fed. Interest rates on loans to Goldman were as low as 0.01% for $200 million on Dec. 30, 2008…

Though Goldman got the biggest single loan, its total borrowings of $53.4 billion were less than for some other financial institutions.

Credit Suisse tapped the Fed a total of 57 times for $259.3 billion, while Deutsche Bank AG got $101 billion by going to the U.S. central bank 37 times.

The good news is the FDIC is taking examination of these firms much more seriously and says it plans to have staff on site all the time (and that means more than two people). The bad news is that regulatory reform has given the Fed far more influence, and there is little evidence that it has undergone a change of heart in the wake of the crisis that its neglect helped create.

8--The collapse in discretionary spending, Pragmatic Capitlaism

Excerpt: ...This is particularly interesting to me because of the balance sheet recession theory and our misguided policy approach. The real weakness in this recovery is rooted in the fact that consumer balance sheets are so mangled that they’re spending primarily on non-discretionary items and saving the rest of their incomes to pay down debts. This is important to understand because policy must be geared in such a way that it does not further hinder the household balance sheet. And therein lies the problem with a policy such as QE2. Anything that can potentially cause cost push inflation will only further weaken the household sector and detract from any possible recovery. In the case of QE2 I think we saw the increased speculation contribute directly to rising commodity prices which ultimately squeezed consumers further and led to the current soft spot in the economy.

9--Weekly Initial Unemployment Claims decline to 418,000, CalculatedRisk

Excerpt: The DOL reports:

In the week ending July 2, the advance figure for seasonally adjusted initial claims was 418,000, a decrease of 14,000 from the previous week's revised figure of 432,000. The 4-week moving average was 424,750, a decrease of 3,000 from the previous week's revised average of 427,750.

Special Factor: Minnesota has indicated that approximately 2,500 of their reported initial claims are a result of state employees filing due to the state government shutdown.
This is the 13th straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January

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