Monday, July 18, 2011

Today's links

1--The Eurozone’s Last Stand, Nouriel Roubini, Project Syndicate

Excerpt: The eurozone crisis is reaching its climax. Greece is insolvent. Portugal and Ireland have recently seen their bonds downgraded to junk status. Spain could still lose market access as political uncertainty adds to its fiscal and financial woes. Financial pressure on Italy is now mounting.

By 2012, Greek public debt will be above 160% of GDP and rising. Alternatives to a debt restructuring are fast disappearing. A full-blown official bailout of Greece’s public sector (by the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility) would be the mother of all moral-hazard plays: extremely expensive and politically near-impossible, owing to resistance from core eurozone voters – starting with the Germans....

So the only realistic and sensible solution is an orderly and market-oriented – but coercive – restructuring of the entire Greek public debt. But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds?

2--Letting Bankers Walk, Paul Krugman, New York Times via Economist's View

Excerpt: Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. ...

Why the kid-gloves treatment? Money and influence no doubt play their part... But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.

It doesn’t. ... And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense. ...

The claim that removing the legal cloud over foreclosure would ... help support housing prices ... leaves me scratching my head. It would just accelerate foreclosures, and ... that would mean more homes offered for sale... An increase in the supply of a good usually pushes that good’s price down, not up. ...

You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?

Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.

The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks ... would not.

3--Households Are Still Deleveraging. Or Not., by Tim Duy, Economist's View

Excerpt: Calculated Risk reviews a David Leonhardt New York Times article and notes:
In addition, household debt as a percent of income, remains very high and household deleveraging is ongoing. That is why so many companies identify their number one problem as "lack of customers"…chart...

If household are trying to deleverage their way back to a net worth position of 470% of GDP, I imagine the period of deleveraging is only just beginning. Consider years of cutting debt while hoping asset values rise sufficiently to pull you out of the post-bubble hole - all the while a mediocre economy ensures building assets is difficult at best.

But aside from the deleveraging question, another takeaway from the last chart always rattles in the back of my head: It sure looks like asset bubble-induced surges of net worth were critical in maintaining full employment during the past decade. And we aren’t coming close to filling that hole with other spending. Which is why we keep getting this picture. (more "must see" charts)

4--What’s Wrong with This Economy, Jared Bernstein, On The Economy

Excerpt: David Leonhardt has an interesting piece in today’s NYT pointing out the much-larger-than-usual decline in consumer spending in this relative to past downturns.

In an economy that’s 70% consumption, that’s an important reason why we’re stuck in neutral. But David L intimates that this decline in consumption is structural not cyclical (“The old consumer economy is gone, and it’s not coming back.”)

I’m not so sure. Seems to me that for the structural call to be true you’d want to see at least the beginning of a change in the consumption share of GDP, and that hasn’t happened.

The figure shows, in fact, that consumption as a share of GDP, was 71.1% most recently, tied for the highest share on record, with data going back to the 1930s. Doesn’t mean the NYT is wrong, but it’s probably too soon to assert a structural shift.

What gives? How could the large declines David L finds comport with the elevated share? It must be that the fall in consumer spending is proportionate to the decline in GDP.

If you want to see a structural change by my definition—one significantly and lastingly altered as a share of the economy—look at investment resident housing. That’s averaged about 5% forever, but as you can see, it did a total cliff-dive with the bursting of the housing bubble. My guess is it will be a while before that share climbs back to historical levels.....chart

Second, regardless of GDP shares, David L’s punchline is exactly right—consumer spending is way down and it’s not getting much of a boost from jobs and paychecks. Which means that fiscal stimulus is about the only game in town, or it would be if policy makers weren’t spending practically every waking minute on budget cuts.

5--Leonhardt: "We're Spent", Calculated Risk

Excerpt: From David Leonhardt at the NY Times: How the Bursting of the Consumer Bubble Continues to Hold the Economy Back

THERE is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs ... the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble ...

The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.

The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.


Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future

Here is the NY Fed paper by Jonathan McCarthy that Leonhardt mentions: Discretionary Services Expenditures in This Business Cycle

The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in “discretionary” services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly. In this post, I suggest that the continued sluggishness in these expenditures lends a note of caution regarding the sustainability of recent PCE strength. ... this in turn raises some concern about the future strength of the recovery.

The chart below shows how much real per capita (to account for differing rates of population growth over time) discretionary services expenditures fell from their previous peak—a zero value in this chart means that these expenditures were above their previous peak. The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions ...
Click on graph for larger image in graph...

... the fact that discretionary services expenditures remain significantly below their previous peaks is of concern for the overall economic outlook. Although these expenditures can be deferred in instances of temporary income drops, the sluggish recovery in these expenditures suggests, consistent with the permanent income/life cycle hypothesis, that households may perceive more persistent shocks to their overall wealth. ... Accordingly, the continued sluggishness of discretionary service expenditures at this point in the expansion lends a note of caution regarding the recently improved economic growth outlook.

This is one of the reasons I track some items of discretionary spending like hotels and restaurants.

To take this a step further - with the lack of demand, there is still too much excess capacity in most areas of the economy for a large contribution from new investment (except in equipment and software). We see this excess in housing (there is an excess supply of vacant housing units), and excess capacity in overall industrial production. There is also excess existing supply in office space, retail space, and other categories of commercial real estate.

In addition, household debt, as a percent of income, remains very high and household deleveraging is ongoing. That is why so many companies identify their number one problem as "lack of customers" (see the small business survey released this week).

Until the excess capacity (and excess supply) is absorbed, and household balance sheets are back in order, the recovery will remain sluggish.

6---Wall Street will not let Republicans pull the debt ceiling trigger, Dean Baker, CIF via Economist's View

Excerpt: The tension is building in the budget talks as the calendar closes in on the August 2 drop-dead date. According to Treasury Secretary Geithner, this is the date where the government would no longer have the money to pay its bills and a default on the debt would be looming.

As many have noted, including me, a default on the debt would be an absolute disaster for the financial system. We would see the same sort of freeze-up of lending as we did after the collapse of Lehman in September of 2008, although this time would almost certainly be much worse. ...

This is why we knew all along that the Republicans in Congress were not serious about their threats over allowing the government to default. While these people might be happy to ... take hard-earned wages and benefits away from working people, and to shove retirees out onto the street, the Republican congressional leadership is not about to cross Wall Street. After all, who pays for the campaigns?

This meant that the Republicans were always going to fold if President Obama didn't cave. The only question was when and how. ...

7--Consumers get more worried, Econbrowser

Excerpt: Reuters reported yesterday that the preliminary July reading for the Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.8, the lowest level in more than two years. In fact, that's about as low as this measure ever got in the recessions of 1981-82 or 1990-91, and is well below values for the recession of 2001.

Yesterday's consumer sentiment report is preliminary, and even the revised value for this series is not a terribly reliable predictor of economic activity. But this is the second "oh no!" report in the last two weeks, following the dreadful employment numbers released last week.

The recent batch of bad economic news led Goldman Sachs to lower their forecast for real GDP growth for Q2 from 2% to 1.5%, and for Q3 from 3.25% to 2.5%.

And I'm not going to argue with that.

8--Getting to Crazy, Paul Krugman, New York Times

Excerpt: There aren’t many positive aspects to the looming possibility of a U.S. debt default. But there has been, I have to admit, an element of comic relief — of the black-humor variety — in the spectacle of so many people who have been in denial suddenly waking up and smelling the crazy. ...

Let’s talk for a minute about what Republican leaders are rejecting.

President Obama has made it clear that he’s willing to sign on to a deficit-reduction deal that ... includes ... extraordinary concessions. ...

Yet Republicans are saying no. Indeed, they’re threatening to force a U.S. default, and create an economic crisis, unless they get a completely one-sided deal. And this was entirely predictable.

First of all, the modern G.O.P. fundamentally does not accept the legitimacy of a Democratic presidency — any Democratic presidency. We saw that under Bill Clinton, and we saw it again as soon as Mr. Obama took office.

As a result, Republicans are automatically against anything the president wants, even if they have supported similar proposals in the past. ... Beyond that, voodoo economics has taken over the G.O.P. ...

Which brings me to the culpability of those who are only now facing up to the G.O.P.’s craziness.
Here’s the point: those within the G.O.P. who had misgivings about the embrace of tax-cut fanaticism might have made a stronger stand if there had been any indication that such fanaticism came with a price, if outsiders had been willing to condemn those who took irresponsible positions.

But there has been no such price. Mr. Bush squandered the surplus of the late Clinton years, yet prominent pundits pretend that the two parties share equal blame for our debt problems. Paul Ryan, the chairman of the House Budget Committee, proposed a supposed deficit-reduction plan that included huge tax cuts for corporations and the wealthy, then received an award for fiscal responsibility.

So there has been no pressure on the G.O.P. to show any kind of responsibility, or even rationality — and sure enough, it has gone off the deep end. If you’re surprised, that means that you were part of the problem.

9--Past Presidents’ Cuts In Military Spending To Reduce The Deficit: A new report released today by the Center for American Progress, Economist's View

Excerpt: (CAP) outlines how President Obama and the Congress could cut military spending using bipartisan historical precedents without sacrificing security. “Defense spending helped create the fiscal crisis facing our nation today,” write CAP’s Lawrence Korb, Laura Conley and Alex Rothman, “and defense cuts must be part of the solution.” Levels of spending exceed the heights of the Reagan-era Cold War by $100 billion and the Eisenhower-, Nixon-, H.W. Bush- and Clinton-eras by more than $250 billion. “This ballooning defense budget played a significant role in turning the budget surplus projected a decade ago into a massive deficit,” the CAP experts write. This chart from the report maps out past presidents reducing military spending during similar budget crises: (chart)

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