Friday, July 22, 2011

Weekend links

1--Weekly Initial Unemployment Claims increase to 418,000, Calculated Risk

Excerpt: The DOL reports:

Special Factor: Minnesota has indicated that approximately 1,750 of their reported initial claims are a result of state employees filing due to the state government shutdown.

In the week ending July 16, the advance figure for seasonally adjusted initial claims was 418,000, an increase of 10,000 from the previous week's revised figure of 408,000. The 4-week moving average was 421,250, a decrease of 2,750 from the previous week's revised average of 424,000.
This is the 15th straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January. ...

This increase was about at expectations. With all the recent layoff announcements (Borders, Cisco, etc), there is some concern that weekly claims will rise over the next couple of months. From the WSJ:
Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery.

Cisco Systems Inc., Lockheed Martin Corp. and troubled bookstore chain Borders Group Inc. are among those that have recently announced hefty cuts.

2--Existing Home Sales in June: 4.77 million SAAR, 9.5 months of supply, Calculated Risk

Excerpt: The NAR reports: June Existing-Home Sales Slip on Contract Cancellations

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 0.8 percent to a seasonally adjusted annual rate of 4.77 million in June from 4.81 million in May, and remain 8.8 percent below the 5.23 million unit level in June 2010, which was the scheduled closing deadline for the home buyer tax credit.
...
Total housing inventory at the end of June rose 3.3 percent to 3.77 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, up from a 9.1-month supply in May....Inventory should increase next month (the normal seasonal pattern), and the YoY change is something to watch closely this year.

Months of supply increased to 9.5 months in June, up from 9.1 months in May. This is much higher than normal.

3--The Shameful Murder of Dodd Frank, Robert Reich's blog

Excerpt: One full year after the financial reform bill spearheaded through Congress by Christopher Dodd and Barney Frank was signed into law, Wall Street looks and acts much the way it did before. That’s because the Street has effectively neutered the law, which is the best argument I know for applying the nation’s antitrust laws to the biggest banks and limiting their size.

Treasury Secretary Tim Geithner says the financial system is “on more solid ground” than prior to the 2008 crisis, but I don’t know what ground he’s looking at.

Much of Dodd-Frank is still on the drawing boards, courtesy of the Street. The law as written included loopholes big enough to drive bankers’ Lamborghini’s through — which they’re now doing....

What kind of derivatives must be traded on open exchanges? What are the capital requirements for financial companies that insure borrowers against default, such as AIG? How should credit rating agencies be funded? What about the much-vaunted Volcker Rule requiring that banks trade their own money if they’re going to gamble in the stock market – how should their own money be defined? What “stress tests” must the big banks pass to maintain their privileged status with the Fed?

The short answer: whatever it takes to maintain the Street’s profits and perquisites.

4--It Worked. (The stimulus, that is) THE ECONOMIC IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009, Council on Economic advisors, Office of the President of USA

Excerpt: Executive Summary:

Among the key findings of the study are the following:

Following implementation of the ARRA, the trajectory of the economy changed
significantly. Real GDP began to grow steadily starting in the third quarter of 2009 and
private payroll employment increased on net by 1.7 million from the start of 2010 to the
end of the first quarter of 2011. (From the employment trough in February 2010 to May
2011 private payroll employment increased by 2.1 million.)

The two established CEA methods of estimating the impact of the fiscal stimulus suggest
that the ARRA has raised the level of GDP as of the first quarter of 2011, relative to what
it otherwise would have been, by between 2.3 and 3.2 percent. These estimates are very
similar to those of a wide range of other analysts, including the non-partisan
Congressional Budget Office.

CEA estimates that as of the first quarter of 2011, the ARRA has raised employment
relative to what it otherwise would have been by between 2.4 and 3.6 million.

5--1937! 1937! 1937!, Paul Krugman, New York Times

Excerpt: The Telegraph has a leaked draft of the eurozone rescue plan for Greece. The financial engineering is Rube Goldbergish and unconvincing. But here’s what leaped out at me:

9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.
OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries.

Plus, the ECB is raising rates.

So demand will be depressed in both crisis and non-crisis economies; this will lead to a vigorous recovery through … what?

The Serious People are determined to destroy all the advanced economies in the name of prudence.

6--Welcome to the Recovery, Paul Krugman, New York Times

Excerpt: Companies step up layoffs.

In Washington-speak, coming from both the White House and the Fed, we’re always on the road to recovery, with a few setbacks on the way. But the reality is that we’ve been basically flat on the employment front since late 2009, with nothing suggesting a sustained break back toward better performance: (see chart)

Maybe someone should talk about doing something? Nah.

Oh, by the way, why are companies stepping up layoffs? It’s because of weak demand.

7--Layoffs Deepen Gloom, Wall Street Journal

Excerpt: Companies are laying off employees at a level not seen in nearly a year, hobbling the job market and intensifying fears about the pace of the economic recovery.

Cisco Systems Inc., Lockheed Martin Corp. and troubled bookstore chain Borders Group Inc. are among those that have recently announced hefty cuts, while recent government numbers underscore how companies have shifted toward cutting jobs.

The increase in layoffs is a key reason why the U.S. recorded an average of only 21,500 new jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2%.

8--More on the balance sheet recession, Pragmatic Capitalism

Excerpt: What’s really happened in the US economy is that the driving engine of growth (household debtors – does anyone contest that households are the primary driver of US economic growth?) took on excessive amounts of debt. When the real estate bubble popped these consumers became savers as they were forced to pay down bubble era debts with post-bubble era cash flows. Bank transactions, however, net to zero. So, where did the money go that has been used to pay down these debts? Well, it went to the banks of course!*

Beckworth is right to note that there is a creditor for every debtor, but this implies that all creditors have an equally positive effect on the economy (the truth is that banks are not in any way equal to all other productive economic agents and instead serve as middlemen in the capitalist process). So, the real question that David Beckworth should be asking himself is whether banks are the engine of the economy (I have argued, emphatically, that they are not)? Are they truly productive economic agents or are they middlemen who “grease the engine of capitalism” (as I like to say). More importantly, Beckworth might want to research whether this growth in the financial sector has actually DETRACTED from US economic growth?

I think our Federal Reserve would agree with Beckworth that a healthy banking system is absolutely vital if we are to have a healthy economy. After all, this is why Fed policy has been mainly focused on saving the banking system. And they’ve largely succeeded. Banks are reporting an incredible v-shaped recovery (see figure 1). Profits are at all-time highs for these “creditors”. So why aren’t they ploughing all of this money back into the economy as any good capitalist entity should? The answer is quite obvious. First of all, banks don’t “plough” money back into the economy unless there is demand for loans. The Fed has bolstered bank balance sheets and injected the banks full of reserves with the assumption that this might lead to increased lending. But anyone who understands how a modern banking system works knows that banks are never reserve constrained. So, the only way that a bank could “plough” money back into the economy is if there is demand for loans (outside of their less productive normal business operations). Clearly, with low aggregate demand there remains very weak demand for loans. The weak demand for loans is a direct result of the fact that consumers have become savers, which has resulted in reduced domestic revenues for corporations and ultimately a reduction in lending....

the US economy is suffering a balance sheet recession that is primarily caused by a collapse in household balance sheets. And while it is extreme to imply that monetary policy is entirely ineffective (I in fact said that QE1 would help stabilize the banks and market at the time it was implemented) during a balance sheet recession, it should be clear to most observers by now that the Fed’s policies have not done a great deal to help the US economy and cannot be relied upon as the balance sheet recession continues.

In sum, it’s clear that the mainstream continues to misdiagnose the true cause of this recession. The implication that banks and other creditors are somehow the engine of growth is just not an accurate portrayal of the US economy. And this idea that more bank reserves and altering expectations is a recipe for growth should be obviously inaccurate by now.

9--Is B of A in trouble? Naked Capitalism

Excerpt: The crucial question today is whether Bank of America needs fresh capital to strengthen its balance sheet. Moynihan emphatically says it doesn’t, pointing to regulatory-capital measures that would have us believe it’s doing fine. The market is screaming otherwise, judging by the mammoth discount to book value. Then again, for all we know, the equity markets might not be receptive to a massive offering of new shares anyway, even if the bank’s executives were inclined to try for one.

Weil correctly depicts BofA as a systemic risk. And this confirms a point made by critics of so-called financial reforms, including yours truly, that the banks were not dealt harshly enough in the crisis. Both Citi and BofA were at risk of failure in early 2009. Citi at least was forced to divest many of its operations (note that isn’t an adequate remedy, since the bank is still too big to fail, but at least it is easier for managers and regulators to oversee). Bank of America, by contrast, was allowed to soldier on. The authorities have grossly underestimated the severity of the housing crisis and are still refusing to confront some of its key elements, such as the broken servicing model and chain of title problems.

And let us tell you a dirty secret: while Bank of America, thanks to Countrywide, is patient zero of the housing mess, Wells is next in line. Residential real estate is proportionately even bigger relative to the bank’s earnings and balance sheet, its accounting has been somewhere between aggressive and misleading, and despite its pious claims otherwise, it is no better than any of the other big banks. Stay tuned.

10--Rupert Murdoch's Fox News ran 'black ops' department, former executive claims, Telegraph

Excerpt: Rupert Murdoch’s Fox News television channel had a “black ops” department that may have illegally hacked private telephone records, a former executive for the station has alleged....

Dan Cooper, who helped launch Fox News as managing editor in 1996, said that a “brain room” carried out “counter intelligence” on the channel’s enemies from its New York headquarters.
He was threatened after it found out he spoke to a reporter, he claimed....

Another former Fox News senior executive, who did not wish to be named, said staff were forced to operate under conditions reminiscent of “Russia at the height of the Soviet era”.

“There is a paranoid atmosphere and they feel they are being watched,” said the former executive. “I have no doubt they are spying on emails to ensure no one is leaking to outside media.

“There is a unit of spies that reports up to the boss about who was talking to whom. A lot of people are scared that they’re going to get sidelined or even that they’re going to get killed.”

11--Consumers in U.S. Relying on Credit as Inflation Erodes Incomes, Bloomberg

Excerpt: Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.

The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.

“Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.”

Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy.

After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 percent and food climbed 2 percent during the same period.

The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.

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