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.

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