Thursday, August 18, 2011

Today's links

1--The President’s Bold Jobs Bill (Maybe), Robert Reich's blog

Excerpt: The President is sounding like a fighter these days. He even says he’ll be proposing a jobs bill in September – and if Republicans don’t go along he’ll fight for it through Election Day (or beyond).

That’s a start. But read the small print and all he’s talked about so far is extending the payroll tax cut and unemployment benefits (good, but small potatoes), ratifying the Columbia and South Korea free trade agreements (not necessarily a job-creating move), and creating an infrastructure bank.

An infrastructure bank might be helpful, depending on its size....

Combine the budget cuts state and local governments continue to make with the slowdown in consumer spending, the reluctance of businesses to expand or hire, and the magnitude of unemployment and under-employment, and you need a big new booster rocket. I’d estimate the shortfall in aggregate demand to be $300 billion to $500 billion this year alone.

2--President to Rollout Jobs Package Next Month, On The Economy

Excerpt: So, what will/should President Obama say in September on jobs?

–Given everything he’s been saying so far, he most likely starts out with a strong call to renew the payroll tax holiday and extend UI benefits.

–These are both essential—EPI estimates that to lose them next year would cost over one million jobs. But since they’re already in the system, they don’t add anything new, so it’s like keeping your foot where it is now on the accelerator. If they expire on schedule at years’ end, your foot comes off. But keeping them going only maintains current speed, such that it is.

–He then pushes an infrastructure plan.

–Two criteria I’d strongly recommend here: first, the plan needs to start creating jobs quickly, and second, it needs to create jobs for people, not machines.

–On the first point, the infrastructure bank, which I like very much, will take one-two years, I’d guess, before it starts creating jobs. On the second point, my experience with the Recovery Act (I’ve yet to see solid research on this, but I’ll bet I’m right) is that traditional infrastructure (e.g., roads and bridges) has gotten considerably more capital-intensive, and thus less labor intensive.

–The FAST! idea, which is getting some nice traction, meets both of these criteria, plus it has great optics—fixing schools in communities.

3--Is household debt still holding back the economy?, Suzy Khimm, Washington Post

Excerpt: Higher consumer demand is critical to jump-starting the economy. But Americans won’t be inclined to spend and borrow more until they’ve pulled themselves out of the quagmire of debt left in the wake of the 2008 meltdown. Household debt has to come down before the economy can recover. The latest data from the Federal Reserve Bank of New York show modest signs of healing from U.S. households, which are still unwinding their debt but may be slightly more inclined to spend again. The N.Y. Fed’s report also makes it clear, however, that parts of the country are still underwater, and the mortgage crisis is still a drag.

Nationwide, household debt excluding real estate fell 0.4 percent in the last quarter, and mortgage and home-equity balances both fell. The pace of consumer debt reduction has slowed as compared to the previous nine quarters, but some are interpreting this as a sign that consumers have managed to unwind many of their most toxic assets. “This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed,” Andrew Haughwout, vice president of the N.Y. Fed’s research and statistics group, said in a statement. In fact, delinquency rates fell slightly, and new foreclosures were also down more than 20 percent from the first quarter. There were also small improvements on the demand side: Open credit card accounts rose by 10 million, and credit card limits rose by 2.1 percent, showing banks may be more willing to lend....

In recent weeks, President Obama has vowed to address these lingering problems in the consumer housing market. Until these underlying problems in housing finance are resolved, toxic debt could to keep U.S . households — and the economy — from fully recovering.

4--Fed eyes EU banks, Wall Street Journal

Excerpt: Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.

The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.

Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.

Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets....

In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.

Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector. While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.

Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.

In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.

On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.

Spokesmen for Société Générale and Deutsche Bank declined to comment on the reasons for the funding buildup or whether there has been a pullback.

In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year.

The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.

5--Beijing, Shanghai Home Prices Stop Rising in July From June, Bloomberg

Excerpt: Home prices in Beijing and Shanghai stopped rising for the first time this year, signaling measures to cool the property market are beginning to work.

New home prices in the nation’s capital and financial center were unchanged last month from June, while they fell in 14 of 70 cities monitored by the government, the statistics bureau said on its website today. The eastern coastal city of Ningbo and the western city of Chengdu fell 0.3 percent each, the biggest declines month on month. New home prices rose in all but two cities in July from a year earlier....

Downward Trend

“This is the beginning of a downward trend in property prices in China, with more second- and third-tier cities introducing purchase restriction policies,” said Sun Mingchun, a Hong Kong-based economist at Daiwa Securities Capital Markets, in an e-mail. “Price declines will occur in more and more cities in the coming months.”

6--Fed Dissenters Say Pledge Gives Appearance of Targeting Stocks, Bloomberg

Excerpt: Two Federal Reserve policy makers said the central bank’s commitment to keep its benchmark rate near zero for two years may create a misperception it’s aimed at boosting stocks, which contributed to their opposition.

Philadelphia Fed President Charles Plosser said in an interview yesterday that taking action after stocks tumbled “signaled that we are in the business of supporting the stock market.” Richard Fisher, the Dallas Fed chief, said in a speech that the Fed “should never enact such asymmetric policies to protect stock market traders and investors.” Both also said the policy won’t help spur growth.

Plosser, Fisher and Narayana Kocherlakota of Minneapolis voted against last week’s Fed decision to hold the benchmark interest rate at a record low until at least mid-2013, the most dissent in almost 19 years. The move followed an 18 percent drop in the Standard & Poor’s 500 Index of stocks from the end of April through Aug. 8.

“It was inappropriate policy at an inappropriate time,” Plosser said yesterday in a radio interview in New York on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Policy makers will probably need to raise rates before 2013 and should have waited to see how the economy performed, he said.

7--Is the SEC Covering Up Wall Street Crimes?, Rolling Stone

Excerpt: A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008.

8--The 'Merkozy' Summit - Bad Politics, Bad Economics, IIEA

Excerpt: Saving the Euro?

The Sarkozy-Merkel press conference provided the now-obligatory statement that they will 'do whatever it takes' to save the Euro. But what does this really mean? Does saving the Euro require all seventeen members to pass constitutional debt brakes over the next few years? One hardly needs to be an expert on European politics to hazard a guess that these proposals will run into serious problems in a number of Eurozone countries.

The Eurozone is something of a Hotel California construct: Even if a country’s government may feel it was a mistake to join, that doesn’t mean that it is easy to leave. The French and German proposals to require constitutional fiscal policy constraints as a condition of Euro area membership raise the question of how they plan to usher the countries that don’t want these constraints through the Euro’s (currently non-existent) exit door.

These proposals also increase the probability that some countries may decide that the price of Euro membership is not worth the hassle, leading to a messy break-up of the Euro area. It may turn out that some of the measures promoted as saving the Euro will be seen by future historians as setting the scene for its demise. It is certainly unlikely that a continent-wide campaign to pass rigid fiscal rules that run counter to textbook macroeconomic principles will do much to boost the Euro’s popularity.

Back to the Present

The 'Merkozy' proposals have little chance of being agreed and passed by 2012 as proposed. In the meantime, the Eurozone still has a serious debt crisis. Ultimately, there are three possible solutions to the crisis.

The first is that fiscal austerity in peripheral countries will convince financial markets that they are worth lending their money to despite the risks of getting 'haircuts' if things go wrong (now an official EU policy). This 'Plan A' approach has not worked so far.

The second is a fiscal solution: Either the EFSF is substantially expanded to be big enough to support Spain and Italy or Eurobonds are used to provide new financing. It is this solution that the current proposals are aimed towards. German politicians appear to believe that they cannot sell 'fiscal union' proposals of this type to their public without strong assurances that fiscal profligacy in Eurozone countries is a thing of the past.

If this approach really requires a long process of formulating and passing new fiscal rules in all Eurozone member states, then it is not operational now or any time soon. This leaves us with the third solution: Massive ongoing intervention in the sovereign bond market by the ECB.

This approach is also unpopular in Germany (and with the ECB’s senior officials). But it can be done without consulting any national parliaments, including the Bundestag. The way is there but is there the will?

9--How Austerity Is Ushering in a Global Recession, Robert Reich's blog

Excerpt: Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl.

We’re on the cusp of a global recession.

Policy makers be warned: Austerity is the wrong medicine....

Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.

Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.

When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.

That’s what we’re seeing now.

What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger....

when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.

Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.

Fiscal austerity is the wrong medicine at the wrong time.

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