Tuesday, August 30, 2011

Today's links

Today's Quote: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” Karl Marx, Kapital

1--Matt Stoller: Power Politics – What Eric Schneiderman Reveals About Obama, Naked Capitalism

Excerpt: When you look closely at most significant areas of government, it becomes clear that the President and his administration are enormously powerful actors who get a lot done. Handing over our national wealth to the banks and to China is not nothing. These people are reorganizing the economy and the political system so that there are no constraints on the oligarchical interests that fund and pay them. That is their goal, it has been their goal from day one (or even before that), and anyone who says otherwise is just wrong or deluding him or herself. Obama spoke at the founding of Robert Rubin’s Hamilton Institute, and his first, and most important by far policy initiative, was his whipping for TARP, a policy that was signed by Bush but could not have passed without Obama getting his party in line. That was his goal, and he’s still pursuing it. The numerous “what happened to Obama” wailing editorials overlook the consistency of his policy agenda, which stretches back years at this point.

If someone worked or works for the Obama administration, or the Department of Justice, or any other executive branch agency, they need to remember their service as a mark of shame for the rest of their lives. Remembering how they participated in this example of how to govern is literally the least they could do for the damage they have caused. I would leave out the small number of people who are there to overtly prevent as much damage as possible, and those who resign or are fired in protest.

For the rest of the Democratic Party, well, reality is just beginning to intrude into the fantasy-land of partisans, even though the 2010 loss should have delivered a searing wake-up call to the failure Obama’s policy agenda. From 2006-2008, the Bush administration’s failures crashed down upon conservatives, and they in many ways could not cope. But their intellectual collapse was bailed out by Obama. Faux liberals are seeing their grand experiment in tatters, though right now they can only admit to feeling disappointed because the recognition that they have been swindled is far too painful. And the recognition for many of the professionals is even more difficult, because they must recognize that they have helped swindle many others and acknowledge the debt they have incurred to their victims. The signs of coming betrayal were there, but in the end it all comes down to judging people based on what they do and who they choose as opponents. And this Democratic partisans did not do, choosing instead a comfortable delusional fantasy-land where foreclosures don’t matter and theft enabled by Obama (and Clinton before him) doesn’t matter.

2--From Green to Red – Is Credit Crunch 2.0 Imminent?, Satyajit Das, The Big Picture

Excerpt: The rapid and marked deterioration in economic and financial conditions means that the risk of a serious disruption is now significant.
If markets seize up again, then “this time it will be different“. There might just not be enough money to bail out everyone and every country that may need rescuing.

Government policy options are severely restricted. Government support is restricted because of excessive debt levels and the reluctance of investors to finance indebted sovereigns. Interest rates in most developed countries are low or zero, restricting the ability to stimulate the economy by cutting borrowing cost. Unconventional monetary strategies – namely printing money or quantitative easing – have been tried with limited success. Further doses, while eagerly anticipated by market participants, may not be effective.

The global economy may muddle through, but a second credit crash is now distinctly possible. But the trigger and timing is unknown. As John Maynard Keynes remarked: “The expected never happens; it is the unexpected always.”

3--Trichet Gives Master Class in Saying Nothing, CNBC

Excerpt: On Sunday, the Sunday Times in the UK reported that policy makers in Brussels are drawing up radical plans to offer central guarantees over certain types of debt issued by banks. The move is reported to be a direct response to the sharp fall in U.S. funding for Europe’s banks. If true, this is clearly something the boss of the ECB can't be discussing in public....

The head of the International Monetary Fund, Christine Lagarde, summed up the mood in her own speech to the meeting in Jackson Hole perfectly. “Developments this summer have indicated we are in dangerous new phase. The stakes are clear, we risk seeing a fragile recovery derailed, so we should act now.”

The former French Finance Minister said Europe’s banking industry needs to be recapitalized whilst warning fiscal policy must aim boost growth and monetary policy remain highly accommodative."

4--Europe May Offer to Guarantee Banks’ Bonds, Sunday Times Says, Bloomberg

Excerpt: European policy makers are considering providing central guarantees over some types of debt sold by banks to prevent a new credit crunch in the region, Sunday Times reported.

The debt guarantee will allow cash from the 440 billion- euro ($635 billion) European Financial Stability Fund to be used temporarily to insure banks’ bonds, according to the newspaper.

5-Number of the Week: Slow Growth Adds to Deficit, Mark Whitehouse, WSJ

Excerpt: 32%: The increase in U.S. government debt over the next five years if US economic growth stays as slow as it is now.

It can be tough to get excited when economists warn that the U.S. could face a long period of substandard growth. Slow growth, after all, sounds a lot better than no growth at all.

A mere percentage point a year, though, can make a big difference. In an annex to its latest Global Financial Stability Report, the International Monetary Fund drives the point home as it applies to government finances.
The IMF forecasts how much various governments’ debts would rise if annual economic growth proved one percentage point slower than expected over the next five years. If, for example, the U.S. economy grows at an inflation-adjusted annual rate of 1.7% — about the rate it’s currently growing — government debt will reach 122% of annual economic output as of 2015, up from 93% now. Annual growth of 2.7% would cut that estimate to 110%. The difference equates to about $2.2 trillion, or close to $7,000 a person.

The IMF’s estimate provides a glimpse at the stakes involved in deciding whether to pump more government money into the economy. If $2.2 trillion in stimulus could provide an added percentage point of economic growth over the next five years, then the government could effectively achieve higher growth with no damage to its finances. If, by contrast, the accompanying massive budget deficits would scare people and businesses into cutting back on spending, then we could end up with slow growth and even more parlous finances.

6--(From the archives) Number of the Week: Default, Not Thrift, Pares U.S. Debt, Mark Whitehouse, WSJ

Excerpt: 122%: U.S. household debt as a share of annual disposable income
U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it....

The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.

Since household debt hit its peak in early 2008, banks have charged off a total of about $210 billion in mortgage and consumer loans, including credit cards. If one assumes that investors suffered at least that much in losses on similar loans that banks packaged and sold as securities (a very conservative assumption), then the total — that is, the amount of debt consumers shed through defaults — comes to much more than $400 billion.

Problem is, that’s more than the concurrent decrease in household debts, which amounts to only $372 billion, according to the Federal Reserve. That means consumers, on average, aren’t paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades.

7--Some predictions for the rest of the decade, Michael Pettis, China Financial Markets

Excerpt:   For much of the past decade there has been a growing recognition that Chinese growth has been seriously unbalanced, as Premier Wen put it, and that at the heart of the imbalance has been the very low consumption share of GDP. In 2005, when consumption hit the then-astonishing level of 40% of GDP, there was a widespread conviction in policy-making circles that this was an unacceptably low level and that it left Chinese growth much too dependent on the trade surplus and on increases in domestic investment.....

Low consumption levels are not an accidental coincidence. They are fundamental to the growth model, and the suppression of consumption is a consequence of the very policies – low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth. You cannot change the former without giving up the latter. Until Beijing acknowledges that it must dramatically transform the growth model, which it doesn’t yet seemed to have acknowledged, consumption will continue to be suppressed....

Why do I say we will be talking about 3% growth soon? Two reasons. First, I am impressed by the bleakness of historical precedents. Every single case in history that I have been able to find of countries undergoing a decade or more of “miracle” levels of growth driven by investment (and there are many) has ended with long periods of extremely low or even negative growth – often referred to as “lost decades” – which turned out to be far worse than even the most pessimistic forecasts of the few skeptics that existed during the boom period. I see no reason why China, having pursued the most extreme version of this growth model, would somehow find itself immune from the consequences that have afflicted every other case....

That is why Japan is a useful reminder of what can happen. After 1990 GDP growth collapsed from two decades of around 9% on average to two decades of less than 1% on average, but there was no social discontent, and unemployment didn’t surge. Some analysts credited Japanese lifetime employment or invoked the natural docility of Japanese people (a bizarre argument at best) to explain the lack of social upheaval, but for me it was because Japan genuinely rebalanced in the past two decades....

Because of its rapidly rising debt burden, the only way for China to manage a smooth social transition will be through wealth transfers from the state sector to the household sector. In the past, Chinese households received a diminishing share of a rapidly growing pie. In the future they must receive a growing share. This will probably be accomplished through formal or informal privatization.

The right way to engineer the transition to a system in which household wealth isn’t used to subsidize growth is to raise wages, raise the value of the currency, eliminate SOE monopoly pricing, and raise interest rates. The problem is that all of these have to adjust so far that to do so quickly would lead to massive financial distress....

What’s more, the only strategies by which Spain can regain competitiveness are either to deflate and force down wages, which will hurt workers and small businesses, or to leave the euro and devalue. Given the large share of vote workers have, the former strategy will not last long. But of course once Spain leaves the euro and devalues, its external debt will soar. Debt restructuring and forgiveness is almost inevitable.

Unless Germany moves quickly to reverse its current account surplus – which is very unlikely – the European crisis will force a sharp balance-of-trade adjustment onto Germany, which will cause its economy to slow sharply and even to contract. By 2015-16 German economic performance will be much worse than that of France and the UK.

If Germany does not take radical steps to push its current account surplus into deficit, the brunt of the European adjustment will fall on the deficit countries with a sharp decrease in domestic demand. This is what the world means when it insists that these countries “tighten their belts”.

If the deficit countries of Europe do not intervene in trade, they will bear the full employment impact of that drop in demand – i.e. unemployment will continue to rise. If they do intervene, they will force the brunt of the adjustment onto Germany and Germany will suffer the employment consequences.

For one or two years the deficit countries will try to bear the full brunt of the adjustment while Germany scolds and cajoles from the side. Eventually they will be unable politically to accept the necessary high unemployment and they will intervene in trade – almost certainly by abandoning the euro and devaluing. In that case they automatically push the brunt of the adjustment onto the surplus countries, i.e. Germany, and German unemployment will rise. I don’t know how soon this will happen, but remember that in global demand contractions it is the surplus countries who always suffer the most. I don’t see why this time will be any different....

As unemployment persists, and as the political pressure to address unemployment rises, the US will, like Britain in 1930-31, lose its ideological commitment to free trade and become increasingly protectionist. Also like Britain in 1930-31, once it does so the US economy will begin growing more rapidly – thus putting the burden of adjustment on China, Germany (which will already be suffering from the European adjustment) and Japan.

Trade policy in the next few years will be about deciding who will bear the brunt of the global contraction in demand growth. The surplus countries, because they are so reliant on surpluses, will be very reluctant to eliminate their trade intervention policies. Because they are making the same mistake the US made in the late 1920s and Japan in the late 1980s – thinking they are in a strong enough position to dictate terms – they will refuse to take the necessary steps to adjust.

But in fact in this fight over global demand it is the deficit countries that have all the best cards. They control demand, which is the world’s scarcest and most valuable commodity. Once they begin intervening in trade and regaining the full use of their domestic demand, they will push the adjustment onto the surplus countries. Unemployment in deficit countries will drop, while it will rise in surplus countries.

8--Profits Falling, Banks Confront a Leaner Future, New York Times

Excerpt: Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income in anticipation of a fundamentally altered financial landscape requiring leaner operations.

Bank executives and analysts had expected a temporary drop in profits in the aftermath of the 2008 financial crisis. But a deeper jolt did not materialize as trillions of dollars in federal aid helped prop up the banks and revive the industry.

Now, however, as government lifelines fade and a second recession seems increasingly possible, banks are finding growth constrained. They are bracing for a slowdown in lending and trading, with higher fees for consumers as well as lower investment returns amid tighter regulations. Profits and revenues are slipping to the levels of 2004 and 2005, before the housing bubble.

“People heard all these things before, but the reality of seeing the numbers is finally sinking in,” said John Chrin, a former JPMorgan Chase investment banker and executive in residence at Lehigh University’s business school. “It’s hard to imagine big institutions achieving their precrisis profitability levels, and even the community and regional banks are faced with the same problems.”....

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told. ..

Banks have been through plenty of boom and bust cycles before. But executives and analysts say this time is different.

Lending, the prime driver of revenue, has been depressed for several years and is not expected to pick up anytime soon, even with historically low interest rates favorable to borrowers. Consumers are spurning debt after a 20-year binge, while businesses are so uncertain about the economy that they are hunkering down, rather than financing expansion plans.

Making matters worse, the Federal Reserve’s pledge to keep rates near zero into 2013 is eating into profit margins earned on mortgages and other loans, as well depressing investment yields that usually offset fallow periods for lending.

Trading profits have also been waning amid a slowdown in volumes, and Wall Street’s once-lucrative mortgage packaging business is unlikely to bring in the blockbuster fees it earned during the housing boom....

All of this looms over the industry. To be sure, profits have rebounded from the depths of the financial crisis. All told, the nation’s banks earned $28.8 billion in the second quarter, nearly 38 percent more than a year ago and about what they earned in 2004, according to Trepp, a financial research firm. But more than one-third of those profits came as banks shifted capital to their bottom line that had been set aside to cover losses.

That helped obscure a 4.4 percent drop in revenue, which fell to $188 billion, the industry’s level in 2005. Trepp analysts project it could fall an additional 4 to 5 percent over the next year.

9--Personal Saving Rate Plunges From 5.5% To 5.0% As July Energy Expenditures Soar, zero hedge

Excerpt: July personal income and expenditures were quite surprising in that while many were expecting the drop in the market to force consumer saving to upshift (lower spending than income), not only was this not true, but expenditures spiked by 1 whole percent from -0.2% to 0.8%, on expectations of 0.5%, even as Personal Income came in line with expectations of 0.3%, up from a revised 0.2% (concurrent with extensive prior data revisions). This was the biggest difference between a monthly change in income and spending since October 209. The net result was a plunge in the savings rate from 5.5% to 5.0%. And while on the surface this would be good news, as in Americans are spending again, a quick look at the PCE components indicates that virtually the entire surge is due to a spike in Energy goods and services. In other words, the entire spike in spending was to... pay for gas and associated energy expenses. Which makes sense: in June this was a drop of -4.5%, it is only logical that the subsequent jump in Brent and WTI forced American savings to drop. All in all: in July Americans continued to max out their credit cards to pay for gas. As for the income side, transfer payments as a % of spending refuse to budge: thank you Uncle Sam.

10--Personal Consumption and the Housing Bubble, Dean Baker, CEPR

Excerpt: ...Unless another asset bubble again propels consumption by pusing the savings rate to extraordinarily low levels, the factor that will eventually have to lift the economy is an improving trade balance. This is not a matter of speculation, it is an accounting identity. That means it has to be true....

consumption depends in part on housing wealth. The size of the effect is usually estimated at between 5 to 7 percent, meaning that for every additional dollar of housing wealth annual consumption will increase by between 5-7 cents.

This effect was very important during the years of the housing bubble. The $8 trillion of housing bubble wealth led to a consumption boom that pushed the savings rate to near zero. With the loss of most of this wealth, it was 100 percent predictable that consumption would fall....

Savings have fallen first and foremost because most of the $8 trillion in housing bubble wealth that was driving consumption has disappeared since the collapse of the bubble. Consumer sentiment, especially about future conditions, is a very poor predictor of consumption. The most obvious explanation for the weakening of consumption in the second quarter was the surge in oil prices which reduced real incomes. With oil prices falling again in the last two months, most economists expect somewhat of an upturn in consumption in the second half of 2011.

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