Friday, September 2, 2011

Today's links

1--Banks Still Fabricating Docs, Commiting Foreclosure Fraud, The Big Picture

Excerpt: As hard as it may seem to believe, the largest mortgage servicers are still fabricating documents for use in foreclosures.

That’s according to an article in American Banker, titled Robo-Signing Redux: Servicers Still Fabricating Foreclosure Documents.

Key points:

• The practice continues a year after the companies were caught in the robo-signing scandal, even as the industry has been negotiating a settlement with state attorneys general re: loan-servicing abuses.

• Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose.

• Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist.

2--A TARP for Europe?, WSJ

Excerpt: Christine Lagarde is getting pounded for pointing out what everyone knows but few in Europe care to admit—that bank lending to debtor nations is the primary source of Europe's systemic-risk problem. In remarks at this weekend's Jackson Hole confab for central bankers, the International Monetary Fund chief and former French Finance Minister said Europe's banks "need urgent recapitalization," adding that "they must be strong enough to withstand the risks of sovereigns and weak growth."

Twenty months into the euro-zone's sovereign-debt crisis, this ought to be obvious. The main reason that the specter of an unruly default keeps policy makers up at night is its likely consequences for Europe's banks, whose balance sheets hold some 45% of Europe's government bonds. Repeated stress tests by bank regulators have ignored the vast majority of those bonds that are held to maturity....

"The most efficient solution," Ms. Lagarde argued Saturday, "would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary." She suggested that the EU's existing sovereign bailout fund could be used for this purpose. In response, anonymous European mandarins have taken to the media to criticize the message, arguing that Europe's banks face liquidity issues, but not a solvency crisis....

Forced recapitalizations are not without risks, especially in terms of moral hazard. But many of these banks are being bailed out already as their bonds come due and they're repaid by Athens, Dublin and Lisbon with funds provided by the EU and the IMF. Short of an economic miracle, others will end up being bailed out directly.

If moral hazard is the fear, better to recapitalize through the front door, a la TARP in the U.S. in 2008. This at least forces taxpayers to confront the costs directly, and to hold the bankers and politicians accountable.

Moral hazard also could be reduced by sacking bank managers, wiping out current shareholders and giving a haircut to bank creditors, and in some cases breaking up banks that are persistent offenders. (Well, we can dream.) Ms. Lagarde's speech was short on specifics, but any recapitalizations should come with what Europe is fond of calling "strict conditionality," especially for the managers in question....

In the U.S., TARP helped to save the financial system, though its moral hazard implications could have been reduced if at least Citigroup would have been allowed to fail and had been broken up, as a three-time loser. Treasury Secretary Hank Paulson also erred in forcing all the banks to take public capital, which soured Americans on all banks and gave the political class more leverage over the entire banking system, not merely the losers.

A better model was the Resolution Trust Corporation in the U.S. during the savings and loan crisis in the early 1990s, which made a distinction between solvent and insolvent banks and seized the assets of the latter. That would require the courage to make the distinctions, which Mr. Paulson was reluctant to do three years ago and Europe's politicians are equally reluctant to do today.

But dealing with the banking problem directly is surely preferable to radically rewriting the rules of the euro-zone through the creation of transnational "euro bonds." That would socialize the bad fiscal behavior of the southern Europeans at the expense of the more fiscally continent north. German taxpayers might not be happy about recapitalizing their banks, but we suspect they'd prefer that to permanently underwriting the spend and borrow habits of Athens, Lisbon, Rome and Madrid.

3--Eurozone emergency fund will "lend money to recapitalize banks", Bloomberg

Excerpt: Europe’s rescue fund faces political demands that risk hobbling its response to emergencies as the 17 euro-area governments prepare to ratify its overhaul.

The fund, known as European Financial Stability Facility, would have to wait for a request from a debt-hit government before buying its bonds in the secondary market, its new statute shows....


The retooled rescue fund, the product of a July 21 emergency summit, came as euro-area leaders approved a second Greek bailout, trying to arrest a debt crisis that has spiralled from a 2009 fiscal headache in Athens to a global economic risk.

The 48-page revision to the EFSF statutes, dated Aug. 26, gives legal form to the summit decision to enable the fund to buy bonds trading on the market, offer precautionary credits and lend money to recapitalize banks. The need for governments to seek a bond-buying effort wasn’t part of the summit statement.

4--Martin Wolf Looks the Economic Situation Squarely in the Eye, Grasping reality with both hands

Excerpt: And boy is it depressing. Martin Wolf:

Struggling with a great contraction: In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander…. Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed….

In the long journey to becoming ever more like Japan, the yields on 10-year US and German government bonds are now down to where Japan’s had fallen in October 1997, at close to 2 per cent (see chart). Does deflation lie ahead in these countries, too? One big recession could surely bring about just that. That seems to me to be a more plausible danger than the hyperinflation that those fixated on fiscal deficits and central bank balance sheet find so terrifying.

A shock caused by a huge fight over fiscal policy – the debate over the terms on which to raise the debt ceiling – has caused a run into, not out of, US government bonds. This is not surprising for two reasons: first, these are always the first port in a storm; second, the result will be a sharp tightening of fiscal policy. Investors guess that the outcome will be a still weaker economy, given the enfeebled state of the private sector. Again, in a still weaker eurozone, investors have run into the safe haven of German government bonds….

Nouriel Roubini, also known as “Dr Doom”, predicts a downturn. “A stopped clock”, some will mutter. Yet he is surely right that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the eurozone is stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes, a panic and back to bad fundamentals are large, with further economic contraction ahead.

Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for manoeuvre – and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it. Much more could also be done to hasten deleveraging of the private sector and strengthen the financial system. Another downturn now would surely be a disaster. The key, surely, is not to approach a situation as dangerous as this one within the boundaries of conventional thinking.

5--The Debt Non-Explosion, Paul Krugman, New York Times

Excerpt: A conversation I had earlier today suggested that it might be worth pointing out a fact that isn’t as widely known as it should be: namely, that there has not been an explosion in debt over the past few years. There has been a big rise in federal debt, but this has gone along with a collapse in private borrowing, so that overall debt growth has been lower than it was in the pre-crisis years: (chart)

Bear this in mind when someone starts ranting about hyperinflation just around the corner thanks to explosive debt growth.

6--Obama’s Jobs Plan: Will He Offer Policy Miniatures or Give ‘em Hell?, Robert Reich's Blog

Excerpt: Next Thursday President Obama will unveil his jobs plan.

He’ll choose either Plan A or Plan B.

Plan A would be big enough to restart the economy (now barely growing) and reduce unemployment (which continues to grow). That means spending another trillion dollars over the next two years – rebuilding the nation’s infrastructure, creating a new WPA and Civilian Conservation Corps, and lending money to cash-starved states and cities.

Republicans will oppose it, of course. They’ll say the stimulus didn’t work the first time (they’re wrong – it saved 3 million jobs but it was way too small given the drop in consumer spending as well as budget cuts by states and cities), and we can’t afford it (wrong again – the yield on 10-year Treasury bills is now 2 percent, meaning this is the best time to borrow. And if growth isn’t restored soon, the debt/GDP ratio will balloon beyond belief). But their real hope is to keep the economy anemic through Election Day 2012 so voters will send Obama home.

That means the President would have to fight for it. He’d have to barnstorm the country, demanding Republican votes. He’d build his 2012 campaign around it, attacking the Republican “do nothing” Congress. He’d give ‘em hell.

Plan B would be a bunch of policy miniatures that would have almost no effect on the economy or employment but would nonetheless be good things to do (extending the Social Security tax cut, extending unemployment benefits, reauthorizing the highway building trust fund, giving employers a tax incentive to hire the long-term unemployed, ratifying trade agreements).

Republicans will oppose it, of course. They’ll say this is no time for new initiatives, that our biggest problem is the size of government, debt, and over-regulation. They’ve been saying almost exactly the same thing for eighty years....

Here’s Truman’s acceptance speech at the Philadelphia convention that nominated him prior to the 1948 election:

Senator Barkley and I will win this election and make those Republicans like it… We will do that because they are wrong and we are right… [T]he people know the Democratic Party is the people’s party, and the Republican Party is the party of special interests and it always has been and always will be… The Republican Party… favors the privileged few and not the common, every-day man. Ever since its inception that Party has been under the control of special privilege, and they concretely proved it in the 80th Congress. They proved it by the things they did to the people and not for them. They proved it by the things they failed to do.

Give em hell, Barack.

7--Weak consumer confidence and real wage growth portend weak consumer spending, Angry Bear

Excerpt: Yesterday the Conference Board released its measure of consumer confidence, which dropped to 44.5 in August. This brings the Conference Board measure of confidence in line with the Reuters/University of Michigan measure of consumer sentiment. Bloomberg summarizes the Conference Board results.

Confidence is important, since consumer spending accounts for the lion's-share of aggregate spending. Consumer confidence measures are highly correlated with the annual growth in real personal consumption expenditures - the correlation coefficients are 75% and 67% for the University of Michigan Sentiment index and the Conference Board's Confidence index, respectively.

Ultimately, though, it's all about jobs and personal incomes....To date, while July real wages and salaries (deflated using the CPI) fell on the month, the 3-month average continues its ascent. Clearly the sluggish climb in real wages and salaries is not enough to spark a surge in confidence and spending. Neither will consumers draw down saving, as was the case over the last decade amid debt-financed consumption. In fact, saving is more likely to rise as a share of income than fall as the balance sheet repair process furthers.

Jobs and incomes will drive consumption.

To be sure, measures of confidence are "better" predictors of economic activity when the economy is fragile. We know that the economy is now much more fragile than previously thought. Weak confidence plus meager real wage and salary growth is, unfortunately, a harbinger of further 'weak' economic activity.

8--IMF Estimates Show Damage To European Banks, Global Finance

Excerpt: The International Monetary Fund said that European banks' balance sheets suffered serious damage from their holdings of troubled euro zone sovereign debt, in estimates that attracted rebuttals from euro zone authorities, the Financial Times reported Wednesday.

The IMF's draft version of its regular Global Financial Stability Report contained an estimate that showed that marking sovereign bonds to market would reduce European banks' tangible common equity by around EUR200 billion ($287.49 billion), a drop of 10-12%, the newspaper said, citing two officials.

The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks, the report added.The European Central Bank and euro zone governments have rejected the estimates, calling them partial and misleading, according to the newspaper.

The final version of the IMF report will be published in three weeks, just before the Fund's annual meetings, and is subject to revision depending on the debate between fund staff and the board, the newspaper said.

9--Sustained, high joblessness causes lasting damage to wages, benefits, income, and wealth, EPI

Excerpt: The national unemployment rate is currently 9.1%, and it has been at or above 8.8% for the past 28 months. The underemployment rate has remained between 15.7% and 17.4% since the spring of 2009, and it currently stands at 16.1%.

Sustained, high joblessness causes lasting damage to wages, benefits, income, and wealth by EPI President Lawrence Mishel and economist Heidi Shierholz explains that the monthly unemployment and underemployment rates do not capture the full picture of how many U.S. workers experience labor market distress. Roughly 31% of U.S. workers experienced unemployment or underemployment at some point in 2009. The unemployment rate also does not capture how severe the problem of long-term unemployment is—the share of unemployed workers who have been out of work for over six months has hovered around 45% for more than a year. Finally, the unemployment rate as it is experienced by children is higher than the national average. In 2010, the unemployment rate averaged 9.6%, but 10.6% of children had at least one unemployed parent.

The jobs shortfall in the labor market is roughly 11.1 million jobs—there are 6.8 million fewer jobs than there were when the recession started, and 4.3 million additional jobs were needed to keep pace with the growth in the working-age population. To fill the gap by mid-2014, three years from now, 400,000 jobs would need to be created each month. However, over the last six months, the economy has added an average of 144,000 jobs each month—at that rate, it will take 15 years to get back to the pre-recession unemployment rate. The shedding of public sector jobs—35,000 a month—is contributing to the slow pace of job growth. Over 40% of private-sector job gains in the current recovery have been canceled out by job losses in the public sector. Forecasters expect the unemployment rate to be at least 8.5% at the end of 2012, a rate higher than the worst months of the prior two recessions.

One of the significant consequences of persistently high unemployment is slowed wage growth. In fact, wage growth has been slower in the last two years than at any time over the last 30 years, a three-decade period that has been marked by stagnating wages across occupations and education levels. For instance, the inflation-adjusted median weekly wages for both high school and college-educated men have been stagnant for ten years. High unemployment also causes family incomes to fall. The median working-age household saw an income decline of $2,700 from 2007 to 2009, on the heels of one of the worst business cycles (2000-07) on record for income or employment gains. As a result, the typical working-age household brought in roughly $5,000 less in 2009 than it did in 2000. Poverty has also risen—in 2009, one in seven people was living in poverty. For children under the age of 6, the figure was one in four. Finally, average wealth declined 17.3% a year for the two years between 2007 and 2009, and it declined substantially faster for those with less of it to begin with. The bottom four-fifths of households had less wealth in 2009 ($62,900) than in 1983 ($65,300). In contrast, the wealth of the top fifth was 50% larger in 2009 than in 1983.

10--Roubini: "We're headed for recession", Pragmatic Capitalism

Excerpt: Roubini on what the Fed could do at this point to avoid a recession:

“We’ve reached a stall speed in the economy, not just in the U.S., but in the euro zone and the UK. We see probably a 60% probability of recession next year and unfortunately we’re running out of policy tools. Every country is doing fiscal austerity and there will be a fiscal drag. The ability to backstop the banks is now impossible because of political constraints and sovereigns cannot bail out their own distressed banks because they are distressed themselves.”...

On whether there are any monetary policy tools that might be more helpful than others:

“The ones that are being discussed by the FOMC will not have much of an effect because if you lengthen the maturities, you are buying long-term Treasuries and selling short-term, you are flattening the yield curve in a way that hurts the banks…This time around we will not have an additional purchase of Treasuries or fiscal stimulus. We will have a fiscal drag and the short-term effect of a rally in the market will fizzle out when the real economy is going in the tank. We are entering a recession based on my numbers.”

On what President Obama and Congress could do if Bernanke doesn’t have the ammunition:

“We certainly need another fiscal stimulus. Much stronger than the one we had before. The one we had before was not enough. Congress is controlled by the Republicans and they’re going to vote against Obama in the realm of fiscal austerity. If things get worse, it’s only to their political benefit.”

“[The American Recovery and Reinvestment Act of 2009] was effective in the sense that the recession could have turned into a Great Depression. Things would have been much worse without it, so it was very effective in the sense of preventing a Great Depression, but it was not significant enough. With millions of unemployed construction workers, we need a trillion dollar, five-year program just for infrastructure, but it’s not politically feasible and that’s why there will be a fiscal drag and we will have a recession.”...

On whether there’s anything to prevent a debt crisis from becoming a true systemic financial crisis:

“The banks in Europe are already in trouble. Banking risk has become sovereign risk when the banks were bailed out by the sovereigns, but now the sovereign risk is becoming banking risk because you have a bunch of distressed near insolvent sovereigns who cannot backstop their own banks. There is a good chunk of the government debt held by the banking system. It is a vicious circle between the sovereign risk and the banking risk. You cannot separate them. The current approach of the Europeans is to muddle through and kick the can down the road. Extent and pretend. It is not a stable equilibrium. It’s an unstable disequilibrium. Either the Europeans go in the direction of a greater economic monetary fiscal and political union or the only other alternative is a disorderly default or work out and eventually break up of the monetary union.”

11--Global Manufacturing Slowdown Shows Every Nation Can’t Count on Exports for Growth, Kathleen Madigan, WSJ

Excerpt: It’s not a surprise: if few are buying goods, then few need to produce goods.

Around the world, factory activity contracted in August. Purchasing managers’ indexes from Australia to Korea to the euro zone fell into negative territory. The reading for U.K. manufacturers fell to a 26-month low.

The U.S. was one of the few nations to see its factory sector skirt contraction. But even here, activity was barely growing.

The problem is weak demand, as evidenced for falling new orders. The U.K. report showed new orders declined for the fourth consecutive month and at the sharpest rate since April 2009. The euro-zone order index fell to its lowest in more than two years.

In the U.S. the new orders index showed orders falling for the second month in a row. Despite that, what seems to be helping American factories is a rebound in car sales and output after supply chain disruptions in Japan caused U.S.-based vehicle makers to cut production schedules in the spring and early summer.

But U.S. factories at best can be described as treading water.

To offset weak demand at home, factories around the world are counting on exports. For instance, the U.S. government hopes to double exports in a few years. The problem is that one nation’s domestic demand in another’s export market.

12--Economists React: U.K. ‘Bright Spot’ Dims, WSJ

Excerpt: U.K. manufacturing slumped to the weakest level for more than two years in August. Below, economists react:

The purchasing managers survey showing a second month of overall contraction in manufacturing activity fuels the serious concern over the current state of the U.K. economy and the outlook. While manufacturing output only accounts for 12.8% of GDP, it was very much the bright spot of the economy in 2010 and early 2011.– Howard Archer, IHS Global Insight

The latest [U.K.] survey readings confirm that much of the slowdown since the start of the year represents a notable weakening in the global trade cycle, rather than temporary supply disruptions, and as such manufacturing is unlikely to produce the kind of positive contributions to growth which may have previously been expected and hoped for. – HSBC Global Research

13--Global slowdown alert, FT.Alphaville

Excerpt: The August global manufacturing PMI index fell to 50.1 from 50.6 in July, the lowest level since June 2009. The deterioration also marks the sixth consecutive month of decline and the longest losing streak since 2008. The index is now lower than both the survey’s long-run average (51.9) and the levels reported during the start of the last global recession (e.g., 50.8 in H1 2008). Moreover, the forward-looking new orders component fell further below 50, pointing to poor momentum in the global manufacturing sector in the near term.

The slowdown is broadly observed across major economies, especially in Western Europe. In the US, ISM Manufacturing declined less than expected to 50.6 from 50.9, falling to the lowest level since July 2009. But details were of concern, with higher inventories keeping the headline index above water. New orders remained in the sub-50 territory for the second consecutive month. The deterioration in euro area PMI reports is marked in both core and peripheral euro area economies. The August euro area PMI fell to 49.0, the first below 50 reading since September 2009.

Of note, the German PMI is now at only 50.9, while the France PMI fell below 50. In addition, the Italian PMI dips again below 50 in August. Both the Spanish and Greek PMIs declined in August and remained at the subdued levels of 45.3 and 43.3, respectively. The weak PMI surveys raise doubts on the credibility of current fiscal consolidation programs and increase the pressure on further fiscal retrenchment, especially for the periphery. The UK manufacturing PMI was also weak in August and remained below 50 for a second month in a row.








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