Tuesday, September 6, 2011

Today's links

1--Shadow inventory Armageddon, Dr Housing Bubble

Excerpt:  The latest data shows that the shadow inventory has increased a bit in the last few months:

To break down the figures even further you have 2.48 million loans that are less than 90 days delinquent (3 missed payments), 1.9 million loans that are 90+ days delinquent (more than 3 missed payments), and 2.16 million loans already in the foreclosure process. In total, this adds up to over 6.54 million loans in the distressed pipeline and this is what I would categorize as the shadow inventory. As the chart above highlights, only about 500,000 properties are actually real estate owned and show up for sale in local MLS data (and not all REO show up but a lot do). The cure rates are abysmal on many of the loans and many are underwater to levels that will never cure on these properties. In fact, the latest data shows that the typical foreclosure process timeline is now up to a stunning 599 days!

“(LPS) The July Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure timelines continue their steady upward trend, as a payment has not been made on the average loan in foreclosure in a record 599 days. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. At the same time, first-time foreclosure starts in June were near three-year lows, and first-time delinquencies accounted for only 25 percent of new delinquent inventory.”

Even more disturbing you have 42 percent of the 1.9 million loans that are 90 or more days delinquent not making a payment in more than a year (approximately 798,000 mortgages are going with no mortgage payment for more than a year yet no foreclosure process has been initiated). ...
the true shadow inventory figure is up to 6.54 million. Of course the banks are happy pretending the housing issue is only 500,000 homes but the reality is much more disastrous and given the immobility of the figure, we realize banks still have no handle on how to move the properties. Why? Because they are only focused on keeping their personal interests going at the expense of taxpayers. Most of the loans are government backed (aka taxpayers) so it is ironic that we give the same banks that caused this financial mess the obligation and power to clear out the inventory. Is it any wonder it has been a boondoggle? How many million dollar bonuses have been paid to banking executives all the while the housing market has continued to implode? It would have been better to create a RTC like entity, let too big to fail actually fail, and simply clear out the market. As we have seen, price will get sales going and also free up disposable income instead of paying the bank to live in a stucco home. Four years into the crisis and we are still at worse than square one. What do you expect when people trust the same financial and banking sector that led us into this mess to solve it with no actual change?

2--Meanwhile, in Europe, Paul Krugman, New York Times

Excerpt: The Spanish and Italian interest rate spreads — the difference between their borrowing costs and Germany’s — are widening again. So we’re drifting back toward the point at which these countries might enter vicious circles of falling confidence and rising debt burdens.

My guess is that this reflects both doubts about whether the ECB will backstop these economies in the face of growing opposition, especially in Germany, and the bad economic news for Europe generally, since paying debts will become much harder in the face of a recession. To make austerity in some European countries workable, you really needed stronger European economies not to be practicing austerity; austerity for all was and is a recipe for failure.

Truly, this is turning into a global disaster.

3--The Austerity Economy, Paul Krugman, New York Times

Excerpt: Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no, because austerity hasn’t actually happened yet in America. But they’re wrong.

The fact is that the fading out of the stimulus, and in particular of aid to state and local governments, is already and noticeably leading to substantial withdrawal of government demand. Look, in particular, at actual government purchases of goods and services — governments at all levels buying stuff — which is what standard macroeconomics says should have the highest multiplier, since unlike transfers and tax cuts it is by definition spent rather than saved. Here’s the picture, showing changes in real spending over the previous year: (see chart)

When the recession officially ended, spending was rising at an annual rate of around $60 billion; now it’s declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe 1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor in our growth slowdown.

Still, I guess the beatings will continue until morale improves.

4--IFR-Banks dump assets as funding worries intensify, Reuters

Excerpt: Funding market tensions have triggered emergency measures at European banks, with some firms now dumping assets at the fastest rate since the collapse of Lehman Brothers as they seek to build up stockpiles of cash and reduce their reliance on short-term borrowings.

Nervy lenders have sold off billions of euros of "good assets" since the start of August, according to treasurers and business heads overseeing such sales, with some firms also halting new loans to large corporate clients in an effort to preserve cash.

Such a defensive response to the enfolding funding crisis in Europe is the clearest sign yet that credit market tensions - whether rooted in truth or unwarranted investor panic - pose an increasing threat to the global economic recovery, potentially choking off credit to critical engines of growth.

"We have taken the decision to sell off assets and reduce risk as a direct result of the funding situation," said one global head of markets at a large European bank. "Many of these are good assets, they are solid assets, but it's what you have to do to minimise your exposure to a funding squeeze."...

Longer-term funding markets are also dysfunctional. No European bank has done a senior unsecured bond deal since early July - despite about 150 billion euros of issuance in the first half. While a handful of covered bonds have come to market, activity is only a small fraction of its normal pace.

"Things have slowed in a big way," said one London-based banker who advises financial firms on debt issuance. "The volatility during August was exaggerated by a lack of trading volumes, but being realistic right now we would have expected many more deals back in the market."

Indeed, there have been some indications since mid-August that so
me banks are no longer lending to large corporate clients. French lenders were absent from a $900 million loan deals for Casino this week, for example, after dominating the domestic supermarket chain's previous $1.2 billion refinancing last year....

Senior bankers spoken to for this article were unanimous in saying that political and central bank intervention is now needed to stabilise Europe's banking system.

"Have we seen banks selling off massive portfolios? Yes. Is it getting worse? Yes. Do policy makers have to do something? Yes," said the European head of one US investment bank. "Some banks are really under pressure and are decreasing their balance sheets for fear they may come under attack."


"Eurozone banks have real problems getting funding," added the treasurer of another large European bank, which has also sold off assets recently. "Banks are building up their cash pools and increasing their liquidity pools by selling assets, and that will feed through to the rest of the economy."...


That could create additional problems, say some, leaving European banks stuffed with bad assets they are no longer able to sell or finance. "Unfortunately the first assets you sell off are the most liquid ones," said the markets head. "Many banks will end up with only their most illiquid assets left."

Bereft of their best interest-bearing assets, the sales could also eat heavily into profits, reducing many banks' plans to reach higher regulatory capital requirements under the Basel III rules through retained earnings over coming years. Given market drops, some assets will also have been sold at a loss.

"De-leveraging has been fairly aggressive, and given the falls in the prices of some financial assets during August some banks selling will have taken a big hit," said the London-based debt banker. "If markets pick-up, de-leveraging could too."

"The European policy makers have to understand this," added the boss from the US firm. "Banks have been deleveraging for the past two years, and if banks don't extend credit then that will feed back into the economy. I think we're going to be in pretty gnarly markets for some time."

5--MONEY MARKETS-No let up in bank demand for long-term ECB loans, Reuters

Excerpt: Euro zone bank demand for long-term emergency loans from the ECB remained high on Wednesday, showing that while tension in interbank markets was not increasing, funding for some institutions remained difficult.

Banks took 49.4 billion euros of three-month loans from the European Central Bank, slightly above the amount expiring, leaving the system awash with cash in a sign that longer-term interbank lending remains restricted.
"I would rather say this demand is from bad banks who can't access the market because the difference between Eonia (market rates) and the rate at these tenders is quite high," said Alessandro Tentori, rate strategist at BNP Paribas....


U.S. money market funds have also been less willing to lend dollars to euro zone banks, with dramatic contractions in lending earlier this month capturing market attention and raising the threat of a full-on funding squeeze.

While the benchmark dollar Libor borrowing rate , currently at its highest in a year, edged higher, other measures of stress pointed to elevated but stable tension.

6--Liquidity Lessons, FT.Alphaville

Excerpt: Liquidity means you can generate cash from a physical asset or paper claim.

If you can’t exchange the asset for a major currency to meet a sudden funding need, then the asset shouldn’t be permitted as regulatory capital. Basel II and Basel III have generated hundreds of pages around credit scoring and asset type while ignoring the fact that most of what banks are attributing as capital cannot be turned into cash on demand.

Liquidity is measured by size, speed and spread – not by price levels.
Whatever the market price, a market isn’t liquid if those holding assets in size cannot deal in size...

Such as this kind of thing in European banks, via IFR:

Nervy lenders have sold off billions of euros of “good assets” since the start of August, according to treasurers and business heads overseeing such sales, with some firms also halting new loans to large corporate clients in an effort to preserve cash…

…treasurers and business heads said that it would be the most liquid assets which would be sold off first, especially given the market tensions of late, which have shut down secondary trading in many markets such as those for big corporate loans.

That could create additional problems, say some, leaving European banks stuffed with bad assets they are no longer able to sell or finance. “Unfortunately the first assets you sell off are the most liquid ones,” said the markets head. “Many banks will end up with only their most illiquid assets left.”

Minsky moment, no?

7--Europe's Banking System: A Slow-Motion Bank Run in Progress?, Streetlight blog

Excerpt: Last week The Economist described what it called a "slow-motion run in the funding markets" in Europe -- in other words, a gradual but steady run on European banks, as depositors remove their money from European banks and put it in places that are seen to be safer. It's worth taking a look at some data to see how significant this phenomenon is....

The truly troubling thing to note in the table, however, is the rate at which financial institutions have been withdrawing money from European banks. This has particularly affected those countries that have traditionally been large international money centers, such as Germany, the UK, and to a lesser degree, Ireland, but it has affected all of the major European economies to some extent. To varying degrees these withdrawals by financial institutions have been offset in the large euro-zone countries by steady increases in the deposits made by domestic residents and corporations (i.e. non-MFI deposits), leaving the overall level of deposits in the euro-zone roughly unchanged. But it seems very clear that the world's big banks and other financial institutions are indeed moving their funds out of Europe at a significant rate.

Fortunately for them, the big euro-zone countries all have a large domestic base of depositors that has continued to deposit a portion of their earnings into their own banks, so alarm bells have not yet been sounded. But the fall in deposits by MFIs indicates that international money managers are nervous about keeping their money in European banks. And if their nervousness begins to spread to households and non-financial corporations (the way that it clearly has in Ireland and Greece, for example), this hidden slow-motion bank run will suddenly become very visible, and very dangerous.

8--The next Angela moment, Business Live

Excerpt: Global financial markets are now watching every move German Chancellor Angela Merkel makes, as she is the lynchpin that holds the European financial system together....

The IMF had urged Europe's banks over the last two years to beef up their capital base while the equity market rally was in full swing. Now the share prices of several European banks are below their September 2008 levels.

Europe's inter-bank market is effectively frozen and European banks have also lost access to America's $7-trillion money markets. Lenders have parked €126bn at the European Central Bank for safety rather than risk exposure to other commercial banks.

Many banks remain reliant on short-term funding from the European Central Bank. Banks also refinance themselves with short-term funds available in interbank money markets, where a sudden spurt of risk aversion could dry up funds overnight, as happened in 2008.

Moody's Investors Services estimated earlier this year that the world's banks face an unprecedented amount of refinancing until 2015. Next year alone, banks in the euro area will need to refinance nearly $1-trillion worth of debt. Large money funds have been pulling back on making unsecured loans to European banks, and instead moving to secured transactions. This has left the banks scrambling for dollar-based funding.
The problem is that the drying up of the inter-bank market effects global liquidity and similar to the fourth quarter 2008 and the first quarter 2009, simple routine trade finance deals no longer happen as banks put on their ultra-cautious cap.

9--Three Charts To Email To Your Right-Wing Brother-In-Law, Smirking Chimp

Excerpt: Problem: Your right-wing brother-in-law is plugged into the FOX-Limbaugh lie machine, and keeps sending you emails about "Obama spending" and "Obama deficits" and how the "Stimulus" just made things worse.
Solution: Here are three "reality-based" charts to send to him. These charts show what actually happened. (see chart)...

Deficits (another chart)

The numbers in these two charts come from Budget of the United States Government: Historical Tables Fiscal Year 2012. They are just the amounts that the government spent and borrowed, period, Anyone can go look then up. People who claim that Obama "tripled the deficit" are either misled or are trying to mislead.

The Stimulus and Jobs (next chart)...

In this chart, the RED lines on the left side -- the ones that keep doing DOWN -- show what happened to jobs under the policies of Bush and the Republicans. We were losing lots and lots of jobs every month, and it was getting worse and worse. The BLUE lines -- the ones that just go UP -- show what happened to jobs when the stimulus was in effect. We stopped losing jobs and started gaining jobs, and it was getting better and better. The leveling off on the right side of the chart shows what happened as the stimulus started to wind down: job creation leveled off at too low a level.

It looks a lot like the stimulus reversed what was going on before the stimulus.


10--It's Not Regulatory and Tax Uncertainty, Economist's View

Excerpt: Gary Burtless explains why the complaint from conservatives that regulatory and tax uncertainty is holding back the economy doesn't make sense (via email):

A couple of hours after talking to an ABC correspondent about the woeful job numbers and what might be done to improve them, I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business "uncertainty" about future tax hikes and regulatory burdens. I asked Bloomberg's host whether he was aware that corporate profits relative to national income had just hit a 60-year peak? He had heard rumors to that effect. Was he aware that taxes on corporate earnings were at a 60-year low? The Heritage guy had heard that might be the case.

Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now? If managers thought taxes or regulatory costs might go up in the future, wouldn't it make sense to take advantage of today's low taxes and lower burdens to invest and hire today? According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018. Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?...

The odd thing is, when businesses are asked why they're not expanding, "high taxes" and "heavy regulatory burdens" and "tax uncertainty" don't feature as prominent answers. They mostly say they don't see good prospects for extra sales. But right-wing economists have their talking points, even if they make little sense, and they're sticking with 'em. Another of their favorites is "... executives tell me they can't find good candidates for the job openings they have." Don't get me started on that one.

11--The Zero Economy, Robert Reich's blog

Excerpt: The Bureau of Labor Statistics reports today no jobs were created in August. Zero. Nada.

Well, not quite. The strike at Verizon reduced the labor force by 45,000. Minnesota government employees returned to work, adding 22,000. So in reality, America added 23,000 jobs. Almost zero.

In reality, worse than zero. We need 125,000 a month merely to keep up with population growth. So the hole continues to deepen.

Since this Depression began at the end of 2007, America’s potential labor force – working-age people who want jobs – has grown by over 7 million. But since then the number of Americans with jobs has shrunk by more than 300,000.

If this doesn’t prompt President Obama to unveil a bold jobs plan next Thursday, I don’t know what will.

The problem is on the demand side. Consumers (whose spending is 70 percent of the economy) can’t boost the economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. Their jobs are disappearinig, their pay is dropping, their medical bills are soaring.

And businesses won’t hire without more sales.

So we’re in a vicous cycle....
So what does a sane nation do when the consumers and businesses can’t boost the economy on their own?

Government becomes the purchaser of last resort. It hires directly (a new WPA and Civilian Conservation Corps, for example). It helps states and locales, so they don’t have to continue to slash payrolls and public services. (The help could be structured as a loan, to be repaid when unemployment drops to, say, 6 percent.)

And it hires indirectly — contracting with companies to rebuild our crumbling infrastructure, including school buildings, to take another example.

Not only does this create jobs but also puts money in the hands of all the people who get the jobs, so they can turn around and buy the goods and services they need – generating more jobs...

12--Weak housing conceals higher inflation, Pragmatic Capitalis

Excerpt: I’ll bet you did not know that housing makes up 42% of the Consumer Price Index (CPI). All the rest of it, food, energy, clothing, recreation, education, transportation, toys, cosmetics, etc. makes up the other 58%. So whatever housing prices are doing has a big effect on the headline CPI number.

The softness of housing prices continues to artificially supress the growth of the CPI inflation rate. Some Fed officials are even saying that they need to strive for higher inflation to help the economy rebound, in spite of the Fed’s mandate to promote “stable prices”.

Most people have heard about the CPI variant that excludes food and energy. But not many people outside the economics community know that the Bureau of Labor Statistics also publishes a long list of alternate permutations of CPI calculations, including or excluding various components. This week’s chart shows a comparison of the CPI-Housing growth rate versus “all items less shelter”, which is that other 58% of the CPI calculation I mentioned above. When we exclude the contribution of the housing price data, we can see that the inflation rate for everything else is already up to 4.68%....

This chart shows that the CPI-Housing growth rate follows the movements of lumber prices, with a lag time of about 18 months. So the bottom for housing prices in 2010 was just the echo of the bottom in lumber prices in early 2009. The current uptrend for the growth rate of CPI-Housing is following the path of an up move in lumber prices that occurred 18 months before. Lumber prices peaked in December 2010, which suggests that the CPI-Housing numbers should continue rising until around June 2012.

If so, that is going to take away the depressing effects of low housing prices on the headline CPI data. And a higher input from housing prices joining with the already 4%+ inflation everywhere else is going to make it really hard for the Fed to live up to its promise to keep interest rates low until 2013.

13-Global Manufacturing Slowdown Shows Every Nation Can’t Count on Exports, Wall Street Journal

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.

14-On the Inadequacy of the Stimulus, Paul Krugman, New York Times

Excerpt: Hmm. I don’t think I’ve ever put up a simple explanation of why the stimulus was so clearly inadequate to the task. By the way, my point here is not what Obama shoulda-coulda done; I just want to look at the straight economics.

So here’s the thing: the financial crisis, and in particular the popping of the housing bubble, had two big effects on spending. One was that housing investment plunged from well-above-normal to well-below-normal levels. The other was that consumers suddenly increased their savings. Here’s a picture, with the red line showing residential construction as a percentage of GDP and the blue line showing the personal savings rate (see chart)

Put these together and you have a negative shock on the order of 6 percent of GDP.

Against this you had a stimulus bill of $800 billion — except $100 billion of that was AMT extension that was going to happen anyway, another $200 billion was other tax cuts of dubious effectiveness, so you were left with $500 billion of spending, spread over more than 2 years — maybe 1.5 percent of GDP or less.

It just wasn’t big enough to do the job.

15--1937, Paul Krugman, New York Times

Excerpt: Between Friday’s US job report and today’s economic news from the rest of the world, it’s hard to avoid the sense that things are going bust all over. Austerity is really biting, and the global economy is sputtering.

Plus, Europe! Spreads are widening out drastically, again — and where is the ECB? Still unwilling to concede that its move toward monetary tightening was exactly the wrong thing. And Munchau is right: if all of Europe is going to be engaged in fiscal austerity, with the ECB adding to the downdraft instead of fighting it, there’s no way the peripheral countries can make it.

What gets me, always, is that there is nothing mysterious about this crisis; nothing is happening that someone who read Paul Samuelson’s original, 1948 edition of his textbook would find puzzling. And old-fashioned textbook analysis tells us quite clearly what we should be doing about it. Hint: not austerity.

But much of the economics profession has turned its back on what it used to know, and policy makers have chosen to go with fantasies about expansionary contraction rather than macroeconomics 101.


16-Just another manic Monday, The Economist

Excerpt: ..IF THIS is the week that senior traders and investors return to their desks (British children are returning to school), they have not returned from holiday in a very cheerful mood. As I write, the DAX is down 3.7% and the FTSE 100 is off 2.2%; Italian bonds are falling for the 11th successive day.

Some of this could be a hangover from Friday's jobs report in the US, and from the lawsuit launched by an arm of the government against the banking sector. But Europe's wounds are also self-inflicted. Let us sum up the recent news. The Greek talks with its multinational lenders have been suspended (broken down?) on signs the government is missing its targets; Italy's politicians are backtracking from the measures unveiled in its austerity budget. Europe's Plan A - that countries will bring their debts down through fiscal discipline while the markets wait patiently - looks less and less likely to succeed. In the FT, Wolfgang Munchau said that
the very least one should expect is for the eurozone to abandon all austerity measures with immediate effect

Actually, that is rather a lot to expect. Just to illustrate the confusion among policymakers, Christine Lagarde, the new head of the IMF, said at the weekend that European countries should
consider stimulus measures to drive growth
while Jean-Claude Trichet, head of the ECB, called for faster implementation of austerity measures.

Plan B for the euro-zone was for fiscal union, meaning that the Germans would guarantee the debts of the periphery. But with Angela Merkel suffering her fifth regional election defeat of the year, the German government will be more reluctant than ever to sign a blank cheque.

While the authorities bicker, the borrowing costs of banks are rising as US money market funds retreat from the region. The costs of insuring against European corporate defaults has risen 7% today. That will make the banks even less keen to lend; the annual growth rate of private sector lending was just 2.4% on the latest data.

Animal spirits may not be the only factor that drives an economy. But when you consider all the above factors - sovereign debt crisis, fiscal austerity, bank funding pressures, weak credit growth, falling markets, political drift - the background facing consumers and businesses is very gloomy. Only those German companies exporting to China can feel immune.

17--The revolution of capitalism, John Gray, BBC

Excerpt: As a side-effect of the financial crisis, more and more people are starting to think Karl Marx was right. The great 19th Century German philosopher, economist and revolutionary believed that capitalism was radically unstable. It had a built-in tendency to produce ever larger booms and busts, and over the longer term it was bound to destroy itself.
Marx welcomed capitalism's self-destruction. He was confident that a popular revolution would occur and bring a communist system into being that would be more productive and far more humane. Marx was wrong about communism. Where he was prophetically right was in his grasp of the revolution of capitalism. It's not just capitalism's endemic instability that he understood, though in this regard he was far more perceptive than most economists in his day and ours.

More profoundly, Marx understood how capitalism destroys its own social base - the middle-class way of life. The Marxist terminology of bourgeois and proletarian has an archaic ring. But when he argued that capitalism would plunge the middle classes into something like the precarious existence of the hard-pressed workers of his time, Marx anticipated a change in the way we live that we're only now struggling to cope with. He viewed capitalism as the most revolutionary economic system in history, and there can be no doubt that it differs radically from those of previous times....

But we have very little effective control over the course of our lives, and the uncertainty in which we must live is being worsened by policies devised to deal with the financial crisis. Zero interest rates alongside rising prices means you're getting a negative return on your money and over time your capital is being eroded. The situation of many younger people is even worse. In order to acquire the skills you need, you'll have to go into debt. Since at some point you'll have to retrain you should try to save, but if you're indebted from the start that's the last thing you'll be able to do. Whatever their age, the prospect facing most people today is a lifetime of insecurity.

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