Monday, September 12, 2011

Today's links

1---European Banks Valued at Post-Lehman Lows Show Sovereign Risks Are Growing, Bloomberg

Excerpt: BNP Paribas SA, Societe Generale and Credit Agricole SA (ACA), France’s largest banks by market value, are trading at levels that imply a 100 percent loss on Greek, Irish and Portuguese holdings, according to Barclays. In the case of Paris-based Societe Generale, the share price even implies full writedowns on Italian and Spanish debt, according to Barclays.

“The current discounts to book are driven by much broader macro concerns, and attributing all of the discount to a single risk factor like sovereign is too simplistic,” Sigee wrote, adding that the French banks’ risks remain manageable. “However, it does give a sense of how severely sovereign risks have been priced into equity valuations.”...

The 90 banks that underwent European stress tests would face an estimated capital shortfall of 350 billion euros if Greek, Portuguese, Irish, Italian and Spanish government bonds were written down to market values, according to Nomura analysts led by Jon Peace. No “practical” amount of capital can prepare them for a large sovereign debt impairment or default, Nomura said in a note on Sept. 7....

2--Thomas Friedman Thinks the Tea Partiers Are Extremists of the Left, Dean Baker, CEPR

Excerpt: Thomas Friedman is once again orthogonal to reality. In his column today he urges a "grand bargain" where the Republicans abandon extremists of the right and agree to tax increases and Democrats abandon extremists of the left and agree to cut Medicare and Social Security (euphemistically referred to as "entitlements"). There is one little problem with Friedman's story.

Support for Social Security and Medicare is not confined to extremists of the left. Overwhelming majorities of every group, including Republicans and self-identified supporters of the Tea Party, are opposed to cuts to Social Security and Medicare. The only people who seem to support such cuts are wealthy people like Mr. Friedman.

The reality is that Social Security is easily affordable as everyone familiar with the projections knows. According to the latest projections from the Congressional Budget Office the program can pay every penny of benefits for more than a quarter century with no changes whatsoever. To make the program fully solvent throughout its 75-year planning horizon would require a tax increase is equal to 5 percent of the wage growth projected over the next 30 years. This is why people familiar with the program's finances are generally unwilling to support cuts in Social Security benefits, unlike Mr. Friedman.

3-- Hold banks to account for their role in crisis, Phil Angelides, Sacramento Bee

Excerpt: Perhaps most troubling is a growing chorus in the financial arena suggesting that holding the banks financially responsible for their actions might sink the banks and the financial system. These concerns are misplaced. The 10 biggest publicly traded U.S. banks have tangible common shareholder equity in excess of $600 billion, with the regulators able to require more if needed. Their profits topped $62 billion in 2010. They are healthy enough to be paying billions of dollars each year in dividends and to have given out $464 million in collective compensation last year to the top five executives at each of those banks. Moreover, the legal system is likely to balance these concerns as plaintiffs have clear incentives to seek maximum recoveries without precipitating bankruptcies. In any event, money isn't the only remedy: Reforms of corporate governance and bank practices can provide meaningful change.

It's critical that the banks not be given an unlimited pass for past transgressions – to ensure that the truth of what happened to our country is revealed and justice is not short-circuited by financial power. To date, front-line public officials appear to be holding firm. For example, Illinois Attorney General Lisa Madigan, a leader in pursuing cases to help homeowners harmed by bank abuses, recently made it clear that any settlement with the attorneys general will not include the broad waivers the banks are seeking.

When the Financial Crisis Inquiry Commission issued its final report in January, the commission made it clear that its report should not be the end of the examination of the financial crisis, given there was still much to investigate and fix. Let's allow our system of justice to work. After all, while the nation's megabanks may be too big to fail, they aren't too big to be held accountable.

4--An Impeccable Disaster, Paul Krugman, New York Times

Excerpt: Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.

Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. ...

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions. ...

Now, a country with its own currency, like Britain, can short-circuit this process:... the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed); but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. ...
What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. ...

We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer. So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.

5--The magical world of voodoo ‘economists’, Steven Pearlstein, Washington Post

Excerpt: If you came up with a bumper sticker that pulls together the platform of this year’s crop of Republican presidential candidates, it would have to be:

Repeal the 20th century. Vote GOP.

It’s not just the 21st century they want to turn the clock back on — health-care reform, global warming and the financial regulations passed in the wake of the recent financial crises and accounting scandals.

These folks are actually talking about repealing the Clean Air Act, the Clean Water Act and the Environmental Protection Agency, created in 1970s.

They’re talking about abolishing Medicare and Medicaid, which passed in the 1960s, and Social Security, created in the 1930s.

They reject as thoroughly discredited all of Keynesian economics, including the efficacy of fiscal stimulus, preferring the budget-balancing economic policies that turned the 1929 stock market crash into the Great Depression.

They also reject the efficacy of monetary stimulus to fight recession, and give the strong impression they wouldn’t mind abolishing the Federal Reserve and putting the country back on the gold standard.

They refuse to embrace Darwin’s theory of evolution, which has been widely accepted since the Scopes Trial of the 1920s.

6--Inequality, Mobility, NDD Spending, and the American Dream, Jared Bernstein, On The Economy

Excerpt: ...Many of the budget cuts we’re (pretty blithely) contemplating in what’s called non-defense discretionary (NDD) spending –as obfuscating a label as you’ll hear in DC—have mobility implications. Much of this spending has been shown to help lower mobility barriers, and in an era where inequality makes those barriers higher, we need more, not less of such investments.

Consider WIC— the Special Supplemental Nutrition Program for Women, Infants, and Children . It’s about a $7 billion program in which more than half of all newborns, and about one in four children under five, participate. It also provides nutritious food, counseling on healthy eating, and health care referrals to around nine million low-income pregnant and postpartum women and their babies.

Head Start is also part of this funding stream, as are many other education boosters for low-income families.

And all of these programs have been shown, in pretty extensive and consistent research, to be associated with lifelong advantages. They are, in short, tools to reduce mobility barriers.

As commenter DCS reminds me, this line of thinking also implies an explanation for the Euro/Scandinavian result–it shouldn’t surprise us that greater social protections are associated with greater economic mobility. Once again, it may well be the case that the classical economics model is backwards: such protections don’t incent laziness and stagnation, as the model argues…they reduce increasingly entrenched societal barriers and thus enable people to better realize their intellectual and economic potential.

So when you hear people talking about cuts to “non-defense discretionary spending” or even when the White House brags that under their watch NDD will be “the lowest as a share of the economy since the Eisenhower years” ask not for whom the bell tolls. It tolls for those whose futures depend on pushing back on the ever-rising barriers to income mobility. Or even more fundamentally, it tolls for the American dream.


One of them is even talking about repealing the 16th and 17th amendments to the Constitution, allowing for a federal income tax and the direct election of senators — landmarks of the Progressive Era.

7--Investors Brace as Europe Crisis Flares Up Again, New York Times

Excerpt: Fears about Europe’s deteriorating finances intensified on Sunday as new doubts about the health of French banks, as well as Germany’s willingness to help Greece avert default, left investors bracing for another global stock market downturn this week. ...

On Sunday, French government officials braced for possible ratings downgrades by Moody’s Investors Service of France’s three largest banks, BNP Paribas, Société Générale and Crédit Agricole, whose shares were among the biggest losers last week. The biggest banks in Europe, especially in France, hold billions of euros’ worth of Greek bonds, and investors fear even a partial default by Greece would sharply diminish the value of those assets, eroding already weak capital positions.

American financial institutions, typically heavy lenders to their French counterparts, have begun to pull back on these loans, but United States banks’ exposure to France remains substantial.

8--Latvian Hooker Index: No Recovery in Sight, economywatch.com

Excerpt: The price of Latvian prostitutes, along with the number of extramarital affairs happening have both been proposed as accurate indicators of economic health there, though this could apply anywhere in the world.

According to economists, "animal spirits" play a considerable part in the inner workings of the business cycle. This may be part of the reason business cycles have always been so hard to predict.

John Hempton, from Bronte Capital, suggests that the price of prostitutes in Latvia is a good barometer of Baltic economies and their overall wellbeing.

"The contractual terms of prostitution are short (an hour, a night) and entry to the industry is unconstrained," he says. "That means that the prices are very flexible."

This price flexibility is essential to mirror the economic bigger-picture, as it can change overnight.

Prices have slumped about two-thirds in the past year or so, and deflation looms in the Baltic region. This index seems valid and accurate so far.

9--Germany and Greece flirt with mutual assured destruction, Telegraph

Excerpt: If you had any doubts as to the implications of these actions, the Germans appear to harbor no such illusions. Per Ambrose Evans-Pritchard, this is a calculated effort to put Greece to the lash:

First we learn from planted leaks that Germany is activating “Plan B”, telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece’s return to the drachma.

German finance minister Wolfgang Schauble has chosen to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and global credit strains are testing Lehman levels. The recklessness is breath-taking….

Mr Schauble said there would be no more money for Athens under the EU-IMF rescue package until the Greeks “do what they agreed to do” and comply with every demand of `Troika’ inspectors.

Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.

Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy – 16pc of GDP of net tightening in three years – without offsetting monetary stimulus, debt relief, or devaluation.

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