Today's quote: "The ideas of the ruling class are in every epoch the ruling ideas... The class which has the means of material production at its disposal, has control at the same time over the means of mental production, so that thereby, generally speaking, the ideas of those who lack the means of mental production are subject to it. The ruling ideas are nothing more than the ideal expression of the dominant material relationships, the dominant material relationships grasped as ideas."
Karl Marx, German Ideology (1845)
1--Pain mounts for Europe banks, Wall Street Journal
Excerpt: Europe's banks, burdened by concerns about exposure to ailing Greece, took a perilous turn on Monday despite efforts by the biggest of them to calm panicked investors.
The pressure on the banks is intimately linked to Europe's sovereign debt crisis. Financial markets are now anticipating a default by Greece, a step that would generate losses at European banks and deepen worries about whether other governments in the 17-nation euro-zone will be able to repay their debts....
Oudéa, who is expected to speak again on Tuesday during a Barclays Capital financial-services conference, outlined the bank's funding and asset plans in Monday's call.
He said the bank would accelerate asset sales and launch a cost-cutting plan that would include layoffs in a bid to free €4bn in capital by 2013. Oudéa, the current president of the French banking federation, also said there were no talks between the government and French banks over financial aid. He added there were no substantial customer withdrawals from Société Générale....
Several financial gauges flashed warning signals. Foreign banks are being forced to pay more for short-term dollar borrowings, according to a gauge of financial market health. On Monday, the London interbank offered rate, or Libor—the rate at which banks lend money to each other—rose to its highest level in a year.
Another barometer, a measure of insurance on bank debt known as a "bank-fear index," also rose. As of Monday, the cost of five-year default insurance on €10mn of European financial-firm debt was €313,000, according to the Markit iTraxx Senior Financials Index. The index, which is a thinly traded measure or bank health, has climbed steadily from €171,000 in July.
In a reflection of banks' unwillingness to lend to each other and instead to park money at the European Central Bank, overnight deposits with the central bank totaled £181.79bn on Friday, once again setting a new high for the year and the largest amount since July 2010.
2--The Death of the Confidence Fairy, Paul Krugman, New York Times
Excerpt: The latest entry is a comprehensive review of past episodes of austerity by economists at the IMF, from which the figure above is taken.
Yes, contractionary policy is contractionary. And as the authors point out, it’s probably even more contractionary than usual under current conditions:
The reduction in incomes from fiscal consolidations is even larger if central banks do not or cannot blunt some of the pain through a monetary policy stimulus. The fall in interest rates associated with monetary stimulus supports investment and consumption, and the concomitant depreciation of the currency boosts net exports. Ireland in 1987 and Finland and Italy in 1992 are examples of countries that undertook fiscal consolidations, but where large depreciations of the currency helped provide a boost to net exports.
Unfortunately, these pain relievers are not easy to come by in today’s environment. In many economies, central banks can provide only a limited monetary stimulus because policy interest rates are already near zero (see “Unconventional Behavior” in this issue of F&D). Moreover, if many countries carry out fiscal austerity at the same time, the reduction in incomes in each country is likely to be greater, since not all countries can reduce the value of their currency and increase net exports at the same time.
Simulations of the IMF’s large-scale models suggest that the reduction in incomes may be more than twice as large as that shown in Chart 2 when central banks cannot cut interest rates and when many countries are carrying out consolidations at the same time. These simulations thus suggest that fiscal consolidation is now likely to be more contractionary (that is, to reduce short-run income more) than was the case in past episodes.
Unfortunately, austerity programs are now the rule everywhere; even if the new Obama plan became law, which it won’t, it would only slow the pace of fiscal consolidation in America, and there’s nothing like it even on the table elsewhere.
Economic policy: we’re doing it wrong.
3--Europe Close to Banking Crisis: El-Erian, Bloomberg
Excerpt: Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act with European banks at risk of being engulfed in the region’s sovereign-debt crisis.
“We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the U.S.”
The World Bank and the IMF meet Sept. 23-25 in Washington as European officials work to keep the currency union from unraveling while weighing whether to allow Greece to default. French banks have become a focal point because of their holdings of bonds issued by the euro region’s most-indebted nations, topping the list of Greek creditors with $56.7 billion in overall exposure, according to a June report by the Bank for International Settlements.
4--The Lost Decade for the Middle Class, Jared Bernstein, Economist's View
Excerpt: The poverty and income results for 2010 came out this morning and they’re a) about what you’d expect, and b) pretty bad. ...
The headline numbers are:
•the poverty rate increased to 15.1% in 2010 from 14.3% in the previous year;
•the income of the median household, the one right in the middle of the income scale, fell 2.3% in real terms, a loss of about $1,100; median income was about $49,500 last year.
•just about 50 million people lacked health insurance last year, about 16.3% of the population, which is about the same share as last year; but this steady share reflects loss of employer-based coverage and gains in coverage by a government plan. ...
But what is remarkable and historically unprecedented is the breadth and depth of the loss of middle-class income...: compared to its peak in 1999, median household income is down down $3,800 (2010 dollars), more than 7%....
Economists talk about the lost decade in Japan... Well, with these 2010 data, we can confirm the lost decade for the American middle class. ...
These Census results should force us to be very clear eyed in recognizing that ... the federal gov’t must fill two very important roles.
First, we must have countercyclical measures to protect the most vulnerable among us, those least able to withstand the loss of income or health care coverage... Today’s results deeply underscore the need for countercyclical policies like Unemployment Insurance, nutritional assistance, and publically-provided health-care coverage...
The second critical role for gov’t ... is to help offset the contraction in private sector demand, with temporary measures to help people get back to work. In case we needed another reminder, these results underscore urgency of passing the jobs measures the President recently introduced.
5--Households Doubling Up, David Johnson, US Census Bureau
Excerpt: In coping with economic challenges over the past few years, many of us have combined households with other family members or individuals.
These “doubled-up” households are defined as those that include at least one “additional” adult – in other words, a person 18 or older who is not enrolled in school and is not the householder, spouse or cohabiting partner of the householder.
The Census Bureau reported today that the number and share of doubled-up households and adults sharing households across the country increased over the course of the recession… In spring 2007, there were 19.7 million doubled-up households, amounting to 17.0 percent of all households. Four years later, in spring 2011, the number of such households had climbed to 21.8 million, or 18.3 percent.
All in all, 61.7 million adults, or 27.7 percent, were doubled-up in 2007, rising to 69.2 million, or 30.0 percent, in 2011.
Young adults were especially hard-hit, with 5.9 million people ages 25 to 34 living in their parents’ household in 2011, up from 4.7 million before the recession. That left 14.2 percent of young adults living in their parents’ households in March 2011, up more than two percentage points over the period.
6--Misc: Household Income declines, Poverty increases, Austerity leads to contraction, Calculated Risk
Excerpt: From the WSJ: Income Slides to 1996 Levels
The income of the typical American family ... has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.
The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said.
• From the WaPo: U.S. poverty rate reaches 15.1 percent
The nation’s poverty rate spiked to 15.1 percent in 2010, the highest level since 1993, the Census Bureau reported on Tuesday ... About 46.2 million Americans lived in poverty last year, marking an increase of 2.6 million over 2009 and the fourth consecutive annual increase in poverty.
• And an IMF report that analyzes austerity program, from the WaPo: IMF: Austerity boosts unemployment, lowers paychecks
In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”
More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place ... if multiple countries are all carrying out austerity at the same time, the overall pain is likely to be greater.
7--Huge Surge in Bank of America Foreclosures, Calculated Risk
Excerpt: From Diana Olick at CNBC: Huge Surge in Bank of America Foreclosures
Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months ...
Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity ... [BofA responded to Olick]
"It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month."
RealtyTrac ... is also confirming a surge in overall notices of default in its August numbers
As Olick notes, this might be a short term pickup. However other servicers have told me they are staffing up - and we will probably see foreclosure activity pickup late this year or early in 2012.
8--Dollar borrowing costs add to strain on European banks, Financial Times via the Streetlight blog
Excerpt: European banks are facing increasing strains on their balance sheets because of the dramatic jump in the cost to borrow dollars, essential for some institutions as they need to repay loans in US currency.
The cost for European banks to swap euros into dollars has jumped fivefold since June, hitting the highest levels since December 2008, and raising the risk of insolvency in the region’s financial sector.
...The main reason for the spike in the cost of swapping euros for dollars is the overwhelming demand for the US currency due to its growing status as a haven in the face of rising worries of an imminent Greek default that could spark a deeper sovereign debt crisis.
European banks, which need to borrow dollars to repay loans, face an extra premium of 103 basis points to swap euros into dollars for three-month loans – a dramatic jump since June when they only had to pay an extra 20bp.
Don Smith, economist at Icap, said: “More and more banks want dollars because of worries about the debt crisis in Europe. This leads to a vicious circle where the cost to swap dollars for euros rises and creates even more strains and potentially deeper problems for the financial sector.”
Since dollars are growing more scarce and more expensive for European.
9--Geithner to attend EU ministers’ meeting, Financial Times
Excerpt: Tim Geithner, the US Treasury secretary, is to attend a gathering of European Union finance ministers in Poland on Friday, according to his department, in a sign of growing concern in Washington over Europe’s handling of its debt crisis.
Mr Geithner has becoming more involved in pressing Europe to take more decisive action, particularly on regular conference calls of finance ministers from the Group of Seven main industrial powers, which officials said are now held almost weekly....
One senior US official said it pressed European leaders to continue the European Central Bank’s policy of buying bonds of weak, peripheral eurozone countries, particularly Spain and Italy, to ensure they would be able to continue borrowing at sustainable rates. The policy has come under criticism in Germany.
Mr Geithner has publicly suggested Europe take less public and more decisive action to win back confidence from wavering financial markets, telling a forum earlier in the year that effective responses are usually done quickly and in overwhelming fashion to get ahead of market sentiment.