Monday, September 19, 2011

Today's links

1--Bank Deposits increase Sharply, Calculated Risk

Excerpt: From Scott Reckard at the LA Times: Bank deposits soar despite rock-bottom interest rates Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion ...

In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.
...
The large amount of cash only adds to expenses such as paying for deposit insurance premiums. ... [banks] have slashed interest payments to discourage customers. Wells Fargo & Co. ... halved its payments on one-year certificates of deposits to 0.1%; Citigroup ... dropped its payment to a paltry 0.3%.
...

[Some banks are] stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.

2--European Banks Are ‘Grossly Under-Capitalized,’ Brown Says, Bloomberg

Excerpt: European banks are “grossly under- capitalized” and the debt crisis is more serious for the region than the 2008 meltdown as governments are constrained by fiscal pressures, former U.K. Prime Minister Gordon Brown said.

“In 2008, governments could intervene to sort out the problems of banks,” Brown said at the World Economic Forum in the Chinese port city of Dalian today. “In 2011, banks have problems, but so too do governments.”

Investor skittishness over Europe’s sovereign debt crisis raised lenders’ funding costs and caused a rout in the region’s banking stocks this month. European Central Bank President Jean- Claude Trichet pressed euro-area governments late yesterday to take decisive action to restore confidence after the ECB extended an emergency lifeline to lenders.
Brown said that while the ECB is part of the short-term solution, it needs additional assistance.

The European Financial Stabilization Mechanism, which is run by the European Union’s 27-nation executive arm, is “not enough,” Brown said. “Substantially more resources” are required, including from the International Monetary Fund and lenders including China, he said.
‘Hour to Midnight’

“The euro area problem is now moving to the center,” Brown said. “The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are I think at an hour to midnight in the way that we look at this issue.”

3--Europe Rules Out Stimulus, Shuns Geithner Plea, Bloomberg

Excerpt: European finance ministers ruled out efforts to spur the faltering economy and showed no signs of taking up a proposal by U.S. Treasury Secretary Timothy Geithner to increase the firepower of the debt crisis rescue fund.

Inviting Geithner to a euro meeting for the first time, the European finance chiefs said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.
“We have slightly different views from time to time with our U.S.

colleagues when it comes to fiscal-stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing the meeting yesterday in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”

Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros ($353 billion) in aid for Greece, Ireland and Portugal has failed to extinguish.

Geithner made little headway with a call for Europe to boost the capacity of the 440 billion-euro rescue fund, known as the European Financial Stability Facility, by enabling it to tap the European Central Bank....

the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the primary and secondary market, offer precautionary credit lines and create a bank- recapitalization facility. The target for completing national approvals of the new powers slipped to mid-October.

4--House Republicans Whittle Down $447 Billion American Jobs Act to $11 Billion, Economist's View

Excerpt: The House GOP leadership has written a memo to their caucus picking and choosing what they would be willing to support in the American Jobs Act. The numbers come out to support for 1/44th of the overall price tag, about 2% of the total bill.

As you may know, the AJA is comprised of about 57% tax cuts and 43% spending initiatives. So in the main, House Republican leaders tossed out the spending and embraced a few of the tax cuts. They also rejected the tax hikes on corporations and the wealthy to pay for the bill.
John Boehner, Eric Cantor, Kevin McCarthy and Jeb Hensarling, who wrote the memo, took advantage of the President’s backtracking of an “all or nothing” approach to the bill, and stressed “areas of common agreement” in the plan. ...

So at best, you’re talking about a $447 billion jobs bill whittled down to no more than $11 billion. The memo closes by saying that “We are, however, committed to passing legislation to implement the policies in the areas where agreement can be found to support job creation and long-term economic growth.” With these numbers, I’m not sure why they’re even bothering.

5--Europe's Lehman Moment, Jeffry Frieden, Econbrowser

Excerpt: Europe’s experience differs from that of America’s because of the existence of the euro, a common currency for both the lenders and the borrowers. The monetary policy of the European Central Bank (ECB) kept interest rates very low, even for rapidly growing countries in Southern Europe that had previously had high interest rates. And the expectation that other members of the Euro zone would step in if a debtor member state got into trouble led lenders to believe that lending within the Euro zone was close to riskless. But as in the United States, the boom was not sustainable. When the global financial crisis began in October 2008, the European debtors were largely frozen out of financial markets. As their economies spiralled downward, they faced grave difficulties in servicing their debts. The problems of Europe’s debtors were not just worrisome for the debtors themselves. Most of their debts were owed to Northern European banks and investors, and the crisis threatened the very solvency of major European financial systems. This – not some abstract desire to extend a hand to the Greek and Portuguese people, or to save the euro – has been the principal reason for Europe’s ongoing debt bailout:

The rationale here was like that of bailing out a bank: a collapse of Greek or Portuguese finances could harm the rest of the euro-zone financial systems. If Bank of America was too big to fail, then so was Greece. And since a deepening of the financial crisis that drew in the entire euro zone would affect the entire global financial system, the International Monetary Fund was also drawn into the rescue….And because the Greek emergency triggered a crisis of confidence in other euro-zone countries whose failure could harm the region as a whole, the European Union was driven into a massive trillion-dollar package for other troubled European debtors. (page 188)

But the first bailout was not enough. It seems clear that the Greek and Portuguese austerity measures will not be sufficient to allow the countries to continue to service their debts; Spain seems on the verge of a similar slide into default; and even Italy is now at risk of going the way of the other debtors. Some or all of these debts will have to be restructured, the interest rates reduced and maturities extended. If not, there will be a wave of defaults whose reverberations will rival those of the Lehman failure.

For two years, Europe’s governments have been grappling with how to address this continuing debt crisis. But most of the public discussions have been highly misleading. In Northern Europe, and especially Germany, the tone has been one of outraged indignation. This high moral tone is misplaced. Certainly many Southern European banks and households, and the Greek government, borrowed irresponsibly; but German and other Northern European banks and investors lent just as irresponsibly. It’s not clear that there’s any real ethical distance between irresponsible borrowers and irresponsible lenders.

And most Northern Europeans also seem to believe that the bailouts have gone to lazy Southern Europeans. In fact, their purpose has been to shore up the fragile Northern European financial systems. German banks are among the weakest in Europe; some of them (especially the state-owned landesbanks) are effectively bankrupt. If they were forced to mark down their Southern European debt, they might well collapse in a heap, and the European financial system could grind to a halt. Just as in the United States, the real impact of the European bailout has been to shore up the continent’s banks – not to help the continent’s debtors. The recent downgrading of two of France’s most important banks, due to their holdings of Greek debt, reminds us of how exposed Northern Europe’s financial systems remain. And rumors of a recent IMF report that European banks are over $270 billion short of the capital they need to confront their current problems served to drive the point home...
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Eventually Europe’s creditors and its debtors will have to admit that these debts will not be serviced as contracted, and the debts will be restructured. Pretending otherwise will only prolong the agony – not just for the debtor countries imposing austerity, but also for the financial systems that are now crippled by debts that nobody believes will be repaid. When major central banks, earlier this week, threw a lifeline to the European financial markets, they undoubtedly helped avoid what appeared to be an imminent panic. However, this initiative will only postpone the final reckoning with the region’s underlying financial weaknesses.

In Europe as in America, the real question is how the costs of this devastating debt crisis will be distributed. Who will pay – creditors or debtors? Taxpayers or government employees? Germans or Greeks? More realistically, what combination of sacrifices will be politically tenable, both across countries and within countries. The aftermath of every debt crisis sinks into conflict over who will bear the burden of adjustment to the new reality. The sooner Europeans recognize the true nature of the debates they’re having, and the inevitability of working out some mutually acceptable conclusion, the better off they will be.

6--Austerity USA, Paul Krugman, New York Times

Excerpt: Goldman Sachs (no link) has a nice chart showing just how much fiscal policy has been a drag on the economy since the second half of last year, and also shows that the Obama jobs plan, even if enacted in full, would only be enough to put it in neutral: (see chart)

7--Sliding toward financial crisis, Reuters

Excerpt: Three years after the collapse of Lehman Brothers, the world's financial system is sliding toward another major crisis.

At stake is the global recovery and future shape of Europe.

Calls are mounting for financial leaders of the world's biggest economies meeting this week to take bold action, not on the scale of the $1 trillion rescue package of March 2009 but something equally important in policy terms.

The challenge for the Group of 20 talks in Washington on Thursday and Friday is to prevent a sovereign debt crisis centered in Greece from turning into a full-blown banking crisis. Such a crisis could engulf other indebted European countries, lead to messy defaults and plunge the region and world back into economic and financial turmoil.

8--Consumer mood up but outlook at 31-year low, Reuters

Excerpt: Consumer sentiment in the United States rose in early September, but Americans remained very gloomy about the future with their expectations for the economy falling to the lowest level since 1980.

The Thomson Reuters/University of Michigan's survey showed consumer sentiment edged up to 57.8 from 55.7 in August, creeping back up after a nearly three-year low last month and stronger than economists' expectations.

Even so, the expectations gauge in the preliminary survey inched lower, and three out of four consumers expected bad times for the economy in the year ahead.

Only half of respondents said the same at the beginning of the year.

Consumer spending is a linchpin of the U.S. economy, but confidence has been badly hit as unemployment remains high and wages stagnate. Acrimonious political debate over the United States' debt ceiling dampened sentiment over the summer. So did worries the U.S. economy could fall back into recession.

"The consumer is still very frustrated with virtually everything -- 9 percent unemployment, still very tepid jobs creation and heightened job destruction," said Lindsey Piegza, economist at FTN Financial in New York.

The survey's index of consumer expectations dipped to 47.0 from 47.4, hitting the lowest level since May 1980. The economic outlook for the next 12 months fell to 38 from 40, the lowest since February 2009 when the world economy was gripped by the credit crisis.

Only 17 percent of those surveyed expected their finances to improve, the lowest rate ever recorded.

"Consumers are going to be very hesitant to spend with such negative views of their personal finances," survey director Richard Curtin told Reuters Insider.

9--U.S. Stock Futures Fall on Concern Greece’s Crisis Is Worsening, Bloomberg

Excerpt: U.S. stock futures fell, following the longest rally since July for the Standard & Poor’s 500 Index, amid concern that Greece’s debt crisis is worsening.....

“The Greek situation could be coming to a head,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which oversees about $10 billion. “Some haircut might be needed for Greece if it doesn’t receive additional funding. That could create a domino effect in countries like Spain, Italy and Portugal. That’s what the market is fearing.”...

Greece’s ability to avoid default hangs in the balance as international monitors prepare to assess whether Prime Minister George Papandreou can meet the conditions of rescue loans. European Union and International Monetary Fund inspectors hold a teleconference today at 7 p.m. Athens time with Finance Minister Evangelos Venizelos, to judge whether the government is eligible for an aid payment due next month and on track for a second rescue package approved by EU leaders July 21.

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