Friday, September 16, 2011

Weekend links

1--Weekly Initial Unemployment Claims increased to 428,000, Calculated Risk

Excerpt: From the NY Fed: Empire State Manufacturing Survey: "The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened for a fourth consecutive month in September. The general business conditions index inched down one point, to -8.8." This was lower than expectations of a reading of -3.6....

The DOL reports:

In the week ending September 10, the advance figure for seasonally adjusted initial claims was 428,000, an increase of 11,000 from the previous week's revised figure of 417,000. The 4-week moving average was 419,500, an increase of 4,000 from the previous week's revised average of 415,500....

The 4-week average has been increasing recently and this is the highest level since early July.

2--EU warned of credit crunch threat, French banks hit, Reuters

Excerpt: European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a "systemic" crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday.

In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation currency area faces a "risk of a vicious circle between sovereign debt, bank funding and negative growth."

"While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," the influential Economic and Financial Committee said.

"A further reinforcement of bank resources is advisable," ministers were told in language that echoed an International Monetary Fund call for urgent action to recapitalize European banks....

Moody's Investors Service downgraded two of France's top banks, Societe Generale and Credit Agricole, saying its concerns about their funding and liquidity profiles had increased in the light of worsening refinancing conditions.

The ratings agency left France's largest bank, BNP Paribas, on review, saying its profitability and capital base gave it an adequate cushion to support its Greek, Portuguese and Irish exposure.

The euro and European stocks were earlier boosted by an announcement by the head of the European Commission that the EU executive would soon present options for issuing a common euro zone bond, despite fierce resistance in Germany....

A Greek official said after the call that Athens now expected the EU/IMF "troika" to report that Greece was on track to meet its 2011-12 targets after the latest additional austerity measures announced last weekend.

EU Economic Affairs Commissioner Olli Rehn said issuing common euro zone bonds would require much more intrusive surveillance of member states' fiscal and economic policies, which would have to be fully debated in each country...

Two unidentified banks tapped the European Central Bank for dollar funding on Wednesday in the latest sign of stress as U.S. money market funds and other traditional dollar providers cut back on lending to Europe.

3--"The Late American Jobs Machine", Economist's View

Excerpt: The U.S. labor market is bad shape. The great recession and its aftermath are the chief culprits, of course, but the sputtering began earlier. In the 1970s, 1980s, and 1990s employment increased so rapidly that our economy was sometimes referred to as the "great American jobs machine." In the early and mid 2000s that ended....

The employment-to-population ratio gained no ground over the 2002-07 upturn. It was 63% when the economy emerged from recession at the beginning of 2002 and 63% just before it plunged back into recession at the end of 2007....

What caused this collapse of the American jobs machine? I think the most convincing explanation is a shift in management’s incentives and in its leverage relative to employees. According to Robert Gordon, this has its origins in the 1980s and 1990s but emerged in full force in the early 2000s:

Business firms began to increase their emphasis on maximizing shareholder value, in part because of a shift in executive compensation toward stock options. The overall shift in structural responses in the labor market after 1986 were caused by … the role of the stock market in boosting compensation at the top, … the declining minimum wage, the decline of unionization, the increase of imported goods, and the increased immigration of unskilled labor. Taken together these factors have boosted incomes at the top and have increased managerial power, while undermining the power of the increasingly disposable workers in the bottom 90 percent of the income distribution.

Executives’ compensation is heavily influenced by their firm’s stock price. Financial advisers believe “lean and mean” delivers better long-term corporate gains. Employees have limited capacity to resist employment cutbacks during hard times and to press for more jobs during good times....
The importance of this slowdown in employment growth is hard to overstate. In recent decades the American labor market has suffered from twin maladies: it’s been producing fewer middle-paying jobs and wages in the bottom half of the earnings distribution have been stagnant. For much of this period its chief virtue was that it created a large number of jobs. That looks to have gone by the wayside.

4--Bigger Economic Role for Washington, New York Times

Excerpt: The possibility of major parts of President Obama’s $447 billion jobs bill becoming law, and of further steps next week by the Federal Reserve, have forecasters saying that the decisions Washington makes in the weeks ahead could have a substantial effect on economic growth and unemployment. At a minimum, the stimulus could be insurance against the headwinds blowing from Europe’s debt crisis and the impact of the recent government spending cuts in this country.

The jobs package of tax cuts and spending initiatives could add 100,000 to 150,000 jobs a month over the next year, according to estimates from several of the country’s best-known forecasting firms; the potential Fed actions could add 15,000 more jobs a month over two years.

While those estimates are difficult to verify, the nation’s economy since April has added an average of only about 40,000 jobs a month, raising concerns about a double-dip recession....

More than half of Mr. Obama’s $447 billion jobs package consists of extending and expanding payroll-tax cuts for individuals and businesses, and those cuts have among the best chance of winning Republican support.
The administration’s main goal is to increase demand for goods and services — the lack of which appears to be the economy’s central problem — which could then give employers the confidence to hire. Most of the rest of the plan is for assistance to the long-term unemployed, which would also put money in people’s hands, and infrastructure spending, which would have a more direct impact on job creation.

While the plan also includes a tax credit for businesses that increase their payrolls, its direct impact on hiring is likely to be small, economists say. Macroeconomic Advisers, which was founded by Laurence H. Meyer, a former Fed governor, did not even include the tax credit in its analysis because it saw the effect as being so “modest.”

In all, the firm projected that the plan would add roughly 1.25 percentage points to gross domestic product and create 1.3 million jobs in 2012. JPMorgan Chase estimated that the plan would increase growth by 1.9 points and add 1.5 million jobs. Most bullish is Moody’s Analytics, which forecast that the package would add 1.9 million jobs, cutting the unemployment rate by a point, and increase growth by two percentage points.

5--The Global Liquidity Bailout Arrives: World Central Banks Announce Global Dollar Shortfall Funding Resolution, Zero Hedge

Excerpt: Remember that dollar liquidity crunch Zero Hedge has been covering for the past month? Here is the denouement, in the form of the first global liquidity bailout of the world for 2011, on the 3 year anniversary of the Lehman collapse.

ECB Announcement:

15 September 2011 - ECB announces additional US dollar liquidity-providing operations over year-end

The Governing Council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year. These operations will be conducted in addition to the ongoing weekly seven-day operations announced on 10 May 2010...

These will all take the form of repurchase operations against eligible collateral and will be carried out as fixed rate tender procedures with full allotment. Further information on tender procedures can be found on the ECB’s website.

6--And If There Was Any Doubt..., Zero Hedge

Excerpt: ... Why Goldman lowered their S&P price target 12 hours ago, which as we said last night "leads us to believe that today's firing of David Bianco was merely due to him refusing to play along with the revised script. Which is as follows: the banks are buying everything that their clients have to sell in advance of, you guessed it, QE3 in the US and more QE in the UK, Europe and Japan for one last record bonus hurrah. While we can only hope we are wrong, if we are right this means the short squeeze on the market is about to slam shut and Goldman will make out like a bandit as usual, with the S&P soaring several hundred points on ever worse macroeconomic and geopolitcal data" now you know.

7--Central Banks Boost Dollar Liquidity, Wall Street Journal

Excerpt: Five major central banks moved in concert Thursday to pump dollars into the European banking system by arranging three new funding operations, an action aimed at stemming a new liquidity crisis.
The ECB said that it will be joined by U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three U.S. dollar liquidity-providing operations.

The action addresses an acute shortage of dollar availability as U.S. lenders withheld funds out of concern that the European banking system is over-exposed to the region's government debt crisis.

"They are proactively trying to cover dollar liquidity needs," said Greg Anderson, senior foreign-exchange strategist at Citigroup in New York....
On Wednesday, the European Central Bank said two banks had tapped it for $575 million, only the second time in six months the ECB has doled out dollar funding. The names of banks that tap the ECB are kept confidential.

"This is basically to address the willingness of American banks to fund European banks," Mr. Valli said. "It looks like American banks do not have full trust to lend dollars to European banks, this is a by product of the sovereign debt crisis."

8--Exclusive: Geithner to float idea of leveraging euro rescue, Reuters

Excerpt: Treasury Secretary Timothy Geithner is likely to suggest to European finance ministers on Friday that they leverage their bailout fund along the lines of the U.S. TALF program, EU officials said.

"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official said.

"The leveraging of the EFSF -- I think this is something that he will put on the table," the official said. "There could be some openness to the proposal."

TALF -- the Term Asset-Backed Securities Loan Facility -- was set up by the U.S. Federal Reserve and the U.S. Treasury during the global financial crisis in 2008 to jumpstart the frozen Asset Backed Securities (ABS) market.

Under TALF, the New York Fed would lend out up to $200 billion, taking ABS as collateral with a haircut and the Treasury offered $20 billion credit protection for the Fed.

In this way, a little bit of public money leveraged a much larger central bank contribution and the same idea could work for the European Financial Stability Facility, which has 440 billion euros at its disposal, to offer credit protection to, for example, the ECB to buy euro zone sovereign bonds.

"One of the difficulties is that leverage may be seen as a potential liability," a second EU official said. "But it deserves to be looked at in detail."...

Such a solution would help ease market concerns that the EFSF does not have enough money to bail out Greece, Ireland Portugal and also help Spain and Italy.

"Of course you would have to see if on the basis of the EFSF mandate you can do something similar," the first official said, adding the solution had not been free of hurdles in the United States either and in Europe they could be even bigger.

"From an economic point of view it is a reasonable idea," the first official said, noting however that the ECB would have to play along with such a scheme.

"The issues are more on the institutional and legal side and of course political -- you have to find a way for the ECB not to, de facto, finance fiscal policy, but on the other hand you need to have resources that the ECB has and the EFSF has not."

Leveraging the EFSF, however, would not take place before the fund's new powers of intervention on bond markets, extending precautionary credit lines or lending for bank recapitalization were ratified by the end of September, the official said.

"Once the EFSF becomes more flexible, you can see if there are ways similar or different to try to leverage more the EFSF or find other ways to have a critical mass to ringfence Italy Spain and the others," the official said.

"You can also think about leveraging on other actors, not necessarily just the ECB," the official said.

9--What Next for Greece and for Europe?, New York Times

Excerpt: Aside from the politics, the risk is that the euro loses credibility and falls steeply in value. The European Central Bank thinks it can “sterilize” any bond-buying by selling its own bonds into the market; this would mean no net increase in the supply of money (just fewer Italian bonds and more E.C.B. bonds held by the private sector).

As a technical matter and in the short term, the E.C.B. may be right. But the central bank is taking on a lot of credit risk. If a big country defaults, the bank would need to ask member governments to provide it with more capital, and this is the kind of transparent fiscal hit that politicians hate.

And if E.C.B. financial support is truly unconditional, this just encourages countries to be less careful about their fiscal deficits. “Fiscal dominance” — meaning a central bank always buys up government bonds to keep interest rates down — is a recipe for big inflation.

Expect a great deal of shouting behind the scenes at the highest level in Frankfurt (where the European Central Bank has its headquarters) and in European capitals. Instability seems unavoidable. Significant inflation may follow, although first we will see serious recessions in the troubled European periphery, a ratcheting up of bond buying and repeated political crises.

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