Wednesday, October 5, 2011

Today's links

1--One Third of Americans One Paycheck Away From Homelessness, Naked Capitalism

This stunning factoid was reported in DS News last week and appears not to have gotten the attention it deserves. A mid-September survey ascertained that a full one third of Americans were living paycheck to paycheck, and if they lost their job, they would not be able to make their next rent or mortgage payment. And the article stresses this was not a function of being in or near the poverty line (hat tip reader May S):

Despite being more affluent, the poll found that even those with higher annual household incomes indicate they are not guaranteed to make their next housing payment if they lost their source of income.

Ten percent of survey respondents earning $100K or more a year say they would immediately miss a payment….

Sixty-one percent of those surveyed said if they were handed a pink slip, they would not be able to continue to make their mortgage or rent payment longer than five months.

The implications are grim. The odds of an economic recovery any time soon are close to non-existent. Many large companies (like Bank of America) have announced layoffs. Flagging top lines and a likely to be weak Christmas season, if Chinese shipping volumes are any guide, means more cuts are likely go be announced next year. And that’s before you factor in the impact of a strengthening dollar, state and local government belt tightening and a possible financial crisis.

With so many citizens on a knife’s edge financially, a slackening of demand will have a more severe impact than usual. I strongly suspect that most macroeconomic models don’t allow for the shock of job losses leading so quickly to the loss of the primary residence or extremely rapid curtailment of spending (as regular readers once know, once a homeowner misses a mortgage payment or two, pyramiding late fees pretty much assure they are on a path to foreclosure). In other words, if we have another economic leg down, it will feed on itself in a more pernicious manner than most experts foresee.

2--Dexia, BNP Resist Greek Losses Three Times Worse Than Booked, Bloomberg

Excerpt: Dexia SA (DEXB), BNP Paribas SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default, or if European governments force banks to accept bigger losses than signaled in July. The three would have about 3 billion euros ($4 billion) of extra losses if they took writedowns of 50 percent, data compiled by Bloomberg show.

“It’s no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns,” said Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director of New York-based Citigroup Inc. “You’ve got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system, and is one of the reasons why the shares are being hit so badly.”

Dexia Drops
Further writedowns of Greek sovereign debt would add pressure on the banks to raise capital to meet regulations set by the Basel Committee on Banking Supervision

3--Small Companies Teeter as Beijing Tightens Lending, Wall Street Journal

Excerpt: The city of Wenzhou, a pioneer of China's private sector, has moved to ease funding difficulties faced by small businesses that are putting a cloud over part of the country's economy.

Troubles among small manufacturers in the bellwether Chinese city of Wenzhou are putting a cloud over a key part of China's economy, further shaking investor confidence and underscoring the stakes as Beijing tries to strike a balance between fostering growth and containing inflation.

More than two-dozen small, private businesses in the eastern city known for its entrepreneurial success have gone belly up in recent days because they couldn't repay maturing bank loans, according to state media reports. Wenzhou officials on Thursday urged banks to limit lending rates and make more funds available to small businesses amid worries about a credit crunch....

Further adding to worries over the small manufacturing sector, the HSBC China Manufacturing Purchasing Managers Index on Friday suggested manufacturing activity in September declined for the third straight time. The index is considered to be a gauge of the private sector's performance because it includes small companies. Analysts estimate the small- and medium-sized businesses in the private sector account for 80% of the country's jobs and more than half of economic output.

4--Dexia Moves Debt Crisis From EU Edge to Core, Bloomberg

Excerpt: Less than three months after Dexia SA (DEXB) got a clean bill of health in European Union stress tests, France and Belgium are considering a second bailout, moving the banking crisis from the continent’s periphery to its heartland.

“We’re seeing a practical example of contagion playing out,” said Jean-Pierre Lambert, an analyst at Keefe Bruyette & Woods in London, referring to Dexia’s “material exposure” to the debt of countries on the EU’s rim. “Investors aren’t quite sure what the sovereign debt losses will be, nor where the share price should be. They are concerned about the risks and reduce their funding.”...

Investors are shunning European lenders, whose shares are down 36 percent this year, on concern that the sovereign debt crisis has undermined their ability to fund themselves. U.S. money-market funds cut their holdings of commercial paper sold by foreign financial firms, mostly European, by 31 percent in the third quarter, according to data compiled by Bloomberg.

ECB Support
The European Central Bank has been providing banks with as much short-term euro funding as they need at its benchmark rate against eligible collateral since October 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a global recession. It has been forced by the debt crisis, spreading beyond Greece to Italy and Spain, to extend those measures and in August reintroduced longer-duration, six-month euro loans.

The ECB also joined with the U.S. Federal Reserve and other central banks on Sept. 15 to lend dollars to euro-area banks with three-month loans to ensure lenders have enough of the currency through the end of the year.

The cost of insuring the debt of France’s three biggest banks rose yesterday, with Societe Generale up 32 basis points to 384, Credit Agricole 24 basis points higher at 287 and BNP Paribas SA up 23 basis points to 286, according to CMA prices. An increase signals deteriorating perceptions of credit quality.

“Dexia is by no means alone in terms of being at risk here,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “There are plenty of other banks out there that have grown their assets way in excess of their deposit base like Dexia. That makes them massively exposed. It feels like the capitulation has started, and people are saying we’ve had enough of this state of affairs and something concrete needs to be done.”...

"Dexia’s model is vulnerable because it is dependent on short-term funding,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets. “But the bank could have sold its legacy sovereign bonds portfolio over time and earlier. It didn’t want to take the losses. Now it’s a bit late.”

5--Solow: Keynesian Economics Has Become Dramatically Relevant Again Today, Economist's View

Excerpt: ... a modern economy can find itself in a situation in which it is held back from full employment ... not by its limited capacity to produce, but by a lack of willing buyers for what it could in fact produce. The result is unemployment and idle factories. ... There are some forces tending to push the economy back to full utilization, but they may sometimes be too weak to do the job in a tolerable interval of time. But if the shortfall of aggregate private demand persists, the government can replace it through direct public spending, or can try to stimulate additional private spending through tax reduction or lower interest rates. ... This was Keynes’s case for conscious corrective fiscal and monetary policy. Its relevance for today should be obvious. ...

A second characteristically Keynesian theme meshes very well with the first. In a complex economy, many business decisions have to be made in a fog of uncertainty. This is especially true of investment decisions... The standard practice is to focus on the uncertainty and think about it in terms of probabilities, which at least allow for an orderly analysis... Keynes preferred to focus on the fog. He thought that some of the important uncertainties were essentially incalculable. They would end up being dealt with in practice by a mixture of apprehensiveness, rules of thumb, herd behavior, and what he called “animal spirits.” The point of this distinction is not merely philosophical: it suggests that long-term investment behavior will sometimes be irregular, unstable, and given to doldrums and stampedes. ...

6--Fed Watch: The Fed Drops the Ball, Economist's View

Excerpt: Put aside the non-recessionary real economy data and instead turn to the financial markets for hints. There the signals are decidedly more pessimistic. Equities are heading into bear market territory, interest rates are collapsing, spreads between Treasuries and corporate debt are widening, commodity prices are in virtual free-fall, and the TED spread, while still well short of the highs reached during the financial crisis, have more than doubled from 15bp in the spring to 38bp now.

There is no way to read the ongoing financial turmoil as anything other than increasing fear that a recession is underway. Perhaps it is all simply a growth scare, and that in a few months we will wonder what all the fuss was about. But ECRI believes it is already too late for that story:

A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about....

It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.

Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

7--Bernanke: Fiscal Policy is of Critical Importance, Moneywatch

Excerpt: Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain. …

I would submit that, in setting tax and spending policies for now and the future, policymakers should consider … key objectives. One crucial objective is to … avoid fiscal actions that could impede the ongoing economic recovery. …

To drive the point home, the end of the speech emphasizes that monetary authorities need help from fiscal policymakers:

Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers… Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies–pertaining to labor markets, housing, trade, taxation, and regulation, for example–also have important roles to play....


But the most significant part of these remarks is the call for fiscal policymakers to do more to help the economy, or at the very least to not make things worse through deficit reduction while the economy is trying to recover. As Greg Ip points out, “the biggest policy-related threat is the fiscal tightening that will happen automatically in the next four months as prior stimulus expires and legislated cuts to discretionary spending bite.” President Obama’s proposed $447 billion dollar job creation program could help to offset this automatic fiscal tightening, but the future of this legislation does not look promising.

8--The IMF, ECB, and EC are Prepared to Wreck the World Economy to Squeeze a Few Extra Dollars Out of Greece, CEPR

Excerpt: The NYT piece on the failure of Greece to meet its deficit targets and the response by the IMF, the European Central Bank, and the European Commission should have included a comment from someone pointing out that these institutions are jeopardizing the growth prospects for the world economy in order to try to squeeze some additional money out of Greece for its creditors.

The risk of a Greek default is leading to soaring interest rates on the debt of several euro zone countries and creates a real risk of another Lehman-type financial freeze-up. This would virtually guarantee a double-dip recession in both the euro-zone and the United States.

This fact should have been included in the article. Given that the current economic crisis is in large part the result of the incompetence of these institutions, the public might not appreciate the fact that they are risking further damage to the world economy in order to squeeze a country that is already suffering enormous economic pain.

9--Announced U.S. Job Cuts Rise 212% in Year, Bloomberg

Excerpt: U.S. employers announced the most job cuts in more than two years in September, led by planned reductions at Bank of America Corp. (BAC) and in the military.

Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Cuts in government employment, led by the Army’s five-year troop reduction plan, and at Bank of America accounted for almost 70 percent of the announcements.

While the bulk of firings are not “directly related” to economic weakness, they “could definitely be a sign of more cuts to come,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “Bank of America is not the only bank still struggling in the wake of the housing collapse, and the military cutbacks are probably just the tip of the iceberg when it comes to federal spending cuts.”

More reductions will add to the pool of job seekers competing for work as policy makers, including President Barack Obama and Federal Reserve officials, strive to spur the labor market. Payrolls probably didn’t rise fast enough last month to lower the jobless rate, according to a Bloomberg News survey of economists before the Labor Department’s monthly jobs figures in two days.

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