Tuesday, October 18, 2011

Today's links

1--Losing Their Immunity, Paul Krugman, New York Times

Excerpt: ...the financialization of America wasn’t dictated by the invisible hand of the market. What caused the financial industry to grow much faster than the rest of the economy starting around 1980 was a series of deliberate policy choices, in particular a process of deregulation that continued right up to the eve of the 2008 crisis.

Not coincidentally, the era of an ever-growing financial industry was also an era of ever-growing inequality of income and wealth. Wall Street made a large direct contribution to economic polarization, because soaring incomes in finance accounted for a significant fraction of the rising share of the top 1 percent (and the top 0.1 percent, which accounts for most of the top 1 percent’s gains) in the nation’s income. More broadly, the same political forces that promoted financial deregulation fostered overall inequality in a variety of ways, undermining organized labor, doing away with the “outrage constraint” that used to limit executive paychecks, and more.

Oh, and taxes on the wealthy were, of course, sharply reduced.

All of this was supposed to be justified by results: the paychecks of the wizards of Wall Street were appropriate, we were told, because of the wonderful things they did. Somehow, however, that wonderfulness failed to trickle down to the rest of the nation — and that was true even before the crisis. Median family income, adjusted for inflation, grew only about a fifth as much between 1980 and 2007 as it did in the generation following World War II, even though the postwar economy was marked both by strict financial regulation and by much higher tax rates on the wealthy than anything currently under political discussion.

Then came the crisis, which proved that all those claims about how modern finance had reduced risk and made the system more stable were utter nonsense. Government bailouts were all that saved us from a financial meltdown as bad as or worse than the one that caused the Great Depression.

2--Millions of homes lurk on bank inventories, casting doubts of rebound, McClatchy

Excerpt: Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows — hidden neatly away on banks' balance sheets, stalled in foreclosure court proceedings or simply occupied by nonpaying owners as lenders wait months or years before taking action.

The housing market's ballooning shadow inventory — buoyed by a yearlong foreclosure slowdown — stands as the most menacing obstacle to the recovery of the residential real estate market....

A McClatchy analysis of four years of foreclosure data and thousands of property records found record-high levels of shadow inventory in several housing markets across the nation.

Though real estate trade groups routinely leave these shadow properties out of monthly reports, their influence on home values has grown sharply in recent years.

In the supply-and-demand-reliant real estate market, the national supply of homes is officially listed at about 3.5 million, or about nine months' worth; sales are on track to reach about 5 million this year. But once shadow inventory is added, that supply more than doubles, to at least 7.5 million. A healthy housing market has about a six-month supply of properties, which would be about 2.4 million....

Data from the real estate research firm RealtyTrac, the U.S. Census Bureau and the data firm Lender Processing Services and real estate trade group figures were used in the analysis. The McClatchy analysis found the following shadow inventory:

•644,000 houses already owned by lenders but not yet for sale.

•2.2 million homes whose owners have received initial foreclosure notices or notices of default but haven't yet been foreclosed on.

•1.9 million properties whose owners are 90 days or more behind on their payments but haven't yet been served with foreclosure notices.

the aftermath of the largest home-repossession campaign in history, mortgage lenders are holding properties off the market as a matter of strategy. Flooding the fragile market with an additional 500,000 to 1.1 million homes — many of them deteriorating and selling at deep discounts — would cause already weak prices to fall further.

Mortgage lenders have shown no indication that they're planning to ramp up foreclosure sales, and a growing number of vacant homes have sat idle on banks' balance sheets for several years.

According to the data firm CoreLogic, which has one of the more conservative estimates of shadow inventory, mortgage debt outstanding in the shadow inventory is about $336 billion. Liquidating REO homes through the sales process usually leads to significant write-downs on bank balance sheets.

Wary of seeing such large losses appear in earnest on their books, lenders have been reluctant to deal with bad loans head-on, said Ira Rheingold, the executive director of the National Association of Consumer Advocates.
"They're afraid," he said. "They don't want to take those paper losses. Their books show that they have these assets that are worth 'X' amount of money. But those values are not real."...


Banks are struggling to prove that they have legal standing to foreclose, and it now takes them an average of nearly two years to repossess a property, according to Lender Processing Services. In states such as Florida and North Carolina, where foreclosures are handled in court, the timeline is even longer.....

More than a million foreclosures that were supposed to be completed this year have been pushed into the future, prolonging the housing crisis, RealtyTrac found.

In August 2010, before the foreclosure slowdown, banks repossessed more than 12,000 homes in Florida. In August 2011, there were only 5,000 repossessions.

Nationwide, there are 2.2 million homes stuck somewhere in the foreclosure process, and many of those cases have completely stalled.

"I've got dozens of foreclosure cases in my office that started in 2008 and are still open," Miami foreclosure defense attorney Dennis Donet said, "with lenders doing absolutely nothing to move these cases forward."...

Lenders also are waiting longer before taking action against millions of homeowners who have stopped paying their mortgages.

Nearly 2 million homeowners who haven't paid their mortgages in three months or more haven't received foreclosure filings. About 800,000 of those haven't made payments in more than a year, according to Lender Processing Services.

While some of the holdup can be attributed to foreclosure prevention efforts — mortgage modifications, for example — several banks are using delay as a financial strategy, said Daren Blomquist, a spokesman for RealtyTrac.

Lenders basically are letting delinquent homeowners stay in their homes as a lesser-of-two-evils option. Foreclosing more quickly would mean more empty homes and additional maintenance costs for banks to shoulder. Lenders, already dealing with a mountain of paperwork challenges for homes in foreclosure, would only be adding to their documentation woes by speeding up new filings.

"There are more distressed properties than their foreclosure departments can probably handle," Blomquist said. "Because the foreclosure pipeline is so full, the lenders have delayed foreclosing on those properties."
Additionally, banks aren't selling homes fast enough to justify more aggressive foreclosure filings. Even at the currently slowed pace, foreclosure starts are three times higher than foreclosure sales are, meaning that properties are being loaded onto the conveyor belt much faster than they're being taken off.

"It's kind of like a pig in a python," Blomquist said. "As you start to see more of foreclosure sales and that inventory is cleared out, then you'll begin to see more new filings."

But as lenders hold off on foreclosures, struggling homeowners are strategically gaming the system as well. So-called "strategic defaults" have grown in popularity.

Under a strategic default, homeowners quit paying mortgages they deem bad investments, but they keep living in the homes or renting them out and pocketing the income....

Nationwide, 2.5 million homeowners are 30 to 60 days behind on payments, a sign that the stagnant economy and tepid housing market continue to push more people into the foreclosure pipeline.

Given the grim outlook, lenders have begun to consider new alternatives to foreclosure. Short sales have increased this year, and real estate agents say the once-onerous process of selling a home for less than what's owed on it has become more streamlined.

Banks also are cutting deals with homeowners who agree to hand over the keys to houses rather than go through legal battles. In some cases, lenders are forking over wads of cash to convince troubled borrowers to leave their homes amicably.

"We have been making enhanced financial relocation offers, primarily in states where the foreclosure timelines are extended," said Jason D. Menke, spokesman for Wells Fargo. "We've been offering as much as $10,000 or $20,000 to borrowers who are willing to do a deed-in-lieu or a short sale."
More aggressive foreclosure-prevention measures, such as principal reductions and debt forgiveness, generally have been kept off the table....

Meanwhile, a group of attorneys general has spent the past year trying to negotiate a settlement with major U.S. banks that are accused of wrongfully foreclosing on homeowners.

The process has been slow, as the banks have rejected calls for widespread principal reductions and public officials have called for steep penalties. California Attorney General Kamala Harris pulled out of the negotiations last month, saying the proposed agreement was "inadequate."

McCabe, the Deerfield Beach consultant, said it was in lenders' best interest to keep hundreds of thousands of struggling borrowers from entering the foreclosure pipeline, even if it meant writing down principal balances for underwater homeowners.

"Unless they agree to do principal reductions coupled with mortgage modifications, these delinquent properties will eventually have to be sold," he said. "Which means more banks will fold, because they can't stomach those losses."

3--Chanos on China Banks, Real Estate; U.S. Politics, The Big Picture

4--Does the euro need Greece more than Greece needs the euro?, The Streetlight blog

Excerpt: ...Yes, of course Greece has some awfully compelling reasons to try to avoid a unilateral default on its debt, and to shoulder some of the cost of avoiding that outcome....But the outcome for the rest of the eurozone countries could be equally devastating. The main problem they face is that markets are looking to Greece for information about what the core eurozone countries are willing to do to keep the eurozone together. If Greece is allowed to unilaterally default, the markets will have their worst fears confirmed -- that the core countries are willing to allow other eurozone countries default and effectively exit. European financial markets will immediately be devastated by contagion as a massive selloff in Spanish and Italian debt quickly pushes weak eurozone banks to the brink of collapse. The eurozone will face the prospect of having to come up with perhaps in excess of a trillion euro to support the Spanish and Italian government debt markets and to rescue the entire European banking system from collapse.

It is difficult to overstate the seriousness of the crisis that would hit European financial markets in the wake of a unilateral Greek default, I think. This gives France and Germany an enormous incentive to bail out Greece -- for their own pure self interest.

If on the other hand the core eurozone countries actually do come through with sufficient funds to finally resolve the Greece issue, then all of a sudden markets will have important evidence that the core countries are indeed determined to do whatever is necessary to keep the eurozone whole. Put simply: if Germany is willing to pay up to keep Greece in the system, then it's pretty likely that it will also do what is necessary to keep Spain and Italy in the system. Investors' fears are soothed, and contagion largely goes away.

5--America's Primal Scream, New York Times

Excerpt: The 400 wealthiest Americans have a greater combined net worth than the bottom 150 million Americans.
¶The top 1 percent of Americans possess more wealth than the entire bottom 90 percent.

¶In the Bush expansion from 2002 to 2007, 65 percent of economic gains went to the richest 1 percent.

As my Times colleague Catherine Rampell noted a few days ago, in 1981, the average salary in the securities industry in New York City was twice the average in other private sector jobs. At last count, in 2010, it was 5.5 times as much. (In case you want to gnash your teeth, the average is now $361,330.)

More broadly, there’s a growing sense that lopsided outcomes are a result of tycoons’ manipulating the system, lobbying for loopholes and getting away with murder. Of the 100 highest-paid chief executives in the United States in 2010, 25 took home more pay than their company paid in federal corporate income taxes, according to the Institute for Policy Studies.

6--The Rise of the Regressive Right and the Reawakening of America, Robert Reich's blog

Excerpt: ...Eric Cantor, Paul Ryan, Rick Perry, Michele Bachmann and the other tribunes of today’s Republican right aren’t really conservatives. Their goal isn’t to conserve what we have. It’s to take us backwards.
They’d like to return to the 1920s — before Social Security, unemployment insurance, labor laws, the minimum wage, Medicare and Medicaid, worker safety laws, the Environmental Protection Act, the Glass-Steagall Act, the Securities and Exchange Act, and the Voting Rights Act.

In the 1920s Wall Street was unfettered, the rich grew far richer and everyone else went deep into debt, and the nation closed its doors to immigrants.

Rather than conserve the economy, these regressives want to resurrect the classical economics of the 1920s — the view that economic downturns are best addressed by doing nothing until the “rot” is purged out of the system (as Andrew Mellon, Herbert Hoover’s Treasury Secretary, so decorously put it).

In truth, if they had their way we’d be back in the late nineteenth century — before the federal income tax, antitrust laws, the pure food and drug act, and the Federal Reserve. A time when robber barons — railroad, financial, and oil titans — ran the country. A time of wrenching squalor for the many and mind-numbing wealth for the few.

Listen carefully to today’s Republican right and you hear the same Social Darwinism Americans were fed more than a century ago to justify the brazen inequality of the Gilded Age: Survival of the fittest. Don’t help the poor or unemployed or anyone who’s fallen on bad times, they say, because this only encourages laziness. America will be strong only if we reward the rich and punish the needy.

The regressive right has slowly consolidated power over the last three decades as income and wealth have concentrated at the top. In the late 1970s the richest 1 percent of Americans received 9 percent of total income and held 18 percent of the nation’s wealth; by 2007, they had more than 23 percent of total income and 35 percent of America’s wealth. CEOs of the 1970s were paid 40 times the average worker’s wage; now CEOs receive 300 times the typical workers’ wage.

This concentration of income and wealth has generated the political heft to deregulate Wall Street and halve top tax rates. It has bankrolled the so-called Tea Party movement, and captured the House of Representatives and many state governments. Through a sequence of presidential appointments it has also overtaken the Supreme Court.

Scalia, Alito, Thomas, and Roberts (and, all too often, Kennedy) claim they’re conservative jurists. But they’re judicial activists bent on overturning seventy-five years of jurisprudence by resurrecting states’ rights, treating the 2nd Amendment as if America still relied on local militias, narrowing the Commerce Clause, and calling money speech and corporations people.

Yet the great arc of American history reveals an unmistakable pattern. Whenever privilege and power conspire to pull us backward, the nation eventually rallies and moves forward. Sometimes it takes an economic shock like the bursting of a giant speculative bubble; sometimes we just reach a tipping point where the frustrations of average Americans turn into action.

Look at the Progressive reforms between 1900 and 1916; the New Deal of the 1930s; the Civil Rights struggle of the 1950s and 1960s; the widening opportunities for women, minorities, people with disabilities, and gays; and the environmental reforms of the 1970s.

In each of these eras, regressive forces reignited the progressive ideals on which America is built. The result was fundamental reform.

Perhaps this is what’s beginning to happen again across America.

7--Let’s Admit It: Globalization Has Losers, New York Times

Excerpt: FOR the typical American, the past decade has been economically brutal: the first time since the 1930s, according to some calculations, that inflation-adjusted incomes declined. By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.

8--Income Gain Distribution 1917-81; 1982-2000; 2001-08, The Big Picture

Excerpt: (Great graphics) Here is an interesting interactive tool that lets you look at different year ranges based upon societal gains in income, and how they got distributed. Fascinating to see the shift over the past century.

9--G20 tells euro zone to fix debt crisis in eight days, Reuters

Excert: The world's leading economies pressed Europe on Saturday to act decisively within eight days to resolve the euro zone's sovereign debt crisis which is endangering the world economy.

In unusually direct language, finance ministers and central bankers of the Group of 20 major economies said they expected an October 23 European Union summit to "decisively address the current challenges through a comprehensive plan".

French Finance Minister Francois Baroin, who chaired the meeting, said Berlin and Paris, the leading euro zone powers, were well on the way to agreeing a plan to reduce Greece's debt, stop contagion and protect Europe's banks.

...The communique urged the euro zone "to maximize the impact of the EFSF (bailout fund) in order to address contagion". EU officials said the most likely option was to use the 440 billion euro fund to offer partial loss insurance to buyers of stressed member states' bonds in a bid to stabilize the market.

10--The world economy; Be afraid, Economist

Excerpt: Unless politicians act more boldly, the world economy will keep heading towards a black hole...

for all the breathless headlines from the IMF/World Bank meetings in Washington, DC, Europe’s leaders are a long way from a deal on how to save the euro. The best that can be said is that they now have a plan to have a plan, probably by early November. Second, even if a catastrophe in Europe is avoided, the prospects for the world economy are darkening, as the rich world’s fiscal austerity intensifies and slowing emerging economies provide less of a cushion for global growth. Third, America’s politicians are, once again, threatening to wreck the recovery with irresponsible fiscal brinkmanship. Together, these developments point to a perilous period ahead....

witness the increasingly dark economic backdrop. A slew of recent indicators suggests the euro area is slipping into recession, as Germany’s exports slow, the fiscal screws tighten, confidence slumps and the banks’ travails imply tighter credit. Even if the euro-zone crisis were to be solved tomorrow, the region’s GDP would probably shrink over the coming months.

America’s economy is still limping along, though the summer slump in share prices and consumer confidence suggest future spending will weaken further. The Federal Reserve is trying new ways of support, somewhat half-heartedly. Whatever it does, America is currently on course for the most stringent fiscal tightening of any big economy in 2012, as temporary tax cuts and unemployment insurance expire at the end of this year. That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November. If Democrats and Republicans fail to hash out a compromise on the deficit, draconian spending cuts will follow in 2013. For all the tirades against the Europeans, America’s economy risks being pushed into recession by its own fiscal policy—and by the fact that both parties are more interested in positioning themselves for the 2012 elections than in reaching the compromises needed to steer away from that hazardous course.

What about the cushion the emerging markets provide? That, too, is getting thinner....In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem.

11--Echoes of 2008; Here we go again, Economist

Excerpt: ...What’s more, the components of a solution to the immediate euro-zone crisis, long proposed by this newspaper, are fairly well understood. First, create a firewall around other euro-zone members like Italy and Spain that are solvent but need help financing their debts; second, recapitalise the European banking system, which has done far less since 2008 to fortify its defences than America’s; and third, allow Greece, self-evidently insolvent, to default in an orderly fashion.

The problem with this solution for the rest of the world is that it depends on the Europeans to carry it out. The debt crisis has been running for 18 months now, and the only way that euro-zone leaders have dazzled is through sheer incompetence. It continued this week, with some politicians admitting that a hard restructuring of Greek debt was on the table, whilst others ruled out a default. The result is the worst of all worlds: more uncertainty for banks that hold Greek debt, more pointless austerity for the battered Greek economy (see article).

A clear plan for a forced bank recapitalisation in the euro zone is badly needed, too. The mere rumours of it happening sparked a late market rally on October 4th. There are all sorts of reasons to deplore the fact that banks would once again be propped up by public money. It would have been far better if over the past three years more had been done to boost banks’ capital and liquidity, and to create the mechanisms that would force bank losses onto creditors, not taxpayers. Every euro-zone finance minister should be forced to explain the whitewash “stress tests” that gave even Dexia a clean bill of health earlier this year. But for now the priority is to prevent a systemic meltdown, not to accelerate it for the sake of principle..

The European Financial Stability Facility (EFSF), the euro zone’s bail-out fund, must carry out simultaneous injections of capital into the region’s banks as soon as it can. Central banks must get into full fire-fighting mode, too. In particular, that means offers of unlimited two-year liquidity from the ECB, which was due to meet after The Economist went to press.

Herding Eurocrats

Above all, no amount of recapitalisation would be enough to protect banks from a cascade of euro-zone defaults. Nothing matters more than putting a firewall around the likes of Italy and Spain. Here, the news is bleak. Jean-Claude Trichet, the outgoing president of the ECB, describes this as the worst crisis Europe has faced since the second world war; but the institution he runs is unwilling to respond in kind.

12--More Americans than Chinese can’t put food on the table, Yahoo finance

Excerpt: The number of Americans who lack access to basic necessities like food and health care is now higher than it was at the peak of the Great Recession, a survey released Thursday found. And in a finding that could worsen fears of U.S. decline, the share of Americans struggling to put food on the table is now three times as large as the share of the Chinese population in the same position.

The United States' Basic Index Score, a Gallup measure of access to necessities, fell to 81.4 in September--even lower than the 81.5 mark it reached in February and March, 2009. The recession officially ended in June of that year, but the halting recovery hasn't given a sustained boost to the number of Americans able to provide for themselves. The government reported last month that a record number of Americans is living in poverty.
Between September 2008 and last month, the share of Americans with access to a personal doctor plummeted from 82.5 percent to 78.3 percent. The share with health insurance fell from 85.9 percent to 82.3 percent. And the share saying they had enough money to buy food for themselves and their family dropped from 81.1 percent to 80.1 percent. Gallup's surveys are based on phone and in-person interviews.

Meanwhile, Gallup found that just 6 percent of Chinese said there were times in the past 12 months when they lacked enough money for food for themselves or their family, compared to 19 percent of Americans. Just three years ago, those results were almost reversed: 16 percent of Chinese couldn't put food on the table at times, compared to 9 percent of Americans

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