Wednesday, October 19, 2011

Today's links

1--Martin Wolf nails the euro crisis, FT via Pragmatic Capitalism

Excerpt: “Why do external deficits matter?

First, external deficits mean that residents are spending more than their income and financing the difference abroad. If creditors decide such borrowers are no longer creditworthy (be they private or public), they will cut them off, thereby causing a recession and a plunge into – or deepening of – fiscal deficits. Second, prolonged external deficits also shape the structure and competitiveness of an economy.

Third, sustained deficits lead to huge net external liabilities, often intermediated by banks. When the external lending halts, the banks are likely to implode, undermining both the economy and the fiscal position. As Goldman Sachs notes, the inability to devalue also rules out a way of adjusting net liability positions that has proved helpful to the US and UK. Worse, the only available mechanism – an “internal devaluation” (or falling domestic price level) – will make the burden of external debt even greater. The improvement in the current account balance must then be even bigger than it would otherwise need to be.

Most important of all, people care about what happens to their own country. The inhabitants of a depressed member country will hardly console themselves with the thought that others are booming.

Inside the eurozone, adjustment of imbalances remains essential. But it is also vastly difficult, because the exchange rate has gone. In its place, comes adjustment via depression and default. A currency union with structural mercantilists in the core now threatens a permanent slump in the periphery. Solving that is the true cure. Can it be done? I wonder.” (Outstanding article)

2--Did QE2 Cause the (Present) Recession?, The Big Picture

Excerpt: Randall Forsyth of Barron’s asks this rather intriguing question:

While the Fed mulls more ambitious plans to tell the public how it will steer the economy in the future, perhaps the monetary authorities should reflect on the results of their recent efforts. As notes long-time Fed watcher Lacy Hunt of Hoisington Investment Management in Austin, Texas, the unintended consequences of its policies have all but superseded their professed aims. For instance, QE2—the Fed’s purchase of $600 billion of Treasury securities completed in June—caused the current slowdown instead of giving the economy a boost, he writes in Hoisington’s Quarterly Review and Outlook. Real disposable income was lower in August than in December, in part because of the jump in commodity costs. “While rising equity values helped a few consumers, inflation in necessities, such as food and fuel, decimated real incomes for the average family. Thus, the emergent cyclical weakness that lies ahead can be directly related to the unintended consequences of quantitative easing,” Hunt says.

The Fed’s current policy of attempting to flatten the yield curve by buying long-term Treasury securities and offsetting it with sales of shorter-dated paper—Operation Twist 2.0, after a similar gambit in the early 1960s—also could backfire. The FOMC minutes said the policy was expected “to help make broader financial conditions more accommodative.” Translated from Fed speak, lower long-term rates will make borrowers more willing to borrow while lenders will be more eager to lend.

But, Hunt points out, ultra-low interest rates could have the opposite effect. To earn a profit, banks have to cover their costs, from payroll, overhead, taxes and “elevated” fees to the Federal Deposit Insurance Corp. Then they have to earn a spread to compensate for the risk the borrower could default. At very low interest rates, there aren’t enough basis points left to lend profitably. The historical precedent is Japan, where banks would rather buy government bonds than make loans.

3--Analysis: As banks squeeze, alternative lenders gain traction, Reuters

Excerpt: Alternative finance firms, from credit unions to online and pawn lenders, are gaining traction as banks turn off the tap for easy cash and start charging fees for services that customers have had for free....

Demand for short-term, small-dollar loans from credit unions rose 52 percent in the second quarter, National Credit Union Administration data showed. More aggressive selling by these unions will have seen that rise further in the third quarter...

Among the crop of alternative finance companies opening their wallets to cash-strapped consumers through the Internet are BillFloat, Pawngo and

Online lender BillFloat, backed by Ebay's PayPal, offers a 30-day loan of up to $225 to consumers looking to pay their bills.

The service, started two years ago, has an annualized interest rate of 36 percent, making it far cheaper than payday loans, where rates can be as high as 500 percent....

The growing demand for newer financing options is attracting venture capitalists, who are backing new, Internet-based entrants.


Demand for these services is also spurring alternative financial firms to tap public markets for the cash they need to grow.

Regional Management Corp and Community Choice Financial have filed for initial public offerings this year, and Cash America said it would spin off its online lending unit, Enova International, in a $500 million IPO....
Other listed pawn and payday lenders like EZCorp, First Cash Financial, and DFC Global Corp have

bolstered their pawn lending operations and are adding pre-paid debit cards to the services they offer.

4--Richard Russel: "This is a modern day depression", Pragmatic Capitalism

Excerpt: The signs are growing. I can see the signs in the number of vagrants in La Jolla and south in Pacific Beach. As I drive by I see little clusters of men and women (mostly men) huddled in doorways or sitting in the bushes beside the roads. These are vagrants, always a sign of a severe recession. Men holding cardboard signs stand by the side of the road. The signs read, “Vet needs work.” or “Single mom needs food for her three children.”

Where do these people live? I wonder, where do they sleep? How do they have the energy to stand in the blaring sun all day with their cardboard signs?

But they are the signs of hard times. I’ve seen them before — in the 1930s. Today they are pushing shopping carts around the city, carts filled with junk — old blankets, tin cans, old toys, anything, it seems to fill up their carts.

These are the remnants of society, the “leftovers.” How do they survive, I keep wondering. And it scares me. These are people who have lost everything. And it is spreading. On Wall Street they’re “taking it to the streets.” But these people are being shoved into the streets and the alleys and the bushes of every town in the US.

And I think, “But why La Jolla?” And the answer is that “Nobody ever froze to death in La Jolla.”

I’ve seen them weather the nights in NYC. Some sleep on top of the subway grills where warm air is pushed up from below. Some sleep on the steps of churches where the chances of being robbed are slim. Others sleep under slabs of cardboard, which are fashioned into little huts.

The signs of hard times are all about, but will it get harder? It all brings back bad memories of the 1930s. And to tell you the truth I’m scared.

And above it all stands Wall Street with its giant buildings and it heart of concrete. No wonder they hate the Street most when hard times arrive.”

5--Richard Koo Says Europe Needs to Go Big on Banks, Grasping reality with both hands

Excerpt: Joe Weisenthal:

RICHARD KOO: There's Only One Solution That Can Save Europe Now: The proposal of using taxpayer money to recapitalize European banks is already on the table. If the plan is to be meaningful, the accompanying principal reductions must be large enough to enable the distressed nations to resume growing. Some have proposed increasing the haircut for Greek bondholders to 50% from the original figure of 21%. If they really intend to implement this bold proposal, the authorities should simultaneously announce a large capital injection into the banks. Unless the two measures are presented as a package, attention will focus solely on losses at the banks, exacerbating the atmosphere of mutual mistrust within the financial sector.
The authorities should also declare that they are prepared to inject capital with few or no strings attached. And the capital must be relatively cheap, since the ultimate goal of this exercise is to prevent a credit crunch. With so little time available, the authorities need to prepare a capital injection that can be implemented together with the principal reductions without waiting for banks to raise their own capital….

1.Provide a full guarantee for financial institution liabilities as Japan did in 1997 and the US did in 2008.

2.Prepare a capital injection scheme to prevent principal write-downs and the resulting losses from draining bank capital and sparking a credit crunch.

3.Make it easier for the banks to accept the capital by attaching as few strings as possible, and keep the cost low enough that banks will not need to cut back on lending.

4.Because so little time is available, the government capital injections should be presented as a funding source of first, not last, resort.

It was, I think… April 2008… when I first said that this could get very bad, and that if it got bad the best solution was for the government to buy the banks for a song--given that they would be insolvent--recapitalize them, and then privatize them off gradually later on.

It's difficult to know what alternative policy road might be successful right now. Yes, there is a Greek debt problem. Yes, there is an Italian growth problem. But those are both less urgent than the bank cratering now going on in Europe.

6--The truth about the economy, Robert Reich's blog

Excerpt: (Great 2 minute video)‏

7--Food stamp cuts could put food banks in a box, The Oregonian

Excerpt: Right now, government commodities provided to food banks are disappearing, down 30 percent in the fiscal year that just ended. Meanwhile, other programs, such as the Emergency Food Assistance Program, are in line for cuts, and the problem goes down to the state level, where Oregon likely faces another round of budget cuts in February.

Worse, in the Washington, D.C., budget wars, the crowds are circling around the main pillar of anti-hunger efforts, the Supplemental Nutrition Assistance Program, aka food stamps. That's a matter of some local interest as well: We also learned last week that the number of Oregonians on the program now tops 800,000, up 9.5 percent just since 2010.

And 2010 wasn't a great year, either.

As the congressional supercommittee focuses on cutting $1.5 trillion from the long-term deficit, the $700 billion projected over the next decade for food stamps is on the table. The long-term plan from House Budget Committee Chairman Paul Ryan, R-Wis., takes $121 billion from the program, and turns it over to the states. Sen. Richard Lugar, R-Ind., a power on both agriculture and hunger, is proposing sizable cuts. At the end of the week, the leaders of the House and Senate agriculture committees, which oversee food stamps, were preparing their proposal to the supercommittee.

Secretary of Agriculture Tom Vilsack, visiting Portland recently, warned The Oregonian's editorial board against taking a big budget bite out of food stamps, pointing out that most of the families helped by the program include children and/or senior citizens.

8-- Food stamp use rises to record 45.8 million, CNN

Excerpt: Nearly 15% of the U.S. population relied on food stamps in May, according to the United States Department of Agriculture.

The number of Americans using the government's Supplemental Nutrition Assistance Program (SNAP) -- more commonly referred to as food stamps -- shot to an all-time high of 45.8 million in May, the USDA reported. That's up 12% from a year ago, and 34% higher than two years ago.

The program provides monthly benefits to low-income individuals and families, which they can use at stores that accept SNAP benefits..

To qualify for food stamps, an individual's income can't exceed $1,174 a month or $14,088 a year -- an amount that is 130% of the national poverty level.

The average food stamp benefit was $133.80 per person and $283.65 per household in May.

9--Homelessness in the middle class, Huffington Post

Excerpt: People once accustomed to middle-class comfort have turned to shelters for aid....As home prices continue to fall, and as the national unemployment rate remains stuck near 10 percent, Americans are seeing their wealth erode. More than 2.8 million homes received foreclosure notices in 2009, as foreclosure activity increased more than 20 percent, according to real estate data provider RealtyTrac. Between 2010 and 2012, 7.4 million more homes will likely enter foreclosure, the Federal Reserve predicts.

"Loss of jobs means loss of money, means inability to pay for housing," said Maria Foscarinis, executive director of the National Law Center on Homelessness and Poverty, in Washington. "Some people who are affected in that way end up becoming homeless."

10--Cuts in US welfare programs hit hundreds of thousands of poor families, WSWS

Excerpt: US states are implementing drastic cuts to the Temporary Assistance for Needy Families (TANF) program, creating further hardships for 700,000 families that include 1.3 million children. The slashing of funding for TANF, the welfare program financed by block grants to states from the federal government, is part of an overall attack on all social programs in the US.

The impact and scale of the cuts are documented in a May 19 report issued by the Center on Budget and Policy Priorities (CBPP), a liberal policy group.

The CBPP report lists three areas of cuts being made by the states:

* Monthly cash assistance benefits have been cut in several states. This is pushing hundreds of thousands of families and children well below the poverty line.

* Time limits for receiving TANF benefits have been shortened. California and Arizona are two of the states carrying out such measures, which have the result of cutting off thousands of very poor families from any aid. Other state legislatures are discussing shortening time limits from 60 months to as short as 18 months.

* Working families with low incomes face cuts in TANF-funded supplements in several ways. Michigan’s Earned Income Tax Credit (partially funded by TANF) is being slashed by two-thirds, for example, raising state income taxes for several hundred thousand low-income working families. This is part of a state budget that sharply cut taxes for corporations and the wealthy. In other states, families are having their supplemental TANF benefits cut or eliminated.

These cuts are being carried out by both Democratic and Republican governors. Among the states cited by the CBPP that are cutting benefits are: Washington, under a Democratic governor, where benefits have been reduced by 15 percent, or $84 per month for a family of three; South Carolina under a Republican, by 20 percent; and 8 percent in California, under a Democrat.

The report points out, "States are terminating or reducing benefits for some of the most vulnerable families, most of whom have very poor labor market prospects.” This is under conditions of a continued jobs crisis....
The 2009 Recovery Act included the TANF Emergency Fund, providing some extra funds. Congress declined to extend the bill past September 2010, when the fund ended.

This attack on welfare programs goes back at least 15 years, to the "welfare reform" of the Clinton administration in 1996. Pledging to “end welfare as we know it,” the Clinton administration terminated the Aid to Families with Dependent Children program, replacing it with the block grant program, TANF. Previously, funding for AFDC was provided based on need, where the federal government shared the financial liability with the states when economic conditions caused more families to seek aid.

A key part of Clinton’s welfare reform bill, which bore the Orwellian title of the “Personal Responsibility and Work Opportunity Reconciliation Act of 1996,” was the imposition for the first time of a lifetime limit of 60 months for welfare recipients. Beyond that time, regardless of how dire their circumstances, families are prevented from receiving any aid...

The AFDC program, just before it was ended, served three-quarters of all families with children who lived in poverty. In 2008-2009, only 28 percent of such families were served by TANF. In some states, this figure was as low as 10 percent.

The official US poverty threshold is about $22,000 a year for a family of four. Even at this preposterously low level, the latest US Census figures document a poverty rate of over 17 percent. The government estimates that 25 percent of American children will soon be living in poverty

11--One Million More U.S. Children Living in Poverty Since 2009, New Census Data Shows, ScienceDaily (Sep. 23, 2011)

Excerpt:— Between 2009 and 2010, one million more children in America joined the ranks of those living in poverty, bringing the total to an estimated 15.7 million poor children in 2010, an increase of 2.6 million since the recession began in 2007, according to researchers from the Carsey Institute at the University of New Hampshire.

Furthermore, the authors estimate that nearly 1 in 4 young children -- those under age 6 -- now live in poverty. "It is important to understand young child poverty specifically, as children who are poor before age 6 have been shown to experience educational deficits, and health problems, with effects that span the life course," the researchers said.

12--Nearly one in six in poverty in the U.S.; children hit hard, Census says, Washington Post

Excerpt: Nearly one in six Americans was living in poverty last year, the Census Bureau reported Tuesday, a development that is ensnaring growing numbers of children and offering vivid proof of the recession’s devastating impact.

The report portrays a nation where many people are slipping backward in the wake of a downturn that left 14 million people out of work and pushed unemployment rates to levels not seen in decades.

As poverty surged last year to its highest level since 1993, median household income declined, leaving the typical American household earning less in inflation-adjusted dollars than it did in 1997.

Ominously, several analysts said, unemployment is projected to remain unusually high for the foreseeable future, meaning that the nation is probably in for an extended period of rising poverty and declining income.
“Not only have we experienced severe deterioration in recent years, but knowing how weak the outlook is makes this report even more ugly,” said Heidi Shierholz, a labor economist at the Economic Policy Institute. “We are staring high unemployment in the face for years to come.”

Last year, 46.2 million Americans lived below the poverty line — $22,314 a year for a family of four — marking the fourth year in a row that poverty has increased.....

The economic turmoil has pummeled children, for whom the poverty rate last year — 22 percent — was at the highest level since 1993. The rate for black children climbed to nearly 40 percent, and more than a third of Hispanic children lived in poverty, the Census Bureau reported. The rate for white children was reported as above 12 percent.

With their surging population, Hispanics accounted for 37 percent of the children in poverty, a share that had increased substantially since the recession took hold in 2007, said William Frey, a Brookings Institution demographer.

“We had almost 1 million more children fall into poverty between 2009 and 2010,” said Catherine V. Beane, policy director at the Children’s Defense Fund. “We also have seen a continued increase in the number of children who live in extreme poverty,” for instance, a family of four living on $30 a day.

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