Friday, November 11, 2011

Weekend links

1--Savage recession looms as EC warns of slower growth in Europe, Telegraph

Excerpt: The threat of savage recession was piled on to deliberating European leaders amid warnings that the "clock is ticking" for them to resolve the debt crisis.

As Italy and Greece struggled to agree new governments, the impact of the chaos was laid bare when the European Commission cut the eurozone's growth outlook next year from 1.8pc to 0.5pc.

Olli Rehn, Europe's economic affairs commissioner, said the economy was being sucked into a "vicious circle" of sovereign debt problems, vulnerable banks and collapsed spending. "Growth has stalled in Europe, and there is a risk of a new recession," he said. "GDP is now projected to stagnate until well into 2012."..

Marco Buti, the Commission's head of economic affairs, warned that for the whole European Union "a deep and prolonged recession complemented by continued market turmoil cannot be excluded".

2--Sorry, there is no euro break-up plan – yet, Telegraph

Excerpt: There is no justification for allowing real M1 deposits to contract across most of the eurozone – and to plunge in the south – as has occurred over recent months. For a monetarist central bank, the ECB is remarkably insouciant about money.

The EU must slow the pace of fiscal contraction and launch a monetary blitz to lift the south out of chronic depression. A 5pc nominal GDP growth target for euroland for as long as it takes would do the trick. I believe central banks have the capability to deliver such result.

Let me be clear, this is not my preference. It would better for greater Germany to leave EMU. But given the evidence so far that Germania has no intention of taking such a course, it must instead drop its opposition to the sort of radical reflation stimulus so obviously needed to save monetary union and avoid a savage slump.

What Germany cannot continue to do is to refuse to leave EMU, and refuse to reflate. This is not a policy. The rest of the world is entirely entitled to make its irritation known.

3--MSNBC – Nearly 29% of mortgaged homes underwater, The Big Picture

Excerpt: A whopping 28.6 percent of homeowners with mortgages owe more on their loans than their homes could sell for, according to quarterly data released Tuesday by Zillow, a real estate website. That’s up from 26.8 percent in the second quarter. Home values declined only 0.2 percent from the second quarter but were down 4.4 percent year over year. The rising percentage of homes with “negative equity” or “underwater” status is due largely to how long the foreclosure sale process takes rather than home value fluctuations, said Zillow chief economist Stan Humphries. Prior to the “robo-signing” scandal around foreclosures that came to light in 2010, the negative equity rate hovered in the 21 to 23 percent range, but has been in the 26 to 28 range since due to added delays in foreclosure sales. While the rate of foreclosures is dropping, the time required for foreclosures to sell has lengthened. “We’re in uncharted waters,” Humphries said in an interview. “More than one in four homes underwater and about 9 percent unemployment is a recipe for more foreclosures.”

USA Today – Foreclosure backlogs could take decades to clear out

Foreclosure sales are moving so slowly in half the states that at the current pace, it will take more than eight years on average to clear the 2.1 million homes in foreclosure or with seriously delinquent mortgages, new research shows. That’s about twice as long as a year ago in the states where foreclosures go through courts — before the mortgage industry was upended by last fall’s disclosures that court papers in many foreclosure cases were improperly prepared. Since then, new checks have slowed the process. The backlogs suggest that the fallout from the nation’s worst housing-market collapse is likely to weigh on real estate prices in many markets for years to come, and on some markets for longer than on others.

Comment: According to Census data, a total of 76.428 million owner occupied units existed in the U.S. as of 2009. Of those, 50.3 million currently had a mortgage on their property.

4--Don’t Count on ECB Riding to Rescue, WSJ

Excerpt: European economists are increasingly convinced that the only solution to the escalating debt crisis, that now seriously threatens Italy, is massive intervention in Italian and other bond markets by the European Central Bank.

Bloomberg News“The ECB has to find a way to put all of its understandable reservations to one side and bite the bullet,” analysts at HSBC wrote.

“If worst comes to worst, only the ECB can save Italy and itself… we are getting perilously close to meeting the definition of ‘if worst comes to worst,’” Berenberg Bank economist Holger Schmieding wrote.

Here’s a sampling:

“To ask the ECB to become the lender of last resort to governments, it would mean that the ECB would immediately lose its independence,” ECB executive board member Juergen Stark said late Wednesday....

Dutch Central Bank president Klaas Knot also said the ECB has about reached its limit.

“We’ve come at the end of what we can do, it’s now up to the governments,” he told members of the Dutch parliament Thursday.

This doesn’t sound like an ECB that’s ready to start ramping up the printing press.

5--Econbrowser: Has Austerity Brought a Boom in the UK?, Econbrowser

Excerpt: Or Generalissimo Francisco Franco redux. In "UK: Economic growth, double-dips and the PMI," (G. Buckley, Deutsche Bank, Nov. 4, 2011, not online):

UK GDP grew by 0.5% qoq in Q3, but the position the economy is in is now officially worse than it was in the aftermath of the Great Depression. Add to this the weakening in the composite PMI survey for October (particularly the manufacturing report), also published this week, and escalating risks for a sharper euro area recession, and the stage possibly looks set for a much bleaker picture by the end of this year/start of 2012.

With regards the UK PMI, if the composite index remains at its October level of just above 50 during the remainder of the fourth quarter then that would be consistent with only very modest GDP growth of around 0.1% qoq. However, the risks seem tilted to the downside with our forecast for a technical recession in Europe highlighting the possibility that we see the same in the UK….

This account reminded me about the heated debate over the strength of the empirical results about expansionary fiscal contractions -- especially assertions (such as by the JEC-Republicans -- the document is mysteriously no longer online, but I have saved this gem and posted it here) that the resulting expansion would follow on quickly after the fiscal retrenchment. Over the past few days, I've had several discussions about where the debate now stands. I think if we don't see the phenomenon of a quick expansion in response to austerity in a relatively open, highly indebted economy like the UK, we are unlikely to see such an effect in the United States.

6--The Sovereign Debt Crisis and the Problem of Political Culture In Europe, CEPR

Excerpt: The most obvious threat stems from the political culture in Germany, which is driving the policy coming out of the European Central Bank (ECB). While it has long been obvious to observers across the political spectrum that the solution to the debt problem involves restructuring of the debt of most heavily indebted countries, guarantees of the sovereign debt of the other heavily indebted countries, and a strongly stimulative monetary and fiscal policy to allow countries to grow as they make reforms, Germany's political culture is preventing the ECB from adopting a reasonable policy toward the situation.

Instead, it has been fixated on trying to punish the debtor countries. This has made matters worse, as austerity measures slow growth both within the heavily indebted countries and across the continent. Slower growth leads to larger deficits, causing these countries to consistently miss their deficit targets.

The German political culture also seems to include a bizarre paranoia about inflation. This paralyzing fear can be incredibly damaging in the current situation. If the NYT wants to explain how political culture is worsening the crisis in the euro zone it has focused on the wrong countries.

7--Economic Mismanagement in Europe, Mark Weisbrot, Counterpunch

Excerpt: The ECB is the main problem. It is run by people who hold extremist views about the responsibility of central banks and governments in situations of crisis and recession. Even as facts contradict them on a daily basis, they cling stubbornly to the view that further budget tightening will restore the confidence of financial markets and resolve the crisis.

Governments must take “radical measures to consolidate public finances,” said ECB Executive Board member Jurgen Stark yesterday.

But of course these measures will only pour more fuel on the fire, by pushing Europe further toward recession and exacerbating the debt and budget problems of the weaker eurozone economies.

And the new head of the ECB, Mario Draghi, just a week ago dismissed the idea of the central bank playing the role of lender of last resort – a traditional role for central banks.

ECB authorities think they have already done too much by buying $252 billion of eurozone bonds over the past year and a half. But compare this with the U.S. Federal Reserve, which has created more than $2 trillion since 2008 in efforts to keep the U.S. economy from sinking back into recession.

The ECB could put an end to this crisis by intervening in the way the U.S. Federal Reserve has done in the United States. But they continue to insist that this is not their role. That is the heart of the problem, and until this policy is reversed it is likely that the European economy will continue to worsen.

8--The euro is reaching the point of no return, Telegraph

Excerpt: This is a moment of true peril for the eurozone economy, and only decisive action from the ECB can set things right.

The existential crisis that has engulfed the eurozone has reached a pivotal stage, one where inaction – or further mistakes – by the key players risks turning a calamity for the Continent into a disaster for the global economy. As long as the threat of a sovereign debt default remained confined to small countries such as Greece or Ireland, it was possible for the single currency to stumble along from one multi-billion-euro bail-out to the next. But when Italy – one of the world’s largest economies – stares bankruptcy in the face because the cost of servicing its debt has become prohibitively expensive, the time for a decisive response has arrived.

Yet even as Italian bond yields continued to rise yesterday, up to and beyond the point that most observers believe to be sustainable, the eurozone’s leadership appeared paralysed. It has been apparent for some time that the Germans are unwilling to take the necessary action to underpin the eurozone, by allowing the European Central Bank to intervene in a clear and unambiguous way as a lender of last resort to national governments. Angela Merkel has had to battle with the Bundestag just to get its agreement to increase the bail-out fund for Greece. But Italy is too big to rescue in this way. It has to refinance a sizeable chunk of its debts over the coming months; but the markets, fearful that they will not be repaid, are pushing up the costs of doing so. This forces tighter austerity measures, which restrict growth and precipitate a downward spiral.

9--ECB Says Banks’ Overnight Borrowing Increased to 8-Month High, Bloomberg

Excerpt: The European Central Bank said euro- area financial institutions’ emergency overnight borrowing jumped to an eight-month high.

Banks tapped the Frankfurt-based ECB for 7.7 billion euros ($10.6 billion) yesterday, up from 1.2 billion euros the day before and the most since March 1. Overnight deposits with the ECB fell to 73 billion euros from 298.6 billion euros a day earlier, the ECB said.

Yesterday was the last day of the ECB’s reserve maintenance period, during which banks are required to hold a certain amount of reserves on average. This results in fluctuations at the end of the period as lenders seek to balance their accounts.

10--Italy eyes unity cabinet as EU dithers on crisis, Reuters

Excerpt: Italy's political and economic turmoil has spurred fears of a possible break-up of the euro zone with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to afford a bailout.

German Chancellor Angela Merkel, Europe's main paymaster, called for broad political support for reforms in Greece and said Italy was on the road to winning back confidence, but political clarity was still needed.

She dismissed talk of a possible shrinking of the currency area, saying: "We only have one goal, that is to bring about a stabilization of the euro zone in its current form."

European Union officials continued to dither and pass the buck on how best to fight the worsening sovereign debt crisis.

Three senior ECB policymakers rebuffed pressure from investors and world leaders to intervene massively as a lender of last resort on bond markets to shield Italy and Spain from rapidly spreading financial contagion.

We have gone pretty far in what we can do but there is not much more that can be expected from us. It is now up to the governments," ECB governing council member Klaas Knot told the Dutch parliament.

Knot, the Dutch central bank chief, said bond-buying only had a temporary effect. The ECB has bought more than 180 billion euros of peripheral euro zone bonds and traders said it was active in the market again on Thursday, but the purchases have failed to lower borrowing costs durably.

Stepping up the scale of bond-buying would eventually force the ECB to start printing money with the risk of stoking inflation, which was why the EU treaty had excluded such action, Knot said.

ECB executive board member Peter Praet said it was not the task of the central bank to intervene "when there are fundamental doubts about the sustainability of some countries." Outgoing ECB chief economist Juergen Stark earlier rejected calls for the ECB to act as lender of last resort like the U.S. Federal Reserve or the Bank of England.

In Brussels, a euro zone official said there were no plans to use the bloc's 440-billion-euro ($600 billion) rescue fund to help Italy, even with a precautionary credit line.

"Financial assistance is not in the cards," the official said. A second official said: "The ECB will be drawn like every one else by the weight of gravity (to act).


Merkel, French officials and the EU's executive Commission all tried to quash talk of a possible shrinking of the euro area, although they raised the possibility last week that Greece might have to leave the single currency.

EU sources told Reuters that French and German officials had held informal discussions on a two-speed Europe with a more tightly integrated and possibly smaller euro zone and a looser outer circle.

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