Friday, December 30, 2011

Weekend links

1---Keynes Was Right, Paul Krugman, NY Times via economist's view

Excerpt: “The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as FDR was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover... And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

In declaring Keynesian economics vindicated ... the real test ... hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real GDP in both countries down by double digits.

This wasn’t supposed to happen, according to ... the Republican staff of Congress’s Joint Economic Committee ... report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.

They should have known better...

Now, you could argue that Greece and Ireland had no choice about imposing austerity ... other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more. ...

The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.

The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.


2--The Over-Valued Dollar as Class War, CEPR

Excerpt: ....The article shows clearly how the over-valued dollar that was deliberately engineered by Robert Rubin in the late 90s has put downward pressure on wages of large segments of the U.S. workforce. With the dollar having reversed most of its gains from the 90s, U.S. manufacturing wages can again be competitive with wages in China and other developing countries. Further declines in the dollar will allow manufacturing workers to get higher wages and create more jobs.

Most professionals (doctors, lawyers, economists etc.) are largely protected (by policy) from the sort of competition that manufacturing workers face. For this reason they are likely to benefit from a higher valued dollar since it means that they can get cheaper manufacturing goods and pay less for overseas vacations.

3--Weekly Initial Unemployment Claims increase to 381,000, CalculatedRisk

Excerpt: The DOL reports:

In the week ending December 24, the advance figure for seasonally adjusted initial claims was 381,000, an increase of 15,000 from the previous week's revised figure of 366,000. The 4-week moving average was 375,000, a decrease of 5,750 from the previous week's revised average of 380,750.

4--Overnight Borrowing From ECB Highest Since Feb, Nasdaq

Excerpt: Euro-zone banks' overnight borrowing from the European Central Bank jumped Thursday to a level unseen since early this year, while their deposits remained close to the record levels hit earlier this week.

Banks borrowed EUR17.307 billion from the ECB Thursday, up sharply from EUR4.321 billion Wednesday, the ECB said Friday. The last time their borrowing exceeded the EUR17 billion mark was in late February.

Banks, meanwhile, deposited EUR445.683 billion with the ECB, the ECB said Friday, up from EUR436.583 billion Thursday. Deposits hit an all-time high of EUR452.034 billion earlier this week after the ECB's first ever offer of a three-year refinancing operation last week.

The ECB's Governing Council embarked on several liquidity boosting measures at its last rate meeting in December to prevent a liquidity crunch from developing into a credit crunch. Money supply data that the ECB published Thursday showed that lending growth to the private sector slowed sharply in November from a year earlier and the amount lent fell from the previous month for the first time since January 2010.

The time of year may also be a reason for banks relying heavily on the ECB's overnight facilities as they need to meet certain capital requirements at the end of the year.

5--NY Fed: New Dollar Swap Facility Borrowings Total $42.359 Bln, WSJ

Excerpt: New foreign central-bank borrowings from the Federal Reserve surged again in the latest week, rising by $42.359 billion.

The Federal Reserve Bank of New York said Thursday that total borrowing from its dollar liquidity swap facility stood at $99.823 billion in the week ended Wednesday, compared to $62.599 billion the week before.

The Fed's lending facility provides dollar loans to the European Central Bank, as well as the Bank of Canada, Bank of England, Bank of Japan and the Swiss National Bank.

As it has been in weeks past, the ECB was the main driver for the increase. It borrowed an additional $33.004 billion, leaving it with $85.437 billion borrowed.

The Bank of Japan borrowed $9.035 billion in new money, and the Swiss National Bank took $320 million in new loans.

The dollar swap facility was brought back last year as tensions began to rise in Europe due to the government debt crisis holding sway over that region. Over recent weeks, dollar borrowing from the Fed has been rising. The Fed brought the facility back to ensure the global financial system doesn't run short of dollar liquidity.

6--Libor Gap Hints at Debt Crisis Money-Market Freeze: Euro Credit, SF Gate

Excerpt: The gap between the highest and the lowest rates that banks say they can borrow from each other in dollars is close to a 2 ½-year high, a sign Europe's failure to end the debt crisis is straining the financial industry.

The divergence from reported fixings by the 18 banks contributing to the three-month London interbank offered rate reached 28 basis points yesterday, within two basis points of the widest since May 2009. Libor for three-month loans climbed to 0.579 percent yesterday, the most since July 2009, even as central banks injected cash into the market.

"The interbank market remains broken," said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. "We used to say during the financial crisis a few years ago that interbank rates are rates at which banks won't lend to each other, and sadly that's still the case today. The amount of peripheral government debt banks hold raises questions about counterparty risks."....

"The main problem in the interbank market is not a lack of liquidity, but a lack of trust," said Christoph Rieger, the head of fixed-income strategy at Commerzbank AG in Frankfurt. "There are no central bank tools that would force banks to extend credit lines among themselves. The euro-area sovereign crisis has deepened concern about bank balance sheets."

Six central banks, led by the Federal Reserve, agreed on Nov. 30 to make it cheaper for banks to borrow dollars in emergencies. They also created temporary programs to provide funds in any major currency. The European Central Bank started offering banks unlimited cash for three years on Dec. 22.

The ECB lent 523 banks a record 489 billion euros ($633 billion) last week under the program to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. The money was lent at the ECB's 1 percent benchmark rate.

The central bank's balance sheet soared to a record 2.73 trillion euros after it lent financial institutions more money last week to keep credit flowing during the debt crisis, it said in a statement yesterday....

Even with the ECB steps, there are few signs that banks are lending to each other.

The ECB said yesterday euro-area banks parked 452 billion euros with the Frankfurt-based central bank on Dec. 27 on an overnight basis, the most since the euro was introduced in 1999 and up from the previous record of 412 billion euros. With an overnight rate of 0.25 percent, it means banks would rather incur a loss than lend it for more elsewhere....

European leaders have held 15 summits in two years and produced five plans that so far have failed to convince investors the sovereign-debt crisis begun in 2009 will not be a risk to global financial markets. Falling prices for European sovereign debt led to the breakup of Franco-Belgian Dexia SA, once the world's largest municipal lender, and the failure of New York-based futures brokerage MF Global Holdings Ltd.

Fresh Capital

The European Banking Authority demanded this month that the region's banks raise 114.7 billion euros of fresh capital to withstand writedowns on Greek bonds and other sovereign debt.

"The intensification of the euro-area sovereign debt crisis went hand in hand with banking-sector weakness," said the BIS Quarterly Review published on Dec. 11. "While bank funding problems had manifested themselves throughout the year, policy makers and market participants increasingly turned their attention to issues of bank solvency."

7--Financial market credit tightened at year end: Fed, Reuters

Excerpt: Banks tightened the screws on lending to major financial market participants in recent months, the U.S. Federal Reserve said on Thursday, reflecting concerns about Europe's banking crisis.

The central bank's survey of senior credit officers did not mention Europe directly, but indicated a "broad but moderate tightening of credit terms applicable to important classes of counterparties over the past three months."

Large financial firms have been under pressure from worries that Europe's political deadlock may eventually lead to some type of sovereign debt default, saddling institutions with massive losses.

The Fed said tighter credit terms were especially evident for hedge funds, real estate investment trusts and non-financial corporations.

"These responses reflect an apparent continuation and intensification of developments already in evidence in the last survey in September," the report said.

Since then, Europe's crisis has engulfed financial markets in a fear of a possible repeat of the fall of 2008, when massive investment bank failures sent an already weak economy into a nose dive.

The European Central Bank's latest attempt to stem the crisis, a 489-billion-euro program of cheap three-year loans for banks, has managed to bring down interbank borrowing costs for now. But few analysts see the situation as sustainable.

"I expect (banks) to keep the money in deposits ... because they fear they can run short of liquidity and that they cannot face a bond redemption, (while) deposits are shrinking so they need higher liquidity buffers," ING rate strategist Alessandro Giansanti said.

Indeed, despite being awash with liquidity, banks still appear distrustful and prefer to deposit their money at the ECB's overnight facility rather than lend to each other.

8--(From the archives) A Short History of Bubblenomics, Mike Whitney, Counterpunch

Excerpt: The Fed can induce spending by lowering interest rates, easing credit or buying bonds, but the banks do the heavy lifting. That’s where the zillions in leverage are created via off-balance sheets operations, repo transactions and derivatives contracts. These asset-pumping operations remain largely concealed from the public, so no one really knows what’s going on. That’s why the connection between money supply and financial asset prices is so tenuous and misleading, because the banks create money that doesn’t appear in the data. That’s what off-balance sheets operations are all about. They generate unknown amounts of credit which stimulates activity, but remains invisible. The printing presses have essentially been handed over to private industry. Here’s how it all works according to Independent Strategy’s David Roche

"The reason for the exponential growth in credit, but not in broad money, was simply that banks didn’t keep their loans on their books any more ? and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.

There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks’ balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt." ("The Global Money Machine", David Roche, Wall Street Journal)

The Fed is not the main culprit in this new paradigm where banks and shadow banks stealthily add to the money supply without any oversight. The problem is the lack of regulation. There needs to be strictly enforced guidelines on the amount of leverage a bank can use and–more importantly–any financial institution that acts like a bank must be regulated like a bank. (Dodd-Frank reforms don’t fix this problem.)

9--Spain to Cut Spending, Boost Taxes, Bloomberg

Excerpt: Spanish Prime Minister Mariano Rajoy announced 14.9 billion euros ($19.3 billion) of deficit cuts, with the government’s finances in worse shape than expected and the budget shortfall exceeding European Union forecasts.

The deficit this year will reach 8 percent of gross domestic product, requiring tax increases of 6 billion euros and spending reductions of 8.9 billion euros, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid. Spain will finish the year with a budget gap twice that forecast for Italy and more than four times Germany’s shortfall.

The stepped up austerity to avoid a bailout may derail Rajoy’s aim of trimming the country’s rising debt while spurring a shrinking economy that’s being choked by Europe’s highest unemployment rate. Joblessness of 22 percent helped drive former Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party from power in the Nov. 20 elections, when Rajoy won the biggest parliamentary majority in three decades....

Higher Taxes

The government plans to raise tax on income, interest on savings and on high-value homes and maintain a freeze on civil servant wages. Pensioners will receive a 1 percent increase, a move that will cost 1.4 billion euros, and the government will also maintain a special 400-euro a month unemployment benefit, a popular measures in a country where almost one in four people is jobless.

10--The Big Lie is the gift that keeps giving, The Big Picture

Excerpt: No. 1. Big Whopper--- “The financial crisis was caused not by Wall Street but by the federal government, namely Fannie Mae (FNMA) and Freddie Mac.”

This is a convenient argument made by conservatives trying to gut regulation of Wall Street (or attack Freddie “consultant” Newt Gingrich), one that draws its force from Fannie and Freddie’s role as a piggy bank for ex-officials from both parties over the last 20 years. The two institutions performed abominably and attempted to conceal their mistakes and thwart regulators; so far, six of their former executives have been sued by the Securities and Exchange Commission.

But the abuses of Fannie and Freddie did not cause our woes. David Min of the Center for American Progress makes mincemeat of Peter Wallison, a lonely dissenter on the Financial Crisis Inquiry Commission who has loudly and fallaciously insisted that the government’s affordable housing policies lie at the root of the entire financial crisis. Min points out that bubbles in commercial real estate and consumer credit developed independent of housing, and that the crisis extended around the globe to regions and institutions with no U.S. residential housing exposure. Besides, mortgages from private lenders defaulted at higher rates than those from Fannie and Freddie, which got into the securitization racket much later and at lower levels than Wall Street, the true source of the mess. This week’s $335 million settlement in the Countrywide case, where private lenders preyed on blacks and Hispanics, is a reminder that Fannie and Freddie were hardly the only miscreants and shouldn’t be immortalized as the direct cause of the crisis.

Economics is now divided into two camps: Those who see the world as it is, and those who see the world as they want it to be.

11--Liquidity Returns To Flood The ECB Basement, WSJ

Excerpt: The European Central Bank turned the fire hose on the euro-zone banking system last week. The fire is still burning, but the liquidity has simply returned to flood the ECB’s basement — at least for the time being.

The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday, up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.

Use of the deposit facility is frequently seen as an indicator of stress in the financial system, but the latest surge probably doesn’t reflect any deterioration in the situation since last week. “This is just a mirror image of the liquidity that the ECB is pushing into the system,” said Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland in London.

Last week, banks had taken a massive €489 billion from the ECB’s first-ever three-year lending operation. In an interview with the German magazine Stern, published Wednesday, Deutsche Bundesbank President Jens Weidmann described the operation as a sort of bridging loan for banks “who will only be on a sound footing again when the sovereign debt crisis is overcome.”

Mr. Weidmann again ruled out an expansion of outright government bond purchases by the ECB to tackle the debt crisis, saying that, “Over time, financing public debts with the money printing press would burden the modest saver and the person with low income.”

12--America’s Financial Leviathan, Bradford DeLong, Project Syndicate

Excerpt: In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.

Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”

But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics. At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.

....well-functioning financial systems match large, illiquid investment projects with the relatively small pools of money contributed by individual savers who value liquidity highly. There has been one important innovation over the past two generations: businesses can now issue high-yield bonds. But, given the costs of the bankruptcy process, it has never been clear why a business would rather issue high-yield bonds (besides gaming the tax system), or why investors would rather buy them than take an equity stake.

Third, improved opportunities to borrow allow one to spend more now, when one is poor, and save more later, when one is rich. Households are certainly much more able to borrow, thanks to home-equity loans, credit-card balances, and payday loans. But what are they really buying? Many are not buying the ability to spend when they are poor and save when they are rich, but instead appear to be buying postponement of the “unpleasant financial retrenchment” talk with the other members of their household. And that is not something you want to buy.....

Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance. Lahart cites the conclusion of New York University’s Thomas Philippon that today’s US financial sector is outsized by two percentage points of GDP. And it is very possible that Philippon’s estimate of the size of the US financial sector’s hypertrophy is too small.

Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends? There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money. Are we sure that most of the growth in finance stems from a rising share of financial professionals who undertake the former rather than the latter?

13--Iraq’s tragic encounter with US imperialism, James Cogan, WSWS

Excerpt: The withdrawal of American combat troops from Iraq after nearly nine years of military occupation has been accompanied by a surge in sectarian tensions and violence that threatens to escalate into civil war. Following the explosions that ravaged Baghdad last week, there have been further attacks on government buildings in the capital and bombings and killings in the volatile cities of Fallujah, Mosul and Kirkuk.

The national unity government made up of rival sectarian- and ethnic-based factions has collapsed. Prime Minister Nouri al-Maliki, the representative of the dominant Shiite political bloc, has issued an arrest warrant against Sunni Vice President Tariq al-Hashemi, accusing him of directing sectarian terrorism. Sunni parties are boycotting the parliament and their ministers have walked out of the cabinet. They have accused Maliki of seeking to establish a dictatorship, and their leader, Iyad Allawi, has called for intervention by the US, Turkey and the Arab League.

There can be no doubt that the US State Department, the CIA and other intelligence agencies, operating from the massive American embassy in central Baghdad, are active participants in the political crisis. The Obama administration and the US military agreed to remove all combat troops, as stipulated in the Status of Forces agreement reached in 2008, only after they failed to bully the Iraqi regime into allowing thousands of troops to remain under a blanket exemption from prosecution under Iraqi law. None of the Iraqi parties could support such a demand because of massive popular hostility toward the US occupation.

Events are now beginning to spiral out of control. Hashemi has taken refuge in the autonomous Kurdish region in the north and the Kurdish establishment have rejected Maliki’s demands that they hand over the Sunni official. The Sunni leadership of Anbar province, where Fallujah is located, has joined with the majority Sunni provinces of Diyala and Salahaddin in announcing that it wants the same autonomous status as the Kurdish region.

Maliki declared Saturday that he would oppose the autonomy moves, warning that it would lead to “dividing Iraq and to rivers of blood.” Troops and militias loyal to the Shiite parties have deployed across Baghdad and are massing near other major cities such as Mosul. There is little doubt that Sunni militias are mobilising and that the Kurdish armed forces have been placed on alert.

Just two weeks ago, US President Barack Obama declared Iraq to be a country “that is self-governing, that is inclusive, and that has enormous potential.” In reality, a war fought on the most reactionary communalist lines is looming, potentially providing the pretext for some form of new US-led intervention in Iraq. The conspiracies, assassinations and bombings taking place all have the character of black operations intended to destabilise the country.

At least 40,000 American troops, backed by an array of aircraft, are currently based in Kuwait, Bahrain and elsewhere in the Middle East.

From the beginning, the US intervention in Iraq has had one primary aim: to ensure that its large oil and natural gas reserves were brought under US corporate domination and American military control. To achieve that end, the American occupation regime ruthlessly stoked sectarian and ethnic divisions to prevent the emergence of a unified movement among the Iraqi people against US imperialism.

The disbandment of the entire Iraqi Army and the illegalisation of Saddam Hussein’s Baath Party in the first weeks of the occupation were intended to disempower the largely Sunni Muslim ruling elite. Despite their close links to Iran, Shiite religious parties were elevated in place of their Sunni counterparts, providing they helped repress Iraqi Shiites who were organising to resist. The north of the country was handed over to a venal Kurdish elite as a private fiefdom in exchange for their provision of Kurdish forces to assist the US military.

At every point, sectarian violence was used to weaken the anti-occupation insurgency. The February 2006 bombing of the Shiite Askiriya shrine by unknown assailants was blamed on Sunni extremists and seized upon by the Shiite-dominated government and security forces to unleash a frenzy of killings throughout the suburbs of Baghdad. The US military stood by as thousands of Sunni men and boys were hideously tortured and their bodies dumped in the streets.....

The US occupation of the country has amounted to a conscious policy of sociocide—the destruction of the very fabric of a society. Formerly mixed suburbs have been transformed into sectarian enclaves, and the people have been traumatised by bitter memories of communal violence. The Iraqi population as a whole has been left to endure radioactive and other forms of contamination, dysfunctional water and electricity supplies, a ruined health and education system, and the loss of a large proportion of an entire generation of men. Well over one million people were killed, with millions more wounded and still more millions turned into refugees.

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