Thursday, January 5, 2012

Today's links

Three Day Pledge Drive: A lot of work goes into a blog like this. If you can help out, it would be greatly appreciated. Thanks, Mike

Today's quote: "When the financial system can no longer find outlets for the credit it creates, then it de-levers." Bill Gross, Pimco

1--Banks Must Hold Capital for Sovereign Risk, EU Lawmaker Says, Bloomberg

Excerpt: Banks should be forced to hold reserves to guard against possible losses on sovereign debt, according to a lawmaker overseeing Europe's implementation of Basel capital rules.

The region's fiscal crisis, which has involved bailouts of Greece, Portugal and Ireland has shown that a zero capital requirement for sovereign debt “no longer corresponds with economic reality,” said Othmar Karas, an Austrian member of the European Parliament, in a draft report published on the EU assembly's website.

His demand echoes international calls to toughen rules that allow lenders to apply zero risk-weightings to government bonds issued in a bank's home currency when calculating capital ratios. Lenders don't need to hold any capital against possible losses on the securities, even after the cost of insuring government bonds against default rose to a record last year.

The European approach “is not in line with the spirit” of global measures endorsed by the Basel Committee on Banking Supervision, Herve Hannoun, deputy general manager of the Bank for International Settlements, said in October. The U.S. “situation regarding the treatment of sovereign risk is also unsatisfactory,” he said. The BIS is the Basel committee's parent


2--Banks Park Funds at ECB, Bloomberg

Excerpt: Euro-area banks parked 453.2 billion euros with the European Central Bank yesterday, up from 446 billion euros the previous day. That’s the highest since the euro’s introduction in 1999...

“The European debt crisis has never really abated,” said John Plassard, director at Louis Capital Markets SA in Geneva. “Even though 2011 ended relatively well, 2012 remains at risk. States will have to find 800 billion euros in the financial markets this year, so we should have a lot of market volatility ahead of us, at least during the first half.”

3--Why Economic Growth Has Slowed in the US Over Time, angry bear

Excerpt: In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz:

By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

Most of the "big government" countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship...The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren't motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

4--Bank worries hit Europe stocks, euro down, Reuters

Excerpt: The auction kicked off a huge sovereign refinancing cycle in the euro zone, with traders worried that debt-laden countries such as Italy and Spain may have to pay unsustainably high prices to meet their needs.

The single currency slipped 0.5 percent to $1.2990, after gaining as much as 0.9 percent on Tuesday to reach its highest in a week at $1.3077 in the wake of a better-than-expected U.S. manufacturing report.

In a separate sign of stress in the euro zone banking sector, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion euros, data showed on Wednesday.

However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity.

Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans.

5--Mortgage demand fell at year-end, purchases sag, Reuters

Excerpt: Demand for loans to buy homes and refinance mortgages slid in the final week of 2011, even as mortgage rates dipped, an industry group said on Wednesday.

Applications for U.S. home mortgages fell 4.1 percent in the week ended December 30, weighed down by a 9.6 percent drop in purchase loan requests and a 2.5 percent decline in refinancing requests, seasonally adjusted data from the Mortgage Bankers Association showed.

Average 30-year conforming mortgage rates dipped to the year's low of 4.07 percent from 4.10 percent the prior week, and well below 4.82 percent at the end of 2010.

The slide to near-record-low borrowing rates has spurred more homeowners to seek refinancing, propelling that index up more than 60 percent in 2011.

But demand for loans to buy homes fell in the year, as borrowers struggled to come up with enough cash for down payments or stayed on the sidelines due to worries about unemployment. Some buyers had also leapt into the market in 2010 to take advantage of a first-time buyer tax credit....

"It's going to be another couple of years until these short sales and foreclosures are flushed out of the system, so you might see a little weakness in prices this year," Moulton added. "We're feeling a little better about 2012 than 2011, but you're always waiting for the next shoe to drop."

6--ECB Overnight Deposits Rise to New High of 453.2 Billion Euros, Bloomberg

Excerpt: The European Central Bank said overnight deposits from financial institutions rose to an all- time high.

Euro-area banks parked 453.2 billion euros ($592.4 billion) with the Frankfurt-based ECB yesterday, up from 446 billion euros the previous day. That’s the highest since the euro’s introduction in 1999.

Last month the ECB lent 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy as the sovereign debt crisis persists. It lent the money at its benchmark rate of 1 percent. Banks are depositing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it for more elsewhere.

Banks also borrowed 15 billion euros in emergency funds at the rate of 1.75 percent, up from 14.8 billion euros the previous day.

7--UPDATE 1-Banks have less appetite for ECB dollars, Reuters

Excerpt: Commercial banks took about $32 billion in a European Central Bank offer of dollars on Wednesday, with demand for three-month dollar funding halving from last month.

In the second three-month tender since the bank slashed its cost of dollar funding, 34 banks asked for $25.5 billion, down from $50.7 billion in December. the interest rate in the operation was fixed at 0.58 percent....

Banks were guaranteed to receive all the funds they requested in both operations.

The swap lines between the U.S. Federal Reserve and other major central banks are intended to ensure banks outside the United States have easy access to dollars, which banks in Europe have been having more difficulty obtaining in the market as investor concerns about the euro zone debt crisis have grown.

The Fed set up dollar swaps with the ECB and the Swiss National Bank in December 2007. The facilities are unlimited.

The total use of the lines peaked at more than $580 billion in December 2008. Demand for Fed dollar swaps was high right after their reintroduction in May 2010, with $9.2 billion scooped up on May 12, all through the ECB.

8--A Call for Action: Conditional Inflation Targetting, econbrowser

Excerpt: From an article by Menzie Chen and Jeffry Frieden in the newly released Foreign Policy:

[We need] inflation -- just enough to reduce the debt burden to more manageable levels, which probably means in the 4 to 6 percent range for several years. The Fed could accomplish this by adopting a flexible inflation target, one pegged to the rate of unemployment. Chicago Fed President Charles Evans has proposed something very similar, a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.

Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.

9--The wisdom(?) of Bill Gross, FT Alphaville

Excerpt: The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,”...

Now, the global economy’s appetite for more debt, which is already well over and above its ability to produce real assets, is sated. That means there is more debt in the world than there are real assets to back that debt. That in itself is a scary thought.

That’s why the old cycle of recession, followed by lower interest rates, an increase in new debt and recovery, is over. Debt indigestion means we can no longer rely on more debt to pull us out of a slump. That hasn’t stopped the politicians and central banks from trying though. On a global basis, the only new debt creation now is government debt. It is entirely unproductive and eats into what’s left of the wealth created by the private sector. That’s hardly conducive to good old ‘wealth creation’....

Only the actions of governments and central banks can determine which way the wealth destruction will happen. Deflation would reward the holders of ‘non-productive’ government debt, while inflation would reward the holders of tangible real assets. QE (or a lack of QE), meanwhile, could help tip the balance either way.

What’s fair to say is that without government intervention continued capital flows into “safe government securities” would lead to an inevitable giant tidal wave of deflation — just as they did during the original Great Depression.

Of course, unless money can be encouraged to flow into productive assets, it’s hard to say whether wealth creation can really ever be reinvigorated by compensatory government and central bank credit expansion moves. At least for the foreseeable future.

10--A depressingly familiar story of denial from the eurozone, Telegraph

Excerpt: Jens Weidmann, head of the Bundesbank, has been rubbing home the point in a new year's commentary for Boesen-Zeitung today. "Financing of governments in the eurozone was forbidden not only for the reason of stability. It was also forbidden to avoid the risk of spreading or socialising the debt of the single eurozone countries", he insists.

But was it forbidden for the purposes of demand management? The answer to this question is no, providing a small glimmer of hope. The ECB is indeed forbidden from buying bonds directly from goverments, but there is nothing to stop it from buying in the secondary market, or applying the same sort of quantitative easing techniques already used by the Federal Reserve in the US and the Bank of England in the UK.

The big up coming question for markets this year is at what point the ECB relents and cranks up the money printing presses. Mr Weismann doesn't say so in his article, but I'm pretty sure he would strongly oppose this type of bond buying too. His opposition goes to what has always been the heart of the problem for the eurozone – that there is no such thing as a one size fits all monetary policy.

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