Monday, January 16, 2012

Today's links

1--Rising Share of Americans See Conflict Between Rich and Poor, Pew

Excerpt: The Occupy Wall Street movement no longer occupies Wall Street, but the issue of class conflict has captured a growing share of the national consciousness. A new Pew Research Center survey of 2,048 adults finds that about two-thirds of the public (66%) believes there are "very strong" or "strong" conflicts between the rich and the poor -- an increase of 19 percentage points since 2009.

Not only have perceptions of class conflict grown more prevalent; so, too, has the belief that these disputes are intense. According to the new survey, three-in-ten Americans (30%) say there are "very strong conflicts" between poor people and rich people. That is double the proportion that offered a similar view in July 2009 and the largest share expressing this opinion since the question was first asked in 1987.

As a result, in the public's evaluations of divisions within American society, conflicts between rich and poor now rank ahead of three other potential sources of group tension -- between immigrants and the native born; between blacks and whites; and between young and old. Back in 2009, more survey respondents said there were strong conflicts between immigrants and the native born than said the same about the rich and the poor.

2--MONEY MARKETS-Bumper cash eases strains but bank trust elusive, Reuters

Excerpt: Commercial banks deposited a record high of 490 billion euros at the ECB overnight facility, figures showed on Friday, effectively cancelling out the near half a trillion euros pumped into the system by the central bank's 3-year loans last month.

With total ECB lending at 664 billion euros, banks are now returning over 70 percent of these funds to the ECB, compared with around a third after the collapse of Lehman Brothers back in late 2008.

Overnight deposits traditionally rise towards the end of the ECB's month-long reserves maintenance period, which this time ends on Jan. 17. As banks have typically already hit their ECB reserves target at the end of the period, they have fewer options to juggle their funding.

Deposits may rise even further from the beginning of the next reserve maintenance period on Jan. 18 when the ECB will cut the amount of reserves banks are required to park with it.

The move, which will reduce the reserves ratio from 2 to 1 percent, is one of a swathe of support measures the ECB announced last month and one it calculates will free up around 100 billion euros for banks.

But interbank lending remains in the doldrums, with most activity confined to top-tier banks with signs that the debt crisis is far from being resolved keeping most market participants cautious.

We're off to a positive start with the liquidity but we're not seeing any pickup of activity in unsecured lending and it's going to take a lot of time before we see any significant lending activity," a money market trader said.

Highlighting the dislocation still plaguing markets, a member of Germany's Bundesbank was quoted as saying the risk of a credit freeze in debt-strained euro zone countries and some places in eastern Europe was still markedly high. Andreas Dombret also said German banks were "somewhat reluctant" to grant new loans.

His views closely mirrored those of ECB President Mario Draghi who said on Thursday that while lending data suggested there was no euro zone-wide credit drought, there was clear evidence it was drying up in parts of the bloc.

Draghi added the central bank's three-year loans had helped avoid a more dramatic credit crunch and improved banks' funding conditions.

3--How the Wall Street Journal Misleads About Federal Jobs, WSJ

Excerpt: The Journal endlessly tries to portray the "growth of government" as a social welfare system run amok. The editorial implies that President Obama is repeating LBJ's Great Society by building up giant welfare and regulatory programs reflected in the "boom" of federal employment. But where did this so-called "boom" (actually a tiny boomlet) actually appear? In Great Society programs? In entitlements?

No, the increase in employment is mainly in national-security-related employment: the military, homeland security, and justice (including prisons, FBI, drug enforcement, and the like). Welfare and entitlements programs little to do with it. If we parse the increase of 225,000 federal jobs between 2008 and 2011, three-fourths came in the Defense Department (+84,000), Homeland Security (+28,000), Justice (+13,000), and Veteran's Affairs (+45,000).

Of course the Journal's entire argument is ... a red herring, since the increase of 225,000 jobs represents all of 0.0017 of U.S. non-farm employment of 131 million workers. The entire federal civilian workforce is a mere 1.6 percent of the total non-farm employment. The Journal is taking tiny fluctuations and making them into a federal case, so to speak, for its propagandistic purposes.

The actual fact of relevance is that the federal government has been declining as a share of national non-farm employment, from 2.3 percent in 1981 to 1.6 percent in 2011. ...

The big lie of our time is that the federal government is expanding out of control. ... For government services that count for the 99 percent, the federal government is shrinking, alas, no matter which phony figures the Wall Street Journal throws our way.

4--'Iran oil ban targets US econ. rivals', Press TV

Excerpt: Iran's Foreign Ministry Spokesman Ramin Mehmanparast says US and European Union sanctions against the Islamic Republic's energy sector target Washington's economic rivals in Asia.

“One of their (US and EU) ulterior motives [in imposing oil sanctions] is defeating their Asian economic rivals but I believe that Asian states are too smart to jeopardize their national interests because of US political pressure,” Mehmanparast said on Sunday.

He went on to add that major Asian economies like China, Japan and India are in need of “sustainable and lasting” energy resources and the US wants to destabilize the energy market by imposing sanctions against Iran's oil industry in order to inhibit the economic growth of its rivals.

“We are not the least but concerned about US sanctions because there are enough customers for Iranian crude oil and there are no problems in this regard,” Mehmanparast said.

On December 31, US President Barack Obama signed into law fresh economic sanctions against Iran's Central Bank in an apparent bid to punish foreign companies and banks that do business with the Iranian financial institution.

The bill requires foreign financial firms to make a choice between doing business with Iran's Central Bank and oil sector or with the US financial sector. The legislation will not take effect for six months in a bid to provide oil markets with time to adjust.

Iranian officials have threatened that if an oil embargo is actually imposed on the country, Iran will respond by closing the strategic Strait of Hormuz, making it impossible for any oil to pass through the Persian Gulf.

5--Fed's Bullard: Best To Leave Economic Stimulus To Fed, WSJ

(Editor--More proof that the Fed wants total control over the US economy)

Excerpt: The Federal Reserve's ability to generate stimulus even when interest rates are at 0% negates the need for the government to step in an provide additional stimulus to the economy, a top central banker said Friday.

Federal Reserve Bank of St. Louis President James Bullard argued in a paper he was to present that his observation was mostly theoretical in nature. He declined to offer an evaluation of the spending and taxation decisions made by political leaders since the start of the financial crisis.

Bullard instead argued the crisis and resulting recession has shown the Fed can still offer plenty of stimulus on its own even when it can't cut its traditional policy tool, the overnight fed funds rate, any further. He was referring to the various balance sheet actions undertaken by the central bank, which have bought Treasury and mortgage bonds in a bid to push up overall economic activity.

Because the central bank can still affect the economy, theory suggests the government can stand aside and leave the act of stabilizing the economy to the central bank. The experience of recent years shows "the Fed was not out of bullets.... We've been able to react fairly effectively" over the course of the last three years, Bullard told reporters in a conference call.

The paper he was presenting was called "Death of a Theory." Bullard, who will be a nonvoting member of the Federal Open Market Committee for 2012, made no forward-looking comments about monetary policy, although he did say central bank policy has been "appropriate" over the last three years. He also warned the very low borrowing rates currently enjoyed by the Treasury Department could quickly end, suggesting an additional aspect of danger to the U.S.'s high borrowing levels.

"The typical assumption is that governments can borrow unlimited amounts on international markets," Bullard said, with low borrowing rates serving as "an indication that more debt can be taken on safely." He warned "the U.S. has low borrowing rates today, but when a crisis occurs, rates will rise rapidly.

Bullard argued his view on what part of the government is the best source of economic stabilization represents a return to the consensus that existed before the financial crisis. Then, the official said, the conventional wisdom held fiscal stimulus actions, be they in the form of stimulus spending or special tax cuts, would be too late or ineffective due to the nature of the political process.

Bullard said that consensus was tested by events that have happened since 2008, which included unprecedented central bank action and huge amounts of fiscal stimulus spending.

In materials supplementing his paper, Bullard said "the turn toward fiscal approaches to stabilization policy has run its course."

"Stabilization policy should be left to the monetary authority, which can operate effectively even at the zero lower bound," the official said, adding "Unconventional monetary stabilization policy has been quite effective over the last three years, making fiscal action redundant."

When it comes to government spending, Bullard said theory suggests "tax and spending policy should be set for the medium and longer term."

Bullard's low opinion of government stimulus is not new. He noted in remarks he gave in St. Louis in November that when it comes to Keynesian economic thought--it holds government deficit spending can offset a drop in private activity and restart growth--"we are witnessing the death of a theory." It prompted him to say "I love Hayek," in a nod to Friedrich Hayek, who saw government as a problem and not a solution when it comes to the economy.

6--(from the archives) House Prices and Current Account Deficits, The Streetlight blog

Excerpt: ...is there a systematic relationship between current account deficits and booms in housing prices, and if so, why?...

looking across countries there's clearly a significant correlation between the house price appreciation and current account deficits. And looking across time within a single country, the relationship is also easy to see -- for example, the biggest boom years in the US housing market (2002-06) coincided perfectly with the largest current account deficits in modern US history. Many European countries experienced the same coincidence in timing.

So if we believe that there is indeed a causal relationship between house price appreciation and current account deficits, what's the explanation? Bergin mentions a couple of possibilities:

1. Rising house prices make consumers wealthier, so they spend more, which causes an increase in imports.

2. Rising house prices give consumers more collateral against which to borrow, easing credit constraints and allowing more consumption, which causes an increase in imports.

A third possibility, discussed in a paper by Pedro Gete, is this:

3. Rising house prices cause a reallocation of an economy's productive resources away from manufacturing and into construction. The country must therefore source more manufactured goods from elsewhere, leading to an increase in imports.

All of these mechanisms are probably at least part of the story. But notice that these explanations all assign the role of cause to the house price boom, and leave the widening current account deficit as an effect. But in some cases at least, it is entirely possible that the causality could go in the opposite direction.

When a country experiences a surge in capital inflows -- and yes, I'm thinking particularly about the periphery eurozone countries during the years after euro adoption -- that capital flow itself may have a substantial impact on house prices, for a couple of reasons:

4. Capital inflows reduce interest rates, which has the effect of driving up the value of long-lived assets like houses.

5. Capital inflows require offsetting current account deficits, which imply a real exchange rate appreciation. With fixed exchange rates (e.g. within the eurozone) this will typically happen through a rise in price levels in the recipients of the capital inflows, and such price increases will disproportionately affect non-traded goods like real estate.

This is certainly not an exhaustive list; I think that this is an important area for additional research, both to explore other possible mechanisms as well as to better understand the relative importance of each. Just as importantly, better insight into how capital flows can affect asset prices will be crucial to understanding how policies that affect capital flows might impact house prices, or might even be used to dampen real estate bubbles. And as a bonus, this line of research will also help shed crucial light on how the flow of capital from the core to the periphery in the eurozone, by contributing to real estate booms in the periphery countries, may have done much more to sow the seeds for the eurozone crisis than commonly believed.
7--The Inexplicable American Consumer Takes A Breath, zero hedge

Excerpt: Consumer confidence is an ugly story. The Conference Board Index peaked at around 140 during the period of 1999 to 2001. Back then, it was fun being a consumer. Everyone had jobs, money markets actually made money, most yields were higher than inflation, stocks were shooting up, and even when they were crashing, everyone knew they’d reverse soon and make new highs. Then consumers discovered reality. Confidence began to unravel with sharp drops from 2001 to 2003, followed by mild upswings from 2003 to 2007, and a collapse by early 2009, when it dipped into the 20s. Since then, it has been rising, reaching the 70s in early 2011. But over the summer, it collapsed again to 44.5.

August was a horrid month for confidence, and yet, the inexplicable American consumer pulled out a stack of credit cards and went shopping ... though real income (adjusted for inflation) continued its morose decade-long decline—that it parallels the decline in consumer confidence over time is probably not a coincidence. The shopping spree lasted through Thanksgiving.

In December, plot twist. The trend reversed. Though consumer confidence shot up, the toughest creature out there took a deep breath. Retails sales ex-autos declined from November by 0.2%. Sales of electronics dropped by 3.9%, online sales edged down 0.4%, and sales in malls were down 0.8%. Including autos, which had a good month, sales rose only 0.1%. Out the window are the projections for a strong end of the holiday season. And it could be the beginning of another downdraft.

Gallup sheds some light on this from a different angle. With a poll of open-ended questions, it tried to determine what worried Americans most about the national economy. Top three: “Jobs/unemployment” 26%, “National debt/Federal budget deficit” 16%, and “Continuing economic decline/Economic instability” 10%.

Jobs, still. Despite ceaseless rhetoric from the White House about the millions of jobs that it had created somewhere, the job market has improved only slightly. The BLS’s Employment Population ratio, which measures the percentage of people age 16 and older who have jobs, is the least corruptible employment number the government makes available. At 58.5%, it's only a fraction above the 58.1% from August, which was the lowest reading since 1983, and it’s far below its peak of 64.7% in April 2000.

8--Chart of the Day: U.S. Gasoline Consumption Tanks in 2011, credit writedowns

Excerpt: Here's a Chart of the Day: U.S. Gasoline Consumption Tanks in 2011

(see chart)

9--Wolf Richter: Greece – Disagreement Everywhere, Rift in the Troika, naked capitalism

Excerpt: ...now the Troika itself is in disarray. It surfaced today at an IMF press briefing in Washington: the IMF no longer supports austerity as a guiding principle. Athens News quoted a senior IMF source, who was speaking on condition of anonymity. Frustration was practically palpable:

Horizontal austerity measures are constantly being adopted that are leading nowhere, whilst further wage and pension cuts are unjustified because the only way to improve competitiveness is through growth-creating market liberalization, the opening of closed professions, and productive investments.

The three Troika inspectors—Poul Thomsen from the IMF, Mathias Morse from the EU, and Klaus Mazouch from the ECB—are supposed to head to Greece next week to inspect its books; the budget deficit is once again higher than the revised limit that Greece had vowed to abide by. And they’re supposed to negotiate additional “structural reforms.” But there probably won’t be three inspectors, according to senior IMF sources. Missing: Poul Thomsen. The IMF has had enough....

Lagarde’s demand for a larger haircut smacked into an onslaught of leaks from the bond-swap negotiations between the government and private sector bond holders. First, there were rumors that the banks had largely agreed on a deal. Then there were rumors that hedge funds that had acquired some of these bonds at a discount were refusing to go along with anything. They were betting that they could profit from a default because it would trigger CDS payouts. And if the majority agreed to the haircut, they would also profit because Greece would eventually redeem the bonds.

Now, there are rumors that the government wants to compel these hedge funds to join the bailout majority. Tool: retroactive “collective-action clauses”—if a majority of bondholders agrees to the deal, the recalcitrant minority could be forced to go along.

“Frankly, a disaster,” is how David Riley, head of global sovereign ratings at Fitch, described the negotiations.

Mid March, Greece will either default or receive the next bailout tranche. Its economy is in shambles, its society in turmoil, and its finances ruined.

10--Exclusive: Angelides to lead distressed mortgage firm, Reuters

Excerpt: Phil Angelides, formerly the chairman of a federal commission who led investigations into why the financial markets collapsed, is heading an investment group that hopes to "do a good thing" for America while turning a profit from the wreckage of the housing market.

The startup company, of which Angelides is executive chairman, seeks to raise money from investors to purchase troubled mortgages from banks and other financial institutions in order to help keep homeowners from being foreclosed upon, according to a January 4 letter reviewed by Reuters.

The company, Mortgage Resolution Partners, claims its strategy of using "legal and political leverage" to acquire the loans could generate a 20 percent annual return for investors. The company intends to purchase mortgages at a steep discount and re-work them to enable the homeowners to continue making payments, with the firm collecting the proceeds....

We just might do a good thing for America, and along the way get a great return on investment," says the letter to prospective investors. "If our hopes do not pan out, the amount wagered should be a deductible loss."

In the letter, the mortgage company refers to its political connections as its "secret formula."

Angelides, a former California state treasurer, Democratic politician and land developer, was head of the Financial Crisis Inquiry Commission until last February.

Planning for the Mortgage Resolution Partners began last summer, less than five months after the Commission wrapped up its work in Washington, D.C. In January 2011, the Commission issued a 662-page report that highlighted Wall Street's role in the collapse of the U.S. housing market...

His move into housing comes at a time when hedge funds, private equity firms and other deep-pocketed investors are looking to scoop up foreclosed homes and earn money by renting them out. The Federal Housing Finance Agency, which regulated Fannie Mae and Freddie Mac, recently received proposals from hundreds of investment groups interested in acquiring and renting out single-family homes federal agencies have foreclosed on.

"The big question is, 'How can he possibly jump to the front of the line when everybody's been jockeying for this and to get to this feeding trough. Perhaps because he knows where the front of the line is?" Laus Abdo, executive director at TriArchic Advisors, a Las Vegas real estate advisory firm which has been focusing on rentals of single-family homes acquired through foreclosure.

Mortgage Resolution Partners is starting off small, aiming to raise about $6 million to study the feasibility of its plan, which mainly focus on acquiring home loans in distressed communities in California.

Most of the group's founding members have deep ties to California and have either political or finance backgrounds. The letter lists former San Francisco Mayor Willie Brown Jr. and Putnam Lovell Securities founder Donald Putnam as early backers of the company....

The idea of investment groups buying distressed mortgages and writing down the principal and attempting to make money by keeping homeowners current on their new mortgages isn't totally new. A handful of other investment funds are trying that, including Selene Residential Mortgage Opportunity Fund, founded by mortgage-backed securities pioneer Lewis Ranieri.

But the more common approach is for investors to raise money to buy foreclosed homes and rent them out.

Lenzner, the spokeswoman for Mortgage Resolution Partners, said since the group has just been launched "it's premature to determine" the firm's final approach to the mortgage problem because it is "still in the research and development stage."

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