Tuesday, January 17, 2012

Today's links

1--What is the government considering?,(another sweetheart deal for the investor class), WSJ

Excerpt: Government officials solicited more than 4,000 comments from the public last year on potential initiatives that would take foreclosed properties off the market and rent them out. The initiatives are likely to focus only on loans backed by federal entities Fannie Mae, Freddie Mac, and the Federal Housing Administration.

There are two different types of programs that officials are likely to consider. Under the first, the FHA could sell properties in bulk to investors who agree to rent them out. Bulk sales have been rare largely because investors tend to demand deep discounts that sellers haven’t been willing to accept.

A more likely option for Fannie and Freddie, if they move forward with any pilot programs, would be to set up pools of properties in which third-party investors would take a stake. Investors could be responsible for handling maintenance and day-to-day operation of the rental pool, with the mortgage-finance giants sharing in some of the returns.

How many homes are we talking about?

Fannie and Freddie held around 180,000 homes at the end of September, down from around 235,000 one year earlier. The FHA held around 35,000 homes at the end of November, down from 55,000 one year earlier.

The drop figures to be temporary because many loans backed by the FHA have fallen into foreclosure, but banks have been slow in taking back homes after they were caught fabricating documents in order to quickly repossess homes.

Why does the idea of renting out homes have appeal?

Officials like the idea for three reasons. The first is that a backlog of foreclosures estimated in the millions could roll onto housing markets in the coming years. The New York Fed estimates that banks and mortgage companies could take back 1.8 million properties in each of the next two years, up from 1.1 million in 2011 and 600,000 in 2010...

Why can’t the private sector do this on its own?

Certainly, private investors have been building up operations in the rent-and-hold arena, and it’s possible that these types of rental transactions could happen anyway without any government involvement.

But there are two main obstacles facing investors: financing and scale. Most foreclosure investing has been done by local investors. But these outfits have faced challenges getting financing to buy enough homes to scale up a viable rental model. Institutional investors, meanwhile, have deeper pockets but banks have largely resisted big bulk sales of homes, making it harder for them to assemble big pools of homes.

Will this program have any impact on home prices?

To do so, the program would need to be quite large, and that isn’t likely to happen for some time. Michelle Meyer, an economist at Bank of America, says the proposed programs run the risk of being too small to have much impact.

2--US prepares for war against China, WSWS

Excerpt: The Pentagon’s new strategic guidance, “Sustaining US Global Leadership: Priorities for 21st Century Defence”, released last week places China squarely at the centre of American war planning. It formalises the shift in American foreign and military policy from the Middle East to Asia that has been under way since President Obama took office....


“US economic and security interests,” the document declares, “are inextricably linked to developments in the arc extending from the Western Pacific and East Asia into the Indian Ocean and South” signifying that “we will of necessity rebalance toward the Asia Pacific region.” It calls for an expansion of the network of US military alliances and partnerships, specifically naming India as “a regional economic anchor and provider of security in the broader Indian Ocean region.”

China is the only country named as a threat to American interests, with a call for “greater clarity of its strategic intentions in order to avoid causing friction in the region.” The document declares that the US in conjunction with its allies will “protect freedom of access throughout the global commons.” Under the rubric of “freedom of navigation”, the US has already greatly heightened tensions in the South China Sea by challenging China’s maritime claims in these strategic waters.

The Pentagon’s military reorientation to Asia goes hand-in-hand with an aggressive US diplomatic offensive to undercut growing Chinese economic and political influence throughout Asia and internationally. Powerful sections of the US political and foreign policy establishment backed Obama for the presidency in 2008 out of deep concern that China had gained while the US was mired in the Bush administration’s wars in Iraq and Afghanistan.

These sentiments were voiced in an essay last November entitled “Reorienting America” by Richard Haass, President of the Council on Foreign Relations. He warned that the US had “become preoccupied with the Middle East... and had not paid adequate attention to East Asia and the Pacific, where much of the twenty first century’s history will be written.” Welcoming the “rediscovery of Asia” under Obama, Haass declared that it was “difficult to exaggerate the region’s economic importance”, adding that the US had to ensure “China is never tempted to use its growing power coercively.”

3--NY Fed seeking bidders for mortgage bonds, Reuters

Excerpt: The Federal Reserve Bank of New York will test a new strategy for getting the best price for beaten-down mortgage bonds after being approached by a potential buyer for the bonds.

Prompted by interest from the buyer, identified as Goldman Sachs Group Inc (GS.N), the New York Fed over the next week is expected to attempt to sell about $7 billion worth of securities that were acquired as part of the 2008 bailout of American International Group Inc (AIG.N).

The securities, which are backed by subprime home loans, are in a portfolio called Maiden Lane II that the NY Fed has sought to sell over time.

The effort hasn't always gone smoothly. In March, after rejecting a $15.7 billion offer from AIG for the bonds, the New York Fed said it would pursue auctions as well as sales prompted by approaches from interested buyers, known as reverse inquiries.

By May, however, disappointing economic news and a market flooded with purchases from the Fed, contributed to falling prices of mortgage bonds. The bank then said it would slow the sales of beaten-down mortgage securities

4--Fed Flummoxes Traders in The Mortgage Market, WSJ

Excerpt: Thursday afternoon, the New York Fed tried to keep hush hush Goldman Sachs Group Inc.’s offer to buy a multibillion dollar parcel of risky mortgage bonds from its Maiden Lane II portfolio. But when word got out that the Fed had canvassed a few other dealers for competing bids, the news traveled fast that the U.S. central bank was back in the market with some of the toxic mortgage bonds it had acquired from the 2008 rescue of American International Group Inc.

The AIG portfolio sale was important to traders because they learn from mistakes. The last time the Fed tried to unload some of its crisis-era holdings, auctions it held last year wound up driving down prices of mortgage bonds. The Fed backed off and halted the auctions. Traders didn’t want to be caught off-guard by a downtick in the prices of the securities they have for sale caused by the Fed’s unloading.

Dow Jones Newswires reporter Al Yoon broke the news that the Fed might resume selling Maiden Lane II’s holdings in a story published at 2:30 p.m., saying the plan was to sell about $7 billion in subprime and other mortgage bonds

Traders blasted Bloomberg messages and emails to each other wondering what was going on, how the Fed’s sudden sale would impact the market, and sending cut-and-pasted copies of the Dow Jones story to each other, said traders.

But it was also bewildering for another reason and it caused trading to briefly grind to a halt.

5--Mind over Market, Michael Spence, Project Syndicate

Excerpt: In the 66 years since World War II ended, virtually all centrally planned economies have disappeared, largely as a result of inefficiency and low growth. Nowadays, markets, price signals, decentralization, incentives, and return-driven investment characterize resource allocation almost everywhere.

This is not because markets are morally superior... Markets are tools that, relative to the alternatives, happen to have great strengths with respect to incentives, efficiency, and innovation. But they are not perfect; they underperform in the presence of externalities (the un-priced consequences – for example, air pollution – of individual actions), informational gaps and asymmetries, and coordination problems when there are multiple equilibria, some superior to others.

But markets have more fundamental weaknesses. Or, rather, most societies have important economic and social objectives that markets and competition are not designed to achieve. In today’s rapidly globalizing world, the most important of these objectives – expressed in various ways through the political and policymaking process in a wide range of countries – are stability, distributional equity, and sustainability. ... Stability, equity, and sustainability challenges have become crucially important, and the role of the state in relation to markets may need re-thinking as a result. ...

6--Some Good Economic News, but Will It Last?, New York Times

Excerpt: Right now, it looks as though the United States economy will continue to recover at a moderate pace in 2012. But there are considerable downside risks that could cause growth to falter.

The central problem remains inadequate aggregate demand – both at home and around the world. The shortfall in demand is reflected in unutilized resources, notably unemployed and underemployed workers and idle plant and machinery....

In the United States, high levels of unemployment, weak wage gains and a steep decline in home values continue to constrain consumption, which accounts for about 70 percent of aggregate demand. Real disposable personal income actually decreased in the second and third quarters of 2011 and was essentially unchanged for the year.

The uptick in consumer spending in the last months of 2011 was offset by a worrying drop in the household saving rate, which fell to 3.5 percent, down from an average of 5.3 percent in 2010 and less than half its long-term historical average of 8 percent.

A sustained increase in household saving is necessary to make a significant and permanent dent in household debt, which still hovers at near-record levels relative to household incomes.

But instead of saving more, households borrowed more at the end of 2011, and consumer debt registered its largest increase in percentage terms since October 2001. This trend is neither healthy nor sustainable....

According to the Hamilton Project, the United States still has a “jobs gap” of 12.1 million jobs, and even with monthly job growth at the December 2011 rate of 200,000 jobs a month, the gap will not close until 2024.

Corporate profits are at an historic high as a share of national income, and business investment in plants and equipment has been strong, fueled in large measure by robust demand in emerging economies. But growth in these economies is also poised to slow in 2012 as recession in Europe and lower commodity prices eat into their exports....

At this point, it is not even certain that the payroll tax cut and unemployment benefits will be extended through the rest of this year. What is certain is that we will hear a lot about job creation from Republican Congressional and presidential candidates but will see little action by a Congress mired in gridlock.

The danger in 2012 is not too much fiscal stimulus, but too much fiscal austerity. The same danger is stalking Europe and could lead to a sovereign default by a euro-zone country and the breakup of the euro.

7--S&P downgrades put EFSF at risk, Felix Salmon, Reuters

Excerpt: S&P’s actions are going to have a significant and far from positive effect — and that’s the European Financial Stability Facility, or EFSF. The way that the EFSF is structured, its credit rating is particularly reliant on the ratings of the euro zone’s biggest sovereigns. Here’s how S&P put it back on December 6:

Based on EFSF’s current structure, were we to lower one or more of the current ’AAA’ ratings on EFSF’s guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated ‘AAA’.

What this means is that Europe now faces a choice. On the one hand, it can restructure the EFSF so that it retains its triple-A credit rating. That would almost certainly involve shrinking the EFSF in size. Or, it can be sanguine about the EFSF downgrade and just let it happen. But that’s not a pleasant outcome either, given that everybody’s bright idea, when it comes to Europe’s sovereign bailouts, is to leverage the EFSF to some multiple of its present size. Leveraging a triple-A EFSF is hard enough; leveraging a double-A EFSF is pretty much impossible.

My guess is that the EFSF is going to get downgraded very soon — quite possibly on Monday. There’s actually not much point in Europe restructuring it so that it retains its triple-A: the political cost would be huge, and the benefit would be entirely hypothetical. (In theory, the financial markets are happy to lever up triple-A-rated assets. In practice, if those assets are European sovereign debt, not so much.)

Some small part of me thinks it’s a jolly good thing that the world is losing its store of triple-A assets. They’re dangerous things, precisely because we’re given to understand that they’re risk-free. But in this particular context, there are very few ways that today’s news can help Europe, and there are many, many ways that it can hurt. Not least when it comes to the amount of capital that Europe’s banks need to squirrel away against their stocks of sovereign debt.

8--Why Oil Prices Are About to Collapse, The Oil Drum via information clearinghouse

Excerpt: Current Position

If you believe the investment banks – who all have oil funds to sell to the credulous – Far Eastern demand is holding up, supplies are tight, and stocks are low, so prices are set to rise to maybe $120 or above in 2012, even in the absence of fisticuffs involving Iran.

I take a different view. I see real demand – as opposed to financial demand and stock-piling, such as in the copper market – declining in 2012 as the financial crisis continues at best, and deepens at worst, particularly in the EU. Stocks are low because bank financing of stock is disappearing as banks retrench, and it makes no sense for traders to hold stocks if forward prices are lower than today’s price.

As for supplies, US crude oil production is probably higher, and consumption lower, than widely appreciated. Elsewhere, there is plenty of oil available now that much of the Dark Inventory has been liquidated, and this liquidation was probably why in November 2011 we saw the highest Saudi monthly deliveries in 30 years.

Finally, we see North Sea oil being shipped – for the first time since 2008 – half way around the world to find Far East buyers. We also see Petroplus, a major independent Swiss refiner, crippled by inflated crude oil prices, and shutting down three refineries because demand for its products has disappeared, and it can no longer finance crude oil purchases now that banks have pulled its credit lines.

In my world, refineries closed due to reduced demand for their products imply a reduction in demand for crude oil: but not, apparently, on the Planet Hype of investment banks with funds to sell.

History does not repeat itself, but it does rhyme, and my forecast is that the crude oil price will fall dramatically during the first half of 2012, possibly as low as $45 to $55 per barrel.

Then What?

As the price collapses we will see producer nations generally and OPEC in particular once again going into panic mode, and genuinely cutting production. We will also see the next great regulatory scandal where a legion of risk-averse retail investors who have lost most or all of their investment will not be pleased to hear that they were warned on Page 5, paragraph (b); clause (iv) of their customer agreement that markets could go down as well as up.

At this point, I hope and expect that consumer and producer nations might finally get their heads together and agree that whereas the former seeks a stable low price, and the latter a stable high price, they actually have an interest – even if intermediaries do not – in agreeing a formula for a stable fair price....

Enter Iran

In my view, there is little or no chance of military action against Iran, and having been to Iran five times in recent years, and as recently as two months ago, there is much I could write on this subject.

9--S&P On Europe, Paul Krugman, NY Times

Excerpt: S&P’s downgrade of a bunch of European sovereigns was no surprise. What was somewhat surprising — and which went unmentioned in almost all the news stories I’ve read — was why S&P has gotten so pessimistic. From their FAQs:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

And today we read about the response:

German chancellor Angela Merkel has called on eurozone governments speedily to implement tough new fiscal rules after Standard & Poor’s downgraded the credit ratings of France and Austria and seven other second-tier sovereigns.

Still barreling down the road to nowhere

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