Wednesday, February 1, 2012

Today's links

Definition of 'Zombie Bank'

A bank or financial institution with negative net worth. Although zombie banks typically have a net worth below zero, they continue to operate as a result of government backings or bailouts that allow these banks to meet debt obligations and avoid bankruptcy. Zombie banks often have a large amount of nonperforming assets on their balance sheets which make future earnings very unpredictable. --Source: Investopedia

1--Dead Market Exhibit A: January Volume, zero hedge

Excerpt: Presented with little comment except to say that the total lack of volume (and massive concentration of what volume there is at the close) is hardly reflective of a market that is anything other than broken and dying. Last January (2011) the average number of stocks traded on the NYSE per day was 891mm shares vs 661mm for this January (a 26% drop YoY!) and this is down an incredible 59% from January 2008.

2--Consumer Confidence Unexpectedly Declines, WSJ

Excerpt: U.S. consumer confidence in January gave back some of the huge gains posted in the previous two months, according to a report released Tuesday. Views on labor markets darkened.

The Conference Board, a private research group, said its index of consumer confidence retreated to 61.1 this month from a revised 64.8 in December, first reported as 64.5. The January index was far less than the 68.0 expected by economists surveyed by Dow Jones Newswires.

The fallback was concentrated in consumers’ view of the current economy. The present situation index, a gauge of consumers’ assessment of current economic conditions, dropped to 38.4 in January from a revised 46.5, originally reported as 46.7.

3--Here we go again: Subprime Debt Insured by FHA Climbs in Bet on Housing Recovery,

Excerpt: Subprime Debt Insured by FHA Climbs in Bet on Housing Recovery: Mortgages

By Kathleen M. Howley – Jan 26, 2012 In Honolulu, on the southern coast of the island of Oahu, there’s a four-bedroom home priced at $785,000 that has views of the sun setting over the Pacific Ocean. The beaches of Waikiki are 15 minutes away.

Starting this month, the property is available to buyers with a subprime credit score, limited cash reserves and a 3.5 percent down payment using a loan backed by the Federal Housing Administration. Without the agency, a buyer would need a 20 percent down payment and an unblemished financial history for a jumbo mortgage.

The FHA is betting housing can recover enough to expand financing and earn bigger fees to revive its record-low capital levels. The agency increased the size of mortgages it’s willing to insure to as high as $793,750 in Hawaii and $729,750 in the costly real estate markets of states including California, Florida, and Virginia. In his State of the Union address on Jan. 24, President Barack Obama proposed a new refinancing program that may expand FHA’s responsibilities, and risks, even further...

Refinancing Borrowers

The initiative would apply to all borrowers, whether or not their loans are currently government-backed, with details still to be worked out, according to senior administration officials, who asked not to be named. Neither Obama nor the officials specifically said FHA would insure the private mortgages that refinance, though that was a conclusion drawn by analysts including Mahesh Swaminathan of Credit Suisse Group AG in New York.

“Our preliminary interpretation is that the program is aimed at refinancing borrowers with underwater private label mortgages into FHA loans,” he said in a note to clients yesterday.

...“The FHA is leveraged to the hilt, and it has over $1 trillion of loan guarantees outstanding,” Edward Pinto said. AEI is a Washington think tank that supports limiting the role of government....

The agency in 2010 began mandating credit scores of at least 580 for borrowers who use its minimum down payment of 3.5 percent. Home buyers rated below that level, down to 500, have to put 10 percent down. Credit scores lower than 640 are considered subprime, according to the Federal Reserve.

Basically, the role of the subprime lender was replaced by FHA. Most of the subprime lending was the result of Federal government’s “Making Homes Affordable Program”. This program push banks making risky loans that were purchased by Fannie and Freddie. The market place couldn’t support a program like this, so the American tax payers had to bailout the banks, the GSE’s, and AIG.....

Neither Obama nor the officials specifically said FHA would insure the private mortgages that refinance, though that was a conclusion drawn by analysts including Mahesh Swaminathan of Credit Suisse Group AG in New York.

“Our preliminary interpretation is that the program is aimed at refinancing borrowers with underwater private label mortgages into FHA loans,” he said in a note to clients yesterday.

4--Commentary: Three female regulators' warnings about financial crisis were ignored, McClatchy

Excerpt: More people in positions of power — government regulators, especially — should have foreseen the subprime financial crisis coming.

They could have saved us from this mess.

But wait …

Three regulators did indeed ring warning bells — at the right time, in the right places, and loud enough for other banking and financial system overseers.

All three were women: Brooksley Born, Sheila Bair and Susan Bies.

All three were ignored.

5----"Should The U.S. Take A Harder Stance On China's Currency?", economist's view

Excerpt: Joe Gagnon says the "best way to discourage currency manipulation is to tax it heavily":

Should The U.S. Take A Harder Stance On China's Currency?, by Joe Gagnon, Planet Money:

...Ben Bernanke recently said that Chinese currency manipulation "is blocking what might be a more normal recovery process." In fact, the problem goes beyond China to include many other emerging economies and even a few advanced economies. ... The evidence suggests that currency manipulators jointly have increased their trade balances by about $1 trillion relative to where they would have been in the absence of manipulation. Europe and the United States have suffered the corresponding decline in trade balances. ...

Based on estimates of the International Monetary Fund, the $1 trillion boost to European and US net exports from the ending of currency manipulation would return these economies to nearly full employment.

The best way to discourage currency manipulation is to tax it heavily. The taxes should apply to all purchases of European and US assets, including bank deposits, by governments that engage in currency manipulation. Unlike trade sanctions, such taxation is allowed under international law, and it also does not cause the economic distortions that trade sanctions cause. As I outlined recently with my colleague Gary Hufbauer, anti-money-laundering procedures now in place can prevent currency manipulators from hiding their investments through third parties.

One consequence of a reduction in currency manipulation would be a sharp drop in the values of the dollar and the euro in terms of the currencies of the manipulators. It is this exchange rate adjustment that would boost US and European exports, thereby generating jobs. ...

6---You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month, Mish

Excerpt: The Financial Times reports Banks set to double crisis loans from ECB

European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze.

Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29.

“Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.”

Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.

7--Jittery Consumers Equal Bigger Savers, WSJ

Excerpt: December was one of the driest on record in the U.S., but consumers were focused on rainy days.

Personal income rose a healthy 0.5% in December, and just about all of it was stashed in rainy-day funds. The saving rate — personal savings as a% of aftertax income — jumped to 4.0% from 3.5%. According to economists at Credit Suisse, the half-point increase was the biggest gain since April 2010.

An increase in savings had been expected, and in the long run is seen as good for the economy. From September until November, consumers financed their purchases at the expense of savings. Economists had warned newly frugal consumers would return to increasing their precautionary savings, even if the result was a slowdown in current spending.

Indeed, consumer spending was virtually flat in December, capping off a lackluster fourth quarter. As a result, spending is starting the first quarter at a low level compared to its fourth-quarter average.

The need to save reflects the jitters still evident in the household sector. Consumer fundamentals have improved — but the improvement is relative: Economic sentiment and finances of families are still worse than they were before the global financial collapse and recession.

8--Number of the Week: Dismal New Home Sales in 2011, WSJ

Excerpt: 2.5: The number of new single-family homes sold per 1,000 households.

New home sales in 2011 hit their lowest level on record, but it’s difficult to express just how bad that is

Just 302,000 new single-family homes were sold last year, according to Commerce Department data released on Thursday. That was the smallest number of new houses sold going back to 1963 when data were first collected.

Adjusting for population the figure looks even worse. There were about two and a half new homes sold for every 1,000 households in the U.S. last year. Prior to 2008 that number had fallen below five only once — in 1982. During the boom in 2005, it was above 11 new homes sold for every 1,000 households.

The numbers are so low that the Commerce Department can’t even say with confidence whether sales rose or fell on a month-to-month basis. The government estimates that sales were down 2.2% in December from November, but they say the actual figure could be anywhere from an 11% increase to a 15.4% drop. Without seasonal adjustments, Commerce estimates that just 21,000 new homes were sold in the entire country last month.

9--A Competitive Dollar: The Missing Link in President Obama's Manufacturing Agenda, Truthout

Excerpt: President Obama failed to commit himself to restoring the competitiveness of the dollar as part of his agenda for bringing back manufacturing jobs. The value of the dollar really has to be front and central in any effort to restore US competitiveness since it is by far the most important factor determining the relative cost of US goods compared with goods produced elsewhere.

If the dollar is 20 percent above its proper value, then it is equivalent to putting a 20 percent tariff on all of our exports. If the price of US made goods are 20 percent higher for people living in other countries because of an overvalued dollar, we are not going to be able to export very much.

The opposite is true with imports. The overvalued dollar is equivalent to giving a 20 percent subsidy to people who import goods from other countries. This places US-made products at an enormous disadvantage competing with imports. This explains the flood of imports coming into the country over the last 15 years....

The idea of the dollar falling in response to a trade deficit is actually fairly basic economics. In a system of floating exchange rates, countries with large trade deficits, like the United States, are supposed to see their currency fall, which brings trade back into balance. The lower-valued dollar has little effect on the price of most goods and services people in the United States consume. It just raises the price of imports, which is necessary if we are not going to keep borrowing money to pay for the fact that we consume more imports than we export.

The trade deficit is not leading to a fall in the dollar now because the central banks in many countries (most importantly China) are buying up large amounts of dollars precisely to keep the dollar from declining and eliminating their trade surpluses and our trade deficit. President Obama must persuade these countries to change their practice or take steps to force the dollar down. If he doesn't, then he is largely wasting our time with his "built to last" agenda.

Balanced trade would have a huge impact on US labor markets. It would lead to more than five million new jobs in manufacturing. If we had balanced trade, as opposed to a $580 billion trade deficit (4 percent of gross domestic product), we could get back to full employment without needing either the stimulus from large budget deficits or the boost from the demand generated by a housing bubble....

There is a real class dimension to the high dollar since it means that Wall Street's money will go further when it invests overseas. It also helps to keep down inflation, Wall Street's nemesis. In other words, the value of the dollar is another one of those 99 percent versus the 1 percent issues.

In short, if we actually want to see results in the form of more manufacturing jobs, rather than just a good speech, we will have to press President Obama to challenge the 1 percent. A more competitive dollar must be at the center of a serious manufacturing policy. Everything else on President Obama's "Built to Last" agenda is just window dressing.

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