Monday, February 6, 2012

Today's links

1--Charles Biderman on the US Non-Farm Payrolls Report, Jesse's cafe

Excerpt: If I wish to leave you with one takeway, it is that the current use of the monthly headline number is more of a Sales and PR program for Wall Street and the government, and hardly the product of serious and thoughtful analysis of statistical data.

The US economy is on a flatline from all that I can tell. I suspect that if a double dip occurs it will be blamed on Europe or some other factor. but in fact there has been no real recovery as of yet.

There is a yawning discrepancy between the bond and equity markets in the manner in which they are interpreting the data. And one of them is wrong. Based on my experience, it is the bond guys who are most always the adults in the room.

Still, the markets are what they are, and it does not pay to fight the tape ahead of its season. Wall Street and its Banks have shown a marvelous ability to create paper rallies out of nothing and sustain them for quite some time before their inevitable collapse.

The US economy can recover. The system can be repaired. But I do not see the effort required to perform that task coming out of New York or Washington yet. They may be talking a good game, but it looks like just more of the same.(see short video)

2--Schneiderman MERS Suit and HUD’s Donovan Remarks Confirm That Mortgage “Settlement” is a Stealth Bank Bailout, naked capitalism

Excerpt: Let me stress: this is a huge bailout for the banks. The settlement amounts to a transfer from retirement accounts (pension funds, 401 (k)s) and insurers to the banks. And without this subsidy, the biggest banks would be in serious trouble

Why? As leading mortgage analyst Laurie Goodman pointed out in a late 2010 presentation, just over half of the private label (non Fannie/Freddie) securitizations have second liens behind them (overwhelmingly home equity lines of credit). Moreover, homes with first liens only have far lower delinquency rates than homes with both first and second liens. Separately, various studies have found that defaults are also correlated with how far underwater a borrower is. If a borrower is too far in negative equity territory, it makes less sense for them to struggle to stay current, no matter how much they love their home.

The second liens pose a huge problem to the banks. Courtesy Josh Rosner, this is data as of September 30 for Citi, Bank of America, JP Morgan, and Wells, respectively:

Compare these totals with the book value of their equity as of the same date: $42 billion in seconds for Citi versus $177 billion in equity; BofA, $121 billion in seconds versus $230 billion in equity: JP Morgan, $97 billion in seconds versus $182 billion in equity; Well, $109 billion in seconds versus $139 billion in equity. One of my mortgage investor mavens says that BofA’s seconds should bve written down by about $100 billion and JP Morgan’s by $60 billion. That writeoff would exceed BofA’s market cap and would make a major dent in Jamie Dimon’s touted “fortress balance sheet.” And a similar magnitude of haircut to Wells would expose it as being grossly undercapitalized.

3--Europe placed under the dictatorship of the banks, WSWS

Excerpt: The defining event of this week’s European Union summit was not what was finally discussed, but the proposal that was sidelined.

Prior to the summit, Germany leaked news that it was demanding an EU-appointed “budget commissioner” for Greece with the power to override Greek budget policy as a precondition for any further loans. Greece would have to make payments to the banks on its debt—which stands at 350 billion euros even before the 145 billion euros in new loans it is likely to seek—its “first and foremost” priority. It could not threaten its creditors with default and would have to accept whatever cuts financial authorities demanded of it, even if the banks withheld agreed-upon bailout payments.

A German government source said that the proposal was also aimed at other struggling euro zone members that receive aid, including Spain, Portugal, Italy and Ireland.

The proposal caused outrage in Greece. It was accompanied by proposals from the EU and the IMF demanding the elimination of an additional 150,000 government jobs, cuts and closures across the public sector, and a reduction in the paltry 750-euro monthly minimum wage.

The proposal was shelved at the last moment because it was too politically revealing. It would have confirmed for all to see that European governments now operate directly at the behest of the financial elite, and that democracy no longer operates in any meaningful sense.

4--Guest Post: The State of US Surveillance, zero hedge

Excerpt: One of the most ominous developments for us personally crawled out from under its rock in November. Again without any public debate, DHS unleashed its National Operations Center's Media Monitoring Initiative. Yep, it's exactly what it sounds like: The NOC's Office of Operations Coordination and Planning is going to collect information from news anchors, journalists, reporters, or anyone who may use "traditional and/or social media in real time to keep their audience situationally aware and informed."

Thus Washington, D.C. unilaterally grants itself the right to monitor what you say. Doesn't matter if you're the New York Times, Brian Williams, a basement blogger, an online whistleblower, or known government critics like ourselves. They're gonna take note of your utterances and file them away for future use....

The report concludes that: "Plummeting digital storage costs will soon make it possible for authoritarian regimes to not only monitor known dissidents, but to also store the complete set of digital data associated with everyone within their borders. These enormous databases of captured information will create what amounts to a surveillance time machine, enabling state security services to retroactively eavesdrop on people in the months and years before they were designated as surveillance targets. This will fundamentally change the dynamics of dissent, insurgency and revolution."

5--Do Manufacturers Need Special Treatment?, Christina Romer, NY Times via economists view

Excerpt: Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries.

A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.

The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories. None are completely convincing: Market Failures ..., Jobs ..., Income Distribution ...

As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made...

6--Greek Bailout Hangs on ‘Razor’s Edge’ as Reforms, Cuts Sought, Bloomberg

Excerpt: Resisting Cuts

Underlining the complexity of the task for Papademos, representatives of Greek employers and the biggest private sector union on Feb. 3 called on him to resist pressure to cut the minimum wage and holiday allowances.

The troika argues that cutting private-sector holiday allowances is among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.

The troika demanded the minimum wage be cut to less than 600 euros a month and that at least one holiday allowance be abolished, Mega TV said, citing unidentified ministers who met with Venizelos yesterday. Supplementary pensions should be cut by 35 percent, the Athens-based channel said.

Greece must carefully examine the terms being demanded by international creditors before agreeing to them, said George Karatzaferis, leader of the Laos party, one of the three supporting Papademos.

“I will examine every detail and footnote,” Karatzaferis said in Thessaloniki yesterday, according to an e-mailed transcript of his speech. “If we don’t agree with something and the troika insists, we won’t take the package.”

Budget Targets

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country’s economy shrank 6 percent last year, according to the latest IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is around 18 percent.

“We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said on Feb. 2. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.”

More austerity risks triggering a “social explosion,” Hieronymos II, the head of Greece’s Orthodox Church, said in a statement on Feb. 3.

“We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy,” he said.

7--Crucial meeting of coalition partners, Athens News

Excerpt: The crucial negotiation of the coalition political party leaders over the EC-ECB-IMF troika's ultimatums and shock measures has been set for 13:00 on Sunday. [update: meeting postponed by three hours].

In this new meeting of the leaders of the three parties backing the interim government led by Lucas Papademos which will take place on Sunday, the prime minister is expected to present them with a document detailing the rigid positions of the troika. The document is the result of recent painstaking negotiations between representatives of the country's lenders with finance minister Evangelos Venizelos and other ministers.

The party leaders will be required to take a stand on these issues, under pressure and reactions within their parties, given the large number of deputies who refuse to vote for lower wages in the private sector, layoffs of thousands of employees in public enterprises and the public sector, including policemen, firemen, army personnel and teachers, or the recapitalisation of banks with preferred shares.

The proposed measures also include reductions in supplementary pensions, fair market value increases ​​and privatisations, although it is estimated that a three party agreement on these issues will be easier to reach.

8--European Politicians in Denial as Greece Unravels, Der Speigel

Excerpt: Ironically, only three months ago European leaders believed that things were already on the mend. Greece's private creditors were supposed to abandon half of their claims, and the partner countries planned to contribute another €130 billion ($172 billion). These efforts were expected to bring the country's debt level from more than 160 percent of gross domestic product (GDP) to a more tolerable 120 percent by 2020.

But these hopes were deceptive. The Greek economy is shrinking faster than European politicians believed was possible in autumn, and now the country is short on funds once again. The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall to be about €15 billion, meaning that Greece needs €145 billion instead of €130 billion. "We do not assume that the additional funds can be collected solely from private creditors," say sources within the troika.

The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs. But obtaining cash is becoming increasingly difficult. A serious dispute over who will come up with the additional money has been raging behind the scenes for days -- a dispute that resembles a game of Old Maid.

Politicians Bicker with Banks

The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue. The countries involved are already pitching in €130 billion to the new bailout package, and Berlin feels that that ought to be enough.

The banks' representatives disagree completely. They have already increased their contribution several times, and now they point out that it isn't just private institutions that hold Greek government bonds. The European Central Bank, for example, holds up to €55 billion in Greek securities. Why shouldn't the ECB participate in the write-downs, Deutsche Bank CEO Josef Ackermann asks himself?

9--Germans want Greece to quit euro, Athens News

Excerpt: The majority of Germans feel the euro currency bloc would be better off if debt-crippled Greece left it, a poll published in mass-selling newspaper Bild am Sonntag showed on Sunday.


The Emnid poll said 53 percent of Germans surveyed thought Greece should return to its former currency, the drachma, while only 34 percent felt it should keep the euro.

Euro zone ministers had hoped to meet this coming Monday to finalise the second Greek bailout, which must be in place by mid-March to prevent a chaotic default, but the meeting was postponed because of reluctance in Athens to commit to reforms.


Without the austerity measures, which include cutting holiday bonuses and lowering the minimum wage in a country reeling from its fifth year of recession, the ministers say they cannot approve the 130 billion euro ($171 billion) rescue plan.

10--Stocks Least Loved Since 1980s as Americans Scale Steepest Wall of Worries, Bloomberg

Excerpt: The Standard & Poor’s 500 Index’s best start in 25 years is doing little to restore Americans’ confidence in the stock market.

The benchmark gauge for U.S. shares has climbed 6.9 percent in 2012, the most since it rose 14 percent to begin 1987, data compiled by Bloomberg show. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.

Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

“Investors are scared to death,” Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees about $370 billion, said in a telephone interview on Feb. 3. “The fears are justified, but from a valuation standpoint the market has overshot, as it typically does. We’ve been pounding the table to put money into equities.”

The Standard & Poor’s 500 Index rose 2.2 percent last week to 1,344.90 after U.S. unemployment fell to the lowest level since February 2009 and manufacturing grew at the fastest rate in seven months. S&P 500 March futures retreated 0.2 percent at 9:07 a.m. in Hong Kong today....

Three-Year Rally

Sentiment has deteriorated even as the S&P 500 rose 99 percent since March 9, 2009. The 106 percent expansion in U.S. earnings during the last nine quarters, the most since 1987, helped fuel the rally. For the period ended Dec. 31, 67 percent of companies in the S&P 500 beat analyst profit estimates as earnings advanced 3.3 percent.

Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. Withdrawals were $135 billion last year, the second-highest total after 2008, the ICI said.

Concern European leaders will fail to keep Greece from defaulting, the May 2010 flash crash in which $862 billion was erased from equities in less than 20 minutes and some of the most volatile markets on record last year helped spur the withdrawals. Of the more than $11.1 trillion that was wiped off U.S. shares between 2007 and 2009, $8.1 trillion has been restore...

Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares, according to data compiled by Bloomberg. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.

That’s contributing to a contraction on Wall Street. The number of securities professionals registered with the Financial Industry Regulatory Authority fell to 629,518 last year, the lowest end-of-year level since at least 2002.

11--Why economic inequality leads to collapse, Guardian

Excerpt: The lesson of the Great Crash was that unequal enrichment provokes asset bubbles, excessive demand for debt and, finally, economic failure. Now we are painfully learning that again

During the past 30 years, a growing share of the global economic pie has been taken by the world's wealthiest people. In the UK and the US, the share of national income going to the top 1% has doubled, setting workforces adrift from economic progress. Today, the world's 1,200 billionaires hold economic firepower that is equivalent to a third of the size of the American economy.

It is this concentration of income – at levels not seen since the 1920s – that is the real cause of the present crisis.

In the UK, the upward transfer of income from wage earners to business and the mega-wealthy amounts to the equivalent of 7% of the economy. UK wage-earners have around £100bn – roughly equivalent to the size of the nation's health budget – less in their pockets today than if the cake were shared as it was in the late 1970s.

In the US, the sum stands at £500bn. There a typical worker would be more than £3,000 better off if the distribution of output between wages and profits had been held at its 1979 level. In the UK, they would earn almost £2,000 more.

The effect of this consolidation of economic power is that the two most effective routes out of the crisis have been closed. First, consumer demand – the oxygen that makes economies work – has been choked off. Rich economies have lost billions of pounds of spending power. Secondly, the slump in demand might be less damaging if the winners from the process of upward redistribution – big business and the top 1% – were playing a more productive role in helping recovery. They are not.

Britain's richest 1,000 have accumulated fortunes that are collectively worth £250bn more than a decade ago. The biggest global corporations are also sitting on near-record levels of cash. In the UK, such corporate surpluses stand at over £60bn, around 5% of the size of the economy. This money could be used to kickstart growth. Yet it is mostly standing idle. The result is paralysis.

The economic orthodoxy of the past 30 years holds that a stiff dose of inequality brings more efficient and faster-growing economies. It was a theory that captured the New Labour leadership – as long as tackling poverty was made a priority, then the rich should be allowed to flourish.

So have the architects of market capitalism been proved right? The evidence says no. The wealth gap has soared, but without wider economic progress. Since 1980, UK growth and productivity rates have been a third lower and unemployment five times higher than in the postwar era of "regulated capitalism". The three post-1980 recessions have been deeper and longer than those of the 1950s and 1960s, culminating in the crisis of the last four years.

The main outcome of the post-1980 experiment has been an economy that is much more polarised and much more prone to crisis. History shows a clear link between inequality and instability. The two most damaging crises of the last century – the Great Depression of the 1930s and the Great Crash of 2008 – were both preceded by sharp rises in inequality.

The factor linking excessive levels of inequality and economic crisis is to be found in the relationship between wages and productivity. For the two-and-a-half decades from 1945, wages and productivity moved broadly in line across richer nations, with the proceeds of rising prosperity evenly shared. This was also a period of sustained economic stability.

Then there have been two periods when wages have seriously lagged behind productivity – in the 1920s and the post-1980s. Both of them culminating in prolonged slumps. Between 1990 and 2007, real wages in the UK rose more slowly than productivity, and at a worsening rate. In the US, the decoupling started earlier and has led to an even larger gap.

The significance of a growing "wage-productivity gap" is that it upsets the natural mechanisms necessary to achieve economic balance. Purchasing power shrinks and consumer societies suddenly lack the capacity to consume.

In both the 1920s and the post-1980s, to prevent economies seizing up, the demand gap was filled by an explosion of private debt. But pumping in debt didn't prevent recession: it merely delayed it.

Concentrating the proceeds of growth in the hands of a small global financial elite not only brings mass deflation – it also leads to asset bubbles. In 1920s America, a rapid process of enrichment at the top merely fed years of speculative activity in property and the stock market. In the build-up to 2008, rising corporate surpluses and burgeoning personal wealth led to a giant mountain of footloose global capital. The cash sums held by the world's rich (those with cash of more than $1m) doubled in the decade to 2008 to a massive $39 trillion.

Only a tiny proportion of this sum ended up in productive investment. In the decade to 2007, bank lending for property development and takeover activity surged while the share going to UK manufacturing shrank. While the contribution to the economy made by financial services more than doubled over this period, manufacturing fell by a quarter.

Far from creating new wealth, a tsunami of "hot money" raced around the world in search of faster and faster returns, creating bubbles – in property, commodities and business – lowering economic resilience and amplifying the risk of financial breakdown.

New Labour's leaders were right in arguing that the left needed to have a more coherent policy for wealth creation. That is the route to wider prosperity for all. But the central lesson of the last 30 years is that a widening income gap and a more productive economy do not go hand in hand.

An economic model that allows the richest members of society to accumulate a larger and larger share of the cake will eventually self-destruct. It is a lesson that is yet to be learned.

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