Monday, February 13, 2012

Today's links

1--Mortgage settlement is great — for politicians and banks, LA Times

Excerpt: The settlement mostly requires mortgage lenders and servicers to comply with what I would have thought was already the law, which prohibits, you know, criminal fraud....

If you don't listen too closely, it sounds as if they're putting up the $25 billion. Not so. The only cold cash the banks are paying is a combined $5 billion, including $1.5 billion to compensate borrowers whose homes were foreclosed on from 2008 through the end of last year, with the rest going to the federal and state governments to pay for regulatory programs.

Most of the balance is in mortgage relief for stressed or underwater mortgage holders, including principal reductions, refinancings and other modifications....

Many of the loans destined to be modified under the settlement aren't even owned by the banks, but rather by investors — the banks just collect the checks.

Consequently, as mortgage expert Adam Levitin of Georgetown Law School observes, most of the settlement "is being financed on the dime of MBS [mortgage-backed securities] investors such as pension funds, 401(k) plans, insurance companies and the like — parties that did not themselves engage in any of the wrongdoing covered by the settlement."

What about homeowners? They don't get much, especially in relation to the scale of the housing crisis. More than 2 million owners have lost their homes to foreclosure during the last four years; this deal will provide 750,000 with a payment of $2,000 each.

Some 11 million homeowners are underwater by about $700 billion combined, or an average of nearly $65,000 each. In a transport of optimism, federal officials are projecting that this deal will help 2 million of them, to the tune of perhaps $20,000 each. By the way, loans owned by the government-sponsored firms Fannie Mae and Freddie Mac aren't eligible for this relief. Since they own or control the majority of all outstanding mortgages, that's a rather large black hole....

In the words of business consultant Susan Webber, who blogs expertly on financial matters under the pen name Yves Smith, "We've now set a price for forgeries and fabricating documents. It's $2,000 per loan." She observes, quite properly, that the payoff is a minuscule fraction of the costs these practices have imposed on borrowers, the court system and the economy.

2--Bernanke renews push for foreclosed rentals, Marketwatch

Excerpt: Federal Reserve Chairman Ben Bernanke on Friday made a renewed push for programs to convert foreclosed homes into rental units to help revive the housing market.

“With home prices falling and rents rising, it could make sense in some markets to turn some of the foreclosed homes into rental properties,” Bernanke said in a speech in Orlando at the National Association of Home Builders conference, according to a copy of prepared remarks. “Real-estate-owned to rental programs appear to have some potential for success.”

The central bank chairman added that such programs could help cure the market’s current “serious” imbalances where there is a excess supply of vacant homes and an expanded rental market.

Bernanke added that there are an additional 1 million foreclosed properties could be held by banks, guarantors and servicers “in each of the next few years.” He added that the number of properties in the foreclosure process is more than four times the number of foreclosed properties owned by banks, government-seized Fannie Mae, Freddie and the Federal Housing Administration.

The number of properties suitable for rental is bound to increase, as the number of properties currently in the foreclosure process is more than four times the number of properties in the REO inventory.

The Federal Reserve is making a push to encourage banks to rent out foreclosed properties they own. Existing statutes and regulations do not prohibit financial institutions from renting out their foreclosed properties, but regulators encourage sales instead of rentals. To counter that, Bernanke recently said the agency may soon provide guidance that could encourage rentals of foreclosed properties owned by banks. Read more about Bernanke White Paper

Also, the regulator for government-seized housing giants Fannie Mae and Freddie Mac is working on a program that may employ government financing or guarantees to attract investors to buy up foreclosed properties on their books in bulk and rehabilitate and convert them into rentals.

In response to a question, Bernanke said financing was critical for these programs to work because it required the purchase of large numbers of homes within a particular geographic area, all of which is necessary to attract investors and management companies.

“Providing financing for these kind of projects, which could involve hundreds of homes, is an important direction and one in which new financing policies could be quite helpful,” Bernanke said.

He also suggested programs to create so-called “land banks,” which are typically government entities that have the ability to purchase and sell real estate. He said these land banks could buy and rehabilitate these homes and convert them into rentals. He added that these are a “promising” option but that so far existing land banks lack the resources to keep pace with the number of low-value U.S. properties

3--Congress' Job Approval at New Low of 10%, Gallup

Excerpt: A record-low 10% of Americans approve of the job Congress is doing, down from 13% in January and the previous low of 11%, recorded in December 2011. Eighty-six percent disapprove of Congress, tying the record high for disapproval set in December.

Congress' current low ratings continue a generally negative trend. The 17% annual average for 2011 is by one percentage point the lowest yearly average Gallup has recorded. More broadly, the average congressional job approval rating since 1974 is 34%, signifying the generally poor esteem in which the American people have held Congress over the past decades.

Both Democrats and Republicans Give Congress Equally Low Ratings

Democrats' and Republicans' approval of Congress are equally low, at 11% and 12%, respectively, while 8% of independents approve. Republicans control the House of Representatives and Democrats control the Senate, and this divided government no doubt helps explain these uniformly low ratings. Through much of 2009 and 2010, when Democrats controlled both houses of Congress, Democrats were more positive about Congress than either independents or Republicans were.

This month's record-low congressional job approval rating is but the latest example of Americans' widely negative views of Congress, government, and the political process. The February drop in congressional job approval is particularly noteworthy, given that Americans in the same survey expressed modestly increased satisfaction with the way things are going in the United States. Additionally, economic confidence has grown rather than declined over the past month, and President Obama's job approval rating is trending slightly upward, reaching 50% in this same survey and 47% in the Gallup Daily tracking average ending Feb. 7. This means Congress' image is a major exception to the gradual improvement on a number of measures Gallup is tracking.

4--The insiders are selling heavily, Marketwatch

Excerpt: To be sure, heavy insider selling doesn’t always lead to this much market weakness, or this immediately. And there were a lot of other things going on last summer that aren’t present today.

Still, on the theory that corporate insiders — officers, directors and largest shareholders — know more about their firms’ prospects than do the rest of us, it can’t be good news that they are selling at such a heavy pace.

Research of the number of shares insiders have sold in the open market to the number that they have bought. Last week, according to the latest issue of Argus’ service, the Vickers Weekly Insider Report, this sell-to-buy ratio stood at 5.77-to-1. And among insiders at companies listed on the New York Stock Exchange, this ratio was even more lopsided at 8.2-to-1.

Making these recent readings even more worrisome, according to Argus Research, is that they came on markedly stepped-up activity among corporate insiders. This increases our confidence that the ratio accurately reflects prevailing sentiment among a broad cross-section of the insiders.

5--Why Is Gasoline Consumption Tanking?, Charles Hugh Smith

Excerpt: Gasoline deliveries reflect recession and growth. The recent drop in retail gasoline deliveries is signalling a sharp contraction ahead. ...

Retail gasoline deliveries, already well below 1980 levels, have absolutely fallen off a cliff. Is the plunge inventory-related, i.e. are storage facilities so full that retailers are simply putting off deliveries? ...

Even if you dismiss the recent plunge as an outlier, the declines in retail gasoline deliveries are mind-boggling. If you look at the data from 1983 to 2011 on the link above, you will note that delivery declines align with recessions....

There are all kinds of other things that influence the number of miles driven, but there is little evidence that any one factor can account for a 47% drop in retail gasoline deliveries....

There are no data-supported broad-based drivers for dramatically lower gasoline consumption other than austerity and lower economic activity. The code-word for "austerity and lower economic activity" that is verboten in the Mainstream Media is "recession." Indeed, if you examine the EIA data, the only causal factor that has backing in the data is recession--or if you prefer, austerity and lower economic activity....

Oil has been elevated for months, kissing $100 and rarely dipping below $90/barrel. Do higher oil costs explain the decline in gasoline consumption? Once again, they undoubtedly influence consumption, but that cannot explain the 40% drop in consumption. After all, when oil spiked in 2008 to $140/barrel, deliveries only dropped by a few million gallons: from 58.8 MGD in July 2007, before the spike, to 54.8 MGD at the point of maximum pain in July 2008.

The cost of oil has declined sharply from mid-2008, yet consumption has tanked from 54.8 MGD in July 2008 to 42.4 MGD in July 2011. That's a hefty 21% decline.

What other plausible explanation is there for the decline from 42.4 MGD in July 2011 to 30.9 MGD in November 2011 other than a dramatic decline in discretionary driving? That 27% drop in a few months in unprecedented, except in times of war or sharp economic contraction, i.e. recession.

If we stipulate that vehicles and fuel consumption are essential proxies for the U.S. economy, then we can expect a steep decline in economic activity to register in other metrics within the next few months.

Such a sharp drop would of course be "unexpected" given the positive employment data of the past few months. But as the data above shows, employment isn't tightly correlated to gasoline consumption: gasoline consumption reflects recession and growth.

In other words, look out below.

6--Petroleum 3-Month Rolling Average Turns Sharply Lower; Negative Shipping Rates; Collapse in Global Trade, Mish

Excerpt: Wallace writes "Gasoline and petroleum demand recently has plunged more than at any time in the recession. When you see petroleum usage back to numbers in the 1990's, you know there is serious economic trouble no matter what the talking heads say...

Negative Shipping Rents

Amazingly, shipping rates have dropped so low, shippers will pay you to ship, just to get the cargo vessels to better locations.

Bloomberg reports Charter Rates Go Negative....

Rather, the huge dropoff in gasoline and petroleum usage in the US, coupled with falling shipping rates, a drop in Japanese Exports Three Consecutive Months, and a European Recession poised to get much worse, makes a strong case that a collapse in global trade is underway

7-- Making the Case for Occupy Wall Street, TrimTabs

Excerpt: For some, this economy is lots better. We keep hearing that an economic recovery is underway. Yet for those who don’t have lots of money in the stock market, there’s been no economic recovery.

How many of you know that the market value of all US listed stocks right now is $18.7 trillion. Not only is that almost a double from the March 2009 low, but the gain itself is just over $9 trillion. Let me repeat, the value of all US stocks is up by over $9 trillion in three years. Wow.

Obviously for such a huge gain the underlying US economy, particularly wages and salaries and employment must be doing so much better than it was back in early 2009. Right? Wrong.

Early in 2009, after tax take home pay for everyone who pays taxes was just about $5.9 trillion annualized. That was down from an all time peak of $7 trillion annualized at the beginning of 2008. The main reason after tax income was down so much was a plunge in capital gains – primarily from profits on home sales.

After three years of attempts at a recovery, take home pay is now around $6.3 trillion, up all of $400 billion annually since the early 2009 bottom, or 2% a year. Wait a minute! Incomes are up only 2% before inflation per year. How does that minimal increase in take home pay justify a $9 trillion increase in market value?

Occupy Wall Street complains that Wall Street is doing great and everyone else is not. I think they have a point. Shareholder wealth has doubled up, $9 trillion to $18 trillion, and take home for everyone who pays taxes is up about 2% a year,– which is not even keeping up with inflation. After inflation wage earners are losing ground while shareholders are buying Coach and Louis Vuitton stuff at Bloomies and Nordstroms.

So wait a second, how is the stock market up $9 trillion, while the rest of the economy is flat on its butt? The simple answer is that shareholders owe it all to President Obama and Fed Chairman Bernanke. The US government has added about $5 trillion in debt over the past three years. Where did that $5 trillion go? Some of it ended up on the balance sheet of corporate America. The record amount of cash on public company balance sheet currently earns nada, nothing in terms of interest income.

Therefore, companies say to themselves, why not use this free cash to buy back shares? And so they do. And so stock prices have been going up. However, recently as the stock market has risen ever higher new stock buybacks are slowing dramatically and insider selling is spiking and insider buying is disappearing. Unless incomes start surging soon, stock prices eventually have to crash. As I have said many times, there is no way income growth can surge anytime soon. Therefore, at some point in time, I expect a major stock market crash. The only question is when.

8--Greece: Memorandum of Understanding, New Austerity Deal for Greece--

9--EU banks still parking money at ECB deposit facility, Reuters

Excerpt: With high amounts of excess liquidity in the system, banks are depositing much of the extra cash back at the ECB. Overnight deposits at the ECB hit a record high of 528 billion euros at the peak of the ECB's last reserves period and currently stand at a hefty 496 billion euros according to Reuters calculations.

10--More on Obama's stimulus, NY Times

Excerpt: I spent three years reporting on the $840 billion stimulus plan that the Obama administration pushed through Congress in 2009. My conclusion: government can create jobs — it just doesn’t often do it well.

The stimulus — a historic package of tax cuts, safety-net spending, infrastructure projects and green-energy investments — certainly did a lot of good. As the economists Alan S. Blinder and Mark Zandi have noted, it’s one of the key reasons the unemployment rate isn’t in double digits now.

But the stimulus ultimately failed to bring about a strong, sustainable recovery. Money was spread far and wide rather than dedicated to programs with the most bang for the buck. “Shovel-ready” projects, those that would put people to work right away, took too long to break ground. Investments in worthwhile long-term projects, on the other hand, were often rushed to meet arbitrary deadlines, and the resulting shoddy outcomes tarnished the projects’ image....

The stimulus also could have been more powerful if the administration had pursued a temporary jobs program similar to the Works Progress Administration, which directly employed eight million people during the Depression.

As it was, states could create temporary jobs programs through a $5 billion emergency welfare fund. Not enough states took advantage of it, but those that did saw real results. Fresno County, Calif., where unemployment was 18 percent, found jobs for 2,000 people who were out of work or underemployed.

It also helps to avoid losing jobs in the first place. The promise of $50 billion in state fiscal relief prompted school districts to forgo layoffs. By early 2010, the stimulus money had saved the equivalent of nearly 300,000 full-time teachers and support staff.

Even $50 billion, though, wasn’t enough to plug the budget gaps. The administration should have shifted more money there, and it could have tried to prime a similar effort in the private sector.

Germany’s “work-sharing” program — in which companies reduce hours rather than lay people off, with the government providing partial unemployment benefits to make up for lost wages — has helped keep its unemployment rate below 8 percent since 2008. It also will let companies ramp up quickly when the economy recovers.

11--OECD: No, the U.S. Government Is Not a Powerful Engine of Income Redistribution, Grasping reality with both hands


The United States has the fourth-highest inequality level in the OECD, after Chile, Mexico and Turkey. Inequality among working-age people has risen steadily since 1980, in total by 25%. In 2008, the average income of the top 10% of Americans was 114 000 USD, nearly 15 times higher than that of the bottom 10%, who had an average income of 7 800 USD. This is up from 12 to 1 in the mid 1990s, and 10 to 1 in the mid 1980s.

Income taxes and cash benefits play a small role in redistributing income in the United States, reducing inequality by less than a fifth – in a typical OECD country, it is a quarter. Only in Korea, Chile and Switzerland is the effect still smaller.

Key findings:

•The wealthiest Americans have collected the bulk of the past three decades’ income gains. The share of national income of the richest 1% more than doubled between 1980 and 2008: from 8% to 18% [Table 9.1]. The richest 1% now makes an average US$1.3 million of after-tax income (compared to US$17,700 for the poorest 20% of US citizens). During the same time, the top marginal income tax rate dropped from 70% in 1981 to 35% in 2010.

•The rising incomes of executives and finance professionals account for much of the rising share of top income recipients. Moreover, people who achieve such a high income status tend to stay there: only 25% drop out of the richest 1% in the US, compared to some 40% in Australia and Norway, for instance.

•The main reason for widening inequality in the US is the widening wage gap. The gap between the richest and poorest 10% of full-time workers has increased by almost one third, more than in most other OECD countries.

•Contrary to the OECD trend, annual hours among lower-wage workers in the US increased by more than 20% over the past decades [Table 4.A1.2] – probably linked to incentive policies such as the Earned Income Tax Credit (EITC) but also the relatively low level of the minimum wage. This trend partially offset the rising wage gap and led to a more moderate increase in overall annual earnings inequality. 

•Societal change — more single and single-parent households, more people with a partner in the same earning group — accounts for much less of the increase in household earnings inequality (about 13%) than the widening dispersion of men’s earnings (about 46%). At the same time, increase in employment, both among women and men, countered the increase toward higher inequality.

•Redistribution of income by taxes and benefits is limited. Over the long run, these offset less than 10% of the increase in inequality of market incomes – gross earnings, savings and capital taken together.

•The limited redistributive effect in the United States is to be found on the benefit side rather than the tax side: benefits represent just 6% of household income, while the OECD average is about 16%. Income support for the unemployed has become less generous over time prior to the 2008-09 financial crisis. The gap between in-work and out of work income has increased for lone parent families and couples with children particularly. The income of a lone mother with 2 kids, who had full unemployment insurance and earned around the average wage, is less than 40% of her former take-home pay – in 1995, this was over 50%.

•On the other hand, the US invests relatively more in public expenditures in in-kind services [Figure 8.1], and those help reducing inequality by roughly 18%.

Key policy recommendations for OECD countries from Divided We Stand:

•Employment is the most promising way of tackling inequality. The biggest challenge is creating more and better jobs that offer good career prospects and a real chance to people to escape poverty.

•Investing in human capital is key. This must begin from early childhood and be sustained through compulsory education. Once the transition from school to work has been accomplished, there must be sufficient incentives for workers and employers to invest in skills throughout the working life.

•Reforming tax and benefit policies is the most direct instrument for increasing redistributive effects. Large and persistent losses in low-income groups following recessions underline the importance of government transfers and well-conceived income-support policies.

•The growing share of income going to top earners means that this group now has a greater capacity to pay taxes. In this context governments may re-examine the redistributive role of taxation to ensure that wealthier individuals contribute their fair share of the tax burden.

•The provision of freely accessible and high-quality public services, such as education, health, and family care, is important.

12--Number of the Week: Accounting for Labor Force Dropouts, WSJ

Excerpt: 8.9%: The unemployment rate taking labor-force dropouts into account.

People dropping out of the labor force are making the unemployment rate look smaller, but not as much as some might think.

The jobless rate was reported to be 8.3% in January, marking the fifth consecutive decline. Some greeted the drop with skepticism, noting that the labor force — the number of people working or actively looking for a job — has declined and that is distorting the number.

The unemployment rate is calculated by taking the number of unemployed and dividing it by the labor force. When people stop actively looking for work because they get discouraged, it reduces both the number of unemployed and the size of the labor force. But there are other reasons why people leave the labor force, and the share of the population in the labor force has been steadily declining since 2000.

There are two issues leading to a longer-term shift in labor-force participation. One is that a growing percentage of the population is over 55 thanks to aging Baby Boomers and many of them are leaving the labor force forever, whether by choice or after a long spell of unemployment. The other is that the share of 18- to 24-year-olds looking for work has been steadily declining for years. So, while some of the decline in the labor force has been through discouraged workers giving up, a large portion of it has come from demographic factors that were in place before the recession.

That begs the question: “How much of the decline in the labor force is due to people dropping out and how much is due to demographic factors?” The Labor Department offers a decent proxy. The survey tracks people marginally attached to the labor force — people who aren’t counted in the official tally but would take a job if one was offered. In January, there were roughly 2.8 million people in this category.

But we can’t just add all those people back into the main number. Even in the healthiest labor markets there is a certain percentage of the population who are marginally attached. Right now about 1.8% of the population falls into this category. During more normal-times that level is closer to 1%.

If we take those marginally attached workers that would be in the labor force in better times, the unemployment rate is 8.9%.

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