Tuesday, February 28, 2012

Today's links

1--Europe’s Empty Fiscal Compact, Martin Feldstein, Project Syndicate

Excerpt: which Germany and other strong eurozone economies would transfer funds year after year to Greece and other needy countries, in exchange for the authority to regulate and supervise the recipient countries’ budgets and tax collections. The German public rejected the idea of permanent transfers from German taxpayers to Greece, while Greek officials and the Greek public rejected the idea of German control over their country’s fiscal policy.

The next step was the fiscal plan that was agreed in Brussels at the end of last year, which completely abandoned the idea of a transfer union in favor of an agreement that each eurozone country would balance its budget. Under this scheme, a financial penalty would “automatically” be imposed on any country that violated that obligation. With balanced budgets everywhere, there would be no need for fiscal transfers.

But how, exactly, should the balanced budget requirement be defined? In a letter to the officials negotiating the formal agreement, Jorg Asmussen, the German member of the European Central Bank’s Executive Council, stressed that a balanced budget meant just that. Even if a country ran budget deficit because a cyclical downturn caused a fall in tax revenue and an increase in social transfers, it should be required to raise taxes or cut spending to restore a balanced budget.

If this proposal were actually implemented, it would have the effect of turning small recessions into major economic downturns. Fortunately, this recipe for creating future European depressions was rapidly dropped....

f this is the essence of the fiscal compact that is eventually agreed, it will have no predictable effect on eurozone countries’ behavior. Its only effect will be to allow the eurozone’s political leaders to claim that they have created a fiscal union, and thus that they have moved Europe closer to the political union that is their ultimate goal.

But a fiscal union conceived in this way is completely different from how most people understand the term. In the United States, for example, the central government collects about 20% of the country’s GDP and pays out a similar amount. That centralization of taxes and spending creates an automatic stabilizer for any region that experiences an economic downturn: the affected region’s residents send less money to Washington and receive more in transfers.

There is no similar process in the eurozone, where taxes and spending occur at the national level. The centralized fiscal role in the US also allows all of the individual states to operate with true balanced budgets, modified only by relatively small “rainy day” funds.

2--Speculation In Crude Oil Adds $23.39 To The Price Per Barrel, Forbes

Excerpt: If there were no speculation in oil futures on commodities exchange, the price of a barrel of oil might be as low as $74.61– not more than the present price of $108.00 a barrel.

But, there is plenty of speculation as the possibility of strife in Iran, one of the globe’s largest crude oil producers, pushes up the price of oil futures, which in turn impact the price of buying crude oil in the open market. As of February 23, 2012 “managed money” held positions in NYMEX crude oil contracts equivalent to 233.9 million barrels of oil– the equivalent of about one year’s crude oil supply from Iran to Western European nations like France, Belgium, Greece, Italy and Spain.

As Goldman Sachs believes that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil, this means that in theory the speculative premium in oil prices due to speculation is as much as $23.39 a barrel in the price of NYMEX crude oil.

In turn oil analysts believe that every $10 rise in the price of crude oil translates into a 24 cent rise in the price of gasoline at the pump. Using the 24 cent rise in the price of gasoline suggests that each dollar increase in a barrel of oil equals about $.56 per barrel.

So, if a barrel of crude oil is $23.39 higher because of speculative action in the commodity markets– this translates out into a premium for gasoline at the pump of $.56 a gallon. Since gasoline in the northeast is about $3.68 a gallon, this suggests that without any speculation, the cost of a gallon would be only $3.12, a lot more favorable outcome.

3--Oil falls after recent jump, supply worry supports, Reuters

Excerpt: Oil prices pulled back on Monday after a string of higher settlements as G20 concerns
about the effect of high oil prices on global growth and a stronger dollar helped counter support from worries about Iran and potential supply disruptions.

The Group of 20 finance ministers and central bankers said on Sunday they were "alert to the risks of higher oil prices"and discussed at length the impact that sanctions on Iran will have on crude supplies and global growth.

The G20 officials also said that they welcomed a commitment from producer countries to ensure oil supplies. ...U.S. crude is on pace for a 10 percent gain in February and is up nearly 11 percent in 2012 after rising 8.2 percent last year....

Sanctions against Iran over its nuclear program have removed a major supply source for many refiners and investors worry escalating confrontation in the Middle East could disrupt oil flows from other suppliers in the Gulf.

4--Anonymous joins forces with OWS against NDAA-supporting politicians, RT

Excerpt: America’s most powerful protest groups are joining forces to warn elected officials that they will be held accountable for their actions. The campaign is called Our Polls and its being launched with help from both Anonymous and the Occupy movement.

The AnonOps Communications website revealed details early Monday this week regarding the hacktivist collective’s latest campaign. Along with the nation-wide Occupy Wall Street movement, Anonymous says they are going after the politicians in America that supported legislation that both entities have largely advocated against.

“Elected officials serve one purpose — to represent their constituents, the people who voted them into office,” reads a statement posted to the website. “Last year, many of our elected officials let us down by giving in to deep-pocketed lobbyists and passing laws meant to boost corporate profits at the expense of individual liberty.”

The legislation in question include the National Defense Authorization Act for Fiscal Year 2012, the Stop Online Piracy Act and the Protect IP Act. In an act of retaliation aimed at those that supported these bills, the groups have released a roster of politicians that have not only expressed favor for the laws, but that are also up for reelection this year.

“You are one person. You have one vote. Use that vote on November 6 to hold your elected official accountable for supporting bills such as NDAA, SOPA and PIPA,” reads their statement.

Although both SOPA and PIPA have been halted in Congress, the NDAA was successfully signed into law by US President Barack Obama on December 31, 2011, granting the commander-in-chief the power to authorize the military detainment of American citizens without ever bringing charges against them.

“Our Senators and Representatives showed how little they cared about personal freedoms when they voted overwhelmingly to pass the National Defense Authorization Act (NDAA),” reads Monday’s statement, which also calls the act “a prominent threat to the inalienable due process rights of every US citizen as laid out in the Constitution.”

“It allows the military to engage in civilian law enforcement, and to suspend due process, habeas corpus or other constitutional guarantees when desired. Our congressmen passed one of the greatest threats to civil liberties in the history of the United States.”

Similar legislation in the vein of the failed SOPA and PIPA acts have also been drafted since their defeat, which critics fear could cause the US government to implement a veil of censorship over the World Wide Web.

Although activists with both Anonymous and Occupy have openly opposed such laws in the past, the latest campaign will at last bring both bodies together to protest any other damning legislation.

5--Once again, speculators behind sharply rising oil and gasoline prices, MCLatchy

Excerpt: "Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation," said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. "I still remain convinced oil prices are inflated."

Consider that light, sweet crude trading on the NYMEX changed hands at $79.20 a barrel just four months ago, but soared past $106 a barrel Tuesday afternoon, partly on news that Iran would halt shipment of oil to Britain and France. But those countries already had stopped buying Iranian oil. And Didier Houssin, the International Energy Agency's director for energy markets and security, said that "there are alternative supplies that can make up for any loss of Iranian exports," The Wall Street Journal reported.

Still, oil's price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading.

Since oil prices are the biggest component in the price of gasoline, pump prices are soaring. AAA said Tuesday that the nationwide average price for a gallon of gasoline stood at $3.57, compared with $3.38 a month ago and $3.17 a year ago. It takes about $6 more to fill up the tank than it did this time last year — and last year's gasoline-price surge helped take the steam out of the economic recovery.

Defining what percentage of today's high oil and gasoline prices is due to excessive speculation, driven by Iran fears, is something of a guessing game.

"I put the Iran security premium at about $8 to $10 (a barrel) at this point, which still puts crude at about $90 or $95," said John Kilduff, a veteran energy analyst at AgainCapital in New York.

The fear premium is the froth above what prices would be absent fears of a supply disruption_ somewhere in the $80 to $85 range for a barrel of crude oil. It means that even with the extra cost put on oil from Iran fears, prices are at least another $10 higher than what demand fundamentals would dictate.

6--Draghi’s Unlimited Loans Are No Panacea, Bloomberg

Excerpt: European Central Bank President Mario Draghi’s success in quelling a bond-market rout across the euro region’s periphery masks a failure by the region’s banks to bolster their capital.

The ECB will offer a second round of unlimited three-year funds on Feb. 29. Firms will seek 470 billion euros ($629 billion), approaching the 489 billion euro take-up by 500 banks at the first long-term refinancing operation on Dec. 21, the median estimate of 28 analysts surveyed by Bloomberg show.

“The worry is it may act to keep afloat institutions that aren’t exactly viable,” said Stewart Robertson, chief European economist at Aviva Investors in London, which manages more than $425 billion. “This buys time for banks, but does it really provide them with an incentive to sort out their books? The worry is it doesn’t.”

The Frankfurt-based central bank is flooding the market with cheap money to head off a credit crunch, boost lending to companies and consumers, and spur demand for unsecured bank debt. Rates on two-year Spanish notes have fallen 241 basis points to 2.56 percent since the first offer was announced on Dec. 8 and Italian yields have shed 336 basis points to 2.79 percent.

“Providing money so cheaply, for so long, against what is now effectively any collateral whatever, leaves the ECB in a position no central bank would choose to be in,” UBS AG analysts led by London-based Alastair Ryan said in a Feb. 22 note to clients. “It cannot control the credit risk coming onto its books, or at least onto the books of its national central banks. Worse, the success of its interventions risks encouraging politicians to avoid making necessary but difficult decisions.”

Banks can borrow from the ECB at 1 percent and invest the proceeds in 10-year Italian government bonds yielding 5.49 percent. While that so-called carry trade will help boost banks’ income, it makes them more vulnerable to a decline in the value of government debt. It also may become costlier for banks to obtain longer-term funding because ECB loans are senior to claims from other lenders. ....

Overnight Parking

Rather than heed calls by politicians to boost lending to companies and consumers, some banks are choosing to deposit the money in the ECB’s overnight facility at a rate of 0.25 percent until they need it to refinance maturing debt. Deposits with the central bank rose to a record 528 billion euros on Jan. 17 and were at 477 billion euros at the end of last week, according to ECB data.

“This will ease credit flows but won’t stop the great deleveraging,” Huw van Steenis, an analyst at Morgan Stanley in London, wrote in a note to clients. “LTRO is important but not a panacea. While the LTRO should materially ease the euro zone deleveraging process, credit conditions appear likely to remain fairly tight in Spain, Italy and central and eastern Europe.”...

“The crisis will only be resolved when, and if, European banks are sufficiently recapitalized to render a Greek default, and the concomitant peripheral contagion containable,” Danny Gabay and Yiannis Koutelidakis, London-based economists at Fathom Consulting, said in a note to clients last week. “European politicians have been lulled into a false sense of security by the market’s euphoric reaction” to the LTRO, they wrote.

Growing Risk

Banks also are cutting lending outside their home markets, data compiled by the Bank for International Settlements show. Euro-area banks reduced lending to Asia by 9 percent and to central and Eastern Europe by 8 percent in the third quarter.

“While the two three-year LTRO tenders establish a relatively long period for the industry to adjust, the ECB exit, in our opinion, represents a large risk that will grow over the coming three years as the first quarter 2015 maturity of the three-year LTRO approaches,” rating company Standard & Poor’s said in a Feb. 21 note.

7--IFR Comment: A big kicker for risk from second LTRO, IFR

Excerpt: It’s a big week for risk markets as we get another (and likely final) instalment of the ECB’s 3-year LTRO and we expect take-up to be around €500bn. Unlike in December when the 3-year LTRO liquidity helped to mitigate concerns over tail risk the liquidity impact from the LTRO this week will likely add a kicker to markets already flirting with risk-on.

Looking beyond the headlines: The December 3-year LTRO might have had a size of €489bn but the actual net new liquidity add was €193.4bn. This is because some €277bn of liquidity was shifted from shorter dated liquidity operations to the 3-year operation. This week there are some €253bn of liquidity operations maturing and in addition to this we have a special one-day operation.

The allotment at the 3-year LTRO this week needs to be adjusted for how much is rolled from the maturing operations to get a better idea of the liquidity add. It seems likely that net new liquidity will be greater than the €193.4bn that was allocated at the December 3-year LTRO.

Pro-risk trades

Interpretation will be positive: Market sentiment is thus that whatever the size of the allocation the interpretation will be that it is positive for risk markets. A higher than expected allocation will see a focus on the liquidity impact for risk markets while a lower than expected allocation will see markets view it as a sign that eurozone banks are seen as less risky. This is the set-up of the market that has moved from pricing out the tail risks (especially on a Greek default) and has been grudgingly forced to focus on pro-risk trades.

Not everyone likes to party: When the music is playing it seems that some people just have to dance and the longer you stay on the sidelines the more tempting it becomes to throw away your inhibitions and start dancing. Monetary easing from the BoE (further £50bn QE), BoJ (additional ¥10trn in QE) and the Fed (lower for longer on Fed Funds as well as continuing QE) has made sure that a drying punch bowl was once again filled to the brim.

The fact that volumes remain low suggests that participation remains low and there are still plenty listening to the music and not yet dancing.

Unlike Q1 2009 the markets are aware that a liquidity fuelled binge on risk can be damaging to the P&L and are more cautious. However, the ECB’s LTRO could help to add a larger kicker to risk assets especially as stock indices have shown little intention to correct preferring instead to move sideways before the next small leg up. The longer this continues, the more difficult and uncomfortable it becomes for players who had dived into safety and liquidity to stay on the sidelines.

8--Could free ECB money have expensive consequences?,IFR

Excerpt: “In theory, everybody would love to borrow at zero or negative rates without going through the pain of finding a creditor happy to take the opposite side of the transaction,” he said. “If the central bank offers this service systematically, banks can dismantle their trading platforms – which are costly to maintain – and become addicted to central bank credit.”

He continued: “If a protracted period of zero or negative interest rates were to be experienced in the euro area, it would be particularly important not to lose the perspective, and the possibility, of restarting the interbank market at a later stage. The intermediation role taken by the central bank cannot, and should not forever take the place of money market activity.”

He makes some good points. The LTRO and other ECB operations have clearly played a role in calming frayed nerves around the stability of the banking sector. But I guess the questions that arise are: Can there be such a thing as too much free money for too long? How do you wean banks off the drugs? What risks are there to shock withdrawal therapy and the danger of leaving a vacuum?...

The nirvana of unlimited free money has a flip side when the taps are turned off that could lead back to exactly what Draghi railed against so clumsily the other week with his virility comment.

Banks that struggle to access funding in an otherwise stable borrowing environment are likely to be ostracised by risk-averse counterparties. And you know what? In an efficient marketplace, stigma around the weaker links in the money supply chain which have no recourse but to tap the central bank for funds is arguably a good thing, unless the expectation is for an interventionist ECB standing in perpetuity with its interest-free cheque book at the ready.

In the meantime, drowning the system in cheap cash could drive money-market funds out of business because it undermines their business model and encourages investors to shift their investments to alternative, more profitable, segments.

Coeure believes low rates can undermine the profitability of commercial banks on the basis that deposit-flight risk could compel them to keep depo rates at current levels at the same time as lending rates are falling, leading to a negative loan-deposit spread, which in practice means credit to the real economy will contract.

9--LTRO and the Sarkozy trade, IFR

Excerpt: ECB data show that during January, eurozone banks increased their government bond holdings by €3.3bn. What is interesting from the country breakdown is that 82% of the rise in government bond holdings is accounted for by banks in Spain and Italy.

While the data does not shed light on what bonds were purchased by country, it does support the notion that LTRO funds made their way into sovereign debt.

How much of the December LTRO funds made their way into sovereign debt has been a hot topic, but until now there has been little in the way of data. The ECB data released today show an increase in bond holdings of the eurozone banks totalling €53.3bn.

The breakdown by country (holdings and not the bonds purchased) shows that Spanish banks increased their holdings by €23.1bn and Italian banks by €20.6bn with Reuters highlighting that both were record monthly increases.

The data also shows that French banks increased government bond holdings by €4.5bn and German banks by €5.7bn suggesting that the carry trade was mainly a phenomena dominated by Italy, Spain, France and Germany.

While the data do not show which country bonds were purchased they will be watched again in March and April to see whether funds from the 2nd LTRO this week will be more evenly distributed in making its way toward the sovereign carry trade.

10--The End Game, Chris Cook, Asia Times

Excerpt: The end game is about to begin. On the one hand you have the noise and rhetoric. Greedy speculators gouging gasoline prices; mad mullahs preparing to wipe Israel off the map; bunker buster bombs and fleets being positioned; huge demand for oil from the BRIC countries; China’s insatiable thirst for oil; the oil price will head for $200 a barrel and will never again fall below $130 …

On the other hand you have the reality.

Oil Markets

The oil markets are completely manipulated and orchestrated, and the conductors of the orchestra have the benefit of having already held a rehearsal in 2008.

History never repeats itself, but it does rhyme. This time around it is not demand from the United States that is collapsing, but European Union and United Kingdom demand, as oil prices in euros and pounds sterling have never been higher. In the meantime, the US is awash in oil as domestic production quietly increases, flushed out by the high prices.

As I have outlined in previous articles, the culprit for the high oil prices between 2009 and 2012 – with the exception of the speculative “spike” between March 2011 and June 2011 driven by Fukushima and Libyan price shocks – has been passive investment by risk-averse investors, which enabled producers to support oil prices at high levels.

Much of this passive money underpinning the market and enabling producers to monetize inventory pulled out of the market in September 2011, and another wave pulled out in December 2011.

What is now happening is the end game: an orchestrated wave of noise that is drawing in speculative money. This is enabling the producers who are actually in the know to hedge by selling production forward during what they confidently expect will be a temporary – and pre-planned – managed fall in the oil price....

The effect of a managed decline in oil prices to, and probably over-correcting well through, $60 a barrel – which is coming fairly soon – will be extremely beneficial to the US in two ways.

Firstly, it will be catastrophic in particular for Iran, Russia and Venezuela – not exactly on the White House party list – whose hugely oil-dependent revenues will collapse. The ensuing economic mayhem will open these countries up to regime change and to rescue plans which Wall Street will be dusting off.

Secondly, the US population will be laughing all the way to the gas station as gasoline prices fall – at least temporarily – below $2.50 a gallon and release purchasing power into the economy, thereby doing the president’s re-election chances no harm at all.

What will then happen is that members of the Organization for Petroleum Exporting Countries will panic and genuinely reduce their production. The Saudis/Gulf Cooperation Council will again orchestrate the inflation of the oil price – as they did in 2009 – comfortable in the knowledge that they have been able to hedge against this temporary fall in prices at the expense of the speculators currently pouring in to the market....

System Fragility

The markets in oil have never been so fragile and susceptible to shocks. Private inventories of oil are low. The investment banks interpret this – as they interpret everything – as a sign of physical demand and therefore as bullish for the oil price … oh, and by the way, here are some oil funds they have to sell you.

The reason inventories are low is that private intermediary buyers will only store oil if they can both finance it and lock in a higher forward sale price. Bank financing is scarce and getting scarcer, while forward prices are below current prices; the result is that inventories are low.

The systemic shortage of finance capital means that neither physical oil traders nor the remaining proprietary traders of banks can afford to take into storage much of the approaching flood of oil onto the market....

In my view, the steep decline which is planned could easily get out of hand in a not dissimilar way to the tin market in 1985 when the price collapsed – literally overnight – from $8,000 per tonne to $4,000 per tonne.

We will then see whether the clearing houses are “too big to fail” – and ask why, if so, such utilities are run for private profit?

When, Not If

In my analysis, absent a massive, and sustained, shortfall in oil supplies – which I cannot see occurring, since all involved have every interest in ensuring it does not occur – the oil price will, as I have already forecast, fall dramatically by the end of this year’s second quarter at the latest. It’s not a matter of if, but when it will happen.

11--Michael Olenick: Debunking the “Housing Has Bottomed” Meme, naked capitalism

Excerpt: ...there is not a single credible data point I’ve seen that home prices will increase anytime soon. They may stabilize if banks control inventory, but by definition that means buyers can wait to see what actually happens rather than what’s predicted to happen....

Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans. ...

As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.

Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor....

As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.

For buyers who want a home, not a house — that is, if your primary purpose is to shelter your family rather than your money — and you don’t want to rent because you plan to make improvements, don’t plan to move for a decade or longer, and can purchase with cash, it may not be a bad time to buy.

But for all other buyers, which includes virtually everybody, heed the hindsight of those who purchased homes at every other phantom market bottom and who are now underwater. Wait until you see price appreciation, in the region you want to purchase, for a quarter or two. Your house may cost a few thousand dollars more in the short-term than at the genuine bottom but, in the long run, it’s a safer bet than losing tens of thousands of dollars in an unstable market.

12--From the FHFA: FHFA Announces Pilot REO Property Sales in Hardest-Hit Areas, calculated risk

Excerpt: The Federal Housing Finance Agency (FHFA) today announced the first pilot transaction under the Real Estate-Owned (REO) Initiative, targeted to hardest-hit metropolitan areas — Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.

With this next step, prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years.

What is surprising is that most of these units are already rented (85% of the units are rented) and almost 60% of the units on term leases (the rest are month-to-month).

The original idea behind the REO-to-rental program was to sell vacant REO to investors and only in certain areas. These investors would agree to rent the properties for a certain period, and that would reduce the number of vacant units on the market (or coming on the market). This offer doesn't seem to match that goal.

Fannie already has a program to keep tenants in place if they foreclose on a rented property - and this sounds like Fannie is selling some of these tenant-in-place properties

13--This Tribal Nation, Paul Krugman, NY Times

Excerpt: Digby sends us to Chris Mooney on how conservatives become less willing to look at the facts, more committed to the views of their tribe, as they become better-educated:

For Republicans, having a college degree didn’t appear to make one any more open to what scientists have to say. On the contrary, better-educated Republicans were more skeptical of modern climate science than their less educated brethren. Only 19 percent of college-educated Republicans agreed that the planet is warming due to human actions, versus 31 percent of non-college-educated Republicans.


But it’s not just global warming where the “smart idiot” effect occurs. It also emerges on nonscientific but factually contested issues, like the claim that President Obama is a Muslim. Belief in this falsehood actually increased more among better-educated Republicans from 2009 to 2010 than it did among less-educated Republicans, according to research by George Washington University political scientist John Sides.

The same effect has also been captured in relation to the myth that the healthcare reform bill empowered government “death panels.” According to research by Dartmouth political scientist Brendan Nyhan, Republicans who thought they knew more about the Obama healthcare plan were “paradoxically more likely to endorse the misperception than those who did not.”

What this made me think about was the way Christy Romer ended her excellent speech (pdf) laying out what we know about the effects of fiscal policy.:

The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.

That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

What Chris Mooney is telling us is that this is a vain hope. Highly educated political conservatives — and this includes conservative economists — are going to be less persuadable by empirical evidence than the man or woman in the street. The more holes you poke in doctrines like expansionary austerity or supply-side economics, the more committed they will get to those doctrines.

This debate isn’t going to be won by rational argument

14--What Ails Europe?, Paul Krugman, NY Times

Excerpt: Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.

Why has Europe become the sick man of the world economy? ... Read ... about Europe ... and you’ll probably encounter one of two stories, which I think of as the Republican narrative and the German narrative. Neither story fits the facts.

The Republican story — it’s one of the central themes of Mitt Romney’s campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we’re watching the death throes of the welfare state. ..

.Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer...? But let’s do this systematically. Look at the 15 European nations currently using the euro..., and rank them by the percentage of G.D.P. they spent on social programs before the crisis.

Do the troubled Gipsi nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No,... only Italy was in the top five, and even so its welfare state was smaller than Germany’s.

So excessively large welfare states didn’t cause the troubles.

Next up, the German story, which is that it’s all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. ...

So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression. ...

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

Now, understanding the nature of Europe’s troubles ... makes a huge difference, because false stories about Europe are being used to push policies that would be cruel, destructive, or both. The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here’s what you need to know: they have no idea what they’re talking about.

15--Wealth distribution without redistribution, VOX

Excerpt: What does the distribution of wealth look like in an economy in which all households have identical skills and patience, but there is no redistribution? This column argues that without some redistributive mechanism – either explicit in the form of government tax or fiscal policies, or implicit in the form of limited intergenerational transfers – the wealth in the economy tends to concentrate at the top....

Redistribution and stability

Our analysis highlights the crucial role of redistributive mechanisms in an economy. Indeed, it is their presence alone that ensures the stability of the economy and prevents an outcome in which the distribution of wealth becomes increasingly skewed towards the top.

We interpret redistribution broadly, so that redistributive mechanisms include any process that proportionally affects wealthy households and poor households differently.

Redistributive mechanisms include explicit mechanisms such as government tax or fiscal policies that directly transfer income from wealthy to poor households as well as implicit mechanisms such as limited intergenerational transfers of wealth that reduce the total wealth held by wealthy households proportionally more than that of poor households. Although implicit redistributive mechanisms do not involve direct transfers of wealth from wealthy to poor households, their stabilising effect on the equilibrium distribution of wealth is the same.

Implications and questions

The main conclusion of our analysis is clear. In the absence of any redistribution, the distribution of wealth is unstable over time and becomes concentrated entirely at the top. This occurs despite the fact that all households have identical patience and skill.

16--New York Times: US Intelligence Says Iran Not Developing Nukesantiwar.com The mainstream media is beginning to report the actual assessments of Iran's nuclear program, instead of the usual fear-mongering



Excerpt: The intelligence community in the United States believe there is no hard evidence that Iran has decided to build a nuclear bomb, the New York Times finally reported on Saturday.

The New York Times ran a front page article on Saturday reiterating the consensus view of the U.S. military and intelligence community regarding Iran’s nuclear program, splitting from usual mainstream media coverage which has hyped fear that Iran is on the verge of having nuclear weapons.

The U.S. assessments that Iran is not developing nuclear weapons and has demonstrated no intention of doing so has been reported here at Antiwar.com and many other alternative news sources, but only now, after successive pronouncements by high level officials going against the grain of the hawkish rhetoric on an impending Iranian bomb has the Times given the issue substantial space.

“Recent assessments by American spy agencies are broadly consistent with a 2007 intelligence finding that concluded that Iran had abandoned its nuclear weapons program years earlier,” the report said. “The officials said that assessment was largely reaffirmed in a 2010 National Intelligence Estimate, and that it remains the consensus view of America’s 16 intelligence agencies.”

The report points to testimony from James R. Clapper Jr., the director of national intelligence, David H. Petraeus, the C.I.A. director, Defense Secretary Leon E. Panetta and Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, all in agreement that there is no military dimension to Iran’s nuclear program. This reportedly contradicts Israeli assessments and lately those of the U.N.’s nuclear watchdog, the International Atomic Energy Agency, which stirred up controversy over Iran’s program, claiming they are “unable to provide credible assurance about the absence of undeclared nuclear materials and activities in Iran.”

But “intelligence officials and outside analysts,” the Times reports, believe “Iran could be seeking to enhance its influence in the region by creating what some analysts call ‘strategic ambiguity.’ Rather than building a bomb now, Iran may want to increase its power by sowing doubt among other nations about its nuclear ambitions

As Mohamed ElBaradei, former head of the IAEA, said in 2009 “I don’t believe the Iranians have made a decision to go for a nuclear weapon, but they are absolutely determined to have the technology because they believe it brings you power, prestige and an insurance policy.”

Despite this consensus view in the U.S., Washington has continued to isolate Iran, to heap crippling economic sanctions on Iran to support Israel – and refuse to criticize it – even while Tel Aviv has supported terrorist operations against Iranian nuclear scientists. Amid intense pressure from various Western foreign policy elites to wage war on Iran, perhaps to install an obedient regime, the intelligence has removed the one possible pretext: an Iranian nuclear weapon. And even the mainstream news media is now reporting it.

17--US STRUCTURED FINANCE: BofA warns investors over ABS/MBS exposure, IFR

Excerpt:  Bank of America Merrill Lynch has warned investors to scale back exposure to securitised products, saying the external shocks that rocked the sector a year ago could be due for a repeat performance.


“Once again, securitised products may well be priced for a perfection that is unsustainable,” wrote Chris Flanagan, an ABS/MBS strategist at BofA, in a new research report.

The report noted that last year started strongly before outside factors – rising oil prices due to Mideast unrest, the European debt crisis, the Japan tsunami, and the US debt downgrade – caused securitised products to stumble badly.

Given the phenomenal risk-on credit market rally that has started 2012, the BofA analysts believe that there are important similarities that investors should be mindful of....

BofA economists see US fiscal tightening and economic slowing looming on the horizon “as political gamesmanship leading up to the election outweighs constructive policy developments”.


“Again, remarkably, a variation on the 2011 debt ceiling debacle appears to be in the works for the US,” Flanagan said. BofA reminded investors that in spite of the recent credit-market rally, price returns across all credit indices are still negative over the past year.

“We think significantly increased caution with respect to risk-taking is warranted,” Flanagan said.

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