1--The Misunderstood Consequences of the Student Debt Crisis, The Atlantic
Excerpt: Last week, the Federal Reserve Bank of New York published a study finding that 27 percent of student borrowers whose loans have gone into repayment are now delinquent on their debt. Then on Saturday, The Washington Post reported that bankruptcy lawyers are seeing a growing number of clients seek relief from their education loans.
This is not necessarily shocking news. A year ago, the Institute for Higher Education Policy published a study tracking the dismayingly high delinquency and default rates of the class of 2005. But as the sum of outstanding student loans has climbed towards the $1 trillion mark, passing total credit card debt along the way, the fact that America's students are essentially putting themselves into hock for an education has more than a few people panicking. As William Brewer, head of the National Association of Consumer Bankruptcy Attorneys, told the WaPo, "This could very well be the next debt bomb for the U.S. economy."
Well, "bomb" might not be the right word for it. Bum student loans are not a danger to the economy the same way subprime mortgages were in 2007. According to the New York Fed, total outstanding student debt grew to $870 billion last year. That sounds like a huge number, but it still only accounts for roughly 8 percent of all U.S. household debt. Mortgages, meanwhile, make up 72 percent of household debt, as the graph below spells out
2--Bad bank funding drives out good, IFR
Excerpt: The truth is that Europe has rescued its banks, as a government in a fiat money system always can, but in doing so has further crippled their ability to stand without assistance. This brings up ugly decisions and difficult negotiations with Europe’s international peers.
Should Europe keep bank funding so cheap that pressure is removed to shrink balance sheets? That will help ease the credit crunch but it is also a key part of how Japan ended up where it is today, all these growth-less years down the road.
It seems obvious that having given the banking system about €1 trillion in three-year loans, the LTRO will now have to become a standing feature for some time to come.
All of this may just beat the alternative of a mass bank run in the eurozone, but an institutionalised system in which banks depend utterly on official support, supporting in turn those governments by holding their bonds, is one which, to put it kindly, cannot go on forever.
3--Guggenheim Partners: It’s Time To Short The Treasury Market ‘Ponzi Scheme’, The Big Picture
Excerpt: In a recent letter, Scott Minerd of Guggenheim Partners argues that thanks to the world’s central banks, the economy — at least in the US — has entered a self-sustaining recovery, and that domestic investments will continue to do well. And like many other top tier investors (too many to count, really) he loathes Treasuries.
In the U.S. fixed income markets, the credit trade has worked very well. As concerns about the recession dissipate, riskier asset classes are rallying. However, while below investment- grade credits continue to look attractive, Treasury yields remain unsustainably low. I think the Fed’s policy actions will keep rates lower than they normally would be, but I believe the improving U.S. economy will put upward pressure on rates over the next six to twelve months. Essentially, what we have right now in the Treasury market is a Ponzi scheme. If the market had its way, Treasury rates would be at least 100 basis points higher than they are today. But because there is a buyer out there who is willing to keep purchasing these securities, even though it doesn’t make any economic sense as a prudent investment, the market has reached levels that wouldn’t be sustainable if free market forces were allowed to prevail.
4--Foreclosure Fraud Settlement Docs Finally Released, FDL
Excerpt: The foreclosure fraud settlement has been filed in federal court in Washington. The Justice Department has provided the relevant documents, over a month after the settlement was announced. So now we can finally begin to assess the settlement and what it will mean for housing policy....
Here’s just one list from the complaint of servicing abuses found by the government:
a. failing to timely and accurately apply payments made by borrowers and failing to maintain accurate account statements;
b. charging excessive or improper fees for default-related services;
c. failing to properly oversee third party vendors involved in servicing activities on behalf of the Banks;
d. imposing force-placed insurance without properly notifying the borrowers and when borrowers already had adequate coverage;
e. providing borrowers false or misleading information in response to borrower complaints; and
f. failing to maintain appropriate staffing, training, and quality control systems (there's much more)
5--Ray Dalio: Man and machine, The Economist
Excerpt: What Mr Dalio calls the “timeless and universal” core of his economic ideas is set out in a 20-page “Template for Understanding” that he wrote shortly after the collapse of Lehman Brothers in 2008 and recently updated. The document begins: “The economy is like a machine.” This machine may look complex but is, he insists, relatively simple even if it is “not well understood”. Mr Dalio models the macroeconomy from the bottom up, by focusing on the individual transactions that are the machine’s moving parts. Conventional economics does not pay enough attention to the individual components of supply and, above all, demand, he says. To understand demand properly, you must know whether it is funded by the buyers’ own money or by credit from others.
6--U.S. auto lenders give easier terms, cheaper money, Reuters
Excerpt: U.S. lenders made more auto loans in the most recent quarter, but took more risks and charged less interest to get the business, according to a report released on Thursday by credit reporting and market information firm Experian Automotive.
Outstanding car loans increased nearly 4 percent to $658 billion at the end of December from a year earlier as borrowers financed larger amounts per car and lenders accepted lower credit scores and gave people more time to pay.
The expanded lending and easier credit came with evidence that the economic recovery is benefitting banks and borrowers alike: delinquency rates declined and the amount of loans at risk fell by nine percent, according to Experian....
The portion of all loans made to subprime borrowers rose to 41.5 percent from 38.4 percent.
Lenders made loans for an average 110 percent of the value of new cars, which was two percentage points, and for 130 percent of the value of used cars, about the same as a year earlier. The average amount financed for new cars was $17,404 and for used cars $9,015
6--How the Depression Made Keynesians of Capitalists, Bloomberg
Excerpt: Roosevelt and his New Dealers would eventually give up conventional thinking on government spending. Business confidence gave way to demand management as the policy of the Democratic Party. That story is well-known. More surprising is that liberal politicians and economists were supported by a range of business leaders. Within five years of the 1937 recession, part of the business community had formed a "growth coalition" centered on the proposition that only government spending could end the Depression -- and thus save capitalism.
One of the more unexpected business voices for growth and spending was a Republican Mormon banker named Marriner Eccles. From a wealthy Utah family, Eccles had taken charge of his father's construction business and diversified into finance and other areas. His company survived the Depression, but he learned that austerity and savings were self-defeating. "In seeking individual salvation," he wrote, "we are contributing to collective ruin." The grim ironies of Depression economics had led him "face to face with the proposition that the only way we could get out of the depression was through government action."
Appointed chairman of the Federal Reserve by Roosevelt, Eccles was unable to get his fellow Fed governors to embrace a more liberal monetary policy. But he was an early supporter of Keynesian fiscal stimulus....
soon even the Chamber of Commerce took the plunge and joined the growth coalition. Under the dynamic leadership of Eric Johnston, it supported the Full Employment Act of 1946, a Keynesian, albeit conservative, embrace of government spending to reduce the boom-and-bust cycle that Hoffman feared. Johnston, a wounded veteran of World War I, had built up the largest appliance distributorship in the Northwest, starting out as a door-to-door vacuum-cleaner salesman. This Main Street entrepreneur understood that capitalism couldn't survive on a starvation diet. "We can't afford to go into another tailspin," he told the Chamber's staff. "Another depression would mean the loss of our system."
Growth now took precedence over the conventional thinking on balanced budgets and the ideology of market self-regulation. After World War II, the U.S. embraced a Keynesian anti-depression economics that united business, government and labor. That coalition would endure for the next 40 years of prosperity.
7--Real Wages Remain Below Their Peak for 39th Straight Year, middle class political economist
Excerpt: ...we have 39 straight years where real wages have yet to get back to their 1972 peak and, indeed, they are a long way from that peak still. This is doubly surprising when we consider that productivity has been increasing steadily throughout that period, approximately doubling from 1970 to 2011...
The fact that, adjusted for inflation, wages still remain almost 14% below what they were 40 years ago, despite a doubling in productivity, is a national disgrace. It is one of the roots of the increase in multi-income households, in higher levels of indebtedness needed to maintain consumption levels, and of the sharp increase in inequality we have seen over recent decades.
8--How Is the Payroll Tax Cut Doing?, NY Times
Excerpt: Beginning in January 2011, the payroll tax withheld from employee paychecks was temporarily reduced to 4.2 percentage points from 6.2 percentage points. The cut was scheduled to expire at the end of 2011, but Congress has continued it through the end of 2012.
My calculations last year, based on the proposed cut of 3.1 percentage points, suggested that the payroll tax cut “could raise employment by at least a million, albeit the duration of job creation is related to how long the tax cut lasts.”
n a seasonally adjusted basis, payroll employment was 130.2 million at the end of 2010, just before the payroll tax cuts took effect. As of last month, payroll employment was up 2 percent, or 2.5 million, to 132.7 million. The household employment survey tells a similar story. Aggregate hours worked — the product of employment and the length of an average employee’s work — increased almost 3 percent.
Of course, the payroll tax cut was not the only factor affecting the economy since 2010. If nothing else, population growth would have increased employment by about 1.2 million over that time frame. In addition to the increase expected from population growth, payroll employment therefore increased by another 1.3 million since the time that the payroll tax cut went into effect.
During the same period, various parts of the federal government’s 2009 stimulus package expired and state and local governments were, on average, laying off employees. Housing prices also fell somewhat — more than 4 percent according to the Case-Shiller index. One point of view is that government and housing contraction tends to reduce total employment, which makes it even more remarkable that the net result of the payroll tax cut and these contractionary events was an employment increase beyond population growth.
Regardless of the source of the two and a half million new jobs, employment is still millions below where it would have been if employment had grown with population since 2007. But nobody promised that a mere two-percentage-point payroll tax cut would bring the economy back all by itself.
9--Would a Higher Top Tax Rate Raise Revenues?, Bruce Bartlett, NY Times
Excerpt: On Friday, Prof. Allan Meltzer of Carnegie Mellon University, a well-known conservative economist, offered a commentary in The Wall Street Journal arguing against policies to equalize the distribution of income.
His key piece of evidence is ... from a study by the Swedish economists Jesper Roine and Daniel Waldenstrom, that shows the share of income accruing to the top 1 percent of earners in seven Western democracies.
They all follow the same trend line, Professor Meltzer says, and it proves that “domestic policy can’t be the principal reason for the current spread between high earners and others.” ...
Leaving aside the fact that the ultrarich have gained far more in the United States than any other country in his sample and that there is no upward trend at all in the Netherlands, he seems to have missed an important implication of his own conclusion.
If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim. ...
If, as Professor Meltzer has shown, the rich get richer regardless of the tax rates, there is no economic reason not to raise the top rate. Perhaps unwittingly, his research confirms that of other economists who say that we could get substantial additional revenues even if the top rate doubled.
10--Fed Watch: No QE3...yet, economist's view
Excerpt: despite Richmond Federal Reserve President Jeffrey Lacker's objection, they did not retreat from their expectation that rates will remain low though at least late 2014. This is important, as a commitment to low rates would have more of an effect when there exists upward pressure on interest rates, as opposed to being simply another confirmation that the economy is operating at a decidedly sub-par equilibrium. Moreover, they telegraphed that additional easing is still a possibility, indicating that tightening is not the only game in town. Perhaps they have learned a lesson from last year's turn toward hawkishness in the spring.
Bottom Line: The Fed isn't ready to ease further, but isn't ready to tighten either. If you are looking for the Fed to leverage the current momentum with another blast of easing in an effort to lift us well clear of the lower bound, you are likely to remain disappointed. But at least you can find some comfort, however small, in their obvious effort to make clear they remain far from taking a more hawkish turn anytime soon.
11--Econ crisis: Double Bubble, you tube
video: just 2 minutes. You gotta watch this one!
12--Why I Am Leaving Goldman Sachs, NY Times
Excerpt: TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied....
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
13--French Presidential Elections--Hollande Wants to Renegotiate EU Fiscal Pact, Der Speigel
Excerpt: He's ahead of incumbent Nicolas Sarkozy in polls and he would like to become France's next president. If elected, Socialist Party candidate François Hollande says in a SPIEGEL interview, he will seek to renegotiate the European fiscal pact agreed to by Merkel and Sarkozy. He also wants to introduce common European "project bonds".
French presidential candidate François Hollande has not allowed himself to be provoked by the German chancellor's refusal to meet with him ahead of elections in France. In an interview with SPIEGEL to be published on Monday, Hollande said: "I understand that Mrs. Merkel supports Mr. Sarkozy. After all, they're within the same conservative family of parties." At the same time, the center-left Socialist Party candidate said he isn't necessarily convinced that this support actually benefits the president.
After news emerged last week that Merkel and other conservative leaders in Europe planned to shun Hollande, the first thing the French asked themselves, the challenger to conservative President Nicolas Sarkozy said, was "why this intention existed" in the first place. Besides, he added, it isn't "foreign leaders who will make the decisions for the French people." Perhaps those who didn't want to meet with him "have done me a service without knowing it," Hollande said.
Hollande said he had "simply indicated (to Merkel) my availability in case the possibility to meet before the election could have been given to us." He added that he had not received any official refusal. "But I think it doesn't make sense to insist."
Hollande said confidently: "Now everyone knows my position on the fiscal pact, and they will have to take it into consideration after the election." If he becomes president, he added, "France will not pursue the same policies as under (current President) Nicolas Sarkozy.
'We're Not Quite at a Point at Which We Combine Our Last Names'
Hollande told SPIEGEL that he wants to "renegotiate" the European fiscal pact. What is most important, he added, is that "the necessary budget discipline needs to be accompanied by growth."
Who seriously believes, he asked, "except perhaps a few people in Germany, that we can reduce our deficits if there is no growth?" He also said he is opposed to the European Court of Justice having the power to encroach on national fiscal sovereignty, as is currently stipulated in the fiscal pact.
His goals include "introducing euro bonds as a tool against speculation." He specified that he did not want euro bonds to mutualize the entire debt of the euro zone. This was possibly only in the long term, Hollande added. He said he preferred "project bonds" for targeted investment in growth projects.
When asked whether he would replace the "Merkozy" tandem by a "Merlande" combination in the event of an election win, the candidate responded coolly: "We're not quite at the point yet at which we combine our last names."