Tuesday, March 27, 2012

Today's links

1--Does inequality lead to a financial crisis?, VOX

Excerpt: Did inequality in the US lead to the global financial crisis? This column presents evidence from 14 countries between 1920 and 2008 and argues that while inequality can be blamed for many things, the global crisis is not one of them.

In his 2010 book, Fault Lines, Raghuram Rajan argued that rising inequality in the past three decades led to political pressure for redistribution that eventually came in the form of subsidised housing finance. Political pressure was exerted so that low-income households who otherwise would not have qualified received improved access to mortgage finance. The resulting lending boom created a massive run-up in housing prices and enabled consumption to stay above stagnating incomes. The boom reversed in 2007, leading to the banking crisis of 2008. Along these lines, Kumhof and Rancière (2011) explore the links between inequality, leverage and crises within the context of a DSGE model. They motivate their model with examples from the US in the 1920s and the more familiar events leading up to the subprime crisis.

There is reason to pause before accepting the generality of this new view.
Credit and crises

On the other hand, we do agree with Rajan et al that financial instability and banking crises often follow above-average growth in credit. Our evidence, which reproduces that found in Schularick and Taylor (forthcoming), finds a fairly strong relationship between growth in real credit and the probability of a banking crisis. This is consistent with many different models of financial instability, but we take no stand on this in our paper. What can be said is that inequality is not significantly related to systemic banking crises in our large sample. Since income concentration is not a good predictor of credit growth, it is hard to see how it can be related to crises by the channels proposed in the work cited above.

History, credit, and crises

Historical evidence from several major credit booms finds scant support for the inequality/crisis hypothesis. In the 1920s in the US, consumer and mortgage debt did indeed rise as the top 1% share in total income climbed from 15% in 1922 to 18.42% in 1929 (Piketty and Saez 2003). In that period, consumer credit was closely related to the rise of new, big-ticket consumer durables in the 1920s such as automobiles, washing machines, and radios. The rise of consumer credit arguably came from supply-side innovations rather than from increased household demand to maintain consumption in the face of stagnant incomes as in Kumhof and Rancière (Olney 1989). The housing boom that ended in 1926, well before the Depression started, reflected a significant amount of postwar pent-up demand, higher quality housing, and a favourable interest-rate environment (White 2009). It appears to have had little to do with the subsequent Depression and series of banking crises that would begin in mid-1929.

Time series evidence from other countries is not consistent with the inequality link either....
Conclusions and lessons

If income inequality drove the credit boom that preceded the subprime crisis in the US, the event was an outlier by historical standards. Comparative evidence from the last century shows little relationship between rising inequality and credit booms. Even in the US, a more plausible interpretation of events in the first decade of the 21st century is that interest rates were at historical lows. That situation coupled with financial innovation allowing low-income workers to buy houses at unrealistic prices given forecasts of permanent incomes and the likely reversion in interest rates.

If there is a policy lesson in all of this, it might be related to the fact that market-determined rates of leverage can lead to a systemic financial crisis and ensuing negative spillovers. But an increase in the supply of credit that generates a financial crisis has very different policy implications from those that might be prescribed by an increase in the demand for credit that allegedly arose to maintain consumption in an increasingly unequal society. In the former case, financial regulations and reforms to limit leverage and systemic risk that have been discussed and enacted since 2008 are potentially more appropriate remedies to achieve financial stability. While inequality is arguably problematic for many other reasons, we remain sceptical of claims that it engenders financial crises.

2--SEC alleges Wells Fargo ignored MBS subpoenas, Housingwire

Excerpt: The Securities and Exchange Commission seeks to enforce subpoenas it filed against Wells Fargo for alleged failure to produce documents in the SEC's mortgage-backed securities probe.
The SEC filed a subpoena enforcement action in a California federal court against the bank.
The commission is investigating possible fraud in connection with Wells Fargo’s sale of nearly $60 billion in residential mortgage-backed securities to investors, according to court documents. The SEC said it filed subpoenas with Wells Fargo that date back to September 2011.

"The bank was obligated to produce (and agreed to produce) documents to the commission, but has failed to do so," the SEC said in a statement Friday.

The commission’s action relates to its investigation into whether Wells Fargo made material misrepresentations or omitted material facts in a series of offerings between September 2006 and early 2008.

"The staff in the commission’s San Francisco regional office issued several subpoenas to Wells Fargo since September 2011 seeking, among other things, materials related to due diligence and to the bank’s underwriting guidelines," the SEC said in a statement. Wells Fargo agreed to produce the documents, and set forth a timetable, yet failed to produce many of the materials, the commission said.

The SEC seeks a court order compelling Wells Fargo to comply with its subpoenas. The commission noted that it is in a fact-finding inquiry and has not concluded that anyone has broken the law.
Wells Fargo could not immediately be reached for comment.

In February, Wells Fargo and Goldman Sachs received Wells notices over mortgage-backed securities disclosures, according to regulatory filings.

Other banks also face potential government probes over whether they misrepresented the quality of loans placed into mortgage-backed securities.

During his State of the Union address in January, President Barack Obama announced the formation of a mortgage fraud task force to look into fraud involving mortgage-backed securities.

The new federal task force, led by New York Attorney General Eric Schneiderman, sent subpoenas to the 11 largest financial institutions in late January.

3--Goldman hoses its own clients with toxic MBS, Reuters

Excerpt: As I read through Marrero's decision, I kept thinking of the movie Margin Call, in which Kevin Spacey suffers a crisis of conscience as he oversees a sell-off of his bank's MBS portfolio, at the expense of the clients buying the securities. Goldman, like the unnamed investment bank in the movie, came to a sudden realization that it had to shed MBS exposure. But its bankers were much smarter than their counterparts in Margin Call. They didn't just sell off their portfolio, according to the Marrero ruling. They created doomed CDOs, hedged against the (inevitable) failure of their own instruments, and gladly accepted fees from the clients they allegedly duped into buying the securities. It was a breathtakingly brilliant campaign, if you're of a ruthless bent. Goldman's secret MBS short, as Marrero depicts it, tricked not just its own clients but the entire MBS marketplace....

With those caveats, Marrero portrays a scheme he describes as "not only reckless, but bordering on cynical." As early as 2005, he said, Goldman began to understand through its own underwriting and its relationship with the outside mortgage appraiser Clayton Holdings that mortgage lending standards were deteriorating. Goldman Sachs had bet heavily on the continued success of mortgage-backed securities, and by the summer of 2006, knew that was a bad bet. The problem, according to the co-manager of the bank's structured products unit (quotes in Marrero's ruling), was that there were "few opportunities" to shed Goldman's MBS risk. The market believed the bank was "very long for the foreseeable future," according to another Goldman official Marrero cited.

Nevertheless, in December 2006, CFO Viniar directed the structured finance group to begin aggressively ridding the bank of subprime risk and positioning Goldman to take advantage of "very good opportunities as the market goes into what is likely to be even greater distress." Thus was born the program of shorting Goldman-devised (and Goldman-sold) CDOs based on mortgage-backed securities.

The program was so successful that according to filings Marrero cited, Goldman had a net short position of $2.1 billion in credit default swaps on mortgage-backed instruments by March 2007. By August 2007, Goldman told the SEC, it had reduced its overall exposure to subprime mortgage backed securities from $7.2 billion to $2.4 billion. Through what Marrero called "the fine art of financial transubstantiation," Goldman (in the words of one of its bankers) managed "to make some lemonade from some big old lemons."

The Hudson CDO offerings came smack in the middle of Goldman's risk reduction campaign, context that was crucial to Marrero's decision not to dismiss most of the investors' case. Goldman's own actions -- "selecting the referenced (residential) MBS and then betting heavily against them" -- indicated to Marrero that the bank well understood the risks of its subprime exposure and "maneuvered" to offload it. "All Goldman needed for the success of its venture was large 'sophisticated' investors (to) drink up the bittersweet potion despite Goldman's boilerplate warnings," the judge wrote. "Goldman thus managed to shift its significant subprime risk over to its own clients."

4--More on austerity, Paul Krugman, NY Times

Excerpt: ...if allowing an economy to remain persistently depressed reduces long-run growth prospects — and there’s pretty good evidence to that effect — then austerity in a depressed economy has enormous costs, and may even lead to a vicious circle of shrinking potential leading to even more austerity and so on. Indeed, maybe that’s happening to the Cameron government right now.

5--Comstock is still bearish, pragmatic capitalism

Excerpt: The S&P 500 earnings (as most of our regulars viewers understand-we prefer using “reported” earnings, but since all of Wall Street focuses on “operating” earnings we will use “operating”) are also just starting to show some weakness as the first quarter will be the first slowdown (earnings growth about 0.5%) in a couple of years as the profit margins were at peak levels and have always reverted to the mean in the past. Also, every single time the S&P 500 was expected to earn $100 or more, the investors were always disappointed. In fact, the 2008 earnings estimates were over $100, but when the actual number came in for “operating” earnings it was a disappointing $49.50. The 2012 earnings estimates for the S&P 500 this past fall for were up around $114, but have subsequently dropped to about $105 and will probably disappoint again. The present earnings estimates for 2013 are $119 (bottom up) and will probably be revised down sometime soon. Also, if oil continues rising, not only will earnings be affected negatively, consumer sentiment will drop and that could affect the consumer spending almost as much as the debt overload in the household sector.

We understand the jobs picture has improved, but let’s put the improvement into perspective. The unemployment rate has declined to 8.3%, but at least half of the decline is explained by many of our older citizens who have dropped out of the labor force (as well as many other discouraged workers dropping out). And if we continue to generate jobs at the same rate as the past couple of years it would still take 13 years to get to full employment. Keep in mind that we have fewer jobs presently than we had 11 years ago. Housing is dependent upon a vigorous jobs market and, with all the debt the household sector has built up, we don’t expect the housing market to bottom before the prices decline to the trend line of normal prices (taking out the bubble prices of housing from 2002 to 2007) and we still have 10% to 15% more decline left. The NAHB (National Association of Home Builders) February confidence index was just released at a disappointing 28, unchanged from January, and keep in mind anything under 50 is considered negative.

We are also looking at what Ben Bernanke called a “Fiscal Cliff.” He was referring to the Bush tax cuts expiring at the end of the year and if they expire on everyone it will essentially be a tax increase of about $450 billion/year, or $4.5 trillion over 10 years. The payroll tax holiday expires and that could be another $100 billion/year and the “super committee” will be forced to sequester another $100 billion of spending. Also, we have the winding down of the $787 billion fiscal stimulus package that was initiated in 2009. This will turn out to be as onerous to the U.S. as the austerity programs imposed on Greece and other European countries more recently....

So, the bottom line is that the technical position of the market looks very weak to us (and the swings from up about 100% and down about 50% we believe will continue, with the next move down) and the global economy is not what we would call supportive to U.S. growth. Also, the U.S. debt will be an anchor around our necks until we figure out a way to grow our way out, pay it down (deleveraging), or inflate our way out.

6--Europe and China PMI dip into the red, pragmatic capitalism

Excerpt: Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:
“The Eurozone economy contracted at a faster rate in March, suggesting that the region has fallen back into recession, with output now having fallen in both the final quarter of last year and the first quarter of 2012. The downturn is only very mild at the moment, with the PMI signalling a drop in GDP of approximately 0.1-0.2%, and an upturn in business confidence in the service sector provides hope that conditions may improve again later in the year. However, firms are clearly focusing on cost reduction, with employment falling at the fastest rate for two years as inflows of new business continued to deteriorate, reflecting weak demand across the region.
And on China:

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & CoHead of Asian Economic Research at HSBC said:

“Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders which came in at a four-month low. External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook. More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises’ hiring desire. The soft-patch in manufacturing was in line with the recent downside surprise in industrial production growth. Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authority.”

7--Since budget deficits have been driving corporate profits; wwhat happens now?, pragmatic capitalism

Excerpt: The key takeaway from the Montier piece is that corporate profits have been largely driven by budget deficits in recent years. This has been the single most important understanding of the balance sheet recession. If you understood that large budget deficits would help offset the de-leveraging process then you had a huge advantage over those who thought we were in for one sustained depression. Unfortunately, the risks are mounting in this regard and corporate profits are at the top of the list.

As both Montier and Richard Bernstein have recently noted, the outlook for profits is looking tepid at best...

The key point here is that without a big debt boom and an enormous and probably historic investment boom the corporate profits picture is likely to come under more pressure as we head into 2013. And if the budget cuts are sharper than expected we can expect a substantial hit to corporate profits. Stay tuned. Budget updates will continue to play heavily into this outlook as the year plays out….

8--How much Iran premium in oil prices is justified?, sober look

Excerpt: The folks at Capital Economics believe that there is too much "Iran premium" built into crude oil prices. They argue that the oil markets have gotten ahead of global growth. And with global growth expectations overdone, the premium is now mostly due to the Iran disruption risk. So the question becomes is the Iran premium built into oil prices too high?

The chart below compares trends in equity prices vs. Brent crude. It does seem to indicate that there may be a material gap between the two with oil prices overshooting. Based on this chart, Brent should be some $5 -$10 cheaper. That would not represent a high Iran premium

9--US student debt surpasses $1 trillion, WSWS

Excerpt: Total student loan debt has grown by 511 percent, or more, over the past dozen years. In the first quarter of 1999, a mere $90 billion in student loans were outstanding. That figure had soared to $550 billion in the second quarter of 2011, which may turn out to have been an underestimation. Between 1999-2000 and 2007-2008, private student loan borrowing grew four times, from $4.5 billion to $21.8 billion per year. The College Board reports that, adjusted for inflation, students are borrowing twice what they did a decade ago.

According to the Project on Student Debt, some two-thirds of college seniors graduated with loans in 2010. Those graduates also faced the highest official unemployment rate for young college graduates in recent history, 9.1 percent. The Economic Policy Institute estimates that between 2000 and 2011, wages for college-educated men and women entering the workforce saw their inflation-adjusted earnings fall 5.2 percent and 4.4 percent, respectively.

A recent study by NERA Economic Consulting points out that the 37 million people in the US currently holding student debt are “concentrated in the younger segment of the population, as more than 60 percent of the total is between the ages of 18 and 39.”

The consulting firm adds, “One of the most worrisome student borrowing trends is the increase in the number of high-debt borrowers who carry debt loads far above $25,000, the national average amongst undergraduate student borrowers. Student debt loads of $50,000, $100,000, and $200,000 are still the minority, but those high figures are becoming more common, and with unknown consequences for the individual debtors or the economy as a whole.”

Moreover, private and public lenders have “broad collection powers, far greater than those of mortgage or credit card lenders. The debt can’t be shed in bankruptcy” (USA Today).

10--Iran Nuke Threat Far Off, antiwar.com

Excerpt: Solid, in depth intelligence confirms with high confidence Iran has no weapons program, but peace is still rejected

The United States, European allies, and Israel all agree that Iran does not have a nuclear weapon, has not decided to build one, and is several years away from having a deliverable nuclear missile. Still, aggressive postures towards Tehran continue.

In 2007, the U.S. intelligence community concluded that Iran had halted weaponization of its nuclear program back in 2003 and has not restarted it since. That conclusion has been repeatedly reaffirmed in recent years, but some further details of the secret intelligence have been released.
According to Reuters, U.S. intelligence intercepted telephone and email communications from late 2006 or early 2007 in which Mohsen Fakhrizadeh, a leading figure in Iran’s nuclear program, and other scientists complained that the weaponization program had been stopped. This was one piece of the puzzle that led to the 2007 finding....

One primary type of intelligence the U.S. has on Iran’s nuclear program is what is called “measurement and signature intelligence,” or MASINT. These are “sensors on satellites, drones, and on the ground” measuring “everything from the electromagnetic signatures created by testing conventional missile systems to disturbances in the soil and geography around a hidden nuclear facility to streams of radioactive particles that are byproducts of the uranium enrichment process.” The U.S. “knows what Iran has and doesn’t have,” writes journalist Marc Ambinder.

These and other forms of intelligence have made current and former U.S. officials highly confident that Iran has no secret uranium-enrichment site outside the purview of U.N. nuclear inspections.
11--Montier on Peak Earnings, The Big Picture

Excerpt: Currently, U.S. profit margins are at record highs according to the NIPA data (see Exhibit 1). More freakish still is that these record high profit margins are coming during the weakest economic recovery in post-war history: see chart

Whilst we at GMO fret over evidence of the strained nature of profit margins, the ever bullish Wall Street analysts expect profit margins to continue to rise! Witness Exhibit 4. In our search for evidence of a structural break, this simple-minded extrapolation gives us some comfort because the Wall Street consensus has a pretty good record of being completely and utterly wrong...

12--The ECB swallowed the market, Golem

Excerpt: The problem is this. The Central banks have chosen to lend to insolvent private banks and to the nations that already bankrupted themselves trying to bail out their unbailable banks. In an attempt to make their lunacy seem sensible, the central banks assured everyone that they would only accept as collateral for the money they were lending out, the best assets the banks possessed. So the best of the insolvent banks’ assets were sucked in and cheap central bank loans flooded out.

The central banks said that ‘now the banks were stabilized’ they hoped the banks would lend to the market and to each other thus allowing the broader economy and the banks themselves to be funded ‘by the market’. Neither happened. Why? Well the banks continued not to trust the quality of the assets they were offering each other as collateral. Not entirely surprising since the banks had already pledged the best of them to the central banks. Without trust-able assets as collateral – no loans.

So the banks were forced back to the ECB and the Fed for more loans. Of course they had already pledged their best assets. So began the gradual but inexorable loosening of criteria for what the ECB would accept as collateral. At first it was only AAA rated. Then it was bonds from ailing nations. Then it was anything that came to hand. Which made the ‘market’, AKA other banks, even less keen on accepting as collateral whatever was left. And so on round and round. We have long since reached the point where the central banks like the ECB, either directly or washed first through a national bank such as The bank of Greece or Spain, has begun to accept almost anything as collateral.

When I say washed what I mean is the national bank in Spain or Greece or Ireland may accept some asset which is thoroughly sub-prime in return for a sovereign bond. That bond is then acceptable to the ECB as collateral because it is a Sovereign bond, which as we all know are AAA rated, for sure, for sure never going to default. However the more sub-prime, stinky, slimy paper the national banks are stuffed with, the more the sovereign debt is backed by a national bank which resembles a sewer of rotting rubbish, a nation in the grip of austerity and a contracting economy. Whatever pretty prime-time fictions you get hosed with each evening, this is the reality that dare not be reported. And we all know it. Ireland is in recession, Spain’s economy is contracting and so is Portugal’s. That is why ‘the market’ keeps hiking the interest it insists upon for lending to National banks.

The result is that the private banks have already pledged anything good they had. They will not therefore lend to each other because they know none of them has any assets left which are worth anything. Thus they are forced to go back to the ECB and Fed for more money and those institutions are forced to take even more ropey assets in return for issuing even more loans. Each time round, each new QE and new lot of money, sucks in more bad assets and makes any possiblity of private funding even more remote. The Central banks have swallowed the market. All debt and debtors are being drawn into ever tighter orbit. None will escape.

Now you might object that I have simply missed the point of the official policy. Certainly the National banks and the Central Banks have removed huge amounts of the toxic loan/assets from the private banks… and this we are assured is a good thing. This is called ‘cleaning up’ the banks. The rubbish is removed and in its place ‘good’ national and central bank bonds are put in their place, giving the private banks lots of good assets. And it does sound possibly OK when you hear it put that way and don’t think too hard about it.

But we have to remember a couple of things. First the bad assets have not ‘gone’. They still exist. They are still money which was lent out, which itself was often borrowed and thus has to be repaid, but which is not now bringing in any profit. Those losses are still warm and moistly rotting, just doing it in National and Central bank vaults now. Second, for all that the banks do now have sovereign and Central bank bonds to pledge, they are still, all of them, coming back to the ECB and the Fed for more QE easy money loans. This is because even though the banks have used that QE money to speculate on commodities and currencies to try to make a fast and out-sized profit – still chasing high risk and return – they still have huge liabilities (money they owe) not being paid for from income which is not coming in from yet more bad assets which are nevertheless still being held at imaginary values so as to make the assets side of the balance sheet look like it might balance out those liabilities. Imagine a very long turd tied into a knot.

But I digress. My main point is that the banks, despite 4 years of never-quite-materializing recovery, still need loans from the central banks and still need to pledge assets to get them. How many more assets do they have? Probably many hundreds of billions. But they are increasingly awful. Which means we have an alleged recovery that must increasingly be fueled by the very debts and worthless dross it is trying to recover from.

Now just for fun imagine how many times any assets were re-hypothecated before they got to the ECB and how many times the ECB bond issued in return for those assets will itself be re-hypothecated. And then feel good about the solidity of the banks, the system and the recovery.

My guess is that as this year progresses banks will quietly bring rubbish back on to their balance sheets from off-balance sheet vehicles just so they can be slipped into the ECB. These would be assets that were declared worthless and written off for a tax rebate in the country of origin, before being moved to an SIV in Ireland where they would be declared at face value so as to be written down again and then pledged to the ECB at far above their real market value in return for an ECB bond which can be used to speculate against various nations and their debts.

13--Joe Weisenthal Quotes Sven Jari Stehn on Delong And Summers, grasping reality with both hands

Goldman On New Paper From Delong And Summers: Spending Cuts Now Will Be A Disaster: Goldman's Sven Jari Stehn is out with a new note spotlighting new research from economists Larry Summers and Bradford DeLong…. The gist: When interest rates are at zero, spending more to stimulate the economy has a long-run effect of helping the fiscal situation…. Here's Stehn:

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

Stehn then backs up their work, pointing out that Goldman's own research shows deleterious effects of fiscal consolidation in times like these…

14--The Public Is Still Not Buying Equity Mutual Funds, Big Picture

Excerpt: “Goldman screams it is a generational buy, Larry Fink goes all in stocks, Notorious BIGGS is 90% long, anchors on comedy-financial fusion channels are channeling the producer in their earpiece and screaming at the teleprompter to “sell bonds and buy stocks”, even as stocks are at their highest in nearly 5 years and… what happens? In the latest week, ICI just reported that domestic equity retail funds just saw another $2.9 billion outflow, the 4th consecutive in a row, and the 23 of out 27 outflows during the entire parabolic blow off top phase the market has undergone since October, and instead put another $9 billion in fixed income funds “soaring” yields be damned.

What does this mean? Probably that the stock ramp is about to get uber-parabolic for the simple reason that this is the only thing left in the status quo’s arsenal – to keep doing the same old same old, hoping for a different outcome, because this time it’s different. Only this time the dumb money either doesn’t have the cash to burn, or just doesn’t want to participate in a rigged, corrupt, centrally-planned market. Whatever the case, the Primary Dealers and the Fed will just have to keep hoping more central banks pull a Bank of Israel and sell the hot grenade axes to them, since Joe Sixpack is done being the “dumb money.”

15--Bernanke Sees Need for Higher Household Spending to Fuel Growth, Bloomberg
Excerpt: Federal Reserve Chairman Ben S. Bernanke said the U.S. economy is operating below its level prior to the financial crisis, and that increased household spending is needed to sustain the expansion.
“Consumer spending is not recovered, it’s still quite weak relative to where it was before the crisis,” Bernanke said yesterday in the second of four lectures on the history of the Fed that he plans to deliver at George Washington University. “In terms of debt and consumption and so on we’re still way low relative to the patterns before.”...
The conference will first consider a research paper by New York University Professor Mark Gertler saying the Fed’s asset purchase programs will help spur growth by reducing interest rates rather than by increasing the amount of reserves in the banking system.

Gertler, an adviser to the Federal Reserve Bank of New York who has co-written research with Bernanke, said in an interview yesterday that the economy may not need such a stimulus program at all.

“Inflation still appears to be contained so that’s good,” Gertler said in a phone interview. “Employment growth is picking up, so that’s good. It seems like the controls are at the right setting now.”

16--Chart Attack: Following the Corporate Cash Hoard, Bloomberg

Excerpt: video (amazing!)

17--Sales of New Houses in U.S. Decrease for Second Month: Economy, Bloomberg

Excerpt: Purchases of new homes in the U.S. unexpectedly fell in February for a second month, a sign the recovery in the housing market may be uneven.

Sales dropped 1.6 percent to a 313,000 annual pace, the slowest since October, from a 318,000 rate in January that was weaker than previously reported, figures from the Commerce Department showed today in Washington. The median estimate of 78 economists surveyed by Bloomberg News called for 325,000.
Residential real estate is struggling to gain momentum as property values remain depressed by the threat of more foreclosures. Nonetheless, a pickup in hiring, growing incomes and mortgage rates near a record low are making houses more affordable, which may help underpin the market.

“There are signs of life in the market in certain regions, but we’re not seeing a broad-based recovery,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York, who projected a 310,000 sales pace. “Builders are still competing with existing inventories. The spring selling season should show some modest improvement, but it will be limited.”

18--Is Deflation the Biggest Risk to the Economy?, The Big Picture
Excerpt: video --Robert Precter

19--1--Firms’ Cash Hoarding Stunts Europe, WSJ

Excerpt: Across Europe, banks, households and governments are pulling in their horns at the same time.

Banks are struggling to rebuild capital and repair the damage wrought by poor lending and investment decisions they made before the financial crisis, and are wary about new lending.
In many countries, households are struggling to pay down the heavy debts they built up in the boom years, and cutting back on consumption.

Governments are retrenching, too. For some, it is the price of aid from Germany; for others, it is out of fear that if they don’t, bond investors will cut their access to finance. A minority, including Germany—whose government approved plans on Wednesday to balance its budget in 2014, two years earlier than planned—are doing it because they think it’s a good thing.
It is a depressing recipe for a classic “balance-sheet recession” as the public and large parts of the private sector try to repair the excesses of the boom and rebuild balance sheets.
One part of the economy, however, is an important exception to the rule: companies, particularly large ones. Across Europe, corporations are sitting on a mountain of cash. The trouble is, they aren’t spending much of it. This means one possible way out of Europe’s economic crisis—a big boost in business investment—is closed off.

It’s not only in Europe that companies are hoarding piles of cash. According to the Institute of International Finance, the same is true across a number of mature and emerging economies. In January, the Washington-based organization that speaks for financial institutions world-wide estimated that corporations in the U.S., the euro zone, the U.K. and Japan held some $7.75 trillion in cash, or near equivalents, an unprecedented sum. Apple Inc.’s decision this week to pay investors from its own $97 billion cash balance won’t make much of a dent in that.

In Europe, the problem is particularly acute. According to Simon Tilford, chief economist at the Centre for European Reform think tank in London, the ratio of investment to gross domestic product in Europe is at a 60-year low even as companies pile on cash. Corporate cash holdings are now €2 trillion ($2.64 trillion) across the euro zone and an extraordinary £750 billion ($1.19 trillion) in the U.K.

ch in September, Adam Posen, a U.S. economist who sits on the Bank of England Monetary Policy Committee, depicted the corporate cash piles in the U.K. as a symptom of the private sector’s unwillingness to take enough constructive risks. That is a response in part, he said, to an excessive accumulation of debt by households and bank losses. “Some correction from the risk-taking behavior of the boom years is justified, but this has gone too far and persisted far too long,” he said.

Companies are piling up cash for a combination of reasons, say analysts. One is a reaction to the financial crisis. Companies that built excessive debts before the crisis are paying them down. Firms also are hoarding cash because of broken banking systems: Banks have retreated from lending and companies are building cash buffers to compensate. For continental Europe, where companies still draw a majority of their finance from banks rather than from the capital markets, the retreat of bank lenders is significant.
Mr. Tilford argues that another reason is government policies. “Excessive fiscal austerity,” he says, “has snuffed out Europe’s tentative economic recovery and threatens a swath of the euro zone with a slump.” Why invest to produce goods and services for economies that have little prospect of growing?
Other factors may play a role. Lower corporate tax rates and labor-market reforms aimed at reducing the power of trade unions have boosted the income of the corporate sector versus the household sector.

This suggests, Mr. Tilford argues, that policies aimed at further depressing the share of labor in national income will further undermine economic growth. He suggests increasing corporate income won’t help spur investment—while squeezing households by cutting wages will damp growth.
This argument is being made in Brussels by the Greek government, which is seeking to head off pressure from the country’s official lenders for further wage cuts as a way to increase the competitiveness of the Greek economy.

Greece has cut its minimum wage by 22%—and 32% in the case of young workers—but further efforts to trim wages to boost the international competitiveness of the Greek economy are likely. Further depressing Greek wages “is unnecessary and potentially destructive,” said one senior Greek official this week. If more cuts are imposed, “the recession in Greece will be double-digit,” he added.
The other implication is that cutting corporate taxes won’t help spur investment. That view doesn’t seem to be held by the British government: Chancellor of the Exchequer George Osborne lowered corporation tax from 26% to 24% in his annual budget speech on Wednesday, in the first step of a plan to cut it to 20%.

There is, Mr. Tilford suggests, another factor helping to build corporate cash piles: distorted incentives for senior executives. With their remuneration linked to short-term performance, senior executives have little incentives to embark on big, long-term investment projects that won’t yield benefits until after the executive has moved on. “Firms are being run for cash rather than growth, with damaging implications for economic activity,” he says.

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