Monday, April 30, 2012

Today's links

1--Where The Productivity Went, Paul Krugman, NY Times
Excerpt: (See chart) Larry Mishel has a systematic breakdown of the reasons for worker income stagnation since 1973. He starts with the familiar divergence: productivity up 80 percent, the compensation (including benefits) of the median worker up only 11 percent. Where did the productivity go?

The answer is, it’s two-thirds the inequality, stupid. One third of the difference is due to a technical issue involving price indexes. The rest, however, reflects a shift of income from labor to capital and, within that, a shift of labor income to the top and away from the middle.

What this says is that widening inequality makes a huge difference. Income stagnation does not reflect overall economic stagnation; the incomes of typical workers would be 30 or 40 percent higher than they are if inequality hadn’t soared.

2--The wedges between productivity and median compensation growth, EPI

Excerpt: Income inequality has grown over the last 30 years or more driven by three dynamics: rising inequality of labor income (wages and compensation), rising inequality of capital income, and an increasing share of income going to capital income rather than labor income. As a consequence, examining market-based incomes one finds that “the top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share: 36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent” (Mishel and Bivens 2011)....

Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent, and nearly all of that growth occurred in a short window in the late 1990s. The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity. Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. It is hard to see how reestablishing a link between productivity and pay can occur without restoring decent and improved labor standards, restoring the minimum wage to a level corresponding to half the average wage (as it was in the late 1960s), and making real the ability of workers to obtain and practice collective bargaining.

3--Breaking Down First Quarter 2012 GDP Numbers, credit writedowns

Excerpt: In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA’s bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% — hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery....

As lackluster as it may be, the headline number of 2.20% is still likely overstating the health of the economy:

– The "deflater" used in constructing the reported growth rate (reflecting annualized inflation of 1.54%) will seem patently absurd to anyone who lived in the real world during the first quarter of 2012, especially if they bought gasoline or groceries. Using the CPI-U as a deflater makes the headline growth almost completely vanish.

– Even the BEA’s optimistic "deflaters" couldn’t keep the per capita disposable income from shrinking during the quarter.

– Governments continued to shrink their spending, and they sucked -0.60% from the headline number. That trend is unlikely to reverse anytime soon.

– "Real final sales" and factory production continued to be supported by inventory building — which is unsustainable and must ultimately reverse (even if the cost of carrying the inventories has been kept artificially low by the Fed).

Our bottom line for the economy has always been the health of households. This report shows per capita disposable income is shrinking and that any improvements in consumer spending are likely unsustainable. We suspect that the softening seen in this report the harbinger of a collapsing "recovery" that will continue to unfold during 2012.

4--The housing crash continues, Dr Housing Bubble

Excerpt: US home prices have once again made a post-bubble low in spite of all the artificial intervention and massive bailouts to financial institutions. The bottom line unfortunately is that US household incomes have been strained for well over a decade. You can slice it up by nominal or inflation adjusted data but household incomes have been moving in a negative direction during the 00s and continuing into this decade. Keep in mind there is a massive pipeline of problems still in the housing market with over 5.5 million mortgage holders in some stage of foreclosure or simply not paying on their mortgage. This is more than a housing crisis but a crisis of quality job growth. At the core, that is truly the problem. There are markets in the US that are still correcting severely even after record breaking declines from their peaks reached in 2006 or 2007. Some of these markets are approaching two lost decades which seems stunning but again, this reflects weaker household balance sheets....

Lenders have a front row seat to what is going on and essentially what they are saying with a swarm of short sales is they believe home prices in the intern will be going down. Why else would you want to exit at this moment if you believed home prices would be soaring shortly? Bank balance sheets are still inflated with poor performing properties and what the Case-Shiller report shows is there is likely to be little support for higher prices anytime soon....

The crashing markets of Atlanta and Las Vegas simply show that economic growth is not able to support current home prices even in cheap metros. The lower prices in Chicago, Los Angeles, and San Francisco reflect the correction in the mid-tier markets. What impact will 5.5 million distressed and foreclosed properties have on the market going forward? So far, it has been to push prices lower which isn’t a surprise.

5--Prescription for a Depression, NPR

Excerpt: "It would be nice if we had a political system in which important figures from both parties understood textbook macroeconomics, because that's all we're talking about here," he says. "The odd thing is I'm not a radical. I'm actually calling for believing your Econ 101 textbooks and acting on what they say."

Mustering the political will to extract the U.S. from its worst economic downturn since the Great Depression won't be easy. But, Krugman says, "that's not a reason to stop trying to get the truth out there."....

On austerity at the state and local levels
"Particularly since the stimulus such as it was has expired, what we've actually had is a lot of fiscal austerity. If you include the state and local governments — which you should — then what we've actually had is a record-breaking decline in government payrolls, a really major drag from governments cutting back rather than expanding. So, people have said about the 1930s that Keynesian policies didn't really work because they weren't really tried, and that applies with extra force to this depression."

6--Spain's Credit Crunch, Euro Group Considers Direct Aid for Banks, Der Speigel

Excerpt: The banking crisis in Spain has countries across Europe in a deep state of worry. A German newspaper is now reporting that the European Central Bank and a number of euro-zone countries would like to change the euro bailout fund in order to permit it to lend money directly to financial institutions in the throes of the crisis. Germany, however, is strictly opposed to the idea. ...

Euro-zone member states are apparently concerned that recent efforts by the European Central Bank to flood banks with cheap credit were insufficient to stave off the crisis. In two steps, the ECB recently issued cheap longterm loans to European banks with a total value of €1 trillion. But this aid is only slowly reaching businesses. That's why leaders are now considering providing the ESM with similar bank lending capabilities, according to the Süddeutsche.

The effort, assuming it materializes, is likely to provoke a heated debate within the European Union. Over the weekend, German Finance Minister Wolfgang Schäuble, of Chancellor Angela Merkel's conservative Christian Democratic Union party, expressed his vehement opposition to allowing the ESM to provide direct loans to banks. The governments of the Netherlands, Austria and Finland also oppose plans to provide ESM aid directly to banks.

Under the current rules for the euro bailout program, only euro-zone member states can request money from the backstop fund. Countries can then in turn lend that money to banks, but the governments are also required to adhere to strict austerity and reform measures as part of the deal. These stipulations were an important precondition for getting Germany to agree to the EU bailout fund in the first place. If ESM were permitted to lend directly to banks, it would effectively nullify those provisions.

7--Banks Are Manipulating Inventory, Abigail Field, Firedog Lake

Excerpt:   Given the grim reality of too many houses at crazy high prices, how come we’re seeing a spate of good housing news stories? Well, those stories reported supply had shrunk so much, prices were rising. One of the most comprehensive was by Nick Tiramos for the Wall Street Journal, detailing that shrunken inventory was leading to some bidding wars in several markets. Local pieces, this Arizona Republic story, continued the theme. Both articles noted that the bidding wars didn’t mean prices had recovered much compared to the bubble years. Nonetheless, if the decreased inventory is for real, the optimism’s justified, right?
Too bad the inventory decrease seems artificial, the result of bank manipulation. Take Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but lists less than 4,000 homes of any type. lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?

(To Tiramos’s credit, his piece acknowledges the good news may not last because of the bank owned backlog; the more cheerleading articles don’t.)

Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?

By holding off inventory, the banks provide temporary support to prices, but for how long? The inventory will make its way to market–there’s just too many houses held in reserve for the banks to manage and maintain the properties in a market-price optimizing way. Moreover, this artificial control of inventory means foreclosures do not help a market to bottom; foreclosing cannot “clear” the market


Saturday, April 28, 2012

Weekend links

Today's quote: "Of course there can be economists who are opposed to the idea that stimulus can work as an article of religious faith. Economic theory also predicts that for a large enough sum of money there will be economists who will say that the stimulus did not work regardless of what they actually believe to be true." Dean Baker, economist

1--How Richer States Finance Poorer Ones, NY Times

Excerpt: Third, and most important, we have found a number of camouflaged vehicles through which we can indirectly make sizable transfers of real wealth among the states, without exciting the citizenry by booking them as explicit transfers. Chief among these are Medicaid and Medicare, as Bruce Vladeck notes in his classic paper, “The Political Economy of Medicare.”

There is also vast military spending, along with sundry other federal programs directing federal money to the states. (see chart) Readers contemplating the table will discover in it a certain paradox — that those residents who most often denounce big government and call for sharp cuts in government spending often benefit themselves from such spending or live in regions that receive significant government support. This was also noted by the Tax Foundation. In presenting the data in the form of a geographic map, the foundation wryly observes: As you can see from the map, states that get the “worst deal” — that is, have the lowest ratio of federal spending to taxes paid — are generally high-income states either on the coasts or with robust urban areas (such as Illinois and Minnesota). Perhaps not coincidentally, these “donor” states also tend to vote for Democrat candidates in national elections. Similarly, many states that get the “best deal” are lower-income states in the Midwest and South with expansive rural areas that tend to vote Republican.

2--American Austerity, Paul Krugman, NY Times (Big job losses under Obama)

Excerpt: With all the focus on Europe’s sudden discovery that austerity doesn’t work, we shouldn’t lose sight of just how much de facto austerity we’ve done on this side of the Atlantic. Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy: (chart) That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

3--Stock market is in for a rude awakening, pragmatic capitalism

Excerpt: The overwhelming weight of the evidence over the past four to six weeks is that economic growth has peaked and is now slowing down. In that period we have seen either disappointing results or actual declines in the following important economic indicators: core durable goods orders, the Chicago Fed National Activities Index, initial weekly unemployment claims, new home sales, existing home sales, payroll employment, the NFIB Small Business Index, construction spending, the ISM Non-Manufacturing Index, personal income, the Kansas City Fed Index, the Philadelphia Fed Survey, industrial production, the Empire State manufacturing index and the NAHB Housing Market Index. These indicators cover most of the U.S. economy and generally provide a good idea of where activity is headed.

In this regard we point out that the Chicago Fed computes and puts out a little-followed monthly indicator called the Chicago Fed National Activity Index (CFNAI), a weighted average of 85 monthly economic indicators covering production, income, employment, hours worked, personal consumption, housing sales, orders and inventories. The CNFAI has declined for three consecutive months and entered negative territory in March. From what we see so far in the current numbers, another drop is likely in April as well. The significance of the above data is reinforced by ECRI Weekly Leading Indicator. On December 10th the ECRI dropped to 5.25% below a year earlier, a level that indicates a high probability of recession. In fact, since 1968 the ECRI leading indicator has declined to that level or below only six times, and each time a recession began either a few months before or a few months after. There has never been a false call, and this is the first negative call since January 2008. Since most serious investors follow the same economic releases that we do, they must be aware of the fragility of the current recovery, particularly given the household debt burdens and the problems in Europe and China as well as the so-called “fiscal cliff” awaiting the U.S.

That is why they slice and dice every single word in the FOMC monetary statements, minutes and speeches of Chairman Bernanke and every other Federal Reserve Board member, hoping to get a hint that QE3 is coming to the rescue soon. Yesterday was a good example where the FOMC and Bernanke basically said nothing new, yet were subject to all kinds of interpretation by the “experts” who do that sort of thing for a living. The market has been moving up on the liquidity provided by central banks around the world and is deathly afraid of going it alone. All in all, the economic recovery is not sustainable, and we doubt that the Fed can do anything more. Although QE1 helped prevent the economic and financial system from collapsing, each easing move after that has had less and less effect. We believe that the stock market is in for a rude awakening.

4--Economists React: GDP Is ‘Disappointing but Also Puzzling’, WSJ

 Excerpt: The GDP data at face value are disappointing but also puzzling. Private sector hours worked rose 3.7% in the first quarter — what were these workers producing? The unemployment rate fell from 8.5% in December to 8.2% in March — how can this be if the economy was only growing at around its potential rate? The positives in the report are the growth in consumer spending and the rise in residential investment, which gives the expansion in demand a better balance. However, the pace of inventory investment is likely to be a drag on second-quarter growth. We must remember that these data are revision prone and we also believe that the expenditure estimate of GDP has systematically understated the strength of the recovery.

 Our focus will remain on job creation, profits, and industrial production as giving the best guide to the pace of growth and the direction of the economy and we still look for growth of 3% this year. –RDQ Economics While the warm weather of the first quarter may have provided a boost to the overall [consumer spending], it is noteworthy that such reduced the demand for utilities. Services provided from housing and utilities served as a 0.23% drag on first-quarter GDP. The good news is that more seasonal weather in the second quarter should reverse the weather related drag on both fourth and first quarters.–Ray Stone, Stone & McCarthy... Private consumption rose at the fastest pace since late 2010, “financed” by a sizeable decline in the savings rate. More than a third of that pick-up was attributable to surging car sales. In addition residential investment jumped by almost 20%, the most since 2Q10, probably supported by the unusually mild winter weather. While we expected consumer spending and residential investment to be the main growth drivers at the beginning of the year, their contributions were even larger than we anticipated. –Harm Bandholz, Unicredit

5--Argentina's deputy economy minister is "fiery red Marxist", b92net Excerpt: (Mostly propaganda)

6-- Actual home purchases are not keeping up with pending home sales, sober look

Today we saw stronger than expected pending home sales in March from the National Association of Realtors. Bloomberg: The index of pending home purchases rose 4.1 percent to 101.4, the highest level since April 2010, after a 0.4 percent gain in February that was revised from a previously estimated 0.5 percent drop, the National Association of Realtors reported today in Washington. The median forecast of 43 economists surveyed by Bloomberg News called for a 1 percent rise in the measure, which tracks contracts on previously owned homes. This is great news for the housing market, but there is a problem.

Typically the pending home sales index leads existing home sales by a month or two. But recently the actual closings have not kept up with this index and the gap has gotten wider. Here are the two indices from 2002. (see charts) It shows that many pending transactions never make it to closing. The only explanation for this is the persistence of tight credit conditions in the housing market, with buyers unable to obtain adequate financing in order to close. This is in spite of record low mortgage rates. Within a month or two we should know if there have been improvements in the rate of closings. If so, we should see existing home sales pick up sharply. But given the recent history of the two indicators, this improvement is far from certain.

7--A Worrisome Rise in Jobless Claims, NY Times

Excerpt: The odds that the economy has fallen into a spring slowdown – for the third straight year – rose this morning. The number of people who filed new claims for jobless benefits held roughly steady last week, according to the seasonally adjusted numbers released by the Labor Department today. The report was bad news because it suggested that the rise in claims over previous weeks might not have been, as some optimists hoped, a statistical fluke caused by the timing of Easter. Last week, 388,000 people filed an initial claim for unemployment insurance (again, according to the seasonally adjusted numbers, which is why the timing of holidays matters). That number was largely unchanged from 389,000 the prior week and 388,000 the week before. Three weeks earlier, though, only 362,000 people filed initial claims, which seemed to be a sign that the labor market was continuing to improve. The weekly jobless-claims statistics are notoriously volatile. But three straight weeks of elevated claims suggests that job growth in April may have been as disappointingly modest as March’s job growth had been, following much better numbers in late 2011 and early this year.

As Annie Lowrey wrote in The Times last week: Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again, raising fears that the winter’s economic strength might dissipate in the spring. In recent weeks, European bond yields have started climbing. In the United States and elsewhere, high oil prices have sapped spending power. American employers remain skittish about hiring new workers, and new claims for unemployment insurance have risen. And stocks have declined…. A third straight year of economic disappointment could have major political implications, hurting President Obama’s re-election campaign and helping Mitt Romney, the likely Republican nominee, make the case against Mr. Obama.

8--Running on empty, macrobusiness Excerpt: .

The New York Fed: April’s Empire State Manufacturing Survey indicates that manufacturing activity in New York State improved modestly. Although the general business conditions index fell fourteen points, it remained positive at 6.6. The new orders and shipments indexes also remained positive, but showed only a small increase in orders and shipments. The prices paid index inched downward but remained high, and the prices received index climbed six points to 19.3. The index for number of employees rose to its highest level in nearly a year, indicating a significant increase in employment levels, while the average workweek index fell to a level that indicated only a small increase in hours worked. Future indexes remained quite positive, suggesting a strong and persistent degree of optimism about the six-month outlook....

As I said last month, the regional indexes hold a loose relationship with the all important national manufacturing measure, the April ISM. But with two months of slowing, it’s an increasing possibility that we’ll see a decent fall in the ISM on May 1st. The other news last night was that the weekly DOL report of unemployment claims rose on revised figures from last week: In the week ending April 21, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 1,000 from the previous week’s revised figure of 389,000. The 4-week moving average was 381,750, an increase of 6,250 from the previous week’s revised average of 375,500. That’s three straight weeks of rises and the highest 4 -week moving average this year. Bloomie reckons this trend is hitting confidence, the biggest fall in a year (though still well above the last few years): The Bloomberg Consumer Comfort Index declined to minus 35.8 from minus 31.4 the previous week. So, we may also be setting up for a consecutively weak BLS payroll number on May 4th. Still, from a week or so ago, March retail sales were still moving at a ripping 0.8% month on month and 6.5% year on year, though that may now be old news. More to the point, the rally in the Dow last night was driven by one data point above all others, pending home sales, which beat the street handsomely:...

We are much closer to a bottom in US house prices, but the experience of Japan suggests strongly that looking for a bottom in such markets is itself a mistake. Prices eventually flatten out sure, and stay flat. If the new normal means anything it is surely that asset prices will be determined by wider investment, real income and productivity gains, not leveraging up!

9--Argentina partially re-nationalizes YPF oil company, WSWS

Excerpt: Last week, Argentina’s president, Cristina Fernandez de Kirchner, announced that her government was expropriating 51 percent of the formerly state-owned oil company YPF from its Spanish owner Repsol. The announcement provoked denunciations and threats from Spanish and European governments and corporations, along with recriminations in the Western media. It also evoked praise from petty-bourgeois “left” elements in Latin America and elsewhere.... Indeed, the reassertion of state control over the company has overwhelming support in Argentina, with polls showing 80 percent of the population in favor of the move. Similar percentages opposed its privatization in the 1990s under the previous Peronist government of President Carlos Menem. The sell-off of the company along with a host of other state-owned enterprises was the centerpiece of a neo-liberal policy backed by the International Monetary Fund that led to a sharp increase in unemployment and poverty for the Argentine working class... Fernandez and her aides have blamed the crisis on Repsol’s “looting” of YPF, including paying out the vast bulk of the company’s profits in dividends to shareholders, failing to invest in production, and not increasing output to meet expanding demand

10--Death of a Fairy Tale, by Paul Krugman, Commentary, NY Times:

This was the month the confidence fairy died. For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets. Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen.

Why? Confidence! ... Or as I put it..., the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue. The good news is that many influential people are finally admitting that the confidence fairy was a myth. ... Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. ...

The question now is what they’re going to do about it. And the answer, I fear, is: not much. For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs. Now, claims that only austerity can pacify bond markets have proved ... wrong... And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better. But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure...,

on the grounds that any relaxation of austerity would cause borrowing costs to soar. So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

 11--Argentina: The Rise of NeoCorporatism, economonitor 1

Thursday, April 26, 2012

Today's links

1--The ECB is on Mars, Delusional Economics, naked capitalism

Excerpt:  (Shrinking credit in the EZ depite LTRO) Overnight the president of the European Central Bank, Mario Draghi, gave a speech to the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament.....

On the negative side this has in no way effected the strong downwards trend in lending to the private sector:

In the first quarter of 2012, the net demand for loans to NFCs dropped significantly (-30% in the first quarter of 2012, compared with -5% in the fourth quarter of 2011. By contrast, for the second quarter of 2012, banks expect a rise in demand for corporate loans. The fall in net demand for loans in the first quarter of 2012 was driven in particular by a further sharp drop in the financing needs of firms for fixed investment (-36% in the first quarter of 2012, compared with -20% in the fourth quarter of 2011).

Euro area banks also reported a strong further contraction in the demand for housing loans in the first quarter of the year (-43% in net terms in the first quarter of 2012, from -27% in the preceding quarter. The decline was mainly on account of a deterioration in housing market prospects (-31%, compared with -27% in last quarter of 2011) and consumer confidence (-37%, compared with -34% in the previous quarter), as well as a decline in non-housing-related consumption.

Net demand for consumer credit fell more strongly than expected in the first quarter of 2012, standing at – 26% according to euro area banks, compared with -16% in the previous survey round. This decline was mainly explained by the negative impact on loan demand from internal financing of households via savings (-13% in the first quarter of 2012, compared with -3% in the preceding quarter), lower household spending on durable goods and a decrease in consumer confidence (with both household spending on durable goods and consumer confidence falling to -28% in the first quarter 2012, from -20% in the last quarter of 2011)."

As I have explained recently in the context of Spain, collapsing credit demand ultimately leads to a loss of banking capital, which is the exact opposite of what the LTRO program was set up to achieve.

2--Watch out! Is the Fed pushing us into another bubble?, Sheila Bair, CNN

Excerpt:  The Fed has maintained interest rates at or near zero for four years running, even though the financial system has been relatively stable since 2009. The Fed's actions have kept Treasury bond prices high (while keeping the government's interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in. Sooner or later, the bond bubble will burst. History has shown that a structurally weak economy combined with a fiscally irresponsible government propped up by accommodative central-bank lending always ends badly. Absent a change in policies, a toxic brew of volatile interest rates and uncontrollable inflation could define our future.

As we saw in the years leading up to the subprime crisis, yield-hungry investors are taking on more and more risk. Pension managers are investing in hedge funds, and gullible investors are buying up junk bonds. Meanwhile, low-yielding assets pile up on the balance sheets of more risk-averse banks. If interest rates suddenly spike, bankers may find that the paltry returns on their loans are insufficient to cover interest on their deposits. (Does anybody remember the S&L crisis?) Most important, retirees and others who want to keep their savings in supersafe liquid investments are earning returns of 1% to 2% (if they are lucky), while inflation creeps higher, now hovering around 3%....

The economy is finally starting to recover, albeit modestly. The Fed should declare victory and not intervene if the market wants to push rates up a bit. Start deflating the bubble before it pops. This will help savers, and possibly make it easier for small businesses to get loans, while leaving plenty of room for mortgage refinancings. Who knows? We might see increased demand for homes as new buyers come into the market to lock in the low rates. Most important, higher rates will send a wake-up call to Congress and the administration to do their jobs. Excise special-interest tax breaks, and get entitlement and defense spending under control. We need more leadership from our politicians and less easy money from the Fed.

3--Britain falls into recession, NY Times

Excerpt: Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far.

4--American Austerity--job losses under Obama, NY Times

With all the focus on Europe’s sudden discovery that austerity doesn’t work, we shouldn’t lose sight of just how much de facto austerity we’ve done on this side of the Atlantic. Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy: see chart

That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

5---It’s Official: Keynes Was Right, NY Times

Excerpt: It’s Official: Keynes Was Right, says Henry Blodget. Recent election results in Europe seem to have raised consciousness in a way literally years of economic data couldn’t: the austerity doctrine that has ruled European policy is a big fat failure.

I could have told you that would happen, and sure enough, I did. Did I mention that after three years of dire warnings that the bond vigilantes are attacking, the interest rate on US 10-years remains below 2 percent?

It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case — that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks — was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.

And now the results are in: Keynesians have been completely right, Austerians utterly wrong — at vast human cost.

I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.

6--Improving Housing Market?, northern trust

Excerpt:  Sales of new homes fell 7.1% in March to an annual rate of 328,000, hold your breath and don’t be disappointed. The level of sales would have been much lower if the sales of new homes of February had not been revised to an annual rate of 353,000 from the earlier estimate of 313,000 and January’s sales was 318,000 and not 329,000 as the report shows today...

While we are looking at new home sales, it is instructive to peruse data of existing home sales also. Sales of existing homes fell in February (-0.7%%) and March (-2.6%) but increased in January (+5.7%) and raised the quarterly average. The 6-month moving average of existing home sales in March is 4.468 million units, up nearly 15% from a low of 3.888 million units seen in April 2009 (the low of 2010 is excluded because the wide swings were related to the first-time homebuyer credit program (see Chart 2). The main conclusion is that much like the market of new homes, sales of existing homes show a small but noticeable upward trend....

Speaking about home prices, the Case-Shiller Home Price Index for February moved up 0.2%, a rare monthly gain. As shown in Chart 4, the stretch from early 2006 – February 2012 is marked with few monthly gains, with most related to the first-time home buyer program that was in place during most of 2009-2010. But, the Case-Shiller Home Price Index fell 3.5% from a year ago and dampens the enthusiasm related to the monthly increase. The question now is if the February increase is the beginning of a long line of monthly gains in prices of homes

7--US home prices drop for 6th straight month, yahoo finance

Excerpt: Home prices fall in most US cities for sixth straight month, as housing struggles to recover

Home prices dropped in February in most major U.S. cities for a sixth straight month, a sign that modest sales gains haven't been enough to boost prices.

The Standard & Poor's/Case-Shiller home-price index shows that prices dropped in February from January in 16 of the 20 cities it tracks.
The steepest declines were in Atlanta, Chicago and Cleveland. Prices rose in Phoenix, San Diego and Miami. They were unchanged in Dallas.

The declines partly reflect typical offseason sales. The month-to-month prices aren't adjusted for seasonal factors.

Still, prices fell in 15 of the 20 cities in February compared with the same month in 2011. That indicates that the housing market remains far from healthy despite the best winter for sales in five years.

The steady price declines have brought the nationwide index to its late 2002 level. Home prices  have fallen 35 percent since the housing bust.

8---The Bottom for House Prices, calculated risk

Excerpt:   From John Gittelsohn and Prashant Gopal at Bloomberg: Housing Declared Bottoming in U.S.

Economists including Bank of Tokyo-Mitsubishi UFJ's Chris Rupkey, Bank of America Corp.'s Michelle Meyer and Mark Fleming of CoreLogic Inc. are also predicting prices are close to a trough after a 35 percent slump from a July 2006 peak, even as the threat of more foreclosures loom to boost supply.

...Meyer, senior economist with Bank of America in New York, said the recovery will be led by the parts of the country with fewer foreclosures and more job growth. She estimates that U.S. prices will reach bottom this year and stay little changed until 2014, when they may gain about 2.5 percent.

..It's just a matter of months before we get positive year- over-year numbers in the overall index," Fleming said in a telephone interview from Washington. "Our data lags the reality. The turnaround is happening in the March, April and May time frame."

9--Top Experts Diss Housing Market Bullishness, Foresee Protracted Headwinds, naked capitalism

Excerpt:   Even though some distressed markets have seen an upsurge in speculative buying (my Florida locals expect much of current activity in that state to come to tears, given the massive number of foreclosures in the pipeline), the fundamentals are not at all rosy. Nick Timiraos of the Wall Street Journal pointed out, as others have, that the “inventories are tight” picture is misleading. Even though banks have put houses on the market, a lot of private sellers are holding back, still (after 5 years) hoping for a better market. And servicers slowed down new foreclosures and attenuated foreclosures while the mortgage settlement negotiations were on. They have sped up new foreclosures considerably, which will eventually show up in the liquidation of more homes (note we think there’s good reason for banks to be dragging out the foreclosure process: they make more money that way and defer the recognition of losses on related second liens). ...

Two experts who foresaw the housing bust see no reason for optimism on US housing. The Case Shiller index release today showed that housing prices fell in 16 of 20 cities in February. Robert Shiller in a Reuters interview said “I worry that we might not see a really major turnaround in our lifetimes.”

A draft presentation by Josh Rosner gives a detailed and persuasive analysis as to why Shiller’s gut feel is warranted. Per Rosner, the forces that helped produce the housing bull market, liberalization of credit, a one-time boost in incomes as more women entered the workforce, and baby-boomers increasing demand by entering their peak earning years, are either no longer operative or have reversed, creating headwinds for the housing market (see report)

10--Ritholtz on "Case Schiller data is 2 months old", The Big Picture

Excerpt: Its pretty self-evident that claiming a data series is 2 months (Case Shiller, that is) old during a 72 month slide borders on insanity. The overall trend has been devastating, the entire 60 day lag down . . .

What about prices and homes sales stabilizing?

Well, not exactly — even that bottom scraping that looks like stabilization is the result of a massive concerted effort between multiple bailouts, fed actions and tax credits: (Home buyer tax credits, HAMP, HARP, mortgage writedowns, foreclosure moratoria, Gov support--QE1 QE2, Operation Twist, ZIRP, Fraudclosure settlement etc)

11--A housing bottom, Ivy Zelman, CNBC (video)

12--Discontents: In Nothing We Trust, The Bg Picture

Losing faith in institutions

13--Setting the Record Straight: The Housing Bubble Lie, Firedog Lake

Excerpt:   Let’s get something straight: we did not have a housing “bubble”, in the usual sense of the word. The mainstream narrative of crazed, greedy, irresponsible homeowner-wannabes driving prices unsustainably high, causing the still ongoing crash is wrong. Yes, we had a housing “bubble” in one sense; prices soared way beyond reality because excess demand fueled irrational bidding wars. The lie deals with why we had a housing bubble. The lie matters because like all problem-defining narratives, it shapes the policy solutions offered. So let’s take a look at the lie...

We didn’t have a housing bubble in the ordinary sense because consumers don’t buy houses; banks buy houses. The housing market cannot undergo a demand-driven bubble without lender collusion and complicity.

No Bubble Without Bankers Blowing It

Home buyers who don’t have enough cash have to get a bank’s permission to buy. The dollars involved are big enough that banks historically did not hesitate to say “No, sorry, I know you want that house, but the house just isn’t worth that much, and besides, even if it were, you’re kidding yourself when you think you can repay the loan you want. No dice. Go find something more reasonable and we can talk again.”

In normal times, meaning, when bankers care if the loan will be repaid, bankers have two basic tools to protect their interests: appraisals and underwriting. Both get used conservatively, because if an appraisal is too high, the collateral isn’t worth the loan the banker’s making, sharply increasing his risks. If an appraisal’s too low, well, the deal might not get done, but from the banker’s perspective, better no deal than a loser. Ditto with underwriting. If the standards are very loose, the loans will default and foreclosures follow; if the standards are very tight, well, that shrinks the market and keeps prices down, but again, the bankers are happy: they’re getting paid back consistently. Bottom line: across most of the housing market’s history, bankers’ self-interest foreclosed any possibility of a housing bubble.

Obviously, the fact that the entire nation underwent a housing bubble the last decade or so means something changed. Given the market dynamics, only one thing can have changed: lenders’ incentives. People didn’t suddenly become nuts about housing; Americans have been so nuts about housing for so long the “American Dream” shifted from my immigrant grandparents’ dream of “equal opportunity to get ahead, hard work and talent is all it takes” to the “dream of home ownership...

Or to put it another way: what evidence is there that circa 2005 wannabe homebuyers became so sophisticated–nationwide, simultaneously–that they could con bankers who cared about ensuring loans made against sufficient collateral would be repaid into making huge numbers of loans that couldn’t be, against collateral that today’s market exposes was worth nowhere near the amounts claimed? Did some evil villain put something in the public water supply that somehow made wannabe homebuyers into talented con men and bankers gullible rubes?

Of course we got a housing bubble because lender behavior changed, not because consumer behavior did....

To get a flavor of how the volume of liar’s loans exploded during the bubble, see this column by Joe Nocera of the New York Times. A couple of key excerpts:

“…stated-income loans became a means for both borrowers and lenders to commit fraud….Real estate speculators used stated-income loans to buy properties that would otherwise have been out of reach, hoping to flip them quickly, before their lack of income caught up with them. Far more frequently, however, mortgage originators used stated-income loans to put people into homes that were far beyond their means, knowing full well that the chance of the borrower ever paying back the loan was practically nil.”

Tuesday, April 24, 2012

Today's links

1--Why Paul Krugman is Full of Shit, counterpunch

Excerpt: Fed Chair Bernanke gave a veiled explanation of how this works in his Jackson Hole speech from 2010 that can be found online. Mr. Bernanke calls his method the “portfolio balance channel,” and it it is premised on two basic economic concepts, supply and demand and substitution. When the Fed buys assets it takes those interest-paying assets out of circulation and replaces them with cash. This reduces the supply of interest bearing assets in financial markets and replaces them with cash with which to buy other assets. It also reduces market interest rates thereby making stocks and other assets (substitution) more attractive.

But we need not rely on theory to see if this works the way that Mr. Bernanke theorized that it would. There are a significant number of rigorous analyses that were done demonstrating that when the Fed (or the ECB) is buying assets through QE financial markets rise and when the Fed stops buying they fall. The evidence is both unambiguous and voluminous. And in an anecdotal sense, there was some skepticism from Wall Street in 2009 when QE began but few if any doubters remain—it is absolutely the perceived wisdom on Wall Street that the reason that financial asset prices have been rising when they have is because the Fed is causing them to. The only question still out there for Wall Street is whether or not the Fed will continue to run prices up further?

How does running up the prices of financial assets directly benefit the richest Americans? Ironically, every three years the Fed also produces a survey of income and wealth distribution in the U.S. that is available on the Fed’s website. The data is broken out by income and wealth deciles. The quick answer to who benefits from rising financial asset prices is that the rich do because they own all the financial assets.

2-- Run, Don't Walk, John P. Hussman, Ph.D., Hussman Funds

Excerpt: we emphatically view present conditions as being among the most negative subset we've observed in the historical record.

....examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began. These were not small numbers. The average payroll growth (scaled to the present labor force) translates to 200,000 new jobs in the month of the recession turn, and about 500,000 jobs during the preceding 3-month period. Indeed, of the 80% of these points that were positive, the average rate of payroll growth in the month of the turn was 0.20%, which presently translates to a payroll gain of 264,000 jobs. Notably however, the month following entry into a recession typically featured a sharp dropoff in job growth, with only 30% of those months featuring job gains, and employment losses that work out to about 150,000 jobs based on the present size of the job force. So while robust job creation is no evidence at all that a recession is not directly ahead, a significant negative print on jobs is a fairly useful confirmation of the turning point, provided that leading recession indicators are already in place." (see Leading Indicators and the Risk of a Blindside Recession).

The upshot is that while I expect a weak April jobs report, we should hesitate to take leading information from what remains largely a short-lagging indicator. We're already seeing deterioration in economic data, but it remains largely dismissed as noise. An acceleration of economic deterioration as we move toward midyear would be more difficult to ignore. My impression is that investors and analysts don't recognize that we've never seen the ensemble of broad economic drivers and aggregate output (real personal income, real personal consumption, real final sales, global output, real GDP, and even employment growth) jointly as weak as they are now on a year-over-year basis, except in association with recession. All of these measures have negative standardized values here. My guess is that we'll eventually mark a new recession as beginning in April or May 2012.

3--Short sales expected to surge this year, CNN
Excerpt: Short sales are rising sharply, offering many struggling homeowners a better alternative to foreclosure in many of the nation's hardest hit states.

In short sale deals, the sale price of the home is less than what the seller owes. Often, the bank that holds the mortgage takes so long to approve the sale that the deal falls through. But in recent months, the pace of short sales has increased, a trend that should gain momentum, according to RealtyTrac.

In January, short sales rose 33% compared with 12 months earlier, the company reported.
During the month, 32 states saw year-over-year percentage increases in short sales. Even more encouraging, short sale deals outnumbered foreclosures in 12 states, including some of the hardest hit like California, Arizona and Florida.

4--60 Minutes: The Case Against Lehman Brothers, economist's view

15 minute video

5--European Budget Deficits Did Not "Balloon" in the Credit Bubble of the Last Decade, CEPR

Excerpt: Fox on 15th Street is on the loose again. A Washington Post article on renewed worries over European sovereign debt referred to:

"massive cuts in government spending aimed at reducing deficits that ballooned during the credit bubble of the past decade."

No, the deficits did not balloon during the bubble. Greece and Portugal did run large deficits in the bubble years. However Italy's debt to GDP ratio was falling and the other two crisis countries, Spain and Ireland, were running budget surpluses.

How can a Washington Post reporter not know these facts? How can an editor allow this assertion to get into print? We know that claims like this fit the Post's obsession with deficits, but the paper should show a bit more respect for the facts.

6--Stagnant Worker Wage Income Leads to Overcapacity, Henry C.K. Liu website

This article appeared in AToL on November 24, 2010

In the economics of development, there is an iron-clad rule that “income is all”. The rule states that the effectiveness of developmental policies, programs and measures should be evaluated by their effect on raising the wage income of workers; and that a low-wage economy is an underdeveloped economy because it keeps aggregate consumer demand below its optimum level, thus causing overcapacity in the economy that needs to be absorbed by export.

Workers income is the key factor in generating national wealth in a country. Export through low-wage production is merely shipping under-priced national wealth outside the national border without adequate compensation, by under-pricing labor within the nation. During the age of industrial imperialism, export of manufactured goods was promoted by high-wage economies to the low-wage colonies in return for gold-back money, so that more investment could be made to provide more jobs for high-wage workers at home. In post-industrial finance economies, cross-border wage arbitrage in unregulated global trade exploits workers in low-wage economies to produce for consumers in higher wage economies to earn fiat crrency in the form of the dollar that cannot be spent in the exporting economy.

Globalization of Trade Preempts Domestic Development in All Countries
This “income is all” rule has been mostly obscured in recent decades during which globalized foreign trade promoted by neoliberals has pre-empted domestic development as the engine of economic growth in all market economies around the world. In today’s game of globalized international trade, the new operative rule is that “profit is all” and that high profit in competitive export trade requires low domestic wages, even if low local wages retard domestic economic development by reducing aggregate purchasing power in the domestic market to cause overcapacity that rely on export. As workers wages are not sufficient to buy the goods they produce, domestic markets fall into underdevelopment and export to high-wage economies is needed to produce profit for companies.

Excessive Corporate Profit From Low Wages Leads to Overcapacity

This new rule of globalized trade is designed to produce short-term maximization of corporate profit for an export sector. But in the post industrial finance economy, the export sectors in low-wage economies are largely owned or financed by cross-border international capital. This type of international trade incurs inevitable long-term stagnation in the domestic economies of all trading nations because the low wages paid by international capital lead to insufficient aggregate domestic consumer demand. Stagnant wages everywhere in turn reduce aggregate global purchasing power needed for the expansion of international trade. It is a clear case of imbalanced economic sub-optimization.

7--Draghi’s ECB Rejects Geithner-IMF Push for Measures, Bloomberg

Excerpt: European Central Bank officials led by President Mario Draghi resisted calls from the International Monetary Fund and U.S. Treasury to do more to stem the debt crisis roiling the euro-area economy.

As talks of global finance chiefs ended yesterday in Washington, euro-area central bankers from Draghi to Bundesbank President Jens Weidmann argued they have done enough by cutting interest rates and issuing more long-term bank loans.

None of the advice that the IMF is offering has been discussed by the Governing Council, in recent times at least,” Draghi said on April 20 while attending IMF meetings in Washington. Weidmann said in an interview that “the problems in Europe can’t be solved by monetary policy measures.”

Officials in Europe and around the world are bickering about additional crisis-calming steps, as turmoil returns to the continent’s bond market amid concern that Spain may need a bailout. While Draghi says Spain and Italy need to agree further action, Prime Minister Mariano Rajoy’s government wants the ECB to reactivate its bond-buying program.

Spain and Italy have made “remarkable” progress on structural changes, Draghi said. Even so, the process is far from complete for both countries, he said

Pressure on Governments’

“The ECB is drawing a line to keep pressure on governments to make the necessary adjustments,” said Megan Greene, head of European economics at Roubini Global Economics LLC, who was in Washington. “If push came to shove the ECB would step in, but they’ll hold the line for now.” ...

The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets,” Geithner told the IMF....

Further measures to quell financial turmoil in Spain risk stretching the credibility of the bank’s monetary policy, Luc Coene, ECB Governing Council member and governor of Belgium’s central bank, said in an interview on April 21.

“We have done what we can do so far within our mandate and within the possibilities we have,” he said in Washington. “The only thing we could do is overstretch ourselves and then we would even lose the credibility we have at that moment.”

Weidmann of the Bundesbank indicated the ECB may welcome higher borrowing costs as a way of forcing governments not to backpedal.

“Higher interest rates are also a spur toward reforms,” he said.

8--The Spanish Dilemma--Euro's Fate Hinges on Austerity in Madrid, Der Speigel

Excerpt: Spain's banks are widely regarded as time bombs, with portfolios of volatile loans on their balance sheets that could explode at any time. The country is sliding deeper into recession and international financial investors are slowly but surely withdrawing. Last week, the government in Madrid succeeded in selling new bonds on the markets. But the yields for these 10-year sovereign bonds are currently running at a crisis level of roughly 6 percent.

The fate of the monetary union currently depends on Spain's austerity policies. The experts in Brussels are convinced that if the country seeks aid from the rescue package, the crisis will reach the next escalation stage.

The danger is real. Indeed, since the current Spanish government took office four months ago, it's proven more adept at upsetting its European partners than at solving its financial problems. Many observers say that the latest escalation in the crisis was sparked when Spanish Prime Minister Mariano Rajoy announced that he did not intend to adhere to EU austerity rules. "That's the perfect way to scare off investors," said an official in the German Finance Ministry in Berlin.

Since then, officials in Brussels have been saying that Spain isn't expressing enough serious interest in cutting costs. According to the plans put forward by the government in Madrid, public expenditures will rise by 2 percent this year alone, taxes will only be moderately increased and Rajoy doesn't even intend to reduce the public sector workforce. There's quite a lot of "fat" in Spain's public sector, as European Commission President Barroso often complains in small circles.

Next Setback Unavoidable

For example, Spain has some 4,000 state-owned companies whose privatization could fill government coffers with billions of euros. But these stakes are primarily held by regional governments, and Rajoy can't simply issue instructions to regional political leaders. Last year, the central government in Madrid got a taste of what this entails. Madrid had largely adhered to the belt-tightening regulations. Spain's autonomous regions, though, such as Catalonia and Andalusia, ruined the results with their debt policies.

The next setback is unavoidable. The prime minister recently announced that he wants to reduce expenditures in the country's education and health system by €10 billion. But Spain's regions are doing everything they can to resist the threatened cuts in their budgets. Andalusia, for example, is slated to receive €2.7 billion less, but it's demanding €1.5 billion from the central government for investments that were approved over the previous years.

The conflict threatens to escalate. To meet the demands of the central government, the regions would have to slash 80,000 out of 500,000 teaching positions, the teachers' trade union claims. Not surprisingly, this has met with staunch resistance from local politicians and it remains unclear whether Madrid can meet its budget commitments.

There are equally large concerns about Spain's financial sector. Just a few years ago, the banks financed an unprecedented real estate boom. This was fueled by the low interest rates that Spain enjoyed after the introduction of the euro, along with the avid interest of foreign investors. Between 1997 and 2007, real estate prices rose by approximately 120 percent....

And there is another reason for pessimism: Due to the recession, an increasing number of companies and private households can no longer service their debts. As a result, when the ECB pumped money into the European banking sector this winter, Spanish banks soaked it up like a sponge. By late March, they owed the ECB €228 billion....

9--Q&A: ECB President Mario Draghi, WSJ

10---Social Model Is Europe’s Solution, Not Its Problem, Bloomberg

Excerpt: Wealth that is generated by the creation of a continent- wide market should benefit the citizens of the EU together. It should, above all, raise standards of living. But the effect has been the opposite.

Monday, April 23, 2012

Today's links

1--Debt Burden Lifting, Consumers Open Wallets a Crack, NY Times
Excerpt: The bursting of the real estate bubble and the ensuing credit crisis forced American consumers to do something that they had little experience in trying: reduce their debt.

It has been a painful process both for borrowers, who have faced foreclosures and bankruptcies, and for lenders, whose have had to take losses vastly in excess of what they thought possible...

But the process is working far faster in the United States than in countries like Britain and Spain, which also faced plunging real estate prices. And now it appears to be contributing to an economic recovery that has gained a little momentum, despite facing headwinds from the European debt crisis. This week’s report that retail sales grew faster than expected in March was the latest sign that consumers — or at least a substantial number of them — are growing more optimistic.

One measure of the financial health of householders is the level of financial obligations, like required mortgage and credit card payments, to disposable income. By the fall of 2007, those obligations took up 14 percent of disposable income, more than at any time since the Federal Reserve began calculating the statistic in 1980.

But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.

There is little mystery in how that happened. First, debt levels have fallen. Over all, households owe about $13.2 trillion, nearly $600 billion less than in late 2008. Second, low interest rates mean that servicing that debt costs less. The Commerce Department says that mortgage interest payments, in dollars, are lower than at any time since 2005.

Getting those debt levels down was not a simple matter of making payments, of course. The McKinsey Global Institute estimates that about two-thirds of the reduction came from the cancellation of debt, through write-offs and foreclosures.

But the benefit is appearing. This week’s report of surprisingly strong retail sales in March may in part be because of warm weather. However, it also owes something to the fact that money that once went to mortgage payments may now be available for other things....

Ms. Lund points out that from 2003 to 2007, American homeowners took out $2.2 trillion from home equity loans and mortgage refinancings, a source of economic stimulus that will not return anytime soon. “Compared to the much-debated government fiscal stimulus, this was more than twice the size,” she noted. She thinks the household deleveraging process will continue for two more years.

2--Some thoughts on housing and foreclosures, calculated risk
Excerpt: According to LPS, there are currently about 2 million properties in the foreclosure process and another 1.7 million loans 90+ delinquent. However many of these loans are in judicial states, and even with the mortgage settlement, it will take some time to work through the courts. So it is hard to imagine a huge wave of foreclosures, if anything it will be more like a sustained high tide in certain judicial foreclosure areas.

Meanwhile the lenders are offering cash incentives to these same borrowers to do short sales. These incentives are one of the reasons short sales are now at about the same level as REO sales according to LPS. Just yesterday Fannie and Freddie announced new short sale timelines to try to streamline this process further. Sure short sales are still distressed sales, but the impact of short sales on the market is probably less than foreclosures. And more short sales will reduce the number of REOs on the market (listed inventory is what impacts prices).

Meanwhile the GSEs are trying a new REO-to-rental pilot program, and the regulators are allowing banks to hold REOs as rentals for an extended period.

3--Slump Taught Profligate Americans Value of Saving: Economy, Bloomberg

Excerpt: Americans are likely to keep rebuilding their savings for years to come as the specter of job losses and the meltdown in stocks triggered by the recession lingers, economists say.

Households are putting money away at a pace more than double that leading up to the economic slump. The saving rate has averaged 4.8 percent since June 2009, when the 18-month contraction ended, compared with 2.2 percent in the three years leading up the downturn.

Households are going to be mired in this deleveraging environment for a few more years,” Ellen Zentner, a senior U.S. economist at Nomura Securities International Inc. in New York, said in a telephone interview. “That’s not atypical following a financial crisis.”

The need to boost cash reserves and pay down debt may eclipse the urge to be the first on the block to drive the newest model car, stemming a recent decrease in the saving rate. Almost three years into the recovery, the economy has yet to regain even half the 8.8 million jobs lost or the $16.4 trillion in household net worth washed away as a result of the recession, indicating consumers will want to keep a bigger cash cushion.

“A savings rate in the neighborhood of 5 percent is one that would allow consumers to prepare for long-term obligations and yet will support the economy in the short-term,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Pent-Up Demand

Pent-up demand for automobiles helped propel a 0.8 percent gain in consumer spending in February, the biggest in seven months, according to Commerce Department data. The pickup carried over into March as figures this week showed retail sales also advanced 0.8 percent, reflecting stepped-up purchases of furniture, clothes and electronics.

Stronger earnings, reflecting in part the recent pickup in sales, are boosting share prices. The Standard & Poor’s 500 Index climbed 0.1 percent to 1,378.53 at the 4 p.m. close in New York. General Electric Co. (GE), Microsoft Corp. (MSFT) and Schlumberger Ltd. reported profits that topped analysts’ estimates.

Shares also rose on better economic news elsewhere. A report today showed German business confidence unexpectedly increased in April for a sixth month.

Recent Drop

The increase in U.S. consumer spending pushed the saving rate down to 3.7 percent in February, the lowest in more than two years and matching the level in August 2009 as the weakest of the current expansion, Commerce Department data show. ...

“The Federal Reserve, with its low-rate policy, has been subsidizing consumers’ ability to spend by reducing the desire to save,” said LeBas. The central bank “has actually been more effective than most people recognize in that they’ve really convinced consumers to spend rather than save, thereby supporting short-term economic activity,” he said. ...
Other economists, such as Ken Mayland, believe the current pace of household spending is unsustainable.

“Consumers have been working down their personal savings rate to sustain a spending style,” Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, said in a telephone interview. “That can only go on so long.”

4--Core Europe under attack on periphery woes, IFR
Excerpt: Investors are racking up large short positions in core European countries in preparation for a wider eurozone meltdown, as the blow-out in Italian and Spanish spreads has made outright bets against the periphery prohibitively expensive....

“We’re seeing a massive increase in demand for protection on core countries like France, the UK and Germany, and away from high-beta names like Spain and Italy. It’s difficult to buy Spain at the wides of 500bp when it’s never traded that high, whereas people are used to France trading at 200bp,” said Antoine Cornut, head of credit flow trading for Europe and the Americas at Deutsche Bank.

5--"FIGHT THE NET": Pentagon Media Psyops and "Black Propaganda", global research

6--Republicans Want to Repeal Resolution Authority, economist's view
Excerpt: This is crazy: the House Republicans on the Financial Services Committee just voted to repeal "resolution authority."...
...government regulators believed there were only two (bad) choices. Let too big to fail banks fail and suffer the economic consequences, or to bail them out, including bailing out the owners and managers who had led the banks to disaster. If it had resolution authority -- the ability to step in take over when banks fail -- the rewards to management could have been avoided, and taxpayers could have been better protected in other ways, but limits on legal authority gave regulators only two bad options. Do nothing, or bail the banks out.

The resolution authority in Dodd-Frank is intended to fix this problem by putting into place a procedure that is similar to what is done with ordinary banks. Resolution authority allows government regulators to take control of the banks, fix the problems, and then return them to the private sector. But, and this is important to recognize, Dodd-Frank also prevents the type of bank bailout that was done during the financial crisis.

Thus, the authority for the type of bailout that we saw during the crisis no longer exists. If if we now remove resolution authority there will be just one choice if a too big to fail firm gets in trouble -- let it fail. That, and the cascading shadow bank failures that would follow, would be a disaster.

I was unsure that resolution authority as spelled out in Dodd-Frank would actually work. If a large, systemically important bank was failing, would regulators have the courage to try this risky new procedure, or would they fall back on what has worked before, the type of bailouts we saw during the crisis? The legal authority to do bailouts is now gone, so a bailout is no longer a choice, but the law could always be altered quickly and I expected that might happen when the next financial crisis hits.

But we need to be able to do one or the other -- to bail them out or put them through resolution authority -- and resolution authority would be much better if it works. The idea embraced by Republicans that letting these banks fail will prevent moral hazard (banks will take less risks if they know there's no bailout coming, or if the managers will get kicked out as resolution authority is exercised), but won't cause a disaster, is nuts. Financial history tells us that failing to step in and do something -- a bailout or resolution authority -- leads to cascading bank failures and economic disaster. Saying government won't step in to save a system in cascading failure is not a credible threat. It will step in. So this doesn't fix the moral hazard the GOP is so worried about, and it likely makes it worse since the moral hazard associated with a bailout is larger than with resolution authority. I am not sure that resolution authority will work, we may still need to do a bailout anyway, but letting large, systemically important banks fail as the GOP would have us do is not a risk we ought to take

7--Paul Krugman is Very, Very Wrong, Mike Kimel, angry bear

Excerpt: I'm sure I'm missing something here, because Paul Krugman is so often extremely perceptive, but I think here he is very, very wrong. He writes:

The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.

To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

Um, I dunno. Perhaps on specific day to day operations Ben B. is not giving money to the banks, but things look very different with a 30,000 foot view. (I suspect "the banks" most people mean if they say there are giveaways going on are not all banks but rather a small subset of basket cases.) Remember the toxic asset purchase? When the Fed spends over a trillion bucks paying the face value for securities whose real worth has declined to a fraction of that face value, to me that is both an expansion of the money supply and a give-away to those from whom one "purchases" those assets. There have been any number of similar, er, programs the Fed has run in the last few years which have had the same purpose: injecting money into a small number of entities that made extremely bad lending decisions in ways that specifically avoid making those entities pay any sort of market or reasonable price for that money.

8--Obama to Grad Students: Pay Up, The Village Voice
Excerpt: Speaking to a college crowd at the University of Michigan in January, President Barack Obama noted that for the first time Americans owe more on their student loans than on their credit cards. "That's inexcusable," Obama said. "Higher education is not a luxury—it's an economic imperative."

But even as the president laid out a program that included earlier loan forgiveness, lower interest rates, and caps on repayments of loans, he was putting the screws to graduate students. Starting this July, graduate-student loans will no longer be subsidized, meaning students will see their debts multiply with interest even before they've received their degrees.

The change will save the government an estimated $18 billion over the next decade—most of which has already been redirected to fund Pell Grants for undergraduates—but it's sure to tack thousands of dollars onto the debts of individual graduate students. The repercussions for graduate schools might be far-reaching, as people grapple with the question of whether a $50,000 master's or a $100,000 law degree is worth the money.

"The burden on graduate students is growing, and this makes a bad situation worse," says Eli Paster, a Ph.D. candidate at the Massachusetts Institute of Technology and the head of legislative concerns at the National Association of Graduate-Professional Students. "We don't want a disincentive for people to pursue a graduate degree."

9--Is high public debt harmful for economic growth?, Ugo Panizza and Andrea F Presbitero, Vox EU, economist's view
Excerpt: Most policymakers do seem to think that debt reduces growth. This view is in line with the results of a growing empirical literature which shows that there is a negative correlation between public debt and economic growth, and finds that this correlation becomes particularly strong when public debt approaches 100% of GDP (Reinhart and Rogoff 2010a, 2010b; Kumar and Woo 2010; Cecchetti et al. 2011)......

The fact that we do not find a negative effect of debt on growth does not mean that countries can sustain any level of debt. There is clearly a level of debt beyond which debt becomes unsustainable, and a debt-to-GDP ratio at which debt overhang, with all its distortionary effects, kicks in. What our results seem to indicate, however, is that the advanced economies in our sample are still below the country-specific threshold at which debt starts having a negative effect on growth. ...


Our reading of the empirical evidence on the link debt-growth link in advanced economies is:

Many papers that show that public debt is negatively correlated with economic growth.

No paper that makes a convincing case for a causal link going from debt to growth.

Our new paper suggests that such a causal link does not exist (more precisely, our paper does not reject the null hypothesis that there is no impact of debt on growth).

We realize that our results are controversial. While we are convinced of the soundness of our findings, we know that skeptical readers will find ways to challenge our identification strategy. However, the first two points are uncontroversial. The case that public debt has causal effect on economic growth still needs to be made. ...

10--The Washington Post Doesn't Like Populist Governments in Latin America, CEPR

Excerpt: There is certainly no case here that the populist governments, as identified by the Post, are doing worse than the Post favorites. Argentina ranks second among the whole group with an average per capita growth rate that is more than 3.5 percentage points above WAPO favorite Mexico. Bolivia and Ecuador are very much in the middle of the pack, even though the relatively brief period of populist rule includes the years of the world economic crisis. (Ecuador's growth would put it above both Chile and Colombia for the period that overlaps with populist rule and Uruguay's growth puts above Chile for the period of overlap.) Even relatively slow growing Venezuela has seen more rapid growth under populist rule than in the prior two decades when per capita GDP fell.

There has also been a substantial reduction in inequality in the countries the Post identified as populist (as opposed to an increase in inequality in Mexico). This means that the typical person in these countries has likely seen a sharp improvement in living standards.

Ironically the context for this piece is the decision by Argentina's government to re-nationalize the largest oil company in the country. (It had been privatized in the 90s.) Several of the countries held up by the Post as models, notably Brazil and Mexico, already have state owned oil companies.

Friday, April 20, 2012

Weekend links

--No exit in the EU, naked capitalism

Excerpt: private credit has become remarkably inefficient. Private finance is supposed to be a service enabling greater growth in the real economy of production and services. This argument made more sense in the Bretton Woods era following WW II until the 1970s when economic growth was strong and financial institutions comprised some 15% of corporate profits in the US. Yet, since the liberalization of finance from the 1970s, economic growth has continued to diminish in the West, meanwhile in the most liberalized ‘finance gone wild’ economies, like the US, finance now comprises some 40% of corporate profits. The bottom line is that deregulated capital markets in recent decades have taken an ever-increasing share of our economy, while producing less economic growth. Finance no longer enables economic growth by providing a needed service, but instead impose a massive rent seeking tax on the economy.

2--No Housing Recovery Until 2020 In 5 Simple Charts, zero hedge

Excerpt: From BofA: "The foreclosure inventory pipeline that must be cleared in the next few years is very large. Our mortgage strategists forecast that another 6.6 million homes will need to be liquidated over the next five years."

Live at home children: Since the recession, the share of young adults that still live with their parents has climbed. Of the 25-34 year age group, 14.2% live at home compared to an average of 10.5% in the first half of the last decade. Similarly, of the 18-24 year age cohort, 54.6% live at home, which is up from the low of 50% early in the last decade, but is close to the longer-term average. We should expect to see the 25-34 year olds move out of their family homes once the economy heals. It may take more time for the younger age cohort."

We forecast household formation to gradually turn higher over the next two years with a notable pickup starting in 2014. This inflow of new households will be supportive of the renovation market. Many of these new households will initially move into the rental market due to slow wage growth and tight credit conditions, as well as the typical attraction to renting for the young adult age cohort...

gain in renovations and multifamily building in the next two years should provide some support before the eventual turn in single family construction begins. Assuming housing starts return to the historical average of 1.5 million by 2016 and renovation spending remains healthy, residential investment will once again become an important part of the economy. We expect residential investment to reach 3.5% of GDP by 2016 and return to the historical average of 4% by 2020."

3--BP Blow-out Cover-Up: Two Years of Lies, by grtv

EcoWatch reveals shocking information of a BP cover-up of a blow-out prior to the deadly Deepwater Horizon explosion in the Gulf.

Special report from the Caspian sea. for by investigative reporter Greg Palast.

4--Blamed for Bee Collapse, Monsanto Buys Leading Bee Research Firm, natural society

Excerpt: Monsanto, the massive biotechnology company being blamed for contributing to the dwindling bee population, has bought up one of the leading bee collapse research organizations. Recently banned from Poland with one of the primary reasons being that the company’s genetically modified corn may be devastating the dying bee population, it is evident that Monsanto is under serious fire for their role in the downfall of the vital insects. It is therefore quite apparent why Monsanto bought one of the largest bee research firms on the planet.

It can be found in public company reports hosted on mainstream media that Monsanto scooped up the Beeologics firm back in September 2011. During this time the correlation between Monsanto’s GM crops and the bee decline was not explored in the mainstream, and in fact it was hardly touched upon until Polish officials addressed the serious concern amid the monumental ban. Owning a major organization that focuses heavily on the bee collapse and is recognized by the USDA for their mission statement of “restoring bee health and protecting the future of insect pollination” could be very advantageous for Monsanto.

In fact, Beelogics’ company information states that the primary goal of the firm is to study the very collapse disorder that is thought to be a result — at least in part — of Monsanto’s own creations. Their website states:

While its primary goal is to control the Colony Collapse Disorder (CCD) and Israeli Acute Paralysis Virus (IAPV) infection crises, Beeologics’ mission is to become the guardian of bee health worldwide.

What’s more, Beelogics is recognized by the USDA, the USDA-ARS, the media, and ‘leading entomologists’ worldwide. The USDA, of course, has a great relationship with Monsanto. The government agency has gone to great lengths to ensure that Monsanto’s financial gains continue to soar, going as far as to give the company special speed approval for their newest genetically engineered seed varieties. It turns out that Monsanto was not getting quick enough approval for their crops, which have been linked to severe organ damage and other significant health concerns.

Steve Censky, chief executive officer of the American Soybean Association, states it quite plainly. It was a move to help Monsanto and other biotechnology giants squash competition and make profits. After all, who cares about public health?

5--The Shrinking Government Sector, economist's view

Excerpt: Tim Taylor highlights a recent publication from the Cleveland Fed on "The Shrinking Government Sector" showing, among other things, that "government spending on goods and services was actually higher in the much of the 1970s than it is today"...

The recent rise in government transfer payments is extraordinarily large 4%: nearly 4% of GDP during the recent recession... For comparison, total defense spending in 2011 was 4.7% of GDP. Thus, just rise in government transfer payments has been roughly comparable to total defense spending. ...

Increases in transfer payments during recessions stabilizes spending. Without such a large infusion of transfers from the government, the recession would have been much worse (though I would have preferred more actual spending in the mix, and more spending overall). It's also likely that transfer payments will fall back to to a level near the 12 percent level that existed prior to the recession (in fact, as the graph shows, the turnaround has already started), that is, the recent run-up is temporary. This is not what we should be worried about.

What ought to concern us is the fall in government spending in such areas as "building roads, providing education,... paying for research and development," and so on. At a time when we ought to be using infrastructure spending to help the recovery along and to enhance future growth prospects -- the price of this spending is at rock bottom levels we are unlikely to see again anytime soon -- we are cutting spending sharply (note the fall-off in spending at the end of the first graph, and the more general downward trend). Using the temproary run-up in the deficit from the recession to block needed spending on infrastructure is a penny-wise, pound-foolish approach to governing. Even without including the substantial help it provides to the recovery, the benefits of infrastructure spending outweigh the costs. We are worse off, not better off, when such spending is blocked by deficit hawks.

6--Democrats conceal post-election austerity plans, WSWS

Excerpt: While the Obama reelection campaign claims to support higher taxes on the wealthy and oppose cuts in Medicare and other programs on which working people depend, the White House and congressional Democrats are already making plans for a bipartisan attack on social programs after the election.

These plans are being concealed from the people behind a smokescreen of demagogy about standing up for the “bottom 99 percent” and making the rich pay “their fair share” in taxes. The cynicism of the Obama campaign underscores the phony and undemocratic character of the entire electoral process.

The Obama campaign has focused on political ploys such as the “Buffett Rule,” a proposal to establish a minimum 30 percent income tax rate for all those making $1 million or more a year. This is an effort to make the American people forget three years of bailouts of the banks and the super-rich and a worsening of income inequality. According to a study released March 2, the top one percent of the American population garnered 93 percent of all increased income in 2010, the first year of economic “recovery” according to the White House....

The real attitude of the Democrats to massive budget cuts was seen in Tuesday’s decision by Senate Budget Committee Chairman Kent Conrad, Democrat from North Dakota, to postpone any action on a 2013 budget resolution until after the November election. Conrad announced that his committee would begin drafting a budget resolution based on the deficit-cutting recommendations of the Simpson-Bowles commission, appointed by Obama, but that no actual votes would be taken until after the election—i.e., until it is too late for the American people to react at the polls.

Conrad said he had made the decision to postpone a vote after it became clear that not enough Democrats were prepared to support a comprehensive deficit-reduction plan in advance of the elections. “I don’t think we will be prepared to vote before the election,” Conrad said, indicating action would only be taken in a lame-duck session of Congres...

after the November 6 election, when the US Treasury again reaches the legal limit on borrowing and the Bush tax cuts expire December 31, as do other stopgap measures adopted over the past two years, including the extension of unemployment benefits and the payroll tax cut for working people and the deadline for $1.2 trillion in automatic spending cuts.

These deadlines will be used to create a crisis atmosphere and claim that sweeping austerity measures are unavoidable. The measures that will be brought forward after the election will go far beyond anything proposed publicly by either party.

According to New York Times columnist David Brooks, Obama administration officials have given private assurances of support for major spending cuts after the elections and have already proposed, in the most recent budget, to cut discretionary domestic spending from 4 percent of US gross domestic product to only 2.2 percent, far below the level of the Reagan administration.

The 2012 election is a political fraud, used by the big business politicians of both parties to give the American people the illusion of choice, while behind the scenes the two parties are preparing measures so unpopular that they cannot be discussed openly for fear of a public backlash.

The American two-party system is a political conspiracy against the working class.

7--IFR Comment: Synchronised and large-scale deleveraging, IFR

Excerpt: The ECB’s 3-year LTROs have dealt with financial sector tail risk by allowing banks to partially overcome refinancing needs. This has not eliminated the prospect of severe deleveraging which according to the IMF will see large EU-based banks shrink their balance sheets by a combined €2.0trn through end-2013 (7% of total assets). This only serves to support calls for the eurozone to change its crisis response strategy and deal more actively with the financial sector...

When the US looked to deal with its banks via TARP there was the ability to rely on government funds and unless Germany is willing to open up its coffers the ECB route for accessing funds continues to be the only real way out. Eurozone policy makers have tended to deliver too-little-too-late when it comes to the crisis response but we have got to a stage where the response itself now needs to morph and change. The ECB needs to throw away its inhibitions over solvency concerns and play a more active role in fostering a solution that will deal with the financial sector and in turn create a firmer basis for growth.

Given the likelihood that policy action will require things to get worse we should expect to see the widening trend on peripheral debt being maintained. But on the view that Germany/eurozone will be forced into closer fiscal integration, or the ECB playing a more active role, then Bunds should ultimately suffer either on dilution of creditworthiness or concerns over ECB liquidity creation.

8--The Son of the Housing Bubble: First-Time Homebuyers Tax Credit, Dean Baker, Huff Post

Excerpt: The first-time homebuyers tax credit was added to President Obama's original 2009 stimulus package. It was introduced by Senator Johnny Isakson, a Republican from Georgia, but the proposal quickly gained support from both parties. The bill gave a tax credit equal to 10 percent of a home's purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009, however the credit was extended to buyers who signed a contract by the end of April, 2010....

once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010. Adjusting for inflation, the decline was more than 12.0 percent.

The problem was that the credit did not lead more people to buy homes, it just caused people who would have bought homes in the second half of 2010 or 2011 to buy their homes earlier. This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.

This delay allowed homeowners to sell their homes for higher prices than would otherwise have been the case. It also allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.

This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.

According to my calculations, the temporary reversal of the price decline transferred between $200 and $350 billion (in 2009 dollars) from buyers to sellers and lenders. Another $15-25 billion went from homebuyers to builders selling new homes for higher prices than would otherwise have been possible.

While this might look like bad policy on its face, it gets worse. The tax credit had the biggest impact on the bottom end of the market, both because this is where first-time buyers are most likely to be buying homes and also an $8,000 credit will have much more impact in the market for $100,000 homes than the market for $500,000 homes.

The price of houses in the bottom third of the market rose substantially in response to the credit, only to plunge later. To take some of the most extreme cases, in Chicago prices of bottom tier homes fell by close to 30 percent from June 2010 to December of 2011, leading to a lose of $50,000 for a buyer at the cutoff of the bottom tier of the market. The drop in Minneapolis was more than 20 percent or more than $30,000. First-time buyers in Atlanta got the biggest hit. House prices for homes in the bottom tier have fallen by close to 50 percent since June of 2010. That is a loss of $70,000 for a house at the cutoff of the bottom tier.

Many of the 11 million underwater homeowners in the country can blame the incentives created by the first-time homebuyers credit for their plight. This was really bad policy, which should have been apparent at the time. Unfortunately, it is only the victims who are suffering, not the promulgators of the policy. Welcome to Washington.

9--IMF insists austerity drive must be intensified, WSWS

Excerpt: The continuing austerity program was set out Tuesday in the IMF’s World Economic Outlook, which made clear there was no prospect of what was once considered a “normal” pattern of economic recovery. The Global Stability Report published Wednesday noted that European banks intended to cut their balance sheets by $2.6 trillion, dealing a major blow to business credit and household borrowing, and prompting a call by IMF chief economist Olivier Blanchard for further government-funded bank bailout operations.

Both reports served to underscore that the collapse of Lehman Brothers in 2008 and the ensuing financial crisis represented not a conjunctural downturn, from which there would be a genuine recovery, but rather a breakdown in the capitalist order leading to a fundamental restructuring of social and economic relations. Nearly four years later, that restructuring is being ruthlessly pursued with ever more dire consequences for the working class...

The claim is that these measures will bring economic stability. But their impact can be seen most clearly in Greece, where the IMF-backed austerity program has produced devastation. The World Economic Outlook noted that after contracting by about 7 percent in 2011, the Greek economy could be expected to shrink by a further 4.7 percent in 2012.

The class content of these measures was made clear by the IMF itself. The report noted that “labour market conditions” will remain “difficult” in many advanced economies—that is, there will be no reduction in jobless levels now reaching 20 percent in some parts of Europe. At the same time, it pointed out, “much of the increase in GDP since the trough has flowed to profits.” The report declared that it would be a “long time” before there were any real wage increases.

In other words, what is taking place is not “recovery” but a massive redistribution of wealth up the income scale....

This “madness”, however, is not a result of some policy failing. It is embedded in the very operations of the financial markets. Rising sovereign debt to GDP ratios, resulting from government bank bailouts, provoke the demand from financial markets for more spending cuts. Such cuts lead in turn to a fall in GDP, raising the sovereign debt to GDP ratio, leading to financial-market pressure for still more cuts.

Responding to a question on his reference to schizophrenia, Blanchard insisted that financial markets had to be appeased at all costs. “The markets listen and you have to convince them that you are credible, that you know what you are doing,” he said. One of the methods for achieving this goal was spelled out in the executive summary of the World Economic Outlook, which emphasised the importance of what it called “reforms to aging-related spending” in rebuilding “market confidence.”

In other words, the health and well-being of pensioners and the aged, as well as other vulnerable sections of society, must be sacrificed in a vain attempt to appease the insatiable demands of finance capital....

It also made clear that none of the contradictions of the capitalist economy that exploded in 2008 has even begun to be resolved, let alone overcome. In fact, the measures taken by governments over the past three-and-a-half years make them less able to deal with a new financial crisis. As the report noted: “In the current environment of limited policy room, there is… the possibility that several adverse shocks [a crisis in the euro zone, an oil price spike, for example] could interact to produce a major slump reminiscent of the 1930s.”

10--Financial turbulence mounts as global economy slides deeper into slump, WSWS

Excerpt: The source of the new round of turbulence, however, is not just the situation in Spain and Italy, but the deepening malaise of the world capitalist economy as a whole. Four years after the onset of the global financial crisis, nothing has been resolved. In the words of a report prepared by the Financial Times and the Brookings Institution, the world economy “remains on life support.”

It is being kept afloat largely by the pumping of massive amounts money into the financial system. According to Professor Eswar Prasad of the Brookings Institution: “The global economic recovery is still spluttering due to a lack of robust demand, policy tools that are stretched to their limits and unable to muster much traction, and enormous risks posed by weak financial systems and political uncertainty.”...

The deepening recessionary trends in the world economy have immediate political implications. They will bring an intensification of the international assault on the working class through the imposition of austerity measures, combined with layoffs and wage cuts in every sector of the economy.

11--Food Stamp Rolls to Grow Through 2014, CBO Says, WSJ

Excerpt: The Congressional Budget Office said Thursday that 45 million people in 2011 received Supplemental Nutrition Assistance Program benefits, a 70% increase from 2007. It said the number of people receiving the benefits, commonly known as food stamps, would continue growing until 2014.

Spending for the program, not including administrative costs, rose to $72 billion in 2011, up from $30 billion four years earlier. The CBO projected that one in seven U.S. residents received food stamps last year.

In a report, the CBO said roughly two-thirds of jump in spending was tied to an increase in the number of people participating in the program, which provides access to food for the poor, elderly, and disabled. It said another 20% “of the growth in spending can be attributed to temporarily higher benefit amounts enacted in the” 2009 stimulus law.

CBO said the number of people receiving benefits is expected to fall after 2014 because the economy will be improving.

“Nevertheless, the number of people receiving SNAP benefits will remain high by historical standards,” the agency said.

It estimated that 34 million people, or 1 in 10 U.S. residents, would receive SNAP benefits in 2022 “and SNAP expenditures, at about $73 billion, will be among the highest of all non-health-related federal support programs for low-income households.”

12--$82B for Food Stamps as Users Hit Record Highs, Bloomberg (video)

Excerpt: "From 2007 to 2011, the cost of the food stamp program rose 135%"...... "For all of 2011, total cost of the program was $78 billion...and it is forecast to cost $82 billion over the next year."

13--Foreclosure ripple effect: 8.3 million children in jeopardy, MSNBC

When we think of foreclosure, we tend to think of the tremendous financial toll it takes on adults. But a new report sheds light on the millions of children who are having their lives thrown into disarray by the crisis as well.

The analysis of foreclosure data, prepared for the children’s advocacy group First Focus, finds that as many as 2.3 million children have lost their homes to foreclosure. In addition, the report finds, another 3 million are at risk being displaced from their homes due to foreclosure.

The researchers also say that an additional 3 million kids could be affected by foreclosure because they live in a rental home that is either in foreclosure or at risk of being foreclosed upon. That means more than 8 million children are either affected or at risk

14--The Crappy Jobs of May 2011, economic populist

Excerpt: The two largest occupations were retail sales clerks and cashiers. These two job titles make up a whopping 6% of total occupations. After retail sales people, then cashiers, the next largest occupations where general office clerks, food preparation and serving, registered nurses, waiters and waitresses and customer service representatives. The above BLS chart describes the top 10 occupations in the United States for May 2011. Notice, except for nurses, these are all crappy jobs, below the average wage....

Of the 10 largest occupations, only registered nurses, with an annual mean wage of $69,110, had an average wage above the U.S. all-occupations mean of $21.74 per hour or $45,230 annually. Annual mean wages for the rest of the

10 largest occupations ranged from $18,790 for combined food preparation and serving workers to $33,120 for customer service representatives.

15--Economic Reports Fan Fears, WSJ

Excerpt: Dimmer Jobs Picture and Sluggish Home Sales Cast Doubt on Recovery's Footing...

Rising layoffs, falling home sales and slowing manufacturing activity are sparking fears that the economic recovery is headed for a springtime stall for the third year in a row.

New data Thursday provided fresh evidence that the job market is losing the momentum it built earlier this year, which could pressure fragile housing markets that have been showing signs of life. Separate reports this week suggested that the factory sector, a source of strength in the recovery, now is being hurt by weak growth overseas.

owever, recent signals have been mixed, with worrisome indicators following positive ones—such as consumer confidence and auto sales—that suggest the recovery remains on track. Economists generally believe total economic output in the first three months of the year grew at a rate a bit above 2%—slower than at the end of 2011 but significantly stronger than the same period a year ago.

"It's been the weakest recovery in the post-World War II period, and that hasn't changed," said David Rosenberg, chief economist for investment firm Gluskin Sheff.

New claims for unemployment benefits ticked down last week to 386,000 from 388,000 the week before, the Labor Department said Thursday. But those figures have been repeatedly raised in recent weeks, suggesting that the final number could be higher—and well above the 361,000 notched in mid-February. The less-volatile four-week average rose for the fifth time in seven weeks, a sign that layoffs are increasing again after approaching a four-year low earlier this year.

Economists cautioned that a range of factors, from a historically warm winter to an early Easter, have muddied the weekly figures and made it difficult to identify clear trends....

Nonetheless, the recent figures, combined with an unexpectedly weak March jobs report, suggest the job market is cooling. "It adds to concern about backsliding in job creation after faster employment gains earlier in the year," Credit Suisse economist Jonathan Basile wrote in a note to clients.

The housing market continues to bump along the bottom. Sales of previously owned homes fell 2.6% in March from February, according to the National Association of Realtors, meaning that the rise in buyer traffic during the mild winter hasn't yet translated into strong sales gains....

The manufacturing sector also is showing signs of cooling. Factory output slipped in March after rising a month earlier.