Thursday, April 12, 2012

Today's links

1--All the pain in Spain, aljazeera

Excerpt: Millions refuse to lie down and see their lives smashed for the benefit of a few bankers, says Escobar....

The strike was a response to Rajoy's EU-imposed labour market reforms that, according to Antonio Carretero from the CGT union, are "a counter-reformation that erases with a single stroke many labour and union rights acquired by the working class in decades and generations". That includes extremely harsh cuts in health, education and social services....

The catalogue of Spain's "austerity" is the usual catalogue of neoliberalism in trouble. A previous, nominally socialist and now an ultra-conservative government have furiously decimated unemployment, retirement and severance benefits; turned virtually all labour contracts into precariousness hell; steeply raised fees for education and transportation; vastly militarised the police; and spent fortunes to bail out banks....

And this in a country with a staggering 6 million unemployed. The official unemployment rate is 24 per cent - higher than Greece and the highest in Europe. In reality it's more like 30 per cent. Among young people, it's between 45 per cent and 50 per cent. An extra 600,000 Spaniards will definitely lose their jobs in 2012.

The rebel Spanish middle and working classes are feeling in their own skin how European governments bend over backwards to allow the economic rape of their own countries. Spain is being subjected to the tightest fiscal squeeze ever imposed on a European economy...

2--Spanish banks face funding lock-out, IFR

Excerpt: Covered bond syndicate bankers are expecting weak jobs data out of the US and a persistent deterioration of Spanish bank credit to weigh heavily on the new issue market for the foreseeable future. It’s a backdrop that is likely to lock Spanish banks out of the primary market and deprive the country’s banks of a funding plan B, according to one banker.

“The Spanish are continuously looking at the market but the increasing weakness in the government spreads and the confusion around the M&A sector is putting a number of investors off.”...

“The Spanish are completely shut out of the market,” said a covered bond trader. “You won’t get any momentum for a deal, and for investors, they have no incentive to buy into a deal when the market is declining.”

3--Lenders Again Dealing Credit to Risky Clients, NY Times

Excerpt: financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost.

“These people are addicted to credit, and banks are pushing it,” said Charles Juntikka, a bankruptcy lawyer in Manhattan.

The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.

Some former banking regulators said they worried that this kind of lending, even in its early stages, signaled a potentially dangerous return to the same risky lending that helped fuel the credit crisis.

“It’s clear that we are returning to business as usual,” said Mark T. Williams, a former Federal Reserve bank examiner.....

Regulators with the Office of the Comptroller of the Currency, which oversees the nation’s largest banks, said that as long as lenders adhered to strict underwriting standards and monitored risk, there was nothing inherently dangerous about extending credit to a wider swath of people.

In fact, an increase in lending is a sign that the economy is improving, economists say. While unemployment remains high, consumers have been reducing their debts.

4--The Real Threat Is Spain, Not Greece, CNBC

Excerpt: The American Depository Receipts for Spain’s two biggest banks, Banco Santander [STD 6.70 0.19 (+2.92%) ] and BBVA [BBVA 7.14 0.32 (+4.69%) ], have fallen 11.6 percent and 13.1 percent over the past four weeks respectively. Both stocks are now down more than 40 percent over the past year. Yields on 10-year Spanish bonds are close to yielding 6 percent, and the cost to insure Spanish debt is nearing a record high.

Here’s the fear: Banco Santander, BBVA and the third largest bank in Spain, La Caixa, have combined assets of about $2.7 trillion. Spain’s GDP is just about $1.4 trillion.

In other words: Spain’s three biggest banks are nearly twice as big as the entire Spanish economy.

By contrast, America’s three largest banks by assets — JPMorgan Chase, Bank of America and Citigroup — have combined assets of around $6 trillion, or about 40 percent of U.S. GDP. If JPMorgan [JPM 44.01 1.05 (+2.44%) ], Bank of America [BAC 8.86 0.32 (+3.75%) ] and Citi [C 33.585 0.725 (+2.21%) ] are too big and too systemically important to fail, what does that make Spain’s big three?...

For this reason alone, Ben Bernanke and central bankers around Europe are right to be worried. Consider the difficulty the ECB, IMF and European Commission had in working out a bailout for Greece. Now multiply the economic problem a few times over and the scope of the growing Spanish crisis becomes clearer.

Spain’s economy is the 14th biggest in the world, nearly five times larger than Greece. Spain’s unemployment rate is a staggering 23 percent. That’s worse than the jobless rates in Mozambique, Micronesia or Equatorial Guinea and means there are nearly as many people without a job in Spain as there are working age people in Greece.

5--Growth of Income Inequality Is Worse Under Obama than Bush, naked capitalism

Excerpt: ...under Bush, the 1% captured a disproportionate share of the income gains from the Bush boom of 2002-2007. They got 65 cents of every dollar created in that boom, up 20 cents from when Clinton was President. Under Obama, the 1% got 93 cents of every dollar created in that boom. That’s not only more than under Bush, up 28 cents. In the transition from Bush to Obama, inequality got worse, faster, than under the transition from Clinton to Bush. Obama accelerated the growth of inequality.

The data set is excellent, it’s from the IRS and it’s extremely detailed. This yawing gap of inequality isn’t an accident, and it’s not just because of Republicans. It’s a set of policy choices, as Saez makes clear in his paper.

Looking further ahead, based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s.

Income concentrations are relatively rare, but when they happen, sharp policy moves can retain a strong measure of equality. It’s well-known at this point that President Obama did not want to make such moves. TARP, cramdown, and the foreclosure fraud settlement suggest that his interests lie in preserving the capital structure of the large banks. What about other policy priorities?

6--Euro rises on prospect of more ECB bond purchases, Reuters

Excerpt: European Central Bank Executive Board member Benoit Coeure

said the ECB's bond-buying program remained an option, as the

euro zone debt crisis continues to hang over markets. His

comments were a balm for benchmark 10-year Italian and Spanish

debt, whose yields fell after surging on Tuesday to multi-month


Coeure's comments calmed investors' fears over the fiscal

health of the debt-laden southern European nations one day after

Spanish bond yields hit their highest levels this year. The ECB

left the bond-buying program unused for the seventh time in

eight weeks last week.

"Today's price action comes after a couple of days of

pessimism, but the ECB's comments helped reverse some of that,"

said Win Thin, global head of emerging market currency strategy

at Brown Brothers Harriman in New York.

Market players were also encouraged by the narrowing

Wednesday of Italian and Spanish and Italian 10-year yield

spreads over the German equivalent, a gauge of investor risk


"However, I think this is a temporary respite for the euro,

and the Spain issue will remain a major issue, if not intensify

going forward," Thin said. "Greece will also be back in the

headlines soon as well."

7--ECB to Buy Euro-Zone Bonds Again, as Contagion Spreads?, WSJ

Excerpt: Reviving the Securities Markets Program would be deeply unwelcome within the ECB for more than one reason. It would represent another indecently quick policy U-turn after President Mario Draghi appeared to rule out such a move at last week’s press conference, and it would risk another public fight with Germany over “back-door bailouts” of the euro zone’s weaker members.

It would also be an admission that the €1 trillion injected by the ECB into the euro zone’s banking system between December and February can’t even buy more than a couple of months for euro-zone governments to sort out their deeper-lying problems.

But analysts say the ECB may find it has no alternative–or at least no better one–if it wants to stop fears about the health of Spain and Italy developing into a major new chapter of the euro zone’s three-year-old sovereign debt crisis.

For the past two months, the ECB has been able to suspend the Securities Markets Program (SMP) all but completely. Instead it has lent on unprecedentedly generous terms to banks, who have invested a large part of those loans in their government bond markets. Spanish and Italian banks have bought more than €100 billion net in euro-zone government bonds since December. For comparison, the ECB has taken nearly two years to amass an SMP portfolio of €214 billion.

“The bond purchases are relatively easy to reactivate,” said Timo Wollmershaeuser, an analyst with the Munich-based Ifo institute. “It’s easier to communicate and more targeted” than another three-year refinancing tender would be,” he added...

Mr. Schulz argued that there would be less German resistance on ideological grounds to another big long-term refinancing operation, or LTRO, than to a resumption of bond purchases. While the SMP would address the problem far more directly, the ECB is acutely sensitive to German accusations of it acting as lender of last resort to governments, something that its charter forbids.

8--How Has Fed Intervention Impacted Markets?, The Big Picture

Excerpt: (See chart)

9--Finance expert says speculators are behind high oil and gasoline prices, McClatchy

Excerpt: Financial speculators are gambling on oil the same way they gambled on the housing market a few years ago — a frightening prospect for the fragile economy, a Democratic congressional committee was told Wednesday.

"It is similar to the gambling Wall Street did on whether or not people would pay their subprime (below-market rate) mortgages in the mortgage meltdown," said Michael Greenberger, a law professor at the University of Maryland and a former federal regulator of financial markets. "Now they are betting on the upward direction of the price of oil."

The housing industry collapse helped trigger the deep recession that began in late 2007 and whose effects are still felt today...

Financial speculators such as investment banks and hedge funds account for at least 65 percent of purchases of contracts for future oil deliveries, more than twice their traditional share, while buyers who intend to actually take delivery of the oil and use it, such as airlines, make up only about one-third of demand. The speculators bid up contract prices, sending oil and gasoline prices higher and reaping them huge profits. The bidding is stoked by fear of possible violence in oil-producing countries, notably Iran.

Congress has tried to pressure the Commodity Futures Trading Commission to put limits on how many contracts anyone can buy, but financial interests have stymied CFTC efforts in federal court....

The Energy Information Administration said Wednesday that U.S. crude oil inventories "are above the upper limit of the average range for this time of year." Total motor gasoline inventories also remain in the upper limit of the average range. Both were as of March 30. That means supplies are plentiful; there's no shortage pressure driving prices up.

The EIA, the statistical arm of the Energy Department, also said that total products supplied over the last four-week period have averaged about 18.2 million barrels per day, down by 4.7 percent compared with the similar period last year. Similarly, over the last four weeks, motor gasoline product supplied has averaged nearly 8.6 million barrels per day, down by 3.8 percent from the same period last year.

10--Fed May Have Aggravated Income Inequality, El-Erian Says, Bloomberg

Excerpt: The Federal Reserve and other central banks may have increased income inequality with policies that boosted prices of stocks and other assets without having a commensurate effect on the economy, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.

In a lecture prepared for delivery at the Fed Bank of St. Louis today, El-Erian said central banks may be nearing the limits of their ability to spur growth and suggested that the “collateral damage” their policies are having on the economy and financial markets may soon outweigh the benefits.

“The unusual activism of central banks may, at the margin, have worsened further wealth distribution,” said El-Erian, whose company is manager of the world’s largest bond fund. “To the extent that such policy activism succeeds in bolstering asset values, but not the real economy, the rich benefit disproportionately.”...

Market ‘Distortions’

Policies of ultra-low interest rates and bond purchases have caused distortions in financial markets, including the promotion of “risk-on” and “risk-off” trading strategies, the former International Monetary Fund official said. Other “unintended consequences” of the bankers’ policies are a shrinking money market fund industry in the U.S. and increased financial pressure on pension funds, he said.

“Central banks in advanced economies needed -- and need -- help from other policy-making entities to deal with the twin unfortunate reality of too much debt and too little growth,” said El-Erian, who is also co-chief investment officer at Newport Beach, California-based Pimco.

11--Low-Wage Jobs to Blame for Slow Economic RecoveryBy Eileen Appelbaum, CEPR

Slower-than-expected employment growth in March 2012 has brought the halting pace of economic recovery into sharp focus again. Nearly three years since the recession officially ended in June of 2009, 12.7 million people are still out of work and unable to find a job—a figure that rises to 22.8 million if workers who have given up looking but still want to work and those employed part-time because of the poor economy are included. Demand for goods and services has been slow to recover—consumer spending has been hampered by a loss of housing wealth, continued high unemployment, and economic insecurity while government spending has been hamstrung by political infighting in Washington. The job growth that has occurred has been largely concentrated in very low wage occupations.

Economic theory—and common sense—tells us that high unemployment will persist until demand picks up. Businesses are not going to increase the pace at which they hire workers until the pace of spending increases.

Despite the obvious employment gap that results from the shortfall in spending, some observers contend that it is a mismatch between the skills of unemployed workers and the skills employers require that is responsible for the continuing high unemployment. Many of the ills of the labor market have been attributed to a supposed hollowing out of the job distribution—to "job polarization." Indeed, the claim that middle-skill/middle-income jobs in the United States are disappearing while jobs at the top and bottom of the occupational ladder are growing has been put forward as the explanation for four decades of wage stagnation for men. Today, the claim that employers have good jobs but can't find workers with the right skills to fill them has gained currency in the popular press. Yet such an imbalance between supply and demand would cause wages to rise in those occupations, and no such increase in pay can be observed.

Now a new study attributes the jobless recoveries following recent recessions to such job polarization....

12--The US Has the Highest Share of Employees in Low Wage Work, economist's view

See chart...

13--Running on empty, understanding society

Excerpt: Here is a summary from USAToday in 2011 (link):

Median household income fell 2.3% to $49,445 last year and has dropped 7% since 2000 after adjusting for inflation, the Census Bureau said Tuesday. Income was the lowest since 1996.

Poverty rose, too. The share of people living in poverty hit 15.1%, the highest level since 1993, and 2.6 million more people moved into poverty, the most since Census began keeping track in 1959.

The poverty statistic is stunning: it implies that 30 percent of the bottom 50 percent are officially living in poverty -- almost one-third....

58% of non-elderly Americans with income below 250% of the Federal poverty line are uninsured, while 12% of non-elderly Americans between 250% and 400% of FPL are uninsured. Only 5% of non-elderly Americans with income in excess of 400% of the Federal poverty line are uninsured...

A household of 4 persons has a Federal poverty line of $22,350 on this standard, so 250% of this is $55,875 -- a bit above the median household income for 2011. So lack of health insurance is heavily concentrated in the bottom 50 percent.

Home foreclosure is another reality in middle income America. Foreclosure has been a reality across full range of the income spectrum since 2008. But it appears to be more devastating in the bottom half of the income distribution. (This is evident in Detroit and Southeast Michigan.)

What is our society doing about these basic realities? Not very much. And, of course, a major candidate for President is on record: "I'm not concerned about the very poor" (link). One would hope that the bottom 50 percent think very carefully about which political platform best serves their real interests, including maintenance of a social safety net, aggressive and effective efforts to stimulate job growth, tax reform that requires the affluent to pay their fair share, and preservation of the broadened health insurance coverage promised by the 2010 health care reform legislation.

14--Is austerity self-defeating? Of course it is, VOX

Excerpt: ...The main argument of Giancarlo Corsetti’s article is that, in the short term, both fiscal austerity and “sovereign” risk have a contractionary impact in the short-term; the optimal policy for countries which require fiscal adjustment is hence to steer between the Scylla of excessive short-term fiscal contraction, which will reduce demand and output; and the Charybdis of a loss of market confidence in government debt, with knock-on impacts on risk premia for private sector borrowing and hence will also damage the real economy. Not a comfortable situation.

At one level this is obvious. At another level, however, it is misleading, and, if taken seriously by policymakers, potentially damaging, for three reasons. First, it fails to distinguish between Eurozone countries and those that have monetary sovereignty, for which these tradeoffs, at least in this form, simply don’t apply. Second, it fails, for the former, to correctly identify the source of sovereign risk, and hence risks prescribing policies that will be ineffective if not damaging. And third, it treats individual countries as if they were making independent policy decisions –when, of course, this crisis is a Eurozone crisis and needs to be addressed as such...

Bailouts of banks have contributed to the sovereign debt problems, but banks are also at risk due to their holdings of sovereign bonds. Weak growth contributes to the potential insolvency of the sovereigns, but also, the austerity inspired by the debt crisis is constraining growth. Finally, a weakened banking sector holds back growth while a weak economy undermines the banks.”

The policy implications for the Eurozone as a whole – loose monetary policy, action to recapitalise and resolve banks, and fiscal policy coordination, including looser fiscal policy in less vulnerable countries – are obvious, and have been so for some time; even David Cameron, who continues to pursue damaging and misguided fiscal policies domestically, set them out clearly in an excellent speech at Davos earlier this year. In particular, of course, the DeLong and Summers analysis strengthens the case for coordinated European fiscal policy action; while multipliers in any one European country (including the UK) are likely to be much smaller than that for the US, the multiplier for Europe as a whole might be expected (since the EU is roughly as open an economy as the US) to be approximately the same.

Consequently, the question posed by this Vox debate – “Is austerity self-defeating”? – more or less answers itself, when looked at a European level. Of course it is. The much more difficult task for European economists is to convince European policymakers that this is not the question they should be asking at all.

15--Why the euro-zone needs radical economic adjustment, and the case for break-up, Roger Bootle, policy exchange

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