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.

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