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.”









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