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.

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