Thursday, May 31, 2012

Weekend Links

1--A Fiscal Union Won't Fix the Euro Crisis --The only practical choices are more geographic mobility, inflation, or subsidies..WSJ

Excerpt:  One key economic difference is the existence of a fiscal union in the United States. Increasingly, euro-zone hardliners have called for putting in a disciplined, unified fiscal arrangement similar to the one we have in the U.S. Unfortunately, their vision of fiscal union has badly missed the essence of the U.S. experience and would not fix the euro crisis.

At root, the euro-zone problem remains the locking together of very different economies into a monetary union without a way to adjust. Since the start of the union in 1999, productivity in the North, especially in Germany, has grown rapidly while wages have not. In the South, productivity has lagged. As a result, the unit labor costs in Germany have fallen about 25% since the euro's creation as compared to the Southern countries and France.

Normally, exchange-rate adjustments would reduce this gap. The slower growing, poorer country would become more competitive as its manufactured goods and its tourism became cheaper. Real incomes would take a hit initially, but the economies would have a path to growth. Inside a monetary union, however, there are no exchange rates to change.

That alone doesn't need to doom the monetary union. But without an exchange-rate safety valve you need an alternate way to rebalance economies. Moving, inflating, struggling, or subsidizing are your only choices—and none of them is easy.

If workers move freely to high-growth areas or if the central bank is willing to loosen monetary policy to get the high-growth economies to start inflating, that can replace the exchange rate as the safety valve. Inflation in the high-growth economies will change the relative real wages between the counties the same way a devaluation can. Labor mobility helps the U.S. in that sense. In Europe, though, mobility between countries with different languages is low and German tolerance for inflation seems even lower. That leaves suffering and subsidies.

Southern Europe can struggle through the problem—grinding down wages through high unemployment and structural labor-market reforms to make a country such as Greece more competitive internationally. History suggests this will not be an easy sell. Wage cuts usually come only after tremendously extended bouts of high unemployment. Structural reforms can take years to actually raise productivity growth rates.

Or Northern Europe could decide, for the sake of a united Europe, that it is willing to permanently subsidize euro-zone countries with low productivity growth. That could be through explicit subsidies or through bailouts and broad-based guarantees. But in the North, subsidies remain anathema. The Germans are quite right that the euro zone was absolutely not created to enable permanent subsidies, and their opposition is easy to understand.

Thus, lacking the normal safety valves to keep dangerous imbalances from destroying the monetary union, the euro hardliners are left with the idea of fiscal union. These hawks, however, misunderstand a fundamental strength of the U.S. fiscal union. They seek a union to impose budgetary discipline and structural reforms on laggard countries while the U.S. fiscal union serves mainly as an engine of subsidy.

Last year, the Economist compiled census data from 1990 to 2009 for all 50 U.S. states on the amount of federal spending in each state minus the amount the state's residents pay in federal taxes. Over 20 years, states like Minnesota and Delaware annually paid in about 10% more of their state GDP than they got back. On the other side, for the last 20 years New Mexico, Mississippi and West Virginia have received annual subsidies of more than 12% of state GDP. While not a perfect measure of subsidy, it conveys the basic point well. These are big. Greece's entire 2011 deficit, for example, was 9.1% of GDP.

The U.S. fiscal union has worked, in no small part, by enabling subsidies to the Mississippis without requiring the approval of the Minnesotas. It creates an important form of insurance. When Texans suffered from the collapse of the oil market in the 1980s, they could rely on the fiscal union to help them. When Texas boomed with rising oil prices in the 2000s, it contributed to the union to help harder hit regions.

Giving Northern Europe a veto over Southern Europe's budgets will not hold a monetary union together. The euro zone will continue to need the weaker countries to stomach decades of high unemployment to grind down wages.

Without some significant inflation in the North or mobility from the South, holding the European monetary union together will cost Northern Europe a great deal of money. In other words, if a fiscal union is to save the euro zone, it would need to facilitate subsidies from North to South, not eliminate them. As far as the likelihood of that, I wouldn't be willing to bet a dollar—even if it were backed by the state of Minnesota itself.

2--Woman Not Intimidated by Citi Wins $31M, Bloomberg

Excerpt:  By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses.

Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012.

In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve — more in total than any other U.S. bank — Jeffery Polkinghorne, an O’Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting.

The encounter with Polkinghorne was brief and tense, Hunt says. The number of loans classified as defective would have to fall, he told them, or it would be “your asses on the line.”

On March 29, 2011, Hunt walked into CitiMortgage’s human resources department in O’Fallon and told them everything: how the bank had been routinely buying and selling bad mortgages for years, how the fraud unit wasn’t doing its job and how the quality-control people were being pressured to change their ratings.

One place where she uncovered flaws was in the fraud prevention and investigation group. That’s where Hunt’s team shipped questionable loans, with issues such as obviously forged signatures, whited-out income lines on tax forms or misspelled bank names on borrower bank statements.

There was no testimony and no trial. Citigroup admitted wrongdoing on Feb. 15 and paid the $158.3 million to settle. In a press release the same day, Citi said it was pleased to resolve the matter.

“We take our quality-assurance processes seriously and have proactively undertaken process improvements to ensure that they are as robust as possible,” the bank wrote. The statement didn’t mention Hunt.

Bank of America

Citigroup isn’t the only bank that’s been held accountable for processing bad mortgages. In February, Charlotte, North Carolina-based Bank of America Corp. settled a false-claims case with the government for $1 billion, without admitting wrongdoing.

In May, Frankfurt-based Deutsche Bank AG agreed to pay $202.3 million for endorsing unqualified mortgages for FHA insurance, and admitted wrongdoing...

What continues to set Citigroup apart is that the bank approved flawed loans well past the 2008 financial crisis. A battleground over loan quality persisted at CitiMortgage even as the settlement was signed in February, the complaint says.

3--China and the Impending Global Slowdown, econbrowser

Even before the newest portents of a slowdown, [0] it was clear that 2012 gains in world output were going to be highly reliant on Chinese growth. Figure 1 shows that the Eurozone switches to a net drag on world growth. China’s contribution is thus a much larger share of total world growth.

Clearly, a slowdown is underway. In addition, a domestic source of growth –- namely the property market –- is cooling off.

The slowdown in the BRICs and recession in the Eurozone (and the UK!) highlights the need to avoid the contractionary impact of ending extended unemployment benefits, the payroll tax rate reduction, and the provisions of EGTRRA and JGTRRA (many charts)

4--PIMCO's Gross warns of economic "breaking point", Reuters

Excerpt:  The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a "potential breaking point" in the global economy, PIMCO's Bill Gross, manager of the world's largest bond fund, said in his monthly letter to investors.

In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.

"Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core," Gross said.

"Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year old global monetary system," he added.

5--FHA Sub-Prime Defaults At 9% In California, testosterone pit
The American taxpayer is about to be saddled with another multi-billions bail-out of sub-prime mortgage loan losses from the stealth Federal Housing Authority (FHA) lending program that has been offering ultra-low 3.5% down payments since 2009. Delinquency rates are already at 9% in California and expanding rapidly across the United States.

Sub-prime lending drove the U.S. housing bubble from 1998 until its collapse beginning in 2007. Since that time, real estate prices have fallen by 35% across the United States. Sub-prime was first hailed for its expansion of the number of people who could qualify for a mortgage. But many of those borrowers fudged on their income and net worth levels in order to borrow more than their true incomes would allow them to repay. Since the bubble burst and many sub-prime borrowers defaulted, the U.S. government has provided bank bail-outs deficit spending stimulus that will double the national debt from $9 trillion in 2007 to $18 trillion next year. ...

Unfortunately, taxpayers are about to learn they are increasingly liable for another multi-billion dollar sub-prime bail-out. The U.S. Department of Housing and Urban Development website trumpets: “FHA Loans Help You.” In smaller print that help is described as insuring your loan so your lender can offer you mortgage down payments of 3.5% of the purchase price that include closing costs and fees in the loan. FHA will allow you to buy a home, remodel and refinance your existing home or convert your equity into cash through a reverse mortgage if you are 62 or older. All this FHA hoopla sounds allot like sub-prime lending, because it is sub-prime lending!

Any bank that made this type of loan on its own would be required by regulators classify the loan as a non-conforming investment and reserve approximately 25% of the amount of the loan in cash as protection against a potential sub-prime borrower default. But the beauty of the FHA insured loan program is banks collect fees for risk-free processing of loans and then sell the loans to Federal National Mortgage Corporation (Fannie Mae) or The Federal Home Loan Mortgage Corporation (Freddie Mac) for another profit.

Of course both of these government sponsored enterprises have been in operating in conservatorship (nice word for bankruptcy) since September 6, 2008 as a result of sub-prime loan losses. Treasury Secretary Henry Paulson stated “I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.” That correction has resulted in 5 million completed foreclosures and another 8 million mortgages that are over 30 days delinquent or in foreclosure.

Center for Responsible Lending (CRL), founded by ACORN, recently published a study reporting that requiring a 20% down payment would prevent 60% of all FHA borrowers from qualifying for a residential mortgage.
The Obama Administration’s Office of Management and Budget estimated in October 20111 that  FHA’s $4.7 billion capital reserves will be wiped out this year, forcing FHA to seek at least $700 million bail-out from the U.S. Treasury.  Americans are justifiably angry at being required to bail-out the banks’ irresponsible sub-prime lending.  Think how angry they are going be this election season, when they have to bail-out the government’s irresponsible sub-prime lending

6--Capital flees China, Tim Duy, economists view

With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party's brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history.

And yet, while the party touts the economic success of the "Chinese model," many of its poster children are heading for the exits. They are in search of things money can't buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets.

Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions. So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy. It is another signal that emerging markets will not be supporting global demand anytime soon. I think the team at alphaville is right - this story is slipping under the radar while we all have our eyes focused on the farce in Europe. But it could be the real game changer in the global economy.

7--FHA foreclosures spike 73% in April: LPS, Housingwire
Foreclosure starts on mortgages insured by the Federal Housing Administration spiked 73% in April, according to data from Lender Processing Services ($23.08 -0.3%).

Mortgage servicers foreclosed on 63,129 total FHA-backed loans in April, more than any other product type including home loans guaranteed by Fannie Mae, Freddie Mac or held by private investors.

When the mortgage market collapsed in 2007, FHA stepped in. Originations backed by the agency tripled in 2008 and increased to five times the historical average the next year. The rise in April foreclosure starts consisted of loans guaranteed in 2008 and 2009.

"Whether or not it's the beginning of a trend for these vintages is hard to tell. It's cloudy," said LPS Analytics Senior Vice President Herb Blecher. "It does seem like there is some exogenous effect in April."...


Robert Shiller:  We had home prices going up for almost a decade….Home prices show a lot of momentum. They’re not like the stock market. The real question is do we still have downward momentum? There’s a lot of positive signs but a skeptic who believes in momentum says it’s been going on now for six years and I am a little bit of a skeptic, might well say it’s going to keep going down. After the seasonal blip is over, it may not be over.”

9--False Reporting on the Health of Venezuela's President Hugo Chavez, Eva Golinger, global research

Venezuelan President Hugo Chavez was diagnosed with cancer and a malignant tumor was removed from his pelvic region last June, all kinds of rumors, lies and speculations have circulated about his health. Most of the hype has come from known anti-Chavez media, such as the Miami Herald and several online blogs run by right-wing extremists like Bush’s former Assistant Secretary of State Roger Noriega, who’s been obsessed with Chavez for years. All cite unnamed sources who claim they have “insider information” about the Venezuelan head of state’s health.

It’s been unsurprising that those media outlets, known for their decade-long distortions of Venezuela’s reality, would publish such falsities and morbid tales about President Chavez. But that a serious, veteran, investigative journalist, such as Dan Rather, would indulge in the necrophiliac story-telling about the Venezuelan President is truly disappointing.

Rather, who now runs his own show on HDNet, Dan Rather Reports, posted a report on Wednesday, May 30, claiming President Chavez’s health is “dire” and has “entered the end stage”. Rather also claims his unnamed “high-level” source, who he alleges is close to the Venezuelan President, told him Chavez won’t live “more than a couple of months at most”.

In his brief report, which he calls an “exclusive”, Rather also bids in with his own biased language, calling the democratically-elected Venezuelan President a “dictator”.

What prompted Dan Rather to write such diatribe? Why would he join the ranks of Roger Noriega, the wretched Miami Herald and a slew of pseudo-journalists drooling over their morbid wet dreams of President Chavez’s failing health?

What is apparent is that Rather was quick to the gun to “break” his “exclusive” story. Just the day before, President Chavez hosted a cabinet meeting broadcast live on television that lasted more than four hours. The Venezuelan head of state appeared energized, optimistic and focused on his duties, and even sang a few heartfelt songs, as is custom for the eclectic and charismatic Chavez. He reaffirmed his candidacy for the October 7th presidential elections. (Yes, Venezuela is a democracy!) That’s a far cry from being on his “death bed”, as Rather implies.

10--Chicago Business Barometer Signals Economy on Edge of Recession, WSJ

A closely-watched index gauging U.S. factory output fell to a near 2 1/2-year low in May, indicating the economy might be heading back toward a recession.

The Institute for Supply Management-Chicago reported Thursday that its business barometer fell 3.5 points to 52.7 in May, the third straight monthly drop and lowest reading since September 2009.

Readings above 50.0 reflect economic expansion. However, three consecutive declines are “associated with the onset of each of the last seven national recessions, with a lead of some six-to-eight months,” ISM-Chicago said in a news release.

11--Once Again, Economy Cools When Weather Warms Up, WSJ
The U.S. recovery can’t seem to shake off the hot-weather jinx.

Thursday brought uniformly bearish news on May economic activity. Private-sector hiring is weak, jobless claims are rising and factory activity in Chicago slumped to its weakest level since September 2009.

The data paint an economy stumbling in the spring. Gross domestic product growth probably won’t turn negative, but a jump to above 3% also looks like a long shot this quarter.

The weak ADP report–which showed only 133,000 private jobs created–raises questions about the health of the labor markets just ahead of Friday’s closely watched employment report.

Most economists are sticking to their payroll forecasts. But the risks are clearly on the downside for the consensus projection of 155,000 new jobs added in May. The unemployment rate is expected to stay at 8.1%.

About the only bright spot in the trove of Thursday data was slower inventory accumulation last quarter that led to GDP growth being revised down to a 1.9% annual rate from 2.2%. U.S. businesses ended the first quarter with fewer goods on hand than previously estimated. That diminishes the risk that excessive stockpiles will lead to less ordering and production and job cutbacks.

12--More Student Loans Are Past Due, WSJ

13--U.S. Savings Rate Falling Amid Stagnant Incomes, WSJ
The government made a sharp downward revision to fourth-quarter income figures Thursday, a sign of stagnant wages and a potential hurdle for consumer spending.

The figures, tucked in to the latest GDP report, show real disposable personal income–income minus taxes, adjusted for inflation–rose only 0.2% in the fourth quarter, compared with an earlier estimate of 1.7%. The change is largely due to lower-than-expected paychecks. Real first-quarter income was unrevised at a 0.4% gain.

The upshot: consumers are saving less in order to spend more. Consumer outlays rose a solid 2.1% in the fourth quarter and 2.7% in the first three months of this year.

But the personal savings rate for the first quarter dropped its lowest level since the start of the recession. Americans stashed away 3.6% of personal income in the first quarter, down from 4.2% in the fourth quarter and a near-term peak of 6.2% in the second quarter of 2009


Wednesday, May 30, 2012

Today's links

1--EU Weighs Direct Aid to Banks as Antidote to Crisis, Bloomberg

Excerpt:  The European Commission challenged Germany’s remedies for the financial crisis, calling for direct euro-area aid for troubled banks and demanding a path to common bond issuance.

The commission, the European Union’s central regulator, sided with Spain in proposing that the planned permanent rescue fund, the European Stability Mechanism, inject cash to banks instead of channeling the money via national governments......

Proposals for more liberal use of European bailout money face resistance in creditor countries such as Germany, Finland and the Netherlands, the scenes of growing taxpayer opposition to adding to the 386 billion euros ($479 billion) already pledged to fight the crisis.

Germany showed no signs of easing its stance, as Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, told reporters in Berlin that “the German position on the direct recapitalization of banks out of the European rescue funds is known.” ...

The commission packaged the bank-aid ideas along with a call for a European deposit-insurance program, designed to break the spiral of faltering governments and failing banks. It said it will make concrete proposals for common bond issuance -- also opposed by northern European donor countries -- and singled Spain out as the only country entitled to more time to cut its budget deficit....

The commission appealed for a “banking union” that would more tightly integrate supervision and create a pool of European funds to clean up banks with cross-border exposure and segregate their underperforming assets.

2--Barney Frank: Obama Rejected Bush Administration Concession to Write Down Mortgages, naked capitalism

Excerpt: Here’s Barney Frank, in an exit interview recently in New York Magazine, revealing unwittingly that Obama during the transition rejected a Bush administration concession to write down mortgages. Here’s what Barney said.

The mortgage crisis was worsened this past time because critical decisions were made during the transition between Bush and Obama. We voted the TARP out. The TARP was basically being administered by Hank Paulson as the last man home in a lame duck, and I was disappointed. I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it. This is now December, so we tried to get the Obama people to ask him and they wouldn’t do it.

This is consistent with other accounts. There were policy debates within Obama’s economic team about what to do about the mortgage crisis. The choices were to create some sort of legal entity to write down mortgage debt or to allow the write-down of mortgage debt through a massive wave of foreclosures over the next four to six years. He choice the latter. That choice was part of what led to roughly $7 trillion of middle class wealth gone, with financial assets for the elites re-inflated.

Since I pointed out that the growth of income inequality under Obama is worse than that under Bush, many people have responded by saying that somehow this is not Obama’s responsibility, that it was an inherited crisis and structural problems that caused a widening of inequality. They simply do not want to accept that policy matters, or, if it does, that Obama had any choice in the policy choices he made.

In fact, crisis response is the single most significant policymaking time imaginable, because all structural barriers are swept away. Think about it – this was literally a deal offered by Hank Paulson – one guy – to Barack Obama, with a multi-trillion dollar impact. No 60 votes in the Senate. No hearings. No confirmations. Just a handshake, basically. In other words, policy does matter, and Obama had a variety of choices and leverage, and he did what he thought was best. He did not want to write down mortgages, even though he was offered that choice by the Bush administration and Barney Frank. So he didn’t.

So yes, Barack Obama is worse than George Bush on economic inequality.

3--National Bank warns of dire Grexit fallout, athens news

Excerpt: If the country left the euro, living standards would plummet, incomes would be slashed by more than half, and inflation and unemployment would skyrocket, the country's biggest bank warned on Tuesday.Lower provisions for loan losses and higher noninterest income were responsible for most of the year-over-year improvement in earnings.

In a 16-page report, the privately owned National Bank of Greece said the risk of a Greek euro exit was no longer just a theoretical possibility, warning that the fallout from such a move would be dramatic.

"An exit from the euro would lead to a significant decline in the living standards of Greek citizens," the NBG wrote.

The bank said per capita income would collapse by at least 55 percent, the new national currency would depreciate by 65 percent against the euro and a recession, now in its fifth year, would deepen by 22 percent.

Painting a dire picture of a post-euro landscape, it added that unemployment would jump to 34 percent of the work force from around 22 percent now and that inflation would rise to 30 percent from its current level of 2 percent.

4--Housing Recovery - Hope and Reality, dshort

Excerpt: Every year for the past three years there have been recurring calls for a housing bottom and recovery. The importance of an eventual recovery in housing should not be dismissed as it is a critical component of an economic recovery due to the large multiplier effect of each dollar spent. The recovery in housing would signal that a foundation for a more lasting economic recovery would be in place. That is the hope anyway.
One issue that will continue to confound the real estate market in the near term is the level of inventory that is being held off market for various reasons. This does not include the shadow inventory held by banks which is an additional issue. As we have stated in previous reports the housing market is driven by the activity "at the fringes" between those actively seeking to buy a house versus those with "for sale" signs in their yard. Today, roughly 1/3 of all homeowners are under water on their mortgages. Therefore, it is no surprise that many are holding homes as long as possible hoping for a price recovery. However, at some point these "vacant" houses, along with the excess shadow inventory and trapped homeowners, will come to market either due to force or desperation. The excess supply will continue to pressure home prices, more supply than demand, in the future further exacerbating the problem for those already drowning in their home....

Ultimately there is only one truth to whether there is really a housing recovery or not. How many people own a home? If new and existing home activity, as seen in recent reports, is truly on the rise then we should see the number of individuals that are "home owners" on the rise as well.
5--What record low 10-year rates tell us about the toxic effects of permanent zero, credit writedowns

Excerpt:  If the central bank is telling you that zero rates are practically permanent i.e. permanent zero, wouldn’t you expect the term structure to eventually flatten? That’s what has happened, folks – just as in Japan.

So what does this mean for you and me? Well, first of all, what’s your savings account statement saying? Is it telling you you can spend a lot more because you are flush with interest income or is it telling you you better save more if you expect to retire without having to live on cat food? Here’s another question: does this bode well for consumption or ill? Clearly, it bodes ill via the interest income channel but it could bode well if you and I leverage up a bit as debt service costs are down. And that is the point of low rates, by the way.

The Fed is squeezing interest rates down to levels where you see private portfolio preference shifts, a euphemism for the risk seeking return mentality that arises from artificially low real fixed income returns and that forces up risk assets. But this can only go one for so long.

See, eventually there will be another recession and the question should be what happens to all those toxic assets on bank balance sheets. What happens if new loans go sour too? If you recall, US FDIC-insured institutions recorded $35 billion in Q1 2012 accounting gains. But the quality of those accounting gains was dubious. Here’s the key line to note:

That means FDIC insured institutions are under-provisioning and earning money through non-lending channels. These institutions are taxpayer guaranteed by the FDIC because they take deposits and lend that money in support of economic activity. Yet, what the FDIC is telling you is that institutions are not earning money through the traditional interest income channel which is the source of their FDIC guarantee. And that’s as you should expect in a permanent zero environment.

6--Most Aid to Athens Circles Back to Europe, NY Times

Excerpt:  Its membership in the euro currency union hanging in the balance, Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout.

But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.

The European bailout of 130 billion euros ($163.4 billion) that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt — while the Greek economy continues to struggle.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone....

In an elaborate payment system that began after the May 6 election that brought down the Greek government and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payments on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

About three-quarters of Greece’s debt, or $229 billion, is now effectively owned by one of the three troika members, according to estimates by the investment bank UBS....

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,’ ” said Stephane Deo, global head of asset allocation in London for UBS. Mr. Deo said such arrangements were common in situations where governments were in danger of defaulting on their debts....

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

This circular lending is all about risk management.

7--Mysteries of the ELA, acting man

Excerpt:  The European Central Bank is trying to limit the flow of information about so-called Emergency Liquidity Assistance, which is increasingly being tapped by distressed euro-region financial institutions as the debt crisis worsens. Focus on the program intensified last week after news leaked that the ECB moved some Greek banks out of its regular refinancing operations and onto ELA until they are sufficiently capitalized....

European stocks fell and the euro weakened on May 16 as investors sought clarity on how the Greek financial system would be kept alive. The episode highlights the ECB’s dilemma as it tries to save banks without taking too much risk onto its own balance sheet. While policy makers argue that secrecy is needed around ELA to prevent panic, the risk is that markets jump to the worst conclusion anyway.

“The ELA is a perfect life-support system, but it’s not a system for what happens after that,” said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC in Clare, Ireland. “What you need is a bank resolution mechanism, a method to get rid of a bank that’s insolvent. In Ireland, and perhaps in Greece as well, the problem is that you’ve got banking systems that are insolvent.”

8--Squatters rent?, Bloomberg
Excerpt:  So-called “squatter’s rent,” or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that’s equal to about half the estimated savings generated by cuts to payroll withholding in December’s bipartisan tax plan.

“We’ve had a lot of government transfers to the household sector; this is a transfer from the business sector to households,” Feroli said. “It’s a shock absorber that has helped the consumer ride out the storm.”

9--Greece economy "in depression" is best, infowars

Excerpt:  The article, entitled Greece to Leave Euro Zone on June 18: Wealth Manager, focuses on Integral Asset Management’s Nick Dewhirst’s contention that Greece will exit the single currency the day after national elections on June 17 if the populist party is victorious.

However, in the very last paragraph of the story we read;

“Kit Juckes, global head of foreign exchange at Societe Generale, told CNBC’s “Worldwide Exchange” (see video above) that the best outcome was “the status quo.” “A Greek economy in depression, austerity that guarantees they’ll stay in depression and living on life support from the rest of Europe is the best,” he said.”

As the representative of Societe Generale, one of Europe’s biggest banks, Juckes is brazenly admitting that the elite would rather see Greece rot and decline into a failed state than allow her to leave the euro and become economically independent once again.

10--Greek Leftist Leader Alexis Tsipras --'It's in Europe's Interest to Lift the Austerity Diktat', Der Speigel

Excerpt:  SPIEGEL: Which "others" do you mean? The Greek economy is already in a shambles.

Tsipras: What I mean by that is if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel.

SPIEGEL: Are you seriously claiming that the reforms which Europe is demanding as a precondition for loan assistance are the reason for Greece's miserable situation?

Tsipras: If we are once again pushed and blackmailed into an austerity program that has so obviously failed, then it won't be long before Greece is in fact no longer capable of paying its creditors. The result will be a halt in payments, one into which we were practically forced. This would not only be dangerous for Greece, but for the entire European economy. These days, the financial systems of all countries are so closely intertwined with each other that one can't limit the crisis geographically. It's a problem of all countries and of all national economies.

SPIEGEL: If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?

Tsipras: I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit. The fact that there is financial assistance is the principle of European solidarity and a mark of being part of a community. That's good. But we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts.

SPIEGEL: For you, other people are always the scapegoat. It's other people's fault that the economy is languishing, so other people also have to rescue it …

Tsipras: That's not correct; we naturally also take a critical look at ourselves. We bear significant responsibility for our situation. We've accepted politicians who have destroyed our country's manufacturing base and created a corrupt state. We have elected the very people who have stashed their money away abroad and not only allowed tax evasion to occur, but also fostered it. Of course we are responsible for that; we allowed it all to happen. But we also have the responsibility to change exactly that right now.

SPIEGEL: Given your dependence on financial support and your rejection of vital structural reforms -- such as that of the public administration -- already agreed on, how do you propose doing so?

Tsipras: We're not opposed to reforms. We're only saying what so many economists, what many German newspapers and what even former German Chancellor Helmut Schmidt are saying -- and what the OECD has now reconfirmed in a study: The austerity policies we've been implementing for two years -- the policy of solely relying on drastic belt-tightening -- have failed. We now find ourselves in the fifth year of the recession. This year too, our economy will once again contract by at least 6 percent.

The political reality is simple: The austerity programs, as constructed thus far, have failed, partly because they've been based on a false model, namely, that of domestic devaluation. But we're not an exporting country. It is much more the case that most of what we produce, we consume. Our ability to compete doesn't only depend on labor costs, as so many people say; they also depend on other parameters, such as the infrastructure and the mind-set of people and politicians. We really do long for a bit more meritocracy




Tuesday, May 29, 2012

Today's links

1--European Union Survey --Poll Finds Huge Gap between Greeks and Germans, Der Speigel

Excerpt:  Of the five euro-zone member states surveyed (France, Germany, Spain, Italy and Greece), a median of only 37 percent sees the common currency as a good thing, while those countries outside the euro zone are happy they didn't join, including nearly three-quarters of the British (73 percent). Similarly most -- including the Germans -- do not have a favorable view of the European Central Bank, with only 39 percent having a positive view of the ECB.

Except for Germany, support for a free market is declining, down 20 percent between 2007 and 2012 in Spain and 23 percent in Italy, though relatively unchanged in the United States with a 3 percent decline. Support for free markets rose in Germany by 4 percent.
Despite all this, the report showed that Europeans are reluctant to relinquish symbols of a united Europe. More than half of those surveyed in the five euro-zone member states -- including 71 percent of the Greeks, 69 percent of the French and 66 percent of the Germans -- would like to keep the euro as their currency.

Europeans are divided over who to blame for the crisis. The Greeks, Italians, Poles and Czechs blame their own governments. The French and Spanish blame banks and other major financial institutions. The British and Germans blame both.

2--JP Morgan dips into cookie jar to offset "London Whale" losses, IFR

Excerpt:  JP Morgan Chase & Co has sold an estimated US$25bn of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale”, compounding the cost of those trades.

CEO Jamie Dimon earlier this month said the bank sold corporate bonds and other securities, pocketing US$1bn in gains that will help offset more than US$2bn in losses. As a result, the bank will not have to report as big an earnings hit for the second quarter.

The sales of profitable securities from elsewhere in the bank’s investment portfolio will increase its costs by triggering taxes on the gains and by eliminating future earnings from the securities.

Gains from the sales could provide about 16 cents a share of earnings, about one-fifth of the bank’s second-quarter profit, analysts said. But rather than creating new value for investors, the transactions merely shift gains in securities from one part of the company’s financial statements to another.

“They really made two stupid decisions,” said Lynn Turner, a consultant and former chief accountant of the Securities and Exchange Commission. The first was taking risks with derivatives that they did not understand, Turner said.

“The second is selling assets with high income that they can’t replace,” Turner added. In a low interest-rate environment, the bank will struggle to generate as much income with the cash it received from selling the securities, he said.

3--ECB moves from liquidity to solvency role, IFR

Excerpt:  We have moved from a situation last year where the EBA stress tests showed “No Spanish bank is required to increase its capital as a result of the EBA stress test” to beefing up the capital base of Bankia
The worry remains that we are running through a script similar to that for Ireland where we also went from a position of no help being needed and ended up with a complete overhaul of the banking system that saw the sovereign fall into the hands of the EU/IMF bailout.

With funding options for the sovereign and financials difficult the end result is to rely on government guarantees and the ECB.

Like it or not the ECB’s liquidity is increasingly being used to shore up solvency of sovereigns and financials in the eurozone. This is something that the ECB will find difficult to stop as we can see by the way in which the ELA has increasingly been used in recent weeks and also LTRO usage by Spain and Italy to help fund sovereigns.

Getting help from the ESM/EFSF is one option but this still faces the difficult task of reducing the firewall for other countries. In the end the ECB will likely be forced to play a more pivotal role by opening up its balance sheet and more formally supporting solvency. Without this the eurozone sovereign/financial crisis will be difficult to put to bed.

4--Stop subsidizing the banks, London Banker

Excerpt:  At some point policy makers will need to turn their efforts from reinforcing and bailing out the bankers who use any and every opportunity to take public support as private bonuses and instead evaluate much simpler, lower cost models of financial intermediation likely to yield domestic investment in domestic businesses and assets....
It is a conservative principle that the state should intervene when markets fail. If the banking system has failed (and it has) and requires a taxpayer subsidy to continue to operate (which it does), then conservative principles dictate that the state must intervene to secure a resolution in the public interest. More of the same is not a conservative policy, but social welfare for bankers.

We currently have a system of excess regulatory complexity, hidden market distortions and public subsidies. Moving away from the status quo requires state action to identify and reduce subsidy through promotion of business models that are simpler, more transparent and more directly aimed at securing public benefit
5--- U.S. Winds Down Longer Benefits for the Unemployed, NY Times

Excerpt:  Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year. ... In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits.

Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million, according to the National Employment Law Project. That estimate does not include people who simply exhausted the weeks of benefits they were entitled to.

...Most states offer 26 weeks of unemployment benefits, plus the federal extensions that kicked in after the financial crash.

The number of extra weeks available by state is determined by several factors, including the state’s unemployment rate and whether it is higher than three years earlier. So states like California have had benefits cut even though the unemployment rate there is still almost 11 percent.

“Benefits have ended not because economic conditions have improved, but because they have not significantly deteriorated in the past three years,” Hannah Shaw, a researcher at the Center on Budget and Policy Priorities, wrote in a blog post. In May, an estimated 95,000 people lost benefits in California. the end of September, the extended benefits will end in the last three states providing 99 weeks of assistance — Nevada, New Jersey and Rhode Island.

6--Greek Leftist Leader Alexis Tsipras --'It's in Europe's Interest to Lift the Austerity Diktat', Der Speigel

Excerpt:  Tsipras: If we are once again pushed and blackmailed into an austerity program that has so obviously failed, then it won't be long before Greece is in fact no longer capable of paying its creditors. The result will be a halt in payments, one into which we were practically forced. This would not only be dangerous for Greece, but for the entire European economy. These days, the financial systems of all countries are so closely intertwined with each other that one can't limit the crisis geographically. It's a problem of all countries and of all national economies.

SPIEGEL: If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?

Tsipras: I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit. The fact that there is financial assistance is the principle of European solidarity and a mark of being part of a community. That's good. But we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts.

SPIEGEL: For you, other people are always the scapegoat. It's other people's fault that the economy is languishing, so other people also have to rescue it …

Tsipras: That's not correct; we naturally also take a critical look at ourselves. We bear significant responsibility for our situation. We've accepted politicians who have destroyed our country's manufacturing base and created a corrupt state. We have elected the very people who have stashed their money away abroad and not only allowed tax evasion to occur, but also fostered it. Of course we are responsible for that; we allowed it all to happen. But we also have the responsibility to change exactly that right now.

SPIEGEL: Given your dependence on financial support and your rejection of vital structural reforms -- such as that of the public administration -- already agreed on, how do you propose doing so?

Tsipras: We're not opposed to reforms. We're only saying what so many economists, what many German newspapers and what even former German Chancellor Helmut Schmidt are saying -- and what the OECD has now reconfirmed in a study: The austerity policies we've been implementing for two years -- the policy of solely relying on drastic belt-tightening -- have failed. We now find ourselves in the fifth year of the recession. This year too, our economy will once again contract by at least 6 percent.

The political reality is simple: The austerity programs, as constructed thus far, have failed, partly because they've been based on a false model, namely, that of domestic devaluation. But we're not an exporting country. It is much more the case that most of what we produce, we consume. Our ability to compete doesn't only depend on labor costs, as so many people say; they also depend on other parameters, such as the infrastructure and the mind-set of people and politicians. We really do long for a bit more meritocracy
7--The Eurepo curve spells trouble, FT Alphaville
Excerpt:  Sandy Chen at Cenkos has drawn our attention to an interesting development in the repo market: the Eurepo curve has inverted.

Why is this important?

Because it’s a clear signal of stress in the repo market. The Eurepo curve shows the repo rate for Euro borrowing amongst European banks at maturities from 1-day to 1-year; we interpret this inverted curve as a sign that banks are unwilling to commit the collateral (required for the repo) beyond a 1-month contract. Indeed, it appears that 1-day repos are strongly preferred. The Eurepo curve has shifted a lot in a month.

In other words, banks want to be able to get collateral back and prefer short maturities. It’s also a quite negative view on Europe’s ability to handle the crisis:

Judging from the shift in the Eurepo curve, the banks themselves don’t believe that any boosts will last longer than a month.

As Sober Look noted on Friday, inverted repo curves mean stress in the market, and looking at the shift in the Eurepo curve in the last month, the level of stress has gone up considerably…

8--College loans are next debt crisis, Miami Herald

Excerpt:  Some 62 percent of the grads from U.S. public universities emerge with both a diploma and debt, according to figures compiled by the federal Department of Education’s Project on Student Debt. About 72 percent of grads from private nonprofit universities owe money. An astounding 96 percent of the kids who attend for-profit schools venture out into the real world as debtors.

The study was conducted in 2008. It’s only gotten worse amid a recession and slow, slow recovery, as state legislatures hack away at higher education allocations.

If grads from Cypress Bay High attend one of Florida’s universities this fall, their freshman year will coincide with a $300 million cut in state funding. Along with a 15 percent pop in tuition and diminished help from Bright Futures scholarships.

They’ll be attending schools with fewer courses and larger classes, taught by professors disheartened by stagnant wages and benefit cuts, on campuses suffering from drastic cutbacks in maintenance budgets.

Florida college students, after paying ever more for ever less education, graduated in 2010 owing an average of $21,184 in student loans. The dismal trend lines indicate that the debt load will be much heftier when the Cypress Bay High School Class of 2012 finally get their degrees.

As the state’s contribution to higher education was cut by 24 percent over the last five years, Florida universities responded by jacking up tuition (five state universities have increased tuition by 60 percent over the last four years, six others by 45 percent.) Incoming freshmen are looking at annual 15 percent increases — the maximum the state allows — throughout their academic careers.

At the bottom of the education food chain, the students respond by borrowing more money.

Their debt will add to the $1 trillion in unpaid student debt already looming over the U.S. economy. This isn’t limited to recent college grads. A third of American student debtors are 40 years old or older.

9--US threatens military intervention in Syria following Houla massacre, WSWS
Excerpt:  The massacre of over 100 people in Houla is being utilized by the United States, other Western powers and the Gulf States to step up their drive for regime-change in Syria. Thirty-two children and 34 women were among Friday’s dead, the United Nations has said.

Speaking yesterday to Fox News, Chairman of the US Joint Chiefs of Staff Gen. Martin Dempsey said, “Of course, there is always a military option… it may come to a point with Syria because of the atrocities.”

His comments follow a series of bellicose statements by Washington. US Secretary of State Hillary Clinton said, “The US will work with the international community to intensify our pressure on [Syrian President Bashar] Assad and his cronies, whose rule by murder and fear must come to an end.” The White House called the Houla attack “a vile testament to an illegitimate regime.”

The Gulf Cooperation Council, led by Saudi Arabia and Qatar, is also once again urging direct military intervention. Kuwait, which currently heads the Arab League, announced it is calling for a ministerial meeting to “take steps to put an end to the oppressive practices against the Syrian people.”

The Free Syrian Army (FSA), based in Turkey and funded and organized by Washington and its allies, declared it was no longer committed to the truce brokered by former United Nations Secretary-General Kofi Annan. It issued a statement saying that “unless the UN Security Council takes urgent steps for the protection of civilians, Annan’s plan is going to go to hell.”

The Western-backed Syrian National Council (SNC) has called on the UN Security Council to convene an emergency meeting and take binding decisions to “protect the Syrian people” by invoking Chapter VII, which sanctions the use of force.

The Obama administration has to date confined its efforts to destabilize the Assad regime to covert support for proxy Sunni-based forces such as the FSA and SNC. But it is seeking to capitalise on the tragic events in Houla to secure the necessary political backing for direct intervention. This means either enlisting Russia’s support or neutralizing Moscow’s opposition to any move to depose Assad...

Moscow fears that regime-change would deprive it of its main base in the Middle East and secure undisputed US hegemony over the region’s oil riches by surrounding Shia Iran with a ring of pro-Washington Sunni regimes.

Russian Foreign Minister Sergei Lavrov, speaking yesterday at a news conference with UK Foreign Secretary William Hague, said he wanted Damascus to resolve its problems “without foreign interference..

Houla is being lined up to serve the same political function as atrocities in the former Yugoslavia and elsewhere in providing a justification for imperialist intervention....Ultimate responsibility for Houla rests with Washington and its allies, who have fostered and armed a sectarian Sunni insurgency dedicated to the overthrow of the Assad regime and its replacement by a government entirely subordinated to a strategic Middle East alliance dominated by the US.

10--Double suicide underscores Greece’s deepening health crisis, WSWS

Excerpt:  The appalling suicide of a mother and son in Athens again underscores the social nightmare being visited on Greece by the troika—the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF).

The tragedy occurred May 24. The mother, aged 90, and her son, aged 60, leapt hand in hand from the roof of their apartment building in the capital shortly after 8 a.m.

The son was identified as Antonis Perris, an unemployed musician. Since Antonis had been unable to find work, the pair had been forced to survive on the mother’s pension of just €340 (US$427) a month.

The joint suicide occurred only days before IMF head Christine Lagarde dismissed reports that people were dying in the country due to the savage austerity measures being imposed, callously claiming that it was “payback” time for Greek workers.

The night before their deaths, Perris described their deteriorating economic situation and suffering on a well-known blog site.

He wrote, “I have been taking care of my 90-year-old mother for 20 years. In the last 3-4 years she has developed Alzheimer’s, recently she also has been having Schizophrenic fits amongst her other grave health problems, so nursing homes won’t accept her.

“The problem is that I hadn’t foreseen the crisis so I don’t have enough cash in my account, although I have real estate assets I sell from time to time, I’m left without cash and we can no longer eat. I borrow money from my credit card with 22% interest even though the banks themselves borrow with 1%. I have other running costs.

“Unfortunately, I have also developed serious health problems lately. I have no solution in front of me. I can no longer live this drama. There’s no solution. Does anyone have a solution?”

In his blog posting, Perris cited the lack of vitally needed medical services available to his mother as well as his inability to get the necessary remedies for his own developing medical problems. This is a direct result of the austerity measures imposed by PASOK and New Democracy, which are following the dictates of the EU and the IMF.

Bailout funds, destined for Greek banks, have been tied to the gutting of health care provision. Under the terms of the first bailout, health care spending was gutted by more than 10 percent. Under the second €174 billion agreed in March, another €1 billion cut in health care spending was made. This is equal to 0.5 percentage points of GDP. Its impact has been devastating under conditions in which many Greek workers have seen their wages reduced by up to 50 percent while unemployment has skyrocketed. Millions of people are now being forced to pay the full price for essential, life-saving medicines.

In April, the government suspended payments into the National Organisation for Health Care Provision (EOPPY), on which pharmacists rely for funding to prescribe drugs. According to officials last week, the state health system in Greece no longer has any funds to pay pharmacies for supplying their prescriptions.

People who used to pay prescription charges of between 10 and 25 percent for drugs, including those for treating heart conditions and cancer, now have to pay the full price. They can apply for a refund from social insurance funds that are members of EOPPY, but the likelihood of them ever getting the money back is slim. EOPPY was created last year on the direction of the troika and is now in a state of collapse. Pharmacies are owed a total of €520 million by EOPPY and other social insurance funds for prescriptions already supplied.

Patients in state hospitals are also being forced to go without basic medicines. One hospital administrator told the Financial Times, “We used to provide drugs for all patients receiving treatment, but we’re so squeezed now that we ask them to bring their own supplies of prescription drugs.”

There are warnings that Greece could rapidly run out of medicine. Dimitris Karageorgiou, secretary general of the Panhellenic Pharmaceutical Association, warned, “Already we have cancer sufferers going from hospital to hospital to try and find drugs because no one can afford to stock them.

“If the shortages get worse, God knows what we will see.”

11--.US student loan debt: Where did it come from and who benefits?, Nancy Hanover,  WSWS

The impoverishment of American students and their families by student loan debt has become a well-known fact.

A generation of young people are facing financial desperation in order to make huge monthly payments on their loans. The scale of this collective debt affects all aspects of their lives:

* 39 percent of 18-to-29-year-olds have no health insurance.
* 23 percent say they cannot buy basic necessities.
* 20 percent have credit card debt of more than $10,000.
* 49 percent have taken a job they didn’t want in order to pay bills.
* 24 percent have moved back home with parents to save money.
* 20 percent have postponed marriage.
* 22 percent of 18-to-34-year-olds have postponed having children.

Today, 15.4 percent of Americans have student loans, and 14.4 percent of these loan holders are delinquent, the highest delinquency rate of any form of debt.

But why this is this tsunami of debt devastating a generation, and who benefits?
To avoid the mention of profit, the banking industry or the role of the government, the media typically blames either the students themselves, the purportedly overpaid faculty, or the mindset of an “entitled generation.”

Yet the actual cost of the loans themselves is more than covered by the 3.4 percent rate, since the bankers’ interest rate, the Federal Reserve discount window, has fluctuated between 0 percent and 1 percent. The fact is that the Obama administration is not arguing with the Republicans over assisting students, but over how much to squeeze them....

Even without doing all the math, clearly it is the banks that profit most handsomely from student loan payments—while being uniquely protected by the federal government.

Loans originated in the Federal Family Education Loan Program (FFEL) have a 97 percent guarantee against default by the federal government (with accrued interest in addition). Additionally, since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, student loans are the only type of consumer debt that may not be discharged in bankruptcy.....

With more than two thirds of students (up from 45 percent in 1993) forced to borrow to earn a bachelor’s degree, the indebtedness of a generation is clearly social policy. On average, for every dollar borrowed, a student will pay $2....

No longer just protecting the profits of the banks, the government is now well on its way to becoming the largest holder of student debt. This process was dramatically accelerated with Obama’s Health Care and Education Reconciliation Act, which made the government the sole funder of new student loans.

According to the Federal Reserve Bank of New York, non-revolving personal bank debt—the vast bulk of which is student loan debt—has jumped a massive 368 percent since 2007. The amount of student loans held by banks is now about $500 billion, or half of existing student debt, with the federal government just slightly behind. Federal-held student loans have quadrupled over the past four years.

This process has transformed the government’s role. The DOE report shows that there is not just a declining higher education subsidy, but that there is actually no overall subsidy from the federal government for student loans. On the contrary, student loans are an income source, to the tune of nearly $30 billion for 2012. Below is a chart from the president’s 2013 budget request showing the net inflow of cash from student debtors into federal coffers since 2009. The negative figures are inflows, the positive ones represent federal costs....

Government “subsidies” for student loans go from a cost to the federal government in 2008 of $2 billion to an estimated cash inflow of $39 billion for 2012. (Source: US DOE)

In 2011, more than 11 million new Direct Loans have been issued to students, for a total of $109 billion. The administration is realizing a steady increase in student loan market share. The DOE budget proposal states, with dry but unmistakable language, “For FY 2013, based on proposed policies, the Direct Loan program weighted average subsidy rate is estimated to be -20.08 percent. The reflects the projection that on average, the Federal Government will earn 20.08 percent on each dollar of loans originated in FY 2013.”

This is a far cry from the official line—”students who rely on loans to finance postsecondary education should not be burdened with additional college debt.” It is the government that will collect the debt, interest, origination fees and late penalties from student debt, rather than the servicers, guarantors and banks that dominated the business in the past.

New attacks from Obama

The report then details Obama’s proposed student loan “reforms” for the FY 2013 budget. These changes will actually increase the cost of college borrowing, place more loans under the DOE’s aegis and allow debt collectors to apply more pressure on students....

Legalize auto-dialing collection calls to students’ cell phones.

In the “President’s Plan for Economic Growth and Deficit Reduction,” he calls for an amendment of the 1934 Communications Act to allow prerecorded voice messages and robo-dialing to wireless phones for the purposes of debt collection.

* Require guaranty agencies to forward their portfolio of rehabilitated loans (student loans which were temporarily in default, but are now in repayment) to the DOE.

While the Obama administration insists on being the new collector, the rules stipulate that the former guaranty agencies may still collect a whopping 16 percent fee.

Obama has also pointed the way toward creating a national rating system on college affordability and value, and hinted that low-rated schools could be punished via withholding of loan or grant eligibility. There has been similar action threatened against the for-profit schools with skyrocketing default rates. Neither of these public relations maneuvers encroaches in the slightest on the banking industry’s ability to profit from student loans or lessens the income accruing to the federal government from their loans.

Already, state and federal governments are withdrawing professional licenses from those who default on their student loans, and garnisheeing Social Security and other government checks. Under the Higher Education Act, the DOE can subject student loan defaulters to Administrative Wage Garnishment or Federal Salary Offset, and require employers to forward 15 percent of “disposable pay” toward repayment of loans. The Debt Collection Improvement Act of 1996 permits the DOE to garnish up to 15 percent of disposable pay until the entire balance of the outstanding loan is paid.

The government is also pressing schools to withhold transcripts for those students delinquent in payments, which prevents them from transferring, applying for certain types of work, or seeking further degrees....

Student loan debt collection, a new parasitic industry

Student loans have become so lucrative that their debt collection has become its own spin-off industry—all overseen by the federal government. explains ballooning fees that defaulters face: “The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan…. The contractors earn a commission, or contingent fee, for any payments then made on those loans. The Department [of Education] charges each borrower the cost of the commission earned by the contractor…the amount needed to satisfy a student loan debt collected by the Department’s contractors will be up to 25 percent more than the principal and interest repaid by the borrower.”....

Last week, the San Francisco Chronicle’s “Number of the Day” was $454,000, the one-year income of Joshua Mandelman, a student-loan debt collector. It reports on the nearly half-million dollars earned by Mandelman and six others at Educational Credit Management, a Minnesota nonprofit group, which subcontracts with the U.S. government to collect on defaulted student debt.

Education is a basic right

Only the Socialist Equality Party considers education a basic right. It should not be a means to prey on the young and create a new form of lifelong peonage.

We call for the immediate forgiveness of all student loan debt. Neither the banks nor the government have the right to profit from the determination of the population to become educated and productive.

We call for the right to free education for all, from pre-school through college and adult education.

12--Fukushima radiation seen in tuna off California, Reuters

Excerpt:  Low levels of nuclear radiation from the tsunami-damaged Fukushima power plant have turned up in bluefin tuna off the California coast, suggesting that these fish carried radioactive compounds across the Pacific Ocean faster than wind or water can.

Small amounts of cesium-137 and cesium-134 were detected in 15 tuna caught near San Diego in August 2011, about four months after these chemicals were released into the water off Japan's east coast, scientists reported on Monday.

That is months earlier than wind and water currents brought debris from the plant to waters off Alaska and the U.S. Pacific Northwest.

The amount of radioactive cesium in the fish is not thought to be damaging to people if consumed, the researchers said in a study published in the journal Proceedings of the National Academy of Sciences....

scientists found elevated levels of two radioactive isotopes of the element cesium: cesium 137, which was present in the eastern Pacific before the Fukushima Daiichi disaster in the spring of 2011; and cesium 134, which is produced only by human activities and was not present before the earthquake and tsunami hit the Japanese plant....There was about five times the background amount of cesium 137 in the bluefin tuna they tested...

Most of the radiation was released over a few days in April 2011, and unlike some other compounds, radioactive cesium does not quickly sink to the sea bottom but remains dispersed in the water column, from the surface to the ocean floor.

Fish can swim right through it, ingesting it through their gills, by taking in seawater or by eating organisms that have already taken it in, Madigan said


Saturday, May 26, 2012

Weekend Links

1--Forecasters Flying Blind When Predicting Repercussions of Greek Exit, WSJ

Excerpt:  Economic computer models typically depend on the past to forecast the future. The possibility of Greece leaving the euro zone is an exception to the rule because no nation has exited before.

The most immediate impact would be seen in the financial markets. Until the dust settles, investors would be likely to seek safe assets.

“A Greek exit from the euro is not priced into the markets,” says Eric Green, chief rate strategist at TD Securities, because no one has a clear handle on what will happen.

One advantage for the U.S. is that the Federal Reserve stands ready to safeguard the recovery. But even the Fed is consigned to observer status until more clarity takes shape, says Green.

Another plus is the health of the U.S. banking system. Just a few years ago, a Greek exit–which likely would include the government defaulting on its sovereign debt–would have pulled down the U.S. banks.

That doesn’t seem to be the case today.

2--Map: Where are homes underwater?, The Big Picture
3--President Obama Won’t Be Returning His Donations From Bain Capital, politicker

Excerpt: Though the Obama campaign has repeatedly attacked Mitt Romney for his career at Bain Capital, President Obama still accepted $7,500 in campaign contributions from two Bain executives. His campaign press secretary, Ben LaBolt told The Politicker the president has no intention of giving the money back.

4--Lost government under Obama, streetlight blog

5--Eurozone manufacturing taking on water, pragmatic capitalism (chart)

6--Short Sellers Find Friends in Banks, WSJ

Excerpt:  As traders at Morgan Stanley MS -0.45%were frantically trying to shore up Facebook Inc.'s FB -3.39%share price following the company's initial public offering, other managers on the deal were helping short sellers bet that the newly minted stock would fall.

Trading desks at Goldman Sachs Group Inc. GS -0.17%and J.P. Morgan Chase JPM -1.38%& Co., two of the firms that helped Morgan Stanley underwrite the IPO, were among those lending out Facebook shares that hedge funds needed for short sales, according to people familiar with the matter.

The role of the firms in enabling short sellers in Facebook's stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.

"In general, Wall Street has conflicts of interest, and conflicts of interest are profitable," said Daylian Cain, a Yale School of Management professor of business ethics. "It's hard to navigate them when there are millions of dollars at stake."

In a short sale, investors sell borrowed stock, hoping the shares fall so they can buy the stock at a lower price, return the shares and pocket the difference.

Clients of Goldman, J.P. Morgan and other banks were also helping contribute to a downdraft in Facebook's shares. The decline in the stock in the days after the IPO added to widespread anger among investors over the handling of the IPO after trading was disrupted by glitches on the first day.

While it isn't uncommon for Wall Street firms to make shares available for shorting on IPOs they manage, Morgan Stanley, the lead underwriter, didn't lend shares, according to people familiar with the matter.

Facebook shares were priced at $38 last Thursday. They held above that level last Friday as Morgan Stanley helped support the stock.

But they fell 11% on Monday and a further 8.9% on Tuesday, providing the opportunity for a rich profit for short sellers. The stock rebounded on Wednesday and ended 4 p.m. trading at $33.03 on Thursday....

On Wednesday short selling accounted for at least 36% of total volume.

7--Red Flag in Bank Lending?, WSJ

Excerpt:   Lending stumbled in the first quarter after nearly a year of growth, deepening questions about the recovery and confidence of borrowers and bankers.

Loan balances fell by more than $56 billion, or 0.8%, in the quarter ended March 31, according to the Federal Deposit Insurance Corp. The quarter-over-quarter decline marks a reversal from three consecutive quarters in which lending expanded.

While lending to larger commercial and industrial customers rose as it has for nearly two years, declines came in nearly all other types of loans, including those to small businesses.

"We're afraid to expand right now," said Dan Thystrup, who owns Adventureglass, a four-person company in North Webster, Ind., that builds fiberglass paddleboats in the shape of swans, ducks and dragons. Mr. Thystrup said his reasons for caution include sluggish demand and new environmental regulations.

Overall, lending rose about 2% on a year-over-year basis in the first quarter.

James Chessen, chief economist for the American Bankers Association, said lending won't expand significantly until the housing market rebounds. "The housing market is still rotten and hasn't yet bottomed out," he said.

Despite the lending slowdown, the U.S, banking industry had profits of $35.3 billion in the first quarter, up 23% from a year earlier. The jump came largely from setting aside less cash to cover bad loans. Revenue rose about 3%, largely reflecting higher sales of loans by banks.

To be sure, banks kept lending more to larger companies. Commercial and industrial loans grew 2% from last year's fourth quarter. Auto lending rose 1.5% from the last quarter of 2011.

But those increases were offset by contraction in other categories, led by a 5.6% decline in credit-card loan balances.

And despite some of the lowest mortgage rates on record, single-family residential mortgage origination fell 1% from the previous quarter, while home-equity lines of credit declined 2.2%, according to the FDIC.

Lending to small businesses slid, too, with small-business and farm-loan balances down $10.8 billion, or 1.6%.

8--US headed into recession, WSJ (video)

Excerpt: "Recession actually hit 8 months before Lehman."

9--USDA Is a Tough Collector When Mortgages Go Bad, WSJ

10--A Deposit Risk U.S. Banks Can Live With, WSJ

Excerpt:  As far as problems go, this isn't the worst to have. Deposit money is still washing over U.S. banks even as loan growth continues to prove elusive.

The result: Net loans equaled just 70% of total deposits in the first quarter, according to the Federal Deposit Insurance Corp.'s quarterly banking profile released Thursday. That is the lowest level since 1984.

With interest rates at rock-bottom levels, this keeps banks' net interest margins under pressure. And as J.P. Morgan Chase JPM -1.38%recently showed with its more than $2 billion loss, overly aggressive attempts to invest excess deposits can lead to problems.

Of course, European banks can only look on with envy. There, the fear is depositors are yanking money from institutions in countries like Greece rather than piling it up.

Total deposits at U.S.-chartered commercial banks and savings institutions rose in the first quarter by about $75 billion, to $10.26 trillion, according to the FDIC. While taking that number to a new high, a roughly $50 billion increase in domestic deposits was a far cry from the more than $200 billion gains seen in each of the previous three quarters.

And a drop-off in one type of deposit sounds a cautionary note. For more than a year, the bulk of deposit growth has come from a sharp increase in noninterest-bearing deposits. These are typically from companies parking cash that, under a special program, receive unlimited deposit insurance until the end of this year.

Yet in the first quarter, these deposits fell by about $30 billion overall, while there was an about $78 billion decline in noninterest-bearing deposits above $250,000. That was on the heels of a 56% increase in such large deposits during 2011.

The outflow, the FDIC said, was concentrated in a handful of large banks. The cause isn't clear. But it is worth remembering that this drop, along with the slowing of overall deposit growth, came against the backdrop of a run-up in stock markets in the first quarter and a brightening of the global economic picture.

That has proved short-lived. Meanwhile, banks should remember that they are in uncharted water when guessing what will happen when unlimited insurance for noninterest-bearing deposits expires. And at some point, individuals and companies will simply decide it is safe enough to do something else with their deposit money.

Banks have to stay ready for that day, no matter how far off it seems at the moment.

11--For Europe’s sake Greece must renege on its bailout commitments,  Le Monde

Excerpt:  Conventional wisdom has it that, if Greece wants to stay in the Eurozone, it must abide by the terms and conditions of its ‘bailout’ deal.

It is my considered opinion that the conventional wisdom is, once more, profoundly wrong. That Greece’s only realistic chance of staying in the Eurozone is to challenge the terms of its ‘bailout’ agreement. Moreover, I shall be arguing that such a challenge would be a great gift to Europe. Indeed, it may prove a prerequisite for the Eurozone’s survival.

Consider the following indisputable facts:

1.A week ago the bankrupt Greek state borrowed 4.2 billion from Europe’s bailout fund (the EFSF) and immediately passed it on to the European Central Bank (ECB) so as to redeem Greek government bonds that the ECB had previously purchased in a failed attempt to shore up their price. This new loan boosted Greece’s debt substantially but netted the ECB a profit of around 840 million (courtesy of the 20% discount at which the ECB had purchased these bonds).

2.During the same week, the fiscally stressed Spanish government was injecting large amounts of capital into Spanish banks. Simultaneously, to help finance the Spanish state, the ECB has provided large loans to Spanish banks (at 1% interest rate) which they then re-lent to their ‘saviour’, i.e. the Spanish state, at interest rates often exceeding 6%....

The German Chancellor (correctly) argues that we cannot escape a debt trap by accumulating more debt. However, consider facts 1,2&4 above: they constitute a typical case of adding debt to debt; of insolvent states borrowing in order to pay a Central Bank that is lending to insolvent banks which, at once, receive capital from insolvent states and lend to them part of the money they themselves borrowed from the Central Bank!...

Is this prudential, austerity-driven, economics that a country like Greece must abide to? Or is madness-in-action? With such policies in place, is it any wonder that the Eurozone has already entered an advanced stage of disintegration?...

Imagine if the incoming Greek Prime Minister were to try out something novel: Telling the truth! Addressing our European partners and telling them that, even if every Greek man, woman and child strove to stick to the nation’s ‘bailout’ commitments, Greece’s debt-to-GDP ratio will remain on an explosive path which guarantees an ignominious exit from the Eurozone. And then add:

◦that Greece will not borrow another euro from the troika until and unless a rational plan is in place

◦that this ‘rational plan, must apply to all member-states, rather than privilege Greece at the expense of Ireland, Portugal, Spain etc.

◦that until such a plan is in place, Greece will strive to live within its meagre means within the Eurozone, suspending temporarily all payments to all creditors

At that point, Europe will have to make a momentous decision. Either ignore this Greek call to sanity, and instruct the ECB to cut Greece loose (with devastating repercussions for the Eurozone as a whole), or choose to europeanise the banks throughout the Eurozone (i.e. recapitalise them directly by the EFSF, without that capital counting against national debt), europeanise investment projects (via the European Investment Bank) and europeanise part of the member-states’ debt (via eurobonds).

Am I proposing that Greece blackmail Europe? Certainly not. Since when is telling the truth and refusing to take loans that one cannot repay a form of blackmail? By taking this principled stance, Greece will be acting as a good citizen of Europe and will offer leaders like President Hollande a splendid opportunity to stop the rot that is nowadays consuming Europe’s body and soul


Thursday, May 24, 2012

Today's links

1--Yanis Varoufakis, on Greece

Excerpt:  Our listeners must grasp something very, very simple. This is not a recession, it’s not just the recession we had to have as Keating said once here in Australia. This is a calamity.

It’s one thing to have a recession, it’s quite another to have a complete and utter breakdown in the circuits of credit. No one trusts anyone with their money anymore. We are talking about wholesale implosion and this is what Greece is going through now.....

Greece is almost finished. Greece is in a state that – it’s very hard to imagine how we can actually escape that mire in the next few years with any modicum of respectability and hope.

But my great worry is that if we bring down with us the rest of Europe, then the chances of Greece ever climbing out of its hole diminishes substantially.....When things get bad, people forget that they can get worse. Things can get worse in Greece at the moment, things can get far, far worse. People are still not starving on the streets.

That’s perfectly possible. Remember the 1930s.

2--EZ manufacturing contracts, FT Alphaville

Excerpt: The survey is broadly consistent with gross domestic product falling by at least 0.5% across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany.

The underperformance of manufacturing relative to services has not been as extreme since the low point of the recession in early 2009, with a key driver then as now being a steep downturn in export sales. May’s drop in manufacturing production was the steepest in nearly three years, and the current period of falling new orders now almost matches the length, though not the depth, of the contraction in 2008/09.

3--EZ manufacturing points towards deeper recession, credit writedowns

4--Euro zone slump deepens, China falters, Reuters

Excerpt:  The shadows being cast over the global economy darkened this month as the euro zone's private sector declined further and China's once-booming factories faltered, business surveys showed on Thursday.

Worryingly for European policymakers, a downturn that started in smaller euro zone periphery members is now taking root in the core countries of Germany and France, whose tepid combined growth had been keeping the troubled bloc afloat.

"We are very much in a period of weakening global growth. It doesn't quite feel like 2008 yet but the danger is we could get there quicker than we think," said Peter Dixon at Commerzbank

The data sent German Bund futures to a record high as investors sought relative safety, and the euro fell to a near two-year low against the dollar.

The moves were also exacerbated by Wednesday's news that European Union leaders have been advised by senior officials to prepare contingency plans in case Greece quits the single currency - a once seen unthinkable event.

The euro zone composite PMI, a combination of the services and manufacturing sectors and seen as a guide to growth, fell to 45.9 this month from April's 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction

5--DERIVATIVES: Fed data expose US$100bn JP Morgan blunder, IFR

Excerpt:  Official data from the US Federal Reserve have laid bare the eye-watering size of trading positions built up by JP Morgan’s chief investment office in synthetic credit indices, raising further questions about risk management standards at the bank.

According to the figures, JP Morgan’s position in investment-grade credit default swaps jumped eightfold from a net long of US$10bn notional at the end of 2011 to US$84bn at the end of the first quarter this year.

The Fed data support previous reports about the nature of the trading strategy that has led to the losses. In investment-grade CDS with a maturity of one-year or less, JP Morgan’s net short position rocketed from US$3.6bn notional at the end of September 2011 to US$54bn at the end of the first quarter. Over the same period, JP Morgan’s long position in investment grade CDS with a maturity of more than five years leapt five times from US$24bn to US$102bn (see chart).

“I don’t care how big a bank you are, that’s still a big move,” said one seasoned credit analyst.

6--Mother and son jump to their deaths, Athens News

Excerpt: A mother and son have jumped to their death from the roof of a five-floor building in an apparent suicide.
7--Euro Zone Developing Grexit Contingency Plan, Der Speigel

8--EU banks still hoarding at ECB, Reuters

Excerpt:  High excess liquidity in the banking system has led to heavy use of the ECB's overnight deposit facility, where banks parked 762 billion euros overnight. In normal times the amounts are minimal.

Tensions were further highlighted on Thursday as borrowing of costly ECB overnight loans rose to almost 4 billion euros, the highest since mid-March

9--California bank repossessions continue to plummet, squatters rejoice, OC Housing News

Excerpt:  The precipitous declines in REO were not due to improving borrower delinquency. Far too many people are not paying their mortgages, and banks haven’t made significant progress in reducing shadow inventory. In short, they didn’t stop foreclosing because they ran out of people to foreclose on. So why did they?

10--Germany won't change stance on euro bonds, Athens News

Excerpt:  Germany does not believe that jointly issued eurozone bonds offer a solution to the bloc's debt crisis and will not change its stance despite calls from France and other countries to consider such a step, a senior German official said on Tuesday.

"That's a firm conviction which will not change in June," the official said at a German government briefing before an informal summit of EU leaders on Wednesday. A second summit will be held at the end of June.

11--Germany got bailed out too!, Bloomberg

Excerpt:  Would it surprise you to know that Europe’s taxpayers have provided as much financial support to Germany as they have to Greece? An examination of European money flows and central-bank balance sheets suggests this is so.

Let’s begin with the observation that irresponsible borrowers can’t exist without irresponsible lenders. Germany’s banks were Greece’s enablers. Thanks partly to lax regulation, German banks built up precarious exposures to Europe’s peripheral countries in the years before the crisis. By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford.

When the European Union and the European Central Bank stepped in to bail out the struggling countries, they made it possible for German banks to bring their money home. As a result, they bailed out Germany’s banks as well as the taxpayers who might otherwise have had to support those banks if the loans weren’t repaid. Unlike much of the aid provided to Greece, the support to Germany’s banks happened automatically, as a function of the currency union’s structure

12--The real origins of the EU debt crisis, Macronomyblogspot

Excerpt:  In a note published today by French broker Oddo, Bruno Cavalier indicates clearly the many mistakes taken since the Sovereign debt crisis broke out in 2010:

"The first error was the diagnosis in 2010, namely that the crisis of the euro had its main source, if not unique, in loose fiscal policies. If this point is not debatable in the case of Greece, it is not true for Ireland and Spain. Before 2008, both countries had scrupulously respected the public deficit criteria. Their current difficulties were not caused by an excessive public debt; they appeared when foreign capital financing their housing bubble ended abruptly. In fact, current problems in the euro area therefore reflect as much a fiscal crisis than a balance of payments crisis.

However, the policy prescriptions are not necessarily the same in one case or another. Faced with a budget crisis, as in Greece, it is essential to run a thorough reform of the state, forcing us to rethink the tax system to make it more efficient and reduce public funds waste. Faced with a crisis of balance of payments, jeopardizing the banking system, the priority is different. There is an urgent need to recapitalize institutions in big trouble, if any, by nationalizing them, it should be the priority in Spain. In this country, controlling public deficits cannot obviously be ignored, but it is secondary to the need of cleaning up the banking system.

13--German Press: "The Greek Exit Is A Done Deal",  zero hedge

14--US government panel calls for halt to prostate cancer screening, WSWS

Excerpt:  While the panel’s summary for patients states that “the USPSTF realized that some men may continue requesting the PSA test and some physicians may continue offering it,” the implications of the new advisory are that cancers will go undetected and untreated, resulting in preventable deaths.

By the panel’s own admission, one of the two studies used as the basis of their recommendation showed that of every 1,000 men receiving the PSA test, one life could possibly be saved, a not insignificant statistical finding. They conclude, however, that “screening may benefit a small number of men but will result in harm to many others.”

According to the Task Force, “Good evidence shows that PSA-based screening can cause harms, including pain and complications from prostate biopsy and worry about test results,” and that “screening puts men at risk for unnecessary worry and adverse effects of treatment with surgery, hormones, or radiation therapy” (emphasis added). They add, “The side effects of prostate cancer treatments include sexual dysfunction, bowel and bladder incontinence, and even death.”

Plainly stated, these are sweepingly false statements that equate the test itself with the potential outcomes of subsequent treatment. The screening—a simple blood test that measures prostate-specific antigen (PSA) levels—poses no risk to the patient. What is done on the basis of the test results should be the subject of careful research and consideration within the medical community and discussion between the patient and his doctor. Instead, the government panel has issued a blanket recommendation that no one should get the test.

15--Canada criminalizes dissent, WSWS

Excerpt: More than 100,000 people took to the streets of Montreal yesterday to mark the 100th day since the beginning of the Quebec student strike and to denounce the Quebec Liberal government’s Bill 78.

Adopted in less than 24 hours late last week, Bill 78 criminalizes the student strike by outlawing picket lines anywhere in the vicinity of the province’s universities and CEGEPs (pre-university and technical colleges) and by threatening teachers with criminal prosecution and massive fines if they make any accommodations to striking students or fail to perform all of their normal functions.

Bill 78 also places sweeping restrictions on the right to demonstrate anywhere—and over any issue—in Canada’s second most populous province. Any demonstration of more than 50 people is illegal unless demonstration organizers submit to police in writing more than eight hours in advance the route and duration of the protest and abide by any changes requested by the police. Demonstration organizers are also legally compelled to assist the authorities in ensuring that protesters do not transgress the police-prescribed protest route.

16--Time for bank bond write-downs, IFR

Excerpt:  the now five-year-old global financial crisis, writing down bank debt when banks are insolvent is a step that policy-makers have been almost universally unwilling to take.

Fearing a rolling line of bank failures if the weak were allowed to go down, policy-makers have generally followed the following three-point script:

First, make abundant liquidity available to banks, ensuring that they don’t fall over in a panic. The European Central Bank’s unlimited LTRO is the logical extension of this.

Second, create conditions where banks can profit, hoping they rebuild their own capital. JP Morgan’s recent speculative losses are a good example of how this doesn’t always work, while the US mortgage market, where lower interest rates from quantitative easing don’t always make it through to borrowers, is a good example of how when it does work the gains are unequally distributed between Wall Street and Main Street.

Third, inject capital or buy illiquid assets from banks, some of which you may need to take on to national balance sheets. Europe is in this phase now, as shown in Spain where Bankia has been nationalised and now requires a capital injection of at least €9bn. It is worth noting that in the only place where this script was not followed, Iceland, growth has now returned and the banking system is on a reasonably sound footing.

There are a number of serious problems with the extend, pretend and then underwrite approach...

The more liquidity and aid banks are given, the worse the balance sheet of the country looks. The greatest threat out of Greece may not be its exit, but what this does to Spain’s banking system, which is to say, what it does to Spain...

Ben Lord, fund manager at M&G Investments in London, argues that it is time for this cycle of dependency to end. Bail-ins, where senior and subordinated bondholders make a contribution, in some cases of 100%, may be in order in some cases where the bank is weak and the sovereign weakening. This is a rapid way to create capital and deleverage the system.

It won’t, of course, be necessary in every country, or even in every bank in the weaker countries.

“If this doesn’t work, then nationalisation is the last resort, and the taxpayer must step in one last time,” Lord wrote in a note to clients.

“But this situation of creeping nationalisation where taxpayers provide 24-hour life support in European banks through emergency policy response after emergency policy response, at the expense of much higher tax and lower quality of life across all citizens for a very long time feels wrong, at least before the risk-takers have suffered.”

While this proposal has logic and justice on its side, it probably is unlikely to be put into place. If a strong and extremely stable state like the US had difficulty grasping the politically toxic nettle of imposing losses on bondholders, it will be that much harder in Spain or Portugal, which are struggling not just with recession but with uncertainty about their role in the eurozone and about the eurozone itself.

If Europe chooses bailouts over bail-ins, growth will be suppressed and the fruits of growth will be unfairly distributed; in other words, more of the same.

17--Obama hails police state methods in Chicago, WSWS
Are you surpirised?

18--China Is Stimulused Out, WSJ

Excerpt:  There is no longer any doubt that China is facing a rough economic patch. Last month's data showed almost zero growth in imports and electricity use. Industrial production grew just 4.3% on a month-on-month annualized basis. On a broad range of growth indicators, China has fallen to 2009 levels.

Three years ago, the government responded with one of the largest stimulus programs the world has ever seen, totaling 15% of GDP. It included $580 billion in government spending, but the bulk was in the form of new bank lending, most of it for investment in infrastructure and industrial capacity. Some analysts estimate half of those loans will eventually go bad. Beijing can't afford to do that again...

Only it isn't working this time. The People's Bank of China has loosened credit, but companies don't want to borrow when they are already having trouble making profits. New bank loans contracted by 8% in April, and the percentage of long-term business loans in the banks' asset portfolios is falling.

The lack of confidence is due to the overhang from the last blowout. All of that investment in industrial capacity and real estate is now coming on line. Companies and local governments are finding it difficult to make their new assets generate enough revenue to service the debt. Inventories are piling up, and China is seeing capital flight for the first time in decades.

In other words, much to the surprise of some investment bank analysts, China is not immune to the business cycle after all. It is overdue for a bout of creative destruction to clear out inefficient enterprises such as the builders of empty "ghost cities."

The worry is that China has gone more than a decade without a painful slowdown. During that time, the government held down interest rates at artificially low levels to encourage investment. Such conditions often precede particularly long and painful contractions, a phenomenon the Depression-era economist Irving Fisher called debt deflation, otherwise known as a liquidity trap. One symptom is the lack of demand for credit that China is experiencing.

It's possible that Beijing pulled the monetary punch bowl away in time. Yet in recent months we have learned that hidden debts in corners of the economy such as credit-guarantee companies and local government financing vehicles were huge, and the true extent of their liabilities is still not fully revealed. Now is not the time to try to reinflate the economy with more wasteful spending and investment. That would only ensure the trap is sprung at a later date, at an even higher cost.



Witnesses say the two leapt while holding hands, a little after 8am in the small neighbourhood of Vathi square in Metaxourgeio, in central Athens. The mother was 90 years old and her son, musician Antonis Perris, was 60 years old. They lived on the first floor of the building....

According to reports, neighbours say the pair had economic difficulties.

The son recently wrote a blog post describing his current situation:

"I have been taking care of my 90 year old mother for 20 years now … Three or four years ago she was diagnosed with Alzheimer's and recently she has been subject to schizophrenic fits and other health problems. Nursing homes don’t accept patients who are such a burden. The problem is that I was not prepared … when the economic crisis hit."

The blog message also contained some verses he had written regarding the economic and social crisis.

Last month, 77-year old-man Dimitris Christoulas took his life in Syntagma Square in a incident that captured international attention.

Studies have shown a marked increase sharp increase in the suicide rate in Greece recent years.