Thursday, May 3, 2012

Today's links 1

1--Italian, Spanish banks load up more on government debt: ECB, Reuters

Excerpt:  Banks in Italy and Spain stuffed their coffers with government bonds last month, European Central Bank data showed on Monday, in the latest sign they have been using ultra-cheap three-year ECB funds to stock up on sovereign debt.

Italian banks now hold more government debt than lenders in any other country in the euro zone, and Monday's data may add to concerns that banks there and in Spain are becoming ever more wedded to the fate of their own heavily indebted governments.

2--The Tinder-Box Society, Robert Reich's blog

Excerpt:  The Dow Jones Industrial Average hit 13,338 Tuesday, its highest since December, 2007. The S&P 500 added 16 points. Wall Street will remember May 1 as a great day.

But most of these gains are going to the richest 10 percent of Americans who own 90 percent of the shares traded on Wall Street. And the lion’s share of the gains are going to the wealthiest 1 percent.

Shares are up because corporate profits are up, and profits are up largely because companies have figured out how to do more with less.

Payrolls used to account for almost 70 percent of the typical company’s costs. But one of the most striking legacies of the Great Recession has been the decline of full-time employment – as companies have substituted software or outsourced jobs abroad (courtesy of the Internet, making outsourcing more efficient than ever), or shifted them to contract workers also linked via Internet and software.

That’s why most of the gains from the productivity revolution are going to the owners of capital, while typical workers are either unemployed or underemployed, or else getting wages and benefits whose real value continues to drop. The portion of total income going to capital rather than labor is the highest since the 1920s.

3--ISM to Regional Factory Reports: Drop Dead, WSJ

Excerpt:  What factory slowdown?

Bucking expectations, the Institute for Supply Management reported nationwide factory activity accelerated in April. Its purchasing managers’ index rose to an 11-month high of 54.8, with new orders, production and employment picking up speed.

The ISM report was a refutation of several regional Federal Reserve surveys that showed factory activity slowing sharply or even contracting last month. Since manufacturing has been leading the recovery, a nationwide stumble by the sector would have raised questions about the total U.S. recovery’s health.

One reason manufacturing is doing well, said Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, is pent-up demand. Consumers are buying goods like cars that are wearing out. Firms are replacing equipment.

4--Foreclosure Activity Returns in Majority of US Markets, CNBC

Excerpt:  Just over 7 percent of U.S. loans were in some stage of delinquency in March, and 4.14 percent were in the foreclosure process, according to a new report from Lender Processing Services. The delinquency number is down almost 9 percent from a year ago, but the foreclosure inventory is fairly flat, down 1.6 percent from a year ago, but up slightly from the previous month. 5.6 million properties are still in some stage of delinquency or foreclosure. These numbers, negative home equity, and still-tight credit are the largest impediments to a robust recovery in the housing market.

5--Flood of Foreclosures Still Fails to Materialize, CNBC

Excerpt:  The number of homes entering the foreclosure process rose in March, up 8.1 percent, according to a new report from lender Processing Services, but the volume is down more than 30 percent from a year ago.

Analysts had expected this number to skyrocket immediately following the $25 billion settlement between banks and state governments over fraudulent mortgage servicing.

Foreclosures sales, which are the final stage of the foreclosure process, not sales of bank-owned homes, dropped precipitously in March to their lowest point in over two years. They dropped most sharply — 14 percent month-to-month — in states where a judge is not required in the foreclosure process (so-called non-judicial states).


Again, that is contrary to expectations, but could be yet another stall in the system, as banks try to modify more loans to meet some of the terms of the servicing settlement. The foreclosure sales decline also appears to be exclusively in private and portfolio loans, which again points to the settlement.

That low pace of foreclosure sales is keeping foreclosure inventory, or loans in the foreclosure process, at near historic highs, according to LPS. That number may be heading lower, however, as banks ramp up the short sale process. Short sales, when the bank allows the home to be sold for less than the value of the mortgage, are in fact now outpacing sales of bank-owned homes in many markets, according to a new report from RealtyTrac

6--Not All Economists Expect Spain's Recession to Bring About Deflation, CEPR

Excerpt: In reference to the high unemployment rate in Spain the Post told readers:

"The recession also is expected to force down wages and prices and, over time, make Spanish exports more competitive and the country more attractive to investors and tourists."

Actually there are few, if any, examples of countries where high unemployment led to this process of falling wages and prices that in turn restored competitiveness. Wages tend to be very sticky downward, which is why prices in countries across the euro zone, even those with double-digit unemployment, continue to rise.

It's also not clear the these economies would benefit even if they did have deflation. This would make real interest rates higher (borrowers would have to repay loans in money that is worth more than what they borrowed) and also increase the interest burden for homeowners with mortgages and other debtors.

Many economists have made these points. It is therefore misleading readers to imply that there is a simple story whereby Spain's high unemployment is a step in a process toward restoring prosperity.

7--The Endless Crisis, John Bellamy Foster and Robert W. McChesney, Monthly Review

Excerpt:   John Kenneth Galbraith, in The Economics of Innocent Fraud, provided a still stronger condemnation of prevailing economic and social science, arguing that in recent decades the system itself had been fraudulently “renamed” from capitalism to “the market system.” The advantage of the latter term from an establishment perspective was: “There was no adverse history here, in fact no history at all. It would have been hard, indeed, to find a more meaningless designation—this is a reason for the choice. So it is of the market system we teach the young. No individual or firm is thus dominant. No economic power is evoked. There is nothing here from Marx or Engels. There is only the impersonal market, a not wholly innocent fraud.” Along with this, “the phrase ‘monopoly capitalism,’ once in common use,” Galbraith charged, “has been dropped from the academic and political lexicon.” Perhaps worst of all, the growing likelihood of a severe crisis and a long-term slowdown in the economy was systematically hidden from view by this fraudulent displacement of the very idea of capitalism (and even of the corporate system)....

Monthly Review had long focused on the problem of financialization and its relation to underlying stagnation tendencies in the economy. But the realization that a devastating crisis was in the making as a result of the buildup of the housing bubble was not unique to us; rather it was quite widespread among heterodox observers, even penetrating into the business literature. This included, most notably, Dean Baker, Stephen Roach, John Cassidy, Robert Shiller, and Kevin Phillips—while also extending to pragmatic business publications like Business Week and The Economist. In August 2002 Baker wrote a report for the Center for Economic Policy Research, entitled “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” The same month Business Week warned: “The investors who buy many of the [mortgage] loans they securitize—may soon decide that enough is enough. If [interest] rates go higher, the burden of debt service will increase. Approximately 30 percent of outstanding mortgage debt has adjustable rates. A credit crunch could set in if a rate rise triggers a wave of defaults by holders of adjustable mortgages.” On September 22, 2002 Stephen Roach wrote an op-ed piece for the New York Times on “The Costs of Bursting Bubbles” in which he stated, “There is good reason to believe that both the property [real estate] and consumer bubbles will burst in the not-so-distant future.” In November 2002, New Yorker economic columnist John Cassidy published an article entitled, “The Next Crash: Is the Housing Market a Bubble That’s About to Burst?” The following year, Yale economist Robert Shiller co-authored a prescient Brookings Institution paper entitled “Is There a Bubble in the Housing Market?” The Economist in June 2005 stated, “The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.” Political commentator Kevin Phillips continually warned of the dangers of financialization, commenting in 2006 that homes had become “tools of speculative finance” and that “the United States had exchanged a stock-market bubble for the larger credit bubble,” presaging financial collapse...

Paul Sweezy, a Harvard-trained octogenarian who had emerged from the same Cambridge cohort as Galbraith and Samuelson, and who wrote what is still the best introduction to Marxist economics, was the leader of the left-wing dissidents. To a free market economist, the rise of Wall Street was a natural outgrowth of the U.S. economy’s competitive advantage in the sector. Sweezy said it reflected an increasingly desperate effort to head off economic stagnation. With wages growing slowly, if at all, and with investment opportunities insufficient to soak up all the [actual and potential] profits that corporations were generating, the issuance of debt and the incessant creation of new objects of financial speculation were necessary to keep spending growing. “Is the casino society a significant drag on economic growth?” Sweezy asked in a 1987 article he cowrote with Harry Magdoff. “Again, absolutely not. What growth the economy has experienced in recent years, apart from that attributable to an unprecedented peacetime military build-up, has been almost entirely due to the financial explosion.”24

For Sweezy, in particular, stagnation and financialization represented coevolutionary phenomena caught in a “symbiotic embrace.”...
 
Sweezy argued on the basis of Marx and Keynes that “accumulation is the primary factor” in capitalist development, yet noted that its influence was waning. “There is no mechanism in the system,” he explained “for adjusting investment opportunities to the way capitalists want to accumulate and no reason to suppose that if investment opportunities are inadequate capitalists will turn to consumption—quite the contrary.” Hence, the motor was removed from the capitalist economy, which tended—without some external force, such as “the outside shot in the arm of a war”—toward long-run stagnation...
 
The normal state of the monopoly capitalist economy,” they declared, “is stagnation.”28 According to this argument, the rise of the giant monopolistic (or oligopolistic) corporations had led to a tendency for the actual and potential investment-seeking surplus in society to rise. The very conditions of exploitation (or high price markups on unit labor costs) meant both that inequality in society increased and that more and more surplus capital tended to accumulate actually and potentially within the giant firms and in the hands of wealthy investors, who were unable to find profitable investment outlets sufficient to absorb all of the investment-seeking surplus. Hence, the economy became increasingly dependent on external stimuli such as higher government spending (particularly on the military), a rising sales effort, and financial expansion to maintain growth...
 
 In essence an economy in which decisions on savings and investment are made privately tends to fall into a stagnation trap: existing demand is insufficient to absorb all of the actual and potential savings (or surplus) available, output falls, and there is no automatic mechanism that generates full recovery....
 
Let me digress for a moment to point out that the fact that the overall performance of the economy in recent years has not been much worse than it actually has been, or as bad as it was in the 1930s, is largely owing to three causes: (1) the much greater role of government spending and government deficits; (2) the enormous growth of consumer debt, including residential mortgage debt, especially during the 1970s; and (3) the ballooning of the financial sector of the economy which, apart from the growth of debt as such, includes an explosion of all kinds of speculation, old and new, which in turn generates more than a mere trickledown of purchasing power into the “real” economy, mostly in the form of increased demand for luxury goods. These are important forces counteracting stagnation as long as they last, but there is always the danger that if carried too far they will erupt in an old-fashioned panic of a kind we haven’t seen since 1929–33 period.

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