Thursday, May 10, 2012

Today's links

1--We’re All Greeks Now, counterpunch

Excerpt:  The IMF (International Monetary Fund) has been implementing “structural adjustment” programs, AKA austerity, for decades....
When the ECB (European Central Bank) began discussing structural adjustment policies for Greece in 2009 there was little pretense that they would benefit the Greeks. European banks had loaded themselves to the gills with peripheral sovereign debt, in some measure to game the regulatory capital requirements in much the same way that Wall Street banks did with “AAA” rated garbage in the lead-up to the most recent financial disaster. And like their American counterparts, European banks had cynically lent money under fraudulent terms to people who could not pay it back. And European banks, like their American counterparts, require ongoing bailouts for the current economic order to stand...

With only six decades of IMF history to draw from, the template being used in Europe (and in America) is (1) install or corrupt a political elite who will support extractive economic policies for the benefit of bankers, (2) indebt, or cause to become indebted, a naïve, oblivious or otherwise captive population who will accept, grudgingly or otherwise, the institutional convention that the debt is legitimate and must be repaid, (3) under a patina of intellectual legitimacy, implement openly extractive economic policies against entire populations for the benefit of said banks, (4) while the culpable elites retire to large houses behind high walls with their portions of the loot.

In the 1980s major New York banks (Wall Street) made loans to South American and African nations using this template. In some fair proportion the proceeds of these loans were promptly re-deposited into these same banks in the names of specific government officials. When the victim populations rebelled, arguing either that the debt was not legitimate and didn’t need to be repaid, or realized that the debt was a de facto form of slavery and couldn’t be repaid, these New York banks were bailed out by the U.S. government under the veil of “Brady Bonds” and the government took over as creditor to collect the debts.

This is the game now playing out in Europe and, in a less visible sense; the U.S. Wall Street bankers (including European banks) are conspiring with corrupt, naïve, duplicitous or powerless peripheral leaders to implement austerity policies on indebted populations. These populations are indebted because of banker duplicity and/or because of the financial bubbles and their aftermath that Wall Street created. These austerity programs are for the sole benefit of the banks. In the U.S. the Wall Street banks were bailed out without being made to write off the bad loans that never should have been made. This creates a similar dynamic where some fair proportion of Americans will now live out their remaining days in debt slavery to the banks.

In addition to multi-trillion dollar unconditional and ongoing bailouts the Obama administration recently also gave the banks retroactive and future immunity for straightforwardly criminal behavior through the mortgage “settlement” and has expanded the corrupt and usurious student loan business for the benefit of the banks. Add the looting of state, municipal and private pensions, the corporate takeover of the legislative process and full implementation of neo-liberal austerity economics at the state and local levels and the battle lines in the U.S. are clearly drawn. We are all Greeks now.

2--Nigel Farage: "The EU Titanic Has Now Hit The Iceberg", zero hedge

2 minute video

3--From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics,  Thomas Palley, Economist's View

Excerpt:  Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do.

Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.

The government failure argument holds the crisis is rooted in the U.S. housing bubble and bust which was due to failure of monetary policy and government intervention in the housing market. With regard to monetary policy, the Federal Reserve pushed interest rates too low for too long in the prior recession. With regard to the housing market, government intervention drove up house prices by encouraging homeownership beyond peoples’ means. The hardcore perspective therefore characterizes the crisis as essentially a U.S. phenomenon.

The softcore neoliberal market failure argument holds the crisis is due to inadequate financial regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators allowed perverse incentive pay structures within banks that encouraged management to engage in “loan pushing” rather than “good lending.” Third, regulators pushed both deregulation and self-regulation too far. Together, these failures contributed to financial misallocation, including misallocation of foreign saving provided through the trade deficit. The softcore perspective is therefore more global but it views the crisis as essentially a financial phenomenon.

The progressive “destruction of shared prosperity” argument holds the crisis is rooted in the neoliberal economic paradigm that has guided economic policy for the past thirty years. Though the U.S. is the epicenter of the crisis, all countries are implicated as they all adopted the paradigm. That paradigm infected finance via inadequate regulation and via faulty incentive pay arrangements, but financial market regulatory failure was just one element. ...

The neoliberal economic paradigm was adopted in the late 1970s and early 1980s. For the period 1945 - 1975 the U.S. economy was characterized by a “virtuous circle” Keynesian model built on full employment and wage growth tied to productivity growth....

After 1980 the virtuous circle Keynesian model was replaced by a neoliberal growth model that severed the link between wages and productivity growth and created a new economic dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset price inflation became the engine. ...

For proponents of the destruction of shared prosperity hypothesis the policy response is ... to overthrow the neoliberal paradigm and replace it with a “structural Keynesian” paradigm that ... restores the link between wage and productivity growth. ... That requires replacing corporate globalization with managed globalization; restoring commitment to full employment; replacing the neoliberal anti-government agenda with a social democratic government agenda; and replacing the neoliberal labor market flexibility with a solidarity based labor market agenda.

Managed globalization means a world with labor standards, coordinated exchange rates, and managed capital flows. A social democratic agenda means government ensuring adequate provision of social safety nets, fundamental needs such as healthcare and education, and secure retirement incomes. A solidarity based labor market means balanced bargaining power between workers and corporations which involves union representation, adequate minimum wages and unemployment insurance, and appropriate employee rights and protections.

4--Achuthan: The US will be in recession by the end of next month, credit writedowns

5 minute video

5--More on austerity, The Economist

Excerpt:....the importance of spending cuts in episodes of austerity derives from the view that they are more likely to "stick" than tax rises, and that they are critical in generating "expansionary austerity". But this is no iron law of fiscal consolidation. Rather, as a recent IMF paper pointed out, it is due to the fact that central banks are more likely to accommodate spending cuts with aggressive easing than they are tax rises.

The austerity is there. If it isn't working out as many expected, that's either because what they expected was unreasonable, or because the central bank isn't doing its part.

6--Government jobs lost under Obama, Streetlight blog

See chart
7--Consumer Credit – Worse Than You Think, The Big Picture

Excerpt: – Consumer Credit in U.S. Increases by Most in 10 Years

Consumer borrowing in the U.S. surged in March by the most in more than a decade on growing demand for educational financing and autos. Credit rose by $21.4 billion, the biggest gain since November 2001, to $2.54 trillion, Federal Reserve figures showed today in Washington. The advance was paced by a $16.2 billion jump in non-revolving debt, including student and car loans. Americans may have been trying to get school financing before a possible increase in interest rates takes place on July 1. Rising consumer confidence also means that households are more willing to take on debt to boost spending, which accounts for about 70 percent of the economy.

Comment---The story above, like most stories on consumer credit, does not seem to understand the effect that student loans are having on consumer credit.....Take out government-owned student loans and there has been virtually no rebound in consumer credit since the Great Recession ended. Restated, the consumer has not been borrowing since the Great Recession has ended. Rather, students took advantage of below-market rates on loans provided by the government starting in 2009....

Most of the improvement in credit is a function of the explosion student loan debt,” said Neil Dutta, an economist at Bank of America Corp. in New York. “The reason student loan debt is exploding? Because the youth population is having difficulty finding work. Hardly a good reason for credit extension

8--Good and Bad in Credit-Card Binge, WSJ

Excerpt:   Talk about March Madness: consumers went on a borrowing spree, adding $21.4 billion in borrowing for the month.

The surge was the largest–in both dollar and percentage terms–since November 2001. What was unusual was an increase of $5.2 billion in revolving debt. The category–which includes credit cards–had been on a downtrend over the last three years. That lack of credit use had limited consumer spending.

The question is how to read the March credit increase. Was the gain an upbeat, “glass-is-half-full” view of consumers? Were consumers confident enough about their finances to haul out the credit card again? Or are consumers feeling half-empty, needing credit cards to cover the higher cost of gasoline?

The answer is probably a little of each, and it may take a few more months of credit data to gauge its true signal. It is another example of the split in the household sector. Some consumers have put the recession behind them while others still struggle with the drags of underwater mortgages, joblessness and past debt.

On the half-full side: According to the Conference Board, February and March had a gain in the percentage of consumers who thought their incomes would increase in the next six months. Households feel more comfortable borrowing if they expect bigger paychecks in the future.

In the half-empty view: average hourly pay increased only 0.5% in the first quarter, below the 8.8% jump in gas prices and the 0.9% rise in total inflation. To maintain their lifestyle, consumers had to borrow to meet current expenses.

If breaking out the plastic was a gas phenomenon, then the latest outlook on energy prices offers good news for the consumer outlook.

The Energy Information Administration said Tuesday summer gasoline prices wouldn’t tip the $5-a-gallon mark as some analysts had feared. The EIA said gas prices will average $3.79 per gallon during the summer driving months. That is down from the $3.95 they projected last month.

The 16-cent price cut will free up money that might have been spent at the pump but now can be spent elsewhere. Households budgets will get some breathing room and drivers won’t have to pull out the Visa or MasterCard to fill up.

9--The Seismic Results in Greece, counterpunch

Excerpt:   At the May 6 polls, the radical left-wing coalition Syriza becomes the second “party” in numbers of voters as it moves from 4.5% at the previous elections (2009) to 16.8% (52 MPs instead of 13). It is the first party in the major agglomerations and among people aged 18-35....

The principal point to be retained from this election is the highly positive result of the Syriza coalition that ran its campaign on the issue of immediate and unconditional suspension of Greek debt repayments for a period of three to five years, the cancellation of austerity measures enforced since 2010, the non-fulfilment of agreements with the Troika, the nationalization of a significant part of the banking sector, the need to set up a left-wing government to implement these measures. Several Syriza MPs actively support a citizens’ audit of the Greek debt and the need to cancel illegitimate debts, among them Sofia Sakorafa, who broke up with Pasok in 2010 as a protest against austerity. We will see whether Syriza will keep this orientation after its electoral success. It is encouraging to know that so many voters supported these radical proposals. The future will tell whether Syriza can meet the challenge of this remarkable popular support. “On his upcoming talks to explore whether he will be able to form a majority coalition with parties of the left and parties representing environmental concerns, the head of Syriza laid out the five points that will be the focus of discussions:

1. The immediate cancellation of all impending measures that will impoverish Greeks further, such as cuts to pensions and salaries.

2. The immediate cancellation of all impending measures that undermine fundamental workers’ rights, such as the abolition of collective labor agreements.

3. The immediate abolition of a law granting MPs immunity from prosecution, reform of the electoral law and a general overhaul of the political system.

4. An investigation into Greek banks, and the immediate publication of the audit performed on the Greek banking sector by BlackRock. 5. The setting up of an international auditing committee to investigate the causes of Greece’s public deficit, with a moratorium on all debt servicing until the findings of the audit are published.”[1]

10--Breaking Up Four Big Banks, NY Times

Excerpt:  We particularly stress the appeal of having a binding “leverage ratio” for the largest banks. This would require them to have at least 10 percent equity relative to their total assets, using a simple measure of assets not adjusted for any of the complicated “risk weights” that banks can game.

We also agree with the SAFE Banking Act that to limit the risk and potential cost to taxpayers, caps on the size of an individual bank’s liabilities relative to the economy can also serve a useful role (and the same kind of rule should apply to nonbank financial institutions).

Under the proposed law, no bank holding company could have more than $1.3 trillion in total liabilities (i.e., that would be the maximum size). This would affect our largest banks, which are $2 trillion or more in total size, but in no way undermine their global competitiveness. This is a moderate and entirely reasonable proposal.

11--FHA New Foreclosures Jump as Modified Loans Default, Bloomberg

Excerpt:  The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later.

The FHA’s role in lending to first-time buyers with poor credit and limited cash expanded after the 2008 collapse of the mortgage market put it at the center of government efforts to revive housing. The FHA allows down payments as low as 3.5 percent for borrowers with a credit score of 580, below the 640 defined as subprime by the Federal Reserve.

The credit standards are way too loose -- you can get into a house with very little skin in the game, and if home prices drop by a small amount, you’re underwater,” said David Lykken, managing partner at Mortgage Banking Solutions, an Austin, Texas-based consulting firm. “We’ve got to start getting reasonable about standards. What they’ve done so far, some very slight attempts at tightening, doesn’t really count.”

An increase in FHA foreclosures may lead to further demands for stricter standards that could shut buyers out of the real estate market as it shows signs of stabilizing after a six-year slump. Mark Calabria, director of financial regulation studies at the Cato Institute in Washington, in a February report called for Congress to tighten the agency’s lending qualifications to protect taxpayers, who insure the loans. First-time homebuyers accounted for 33 percent of real estate sales in March, according to the National Association of Realtors....

The recovery is uneven, with the annualized pace of existing home sales falling to 4.48 million in March, the second consecutive decline, according to the National Association of Realtors. Housing starts fell 5.8 percent in March after a 2.8 drop in February, according to Commerce Department data.

About 4.4 percent of all U.S. mortgages were in foreclosure in the fourth quarter, according to the Mortgage Bankers Association in Washington. That translates into more than 2 million homes that will have to be sold for the market to return to equilibrium, said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

“The main issue is we have a housing market that can’t clear,” said Swonk. “Right now, for a lot of people, the FHA is the only game in town.”

About 26 percent of the FHA-insured loans originated in 2007 are seriously delinquent, meaning overdue by 90 days or in foreclosure, according to a March 26 FHA report to Congress. For 2008 mortgages, the share is 24 percent. For 2009, the rate is 11 percent, for loans originated in 2010 it is 4.1 percent, and for last year, it’s 1 percent. In September 2011, 638,000 FHA mortgages were in their second default, the agency said in a November report to Congress...

Credit Scores

The agency in 2010 began mandating credit scores of at least 580 for borrowers who use its minimum down payment --which was raised to 3.5 percent from 3 percent in 2009. Last year the FHA cut the amount that sellers can give to buyers for down payments to 3 percent from 6 percent....

The agency “has acted aggressively to strengthen and protect the mortgage insurance fund and put FHA on a sustainable path for the long term,” Carol Galante, acting FHA commissioner, said in a March 27 blog. “FHA programs remain vital to ensuring more Americans have the opportunity to realize or maintain the economic security of the middle class.”

Lax Standards

Other FHA guidelines have remained intact. All of the down payment can be funded by relatives or employers. Buyers can cite income from future roommates to qualify for a loan. Cash reserves, required by Fannie Mae and Freddie Mac to show a borrower’s ability to pay a mortgage if a hot water tank bursts or if the roof leaks, aren’t required for many FHA loans

 12--Bank Loan Bundling Investigated by Biden-Schneiderman: Mortgages, Bloomberg

Excerpt:  New York Attorney General Eric Schneiderman and Delaware’s Beau Biden are investigating banks for failing to package mortgages into bonds as advertised to investors, three months after a group of lenders struck a nationwide $25 billion settlement over foreclosure practices.

The states are pursuing allegations that some home loans weren’t correctly transferred into securitizations, undermining investors’ stakes in the mortgages, according to two people with knowledge of the probes. They’re also concerned about improper foreclosures on homeowners as result, said the people, who declined to be identified because they weren’t authorized to speak publicly....

“The attorneys general could create a lot of problems for the banks and for the trustees and for bondholders,” Gradman said. “I can’t imagine a better securities law claim than to say that you represented that these were mortgage-backed securities when in fact they were backed by nothing.”...

The sale of mortgages into the trusts that pool loans may be void if banks didn’t follow strict requirements for such transfers, Biden said in a lawsuit filed last year over a national mortgage database used by banks. The requirements for transferring documents were “frequently not complied with” and likely led to the failure to properly transfer loans “on a large scale,” Biden said in the complaint.

“Most of this was done under the cover of darkness and anything that shines a light on these practices is going to be good for investors,” Talcott Franklin, an attorney whose firm represents mortgage-bond investors, said about the state probes.

Critical to Investors

Proper document transfers are critical to investors because if there are defects, the trusts, which act on behalf of investors, can’t foreclose on borrowers when they default, leading to losses, said Beth Kaswan, an attorney whose firm, Scott + Scott LLP, represents pension funds that have sued Bank of New York Mellon Corp. (BK) and US Bancorp as bond trustees. The banks are accused of failing in their job to review loan files for missing and incomplete documents and ensure any problems were corrected, according to court filings.

“You have very significant losses in the trusts and very high delinquencies and foreclosures, and when you attempt to foreclose you can’t collect,” Kaswan said.

13--Greeks May Hold $510 Billion Trump Card in Renegotiation, Bloomberg

Excerpt:     Greece’s next government may hold a trump card worth more than $510 billion if it heeds voters’ demands to renegotiate its bailout with the European Union.

The nation owes about 400 billion euros ($517 billion) to private bondholders, public bodies such as the International Monetary Fund and European Central Bank and other creditors, according to data compiled by Bloomberg. About 252 billion euros of that’s due to official organizations that used their status to avoid the losses suffered by ordinary bondholders when Greece restructured its debt two months ago.

Greek voters are demanding their leaders renegotiate the terms of rescue packages that have imposed unprecedented austerity on the country since 2010. One potential prime minister, Syriza party leader Alexis Tsipras, has pledged to tear up the EU-led bailout agreement. With Greece owing a sum roughly equal to Switzerland’s economy, the fallout for taxpayers could be calamitous if the country walks away.

“Greece has got some strong cards to persuade them to go easy on austerity,” said John Whittaker, an economist at Lancaster University Management School in England. “Everyone fears a Greek departure from the euro because they’ll lose money and lose political capital.

European governments have poured money into Greece since its first rescue was agreed in April 2010 in a bid to keep the country in the euro and prove that monetary union, a symbol of European post-war integration, is irrevocable.

After receipt of a 7.5 billion-euro tranche in March, Greece now owes other countries more than 80 billion euros in bailout funds. The European Financial Stability Facility said 4.2 billion euros of rescue cash will be disbursed to the nation today.

The ECB also stands to lose much if Greece walks away from its obligations. First, the central bank bought about 50 billion euros of the government’s bonds to push down yields and help the nation retain access to the capital markets. .....

Tsipras’s Syriza party wants to renege on all Greece’s bailout commitments. As it stands, the composition of the next government is far from certain, meaning new elections may be necessary next month.

Election Risk

“From a political perspective, there is a considerable risk that a left-leaning coalition is formed at the next election with a more explicit mandate to reject the EU/IMF program,” Credit Suisse Group AG economists including London- based Yiagos Alexopolous said in an e-mailed note. Their main scenario is that a national unity government will be formed that changes part of the bailout program but keeps its “broad thrust” on track, they wrote.

Greece also has 143 billion euros of bills and bonds outstanding, Bloomberg data show, taking total liabilities to 395 billion euros.

None of the numbers include money owed by private debtors including banks. Greek lenders, which are locked out of debt markets, in January borrowed 73.4 billion euros from the ECB to fund their operations, the Bank of Greece said May 3. Lenders typically use government bonds and bills as collateral when borrowing from central banks

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