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


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