Saturday, June 30, 2012

Today's Links

1--The Dollar Rising, The Big Picture

2--The Greek economy is finished, Yanis Varoufakis

YANIS VAROUFAKIS: They cannot fix the Greek economy. The Greek economy is finished. The Greek economy is in a great, great depression. The growing social economy is in its long, long winter of discontent. There is no power, no force within the Greek economy, with Greek society that can avert – it’s like – imagine if we were in Ohio in 1931 and we were to ask: what can Ohio politicians do to get Ohio out of the Great Depression? The answer is nothing....

YANIS VAROUFAKIS: This is a our Great Depression. Not only in an economic sense, but also in a psychological sense. Greeks are in a catatonic state. One moment, in a state of rage, another, this is a typical case of manic depression. There are no prospects. There is no light at the end of the tunnel. There are sacrifices, but nobody gets a feeling that these are sacrifices that take the form of some kind of investment in turning the corner. This is the problem when you are stuck in a eurozone which is really badly designed, which is collapsing and which does not give opportunities to its flimsier parts to escape through some kind of redemptive crisis.

3--Barclays fine suggests Libor collusion, IFR

The Libor fixing scandal, which last week cost Barclays US$453m in fines to the US and UK authorities, highlights widespread industry collusion and a failure of corporate governance across the banking sector.

The FSA‘s damning report laid bare an open dialogue between derivatives traders and submitters as they sought to game the system to boost the profits on deals (and therefore their own remuneration). But more worrying are the clear attempts by the bank (and the industry as a whole) to submit artificially low Libor levels, at the height of the financial crisis, to ward off any negative attention on liquidity issues.

The episode casts a shadow over the reputation of Barclays’ management – CEO Bob Diamond in particular – as well as the credibility of one of the industry’s most important benchmarks.

“The lack of management control is breathtaking. Looking at the extent of the communication between submitters and traders, how on earth they [Barclays’ management] managed not to pick this up is completely shocking,” one senior banking adviser told IFR.

4--US Fears Mexico Vote Could Undermine Drug War,

There aren’t many times when running as the candidate looking for “bring down the death toll” can earn you international scorn. But Mexico seems to be facing that situation right now, as the US openly frets the frontrunner, former Governor Enrique Pena Nieto, for exactly that.

That’s because for the US, policy in Mexico is all about the drug war, and keeping it going no matter what the cost for the Mexican public. With an ugly level of drug war related violence nationwide, Pena Nieto’s promise to focus policy on “diminishing violence” is quite popular, and has him with a commanding lead in the polls.

5--The Global Slowdown Will Accelerate, credit writedowns

Slowing growth as well as deficit and debt problems in the Eurozone, U.S., China and the emerging nations increases the odds of a deflationary global recession and a renewed down leg in the ongoing secular bear market.

The Eurozone crisis is worsening as economic growth is being hit by front-loaded austerity measures that are exacerbating budget deficits and reducing tax revenues. The southern-tier nations, particularly Spain and Italy, cannot get credit as interest rate spreads have widened to unsustainable levels. Funds have been flowing out of the disadvantaged nations and appear on the verge of a full-fledged run if financial aid in some form is not provided in the very short term....
The U.S economy has been slowing in the last two or three months. Either downside surprises or actual declines have been reported in key economic indicators relating to consumer spending, new orders, production and employment. A number of major companies have either revised down their second quarter earnings estimates or reduced their guidance for the second half. As a result, second quarter earnings estimates for the S&P 500 have been declining and full-year estimates probably will drop as well. When we further consider the dysfunction in Congress, the "fiscal cliff", the prospective end of operation twist, the elections and the prospect of renewed fighting over the debt ceiling, the threats to an already fragile recovery are high....

The Chinese economy is slowing, perhaps by more than the official numbers show. The NY Times has reported that many local and provincial officials have been falsifying numbers to hide the true extent of the problems. China’s economic model is heavily dependent on capital investments and exports, while internal consumer spending remains a relatively small part of GDP. Although Chinese officials recognize the need to increase consumer spending as a percentage of GDP, that is a long-term solution. In the meantime, exports to Europe, China’s top customer, are falling now and cannot be offset, except by ordering the building of more plants that will produce goods for which there is no current market. All in all, it seems that it will be difficult to avoid a hard landing.

The slowdown in Europe, the U.S. and China is also impacting the economies of the emerging nations, which are heavily dependent on exports. Declining growth is also driving down commodity prices. Despite all of the talk of decoupling, it seems apparent that the economies of all nations are linked and that there is little prospect of an oasis of prosperity in an increasingly dependent world.

Unfortunately, the monetary and fiscal authorities are out of ammunition. With short-term rates near zero and the 10-year bond yielding 1.6%, there is not much more the Fed can do. At the same time fiscal stimulus is restrained by debt and deficits that are too high relative to GDP.

6--Banker to the Bankers Knows the Numbers Are Lying, Bloomberg

The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies.

“The financial sector needs to recognize losses and recapitalize,” the Basel, Switzerland-based institution said in its latest annual report, released this week. “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” The implication is that many banks are showing inaccurate numbers now...

Unfortunately the BIS’s suggested approach is almost all carrot and no stick. “The challenge is to provide incentives for banks and other credit suppliers to recognize losses fully and write down debt,” the report said. “Supporting this process may well call for the use of public sector balance sheets.”

So there you have it. More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so -- in writing. (The BIS’s board includes Federal Reserve Chairman Ben Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too...

To date, the task of propping up the economies in Europe and the U.S. has fallen largely to central banks. As the BIS wrote, easy-money policies also can make balance-sheet repairs harder to accomplish.

“Prolonged unusually accommodative monetary conditions mask underlying balance sheet problems and reduce incentives to address them head-on,” the report said. “Similarly, large- scale asset purchases and unconditional liquidity support together with very low interest rates can undermine the perceived need to deal with banks’ impaired assets.”

7--JPMorgan’s Other Big Gamble, Pam Martens, Wall Street on Parade

In 2007, Citigroup told investors it had $13 billion in subprime exposures, knowing the figure was in excess of $50 billion. It got caught and on July 29, 2010 paid $75 million to settle charges with the SEC. Its CFO, Gary Crittenden, was fined a puny $100,000 and the head of its Investor Relations Department, Arthur Tildesley, was fined an even punier $80,000. That sent a clear message to Wall Street, lying about the risks you are taking or what’s on your balance sheet results in a slap on the wrist and some chump change. Lying has now morphed into its own profit center....

“Since March 31, 2012, CIO [Chief Investment Office of JPMorgan Chase] has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

“The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.”

Nothing in this statement suggests that a momentous event has occurred – momentous enough to bring in the Department of Justice, the FBI, three Congressional hearings and the shaving, at one point, of $30 billion off the market capitalization of the firm....

What the statement does not capture is the following: JPMorgan Chase was selling tens of billions of dollars of credit default insurance to hedge funds in return for a large up-front payment and a quarterly income stream. It sold that protection in an off-the-run (outdated) derivatives index that is illiquid. AIG Financial Products blew up the behemoth AIG Insurance selling credit default insurance. The U.S. taxpayer had to bail out AIG and pay off that insurance to Wall Street firms like Goldman Sachs and JPMorgan Chase. That was just a little over three years ago. Should Congress and the regulators be caught off guard once again, there will be hell to pay.

On May 10, 2012, the same day JPMorgan filed its 10Q with the SEC, JPMorgan Chairman and CEO, Jamie Dimon, said on a conference call with analysts that the existing credit derivative losses were $2 billion and could grow. What he did not mention was anything about an internal document existing at that time that said the losses could grow to $9 billion. The difference between $2 billion and $9 billion is a very material number.

On June 29, 2012, Jessica Silver-Greenberg and Susanne Craig reported in the New York Times that “In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.” The operative words in that sentence are “April” and “$9 billion.”

8--The Myth That Entitlements Ruin Countries, Busted in 1 Little Graph, The Atlantic

, we have a long-term healthcare spending problem. But that doesn't make us Greece. Heck, Greece isn't even Greece. At least not the "Greece" that's become such a political football. The evidence -- or lack thereof -- is in the chart below. It compares each country's average social spending since 1999, via the OECD, against its current borrowing costs. See the pattern?

There is none. Europe's biggest social spenders don't have any problems. And Europe's biggest problem countries don't spend that much on social programs. The death knell of the welfare state this is not.

Here's the dirty little secret of the euro debt crisis. There is no euro debt crisis. There is a euro crisis. The debt is a symptom of the crisis of the common currency.* Europe's bailed out countries all saw piles of capital pour in during the boom, only to pour out during the bust. They were left with inflated, uncompetitive wages -- and that's sent them into deep slumps. That's been despite lower social spending than their northern euro neighbors. Germany, Austria, Finland, Finland, the Netherlands, Belgium and -- at least for now -- France have all been able to sustain more generous safety nets thanks to the magic of competitive wages.

9--A Huge Break in the LIBOR Banking Investigation, Rolling Stone
This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

First there were huge bid-rigging settlements for Chase, UBS, Bank of America, GE and Wachovia. Now we’ve got a $450 million settlement for Barclays for Libor manipulation, and one imagines this won’t be the end of it. Anyway, more on this to come soon, and if you’re wondering, yes, there should be a lot more press on this.

10--Banks still withholding massive housing backlog, naked capitalism

Funny how there is nary a mention of the reasons banks have for wanting to draw out foreclosures: more servicing and late fees, deferral of recognition of losses on second liens. Nor is there any mention of how, in Las Vegas, I have been told by informed insiders that there are entire blocks in affluent areas where pretty much no one has paid their mortgage in over two years as of late 2010 with nary a foreclosure notice sent. Read that date: a lot of big ticket properties were being kept in limbo before the new law was passed. Similarly, Keith Jurow wrote in February:

In November 2011, posted my 30-page New York City Housing Market Report. The report included never-seen-before charts, graphs and data that revealed what has been going on there. The banks have not been foreclosing for the past three years. This started well before the robo-signing mess. On February 7, 2012 there were a total of only 242 repossessed properties on the active MLS in Queens according to This is a borough with a population of 2.2 million.

Because of this, the number of seriously delinquent properties throughout NYC has been soaring. Based on individual charts for each borough from the NY Federal Reserve Bank which I included in my report, there were roughly 80,000 properties where the mortgage had not been paid in more than 90 days as of June 2011...

Funny, Jurow debunked that in a May piece:

We hear that California markets are showing signs of revival and that prices are rising in certain markets. Let’s see. Here are the latest figures from

In Los Angeles, trulia reports that the average price-per square foot for homes sold in February through April was down 9.3 percent year-over-year for 3-bedroom homes and down 8.7 percent for 2-bedroom homes.

In San Francisco, allegedly one of the hottest areas in the nation, the 3-bedroom average price-per-square-foot was down 4.7 percent year-over-year and 1-bedroom price-per-square foot was down 8.1 percent.

Price-per-square-foot statistics are the best way to compare prices because it does not matter how large the house is. Median prices are skewed by square footage as well as by the percentage of distressed properties sold.

And that recovery in Arizona? Banks are holding properties off the market:

Take a good look at this revealing chart for Phoenix from

Bank repossessions in Maricopa County plunged from 3,159 in April 2011 to a mere 767 a year later. Clearly, the banks are gambling that this will help to stem the decline of home prices….

In April, only 17 percent of all homes sold in the Phoenix metro were REOs on the active MLS. Banks are hoping that this cutback of foreclosed properties for sale will steady home prices....

By contrast, look at how Wall Street Examiner’s Lee Adler characterizes the situation:

Meanwhile, the mortgage servicing bankster mafiosi have figured out that by holding rather than dumping massive numbers of foreclosed properties, and even by slowing down the foreclosure process while allowing a few cramdowns in the form of short sales, the market has begun to rebound on its own. The bankster mafia know that placing massive numbers of properties on the market at once would crash the market and destroy the value of their portfolios, and essentially crash the financial system. So they have made a wise strategic decision not to self immolate.

11--Federal Reserve, Regulators Arguing for More, Quicker Foreclosures, Dave Dayen, FDL
12--Bankers Are Responsible For the Housing Crisis, Abigail Field, Reality Check

Let’s be clear: The banks are responsible for shadow inventory and the underwater crisis. Not homeowners, not Due Process, not judges, not law enforcement....

Second, banks are manipulating housing market inventory, letting properties they own rot, not listing them for sale, and when auctioning them, sometimes outbidding third parties. Third, bankers’ securities fraud broke the secondary market for non-government backed mortgages. As a result, there’s a lot less capital to lend wannabe homeowners. Fourth, lender-driven appraisal fraud led to such inflated prices that the underwater problem is directly attributable to them....Banks are holding properties off the market all over the place.




Wednesday, June 27, 2012

Today's links

1--Map Shows Which States Are The 'Greeces' Of America, Business Insider

2--Mortgage origination (graphs) 2007 to 2011, Sober Look
3--Case-Shiller Index Shows Home Prices Off Record Lows for April 2012, economic populist

The April 2012 S&P Case Shiller home price index shows a -1.9% decline from a year ago for over 20 metropolitan housing markets and a -2.2% decline for the top 10 housing markets from April 2011. Home prices are now comparable to May 2003 levels for the composite-20 and March 2003 for the composite-10, but up for the month. Both composites are now down -34% from their 2006 home price bubble peaks. March 2012 home prices were record lows. Below is the yearly percent change in the composite-10 and composite-20 Case-Shiller Indices. These are not seasonally adjusted, but comparing from April 2011....

The turmoil in the housing market in the last few years has generated unusual movements that are easily mistaken for shifts in the normal seasonal patterns, resulting in larger seasonal adjustments and misleading results....

Not seasonally adjusted data can create more headline buzz on a month by month basis due to the seasonality of the housing market. S&P does make it clear that data should be compared to a year ago, to remove seasonal patterns, yet claims monthly percentage changes should use not seasonally adjusted indices and data. This seems more invalid than dealing with the statistical anomalies the massive housing bubble burst caused. Below is the seasonally adjusted and not seasonally adjusted Composite-20 Case-Shiller monthly index.....

(From comments) Folks, look, we may have hit a bottom, although I'm not so sure on home prices, but in terms of sales, rolling around there, but over 1 month, just 1 month of data we have some claiming everything is rosy, home prices will rise 10%, sales will increase, construction jobs are coming back and the economy is "on the mend".

This is ridiculous! The NAR especially claims this and has been doing so, no matter what the data says and they are all about realtors, so do not believe their hype.

One month of data does not a trend make at all, not by a long shot. Just unreal how various press and pundits jump on one month's of data and make declarations. You cannot do that, even with a quarter's worth of data. 6 months, ok, you can say something.

4--S&P 500 Q2 Earnings Growth Estimates Tank, Bespoke

The world's economic troubles since the second quarter began have done a number on Q2 earnings growth estimates for the S&P 500.  At the start of March, year-over-year S&P 500 Q2 earnings growth (bottom up) was expected to be +1.2%.  From the start of March through mid-April, this growth estimate steadily increased to a high of +2%, but since then we've seen pretty much a straight line lower.  As of this week, Q2 earnings for the S&P 500 are expected to decline 1.1% versus Q2 2011
5--Mortgage backed securities slowly rebound, WSJ (graph)

6--MBA: Mortgage Applications Decrease in Latest Weekly Survey, calculated risk

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier.

“Refinance volume fell last week due largely to a fall-off in refinance applications for government loans, which had more than doubled the prior week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “The large swings in activity were due to the implementation of FHA’s new premiums on streamline refinances, and borrowers timing their applications to lower their premiums.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.88 percent from 3.87 percent, with points decreasing to 0.40 from 0.49 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

7--To Save the Euro, Leave It, NY Times

AS the European economic crisis continues to intensify, policy makers are faced with the need to take ever more extreme measures to prevent a financial cataclysm. Tomorrow, European Union leaders will meet in Brussels to discuss the latest proposals: centralizing banking regulation and putting limits on national spending and borrowing.

A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.

Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.

8--Lender regulation and the mortgage crisis, VOX

Ever since the recent mortgage crisis, calls for tighter regulation on lenders have been widespread. But would stricter supervision and regulation of lenders have been any use during the frenzied optimism of a boom? This column argues that it might. It shows that lending by the loosely regulated non-bank companies was associated with higher foreclosure during the housing downturn when compared with lending by the more tightly regulated banks....

Overall the findings support the view that more stringent regulations could have averted some of the volatility on the housing market during the recent boom-bust episode. While we do not study the impact of specific regulations, the results of the paper suggest that enhanced supervision, which is what ultimately differentiated banks from non-banks, could be a first step in the right direction. However, enhanced supervision alone is unlikely to be effective at substantially reducing risky lending without additional mortgage-specific regulations that set higher lending standards and eliminate some of the perverse economic incentives that were behind the boom in risky lending.

9--Biggest U.S. Banks Curb Loans as Regional Firms Fill Gap, Bloomberg

10--Principal Reduction Most Effective Type of Mod: Amherst, DS News

11--US Drug War in Honduras Expands as Human Rights Abuses Increase,

12-- Is “Arab Spring” coming to Latin America, RT

13--Corporate profits hit all-time high as wages hit all-time low, Business Insider


Monday, June 25, 2012

Today's links

1--Family Net Worth Drops to Level of Early ’90s, Fed Says, NY Times

The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

The new data comes from the Fed’s much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families. ...

Conversely, the share of families with education-related debt rose to 19.2 percent in 2010 from 15.2 percent in 2007. The Fed noted that education loans made up a larger share of the average family’s obligations than loans to buy automobiles for the first time in the history of the survey.

The cumulative statistics concealed large disparities in the impact of the crisis.

Families with incomes in the middle 60 percent of the population lost a larger share of their wealth over the three-year period than the wealthiest and poorest families.

One basic reason for this disproportion is that the wealth of the middle class is mostly in housing, and the median amount of home equity dropped to $75,000 in 2010 from $110,000 in 2007. And while other forms of wealth have recovered much of the value lost in the crisis, housing prices have hardly budged.

Those middle-income families also lost a larger share of their income. The earnings of the median family in the bottom 20 percent of the income distribution actually increased from 2007 to 2010, in part because of the expansion of government aid programs during the recession. Wealthier families, which derive more income from investments, were also cushioned against the recession.

2--US bank profits soar while lending drops, WSWS

US bank profits rose sharply during the first quarter of 2012, according to figures compiled by the Federal Deposit Insurance Corporation (FDIC), the eleventh consecutive quarter in which net earnings were higher than the previous year.

Aggregate profits of all the banks and savings institutions insured by the FDIC rose to $35.3 billion in the January-March period, up from $28.7 billion in the fourth quarter of 2011 and the highest quarterly profit figure since 2007.

The five-year record profits come on top of bumper earnings in 2011, the most profitable year for banking since 2006. While jobs and wages for working people remain deeply depressed, the financial sector, which caused the economic slump, is doing better than ever.

This applies particularly to the financial giants. Two-thirds of all US financial institutions reported increased profits, but the vast bulk of these profits were concentrated in the largest banks, those with assets over $10 billion. While they make up only 1.4 percent of all banks, these institutions raked in 81 percent of the net earnings.

While profits rose 23 percent compared to a year earlier, net operating income revenue was up only five percent. This means most banks boosted their profits not from lending activities, but through bookkeeping operations, like reducing the amount they set aside to cover loan losses (down $6.6 billion compared to the same quarter in 2011).

Overall, banks cut their total lending by about one percent in the first quarter of 2012 compared to the previous quarter. This once again disproves the rationale for the Bush-Obama bank bailout: the claim that rescuing the banks would enable them to resume lending on a wider scale and thus fuel an economic recovery in the United States.

Consumer lending fell in most categories, with the biggest drop in credit card debt, $38.2 billion, a 5.6 percent decline typical of the post-Christmas quarter. Home mortgages fell by $19.2 billion and home equity lines of credit by $13.1 billion. Auto loans rose by $4.5 billion.

Loans to businesses were mixed, with construction and real estate development loans declining by $11.7 billion, offset by an increase in loans to commercial and industrial borrowers, which rose $27.3 billion, or 14 percent.

Combining both consumer and business lending, bank credit fell by $56.3 billion compared to the fourth quarter of 2012, reversing the previous nine months in which aggregate lending increased.

3--Who Destroyed America's Middle Class? , Washington's blog

The vast majority of households in this country generate 75% to 81% of their income from wages. Virtually none of the income generated in 85 million households (the bottom 75%) comes from interest, dividends or capital gains. You need money to make money. The top 10% only generated 46% of their income from wages. The report does not provide details on the top 1%, but wages most certainly account for less than 20% of their income. Interest, dividends and capital gains represented 22.2% of the income for the top 10%, while it represented less than 1% of income for the bottom 75%. This data is the smoking gun that proves that Federal Reserve policy and control fraud on a grand scale by the titans of Wall Street was designed and executed to benefit only the wealthy elite billionaire class and their co-conspirators. All the income gains during this time accrued to the psychopathic amoral financial oligarchy. The average family saw their real wages decline and anyone lured into the housing market during this time frame by the “sophisticated” financial experts at Citicorp, Bank of America, Wells Fargo, Merrill Lynch, Countrywide, Washington Mutual, Wachovia, Bear Stearns, Goldman Sachs, Lehman Brothers, and the other members of the Too Big To Fail criminal syndicate was set up for epic loses. ...

Despite the fact that the median net worth of the top 10% actual rose from $1.17 million in 2007 to $1.19 million in 2010 (while the bottom 80% saw their net worth decline by 36%...

A few data points from David Rosenberg make that clear:

Forty-six million Americans (one in seven) are on food stamps.

One in seven is unemployed or underemployed.

The percentage of those out of work defined as long-term unemployed is the highest (42%) since the Great Depression.

54% of college graduates younger than 25 are unemployed or underemployed.

47% of Americans receive some form of government assistance.

Employment-to-population ratio for 25- to 54-year-olds is now 75.7%, lower than when the recession “ended” in June 2009.

There are 7.7 million fewer full-time workers now than before the recession, and 3.3 million more part-time workers.

Eight million people have left the labor force since the recession “ended” — adding those back in would put the unemployment rate at 12% instead of 8.2%.

The number of unemployed looking for work for at least 27 weeks jumped 310,000 in May, the sharpest increase in a year.

I would add a few more data points to David’s list of woe:
Over 7.5 million homes have been foreclosed upon by the Wall Street bankers since 2008.

The National Debt has increased by $5.7 trillion (57% increase) since September 2008, while real GDP has risen by $305 billion (2.3% increase) since the 3rd quarter of 2008.

Interest income paid to senior citizens and savers has declined by $400 billion (29% decline) since September of 2008 due to Ben Bernanke’s ZIRP.

Government transfer payments have risen by $500 billion (32% increase) since September 2008, while private industry wages have risen by $200 billion (4.7% increase).

The price of a gallon of gas has risen from $1.70 in December 2008 to $3.53 today.

Food prices have risen by 7% to 10% since late 2008, even using the falsified BLS data. A true assessment by anyone who actually goes to a grocery store (not Bernanke – his maid does the shopping) would be a 10% to 20% increase.

4--Fed report shows---Crisis has thrown back US families 20 years, WSWS

The financial crisis of the past four years has thrown American families back two decades, according to figures provided by the Federal Reserve Board in its triennial Survey of Consumer Finances.

The median net worth of US families—the combined value of homes, bank accounts and other assets, minus mortgages and other debts—fell 38.9 percent between 2007 and 2010, from $126,400 to $77,300, approximately the level recorded in 1992. Median income also fell over the three-year period, down 7.7 percent before taxes, adjusting for inflation....

The survey, based on interviews conducted in 2010 and early 2011, understates the impact of the ongoing economic slump, which has continued since then. Its figures on the distribution of wealth and income lag behind even more, since there has been a substantial rebound in the position of the wealthiest US households because of soaring corporate profits and rising stock prices.

The headline number of the Fed report, and deservedly so, is the dramatic fall in median net worth. This is the byproduct of the housing collapse, which has devastated the principal asset of working class and middle class families.

The median value of a US home fell by 42 percent between 2007 and 2010, from $95,300 to $55,000. At the same time, the burden of mortgage debt actually rose, from 51.3 percent of median home value to 64.6 percent, and 11.6 percent of homeowners with mortgages were under water, owing more on their homes than their present value

In terms of income groups, the bottom 25 percent of households experienced a decline of 100 percent in median net worth, from a miniscule $1,300 per household in 2007 to zero in 2010. The second and third quartiles of the population saw decreases of 40 to 50 percent, while median net worth for the top 10 percent fell by only 6.4 percent (and has risen considerably since the end of 2010)....

these figures document a vast social retrogression, in which the financial position of the overwhelming majority of the American people is getting worse. This is not merely the result of impersonal economic processes, however. It is the direct consequence of decisions made in corporate boardrooms and in Washington that have exclusively benefited the super-rich at the expense of working people.

5--Merkel Hardens Resistance to Euro-Area Debt Sharing, Bloomberg

Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.

“It’s not a bold prediction to say that in Brussels most eyes -- all eyes -- will be on Germany yet again,” Merkel said. “I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures.”

6--Housing update, Dr Housing Bubble

Today the big generator of movement comes from artificially controlled low inventory and stunningly low interest rates.  The Federal Reserve has essentially gone Soviet Union on the US housing market.  Without a doubt this has caused a mini-boom in the market but is this simply more fumes or something more sustainable..

Fed now promoting maximum leverage

It might be hard to believe but in 2000 the 30-year fixed rate mortgage was at 8.5 percent. Not that it mattered since most were levering up with funny money no-doc, no-income, and no-pulse mortgages. Since 2000 to current rates, the conventional 30-year mortgage has seen rates fall by an amazing 55 percent. These low rates are here because of financial panic, horrible employment figures, and banking systems in ridiculous debt. Make no mistake, this is artificial and spurred on by a poor economy. The Fed now holds trillions of dollars in mortgage-backed securities and other archaic debt just to keep this game going.

7--U.S. Banks Aren’t Nearly Ready for Coming European Crisis, Bloomberg

According to my calculations with John Parsons, a senior lecturer at MIT and a derivatives expert, JPMorgan’s balance sheet using the European method isn’t $2.3 trillion but closer to $4 trillion. That would make it the largest bank in the world.

What are the odds that JPMorgan would lose no more than $50 billion on assets of $4 trillion, much of which is complex derivatives, in a euro-area breakup, an event that would easily be the biggest financial crisis in world history?

8--Will dwindling housing supply cause resale prices to rise or sales volumes to fall?, OC Housing

We established that banks are cutting standing REO inventories by reducing new acquisitions by 50%. They are reducing their inventory by allowing delinquent borrowers to continue to live payment-free in houses. Of course the perpetual shadow inventory extends housing downturn and creates uncertainty, but lenders believe they can force house prices to bottom by restricting MLS supply. Perhaps they are right.

The success or failure of lenders’ efforts to force housing prices to bottom hinges on one thing. Will dwindling supply cause prices to rise or sales volumes to fall?

If you listen to realtors — a practice I advise against — they will tell you the reduced supply must make prices go up… and you better buy now or be priced out forever… But in reality, there is another alternative. If buyers do not raise their bids, sales volumes will decline, and the so-called housing recovery will prove as illusory as the bear rally of 2009 and 2010.

I believe it’s more likely that sales volumes will plummet rather than house prices go up. First, for house prices to go up, buyers must raise their bids. Many can’t. Borrowers today face real lending standards with income verification. Further, they need down payments that most don’t have. This spring many buyers put in bids they could not live up to. The housing market witnessed an astonishing 50% escrow fallout rate. Appraisers aren’t playing the bubble game this time around, so contract prices significantly over recent comps get haircuts, and borrowers don’t have the cash to make up the difference on a low appraisal. Plus, some borrowers don’t want to. With all the accurate talk about shadow inventory, educated buyers do not fear being priced out forever. The low inventory may price people out the rest of this buying season, but eventually inventory must return to the market.....

Kevin Mahn, Contributor — 6/21/2011 @ 3:51PM

According to the Mortgage Bankers Association (MBA), in a June 8, 2011 report entitled, “Mortgage Applications Decrease in Latest MBA Weekly Survey” the average interest rate for 30-year mortgages decreased to 4.54%, which is the lowest rate observed since November 19, 2010.

Despite the historically low rate of interest, and the seemingly available supply of credit, applications for mortgages are not increasing, as one might expect, but actually are continuing to decline. According to the MBA, as of the week ending June 3, 2011, mortgage loan applications, as measured by the seasonally adjusted Purchase Index, decreased by 4.4% over the course of the previous week and by 3% over the month of May.

Let’s be clear about what the chart above says about the housing market. The talk about increasing demand is complete and utter bullshit. Sales volumes are still more than 20% below their historic norms, and the small increase in sales volumes this year are largely due to cash buyers. As you can see above, the increase in sales volumes is not due to more financed buyers active in the market. Cash buyers won’t drive up prices. Financed buyers are needed to do that.

Looking back even further, applications for mortgage loans are down over 15% on a year-over-year basis as of May 2011.

While applications for refinancing do not paint as dismal of a picture, the figures have also been on a negative trend since November 2010. So what gives?

It is our contention at Hennion & Walsh that the credit crisis was not, and is not, a question of the lack of supply (or cost) of credit but rather is based on a lack of aggregate demand for credit

9--Shadow bank inflection point? zero hedge

...And as of March 31, the spread between Shadow Banking and traditional financial liabilities has collapsed to just $206 billion, after hitting a record $8.7 trillion in March 2008....

Why is any of this relevant?


What shadow banking has been for America is nothing short of an inflation buffer. Recall what the primary characteristic of shadow banking is: it performs all the traditional credit intermediation transformations that conventional banking entities do: Maturity, Credit and Liquidity.

However, unlike traditional banks, shadow banking has one huge deficiency: it has no deposits! In other words, the entire rickety shadow banking system is based simply on the good faith and credit that rehypothecated assets, converted into liabilities, and so on (think repos and reverse repos) courtesy of fractional reserve credit formation (recall rehypothecation), are valid and credible sources of liquidity. While that may be the case in a leveraging environment, i.e., in the expansionary phase of the ponzi, it no longer works when systematically deleveraging, i.e., where we are now.

Chart--Shadow bank sub compnonents:

10--Mortgage purchase applications (MBA) back to 1998 levels, Calculated Risk---Chart

11--America is no longer a land of opportunity,  Joseph Stiglitz, Financial times via economists view

US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good. ...

Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking ... and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy

12--1931, Paul Krugman, NY Times

13--A Cruel and Unusual Record, Jimmy Carter, Info clearinghouse

14--The Decreasing Impact of QEs / Twists, The Big Picture

15--Citi’s Economic Surprise Index Takes a Dive, pragmatic capitalism

The last time we posted the Citigroup Economic Surprise Index the market was starting to reverse off new highs as the index was taking a nosedive. It proved a pretty reliable leading indicator. I like this index because of its uniqueness. It’s an intuitive index in that it compares current sentiment to expectations. That is, it compares actual economic data to the analyst’s expectations. So when the analysts finally reverse course and start to downgrade the outlook the index generally leads their views.

Economic data has been weakening meaningfully relative to economist’s expectations in every major global region, according to the Citigroup Economic Surprise Indices. Previous instances where economic data disappointed on similar scale, have led to central bank intervention and it is definitely possible we might see that occur again prior to both the US and German elections. Having said that, previous “money printing programs” have only helped the private sector business activity modestly at best, while we have not been able to reached escaped velocity within the current business expansion. In other words, the expansion has failed to become self sustaining. Therefore, ever summer economy weakens, global investors start asking if we are edging closer to another recession?”

Sunday, June 24, 2012

Today's links

1--Vatican hires Fox News journo for image makeover, RT

The Vatican has turned to a Fox News reporter for help to improve its relations with the media amid communications blunders and a leaks scandal. The Holy See hired the Channel’s Rome correspondent for the position of senior communications adviser.

­The TV journalist Greg Burke is also a member of the Opus Dei movement, described by Dan Brown in his “The Da Vinci Code” as a “secretive, powerful and murderous sect whose members whip themselves bloody.” The best-selling book portrays the sect as being at the root of an international Catholic conspiracy. Burk said he didn't know what, if any, role his membership in Opus Dei played.

Burke, Fox's Rome-based correspondent for Europe and the Middle East, will leave the channel and assume the new post of senior communications adviser to the Secretariat of State, the Vatican’s key department responsible for all political and diplomatic functions.

His role will be similar to that of a communications adviser in the White House.

``You're shaping the message, you're molding the message, and you're trying to make sure everyone remains on-message. And that's tough,'' Burke said in a phone interview with the Associated Press.

2--Koo on German bubbles, FT Alphaville
In 2005, I told a senior ECB official that it was unfair to force other countries to rescue Germany by boosting their economies with loose monetary policy without requiring Germany to administer fiscal stimulus, when it was Germany that had become so deeply overextended in the bubble. The official responded that that is what a unified currency means: because Germany could not be granted an exception on fiscal stimulus, the only option was to lift the entire region with monetary policy.

In other words the ECB is at fault for blowing bubbles, helped by the framework of fiscal deficit (dis)allowance....
According to Koo, a balance sheet recession struck the German economy. As Germans increased savings, aggregate demand decreased. With fiscal policy somewhat constrained by the Stability and Growth Pact (not really, but a little), the ECB had to step in (our emphasis)...

Germany’s actual fiscal deficits modestly exceeded that threshold on several occasions, but the resulting fiscal stimulus was far from sufficient to prop up the economy. The ECB therefore took its policy rate down from 4.75% in 2001 to a postwar low of 2% in 2003 in a bid to rescue the eurozone’s largest economy.

But those ultra-low rates still had little impact on Germany, where balance sheet problems were forcing businesses and households to minimize debt. The money supply grew very slowly, and house prices continued to fall. Naturally there was only minimal inflation in wages or prices.

The countries of southern Europe, which had not participated in the IT bubble, enjoyed strong economies and robust private sector demand for funds at the time. The ECB’s 2% policy rate therefore led to sharp growth in the money supply, which in turn fueled economic expansions and housing bubbles.

In short, the ECB’s ultra-low policy rate had little impact in Germany, which was suffering from a balance sheet recession, but it was too low for other countries in the eurozone, resulting in widely divergent rates of inflation....

Anyway, back to Koo (our emphasis):

In other words, there would have been no need for such dramatic easing by the ECB—and hence no reason for the competitiveness gap with the rest of the eurozone to widen to current levels—if Germany had used fiscal stimulus to address its balance sheet recession.

The creators of the Maastricht Treaty made no provision for balance sheet recessions when drawing up the document, and today’s “competitiveness problem” is solely attributable to the Treaty’s 3% cap on fiscal deficits, which placed unreasonable demands on ECB monetary policy during this type of recessions. The countries of southern Europe are not to blame.

3--New Housing Crisis: Not Enough to Buy, CNBC

Sales of existing homes declined in May, according to a new report from the National Association of Realtors, not just because the overall housing market is struggling, but because there are simply not enough homes to buy.

There are currently 2.49 million for sale, a drop of 20 percent from a year ago. To make matters worse, supply is lowest on the low end, where so much of the investor activity has been over the past several years.

This lack of supply has seriously skewed the readings on home prices for the second straight month.

The median price of an existing home, as reported by the Realtors, rose 7.9 percent in May annually, but NAR chief economist Lawrence Yun was quick to point out that this does not mean the average home owner gained that much equity; it is simply a big shift in the type of home that is selling. Sales of homes priced under $100,000 dropped two percent from a year ago, while sales of homes priced between $250,000 and $500,000 shot up nearly 29 percent (though still at low volumes historically). Again, this is due to lack of supply on the low end, specifically distressed homes.

While there are still plenty of delinquent mortgages and homes in the foreclosure process, 5.57 million according to a new report from Lender Processing Services, the big bank servicers are still trying to go back and modify many of these loans. There is also still a huge backlog of foreclosures in judicial states like New Jersey, Florida and New York. Inventories of foreclosed properties in non-judicial states (where you don’t need a judge in the foreclosure process), like Arizona, have dropped to under a three-month supply.

Realtors say they did not see the usual spring bump in supply, as fewer regular homeowners put their homes on the market this year. The big question is, why not? Mortgage rates just hit yet another record low at 3.66 percent on the 30-year fixed, according to Freddie Mac. Home prices are stabilizing, if not gaining. Low supply should be a signal to homeowners that they could possibly get a bidding war. Still, nothing....

Fear is clearly a factor, as is negative equity. Between 11 and 12 million borrowers still owe more on their homes than they can sell them for, and many more borrowers in a near negative equity position; that means they can’t get enough equity out of their homes to cover the Realtor fees and the moving costs, nor to put down on a new home. That’s why the market is ripe for first time buyers, but they are not stepping up either, at just 34 percent of purchases. In a normal market, they would make up 45 percent. That, again, is part fear, but largely tight credit.

Mortgages may be cheap, but they are not easy.

The supply situation has gotten so bad in Northern Virginia that the Realtors there launched a new campaign this week titled, “Ask Me,” trying to get potential sellers to contact agents to find out, “Is it the right time for me to sell or buy a home?”

The Northern Virginia Association of Realtors, in the release, claims there is less than 2 months’ supply of available homes for sale in the market, a 37 percent drop from a year ago. Unemployment is trending down, and sellers have been able to get 97 percent of their list price, according to NVAR. The Realtors there are literally begging for more supply.

This supply situation proves just how tenuous and unique the current housing recovery is. It is heavily dependent on investor activity, not real, organic buying, selling and moving up. An investor purchase registers one sale, but a regular sale represents at least two, as the seller will likely buy another home, and so on and so on. Investors are certainly necessary to clear all the distress left over from the housing crash, but until we see not just more sales but more sellers out in the market, the housing recovery will remain in low gear.

4--Foreclosure Spike Is Positive Sign For Housing, CNBC

After months of declines, the foreclosure numbers are going up again.

Foreclosure starts, the first phase of the process, rose 9 percent in May month-to-month, the first increase in over two years, according to a new report from RealtyTrac. Bad news, right? Only if you are the one losing your home.

For the overall housing market, this is exactly what needs to happen to return to health. For hungry investors, it means more opportunity.

There are still millions of delinquent loans which will never "cure," and the sooner they get processed and sold, the better for home prices and home buyer confidence.

As the so-called, "shadow inventory" of distressed properties (seriously delinquent loans and bank owned homes yet unlisted) drops, down to 1.5 million units in the first three months of this year from 1.8 million a year ago, according to a new report from CoreLogic, the real inventory of potential homes for sale can stabilize and become a more dependable reading for buyers.

5--Chinese Data Mask Depth of Slowdown, NY Times

As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist. ...Manipulation of official statistics would also provide a clue why some wholesalers of consumer goods and construction materials say sales are now as dismal as in early 2009....

But a survey of Chinese manufacturing purchasing managers, released on Thursday by HSBC and Markit and conducted independently of the government, gave the second-gloomiest reading for their businesses since March 2009. Only November of last year was worse, when many small and medium-size businesses faced a brief but severe credit squeeze.

6--A global slide into depression, WSWS
It is now coming on close to four years since the collapse of Lehman Brothers in the autumn of 2008. The events of the past several months underscore two fundamental features of the crisis that emerged out of the subsequent financial collapse: 1) that it is systemic, not temporary; and 2) that it is global, affecting every country in the world. Globally integrated capitalism has created a globally integrated catastrophe.

This week, a series of economic figures were released confirming this analysis. Hopes from bourgeois commentators that the debt crisis in Europe could be offset by economic growth in Germany, or that weakness in the West as a whole could be counterbalanced by strong production in Asia, are being dashed with each passing day.

In fact, production in both Germany and China is contracting, in large part due to falling exports. According to Thursday’s figures, Germany’s composite purchasing managers index hit a three-year low, falling to 48.5 in June from 49.3 a month before. The HSBC China Manufacturing Purchasing Managers’ Index likewise fell to 48.1 in June, down from 48.4 in May. It was the eighth consecutive month of readings below 50, indicating contraction.

Other major “developing” economies are doing no better. India’s economy grew only 5.3 percent in the first quarter of the year, its lowest growth rate in nine years and down nearly four percentage points from 2011. The Brazilian Central Bank said last week that the country’s economy probably contracted in April compared with a year earlier, the first such yearly decline since late 2009.

In the United States, the center of world capitalism, the Obama administration is seeking to cover over with honeyed words what is clearly a sharp downturn, following a largely nonexistent “recovery.” The Federal Reserve reported this week that all the basic indicators of economic health have slowed since March, but proposed no serious measures in response....

Amidst the perplexity in ruling circles, and in the face of bitter and growing conflicts between the major powers, the bourgeoisie does have a conception of how it will respond to the crisis: with the most ruthless, determined and unending assault on the working class. It has reacted to each phase of the crisis with bank bailouts and ever more savage austerity, in effect orchestrating the largest upward transfer of wealth in modern history. The crisis is expressed in the most bitter class warfare.

What has happened to Greece shows the working class of the world what is being prepared in every country. A quarter of the workforce is unemployed—including more than half of the country’s youth—and Athens Wednesday saw thousands lining up for a distribution of free produce in a scene that evoked the Great Depression of the 1930s...

“The turbulence in world financial markets is the expression of not merely a conjunctural downturn, but rather a profound systemic disorder which is already destabilizing international politics.”

7--Obama’s jobs program: A laundry list of corporate handouts, WSWS

Three of Obama’s five proposals are simply tax handouts for businesses. One would create a ten percent income tax credit for companies that “create new jobs” in 2012, and the second would expand the current tax subsidy for “investments in clean energy manufacturing.”

Under the guise of helping homeowners facing foreclosures, Obama is proposing to “cut red tape in the mortgage market,” meaning further deregulation of the mortgage industry. This under conditions in which home prices continue to plummet, and hundreds of thousands of families are on the brink of foreclosure.

Only one of his proposals is not a hand-out to corporations. As such, it is predictably trivial: He called for a program that would put 20,000 military veterans to work on an environmental conservation program over five years and provide an “online training program” in “the fundamentals of small business ownership” for 10,000 veterans....

Far from seeing unemployment as a social evil, the administration, together with the corporations it represents, has used mass unemployment to drive down wages, slash benefits, and impose workplace speedups.

As a result, corporate profits are at their highest levels in history, while the labor force participation rate is down to its lowest level since the 1980s.

The ruling class has responded to the economic crisis with a ruthless and unprecedented attack on the social position of the working class. The Obama administration, working with the trade unions and their supporters, has been the spearhead of this attack.

Obama’s speech is a quintessential expression of the sclerotic and unrepresentative nature of the American political system. Amid mass unemployment and growing poverty, both Romney and Obama sing the praises of the profit system and propose no policies that are not direct handouts to major corporations and the super-rich.

8--Obama's economic “vision”, WSWS

Thus, he declared that programs “we can’t afford” had to be cut. His vision, he stressed, “despite what you hear from my opponent,” had “never been a vision about how government creates jobs”—meaning no government jobs or public works programs. The vision did, however, include “a federal government that is leaner and more efficient,” i.e., thousands of federal worker layoffs and cuts in pay and benefits.

Obama boasted of signing a law to cut the deficit by $2 trillion and “reduce our yearly domestic spending to its lowest level as a share of the economy in nearly 60 years.” What was America like 60 years ago? No Medicare, no Medicaid, no food stamps, no federal aid to education, no interstate highway system.

Obama’s vision turns out to be a nightmare scenario of social retrogression that amounts to a social counterrevolution.....

Obama, in particular, seems always to proceed from the assumption that the American people are infinitely gullible and suffer from collective amnesia. He relies as well on his well-placed confidence in the liberals and assorted “left” organizations around the Democratic Party to go along with the fraud.

However, the scale and pervasiveness of lying in the current election campaign, remarkable even by the degraded standards of American politics, cannot simply be attributed to the subjective, personal characteristics of individual politicians. It is more fundamentally an expression of the vast and unbridgeable chasm that has opened up between the entire political system and the overwhelming majority of the American people. Under conditions of the deepest economic crisis since the Great Depression, the capitalist two-party system is impervious to the needs and desires of the people and incapable of offering any policies to address their economic distress.

The completely sclerotic and corrupt character of the political system, staffed from top to bottom by bribed toadies of the corporate-financial aristocracy, reflects vast changes in the social and economic structure of the United States that have taken place since the last great breakdown of American and world capitalism in 1929.

In the Depression of the 1930s, Franklin D. Roosevelt, a representative of the American ruling class and unswerving defender of capitalism, presented himself as the protector of the common man and launched verbal attacks on the “economic royalists” of Wall Street far sharper than anything Obama would dare to utter. But Roosevelt was able to back up his rhetoric with significant social reforms, such as Social Security, unemployment insurance, public works programs and the Tennessee Valley Authority. While these were carefully designed not to threaten the basic interests of the capitalist class, they did improve the lot of millions of people.

Today, no such reforms are on offer, fundamentally because of the vast economic decline of American capitalism in the intervening decades. From the industrial workshop of the world and the rising global economic power, the United States has deteriorated to the status of the world’s biggest debtor, with a shrunken industrial base and an economy based largely on financial speculation and parasitism. The most important social expression of this decline has been a colossal growth of social inequality, making the US the most unequal industrialized country in the world.

The decay of America’s industrial base and its increasing turn to financial speculation and manipulation have also produced critical changes in the ruling class itself, leading to the supremacy of a financial elite which derives its vast and ever growing wealth not from the production of useful goods, but from quasi-criminal speculative activities that are divorced from and detrimental to real production.

9---Smells like Pope: His Holiness commissions custom-made perfume, RT
Pope Benedict XVI has commissioned a signature scent just for him. His Holiness’ custom-made eau de cologne will convey his love to nature, peace and tranquillity.

Famed Italian perfume maker Silvana Casoli preferred to keep the complete list of ingredients secret to prevent unauthorized copying of the Pope’s scent.

His Holiness, the Head of the Roman Catholic Church will be the only person to wear this fragrance. "I would not ever repeat the same perfume for another customer," Casoli told the Guardian newspaper.

Thursday, June 21, 2012

Today's links

1--Obama backs gay marriage, World Socialist Web Site

Issues such as gay marriage serve a definite and important function in American politics. For most of the population, regardless of sexual orientation, they are of decidedly secondary importance. According to a recent PEW poll, gay marriage ranked 18th in the list of important issues, coming far behind the economy, jobs, health care and war.

The pro-Democratic Party organizations seek to promote issues of identity and lifestyle as a means of obscuring the basic class issues and diverting attention from the thoroughly reactionary policies of the Obama administration on every front. In doing so, they seek to exploit the general support for equality and the expansion of marriage rights, particularly among young people. The Democratic Party uses such issues in the attempt to establish points of difference with the Republicans, under conditions in which the two parties agree on all fundamental issues.

2--New dangers lurk for rudderless Spain, Reuters

Spain seems trapped on a conveyor belt carrying it toward a furnace - an international rescue of the euro zone's fourth biggest economy.

Bad commercial loans, economic decline and sliding real estate prices are all aggravating problems at Spain's over-extended banks, which lent too much too freely during a credit fuelled property boom that lasted almost a decade.

Madrid's euro zone partners are making available up to 100 billion euros to clean up the banks and, they hope, shield Spain from a debt crisis that has engulfed Greece, Ireland and Portugal and now threatens the single currency project itself.

But grave risks remain as the economy succumbs to a cycle of budget cuts destroying economic growth, leading to more cuts. Many in the bond market don't believe Spain can save itself - more evidence of that came on Thursday when Madrid's 5-year borrowing costs hit a 15-year high above six percent.

"Spain is getting too close to a point of no return when it comes to public debt," said Alejandro Ruyra financial analyst with Kepler Research in Madrid.....

But beyond the property market, the construction firms and other businesses most exposed to the price crash, there are other dangers. A detailed independent audit of the banks by four major global accounting firms - due by September - may show companies from other business sectors have also been pushed to the brink of default. Banks are already seeing rising mortgage defaults and bad loans in non-property sectors....

Rajoy has clung to the argument that he has done enough and it is now up to the European Central Bank or the European bailout mechanisms to step in with emergency action to bolster Spanish debt prices while his reforms take effect.

"How far does Europe have to go to the edge before the ECB steps in," asked one high-level Spanish official.

This game of chicken - basically a Spanish threat to take the euro currency to the brink of disaster unless it gets aid with minimal strings attached - will be hard to sustain. European leaders are pushing Rajoy to raise sales tax, further cut public sector wages and speed up plans to raise the retirement age.

"Rajoy has lost too much credibility over the last few months to just appeal for the ECB to intervene and for Europe to continue to support him. He's unrealistic if he thinks Europe is going to help him without getting something in exchange and they've been unimpressed recently by what he's done here," said David Bach, political analyst at IE business school in Madrid.

3--Euro business activity shrinks and U.S., China output slows, Reuters

Business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed U.S. factory growth, surveys showed on Thursday.

The data darkened the outlook for the world economy, adding to fears that Europe's debt crisis and slower growth in the United States and Asia would cause downturns around the globe.

On Wednesday, the U.S. Federal Reserve extended a stimulus program to help boost growth and said it was ready to do more if Europe's debt crisis were to worsen.

According to financial information firm Markit, the 17-country euro zone's private sector shrank in June at its fastest pace in three years. Activity declined across the euro zone, including in its largest economy Germany and in France.

Analysts said that should raise pressure for the European Central Bank to follow the Fed's lead and take further action to support the economy.

"We are at the point where the economy is increasingly losing traction and it's hard at this stage to see what will give us a lift. The ECB will do more, that will probably involve a rate cut - which is symbolic - but is action," said Peter Dixon at Commerzbank

Markit's euro zone Flash Composite Purchasing Manager's Index for June, which comprises the service and manufacturing sectors, fell to 46.0. It has contracted for nine of the last 10 months. A reading above 50 indicates expansion.

"The only remotely positive spin that can be put on the dismal euro zone (PMI) is that there was no further deepening in the overall rate of contraction. Hardly a cause for celebration," said Howard Archer at IHS Global Insight....


Europe's sluggish growth also affected U.S. manufacturing, which Markit said grew at its slowest pace in 11 months in June. Hiring also slowed, with firms adding employees at the slowest pace in eight months.

"The impact of weak sales on employment is a key concern," said Markit chief economist Chris Williamson. "The close fit of the survey data with non-farm payroll number suggests that the official (employment) data for June will show a further weakening of the labor market."

Job growth in the United States slowed sharply for a third consecutive month in May and the unemployment rate rose for the first time in nearly a year.

Slower growth in China and other large emerging market economies also hit demand for U.S. goods, Markit said. The company's U.S. Flash Manufacturing Purchasing Manager's Index fell to 52.9 in June from 54.0 in May.

A separate report showed that factory activity in the U.S. Mid-Atlantic region contracted for a second straight month as new orders tumbled.

4--The Real Story of the Housing Crash, counterpunch

Corporate profits are at their highest share as a percentage of the economy in almost 50 years. The share of profits being paid in taxes is near its post-World War II low. The government’s share of the economy has actually shrunk in the Obama years, as has government employment. ...

The housing bubble had been driving the economy prior to the recession. It created demand through several channels. A near-record pace of housing construction added about 2 percentage points of GDP to annual demand or more than $300 billion in the current economy.

The $8 trillion in ephemeral housing wealth created by the bubble led to a huge surge in consumption. Tens of millions of people borrowed against bubble-generated equity or decided that they didn’t need to save for retirement. When house prices were going up 15-20 percent a year, the house was doing the saving. The result was a huge consumption boom on the order of 4 percent of GDP or $600 billion a year.

In addition, there was a bubble in non-residential real estate that followed in the wake of the housing bubble. This raised non-residential construction above its normal levels by close to 1 percent of GDP or $150 billion a year.

Adding these sources of demand together, the bubble generated well over $1 trillion in annual demand at its peak in 2005-2007. When the bubble burst, this $1 trillion in annual demand vanished as well. That is the central story of the downturn.

To recover we must find some way to replace this demand; however that is not easy. People will not go back to their old consumption patterns because they know they need to save more. Tens of millions of people have much less wealth than they expected at this point in their lives after they saw the equity in their homes largely vanish. Tens of millions of baby boomers are approaching retirement with almost nothing but their Social Security to support them.

Given the huge loss of wealth from the collapse of the housing bubble it is not reasonable to expect consumption to rise to fill the demand gap....Until we get our trade deficit closer to balance we will need large government deficits to fill the gap in demand created by the housing bubble. That is the simple reality that neither party seems anxious to tell the people.

5--Why The Economy Can't Get Out of First Gear, Robert Reich, Huff post

American consumers, whose spending is 70 percent of economic activity, don't have the dough to buy enough to boost the economy -- and they can no longer borrow like they could before the crash of 2008.

If you have any doubt, just take a look at the Survey of Consumer Finances, released Monday by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 -- a drop of 7.7%.

All of the gains from economic growth have been going to the richest 1 percent -- who, because they're so rich, spend no more than half what they take in.

Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.

Starting around 1980, globalization and automation began exerting downward pressure on median wages. Employers began busting unions in order to make more profits. And increasingly deregulated financial markets began taking over the real economy.

The result was slower wage growth for most households. Women surged into paid work in order to prop up family incomes -- which helped for a time. But the median wage kept flattening, and then, after 2001, began to decline.

Households tried to keep up by going deeply into debt, using the rising values of their homes as collateral. This also helped -- for a time. But then the housing bubble popped.

The Fed's latest report shows how loud that pop was. Between 2007 and 2010 (the latest data available) American families' median net worth fell almost 40 percent -- down to levels last seen in 1992. The typical family's wealth is their home, not their stock portfolio -- and housing values have dropped by a third since 2006.

Families have also become less confident about how much income they can expect in the future. In 2010, over 35% of American families said they did not "have a good idea of what their income would be for the next year." That's up from 31.4% in 2007.

But because their incomes and their net worth have both dropped, families are saving less. The proportion of families that said they had saved in the preceding year fell from 56.4% in 2007 to 52% in 2010, the lowest level since the Fed began collecting that information in 1992.

Bottom line: The American economy is still struggling because the vast American middle class can't spend more to get it out of first gear.

What to do? There's no simple answer in the short term except to hope we stay in first gear and don't slide backwards.

Over the longer term the answer is to make sure the middle class gets far more of the gains from economic growth.

How? We might learn something from history. During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007) according to analyses of tax records by my colleague Emmanuel Saez and Thomas Piketty. At that point the bubble popped and we fell into the Great Depression.

But then came the Wagner Act, requiring employers to bargain in good faith with organized labor. Social Security and unemployment insurance. The Works Projects Administration and Civilian Conservation Corps. A national minimum wage. Taxes were hiked on the very rich. And in 1941 America went to war -- a vast mobilization that employed every able-bodied adult American, and put money in their pockets.

By 1953, the top 1 percent of Americans raked in only 9.9 percent of total income. Most of the rest went to a growing middle class -- whose members fueled the greatest economic boom in the history of the world.

Get it? We won't get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.

6--ECB lending hits €1.2 trillion, a new record, sober look

The latest snapshot of the ECB's balance sheet (see Kostas' post for more detail) shows an incremental €21bn of lending for the week. This takes the total balance above €1.2 trillion of loans to Eurozone banks
(see chart)

About €9bn of that increase likely came from deposits moving out of the Eurozone periphery nations to Switzerland as the euro-denominated liabilities to non-residents rose again. The rest is probably due to deposits moving from the periphery to Germany. In both cases the ECB had to step in to replace those private funding sources.

7--China Looks for Loan Boost --Beijing Opens Door to Securitization in an Effort to Combat Economic Slowdown, WSJ
China is expected to kick-start a trial program that would allow banks to turn loans into securities and free up funds for lending at a time when Beijing is seeking ways to bolster growth.

The securitization program could remove as much as 50 billion yuan ($7.9 billion) of loans from balance sheets, according to senior Chinese banking executives. Endorsed by China's banking regulators and the Ministry of Finance, it represents another step in China's efforts to revamp its financial system into one that relies more on market forces.

It also comes as Chinese authorities are stepping up efforts to fight a deepening economic slowdown amid the European debt crisis, which has hurt China's exports. This month, China cut interest rates for the first time since 2008 and loosened controls on banks' lending and deposit rates.

When economic growth slows, government leaders typically call on state-owned banks to make loans to rev up activity. But this time, there are concerns about banks' own funding constraints as well as a reluctance by businesses to take out loans when demand is uncertain.

By allowing banks to transfer a portion of loans off their books, the securitization initiative would help free up capital for the banks to lend more, banking executives said.

Chinese regulators have been wary about securitization, a process blamed for contributing to the global financial crisis after Western banks' packaging of risky home mortgages into securities led to losses for investors world-wide. Thus, the Chinese program is starting out cautiously, with a 50 billion yuan quota this year, or less than 1% of the banking sector's total loan balance.

China floated the idea of securitization about six years ago, only to put it on hold when the global financial markets went into a tailspin in 2008 following the collapse of Lehman Brothers Holdings Inc.

"Regulators are taking a very cautious approach to securitization," one of the senior banking executives said. "The emphasis is on beefing up lending to sectors that are in line with China's priorities."

Under the program, among the loans that banks would be able to remove from their books and repackage into investible products are those to infrastructure projects, small and medium-size companies, quality local-government financing vehicles and low-cost social-housing projects, the banking executives said.

China's Big Four banks, major policy banks and some medium-size lenders already have been gearing up for a share of the quotas, with the first securitization deal expected to hit the market in a month or two, the executives said.

Despite the cautious approach adopted by Chinese regulators, securitization boasts risks that could leave China's banking system with less of a buffer for loans that default. That is because any buyers of such repackaged products sold in China's still-underdeveloped capital markets are likely to be banks themselves.

"In China, risk transferring through securitization will be limited because the buyers of the securities will be mostly banks, and, therefore, most of the risks remain in the banking system," said Yvonne Zhang, a Beijing-based senior banking analyst at Moody's Investors Service.

In addition, Ms. Zhang said, "If banks, with the capital relief, go on to take on more risks in their new lending, it could also increase the risks for the banking system."

Meanwhile, as China moves toward letting the market determine banks' lending as well as deposit rates, regulators are considering allowing Chinese banks to tap certificates of deposits as a funding source, according to the banking executives.

Chinese banks including Bank of China Ltd. 3988.HK -0.34%and Industrial & Commercial Bank of China Ltd. 1398.HK -1.58%in the past year have been big sellers of such CDs in Hong Kong as a way to build up their yuan-deposit base offshore. But they aren't allowed to issue CDs on the mainland.

Should that restriction be lifted, "CDs could help banks attract deposits and provide savers with better rates and greater liquidity," said Zhu Chaoping, Shanghai-based head of research at ChinaScope Financial, a research firm and data provider.

8--Canadian housing boom to grind to a halt, Financial Post

9--Pink Slips, NY Times

Across the country, many states like Pennsylvania that happily accepted stimulus money to pay for existing employees are laying off those workers now that Congress has turned off the spigot. Over the last three years, at least 700,000 state and local government employees have lost their jobs, including teachers, sanitation workers and public safety personnel, contributing a full percentage point to the unemployment rate. ...

There have been at least 100,000 education employees laid off nationwide in the last three years; the White House puts the figure at 250,000. California has lost 32,000 teacher jobs — 11 percent of the work force. Pennsylvania laid off nearly 9,000 teachers and other school workers last year, largely because of Governor Corbett’s cuts.

In some cases, states have been forced to cut public employees because of unduly high pension benefits, and we have supported state efforts to reduce those pensions. But putting educators and others back to work ultimately depends on Congress, where Republicans are blocking vital legislation to bolster a faltering economy. For desperate cities like Reading, time is running out.

10--The Fed in Action, NY Times (graph Fed's balance sheet)

11--The NAR reports: Existing-Home Sales Constrained by Tight Supply in May, Prices Continue to Gain, calculated risk  (see chart)

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.5 percent to a seasonally adjusted annual rate of 4.55 million in May from 4.62 million in April, but are 9.6 percent above the 4.15 million-unit pace in May 2011.

...Total housing inventory at the end of May slipped 0.4 percent to 2.49 million existing homes available for sale, which represents a 6.6-month supply2 at the current sales pace; there was a 6.5-month supply in April. Listed inventory is 20.4 percent below a year ago when there was a 9.1-month supply. Unsold inventory has trended down from a record 4.04 million in July 2007; supplies reached a cyclical peak of 12.1 months in July 2010.

12--Housing fits and starts, The Big Picture

Existing Home Sales in May totaled 4.55mm annualized, slightly below expectations of 4.57mm and down from 4.62mm in April. The sales drop from April was seen for both single family homes and condos/co-ops. While the amount of homes for sale declined, it wasn’t enough to offset the drop in sales m/o/m and thus months supply rose to 6.6 from 6.5, the most since Nov ’11. The median home price did rise 7.9% y/o/y to $182,600, the most since June ’10 as large y/o/y increases were seen in homes valued $250k+. The NAR interestingly in its release is talking about housing shortages in some markets in the lower price ranges except in the Northeast and “in the West supply is extremely tight in all price ranges except for the upper end.” They also said Florida is seeing “widespread inventory shortages.” Distressed sales totaled 25% of sales vs 28% in April and down from 31% in May ’11. First time buyers made up 34% of sales vs 35% in April. Investors (including those buying homes to rent) accounted for 17% of sales vs 20% in April and 19% in May ’11. Bottom line, housing continues to show signs of bottoming but the recovery will still be in fits and starts for years to come.

13--Austerity is not the real problem in the EZ, Baseline Scenario

The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised never to change that exchange rate. This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would, in effect, become more like the Germans.

Alternatively, if the economies did not converge, the implicit presumption was that people would move; Greek workers would go to Germany and converge to German productivity levels by working in factories and offices there.

It’s hard to say which version of convergence was less realistic.

In fact, the opposite happened. The gap between German and Greek (and other peripheral country) productivity increased, rather than decreased, over the last decade. Germany, as a result, developed a large surplus on its current account – meaning that it exports more than it imports.

The other countries, including Greece, Spain, Portugal and Ireland, had large current account deficits; they were buying more from the world than they were selling. These deficits were financed by capital inflows (including some from Germany but also through and from other countries).

In theory, these capital inflows could have helped peripheral Europe invest, become more productive and “catch up” with Germany. In practice, the capital inflows, in the form of borrowing, created the pathologies that now roil European markets.

In Greece, successive governments overspent – financed by borrowing — as they sought to stay popular and win elections. Whether the new government installed on Wednesday after last weekend’s elections will make any progress is not clear.

Greece has already adopted a considerable degree of fiscal austerity. Now it needs to find its way to growth. Cutting the budget further won’t do that. “Structural reform” – a favorite phrase of the Group of 20 crowd – takes a very long time to be effective, particularly to the extent that it involves firing people in the short run. Throwing more “infrastructure” loans from Europe into the mix – for example, through the European Investment Bank – is unlikely to make much difference. Additional loans of this kind are likely to end up being wasted or stolen as more and more well-connected people prepare for the moment when the euro is replaced in Greece by some form of drachma.

In Spain and Ireland, capital inflows – through borrowing by prominent banks – pumped up the housing market. The bursting of that bubble has shrunk their real economies and brought down all the banks that gambled on loans to real estate developers and construction companies. Their problems have little to do with fiscal policy.

As conventionally measured, both Ireland and Spain had responsible fiscal policies during the boom, but they were building up big contingent liabilities, in the form of irresponsible banking practices.

When the banks blew up in Ireland, this created a fiscal calamity for the government, mostly because of lost tax revenue. It remains to be seen if Ireland can now find its way back to growth.

Spain still needs to recapitalize its banks – putting more equity in to replace what has been wiped out by losses — and, most important, it must also find a renewed path to private-sector growth. Investors are rightly doubtful that the current policies are pointed in this direction.

In Portugal and Italy, the problem is a longstanding lack of growth. As financial markets become skeptical of European sovereign debt, these countries need to show that they can begin to grow steadily – and bring down their debt relative to gross domestic product (something that has not happened for the last decade or so).

Fiscal austerity will not help, but fiscal expansion is also unlikely to do much – although presumably it could increase headline numbers for a quarter or two. The private sector needs to grow, preferably through exporting and through competing more effectively against imports.

Peripheral Europe could, in principle, experience an “internal devaluation,” in which nominal wages and prices fall and those countries become hyper-competitive relative to Germany and other trading partners. As a matter of practical economic outcomes, it is hard to imagine anything less likely.

Some politicians still hint they could produce the rabbit of “full European integration” from the proverbial magic hat. What does this imply about quasi-permanent transfers from Germany to Greece (and others)? Who pays to clean up the banks? What happens to all the government debt already outstanding? And does this mean that all Europe would now adopt German-style fiscal policy?

These schemes are moving even beyond the far-fetched notions that brought us the euro. “Europe only integrates in the face of crisis” is the last slogan of the euro enthusiasts. Perhaps, but crises have a tendency to get out of control – particularly when they produce political backlash.