Tuesday, June 5, 2012

Today's links

1--The US economy and jobs: the basic arithmeticEconomics pundits veer wildly from elation to despair. The reality is that jobs and growth will improve – just not nearly enough, Dean Baker, The Guardian

The excessive negativism matters for the same reason that it mattered last summer, when the double-dip crowd was ranting about the weak economic numbers in the spring of 2011. Creating an overly negative view of the economy lays the basis for excessive optimism, as we saw last fall, when the recovery was actually following an extremely mediocre course.

These swings from excessive pessimism to excessive optimism, and back again, are preventing the public from understanding the real picture of the economy – which is, in fact, awful. This is like baseball fans standing up and cheering wildly when their pitcher throws a strike, then falling into despair when the next pitch is a ball, ignoring the fact that their team is losing 12-0.

The discussions of the economy have lost sight of the basic score. The US economy is operating at close to 6% below its potential with employment down by almost 10 million compared with its trend level. This is an incredible waste of resources. It is also devastating to the unemployed workers and their families.

The basic story of this downturn remains incredibly simple. We lost close to $1.4tn in annual demand when the housing bubble collapsed. The construction boom that was fueled by the bubble went into reverse, with new construction falling to its lowest levels in more than 50 years. The consumption boom fueled by the bubble-generated equity collapsed when that equity disappeared.

We cannot return to full employment until we have something to replace the demand that had been generated by the housing bubble. This is simple arithmetic.

2--Why is Employment Growth Still Disappointing and When Will it be “Normal” Again?, calculated risk

In a typical recovery, rapid economic growth is driven by pent-up demand for consumer durable goods, housing, and business equipment. Also, in a typical recovery the government moderately adds jobs, and economies outside of the U.S. are enjoying robust growth, which helps boost American exports and raises the revenues of American multinationals. So what’s different this time? There are several combined factors that are dragging down the U.S. economy and labor market:

1) Government spending is shrinking. The hope was that the federal stimulus would create jobs while the private sector was in recession, and that this federal stimulus would eventually wind down while the private sector would pick up. This wind-down has occurred, but the private sector is not generating enough jobs by itself yet. At the same time, state and local governments... have been cutting back for several years now ... In the past year, state and local governments have slowed down their layoffs, but the number of employees in the federal government is still rapidly shrinking -- down by 1.8%. Overall, the public sector has reduced its workforce for three years in a row, cutting a total of about 700,000 workers.

2) The housing market has barely started recovering, and employers in related industries are barely adding jobs. This typically strong driver of growth during expansions is missing in this economy.

3) The global economy is weak. Many countries in Europe are in recession, and the main emerging countries’ economies are significantly slowing down. As a result, U.S. exports and revenues of multinationals and overall consumer and business confidence are suffering.

4) Commodity prices are now at a much higher level than two-to-three years ago. This has caused large price increases in food, energy, and other commodity related products. In the past 2 years, as a result of the price hikes and weakness in housing, the consumption of food, gasoline, public transportation, housing, and utilities have increased by just 0.5% of their annual rate.

3--ECB funding totals for Italy and Spain, zero hedge

Wow! These guys are in bad shape.

4--Soros on the eurozone, credit writedowns

The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening.

The European authorities had little understanding of what was happening. They were prepared to deal with fiscal problems but only Greece qualified as a fiscal crisis; the rest of Europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis. The authorities did not even understand the nature of the problem, let alone see a solution. So they tried to buy time.

Usually that works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been. That is the political bubble I was talking about.

5--The political economy of euro break-up,  Telegraph

When something is rotten it collapses from within. If the euro implodes it will be very difficult for the EU to continue in the same old way. The loss of prestige for the European elites who constructed it would be enormous. It is founded on an idea whose time has passed. The urge to forge a united Europe was driven not only by the determination to prevent another European war, but also by the supposed need to compete with the two superpowers that the last war had created, the US and the Soviet Union. Meanwhile, such an integrated Europe was made feasible by the division of the continent between East and West, which limited the possible membership. The collapse of the Soviet Union has both clouded the vision and undermined its feasibility
6--Global Banks Cut Lending in Response to Economic Slowdown, NY Times

International lending by global banks in the fourth quarter last year fell by the largest amount since the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements, an association of the world’s central banks.

In total, financial firms cut overseas lending by $799 billion in the last three months of 2011, the latest figures available. Around 80 percent of the reduction came from the so-called interbank market where institutions lend money to one another.

The pullback in credit, particularly among banks themselves, is the latest effort by financial institutions to reduce exposure to the global economic slowdown. It also raises concerns that the unwillingness of banks to lend money to each other may have an effect on the broader economy, as businesses are unable to access new financing.

“Optimism has evaporated,” said Stephen G. Cecchetti, head of the monetary and economic department at the Bank for International Settlements. “Markets have become highly volatile, and investors are having doubts about everything, about growth and the financial health of sovereigns and banks.”

As the ripple effects of the European debt crisis have been felt across the United States and emerging economies in Asia and Latin America, banks in both developed and emerging economies have been looking to pullback on credit to risky borrowers.

Attention has focused on Europe and its beleaguered banking system. In its quarterly review published on Monday, the Bank for International Settlements, based in Basel, Switzerland, said international banks had cut lending to financial firms in the so-called euro zone region by $364 billion in the fourth quarter last year. The reduction represents almost half of the global pullback in lending over the period.

The move by the European Central Bank to inject more than $1 trillion in short-term loans to the Continent’s banking system initially helped to reduce borrowing costs in the first quarter of the year, according to the report by the Bank for International Settlements.

But as optimism about the influx of cheap, government-backed loans began to fade in April, the ability of European banks to raise new funds — particularly in countries like Greece and Spain — has become more difficult.

In part, the financing problems for many European banks relate to growing concerns they will not be able to repay the loans. Along with billions of dollars of bad debts on their balances sheets, firms also are being hurt as customers in the most indebted countries start to withdraw deposits from local lenders. The Greek central bank recently said the country’s citizens had taken more than $1 billion out of domestic banks because of fears that Greece might leave the euro zone.

As confidence continues to be sapped from the banking sectors in a number of European countries, firms are likely to face mounting challenges to raise new money.

“Market conditions remain difficult for a number of banks from the euro area periphery, which found it difficult to place unsecured debt with investors,” the report from the Bank for International Settlements said

7--CEPR Co-Directors Call on Federal Reserve to Intervene in Spanish Bond Market, CEPR
“It is possible that action by the Fed would also cause the ECB to intervene. But in any case, it is within the Fed’s mandate and ability to contain this crisis. It should act quickly before there is further damage to the U.S. economy.

“Other central banks with large reserve holdings may also want to consider intervening as well, if the Fed does not act, or in conjunction with the Fed if it does.”

8--1937, Paul Krugman, NY Times

Cool chart

9--Jeremy Scahill calls Obama a murderer on MSNBC, Information Clearinghouse

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