Sunday, June 10, 2012

Today's links

1--Obama hails record corporate profits at press conference on the economy, wsws

The number of long-term unemployed (out of work for more than six months) shot up by 300,000 last month to a near-record of 5.4 million, and the average duration of unemployment rose to 39.7 weeks.

Meanwhile, some 500,000 people have been cut off of unemployment benefits weeks earlier than they would have been because of a bipartisan deal brokered by the White House in February to slash the duration of federally-funded extended benefits. Tens of thousands more will be deprived of cash assistance every month, and there is every indication that the Democrats and Republicans will agree to terminate the program entirely after the November elections, regardless of which party wins.

As for the private sector doing “a good job creating jobs,” it is, as Obama well knows, sitting on a multi-trillion-dollar cash hoard, refusing to provide loans to small businesses and consumers or significantly increase hiring. The corporate-financial elite calculates that it can make more money from speculation and financial manipulation than from producing useful goods. Moreover, it wants to keep unemployment high in order to blackmail workers into accepting poverty wages and sweatshop conditions....

Even as Obama spoke, leading Democrats such as former president Bill Clinton and former House Speaker Nancy Pelosi were calling for an extension of the Bush tax cuts for the rich before they expire January 1, 2013.

The only semblance of truth in Obama’s remarks were those reflecting his enthusiasm for corporate profits. While poverty, hunger and homelessness are on the rise, US bank profits in the first quarter hit their highest peak since the first quarter of 2007, prior to the Wall Street crash. CEO pay continues to soar, buttressed in part by the systematic lowering of wages and benefits and imposition of speedup, and in part by the gutting of business regulations.

2--German chancellor rejects US-British demands for “immediate response” to the euro crisis, wsws

German Chancellor Angela Merkel delivered a clear rebuff to US and British demands for immediate action to deal with the rapidly worsening European financial crisis in discussions Thursday in Berlin with British Prime Minister David Cameron. After consulting with US President Barack Obama, the UK leader had traveled to Berlin to put pressure on the German government to agree to a plan to bail out European banks.

Merkel responded by declaring “there is no magic bullet” to solve the crisis. She also hinted that Germany was prepared to consider the break-up of Europe into competing economic groups.

The US and British governments are urging Germany to support a fresh injection of funds into the European banking system by either the European Central Bank (ECB) or the European Stability Mechanism (ESM), the European Union’s bailout fund. In the longer term, London and Washington are calling for the introduction of a pan-European finance mechanism, so-called euro bonds, to underpin the continent’s banking system.

All of these measures would require a huge transfer of funds from Germany to the continent’s weaker economies and banks—a step that is opposed by the government, the central bank and broad layers of the business community. Rather than concede to the demands of the US and Britain, which are supported by beleaguered European economies such as Italy and Spain, Merkel made clear that Germany is prepared to forge ahead with a smaller core of countries in a “two-speed” Europe.....

An editorial in the Guardian on Wednesday pointed out that the real issue is not merely insolvent banks in Spain or Ireland, but all of the financial markets of peripheral Europe, plus the major banks (of Germany, France and Austria) that lent to them. The editorial declared: “Forget austerity, fiscal unions, and inflation regimes at the ECB… the euro meltdown is primarily about how governments handle the wreckage in their financial sectors.”

Against the background of a financial meltdown requiring hundreds of billions in new bailout funds, influential business and financial circles in Germany are warning that the time has come to pull the ripcord. Berlin, they argue, must cease to be the paymaster of Europe and prepare for the breakup of Europe into a small core of northern nations dominated by Germany, with the rest left to their fate.

3--Income and Wealth Are Down in U.S, NY Times

AMERICANS are used to recessions, but they are also used to relatively fast recoveries.
Now, however, is the first time in more than half a century that the average American is both earning less and worth less than four years earlier, at least after inflation is factored in.

The genesis of that fall was, of course, the financial crisis and the sharp decline in the value of homes, the principal asset of most Americans, followed by the sharp drop in stock prices. The crisis led to stubbornly high unemployment that cut income for many Americans and made wage increases harder to obtain for those who did hold on to their jobs.

The Federal Reserve estimated this week that the value of owner-occupied real estate rose 2.3 percent in the first quarter of this year, the first such increase since 2010. Even with that gain, those homes are now estimated to be worth $16.4 trillion, 28 percent below the peak set in 2006. Some of that reduction is caused by the fact that fewer Americans now own their homes, but much of it reflects lower values.

Total household net worth rose 4.7 percent to $62.9 trillion in the quarter but was still nearly 7 percent below the peak set in 2007. That figure is exaggerated because it includes nonprofit organizations, but the Fed says there is no way to separate them out. The per capita net worth of Americans at the end of the quarter exceeded $200,000 for the first time since 2008.

3--The State and Local Drag on the Recovery, off the charts

President Obama pointed out this morning that job losses among state and local governments are slowing the recovery. The graph shows what he’s talking about: states and localities have shed 662,000 jobs since employment in this area peaked in August 2008. (see shocking chart)

■When measured as a share of the population, the number of state and local government jobs has fallen in 37 of the last 40 months.
■The number of state and local jobs outside of education (in other words, law enforcement, parks, transportation, and so on) is the lowest it’s been since June 1985, as a share of the population.
The large-scale job losses we’ve experienced slow the economy by weakening consumer demand, since people who lose their jobs must scale back their spending dramatically.

And, due to the services that states and localities provide — education, public safety, health care, and the like — these job losses also can have a real impact on residents’ quality of life.

4--Euro crisis: it's the banks, stupid!, The Guardian

At last, leaders of the eurozone are talking about the issue that really matters – the existential threat to the single currency...

Before getting to those questions, though, it is worth saying this: at last, the leaders of the eurozone are talking about the issue that really matters – the existential threat to the single currency. Forget austerity, fiscal unions, and inflation regimes at the European Central Bank: with the large exception of Greece, the euro meltdown is primarily about how governments handle the wreckage in their financial sectors. Sure, other factors played a part – such as the vicious wage deflation in Germany that effectively priced southern Europe out of world markets – but the fundamental euro issue can best be summed up by twisting the old Clintonism: it's the banks, stupid. Not just insolvent banks in Spain or Ireland, either, but the bigger institutions that lent to them and throughout the go-go markets of peripheral euroland. Admit that, and you see how the mild austerity imposed in Spain is the wrong solution, especially when combined with the relaxed approach to restructuring its bust banking sector, encouraging them to admit to bad loans (with numbers that always looked suspect), to merge and to bring in old politicians as bosses. Just as in Ireland, the web of connections between the elite financiers and good-ol'-boy politicos helped fuel the boom and inevitably made sorting out the bust more complex, expensive and ultimately ineffective.

Admitting the root cause of the euro's problems does not guarantee a decent solution. There are two major issues here: one financial, the other political. At over 10% of the entire eurozone, Spain's economy is almost twice as big as Greece, Portugal and Ireland put together. Estimates of how much it would cost to recapitalise the country's banking sector easily reach €100bn – or about 10% of the country's GDP. Madrid cannot raise such amounts, and so far there is little sign of the ECB accepting any workarounds. Nor is the rest of Europe ready with the cash. The Irish, who have ruined themselves to bail out their banks, would not take kindly to a country in an analogous situation being given a card to get out of debtors' jail for free.

5--Did Republicans deliberately crash the US economy?, by Michael Cohen, CIF: So why does the US economy stink?

 Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Even unemployment insurance, a relatively uncontroversial tool for helping those in an economic downturn, has been consistently held up by Republicans or used as a bargaining chip for more tax cuts. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.

Traditionally, during economic recessions, Republicans have been supportive of loose monetary policy. Not this time. Rather, Republicans have upbraided Ben Bernanke, head of the Federal Reserve, for even considering policies that focus on growing the economy and creating jobs.

And then, there is the fact that since the original stimulus bill passed in February of 2009, Republicans have made practically no effort to draft comprehensive job creation legislation. Instead, they continue to pursue austerity policies, which reams of historical data suggest harms economic recovery and does little to create jobs. In fact, since taking control of the House of Representatives in 2011, Republicans have proposed hardly a single major jobs bill that didn't revolve, in some way, around their one-stop solution for all the nation's economic problems: more tax cuts.

Still, one can certainly argue – and Republicans do – that these steps are all reflective of conservative ideology. If you view government as a fundamentally bad actor, then stopping government expansion is, on some level, consistent. ...

Presidents get blamed for a bad economy... The obligation will be on Obama to make the case that it is the Republicans, not he, who is to blame – a difficult, but not impossible task.

In the end, that might be the worst part of all – one of two major political parties in America is engaging in scorched-earth economic policies that are undercutting the economic recovery, possibly on purpose, and is forcing job-killing austerity measures on the states. And they have paid absolutely no political price for doing so. If anything, it won them control of the House in 2010, and has kept win Obama's approval ratings in the political danger zone. It might even help them get control of the White House.

6--Canada's housing bubble, zero hedge

And now in Canada, Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%. This announcement comes despite his previous warnings over the enormous increase in Canadian private debt. But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only. Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation. Carney won’t admit this though. Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences.

He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death.

What makes the promise of continually low interest rates especially worrisome is not only does it tell the market to keep accumulating debt, but it is also an attempt to keep what some are calling a nation-wide housing bubble from deflating. Over the past decade, Canadian home prices have shot up at a far steeper pace compared to the decades that preceded it. In recent years, the acceleration in home prices has been fueled by the Bank of Canada’s historically low overnight lending rate which went from 3% before the financial crisis to .25% in 2009 and now rests steadily at 1%. The BoC has already acknowledged that its interest rate policies directly affect mortgage rates. Many Canadian media publications and investment newsletters are pointing out this trend and warning of a potential collapse. The BBC even did a report on it. There is nothing potential about a sharp downturn in home prices however; it will happen. It’s only a question of when....

With China and Europe leading the pack, the world economy is beginning to take a turn for the worse. The orgy of money printing which took place over the past few years has slowed down significantly; even in the U.S. Central bankers are standing at a precipice in which they must decide if they will forge ahead and prime the monetary pump to paper over the various malinvestments caused by their previous interventions or actually allow for a contraction and the market to adjust to a new path of sustainable growth. If history is any indication, the latter is not a considerable option as it would be devastating to the banking sector which is reliant on piggybacking credit expansion off of an uninterrupted flow of newly printed monies.

7--Canada's dirty little sub prime loan secret threatens to sink housing market, people's world

House and apartment prices have gone up more than 100 percent since 2000 and are at least double the price compared to the U.S. market. In the U.S., the average house costs $173,000 while in Canada it is $348,178. In Vancouver, where the housing bubble is the most extreme, the average single family home costs $900,000 Cdn. Buying a house or apartment has become unaffordable for most Canadian working people.

According to Garth Turner, a former Conservative Party Cabinet Minister and Member of Parliament, the Conservative government of Stephen Harper has deliberately created a housing bubble through low interest rates and down payments and long amortization periods that is beginning to deflate. The Canadian government, through the Bank of Canada, has kept interest rates low at emergency levels. By 2009 they were lowered to less than 1 percent. Today it sits at 1 percent. The vast majority of mortgage holders in Canada have 5 year fixed mortgages at 3.5 percent interest. In the past, home loans were in the 8 percent range.

The Canadian government requires that buyers only pay 5 percent down payments although this rule is not enforced. However, for buyers who do not have 5 percent, the 6 major banks offer no down payment mortgages or cash back mortgages where they loan the buyer the 5 percent down payment, offering 100 percent financing. The banks also give mortgages to the self-employed and new immigrants without verifying income.

In the past, Canadian banks required down payments of 25 percent, but this amount was gradually lowered. The Conservative government "embraced the sub-prime culture as nobody has done before", writes Turner on his Greater Fool Website. After 1999, it lowered down payments from 10 percent to 5 percent. From 2006 to 2008, Parliament even passed legislation allowing 0 percent down payments and 40-year amortization periods

Until last year the government allowed the Banks to offer 35-year mortgages to buyers, and before that 40 years. To cool the housing market, the federal Conservative government last year lowered mortgages to 30-year repayment periods. Now there is speculation that Finance Minister Jim Flaherty will kill the 30-year mortgage and reduce it to 25 years.

Turner contends that 5 percent or no down payments, low interest rates and long repayment periods have expanded the number of buyers who have bid up housing prices to unsustainable levels and pushed ownership levels to 70percent of the population. Meanwhile, for most Canadian working people, wages have stagnated or failed to keep up with inflation. Unemployment (including involuntary part timers and discouraged workers) is around 10.6 percent, some 2 million workers, and economic growth is beginning to stall.

Many Canadians have also used their homes as ATMs, taking out additional loans using their homes as collateral to finance private consumption. Lines of credit backed by homes made up 50percent of all consumer credit last year, largely to finance home renovation.

The federal government has insured all these low down or no down payment mortgages through the Canadian Mortgage and Housing Corporation (CHMC), a state housing agency whose 10 member Board of Governors is heavily represented by the Housing industry -- 3 developers, 1 real estate broker and 1 partner in a plumbing, renovation company. The CHMC would be the Canadian equivalent of the US government backed Freddy Mac and Fanny Mae insurance holders. The banks therefore can lend money to house buyers with zero risk. By removing risk from lenders who do not have to worry about the credit worthiness of the borrower, the government has encouraged imprudent lending practices, according to Turner. The Harper government even increased the agency's insurable loan limit to $600 billion in 2009, an amount larger than the national debt.

Like in the US, Canadian banks are bundling these risky mortgages into securities and selling them to unwary investors.

Turner argues that the 5percent down payments are Canada's version of US sub prime loans. Many new buyers have bought expensive homes for 5 percent or less at low interest rates that will eventually reset to higher levels, at least double the current low interest rate today of 3.5 percent. The Bank of Canada has been warning over the last year that it will eventually raise interest rates and has been urging Canadians to pay down debt before rates go up. Recently, federal finance Minister Jim Flaherty told reporters that, "interest rates are going to go up. They have nowhere to go but up. So people must make sure that they can afford higher mortgage interest."

"We've systematically lowered mortgage-lending standards, encouraged banks to take excessive risk, eliminated the need for money when buying real estate, and turned what used to be an accomplishment and a privilege into a right and an entitlement. Now that 70percent of us have swilled the kool - aid, pushing prices house prices and debt levels to historic highs, a melt in both sales and prices seems inevitable", writes Turner.

Turner warns that when interest rates go up, mortgage payments will increase and housing prices decline. Many Canadians will face negative equity where they are left paying mortgages that exceed the value of their properties, as in the US, causing economic distress, hardship and a wave of foreclosures. Turner says this is beginning to happen in smaller towns and cities across Canada. A decline in housing prices will also hit the economy hard, as housing spending constitutes 20percent of the Canadian economy. For mortgage owners who cannot pay their mortgages that are insured by the CHMC, the Canadian taxpayer will be on hook to pay the banks, states Turner.

Lax lending practices and climbing house prices have increased household debt to their highest levels. Canadians now have higher per-capita debt levels than Americans and British. For every dollar of income, Canadians owe $151. Debt levels continue to increase each month, much of it mortgage debt, and show no sign of halting. Bank of Canada Governor Mark Carney calls these debt levels "the greatest risk to the domestic economy."

Financial analyst Ben Radiboux shares many of Turner's concerns about the Canadian housing bubble. "In real terms, prices have risen higher and for a longer length of time than at any point in time over the last 40 years [as far back as there is data on house prices]. Relative to underlying fundamentals, things have never looked so ugly", writes Radiboux on his website Economic Analyst. "The balance of probabilities leans strongly towards a housing price correction."

Radiboux argues that there are similarities between US sub prime lending before 2006 and Canadian lending practices today. US lenders gave mortgages at low fixed teaser interest rates for 2 years before resetting to a higher rate adjusted every 6 months for the rest of the mortgage. Canada's fixed mortgages, carrying an average interest rate of 3.5percent, reset every 5 years, exposing borrowers to interest rate fluctuations. A Bank of Canada stress test last year showed that a 0.5percent increase in interest rates would put 1.1 million households " under significant financial pressure."

High loan-to-value mortgages were another feature of sub prime lending in the U.S. where debt is greater than 90percent of the value of the home itself. Yet, CMHC insures mortgages where loan to value is 95percent (5 percent down payment). In addition, Canada's 6 large banks offer 100 percent financing for home purchases with no down payment mortgages and cash back mortgages where they lend the buyer the 5percent down payment.

Radiboux is critical of the CHMC for not being forthright in disclosing the makeup of their insured portfolio, exposing the Canadian taxpayer to great risk in the event of a housing crash.

Another factor that will help depress housing prices is demographics, claims Radiboux. Nine million baby boomers will be retiring in the next few years and many of them will be selling their houses to help finance retirement or simply to downsize into a smaller living space.

It is not just Turner and Radiboux who have been ringing the alarm bells about the Canadian housing bubble. The Bank of Canada said that Canadians are becoming increasingly vulnerable to a housing correction, exposing them to a perfect storm of high debt and falling assets. The International Monetary Fund has also warned that Canada could face a price correction if house prices and debt levels do not come under control.

Capital Economics, a British macro research consultancy that provides independent economic analysis to the global corporate and financial sector, is predicting that Canadian housing prices will crash by as much as 25 percent when the Canadian housing bubble falls.

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