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.

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