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?”

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