Tuesday, July 31, 2012

Today's links


1--ECB Chief Draghi Being Investigated for Membership in the Group of Thirty, naked capitalism

. Draghi should not be involved with the G30 while he is active at the ECB. And if the EU Obudsman does find Draghi’s membership to be a conflict of interest, that has to be just as true for the other EU central bankers that are current participants.

2--More on Draghi’s “The ECB is All In” Bluff , naked capitalism
An article in Der Spiegel confirmed the skeptics’ reading. It depicts Draghi as having make his commitment without getting the support of the ECB council. One assumes he might have hoped to present them with a fait accompli, but that kind of approach can backfire. Per Der Spiegel:

Meanwhile, experts at the central banks of the euro zone’s 17 member states had no idea what to do with the news. Draghi’s remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then....

The Eurozone is increasingly looking like a zero sum exercise to its members: that there are no win-win strategies, only dividing up a fixed pie. And with austerity on in full force, it’s actually worse than that: the power that be are haggling over a pie that is shrinking before their very eyes. There’s declining trust and no willingness to consider alternatives that would put economies on a better trajectory. There’s now lip service being given to the need for growth, but the neoliberal budget-cutting religion is very much intact: the only alternatives under consideration are delaying the wearing of hairshirts, not considering completely different options.

3--Euro-Area Unemployment Rate Reaches Record 11.2%: Economy, Bloomberg

4--Democrats Are not Proposing to Regulate Not For Profit Colleges, They Want to Put Restrictions on Government Student Loans and Aid, CEPR

5--Fed Watch: Quick Euro Update, economists view


Tim Duy: Quick Euro Update, by Tim Duy: Mostly quiet on the Euro front today, but there are some bits and pieces worth chewing over. To recap, ECB President Mario Draghi raised expectations that a big plan was in the works to save the Euro. In short, Draghi's commitment to do everything necessary to save the Euro was interpretted to mean that the ECB was prepared to act as a lender of last resort to bring down yields in struggling periphery nations.

There is an alternative explanation. Draghi was simply making some off-the-cuff remarks, saying things he thought he largely said before, and not intending to illicit the subsequent market response. If so, market participants may be set up for a phenomenal dissapointment this week.

With that in mind, Spiegel says that Draghi dropped a bomb on other ECB members:

It was an illustrious meeting that British Prime Minister David Cameron was hosting on the evening before the opening of the Olympic Games in London...

..It was meant to be a day of glamour, but then Mario Draghi, the president of the European Central Bank (ECB), made a seemingly trivial remark -- but one that ensured that the 200 prominent guests were swiftly brought back to gloomy reality. His organization, he promised, would do "whatever it takes to preserve the euro."

The audience treated the remark as just another platitude coming from a politician. But International financial traders understood it as an announcement that the ECB was about to buy up Italian and Spanish government bonds in a big way. So they did what they always do when central banks suggest they might soon be firing up the money-printing presses: They clicked on the "buy" button...

...Meanwhile, experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

This doesn't sound like Draghi has much time to build a concensus. Interestingly, Spiegel claims that the pressure on Draghi is becoming unbearable:

A deep-seated feeling of mistrust has taken hold at Frankfurt's Eurotower, the ECB's headquarters, and even Draghi, who is normally seen as the epitome of level-headedness among central bankers, has recently shown signs of nervousness. At a dinner in early July, the ECB chief and his fellow governors were discussing the question of whether the ECB's loans to Ireland's government-owned "bad bank" were consistent with the bank's current bylaws

6--How the ECB came to control the fate of the world economy, Guardian

they have refused to end the crisis for a nefarious political reason: in order to force the weaker economies of Europe to accept a regressive political agenda – including cuts in minimum wages and pensions, weakening of labor laws and collective bargaining, and shrinking the state.


The ECB and its allies feared that if they stabilized these bond markets, their leverage over the peripheral countries would be reduced. So, for more than six months now, the ECB has refused to buy Spanish bonds, which would push down yields as it did in similar crises last year. This is a nasty and dangerous game of chicken, because the ECB obviously doesn't want to reach a point where the crisis spins out of control.

7--For Greece there is an alternative to austerity – as Argentina proved, Guardian

There are reasons why Greece's economy can be expected to perform either better or worse than Argentina's did a decade ago. We will only know for sure if it actually does go the default route, but even if it took a year to get back on a healthy growth path, Greece is still likely to look quite good to Spain and Italy. Both countries could easily face a decade of recession or stagnation on the troika's path.


As long as no country takes the euro exit route, politicians can get away with telling their constituents that there is no alternative. They must accept the austerity prescribed by the troika no matter how painful it is. Once Greece leaves the euro, this is no longer a plausible claim. And if the Greek economy turns around and grows at a healthy pace, then the troika's path is likely to prove unacceptable to the people of Spain and Italy.

This is the situation that Germany must fear. However many times Greece misses its targets, the troika is likely to come back and move the goalposts again. They don't want anyone in the eurozone to recognise that there is an alternative to permanent austerity and they will make whatever concessions are necessary to ensure that neither Greece nor anyone else ever discovers the truth.

8--Depression in the Eurozone’s Periphery and how to restore Aggregate Demand without creating new bubbles, Yanis Varoufakis

Certain Eurozone economies remain depressed and with a level of aggregate demand that is falling daily. Their depression increases the probability of a Eurozone breakup while the increases in the probability of a Eurozone breakup boost their depression. Something has to give. If Spain’s, Greece’s, Portugal’s depression is not addressed by policy makers, the Eurozone will simply shrivel and die. Alas, due to the Eurozone’s faulty underpinnings, the Periphery’s Depression cannot be addressed by standard macroeconomic aggregate demand management. Unless a euro is ‘forced’ to have the same value across the Eurozone, the Periphery’s Depression will get worse and the Eurozone will perish. Unless some debt mutualisation is effected, without asking German taxpayers to guarantee others’ debts, the Periphery’s Depression will conspire with the Euro Crisis to end the European Union. Lastly, the last thing Europe needs is another bubble to restore aggregate demand. No, we need to eradicate not only the Crisis’ symptoms but also its underlying causes (i.e. the imbalance in productive investments). In short, we need a cleverly designed New Deal for Europe, with the EIB at its forefront.

9--Consumer spending falls again in June, marketwatch

Second straight decline as Americans pocket increase in wages

U.S. consumers reduced spending for the second straight month despite a sharp increase in wages, boosting their savings rate to the highest level in a year.

The slower pace of consumer spending over the past four months dovetails with slowing jobs growth and a weaker economy. Consumer spending accounts for more than two-thirds of U.S. growth, so any reduction in demand filters through to businesses and hurts the rest of the economy.

Personal spending fell less than 0.1% in June, the Commerce Department reported Tuesday. Spending for May was revised down slightly to a 0.1% decline.

It’s the first time consumer spending has fallen two straight months since early 2009, near the end of the last recession.

The pullback in consumer spending, one of many indicators pointing to a downshifting economy, suggests growth is unlikely to pick up anytime soon.

“This gets the current quarter started on a really sour note,” said chief economist Stephen Stanley of Pierpont Securities.

The drop in spending occurred despite a 0.5% uptick in personal income last month, mainly the result of employees working longer hours. Incomes have risen by at least that amount in four of the first six months of 2012 after doing so only once in the prior year.

What’s more, consumers had significantly more buying power in June than they did at the start of the year when inflation is factored out. Real disposable income, or money left over after taxes, has increased 1.7% over the past 12 months, largely because of lower gasoline prices.

As recently as January the actual buying power of consumers had dropped slightly on a year-over-year basis.

Yet instead of spending the extra cash in their paychecks, consumers boosted their savings rate to the highest level since June 2011. The savings rate jumped to 4.4% from 4.0% in May.

As recently as last November, the savings rate had fallen to a more than two-year low of 3.2%.

While some of the increase stems from the normal pattern of consumers rebuilding their savings, the quick escalation also suggests growing anxiety about the health of the economy. People usually save more when they get worried about losing their jobs or the value of their investments decline.

Inflation, meanwhile, remained tame. An inflation index linked to consumer spending that excludes food and gas rose 0.2% last month, but it was unchanged at 1.8% over the past 12 months.

10--Federal Spending Cutbacks Slow Recovery, WSJ


Sharp Drop in Military, Stimulus Spending Take a Toll on Economic Rebound.
Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.


Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.

"It's unbelievable how much the economy is getting hurt already by the sharp drop in federal spending," said Joe LaVorgna, chief U.S. economist for Deutsche Bank....

the budget cuts come at a tough time for the U.S. economy, which has lost steam after appearing to accelerate earlier this year. Recession in much of Europe and slowing growth in China have cut into demand for U.S. exports, hurting manufacturing, which had been a key source of strength earlier in the recovery. Weak job growth and shaky financial markets have hit consumer spending, which some economists had hoped would drive economic growth this year. The overall economy grew at an annual rate of 1.5% in the second quarter, down from 2% in the first quarter, and most economists expect continued weak growth for the rest of the year.


The federal cuts are a reversal from the recession, when Presidents George W. Bush and Barack Obama tried to spark growth by increasing federal spending through bailouts and stimulus programs. Most economists believe the stimulus programs played at least some role in softening the recession's blow, though some argue their effectiveness was limited because many households and companies ended up saving extra cash rather than spending it.

Now, the stimulus funds are drying up. State and local governments are projected to receive $20.8 billion in federal stimulus funds in the 2012 fiscal year, ending in September, down from a combined $180.7 billion in fiscal 2010 and 2011, according to the Government Accountability Office. In the 2013 fiscal year, stimulus funding to states and localities will fall to a projected $14.3 billion...

The federal cuts are hitting just as state and local governments are starting to recover. Last year, state tax revenue eclipsed its prerecession peak, in 2008, for the first time. State tax revenue was $776 billion in 2011, up 0.2% from 2008, according to the Nelson A. Rockefeller Institute of Government. State-level job cuts are slowing, too, although layoffs are continuing at the local level.


The cuts are especially significant for communities that rely heavily on the military, such as Florida's Okaloosa County, home to Eglin Air Force Base. Said Jim Breitenfeld, a manager in the county's economic-development office: "When someone in D.C. sneezes on a military-defense issue, we say 'achoo.' "

Federal employment, meanwhile, is falling for the first time in the recovery. The biggest cuts are coming among postal workers, who count as federal employees but aren't funded out of the federal budget. But even removing the Postal Service, federal employment is down by 34,000 in the past year—a small number in the context of the overall economy but enough to push public-sector payrolls into negative territory in June for the fourth consecutive month.

11--How Forgiveness Fits in Housing-Fix Toolkit, WSJ

Policy makers are wrestling with a dilemma about the overhang of mortgage debt from the housing bust: to forgive or not to forgive?


With prices down by one-third from their 2006 peak, more than 11 million homeowners are underwater, or owe more than their homes are worth. That is about 24% of all homeowners with a mortgage, according to data firm CoreLogic.

The massive debt overhang—totaling almost $700 billion—is troubling not only because it leaves homeowners more exposed to foreclosure, which further erodes property values. It also weighs on the economy, making homeowners less likely to spruce up their properties and unable to tap equity to start businesses or pay for things like college tuition.

Housing demand also suffers. Without equity, young families are less likely to trade up to bigger places while empty-nesters may be unable to downsize...

Another concern: Many borrowers who are underwater have second mortgages, which are primarily owned by banks, sitting behind the first mortgages that are primarily owned by Fannie, Freddie, and private investors. Writing down taxpayer-backed first mortgages without extinguishing bank-owned seconds is both politically dicey and an inversion of property rights. Is there a way to end this stalemate? 

12--Housing bust is over, WSJ (video)

13--Recession Looks a Bit Less Bad Thanks to Government, WSJ

Real gross domestic product shrank 4.7% between late 2007 and the middle of 2009 — not the 5.1% initially estimated, the Commerce Department says. In 2009, America’s economy contracted 3.1%, much less than the earlier estimate of 3.5%. (The government’s “positive” revisions to the first and second quarters of 2009 were the biggest ones they made.)


So, what happened? It wasn’t consumer spending or business investments; those estimates were pretty much left alone. Net exports of goods and services abroad were a little stronger than initially thought, but that also doesn’t account for the change. That leaves “government consumption expenditures and gross investment,” which jumped far more in 2009 than initially estimated.

Instead of rising 1.7% in 2009 from the previous year, government spending soared 3.7%. Instead of shrinking 0.9%, spending by state and local governments actually grew 2.2% in 2009 — probably a reflection of the Obama administration’s efforts to provide emergency cash to states during the depths of the recession.

This isn’t the only example of government policies fueling growth

14--Fed Eases Toward More Unconventional Action, WSJ

... with long-term borrowing costs already at record lows, it is unclear how much more borrowing a third round of quantitative easing, or QE3, would create. The Fed would likely try to get a bit more oomph out of its debt buying by focusing on mortgage-backed securities, because that would affect household borrowing costs more directly than would Treasury purchases. Even so, the scope for even lower mortgage rates to increase household borrowing is limited at a time when bank lending policies have become more stringent and many consumers are hesitant to take on more debt.

The other way quantitative easing can help the economy is by cheering investors, who bid up stocks and other risky assets—hopefully boosting the confidence of consumers and companies to spend and hire.


It is hard to know how much glee the stock market might take in QE3. But given that investors have seen several rounds of unconventional easing from the Fed since 2008, with the economy so far failing to achieve escape velocity, the risk is that it will be short lived. And stocks are already back within a whisker of their postcrisis highs even as earnings growth slows.

Meanwhile, there is a question of who would actually reap QE3's benefits.

15--Banks Need Just One Thing to Spur Lending: Borrowers, WSJ

Lend more. That has been the message to banks from consumers, politicians and the Federal Reserve.


This reflects a belief among many that banks are somehow holding back on lending and, thus, choking off the recovery. Even the Fed is reportedly considering a new approach that would allow banks to borrow funds cheaply from it if they use the money for new business or consumer loans. Another possible option is for the Fed to stop paying interest on excess reserves that banks keep with it in the hope that they will put the money to use elsewhere.

While overall loans and leases at commercial banks have shown positive year-over-year growth for the past four quarters, they still are 3% lower than a peak of $7.32 trillion in October 2008. That's even more striking considering the big shrinkage of credit outside of banks during that time.


Banks contend they would gladly lend more but that demand just isn't there. Falling levels of interest income at many banks, along with soggy share prices, suggest their argument is more than just bluster. After all, they would be lending if they thought it would raise lackluster profits. Given this, it isn't clear how much benefit will result from further attempts to juice the supply of lending....

One obvious remedy? More loans. J.P. Morgan Chase in the second quarter earned an average rate on trading assets of 3.96% and 2.42% on securities that its holds. Loans were far more lucrative, generating a 4.96% rate....

potential borrowers aren't necessarily clamoring for new loans. Business loans have picked up of late, yet many companies remain flush and are sitting on record cash piles. Consumers still are largely in debt-shedding mode as they try to restore household balance sheets.


Many banks are desperate to boost revenue, profit and their share prices. If increasing the volume of more-lucrative loans was easy, they would have already done it





































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