Thursday, August 30, 2012

Today's links

1--Correspondence and collusion between the New York Times and the CIA, Guardian
Mark Mazzetti's emails with the CIA expose the degradation of journalism that has lost the imperative to be a check to power

2--Five Australian Troops Killed by Afghan ,

3--Gangs of Aleppo, William lind, The American Conservative

The Arab Spring succumbs to post-state violence

4--Money market fear gauge nears record lows, IFR
5--Latest on China: all is well and "economic growth is stabilizing", sober look
6--Economy Still Stuck in Low Gear, NY Times

7--The unintended consequences of QE: not what you think,
(The road to hell is paved with good intentions?)

By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).

Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops...

(From the) Federal Reserve Bank of Dallas working paper from William (Bill) White entitled “Ultra Easy Monetary Policy and the Law of Unintended Consequences“.

A further concern is that the reductions in real rates seen to date, associated with lower nominal borrowing rates and seemingly stable inflationary expectations, might at some point be offset by falling inflationary expectations. In the limit, expectations of deflation could not be ruled out. This in fact was an important part of the debt/ deflation process first described by Irving Fisher in 1936....

Given the unprecedented character of the monetary policies followed in recent years, and the almost complete absence of a financial sector in currently used macroeconomic models, there might well be other unintended consequences that are not yet on the radar screen. By way of example only, futures brokers demand margin, and customers often over margin. The broker can invest the excess, and often a substantial portion of their profits comes from this source. Low interest rates threaten this income source and perhaps even the whole business model. A similar concern might arise concerning the viability of money market mutual funds, supposing that asset returns were not sufficient to even cover operating expenses. A final example of potential problems has to do with the swaps markets, where unexpectedly low policy rates can punish severely those that bet the wrong way. This could lead to bankruptcies and other unintended consequences....

herein lies the irony. For, if it’s clear that low-yield policies and QE buy time, and only time, this inevitably puts the onus on governments, not central banks, to steer the economy out of the path of the unintended consequences of monetary policy.

Indeed, as White concludes:

If governments do not use this time wisely, then the ongoing economic and financial crisis can only worsen as the unintended consequences of current monetary policies increasingly materialize

8--Mostly through short sales, banks met 40% of settlement requirement, OC Housing News

The settlement with the major banks dramatically altered their incentives. As part of the settlement, banks can count short sale losses toward their settlement amount. Foreclosures don’t count. So how did banks respond? They dramatically reduced their REO processing and focused on approving short sales. This had two impacts on MLS inventory. First, the lingering short sales that polluted the MLS for months were cleared out. And second, far fewer REO were processed to replace the REO the banks were selling. By clearing out the backlog and not replacing with fresh supply, the number of properties available for sale on the MLS dried up. As a side benefit, prices went up increasing the bank’s capital recovery on the properties they did sell.

This change in incentives is one of the many policy changes and manipulations impacting the housing market. It’s very difficult to predict when such changes will occur and what their impact will be. Anyone who guesses right about the direction of home prices in this environment is either extraordinarily insightful, or rather lucky

9--A Bold New Call for a Maximum Wage, counterpunch

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