Monday, October 8, 2012

Today's links

1--The Deeper Causes of the Financial Crisis, The Big Picture

The magnitude of the 2008 financial crisis is too big to be explained by the amount of losses onU.S. residential mortgage loans. Rather, although mortgage losses may have served as a triggerto unleash the crisis, its substantial proximate causes lie in the behaviors of financial firms;namely high leverage and strong risk appetite. This is evident from the fact that many financialfirms either failed or nearly failed in the early phases of the crisis. However, the firms' behaviorsdid not simply come out of the blue. They came from a variety of deeper causes, several of which had roots stretching back several decades

2--World Bank cuts East Asia GDP outlook, flags China risks, Reuters

3--Bank Profit Leading S&P 500 as U.S. Earnings Growth Sputters, Bloomberg

As third-quarter earnings season begins, the companies analysts are most bullish about are the ones whose stock prices are farthest below their highs -- banks.
While financial institutions in the Standard & Poor’s 500 Index climbed 24 percent in 2012 for the biggest rally in nine years, they remain 58 percent below the record of February 2007, according to data compiled by Bloomberg. Signs of a housing recovery prompted Wall Street firms to raise estimates for profit growth to 21 percent for the third quarter and 32 percent in the fourth, the most of 10 S&P 500 industries. ...
Loans Down
Almost five years after the stock market high, real-estate loans among 7,246 federally insured banks have fallen to $4.09 trillion from the record $4.81 trillion reached in 2008, Federal Deposit Insurance Corporation data shows. After declining for 14 consecutive quarters, lending expanded 0.4 percent during the last three months of 2011 and less than 0.1 percent between March and June of this year.
Financial companies still haven’t recovered to pre-crisis levels, with revenue per share at less than half the amount in 2007, according to data compiled by Bloomberg. Tighter rules that limit firms’ trading and call for higher capital requirements and new home sales 70 percent below their record are weighing on investor sentiment....
Banks are benefiting as Fed Chairman Ben S. Bernanke buys mortgage bonds to stimulate lending and the economy. The gap between interest charged for residential mortgages and the rates banks pay on securities that package the loans has widened to a record, data compiled by Bloomberg and show, making home lending more profitable. The increase came as new home sales reached a two year high, even though they remain at less than half their 2005 record. ...
For banks, the improvement in home lending reflects a short-term rise in refinancing driven by the Fed and profits show no real growth, according to Peter Kovalski, a fund manager at Alpine Woods Capital Investors LLC in Purchase, New York, that oversees about $5 billion. Chad Morganlander at Stifel Nicolaus & Co. said financial shares may fall as economic growth remains sluggish and Europe’s debt crisis worsens.
“One should be cautious on banks across the board,”Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus, which oversees about $138 billion in client assets, said in an Oct. 3 phone interview. “Until household credit is created without monetary or fiscal stimulus, then bank stocks are going to have a tough time providing long-term leadership.”
Consumer debt has declined to $11.4 trillion as of the second quarter of 2012, from a peak of $12.7 trillion in 2008, according to Fed data. Financial company borrowings fell $3.3 trillion to $13.8 trillion, the data show

4--We win, you lose’: Taliban jeers at US, NATO as Afghan war enters 12th year, RT

NATO forces “are fleeing Afghanistan” in “humiliation and disgrace”, proclaims the Taliban as the US-led war in the country enters its twelfth year.
­"With the help of Allah, the valiant Afghans under the Jihadi leadership of Islamic Emirates defeated the military might and numerous strategies of America and NATO alliance," the Taliban said in a statement Sunday.
Foreign forces have already started leaving the country ravaged by the war on terror the US proclaimed after the 9/11 attacks on New York and Washington.
Driven by its pledge to eliminate Al-Qaeda leader, Osama bin Laden, the US has been sending hundreds of troops to Afghanistan first to topple the Taliban government, which had been harboring bin Laden, and then to contain the Taliban-lead insurgency.
"And now after eleven years of unceasing terror, tyranny, crimes and savagery, they are fleeing Afghanistan with such humiliation and disgrace that they are struggling to provide an explanation," says the Taliban.

5--Chavez wins in landslide, RT (photos)

6--US prepares to topple Chavez--info clearinghouse

Rigged polling, coordinated Western propaganda campaign, and open conspiracy to install Henrique Capriles Radonski as head of new Western client-regime.

7--Why the housing crash is far from over, OC Housing News

I am no longer bearish. I have been an outspoken housing bear for over five years now, but based on recent developments, I have far fewer worries about another catastrophic decline in house prices. The recent changes are as follows:
  • Federal reserve’s open-ended commitment to unlimited stimulus for as long as it takes no matter the consequences.
  • Lending cartel’s improved control of inventory liquidation.
  • Removal of most barriers for refinancing underwater loans to aid kicking the can to spread out liquidations.
These new developments when combined with some older existing policies has finally created the conditions for a manufactured bottom to form.
  • Federal government’s suspension of mark-to-market accounting allowing unlimited delinquent mortgage squatting.
  • Federal reserve’s zero percent interest rate to member banks reducing their expenses to zero on non-performing loans.
  • Private equity funds mobilized to absorb foreclosures in key markets....
As I explained in my latest BUSINESS INSIDER article, nearly 27 million mortgages were refinanced during these three insane years. Millions of these properties were refinanced more than once, especially in California. Many of the loans were “cash-out refis” where the owner pulled cash out of the house’s growing equity. Because of this, nearly all properties with either first or second liens refinanced during 2004-2006 are now underwater. The total amount of mortgage debt on the property exceeds the value of the property. This does not include the millions of mortgages that were refinanced in 2007 – 2009. A growing number of these mortgages are becoming delinquent. Sooner or later, the banks will have to move against these delinquent owners. This spells real trouble for all major metros.

8--The jobs numbers: never mind the quantity, check the quality, Guardian

Behind modest jobs growth, the real story is full-time jobs with good benefits are still disappearing. America's going part-time
...even if the total residential construction spending accelerates, right now it unfortunately accounts for only about 1% of US GDP. So as much everyone wants to see construction drive GDP (as it did to some extent during the boom years), it is still a fairly insignificant contributor to the overall output.
58% of the increase in consumer credit came from the federal government. That is all student loans. For some reason the media is refusing to zero in on this....
Reuters (same report as above): - Credit has been expanding almost continuously since mid-2010 as the country recovered from the 2007-2009 recession. The decline in July was the first drop since August of last year
But if one plots the holders of consumer debt over time (again without the seasonal adjustments), a familiar picture emerges. Yes, consumer credit has been growing since the recession, but all of the growth came from the federal government and not from credit institutions. In fact without the rapid increase in government student loans, consumer credit would still be down from the end of the recession. That explains why consumer spending has been subdued in spite of growth in consumer credit...
Celebrating these large increases in consumer credit is premature because these numbers do not mean vigorous retail credit expansion by financial institutions. Nor are they pointing to increases in consumer spending. Instead, consumer credit growth these days goes to fund the relentlessly rising cost of higher education
What is a "qualified mortgage"?
The main assertions in the piece are just flat out wrong. For example, column tells readers:

"Paradoxically, the same forces that made for such a weak recovery during Obama’s first term suggest that the next four years will be better, regardless of who holds the White House. Right now, businesses, households and governments are all trying to wrestle down their debts. That “deleveraging” saps spending and blunts the power of low interest rates."

This statement would lead readers to believe that the problem is low consumer spending and low business investment because of high debt burdens. However the Commerce Department's data strongly disagrees with this assessment.

The Commerce Department strongly disagrees with Ip, telling us that consumption remains far above its long-term share of disposable income even if it is somewhat below the peaks driven by the wealth from the stock and housing bubbles. It also disputes the business side of Ip's argument. In the second quarter of 2012 (the most recent quarter for which data are available), businesses spent an amount equal to 7.4 percent of GDP on equipment and software investment. In 2007, the last pre-recession year they spent 7.9 percent. See the collapse? In fact, given the large amounts of excess capacity in major sectors of the economy, business investment is surprisingly high.

The real story of the current shortfall in demand is very simple. The wealth generated by the housing bubble led to unusually high consumption. It also led to a building boom in both residential and non-residential construction. Consumption fell back to more normal levels after the wealth that was driving it disappeared. Construction went from boom to bust, as we had enormous overbuilding of both homes and most types of non-residential structures.

There is no simple way to replace this demand from the private sector. And contrary to what Ip asserts, our best and really only hope is to reverse current patterns of trade. While Ip notes that we have had a surge of exports, what matters for demand is net exports, which is the difference between exports and imports.

There has been very little progress in reducing the country's trade deficit over the last four years. Most of the gains have been from reduced imports as a result of the recession. The only plausible mechanism for getting the trade deficit down is by reducing the value of the dollar which will make U.S. goods more competitive internationally. President Obama has made little progress on this front, leaving most of the work to the person occupying the White House for the next four years.

Unless trade is closer to balance, the only way to maintain anything close to full employment (absent another bubble) will be to run large budget deficits. That is accounting -- there is no possible way around this fact.

Ip also comments that, "home prices, which hit bottom in January, are rising steadily." That should scare us. Inflation adjusted house prices are already back to their long-term trend level. The last thing that any sane person should want to see is a re-inflation of the bubble. Anyone feel good about another plunge in house prices of 20-30 percent? It won't be any more fun the next time it happens....

Greg is absolutely right that consumption and housing have not made the contribution to this recovery as they did in prior recoveries. The question is whether there is any reason that we should have expected them to.
I have argued that the pre-recession levels of both were extraordinary and driven by the $8 trillion housing bubble. There was therefore no reason for us to get back to these levels unless the housing bubble re-inflated, which is probably not possible and certainly not desirable. In the case of the pre-recession level of consumption, we were spending at a pace that pushed the saving rate to zero. This is certainly not a good story if we think that people should have anything to live on in retirement other than their Social Security. Absent the run-up in housing wealth, they would not have chosen to spend at this pace.
In the case of housing, we were building way ahead of demand, which was evident by a record vacancy rate as early as 2002. It was inevitable that this overbuilding would lead to a sharp falloff in construction after the bubble's collapse. We are now finally seeing some growth in this sector, but this is only likely to bring us back to post-war averages of 3-4 percent of GDP in residential construction, not the 6.1 percent bubble peak.
Finally, Greg is correct that we don't absolutely need an increase in net exports to get back to full employment on a sustainable growth path, the question is whether there is a plausible alternative. The government could certainly start spending enough money tomorrow to get the economy back to full employment, but I don't think anyone believes that it is politically feasible, regardless of the outcome of the November elections.
We have extensive research that shows that neither consumption nor investment are especially sensitive to interest rates (the former probably more so than the latter). This means that the likelihood that the Fed could somehow prompt enough of either or both to get the economy back to full employment seems remote, especially when it is already up against the zero bound for short-term interest rates.

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