Saturday, November 24, 2012

Today's links

1---Economists, Obama administration at odds over role of mortgage debt in recovery, WA Post

The meeting highlighted what today is the biggest disagreement between some of the world’s top economists and the Obama administration. The economists say the president could have significantly accelerated the slow economic recovery if he had better addressed the overhang of mortgage debt left when housing prices collapsed. Obama’s advisers say that they did all they could on the housing front and that other factors better explain why the recovery has been sluggish.

The question is relevant because although Obama won reelection this month, the vast majority of voters still say the economy is weak and not getting better. Policymakers in Washington are now focused on another type of debt — the public debt all taxpayers owe — but the slow economic recovery, which depresses tax revenue, makes that problem harder to solve.
Nearly 11 million Americans, or more than a fifth of homeowners, are buried in debt, owing more than their properties are worth after piling their life savings into their properties — a persistent and largely unaddressed problem that represents the missing link in what many economists consider the administration’s overall strong response to the recession.

2--Bernanke Says Fed Will Do What It Can to Support Housing, Bloomberg

Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too- tight lending rules to racial discrimination.
“We will continue to use the policy tools that we have to help support economic recovery,” Bernanke said today in a speech in Atlanta, Georgia.
Bernanke is pressing on with record easing including a plan to buy $40 billion a month of mortgage-backed securities, aiming to spur growth and reduce a 7.9 percent unemployment rate. He has resorted to unorthodox policies six years after home prices started a plunge that knocked the economy into the longest recession since the Great Depression...

Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

3---Marginal Rates and Economic Growth: They Go Up Together, angry bear

Higher taxes are good for the economy

4--Abe pledges to make BOJ buy bonds, Japan Times

Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December's Lower House election and he becomes prime minister.

Abe, who heads the largest opposition party, also said he would appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa's term of office is set to expire next April.
"We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market," Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. "We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time
Government antipoverty programs keep nearly 50 million people out of poverty. Without them, the poverty rate would be twice as high, according to the Center on Budget and Policy Priorities. In 2011, unemployment insurance helped 26 million workers, points out the National Employment Law Project (NELP), and lifted 2.3 million people, including more than 600,000 children, above the poverty line.
In 2010, about two-thirds of people counted in the government’s unemployment figures received unemployment benefits. By 2011, however, that number had fallen to 54 percent. This year it fell to only 45 percent, according to George Wentworth, NELP Senior Staff Attorney.
Now, extended unemployment benefits, implemented because of the economic slump and the growth of long-term joblessness, are due to end by December 31. Unless the program is renewed, two million people will be cut off, and in no part of the country will the unemployed receive more than 26 weeks of jobless pay after being laid off.
If the program is allowed to lapse, according to Wentworth, it would mean that only a quarter of those who are officially unemployed would receive any form of benefits.

6--- China Shadow-Banking Risk, Bloomberg

Shadow banking worldwide is a $67 trillion industry whose size “can create systemic risks,” the Financial Stability Board said in a Nov. 18 report. The business in China, which includes banks’ off-balance-sheet vehicles such as commercial bills and entrusted loans, as well as underground lending by individuals, flourishes because more than 90 percent of the nation’s 42 million small companies can’t get bank loans.
China’s 64 trust firms, with sales offices in major cities, combine characteristics of commercial and investment banking, private equity and wealth management. They pool household savings to offer loans and invest in real estate, stocks, bonds, commodities, even bottles of sorghum liquor. No other financial firms operate across all these asset classes...
Trusts took off again in 2010 as they helped banks move loans off their balance sheets and circumvent lending quotas amid monetary tightening. Developers had to rely on trust loans for working capital even as borrowing costs including interest and fees amounted to about 15 percent this year and almost 20 percent last year, according to Benefit Wealth. That compared with the benchmark one-year lending rate of 6 percent

7---Modified-Mortgage Defaults Soar 24% in Looming Housing Challenge, Bloomberg

Subprime Loans
About 35 percent of outstanding securitized subprime loans have been modified and more than 25 percent of so-called option adjustable-rate mortgages, according to the report. About $216 billion of securitized non-agency mortgages are being paid on time after previous delinquencies, Amherst data show.
Recidivism rates after 12 months for modified subprime mortgages have declined to about 40 percent from almost 80 percent for loans reworked in the third quarter of 2008, reflecting loan servicers offering larger payment reductions and more cuts to balances, according to the Nomura analysts.
Fannie Mae and Freddie Mac’s burgeoning holdings of modified mortgages, which drove non-performing loans at the government-supported companies to a record last quarter, also cast “doubts on the true health of the housing recovery,” Jim Vogel, an FTN Financial analyst, wrote in a Nov. 16 report.

‘Thorny Issues’

The firms owned $195 billion of restructured loans on which they were accruing interest as of Sept. 30, according to the report. The debt is also on the “list of thorny issues” that must be addressed before the companies can be replaced, he said.
Values of securities in the almost $1 trillion non-agency market are little changed this month even after the release of the delinquency data and amid slumps in assets including stocksand high-yield company bonds.
Typical prices for the senior-most bonds backed by option ARMs were unchanged last week at 62.8 cents on the dollar, up from 51 cents at the start of 2012, Barclays Plc data show. Option ARMs can allow borrowers to pay less than the interest owed by increasing their balances

8---Task force says global shadow banking hits $67 trillion, Reuters

The system of so-called "shadow banking" blamed for aggravating the global financial crisis grew to $67 trillion globally last year, a new high, amid calls from the world's top policymakers for greater control of the sector.
A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policy makers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and their activities.
Officials at the European Commission in Brussels see closer control of the sector as important in preventing a repeat of the financial crisis that toppled banks over the past five years and rocked the euro zone.
The study by the FSB, set up by the world's top economies (G20) to police global finance, said shadow banking around the world more than doubled to £62 trillion in the five years to 2007 before the crisis struck.
But the size of the total system had risen to $67 trillion in 2011, more than the total economic output of all the countries in the study.
The multi-trillion dollar activities of hedge funds and private equity companies are often cited as examples of shadow banking.
But the term also covers investment funds, money-market funds and even cash-rich firms that lend government bonds to banks, and which in turn use them as security when taking credit from the European Central Bank
Even the man credited with coining the term, former investment executive Paul McCulley, gave a catch-all definition.
McCulley said he understood shadow banking to mean "the whole alphabet soup of levered up non-bank investment conduits, vehicles and structures", such as the special investment vehicles that many blamed for the financial crisis.

9---Shedding Light on Shadow Banking, Bloomberg

The last time people paid attention to shadow banking was when it was ripping the world apart. The 2008-09 global financial crisis, the worst since the Great Depression, was precipitated by a “bank run” that hit nonbank financial firms such as the Reserve Primary Fund money-market fund and American International Group (AIG), then the world’s largest insurer. Creditors accumulated chits that were unpayable by debtors, and the lack of government deposit insurance meant there was nothing to stop the creditors from panicking when the chits hit the fan....

Shadow banking covers any kind of lending that’s not done by banks that take insured deposits. Shadow banking, which remains lightly regulated, matches savers with borrowers in ways that conventional banks can’t. For example, money-market funds allow people and companies to stash excess cash that’s put to work financing auto loans, credit-card borrowings, and so on. Similarly, repurchase agreements (repos)—a form of secured lending—are a cheap way for pension funds and the like to raise money. “Where nonbank financial entities have specialized expertise in assessing risks, they may provide these functions in a cost-efficient manner and provide competition, innovation, and lower borrowing costs,” the Financial Stability Board wrote. Like banks, they fail when they can’t pay off their creditors in a crisis because their funds are tied up in long-term assets.

10---Greece in the grip of the EU, WSWS

Greece serves as a model for the whole continent. The redistribution of wealth from those at the bottom to those at the top cannot be reconciled with democratic rights or parliamentary forms of rule.

On Monday, a government spokesperson announced that Greece would deposit all the proceeds from the privatisation of profitable state enterprises into a special account that would be used exclusively for the repayment of debts and interest and is directly controlled by the troika. The German Finance Minister Wolfgang Schäuble has proposed that the financial aid could also be parked in such an account. In this way, the Greek state would lose the final remnants of its financial independence.

The dictatorship of the EU over all levels of the state administration is a direct reaction to the continuing mass protests, strikes and factory occupations with which the workers throughout Greece are resisting the brutal social attacks.

In order to impose new cuts and to further plunder Greek society, the financial elite is resorting to increasingly authoritarian means. While they subject the state administration to their diktats, the fascist gangs of Chrysi Avgi (Golden Dawn) are being mobilised and encouraged by the police to act against political opponents and workers.

The aim of these measures is not lowering the state debt, which continues to rise, but to lowing the living conditions of the working class to Third World levels. Social rights and the welfare system are being destroyed, wages cut and hundreds of thousands sacked. Many workers have already paid with their lives, being no longer able to pay for medical treatment or medicines in a health system ruined by the cuts.

The financial elite wants to impose this programme throughout Europe. Following Spain, Portugal and Italy, now France is in the firing line. On Monday, the rating agency Moody’s

11---A significant report on the global economy, WSWS

A report by a major US forecasting group has poured cold water on the idea that China, or any of the so-called emerging markets, can provide a new base of expansion for the global capitalist economy, either in the short- or long-term

The idea that China, India and other “emerging economies” could provide a new platform for global growth was always an illusion. It was based on the assumption that the rapid growth of the first decade of this century would continue indefinitely.

This scenario completely ignored the fact that, far from “decoupling” from the advanced capitalist economies, the new growth centres were dependent upon them. Chinese growth, for example, was the result of its development as the cheap labour platform for major transnational corporations, whose main markets were in Europe and the United States.

Those markets underwent a significant contraction with the eruption of the financial crisis, which continues today. In the face of the loss of 23 million jobs in 2008-2009, Chinese government and financial authorities responded with what is reputed to be the largest stimulus package in world economic history, based on increased government spending and the expansion of bank credit in order to try to prevent mass unemployment and social unrest.

However these measures were predicated on the assumption that pre-2008 conditions were going to return. That has not taken place as US and European markets continue to stagnate or contract

12---Workers Must Get a Bigger Slice of the Pie, NYT

ECONOMIC growth in Europe depends on a recovery in household consumption. And that, in turn, requires a rethinking of the balance between capital and labor.
Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P.
Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. These trends have gone hand-in-hand with a steady decline in business investment.
Europe’s strategy for dealing with the euro zone crisis has exacerbated these trends and is therefore a further obstacle to economic recovery. European countries are relying on two things to boost investment and hence employment:
First, they are trying to lower labor costs, make their business environments more attractive by switching the burden of taxation from the corporate sector to the consumer, pushing through labor reforms aimed at reducing workers’ bargaining power and curtailing social rights and transfers. Second, they are attempting to boost business confidence by consolidating public finances.
Such a strategy might make sense for individual countries, so long as they can rely on exports, but not for the European economy as a whole. The strategy promises to further aggravate Europe’s core problem — a structural shortage of demand — by bringing about a further decline of labor income and a further rise in inequality.
There is no doubting the need for reforms aimed at increasing competition and opening the way for the adoption of new technologies. But governments need to combine market-led reforms with measures aimed at preventing a further decline in labor’s share of the pie.
With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.  
Interview Keith Jurow, video
Most loan types increased in default rates during October, with a surge in first mortgage default rates, according to S&P Dow Jones/Experian Consumer Credit Default Indices


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