Tuesday, December 18, 2012

Today's links

1---Banks Seek a Shield in Mortgage Rules, NYT

2---NYSE Volume Chart is Deceptively Informative, Big Picture

3---US Federal Reserve expands “quantitative easing”, WSWS

The Federal Reserve is taking these steps in part because it foresees a significant deterioration in the US economy.

Last week, the University of Michigan said that its confidence index fell sharply in December to 74.5, down from 82.7 percent. The Institute for Supply Management (ISM), meanwhile, reported last week that its index of manufacturing activity fell to 49.5, the lowest level since July 2009....

This is a fraud. In fact, the Federal Reserve’s policy of providing unlimited free cash to the banks, all the while buying up the toxic assets on their balance sheets, has nothing to do with providing jobs to the unemployed....

US corporations are sitting atop a cash hoard that is estimated to be as much as $5 trillion dollars, while levels of investment have dropped to the lowest levels in years. Instead of putting people to work, banks and corporations are either hoarding or using the money to speculate.

The real goal of the Federal Reserve is to guarantee the continual profitability of Wall Street and the personal incomes of the super-rich.

First, the policy of zero interest rates guarantees the banks a profitable investment opportunity, at the very least by borrowing money at zero interest rates and using it to buy the government’s own debt.

Second, one of the stated aims of the quantitative easing program is to reduce interest rates on mortgages, and therefore prop up the US housing market. This is essential for inflating the values of “toxic” mortgage-backed securities, trillions of dollars of which remain on the balance sheets of the banks.

4---Spain Bad Loans Ratio Surges to 11.23% as Defaults Climb, Bloomberg

5---Underwater Homeowners Cannot Explain the Weak Recovery, CEPR

Remarkably, it seems from a Washington Post article that attributes the continuing weakness of the economy to the indebtedness of underwater homeowners, that many of the country's top economists have no better understanding of the economy today than in 2006.The claim is the drop off in consumption due to the debt burden of these homeowners explains the weakness of the recovery....

With 11 million homeowners underwater, the above calculation implies an increase in average annual consumption of between $9,500 and $15,000 a year. The median homeowner has an income of less than $70,000 a year. It doesn't seem likely that such a family would either have this amount of savings each year that they could instead decide to consume if they were no longer underwater in their mortgage or that they could borrow this amount on any sort of sustained basis. In short, the numbers in my calculation above almost certainly hugely overstate the economic impact of eliminating underwater mortgage debt.

In fact, there is no need to turn to implausible underwater mortgage debt explanations for the weakness of the economy. The economy is acting exactly as those who warned of the bubble predicted. We saw a sharp falloff of residential construction as we went from a near record boom, with construction exceeding more than 6.0 percent of GDP at the 2005 peak, to a bust where it fell below 2.0 percent of GDP. This meant a loss in annual demand of more than $600 billion a year.
We also saw a large falloff in consumption due to the loss of $8 trillion in housing wealth. The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand.

There is no mechanism that would allow the economy to easily replace the combined loss of between $1 trillion and 1.2 trillion in demand that would be predicted from the collapse of the housing bubble. Therefore it is hard to see why anyone would feel the need to look to explanations involving the indebtedness of underwater homeowners, the whole downturn is easily and simply explained by the collapse of the bubble.

In this respect it is worth noting that, contrary to the impression given by the article, consumption remains unusually high relative to disposable income, not low.

Source: Bureau of Economic Analysis and author's calculations.

As can be seen consumption as a share of disposable income is well above the level of the 60s, 70s, 80s, and even the 90s prior to the point where the stock bubble led to a consumption boom in the late 90s. If anything, we should be asking why consumption is so high, not why it is low. (Adjusted disposable income refers to the statistical discrepancy in the national income accounts.) In short, the underwater homeowner story is an explanation for a mystery that does not exist.

6---Keynes, Chuck Braman.com

Written during the height of the depression, it offered a new explanation of the depression and the unemployment that plagued it. In addition to its timing, however, Keynes’ new theory probably also appealed to economists because it provided an alternative to the traditionally held view that unemployment can and should be eliminated by a drop in wage rates. Keynes alternative was politically and socially much more palatable to the intelligentsia, because the majority of the intelligentsia held the conclusion, claimed by the Marxist exploitation theory, that wages tend toward the minimum level required to maintain the subsistence of the workers. Thus, for economists to advocate that wages fall yet lower placed them in a seemingly morally indefensible position. Keynes new theory, on the other hand, conveyed a politically much more palatable solution to unemployment: according to Keynes, the solution to unemployment was a growth in government spending. The particular form of government spending advocated by Keynes was for the government to purposely adopt a policy of budget deficits; this he called “fiscal policy.”

7---Pam Martens on "wealth concentration", Wall Street on Parade

A study conducted by Edward N. Wolff for the Levy Economics Institute of Bard College in March 2010 made the following findings:
The richest 1 percent received over one-third of the total gain in marketable wealth over the period from 1983 to 2007. The next 4 percent also received about a third of the total gain and the next 15 percent about a fifth, so that the top quintile collectively accounted for 89 percent of the total growth in wealth, while the bottom 80 percent accounted for 11 percent.
Debt was the most evenly distributed component of household wealth, with the bottom 90 percent of households responsible for 73 percent of total indebtedness.
Wealth concentration in too few hands while the general populace is saddled with too much debt to buy the goods and services produced by the corporations, is a replay of the conditions leading to the crash of 1929 and the ensuing Great Depression.
Writing in his book, “The Worldly Philosophers,” Robert Heilbroner explained the situation leading up to the depression of the 1930s:
“The national flood of income was indubitably imposing in its bulk, but when one followed its course into its millions of terminal rivulets, it was apparent that the nation as a whole benefited very unevenly from its flow. Some 24,000 families at the apex of the social pyramid received a stream of income three times as large as 6 million families squashed at the bottom — the average income of the fortunate families was 630 times the average income of the families at the base…And then there was the fact that the average American had used his prosperity in a suicidal way; he had mortgaged himself up to his neck, had extended his resources dangerously under the temptation of installment buying, and then had ensured his fate by eagerly buying fantastic quantities of stock – some 300 million shares, it is estimated – not outright, but on margin, that is, on borrowed money.”
In both eras, Wall Street ceased being an allocator of capital to worthy enterprises and became an institutionalized system of rigged wealth transfer.

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