Wednesday, December 19, 2012

Today's links

1---Galbraith: Change of Direction, James K Galbraith

And the third great source of our problem is ideological. It is the neo-liberal idea that has given us deregulation and de-supervision; that has given us the notion that markets can function on their own without breaking down or blowing up. It is this notion as applied especially to finance. This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why? Because it was based on declining standards for loans and on lax accounting of the proceeds of those loans. Or to put it in simple terms, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen. And the world has seen a lot of financial fraud. It was known to be such to the lenders at the time. This was true of housing loans in the United States made by the tens of millions that were known to the lenders as “liar’s loans,” as “ninja loans,” no income, no job, no assets; as “neutron loans” destined to explode leaving the building intact but destroying the people. This was known at the time. These were loans that had to be refinanced or they would default....

Rising inequality is often linked to these phenomena. But I think we should be clear about what the linkage is. It is not the case that inequality rose and people compensated for it by borrowing more so they could have a higher standard of consumption. This is not what happened. It certainly did not happen in the United States. What happened was, is that the lenders went out to find new markets often fostering fraudulent loans on low-information borrowers, poor borrowers, inner city home owners, for example, forcing those loans to be refinanced so that the recipient only saw a fraction of the debt with which they were ultimately saddled. And the inequality arose from the booking of fees on those loans. This is how bankers get rich. They make their money in this way. And you can see this in their tax statements and you can see it in the geographical distribution of income gains in the United States.
And when the extent of the fraud could no longer be concealed then there was panic and collapse. This happened both in the United States and Europe and it did damage to the financial structure that was, let me suggest to you, essentially irreversible. It destroyed the underlying basis for economic growth that had sustained us for some time. That is to say it destroyed the housing finance market in the U.S. and it destroyed the sovereign credit market in Europe. And because in Europe it destroyed the sovereign credit market, the effects fell on public services and on dependent populations. Millions of jobs of course were also lost in both continents. That was the collateral damage.

2---Shadow inventory projections for 2013 – Modified loans re-default and new foreclosures. The overall household formation equation., Dr Housing Bubble

3---QE til 6.5% Unemployment? How’s 2018 sound?, Big Picture

Source: Hamilton Project

4---Mexican Gov’t Slams US-Backed Military Approach to Drug War, antiwar

5---Housing Starts at 861 thousand SAAR in November, calculated Risk

6---Models Behaving Badly,  Robert Skidelsky,  Project Syndicate

The IMF has conceded that “multipliers have actually been in the 0.9 and 1.7 range since the Great Recession.” The effect of underestimating the fiscal multiplier has been systematic misjudgment of the damage that “fiscal consolidation” does to the economy.
This leads us to the second mistake. Forecasters assumed that monetary expansion would provide an effective antidote to fiscal contraction. The Bank of England hoped that by printing £375 billion of new money, ($600 billion), it would stimulate total spending to the tune of £50 billion, or 3% of GDP.
But the evidence emerging from successive rounds of QE in the UK and the US suggests that while it did lower bond yields, the extra money was largely retained within the banking system, and never reached the real economy. This implies that the problem has mainly been a lack of demand for credit – reluctance on the part of businesses and households to borrow on almost any terms in a flat market.
These two mistakes compounded each other: If the negative impact of austerity on economic growth is greater than was originally assumed, and the positive impact of quantitative easing is weaker, then the policy mix favored by practically all European governments has been hugely wrong. There is much greater scope for fiscal stimulus to boost growth, and much smaller scope for monetary stimulus.
The policies of ‘extend and pretend’ continue to slow foreclosure activity while ensuring foreclosures will play an important role in our economy for years to come,” said Sean O’Toole, Founder and CEO of Foreclosure Radar. “While we are grateful that the government has extended the relevance of our company, we recognize our customers will need additional tools to be successful in this market. I couldn’t be more excited about what we have coming soon in 2013. Current customers will get it first.Lenders are determined not to clear the market. Due to their double incentive to wait that I described above, they will continue to modify loans over and over again until either they have the capital reserves to absorb the write down or until prices reach the loan balances when they can foreclose and get all their money back.

California REO acquisitions down 16%

Despite the fact that prices are rising and inventories are critically low on inventory, banks actually took back fewer homes last month. The inventory shortages are becoming the new normal....

Notices are also declining

Lenders have greatly reduced their foreclosure filings over the last year despite the fact they have no shortage of delinquent squatters to foreclose on. It is a sign that banks are in no hurry to process California foreclosures due to the upcoming law changes on January 1....

Amend-extend-pretend continues. Lenders are in no hurry to process more foreclosures, and their liquidations still hang over the market. Over the last seven months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward. Expect more of the same going forward.


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