Wednesday, February 29, 2012

Today's links

1--The Great Repression, Big Picture

Excerpt: We’re baffled anybody still looks to the U.S. bond market for signals of future economic activity, inflation, or even risk aversion. Case in point is today’s 7-year bond auction, which CNBC’s Rick Santelli rated an eleven on a scale of ten, i.e., a slam dunk!

Go no further, however, than the chart below to see which maturities on the yield curve are the most repressed. Prior to today’s auction, for example, the Fed owned 43 percent of all Treasury coupon securities maturing in 2019 and more than 50 percent in three of the seven issues maturing in that year....

Finally, we view long-term Treasury interest rates as one of, if not, the most important price in the world. Because of direct financial repression the information it now provides and the signal it sends, which is so important to capital allocation decisions, has, at best, been severely distorted. No wonder corporations are hoarding cash and reluctant to invest.

2--Corporate Profits Rise…but Wages Fail to keep Pace with Inflation, All Gov

Excerpt: American corporations continue to enjoy healthy profit margins, while the average worker is watching inflation outpace wages.

Earnings for businesses began to rebound in early 2010 and have continued to do well ever since. By the third quarter of last year, pre-tax corporate profits climbed to a record $1.97 trillion.

Meanwhile, the consumer price index, which is used to measure the rate of inflation, reveals that inflation went up 2.3% from last year to now. During this same period, average hourly earnings climbed only 1.5%.

Michael Feroli, chief U.S. economist at JPMorgan Chase, told Bloomberg that the decline in inflation-adjusted wages means it will be difficult for the economy to sustain growth because wage earners will not be able to increase their purchases of consumer goods. The tax cuts, stimulus spending and increases in social benefits by the federal government have helped make up for the weak earnings, but eventually the impact of those government fixes will level off.

3--Margins Widen at U.S. Companies as Wages Lag Behind: Economy, Bloomberg

Excerpt: Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services.

The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.

“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.”

While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.

“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”

4--John O’Brien: Mortgage Settlement Fails to Address Banking Criminal Enterprise, economonitor

Excerpt: As Dave Dayen has pointed out, it was two county registers of deeds, Jeff Thigpen in Guiford County, North Carolina, and John O’Brien of South Essex County, Massachusettes, who were the first to look at their own records to see how extensive the frauds were. O’Brien has called his office a “crime scene” and refused to register any more fraudulent deeds. He also performed a study of his own, and the results were released in June 2011. As Dayen reported, the study found widespread failures and apparent fraud, just like the later San Francisco exam:

Register John O’Brien revealed the results of an independent audit of his registry. The audit, which is released as a legal affidavit was performed by McDonnell Property Analytics, examined assignments of mortgage recorded in the Essex Southern District Registry of Deeds issued to and from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America during 2010. In total, 565 assignments related to 473 unique mortgages were analyzed.

McDonnell’s Report includes the following key findings:

• Only 16% of assignments of mortgage are valid

• 75% of assignments of mortgage are invalid.

• 9% of assignments of mortgage are questionable

• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.

• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)

• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

5--Main Street's $100 Billion Stock-Market Blunder, smart money

Arends: The market may be back to pre-crisis levels, but many regular investors have missed out.

Excerpt: Back in the spring of 2009 I was approached by a middle-class investor in a panic. She had dumped all her stocks in the fall of 2008, following the Lehman Brothers collapse. She just couldn't stand watching her life's savings evaporate before her eyes. By the time we spoke, the stock market had already rallied sharply, but she was too afraid to jump back in. She just didn't trust it. I couldn't coax her. She was terrified...

It's a typical story, and the results are plain to see. Last week, the Dow Jones Industrial Average hit 13000 for the first time since the crash. It has recovered most of the ground lost from the peak. When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.

But for all the cheering on Wall Street, there's a sorry tale behind the headlines.

While we've seen a stock-market boom that has made plenty of people rich, much of Main Street America has missed out. Instead of buying, they've been selling. The few moments when they've steeled themselves and turned buyers have been, on the whole, the worst times to do so.

In total, over the last five years the investors in ordinary domestic mutual funds have withdrawn $490 billion from the U.S. stock market, according to data compiled by the Investment Company Institute, the industry trade group. There have been only a few brief periods during which they were buying. The first was the spring of 2008 -- just before the market collapsed. The second was the spring of 2009, after the stock market had already rallied. The third was the start of last year, shortly before the market slumped again.

6--Hours flat and wages up modestly, EPI

Excerpt: The length of the average workweek was unchanged in January at 34.5 hours, still below the December 2007 level of 34.6. Average hourly wages increased by 4 cents in January, and a 1.4 percent annualized rate over the last three months. This remains far below the pre-recession growth rate (3.3 percent from December 2006 to December 2007), as persistent high unemployment has exerted strong downward pressure on wage growth. Average weekly wages grew more strongly at $1.38, and a 2.6 percent annualized rate over the last three months

Labor force participation and the employment-to-population ratio

The labor force participation rate was 63.7 percent in January, its lowest point since the downturn began. Remarkably, the labor force has grown by less than half a million workers since the recession started in December 2007, though the working-age population has grown by nearly 10 million in that time. There are currently 2.8 million “marginally attached” workers—workers who want a job, are available to work, but have given up actively seeking work. If these workers were in the labor force and counted as unemployed, the unemployment rate would be 9.9 percent right now instead of 8.3 percent.

At a time like this, with the labor force not growing at a steady pace, arguably the cleanest measure for assessing labor market trends is the employment-to-population ratio, which is simply the share of working-age people who have a job. The ratio was 58.5 percent in January, also not far from its low of 58.2 percent last summer. The labor market still has substantial ground to make up: The employment-to-population ratio was 63.3 percent five years ago, in January 2007, before the recession started.

Conclusion

The jobs deficit left from losses in 2008–2009 remains in excess of 11 million jobs (when you take into account both the 5.6 million fewer jobs we have now than we did before the recession started, and the fact that we should have added more than five million jobs to keep up with normal growth in the working-age population). To fully fill the gap in three years, by the start of 2015, we would have to add around 440,000 jobs every month between now and then. But that’s not expected to happen. The Congressional Budget Office projects that the unemployment rate will be 8.0 percent at the start of 2015, three years from now. Millions are being needlessly condemned to joblessness for years to come.

7--FASB Sold Out; Expected Results Followed, Big Picture

Excerpt: In the height of the financial crisis, the Financial Accounting Standards Board were pressured to pass FASB 157 (“Fair-value accounting”).

Banks were complaining that some of their holdings were difficult to value, thinly traded, tough to mark. So 157 passes and it allows the accountants at banks to mark these to a model rather than the last trade.

Derided as “Mark-to-Make-Believe” it leads to this unfortunate situation: The same models that led to the unfortunate money-losing purchase decision in the first place are now being used to actually value these holdings. regardless of the obvious flaw in the model in the first place.

As these bad buys plummet in price, investors in banks have no insight into the loss potential — they are hidden from view, along with the true financial condition of the company. This sort of accounting fuckery would never be tolerated in a nation where investors mattered more than insiders and bankers. Instead, it rewards the incompetent and allows near insolvent banks to pretend they are solvent, thereby allowing the granting of huge bonuses.

Almost three years later, we see the results of the Accounting Board’s move. The large bailed out banks remain weakened. Like all wounded animals, they are very dangerous. They have institutionalized fraud, made forgery a business expense. ZIRP exists for the primary reason of allowing these banks to rehabilitate their faulty balance sheets. Savers get punished.

The same could have been accomplished much more quickly and cheaply through prepackaged bankruptcies. That would have required an uncorrupted Congress, an honest Accounting board and a willingness to allow capitalism in America. Instead, we had foisted upon us a convoluted form of Socialism for Financiers.

If you want to know why the Fed has maintained zero interest rates, you need only look at who remains employed at banks, at who gets blamed for their failure. The record low approval rating of Congress at least imply that the public isn’t utterly blinded by the scam.

All to save the asses of a few reckless, incompetent bankers. Something is very, very wrong with this system

8--Mass layoffs expose myth of US economic “recovery”, WSWS

Excerpt: The recent announcements of mass layoffs by the US Postal Service, Procter & Gamble, and Archer Daniels Midland, together with the bankruptcies of Fuller Brush and American Airlines, have upended claims that the United States is in the midst of an “economic recovery.”

In fact, the US economy remains mired in mass unemployment, with falling real wages and growing poverty a fact of life for millions of people. Small and medium businesses, facing immense pressures to cut costs, are collapsing by the tens of thousands.

The worst of the recent job cuts was conducted by the government itself: the US Postal Service announced last week that it would wipe out 35,000 jobs by the end of September, part of a longer-term plan to eliminate 150,000 job...

The reality is completely different. In 2011, the US economy created 1.5 million jobs, but the population grew by 2.2 million, and a roughly equivalent number of young people entered the work force. The employment-population ratio, meanwhile, remains at record lows after having dropped by about 5 percentage points between 2008 and 2010....

The Obama administration set the model for this whole process during the restructuring of the auto industry, where the administration demanded an expansion of super-exploited new hires making $14 per hour as a condition for bailing out the Big Three.

This points to the fundamental nature of the economic crisis, which has been utilized by the ruling class to lower wages and slash social spending throughout the economy, with the aim of boosting corporate profits and the incomes of the super-rich.

Nearly three years after the official end of the recession in June 2009, it is becoming increasingly clear that the crisis of 2008 was not merely another recession, but a transition to a “new normal” where high unemployment is a permanent fixture, real wages are perpetually falling, and third-world poverty a reality for millions of people.

This is because the present downturn is not merely the operation of the normal business cycle, but a general crisis of world capitalism. It reflects the breakdown of the postwar economic order and the historical decline of American capitalism in particular.

The ruling class has responded to the crisis with single-minded determination to destroy the incomes and living standards of working people.

9--Delinquent Debt Shrinks while Real Estate Debt Continues to Fall, NY Fed

Excerpt: Aggregate consumer debt fell $126 billion to $11.53 trillion in the fourth quarter of 2011 according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit, a 1.1 percent decrease from the $11.66 trillion reported in the prior quarter’s findings. The report, which includes data on a variety of household debt levels, also revealed further declines in real estate debt and delinquencies, while showing that other forms of consumer indebtedness increased.

Mortgage and home equity lines of credit (HELOC) balances fell a combined $146 billion, a sign that consumers continue to reduce housing related debt.

After a mild uptick in the third quarter, total household delinquency rates resumed their downward trend in the fourth quarter. The report finds that $1.12 trillion of consumer debt (or 9.8 percent of outstanding debt) is currently delinquent, with $824 billion seriously delinquent (at least 90 days late). Meanwhile about 2.2 percent of mortgage balances transitioned into delinquency during the fourth quarter, resuming the recent trend of reductions in this measure. However, delinquency rates remain elevated compared to historical figures.

"While we continue to see improvements in the delinquent balances and delinquency transition rates this quarter, there has been a noticeable decrease in the rate of improvement compared to 2009-2010," said Andrew Haughwout, vice president and economist at the New York Fed. "Overall it appears that delinquency rates are stabilizing at levels that remain significantly higher than pre-crisis levels."

10--Federal judge weighs whether to let regulators rein in oil speculators, McClatchy

Excerpt: A federal judge on Monday refused to halt efforts by a key regulator to limit excessive speculation in the trading of oil contracts — which is driving up oil and gasoline prices — but hinted that he might soon rule in favor of Wall Street and let speculation go unchecked.

Robert Wilkins, a judge on the U.S. District Court for the District of Columbia, declined a request for a preliminary injunction to halt the Commodity Futures Trading Commission from implementing a congressional mandate to limit how many oil contracts any single financial speculator or company can control.

However, Wilkins told both the CFTC and lawyers for the Securities Industry and Financial Markets Association and the International Swap and Derivatives Association that he expected to make a ruling soon on whether to hear the case. His line of questioning left both sides with the impression that he was concerned about how the regulatory agency has proceeded...

The judge directed most of his questions at the CFTC’s Marcus, grilling him on financial sector complaints that the cost of complying with the new rules was burdensome and that there had not been enough analysis of costs vs. benefits. Marcus countered the judge’s questioning by noting that the Dodd-Frank Act explicitly directed the agency in four different places to quickly impose limits and called the costs to industry “minuscule” compared to their earnings.

11--Corporations don't need tax cuts. Why is Obama proposing them?, Chritian Science Monitor

Excerpt: The Obama administration is proposing to lower corporate taxes from the current 35 percent to 28 percent for most companies and to 25 percent for manufacturers. But American companies are booking higher profits than ever....

It’s not as if corporations are hurting. Quite the contrary. American companies are booking higher profits than ever. They’re sitting on $2 trillion of cash they don’t know what to do with.

12-- Real Data Does Not Corroborate Pollyanna, Trim Tabs

Excerpt: ...many on Wall Street want to believe that a stock market up by more than $9 trillion, or 100% from the March 2009 low, has to mean that the US economy is in a healthy long term recovery. Unfortunately, the Pollyannas are wrong. Their evidence of an improved labor market, higher corporate earnings and the return of the housing market are all based upon misleading data.

The TrimTabs analytical method starts with the question, where is the new cash is coming from? Currently new cash is not coming from the normal source; which has always been income.

The only increase in cash since the March 2009 has been the Federal Reserve giving newly created money away as payment for government expenses. Over the four fiscal years, since 2009 the US Government collected an average of $2.3 trillion annually and has spent, close to $3.6 trillion annually. The combined $4 trillion deficit, when added to the $1.4 trillion given away to banks to buy their worthless mortgages equals the $5 trillion increase is US debt.

For what it is worth, in the peak year of 2007 the federal government collected $2.6 trillion but only spent $2.7 trillion. That was a deficit of only $100 billion.

To go back to the real time data available about the economy, all that is available with which to count current income is withheld income and employment taxes paid by employers to the U.S. Treasury for all 131 million salaried workers. Our analysis says after-tax income is growing at just under 3.0% year over year, not keeping up with inflation. And yes, the BEA and BLS refuse to use this real time data. Why? Ask them. I have, and they’ve never responded.

The reality is that if income tax collections are not growing very fast than neither are the number of new jobs. That calls into question the recent BLS press release that said jobs are growing fast.

The Pollyannas say that declining unemployment claim numbers support the belief that jobs are growing faster. But the reality is that without seasonal adjustments unemployment claims are currently down the same 10% year over year as the past six months. In other words by counting year over year numbers, there is no improvement in the rate of new claims for unemployment. So jobs in reality cannot be growing any faster now than at the end of last year.

So, even if jobs are not growing fast, corporate earnings are, right? The reality is that corporate earnings are no longer growing rapidly. As Jim Bianco reports, when you subtract the Q4 earnings of Apple (AAPL) and AIG (AIG), the rest of corporate America is growing earnings at a meager 5% year over year. What is worse, earnings guidance for 2012 keeps declining.

So if jobs are not growing very fast and neither are corporate earnings, at least the housing market is doing better right? All the seasonally adjusted numbers say so, right? Well, as we reported last week Mark Hanson, of mhanson.com, says real-time data, ignoring seasonal adjustments and counting year over
year numbers, indicate both prices and sales of new and existing home sales are pretty much unchanged from year end 2011. The sole reason the current sales numbers look like big improvements are due to seasonal adjustments that makes a small weather based January gain seem huge. While the real estate market is probably at a bottom at the low end, but higher end home prices will continue decline primarily because there is no jumbo mortgage money easily available.

Yes the stock market has been going up, but that does not have to mean the US economy is improving. While US and European stocks have been going up, gold keeps rising faster. That means it is not gold that is a chimera, or a phantom, it is the US currency that is a phantom.

13--Is it time to buy?, CNBC

Excerpt: Housing appears to be rated a “buy” these days, especially among investors, who see a ripe and rising rental market and big potential for income. But is it the right time yet for what I call “organic” buyers to get in? By this I mean people buying a home to actually live in it, raise a family in it, let the dog run around in the back yard. If prices are still falling, couldn’t an even better deal be waiting down the road a bit?

No. House prices will continue to fall on a national basis at least through 2012, but you have to look past national headlines to your local market, which is likely already recovering nicely. The trouble with the national numbers is that they are heavily weighted toward the lower end of the market and to the distressed end of the market.

Around 73 percent of homes that sold in January were priced below $250,000, according to the National Association of Realtors. Forty-seven percent of homes sold that same month were considered “distressed,” which is either a foreclosure or a short sale (where the lender allows the borrower to sell for less than the value of the mortgage). With all the activity in these areas, no surprise that prices skew lower.

The $250,000 to $500,000 price range may now be the sweet spot for the market. Sales in January were up in this price range, and if you have good credit, you are within GSE and FHA loan limits in most markets. While FHA just raised its insurance premiums, which may hurt much-needed first-time homebuyer demand, it is still one of the best loan products out there today, especially for those with lower down payments.

You cannot time housing any more than you can time the stock market. True, housing moves far more slowly, but that works to its benefit, as prices don’t rise and fall on daily news or even on major events. Sales have clearly bottomed in housing, and prices always lag sales. They will lag longer this time around, no question, but they will come back. Supply and demand will eventually win out, even after an historic crash. If you can’t get a good mortgage now, then perhaps it’s not your time, but if you can, waiting may not buy you much.

Tuesday, February 28, 2012

Today's links

1--Europe’s Empty Fiscal Compact, Martin Feldstein, Project Syndicate

Excerpt: which Germany and other strong eurozone economies would transfer funds year after year to Greece and other needy countries, in exchange for the authority to regulate and supervise the recipient countries’ budgets and tax collections. The German public rejected the idea of permanent transfers from German taxpayers to Greece, while Greek officials and the Greek public rejected the idea of German control over their country’s fiscal policy.

The next step was the fiscal plan that was agreed in Brussels at the end of last year, which completely abandoned the idea of a transfer union in favor of an agreement that each eurozone country would balance its budget. Under this scheme, a financial penalty would “automatically” be imposed on any country that violated that obligation. With balanced budgets everywhere, there would be no need for fiscal transfers.

But how, exactly, should the balanced budget requirement be defined? In a letter to the officials negotiating the formal agreement, Jorg Asmussen, the German member of the European Central Bank’s Executive Council, stressed that a balanced budget meant just that. Even if a country ran budget deficit because a cyclical downturn caused a fall in tax revenue and an increase in social transfers, it should be required to raise taxes or cut spending to restore a balanced budget.

If this proposal were actually implemented, it would have the effect of turning small recessions into major economic downturns. Fortunately, this recipe for creating future European depressions was rapidly dropped....

f this is the essence of the fiscal compact that is eventually agreed, it will have no predictable effect on eurozone countries’ behavior. Its only effect will be to allow the eurozone’s political leaders to claim that they have created a fiscal union, and thus that they have moved Europe closer to the political union that is their ultimate goal.

But a fiscal union conceived in this way is completely different from how most people understand the term. In the United States, for example, the central government collects about 20% of the country’s GDP and pays out a similar amount. That centralization of taxes and spending creates an automatic stabilizer for any region that experiences an economic downturn: the affected region’s residents send less money to Washington and receive more in transfers.

There is no similar process in the eurozone, where taxes and spending occur at the national level. The centralized fiscal role in the US also allows all of the individual states to operate with true balanced budgets, modified only by relatively small “rainy day” funds.

2--Speculation In Crude Oil Adds $23.39 To The Price Per Barrel, Forbes

Excerpt: If there were no speculation in oil futures on commodities exchange, the price of a barrel of oil might be as low as $74.61– not more than the present price of $108.00 a barrel.

But, there is plenty of speculation as the possibility of strife in Iran, one of the globe’s largest crude oil producers, pushes up the price of oil futures, which in turn impact the price of buying crude oil in the open market. As of February 23, 2012 “managed money” held positions in NYMEX crude oil contracts equivalent to 233.9 million barrels of oil– the equivalent of about one year’s crude oil supply from Iran to Western European nations like France, Belgium, Greece, Italy and Spain.

As Goldman Sachs believes that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil, this means that in theory the speculative premium in oil prices due to speculation is as much as $23.39 a barrel in the price of NYMEX crude oil.

In turn oil analysts believe that every $10 rise in the price of crude oil translates into a 24 cent rise in the price of gasoline at the pump. Using the 24 cent rise in the price of gasoline suggests that each dollar increase in a barrel of oil equals about $.56 per barrel.

So, if a barrel of crude oil is $23.39 higher because of speculative action in the commodity markets– this translates out into a premium for gasoline at the pump of $.56 a gallon. Since gasoline in the northeast is about $3.68 a gallon, this suggests that without any speculation, the cost of a gallon would be only $3.12, a lot more favorable outcome.

3--Oil falls after recent jump, supply worry supports, Reuters

Excerpt: Oil prices pulled back on Monday after a string of higher settlements as G20 concerns
about the effect of high oil prices on global growth and a stronger dollar helped counter support from worries about Iran and potential supply disruptions.

The Group of 20 finance ministers and central bankers said on Sunday they were "alert to the risks of higher oil prices"and discussed at length the impact that sanctions on Iran will have on crude supplies and global growth.

The G20 officials also said that they welcomed a commitment from producer countries to ensure oil supplies. ...U.S. crude is on pace for a 10 percent gain in February and is up nearly 11 percent in 2012 after rising 8.2 percent last year....

Sanctions against Iran over its nuclear program have removed a major supply source for many refiners and investors worry escalating confrontation in the Middle East could disrupt oil flows from other suppliers in the Gulf.

4--Anonymous joins forces with OWS against NDAA-supporting politicians, RT

Excerpt: America’s most powerful protest groups are joining forces to warn elected officials that they will be held accountable for their actions. The campaign is called Our Polls and its being launched with help from both Anonymous and the Occupy movement.

The AnonOps Communications website revealed details early Monday this week regarding the hacktivist collective’s latest campaign. Along with the nation-wide Occupy Wall Street movement, Anonymous says they are going after the politicians in America that supported legislation that both entities have largely advocated against.

“Elected officials serve one purpose — to represent their constituents, the people who voted them into office,” reads a statement posted to the website. “Last year, many of our elected officials let us down by giving in to deep-pocketed lobbyists and passing laws meant to boost corporate profits at the expense of individual liberty.”

The legislation in question include the National Defense Authorization Act for Fiscal Year 2012, the Stop Online Piracy Act and the Protect IP Act. In an act of retaliation aimed at those that supported these bills, the groups have released a roster of politicians that have not only expressed favor for the laws, but that are also up for reelection this year.

“You are one person. You have one vote. Use that vote on November 6 to hold your elected official accountable for supporting bills such as NDAA, SOPA and PIPA,” reads their statement.

Although both SOPA and PIPA have been halted in Congress, the NDAA was successfully signed into law by US President Barack Obama on December 31, 2011, granting the commander-in-chief the power to authorize the military detainment of American citizens without ever bringing charges against them.

“Our Senators and Representatives showed how little they cared about personal freedoms when they voted overwhelmingly to pass the National Defense Authorization Act (NDAA),” reads Monday’s statement, which also calls the act “a prominent threat to the inalienable due process rights of every US citizen as laid out in the Constitution.”

“It allows the military to engage in civilian law enforcement, and to suspend due process, habeas corpus or other constitutional guarantees when desired. Our congressmen passed one of the greatest threats to civil liberties in the history of the United States.”

Similar legislation in the vein of the failed SOPA and PIPA acts have also been drafted since their defeat, which critics fear could cause the US government to implement a veil of censorship over the World Wide Web.

Although activists with both Anonymous and Occupy have openly opposed such laws in the past, the latest campaign will at last bring both bodies together to protest any other damning legislation.

5--Once again, speculators behind sharply rising oil and gasoline prices, MCLatchy

Excerpt: "Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation," said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. "I still remain convinced oil prices are inflated."

Consider that light, sweet crude trading on the NYMEX changed hands at $79.20 a barrel just four months ago, but soared past $106 a barrel Tuesday afternoon, partly on news that Iran would halt shipment of oil to Britain and France. But those countries already had stopped buying Iranian oil. And Didier Houssin, the International Energy Agency's director for energy markets and security, said that "there are alternative supplies that can make up for any loss of Iranian exports," The Wall Street Journal reported.

Still, oil's price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading.

Since oil prices are the biggest component in the price of gasoline, pump prices are soaring. AAA said Tuesday that the nationwide average price for a gallon of gasoline stood at $3.57, compared with $3.38 a month ago and $3.17 a year ago. It takes about $6 more to fill up the tank than it did this time last year — and last year's gasoline-price surge helped take the steam out of the economic recovery.

Defining what percentage of today's high oil and gasoline prices is due to excessive speculation, driven by Iran fears, is something of a guessing game.

"I put the Iran security premium at about $8 to $10 (a barrel) at this point, which still puts crude at about $90 or $95," said John Kilduff, a veteran energy analyst at AgainCapital in New York.

The fear premium is the froth above what prices would be absent fears of a supply disruption_ somewhere in the $80 to $85 range for a barrel of crude oil. It means that even with the extra cost put on oil from Iran fears, prices are at least another $10 higher than what demand fundamentals would dictate.

6--Draghi’s Unlimited Loans Are No Panacea, Bloomberg

Excerpt: European Central Bank President Mario Draghi’s success in quelling a bond-market rout across the euro region’s periphery masks a failure by the region’s banks to bolster their capital.

The ECB will offer a second round of unlimited three-year funds on Feb. 29. Firms will seek 470 billion euros ($629 billion), approaching the 489 billion euro take-up by 500 banks at the first long-term refinancing operation on Dec. 21, the median estimate of 28 analysts surveyed by Bloomberg show.

“The worry is it may act to keep afloat institutions that aren’t exactly viable,” said Stewart Robertson, chief European economist at Aviva Investors in London, which manages more than $425 billion. “This buys time for banks, but does it really provide them with an incentive to sort out their books? The worry is it doesn’t.”

The Frankfurt-based central bank is flooding the market with cheap money to head off a credit crunch, boost lending to companies and consumers, and spur demand for unsecured bank debt. Rates on two-year Spanish notes have fallen 241 basis points to 2.56 percent since the first offer was announced on Dec. 8 and Italian yields have shed 336 basis points to 2.79 percent.

“Providing money so cheaply, for so long, against what is now effectively any collateral whatever, leaves the ECB in a position no central bank would choose to be in,” UBS AG analysts led by London-based Alastair Ryan said in a Feb. 22 note to clients. “It cannot control the credit risk coming onto its books, or at least onto the books of its national central banks. Worse, the success of its interventions risks encouraging politicians to avoid making necessary but difficult decisions.”

Banks can borrow from the ECB at 1 percent and invest the proceeds in 10-year Italian government bonds yielding 5.49 percent. While that so-called carry trade will help boost banks’ income, it makes them more vulnerable to a decline in the value of government debt. It also may become costlier for banks to obtain longer-term funding because ECB loans are senior to claims from other lenders. ....

Overnight Parking

Rather than heed calls by politicians to boost lending to companies and consumers, some banks are choosing to deposit the money in the ECB’s overnight facility at a rate of 0.25 percent until they need it to refinance maturing debt. Deposits with the central bank rose to a record 528 billion euros on Jan. 17 and were at 477 billion euros at the end of last week, according to ECB data.

“This will ease credit flows but won’t stop the great deleveraging,” Huw van Steenis, an analyst at Morgan Stanley in London, wrote in a note to clients. “LTRO is important but not a panacea. While the LTRO should materially ease the euro zone deleveraging process, credit conditions appear likely to remain fairly tight in Spain, Italy and central and eastern Europe.”...

“The crisis will only be resolved when, and if, European banks are sufficiently recapitalized to render a Greek default, and the concomitant peripheral contagion containable,” Danny Gabay and Yiannis Koutelidakis, London-based economists at Fathom Consulting, said in a note to clients last week. “European politicians have been lulled into a false sense of security by the market’s euphoric reaction” to the LTRO, they wrote.

Growing Risk

Banks also are cutting lending outside their home markets, data compiled by the Bank for International Settlements show. Euro-area banks reduced lending to Asia by 9 percent and to central and Eastern Europe by 8 percent in the third quarter.

“While the two three-year LTRO tenders establish a relatively long period for the industry to adjust, the ECB exit, in our opinion, represents a large risk that will grow over the coming three years as the first quarter 2015 maturity of the three-year LTRO approaches,” rating company Standard & Poor’s said in a Feb. 21 note.

7--IFR Comment: A big kicker for risk from second LTRO, IFR

Excerpt: It’s a big week for risk markets as we get another (and likely final) instalment of the ECB’s 3-year LTRO and we expect take-up to be around €500bn. Unlike in December when the 3-year LTRO liquidity helped to mitigate concerns over tail risk the liquidity impact from the LTRO this week will likely add a kicker to markets already flirting with risk-on.

Looking beyond the headlines: The December 3-year LTRO might have had a size of €489bn but the actual net new liquidity add was €193.4bn. This is because some €277bn of liquidity was shifted from shorter dated liquidity operations to the 3-year operation. This week there are some €253bn of liquidity operations maturing and in addition to this we have a special one-day operation.

The allotment at the 3-year LTRO this week needs to be adjusted for how much is rolled from the maturing operations to get a better idea of the liquidity add. It seems likely that net new liquidity will be greater than the €193.4bn that was allocated at the December 3-year LTRO.

Pro-risk trades

Interpretation will be positive: Market sentiment is thus that whatever the size of the allocation the interpretation will be that it is positive for risk markets. A higher than expected allocation will see a focus on the liquidity impact for risk markets while a lower than expected allocation will see markets view it as a sign that eurozone banks are seen as less risky. This is the set-up of the market that has moved from pricing out the tail risks (especially on a Greek default) and has been grudgingly forced to focus on pro-risk trades.

Not everyone likes to party: When the music is playing it seems that some people just have to dance and the longer you stay on the sidelines the more tempting it becomes to throw away your inhibitions and start dancing. Monetary easing from the BoE (further £50bn QE), BoJ (additional ¥10trn in QE) and the Fed (lower for longer on Fed Funds as well as continuing QE) has made sure that a drying punch bowl was once again filled to the brim.

The fact that volumes remain low suggests that participation remains low and there are still plenty listening to the music and not yet dancing.

Unlike Q1 2009 the markets are aware that a liquidity fuelled binge on risk can be damaging to the P&L and are more cautious. However, the ECB’s LTRO could help to add a larger kicker to risk assets especially as stock indices have shown little intention to correct preferring instead to move sideways before the next small leg up. The longer this continues, the more difficult and uncomfortable it becomes for players who had dived into safety and liquidity to stay on the sidelines.

8--Could free ECB money have expensive consequences?,IFR

Excerpt: “In theory, everybody would love to borrow at zero or negative rates without going through the pain of finding a creditor happy to take the opposite side of the transaction,” he said. “If the central bank offers this service systematically, banks can dismantle their trading platforms – which are costly to maintain – and become addicted to central bank credit.”

He continued: “If a protracted period of zero or negative interest rates were to be experienced in the euro area, it would be particularly important not to lose the perspective, and the possibility, of restarting the interbank market at a later stage. The intermediation role taken by the central bank cannot, and should not forever take the place of money market activity.”

He makes some good points. The LTRO and other ECB operations have clearly played a role in calming frayed nerves around the stability of the banking sector. But I guess the questions that arise are: Can there be such a thing as too much free money for too long? How do you wean banks off the drugs? What risks are there to shock withdrawal therapy and the danger of leaving a vacuum?...

The nirvana of unlimited free money has a flip side when the taps are turned off that could lead back to exactly what Draghi railed against so clumsily the other week with his virility comment.

Banks that struggle to access funding in an otherwise stable borrowing environment are likely to be ostracised by risk-averse counterparties. And you know what? In an efficient marketplace, stigma around the weaker links in the money supply chain which have no recourse but to tap the central bank for funds is arguably a good thing, unless the expectation is for an interventionist ECB standing in perpetuity with its interest-free cheque book at the ready.

In the meantime, drowning the system in cheap cash could drive money-market funds out of business because it undermines their business model and encourages investors to shift their investments to alternative, more profitable, segments.

Coeure believes low rates can undermine the profitability of commercial banks on the basis that deposit-flight risk could compel them to keep depo rates at current levels at the same time as lending rates are falling, leading to a negative loan-deposit spread, which in practice means credit to the real economy will contract.

9--LTRO and the Sarkozy trade, IFR

Excerpt: ECB data show that during January, eurozone banks increased their government bond holdings by €3.3bn. What is interesting from the country breakdown is that 82% of the rise in government bond holdings is accounted for by banks in Spain and Italy.

While the data does not shed light on what bonds were purchased by country, it does support the notion that LTRO funds made their way into sovereign debt.

How much of the December LTRO funds made their way into sovereign debt has been a hot topic, but until now there has been little in the way of data. The ECB data released today show an increase in bond holdings of the eurozone banks totalling €53.3bn.

The breakdown by country (holdings and not the bonds purchased) shows that Spanish banks increased their holdings by €23.1bn and Italian banks by €20.6bn with Reuters highlighting that both were record monthly increases.

The data also shows that French banks increased government bond holdings by €4.5bn and German banks by €5.7bn suggesting that the carry trade was mainly a phenomena dominated by Italy, Spain, France and Germany.

While the data do not show which country bonds were purchased they will be watched again in March and April to see whether funds from the 2nd LTRO this week will be more evenly distributed in making its way toward the sovereign carry trade.

10--The End Game, Chris Cook, Asia Times

Excerpt: The end game is about to begin. On the one hand you have the noise and rhetoric. Greedy speculators gouging gasoline prices; mad mullahs preparing to wipe Israel off the map; bunker buster bombs and fleets being positioned; huge demand for oil from the BRIC countries; China’s insatiable thirst for oil; the oil price will head for $200 a barrel and will never again fall below $130 …

On the other hand you have the reality.

Oil Markets

The oil markets are completely manipulated and orchestrated, and the conductors of the orchestra have the benefit of having already held a rehearsal in 2008.

History never repeats itself, but it does rhyme. This time around it is not demand from the United States that is collapsing, but European Union and United Kingdom demand, as oil prices in euros and pounds sterling have never been higher. In the meantime, the US is awash in oil as domestic production quietly increases, flushed out by the high prices.

As I have outlined in previous articles, the culprit for the high oil prices between 2009 and 2012 – with the exception of the speculative “spike” between March 2011 and June 2011 driven by Fukushima and Libyan price shocks – has been passive investment by risk-averse investors, which enabled producers to support oil prices at high levels.

Much of this passive money underpinning the market and enabling producers to monetize inventory pulled out of the market in September 2011, and another wave pulled out in December 2011.

What is now happening is the end game: an orchestrated wave of noise that is drawing in speculative money. This is enabling the producers who are actually in the know to hedge by selling production forward during what they confidently expect will be a temporary – and pre-planned – managed fall in the oil price....

The effect of a managed decline in oil prices to, and probably over-correcting well through, $60 a barrel – which is coming fairly soon – will be extremely beneficial to the US in two ways.

Firstly, it will be catastrophic in particular for Iran, Russia and Venezuela – not exactly on the White House party list – whose hugely oil-dependent revenues will collapse. The ensuing economic mayhem will open these countries up to regime change and to rescue plans which Wall Street will be dusting off.

Secondly, the US population will be laughing all the way to the gas station as gasoline prices fall – at least temporarily – below $2.50 a gallon and release purchasing power into the economy, thereby doing the president’s re-election chances no harm at all.

What will then happen is that members of the Organization for Petroleum Exporting Countries will panic and genuinely reduce their production. The Saudis/Gulf Cooperation Council will again orchestrate the inflation of the oil price – as they did in 2009 – comfortable in the knowledge that they have been able to hedge against this temporary fall in prices at the expense of the speculators currently pouring in to the market....

System Fragility

The markets in oil have never been so fragile and susceptible to shocks. Private inventories of oil are low. The investment banks interpret this – as they interpret everything – as a sign of physical demand and therefore as bullish for the oil price … oh, and by the way, here are some oil funds they have to sell you.

The reason inventories are low is that private intermediary buyers will only store oil if they can both finance it and lock in a higher forward sale price. Bank financing is scarce and getting scarcer, while forward prices are below current prices; the result is that inventories are low.

The systemic shortage of finance capital means that neither physical oil traders nor the remaining proprietary traders of banks can afford to take into storage much of the approaching flood of oil onto the market....

In my view, the steep decline which is planned could easily get out of hand in a not dissimilar way to the tin market in 1985 when the price collapsed – literally overnight – from $8,000 per tonne to $4,000 per tonne.

We will then see whether the clearing houses are “too big to fail” – and ask why, if so, such utilities are run for private profit?

When, Not If

In my analysis, absent a massive, and sustained, shortfall in oil supplies – which I cannot see occurring, since all involved have every interest in ensuring it does not occur – the oil price will, as I have already forecast, fall dramatically by the end of this year’s second quarter at the latest. It’s not a matter of if, but when it will happen.

11--Michael Olenick: Debunking the “Housing Has Bottomed” Meme, naked capitalism

Excerpt: ...there is not a single credible data point I’ve seen that home prices will increase anytime soon. They may stabilize if banks control inventory, but by definition that means buyers can wait to see what actually happens rather than what’s predicted to happen....

Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans. ...

As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.

Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor....

As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.

For buyers who want a home, not a house — that is, if your primary purpose is to shelter your family rather than your money — and you don’t want to rent because you plan to make improvements, don’t plan to move for a decade or longer, and can purchase with cash, it may not be a bad time to buy.

But for all other buyers, which includes virtually everybody, heed the hindsight of those who purchased homes at every other phantom market bottom and who are now underwater. Wait until you see price appreciation, in the region you want to purchase, for a quarter or two. Your house may cost a few thousand dollars more in the short-term than at the genuine bottom but, in the long run, it’s a safer bet than losing tens of thousands of dollars in an unstable market.

12--From the FHFA: FHFA Announces Pilot REO Property Sales in Hardest-Hit Areas, calculated risk

Excerpt: The Federal Housing Finance Agency (FHFA) today announced the first pilot transaction under the Real Estate-Owned (REO) Initiative, targeted to hardest-hit metropolitan areas — Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.

With this next step, prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years.

What is surprising is that most of these units are already rented (85% of the units are rented) and almost 60% of the units on term leases (the rest are month-to-month).

The original idea behind the REO-to-rental program was to sell vacant REO to investors and only in certain areas. These investors would agree to rent the properties for a certain period, and that would reduce the number of vacant units on the market (or coming on the market). This offer doesn't seem to match that goal.

Fannie already has a program to keep tenants in place if they foreclose on a rented property - and this sounds like Fannie is selling some of these tenant-in-place properties

13--This Tribal Nation, Paul Krugman, NY Times

Excerpt: Digby sends us to Chris Mooney on how conservatives become less willing to look at the facts, more committed to the views of their tribe, as they become better-educated:

For Republicans, having a college degree didn’t appear to make one any more open to what scientists have to say. On the contrary, better-educated Republicans were more skeptical of modern climate science than their less educated brethren. Only 19 percent of college-educated Republicans agreed that the planet is warming due to human actions, versus 31 percent of non-college-educated Republicans.


But it’s not just global warming where the “smart idiot” effect occurs. It also emerges on nonscientific but factually contested issues, like the claim that President Obama is a Muslim. Belief in this falsehood actually increased more among better-educated Republicans from 2009 to 2010 than it did among less-educated Republicans, according to research by George Washington University political scientist John Sides.

The same effect has also been captured in relation to the myth that the healthcare reform bill empowered government “death panels.” According to research by Dartmouth political scientist Brendan Nyhan, Republicans who thought they knew more about the Obama healthcare plan were “paradoxically more likely to endorse the misperception than those who did not.”

What this made me think about was the way Christy Romer ended her excellent speech (pdf) laying out what we know about the effects of fiscal policy.:

The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence. As I have described this evening, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.

That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

What Chris Mooney is telling us is that this is a vain hope. Highly educated political conservatives — and this includes conservative economists — are going to be less persuadable by empirical evidence than the man or woman in the street. The more holes you poke in doctrines like expansionary austerity or supply-side economics, the more committed they will get to those doctrines.

This debate isn’t going to be won by rational argument

14--What Ails Europe?, Paul Krugman, NY Times

Excerpt: Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.

Why has Europe become the sick man of the world economy? ... Read ... about Europe ... and you’ll probably encounter one of two stories, which I think of as the Republican narrative and the German narrative. Neither story fits the facts.

The Republican story — it’s one of the central themes of Mitt Romney’s campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we’re watching the death throes of the welfare state. ..

.Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer...? But let’s do this systematically. Look at the 15 European nations currently using the euro..., and rank them by the percentage of G.D.P. they spent on social programs before the crisis.

Do the troubled Gipsi nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No,... only Italy was in the top five, and even so its welfare state was smaller than Germany’s.

So excessively large welfare states didn’t cause the troubles.

Next up, the German story, which is that it’s all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. ...

So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression. ...

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

Now, understanding the nature of Europe’s troubles ... makes a huge difference, because false stories about Europe are being used to push policies that would be cruel, destructive, or both. The next time you hear people invoking the European example to demand that we destroy our social safety net or slash spending in the face of a deeply depressed economy, here’s what you need to know: they have no idea what they’re talking about.

15--Wealth distribution without redistribution, VOX

Excerpt: What does the distribution of wealth look like in an economy in which all households have identical skills and patience, but there is no redistribution? This column argues that without some redistributive mechanism – either explicit in the form of government tax or fiscal policies, or implicit in the form of limited intergenerational transfers – the wealth in the economy tends to concentrate at the top....

Redistribution and stability

Our analysis highlights the crucial role of redistributive mechanisms in an economy. Indeed, it is their presence alone that ensures the stability of the economy and prevents an outcome in which the distribution of wealth becomes increasingly skewed towards the top.

We interpret redistribution broadly, so that redistributive mechanisms include any process that proportionally affects wealthy households and poor households differently.

Redistributive mechanisms include explicit mechanisms such as government tax or fiscal policies that directly transfer income from wealthy to poor households as well as implicit mechanisms such as limited intergenerational transfers of wealth that reduce the total wealth held by wealthy households proportionally more than that of poor households. Although implicit redistributive mechanisms do not involve direct transfers of wealth from wealthy to poor households, their stabilising effect on the equilibrium distribution of wealth is the same.

Implications and questions

The main conclusion of our analysis is clear. In the absence of any redistribution, the distribution of wealth is unstable over time and becomes concentrated entirely at the top. This occurs despite the fact that all households have identical patience and skill.

16--New York Times: US Intelligence Says Iran Not Developing Nukesantiwar.com The mainstream media is beginning to report the actual assessments of Iran's nuclear program, instead of the usual fear-mongering



Excerpt: The intelligence community in the United States believe there is no hard evidence that Iran has decided to build a nuclear bomb, the New York Times finally reported on Saturday.

The New York Times ran a front page article on Saturday reiterating the consensus view of the U.S. military and intelligence community regarding Iran’s nuclear program, splitting from usual mainstream media coverage which has hyped fear that Iran is on the verge of having nuclear weapons.

The U.S. assessments that Iran is not developing nuclear weapons and has demonstrated no intention of doing so has been reported here at Antiwar.com and many other alternative news sources, but only now, after successive pronouncements by high level officials going against the grain of the hawkish rhetoric on an impending Iranian bomb has the Times given the issue substantial space.

“Recent assessments by American spy agencies are broadly consistent with a 2007 intelligence finding that concluded that Iran had abandoned its nuclear weapons program years earlier,” the report said. “The officials said that assessment was largely reaffirmed in a 2010 National Intelligence Estimate, and that it remains the consensus view of America’s 16 intelligence agencies.”

The report points to testimony from James R. Clapper Jr., the director of national intelligence, David H. Petraeus, the C.I.A. director, Defense Secretary Leon E. Panetta and Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, all in agreement that there is no military dimension to Iran’s nuclear program. This reportedly contradicts Israeli assessments and lately those of the U.N.’s nuclear watchdog, the International Atomic Energy Agency, which stirred up controversy over Iran’s program, claiming they are “unable to provide credible assurance about the absence of undeclared nuclear materials and activities in Iran.”

But “intelligence officials and outside analysts,” the Times reports, believe “Iran could be seeking to enhance its influence in the region by creating what some analysts call ‘strategic ambiguity.’ Rather than building a bomb now, Iran may want to increase its power by sowing doubt among other nations about its nuclear ambitions

As Mohamed ElBaradei, former head of the IAEA, said in 2009 “I don’t believe the Iranians have made a decision to go for a nuclear weapon, but they are absolutely determined to have the technology because they believe it brings you power, prestige and an insurance policy.”

Despite this consensus view in the U.S., Washington has continued to isolate Iran, to heap crippling economic sanctions on Iran to support Israel – and refuse to criticize it – even while Tel Aviv has supported terrorist operations against Iranian nuclear scientists. Amid intense pressure from various Western foreign policy elites to wage war on Iran, perhaps to install an obedient regime, the intelligence has removed the one possible pretext: an Iranian nuclear weapon. And even the mainstream news media is now reporting it.

17--US STRUCTURED FINANCE: BofA warns investors over ABS/MBS exposure, IFR

Excerpt:  Bank of America Merrill Lynch has warned investors to scale back exposure to securitised products, saying the external shocks that rocked the sector a year ago could be due for a repeat performance.


“Once again, securitised products may well be priced for a perfection that is unsustainable,” wrote Chris Flanagan, an ABS/MBS strategist at BofA, in a new research report.

The report noted that last year started strongly before outside factors – rising oil prices due to Mideast unrest, the European debt crisis, the Japan tsunami, and the US debt downgrade – caused securitised products to stumble badly.

Given the phenomenal risk-on credit market rally that has started 2012, the BofA analysts believe that there are important similarities that investors should be mindful of....

BofA economists see US fiscal tightening and economic slowing looming on the horizon “as political gamesmanship leading up to the election outweighs constructive policy developments”.


“Again, remarkably, a variation on the 2011 debt ceiling debacle appears to be in the works for the US,” Flanagan said. BofA reminded investors that in spite of the recent credit-market rally, price returns across all credit indices are still negative over the past year.

“We think significantly increased caution with respect to risk-taking is warranted,” Flanagan said.

Monday, February 27, 2012

Today's links

1--Eagle owl at 1000 frames per Second towards a camera, dogwork

Video--incredible, hypnotic footage of owl in flight.

2--How Wall Street Is Raising the Price of Gas, ABC News

Excerpt: Chilton obtained an energy research report from Goldman Sachs spelling out how much the Wall Street firm estimated speculators had pushed up the real price of oil sold to make gas, due to large bets in the markets.

Using the numbers from in the Goldman Sachs report, combined with current information from the CFTC, Chilton calculated how much speculation is driving up the price at the pump for the average consumer.

He shared calculations with ABC News for the first time.

By Chilton’s calculation, if you drive a car like a Honda Civic, you’re paying $7.30 more than you should every time you fill up — to Wall Street speculators. If your car is a Ford Explorer you’re paying an extra $10.41.

For a Ford F150, he says owners pay an additional $14.56 per fill up -or more than $750 a year.

For their part, industry groups representing Wall Street say there is no evidence their trading activities actually push up the price of oil.

Chilton isn’t doesn’t buy that argument. He and the CFTC are currently attempting to implement new rules that would put limits on speculation. In response, Wall Street is suing the CFTC attempting to get an injunction, which would allow everything to remain status quo.

“They don’t want these limits,” he said. “They want unbridled ability to speculate in these markets and that’s not good for consumers. It’s not good for markets. It’s not good for the economy.”

3--There's no shortage of Shovel ready jobs? Grasping reality with both hands

Excerpt: Reversing Local Austerity: One question that arises when we talk about the possibility of reversing the disastrous push for austerity runs something like this: “OK, you say you want more government spending, but what should it spend money on?” The truth is that I think the perceived lack of shovel-ready projects was overstated even in 2009, but it was a real concern…. [W]e could get a fairly big fiscal bang just by resuming aid to state and local governments, allowing them to reverse the big cuts they have recently made…. [E]mployment by state and local governments, which has fallen around half a million, with the majority of the cuts coming from education. Moreover, the baseline should not be zero; it should be normal growth…. [W]e could put well over a million people to work directly, and probably around 3 million once you take other effects into account, without any need to come up with new projects; just transfer enough money to state and local governments to let them return to doing the essential business of government, like educating our children.

This isn’t the whole of what we should be doing, by a long shot. But anyone who thinks we don’t have good ways to stimulate demand can be refuted with this observation alone.

4--The eurozone's "real problem---excessive welfare states, fiscal profligacy or balance of payments?, Paul Krugman, NY Times

Excerpt: This is not original, but for reference I find some charts useful. In what follows I show data for the euro area minus Malta and Cyprus — 15 countries. I use red bars for the GIPSIs — Greece, Ireland, Portugal, Spain, Ireland — and blue bars for everyone else.

There are basically three stories about the euro crisis in wide circulation: the Republican story, the German story, and the truth. (charts)

...What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.

And the key point is that the two false diagnoses lead to policies that don’t address the real problem. You can slash the welfare state all you want (and the right wants to slash it down to bathtub-drowning size), but this has very little to do with export competitiveness. You can pursue crippling fiscal austerity, but this improves the external balance only by driving down the economy and hence import demand, with maybe, maybe, a gradual “internal devaluation” caused by high unemployment.

Now, if you’re running a peripheral nation, and the troika demands austerity, you have no choice except the nuclear option of leaving the euro, coming soon to a Balkan nation near you. But non-GIPSI European leaders should realize that what the GIPSIs really need is a general European reflation. So let’s hope that they get this, and also give each of us a pony.

5-- Making the Case for Occupy Wall Street, Trim tabs

Excerpt: How many of you know that the market value of all US listed stocks right now is $18.7 trillion. Not only is that almost a double from the March 2009 low, but the gain itself is just over $9 trillion. Let me repeat, the value of all US stocks is up by over $9 trillion in three years. Wow.

Obviously for such a huge gain the underlying US economy, particularly wages and salaries and employment must be doing so much better than it was back in early 2009. Right? Wrong.

Early in 2009, after tax take home pay for everyone who pays taxes was just about $5.9 trillion annualized. That was down from an all time peak of $7 trillion annualized at the beginning of 2008. The main reason after tax income was down so much was a plunge in capital gains – primarily from profits on home sales.

After three years of attempts at a recovery, take home pay is now around $6.3 trillion, up all of $400 billion annually since the early 2009 bottom, or 2% a year. Wait a minute! Incomes are up only 2% before inflation per year. How does that minimal increase in take home pay justify a $9 trillion increase in market value?

Occupy Wall Street complains that Wall Street is doing great and everyone else is not. I think they have a point. Shareholder wealth has doubled up, $9 trillion to $18 trillion, and take home for everyone who pays taxes is up about 2% a year,– which is not even keeping up with inflation. After inflation wage earners are losing ground while shareholders are buying Coach and Louis Vuitton stuff at Bloomies and Nordstroms.


So wait a second, how is the stock market up $9 trillion, while the rest of the economy is flat on its butt? The simple answer is that shareholders owe it all to President Obama and Fed Chairman Bernanke. The US government has added about $5 trillion in debt over the past three years. Where did that $5 trillion go? Some of it ended up on the balance sheet of corporate America. The record amount of cash on public company balance sheet currently earns nada, nothing in terms of interest income.


Therefore, companies say to themselves, why not use this free cash to buy back shares? And so they do. And so stock prices have been going up. However, recently as the stock market has risen ever higher new stock buybacks are slowing dramatically and insider selling is spiking and insider buying is disappearing. Unless incomes start surging soon, stock prices eventually have to crash. As I have said many times, there is no way income growth can surge anytime soon. Therefore, at some point in time, I expect a major stock market crash. The only question is when.

6--The Great Repression, The Big Picture

Excerpt: We’re baffled anybody still looks to the U.S. bond market for signals of future economic activity, inflation, or even risk aversion. Case in point is today’s 7-year bond auction, which CNBC’s Rick Santelli rated an eleven on a scale of ten, i.e., a slam dunk!

Go no further, however, than the chart below to see which maturities on the yield curve are the most repressed. Prior to today’s auction, for example, the Fed owned 43 percent of all Treasury coupon securities maturing in 2019 and more than 50 percent in three of the seven issues maturing in that year.

Yesterday we caught PIMCO’s very bright and articulate Mohammad El –Erian promoting the “seven-year bucket” in an interview with CNBC,

…make sure you have some gold, some oil, and concentrate your bond exposure in the five to seven-year bucket.

Known for “Fed Surfing” or getting in front of, or riding along with, the U.S. central bank’s market interventions, don’t you think PIMCO likes the seven-year, in part, because that is where Mr. Bernanke is camped out? Front running the Fed has paid handsomely for many and we doubt it is fully dominated by macro views of inflation, economic growth, Chinese hard landings, or risk aversion.

The information we divined from today’s successful bond auction? Especially, in a maturity that has been gagged and bound by Fed intervention? Absolutely nuttin’!

Finally, we view long-term Treasury interest rates as one of, if not, the most important price in the world. Because of direct financial repression the information it now provides and the signal it sends, which is so important to capital allocation decisions, has, at best, been severely distorted. No wonder corporations are hoarding cash and reluctant to invest.

7--Golden rule or golden straightjacket?, VOX

Excerpt: What is noteworthy about the new EU Fiscal Compact, however, is that it does not even correspond to current mainstream thinking among economists as to how an ideal fiscal policy framework should operate.

I suspect most economists would agree that such a framework should have two key elements.

•First, it should guide an economy towards a moderate and sustainable level of public debt.

•Second, it should keep public debt fluctuating around this moderate level in a countercyclical fashion, with higher-than-usual deficits in times of recession being offset by improvements in the fiscal position during expansions.

In relation to the first element, moderate debt levels, the compact emphasises the need for an explicit trajectory whereby countries can return towards a 60% debt-to-GDP ratio. I think this addition to the Stability and Growth Pact is a positive one and one could make an argument for placing it on a formal EU-treaty footing.

Far less positive, however, is the so-called golden rule setting a legally binding maximum structural deficit of a 0.5% of GDP when a country has a debt ratio above 60% and a maximum of 1% when a country has a debt ratio lower than 60%. In addition, independent of the ‘cyclical adjustments’ that are factored in to structural deficits, the maximum actual deficit shall be 3% of GDP.

The idea of the desirability of balancing the national budget may appear self-evident to its designers, embodying as it does the wisdom the famous Swabian housewife. However, an economy is not a single household and, as we know from the paradox of thrift, these comforting comparisons can be highly misleading when applied at an aggregate level.

The truth is that, far from golden, this rule is a poor one that doesn’t correspond to either of the principles of good fiscal policy just mentioned.

In relation to long-run debt levels, this rule, if followed over time, will lead to debt ratios well below those considered sustainable and moderate. An economy’s debt-to-GDP ratio tends to converge towards the ratio of the average deficit percentage to the average growth rate of nominal GDP (see Whelan 2012). So, for example, an economy with an average growth rate of nominal GDP of say, 4%, following a policy in which average deficits are a maximum of 1%, will end up with a maximum debt-to-GDP ratio of 25%, far below what is required to operate a sensible and stabilising fiscal policy....

Because Eurozone member states cannot set their own exchange rates or interest rates and do not receive any federal transfers, these severe restrictions on the only available macroeconomic policy tool are likely to be particularly damaging to macroeconomic stability in the Eurozone. Indeed, they may contribute to its long-run failure rather than help to keep it together....

Because Eurozone member states cannot set their own exchange rates or interest rates and do not receive any federal transfers, these severe restrictions on the only available macroeconomic policy tool are likely to be particularly damaging to macroeconomic stability in the Eurozone. Indeed, they may contribute to its long-run failure rather than help to keep it together....

At least those who inflicted damage on the world economy by sticking to the Gold Standard in the 1930s can claim to have been following prevailing economic thinking. The politicians who have designed these rules will have no such defence.

Ideally, debate about this treaty in all European countries should move beyond misleading analogies about the prudence of households balancing their books to focus on its actual long-run implications. Once passed into treaty form, it will be extremely difficult for European citizens to change these rules. Hopefully, it is not too late to prevent the golden rule from becoming a golden straightjacket.

8--Donovan: The Foreclosure Fraud Settlement Is Strong Because of the OCC Settlement, Firedog Lake

Excerpt: I’ve been amused by the consistent pushback from HUD’s Shaun Donovan, who has made himself into a leading figure just by his ubiquitousness, as it relates to the foreclosure fraud settlement. Donovan has been the point person to rebut criticism of the settlement, and he is back again today in CNN.

The settlement, which hasn’t been released or even decided as far as we know, raised so many questions that Donovan has had to divvy up his rebuttal in parts. His subject today is the $2,000 for foreclosure victims, which is pretty indefensible. In fact, Donovan doesn’t really try to defend it. “Some have questioned whether $2,000 is enough redress for families who lost their homes improperly. The answer is obviously no.” He then adds that the money is best seen as a measure of accountability for both foreclosure fraud and servicer abuse, like improper fees or an inability to inform borrowers of options when they fell into delinquency.

Moving away from that inadequate $2,000, Donovan says that there are other ways for individuals to get the restitution they deserve:

For families who suffered much deeper harm — who may have been improperly foreclosed on and lost their homes and could therefore be owed hundreds of thousands of dollars in damages — the settlement preserves their ability to get justice in two key ways.

First, it recognizes that the federal banking regulators have established a process through which these families can receive help by requesting a review of their file. If a borrower can document that they were improperly foreclosed on, they can receive every cent of the compensation they are entitled to through that process.

Second, the agreement preserves the right of homeowners to take their servicer to court. Indeed, if banks or other financial institutions broke the law or treated the families they served unfairly, they should pay the price — and with this settlement they will.

OK, so in the first place, Donovan is talking about the OCC (Office of the Comptroller of the Currency) consent orders. He doesn’t mention that they are a sham. The foreclosure reviews will be overseen by “independent” consultants chosen by and paid by the banks. What I wrote in November still holds:

This is part of the consent order between banks and the Office of the Comptroller of the Currency, known around these parts as the Office of Bank Advocacy. And they just aren’t to be trusted as a legitimate regulator. The servicer reforms in the consent decree consist mainly of the servicers being told to follow current guidelines. And these foreclosure reviews are a joke. The third party, “independent” reviewers? They’re hired by the banks. And they’re bringing in entry-level functionaries, the equivalent of robo-signers, to do the reviews. Let’s just say I don’t expect them to be exactly rigorous. And that’s even worse, because at the end of the process, the banks will be able to say that an independent review cleared them of wrongful foreclosures. And a federal regulator backed them up on it!

Keep in mind that the OCC has already said publicly that basically nobody was wrongly foreclosed upon (OCC Acting Director John Walsh based this on a sampling of a whopping 2,800 foreclosure files). So I don’t expect a process they created with the banks to dispute that very much.

The second thing that Donovan says is that homeowners still have a private right of action. I’m trying to figure out how a settlement with regulators could ever take that private right of action away. So this isn’t worth really saluting. But furthermore, if private rights of action were so important, someone tell me why we have a law enforcement apparatus? Obviously the answer is that law enforcement at the state and federal level have far more resources from which to draw. A private individual at risk of foreclosure will strain to keep up with the fusillade of white-shoe lawyers the banks will fire at them.

The answer is that $2,000 is totally inadequate, and so are the alternatives, especially when you’re talking about a sustained criminal enterprise. I know we’re told that this is just the beginning of a larger effort for accountability – we promise! – but I’ll give Simon Johnson the last word on that:

Among the fundamental principles of any functioning justice system is the following: Don’t lie to a judge or falsify documents submitted to a court, or you will go to jail. Breaking an oath to tell the truth is perjury, and lying in official documents is both perjury and fraud. These are serious criminal offenses, but apparently not if you are at the heart of America’s financial system. On the contrary, key individuals there appear to be well compensated for their crimes [...]

Indeed, at stake in the mortgage settlement are fundamental and systemic breaches of the rule of law – perjury and fraud on an economy-wide scale. The Justice Department has, without question, all of the power that it needs to prosecute these alleged crimes fully. And yet America’s top law-enforcement officials have consistently – and now completely – backed off.

9--Is the Federal Reserve Responsible for High Oil Prices?, The Atlantic

Excerpt: There is one reasonable way to argue that the Fed has helped pump up oil prices, but it doesn't have much to do with the value of the dollar. Instead, it's all about bond yields. It's possible that, thanks to the super, super low interest rates on U.S. Treasuries, investors seeking higher returns are pouring their money into commodities such as oil. Or, to put it another way, speculators might be driving up prices.

It wouldn't be entirely surprising if that were happening. One of the explicit goals of QE2 was the push investors into assets other than Treasuries, and pump up their value in the process. Unfortunately, we really don't have a perfect way of knowing when the price of oil is being driven by commercial demand, or by speculation. So if you're determined to blame the Fed for the price of gas, you might be able to do it. It'll just be hard to prove your theory.

10--Germany puts more pressure on Greece, Financial Times via Mish

Excerpt: The Financial Times reports Athens told to change spending and taxes.

"European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times.

The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a €130bn second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil.

They range from the sweeping – overhauling judicial procedures, centralising health insurance, completing an accurate land registry – to the mundane – buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks

The programme is much, much more ambitious than economic reform,” said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. “This is state building, as typically understood in traditional low-income contexts.”

Most urgency is attached to a 10-page list of “prior actions” that must be completed by Wednesday in order for eurozone finance ministers to give a final sign-off to the new bail-out at an emergency meeting scheduled for Thursday.

Among the measures that must be completed in the next seven days are reducing state spending on pharmaceuticals by €1.1bn; completing 75 full-scale audits and 225 value added tax audits of large taxpayers; and liberalising professions such as beauty salons, tour guides and diet centers

11--The Housing Recovery In One Index, dshort

Excerpt: ...housing is a major contributing component to long-term economic recovery. Each dollar sunk into new housing construction has a large multiplier effect on the overall economy. No economic recovery in history has started without housing leading the way. So, yes, housing is really just that important, and we should all want it to recover and soon. The calls for a bottom in housing now, however, may be a bit premature, as I will explain. ("must see" chart)

The Total Housing Activity Index shown here is a composite of the sales of new and existing homes, new construction permits for single family homes and new single family home starts. As you can see, we are still near the same lows that we were in 2009 at the end of the recession. Furthermore, and what is really worse, is that the "recovery" was built on the back of a whole slew of tax payer funded bailouts, tax credits and incentives from HAMP to HARP to the Home Buyer Tax Credit. Not quite the recovery the government was hoping for.

The recent bumps in housing have been due to the warmest winter on record in the last 5 years, which is skewing the seasonal adjustments. With 1 in 4 home owners under some form of duress with their mortgage, it is only a function of time until a further erosion in price resumes, particularly as banks start to deal with the backlog of foreclosures and delinquencies that are on their books.

The bottom line here is that, while we have witnessed a very mild recovery in housing from the depths of the abyss, it is important to remember that it has been with the help of extensive artificial support, including the zero interest rate policy by the Fed and "Operation Twist", which has suppressed interest rates on mortgages to historic lows. That won't last forever, and as we wrote in our article on "Why Home Prices Have Much Further To Fall": people buy payments not home prices.

The shear magnitude of the TOTAL inventory that must be cleared, the potential for rising interest rates, a weak employment market (no job = no house), declining real incomes and rising inflationary pressures will likely keep the housing market suppressed and disappointing for quite a while into the future. This is just a function of economics.

Have seen the low point in housing? Has bottom truly has been put in? Perhaps. A bottom, however, doesn't mean that a sharp rise in prices or activity is just around the corner. This particular patient could very well remain comatose for much longer than people expect.

12--People Buy Payments - Not Houses, dshort

When the average American family sits down to discuss buying a home they do not discuss buying a $125,000 house. What they do discuss is what type of house they need, such as a three bedroom house with two baths, a two car garage and a yard. That is the dream part. The reality of it smacks them in the face, however, when they start reconciling their monthly budget.

Here is a statement I have not heard discussed by the media. People do not buy houses - they buy a payment. The payment is ultimately what drives how much house they buy. Why is this important? Because it is all about interest rates.

Over the last 30 years, a big driver of home prices has been the unabated decline of interest rates. When declining interest rates were combined with lax lending standards, home prices soared off the chart. No money down, ultra-low interest rates and easy qualification gave individuals the ability to buy much more home for their money. The demand for home ownership, promulgated by the Fed, the finance and real-estate industry, drove prices far beyond rational levels. Easy credit terms combined with a plethora of psychological encouragement, from home flipping and house decorating television to direct advertisement of the "dream of homeownership", enticed families to bite off way more than they could ever hope to chew.

In 1968 the average American family maintained a mortgage payment, as a percent of real disposable personal income (DPI), of about 7%. Back then, in order to buy a home, you were required to have skin in the game with a 20% down payment. Today, assuming that an individual puts down 20% for a house, their mortgage payment would consume more than 15% of real DPI. In reality, since many of the mortgages done over the last decade required little or no money down, that number is actually substantially higher. You get the point. With real disposable incomes stagnant as inflationary pressures rise, that 15% of the budget is becoming much harder to sustain.

With this in mind, let's review how home buyers are affected. If we assume a stagnant purchase price of $125,000, as interest rates rise from 4% to 8% by 2024 (no particular reason for the date - in 2034 the effect is the same), the cost of the monthly payment for that same priced house rises from $600 a month to more than $900 a month - a 50% increase. However, this is not just a solitary effect. ALL home prices are affected at the margin by those willing and able to buy and those that have "For Sale" signs in their front yard. Therefore, if the average American family living on $55,000 a year sees their monthly mortgage payment rise by 50%, this is a VERY big issue....

Since home prices on the whole are affected by those actively willing to sell, the rise of interest rates lead to declines in home prices across the board as sellers reduce prices to find buyers. Since there are only a limited number of buyers in the pool at any given time, the supply / demand curve is critcally affected by the variations in interest rates.

This is why the Fed has been so adamant to suppress interest rates at very low levels and have injected trillions of dollars to achieve that goal. They understand the ramifications of rising interest rates, not only on home prices, but also on the $3 Trillion in debt they are currently carrying on their balance sheet.

There are basically two possible outcomes from here. First, Ben Bernanke and his gang artificially suppress interest rates for a very long period of time creating the "Japan Syndrome" in the US, which leads to rolling recessions and a general economic malaise. Or, secondly, interest rates rise back towards more normalized levels as the economy begins a real and lasting recovery. I am really hoping for the later. In either case there is a negative and sustained impact to housing going forward. The excesses that were created over the last 20 years will have to be absorbed into the system, allowing prices to return to a more normalized and sustainable level.

None of this means that home construction, sales, etc. can't stabilize at these lower levels even as prices revert to their long term median price. However, stabilization and a recovery, such as the media is currently hoping for, are two vastly different things. We are very early in the entire deleveraging process, and until the excesses are removed from the system, the real housing bottom may be more elusive than anyone expects.

13--How Goldman helped Greece mask its debt, zero hedge

Excerpt: There are also some who remember that back in February 2010, it was none other than the Federal Reserve that tasked itself with uncovering whether Goldman did anything "illegal" by engaging in currency swaps to make the Greek economy appear rosier than it was: "We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece," Bernanke said in testimony before the Senate Banking Committee.... Greece in 2001 borrowed billions, with the aid of Goldman Sachs in a deal hidden from public view because it was treated as a currency trade rather than a loan....Goldman Sachs spokesman Michael DuVally declined to comment on the Fed's probe. "As a matter of policy we don't comment on legal or regulatory matters," DuVally said. Goldman Sachs had defended the transactions in a statement posted on its Website Sunday. The firm said they had a "minimal effect" on Greece's overall fiscal situation." Maybe, just maybe it is time, two years later, for the world to hear something, anything, from the Fed as to what its seemingly quite extensive investigation into Goldman's has yielded.

14--Guest Post by JW Mason: The Dynamics of Household Debt, economist's view

Excerpt: It’s a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It’s also well-known that household borrowing has increased sharply over this period. ... In fact, though,... while the first one is certainly true, the second is not.

How can debt have increased if borrowing hasn’t? Though this seems counterintuitive, the answer is simple. We’re not interested in debt per se, but in leverage, defined as the ratio of a sector’s or unit’s debt to its income (or net worth). This ratio can go up because the numerator rises, or because the denominator falls. Household leverage increased sharply, for instance, in 1930 and 1931 (see Figure 1) but people weren’t were consuming more in the Depression; leverage rose because incomes and prices were falling faster than households could pay down debt. Similarly, changes in interest rates can change the debt burden without any shift in household consumption...

But strangely, despite the example of the Depression (and Irving Fisher’s famous diagnosis of rising debt burdens caused by falling prices and incomes (Fisher 1933)), no one has systematically examined what fraction of changes in private debt can be attributed to changes in interest, growth, inflation and new borrowing. In a new paper, Arjun Jayadev and I attempt to fill this gap, applying the standard decomposition of public sector debt changes to household debt in the United States for the period 1929-2011. (Mason and Jayadev, 2012.) Our findings challenge the conventional narrative about rising household debt.

What we find is that the entire increase in household leverage after 1980 can be attributed to the non-borrowing... — what we call Fisher dynamics. If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2. The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation. In other words, there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households reduced their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn’t, or couldn’t, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices. In this respect, the rise in debt-income ratios in the 1980s is parallel to that of 1929-1931. ...

Think of it this way: If you borrow money and your income in dollars rises by 10 percent a year (3 percent real growth, say, and 7 percent inflation) then you will find it much easier to pay off the debt when it comes due. But if you borrow the same amount and your dollar income turns out to rise at only 4 percent a year (the same real growth but only 1 percent inflation) then the payment, when it comes due, will be a larger fraction of your income. That, not increased household spending, is why debt ratios rose in the 1980s.

Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking. Given the increased availability of credit and rising inequality, some households may well have chosen to increase spending relative to income, and those lower down the income ladder presumably did rely on borrowing to maintain consumption standards in the face of stagnant wages. But for the household sector in the aggregate, until 2000, there is no increased household borrowing to explain. ...

An important point to note ...[is] that in the period of the housing bubble — 2000 to 2006 — the conventional story is right: during this period, the household sector did run very large primary deficits (averaging 3.3 percent of income), which explain the bulk of increased leverage over this period. But not all of it: even in this period, about a third of the increase in debt was due to ... mechanical effects... And in the following four years, households reduced consumption relative to income by nearly as much as they increased it in the bubble years. But these large primary surpluses barely offset the large gap between interest and (very low) growth and inflation over these four years. In the absence of the headwind created by adverse debt dynamics, the increase in household leverage in the bubble would have been effectively reversed by 2011.

We draw two main conclusions. First, as a historical matter, you cannot understand the changes in private sector leverage over the 20th century without explicitly accounting for debt dynamics. The tendency to treat changes in debt ratios as necessarily the result in changes in borrowing behavior obscures the most important factors in the evolution of leverage.

Second, going forward, it seems unlikely that households can sustain large enough primary deficits to reduce or even stabilize leverage. ... As a practical matter, it seems clear that, just as the rise in leverage was not the result of more borrowing, any reduction in leverage will not come about through less borrowing. To substantially reduce household debt will require some combination of financial repression to hold interest rates below growth rates for an extended period, and larger-scale and more systematic debt write-downs. ...