Monday, March 4, 2013

Today's links

1---Euro Leaders Demand Austerity as Italy Nears New Vote, Bloomberg

2--Japan is now biggest debt holder, Bloomberg video

3---"Pervasive” Fraud by our “Most Reputable” Banks, Big Picture

The most interesting reaction to the PSW 2013 study is that of a fraud denier, The Economist’s “M.C.K.” In his January 25, 2013 column, (“Just who should we be blaming anyway?”)
M.C.K. argued that we should blame the victims of the fraud (“the real wrongdoers were not those who sold risky products at inflated prices but the dupes who bought them….”).
Only three weeks later, in his February 19, 2013 column discussing the PSW 2013 study, M.C.K. admitted that fraud by banks had played a prominent role in the crisis.
“BUBBLES are conducive to fraud. Buyers become less careful about doing their due diligence when asset prices are soaring and financing for speculation is plentiful. Unscrupulous sellers exploit this incaution. The victims are none the wiser as long as the bubble continues to inflate.”
I will explain in a later column why I believe this passage is badly flawed, but my point here is that the fraud denier and “blame the victim” columnist has recanted.
“During America’s housing bubble, mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth. Many argue that the banks that bundled those loans into securities deliberately and systematically misled investors and private insurers about the risks involved. It is easy to be unsympathetic in the absence of hard evidence. As I argued in a previous post , ‘investors were not forced to take the losing side of so many trades.’

While I stand by that view, a new paper by Tomasz Piskorski, Amit Seru, and James Witkin convincingly argues that banks deliberately misrepresented the characteristics of mortgages in securities they pitched to investors and bond insurers. The misrepresented loans defaulted at much higher rates than ones that were not—a result that would not be produced by random errors. Moreover, the share of loans that were misrepresented increased as the bubble inflated. The authors estimate that underwriters may be liable for about $60 billion in representation and warranty damages (emphasis in original).”
 
4---Stocks: Time to bail out?, Marketwatch

5----China's Housing: The biggest bubble in history?, 60 Minutes CBS

6--Europe's recession grinds on, macrobusiness

The Italian election proved that there is a growing political backlash against these failing economic policies and that some nations are willing to use their democratic powers to push against them. Austerity fatigue is setting in across the Eurozone and even the usually quiet Portugal has seen mass protests as the economic situation worsens....
 
The question now is exactly what the European Union , Commission, Bank along with the IMF can do in order to suppress the growing tide of social and political angst in Europe. Over the weekend Italy’s Beppe Grillo raised the question whether Italy should leave the Euro, once again bringing “convertibility” risk back to the fore.
It would appear, as I predicted some time ago, that the fiscal compact is reaching its political and social limits and I suspect there will be renewed calls for a re-negoitation of both it and the rules of engagement of the ECB’s OMT over the coming months as it becomes clear that 2013 is not the year that growth returns to the Eurozone.

7--What caused the temporary spike in personal income?, sober look
 
The drop in personal income last week got some media attention, particularly given that it was the largest one-month drop in 20 years.
USA Today: - Personal income growth plunged 3.6% in January, the biggest one-month drop in 20 years, the Commerce Department said Friday. And consumer spending rose just 0.2% with most of it going toward higher heating bills and filling up the gas tank.-

When all the dust settles, the reality is that personal incomes are increasing at around 2% per year or less, just keeping up with the GDP growth. For now it's simply about muddling through, as near-term economic growth in the US is expected to remain subdued.
USA Today: - "With tax hikes and spending cuts buffeting the economy, growth in the first half of the year is likely to be at a sub-2% pace," James Marple, senior economist at TD Economics wrote in a note. "At this pace, the unemployment will not improve and pressure will remain on the Federal Reserve to continue its asset purchase program."
 
8---Personal Income Hammered - Drops -3.6% for January 2013, economic populist

9---Student Loan Bubble So Big It’s Trumping Credit Cards as a Spending Driver, naked capitalism

10---Brave Ireland is the poster-child of EMU cruelty and folly, Telegraph
Ireland has done everything demanded by the EU’s creditor powers, and seemingly survived.

As you can see from this chart, investment has collapsed to 10pc of GDP.



Source: CSO/National Treasury Management Agency

This is the lowest in recorded Irish history and the currently the lowest in the EU. “If this does not recover over the next couple of years, I’ll be worried”, said Rossa White from the National Treasury Management Agency.

Indeed, it is the crux of the matter. Spending has been slashed through the muscle and into the bone. This presumably is what Laszlo Andor, the EU employment commissioner, was talking about last week when he decried a slash-and-burn policy in the name of competitiveness that is tipping the crisis economies into a “downward spiral” and making it even harder to cut control debts. Are his colleagues in the Berlayment listening to him?

A mass exodus of 40,000 to 50,000 each year to the four corners of the Irish Diaspora have kept unemployment down to 14.1pc, but 60pc of those left on the rolls have been out of work for over year -- the highest rate in Europe -- and that is where the “hysteresis” effects of lasting damage bites hardest. It steals from growth from the future by degrading work skills.
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Irish trade union chief David Begg was speaking with poetic licence last week when he accused the Troika of doing more damage to Ireland than the British Empire ever did in eight hundred years, snapping that the English had at least left some “beautiful Georgian buildings.” Needless to say, he has not forgotten the Wexford massacre and the potato famine, and nor have we at this newspaper. Yet he made his point.

“When we meet the Troika, we tell them that austerity is not working, and they tell us that it is. It is a dialogue of the deaf,” he said.

Mr Begg said he had come to realise that EMU is constructed in such a way that the “entire burden of cost adjustment” falls on workers if there is macro-shock. He is right.

11---A  lack of first-time homebuyers is a drag on the housing market, oc housing

Recently, reports in the mainstream media are touting the increase in sales activity. While it’s true that sales volumes are off the anemic lows of the 2008-2011 era, sales are still well below the norm. From 2000 to 2006, sales in Orange County were never below 42,000 sales per year, and the average was about 45,000 per year. Based on the relative number of houses in the county, the ratio of sales to total number of homes was relatively steady. Over the last five years, sales in Orange County have hovered at around 30,000 per year. That’s about 30% less than normal, and about 10% below the average all the way back to 1988 when there were fewer existing homes.
The dramatic decline in sales is apparent in the origination figures:

The low origination volume is a problem across the board. First-time homebuyers are absent due to high debt levels with student loans and credit cards, and move-up markets are hampered by the fact that more than a quarter of borrowers are underwater. The housing market will not recover until first-time homebuyers come back in large numbers at price points high enough to lift existing loanowners above water....

If it weren’t for the activity of investors, including large hedge funds, there would be no market recovery. They are stepping into the shoes of first-time homebuyers and picking up some of the slack. However, this is not without long-term consequences. The move-up market will suffer for another decade because the equity that ordinarily would have accrued to the first-time homebuyers — equity necessary to complete a move-up sale — is instead being diverted to small investors and hedge funds

12---The financial aristocracy and the growth of working class struggle, wsws

13---Michael Pettis on Misguided European Optimism, Mish 

 

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