Thursday, April 4, 2013

Today's links

1---The European Union is more than a political arrangement...   “It’s a faith; a sacred bond, naked capitalism

Brussels) Nonplussed by this week’s unemployment report showing the Eurozone jobless rate rising to an unprecedented 12%, members of the European Parliament and Europe’s national governments pressed ahead on Wednesday with passage of a stringent new package of austerity measures. Dubbed “hyperaustérité” or “Übersparpolitik” by its backers, the new program of ruthless cuts and social demolition promises to deliver even higher levels of joblessness, misery and hopelessness than has been achieved so far by earlier rounds of austerity.

Along with the new economic measures, the European Union (EU) also announced its intention to change its name to the “European Sadomasochistic Cult.” The new ESC will take the leading role in the implementation of European hyperausterity.

“Nothing is really changing,” stated Dutch finance minister and Eurogroup chairman Jeroen Dijsselbloem. “We’re just acknowledging the next phase in the natural evolution of the European system. Europeans need an effective transnational vehicle for the political expression of spite, self-mutilation and cruelty.”

2---Goldman Refuses To Give Up Its Grip On Canada: Goldman Partner To Be Next US Ambassador To Canada, zero hedge

3---David Stockman: The Keynesian Endgame, zero hedge

4---Helicopter QE will never be reversed, Telegraph

Readers of the Daily Telegraph were right all along. Quantitative easing will never be reversed. It is not liquidity management as claimed so vehemently at the outset. It really is the same as printing money....

Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.

The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.

This is more or less the essence of "Abenomics", the three-pronged attack on deflation by Japan's new premier and Great Power revivalist Shinzo Abe.

Stephen Jen from SLJ Macro Partners says Western analysts have been strangely slow to understand the breathtaking scale of what is under way. The Bank of Japan is already committed to bond purchases of $140bn a month in 2014. This is almost double the US Federal Reserve's net purchases (around $75bn a month), and five times as much as a share of GDP. ....

Yet the US money supply figures are no longer flashing buy signals. The M2 money stock has contracted over the past three months, and M2 velocity has dropped to the lowest ever recorded at 1.54.

The country must navigate a fiscal squeeze worth 2.5pc of GDP over the rest of the year, arguably the biggest fiscal shock in half a century....

Bondholders across the world may suspect that Britain, the US and other deadbeat states are engineering a stealth default on sovereign debts, and they may be right in a sense. But they are warned. This is the next shoe to drop in the temples of central banking.

5----QEternity, naked capitalism

Evans-Pritchard goes through a long list of negative indicators: commodity deflation, falling M2 levels and velocity, US consumption holding up only by virtue of dangerously low savings rates, contrasted with too high savings rates elsewhere, particularly China, and misguided austerity in Europe.


I think the US will find it very hard to end QE, but for different reasons than most pundits assume. The conventional view is that the Fed will be loath to raise rates because it will produce losses on its bond portfolio. In reality, this does not matter, at least up to a very high level. Former central banker Willem Buiter warned of the dangers of central banks expanding their balance sheets, but he stresses that they were not equity constrained, since they could monetize any losses, but they were inflation constrained. If a central bank was in danger of violating its inflation mandate, it would need to go to its Treasury for a capital infusion.

But I don’t see that as the immediate impediment. There’s one that is more immediate. Recall how we got in this mess. Whether the Fed said so or not, one of its big motivations for ZIRP and QE was to boost asset prices, not just that of housing to create a consumer wealth effect, but also of financial assets to flatter bank balance sheets, boost their (apparent) capital levels and make them more willing to lend. What has happened is that the central bank has pushed investors into all sorts of risk assets. Do you think the Fed is going to be very eager to impose losses on people it just enticed into the deep end of the pool? The Fed has increasingly come to take a very asset-fixated view of the world, and it is likely to be loath to lower the price of financial assets, save very cautiously. Mind you, like Evans-Pritchard, I don’t think the state of the economy will warrant that any time soon, but that means the Fed will continue to pump up asset prices in an increasingly-desperate effort to get transmission to the real economy. Japan in the late 1980s was the first central bank to deliberately goose asset prices to encourage spending. We know how that movie ended

6---Housing bust plunges Dutch into economic crisis, macrobusiness

I have noted previously (here, here, and here), how the Netherlands housing system all but guarantees unaffordable housing and a susceptibility to housing bubbles, via:
  1. ridiculously easy credit, with a third of mortgages guaranteed by the government;
  2. mortgage interest tax relief and generous subsidies offered to home buyers;
  3. a dysfunctional rental market that encourages households to strive for owner-occupation; and
  4. severely restricted housing supply, which ensures that changes in demand flow predominantly into homes prices rather than new construction.
Dutch house prices have fallen sharply since the onset of the Global Financial Crisis (GFC). According to the National Statistics Agency, Dutch house prices fell by -8% in the year to December 2012 to be down -18% since prices peaked in 2008, with nominal prices now back at June 2005 levels

7---Bank of Japan to Pursue Qualitative and Quantitative Easing - Double Their Monetary Base, Jesse

8---Wall Street's Brightest Minds Reveal The Charts That Worry Them Most, bus insider

9---Trans-Pacific Partnership: Corporate Power-Tool Of The 1%---Neoliberal Overload, counterpunch

Recent statistics claim that the combined economic output of Brazil, China and India will surpass that of Canada, France, Germany, Italy, the United Kingdom and the United States by 2020. More than 80% of the world’s middle class will live in the South by 2030, and what a different world that would be. The United States is economically ailing, and the TPP – Wall Street’s wet dream and Washington’s answer to its own dwindling economic performance – is designed to allow US big business a greater stake in the emerging Pacific region by imposing an exploitative economic model on signatory nations that exempt multinationals and private investors from any form of public accountability. The TPP’s origins go back to the second Bush administration, and it still remains in the negotiating phases under Obama’s second administration. The overwhelming lack of transparency surrounding the talks lends credence to what is known already – that the contents of this trade agreement serve the interests of those on the top of the economic food chain while the rest of us stagnate on the menu.

10---Subprime redux, macrobusiness

11---No cash? No worries. Home lenders ease up rules, CNBC

Meanwhile, as the housing market improves, private mortgage insurers are starting to remove overlays on higher loan-to-value loans, meaning the percentage of the home value that is mortgaged. Low LTV's and high credit scores were the rule recently for the private insurers, but that may now be loosening, making these loans cheaper than FHA.
....
Despite the advantages, FHA's share is already shrinking, as Fannie Mae's is rising. In the first quarter of 2012, loans with between 3 and 10 percent down payment made up 15 percent of Fannie Mae's business for home purchase loans (not refinances). In the second quarter it rose to 17 percent and in the third to 18 percent. Fannie Mae has not reported its fourth quarter yet, but that share is expected to rise again. While a credit thaw is part of it, as mortgage interest rates rise and fewer borrowers apply to refinance, lenders are simply looking for more business.

12---Time bomb to the next crash is ticking as debt sales surge, Telegraph
After every crash there will always be a handful of experts pointing out that they had seen it all coming years before.

The impact of this unprecedented monetary stimulus has been to create a potent mix of historically low yields on government bonds and rising inflation, forcing even the most conservative of investors to hunt for yield in an effort to preserve their capital and achieve a return.

“What you’ve basically seen is people who don’t really want to take more risk being forced up the risk curve to get the yield they need,” says one London-based bond trader.

13---Banks are the largest players in the REO-to-rental space, oc housing

I reported recently that banks are still exposed to $1 trillion in unsecured mortgage debt. That’s just their exposed mortgage amounts. All told, the banks hold about $3.5 trillion in residential mortgage debt. That’s a thousand times more than the combined total of all the private equity put into REO-to-rental funds by private equity. By far the major commercial banks are the largest players in the REO-to-rental space...

2. The people living in the properties have no equity.
According to Zillow about 30% of mortgage borrowers are underwater. If you factor in sales commissions and transaction costs, the number is closer to 50%. These people are no better off than renters. They have no equity, and they must pay whatever the bank tells them too up to the original contract amount, or they face foreclosure, trashed credit, and the loss of hope of future equity. In many ways they are worse off than renters who may leave their properties for job opportunities or personal reasons at the end of their lease term without lasting financial implications. Loanowners are trapped, and they don’t have much leverage to negotiate to improve their financial circumstances.
...
Banks used REO-to-rental funds to turn the market
The major commercial banks realized the REO-to-rental business model was a good one. They also realized that this same business model made money at their expense, so they figured out a way to turn this to their advantage. The banks released enough homes to get the big private equity players in the market, then they shut off the flow of properties and let the buying activity of the REO-to-rental funds cause the housing market to bottom and start moving higher. If it would have been conceived in advance, it would be a clever strategy. Realistically, it was a happenstance that lenders blundered into. However, now that these conditions exist, lenders are keen to keep REOs and short sales off the market to force prices higher so they can benefit from appreciation. More properties will come on the market as prices rise, but the formerly.... Banks succeeded in manipulating the market to their advantage.
14---State-Wrecked: The Corruption of Capitalism in America, NYT

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.
      
There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding. ....
 
If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making.
 
 
there is no reason that a financial collapse should have led to a full depression. Economists since Keynes have long understood the steps necessary to prevent a depression, so it would require an extraordinary level of incompetence to allow a collapse to lead to a depression.
 
It certainly would be best to have a solution to the financial crises in Cyprus and the euro zone that did not involve a collapse, as would have been true during the Lehman crisis in the United States in the fall of 2008. However, given the enormously bloated financial sector in the United States and elsewhere in the world, it may well be better to have a solution involving a collapse that would wipe out this powerful interest group than a government bailout that leaves it intact.

The bloated finanacial sector acts as on ongoing drain on the economy since it pulls out more than it contributes to the economy as was shown in a recent paper from the Bank of International Settlements. In addition, because of the financial industry obsession with inflation, it is likely to use its political power to stifle growth in order to minimize the risk of inflation.

Contrary to Samuelson's assertion, there are people who disagree with him on the need to save the financial industry. (It was the industry whose survival was immediately at stake, not the system as he asserts.) It is striking that he would try to deny the existence of people on the other side but this sort of argument is characteristic of DC elite opinion as when they assert that "nobody" saw this crisis coming. When you have a weak argument it is easiest to just try to exclude the other side from the debate.

16----Behind the US-North Korean Bluster, antiwar

17---Class war in Europe, wsws
 
The punitive measures imposed on Cyprus mark a qualitative deepening of the European bourgeoisie’s class war offensive.
Under terms dictated by the troika—the European Union (EU), European Central Bank (ECB) and International Monetary Fund—the €10 billion bank bailout loan is tied to destroying the economic basis of life on the small Mediterranean island. Its major banks are being wound up or heavily restructured, with haircuts of as much as 60 percent on deposits over €100,000, to repay the ECB.

That this is a looting operation by more powerful sections of finance capital is made plain by the leaked draft “memorandum of understanding” between the Cypriot government and the troika.
Marked “sensitive,” it stipulates that Cyprus must implement immediate “structural reforms,” including a hike in the retirement age, the slashing of public-sector jobs, extensive privatisations, and a “roll-out plan” for the exploitation and “market organisation” of the country’s natural energy resources.
It must also establish “a system of wage indexation commensurate” with the “competitiveness of the economy.” Under conditions in which Cyprus’ GDP is forecast to fall by up to 25 percent and unemployment to double in the next two years, this means savage wage cuts.
What accounts for such political criminality on the part of the ruling elite? Its motives were set out by Maria Damanaki, European Commissioner for Greece in an interview with To Vima FM radio as the crisis in Cyprus began to unfold.

“The strategy of the European Commission over the past year and a half or two has been to reduce the labour costs in all European countries in order to improve the competitiveness of European companies over the rivals from Eastern Europe and Asia,” she said.
This basic agenda underlies the socially destructive bailouts that the EU has imposed on Cyprus, Greece and countries throughout Europe. If the EU is willing to devastate entire countries, it is because its basic agenda is to return masses of European workers to poverty, in the name of ensuring the competitiveness of European capital against its international rivals.
The implication of Damanaki’s casual reference to the need to compete against China and Eastern Europe is the return of the European working class to conditions not seen since the 1930s, so as to fatten the profits of the European financial aristocracy.
 
 

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