Saturday, June 22, 2013

Today's links

1--The Trouble in Brazil, frombrazilblog

Last week I said that this explosion was more the consequence of economic growth in the last decade than of a recent slide in growth or even inflation. Yes, 40 million people rose out of poverty into a new middle class, and people feel empowered now to make the demands for what they were implicitly promised, an advanced middle-class society with services to match. And yes, they justifiably have a lot to complain about, especially when it comes to the things the protests originally centered on. Public transportation is abhorrent and overpriced, public schools and hospitals are tragic, and the police often treat Brazilians like dangerous criminals rather than citizens. This reality contrasts all too clearly with the image the shiny World Cup stadiums want to sell the world.

2---Bernanke Said Taper & Free Money Addicts Felt Withdrawal Symptoms -Trimtabs

central bank new money creation is the sole reason why global stock markets are so high in price. Therefore, any threat to stop the free money has caused stock and bond markets to act as if their future heroin supply is in doubt.

It got so weird that when last Thursday, the Federal Reserve’s unofficial PR guy, the Wall Street Journal’s John Hilsenrath, reported that the Fed is unlikely to stop creating new money anytime soon, the stock market spiked 2%.

In other words the druggie investors need the reassurance from their drug dealer’s mouthpiece that they would still be able to still keep scoring free their drug, free money. Isn’t that precious.

Meanwhile the US economy is sputtering along and barely growing. As we have documented time and time again, wages and salaries of all US workers subject to withholding taxes has been growing about $200 billion yearly each of the past three years, not much more then the growth in inflation. Even to get to this anemic growth rate, the economy has been totally dependent upon the trillions of free money created since 2009.

3----Another shameful day for Europe as EMU creditor states betray South, Telegraph
So much for the denials. The Cyprus "template" for banking crises is to be eurozone policy for other countries after all.

Anybody with serious banking exposure to any EMU state on the front line of Europe's macro-economic crisis now knows what to expect.

The deal reached by EMU finance ministers on the use of the bail-out fund (ESM) to recapitalise distressed banks makes clear who will in fact suffer the real losses: first shareholders, then bondholders and then deposit holders above €100,000. They stand to lose almost everything, as we saw with Laiki in Cyprus.
....

There is no recognition that this disaster was a joint venture, caused by the dysfunctional structure of monetary union; nor that Northern creditors and their banks share half the blame for flooding the South with cheap credit; nor that the ECB played a huge part in stoking unstable credit bubbles in Club Med and Ireland by gunning M3 money supply at double-digit rates to help nurse Germany through its slump. Nor is there even a sensible analysis of what is needed to solve the crisis

4---Snowden Charged With ‘Espionage’ for Leaks to Press, antiwar

5--Treasuries' Worst Week In 50 Years; Stocks Worst Week In 2013, zero hedge

6---NSA Whistleblower: NSA Illegally Spied On Top Generals, All Supreme Court Justices, White House Spokesman, washingtons blog

Members of Congress, both Senate and the House, especially on the intelligence committees and on the armed services committees and some of the–and judicial"

7---"Low Down" payment, easy credit is baaack, Bloomberg

Mortgage rates in the U.S., after increasing at the fastest pace in a decade, have jumped after Bernanke confirmed on June 19 that the central bank is ready to slow its purchases amid signs of an improving economy and housing market. Wells Fargo & Co. (WFC), the largest mortgage lender, increased the rate on a 30-year mortgage to 4.5 percent yesterday from 4.13 percent on June 18 and 3.88 percent last month.
The average rate for a 30-year fixed loan climbed to 3.93 percent earlier this week from 3.35 percent last month and the record low 3.31 percent reached in November, according to Freddie Mac. ...

Home prices are still 28 percent below the 2006 peak, and mortgage rates, still near historic lows, are down from 6.8 percent in 2006 and more than 10 percent in 1990....

While credit may be opening, the process of getting a new or refinanced mortgage remains frustrating, because lenders are making more meticulous demands for evidence of borrowers’ finances, Fleming said....

Bank of America Corp. (BAC), which has hired 1,000 loan officers during the past year, plans to continue adding staff to aggressively go after home-purchase business as refinances slow, said spokesman Terry Francisco.
The company is doing more lower-down-payment originations because mortgage insurers are getting more comfortable with them as home prices rise, he said. The company is considering lowering its down-payment requirement for jumbo loans.....

(entire crisis cost banks less than $100B)
Lenders raised standards after the housing crash compelled the government to rescue Fannie Mae and Freddie Mac and bondholders forced them to buy back faulty loans. In all, poorly underwritten mortgages have cost five banks -- Wells Fargo, Bank of America, JPMorgan Chase, Citigroup Inc. (C) and Ally Financial Inc. (ALLY) -- at least $94 billion in the six years ending 2012

(Low down" is baaack)

While underwriting standards are far more restrictive than they were during the real estate boom, lenders are becoming more flexible, said Cecala. They’re dialing back documentation requirements for jumbo loans for pricier properties and allowing lower down payments even for conventional mortgages, he said.

Down Payments

Zillow Mortgage Marketplace, an online comparison shopping site for home loans, saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments of 3.5 percent to 5 percent in March 2013 compared with two years earlier, said Erin Lantz, director of the site, which received 15 million loan requests during the past 12 months.
“More lenders are willing to lend to borrowers with lower down payments -- it’s an indication that they are able to extend credit more broadly,” Lantz said.
More buyers are also getting low down-payment loans backed by government sponsored mortgage enterprises, Fannie Mae and Freddie Mac, said Credit Suisse Group AG mortgage strategists Mahesh Swaminathan and Vikram Rao. ...

In another sign of loosening credit, Lazerson began this year offering piggy-back loans to allow borrowers to refinance as much as 90 percent of the value of their property. A 10 percent piggy-back mortgage plus an 80 percent prime mortgage on a $700,000 home can cost about $3,100 a month at today’s rates, compared with about $3,575 for a 90 percent loan with mortgage insurance on the same property, Lazerson said.
“That $475 a month adds up over time,” he said in a telephone interview. “And I don’t perceive it as being high risk.”
Piggy-back loans became common during the credit bubble before the housing crash, when lenders offered first loans worth 80 percent of a home along with 20 percent second mortgages, enabling purchases with no down payment, even for borrowers with low credit scores. Those types of loans became rarer when home prices plunged and lenders in the second position faced mounting losses.

8---Bank of America’s Foreclosure Frenzy, Bloomberg

9---The Capitalist’s Case for a $15 Minimum Wage, Bloomberg

The fundamental law of capitalism is that if workers have no money, businesses have no customers. That’s why the extreme, and widening, wealth gap in our economy presents not just a moral challenge, but an economic one, too. In a capitalist system, rising inequality creates a death spiral of falling demand that ultimately takes everyone down.
Low-wage jobs are fast replacing middle-class ones in the U.S. economy. Sixty percent of the jobs lost in the last recession were middle-income, while 59 percent of the new positions during the past two years of recovery were in low-wage industries that continue to expand such as retail, food services, cleaning and health-care support. By 2020, 48 percent of jobs will be in those service sectors.

Policy makers debate incremental changes for arresting this vicious cycle. But perhaps the most powerful and elegant antidote is sitting right before us: a spike in the federal minimum wage to $15 an hour.
True, that sounds like a lot. When President Barack Obama called in February for an increase to $9 an hour from $7.25, he was accused of being a dangerous redistributionist. Yet consider this: If the minimum wage had simply tracked U.S. productivity gains since 1968, it would be $21.72 an hour -- three times what it is now. ....

Raising the minimum wage to $15 an hour would inject about $450 billion into the economy each year. That would give more purchasing power to millions of poor and lower-middle-class Americans, and would stimulate buying, production and hiring.
Studies by the Economic Policy Institute show that a $15 minimum wage would directly affect 51 million workers and indirectly benefit an additional 30 million. That’s 81 million people, or about 64 percent of the workforce, and their families who would be more able to buy cars, clothing and food from our nation’s businesses.

This virtuous cycle effect is described in the research of economists David Card and Alan Krueger (the current chairman of the White House Council of Economic Advisers) showing that, contrary to conventional economic orthodoxy, increases in the minimum wage increase employment. In 60 percent of the states that raised the minimum wage during periods of high unemployment, job growth was faster than the national average...

No one earning the current minimum wage of about $15,000 per year can aspire to live decently, much less raise a family. As a result, almost all workers subsisting on those low earnings need panoply of taxpayer-supported benefits, including the earned income tax credit, food stamps, Medicaid or housing subsidies. According to the Congressional Budget Office, the federal government spent $316 billion on programs designed to help the poor in 2012.

That means the current $7.25 minimum wage forces taxpayers to subsidize Wal-Mart Stores Inc. (WMT) and other large employers, effectively socializing their labor costs. This is great for Wal-Mart and its shareholders, but terrible for America. It is both unjust and inefficient.
A higher minimum wage would also make low-income families less dependent on government programs: The CBO report shows that the federal government gives about $8,800 in annual assistance to the lowest-income households but only $4,000 to households earning $35,500, which would be about the level of earnings of a worker making $15 an hour

10---Stealing crusts of bread from retirees, Reuters

Detroit’s infrastructure is crumbling: 40% of its street lights are out of order, and it has 78,000 abandoned and blighted structures, of which 38,000 are considered dangerous buildings. Those buildings account for a large proportion of the 12,000 fires Detroit has every year. At the moment, firefighters are instructed not to use the hydraulic ladders on their firetrucks unless there is an immediate threat to life, because the ladders have not received safety inspections for years. Detroit also has just 36 ambulances, of which generally no more than 14 are in operation at any given time. And in terms of the city’s IT infrastructure — well, you can probably guess; suffice to say that a recent IRS audit characterized the city’s income tax system as “catastrophic”.

As far as Detroit’s balance sheet is concerned, there is $9 billion of debt, excluding pension liabilities, and also excluding healthcare and life insurance obligations which are calculated at roughly $6 billion.

He wants to write down some of Detroit’s debt, as well — although far from all of it. Cate Long has a good round-up of how various bondholders will be treated under his proposal; she concludes that he’s treating bondholders in good faith, but that he’s behaving less fairly towards retirees. (It’s a combination you might expect, given that Orr was appointed by a Republican governor; it’s basically the opposite of how the Obama administration treated the bankrupt Chrysler and GM.)

It’s worth noting that even though Detroit is defaulting on millions of dollars of debt obligations, bondholders in general are not going to be hit, thanks to the wonders of third-party guarantees. For instance, Bloomberg reports that the 2028 general-obligation bond is currently trading at 96 cents on the dollar, “the lowest since March 2012″ (it’s backed by Assured Guaranty).

As a result, the real pain here is going to be felt by two main groups. The first is the companies who provide wraps for municipal debt — companies whose muni arms somehow managed to escape the financial crisis largely unscathed, and which had to expect some losses on all the debt they were insuring. It’s hard to feel any sympathy for them. But the second group — Detroit’s municipal retirees — had much less choice about taking on their unsecured exposure to the city’s finances. Looking at the straits Detroit is in, the bond default makes sense. But it’s not being driven by stratospheric pension costs, and the swipe at pensioners does look rather gratuitous.

As Long says, “this is merely an opening gambit by Orr”. Let’s hope that Detroit’s unions, as well as the people representing non-unionized workers, fight him aggressively. Because Detroit’s population is poor enough as it is. Those pension payments are needed — and what’s more, they will overwhelmingly be recycled straight back into the local economy. Unlike bond coupons.

11--A $15 minimum wage is a terrible idea, WA Post-

The bigger problem, though, is that there’s been a lot of work on the minimum wage since Card and Krueger, much of which contradicts their findings. David Neumark at UC – Irvine and William Wascher of the Federal Reserve Board of Governors concluded in a 2007 review of the literature that a solid majority of studies find that minimum wage increases reduce employment, while very few, if any, provide convincing evidence that it increases employment....

What of Hanauer’s claim that a minimum wage increase would pump $450 billion into the economy, a point enthusiastically repeated by Felix Salmon? That’s pretty dubious too. Daniel Aaronson and Eric French of the Chicago Federal Reserve Bank did a thoughtful analysis of this point, which Brad ably summarizes here. It’s true, they note, that the minimum wage leads to more spending on the part of low-income workers. But historically that spending has come out of increased borrowing, an avenue that may not be available in the context of today’s tight lending standards. Add in the potential job losses from a minimum wage increase, and you get a very mixed picture of the likely stimulative effects of an increase. Aaronson and French conclude, “We should be somewhat suspicious of claims that the minimum wage will significantly boost the economy.”

12---Worst 2-Day Move For Mortgage Rates in 4 Years, mortgage news daily

13---540,000 banked-owned properties "not even listed" in Florida, DS News

According to RealtyTrac’s estimate, 167,680 properties in foreclosure have been abandoned by their owner. The total represents 20 percent of all foreclosures.
Adding to this total are the more than 540,000 banked-owned properties still waiting to be sold to a third party.
“Somewhat ironically, efforts to slow the slide of the housing market in previous years are now hampering a smooth recovery by holding back inventory of homes that almost certainly must sell in the future but are not yet listed for sale,” explained Daren Blomquist, VP atRealtyTrac.
With 55,503 vacant foreclosures, Florida alone accounted for 33 percent of the national total....

Efforts to prevent unnecessary foreclosures and mitigate their impact on home values have resulted in a foreclosure process that takes an average of 477 days nationwide, and more than two years in some states – which is holding many of these must-sell properties off the market,” Blomquist said.
Among metro areas, Chicago led with 14,717 owner-vacated foreclosures, followed by Miami (13,901), New York (10,074), Tampa (9,998), and Orlando (5,569).
In this current low-inventory environment, the release of these vacant foreclosures should not cause prices to plummet, according to RealtyTrac.

“Even if all these homes flooded the market simultaneously they would likely not cause the once-feared double dip in prices given supply constraints from non-distressed sellers and stronger demand,” Blomquist said. “Given these market dynamics, it’s not surprising to see that Florida, Illinois and New Jersey – states with three of the four longest foreclosure timelines – have all had laws take effect in the last six months that speed up the foreclosure process on vacant properties. These laws should help provide some extra supply and possibly help reduce the threat of another housing price bubble forming in these markets.” 

14---International House Hunters Maintain Activity in U.S. Market , DS News

15--Percentage of "firsttime homebuyer" drops to new low, realty check

Based on the change in mortgage rates from early May to today, the average buyer would have to pay 13 percent more in monthly payments, including taxes and insurance, according to Mark Hanson, a California-based analyst. They also have to earn 10 percent more in income to qualify for a loan based on a typical qualifying debt-to-income ratio of 45 percent.
"These are huge moves especially considering—when purchasing a house using a mortgage—most people buy based on 'monthly payment and the maximum allowable debt-to-income ratio.' This means first-timer share will fall even further. They are already at a multiyear low even with record-low rates," said Hanson.
 
First-time homebuyer participation was at just 29 percent, according to the Realtors, a five-year low. Without these buyers, as investors pull back and prices rise, home sales will likely lose steam. June's report on pending home sales, or signed contracts in May, will tell just how much rising rates are impacting sales. That report will be released Thursday, June 27.

16---The mass protests in Brazil and the crisis of revolutionary leadership, wsws

While it has created some 50 billionaires and over 150,000 millionaires, it has proven incapable of resolving the legacy of imperialist oppression and economic backwardness in relation to the basic social infrastructure. Limited social assistance programs that have been hailed for reducing the rate of extreme poverty and creating a new “middle class” have done little to alter Brazil’s status as one of the most socially unequal countries on the face of the planet.

There are growing signs of economic crisis, with the growth rate falling to 0.9 percent in 2012 and 0.6 percent for the first quarter of this year. Industrial production has fallen 0.3 percent, bringing with it layoffs and hiring freezes. Consumer spending is falling, as the majority of the population faces mounting debts. Inflation has risen to an official rate of 6.5 percent, with the cost of basic necessities rising far more steeply.

While the number of university graduates has doubled in the last decade, the majority of those leaving university are unable to find jobs that require their degrees or pay decent salaries.
These young people, university students and recent graduates, made up a substantial portion of the demonstrators who poured into the streets across Brazil this week, with the bulk of them participating in mass social action for the first time in their lives.

The inevitable political confusion of such a mass spontaneous movement was exploited, particularly on Thursday, by forces of the extreme right. Bands of thugs set upon groups of left-wing marchers and a small number of union members who joined the demonstrations, tearing down and burning their banners, attacking them with pepper spray, stun grenades and metal pipes, and ultimately forcing them out of the march. This happened in Sao Paulo, Rio and a number of other cities, indicating a well-organized campaign, undoubtedly coordinated with the police and possibly the military.

The right wing sought to steer the political direction of the protests away from a struggle for social equality, chanting the slogan “no parties” and denouncing political corruption, high taxes and crime.
While the majority of those who marched were unaware of these sinister events, the fact that the fascist thugs could act with impunity is politically significant....

Nonetheless, a whole range of pseudo-left organizations dedicated themselves to sowing illusions that the PT could be turned into a revolutionary vehicle for establishing socialism in Brazil.
As the PT won elected office on the municipal and state level, its politics shifted further and further to the right, until ultimately Lula was elected president in 2002 based on a guarantee to continue the IMF-dictated economic policies of his predecessors. Brazilian and international capital came to see the PT as the best instrument for protecting their interests against a revolt from below.

Some of the pseudo-left outfits were expelled from the PT, while others stayed, with their members rising to leading positions. In the case of the Pabloite United Secretariat, both things were true.

17---Credit crunch hits China, wsws

Fitch Ratings warned this week that China’s “shadow” banking system was rapidly getting out of control as borrowers were struggling to repay debts. Fitch’s senior director in Beijing, Charlene Chu, warned that particularly worrisome was the $2 trillion in off-the-balance-sheet lending in the form of “wealth products”, such as trusts and managed funds. These financial vehicles were created to evade regulation aimed at curbing property speculation.

Property speculation has mushroomed since the 2008 crisis, due to the lack of profit to be made from investing in productive activity. Much of the “shadow” lending has gone into vast “ghost towns”—empty apartment blocks and shopping malls across China—which most of the population cannot afford to buy or rent. The property is simply owned and hoarded by a small wealthy elite.
Chinese banks have deposited $3 trillion in the central bank, to be drawn on in a crisis. But, as Fitch noted, this sum is only a drop in the bucket, compared to lending in the past five years. China’s overall credit has jumped from $9 trillion in 2008 to $23 trillion today, which, in Chu’s words, has “replicated the entire US commercial banking system in five years.”

China’s credit to GDP ratio has skyrocketed from 75 percent to 200 percent—compared to about 40 percent in the US before the subprime crisis and in Japan before the collapse of the property and share market bubbles in 1990.

“This is beyond anything we have even seen before in a large economy,” Chu warned. “We don’t know how this will play out. The next six months will be crucial.”

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