Tuesday, July 16, 2013

Today's links

1---Bill Black on Bernanke, naked capitalism

Our states and localities have been running pro-cyclical budgets and employment practices in response to the Great Recession, which has substantially weakened our recovery. Public sector employment has fallen materially, exacerbating unemployment and delaying our recovery from the recession.
Even our moderate recovery, however, has been enough to produce a sharp fall in the federal budget deficit. Indeed, the fall has been far too rapid and is slowing our recovery. A candid Bernanke would explain to Congress that their insistence on debt hysteria is the leading problem slowing the U.S. recovery and that the Fed cannot counteract the harm that Congress and Obama are doing when they inflict austerity...

I have written numerous articles explaining that the Fed had the unique statutory authority under Home Ownership and Equity Protection Act of 1994 (HOEPA) to ban liar’s loans issued by lenders who did not have federal deposit insurance. I have shown that Alan Greenspan and Ben Bernanke received ample warnings of twin epidemics of mortgage fraud consisting of endemically fraudulent “liar’s” loans and appraisal fraud. These frauds were overwhelmingly driven by lenders and the perverse incentives their compensation schemes produced among their agents, particularly loan brokers.

Greenspan refused to use HOEPA to ban liar’s loans and refused to even find the facts about liar’s loans. Bernanke did the same, until he finally give in to intense Congressional pressure and banned liar’s loans in mid-2008. Even then, he delayed the effective date of the rule by 15 months. One would not wish to inconvenience fraudulent lenders.

I explained in prior columns that the appraisers’ formal warnings about mortgage fraud began in 2000 and that the FBI’s famous twin warnings that a mortgage fraud “epidemic” was emerging that would cause a financial “crisis” were made in 2004. I also pointed out that real regulators, operating with far fewer facts and resources, had come to the correct conclusion about “stated income” loans in 1990-1991 and driven them out of the industry. Greenspan and Bernanke both could have acted via regulation to end the fraud epidemic and avoid the Great Recession. Wessel, like Greenspan and Bernanke, conveniently assumes the Fed’s role as a financial regulator out of existence even though Wessel’s focus is on the Great Recession.

2---Wages cuts to continue, FRBSF

During the most recent recession the unemployment rate jumped 5.6 percentage points, but wage growth slowed only modestly. The economy has been recovering for four years and unemployment has declined considerably, but wage growth has continued to slow. These patterns contradict standard economic models that hold that unemployment and wage growth normally are tightly related and move in opposite directions.
This Economic Letter argues that these patterns are consistent with the reluctance of employers to adjust wages immediately in reaction to changing economic conditions. In particular, employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions. This behavior, known as downward nominal wage rigidity, played a role in past recessions, but was especially apparent during the Great Recession. Wage rigidity kept nominal wage growth positive throughout the recession. This led to a significant buildup of pent-up wage cuts, that is, wage cuts that employers wanted, but were unable to make. As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels

3---"We remain fully invested", David Kotok

Excess reserves are not required of the banking system. They are created by the Fed’s process of purchasing Treasuries and federally backed mortgage securities. Right now they are at an unprecedented size in the banking system and are on deposit back at the Fed. The Fed currently pays 0.25% (25 basis points) to banks that deposit excess reserves with it. The banks deposit these excess reserves because that is, at this time, the most prudently profitable way to deploy them.

The big future concern is this: what happens when the excess reserves leave the banking system for other assets? What happens when there are loans and investments? Is there a multiplier? Does too much stimulus result? Will inflationary impacts ensue? Will asset bubbles form? The answer to all of those questions is … yes and no. Remember, that for a given single transaction, most of the transfer between agents is of excess reserves from one bank to another: I buy something from you; my bank settles the transaction; and the total amount of excess reserves held by my bank is reduced, while the total amount of excess reserves held by your bank is increased. It takes a loan and credit expansion to increase the amount of required reserves.
Under the present circumstances, credit multiplication is not happening – or if it is, it is doing so in a very small way. What happens now? The Fed buys more government-backed securities, and a few hours later the excess reserve balance is higher than it was the day before. The Fed holds the securities; the balance sheet and excess reserves are increased; and very little economic impact occurs. There may be a psychological impact. That is, the Fed may have seeded the notion that it is going to continue with stimulus until the economy becomes more robust. All of those things are true; however, the impact of the single transaction is negligible....

Our view is from the bottom line. The interest rate of importance is going to be the short-term rate, which is the target of the Fed. It is near zero and is going to be there for the next two years or more. It is bullish for assets. We believe spread product in the bond market is a desirable thing to own. We particularly like municipal bonds. Stocks, real estate, and other asset classes are likely to rise in price as long as this current policy is in place, which will likely be, at least, a couple more years.
The latest reports on retail sales and manufacturing only affirm this outlook. We remain fully invested.

4---Wealth Products Threaten China Banks on Ponzi-Scheme Risk, Bloomberg

China’s credit crunch in June spurred hundreds of millions of households and companies to divert a record share of their savings into wealth-management products, known as WMPs. The amount of such investments surged eightfold from 2009 to 8.2 trillion yuan as of the end of March, according to government data. That’s almost the size of the Australian economy. Fitch Ratings put the amount even higher in May, at 13 trillion yuan....

WMPs look like time deposits to investors, except that about 70 percent of them don’t have their principal guaranteed by banks. About half invest in low-risk deposits, bonds and money markets. The rest venture into riskier areas including stocks, derivatives and loans to local governments and property developers, according to the China Banking Regulatory Commission, which requires banks to register all WMPs they sell.

The investments are popular because they provide rates of return higher than savings deposits, which are set at 3 percent annually, below this year’s government targeted inflation rate of 3.5 percent.
As investors pile in, financial firms need more inflows of cash to pay off maturing products, resulting in mounting risks that prompted China Securities Regulatory Commission Chairman Xiao Gang to call them a “Ponzi scheme” even before the latest record purchases. Issuance of new products and borrowing from the interbank market are among the most common ways banks pay out maturing WMPs, according to Fitch.

‘Huge Size’

“The WMP market has inflated to a huge size,” said Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co. “Should they go bust, Chinese banks have their reputation on the line, and they face the risk of compensating investors because of pressure from the general public.”...

Shadow lending supplies a line of credit to small businesses that can’t otherwise get bank loans. An estimated 97 percent of the nation’s 42 million small companies aren’t eligible for credit from state lenders, according to Citic Securities Co.
Total credit outside the official banking market may double to 46 trillion yuan by the end of 2017 from an estimated 23 trillion yuan as of March 31, according to Standard Chartered

5---Propaganda? Now it's legal, antiwar

6--China slowdown in charts, WSJ

As eagerly awaited as the first sight of Kim Kardashian’s baby, but probably less attractive, China’s second quarter economic data have arrived.
With the world’s second largest economy careening toward its slowest growth in more than 20 years, China Real Time charts it out:
Growth slowed to 7.5% year-on-year in the second quarter, down from 7.7% in the first. That puts the economy on track to hit the government’s 7.5% target for the year, a result that would still be down from 7.8% in 2012, and the lowest growth since 1990.

7---Q2 looks slumpy, WSJ

The first look at second-quarter gross domestic product won’t be released until July 31–the second day of the Federal Reserve‘s next Federal Open Market Committee meeting. But monthly data available make it clear the spring slump was, indeed, very very slumpy.

Monday brought disappointing news on retail sales and business inventories. Retail purchases increased just 0.4% in June, not the 0.8% expected, and May’s sales were revised down. The control sales group, which goes into GDP and which excludes vehicles, building materials and gasoline, rose 0.15% in June, half the gain forecasted.

In addition, businesses increased their inventories level by just 0.1% in May, and April’s increase was revised from 0.2% to 0.3%.
The list of economic shops now estimating real GDP grew by less than a 1% annual rate last quarter include Goldman Sachs (0.8% as of Monday), Macroeconomic Advisors (0.6%), Royal Bank of Scotland (0.5%) and Barclays (0.5%). (One caveat to the upcoming GDP data is that the Bureau of Economic Analysis will be releasing benchmark revisions and new methodology at the same time the second quarter GDP data are released.)

Forecasters at J.P. Morgan, who are sticking with a 1.0% estimate, highlight the dangers surrounding an economy that is barely treading water. They write, “Two questions that the really lousy Q2 GDP tracking raise are [one] how will the disconnect between weak GDP and solid payrolls be resolved and [two] how will the FOMC feel about pulling its foot off the gas while looking at what could be a zero-handle on the most recent GDP print.”

8---Real Wages Still Below June 2009 Level, WSJ

Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.
The flat result stemmed from a 0.4% increase in average hourly earnings being offset by a rise in the consumer price index. Over the last 12 months, inflation-adjusted hourly wages have risen by just 0.4%.
Standard economic models hold that wages should increase during times of economic recovery and falling unemployment. But new research from economists at the Federal Reserve Bank of San Francisco finds that normal wage models don’t apply during and after recessions.

The researchers examined data from the last three U.S. recessions and found that wages held steady or didn’t decline by very much, despite spikes in unemployment, during the downturns. Then, as the economy emerged from recession and unemployment fell, wages didn’t recover much either.

After the last recession, the fraction of U.S. workers whose wages were frozen reached a record high.
The researchers concluded that when companies lower their labor costs to adjust to declining output, they find it easier to lay off workers than to lower wages. Nevertheless, they typically fail to adjust labor costs as much as they think they need to during the downturn, so they continue the adjustment after the recovery takes hold by keeping a lid on wages.

The severity of the last recession means that the damping effects on wages are likely to continue for some time, the researchers said.

9--Eurozone about to repeat Japan's mistake, sober look

10---Spitzer joins the fray, naked capitalism

11---Should have thought of that before you turned the central bank into a "bad bank" for distressed assets: Ending QE will cause financial assets to fall, naked capitalism

The reserves of the banks have ballooned and there has been little expansion of bank credit for investment and other purposes. Since QE involves the direct purchase of financial assets, it would not be surprising if QE at least held up asset prices. The general rise in stock market prices around the globe fits that pattern, and the falls when it is suspected that QE will be unwound.
In their recent annual report, the Bank of International Settlements warned of the issues which could arise as QE is unwound; and as a number of major countries (notably USA, UK and EMU) practicing QE reversals at the similar times would exacerbate the problems. The problems could arise from a general fall in asset prices, and specifically the effects which a fall in asset prices would have on the balance sheets of banks and other financial institutions.

Central banks and governments have so far profited from QE as the central bank purchases interest bearing assets for money. As QE unwinds those interest bearing assets will obviously be sold, and a key question becomes at what price. As interest rates would likely be rising and central banks become substantial sellers of financial assets, asset prices are likely to fall. Since QE has involved major purchases of financial assets, a relatively small fall in asset prices (more asset prices at future sale date compared with prices at time of purchase) would generate significant losses....

The QE programme does not appear to have been a great success in the promotion of economic recovery, though it has held up asset prices. As the QE programme unwinds it is likely to involve the central bank and government in substantial losses, and to have consequences for the stability of the financial system.
12---Hedging China's "Super-Bear" Hard Landing, zero hedge

13---The end of the housing rebound, oc housing

Home prices moved up at a torrid pace during the first half of the year, but don’t expect them to keep pace during the second half.
The big spike in mortgage rates over the past two months has reset the housing market and figures to take a bite out of demand at a time when more sellers have listed homes for sale and when price gains have tested investors’ purchasing appetites.
Mortgage rates, which stood at a low of 3.59% at the beginning of May, jumped to 4.58% during the last week of June, according to the Mortgage Bankers Association. Rates rose even more last Friday, after a strong jobs report firmed up investors’ expectations that the Federal Reserve would begin to curtail its bond-buying program later this year....

For borrowers with less than a 5% down payment, the effective mortgage rate is at its highest level since mid-2009 because loans backed by the Federal Housing Administration now carry higher annual insurance premiums. …...

 A sharp spike in interest rates—even to a level that is still historically low—represents a large payment shock to home shoppers...

Bears have argued that the recovery has been mostly artificial, driven by cheap debt.
The gyrations in bond markets are going to pull back the curtain on just how much the current recovery has depended on ultra-low mortgage rates. …

14--It's Almost Like Workers Don't Like Getting Screwed Over, First Draft
... recent polling from both Gallup and Pew reveal that Americans’ support for unions has risen of late, with the Pew poll showing 55% of the population holding a favorable view of unions, the highest level since before the financial crisis. This recent uptick in support for unions can be partially attributed to the slowly improving economy, as it is accompanied by similar increases in favorability for corporations. On the other hand, there are a few trends — namely income-growth stagnation and the fact that corporate owners are taking a larger share of the national income than they have in generations — that would lead one to expect increasing support for unions.
15----Housing's red flag, Business insider

Nomura finds one ominous nugget:
Building material sales were a major drag on overall sales, as they declined by 2.2% in June. This could be a result of the recent run-up in mortgage rates, but we have to wait for more housing data to conclude that this is actually the case. Housing starts and building permits data for June will be released on Wednesday. Note that the building materials category reflects home improvement items, and given that distressed sales have declined recently, demand for home improvement items could have fallen off leading to the drop in the building materials category. Sales of miscellaneous items (such as office supplies, stationeries, gifts, used merchandise), and retail sales at eating and drinking places also declined in June.

16--Home equity loan delinquencies increase, oc housing

Remember the ARM reset issue? Housing bears postulated that the millions of borrowers who used interest-only and negatively-amortizing ARMs would implode when their payments reset and recast to higher payments. Those borrowers did default, and the banks warehoused them in shadow inventory (now cloud inventory), a purgatory where many of them live today-

17---How do you issue a loan to someone with negative collateral? The US gov figured out how. DS News

One “sensible response” to tackle the issue of negative equity is HARP, the report suggested. Since HARP’s 2009 inception, more than 2.5 million borrowers have been able to refinance under the program, and many of those borrowers were underwater.

For example, from January to April, 44 percent of homeowners who refinanced under the program had loan-to-value (LTV) ratios greater than 105 percent.
The researchers explained much of the program’s success is due to program changes in 2012, one of which included removing the 125 percent LTV ceiling. However, it might be time for even more program changes, the report stated.

One change would be to remove the cutoff date that limits eligibility to Fannie Mae and Freddie Mac loans that were obtained by June 1, 2009. The second change would be to allow borrowers to refinance under the program more than once.
According to the New York Fed report, by eliminating the cutoff date entirely, the number of borrowers who would be “in-the-money” would increase substantially to more than 530,000, or by more than 30 percent. In-the-money borrowers are those who could recoup the costs of refinancing within three years based on the savings from HARP.

Under current guidelines, the authors estimate there are about 1.5 million borrowers who are eligible for HARP and in-the-money.
Additionally, by removing the rule that limits borrowers to just one HARP refinance, eligibility would increase by over 55 percent, the report found

18---Improving Access to Refinancing Opportunities for Underwater Mortgages , NY Fed

19---The "starve the beast" myth, Jeff Frankel

The Starve the Beast Hypothesis claims that politicians can’t spend money that they don’t have.  In theory, Congressmen are supposedly inhibited from increasing spending by constituents’ fears that the resulting deficits will mean higher taxes for their grandchildren.     The theory fails on both conceptual grounds and empirical grounds.   Conceptually, one should begin by asking: what it the alternative fiscal regime to which Starve the Beast is being compared?     The natural alternative is the regime that was in place during the 1990s, which I call Shared Sacrifice.    During that time, any congressman wishing to increase spending had to show how they would raise taxes to pay for it.   Logically, a Congressman contemplating a new spending program to benefit some favored supporters will be more inhibited by fears of constituents complaining about an immediate tax increase (under the regime of Shared Sacrifice) than by fears of constituents complaining that budget deficits might mean higher taxes many years into the future (under Starve the Beast).   Sure enough, the Shared Sacrifice approach of the 1990s succeeded.  Compare this outcome to the sharp increases in spending that took place when President Reagan took office, when the first President Bush took office, and when the second President Bush took office.    As with the Laffer Hypothesis, more systematic econometric analysis confirms the rejection of the hypothesis.
 These matters are not solely of interest to historians or economists.   The presidential campaign of Senator John McCain appears set to drive its wagon down the same road in which Reagan and Bush have already worn deep ruts.   The candidate is apparently selling the same snake oil:  he says he believes that tax cuts increase revenues.   His principle policy director disavows the Laffer Principle, just as the economists who advised Presidents Reagan and Bush did.   But the views of the economic advisers are not what determines what these presidents do. 

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