Tuesday, July 9, 2013

Today's links

1---U.S. Derivatives Regulator Weighs Delay in Cross-Border Rule, Bloomberg

The international reach of Dodd-Frank Act regulations has been one of the most controversial parts of the government’s effort to reduce risk and increase transparency in the $633 trillion swaps market. Regulators around the world decided to increase oversight of the market after largely unregulated swaps helped fuel the 2008 credit crisis and led to the collapse of American International Group Inc. (AIG), a New York-based insurer that booked many of its swaps trades in Europe.

The CFTC’s proposed guidelines -- which could extend agency oversight to many trades conducted by overseas U.S. banks or subsidiaries -- have created a rift with foreign regulators, who say their rules are sufficient for regulating derivatives trades in their jurisdictions.

International Trust

“Having told us to get our act together -- which we are now clearly doing -- is the U.S. suggesting that they cannot trust our systems and that only their rules can apply?” Nadia Calvino, the European Commission’s deputy-director general for internal market and services, said in a speech last week in Brussels.
The CFTC’s proposed guidance was criticized by JPMorgan and other U.S. banks for threatening to put them at a competitive disadvantage when they trade overseas.

Swaps trading has been a major source of revenue for large U.S. banks, and some have conducted roughly half of such trades overseas, often through branches or subsidiaries. JPMorgan, the nation’s biggest bank by assets, often derives as much of its quarterly revenue from global operations as from those in the U.S., Associate General Counsel Don Thompson said last year.

CFTC Chairman Gary Gensler has pushed for a broad reach of Dodd-Frank rules because of the potential for trades overseas to flow back to institutions in the U.S. and possibly put taxpayers at risk. He has frequently cited the 2008 collapse of AIG as a warning.

2---IMF Reduces Global Growth Projections as U.S. Expansion Weakens, Bloomberg

“Downside risks to global growth prospects still dominate,” the IMF said in an update to its World Economic Outlook. It cited “the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals

3---Is the so-called housing recovery the mother of all headfakes?, oc housing

4---Fed Puts Economy At Risk By Letting Interest Rates Soar, Mark Gongloff

The 65 percent increase in the 10-year bond yield over the past month and a half is not in any Fed econometric model," Peter Boockvar, portfolio manager at Morgan Stanley's Excelsior Wealth Management, told CNBC on Monday. The Fed, Boockvar said, is on the brink of losing credibility and control of the bond market -- both bad omens for the broader economy.

In fact, the bond market's massacre has been historic, with a record outflow from bond mutual funds in the last week of June and the biggest jump in interest rates in decades. Interest rates move higher when bond prices fall. And they have fallen hard, making suckers out of so-called bond gurus.

The yield on the 10-year Treasury note, which influences other borrowing costs in the economy, particularly mortgage rates, has jumped by a full percentage point in a little over a month -- from about 1.6 percent to about 2.6 percent. The rate on a 30-year, fixed-rate mortgage has gone from about 3.3 percent to about 4.6 percent in that time, according to the Mortgage Bankers Association. That percentage is the highest since October 2011.....

Ironically, the market's moves could slow down the economy enough to make the market's prediction wrong, by hurting the economy so much that the Fed realizes it can't taper its bond purchases yet.
Most economists doubt higher rates will kill the recovery. Even after the latest surge in rates, borrowing costs are still near historic lows. The stock market has apparently given up worrying about it, rebounding recently after an initial swoon when Bernanke & Co. first started talking about tapering.
But the surge in rates doesn't help, particularly with Congress and the White House already working against the economy by squeezing government spending and hiring. And the Fed is clearly disturbed by the rise in rates, as it's been trying to talk the markets off the ledge in recent weeks. Bernanke will get another chance to preach calm in a speech scheduled for Wednesday.

The economy is still on shaky ground, growing at a just 1.8 percent annualized rate in the first quarter and possibly at an even lower 1 percent rate in the second quarter, according to some estimates. Job growth has been decent, but the unemployment rate is still at 7.6 percent -- well above the 7-percent mark Bernanke has suggested might mean the end of the Fed's bond-buying program.

Rising interest rates directly challenge one of the brighter spots in the economy lately: the housing market. Mortgage applications tumbled 12 percent last week from the week before, according to the Mortgage Bankers Association.

5---Rising rates creating increasing dilemma for homeowners, FP

6---QE is soo over, Fed Watch

The Federal Reserve is having a difficult time convincing market participants that quantitative easing and interest rates represent two separate policy tools.  They want to severe the perception that the two are connected - a reduction in the pace of asset purchases thus does not signal a change in the expected lift-off from the zero bound.  Understanding that the two policies are different is, I think, key to understanding why the Fed is heading toward a September tapering despite what many view as an overall subpar economic environment.

7---Nearly 1 in 6 Americans Receives Food Stamps, WSJ

There's no poverty in the US

8---Inflation adjusted consumer credit, EI

Econintersect believes consumer credit levels are now in its historical channel from the 1990′s

9---Government–Not Business–Has Been the Source of Breakthrough Innovation -EPI

The Entrepreneurial State, that the real innovation engine in the global economy is not business, nor the market, but the government. A recent story about Mazzucato in Forbes cites her view that long-term, patient capital–provided by government–is the absolute prerequisite for breakthrough innovation. “Her case study for myth-debunking is the iPhone, that icon of American corporate innovation. Each of its core technologies–capacitive sensors, solid-state memory, the click wheel, GPS, internet, cellular communications, Siri, microchips, touchscreen—came from research efforts and funding support of the U.S. government and military.” Mazzucato suggests that, given the extent to which tech companies like Apple and Intel owe their great good fortune to the federal government’s investment in R&D, they should share more of their profits with the taxpayers. Instead, of course, Apple has been offshoring profits to avoid taxation and most of the tech industry is contributing to the efforts of the U.S Chamber of Commerce and the rest of the organized business lobby to cut corporate taxes and shrink the government. As Mazzucato makes clear, cutting taxes and the government is no recipe for an innovative, competitive future—just the opposite. -

10---Inflationophobia, NYT

The classical economists thought that inflation was the Achilles’ heel of Keynesian economics, and they hammered this point relentlessly. In truth, the Keynesians were vulnerable on that issue, believing that a little inflation was a small price to pay for bringing down the unemployment rate.

One problem for the Keynesians is that as time went by, their theories became increasingly divorced from the economics of John Maynard Keynes, becoming almost a caricature. Moreover, the economic circumstances were vastly different from those of the Great Depression and required different policies. But economists kept advocating more of what had worked in the 1930s and 1940s.
Keynesian economics was essentially reduced to something called the Phillips curve, which showed that there was always a trade-off between inflation and unemployment – more of one would reduce the other. The only question for policy makers was determining which problem, inflation or unemployment, was more important to voters.

Unfortunately, there was a political bias in the calculation; politicians tended to put reducing unemployment above reducing inflation and so inflation ratcheted upward. There was also confusion among economists about the cause of inflation. The Keynesians, whose view was shaped by the experience of the Great Depression, in which deflation or falling prices was the big problem, underestimated the role of the Federal Reserve and monetary policy in generating inflation.

This led to a counterattack by classical economists based mainly at the University of Chicago. By the 1980s, these economists had essentially overthrown the Keynesians by asserting that inflation had one and only one cause – excessive money growth by the Fed. Tight money had broken the back of inflation and the idea of tying the Fed’s hands, as the gold standard had done, gained popularity.

Fast forward to 2008. The nation fell into another recession. Initially, economists thought it was not dissimilar to those the economy had faced throughout the postwar era; they were slow to recognize its severity as a depression about one-third the size of the Great Depression....

While the Fed has generally maintained an easy money policy, inflation has remained dormant; some of the Fed’s inflation hawks have even become doves. But the constant drumbeat of attacks on the Fed for fostering inflation has constrained its actions, condemning the economy to slower growth and higher unemployment than necessary.

11---What Caused the Decline in Long-term Yields?, FRBSF
Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation.

12---Keeping Bernanke off the ledge, CEPR

Paul Krugman, among many others, has been denouncing the decision by Federal Reserve Board Chairman Ben Bernanke to discuss plans for backing away from the current pace of quantitative easing. While I agree completely with his logic, I am bit less concerned about the downside than he seems to be.

Krugman is certainly right that there is no reason to be talking of tapering right now. We are close to 9 million jobs below the trend level of employment. By the Congressional Budget Office's estimate we are still 6 percentage points below potential GDP, which corresponds to $1 trillion a year in lost output. Furthermore, inflation is low and falling. We would better off if it were somewhat higher since this would lower the real interest rate and reduce debt burdens. In this context, it is difficult to see any upside to talk of tapering.

And Krugman is also right about the market's strong reaction. The interest rate on both 10-year Treasury bonds and 30-year mortgages is up by more than a percentage point from the pre-taper talk levels. That is not helpful for the economy right now.

However, I am also not convinced that it is all that harmful. To my mind, the greatest benefit of low interest rates was the refinancing boom that it allowed. This freed up tens of billions of dollars for consumption. The refinancing process itself also generates economic activity in the form of legal fees, payments for appraisals and other costs (i.e. waste) associated with the refinancing process. Refinancing will quickly slow to a trickle with mortgage rates now over 4.5 percent.

But refinancing was always a self-limiting process. At some point everyone who could profitably refinance a mortgage at 3.5 percent will have done so. We surely must have been reaching this point so that refinancing would have slowed in the second half of 2013 and 2014 with or without the Fed taper.
Higher interest rates will also dampen the rise in housing prices. That is not a bad thing in my view. House prices are back at their trend levels in most parts of the country. In many areas they were growing at ridiculous rates (30-50 percent annually). If that had continued, we would have seen many local bubbles develop. If the rise in rates slows these price increases, that is good news in my book. A new bubble in Las Vegas or Phoenix would not move the national economy, but no one in their right mind could want to see another group of homeowners in these cities caught up again in a bubble, paying 20-30 percent above the trend price for their home.  

Perhaps the biggest negative effect of the Fed taper will be its impact on the value of the dollar. The dollar has risen around 5 percent from pre-taper levels against other major currencies. That will make U.S. goods less competitive and increase the trade deficit. Since trade is the fundamental imbalance in the U.S. economy right now, this is exactly the wrong way to go.

Long and short, this was a bad move by the Fed and pushes the economy in the wrong direction, but the impact will probably be limited. Consider the taper a mistake by Bernanke, but I wouldn't suggest he jump off a bridge over this one.

13---Consumer debt is soaring. That’s good news (for now), WA Post

America is starting to re-leverage itself.
That’s the implication of new data out Monday afternoon that shows that consumer credit — credit cards, auto loans, student loans, basically every form of debt other than mortgages — is rising by leaps and bounds. According to the Federal Reserve’s monthly report, consumer debt rose $19.6 billion in May, an 8.3 percent annual rate. If that rate of increase were sustained it would mean there’d be an extra $235 billion in consumer credit outstanding a year from now. That would amount to more than $2,000 per household.
In billions of dollars. Source: Federal Reserve
In billions of dollars.  Source: Federal Reserve
As Michael Feroli of JPMorgan notes, “Over the last year total consumer credit outstanding has grown at around a 5.5%-6.0% rate, about the same pace as the growth of nominal consumer spending on durable goods — the type of consumer purchase liable to be financed — and so in that sense the recent expansion of consumer credit is about what might be expected in a normal credit supply environment.”

14--Auto loans: The new subprime?, Housingwire

15--NYT celebrates slow growth, CEPR

The NYT tells us that it is good news that we are seeing higher unemployment and slower growth than would otherwise be the case as a result of partisan gridlock in Congress. Of course it did not put it in quite those terms, but an article on Congressional gridlock told readers:
"The upside of inaction is its impact on deficit spending. Total discretionary spending in the fiscal year that ends Sept. 30 will be about $70 billion below the previous year’s — the first such drop since fiscal 1996, another year of sharply divided government. In June, the federal government shed 5,000 jobs, according to jobs data released on Friday."
According to the Congressional Budget Office and most independent analysts the impact of this deficit reduction has been slow the economy in 2013 by more than a percentage point which would translate in somewhere around 700,000 fewer jobs. Of course the NYT may think this is good news, but that sort of comment is usually put in an editorial not a news story.

16---America and the generals in Egypt moved against Morsi to prevent a popular revolution, RT

17---Hezbollah fighting in Syria to defend Lebanon from bloodbath, RT

18---Hands off Edward Snowden!, wsws

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