Thursday, August 29, 2013

Today's Links

1---Jump In Mortgage Rates Dampens Irrational Exuberance in Housing Market, Dean Baker

The Commerce Department reported a 13.4 percent plunge in new home sales in July, suggesting a sharp turning point in the housing market. The new home sales are erratic, so this report should be viewed with some caution, but the drop in sales is consistent with realtor accounts from around the country about the market having slowed sharply since the jump in mortgage rates at the end of June.
hmm-2013-08
The July data on new homes sales are especially important since it provides information on contracts signed in July. Most other data on the housing market, such as existing home sales or the various prices indices, are providing information on closed sales. Since there is typically 6-8 weeks between when a contract is signed and the sale is closed, the sales data are not providing information about the current state of the housing market.
 
 
“The Fed probably shares our concern about the recent numbers, strengthening the argument for continued support for the [mortgage-backed security] market,” even if it begins cutting back on asset purchases next month, Goldman analysts wrote.
 
3---QRM rule. What a joke!, Dave Dayen, naked capitalism
 
If everything written in Dodd-Frank were actually implemented as far as mortgage origination standards, we would certainly have a safer system. The problem is that the plain legislative language often doesn’t match the reality of what the regulators produce. This is exactly the case with the “qualified residential mortgage,” or QRM, rule. To make this completely confusing, there already is a qualified mortgage (QM) rule promulgated by the CFPB, which actually retained at least some, though not all, of its teeth. The QRM rule was in the hands of six different financial regulators, and it was supposed to create “risk retention,” where the originator of the loan would have to hold a 5% stake in the loan on its own books, disabling them from distributing the entire risk. Only “qualified residential mortgages” would escape the risk retention requirements.
After the proposed rulemaking, it appears that the QRM will deliver risk retention in name only.
Six regulators—including the Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission—on Wednesday issued new proposed rules that would require banks and other issuers of mortgage-backed securities to retain 5% of the credit risk of the bonds on their books, as mandated by the 2010 Dodd-Frank financial-overhaul law.
However, the proposal carries an exemption so broad it wouldn’t apply to securities containing most mortgages made under today’s stricter lending standards, which are of relatively low risk. Rather, the rule would apply to the types of higher-risk loans that were popular before the 2008 financial crisis. The rule effectively sets boundaries for what kind of loans might be offered, and on what terms, once lending standards relax.
Had the rule been in effect last year, at least 98% of loans would have been covered by the exemption, according to Mark Zandi, chief economist at Moody’s Analytics.
There’s an “alternative rule” that would include a 30% down payment for the exemption, but that’s so out of left field that it’s obviously been placed in there as a red herring. The elimination of the down payment is the one that will get implemented for sure....

For those wanting the technical details, regulators basically took away the downpayment requirement in the risk retention rule, replacing it with CFPB’s “ability to pay” rule, which doesn’t require a down payment. There’s really been only one line of argument on the side of the mortgage industry, which enabled them to decisively win this round. That’s the claim that forcing a 5% risk retention would “contract credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.” As James Kwak points out, this is precisely the rationale for the last housing bubble, that actually putting regulations on the go-go mortgage market would disrupt credit, and you just don’t want to do that. We’ve seen decisively that whatever economic benefits come from the disposition of runaway credit are far outweighed by the risks.

4--Regulators Repeat Exactly What They Did During the Last Housing Boom,  James Kwak

 The Dodd-Frank Act was supposed to require securitizers to retain 5 percent of the credit risk of the mortgage-backed securities that they issued, in order to reduce the risk of a repeat of the last housing bubble. Today, the federal financial regulators said, “Whatever,” and ignored that requirement. In particular, they created an exemption that would have covered at least 98 percent of all mortgages issued last year.
Why? Because
“adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.”
That’s according to the head of the Mortgage Bankers Association.
This is the exact same argument that was made in favor of deregulation during the two decades prior to the last financial crisis, without the slightest hint of irony. It’s further proof that everyone has either forgotten that the financial crisis happened or is pretending that it didn’t happen because, well, maybe it won’t happen again?
Even leaving aside the specific merits of this decision, the worrying thing is that the intellectual, regulatory, and political climate seems to be basically the same as it was in 2004: no one wants to to anything that might be construed as hurting the economy, and no one wants to offend the housing industry.

5---Working Poor Have Dimming Faith In Economic Mobility, Policymakers, Survey Finds, Huff Post

The polling of low-wage workers, conducted by Hart Research Associates, found that nearly six in ten either scrape by each month or fail to meet their basic needs, and more than half have relied on public assistance in order to make ends meet. Nearly 80 percent said they don't have the savings they would need to provide for their families during three months without income.

Nearly all low-wage workers polled said performing their jobs well means a lot to them, and four out of five said it's important that their children someday graduate from college. But despite their optimism for their children, most were in agreement on the underpinnings of the U.S. economy: America tends to be a downwardly mobile society, and the country's policies are skewed more to the benefit of the rich than to the poor, they said.

"The prospects for low-wage workers are worsening rather than improving, resulting in widespread pessimism about economic mobility in America," Oxfam said in its report. "They express disbelief that the government is on their side, and think that Congress is biased in favor of wealthy people."

6--These Four Massive Threats Are Hitting Financial Markets All At Once , Mark Gongloff

Emerging Market Slaughter:

The Fed's taper talk has also hammered stocks and currencies in emerging markets such as India and Brazil. Traders had taken cheap money from the Fed and pumped it into developing economies that promised high returns. Some of these countries, such as India, had big current-account deficits with the rest of the world and really needed that hot foreign money. Once the Fed started talking about making money a little less easy, the emerging market trade got less profitable, and traders started collecting their winnings.

In some cases, the selling has calmed down recently. Brazil's Bovespa stock index has rebounded by about 10 percent, following a 20 percent collapse between late May and early July. Other countries haven't been so lucky -- particularly India, where the rupee is still under steady attack, falling to new lows against the U.S. dollar just about daily. The selling has gotten so ugly that some analysts have warned of a repeat of the 1997 Asian financial crisis. Standard & Poor's on Wednesday dismissed this possibility, but then S&P also rated subprime mortgage-backed securities "AAA" before the financial crisis, so...

7---Takeaway from Jackson Hole, Bruegel

Arvind Krishnamurthy writes that there exists theoretically a role for LSAPs on Treasury and mortgage yields even after stripping out signaling effects. For example, in the context of mortgage-backed securities (MBS), consider a setting in which a certain set of sophisticated investors (banks, dealers, asset managers) are the only investors in the MBS market (i.e., it is costly for new investors to enter the market) and these investors have limited access to capital, so that there are limits to arbitrage. This is an environment in which MBS yields will be inflated relative to an Arrow-Debreu complete markets benchmark in which MBS risks are broadly diversified across all savers. If capital constraints are slack, there will be no effects of an MBS purchase on prices. The economy then resembles the frictionless economy of Woodford (2012) where LSAPs have no effects on asset prices. On the other hand, if capital is scarce, as was likely in 2008/2009, there will be effects on prices.

Arvind Krishnamurthy writes that asset purchases can have effects precisely because the asset is traded in a narrow and segmented market. Nevertheless, spillovers may arise in this channel. First, to the extent that the LSAP strengthens intermediaries’ balance sheets and relaxes capital constraints, other assets that are traded in a segmented market and concentrated in the portfolios of the MBS specialized investors will also rise in price. Second, there is a possible macroeconomic spillover. If the affected assets are central to economic activity, then the policy may have significant macroeconomic effects and this indirectly spills over to other asset prices.

Arvind Krishnamurthy writes that the portfolio balance channel of QE works largely through narrow channels that affect the prices of purchased assets, with spillovers depending on particulars of the assets and economic conditions. It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds.

8---New Census Numbers Show Recession’s Effect on Families, NYT

The analysis also found that the recession profoundly affected American families from 2005 to 2011, resulting in a 15 percent decline in homeownership among households with children and a 33 percent increase in households where at least one parent was unemployed.
The recession also saw more mothers enter the work force and an increasing dependence on food stamps.
      
The number of households with an unemployed parent soared by 148 percent in Nevada and by more than 50 percent in California, Colorado, Connecticut, Florida, Hawaii, New Jersey and North Carolina in those years.
“During the recession, economic well-being worsened for families with children,” said Jamie Lewis, a demographer in the bureau’s Fertility and Family Statistics Branch who helped write the analysis. “Even after the recession officially ended in 2009, these measures remained worse than before it began.”
      
The severity of the decline often depended on whether the parents were married. Nine percent of married families were living below the poverty line and receiving food stamps. The proportion among single-mother households was four times greater.
In another shift that might be recession related, a higher percentage of adults ages 25 to 34 lived in their parents’ home in 2012 than in the early 2000s. The share among men increased to 16 percent from 13 percent; among women, it rose to 10 percent from 8 percent.
 
 
Economists say his options to drive down rates include reviving a bond-buying program currently paused at £375 billion ($583 billion) or cutting the BOE's benchmark rate even further
 
 
 
 
Krugman says, "No prob".
 
13---Obama at the Lincoln Memorial, wsws (Today's "must read")
 
The disgusting hypocrisy of Wednesday’s gathering, epitomized in Obama’s speech—indeed, in his very presence at the event—nearly defies description. King’s power as an orator arose from his ability to articulate the social grievances of the oppressed. He and the organizers of the 1963 march, for all of their political limitations, spoke for a genuine mass movement that mobilized hundreds of thousands of workers and poor in the South and in the cities of the North. This movement was animated by ideals of democracy and equality.

Obama represents the opposite. He is a creature of the state. He speaks for the military-intelligence apparatus and Wall Street. This was reflected in the emptiness, insincerity and affectation of his speech, which consisted of a litany of clich├ęs: “from every corner of our country,” “the doors of opportunity,” “reignite the embers of empathy,” “the road will be long,” etc. As usual, Obama evinced no regard for the intelligence of his audience.

He praised the veterans of the civil rights movement for “willingly [going] to jail to protest unjust laws, their cells swelling with the sound of freedom songs.”
But the Obama administration is seeking the extradition and prosecution of Edward Snowden for exposing the unconstitutional surveillance being carried out by the National Security Agency (NSA), persecuting Julian Assange for publishing revelations of US war crimes in Iraq and Afghanistan, and condemning Private Bradley Manning to spend the next 35 years of his life in prison in retribution for his fidelity to the principles proclaimed at the Nuremburg Tribunal after World War II—that soldiers have a duty to defy illegal orders and oppose war crimes committed by their superiors.

The very principle of civil disobedience that was central to the civil rights movement and praised by Obama on Wednesday is repudiated in practice by his administration, which insists, in the manner of all authoritarian regimes, that any violation of the law for whatever reason is tantamount to treason.
King, were he alive and holding the same positions he did 45 years ago, would doubtless be targeted by Obama alongside Snowden and Manning. In fact, King was hounded by the FBI....

Obama spoke as though these processes had nothing to do with himself or his own actions. But everyone knows his White House has overseen the transfer of trillions of taxpayer dollars to the financial industry, while spearheading the gutting of workers’ wages and savage cuts in jobs and social services. And while he bailed out General Motors, Chrysler and the Wall Street banks, he has lined up behind financial hatchet man Kevyn Orr’s efforts to use the bankruptcy court to slash Detroit workers’ pensions, privatize and gut city services, and sell off the artistic treasures in the Detroit Institute of Arts.

What accounted for the social decline of the past 50 years outlined by Obama? In his remarks, the president blamed the people themselves.

“Legitimate grievances against police brutality tipped into excuse-making for criminal behavior,” he declared. “[What] had once been a call for equality of opportunity, the chance for all Americans to work hard and get ahead,” he continued, “was too often framed as a mere desire for government support…as if poverty was an excuse for not raising your child...”
What Obama dared not raise was the real source of the social crisis—the crisis and decline of American capitalism.

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