Tuesday, September 10, 2013

Today's Links

1---Maxed Out: Credit-Card Debt Declines, WSJ

Americans’ credit-card debt declined in July, a sign that cautious consumers might give the economy a smaller lift in coming months.
Consumers’ revolving credit, which primarily reflects money owed on credit cards, fell by $1.84 billion, or at a 2.6% annual rate, in July from a month earlier, the Federal Reserve reported Monday. That came after a 5.2% drop in revolving credit in June.
The report showed that Americans stepped up other types of borrowing, namely to buy cars and go to school. Nonrevolving credit, which reflects mostly auto and student loans, rose by $12.28 billion, or 7.4%, in July. That caused overall consumer debt, excluding mortgages, to grow at a 4.4% annual rate in July from June.

The drop in credit-card debt could stoke worries that consumers are clamping down broadly on daily discretionary spending, such as going out to eat or shopping at the mall. Such a development would restrain growth in the U.S. economy, which relies heavily on consumer spending. Consumer spending represents more than two-thirds of economic demand in the U.S.

Revolving credit peaked at just over $1 trillion in summer 2008 in the wake of that decade’s credit boom, when Americans racked up huge debts amid a strong housing market and low unemployment. But after the financial crisis and housing crash, households spent years cutting debt, either by defaulting or by paying down balances. That process, known as deleveraging, put households on firmer financial footing in the long run but drained the economy of much needed spending.
Credit-card balances have dropped in three of the past five months. Revolving credit is now at about $850 billion.

Other signs indicate households are under pressure. Unemployment remains elevated at 7.3%, and those with jobs are seeing only meager income gains, barely keeping up with inflation.
A Labor Department report last week showed that the average hourly wage climbed five cents in August, but is only 2.2% above its year-ago level. Meager income growth and job insecurity could make households reluctant to rack up debt.

2---Abenomics hangover "on the way" Testosterone Pit

This time, the hangover will be bad – given what’s going on in housing. Housing starts have been soaring: up 12% in July year over year, up 15.3% in June, up 14.5% in May... in a country whose population is declining! August looks to be just as strong as orders received by major construction companies jumped 13.7% in July. Housing starts have been up for 11 months in a row. The last time that happened? December 1996, a few months before the last consumption tax hike would take effect. 2013 is moving in lockstep with 1996.

It’s not just housing. In a survey by Orix Bank, 14% of the respondents said they were planning to buy appliances in order to dodge the tax hike, 13.8% would buy a car, and 13.3% would blow some money on domestic travel. Consumers and businesses alike are frontloading outlays for big-ticket items, just like in 1996. This time, too, there will be a price to pay.

However, Japanese consumers have seen all this before and are a cynical bunch. Overshadowed conveniently by the GDP up-revision hullaballoo, the Cabinet Office also released its consumer confidence index for August: It dropped to 43.4, the second-lowest level this year, the fourth month in a row of declines since the euphoric peak in May of 46.0 – euphoric by Japanese conditions. Even during the peak of the bubble in 1988-89, the index only briefly scratched 50.6. By September 1998, as part of the long hangover following, yes, the consumption tax hike of 1997, consumer confidence hit a record low of 34.8 (only to be outdone during the financial crisis). So the cycle repeats itself. Only this time, the hangover might be much worse.

For Japan’s megabanks, lending has rebounded. But instead of funding industrial projects in Japan, they’re funding acquisitions overseas and highfalutin real-estate speculation in Tokyo. They wrote up stock holdings and extracted

3--Elizabeth Warren on the "Supremes", AlterNet

According to a recent study, the five conservative justices currently sitting on the Supreme Court are in the top ten most pro-corporate justices in a half century – and Justices Alito and Roberts are numbers one and two – the most anti-consumer in this entire time. The Chamber of Commerce is now a major player in the Supreme Court, and its win rate has risen to 70% of all cases it supports.  Follow this pro-corporate trend to its logical conclusion, and sooner or later you’ll end up with a Supreme Court that functions as a wholly owned subsidiary of big business.

Look at where we are on the “Too Big to Fail” problem.
Five years ago, experts said the banks had to be bailed out because there was too much concentration in banking and one failure would bring down the entire economy.  Now the four biggest banks are 30% larger than they were five years ago. The five largest banks now hold more than half of all banking assets in the country.  Because investors know they are too big to fail, those big banks get cheaper borrowing, which, according to one study, adds up to an annual $83 billion subsidy from taxpayers—another benefit of being Too Big to Fail. 

What about reform? The Dodd-Frank Act was an incredibly important achievement, but since it passed, the big banks and their army of lobbyists have fought every step of the way to delay, water down, block, or strike down regulations. When a new approach is proposed – like my bill with John McCain, Angus King, and Maria Cantwell to bring back Glass-Steagall – you know what happens – they throw everything they’ve got against it.

4---Investors bail on housing, Reuters

A recent survey by polling firm ORC International found that about 48 percent of investors surveyed planned to curtail home purchases over the next year, up from 30 percent in a poll conducted 10 months earlier. Only 20 percent expect to buy more homes, down from 39 percent.
As the housing sector reached bottom, hedge funds and private equity firms began raising money to snap up foreclosed homes with the intent to rent them out for several years and unload them at a profit once prices rose far enough.
These firms have spent billions of dollars over the last year buying up single-family homes in bulk, mopping up excess inventory in the market and pushing up home prices.
Sellers often jumped at their all-cash offers, rather than taking a chance on first-time homebuyers who would have needed to secure a mortgage, still a hard task for all but the most qualified buyers. Many banks holding foreclosed properties are often looking for a quick deal.

But with mortgage rates rising in anticipation of the Federal Reserve scaling back the generous stimulus to the economy it introduced during the financial crisis of 2007-2009, investors are pulling back.
The softening of investor demand has also coincided with a drop in sales of so-called distressed properties, whether foreclosures or short sales. These homes usually sell for less than others and had been the focus of investor interest.
In July, distressed homes made up only 15 percent of sales, according to the National Association of Realtors. That matched June's reading, which was the lowest since the group started monitoring distressed sales in October 2008.....

Now that there are fewer bargains, there are fewer incentives for investors to make bids.
While investor demand has leveled off, some analysts expect these firms will remain big players in the market.
The U.S. homeownership rate is at a 17-1/2 year low and rental demand is high, with vacancy rates near multi-year lows.

Indeed, the number of occupied rental apartments and townhomes in the United States has been rising since 2009 as millions of home owners were forced out of their properties by foreclosure. At the same time, stricter mortgage requirements have made it harder for would-be buyers to obtain loans.
"The total demand for shelter across in the country is increasing. At the same time, the percentage of owners versus renters is decreasing," said Oliver Chang, a former Morgan Stanley analyst who is the founder of Sylvan Road Capital LLC, an Atlanta-based asset management firm.
"Investors like ourselves whose long-term plan is to rent properties out and manage them on an ongoing basis see this as a macro trend that is supportive of our industry," he said.

5---Lehman Debacle: FDIC rolls up banks all the time, Dean Baker

It's not clear what these people think they mean, but let's work it through. Suppose that we did see a full meltdown. The commercial banks that handle checking and saving accounts and are responsible for most personal and business transactions would then be under control of the FDIC.
The FDIC takes banks over all the time. This would be more roadkill than it was accustomed to, but there is little reason to think that after a few days most of us would not be able to get to most of the money in our accounts and carry through normal transactions.
Credit conditions would likely be uncertain for business loans for some time, as in fact was the case even with the bailouts. Mortgage credit would have been provided by Fannie Mae and Freddie Mac, as has been the case since September of 2008.

One item deserving special attention in this respect is the commercial paper market. This is the market that most major businesses rely upon to meet regular payments like payroll and electric bills. When he was lobbying Congress for the TARP, Federal Reserve Board Chair Ben Bernanke said that this market was shutting down, which would in fact be disastrous for the economy.
What Bernanke neglected to mention was that he unilaterally had the ability to support the commercial paper market through the Fed. In fact he announced a special lending facility for exactly this purpose, the weekend after Congress approved the TARP.

It is also worth ridiculing people who say the government made a profit on its bailout loans. It's true that most loans were repaid with interest. However these loans were made to favored borrowers (Wall Street banks) at far below the market interest rates at the time.

6----The Big Banks: as risky  as ever, Bloomberg

Because Goldman Sachs, Morgan Stanley and other major banks aren’t required to post collateral for all derivatives trades, almost 20 percent of over-the-counter deals involving large firms lack margin agreements, according to the International Swaps & Derivatives Association. That means if a trading partner closes positions because it’s concerned a bank isn’t viable, the bank has to come up with cash or securities. That drained liquidity at Lehman in 2008 and could do the same today to the largest lenders, which are also the biggest derivatives dealers.
Dodd-Frank sought to reduce that risk by requiring central clearing of derivatives trades and forcing parties to post collateral. That could increase the concentration of risk even further, according to Walter, the former Basel administrator.

Derivatives Meltdown

“The frequency of meltdown is less,” said Walter, who’s now a principal at Ernst & Young LLP in New York. “But should a problem occur, the systemic impact could be much greater.”
Regulators also haven’t done much to rein in repurchase agreements, or repos, a form of lending in which the borrower sells a security and pledges to buy it back later. They aren’t even sure how large the market is. A 2010 paper by Gorton estimated $10 trillion. The Federal Reserve Bank of New York pegged it at about half that in a report last year.
Because repo collateral is often resold or re-pledged, it can be difficult for borrowers to retrieve. That led to widespread uncertainty in 2008 and could drive hedge funds and other investors to pull assets from banks in another crisis.
“The bonds they financed most likely won’t be at the place they actually repoed them to, they’ll be two or three or four places down the line,” said Larry Tabb, CEO of New York-based research firm Tabb Group LLC. “So getting those bonds back will be a challenge.”
JPMorgan, Goldman Sachs and Morgan Stanley had sold or re-pledged $1.5 trillion of collateral as of June 30, the highest amount since 2008.

More than 50 bankers, regulators, economists and lawmakers interviewed by Bloomberg News disagreed about what needs to be done. Some said the six biggest U.S. banks have only gotten bigger since 2007 -- a 28 percent increase in combined assets, according to data compiled by Bloomberg -- making it harder to let them fail. Others said they weren’t troubled by bigness or a system that requires government intervention every now and then, calling it an inevitable cost of financing global business.
Banks “are too big, and I think they’re going to have to be too big,” said David Komansky, CEO of Merrill Lynch & Co. from 1996 to 2002. Komansky, now a director at BlackRock Inc. (BLK), the world’s largest asset manager, said he doesn’t have “the horrible distaste for government intervention.”

Catastrophic Consequences

Congressional inquiries and more than 300 books about the crisis have identified many villains: homeowners borrowing beyond their means, banks selling subprime mortgages, government-supported agencies backing the loans, Wall Street packaging them for investors, ratings firms giving seals of approval, regulators offering little objection and politicians encouraging it all to happen.
Three fundamental flaws stand out. Regulators stripped of power allowed banks to embrace too much risk and load up on toxic debt with short-term funds. Insufficient capital left them little margin for error when those assets plunged in value. A system too large, opaque and interconnected meant they couldn’t fail without catastrophic consequences for the economy.

Morgan Stanley’s Gorman, 55, summed it up in a speech in Florida in 2010, soon after taking over as CEO.
“What caused the financial crisis?” the CEO asked. “Illiquid assets, funded short-term, held by overleveraged institutions that were inadequately capitalized.” ...

The basic model hasn’t changed much, and it’s still fragile,” said Anil Kashyap, an economics professor at the University of Chicago Booth School of Business. “The banks need much more capital and liquidity. They’re still way short of being safe.”

One reason is the intensity of Wall Street’s pushback. Bank executives, lobbyists and lawyers logged more than 700 meetings with regulators on a section of Dodd-Frank that seeks to curb banks’ trading for their own account, according to data compiled by Kimberly Krawiec, a Duke University law professor. An October 2011 proposal for implementing the rule, named after former Fed Chairman Paul A. Volcker, generated more than 18,000 letters, many from banks complaining it was too complex and could hurt economic growth. ...

Hiding Risk

Those transactions, along with repurchase agreements that also supposedly offset one another, are part of a shadow-banking system that has more than doubled since 2002, according to the Financial Stability Board. While notional values exaggerate the extent of the risk, netting underestimates it and provides hidden leverage to banks, said Gary Gorton, a finance professor at Yale University.
“You can’t really see how big the banks are or what risks they’re taking by looking at their balance sheets,” Gorton said. “We don’t really know where the risk is.”
The ability of banks to hide risk, years after Lehman’s fall, was demonstrated by JPMorgan’s $6.2 billion loss in 2012 on wrong-way derivatives bets by a trader known as the London Whale because his positions were so vast. The trades, which had a notional value of about $150 billion, appeared much smaller on the balance sheet of the largest U.S. bank. .....

7---Why Labor’s Share of Income Is Falling, NYT

8---Housing: When the greatest stimulus of all time goes away, Mark Hanson

Last month, after the “shocking” 27.4% July MoM drop in headline unrevised New Home Sales — reported down a rosey 17% NSA (-13% SAR) after the record 10.4% June downward revision was swept under the rug — that followed by “2-days” a multi-year high “July” Existing Home Sales, the market is thirsting for more, “post-surge” housing data.  Especially, given how much the leading indicating builder stocks have sold off on the rate “surge” and how little everything else related to housing has on a relative basis.

The market remains polarized on the topic. Some think the rate “surge” will have little impact; others are betting the surge had a “calming”, or “normalizing” effect; while the bears — clearly a minority at this stage (perhaps just me at this point!) — think the rate surge was a rare and powerful “catalyst” only rivaled two times in the last seven years.  The first, when the housing market lost all it’s high-leverage loan programs all at once in 2007/2008; and the second, on the sunset of the Homebuyer Tax Credit in 2010.

In both these previous instances — over a long period of time — leverage-in-finance/stimulus created a ton of incremental demand and pulled-forward as much, or more. Then, when the leverage/stimulus went away — over a very short period of time — housing “reset” to the current supply/demand/lending guideline/interest rate environment, which in 2008 resulted in the “great housing crash”, and in 2010 the “double-dip”.

Here we sit in a eerily similar situation.  From Q4 2011 through May 2013 housing was injected with arguably the greatest stimulus of all time; a 2% “permanent mortgage rate buy down” gift from the Fed.  Over a very short period of time in 2011 the plunge in rates from the 5%’s to the low-to-mid 3%’s created 15% to 20% instant “affordability”, or “purchasing power”, out of thin air. In other words, a buyer on a flat income could instantly pay 15% to 20% more for the same house; or put another way, they could buy a house that cost 15% to 20% more…ca-ching! Over a few short quarters, housing prices “reset” higher to this new found purchasing power....

In summary, the past two-years of massive Fed, Gov’t, and bank intrusion into the housing market went way too far.  Houses are mis-allocated, there is no shortage of houses “in which to live”, and in ALL the popular “mega-recovery” regions are at least 50% expensive on a monthly payment basis than they were at the peak of the housing bubble in 2006. And all it will take is the wave of “cash-money” buyers ‘easing off” a bit; “some” of the organic first-time and repeat buyer cohort stepping away due to the sudden lack of “affordability”; and/or a wave of supply from “panic sellers” hitting the market to send sales volume and prices down sharply, over a very short period of time. And I think the rate “surge” catalyst has caused all three to occur at the same time.

9---Consumers pull back the reins on housing confidence, HW

Rising rates, Fed tapering push them to the sidelines

10--Report: Sellers Returning as Investors Pull Out , DS News

In the firm’s latest edition of US Housing Market Analyst, property economist Paul Diggle notes investor activity has fallen off nearly one-fifth over the last four months, with investor sales dropping from 23 percent to 18 percent as the inventory of heavily discounted distressed homes declines.
Workers and young people must draw the lessons of this experience. The Democratic Party is not anti-war; it is pro-war. No confidence can be put in Congress or any section of the Democratic or Republican Parties. The entire political establishment, along with the media, speaks for the financial oligarchy that dominates all aspects of official politics....
Workers and young people must take a stand: for the defense of civilization, culture, and peace, against the cabal of intelligence agencies and financial swindlers seeking to drag the United States and the world into another war.
This weekend, White House Chief of Staff McDonough told NBC’s “Meet the Press” that while the United States does not have specific evidence that the Syrian government used chemical weapons “beyond a reasonable doubt,” nevertheless “the common sense test” dictates that the Assad government is responsible.
The entire justification for US military action is based on unsubstantiated claims. This is an expression of political, legal and moral bankruptcy. From the standpoint of international law, the US government does not have a leg to stand on.

Everything was prepared for a long-planned military assault on Syria: the White House was ready, the military was ready, the media was ready, but the people were not ready. After a dozen years of uninterrupted war, the American population has had enough. The “war on terror” has been the justification for a decade of dirty wars, the suppression of political liberties in the US, yet now Al Qaeda has turned out to be an ally of the United States against the people of Syria....

The revelations of Edward Snowden have shown the Obama administration for what it really is: nothing but an agent for the military/intelligence apparatus and the banks, dedicated to the expansion of the power of the state and the destruction of democratic rights.
Workers and young people must draw the lessons of this experience. The Democratic Party is not anti-war; it is pro-war. No confidence can be put in Congress or any section of the Democratic or Republican Parties. The entire political establishment, along with the media, speaks for the financial oligarchy that dominates all aspects of official politics.

Who benefits from war? Is it the Syrian people, two million of whom have been displaced by a civil war stoked by the United States, who are now threatened with a massive bombing campaign? Is it the people of the Middle East, who are threatened with regional war? Is it the working people of America, for whom social services and education are being slashed to finance the war drive?
No! The only people who benefit are the handful of billionaires who run society. Not content to plunder the working people in the United States, the financial oligarchs are seeking to conquer, loot and pillage the world.

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