Wednesday, September 11, 2013

Today's Links

1---US income inequality at record high, BBC

The income gap between the richest 1% of Americans and the other 99% widened to a record margin in 2012, according to an analysis of tax filings.
The top 1% of US earners collected 19.3% of household income, breaking a record previously set in 1927.

Income inequality in the US has been growing for almost three decades.
Overall, the pre-tax incomes of the top 1% of households rose 19.6% compared to a 1% increase for the rest of Americans.

And the top 10% of richest households represented just under half of all income in the year, according to the analysis.
Emmanuel Saez at the University of California, Berkeley, one of the economists who analysed the tax data, said the rise may have been in part because of sales of stock to avoid higher capital gains taxes in January.

Mr Saez wrote in an analysis that despite recent policy changes aiming at lessening income inequality, the measures were relatively small in comparison to "policy changes that took place coming out of the Great Depression".
"Therefore, it seems unlikely that US income concentration will fall much in the coming years."
Income counted in the analysis includes wages, private pension payments, dividends and capital gains from the sale of stocks and other assets, but it does not include unemployment benefits or federal public pension benefits, known as Social Security.

While the crash of 2007-09 adversely affected top earners, benefits of rising corporate profits and stock prices since then have largely gone to the richest, according to the study.

Incomes among the richest fell more than 36% between 2007-09, compared with a decrease of 11.6% for the rest of Americans. But in the last three years, 95% of all income gains have gone to the richest 1%.
The top 1% of American households had income above $394,000 (£250,000) last year. The top 10% had income exceeding $114,000.

2---Oh Yes They Can, Krugman, NYT

One of the things you have to get used to if you want to debate real economic policies (or real policies in any area, I suppose) is that people will make arguments that leave you floored with their sheer dumbness. The first time you pay attention, you find it hard to believe.
So, for example, imagine that you’re a novice in this business, and you’re confronted with politicians who say, “You say that austerity hurts growth, but after three years of dismal performance under austerity, we’ve just had one quarter of pretty good growth. You’ve been proved completely wrong!” Your first reaction is to think “They can’t be that stupid, can they?” Or, alternatively, “They can’t think the rest of us are that stupid, can they?”
Oh yes they can.

Nobody has ever said that austerity policies mean that the economy will never grow again. In fact, the standard view among Keynesians is that, unless there are strong hysteresis effects, the economy will eventually recover to its old growth trend even if austerity is never reversed — which means that somewhere along the way there will be some quarters not just of growth but of above-average growth. Actually, that dead-cat-bounce effect is an important factor in the new Jorda-Taylor analysis of austerity: they find that austerity tends to be imposed in depressed economies, and depressed economies have historically tended to recover, so the dead-cat bounce factor obscures the amount of damage the austerity policies really do.

So the claims of success coming from both the European Commission and now from Cameron/Osborne are deeply stupid — but that doesn’t mean that they won’t gain traction

3--Abenomics and the minimum wage, Testosterone Pit

The dismally low Japanese minimum wage will be raised by 2%, or ¥15, to ¥764 per hour ($7.64), from October 6 forward, said the Ministry of Health, Labor, and Welfare. It would be the second year in a row of double-digit-yen increases. Even the newly raised minimum wage – as in the US, where the Federal minimum is an even more dismally low $7.25 per hour – is largely impossible to live on in major urban areas. Point of pride: after this increase, the minimum wage will be below welfare payments in only one of Japan's 47 prefectures, Hokkaido. At the current rate, it is below welfare payments in 11 prefectures. But, the raise isn’t exactly overly generous. The Bank of Japan is “targeting” inflation of 2%. From the way inflation has jumped on a monthly basis for much of this year [my take.... Abenomics Wins: Budget And Inflation Both Jump (Over The Cliff) ], inflation will in all likelihood overshoot that 2%. So it is highly likely that the minuscule raise won’t keep up with rising prices, especially where urban minimum wage earners spend much of their money: transportation, energy, food, and housing. 

4---The yield on 10-year Treasuries has surged 1.33 percentage points to about 2.96 percent since the beginning of May,, Bloomberg

“I have never liked QE, and think it is a poor replacement for sound fiscal policy,” Gundlach said in an e-mail. “Having embarked on QE, the Fed ushered in a new regime of dealing with the fiscal problems underlying the U.S. economy. Ending QE would allow the fiscal problems to reemerge.”

The yield on 10-year Treasuries has surged 1.33 percentage points to about 2.96 percent since the beginning of May, pushing up borrowing costs for homeowners and consumers and fueling a flight of capital from emerging markets. The yield won’t fall below 2.7 percent any time soon, Gundlach said yesterday, unless there’s a catalyst that drives up bond prices, such as a crisis in emerging markets.

Crisis Potential

Gundlach, citing comments by Ray Dalio, founder of $145 billion hedge-fund firm Bridgewater Associates LP, that the next major financial crisis may come from an emerging-market country, said India is the most likely candidate to trigger such a crisis. The country is most vulnerable because it relies too much on outside capital to finance its budget deficit. China and Russia, by contrast, are relatively insulated, Gundlach said.

4---Yep, it's another housing bubble, CNBC

5--Shoulda let the big banks fail, CEPR

There was an alternative. It was possible to allow the market to work its magic, which would have certainly destroyed the other three remaining independent investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch). Two of the megabanks, Citigroup and Bank of America, which were on life support at the time, surely would have failed as well. It is possible that the other two megabanks, J.P. Morgan and Wells Fargo, also would have been dragged down as well.

In this world, we would have quickly eliminated much of the waste that has developed over the decades in a coddled financial sector that uses its political power to get hundreds of billions of dollars of implicit and explicit subsidies from the government. The economy would have taken a big hit, but those of us old enough to remember 2008 recall that the economy did take a big hit even with the bailouts.

6---More on why Osborne is the dumbest fu**er to ever draw a breath, WA Post

They then apply the findings to the specific case of the U.K., producing the chart you see above. But it could be even worse than that. “This caveat is the zero lower bound (ZLB) of monetary policy: the U.K. out-of-sample counterfactual corresponds to a liquidity trap environment, but the in-sample data overwhelmingly do not,” the authors write. “In that case, the true residuals in 2010–13 could be much smaller than above, and the effects of austerity (i.e., the fiscal multipliers) even bigger, big enough to possibly explain most or all of the growth shortfall after 2010.”

In plain English, what they’re saying is that when central banks’ interest rates have gone as low as they can go, fiscal policy is much more powerful than it is usually is. In this case, the Bank of England could not readily offset the impact of fiscal tightening by cutting interest rates, which means that they did more damage to growth. The countries Jordà and Taylor included in their sample mostly weren’t in that situation, meaning they could be lowballing the damage that the austerity policy did to Britain.
Again, this paper is not definitive. And the newness of its methodology, while exciting, also opens the door for error. But if its results hold, the implications for the Cameron/Osborne government are extremely damning.

7---Criminal law is for the poor, Firedog Lake

The New York Times provided a detailed discussion of the reasons for the refusal of the Securities Exchange Commission to refer any cases from the collapse of Lehman Brothers for prosecution, or even to file a civil suit. Once more, we get our slapped in the face by the reality that the rich are not subject to law. Or, as Judge Richard Posner explained it to us simpletons in a 1985 article in the Columbia Law Review:
This means that the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law. This may seem to be a left-wing kind of suggestion (“criminal law keeps the lid on the lower classes”), but it is not. It is efficient to use different sanctions depending on an offender’s wealth. P. 1204-5, fn omitted.
Posner is a member of the Mont Pelerin Society, a group devoted to spreading the cause of neoliberalism. I’m sure Judge Posner is delighted to see his theory put into practice by the SEC and the Department of Justice, under Eric Holder and Barack Obama. Posner’s idea is so preposterous that only the feral rich, their neoliberal tools, people utterly insulated from reality, and fools could possibly endorse it. And so we come to George S. Cannellos, who headed up the SEC team of investigators.
It is deeply moving to see Cannellos’ concerns. The Times says this:
The S.E.C. team also concluded that Repo 105 would not have been “material” to investors because the firm’s leverage ratio was trending downward regardless of Repo 105.
That conclusion set off a wave of dissent inside the S.E.C. Senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures questioned the findings. Ms. Schapiro [then Chair of the SEC] urged Mr. Canellos to keep digging.
But Mr. Canellos, a former federal prosecutor who is now the co-head of the S.E.C.’s enforcement unit, did not budge. Despite the political pressure, he told colleagues at one of the meetings, they could not bring a case if the evidence was lacking.
“Our job is to seek justice,” he said.’’

8---Sheila Bair: Banks never cleaned up their balance sheets, WSJ

And then when we got into 2009 when the system was finally stable, we got capital into the banks, that was good, the stress tests were good, getting more capital into the banks was good, but we didn’t clean up their balance sheet.  We announced this program to force them to sell bad assets but we never followed through with it and I think that was a mistake.
Wessel:  And that’s one reason why the economy isn’t doing better?

Bair:  Look, if you prop up very large institutions they have a lot of bad assets on their books, yeah, they spend a lot of time nursing their bad assets. It makes them conservative. It makes them cautious.  Even now you see the smaller banks doing a lot more lending than larger institutions.  They have all of these issues to work through and there are other reasons for it too as I’ve criticized the capital rules, a disincentive to lending and reward securities and derivatives trading and that’s upside down and needs to be fixed, but yeah, if you take your medicine early, rip off the band-aid, get the balance sheets cleaned up, you have institutions that can go into the economy and do a much better job of lending as opposed to nursing all these bad assets dealing with all this litigation and legacy issues, It’s a drag on the economy and I think we’ve experienced that, absolutely.

Bair:  Mortgages yes, particularly of mortgages.  It looks like we’re losing our political will to do any kind of meaningful reform of securitization and that’s unfortunate.  Money-market fund reform, money markets blew up during the crisis, had to have a tax payer bailout, haven’t done really anything except work around the edges.  The Volcker Rule to ban speculation by institutions in the safety net, a very important rule, needs to be finalized, still pending, so there’s a lot longer list but those some of the big ones....

Bair:  Well, we needed mortgage-lending standards prior to the crisis.  I think everybody agrees with that. Ben Bernanke to his credit admitted that was a mistake. The Fed had the authority, they didn’t do it. We do have, that authority is now at the Consumer Bureau, we now have lending standards so that was helpful. But that wasn’t enough to counter this huge economic incentives that securitization created.  Once we separated the ownership of the mortgage and with that the risk that the mortgage would default, once we separated that interest from the decision to originate the loan and fund the loan we started having problems because people who were originating the loans they were paid up front so they generated volume.

Bair:  Well, I think in the lead up to the crisis there were three things we should not have done which we did.  One was mortgage-lending standards, we needed to have mortgage- lending standards.  We should not have deregulated derivatives, that was just the wrong thing to do and then I think the capital standards were going weaker and weaker, we were fighting that battle in 2006 so the regulators were letting the big banks take on more leverage instead of less and then we had this huge unregulated derivatives market and we had no mortgage lending standards so those are three mistakes we made....

9--- Alan Blinder: We've learned nothing, WSJ

Mortgages and securitization. Piles of unconscionably bad mortgages—underwritten by irresponsible bankers, permitted by somnolent regulators, and passed on like hot potatoes to investors via securitization—were a major contributor to the financial crisis. One response in Dodd-Frank was a "risk retention" rule requiring issuers of asset-backed securities to retain at least 5% of the credit risk, rather than pass it all on to investors. The idea was that a little "skin in the game" would make Wall Street firms a bit more cautious about what they securitized.
But there was a catch. The 5% requirement does not apply to "qualified residential mortgages" (QRMs)—a term left to regulators to define, but intended to exempt safe, plain-vanilla mortgages with negligible default risk. Dodd-Frank does not ban mortgages that do not qualify as QRMs, nor even does it prevent such mortgages from being securitized. It only requires that lenders retain a tiny portion of the credit risk.

The law mandated that a specific rule be written within 270 days. More than 1,100 days have now passed, and the country is still waiting. Just days ago, the regulators issued yet another notice of proposed rulemaking, soliciting comments on (among many other things) two ways to define QRMs. The lighter-touch option would exempt almost 95% of all mortgages from the skin-in-the-game requirement. The "tougher" option would exempt almost 75%. Does anyone doubt which option will be favored by interested commentators? After that, what will be left of the Dodd-Frank requirement?
Derivatives. Disgracefully bad mortgages created a problem. But wild and woolly customized derivatives—totally unregulated due to the odious Commodity Futures Modernization Act of 2000—blew the problem up into a catastrophe. Derivatives based on mortgages were a principal source of the reckless leverage that backfired so badly during the crisis, imposing huge losses on investors and many financial firms. Dodd-Frank calls for greater standardization and more exchange-trading, which would create a safer and more transparent trading environment. Wonderful ideas. But the law exempts the vast majority of derivatives. Do you see a pattern here?

It gets worse. Gary Gensler, the chairman of the Commodity Futures Trading Commission, is one of the few real reformers. But he ran into a wall of resistance from the industry, from European regulators, and from some of his American colleagues when he tried to implement even the weak Dodd-Frank provisions for derivatives. And Mr. Gensler's days leading the CFTC look numbered.
Rating agencies. The credit-rating agencies also contributed mightily to the financial mess. These private, for-profit companies were presumed responsible for calling out hazards. Instead, they blessed financial junk with coveted triple-A ratings. Honest mistakes? Perhaps. But many critics have pointed out a flaw that cries out for fixing: The agencies are hired and paid by the very companies whose securities they rate.

Unfortunately, Congress could not decide how to fix this flaw. So Dodd-Frank instructed the Government Accountability Office to study "providing incentives to credit rating agencies to improve the credit rating process" and report back within 18 months. The law also instructed the Securities and Exchange Commission to study "strengthening credit rating agency independence" and report back within three years. The GAO issued a report 18 months later, laying out a number of options; it has gathered dust ever since. And the SEC? Well, don't get me started. Amazingly, the rating agencies are still compensated as they were on the day Lehman Brothers crashed.
Proprietary trading. The Volcker rule, part of Dodd-Frank, bans proprietary trad
ing by banks, to prevent them from gambling with FDIC-insured funds. President Obama embraced (and named) the rule very late in the legislative game, over the objections, according to multiple press reports, of his chief economic adviser at the time, Lawrence Summers.

10---5 Years Later, We've Learned Nothing From the Financial Crisis, James Kwak

11---Government Policy Gave Us Inequality, not the Market, Dean Baker

12---Saudi-Russian talks raise questions on Syrian war drive, Boston bombings, wsws

13---Bernanke: We knew we were very sure the collapse of Lehman would be catastrophic." WSJ

The big domino was Lehman Brothers, the investment bank dragged down by bad real-estate loans. Standing by as it went into bankruptcy in September 2008 is the most second-guessed decision of the entire crisis. "In hindsight, it is very hard to argue that it wasn't a mistake," says Frederic Mishkin, a Columbia University economist who left the Fed board in August 2008....

The mantra of central bankers and other regulators, Mr. Mishkin says, is that "you want to be tough, as long as you don't blow up the system." The hard part, of course, is to know when to be tough and when intervene to prevent the system from blowing up.
Richard Fuld, Lehman's CEO, told the Financial Crisis Inquiry Commission that he believed to the very end that his company could be saved with government help. He said he told Mr. Paulson, "If you would give us a bridge [loan], let's put Lehman back together. We can wind down these positions, and we can make a lot of this ugliness go away."
The government, of course, refused.

"We knew we were very sure the collapse of Lehman would be catastrophic," Mr. Bernanke told the Financial Crisis Inquiry Commission a year after the event. The Treasury and the Fed tried to sell Lehman, but couldn't. And though they offered different explanations at the time, Messrs. Bernanke, Geithner and Paulson today all say that they had no choice but to let it go.
"I will maintain to my deathbed that we made every effort to save Lehman, but we were just unable to do so because of a lack of legal authority," Mr. Bernanke has said.


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