Monday, November 11, 2013

Today's links

1---Zombie Firms And Zombie Banks, Forbes

Beginning in 1991, Japan experienced a financial crisis that has been documented and studied by many. Japan’s crisis was triggered by a real estate and equity price bubble followed by a collapse of equity and real estate prices. But unlike the examples I cited above, Japanese policymakers met the crisis with prolonged denial and then, when conditions forced recognition of the severity of the problem, very halting steps to address it. Banks were not forced to recognize the condition of their balance sheets and were encouraged to continue lending to firms that were themselves unprofitable. Anil Kashyap labels these “zombie firms.”

Zombie banks continued to direct capital to zombie firms. This charade continued for more than a decade, with the result that the once-powerful Japanese economy was completely stagnant for that period. The government’s main response was to dramatically increase spending on infrastructure and frantically try to get Japanese households to save less and consume more. The resulting “lost decade” of economic growth cost Japan more than 20% of GDP.

2---Zombie companies were the problem in Japan, not so much zombie banks, business time

that in Japan the core problem was more zombie companies than zombie banks. Surowiecki agrees, and—as he tends to do—backs up his opinion with research papers:
As this paper by Joe Peek and Eric Rosengreen shows, during the nineteen-nineties, Japanese banks constantly “evergreened”—they kept extending additional credit to companies that already had loans with them. By extending credit, the banks enabled weak corporate borrowers to keep making their interest payments, and to put off bankruptcy. That made the banks’ balance sheets look better, and also kept companies afloat. The economists Ricardo Caballero, Takeo Hoshi, and Anil Kashyap, in fact, found that thirty per cent of publicly-traded firms were “on life support from banks in the early 2000s.”
Evergreening had two effects. First, because the borrowers had little chance of ever actually paying off their debts (because their underlying businesses were so weak), it kept Japan’s economy from making the adjustments necessary to start growing again. Caballero, et al, conclude that the practice led to lower investment, job creation, and productivity for the economy as a whole. Second, it limited Japanese banks’ profitability, because it effectively meant that, instead of making good new loans, they were constantly throwing good money after bad. As a result, they were never able to earn their way back to health. …
3---Zombie Companies: How Central Bankers Are Killing Growth, seeking alpha

After the bubble burst in January of 1990, the Japanese lowered interest rates. Many companies that should have gone bust continued to operate. These companies were able to stay afloat because they had access to bank loans at cheaper interest rates than the risks warranted; in effect they received subsidized credit. At one level this program worked quite well. The companies that received this credit ended up losing fewer jobs than other companies who were left to market forces. So from a policy standpoint, the low interest rates appeared to be a great success by reducing the pain. But there was one problem.

The lowered interest rates created the dreaded zombie company. These are companies with just enough cash flow to service their debts at very low interest rates, but insufficient profit to invest and grow. They can't innovate. They can't expand. They can't create more jobs. They just exist. They are now they are not just in Japan. They are everywhere.

Japanese zombie companies are still there. About two thirds of Japanese firms do not earn a taxable profit. Over the past decade a quarter of the companies listed on the Tokyo Stock Exchange failed to achieve operating margins above 2%. Like the flu presently spreading throughout the US, zombie companies can infect entire industries. They keep productivity low, put off new entrants, keep workers in unproductive jobs and discourage investment by driving down prices. They are also hard to get rid of.

As long as interests rates stay near zero banks can avoid restructuring or forcing the zombie companies into liquidation. As long as they have sufficient cash flow to service the loan, the loan does not have to be written off. All banks have to do is to extend the loan to avoid heavy losses. At long last even the governor of the Bank of Japan, Masaaki Shirakawa, has acknowledged that a policy of near zero interest rates hurts corporate growth.

Japan has often been the poster child for zombie companies, but now that all of the central banks have gotten into the loose money business, they have spread to Europe. During 2010 30% of English companies were losing money. Although this is a larger proportion than in the recession of 1990, the rate of insolvency was less. They manage to stay afloat because one in ten companies can manage interest payments but cannot reduce the principal. Companies in this category have increased by 10% in the last five months.

4---Japan Posts Trade Deficit for Record 15th Month, WSJ

5---Abenomics Faces Emerging Pressures, WSJ
Trouble in Developing Markets Blurs Growth Picture

Economists polled by The Wall Street Journal say Japan's economy likely posted annualized growth in gross domestic product—the broadest measure of a nation's goods and services—of 1.7% in third quarter, slower than the 2.8% rate for the U.S. and a sharp deceleration from the 3.8% and 4.1% rates of the prior two periods, when Japan outgrew the other Group of Seven advanced economies...

Another early growth generator from Abenomics—a jump in consumer spending—is also wearing off. The initial burst of optimism sparked a surge in Tokyo stocks early this year, which prompted wealthy consumers to open their pocketbooks. But share prices have since leveled off as the markets have gotten used to the policy shift, and spending has leveled off as well. Consumption likely posted its weakest growth in four quarters, just 0.4% in the July-September period, according to government figures.
One big factor pumping up the economy in the third quarter: government-funded public works. Infrastructure spending likely jumped an annualized 35% on the ¥10.3 trillion ($104 billion) stimulus package passed by parliament earlier this year, helping muffle weakness in other sectors. "When exports are weak, the government just spends away to drive the economy forward. This pattern has hardly changed," said Ryutaro Kono, chief economist at BNP Paribas Securities. 
6---The Imperial Roots of Iraq’s Sectarian Violence, Ashley Smith, counterpunch
In turn, Shia militias, including Sadr’s Mahdi Army, turned on the Sunni population, triggering a sectarian civil war that ripped Baghdad apart. As demonstrated in the BBC’s recent documentary James Steele: America’s Mystery Man in Iraq, U.S. ambassador to Iraq John Negroponte and his henchman, Steele, encouraged the Shia militias not only to target al-Qaeda, but the entire Sunni resistance.

Contrary to U.S. propaganda, George Bush’s so-called “surge”–which deployed 30,000 more combat troops to Iraq–did not bring peace to Baghdad. The civil war had largely ended before the surge was implemented–with a Shia victory and an almost complete ethnic cleansing of the city’s Sunni population. The surge also didn’t combat sectarianism, but reinforced it. American forces erected massive concrete blast walls to segregate Shia and Sunni neighborhoods in Baghdad...

Worse, Shia militias have regrouped and begun to stage attacks on the Sunni population. As a result of all the violence, an average of 1,000 people a month are now being killed in bombing and shootings.

7--Rise of the atheist uber church, RT

8---Wealth of world’s billionaires doubles since 2009, wsws

9---Worry Over Inequality Occupies Wall Street, WSJ
Gulf Between Haves and Have-Nots May Hurt Economy

Recent work by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva comparing the performance of advanced economies since the 1960s suggests increases in the share of income the top 1% of the population receives relative to the bottom 99% are at most only slightly negative for growth. What that analysis can't tell is what high levels of inequality like today's might mean. Tax-receipt data collected by Messrs. Piketty and Saez show the top 1% captured 19.3% of U.S. income in 2012. The only year in the past century when their share was bigger was 1928, at 19.6%.
Worse, this is occurring as average incomes have stagnated. Inflation-adjusted, median U.S. family income fell 6% in 2012 from 2002, according to the Commerce Department. Meanwhile, net worth for the median family in the top 10% by wealth was a record 24 times more in 2010 than for the median family overall, according to the Federal Reserve.
Former Morgan Stanley equity strategist Gerard Minack notes the U.S. Gini index, a gauge of income disparities that is also at a record, tracks with measures of political polarization. So he worries inequality could give rise to more political dysfunction that risks damaging the economy.
Another concern is that rising inequality creates financial instability. Raghuram Rajan, the economist now heading India's central bank, has posited that the credit bubble in the early part of the last decade was a consequence of inequality. In his telling, stagnating incomes led middle- and lower-income families to borrow excessively to raise standards of living.
But if inequality has risen to a point in which investors need to be worried, any reversal might also hurt.
One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. Another is companies are paying a smaller share of profits on taxes. An economy where income and wealth disparities are smaller might be healthier. It would also leave less money flowing to the bottom line, something that will grab fund managers' attention.
A Neoliberal Field Guide
Home prices and sales fell last month in the Bay Area as the tech-rich region mirrored a cooling trend elsewhere within the state.
The median home price in the nine-county region fell 1.9% from August to $530,000, while sales dropped 17.1% -- a steeper fall than the normal seasonal slowing, research firm DataQuick said Thursday. It was the second straight month that the median decreased...

Interest rates are higher, the inventory has risen, and investors now account for a lower share of all sales. In addition, we’ve seen a normal, seasonal slowing in the market heading into fall,” DataQuick President John Walsh said in a statement. “It’s likely we’ll see year-over-year price gains trend lower for the foreseeable future.”

15---Foreclosure mitigation programs assist 1.8M homeowners, Housingwire

of September, more than 1.2 million homeowners received permanent modification through the Home Affordable Modification Program, saving homeowners $547 on their mortgage payments each month — an estimated $22.9 billion monthly savings to date.

“The Administration’s Making Home Affordable program continues to provide assistance to struggling homeowners, with more than 1.2 million homeowners receiving permanent modifications through HAMP,” said Treasury assistant secretary for Financial Stability Tim Massad.
He added, “In addition, the standards set through the program have helped change the industry and helped millions more avoid foreclosure.”

16---CBO Report Implies That 30 year Fixed Mortgage To Rise To 6% By 2016, 6.9% By 2018, confounded interest

17---Job gains pass market expectations, Housingwire

Positive economic news point to a Fed tapering

Even though home prices have rebounded strongly and are now close to 'normal' levels, construction still lags. New home starts and construction employment are still way below their pre-bubble norm and face a long, slow climb," said Jed Kolko, chief economist for Trulia.
The jobs numbers also do not bode well for mortgage rates. A stronger employment picture makes the case for the Federal Reserve to slow its purchases of mortgage-backed bonds. Fear of the so-called "taper" was allayed during the government shutdown and debt crisis deadlock, but quickly reared again after Friday's strong employment report.
"Bond markets tanked immediately following this morning's jobs data. Today's rates will be at least an eighth of a point higher than yesterday, and as much as a quarter of a point for some borrowers," said Matthew Graham of Mortgage News Daily.
(Read more: Credit cuts out would-be homebuyers)
Average quoted rates for those with pristine credit and large down payments will now be 4.375 to 4.5 percent, compared with 4.25 percent Thursday, a substantial one-day move.

"Today's jobs data fuels speculation that the Fed will reduce asset purchases at that meeting rather than wait until March, as the last survey of Primary Dealers suggested," added Graham.
Higher rates will also mean more mortgage-related job cuts, as volume drops. The mortgage banking and brokerage sectors of the economy lost 6,000 jobs in September, according to an analysis by Inside Mortgage Finance, and likely shed more in October. Mortgage applications are down 42 percent from a year ago, driven by a 52 percent drop in applications to refinance. Applications to purchase a home are flat.

While the strong overall employment report is easing concerns that the partial government shutdown hurt the economy, consumer sentiment clearly took its own hit, especially when it comes to housing. The share of consumers who said it is a good time to buy a house in October fell to 65 percent, an all-time low for Fannie Mae's monthly National Housing Survey, which began in 2010.

19---Chinese Communist Party plenum to unveil “free market” blueprint, wsws

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