Monday, December 2, 2013

Today's links

1---Why banks do not lend at near-zero interest rates, philipji

I hope readers will be interested in the following graph which plots a) Commercial and Industrial Loans at All Commercial Banks against b) the Effective Federal Funds Rate from January 2001 to June 2011 [The data are from (where else?) the web site of the Federal Bank of St Louis.]

Especially interesting is the period from around the beginning of 2001 when the Fed began to reduce interest rates to get out of a recession and kept reducing rates until the middle of 2004. All through that period, commercial and industrial loans shrank. From the middle of 2004 the Fed started raising rates to curb the housing bubble and immediately commercial and industrial loans began to rise.

2---The Post Only Calls It Redistribution When Government Policy Pushes Income Downward, Dean Baker

3---CNBC’s Diana Olick Has It Right, Says Housing Markets Headed for Trouble, mandelman matters

4---Strung-out Consumers, Desperate Retailers, Crummy Sales, Testosterone Pit

Consumer confidence has been plunging in recent months. No wonder: Booz & Co. found that 65% of Americans were living from paycheck to paycheck, up from 61% last year, as wages at the lower end of the scale have not kept up with inflation – and for many workers have actually declined. Those are the lucky ones. Because there are still 1.5 million fewer jobs than there were in 2008.

But the Fed has taken good care of the economy. Its ceaseless QE and ZIRP have lost savers about $300 billion in annual income and have inflated stock prices by $14 trillion in five years. Corporate cost cutting and financial engineering have replaced revenue growth as driver for upticks in earnings per share, though that too seems to have run out of steam. Neither the Thanksgiving doorbuster hoopla nor the chaos it caused can hide the inconvenient fact that American consumers live in the real economy, a rather drab place, not the glittery one that the Fed inflated into gorgeous bubbles.

5---The volume of unsecured loans among US banks has collapsed in recent years, sober look

The volume of unsecured loans among US banks has collapsed in recent years. Banks fund themselves with deposits, bonds, repo, commercial paper, etc. After the 2008 experience, borrowing from other banks is rarely a material part of banks' funding strategy. The situation in Europe's interbank markets is even worse.

Interbank loans outstanding

6---Asia Stocks Swing From Gain to Loss on Fed Policy Outlook, Bloomberg

 More than $8 trillion has been added to the value of global equities this year, the biggest increase since 2009, as central banks took steps to shore up economies worldwide. U.S. stocks fell yesterday as investors speculated on the impact retail and manufacturing data will have on Federal Reserve bond buying

Economic data over the past few weeks have been progressively coming in better and markets are now in the mood to put good economic news as bad news because that will bring forward any reduction in central bank support,” Matthew Sherwood, head of investment markets research at Perpetual Ltd., which manages about $25 billion, said by telephone. “There might be a little bit of downward pressure this month.”

7---Worst Raw-Material Slump Since ’08 Seen Deepening: Commodities, Bloomberg

8---Back to Housing Bubbles, Nouriel Roubini, project syndicate

9--Shiller: Bubble? prag cap

10--Is QE lowering the rate of inflation? macromania

The answer may be "yes," according to a new paper by Steve Williamson. In examining the effects of a QE experiment in his model economy, he reports the following (p. 16):
Some of the effects here are unconventional. While the decline in nominal bond yields looks like the "monetary easing" associated with an open market purchase, the reduction in real bond yields that comes with this is permanent, and the inflation rate declines permanently. Conventionally-studied channels for monetary easing typically work through temporary declines in real interest rates and increases in the inflation rate. What is going on here? The change in monetary policy that occurs here is a permanent increase in the size of the central bank's holdings of short-maturity government debt - in real terms - which must be balanced by an increase in the real quantity of currency held by the public. To induce people to hold more currency, its return must rise, so the inflation rate must fall. In turn, this produces a negative Fisher effect on nominal bond yields, and real rates fall because of a decline in the quantity of eligible collateral outstanding, i.e. short maturity debt has been transferred from the private sector to the central bank.

11---The Minimum We Can Do, ARINDRAJIT DUBE, NYT

12--Ukraine Defends Its Sovereignty, antiwar-

Ukraine’s "Orange Revolution" – financed in large part by Western "pro-democracy" government agencies, including NED/USAID in the US and their British and European equivalents – was really the beginning of a new cold war with Russia. A renewed East-West confrontation had been brewing ever since Putin threw out the thieving "pro-Western" oligarchs who surrounded Russian President Boris Yeltsin and started challenging the Western agenda of global dominance. ...

The Eurocrats have their Ukrainian fifth column out in the streets of Kiev, attacking government buildings, engaging in hand-to-hand fighting with the police, and deploying the aggressive tactics we have come to know so well from the "color revolutions" of the past. Yet this Orange movement is dried up and rotten to the core, a juice-less phenomenon which holds up as a political ideal the faceless bureaucracy of Brussels, which is rightly hated from Greece to Spain to what used to be the free country of England. Good luck with that!

The pro-EU hooligans in the streets of Kiev are pawns in a larger game: the new cold war with Russia. This battle is being waged with the Europeans in the front lines and the Americans finagling and maneuvering behind the scenes, eager for vengeance against the one man who has successfully defied and outsmarted them at every turn: Vladimir Putin ...

The EU is a failed socialist experiment that exists to fund a huge (and hugely arrogant) bureaucracy and impose a bloodless ideological abstraction over and above the authentic nationalisms it seems to subsume. It is deeply authoritarian in that it provides no mechanism for member states to withdraw, and its super-centralist model is a prescription for tyranny if ever there was one. When a referendum is held on EU membership, and the results aren’t to the pro-EU side’s liking, the election is simply ignored and the Eurocrats mount yet another campaign until the "right" result is achieved.

13---Housing prices fall, mreport

Rising mortgage rates and growing inventories “will lead to further normalization in the market going forward,” Humphries said.
Over the month of October, half of the 388 markets Zillow observes registered price declines, including seven of the 30 largest metros

14---Are Cash Sales Creating a Dangerous Mirage, DS News

Home prices and home sales have been rising over the past few years, pointing to a recovery in the housing market, but RealtyTrac warns that what we are seeing may not be a true recovery but instead a mirage created by investors—a dangerous mirage that could lead to trouble in the years to come.

Cash purchases made up nearly half of home sales across the nation in September, according to RealtyTrac’s data. A Goldman Sachs study puts the number at 57 percent.
“All-cash is driving up home sales nationwide, which looks good on paper,” RealtyTrac said in its most recent Foreclosure News Report.

Cash buyers tend to fall into one of four categories: institutional investors, “rich people,” retirees, and foreign buyers, according to RealtyTrac.
The National Association of Realtors recently reported investors are making up 35 percent of cash deals, and retirees are making up another 12 percent.

“The outsized presence of deep-pocketed Wall Street investors is creating a paradox in the housing recovery,” RealtyTrac said. “A housing boom is taking place alongside a plunging rate of homeownership.”
The high percentage of cash buyers might indicate “financing is too costly,” according to RealtyTrac

15---All that glitters, macronomy

he rise of the Fed's Balance sheet, the rise of the S&P 500, the rise of buybacks and of course the fall in the US labor participation rate (inversely plotted) - source Bloomberg:
In red: the Fed's balance sheet
In dark blue: the S&P 500
In light blue: S&P 500 buybacks
In purple: NYSE Margin debt
In green: inverse US labor participation rate.
“This does not have the characteristics, as far as I’m concerned, of a stock market bubble” - Alan Greenspan.
I mentioned that QE would likely be more deflationary than inflationary: 

“What is equally interesting (in addition to the fact that QE is not economically stimulative) with regards to this whole debate is that this policy response in time of a balance sheet recession is not actually inflationary at all.  With the government merely swapping assets they are not actually “printing” any new money.  In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits.  This might have made some sense when the credit markets were frozen and bank balance sheets were thought to be largely insolvent, but now that the banks are flush with excess reserves this policy response would in fact be deflationary - not inflationary.  Why would we remove interest bearing assets from the private sector and replace them with deposits when history clearly shows that this will not stimulate borrowing?”

“I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,” Shiller told Sunday’s Der Spiegel magazine. “That could end badly,” he said.
“I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable,” he said, describing the financial and technology sectors as overvalued.”


“I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,” Shiller told Sunday’s Der Spiegel magazine. “That could end badly,” he said.
“I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable,” he said, describing the financial and technology sectors as overvalued.”


five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.
16---Two -Year Housing Recovery Mirage Now Over… Bernanke Hoping to Retire Before Everyone Notices, mandelman

17---Scarce Collateral, the Term Premium, and Quantitative Easing, Steve Williamson, Fed 
Conventional open market operations matter in the model, whether they are

swaps of outside money for short-maturity debt or long-maturity debt. Provided

that collateral is scarce, a one-time swap of outside money for government debt

lowers nominal and real bond yields, and lowers the in.ation rate. All of these

e¤ects are permanent. Further, quantitative easing (QE), defined  as purchases

of long-maturity debt holding constant the short-term nominal interest rate, act

to reduce nominal bond yields and the term premium. But real bond yields rise

as the result of QE, because QE increases the quality of collateral outstanding,

and reduces the liquidity premium on liquid assets. As well, QE reduces the

in.ation rate, and increases welfare.

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