Tuesday, December 3, 2013

Today's Links

1---Investors see deflation as bigger threat than inflation, CNBC

"Low/falling inflation suggests that right now deflation is maybe more of a risk than rising inflation in developed countries. Falling inflation reflects significant spare capacity globally and soft commodity prices," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

"In the current environment, a slide into deflation would likely be bad. Falling wages and prices would make it harder to service debts. And when prices fall people put off decisions to spend and invest, which could potentially threaten a relapse into recession," he said.

2---(repeat) Napier: "on the verge of a deflationary shock", zero hedge

3---Many Signs That Values Are Too High, yves smith, NYT

The Fed’s policies of super-low interest rates and quantitative easing, which have lowered yields on Treasury and mortgage bonds, have sent investors scrambling for returns. And the Fed’s efforts have been compounded by similarly aggressive policies in Japan and China, and even a willingness to be more accommodative by the normally tight-fisted European Central Bank.

Market trading has been driven by anticipation of Fed action rather than economic fundamentals. Perversely, good economic news often leads to a flat or weaker stock market, since that means the central bank might withdraw support sooner.

The bulls’ case appears increasingly strained.

4--Dr Doom: The housing bubble is back, macrobussiness

5-- Biggest drop in savings for 40 years, Bank of England figures reveal, Telegraph

6---Japan Salaries Extend Slide as Inflation Begins to Take Root, Bloomberg

Japan’s salaries extended the longest tumble since 2010, increasing pressure on household finances as inflation begins to take root.

Regular wages excluding overtime and bonuses fell 0.4 percent in October from a year earlier, a 17th straight monthly decline, according to labor ministry data released today. Total cash earnings rose 0.1 percent...The slide in wages threatens living standards as consumers face the prospect of sustained inflation on top of a sales-tax increase in April next year. As a weaker yen helps boost company profits, the focus is turning to salary talks early next year that may determine the success of Prime Minister Shinzo Abe’s bid to reflate the world’s third-largest economy

7---(very wonkish) "...if the Fed keeps the interest rate on reserves where it is for an extended period of time, we should expect less inflation rather than more."  Stephen Williamson, new monetarist

Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn't do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I've continued to work on these problems, and stuff has been happening. In particular, we're not seeing that high-inflation path. How come? That's what my previous post is about.
...

.....with the nominal interest rate effectively at the zero lower bound, the rate of inflation is being determined primarily by the liquidity premium on government debt. Once we recognize that, it's not surprising that the inflation rate has been falling for the last three years (see the chart).
The situation in Europe is looking more stable, and the private sector is presumably finding new sources of private collateral, all of which reduces the liquidity premium on government debt. Further, we should expect this to continue, for example as the price of real estate and other assets rise. In general, if we think that inflation is being driven by the liquidity premium on government debt at the zero lower bound, then if the Fed keeps the interest rate on reserves where it is for an extended period of time, we should expect less inflation rather than more.

But that's not the way the Fed is thinking about the problem. What I hear coming out of the mouths of some Fed officials is that: (i) Things are bad in the labor market, and the Fed can do something about that; (ii) inflation is low. Thus, according to various Fed officials, the Fed can kill two birds with one stone, so it should: (a) keep doing QE; (ii) make it clear that it wants to keep the interest rate on reserves at 0.25% for a very long period of time.

What I hope the discussion above makes clear is that this is a trap for the Fed....

 If the Fed actually wants more inflation, the nominal interest rate on reserves will have to go up. Of course that will lead to some short-term negative effects because of money nonneutralities.

The Fed is stuck. It is committed to a future path for policy, and going back on that policy would require that people at the top absorb some new ideas, and maybe eat some crow. Not likely to happen. The observation of continued low, or falling, inflation will only confirm the Fed's belief that it is not doing enough, not committed to doing that for a long enough time, or not being convincing enough.

8---Drop in holiday sales reflects US social crisis, wsws 

9--Dean Baker on stocks: "No Bubble", CEPR

 ....relative to the potential of the economy, the stock market is about 68 percent of its bubble peak. Would this mean we have a bubble now? By my assessment the answer is no. The PEs at the peak in 2000 were above 30 to 1 (using trend earnings, defined as the average share of profits in GDP). That was more than double the historical average. The current ratio would put the PEs around 20. This is still well above the historical average, but not obviously in bubble territory.

10---Consumer Sentiment Rebounds as Stagnant Outlook Emerges , DS News

11---Mortgages Without Risk, at Least for the Banks, NYT
(Here we go again)

There was no single cause of the financial crisis, but a chief one was surely the way mortgage loans were made by people who believed they had no reason to care if the loan was repaid.

That was why the Dodd-Frank financial overhaul law included risk retention — called “skin in the game” — as a major reform. For all but the safest loans, someone connected to the loan had to keep a stake in it. If such a loan went bad, then that lender would suffer along with those who bought securities containing it.
      
“To me,” said Barney Frank, the former chairman of the House Financial Services Committee and co-author of the law, “the single most important part of the bill was risk retention.”
But it now appears that section will be rendered moot as multiple regulators give in to pressure brought by an odd coalition to classify virtually every mortgage as exempt from the risk retention law. ...But it now appears that section will be rendered moot as multiple regulators give in to pressure brought by an odd coalition to classify virtually every mortgage as exempt from the risk retention law.
      
That coalition includes large parts of the banking industry, which seems to have no desire to stand behind its loans, as well as consumer advocates and the housing industry. The latter groups say they are worried that poorer people will be unable to obtain loans if all loans cannot be securitized.
On the other side, asking regulators not to gut the law is an equally unusual, if smaller, coalition. It includes Mr. Frank; Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation; and the American Enterprise Institute, a conservative research group that has rarely, if ever, found itself in agreement with Mr. Frank on a regulatory issue.
      
The Dodd-Frank law told regulators to effectively set up three categories of mortgages. At the top were “qualified residential mortgages,” called Q.R.M. Those were to be the only mortgages that did not require skin in the game if they were pooled and sliced up into securities.
Under that were “qualified mortgages,” called Q.M. The Consumer Financial Protection Bureau was to establish standards for those, which it has done. Those rules, to take effect Jan. 10, were supposed to protect consumers, not the financial system. The bottom category was to include mortgages that met neither of those standards. They would require risk retention, as did the Q.M. mortgages.
      
The rules on qualified mortgages are meant to assure that consumers can afford them, and the requirements are rather low. Lenders must go to the trouble of verifying a borrower’s income, and the total monthly debt obligation must be no more than 43 percent of pretax income. There are no requirements for down payments, or limits on how much is lent relative to the value of the property.
Before the lending excesses that led to the crash, Ms. Bair said in an interview this week, banks generally refused to make loans on which repayments would be more than 35 percent of income, and often had lower limits. “There is,” she said, “a lot of room under Q.M. to make mortgages that should not be made.”
      
That brings us to Q.R.M. — the qualified residential mortgage. The six regulators that are supposed to agree on rules for that put out a proposal in 2011 that gave in to the banks on many issues, but not all. The banks reacted with anger, and the latest proposal is a virtual complete surrender. It essentially says that any mortgage that meets qualified mortgage standards will meet the higher ones as well.
“The result,” Mr. Frank wrote in a comment letter, “would be two categories, those that fall below standards and probably shouldn’t be made, and those that could be made and would not be subject to risk retention.”
      
“I am not surprised,” Mr. Frank added, that “the overwhelming majority of commenters who are interested in building, selling or promoting the sale of housing to lower-income people support effectively abolishing risk retention. I should note that if all of these people were correct in their collective judgment, we would not have had the crisis that we had.”
       
Three fellows of the American Enterprise Institute — Edward J. Pinto, Peter J. Wallison and Alex J. Pollock — agree. “With the demise of an independent Q.R.M.,” they wrote in a comment letter, “the credit quality objective of the Dodd-Frank law has been lost.”
      
Essentially, many of those who want to effectively abolish the Q.R.M. category fear that if lenders are forced to retain some risk, such loans will either not be made or will be prohibitively costly. They seem to take for granted that no bank will be willing to retain risk.
Thus the Virginia Housing Coalition, which supports affordable housing, warned in a comment letter that a 20 percent down payment requirement “would drastically limit access to mortgages and would put homeownership out of reach for low and moderate-income families, first-time home buyers, and disproportionally affect African-American and Latino families.”
      
That argument frustrates Mr. Frank. Speaking last week at a conference organized by the Clearing House, a group of large banks, he noted that until the 1980s risk retention was common for home mortgages. Banks made loans and kept them on their balance sheets, just as they did other types of loans. The securitization revolution changed that, and now the banks like the idea of collecting fees without risking their own capital.
      
To those who would defend the status quo, other reforms in the Dodd-Frank law mean there is no need for risk retention. The requirement that banks evaluate a customer’s ability to repay, along with new appraisal rules, “will help to discourage inaccurate or fraudulent appraisal practices,” wrote the Center for American Progress, a liberal research group. “Together, these restrictions will prevent the securitization of the type of predatory and unsustainable loans that inflated the housing bubble and led to the subsequent foreclosure crisis.”
      
A main reason it is not clear how this will turn out is that the Dodd-Frank law said many rules had to be jointly issued by numerous regulators, without providing any way to resolve differences.
The Q.M. definition was left up to one regulator, the consumer protection agency, whose director could decide. In the case of the Q.R.M. rule, however, unanimous approval of six regulators is required. They are the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Reserve, the Federal Housing Finance Agency, the Department of Housing and Urban Development and the F.D.I.C.
      
They appear to be somewhat divided. While the primary proposal out for comments calls for no rules above the Q.M. standard, the regulators also asked for comment on requiring a down payment of as much as 30 percent to be able to avoid risk retention. The housing industry hates that idea. Ms. Bair thinks it is a good one.
Most of the regulators appear to have been convinced that there is too much risk that a nascent housing recovery would be threatened if banks had to be responsible for the lending decisions they made. The question is whether others will give in and agree.
The banks lost their fight to avoid “skin in the game” in Congress, but they may well win it in the regulatory agencies.

 

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