"Launch of steamer Frank J. Hecker St. Clair, Michigan".
Ilargi: The weekend action and today's news confirm the beggar thy dollar race to the bottom is once again on. The US dollar is going up versus the euro, which is a big surprise to many, especially the ones that bought into the QE2 inflation meme that rapidly spread through the media, but not to those who read The Automatic Earth on a regular basis.
Of course it may seem a coincidence that everyone's talking about Ireland and Greece -again- all of a sudden, but it's not. I see a lot of people write that European leaders like Merkel and Sarkozy are stupid, dumb and incompetent (in no particular order), but it all depends on what their intentions are, doesn't it? And on what they may know, and others may not, on the real debts and deficits in Ireland and Southern Europe. Only this morning, yet another in what is now a long line of reports was issued stating that Greek debt levels really are. It just keeps getting worse.
The US answers with a muni crisis, but that will have to be much more pronounced first before it can make investors believe that the US is worse off than Greece. I’m not saying that it isn't, mind you. By now it's like: who knows? And more to the point: does it really matter anymore? It’s come down to a fight for king of the garbage heap anyway, and no-one even yet been told they’ll live in one.
It’ll all make for an interesting and intriguing week, and we’ll have lots more to say on the topic. First, though, to offer a bit of reflection, here's a new piece from Ashvin Pandurangi on what might have been if only. If only there were no fraud, no lies, no manipulation, no politicians, no lobbyists, no corporate political power, no bottomless greed, then even Keynes would sound pretty good. It’s them damn human qualities that get in the way of a perfectly sound theory.
Oh, and we recommend y'all do as Max Keiser says: buy a silver coin and help make life mighty uncomfy for JPMorgan! By the way, we’ll be visiting Max and Stacy in Paris later in the week for some interviews.
"Nothing in the world is more dangerous than a sincere ignorance and conscientious stupidity"
- Martin Luther King, Jr.
If only we existed in a Keynesian vacuum universe, then the current Administration's economic policies might have actually succeeded in fixing the ailing, debt-ridden economy!
Here are some of the reasons why:
• Swapping bad private debt for public debt would not negatively affect the sovereign bond market in any meaningful way, since all public creditors would realize that it is just a temporary measure to clean up balance sheets and restart economic growth. The prior value of that bad debt would eventually be restored, and it would be repurchased by private actors. The taxpayers would recover all of their money, or maybe even make a small profit.
• Deficit spending would also not affect the bond market for the same reason above. It would go directly to consumers and small businesses who could pay off debt and start productive enterprises that create useful products/services, which could then be consumed. No money would be wasted on pork or in bureaucratic institutions, because the government would know exactly where the money needs to go and how to get it there efficiently.
• A "Deficit Reduction Commission" would effectively deal with any potential possibility of a public debt crisis by making small tweaks to entitlement spending and tax policy, leaving defense spending alone so all Americans can feel safe and secure. As soon as the Commission produced its report, all measures proposed would be instantly voted on by Congress and approved. The minor tweaks, of course, would not have any unintended consequences, such as stifling economic growth (and making deficit/GDP worse) or royally screwing War Veterans by cutting their health benefits.
• Government backstops and subsidies of the housing market would not be taxpayer money wasted, because the bailed out banks and subsidized borrowers would pick up the housing bubble where it left off in 2007. As credit conditions eased, home prices stabilized and unemployment decreased, the government could draw down its market interventions and aggregate demand for homes would not plummet.
• The Dodd-Frank Wall Street "Reform" Bill would not create any level of uncertainty or unintended consequences in financial markets, since it would be extremely clear and targeted with its new measures. The new regulators would analyze the root causes of the financial crisis, propose measures to address these structural problems, implement those proposals via new regulations and enforce the regulations. All new regulators would be insulated from financial industry capture, and would work solely for the benefit of the American public.
• Quantitative Easing by the Federal Reserve would not blow speculative bubbles in any financial markets, and even if it did, that speculation would not artificially increase the prices of commodities for consumers and productive businesses (squeezing their profit margins). Money would flow to the banks from asset purchases, and these banks would lend that money out to consumers and small businesses at affordable interest rates. Asset prices would not go parabolic again via leveraged speculation, because investors would have learned their lessons from the last credit bubble.
• QE would also successfully devalue the dollar enough to make debt burdens more manageable and boost U.S. exports, but not so much as to cause rampant, unchecked inflation. In the Keynesian vacuum universe, other countries do not care about American monetary policy that serves to flood the entire world with dollars used for intense financial speculation.
• Moral hazard would never be an issue. Bailouts and subsidies for banks, businesses or consumers would not affect the future decisions of these market participants, courtesy of the laws of the vacuum universe.
And if we really existed in a vacuum, then we would have never had a global credit bubble or financial crisis in the first place. Life would have been clean, simple and forever productive. It would always be a warm and sunny day outside, with cheerful birds chirping and the faint laughter of little children in the background.
In this universe, political leaders and pundits could look their country's population in the eyes, and tell them that their economy is healthy and their country is "the greatest" with a straight face. The people would never question the wisdom of those wielding power, and their minds would always be at ease. That is, of course, until they snap back to reality and are forced to face their existence beyond the comfort of the vacuum.
Municipal Bond Market Shudders
by Mary Williams Walsh - New York Times
Has the reckoning arrived for municipal bonds? That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.
Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale overwhelmed the market last week. After performing so well for so long, munis and funds that invest in them fell hard. One big muni fund, the Pimco Municipal Income Fund II, for instance, lost 7.5 percent. The fund is still up 6.75 percent so far this year.
While the declines were relatively small given the remarkable gains in these bonds over the last two years, the slump was swift enough to leave investors wondering if this was a brief setback or the start of something worse. For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees.
“I think it’s too early to say that it’s more than a correction,” said Richard A. Ciccarone, the chief research officer of McDonnell Investment Management. “The facts just don’t support a serious conclusion that the whole market’s going downhill,” he said. “They could. We’ve got some serious liabilities out there.”
The causes of the week’s big decline are clouded by unusual factors like the looming end of the Build America Bonds program, which has prompted local governments to race new bonds to market before an attractive federal subsidy is reduced. But the big question confronting this market is how state and local governments will manage their debts. Many are staggering under huge pension and health care obligations that seem unsustainable.
Certainties are impossible because governments do not have to disclose the pension payouts they will have to make in the coming years, as they do for bond payouts.
California, for example, will have to sell nearly $14 billion of debt into the falling market this month, because of its record delay in getting a budget signed this year. The warnings keep coming. On Friday, Fitch, the credit ratings agency, issued a report saying that ratings downgrades for municipal bonds outnumbered upgrades for the seventh consecutive quarter.
And a few prominent defaults have made the market jittery. “This is what happens with our market now, with these fears of a systemic credit crisis,” said Matt Fabian, managing director at Municipal Market Advisors. “Any weakness is related to fears of default.”
Standard & Poor’s, meanwhile, issued a report last Monday observing that even troubled cities like Detroit were still able to bring debt to market at what the rating agency considered favorable rates. It said most government officials seemed determined to honor their general obligations.
Analysts like Mr. Ciccarone said much of the decline was concentrated among longer-maturity bonds and bonds with lower credit ratings. Their values fell more sharply as investors watched the Federal Reserve buying hundreds of billions of dollars of Treasury bonds and concluded the Fed’s move would be inflationary over the longer term. That made some investors less willing to hold long-term municipal bonds, so the prices of the bonds fell.
Until two weeks ago, the municipal bond markets had been frothy, thanks in part to the intensifying interest of wealthy individuals in tax-sheltered investments as the sunset date on the Bush administration’s tax cuts looms. People seek a tax shelter like municipal bonds because the interest is usually not taxed, and the bonds are considered very safe.
This year, however, tax-exempt municipal bonds have been harder than usual to find, because the governments that normally issue them have switched over to taxable bonds. So investors were bidding up the prices. Mr. Fabian said that had fed into the prices of all of the municipal bonds held by mutual funds, which are assigned a value each day on the basis of a model because they may not trade.
The reason for scarcity of tax-exempt bonds has been, in part, the Build America Bonds program, created as part of the fiscal stimulus program. That federally subsidized program is scheduled to expire at the end of this year, so states and cities have been rushing to take advantage of it. Yet the values of tax-exempt munis fell, defying those who said it was all a matter of supply and demand. The last week also brought some large tax-exempt bond issues, including one by a public authority in Massachusetts for Harvard University, which was reduced because of poor investor demand.
Mr. Fabian said the downdraft could continue next week. “The risk is that you don’t know,” he said. “You have an awful lot of money, including from households, that simply follows momentum.”
Muni Issuers Facing Head Winds
by Matt Phillips and Jeannette Neumann - Wall Street Journal
The tumble in long-term municipal bonds last week comes as a flood of states and municipalities are seeking money in the debt markets, raising the prospect some will have to pay higher yields to lure investors. California leads the list of planned borrowers. The state alone is planning $14 billion of sales before Thanksgiving.
Investors have been keeping a close eye on the municipal debt markets in recent months, amid reports—albeit rare—of some municipal borrowers struggling with or walking away from debts. Investors also have begun to worry about the future of Build America Bond program and the effects of the Federal Reserve's bond-buying efforts. That came to a head last week when yields on consulting firm Municipal Market Advisors' index of AAA-rated 30-year municipals jumped up 15 basis points—or 0.15 percentage point— from the prior week. That is the biggest move in 18 months, said Matt Fabian, managing director at the firm.
Yields and prices move in opposite directions, so the move indicates a sharp decline in bond prices. "We would not be surprised to see the long end of the tax-exempt market remain under pressure in coming weeks as issuers attempt to market as much new paper as possible," wrote George Friedlander, managing director and senior municipal market strategist at Citigroup, in a market commentary Friday.
Difficulties have been felt by even high-quality borrowers. Last week Harvard University was forced to pay an interest rate above a key benchmark rate and reduce the amount of debt it sold to close a $600 million bond deal. That got investors' attention, said Mr. Fabian, and helped trigger the price correction in the broader market. California is scheduled to issue $10 billion of so-called revenue-anticipation notes on Wednesday and then, the next day, an additional $2 billion of taxable general-obligation Build America Bonds. The state also is slated to sell $1.75 billion of tax-exempt general obligation bonds before Thanksgiving. The slew of issuance was pending an agreement on the budget, signed after a months-long delay.
Some analysts say the rising influence of Republicans, who won control of the U.S. House of Representatives in part with promises to cut spending, could potentially mean less federal money will flow through to states and localities, putting more pressure on strapped governments. Another concern: the future of the Build America Bond program. The program was designed as part of the Obama administration's effort to help states, cities and other local government entities borrow in the bond markets and lower financing costs by offering a federal subsidy.
The program has been popular. The cheaper borrowing costs on taxable Build America Bonds, or BABs, have meant some borrowers chose to issue BABs instead of their traditional long-term tax-exempt municipal bonds. That has cut down on supply of longer-term tax-exempt munis, driving prices higher and yields lower. "It's been absorbing most of the long supply in the muni market," Mr. Friedlander said of the Build America Bond program.
The gains for Republicans in this month's midterm elections, market participants say, makes reauthorization of the program less likely. "The threat is if that [the BABs program is] not authorized than all that volume comes back to the tax-exempt side," Mr. Friedlander said.
Another Washington-based consideration among muni investors has to do with the Federal Reserve. As part of its recently announced "quantitative easing," or bond-buying plan, the central bank said it wouldn't aim its buying power at 30-year Treasurys. Without the prospect of a buying push by the Fed set to drive prices higher, yields on those bonds have increased. That jump has pulled rates of other long-term debt, such as long-term tax-exempt munis, higher.
by John Hussman - Hussman Funds
[..] From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.
It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it - what we have said to lenders is, here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).
Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.
Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?
The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable. [..]
It bears repeating that $850 billion of QE2 ($600 billion, plus $250 billion funded by bailed-out Fannie Mae and Freddie Mac securities) will not even absorb the new issuance of U.S. Treasury securities over the coming year. That means, in turn, that holders of existing Treasury securities will, in equilibrium, have to continue holding Treasury securities. The only effect of QE2 will be to change the maturity profile - not the overall quantity - of Treasury debt held by the public. At the same time, it will create an enormous overhang of what will effectively be "new issuance" of Treasuries at some future point if/when the Fed reverses its position. Long-term Treasury investors tend to be more forward looking than long-term stock market investors because the stream of payments is known perfectly. It's doubtful, aside from brief rounds of hot potato and musical chairs, that these investors will be moved in any persistent way by the Fed's manipulation.
How Many Times Have You Heard That The Dollar Could Only Go Lower After QE?
by Joe Weisenthal - Business Insider
Over the past several days, we can't recall hearing from a single dollar bull, as everyone has been arguing that QE makes for an easy one-way trade.
Well, here's dollar-yen. Note the bottom was the day after QE was announced.
Europe Paints A Bleak Picture Of Its Own Prospects
by Douglas A. McIntyre - 24/7WallStreet
EuroStat, the statistics bureau of the EU, reports a sharp increase of both the deficit to deficit to GDP ratio and debt to GDP ratio as calculated for last year for the region. “In 2009, the government deficit and government debt of both the euro area and the EU27 increased compared with 2008, while GDP fell. In the euro area the government deficit to GDP ratio increased from 2.0% in 2008 to 6.3% in 2009, and in the EU27 from 2.3% to 6.8%. In the euro area the government debt to GDP ratio increased from 69.8% at the end of 2008 to 79.2% at the end of 2009, and in the EU27 from 61.8% to 74.0%.”
Capital market fears about the economic state of the region have been proved by the numbers. The question is what effect the information will have on the fate of the eurozone and the euro itself. The ratios for the regions were driven up in part by two countries. “In 2009 the largest government deficits in percentage of GDP were recorded in Greece (-15.4%), Ireland (-14.4%).”
The data shows what has happened in the past and recent information from Portugal, Ireland, and Greece show what is likely to happen now. EU officials are practically begging Ireland to take financial aide before its financial problems become a symbol of what is wrong with Europe’s finances, which could drive investors away from paper issued in the region.
The prime minister of Portugal said his country’s problems were dire enough to possibly cause its expulsion from the eurozone, if the country does not decide to quit on its own. Recent reports from Greece are that it missed it budget and deficit targets. The Greek deficit number was recently raised to 15.4% of GDP. It is expected to be 9.4% this year. This could cause a sell-off of its debt or a need for promises from the EU and IMF that they will extend the period over which the southern European nation can pay back its sovereign obligations. Germany has already turned down the idea that Greece should get special treatment. As the largest economy in the region, its veto power holds great strength.
Austerity has also become increasing unpopular in nations which are in the process of deficit reduction. Voters who have seen plans to cut their wages and push up that age at which they can retire are in the streets and at the polls in a attempt to reverse government expenditure plans. The Irish government could fall within a matter of months and be replaced by one that will not embrace austerity as a means to control national economic problems.
Two months ago, the plans for improvement national debt within the regions seemed to hold out hope. The new data on 2009 debt and deficit problems show the trouble was worse than expected. That means the effort to crawl out of the sovereign debt hole will be harder because is unexpectedly deep.
Europe stumbles blindly towards its 1931 moment
by Ambrose Evans-Pritchard - Telegraph
It is the European Central Bank that should be printing money on a mass scale to purchase government debt, not the US Federal Reserve. Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.
If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.
“Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece. “If that is not enough to worry about financial contagion, what is? The ECB's lack of action begs the question as to whether it is fulfilling its financial stability mandate,” he said. That is a polite way of putting it.
The eurozone’s fiscal fund (European Financial Stability Facility) is fatally flawed. Like Alpinistas roped together, an ever-reduced core of solvent states are supposed to carry the weight on an ever-widening group of insolvent states dangling beneath them. This lacks political credibility and may be tested to destruction if – as seems likely – Ireland is forced to ask for help. At which moment the chain-reaction begins in earnest, starting with Iberia.
It was a grave error for Germany’s Angela Merkel and France’s Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder “haircuts” at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states. EU leaders have since made a clumsy attempt to undo the damage, insisting that the policy shift would have “no impact whatsoever” on existing bonds. It would come into force only after mid-2013 under the new bail-out mechanism. Nobody is fooled by such a distinction.
“This is a breath-taking mixture of suicidal irresponsibility and farcical incoherence,” said Marco Annunziata from Unicredit. “If by 2013 countries like Greece, Ireland and Portugal are still in a shaky position, any new debt issued will carry exorbitant yields. The EU would then have to choose between a full-fledged, open-ended bail-out, and reneging on the promise that existing debt would not be restructured. Will German voters then accept higher taxes to save their profligate neighbours?” he said.
In May it was enough for the EU to announce a €750bn safety-net with the IMF for eurozone debtors. Bond spreads narrowed. A spike in economic output - led by Germany’s rogue growth of 9pc (annualised) in the second quarter – beguiled EU elites into believing that monetary union had survived its ordeal by fire. It had not, and this time they will have to put up real money.
Sadly for Ireland, events have snowballed out of control. Confidence has collapsed before Irish export industries – pharma, medical devices, IT, and backroom services – have had time to pull the country out of its tailspin. Premier Brian Cowen – who presides over a budget deficit of 32pc of GDP this year - still insists that no rescue is needed. “We have adequate funding right up until July,” he said. Mr Cowan must know this is not enough. Funding for Irish banks has evaporated, and with it funding for Irish firms.
As we learn from leaks that “technical” talks are under way on the terms of any EU bail-out, it can only be a matter of weeks, or days, before Ireland has to tap EFSF – for €80bn to €85bn, says Barclays Capital.
Portugal is in worse shape than Ireland. Total debt is 330pc of GDP. The current account deficit is near 12pc of GDP (while Ireland is moving into surplus). Portuguese banks rely on foreign wholesale funding to cover 40pc of assets. The country has been trapped in perma-slump with an over-valued currency for almost a decade. Successive waves of austerity have failed to make a lasting dent on the fiscal deficit, yet have been enough to sap the authority of the ruling socialists and revive the far-Left.
Former ministers are already talking openly of the need for an EU-IMF rescue. It is hard to see how Portugal could avoid being sucked into the vortex alongside Ireland. Europe and the IMF would then face a cumulative bail-out bill of €200bn or so. That stretches the EFSF to its credible limits.
The focus would shift instantly to Spain, where economic growth stalled to zero in the third quarter, car sales fell 38pc in October, a 5pc cut in public wages has yet to bite, and roughly 1m unsold homes are still hanging over the property market. The problem is not the Spanish state as such: the Achilles Heel is corporate debt of 137pc of GDP, and the sums owed to foreign creditors that must be rolled over each quarter.
The risks are obvious. Unless core EMU countries raise fresh funds to boost the collateral of the rescue fund, markets will not believe that the EFSF has the firepower to stand behind Spain. Will Germany’s Bundestag vote more funds? Will the Dutch Tweede Kamer, where right-wing populist Geert Wilders now holds the political balance, adamantly opposes such help, and might well use such a crisis to launch a bid for power.
It is far from clear what would happen if Italy was forced to provide its share of a triple bail-out for Ireland, Portugal and Spain. Italy’s public debt is already near danger point at 115pc of GDP. It is also the third-largest debt in the world after that of Japan and the US. French banks alone have $476bn of exposure to Italian debt (BIS data). While Italy has kept a tight rein on spending, it is not in good health. Growth has stalled; industrial output fell 2.1pc in September; and the Berlusconi government is disintegrating. Four ministers are expected to resign on Monday.
It is clear by now that IMF-style austerity and debt-deflation is not a workable policy for the high-debt states of peripheral Europe, since it cannot be offset by the IMF cure of devaluation. The collapse of tax revenues has caused fiscal deficits to remain stubbornly high. The real debt burden has risen further. The ECB is the last line of defence. It can halt the immediate Irish crisis whenever it wishes by buying Irish bonds. Yet instead of pulling out all the stops to save monetary union, the bank is winding down its emergency operations and draining liquidity. It is repeating the policy error it made by raising rates into the teeth of the crisis in July 2008.
Yes, the ECB is already propping up Ireland and Club Med by unlimited lending to local banks that then rotate into their own government debt in an internal “carry trade”. And yes, the ECB is understandably wary of crossing the fateful line from monetary to fiscal policy by funding treasury debt.
Bundesbank chief Axel Weber might fairly conclude that it is impossible at this stage to reconcile the needs of Germany and the big debtors. If the ECB prints money on the scale required to underpin the South, it would set off German inflation, destroy German faith in monetary union, and perhaps run afoul of Germany’s constitutional court. If EMU must split in two, it might as well be done on Teutonic terms.
All this is understandable, but is Chancellor Merkel really going to let subordinate officials at the ECB destroy Germany’s half-century investment in the post-war order of Europe, and risk Götterdämmerung?
EU leaders cannot squash expectations of Irish rescue
by Emma Rowley - Telegraph
European leaders made a bid to halt the soaring cost of Ireland's borrowing by jointly denying that plans to make bondholders take a hit in future bailouts would also apply to existing debt. But the attempt to ease fears that have helped drive yields on Irish government bonds from 6pc to 9pc in just three weeks could not kill talk Ireland was poised for an €80bn (£68bn) bailout as early as this weekend.
Worries about Ireland's costly bank bailout, weak growth and budget deficit have been intensified by Germany recommending that bondholders take "haircuts" - share the pain - in bailouts. With investors demanding sky-high returns to shoulder the risk and Ireland's Prime Minister Brian Cowen complaining markets had been led "to question the commitment" to debt repayment, EU ministers at the G20 summit moved to address the crisis.
"Any new mechanism would only come into effect after mid- 2013 with no impact whatsoever on the current arrangements," said the subsequent statement from the UK, Germany, France, Italy and Spain. Markets steadied a little, with the premium that investors demand to hold Irish 10-year sovereign bonds over the German benchmarks dropping more than one percentage point to under 6pc, while the euro rose from a six-week low against the dollar of under $1.36.
However, denials of an Irish application for emergency funding could not kill off speculation that behind the scenes a rescue package is being prepared, to be announced within days. Ireland is in talks about tapping the EU's rescue mechanism, the European Financial Stability Facility, and is very likely to get aid, sources told Reuters. "Talks are ongoing and EFSF money will be used; there will be no haircuts or restructuring or anything of the kind," one said.
Irish Finance Minister Brian Lenihan argued Ireland did not need to seek aid as it is fully-funded until June. "Why apply in those circumstances?" he said. "We have not, contrary to much speculation, applied to join any facility."
Jean-Claude Juncker, who leads the group of Eurozone finance ministers, likewise said "the question has not been asked" and denied ministers would meet this weekend. But scepticism persisted, given that repeated denials that Greece would be bailed out were followed by its €110bn rescue. Even if Ireland avoids a bailout in the short-term, there is concern as to whether it can borrow at reasonable rates next year.
Irish banks remain a weakness, with new data showing they are becoming more dependent on the European Central Bank, borrowing €130bn last month, up from September's €119bn. While Europe's show of support slightly improved sentiment towards Ireland and other struggling Eurozone members, the worst looks yet to come, Clive Lennox at the Clear Currency brokerage concluded.
EU Urges Ireland to Take a Bailout
by Marcus Walker, Brian Blackstone And Neil Shah Wall Street Journal
European officials are encouraging Ireland to accept a bailout to restore confidence in its solvency and stop the spread of financial-market turbulence to other euro members, according to senior EU officials. Many European policy makers increasingly believe that early action on Ireland would be better than waiting until markets force the country's hand, recalling that repeated delays in coming to Greece's aid this spring led to a near-collapse of investor confidence in the whole euro zone, officials say.
European Union officials are due to discuss the possibility of a bailout for Ireland at a series of meetings in Brussels early next week, amid growing concern that investors' loss of confidence in Irish government bonds could spread to Portugal and Spain. Ireland's government remains reluctant to accept the loss of sovereignty and deepened austerity that a bailout would likely entail. An EU-led rescue package would include a tough policy program drawn up in conjunction with the International Monetary Fund, people familiar with the matter say.
Ireland has repeatedly said it is not seeking a bailout from the EU or IMF. Irish Finance Minister Brian Lenihan told Ireland's RTE Radio One on Friday that "we have not, contrary to much speculation, applied to join any facility, or avail of any facility." However, Mr. Lenihan said European officials have grown worried about rising turbulence in the bond markets of the euro zone's weaker economies. "Our European partners are anxious to bring this matter to a resolution," he said, adding that Irish officials are "in constant liaison with the Central Bank and with the (European) Commission."
European Central Bank officials are advising Dublin that tapping the EU's €500 billion ($685 billion) emergency-loan facility could help Ireland to enact a credible budget and recapitalize its teetering banking system. Although the ECB would support Ireland's use of rescue loans, the central bank isn't trying to force Dublin's hand, a person familiar with the matter said. The ECB thinks that having IMF and EU oversight of Ireland's budget—a prerequisite for a bailout—would give added international credibility to Dublin's austerity measures to rein in a budget deficit expected to top 30% of gross domestic product this year.
Ireland's government is due to present a budget to parliament on Dec. 7. ECB officials worry that, given worsening financial-market jitters in the last two weeks, that may be too long to wait for a concrete deficit-reduction plan. Ireland has stressed that it faces no imminent bond repayments and still holds significant cash reserves, so it doesn't face an immediate crisis of liquidity or solvency despite investors' recent flight from Irish debt. However, fears about contagion to other indebted euro-zone members mean that some other EU countries want Ireland to act.
European governments are set to discuss possible courses of action at meetings of the 16 euro-zone finance ministers on Tuesday and of all 27 EU finance ministers on Wednesday. However, under procedures agreed by EU countries in May at the height of Greece's financial crisis, a euro-zone country has to ask for help in order to trigger a bailout. Observers say Ireland's government is likely to fiercely resist pressure to raise its hand, because such a move would come with a loss of international prestige and economic sovereignty.
The stigma of applying for aid from Brussels or the IMF would also further tarnish the country's unpopular ruling Fianna Fail party, which leads a coalition that holds a razor-thin majority in parliament and could be forced to call early elections next year. And some officials from other indebted euro-zone countries worry that an early rescue of Ireland, several months before it faces a possible cash crunch, could backfire by triggering market pressure for other bailouts, especially of Portugal.
Ireland denies bail-out rumour
by Jonathan Russell - Telegraph
The Irish Government has been forced to make a second denial in two days that it is preparing to go to the EU for a multi-billion euro bail-out. On Saturday night reports suggested that Irish officials had already held talks with the European Financial Stability Fund about a rescue package of between €60bn (£51bn) and €80bn.
Separately, European Central Bank officials were reported to have urged the country to take emergency aid in order to stop concerns about the Irish economy spreading to neighbouring countries. However, a spokesman for the Irish government told The Sunday Telegraph: "There are no talks on an application for emergency funding from the European Union."
Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), tried to play down fears that Ireland could require rescue funding. He said the country had not approached the IMF for funds and he did not think a bail-out was required. Brian Lenihan, the Irish finance minister, also tried to distance the country from any idea of a bail-out, saying it made no sense. The news caps a desperate week for the Irish economy, with government bond prices reaching a record low on Thursday.
Ireland mulls asking for money for banks, not state
by Padraic Halpin - Reuters
Ireland is considering asking for money for its banks from the European Union's emergency fund in a bid to fend off a threatened bailout for the state, the Irish Independent reported on Monday, quoting an unnamed source. EU sources have told Reuters over the past two days that talks on a possible bailout were under way and that Ireland, with borrowing costs rocketing, was unlikely to hold out without assistance.
Ireland did not rule out the possibility that it may have to turn to the European Union for help in dealing with its debt crisis on Sunday as its officials hold discussions with European counterparts. The Irish Independent said Finance Minister Brian Lenihan may ask his European counterparts in Brussels on Tuesday if it would be possible to funnel funds into Irish banks which he has already promised to pump up to 50 billion euros ($68.38 billion) into.
"There is no question about Irish sovereign debt - the question remains about the funding of the banks. The banks are having trouble getting money," the newspaper quoted the source as saying. "We have to find out - could you go to the fund and get money for the banking sector. Lenihan at ECOFIN presents an opportunity to discuss it. It would be the banks that would have to pay it back - not the state." The total amount of outstanding European Central Bank loans owed by Irish banks rose to 130 billion euros as of Oct 29 from 119 billion on September 24, data published on the Irish central bank's website showed on Friday.
Stranger and stranger grows the EU's bailout fund
by Jeremy Warner- Telegraph
Anyone wanting to know just how daft and self defeating the EU’s latest utterences on the Permanent Crisis Resolution Mechanism (the structure through which sovereign bailouts would be conducted) really are, should take a look at the note just published by Marco Annunziata, chief economist at UniCredit Group. I’ve got no link for this, so I’ll quote his digest in full:“The Eurozone’s credibility deficit is getting larger by the day. The most recent antics on the Sovereign Debt Restructuring Mechanism are a breath-taking mixture of suicidal irresponsibility and farcical incoherence, and risk inflicting lasting damage to the recovery prospects of the most troubled peripheral countries and to the credibility of the eurozone’s economic governance framework.
“Germany had seemed determined to have agreement on a SDRM. But now from Seoul, EU finance ministers tell us that that any SDRM would only apply to new debt issued after the mechanism has been approved and put in place, that is 2013 at the earliest. Debt currently outstanding, and any debt issued over at least the next two years, would therefore be safe. But this commitment is time-inconsistent, and therefore not fully credible. If by 2013 countries like Greece, Ireland and Portugal are still in a shaky position, with weak fiscal accounts and weak growth, any new debt issued with SDRM clauses will carry exorbitant yields, inconsistent with debt sustainability.
“The EU would then have to choose between a full-fledged, open-ended bailout, and reneging on the promise that existing debt would not be restructured. Will German voters then accept higher taxes to save their profligate neighbors? Perhaps, but we can hardly take it for granted. The apparent time inconsistency of the Seoul promise implies that we might get the worst of both worlds: spreads will not come in significantly, as investors will doubt that existing debt is really safe, while high-debt countries will still hope that they will be helped and not left to the cruel mercy of the markets. We will get instability and bailouts rather than discipline.”
Germany thought it was making matters better by stressing that “haircuts” for private bondholders would apply only after the mechanism comes into force in 2013 and wouldn’t apply to any outstanding debt. This is what European finance ministers had to say about it all in a statement issued from the G20 in Seoul earlier today:“At its meeting on the 29 Oct 2010 the European Council discussed the future arrangements for ensuring economic and financial stability in the European Union.
“Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any programme under current instruments. ‘Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements.
“The EFSF is already established and it’s activation does not require private sector involvement. We note that the role of the private sector in the future mechanism could include a range of different possibilities such as a voluntary commitment of institutional investors to maintain exposures, a commitment of private lenders to roll over existing debts or the inclusion of collective action clauses on future bond emissions of euro area member states”.
But as Mr Annunziata points out, unless countries such as Ireland, Greece, and Portugal, have by then got their finances back in order, which doesn’t seem likely, the yields demanded on new debt will be so high as to require a restructuring of existing debt anyway. Either that, or the rest of the eurozone would have to give an open ended guarantee.
This crisis is set to run and run.
P.S. Some understandable confusion of terminology is setting in here. The European Financial Stability Fund (EFSF) mentioned by the finance ministers is the existing €750bn fund set up last May to help countries with difficulty repaying their debts. The Permanent Crisis Resolution Mechanism (PCRM) is what they propose should replace it in 2013. I’m assuming that Mr Annunziata’s Sovereign Debt Restructuring Mechanism is the same thing. All clear now?
Haircut talk hastens next euro zone crisis
by Paul Taylor - Reuters
Talking about death doesn't make you die, an old French saying goes. But Europe is learning the hard way that talking about the possibility of default can hasten precisely that outcome. When the history of the euro zone is written, last month's German-driven EU summit agreement to devise a crisis resolution mechanism for countries unable to service their debts may well be cited as the event that pushed Ireland over a cliff.
German Chancellor Angela Merkel's insistence that private sector bond holders be made to share with taxpayers the cost of future euro zone bailouts helped send Dublin's borrowing costs into the stratosphere in the last two weeks. "Those who warned that this could become a self-fulfilling prophecy are being vindicated," said a senior European Union official in the thick of financial fire-fighting.
The deal struck by Merkel and French President Nicolas Sarkozy in Deauville, then thrust on reluctant European Union partners, was not the only factor driving Ireland to the brink. Deepening political uncertainty in Dublin, with opposition parties refusing to back a jaded and unpopular government's austerity plans, and growing concern about the ever rising liabilities of state-guaranteed Irish banks also played a role.
But Prime Minister Brian Cowen was clear about where the main responsibility lay in his eyes, telling an Irish newspaper that loose talk by the German and French leaders had complicated his efforts to overcome the crisis. "It hasn't been helpful," Cowen told the Irish Independent of Merkel's intervention. "What has been said there has had, I think, an unforeseen consequence, perhaps." "The consequence that the market has taken from it is to question the commitment to the repayment of debt," he said.
Even though Ireland is fully funded until mid-2011 and does not need to return to the bond market for now, the huge rise in Irish bond yields on the secondary market has ratcheted up pressure on the country's already battered banks. They are now largely shut out of the inter-bank lending market and ever more dependent on the European Central Bank for funding. Meanwhile, the borrowing costs of other peripheral euro zone governments have also shot up.
This was almost exactly the sequence that preceded the emergency bailout of heavily indebted Greece in May by euro zone countries and the International Monetary Fund. Seeking to douse down a fire that some of their own leaders ignited, the big five EU finance ministers attending last week's G20 summit rushed out a statement stressing any burden-sharing imposed on bond holders of a euro zone state unable to meet its debts would not be retroactive.
"Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism, we are clear that this does not apply to any outstanding debt and any program under current instruments," the ministers said. But much damage has already been done and investors weighing the risk of a "haircut" may find that statement less than reassuring.
First, the whole debate about a resolution mechanism has turned market perceptions of the risk that one or more euro zone states may be unable to honor their debts from a possibility to more of a probability. "The discussion of 'orderly defaults' opened Pandora's box," Lloyds TSB strategists said in a note to clients. "The sharp rise in yields is now all about expectations of future default -- restructuring -- and not difficulties in financing."
Second, the assurance that any new terms would only apply to debt issued after May 2013, when the current temporary European Financial Stability Facility expires, and that all existing bonds are hence safe, may not convince market skeptics. After all, the problem facing Greece is that when its 110 billion euro emergency loan program expires in 2013, it may not be able to service an existing debt mountain forecast to reach 149 percent of gross domestic product by then.
Thirdly, investors trying to price euro zone sovereign risk face a prolonged period of uncertainty while the EU haggles over a permanent crisis mechanism, then tries to turn it into a treaty amendment and have it ratified by 27 countries by 2013.
Merkel is unlikely to back off because German voters outraged by having to rescue Greece demand that banks share any future pain. Moreover, without some such guarantee against future "moral hazard," the German Constitutional Court may strike down Berlin's participation in the existing euro zone safety net when it rules in mid-2011, German officials say.
Ireland has not yet fallen off the cliff, but it is clinging on by its fingernails. It said on Sunday it did not rule out turning to Europe but that no application for aid had been made for yet. Meanwhile, pressure continues to mount on Portugal, the next high-deficit euro zone weakling in the crosshairs. If Ireland does have to seek assistance from the 450 billion euro European Financial Stability Facility created for other euro zone states in May, it will be on existing terms, without debt restructuring or "haircuts" for bond holders.
Loukas Tsoukalis, a senior policy adviser to the European Commission, noted that German Finance Minister Wolfgang Schaeuble has quoted Shakespeare's Hamlet on the need to "be cruel to be kind" in defending Berlin's hard line on debtors. "We should remember that Hamlet's story ends up with far too many deaths. We wouldn't want to repeat the experience, nor wait for a post-mortem to find out whether his prescription is right," Tsoukalis wrote in the policy journal Europe's World.
Greece's budget deficit worsens
Greece's 2009 budget deficit was worse than previously calculated, new figures have shown. The country's deficit last year stood at 15.4% of its annual economic output, said Eurostat, the European Union's statistics office. This is higher than the 13.6% figure reported in April.
The Greek government said that as a result of the revision, 2010's deficit would only be cut to 9.4%, compared with its earlier target of 7.8%. It comes as Athens is continuing efforts to reduce the deficit through austerity measures that have sparked protests from workers. The Greek government is also being visited by EU and International Monetary Fund officials on Monday, who will decide whether to release more funds. Greece is seeking the third part of its 110bn euros ($150bn; £93bn) aid deal, which was arranged in May.
Prime Minister George Papandreou said over the weekend that Greece might be forced to ask for an extension to the time before it has to start repaying aid money. The Greek government said Eurostat had revised up the 2009 deficit figure for three main reasons; a downward revision of the country's economic growth rate that year, an adjustment of social security funds, and by adding data from certain public sector bodies into the general government figures.
Eurostat also revised upwards the total level of Greece's debts in 2009 to 126.8% of its GDP from 115.1% previously. The European statistics office had been concerned that its earlier 2009 deficit figure for Greece had been incorrect. Its new final is its final calculation, and it said it no longer had any reservations.
Greece's Ministry of Finance said: "The revision and validation of the fiscal data up to 2009 is a major step to restore transparency in fiscal management, and to eliminate controversies over the quality and the accuracy of Greek fiscal statistics." Eurostat said last week that Greek economy had contracted by -1.1% between July and September, better than the -1.7% decline from April to June
Greece Beats Ireland for Worst Deficit in Europe
by David Jolly - New York Times
Greece’s 2009 public finances were significantly worse than previously thought, the European statistics agency reported Monday, raising the pressure on the government of Prime Minister George Papandreou to make more spending cuts.
Greece’s budget deficit was 15.4 percent of gross domestic product last year, surpassing Ireland to claim the title of worst in the 27-nation European Union, Eurostat reported. In April, Eurostat had estimated the deficit at 13.6 percent of G.D.P. The country’s 2009 debt was 126.8 percent of G.D.P., Eurostat said, up from its April estimate of 115.1 percent.
Ireland, which is seeking to avoid having to ask for a Greek-style bailout, had the second-worst deficit in the bloc, at 14.4 percent of G.D.P. Italy had the second-worst debt level, at 116 percent of G.D.P. The average government deficit of the 16 euro-zone nations stood at 6.3 percent of G.D.P., and at and 6.8 percent of G.D.P. for the overall E.U. Average debt stood at 79.2 percent and 74.0 percent, respectively. E.U. rules call for deficits not to exceed 3 percent of G.D.P. and debt not to exceed 60 percent.
The Greek announcement, largely in line with market expectations, came as officials from the European Commission, the International Monetary Fund and the European Central Bank were this week in Athens to assess the government’s efforts to gain control over its finances. Mr. Papandreou’s government pledged in the spring, as part of its €110 billion, or $150 billion, bailout agreement with the European Union and International Monetary Fund, to progressively reduce the deficit to below 3 percent of G.D.P. in 2014. More tough measures will thus be needed to bring the deficit down to the agreed 2011 target of 7.6 percent.
Mr. Papandreou suggested in a weekend interview with the newspaper Proto Thema that the terms of the aid repayment might have to be extended. So far, the reaction from the country’s lenders has been that any such changes would harm confidence in the government’s determination. Austerity measures have brought riots and demonstrations, but also some resignation from ordinary Greeks who have had a harsh spotlight cast on their years of fudged budget data.
The Finance Ministry said in a statement from Athens that Eurostat’s revision “is a major step to restore transparency in fiscal management and to eliminate controversies over the quality and the accuracy of Greek fiscal statistics.” Mr. Papandreou’s Socialists gained a vote of confidence Sunday with local election victories that were seen as a referendum on the austerity measures. The Socialists won mayoral races in Athens and Thessaloniki and took eight of 13 regional governor contests.
Righting the public finances at a time of economic weakness is nonetheless a tall order. The Greek statistics agency said Friday that the economy shrank at an annualized 4 percent clip in the third quarter, as the austerity measures began to bite. The jobless rate is at 12.2 percent, and the government has warned it could rise to 14.5 percent next year. Some economists fear that cutting government spending could lead to a vicious circle, in which falling demand further depresses employment, leading to greater declines in demand and output.
“We still think that some kind of debt restructuring is almost inevitable at some point in the future,” Ben May, an economist at Capital Economics in London, wrote Monday.
Bernanke's worst nightmare: Ron Paul
by Chris Isidore - CNNMoney
Ben Bernanke has had his hands full since his first day on the job as Federal Reserve chairman nearly five years ago. It's about to get even tougher. His harshest critic on Capitol Hill, Rep. Ron Paul of Texas, is about to become one of his overseers. With the Republicans coming to power, Paul, who would like to abolish the Fed and the nation's current monetary system, will become the chairman of the House Subcommittee on Domestic Monetary Policy.
If you've never heard of the committee before, you're not alone. But Paul promises you'll be hearing a lot more from it. "It's basically been a committee that's dealt with commemorative coins. I'm going to deal with monetary policy," he said.
Paul doesn't think he'll be able to move his proposal to eliminate the Fed, or to allow Americans to use gold instead of paper money as currency. But he said he does intend to use his new position as "a mini-bully pulpit" to criticize Fed policy and call more attention to what he sees as its negative consequences. And he's confident that American voters are ready to delve into those monetary policy questions.
"Five years ago they wouldn't have listened. Now they will," he said. "We've gained a lot of credibility in making the Federal Reserve an issue since the market collapse." And Paul vows to try again to authorize Congressional audits of the Fed's decisions on the economy, a proposal that passed the House last year but was essentially gutted from the final version of the financial regulatory overhaul legislation. "It will never be easy; the Fed has a lot of influence," he said of the audit legislation. "But there's a lot of life to it. We got further along than I ever expected."
One way that Paul will bring pressure on Bernanke and his Fed allies is to hold hearings to give greater voice to Fed members -- like Kansas City Fed President Thomas Hoenig -- who disagree with the current monetary policy. "Just getting someone there willing to discuss their viewpoint and why they might dissent, I think that would be interesting," Paul said.
Some economists worry that Paul having that kind of pulpit will hurt the Fed, and diminish its ability to fix an economy that still needs help. "From Ron Paul's standpoint, the Fed can't do anything right," said Lyle Gramley, a former Fed governor who is now senior economic advisor to the Potomac Research Group. "He can cause the Fed to lose a lot of public support. But it needs public support to do what it needs to do."
While the Fed policymakers will try to resist pressure from Paul, they won't be able to ignore it, said John Silvia, chief economist for Wells Fargo Securities. And he said there's a potential for that pressure to influence Fed policy. "The Fed has a more balanced, nuanced position on its dual mandate to promote growth and keep prices stable," he said. "Ron Paul probably doesn't."
But other Fed watchers say Bernanke already faces plenty of criticism and doesn't have too much to worry about from Paul having control of an oversight committee. "I think that Bernanke has been pretty cool under fire up to now. I can't imagine Ron Paul being someone who could shake him up," said Michael Bordo, a professor of economics at Rutgers University.
Paul also rejects the idea that he's Bernanke's greatest concern. "He probably just thinks I'm a nuisance rather than a nightmare," he said. And Paul doesn't think he'll be able to reverse Fed policy or force Bernanke to resign, as much as he would like to. "I think psychologically, Bernanke is incapable of changing his mind," he said. "It's probably unlikely [Bernanke will resign] under today's circumstances. But you don't know what it will be like a year or two from now."
Paul argues the Fed is making a serious mistake by pumping more money into the economy to try to spur more spending and growth. He predicts it will only lead to further declines in value of the dollar, inflation and higher interest rates rather than the lower rates the Fed is shooting for. Paul thinks that will bring about another economic crisis that will eventually force Bernanke to resign from office. "That's more likely to happen than for Bernanke to think, 'Well, I guess I made a mistake for 35 years. I've misunderstood the Depression, and I'm going to change my policy.'"
Crash JP Morgan Buy Silver America says Max Keiser
Wow -- Check Out How Blatantly Our Government Misled Us With The October Jobs Numbers!
by Henry Blodget - Business Insider
Remember last Friday's payrolls numbers--the ones that blew away expectations about the number of jobs created and got everyone talking about recovery again?
Well, even at the time those payroll numbers were confusing, because the other part of the jobs report--the "household survey"--showed yet another crappy number.
But by pointing to the crappy household number and ignoring the payroll number, the bears seemed to be trying to make lemons out of lemonade.
But it turns out that there was a simple reason why the payroll numbers looked so good--a reason that had nothing to do with underlying strength of the jobs market.
What was that reason?
The government changed the "seasonal adjustment" it made to the payroll numbers--and, in so doing, boosted the number of "jobs" created in October by 100,000.
Stephanie Pomboy of MacroMavens (via John Mauldin) explains:
" 'The seasonal bar which the payroll data must jump was (inexplicably and dramatically) lowered from prior Octobers.
" 'Thus, in October 2009, the BLS set the bar at 870,000 jobs, similar to the 840,000 it anticipated in October 2008. This year, by contrast, it lowered the bar to 768,000. Mumbo, jumbo, payrolls presented "an upside surprise" of 100,000.'
Alan Abelson of Barrons (again via John Mauldin) adds the following:
"According to John Williams at Shadow Government Statistics, the BLS' fiddling with the figures via what he calls 'seasonal-factor games' actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September, including 56,000 in August."
In other words, it wasn't that there were a surprising number of jobs created in October. It was that the government changed its "seasonal adjustment" assumption in a way that made it look as though there were a surprising number of jobs created in October.
Now, seasonal adjustment is an art not a science. And maybe the new seasonal adjustment is more defensible than the old one. But if our government is going to publish a number like this that represents such a major "surprise," we would expect it to at least be upfront about the reasons for the surprise. And in this case those reasons had NOTHING to do with the jobs market, and EVERYTHING to do with the seasonal adjustment assumption.
Quantitative Easing Explained
What the Federal Reserve is up to, and how we got here.
James Crotty: Austerity Road to 19th Century
More than a million British pensioners will have a mortgage
by Myra Butterworth and Ian Cowie - Telegraph
More than a million pensioners will still have a mortgage within the next five years, experts have warned. There are already almost 250,000 people aged over 65 who are repaying mortgages. Figures disclosed that a further one million home owners approaching retirement had yet to clear their mortgage debts. Experts said that within five years, the number of pensioners with mortgages would rise to more than one million.
The trend was expected to lead to many pensioners facing financial hardship as they struggled to pay off debts from the dwindling value of their pensions. Share prices and savings rates fell during the credit crunch, leaving many pensioners without the money to pay off their home loans. Ros Altmann, the director general of the Saga Group, said: “It is not going to take very long to get to a million pensioners with a mortgage.
“A lot of pensioners are relying on endowment policies or lump sums from their pensions to pay back their mortgage debt. But these things have just not worked out.”
Melanie Bien, of Private Finance, the mortgage broker, said: “While most of us hope to pay our mortgage off long before we retire, an increasing number of home owners simply can’t afford to. “Instead, they are continuing with their mortgage well into retirement, using their bricks and mortar to raise cash to live on, and to help their children and grandchildren with their own property purchases.”
The latest figures, published by the Department for Communities and Local Government, disclosed that almost 249,000 people over state pension age had a home loan. A further 1,071,000 people aged between 55 and 64 still had mortgage debts. A study by the Council for Mortgage Lenders suggested that more than half of all home owners aged over 50 — many of whom retired early — had mortgage terms that stretched beyond the age of 65, and that two-thirds said they intended to remain in debt indefinitely.
Charities expressed concern about pensioners in debt, saying they would be among the worst hit if interest rates rose. Malcolm Tyndall, a director at Elizabeth Finn Care, said: “Faced with greater difficulty in re-entering the workplace, pensioners will naturally use up their savings, with many forced to rely on other methods of payment such as credit cards and high-interest loans. If interest rates rise causing higher mortgage payments, older people are going to suffer disproportionately.
“There is a preconceived image that it’s people of working age who are falling into debt, but we are seeing more people in their later years falling into debt who are often more reluctant to ask for help because of the stigma attached to it.”
Biggest drop in Britain's wealth for 60 years
by Myra Butterworth and Robert Winnett - Telegraph
Britain’s economic wealth has suffered its biggest decline in 60 years as the worst recession on record eliminated jobs and curbed spending, the Office for National Statistics said. Gross domestic product per person dropped 5.5 percent from a year earlier, the most since 1949, the statistics office said in an e-mailed report from London today. However, household disposable income per person increased by 1.2 per cent, helped by falling mortgage-interest costs, the ONS said.
The recession, which lasted for six quarters and ended in late 2009, removed more than 6 per cent of the economy and 600,000 jobs, making it the deepest since records began in 1955. Britons are now bracing themselves for the deepest government spending cuts since World War II, which will lead to the loss of almost half a million public-sector jobs in the next four years.
Household net wealth rose 7.3 percent to £117,000 per person in 2009, the ONS said. That’s still below a peak of £128,000 in 2007 as a result of the drop in house prices during the recession, the statistics office said. Total household debt as a percentage of household disposable income declined to 161 per cent in 2009 from 169 per cent a year earlier, it said.
Economists attributed the increase in wealth of households to babyboomers cashing in on house prices. They warned high prices are unsustainable and that the typical value of a home in Britain is likely to fall further. House prices climbed from an average of £43,000 at the beginning of 1987 to £199,000 before the credit crisis struck in August 2007. They have since dropped to £165,000 amid a lack of mortgage finance.
Vicky Redwood, of Capital Economics, said: “The increase in wealth is outpacing the growth in the wider economy, mainly due to developments in the housing market. Not withstanding the fall in prices in 2009, house prices have soared over that period. We think prices are still overvalued relative to household income so wealth will not stay this high.”
Figures from the Council of Mortgage Lenders showed that 8,900 properties were taken into possession in the third quarter of this year, down 5.3 per cent or 500 properties compared to the second quarter.
Despite the reduction, economists said the lack of improvement among the most serious arrears cases does “not bode well” for the weak period of economic growth that they believe lies ahead.
Howard Archer, an economist at Global Insight, said: “A significant number of homeowners are still at risk, particularly if economic activity slows markedly as tighter fiscal policy bites. The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets, while households already face high unemployment, muted earnings growth and elevated debt levels. “There will also be a lagged impact from the recession as relatively gradual recovery overall will mean that many people who have lost their jobs will be unemployed for a long time and this will weigh heavily on their finances.”
Fresh Attack on Fed Move
by Peter Wallsten and Sudeep Reddy
The Federal Reserve's latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics. A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.
"The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times. The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.
The increasingly loud criticism of the Fed comes as some economic officials outside the U.S. are criticizing the central bank's move to effectively print money, which has the side effect of pushing down the dollar on world currency markets. President Barack Obama last week defended the Fed. The move to buy more bonds, known as quantitative easing, "was designed to grow the economy," not cheapen the dollar, he said.
The Fed, despite frequent criticism from both parties, has enjoyed considerable independence from politicians on monetary policy for the past three decades. Organizers of the new campaign predicted the Fed will increasingly find itself caught in the political crosshairs, though. A tea party-infused GOP is eager to heed voters' rejection of big-government programs, and conservatives say a new move by the Fed to essentially print more money make it ripe for scrutiny by the incoming Republican House majority and potentially an issue in Mr. Obama's 2012 re-election campaign.
"Printing money is no substitute for pro-growth fiscal policy," said Rep. Mike Pence, an Indiana Republican who has been privy to early discussions with the group of conservatives rallying opposition to the Fed plan. He said the signatories to the letter "represent a growing chorus of Americans who know that we should be seeking to stimulate our economy with tax relief, spending restraint and regulatory reform rather than masking our fundamental problems by artificially creating inflation."
The Fed faces potential pressure of a different sort from the left as well. Some prominent Democratic congressmen, including the current chairman of the House Financial Services Committee, have endorsed the quantitative-easing move. But if the economy continues to disappoint as November 2012 approaches, the White House and Democrats in Congress may be pressing the Fed to do more to sustain the recovery as well. Some prominent liberal economists, including Nobel laureates Joseph Stiglitz and Paul Krugman, already have challenged the efficacy of quantitative easing, arguing that more fiscal stimulus is needed to restore the economy to health.
Signers of the new manifesto criticizing the Fed include: Stanford University economists Michael Boskin, who was chairman of President George H. W. Bush's Council of Economic Advisers and John Taylor, a monetary-policy scholar who served in both Bush administrations; Kevin Hassett of the conservative American Enterprise Institute; Douglas Holtz-Eakin, former Congressional Budget Office director and adviser to John McCain's presidential campaign; David Malpass, a former Bear Stearns and Reagan Treasury economist who made an unsuccessful run for a U.S. Senate seat from New York; and William Kristol, editor of the Weekly Standard and a board member of e21, a new conservative think tank seeking a more unified conservative view on economic policy.
A spokeswoman for the Fed said Sunday, "The Federal Reserve...will take all measures to keep inflation low and stable as well as promote growth in employment." She noted that the Fed "is prepared to make adjustments as necessary" to its bond-buying and "is confident that it has the tools to unwind these policies at the appropriate time." "The Chairman has also noted that the Federal Reserve does not believe it can solve the economy's problems on its own," she added. "That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector."
Criticism of the Fed broke out amid the unpopular bailout of Wall Street and the Senate fight over Mr. Bernanke's second term early this year. The critiques had ebbed until its new move to buy bonds. But last week, potential GOP presidential candidate Sarah Palin delivered a stinging speech on the move and then, in a Facebook post, criticized Mr. Obama for defending the Fed.
Last Tuesday evening, about 20 economists and others met over sea bass at the University of Pennsylvania Club in Manhattan and hashed out a broad strategy. Mr. Ryan, who has gained notice for a plan to balance the federal budget through deep spending cuts, joined the group as they discussed ways to encourage the GOP's new House majority to unite behind what they describe as a "sound money policy." "We talked about the importance of the right being outspoken and unified on this," said a participant.
Over the weekend, organizers began discussions with possible GOP presidential candidates, including former Massachusetts Gov. Mitt Romney and former House Speaker Newt Gingrich. On Tuesday, Mr. Boskin and another signer, Paul Singer, head of hedge fund Elliott Management, will brief GOP governors at a conference in San Diego. "It is unfortunate that economists are over-hyping this and trying to politicize it," said Bob McTeer, former president of the Federal Reserve Bank of Dallas and a backer of the Fed's latest step. Mr. McTeer, a fellow at the National Center for Policy Analysis, a right-leaning think tank, added: "What populists on the right and the left have in common is a distrust of the establishment, and to them the Fed personifies the establishment."
To fight a deep recession provoked by a global financial crisis, the Fed has been keeping its target for overnight interest rates near zero since December 2008, and bought $1.7 trillion in U.S. Treasury debt and mortgage securities to push down long-term interest rates, hoping to spur borrowing and spending. That program ended in the spring. With unemployment at 9.6%, well above its mandate of "maximum sustainable employment," and inflation running under its target of a bit below 2%, the Fed policy committee voted to resume bond-buying to try to move inflation up a bit and unemployment down.
Signatories to the letter criticizing the Fed insisted they aren't trying to undercut the central bank's independence. "It's fair to have a public debate about what the right monetary policy is," Mr. Holtz-Eakin said. "I'm a long way away from being comfortable with the idea of the Congress running monetary policy."
US Teacher Pensions: $500 Billion Shortfall and Growing
by Andrew J. Rotherham - TIME
Teacher pensions may not sound like a sexy or even high-profile issue, but keep reading: they're threatening the fiscal health of many states and could cost you - yes, you - thousands of dollars. And like the savings-and-loan crisis at the end of 1980s or the current housing-market mess, insiders see big trouble ahead in the next few years and are starting to sound warnings.
Today there is an almost $500 billion shortfall for funding teacher pensions, and that gap is growing. Why should you care? Because ultimately taxpayers are on the hook for that money. But the problem doesn't just end there. The way teacher pensions operate is badly suited to today's teacher workforce, where 30-year careers are no longer the norm. The current setup penalizes teachers who move between states, switch to private or public-charter schools that do not participate in the pension system or leave teaching altogether. Meanwhile, it becomes financial suicide for teachers to change careers after a certain point even if they no longer want to teach or are not good at it.
But first, let's talk about the money. Teacher pensions are part of a larger set of benefits that states and cities offer public employees, including health care and pension programs for cops, garbage men and other public employees. The Pew Center on the States puts the total shortfall for these benefits at $1 trillion. You read that right: trillion with a t. Obviously, these are important benefits to offer, but the costs are out of hand.
Although three states (New York, Florida and Washington) are currently enjoying funding surpluses for their teacher pensions, the rest have unfunded liabilities, meaning less money on hand than obligations. In New Jersey, Illinois and Connecticut, for example, these unfunded liabilities - that are just for teacher pensions - amount to more than $3,000 per state resident. Many experts see a state or city default as a real possibility in the next few years.
It would be easy to blame these shortfalls on the recent upheaval on Wall Street amid the Great Recession. But in practice, the liabilities stem from lousy incentives and bad decisions by state officials. In Pennsylvania, for instance, a 2002 surplus inspired state policymakers to increase benefits for teachers while decreasing the state's contribution to the pension fund. It was a move that made sense politically but was horrendous fiscally - Pennsylvania's $7 billion surplus by this year had turned into a $10 billion deficit.
Keep in mind that these pension systems are binding contracts, so in practice this means that as more teachers retire, state taxpayers will have to make up the difference through higher taxes, fewer services or both. And unlike Social Security, which relies on a nationwide base of people paying into the system, states and cities aren't propped up by an endless supply of new teachers; in places where enrollment is declining, fewer and fewer workers are being brought into the system. And unlike private-sector companies, state and cities can't go out of business, but that doesn't mean they can perpetually run enormous deficits either - particularly if newly elected GOP governors and Republican-majority statehouses are serious about imposing fiscal discipline.
Perverse incentives abound. Under traditional pensions, teachers and their state or city pay into a retirement fund that doles out a fixed amount to teachers when they retire. But only teachers who taught for 25 or 30 years reap the full benefits. (And since in some states these long-time teachers can be paid as much each year as they were making in their last few years of teaching, boomers who retire in their 50s or 60s and live for 30 more years can end up earning more from their pension than they did cumulatively during their three decades in the classroom.) Everyone else gets less, often much less than they would receive if the money were simply invested in a mutual fund. In other words, the system creates a small number of big winners at the expense of many losers.
There's also the sneaky little practice of cost shifting. In many states, for example, a school district can raise the salaries of teachers in their golden years knowing that the state, not local taxpayers, will bear the cost for the remainder of the teachers' lives after they retire. In some states, teachers can also "retire" and start collecting benefits but return to the same jobs, leaving taxpayers to pay extra for the same teachers.
Yes, a lot of insanity has been built into the current system, but we don't have to keep doing things the way we've been doing them. And the choice is not between anemic benefits for teachers or sticking with the status quo. States can structure sustainable retirement systems that are aligned with the goal of attracting great teachers.
How to do that? For starters, as my colleague Chad Aldeman and I urged in a paper published in August, policymakers need to update the 20th century pension schemes for today's more mobile workforce; 401(k)-style plans are not the only option, but genuine portability is essential. Benefits must be spread more evenly across a teacher's career, not just concentrated in the last few years. Reforms should lead us to a system in which new teachers are not financing the retirement of veterans, but rather saving for their own retirement - and they should be able take their savings with them if they change jobs. Meanwhile, states and cities should be required to make realistic assumptions about how much their pension funds will earn on Wall Street and to budget accordingly.
Reforms could also shine a light on teacher behavior and pensions. Economists Robert Costrell and Michael Podgursky, two of the leading researchers on teacher pensions, point out that despite the development of sophisticated state databases for K-12 education, these are still in no way linked to data about teacher retirements. Even the most basic descriptive data, like what kind of teachers are retiring, are not collected because states too often allow pension systems to run as quasi-independent fiefdoms. If policymakers had access to data on the effectiveness of teachers who are retiring, policy changes could be implemented to try to influence their choices.
In most places, however, it is legally difficult, sometimes impossible, to change the pension systems, so these problems will take a while to unwind. As you'd expect, pension-fund managers and teachers' unions are not too keen on the idea of reform. State pension officials won't share data with researchers who are calling for reform, let alone invite them to meetings. Unions, meanwhile, see traditional pensions as an inviolable right and worry that any reform will shortchange teachers. They are right to worry, but the current system is not sustainable, so the best way to protect teachers and retirees is to come to the table and help fix the problems.
It all sounds wonky, sure, but so did subprime mortgages when they first started popping up in news stories. And this time, the experts have been very clear that absent major reform, this shoe is going to drop. Don't say you weren't warned.
Nominee to Oversee Fannie and Freddie Is Named
by Binyamin Appelbaum - New York Times
President Obama will nominate North Carolina’s chief banking regulator to run the federal agency that regulates and controls the mortgage giants Fannie Mae and Freddie Mac, the White House announced Friday.
The nominee, Joseph A. Smith Jr., who is North Carolina’s banking commissioner, would take charge of the Federal Housing Finance Agency as the administration and Congress prepare to determine the fate of Fannie and Freddie and overhaul the government’s role in housing finance. Mr. Smith, 61, is a leading advocate for increased government protection of mortgage borrowers, helping to create and execute a series of pioneering state laws and regulations in North Carolina. He has also been a vocal critic of federal regulators for failing to police abuses by national banks.
If confirmed by the Senate, he would take a central role in reshaping the federal government’s relationship with the mortgage industry. The administration is scheduled to release an initial proposal in January, generating what could be years of debate. “Mr. Smith brings to this position both tremendous expertise and a deep commitment to strengthening our housing finance system for the American people,” President Obama said in a statement announcing the nomination.
The finance agency was created by Congress in 2008 as part of broader legislation to increase federal oversight of Fannie Mae and Freddie Mac. It also oversees the 12 federal home loan banks, institutions owned by private banks and chartered by the government that also provide financing for lenders. About a month after its creation, the agency placed Fannie Mae and Freddie Mac in conservatorship after deciding they could not survive on their own. The companies have since received $151 billion in federal aid.
The arrangement has given the administration an important lever over private lenders, which depend on Fannie and Freddie to buy their loans. For example, the finance agency, through Fannie and Freddie, has pushed companies to address problems with foreclosure documentation. But it has also resisted some of the administration’s policies, like a program to support homeowner investments in energy-efficient technologies.
The agency has also struggled to balance its responsibility to minimize losses at Fannie and Freddie with helping homeowners avoid foreclosure. It has navigated those challenges without a permanent director since August 2009, operating under the leadership of acting director Edward J. DeMarco.
The chairman of the Senate banking committee, Christopher J. Dodd of Connecticut, and the ranking member, Richard C. Shelby of Alabama, sent a joint letter to President Obama this summer urging the appointment of a permanent director, which they described as long overdue. Mr. Dodd said Friday that he would seek to have the committee consider Mr. Smith’s nomination “as swiftly as possible.”
Mr. Smith was appointed North Carolina banking commissioner in 2002, a job that entails oversight of state-chartered banks and other lending companies. North Carolina in 1999 became the first state to impose restrictions on mortgage lending at high interest rates. Under Mr. Smith, the state aggressively pursued enforcement of that law, clashing at times with federal regulators who prevented the state from investigating lenders owned by national banks.
Mr. Smith also played a crucial role in the state’s response to the collapse of the housing market. He identified abuses by lenders as an important factor in the boom and bust, and pushed for new laws and regulations to curtail lending practices that resulted in high rates of foreclosure. His efforts won praise both from the state’s banks and from consumer protection groups.
Mr. Smith has emerged as a national spokesman for state banking regulators, testifying before Congress on several occasions. He previously worked for almost a decade as general counsel of Centura Banks, a North Carolina company since absorbed by the Royal Bank of Canada. His nomination comes after the recent appointment of his deputy, Mark Pearce, to head a new consumer protection unit at the Federal Deposit Insurance Corporation.