"Unknown location. Embalming surgeon at work on soldier's body"
Ilargi: I had to think quite a bit about publishing the article Ashvin Pandurangi sent me over the weekend. I myself initiated a pending agreement with Ashvin for him to send me what he writes, since I have liked what he sent me in the past, and I want The Automatic Earth to not only be about me and Stoneleigh all of the time. And so far Ashvin hasn't let me down. Still, the essay you find below touches on a subject, and on a more general topic, that I’m not sure we should carry.
I don't want The Automatic Earth to be about politics (and it never will be). The closest I've come to going there is by saying that America doesn't have a financial crisis, but a political one. That statement, however, doesn't mean that I want to get into US politics. In fact, it means the opposite to me.
Now, I know, Ashvin doesn't address politics specifically. He talks about the Tucson massacre which happened just over a week ago. In itself, that is not a particularly political subject; it's simply a tragedy. The thing that strikes me from the get-go, though, is that in America it's impossible to discuss things like this without getting neck-deep into politics, even if the origin of it is basically, from what I can see, a severely troubled and delusional young man, granted, in the setting of what is probabaly a severely troubled and delusional society.
From my vantage point, it‘s as simple as it is clear: America is no longer able to have a sensible conversation with itself about events as dramatic as these. Americans in general don't seem to be able to think and feel for themselves anymore, they go through the processes of anger and sorrow according to scripts dictated to them by their media. "What am I supposed to think? Please tell me".
It's not just a Fox News phenomenon, it's all over the place, right to left. People seem to have lost the ability to process and file their emotions, their reactions, their anger and grief, without being led by highly paid pundits and -wannabe- politicians. "Hey, a congresswoman was shot". Cue: "What party does she belong to"? And they all take it from there. Left, right, whatever forks in the road anyone may have chosen, their reactions to tragedy are determined by what it is people in the media they like seem to be saying.
And that’s by no means a normal human reaction to tragedy. As I said, I don't believe America can have a true conversation on a topic as severe and serious as this one anymore, and neither can it on many other topics. It's all become a culture of "I’ll have what he has", don’t read the menu, minimize risk, try to figure what the Joneses think, and get on with "real life" in your underwater home.
A man put himself on fire in Tunisia three weeks ago. Today, the Tunisian government is gone. Men have set themselves on fire in Algeria and in Egypt the past few days. If you want to talk politics, let’s talk Northern Africa. If that situation spreads, it will soon reach the Middle East, re: Saudi Arabia, and then the US will have a humongous - oil- problem on its hands. Lots of overtime hours at the CIA. And here's waiting for the first American to tackle spontaneous combustion.
Still, the death of a nine-year-old girl will in the end never be about politics, not even on Martin Luther King Day. Ever wonder how many Americans have any idea what Dr. King stood for?
I read a thousand different reactions to the Tucson mayhem, and I got to tell you, I am enormously surprised that no American I’ve seen presented these few lines below, which describe the emotion of it all more than anything else.
You can't fight or ban mayhem or ugliness with rhetoric, or partisanship, or cleverly devised campaigns. The only thing that works to restore balance in your lives, and those of the people around you, is beauty.
Beauty is the only thing that can trump ugliness. Not rhetoric, not blame games, not any of that. These few lines do, though. Sadly, America, as a nation, has long since lost track of where its beauty lies.
Still, these are words written by an American, they're there for the taking, and this is very much -in my humble view- how you mourn a nine-year old girl slain in a senseless gun battle:
In early memory
Was ringing 'round my nursery door
I said take this child, lord
From Tucson, Arizona
Give her the wings to fly through harmony
And she won't bother you no more
This is the story of how we begin to remember
This is the powerful pulsing of love in the vein
After the dream of falling and calling your name out
These are the roots of rhythm
And the roots of rhythm remain
Read that a hundred times. I'm serious. Read it over and over. That is how you mourn and pay respect, America, not on TV. THIS is how you begin to remember. You have to listen to your poets and writers and painters, you have to listen to the best your society has brought forward, and no, the best are not the richest or the loudest. That idea will just get more nine-year-old girls killed. Time to put a stop to it.
It's not the roots of wealth that remain, it's the roots of rhythm that remain, as you can see -and should if you have any respect- in the memory of little Christina-Taylor Green.
There doesn't seem to be a copy of the original SNL video available to be embedded, but if you click this photograph, you’ll see what I mean, 5.30 minutes into the video.
Alternatively, there's the better known Miriam Makeba version (which came a few years after Paul Simon wrote the song for Linda Ronstadt), where the text has changed and Tucson has become Johannesburg:
Ilargi: And here's Ashvin:
"The possibility of madness is therefore implicit in the very phenomenon of passion."
- Michel Foucault (Madness and Civilisation)
The mass shooting in Tuscon, Arizona was a sad and unpleasant event, but it was fully expected by those of us who stay informed. We couldn't predict exactly where such an event would occur, when it would occur or how it would occur, but we knew that it was only a matter of time before people began lashing out against "the system" in violent ways. In early 2010, a man lashed out by flying a plane into an IRS building in Texas, but this time the violence directly targeted a federal politician, who is currently hospitalized in critical condition.
The shooter was Jared Loughner, a 22-year old who was "studying" in an Arizona Community College. Since the event, many people have obviously started digging through every single detail of this man's history, from the "incoherent" and "inappropriate" things he said in class, to his "disturbing" postings on the Internet and his drug-related criminal record. There were all kinds of different "warning signs" available to foreshadow the shooting and potentially prevent it, if only those who had observed him had been more vigilant and took some action.
Perhaps it is true that Loughner's parents, friends or classmates could have deciphered his murderous plans and prevented the shooting. But does that mean this rampage was an isolated incident, specific to a hopelessly deranged individual who had inexplicably fallen from the good graces of "normal" society? Frankly, the whole post-event routine reminds me of CNBC pundits attempting to explain a large market sell-off by referencing a mish-mash of "unexpected" economic events and "temporarily" negative data.
Already, politicians and the mainstream media have framed the event as one involving an individual person who was suffering from mental illness, perhaps even bordering on paranoid schizophrenia. He was clearly a delusional young man, unlike the rest of us "normal" folk, and he eventually succumbed to his "crazy" thoughts and urges to kill. CNN reports:
"Forensic psychologist Kathy Seifert called the postings "absolutely psychotic." Loughner should have been evaluated for schizophrenia, bipolar disorder, autism or other mental illnesses, she said." .And what exactly do these postings say that make them so "absolutely psychotic"? Here are some of the things that Loughner had to say on the Internet:
"In conclusion, reading the second United States constitution I can't trust the current government because of the ratifications: the government is implying mind control and brainwash on the people by controlling grammar..." It isn't really clear which "ratifications" he was referring to or even what he meant by "the second United States Constitution", but he obviously felt the U.S. government was using its alleged Constitutional powers to inappropriately manipulate the ways in which American people think about the world. I, for one, am not afraid to admit that I have very similar thoughts about our government and its exploitative/manipulative powers. Here is a statement found in a YouTube message, and another statement from a classmate who had spoken with Loughner:
"No! I won't pay debt with a currency that's not backed by gold and silver! No! I wont trust in God!" 
He added that one topic that Mr. Loughner seemed to be obsessed with was the American dollar. “He had talked about not liking the currency,” Mr. Cates said. “And he wished that the U.S. would change to a different currency because our currency is worthless.” .Well, informed people in the economic blogosphere who say they don't identify with the above statements are either lying or confused. Loughner's YouTube page also contains the following:
A list of his favorite books included both "Mein Kampf" and the "Communist Manifesto," along with works by George Orwell, Ray Bradbury, Ken Kesey, Herman Hesse, Ernest Hemingway, Plato and Aesop's Fables. With the exception of "Mein Kampf", I can honestly say that I deeply respect all of those writers and most of their works. In the context of our current economic environment, the writings of Karl Marx should especially resonate with people who understand the nature of our predicament. Is it so difficult, then, to connect the dots between Loughner's shooting spree and the ongoing collapse of our financial economic paradigm? For politicians and the media, it is either too difficult or too inconvenient, and I lean towards an explanation with a healthy dose of both.
Outside of these Internet messages, Loughner had revealed himself to be generally disruptive in class and to have a pretty hot temper. Did this make him an absolute psychopath, or someone who had an extremely hard time dealing with the contradictions and exploitations that he witnessed in American society every day? For the latter explanation to make any sense, we must first admit that these contradictions actually exist, and status quo power structures could not possibly conceive of making such a confession. What better way to hide this underlying truth than to relegate Loughner and his actions to the exotic realm of psychiatric disorder?
Inspired by thinkers such as Michel Foucault, who wrote an acclaimed historical treatise on "madness" in Western society , the "anti-psychiatry" movement has been very critical of institutional practices in modern psychiatry and their tendency to lump complex people into general categories of insanity. It specifically criticizes the "miscategorization of normal reactions to extreme situations as psychiatric disorders". . Loughner may have made peculiar comments and exhibited erratic behavior, but it would be foolish to dismiss his violent actions as the result of officially-defined "madness" without considering the systemic context in which they occurred. Unfortunately, this process of dismissal is exactly what is occurring and we should expect it to continue.
Loughner is just another crazy individual who finally went off the deep end and snapped. The only thing left to do now is to dramatically report on the victims for television ratings, stir up some faux debate over mental health procedures and gun regulation, use the event for political advantage and, perhaps most importantly, use Loughner's "mental illness" as a way of discrediting accurate representations of reality. The New York Times has already gotten to work on that last part, and this is what Mark Potok from the Southern Poverty Law Center has to say:
"The position, for instance, that currency not backed by a gold or silver standard is worthless is a hallmark of the far right and the militia movement...That idea is linked closely to the belief among militia supporters that the Federal Reserve is a completely private entity engaged in ripping off the American people." Such grossly inaccurate characterizations of reality by the so-called "educated" in American society were prevalent well before Loughner's rampage, but there is no doubt that power structures are already attempting to use this event to further reinforce the alternative reality. One where only hardcore "extremists" can believe that our country is systemically corrupt, and that the Federal Reserve is funneling trillions of dollars from taxpayers to large financial institutions. However, we can take some solace in the fact that these attempts are being carried out from a deathbed, and there is increasingly little room in the minds of Americans for contrived realities.
The truth is that we are all living in an "extreme situation", where the fabric of modern society is bursting at the seams, and the normal reaction is a combination of sadness, fear, frustration and anger. In the ever-present battle between logical composure and dissonant rage, the latter obviously won out in Loughner's brain. He could have been an informed young man discussing his philosophical and political ideas with people in school and on the Internet, being extremely critical but also calm and respectful. Instead, he ended up with a 9mm Glock in a grocery store with a federal politician and a head full of rage. Still, his lunacy was fundamentally no different from that of millions of other Americans across the nation, and our society continues to ignore that lesson at its own peril.
New Hit to Strapped States
by Michael Corkery and Ianthe Jeanne Dugan - Wall Street Journal
Borrowing Costs Up as Bond Flops; Refinancing Crunch Nears
With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis.
A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil. "We believe that this delay is prudent given the high level of volatility in the municipal bond market," said Rebecca Katz, spokeswoman for the nation's biggest fund company. The market has fallen every day this week, and investors have been net sellers of their holdings in municipal-bond mutual funds for nine straight weeks, according to fund tracker Lipper FMI.
Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, reflecting a spike in perceived risk, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009, during the financial crisis. Amid the selloff, public borrowers such as states and utilities face a wave of refinancing stemming from deals cut mostly during the crisis. The deals involved letters of credit from banks that were designed to keep financing costs down for government entities in need of cash.
Though the financing deals can be meant to last decades, the letters of credit underpinning them are expiring sooner. That could force the borrowers in many cases to pay higher interest rates or seek guarantees at higher costs. For the weakest borrowers, new guarantees may not be available and refinancing too costly. There are about $109 billion worth of letters of credit and similar backstops expiring this year, according to Bank of America Merrill Lynch. Some $53 billion in letters of credit alone is expiring this year, according to Thomson Reuters.
"Municipalities may be hard-pressed to come up with this money or refinance this debt," said Eric Friedland, a municipal analyst at Fitch Ratings. The ratings firm is scouring to identify risks among weaker municipalities that are seeking to renew these deals, and says it could downgrade some. The rollover rush stems from the credit crisis that roiled the U.S. in 2008. Municipalities had issued so-called auction-rate securities, instruments whose rates reset at weekly auctions. Amid the credit crunch, buyers at these auctions vanished.
Many municipalities scrambled to convert the debt into other instruments, including variable-rate demand obligations, which are long-term bonds with interest rates that reset periodically. For a fee, big banks guaranteed many of these deals. These so-called letters of credit from banks typically only last two or three years, leaving municipalities to refinance the deals or obtain a new guarantee. The issuers expected to easily renew the letters of credit. But many of these letters of credit have become much more expensive and scarce, state officials say, leaving them with little choice but to try to refinance at a time when the broader muni market is under pressure.
The short-term squeeze is unusual in the $2.9 trillion municipal bond market. Most debt is paid back over decades. And state and local governments generally don't need to borrow money to fund their daily operations. The long-term nature of the market is a key reason why most experts don't see the problems with state and local government debt spiraling into another financial crisis. Analysts say that many large states and cities with good credit ratings have been able to roll over deals well ahead of their expiration.
But there are parts of the market where short-term cash crunches could emerge, leading municipalities to potentially default on their debts. The risks could spill over to banks that backed bonds with the letters of credit. "This is one area of risk the market hasn't focused on," said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods. Mr. Cannon says it is difficult to determine banks' exact exposure to such deals because they don't typically report them in their financial statements.
The stress is on display at the New Jersey Economic Development Authority, a governmental agency. This week, the agency sought to refinance some variable-rate debt, but met mediocre demand from investors. The state had to reduce its planned $1.8 billion offering to $1.1 billion because of the rates investors were demanding. Part of the $1.1 billion will be used "to eliminate the need for $1 billion in letters of credit at what were sure to have been prohibitively high prices," said Andrew Pratt, a spokesman for the New Jersey Treasurer. Mr. Pratt said the state was able to achieve "favorable rates" in the scaled-back bond sale.
In Texas, J.P. Morgan Chase & Co. has taken control of a debt that it back-stopped in a 2001 deal that requires the public agency running the Houston Texans' football stadium to pay back a 30-year bond over the next three-and-a-half years. "Think of having a 30-year mortgage, and then someone suddenly says you have to pay your house off in five years," said Janis Schmees, executive director of the Harris County Houston Sports Authority, which built the stadium. "That is pretty much our scenario."
California, which has letters of credit backing about $525 million in debt coming due in November, is planning to renew the guarantees. "We expect when November rolls around, we will get those letters renewed," said Tom Dresslar, a spokesman for the state Treasurer. According to Moody's Investors Service, of the 500 municipal issuers that it rates with variable-rate demand bonds backed by some form of bank support, about 200 don't have the top ratings.
The biggest concerns, analysts say, are smaller muni borrowers such as hospitals and schools that have subpar credit. Municipalities borrowed $122 billion of variable-rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before, according to Thomson Reuters. Rollover crunches were a major part of the financial crisis, as banks that had relied on short-term debt couldn't borrow and became insolvent. More recently, rollover issues contributed to Greece's financial crisis.
Banks are reluctant to renew the letters of credit in part because of impending rules that restrict the amount of risk they can take. Besides banks, one provider of muni letters of credit is the giant California pension fund, the California Public Employees' Retirement System, which has back-stopped $2.5 billion of adjustable-rate bonds. Calpers' chief investment officer, Joe Dear, said in an interview that the pension fund partly uses the letters to make it easier for local California entities to borrow money, but it has no plans to ramp up its involvement in such deals. "We, like a lot of people, are watching the muni market, and it is not getting any healthier," said Mr. Dear.
State Budgets: Year Ahead Looms As Toughest Yet
by Judy Lin and Shannon Mccaffrey - AP
If 2011 is hinting at a national recovery, there is little sign of it in statehouses across the country. States that already have raided their reserve funds, relied on borrowing or accounting gimmicks, and imposed deep cuts on schools, parks and public transit systems no longer can protect key services in the face of another round of multibillion dollar deficits.
As governors roll out their budget proposals and legislatures convene this month, they do so amid a sputtering economic recovery and predictions of slow growth for years to come. State and local governments face lackluster revenue projections, worries from Wall Street over looming debt and the end of federal stimulus spending. In the first weeks of 2011, Republican and Democratic governors alike have begun detailing across-the-board pain for education, health care, transportation, public safety and other programs. Some say the year of reckoning for state and local governments is at hand, with calls for structural changes that could radically shift expectations of what services government provides.
Many believe the months ahead will be the most challenging in memory, with consequences for millions who depend on government funding. "We need to send a message to the governor: We're real, and we depend on all these services," said Sergio Garibay, a 41-year-old Southern California resident who relies on state disability payments and recently protested deep cuts to Medi-Cal programs proposed by California Gov. Jerry Brown. "There are other alternatives to the budget. Why don't we tax the rich, these corporations?"
In releasing his budget proposal, Brown told California lawmakers "the year ahead will demand courage and sacrifice" as the state faces a deficit projected to hit $25.4 billion over the next 18 months. His proposal combines spending cuts to Medi-Cal, in-home services for the elderly and higher education with a five-year extension of income, sales and vehicle taxes.
New York Gov. Andrew Cuomo proposed eliminating 20 percent of state agencies by combining duties, such as merging the Insurance Department, Banking Department and the Consumer Protection Board into the Department of Financial Regulation. It's part of "radical reform" to pull his state out of its fiscal crisis. And Gov. Chris Christie in New Jersey skipped a $3.1 billion payment to the state's pension system in a push to cut benefits for public workers, while proposing higher employee contributions and a boost in the retirement age from 62 to 65.
In Illinois, lawmakers voted for a dramatic 66 percent hike in personal income tax, from 3 percent to 5 percent, in a bid to resolve a $15 billion deficit, which amounts to more than half of the state's entire general fund. The tax increase will be coupled with strict 2 percent limits on spending growth. "It's important for their state government not to be a fiscal basket case," Gov. Pat Quinn in defending the major tax hike.
And on and on it goes:
- In oil-rich Texas, where education and social service spending is relatively low and Republican Gov. Rick Perry has railed against government spending, hard times are looming. The shortfall is projected to be between $15 billion and $27 billion over the coming two-year budget cycle.
- In South Carolina, outgoing Gov. Mark Sanford has proposed a spending plan that would end funding for museum and arts programs, slash college funding and give many state employees a 5 percent pay cut.
- In Georgia, deep cuts appear to await the state's popular HOPE scholarship program that provides public college tuition to students who earn good grades. Rising tuition and enrollment have outpaced the lottery revenues that fund the program and Gov. Nathan Deal has not proposed any additional state money to bail it out.
Even as tax revenue in many states shows signs of a rebound, states are expected to collect 6.5 percent less than they did in 2008, according to the National Association of State Budget Officers. And any revenue gains could be more than offset by the expected loss of federal stimulus money. Most of the $814 billion stimulus program was designed to help states provide essential services and give a boost to the economy, but will start to run out this summer. A new round of stimulus funding is unlikely with Republicans controlling one house of Congress. Top GOP lawmakers say they will try to provide states with relief by reducing mandated programs, not by giving them more money.
"States came into this recession with relatively large rainy day funds. Now that states have done the accounting gimmicks and the relatively easier stuff, each year gets harder and harder because those one-time things are gone," said Nicholas Johnson, director of the state fiscal project at the Center for Budget and Policy Priorities, a think tank in Washington, D.C. Despite lower tax revenue since the recession began, the level of service expected from state and local governments remains, often creating a disconnect between public perception and the reality of the fiscal crisis confronting elected officials.
Public schools face rising enrollments, more people are seeking government health care because they have lost jobs or their employers have dropped coverage, and millions of those thrown out of work are receiving unemployment checks. One possible solution is revising tax structures, even with an anti-tax mood persisting across much of the nation. In Georgia, some lawmakers are considering a 4 percent state sales tax on groceries and boosting the tax on cigarettes as part of an overhaul of the state's outdated tax code. The increases would be paired with reductions in the personal and corporate income taxes.
But any proposal for tax increases will run into opposition from Republicans, who were swept into office in large numbers last fall on a message of reducing the size and reach of government. Republicans picked up 690 state legislative seats Nov. 2 – the largest shift since 1966, according to data compiled by the national legislative group. The GOP now controls both chambers of the state legislature as well as the governorship in 21 states. "When you've got an unemployment rate at 10 percent, I don't think that's a good time for us to tell Georgians that we need more of their money," Georgia House Speaker David Ralston said. "I'm going to resist that again this year."
As states struggle to balance their books, Wall Street is watching rising debt burdens, although analysts so far have not sounded many alarms. Federal law does not allow states to file for bankruptcy protection, but states can default on their debt if their financial condition worsens considerably. That move is extremely rare. Arkansas was the last state to default on its debt payments, a move it took during the Great Depression. Moody's predicts that no state government will default on its debt in 2011.
Moody's Managing Director, Naomi Richman, said states generally borrow for long-term infrastructure projects. They don't usually borrow to pay debt and fund operating budgets. Those that have, including California, Illinois and Arizona, already have been penalized with low credit ratings, which increases their borrowing costs. It's possible, however, that more cash-strapped cities and counties could seek bailouts from states, as Harrisburg sought help from the commonwealth of Pennsylvania.
"I think you're more likely to see it cascade up, rather than down," said Steve Malanga, a senior fellow at the Manhattan Institute, during a discussion about state budgets at George Mason University. Kail Padgitt, an economist with the nonpartisan, nonprofit Tax Foundation, said the states with the greatest concerns about their fiscal health are those with costly public employee pensions that are underfunded. Many public pension systems use overly optimistic rates of return and do not provide a true, long-term cost to taxpayers. Padgitt cited a recent study by the Pew Center on the States that found states face a $1 trillion funding shortfall in public-sector retirement benefits, but said that likely underestimate the problem. "The long-term outlook is quite bad," Padgitt said, unless states begin to make pension reforms.
Matt Hanson, 50, a civil engineer who has worked for California's transportation department for 22 years, said he understands that public pension systems could use adjustments but he believes pensions are fundamentally sound. For example, he said he's open to contributing more to cover retiree health care costs, which have been rising. "If there's some shared pain that has to be felt than I want it to be constructive," Hanson said. "There's a difference between going out for a run and feeling pain right after – at least you'll be in better shape in the long run, rather than hitting your hand with a hammer. Pain for pain's sake doesn't make a lot of sense."
States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing
by Olga Pierce - ProPublica,
Sometimes it's time to pay the piper. And sometimes that piper is the federal government. And sometimes the piper wants more than $1 billion. Soon.
Because of the high jobless rate and past fiscal irresponsibility, 30 states have collectively had to borrow more than $40 billion from the federal government just to keep unemployment insurance checks in the mail. A provision in the stimulus bill made those loans interest-free for an extended grace period.
But no more. Efforts to include an extension of the grace period in Obama's tax cut extension enacted at the end of last year failed, and the first batch of 14 states will have to start paying interest before the end of this year. Given that state budgets need to be hammered out in advance, that means state legislatures will soon face tough choices as they come back in session.
The amounts due range from California and Michigan, which each face payments of more than $300 million dollars, to Kansas, which will owe about $6 million. (Fun fact: That's $2 for every Kansan.) And because of federal rules, states can't use unemployment insurance taxes to make interest payments, which means cash-strapped states will have to take that money from their general budgets, so there will be less money for roads, schools and other priorities.
Because of a historical compromise, each state operates its own unemployment insurance fund with wide latitude to set tax rates and benefits. While some states were careful to save up and build a cushion of reserves in good years, others got themselves into this mess by maintaining dangerously low levels of reserves for years before the Great Recession hit.
The bill is coming due at a particularly bad time for state legislatures, which already face an $82 billion shortfall for 2012, said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures. That budget crunch is the largest and deepest fiscal crisis states have faced since the end of the great depression, Perez said.
To make matters worse, most states with trust funds in the red are still bleeding--borrowing more from the federal government to pay out benefits even as they are hit with interest payments. California is borrowing millions of dollars a day, said Loree Levy, a spokesperson for California's workforce agency. Other states have passed unemployment insurance tax increases, straining employers at the worst possible time, but they were not enough to get their funds back in the black.
Overall, state legislators are at something of a loss to deal with the problem, Perez said. Some creative solutions are on the table. Texas, which still has reasonably good credit, plans to sell bonds. California, which at this point would probably not be approved for a Sears card, will borrow money from a creditor that can't say no: Gov. Jerry Brown's plan would dip into the state's disability pension fund.
U.S. Bills States $1.3 Billion in Interest Amid Tight Budgets
by Michael Cooper and Mary Williams Walsh - New York Times
As if states did not have enough on their plates getting their shaky finances in order, a new bill is coming due — from the federal government, which will charge them $1.3 billion in interest this fall on the billions they have borrowed from Washington to pay unemployment benefits during the downturn.
The interest cost, which has been looming in plain sight without attracting much attention, represents only a sliver of the huge deficits most states will have to grapple with this year But it comes as states are already cutting services, laying off employees and raising taxes. And it heralds a larger reckoning that many states will have to face before long: what to do about the $41 billion they have borrowed from the federal government to help them pay benefits to millions of unemployed people, a debt that federal officials say could rise to $80 billion.
The states, when they borrowed the money, hoped that the economy would have turned around by the time the first interest payments came due, or that future Congresses might loosen the terms. But the economy did not turn around in time and the new Congress, dominated by Republicans determined to shrink the size of government, shows little appetite for deepening the federal deficit by bailing out the states.
The problem is not only the staggering number of people who have lost their jobs, but the fact that many states entered the downturn with too little money salted away in the trust funds they use to pay unemployment benefits, which they are supposed to build up in good times by taxing employers. Those anemic trust funds ran dry quickly in many states as millions of newly jobless Americans began collecting benefits. So many states borrowed money from the federal government, helped by the stimulus act, which gave them a break on interest for nearly two years. But that grace period ended Dec. 31, and states will owe the first interest on those loans in September.
Michigan, which owes Washington $3.7 billion, is supposed to pay $117 million in interest by September — just about what it pays each year to run Western Michigan University. California, which owes $362 million in interest on a total debt of $9.7 billion, the highest in the nation, plans to juggle its accounts, borrowing from a trust fund for disabled workers to pay interest to the federal government.
In New York, which owes $115 million in interest on $3.2 billion, the cost will be passed on to employers in the form of a tax surcharge. Texas went to the bond market and borrowed $2 billion to pay back all the money it borrowed from the federal government, judging that the interest on the bonds, which are backed by a tax on employers, would cost less.
Some states are planning to follow the lead of Texas, and borrow the money to repay the federal government. Others are asking for more time. "During this time of extreme economic stress not only on the citizens of our states, but also on state budgets, state loan interest payments that will come due in September 2011 place further hardship on states’ finances and could slow economic recovery," a group of 14 governors from both parties wrote to Congressional leaders last month. Their letter added: "Extending the interest-free loans would allow states to avoid increasing payroll taxes, reducing benefits, or both, while the economic recovery continues."
Many advocates believe that the new Republican majority in Congress, which has said it plans to focus on deficit reduction, may be hesitant to postpone collecting the interest. But they could face pressure from newly elected Republican governors in states like Michigan, Ohio, which owes $2.3 billion, and Florida, which owes $2 billion.
The effects of the problem are already being felt. While states are generally loath to increase taxes on businesses during a recession, for fear that it can discourage much-needed hiring, 35 states were forced to raise their state unemployment taxes on employers in 2010, according to a survey by the National Association of State Workforce Agencies.
If states are unable to repay their outstanding federal loans by November — which will prove difficult for many — nearly half the states could be forced to effectively raise federal taxes on employers by about $21 per worker, under a provision of federal law that automatically reduces the tax credits given to businesses in states that carry loans two years in a row. Businesses in Michigan, Indiana and South Carolina are already paying the higher federal tax.
But even with those effective federal tax increases, which would continue to rise each year the loan is not repaid, it could take years for some states to repay what they have borrowed. "This is a problem that’s going to persist because of the structural imbalances in the way this system is financed," said Patrick T. Beaty, a deputy secretary of the Pennsylvania Department of Labor and Industry, who explained that Pennsylvania’s unemployment tax base had not kept up with the rising cost of the benefits, leading to a chronic insolvency. "Unless that’s corrected, these loans are going to go on for years, even if the economy improves," he said.
Pennsylvania, one of a handful of states that make both workers and employers pay into its unemployment program, is activating a dormant state "interest tax" to pay the $102 million it expects to owe the federal government this year. It owes Washington $3.1 billion, and officials expect the debt to grow to $3.7 billion by the end of the year. Even with the rising federal tax on employers each year, Mr. Beaty said, Pennsylvania could end up owing the federal government $4.3 billion eight years from now.
The state debts are the highest they have been in the 75-year history of the nation’s unemployment program. They are unrelated to the extra weeks of unemployment benefits that Congress agreed to pay for in the stimulus, and then extended late last year as part of the tax cut compromise — those extended weeks are paid for with federal money. The borrowing that many states were forced to do was in order to simply continue paying their basic unemployment benefits, which generally last up to 26 weeks.
The last time state borrowing even approached this level was after the recession of the early 1980s. It took years for many states to repay the debts then, and sparked states to raise taxes on businesses, reduce benefits for the unemployed and borrow money on the bond market — a range of unappealing options for distressed states during a downturn.
Right now, 30 states owe money to the federal government for their unemployment programs. Many of them tried to keep their unemployment taxes low in recent decades as states have competed with one another to lure companies and jobs. Now, although unemployment taxes are low by historic standards, the states face the strong possibility that they will have to take action at the worst possible time, raising taxes on employers at a time of low hiring, and cutting benefits when they are most needed.
States are beginning to try to deal with the short-term problem. In West Virginia, which has not had to borrow unemployment money from the federal government, Gov. Earl Ray Tomblin, a Democrat, used his state of the state speech last week to call for propping up the state’s unemployment reserves with $20 million from its rainy day fund.
And a bill was introduced in Arizona this month that would temporarily raise taxes on employers to repay both the principal and interest of the $258 million the state has had to borrow so far. One of the bill’s sponsors, State Representative Bob Robson, a Republican representing Chandler, said that many businesses understand the need to take action. "They recognize that this needs to be done," he said in an interview, "or the cost would be more prohibitive in the future."
Record $14 trillion-plus debt weighs on Congress
by Tom Raum, AP
The United States just passed a dubious milestone: Government debt surged to an all-time high, topping $14 trillion — $45,300 for each and everyone in the country. That means Congress soon will have to lift the legal debt limit to give the nearly maxed-out government an even higher credit limit or dramatically cut spending to stay within the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea party activists and deficit hawks.
Already, both sides are blaming each other for an approaching economic train wreck as Washington wrestles over how to keep the government in business and avoid default on global financial obligations. Bills increasing the debt limit are among the most unpopular to come before Congress, serving as pawns for decades in high-stakes bargaining games. Every time until now, the ending has been the same: We go to the brink before raising the ceiling. All bets may be off, however, in this charged political environment, despite some signs the partisan rhetoric is softening after the Arizona shootings.
Treasury Secretary Timothy Geithner says failure to increase borrowing authority would be "a catastrophe," perhaps rivaling the financial meltdown of 2008-2009. Congressional Republicans, flexing muscle after November's victories, say the election results show that people are weary of big government and deficit spending, and that it's time to draw the line against more borrowing. Defeating a new debt limit increase has become a priority for the tea party movement and other small-government conservatives.
So far, the new GOP majority has proved accommodating. Republicans are moving to make good on their promise to cut $100 billion from domestic spending this year. They adopted a rules change by House Speaker John Boehner that should make it easier to block a debt-limit increase. The national debt is the accumulation of years of deficit spending going back to the days of George Washington. The debt usually advances in times of war and retreats in peace.
Remarkably, nearly half of today's national debt was run up in just the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s. With a $1.7 trillion deficit in budget year 2010 alone, and the government on track to spend $1.3 trillion more this year than it takes in, annual budget deficits are adding roughly $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.
In a letter to Congress, Geithner said the current statutory debt ceiling of $14.3 trillion, set just last year, may be reached by the end of March — and hit no later than May 16. He warned that holding it hostage to skirmishes over spending could lead the country to default on its obligations, "an event that has no precedent in American history."
Debt-level brinkmanship doesn't wear a party label. Here's what then-Sen. Barack Obama said on the Senate floor in 2006: "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government's reckless fiscal policies."
It was a blast by the freshman lawmaker against a Bush request to raise the debt limit to $8.96 trillion. Bush won on a 52-48 party-line vote. Not a single Senate Democrat voted to raise the limit, opposition that's now complicating White House efforts to rally bipartisan support for a higher ceiling. Democrats have use doomsday rhetoric about a looming government shutdown and comparing the U.S. plight to financial crises in Greece and Portugal. It's all a bit of a stretch. "We can't do as the Gingrich crowd did a few years ago, close the government," said Senate Majority Leader Harry Reid, D-Nev., referring to government shutdowns in 1995 when Georgia Republican Newt Gingrich was House speaker.
But those shutdowns had nothing to do with the debt limit. They were caused by failure of Congress to appropriate funds to keep federal agencies running. And there are many temporary ways around the debt limit. Hitting it does not automatically mean a default on existing debt. It only stops the government from new borrowing, forcing it to rely on other ways to finance its activities.
In a 1995 debt-limit crisis, Treasury Secretary Robert Rubin borrowed $60 billion from federal pension funds to keep the government going. It wasn't popular, but it helped get the job done. A decade earlier, James Baker, President Ronald Reagan's treasury secretary, delayed payments to the Civil Service and Social Security trust funds and used other bookkeeping tricks to keep money in the federal till. Baker and Rubin "found money in pockets no one knew existed before," said former congressional budget analyst Stanley Collender.
Collender, author of "Guide to the Federal Budget," cites a slew of other things the government can do to delay a crisis. They include leasing out government-owned properties, "the federal equivalent of renting out a room in your home," or slowing down payments to government contractors. Now partner-director of Qorvis Communications, a Washington consulting firm, Collender said such stopgap measures buy the White House time to resist GOP pressure for concessions. "My guess is they can go months after the debt ceiling is not raised and still be able to come up with the cash they need. But at some point, it will catch up," and raising the debt limit will become an imperative, he suggested.
Republican leaders seem to acknowledge as much, but first want to force big concessions. "Do I want to see this nation default? No. But I want to make sure we get substantial spending cuts and controls in exchange for raising the debt ceiling," said the chairman of the House Budget Committee, Rep. Paul Ryan, R-Wis. Clearly, the tea party types in Congress will be given an up-and-down vote on raising the debt limit before any final deal is struck, even if the measure ultimately passes.
"At some point you run out of accounting gimmicks and resources. Eventually the government is going to have to start shutting down certain operations," said Mark Zandi, chief economist for Moody's Analytics. "If we get into a heated, protracted debate over the debt ceiling, global investors are going to grow nervous, and start driving up interest rates. It will all become negatively self-re-enforcing," said Zandi. "No good will come of it."
The overall national debt rose above $14 trillion for the first time the last week in December. The part subject to the debt limit stood at $13.95 trillion on Friday and was expected to break above $14 trillion within days.
America: Paydown problems
by James Politi - Financial Times
It was the most startling of warnings. If the US does not get its finances in order "we will have a European situation on our hands, and possibly worse", claimed Paul Ryan, the new Republican chairman of the House of Representatives budget committee.
The consequences of not tackling the country’s mounting debt burden would be dire, he last week told an audience of leading budget experts and economists at a gathering in Washington. "We will have the riots in the streets, we will have the defaults, we will have all of those ugliness problems," he said, referring to "French kids lobbing Molotov cocktails at cars, burning down schools because the retirement age will be moved from 60 to 62".
As it stands today, the US borrows about 40 cents of every dollar it spends. Curbing the budget deficit has been the stated mission of Mr Ryan, a rising Republican star, for several years. But such calls for action have multiplied in Washington in recent months, igniting what some say is the fiercest debate over fiscal and budgetary policy in decades. The risks are big. If the government rushes into austerity, cutting too much and too quickly, it could stunt economic recovery.
But if the political system cannot forge some kind of consensus on steps to restore US deficits to sustainable levels, the danger is potentially even greater: a sovereign debt crisis in the world’s largest economy. "It’s a weak period for the economy, so I don’t think you want to do serious deficit reduction anyway, but we are playing a dangerous game and we will start to pay a price for fiscal irresponsibility," says Ethan Harris at Bank of America Merrill Lynch.
The big fear is that if no action is taken, investors might eventually punish the US for its fiscal laxity. That would raise borrowing costs for businesses and consumers, force severe austerity measures and risk social unrest. Not only America’s triple-A credit rating could be threatened; some point to consequences in foreign affairs and defence as well. Mike Mullen, chairman of the joint chiefs of staff, last year warned that the debt pile could limit the flexibility of the US in funding its military – in his eyes the "most significant threat to our national security".
So far, capital markets have not reacted much to the dismal long-term outlook. The 10-year Treasury yield, for instance, has been trading this week well below 3.4 per cent, close to historical lows although it has risen in recent months. Still, a growing number of voices are calling for a deal to address America’s strained public finances, even if it means tackling programmes such as retirement benefits and healthcare for the elderly that have long been protected.
Yet whether this anti-deficit rhetoric translates into a meaningful turn towards austerity in the coming months – and leading into the 2012 presidential election – is much in doubt, for two main reasons: severe political divisions and the continuing fragility of the economic recovery. "It’s not urgent but at some point it’s going to become more urgent," says Phillip Swagel, who was a senior economic official in the George W. Bush administration. "Clearly the markets don’t think we’re Argentina, but we should send them a signal that they are right, that we will address the issue."
A deal extending Bush-era tax cuts and unemployment benefits in December failed to send that message, adding $858bn to long-term deficits without any commitment to reductions in the future, even though supporters argue that if the measures boost growth, America’s budgetary position will improve too. But more big tests of America’s commitment to fiscal discipline are looming. On January 25, President Barack Obama will lay out his legislative priorities for 2011 in his State of the Union address to Congress, and measures to reduce long-term deficits are expected to be on the agenda.
Some policies have already been flagged. In December, the president announced a two-year freeze on pay for civilian government workers, a nod to the need for budget cutting to begin at some point. The Pentagon has also been trying to get ahead of the game: last week it announced that it would trim its annual budgets of more than $500bn by a combined $78bn over the next five years compared with earlier projections.
These measures will be incorporated into the White House’s proposed annual budget, to be presented in mid-February. Other steps could also be included, such as possible additional plans to cut discretionary spending across government agencies, start tackling social security reform and set a framework for tax reform. Much attention will be paid to both the scope of these proposals and how specific they are, and to signs of the seriousness of the administration’s commitment to deficit reduction.
Mr Obama’s new economic team certainly bodes well for fiscal hawks, including as it does Jack Lew as budget director and Gene Sperling as head of the National Economic Council. The two are back in the same roles they held under Bill Clinton in the 1990s, when the US reduced its deficit through negotiations between a Democratic White House and a Republican Congress. Mr Clinton left office with a budget surplus.
Few expect the administration to take the aggressive approach sought by some prominent Democrats such as John Podesta of the Center for American Progress, a think-tank with close ties to the Obama White House. This would involve cuts to large programmes such as Social Security and Medicare, followed swiftly by a move towards tax reform. But it is unlikely to happen, because it could expose the administration to a barrage of attacks from both its Democratic base and from Republicans.
Nevertheless, Mr Lew maintains that the administration’s resolve on deficit reduction is clear. "We need to have a bipartisan effort, which will address the serious fiscal challenges before us while at the same time promoting an agenda that will build the foundation of the American economy in the future, which to us means continuing to invest in education and innovation even while we make reductions in other places," he says.
But Republicans, who gained control of the House of Representatives in elections last November, partly on a message of fiscal rectitude and opposition to government spending, have other things in mind. They envisage spending cuts on a much larger scale than what is palatable to the White House or many congressional Democrats – and could resist any attempt by the administration to press ahead with new stimulus measures.
Many Republicans have shown little willingness to consider tax increases as part of any deficit reduction package – which many economists believe to be an essential component of a deal. The result could easily be gridlock, with both parties and the White House trading accusations, and investors and businesses growing increasingly nervous about America’s ability to deal with the debt problem.
Meanwhile, a deadline that will force the two parties to engage – and probably battle – on fiscal issues is close. Any time between March 31 and May 16, the Treasury estimates, US debt will hit its congressionally mandated limit of nearly $14,300bn. If the administration and Capitol Hill cannot agree on a deal to raise that threshold, the US would have to shut down the government and default on its international debt obligations – potentially triggering the debt crisis that for the moment seems so distant.
Many Republicans have insisted that a higher debt ceiling should be tied to their aggressive spending cut targets, setting the stage for a big political showdown as the date approaches. The administration does not believe the debt limit should be used as a bargaining chip to extract concessions. "Our view is a clean debt bill is the only responsible thing to advocate – and we’re clearly going to have to engage in Congress on this," says Mr Lew. "We have no alternative but to raise the debt ceiling and it would be irresponsible to use the need to raise the debt limit as a way to force a crisis that could undermine the US economy and its standing in the world very severely."
Lawmakers as well as analysts expect in general that over the next few months a limited agreement – possibly on its own, and possibly involving the enactment of some deficit reduction measures proposed by the administration plus some new ones – will be reached. But while such an accord could placate investors in US debt for some time, it will probably only delay America’s reckoning with its unsustainable public finances rather than correct the course. America’s budget deficit in the year to last September amounted to about $1,300bn – the second highest on record. Over the next several years, as the economic recovery advances and the impact of emergency spending measures taken during the recession start to wane, the country’s deficits are expected to shrink naturally.
But the relief will be temporary: because of the retirement of the baby-boomer generation, which starts in earnest this year, the cost of government healthcare and pension programmes is projected to soar. According to a report issued last month by an 18-member bipartisan commission on fiscal responsibility, by 2025 tax revenues will be sufficient to finance only interest payments – which are projected to soar from their current $200bn a year to more than $1,000bn – and entitlement programmes, with no room for anything else.
"Every other federal government activity – from national defence and homeland security to transportation and energy – will have to be paid for with borrowed money," it warns. By 2035, rising debt could reduce gross domestic product per capita by as much as 15 per cent. That would imply a harsh reduction in Americans’ standard of living.
This gloomy picture is what could eventually cause a crisis in international capital markets. It is also what drove the commission, led by Erskine Bowles, former White House chief of staff under Mr Clinton, and Alan Simpson, former Republican senator from Wyoming, to attempt what had rarely been tried before in Washington: to craft a detailed template to solve the country’s budget woes, offering Americans and their lawmakers a concrete glimpse of what it would take to correct the problem.
The plan recommended a total of $3,900bn in deficit reduction by 2020, with a three-to-one ratio of spending cuts to tax increases. The commission proposed raising the state pension age, curbing government healthcare and limiting popular tax breaks such as the ability to deduct interest paid on mortgages. Some potential options to cut the deficit – such as a consumption or value added tax, or a tax on carbon – were sidelined as politically infeasible. That contributed to a surprising level of agreement on the recommendations, with 11 panellists voting in favour of the package, including six sitting lawmakers. Still, this was not enough to force a vote in Congress on the measures, which would have required a 14-member majority.
The failure of the Simpson-Bowles commission to reach the required threshold is what left America’s fiscal fate in the hands of the ordinary political process, from the White House to congressional leaders such as Kent Conrad, chairman of the Senate budget committee, as well as Mr Ryan. Turning back to Europe’s debt woes, Mr Ryan declares: "This is not who we are, and this is not the fate that we want to have." However avoiding that fate – and ushering in a new era of US fiscal responsibility – will require a level of political harmony that, in spite of a growing awareness of the problem, still seems elusive.
Cuts start to hurt as states seek to balance the books
While the US may take steps this year to curb its deficit, large-scale fiscal retrenchment on a federal level is not widely expected until after 2012. Many Americans, however, already have a sense of what austerity feels like. State and local governments, run by both Republicans and Democrats, have been busy slashing public programmes – and in some cases raising taxes – to plug huge budget shortfalls brought on by the recession.
Some measures have been extremely painful: states have narrowed the eligibility of low earners to government healthcare programmes; public university tuition rates have increased as financial aid for students has been cut at state level; and an estimated 400,000 state and local workers – including teachers and firefighters – have been fired since August.
Others are happening this year. On Tuesday, the Illinois state legislature raised its income tax from 3 per cent to 5 per cent, and the corporate tax rate from 4.8 per cent to 7 per cent. The budget proposal unveiled by Jerry Brown, California’s new governor, includes $12.5bn in cuts. Among them are a 10 per cent pay reduction for state employees; $1.5bn less funding for CalWorks, an employment programme for the poorest residents; and $1bn in cuts for higher education, including the University of California system.
"What states face is their worst budget year ever because revenues are still down and the need for services is up and federal aid is running out," says Nicholas Johnson of the Center on Budget and Policy Priorities in Washington. Paul Krugman, economist and commentator for The New York Times, has said the US is suffering from the actions of "50 Herbert Hoovers – state governors who are slashing spending in a time of recession", in a comparison with the US president in office during the Great Depression.
The reason these tough measures are being taken on a state level is that every state – except Vermont – is required by law to balance its budget every year, a fiscal straitjacket that does not bind the federal government. If some states and local governments fail to meet this requirement, jeopardising their ability to pay creditors, it could seriously damage municipal bond markets, a cornerstone of US capital markets, potentially precipitating a new financial crisis.
For this reason, there has even been talk of possible federal bail-outs of the largest and worst-off states, though that seems unlikely at present. Republicans in control of the House of Representatives are resistant; and Ben Bernanke, Federal Reserve chairman, has said states should not expect loans from the central bank.
Irish lenders besiege central bank for emergency loans
by Ambrose Evans-Pritchard - Telegraph
Irish banks are running out of collateral they can use to borrow from the European Central Bank, turning instead for emergency support from their own central bank on an unprecedented scale. The latest data shows that Anglo Irish Bank and other lenders had borrowed €51bn (£43bn) from the Irish central bank by the end of December, under an obscure progamme listed in the balance sheet as "other assets".
This comes on top of €132bn in loans from the ECB itself, the figure normally tracked by analysts and itself 24pc of all ECB lending. "This is a horror story: it shows the cataclysmic condition of the Irish banking system," said Tim Congdon from International Monetary Research. "The banks have borrowed €183bn in total, or 110pc of Irish GDP. They have burned through all their capital and a lot of their deposits as well. This is going to end up on the national debt".
The actions of the Irish central bank are authorised by Frankfurt, but fall into a grey area of monetary policy since they appear to involve creation of money outside the normal control of the ECB's governing council. The use of Ireland's emergency liquidity assistance programme (ELA) raises further questions since the quality of collateral is unacceptable for normal ECB operations. The volume of borrowing has begun to level off after a surge in November.
Separately, the Spanish media reported that a mission from the International Monetary Fund was arriving in Spain this week to analyse the country's debt sustainability and may discuss a `flexible credit line', akin to precautionary overdraft facilities offered to Mexico and Poland. The IMF's flexible credits are designed to "encourage countries to ask for assistance before they face a full blown crisis". They are not the same as bail-out, and are only avaible to "very strong perfomers" facing "tough times" because of temporary funding pressures. They entail no stigma, and do not come with strings attached.
Accelerating Deposit Flight In Ireland Forces Irish Central Bank To Print Money Independent Of ECB
by Tyler Durden - Zero Hedge
It appears that Irish savers are sufficiently smart to realize that their money is no longer safe in a banking system whose existence is now only backstopped merely from referendum to referendum.
As it is very unclear what will happen to the IMF/ECB rescue mechanism once the Irish election is held in March, with a material possibility that the whole plan will be unwound, leaving the country's financial system in the wind, a behind the scenes bank run is accelerating. Incidentally while this was the topic of the December letter by Guggenheim's Scott Minerd, which we discussed in a post titled "Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations", his just released January missive deals with precisely the same topic (see chart below).
So faced with the prospect of accelerating deposit redemptions, what does the Irish Central Bank go ahead and do? According to the Independent it has gone ahead and proceeded with that traditional recourse to all regimes in the bring: print money. "The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money."
In other words, whereas Ben Bernanke may be 100% confident that US inflation courtesy of POMO and inflation printing will be absorbed by the "massive" excess slack in the economy (oddly enough it wasn't in Tunisia, as food prices hit records despite surging unemployment), we wonder if he feels the same way about other countries in the world, which are already part of a monetary union, yet which have decided to boost the "other assets" line in their balance sheets.
More from The Independent:
ECB lending to banks in Ireland fell from €136.4bn in November to €132bn at the end of December, according to the figures released by the Irish Central Bank yesterday.
At the same time, the bank increased its emergency lending by €6.4bn, bringing the total it is owed to €51bn.
The latest data does show a levelling off in demand for the loans. Emergency lending to banks shot up €16bn in November, but overall demand for the loans only increased by €2bn in December when ECB and Irish Central Bank figures are combined.
However, the figures also provide the latest evidence that responsibility for funding Ireland's broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading "other assets".
A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.
News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.
What is the ECB's response to learning that its own member countries have essentially detached themselves from the ECB monetary mechanism?
A source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.
The volume of those loans surged from €95bn in August 2010 to €136.4bn in November, as Irish banks repaid their bondholders without being able to refinance in the private sector. The ECB loans prevented banks that could not raise funds from the private sector running out of cash after repaying their own lenders and meeting deposit withdrawals.
So let's do the math: ICB "money printing" has increased by €40 billion. For a country whose GDP is about €160 billion, this means that Ireland has printing the equivalent of 25% of its GDP. Put in American terms, this would be the equivalent of about $3.5 trillion in 3 months... In this context we wonder just what the ECB considers "systemically significant."
Tangentially, speaking of "other assets" we can't help by note what we observed during our last comment of the Fed's balance sheet. At $114.480 billion, it may behoove someone to inquire just how the Fed has well over $100 billion in "Other Assets" and what is contained in there. The chart below shows how this number has grown. Frankly, for all we know this could be shares of Amazon and Netflix stock. After all, these are "assets" and they most certainly are "other."
But back to Ireland. We would like to end with a chart created by Scott Minerd showing the wholesale abdication of Irish banks by its depositors:
And his comment on the one trend that the ECB has been unable to reverse yet in any of the distressed countries:
There is a plethora of proof that the crisis isn’t abating. Greece’s long-term issuer default rating was just cut to junk by Fitch with a negative outlook. In addition, the problems in the Irish banking system continue to expand. In November alone, 27 billion euros of domestic deposits (5.4 percent of the total deposit base) fled Irish banks. Total deposits were down 15.1 percent year-over-year and deposits from non-Irish residents declined 28.6 percent. Keep in mind that the crisis in Ireland didn’t broadly surface until late in November. I realize that I said the same thing last month about the situation in Ireland, but with data trending like this I cringe thinking about what the next set of monthly data may reveal.
In other words, just like investors in US stocks, so depositors in European banks refuse to be lied to again. And the more money printed by the ECB (or regional banks as we now learn) as a response to deal with this capital shortfall, the greater the inflation threats will be across Europe. Of course, these will merely reinforce already validated inflation in Africa, and most certainly Asia. And somehow the US government and Ben Bernanke is expecting anyone to believe that just because the highly irrelevant Core CPI is flat that America will not be next?
Large bets fuel commodity bull run
by Gregory Meyer - Financial Times
Still in its infancy, 2011 is conjuring up memories of the start of 2008. Soaring crop prices have stoked fears of a food crisis and oil markets are bubbling. In some parts of the world, inflationary pressure is building: once again, the commodity speculator is centre stage.
Prices for corn, soyabeans and wheat have in January returned to highs that only two years ago sparked food riots in more than 30 countries from Haiti to Bangladesh. Brent crude oil, the North Sea benchmark, hit $99 a barrel on Friday, its highest level for 27 months. In America this week, regulators unveiled sweeping rules to keep big traders from wielding too much power over prices, amid fears that another food crisis could jeopardise global economic recovery. US senators warned of a "speculative bubble that threatens to drive up gas and food prices even further".
Many commodity prices are rising for good reasons. Physical demand is rising strongly, whether for petrol (Chinese car sales rose by a third last year) or for corn (the US ethanol industry will consume 40 per cent of the nation’s crop this year). But investors are stoking the commodities bull run with some big bets. Money flows into commodities have been huge. Barclays Capital estimates $60bn was injected into commodities in 2010. Some observers believe speculative trading has sent prices to excessively high levels, making a sharp recoil likely should the fragile economic optimism fade.
Figures from the Commodity Futures Trading Commission, the US regulator, reveal very bullish bets among money managers such as hedge funds. In late December they owned a record net "long", or buying, position in crude oil futures and options on the New York Mercantile Exchange. In September the same types of traders held record net longs in corn. As well as hedge funds analysing global economic trends, money managers include trend followers who use computer programs to ride market momentum and "high-frequency" traders who move in and out of positions in microseconds. Electronic traders helped send volumes last year in energy, metals and agricultural commodities at the CME, the largest US futures exchange, to a record.
Boris Shrayer, head of commodities marketing at Morgan Stanley, says: "Our business has changed. In the past there were more hedge fund participants who were fundamental or discretionary, going long or short commodities. Today there is an enormous amount of quant funds. "Look at the correlations: copper goes up and two seconds later oil clicks up. The dollar falls, oil rallies. It’s very clear there’s an enormous amount of this correlation trading going on."
At the opposite end of the speculative spectrum are investors passively tracking baskets of commodities, such as the S&P GSCI or Dow Jones-UBS indices, and who trade once a month at most when they roll out of expiring futures contracts. These investors, which include Calpers, the US’s largest public pension fund, and other big institutions, are strictly buyers, often to hedge against inflation. As such, they have become targets of critics claiming they themselves push up prices. "To me it’s a bubble," says Amy Myers Jaffe of Rice University in Houston, who has studied the relationship between oil prices and speculation. "The question is: are we going to have an orderly unwind or a disorderly unwind?"
Hard evidence, though, of strong correlations between traders’ positions and price movements is elusive. In New York cotton trading managed money’s bullish position has fallen by half since mid-September. Prices hit their highest level in exchange history in December. Money managers, moreover, were bearish on soyabeans as recently as July, just before a months-long rally. They quickly built a record net long position by November. "The weight of evidence points to small marginal impacts at most on the average level of prices," says Scott Irwin, economist at the University of Illinois.
Stung by accusations it was blind to the activity of index investors, the CFTC in 2009 began publishing their overall positions. The data did not help the critics. It showed indexers’ net long position in US crude futures fell 11 per cent in the first six months of 2008, even as oil rose to $140 a barrel. Their cotton position was roughly unchanged in 2010, in spite of the surge to record prices. Even as wheat has jumped since July, the index net long position has declined.
Lawrence Eagles, head of oil research at JPMorgan, says: "When oil demand has risen by a massive 2.5m barrels a day [in 2010] and supply is still being held off the market, it’s very difficult to create a case that speculators are pushing oil prices higher." Oscar Bleetstein, of Credit Suisse, says: "There was a huge bubble and it collapsed. People got out and then scrambled to get back in. Now it seems like it’s more back on track."
The CFTC wants to limit big speculators’ holdings. Yet even some of its members doubt its proposals would affect prices. Alberto Weisser, chief executive of Bunge, one of the world’s biggest agricultural traders, is dismissive. "We don’t feel we have too many speculators, and the speculators we have we don’t like to call speculators. We really need people who like to be long because we need to sell our hedges."
Hedge funds bet China is a bubble close to bursting
by Louise Armitstead - Telegraph
The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.
For his first-ever speech as Britain’s new Minister of Trade & Industry last week, Lord Green faced a formidable audience of 400 Chinese and British business delegates.
The former chairman of HSBC declared that China’s economic growth figures over the past five years represented an "extraordinary historic event". Green didn’t need to go over Britain’s experience during the same period for most to agree that plugging into China’s blistering growth - predicted by the IMF to be 10.5pc this year - was of "vital importance" to the UK.
But even as he spoke a hedge fund manager in Mayfair was poring over spreadsheets of sovereign and corporate credit default swaps, interest rate and foreign exchange options with one aim: to "get short on China". The manager, who wanted to remain anonymous, said: "The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy."
He is not alone. Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management. He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the "key engine for global growth", China is an "enormous tail-risk".
There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting. One academic said: "Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up."
More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China’s "already dangerously home-grown inflation". The analysts said figures showing the continuing boom in China were far from welcome: "On the contrary, Chinese policymakers have to slam on the brakes." The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.
A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc. China is the global price-setter for oil, coal and base metals. According to Corriente Advisors: "We expect the economic fallout from a slowdown of China’s unsustainable levels of credit and growth to be as extraordinary as China’s economic outperformance over the past decade." The financiers’ arguments centre on the belief that China’s demand is not real but manufactured by the state.
The Mayfair hedge fund manager said he started work when he saw some news reports on China’s "ghost towns". Last year Al Jazeera, the Middle Eastern television channel, aired a short report from Ordos Shi, a city in inner Mongolia built for one million people that is almost entirely empty. The report reveals empty streets, housing estates, shops and restaurants. The locals prefer the old town of Ordos and tell the cameras there’s no need to move to the new city.
According to Corriente, China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world’s next seven largest producers combined. It has 200m tons of excess capacity. In property, Corriente said it had found an excess of 3.3bn square metres of floor space in China – yet 200m square metres of new space is being constructed each year.
Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become "increasingly disconnected from the fundamentals" but so far has said there is no nationwide bubble. Professor Victor Shih of Northwestern University, Illinois, estimates that Chinese banks have lent $1.7 trillion (£1.1 trillion) to local state entities, many of which are not commercially viable and have used inflated land values as collateral.
Experts in China dismiss the hedge funds’ arguments as narrow and exaggerated. The Chinese government has implemented policy measures to curb credit and control inflation. Above all, they argue that China’s huge and modernizing population will fuel demand for years. Even the hedge funds concede that their timing might not be perfect. Corriente warns that investors, who are required to put in a minimum of $1m each, should brace themselves for an estimated burn-rate of 20pc a year until the theory pays off. But it’s a risk that plenty seem willing to take.
U.S. Consumer Spending Down Sharply in Early January
by Dennies Jacobe - Gallup
Overall self-reported daily consumer spending in stores, restaurants, gas stations, and online averaged $55 per day in the week ending Jan. 9 -- down as expected from the $75 average for the month of December, but also well below the $68 average for the same week in 2010.
Throughout 2010, consumer spending remained relatively close to that of 2009 -- the "new normal" trend. Spending surged in December of each year and then fell back in January as expected, given seasonal spending trends; Gallup's spending data are not seasonally adjusted. Weather may be partly responsible for the sharper drop in early January 2011 -- Gallup has found that it can affect weekly spending. Regardless, there are no signs that an improvement in consumer spending is taking place in early January 2011.
Upper-Income Spending Surged in December, Fell Back in Early January
Spending among upper-income Americans (those making $90,000 or more annually) averaged $102 per day in the week ending Jan. 9 -- down from $127 during the same week in 2010.
The early January drop follows a December surge -- upper-income spending was $144 in December 2010, up from $132 in the same month in 2009. Upper-income Americans appear to have the ability to spend more freely when they choose, but don't always seem to want to do so.
Lower- and Middle-Income Spending Also Declined in Early January
Lower- and middle-income Americans' self-reported spending averaged $45 per day during the week ending Jan 9. Spending by these Americans making less than $90,000 a year had increased to $63 in December, on par with December 2009, but last week fell behind the $54 average spending of the first week of January 2010. It may be that lower- and middle-income consumers pulled back on their early January spending to compensate for their relative spending surge during December.
Gallup Data Suggest "New Normal" Spending Patterns May Continue in 2011
As consumers continue to deleverage -- by not only paying down their debts, but also using less new credit -- it may be that the "new normal" spending patterns of 2009-2010 will continue unabated in 2011. Lower- and middle-income consumers, who remain focused on using cash, may spend more on holidays and for special events, but then feel the need to pull back on spending shortly thereafter to compensate. Upper-income consumers, who have more disposable income to spend, might splurge at certain points during the year, but hold back on their spending more generally, as they did in 2009 and 2010.
Further, unemployment remains near double digits, and the broader underemployment figure stretches to include nearly one in five Americans in the workforce. And, although the government's economic data continue to show little inflation, oil prices exceeding $90 a barrel have pushed gas prices much higher than a year ago. Surging commodity and import prices are doing the same to food prices. A lack of job growth combined with higher food and gas prices may convince many Americans -- particularly middle- and lower-income consumers -- to hold back on their spending once again, as they have over the past couple of years.
On the other hand, the late December spending surge by upper-income consumers may reflect something of a return to so-called frugality fatigue. Bullishness on Wall Street and increasing upper-income American optimism about the economy might not send upscale spending back to the levels of 2007, or even 2008, but could break it out of the 2009-2010 spending new normal.
Whether the decline in spending during early January is an aberration driven by the weather and the aftermath of a late holiday spending surge or, instead, a return to the "new normal" is not clear. What is clear is that the direction of consumer spending during the weeks ahead will be key to the performance of the U.S. economy in early 2011.
The Foreclosure Dump
by Diana Olick - CNBC
It's coming, no question.
[Thursday's] report from RealtyTrac serves as a warning to big banks, Fannie, Freddie and local communities; The foreclosure glut is coming, and they'd better be ready to get rid of that glut in a big way. 2010 saw a record number of bank repossessions, over a million, even with a big drop in volume toward the end of the year, thanks to the robo-signing scandal and ensuing foreclosure freezes.
"Early indications in January were that this robo-signing related delay will be over by the end of first quarter if not sooner," says RealtyTrac's Rick Sharga. "I think we're going to see a significant spike in foreclosure activity early in 2011, and that will contribute in part to 2011 being a record year."
Sharga estimates as many as a quarter of a million foreclosures that should have happened in 2010 will now be pushed into the 2011 numbers, and added to an already huge supply of bank owned properties. The four biggest banks already have close to $7 billion worth of foreclosed properties (REO) on their books, and Fannie and Freddie have about $24 billion collectively. While REO sales make up about one third of all sales in the current market, there is an estimated 3 year supply.
There are obviously many incentives to buy REO's, number one being the price discount, as well as some other programs offered by the government; but there are a lot more downsides. [Recently] I read an article in the Wall Street Journal of witches in Salem being hired to remove the negative spirits from foreclosed homes. Other similar burgeoning businesses include Feng Shui experts, etc. There's always somebody ready to profit from distress.
HousingWire reports on a study by Field Asset Services that finds rehabbed REOs spend five fewer months on the market, 69 days compared to 222 days. Many investors buy foreclosures and do the rehab themselves, but for regular home buyers, clearly having the home renovated, with no sign of the preceding trouble, is a huge added value. Through its Neighborhood stabilization Program, the Department of Housing and Urban Development has provided $7 billion in grants to local governments and nonprofits; that money can be used to rehab foreclosed properties, or, to bulldoze them.
I also know there have been many discussions brewing within the government and at the banks with hedge funds looking to buy up bulk foreclosures. So far no big deals we know of, but they're coming for sure. The government may even be considering incentives to get more investors to buy foreclosures, which I blogged about last month.
As the numbers mount, the GSE's and the banks will have to put more resources into unloading these properties, especially as new Spring organic housing supply comes on the market. If they choose to slash prices even more, the dip in overall home prices may fall deeper than expected.
More banks walking away from homes, adding to housing crisis
by Mary Ellen Podmolik - Chicago Tribune
A new type of property is adding to neighborhood blight: the bank walkaway.
Research to be released Thursday, the first of its kind locally, identifies 1,896 "red flag" homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found. Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions.
The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs. "The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities," said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. "The role of the servicer is to be the person in charge of that property's disposition. You're seeing situations where servicers are not living up to that standard."
City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock. In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.
Woodstock found that as of the end of September, 57.1 percent of the estimated 4,468 single-family, likely vacant homes that became bank-owned from Jan. 1, 2006, to June 30, 2010, were not registered with the city as vacant, as they are supposed to be. "The whole concept of charging off creates this limbo land," said Dan Lindsey, an attorney at the Legal Assistance Foundation of Metropolitan Chicago. "There's still a lien that can follow the borrower."
In November, a U.S. Government Accountability Office report on the frequency and impact of abandoned foreclosures noted that Midwestern industrial cities, including Chicago, seem to bear the brunt of bank walkaways, leaving neighborhoods in deeper distress and cities left to shoulder the associated costs of dealing with unsafe, often unsecured homes.
The GAO report, derived from information provided by six loan servicers, found that servicers nationally charged off loans on 46,000 properties from January 2008 to March 2010, with 60 percent of the charge-offs occurring before an initial foreclosure filing was made. That report listed Chicago as having the second-highest number of servicer-abandoned foreclosures nationally, behind Detroit, with 499 properties charged off during the foreclosure process. An additional 361 properties were charged off without a foreclosure filing.
For its report, Woodstock culled data from the city's vacant properties registry, as well as buildings identified to the city as vacant by municipal departments, foreclosure court filings made from 2006 to the first half of 2010, foreclosure auctions and property transfers. Some of the 1,896 properties flagged by Woodstock as likely walkaways could, in fact, still work toward a resolution in the foreclosure process, but 40 percent of those homes had been in the foreclosure process for more than 18 months.
Woodstock believes its projections are conservative because lenders also decide to write off their investments in properties before filing initial foreclosure actions. For only those 1,896 homes, Woodstock pegs the cost to the city, if it needed to seize, secure and demolish them, at $36 million. "The problem that is being caused here is costing the taxpayer a lot of money," said Richard Monocchio, commissioner of the city's Department of Buildings. "Until the industry does much better and is more creative, leasing back the property for a few years so people can get back on their feet, then we're going to see more vacant buildings."
In 2010, the city demolished 535 homes, the most annually in more than a decade and far more than the 283 residences torn down in 2009, according to Monocchio. The city also doubled, to 891 residences, the number of buildings it secured, sometimes more than once, he said. For building code violations, the city tries to fine anyone associated with the property's title, whether it is a lender or a former homeowner. A bank walkaway can also impede a borrower's ability to take out a loan, because his or her name is still on the home's title and any unpaid debts will follow them.
Privately, lenders say their liability might be limited because they have already written the loan off the books and the homeowner also left them in a lurch. City officials say they meet regularly with top servicers to share lists of troubled properties and to work toward resolutions.
In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178); and JPMorgan Chase (165). When asked to comment generally on bank walkaways, several banks either declined to comment or did not return phone calls. Two lenders, Wells Fargo and Bank of America, said they are working with the city on strategies to deal with these abandoned properties.
Neighborhoods on the city's West and South sides seem to be most at risk of bank walkaways. The city's Roseland neighborhood, on the city's far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor's office showed properties that were reasonably well cared for by homeowners. A little more than three years later, the number of eyesores has grown. Windows are broken, fences are missing and plywood covers some of the broken windows. Even if the houses look secure from the front, back doors are sometimes missing or open. Public records show that foreclosure actions initiated were never completed and titles to properties never transferred.
Woodstock's research shows there are 137 "red flag" properties in Roseland. Also, only 90 of the 214 bank-owned properties in the neighborhood, or 42 percent, have been registered with the city. Woodstock and the GAO recommend that lenders take steps to keep properties occupied, even if it means writing off the loan without initiating a foreclosure. Woodstock also called for servicers to be held more accountable and for city departments to have more authority to uphold the rules. "Many (communities) are now close to a tipping point, if they haven't gone over it," Smith said.
Bank of America, Wells Fargo May Lose Under Plan to Simplify Mortgages
by Carter Dougherty - Bloomberg
The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders. The bureau expects to award a contract to develop the form by the end of the month, making it one of the first projects of the new agency, according to a bidding document given to vendors in November and reviewed by Bloomberg News.
More concise disclosure is one of the main stated goals of Elizabeth Warren, the Obama administration adviser charged with setting up the agency established by the Dodd-Frank Act. Simpler forms that can be directly compared may make the market less lucrative for lenders such as Bank of America Corporation, Wells Fargo & Company, JP Morgan Chase & Co. and Citigroup Inc.
"If buyers are better informed and understand the financial commitments they are entering into, they will be better able to make comparisons among lenders and the market will be more competitive," said Alex Pollock, a former banker who is a resident fellow at the American Enterprise Institute. "In competitive markets, profit margins are -- and should be -- driven down to the level of the cost of capital."
Academic studies have shown that comparison shopping aided by the emergence of the Internet helped cut prices for consumer products including term life insurance in the 1990s. That squeezed profits, said Edward Graves, an associate professor of insurance at The American College in Bryn Mawr, Pennsylvania.
"When you see what’s gone on in terms of prices, the insurers have lost a lot of margin in this product," Graves said in an interview. Bob Davis, an executive vice president at the American Bankers Association, said short disclosure forms might not simplify the process as much as Warren suggests, because of the "interconnected requirements" imposed by federal law. "It’s not so simple as creating two pieces of paper," Davis said in an interview. Bankers agree with Warren’s "starting point," he said.
Warren has said she would like to see a standard document of one or two pages to replace about 80 percent of the mortgage disclosures mandated by the Truth In Lending Act and the Real Estate Settlement Procedures Act. The current "pile of papers" confuses consumers and is costly to business, Warren has said. Smaller community banks might become more competitive with Wall Street if new regulations succeed in reducing costs, Davis added. "The compliance process lends itself to certain scale and big technology solutions," Davis said.
Mortgage Unit Head
Along with the credit-card division, the new bureau’s mortgage unit may have the most immediate impact on consumer financial services. A candidate to run the mortgage section is Patricia McCoy, a University of Connecticut law professor who has been working with Warren part-time, according to a person briefed on the matter who spoke on condition of anonymity because the matter isn’t public. McCoy, 56, is a former corporate litigator who was a partner at Mayer, Brown & Platt during the savings and loan crisis in the early 1990s. Based in Washington, she represented bank auditors and examined residential loans and underwriting standards. She co-wrote a book published this month on the subprime lending crash.
The contract to create a new disclosure form was advertised to selected vendors in November by the Bureau of Public Debt at the Treasury Department, where the consumer bureau is housed until it becomes an independent entity in July. It calls for firms to bid on providing "support services to assist with the design of a model disclosure form, including assessment of the form through consumer testing and revisions to the form resulting from the testing and public comments," according to the copy obtained by Bloomberg News.
Bids had to be in by Dec. 14, and the contract will be awarded before the end of January, according to the proposal document. The vendor must complete the work by Jan. 15, 2012 or a year after the contract is awarded, whichever is earlier. Dodd-Frank requires the bureau to propose regulations on mortgage disclosures for public comment by July 21, 2012. The bidding document indicates that the bureau intends to move more quickly, saying its goal is to issue proposed regulations "as soon after" July 21, 2011, "as possible."
The bid request also emphasizes the role of field tests in the bureau’s decision-making, a point Warren raised at a Dec. 6 symposium at Treasury, according to one attendee, Ira Rheingold, executive director of the National Association of Consumer Advocates. Warren told the audience that "we’re going to be data- driven. We’re going to test things, and figure out what people respond to," Rheingold said in an interview.
Not everyone studying the mortgage industry believes that simpler forms will translate into more comparison shopping by borrowers. "It’s asking a lot for a piece of paper to change actual consumer behavior," John Kozup, an associate professor of marketing at Villanova University and director of the Villanova Center for Marketing and Public Policy Research, said in an interview. "It could be a decision aid but that is it." Kozup, who also attended the Dec. 6 symposium, said that by the time applicants get a mortgage pre-approval and find a house, they "have a psychological commitment to a certain bank or broker, and no kind of disclosure is going to change that."
The Housing Slump Has Salem On a Witch Hunt Again
By S. Mitra Kalita - Wall Street Journal
Buyers Worried About Bad Vibes From Foreclosed Homes Seek a Cleansing
SALEM, Mass.—There's a certain look and feel to a foreclosed home, and 31 Arbella St. has it: fraying carpet, missing appliances, foam insulation poking through cracked walls. That doesn't faze buyer Tony Barletta since he plans a gut renovation anyway. It's the bad vibes that bother him. So two weeks before closing, Mr. Barletta followed witch Lori Bruno and warlock Christian Day through the three-story home. They clanged bells and sprayed holy water, poured kosher salt on doorways and raised iron swords at windows.
"Residue, residue, residue is in this house. It has to come out," shouted Ms. Bruno, a 70-year-old who claims to be a descendant of 16th-century Italian witches. "Lord of fire, lord flame, blessed be thy holy name...All negativity must be gone!" The foreclosure crisis has helped resurrect an ancient tradition: the house cleansing. Buyers such as Mr. Barletta are turning to witches, psychics, priests and feng shui consultants, among others, to bless or exorcise dwellings.
Sellers, too, are adopting the trend to help move a property stuck on the market. In recent months, foreclosure and other distressed sales have represented about a third of all home sales, according to the National Association of Realtors. With so many foreclosures riddling the market, some buyers find that a coat of paint is hardly enough to rid a house of its creepy quotient. "It's not entities or ghosts that we're dealing with anymore," says Julie Belmont, a so-called intuitive who works in Orange County, Calif., where 40% of home sales last year were distress sales. "With foreclosures, a lot of it is energy imprints from past discussions, arguments, money problems. All of that is absorbed by the house."
Homeowners of various faiths have turned to different rituals—called house cleansings or space clearings—for centuries. Catholics and Hindus, for example, might ask a priest to bless a new home before moving in. Before their new year, the Chinese cleanse the home to sweep away any bad luck accumulated over the past twelve months. Ms. Bruno's process pulls from a few methods: Ringing bells, she says, breaks up the negative energy of a place. Iron keeps evil spirits away, says Mr. Day, brandishing a sword across the living room.
Mr. Barletta heard about the pair through his real-estate agent after his offer on the home was accepted. "I'm a spiritual person," he says. "I just wanted to remove the negative energy first." In Salem, the site of the 1692 witch trials, the occult is a part of the everyday, from the high-school sports team known as the Witches to entrepreneurs such as Mr. Day and Ms. Bruno. He owns the Hex Old World Witchery magic shop downtown and she gives psychic readings there. "It's a very spiritual city," says Salem real-estate agent Janet Andrews Howcroft.
But the city's real-estate market hasn't been so charmed. Home prices here fell by about a third in the past two years, according to Ms. Howcroft. And Essex, the county that Salem calls home, had the state's second-highest foreclosure level in October, says the Warren Group, which tracks real-estate data in New England. Ms. Howcroft attributes recent requests for house blessings in part to the economic picture here. She counted at least eight transactions last year that involved a house cleansing, compared to the occasional request in prior years.
The house on Arbella Street is under contract for $167,000, and was appraised for nearly double, pending renovations. But, Ms. Bruno cautioned, that bargain comes with a price. She gestured toward an empty room with "Mike, Age 13" scrawled on the wall in child's handwriting. "If someone took your home away, how would you feel?" Taking her cleansing agent of kosher salt in a bowl of water and lighting a candle, she led the group—including the buyer's agent—up the stairs. Arriving at the upstairs kitchen, gutted of its cabinetry and appliances, Ms. Bruno yelled into the air: "You will not hurt anything I hold dear. I am the exorcist of your garbage!"
She is quick to distinguish her services from that of a plain-vanilla psychic. "Unlike psychics, witches know you can change the future," she explains. They might be described as good witches. Ms. Bruno, who feels she is well compensated for her readings, doesn't charge for her house cleansings—she's done more than 100, she says. Rather, she considers them to be a form of charity work. "I don't want to live off people's sadness," she says. Fellow Salem witch Lillee Allee also performs house blessings and, like Ms. Bruno, she doesn't take a fee.
Elsewhere, others are viewing the rituals as a real business opportunity. Austin, Texas-based feng shui consultant Logynn B. Northrhip is teaming up with Scottsdale, Ariz., real-estate agent Jason Goldberg to offer a package of services to create better vibes in a home, either before sale or after purchase. The two met at a yoga retreat.
In Sacramento, Calif., realtor Tamara Dorris also used feng shui to help speed the sale of a property that had been on the market for more than a year. She placed a jade plant, believed to bring good financial luck, in a "prosperity corner" and waited. "Within two weeks, I had two offers," she says. "Most homes have at least one or two prosperity flaws. Foreclosed homes have five or six flaws."
Sometimes, it's bad feng shui to even attempt to buy a foreclosure. That was Grace Lee's discovery as she toured 30 houses in the San Diego area, her consultant Simona Mainini in tow, to find a new home. In the end, Ms. Mainini just advised her to buy new construction, saying it would save her money on repairs and other troubles in the long run. "You can keep looking for deals in distressed properties," Ms. Mainini recalls telling her client. "But they all have an energy that is very weak for money."
How to Fix Mortgage Mess in Three Steps
by Laurence Kotlikoff and Richard Field - Bloomberg
Fannie Mae and Freddie Mac. What cute-sounding names. They suggest adorable siblings, not twin financial disasters that may cost $1 trillion when we get the final bill.
According to Edward Pinto, Fannie Mae’s former chief credit officer, in 2008 the two government-supported mortgage finance companies, along with the Federal Housing Administration and other U.S. agencies, were holding or guaranteeing some 19 million subprime home loans, or about 70 percent of all such debt. Much of these toxic assets, as well as many of Fannie and Freddie’s prime mortgages, aren’t performing or will likely default. Nationwide, 8 million mortgages -- or one in 10 -- are under water, with the property’s value at least 25 percent below what’s owed.
The Federal Housing Financing Agency puts Fannie and Freddie’s losses at about $300 billion. But industry experts, like Janet Tavakoli, suggest the real number is closer to $700 billion. And if home prices fall another 20 percent to return to their long-term trend, the tab might climb to $1 trillion. The asset-level data needed to get a more precise handle on Fannie Mae and Freddie Mac’s losses aren’t available. U.S. taxpayers, who now own both companies lock, stock, and barrel, and have to cover their losses, can’t, it seems, be trusted with these details. Taxation without representation is a no-no, but taxation with misrepresentation is just fine.
Where does the Constitution instruct Uncle Sam to act as the people’s inept investment banker? Where does it tell him to borrow gargantuan sums to make subsidized loans to dicey borrowers whose credit, collateral and employment he can’t be bothered to check? It’s one thing for the government to assist deserving first-time homebuyers by paying, in broad daylight, a share of their home price. It’s another thing for the U.S. to induce people, whether deserving or not and whether first-time homebuyers or not, to go into debt. Incredibly, Fannie Mae, Freddie Mac and the FHA are still making a significant number of subprime mortgages with extremely low down-payments.
It’s time to get the government out of the mortgage business before it loses more of our money and induces more people to borrow beyond their means. If Uncle Sam wants to help the housing sector as opposed to the borrowing sector, let him restore the First-Time Home Buyers Tax Credit that expired last April. But, hold on!
We can’t rely on the same private mortgage system, which specialized in the production and sale of fraudulent securities and almost vaporized the global financial market. The Dodd-Frank law notwithstanding, credit-rating companies are still on the take, regulators are still on the make, and boards of directors are still on a break. They won’t protect us from Wall Street’s sale of snake oil.
We need a new limited-purpose mortgage system, which confines banks and other mortgage makers to doing just one thing -- connecting lenders with borrowers, not leveraging the taxpayer. And we need the government to directly oversee the mortgage initiation process, organize a competitive market in home loans, and fully disclose all the details of mortgages on the Web so investors in these loans will know what they are buying. This is remarkably easy to accomplish.
Step 1: Set up a new government agency -- the Federal Financial Authority. The FFA would hire companies to verify, rate, appraise and disclose mortgage applications. These contractors would work exclusively for the FFA, eliminating any conflict of interest. Liar loans and no-doc loans would be history. The government would neither endorse nor accept responsibility for appraisals and ratings, and would let borrowers add privately purchased appraisals and ratings to disclosures.
Step 2: Limit buyers of home loans to doing so only through closed-end mortgage mutual funds. If a fund manager chooses poor mortgages, the value of his fund’s shares will fall, but the fund itself won’t go broke. Mortgage defaults will never again lead to financial-sector collapse. The mutual funds would sell shares up to a closing date, use the proceeds to buy mortgages of the type in which they are specializing, and pay out the cash flow to stockholders. The funds would terminate when the loans mature.
Step 3: Establish an electronic mortgage auction and require mutual funds to purchase loans at this market so borrowers receive the best price (lowest interest rate). While mutual funds would buy and hold mortgages, their shares would sell in a secondary market so investors would have liquidity even though their funds’ assets were illiquid. For this secondary market to operate well, it would need to maintain real-time disclosure of all information relevant to the valuation of a given loan.
The mutual funds would, themselves, represent securitizations. But unlike yesterday’s complex mortgage securities, investors would know what they were buying. Investors seeking safety would purchase funds specializing in loans with larger down payments and shorter maturities. Investors seeking higher returns at the price of more risk would buy funds focused on mortgages with low down payments and longer maturities. It’s time for the government to move from making home loans to making a mortgage market that works. The limited purpose mortgage system does both.
Fed Officials Saw Housing Bubble in 2005, Didn't Alter Policy
by Craig Torres - Bloomberg
Federal Reserve staff and policy makers identified a housing bubble in 2005 and failed to alter a predictable path of interest-rate increases to slow down the expansion of mortgage credit, transcripts from Open Market Committee meetings that year show. Led by then-Chairman Alan Greenspan, the FOMC raised the benchmark lending rate in quarter-point increments to 4.25 percent from 2.25 percent at the end of December 2004. The committee also removed uncertainty about the pace of rate increases by telegraphing that future moves would be "measured" in every statement.
The "measured" pace language helped fuel the housing boom by keeping longer-term interest rates low and was inappropriate at the time given the uncertainties about both inflation and asset prices, said Marvin Goodfriend, a professor at Carnegie Mellon University in Pittsburgh. "It was a major mistake of the Fed," said Goodfriend, who attended some of the 2005 meetings as a policy adviser to the Richmond Fed. "It gave markets a sense that the Fed was on top of everything to a degree that wasn’t the case. It gave the impression that this was a mechanical adjustment to normality. The market was overconfident."
Transcripts from February show then-New York Fed President Timothy F. Geithner raising alarms about the low expectations of risk and volatility in financial markets. Geithner called the economic outlook at the time "implausibly benign." "The confidence around this view, which is evident in low credit spreads -- low risk premia generally -- and low expected volatility, leaves one, I think, somewhat uneasy," said Geithner, who is now U.S. Treasury Secretary.
In May, former Atlanta Fed President Jack Guynn noted "white hot" residential construction in Florida as well as "continuing concern about speculation in those markets." Greenspan in December still argued against dropping the word "measured" from the statement "because that would imply that we’re really beginning to see developments out there that are moving very rapidly, and I think it’s too soon to conclude that."
"Whatever froth there is in the housing market is becoming contained at this stage, and it’s getting contained largely because mortgage rates have moved up and are beginning to have an impact," Greenspan said, according to the transcripts. "If we can contain the presumptive housing bubble, then we have a really remarkable run out there."
Subprime mortgage origination to borrowers with little or damaged credit histories rose to $625 billion in 2005 from $100 billion at the start of the decade, according to data from Inside Mortgage Finance. Weak lending standards raised questions about the quality of credits in financial institution portfolios, causing runs against firms such as Bear Stearns Cos. that spread into a financial panic. Contracting credit by banks and lenders helped sink the economy into the worst recession since the Great Depression from December 2007 to June 2009.
While growth has resumed, the unemployment rate stood at 9.4 percent in December 2010. The Fed has kept its benchmark lending rate around zero since December 2008. Since that time, the central bank has expanded its balance sheet with direct bond purchases to a record $2.47 trillion.
The top three subprime originators in 2005 were Ameriquest Mortgage Co., New Century Financial Corp. and Countrywide Financial Corp., according to Inside Mortgage Finance, a publisher of mortgage data based in Bethesda, Maryland. Countrywide Financial was purchased by Bank of America Corp. in 2008. New Century Financial filed for bankruptcy in 2007.
"We were aware of the nature of the risks," Richmond Fed Bank President Jeffrey Lacker told reporters today after a speech in Richmond. "With hindsight, things turned out at the bad end of things we thought were conceivable." In June 2005, the FOMC heard presentations from staff economists, with some raising concern about housing markets, the transcript shows. Those warnings didn’t translate into a more aggressive policy. The committee raised the benchmark lending rate a quarter-point at that meeting and said "policy accommodation can be removed at a pace that is likely to be measured."
"An estimated 4 percent of borrowers are highly leveraged and could lose all of their home equity if house prices were to fall 10 percent," Andreas Lehnert, now the deputy director of the Office of Financial Stability Policy and Research at the Board, told the committee. "One might wonder if financial institutions and investors have, in the face of the continuing housing boom, dropped their defenses against the mortgage losses that would accompany a house-price bust."
New York Fed researcher Richard Peach dismissed press reports describing a housing bubble. "Hardly a day goes by without another anecdote-laden article in the press claiming that the U.S. is experiencing a housing bubble that will soon burst, with disastrous consequences for the economy," Peach told the committee. "Housing-market activity has been quite robust for some time now, with starts and sales of single-family homes reaching all-time highs in recent months and home prices rising rapidly, particularly along the East and West coasts of the country," he said. "But such activity could be the result of solid fundamentals."
Greenspan followed the presentation with questions about the effect of underlying land prices in housing indexes, and the quality of data on whether home purchases were for investment or residences. "There was a fundamental failure of economic analysis to understand what was going on in the potential for house prices to stop rising," said William Poole, the former St. Louis Fed president who attended the meetings in 2005. "The high degree of assurance that we all felt that house prices could not decline on a national average basis in a fundamental way -- that was a significant mistake."
House prices in the last decade peaked at a 15.7 percent year-over-year gain in the first quarter of 2005. By the first quarter of 2009, prices were falling at a 19 percent year-over- year rate, according to the S&P/Case-Shiller U.S. Home Price Index.
On Unemployment, Inflation and Flawed Fed Logic
by Ken Hasner - Portfolio Navigator
The sum total of Fed actions over the past 3 years can probably be summed up as the central bank attempting to create its own reality. They have committed to the following :
- Keeping deflation at bay and raising the inflation rate
- Keeping the Fed Funds rate low for an indefinite period (forever?)
- QE1 and Q2 (and Q3)? (Quantitative Easing - the purchase of US government securities in the open market)
- Supposedly working toward full employment while stating that it will take 4 to 5 years for employment to recover?
All of these actions are the result of a single fact: They are compensating for failing to do the job they were tasked with from 2000 to 2008. They failed and we pay and pay.
I think we have to first explore why inflation is so important to the Fed to make sense of this mess.
The banks are still in a big hole (of their own digging) and need housing prices to stay elevated to keep their losses in check. These same banks need to recapitalize at low interest rates (via bond issuance) and to profit from the rate spread to keep their salary game intact. The wealthiest individuals in America stand to lose the most from deflation, even though housing price devaluation would enable an entire new generation of hard working Americans to participate in the housing market.
The influence of the wealthy on Fed policy is not hard to understand. Keep the status quo and you are safe from congressional inquiry as a Fed governor; do what's in the best long term best interest of the American citizenry at large and you are not. Congress by and large will continue to go along with this charade for as long as we let them. It should be "one man, one vote", but these days it’s how many dollars you can pony up that determines how many "votes" you can muster.
Why does inflation serve the largest banks and corporations disproportionately while hurting the average working citizen?
Greater Inflation is desired because the largest banks still hold massive amounts of "bad" loans on their books that simply cannot be justified under any scenario except elevated housing prices. Greater inflation is desired by large multinational businesses so that they may increase current pricing levels and continue to grow profitability for shareholders. Greater inflation is sought so that the Fed can regain credibility and maintain the illusion of being in control of the markets. Inflation in basic necessities such as food, energy, health care and educational expenses have the potential to drain the resources of anyone below the upper strata of society. Making life harder for those on the margin to protect those at the top is not only bad economic policy, it's immoral.
What might the potential long term effects of a near zero Fed funds rate be?
The longer the Fed keeps rates at zero, the longer the banks have to develop strategies for operating in a "risk" free capital environment. Given past history, it's only a matter of time (when, not if) until the banks blow the economy up yet again. Low rates directly benefit the banks and large corporate sectors of the economy. They can borrow at historic low rates whereas the average citizen has no capability of obtaining such funding. While mortgage rates have moved to levels we have not seen in a decades, the corresponding tightening in loan qualification standards means that many cannot take advantage of them. Profits to the largest businesses and no tangible benefit to the American citizen - can you see a pattern developing?
The Fed will eventually be faced with a quandary of enormous proportions. Either raise rates and suffer the wrath of a capital allocation system that has spent the better part of 5 years devising the most profitable ways to game that system, or keep rates at or near zero and continue favoring the largest and wealthiest businesses in America over the working class. I fear the Fed may be secretly planning to permanently lower rates because I cannot frankly see any other way out of their dilemma.
Let's talk about employment in America, or more correctly, the problem with employment in America.
The latest government report shows a 9.4% rate of unemployment. While that statistic is down from 9.8% from the previous month, it probably reflects people actually dropping out of the labor force and not gains in employment. They drop out when their discouragement level becomes so high it is unbearable for them to keep trying. Unbearable for them to keep trying to seek gainful employment. Is this the America we really want?
The latest report shows that 103,000 jobs were created. This is not even near enough to take up the new workers entering the work force, let alone put back to work the tens of millions (yes that's right....tens of millions) of people who have lost their jobs and are seeking work. I can't believe this is happening in America. It's sickening. Record profits and cash balances for America's biggest businesses and no employment opportunities for the working class.
Unemployment compensation was extended to 99 weeks for those seeking work. But what was missing was any sort of connection between these benefits and actually re-training these folks for careers that may be in demand. If a worker is laid off due to economic circumstances, chances are his line of work or skillset is not in demand anymore. Why in the world are we not getting these folks into new careers? I know for some it is a stretch to think that an educated IT worker may now have to re-train as a health care worker or a nursing home assistant, but at some point in this vicious cycle you have to let the free market work.
We currently 'import' people from all over the world to staff our hospitals and nursing homes and I sometimes wonder why we are not putting able bodied Americans to work instead of just sending them 99 weeks of unemployment checks while they go through the futile exercise of trying to re-live their past glories. The reason, of course, is that these jobs pay much less than their former occupations and then they wouldn't be able to afford that damn McMansion anymore. You do see it all goes back to the banks and their bad loans. When does it all end? The Fed believes that more inflation is the answer to unemployment in America. How about you?
To be constructive in my final analysis, I recommend we do the following things NOW to get this country back on the path to economic opportunity for all, and not just those who already have it:
- Stop trying to keep housing prices inflated. Houses are overpriced now and the market laws of supply and demand should be allowed to set the price level.
- Force the banks to clean up the bad loans. I frankly don't care how much it would hurt profitability. Enough is enough. If we force them to take losses on their bad loans and clear their balance sheets, we can finally get back to the business of growing America for all citizens. The one benefit is the huge Wall Street salary and bonus scam will have to come to an end. Someone in government has got to have enough backbone to take them on - I just don't know who that is.
- Instead of spending taxpayer resources on efforts to keep housing price levels inflated, we should use that money to create a “What's needed now” job clearance engine that will be a government/private industry partnership. When someone loses their job, they would be required to utilize the services of this job clearing facility and be prepared to be re-trained, if necessary. If they don't want to, fine, but the unemployment checks would soon stop. Incentive enough, I would hope. We have become a society of pampered “I want it now” consumers and it's time we realized that our economic competitors in the global scheme are working harder at jobs we would not consider "worthy". We need to wise up before they overtake us and become the ones who determine our economic destiny instead of the other way around. Any work is good work, period.
- We need to get interest rates to a level 3.5 to 5%, where seniors and other people who cannot afford risk taking in any form can still provide for themselves after a lifetime of hard work and savings. What we are doing to these people is surely a crime, and for what? To keep the banks in the salary and bonus business?
- Finally, we absolutely need to question the way we have allowed the largest banks to get bigger during the crisis without regard to solving the "too big to fail" problem. I know that nobody in Congress wants to take them on, but the banks need to be broken up. It's the only way America can get back on sound footing and prevent future disasters.
How The $1.4 Trillion In Bank "Phantom Income" Is Really An $84 Billion (0.5% Of GDP) Consumer "Phantom Stimulus"
by Tyler Durden - Zero Hedge
A few days ago Robert Lenzner of Forbes had a column discussing what he termed "phantom income" created by $1.4 trillion of delinquent mortgages, based on an analysis from TrimTabs' Madeline Schnapp. As usual, we decided to bypass the messenger and go straight to the source.
Below is Madeline's clarification on the issue. As we expected, it is not so much an issue of bank mortgage fraud and cash flow deficiency (which by now everyone knows is pervasive, and everyone knows is being backstopped each and every quarter by the GSEs to the tune of tens of billions of dollars every three months like clockwork). Incidentally, a topic we are surprised nobody in the media has picked up on, is that indeed banker bonuses appear to be running well below last year's levels for many institutions.
The reason: while accounting gimmickry allows banks to pad their bottom line, it does little to actually stimulate the cash flow statement. And since investment bankers prefer to be paid with cash and not out of accounts payable, the truth is that banks are actually hurting when it comes to actual cash retention: a big red flag to cut through all the FASB accounting fraud.
But back to Schnapp's point: a far more important observation, and one which we have been claiming since 2009 is the primary reason for the consumer "renaissance", is that the "phantom stimulus" which allows consumers not to pay their mortgages (with the banks' and the GSEs' blessing) is equivalent to about $84 billion annually, or 0.5% of GDP.
Add to that the $120 billion in payroll tax cuts and $60 billion in "Make Work Pay" tax credit, and one can easily see how that government's fiscal largess immediately accounts for more than half of the projected 2011 GDP growth, the other half being more than accounted for through (now years of) inventory restocking.
We asked Madeline to elaborate on her $1.4 trillion number. Here is what she said:
It was a number taken out of context.
Here is the context using back of the envelope calculations.
There are currently about 7 million delinquent mortgages in which homeowners are not making payments.
Average mortgage probably $200,000.
That means there is somewhere in the neighborhood of $1.0 to $1.4 trillion in non-performing loans that exist somewhere in the system which need to be wrung out of the system if we are ever to get the housing market back as a healthy sector of the economy.
Phantom Stimulus coming from non-performing loans?
Since the average time to foreclose is 484 days and homeowners aren't making mortgage payments and instead are now pocketing their payments, there is a transfer going on from the mortgage servicers who would ordinarily be the recipients of the payments, to the pockets of consumers.
If we assume a mortgage payment is $1,000 per month or $12,000 per year, then conceivably you could be looking at $84 billion annually in extra income to consumers to spend or save.
To put that amount in context, it is greater than the $60 billion "Make Work Pay" tax credit, and is about 2/3rds of the $120 billion extra money that is supposed to come from the 2% payroll tax cut. Or in GDP terms, its in the neighborhood of 0.5% of GDP which is a lot considering Q3 GDP was only 2.7%.
In our view, that's an interesting way of stimulating an economy.
Inflation is here, inflation is here! Or maybe not
by Brian Milner - Globe And Mail
A quick glance at the latest news from the high-growth outposts of the world shows that inflation is rapidly turning into a front-burner issue, as officials grapple with the fallout from rising food and energy costs, loose monetary policies and the flood of hot foreign capital that has driven up asset prices.
Last week, Thailand and South Korea boosted interest rates, and China’s central bank ordered commercial lenders to stash more cash in their vaults for the seventh time in the past year – all in an effort to reduce the supply of cheap credit. The Brazilian government has promised budget cuts, but is reluctant to raise rates, which would boost the value of an already strong currency. The inflation-is-nigh crowd argues that it’s only a matter of time before this inflation wave hits the shores of industrial countries, which are just as guilty of keeping expansive fiscal and other currency-debasing policies around much too long.
Indeed, hard-core inflationistas say it has already arrived. "It seems to me that most of the developed world is accepting inflation as what it believes to be the lesser of the various evils that it can pick from," Peter Schiff, the noted contrarian U.S. investor, author and gold bug, told me last week.
Politicians facing fat budget deficits need to dramatically cut spending or boost taxes, neither of which would help them get re-elected, Mr. Schiff said. "So what can they do? They can inflate. They can print money and pretend that these benefits are free. They can borrow money; the central banks can monetize it and call it quantitative easing. You can dress it up in any kind of fancy packaging you want. But it doesn’t change the reality: It’s inflation."
That, counters Bay Street veteran David Prince, is a load of potash, or words to that effect. Mr. Prince, principal of Harbinger Capital Markets Research, doesn’t want to leave the impression that inflation will not become a problem at some point. He just thinks it’s a mistake for investors to assume it’s coming any time soon. "The hysteria about the imminent arrival of inflation disturbs me a great deal," Mr. Prince says from his usual office perch in front of a bank of computer screens displaying his beloved indexes and charts (the latter being the aptly chosen word on his licence plate).
He points to an old favourite, the Baltic Dry Index, to illustrate his point. Through the course of 2009, the inflation fear-mongers were citing rising shipping rates as a sure sign that resource prices were about to go through the roof. But after peaking during the euro crisis last spring, this gauge of bulk cargo rates has since fallen to an 18-month low. He acknowledges that shortages of grains and some other resources and aggressive buying by index funds have been putting undue pressure on commodity prices. But he argues that the supply problems could prove temporary, and hence not inflationary. High prices for base metals will prompt increased production. And oil prices are typically self-correcting, because of the dampening effect high energy costs have on economic growth.
"A great deal of the inflation scare comes because people are so riveted on commodity input prices and overwhelming demand from emerging markets. There is a constant bombardment of ‘shortages.’ And yet we have consistently proven that if there is a shortage of one particular thing, there has been development of a new product." Mr. Prince, who played a key role in the creation of the world’s first exchange-traded fund nearly 25 years ago, provides global market insights and trading strategies to institutional and other clients. He targets his weekly reports at investors searching for "a different view from what is being preached on the Street."
Deflation, he argues, remains the serious market threat. The billions of dollars pumped into the financial system by central banks have translated into a slight recovery in consumer spending. But in the United States, where housing prices are continuing to fall, the jobless rate is still high and wage pressures are well contained, it may not be sustainable. The rebound in the stock market has been a huge boon to both consumer and business confidence. But any serious correction would unleash another downward spending spiral, he says. The last major contraction in global equity values in 2008 and early 2009 "occurred faster than central bankers could inject money into the system."
Potential policy mistakes also pose an ever-present risk. Too much government austerity, and we could be staring at deflation. And any increase in deficit spending would almost certainly be inflationary. "To have a money manager who is permanently entrenched as an inflationist is going to guarantee you lose money," Mr. Prince says. And the same, he says, is true of the diehard deflationists. "Dogmatism is not a good investment strategy."
New ways to control hot money bubbles
by Gillian Tett - Financial Times
Is there anything governments can do to clamp down on "hot money" flows? That question has prompted much hand-wringing in recent months, as emerging markets have battled strong currencies and asset booms.
This week produced fresh evidence of this fight: Korea announced that it was imposing new equity derivatives controls to deter excessive stock market speculation. This follows other controls announced in recent months in places ranging from Brazil to India on cross-border flows. But as South Korea clamps down, investors would be well advised to keep a close eye on what happens next. For the crucial thing to understand about what is going on in Seoul is that this is not just aimed at frothy stock markets or cross-border flows; nor is it merely about weakening the currency.
Instead, what Korea is essentially doing is launching an intriguing experiment in macroprudential policy, focused on bank regulation, as much as anything else. Seoul, in other words, is turning into something of a financial Petri dish, testing ideas to see whether it is possible to grow a new regulatory and financial culture. The outcomes of this experiment could be thought-provoking – not least because this experiment comes at a time when European and US regulators are also looking hard at whether it would be possible to apply more activist and intrusive "macro-prudential" policies to their banks.
To understand this, take a look at a policy paper that was presented by Hyun Song Shin, a Princeton economics professor, to an economics conference in Denver last week. Shin has spent much of the last year advising the Seoul government, and the experience has left him – like many observers – cynical about whether orthodox monetary policy and regulatory tools can ever cope with bubbles.
Until recently it was generally assumed that the best way to prick credit bubbles was for a central bank to raise interest rates. However, in the case of Seoul, raising rates has notably not worked, since it generally attracts more inflows, fuelling the bubble further. And while regulators have traditionally focused on bank capital to make financial systems safe – and are continuing to emphasise this in the Basel III debate – Mr Shin thinks this misses the point.
After all, he points out, high bank capital ratios do not stop banks from amassing assets in a boom; just look at Ireland for evidence of that. Worse still, the Basel focus on the "loss absorbency of bank capital ... diverts attention from the liabilities side of banks’ balance sheets and vulnerabilities from the reliance on unstable short-term funding". And it is this liability structure which fuels bubbles – and subsequent bank failures too.
So, Korea is trying a different tack. Last June it introduced a leverage cap on banks’ foreign exchange derivatives positions, which aims to stop banks hedging forward dollar positions with carry trades (ie those held in Korean won and funded in short-term dollars). Now, more importantly, its parliament is preparing to debate a "macroprudential levy".
This would impose a charge of up to 50 basis points on banks’ foreign exchange denominated liabilities, with the levy to be raised or lowered by the ministry of finance, depending on whether the ministry thinks there is a bubble. The idea is thus to deter Korean banks from taking out too much short-term debt, even if dollar funding is ultra cheap – in much the way that London’s congestion charge is supposed to deter drivers from using their cars.
Unsurprisingly, such ideas provoke horror among free market economists; not to mention some hedge funds and bank traders. And in reality it is still unclear whether such macroprudential experiments will actually work. But Mr Shin is optimistic: after all, he points out, since Korea’s leverage cap was introduced last June, there is some evidence that Korean bank lending has slowed (although the won itself has notably not weakened).
And if nothing else, regulators will be watching closely to see what happens next if the new macroprudential level comes into force in June 2011, as planned. After all, one of the problems with the "macroprudential" debate until now is that it has all seemed irritatingly nebulous; precisely because this has not really been tried before, nobody has really known what it might look like.
But, as my colleague Brooke Masters revealed this week, global regulators are moving towards adopting a more "macroprudential" approach towards bank capital. But the more Korea (and others) experiment with levies, caps and taxes on liabilities and capital flows, the more paradigms may shift. Stand by for plenty of debate this year; not least because quantitative easing looks set to create more "hot money" bubbles – not just in emerging markets but in the developed world too.
Anger as JP Morgan bankers get $10 billion pay and bonus pot
by Jill Treanor and Graeme Wearden - Guardian
Anti-poverty campaigners renewed their call for new taxes on the financial sector after JP Morgan Chase set aside almost $10bn for basic pay and bonuses in its investment banking division. The Robin Hood Tax campaign said it was "outrageous" that JP Morgan's investment bankers are to receive an average payout of $369,651 (£233,000) for 2010. The group, which supports a global tax on banks' financial transactions, said the size of the payments was "a slap in the face to ordinary people".
David Hillman, spokesman for the campaign, said: "If banks can afford to pay billions in bonuses, they can clearly afford to be taxed a great deal more. A £20bn Robin Hood tax in the UK would help avoid the worst of the cuts and show we are all in this together. While bankers wallow in cash, the general public are suffering unemployment and cuts to public services." The remuneration figures were released after JP Morgan Chase kicked off the US banking reporting season by declaring a 47% jump in profits for the last quarter of 2010. America's second largest bank beat Wall Street forecasts, through improved performance from its retail banking and credit card operations.
JP Morgan said it had allocated $9.73bn (£6.2bn) as "compensation" for its investment bankers, up from $9.33bn in 2009. The average total pay packet fell slightly, though, to $369,651 from $379,986, as the number of employees rose to just over 26,300. The bank, which last month committed to keeping its European headquarters in London, declined to respond to Hillman's comments. Staff members will not be told their individual bonuses for several weeks. It is likely that most employees will receive substantially less than the average of nearly $370,000, while some bankers will be very generously rewarded.
Compass, the centre-left think tank, also attacked the size of the bonus pot. "It is absolutely disrespectful to the public mood and to the taxpayers who bailed out the banking sector only a few years ago," said Gavin Hayes, general secretary of Compass. "It shows how utterly incompetent this government is at putting pressure on the banks to self-regulate. It is the role of government to stop these obscene bonuses."
JP Morgan increased the percentage of turnover set aside for salary and bonuses to 37%, from 33% last year. This meant the total pay and bonus pot increased despite JP Morgan's investment arm making less profit, on lower revenue, than in 2009. For 2010 as a whole, the investment banking arm saw a 4% drop in profits, to $6.64bn, on turnover down 7% to $26.2bn.
Last year JP Morgan handed $550m to the UK Treasury on top of its other taxation payments, under Alistair Darling's one-off bonus tax. Hayes argued that this levy should be reintroduced and made permanent, but the present government has rejected this in favour of a levy on bank balance sheets.
Overall, JP Morgan made net earnings of $4.8bn for the final three months of last year, up 47%. For 2010 as a whole JP Morgan reported a net income of $17.4bn on revenues of $104.8bn, about 48% higher than a year ago. The increased profits were fuelled by a sharp decline in bad debts. Provisions for credit losses almost halved, to $16.6bn in 2010 from $32bn in 2009. The firm also released some funds which it had set aside to cover losses from the credit crisis. The bank's retail financial services division and its credit card arm were both profitable in the last quarter, having made losses a year ago.
Chairman and chief executive Jamie Dimon said that the bank had a "solid" year, but admitted that the crisis in the US housing market was causing problems. "Credit trends in our credit card and wholesale businesses continued to improve. In our mortgage business, while charge-offs and delinquencies have improved, credit costs still remain at abnormally high levels and continue to be a significant drag on our returns," said Dimon. "Although we continue to face challenges, there are signs of stability and growth returning to both the global capital markets and the US economy." Goldman Sachs, Morgan Stanley and Citigroup will report results next week, and are also likely to face scrutiny over remuneration levels.
Goldman Sachs in the firing line over predicted $15.4 billion wage bill
by Andrew Clark - Observer,
The Wall Street bank Goldman Sachs will move centre stage in the ongoing furore over bankers' bonuses this week by setting aside an estimated $15.4bn (£9.7bn) to pay its staff for 2010, amounting to a possible average of $435,000 per employee. Goldman, a perennial lightning rod for fury over banking excess, is likely to suffer a drop in earnings from its figure of $13.4bn a year ago, according to the consensus of analysts' forecasts, and staff payouts will be short of its record $20.2bn distribution before the financial crisis hit in 2007.
But the amounts going to Goldman's bankers will feed into an already frenzied debate about the morality, wisdom and justice of six- and seven-figure pay packets at the top of the finance industry, coming hot on the heels of parliamentary scrutiny of bonuses at Barclays, RBS and Lloyds – including the prospect of £2m for Stephen Hester, successor to Fred "The Shred" Goodwin as head of bailed-out RBS. "Goldman Sachs, of course, are the Manchester United of the investment banking world – but to anybody, these would be regarded as quite astounding sums of money for anybody to be paid," said Chuka Umunna, a Labour member of the Treasury select committee.
Goldman has traditionally been the industry's most generous payer. The bank has 35,400 employees worldwide, including 5,500 in London. Its chief executive, Lloyd Blankfein, was handed a record $67.9m three years ago, but in a show of "restraint", his bonus was reduced to $9m last year. Goldman's board will meet this week to decide whether the time for such "restraint" is over – and industry sources say the firm could raise Blankfein's pay, on the basis that he is earning less than peers such as JP Morgan's boss, Jamie Dimon, and that he received precious little credit for taking a cut last year.
Speaking on Friday, David Cameron insisted he could not "hammer" banks over bonuses because he needed them to lend more to business and pay higher taxes to reduce the deficit. The prime minister said there was part of him that wanted to "go after every penny" and "tax these bonuses to hell", but added that the government had to strike a balance.
Larry Summers Says Job Growth Around The Corner; Unemployment Above 9% For 20 Months
by Shahien Nasiripour - Huffingtonpost
Two years into the Obama administration, the architect of the president's economic policy remains resolute that, if the nation simply waits, job growth is right around the corner. "The prospects for starting to see significant employment growth and reductions in unemployment right now are better than they've been in the United States in a number of years," said Larry Summers, who recently left the White House as director of the National Economic Council.
Summers, who arguably more than anyone in the Obama White House shaped the administration's response to the worst economic downturn since the Great Depression, said accelerated economic growth is "starting to happen." "And historically, the behavior of output precedes the behavior of employment," he said during a Sunday interview on CNN's "Fareed Zakaria GPS." "It's a process that, unfortunately, takes time."
Nearly one in ten American workers is jobless. It's been above 9 percent for 20 consecutive months, the longest such streak since records began in 1948, according to the Labor Department. When Barack Obama took office, the nation's unemployment rate stood at 7.8 percent. To combat that, the Obama administration should temporarily disregard the growing federal deficit and invest more in repairing the nation's decrepit infrastructure to boost the sagging economy, Summers said.
But his argument runs counter to the administration's approach. Largely focusing on cutting taxes and increasing entitlement spending as a means to end the Great Recession, the Obama White House has struggled to add jobs. Two-thirds of Obama's $800 billion stimulus plan, enacted shortly after he took office in 2009, was devoted to tax breaks and direct payments like increased unemployment benefits. Job growth has been anemic.
Summers said the time has come for the government to invest in repairing the nation's roads, bridges and buildings. Short-term deficit worries should be dismissed, he said, echoing similar arguments by Federal Reserve Chairman Ben Bernanke, who began making the case to Congress in June. "If at a time when we have unemployment approaching 20 percent in construction, and a 10-year bond rate in the neighborhood of 3 percent, if that's not a time to invest in repairing our infrastructure, I can't imagine when there would be a better time," Summers said.
"The main thing we have to do to accelerate the process of job creation is to accelerate economic growth," Summers said. "The most important thing we can do is to raise the demand, the level of demand in our economy, so as to create more output. That's what's most important in the short run." Once spending increases, jobs will follow, Summers said. He added that failing to invest in the nation's infrastructure acts like a deficit in that the cost of making needed repairs is passed on to future generations of taxpayers. "Frankly, that's something we've been doing in this country for a long time," Summers said.
The average age of government assets -- like buildings, schools, and roads -- rose to 23.1 years old in 2009, a record, according to Commerce Department data going back to 1925. Highways and streets owned by federal, state and local governments are now on average 24.6 years old. State and local health care facilites average more than 27 years old, data show. Military facilities average 43 years old.
The construction industry has shed 2.1 million jobs since January 2007, Labor Department figures show. The Federal Reserve estimates that the unemployment rate will be around 9 percent at the end of this year. By the next presidential election in 2012, unemployment will be around 8 percent, according to the nation's central bank. The yield on the 10-year Treasury note closed at 3.3 percent Friday. Treasuries are government debt that allow the government to borrow now and repay its funders later. The federal government was paying double its current rate on 10-year debt as recently as 2000, Federal Reserve data show.
The government paid about 3.9 percent interest on all its debt during the last full month of former President George W. Bush's administration, according to the Treasury Department. Last month, the federal government paid just under 3 percent.
EMU policies are pushing Southern Europe into systemic political crisis
by Ambrose Evans-Pritchard - Telegraph
Let us assume for the sake of argument that Europe succeeds in containing the immediate EMU debt crisis, with help from Asia, and that Germany’s fractious coalition actually agrees to a bail-out fund big enough to make any difference. What does this achieve, other than allowing banks to buy time by offloading liabilities onto European and Chinese taxpayers?
The 30pc gap in labour competitiveness that has built up between Germany and Club Med since the eurozone currencies were locked together in perpetuity will remain. Greece, Portugal, Spain, and Ireland will stay trapped in structural depression through this year, and well into next, rotating from a liquidity crisis to a chronic political and social crisis that exposes the inability of elected governments to counter 1930s job wastage. Unemployment is 28pc in Andalucia, and 30pc in Cadiz.
There is an awful possibility – or probability -- that German über-growth will increase the pain for peripheral Europe before it offers a meaningful lifeline to Club Med through trade stimulus. The central assumption of EU policy is that a rising economic tide will ultimately lift all boats. It is a fatal self-deception. A rising tide in Germany is precisely what risks shattering weaker vessels.
This is what happened to Britain during the ERM crisis of 1992, the trial run for the monetary union. German reunification was an "asymmetric shock", setting off a boom that compelled the Bundesbank to tighten the screw again and again, and forcing the Bank of England to follow suit at a time when the UK housing bust was already underway. Spain is about to relive the experience, for Germany is going through another such shock. This one is caused by surging exports to the BRICs -- machinery, luxury cars, aircraft, medical kit, and chemicals. German exports to China rose 40pc last year, and 42pc to Russia.
Oddly, perhaps, I am not seriously worried about Ireland. It has a dynamic manufacturing and export service base, and can hope to export its way back to health. The fact that Ireland has required an EU-IMF rescue should not be misread as evidence that it is in worse shape than several others. Banking busts are desperate but not serious, as the saying goes. The less open economies of Greece, Spain, and Portugal will find it more of a struggle to recover. The IMF says Portugal’s current account deficit will still be 9.2pc of GDP this year (and 8.4pc in 2015, if it is possible to defy gravity for so long), Greece will be 7.7pc, and Spain 4.8pc.
That these deficits should be so high two or three years into a slump shows how hard it will be to turn this crisis around. Meanwhile, The Netherlands will have a surplus of 6.8pc, and Germany 5.8pc. The structural misalignment is grotesque, like the perma-divide between Italy’s North and South but without the vast annual subsidies that stops it blowing up. A full 140 years after the Two Sicilies were gobbled up into Cavour’s lira zone, convergence has not occurred. The Bourbons might have done better.
Already reeling, the indebted European periphery must now brace for a fresh shock as the European Central Bank tightens monetary policy to stop Germany from over-heating. One-year Euribor rates used to price Spanish mortgages have been creeping up for months, and jumped to 1.54pc after Jean-Claude Trichet turned seriously hawkish on inflation last week. It may go much higher very fast if the ECB starts to raise rates by the middle of this year.
This will not help clear a four-year backlog of unsold homes in Spain, which is no doubt why Madrid is pushing for a capital injection of up to €80bn into the smaller banks and cajas – by partial nationalization if necessary. The central bank said in November that the banks have €181bn (£153bn) of "potentially problematic" loans to the real estate sector, or 17pc of GDP. Mr Trichet’s fire-breathing rhetoric can be taken as a signal that the ECB will continue to run monetary policy for German needs and tastes, refusing to accommodate a little slippage on inflation to let Club Med regain lost competitiveness without having to endure the agony of debt-deflation. Indeed, the ECB seems to have picked up some of the worst habits of its mentor.
Mr Trichet is no doubt in an impossible position because the German people gave up the D-Mark under an implicit and sacred contract that EMU should never lead to inflation in their country. Should it ever do so, acquiescence in the whole project comes into question. Yet Mr Trichet's comments on Thursday were astonishing. He cited the ECB’s rate rise in July 2008 with approval – and as a warning -- as if this monetary Charge of the Light Brigade had been vindicated by events. Most economists viewed that decision as best forgotten.
We now know that large parts of the eurozone were already in recession by then, that the commodity spike was burning itself out, that ECB rhetoric had set off a destructive dollar rout and pushed the euro to ruinous highs of $1.60, and that the foundations of the credit system were already crumbling. A paper by the Richmond Fed suggests that ECB’s action was a key trigger of the global crisis.
The ECB is now itching to tighten again, this time because of a temporary jump in headline inflation to 2.2pc, caused by rising oil and food prices. No matter that M3 supply growth in the eurozone is anaemic at 1.9pc. Real M1 deposits have contracted at a rate of 2.8pc over the last six months in the quintet of Italy, Spain, Greece, Ireland and Portugal. "This is comparable with the decline in early 2008 just ahead of the plunge into recession," said Simon Ward from Henderson Global Investors. The ECB has passed the eurozone debt parcel back to EMU governments, deeming it the proper responsibility of fiscal authorities to sort out the mess. So be it.
Since the only government that seems to matter in our new German Europe is in Berlin, the parcel has in reality been handed to Chancellor Angela Merkel. She has two viable options. She can choose to save monetary union, first by doubling the size of the EU bail-out fund and halve the interest rate charged so that the debt-stricken states can recover; and then by acquiescing in fiscal federalism and a pooling of debts -- what McKinsey’s chief in Germany calls a "spiral into a Transferunion" – entailing a regime of subsidies for years to come.
That is to say, Germany must be prepared to do for Southern European what it has already done for its own kin in East Germany, but on six times the scale. Or she can pull the plug, by quietly signalling to the Verfassungsgericht that Berlin would not be too angry if the eight judges declared the EU’s rescue machinery to be unconstitutional, ending EMU as we know it. What is clear is that status quo is ruinous. The slow suffocation of nations still under Fascist rule just one generation ago cannot end well for liberal democracy in Europe.
Could Britain be heading for a crash?
by Simon Heffer - Telegraph
We cannot postpone indefinitely the final acceptance that we must live within our means
I had a long talk on Tuesday with one of the wisest and cleverest economic thinkers I know, and he was sure of one thing: we are heading for a crash. Is he right? The stock market has started the year strongly. Sterling is up against the dollar and was rising against the doomed single currency as well, until the Chinese – for their own Machiavellian reasons – bought vast quantities of euro debt this week.
Sadly, other indicators suggest that such good news as we have is an illusion. It mystifies me why the Bank of England didn't raise interest rates this week, with the threat of inflation now blindingly apparent. Think, though, what that would do to a housing market already heading south; or to those people with other, shorter-term debts, the repayments on which could well become suffocating. For many of them, the day of reckoning has been long postponed. Now, it may be just weeks away.
François Fillon, the urbane and rather successful French prime minister, came to London this week and seemed to take for granted our continued support of the euro, arguing that our economic future depended upon it, too. He exaggerated, but did so because of the great fear in France that the game is up for their currency. It is hard to see why there is this fear. If the euro goes under, the French can simply resort to the franc and find themselves able to widen their export markets, because everything would be cheaper.
True, the financial sector, with its exposure to euro debt, would take a thumping – our own included. But these were risks taken by banks, and they would just have to bear them. In the same way that the Government has no business telling banks what they can pay their staff, it has no business continually bailing them out either. What is most important is that the Government should peer over the horizon at these potential problems, and work out how to manage their consequences.
Our rulers have encouraged the thought in the past couple of months that while things are still very difficult, and hardships inevitable, the worst is over. Perhaps it isn't, though; because maybe what they meant was that they had inflicted on us all the pain that they thought was needed, and no more was planned.
What they hadn't taken into account, as so often with this Government, is that factors beyond their control will now start to kick in. If there is some sort of external blow to the economy, whether in the shape of the euro ceasing to defy gravity, or simply more bad news from America, there will have to be a sharp adjustment to policy here. Our taxes remain far too high, and an obstacle to recovery as it is. If the recovery has to start from an even lower base, the obsession with not cutting taxes in case some "rich" person – possibly even an evil banker – becomes richer will have to be jettisoned once and for all.
Where my economist friend is almost certainly right is that, even without external shocks, interest rates must rise. Personal bankruptcies and business failures will rise with them; so will unemployment. House prices will fall, and possibly also many other asset values, including the stock market. We cannot postpone indefinitely the final acceptance that we must live within our means.
If such a downturn comes, then growth is the only way out of it. That requires the Government to stimulate demand. It will be all too easy, if things turn ugly, to act like the rabbit in the headlights. We have seen governments do this before. What our rulers need to remember is that such paralysis is always fatal.
Global food chain stretched to the limit
by John W. Schoen - Msnbc.com
Strained by rising demand and battered by bad weather, the global food supply chain is stretched to the limit, sending prices soaring and sparking concerns about a repeat of food riots last seen three years ago. Signs of the strain can be found from Australia to Argentina, Canada to Russia. On Friday, Tunisia's president fled the country after trying to quell deadly riots in the North African country by slashing prices on food staples.
"We are entering a danger territory," Abdolreza Abbassian, chief economist at the U.N.'s Food and Agriculture Organization (FAO), said last week. The U.N.'s fear is that the latest run-up in food prices could spark a repeat of the deadly food riots that broke out in 2008 in Haiti, Kenya and Somalia. That price spike was relatively short-lived. But Abbassian said the latest surge in food stuffs may be more sustained.
"Situations have changed. The supply/demand structures have changed," Abbassian told the Australian Broadcasting Corp. last week. "Certainly the kind of weather developments we have seen makes us worry a little bit more that it may last much, much longer. Are we prepared for it? Really this is the question."
Price for grains and other farm products began rising last fall after poor harvests in Canada, Russia and Ukraine tightened global supplies. More recently, hot, dry weather in South America has cut production in Argentina, a major soybean exporter. This month's flooding in Australia wiped out much of that country's wheat crop. As supplies tighten, prices surge. Earlier this month, the FAO said its food price index jumped 32 percent in the second half of 2010, soaring past the previous record set in 2008.
Prices rose again this week after the U.S. Department of Agriculture cut back its already-tight estimate of grain inventories. Estimated reserves of corn were cut to about half the level in storage at the start of the 2010 harvest; soybean reserves are at the lowest levels in three decades, the USDA estimates, in part because of heavy buying by China. The ratio of stocks to demand is expected to fall later this year to "levels unseen since the mid-1970s," the agency said.
"I haven't seen numbers this low that I can remember in the last 20 or 30 years," said Dennis Conley, an agricultural economist at the University of Nebraska. "We are at record low stocks. So if there any kind of glitch at all in the U.S. weather, supplies are going to remain tighter and we might see even higher prices."
Higher oil prices are also pushing up the cost of food — in two ways. First, the added shipping cost raises the delivered price of agricultural products. Higher oil prices also divert more crops like corn and soybeans to biofuel production, further tightening supplies for livestock feed and human consumption. Conley estimates that more than a third of the corn produced in the U.S is now used to make ethanol.
Despite tightening supplies, the rise in food prices has been much tamer in the developed world. On Friday, the U.S. Bureau of Labor Statistics reported that food prices at the consumer level rose just one-tenth of one percent. On Thursday, the government reported that the food component of the Producer Price Index rose just 0.8 percent in December. For all of 2010, food prices at the producer level rose 3.5 percent. The reason for the modest price rise in the U.S.? People living in developed countries eat more processed foods, so raw materials make up a much smaller portion of the total retail cost.
"In this country, a much higher proportion of your food dollar is spent on processing, advertising and promotion and marketing," said Tom Jackson, a senior economist with Global Insight. "There’s not really that margin built in between the farmer and the consumer in the developing countries."
Food price spikes hit less-developed countries much harder because a greater share of per capita income — half or more — goes to pay for food. U.S. consumers, on the other hand, spend an average of about 13 percent of disposable income on food. The impact of higher prices is blunted somewhat in countries that subsidize food to stabilize costs, but the trend in prices may make those subsidies unsustainable.
Last month, Iran deployed squads of riot police to maintain order after slashing subsidies for food and gasoline. In September, 13 people were killed in street fighting in Mozambique after the government cut subsidies it could no longer afford, sparking a 30 percent rise in bread prices. Though strong global demand and tight supplies are bringing misery to some poor countries, the price surge is a sign of improving conditions in emerging economies. That’s because increased demand is caused in part to rapidly rising standards of living, according to David Malpass, president of economic research firm Encima Global.
"Some of the gains in prices in Brazil and India are because people are better off," he said "So we have to expect some inflation in those countries as people earn more and more per year."
Unilever chief warns over global crisis in food output
by Kamal Ahmed - Telegraph
The chief executive of one of the world's largest food producers is to warn that the global crisis in food production is reaching "dangerous territory" with prices soaring and demand outstripping supply. In a speech on Tuesday, Paul Polman, the chief executive of Unilever, will say that market distortions created by European Union subsidies work against the needs of the developing world. He will also demand fewer subsidies for harmful first-generation bio-fuels and say that climate change must be tackled by companies changing to sustainable models of agriculture.
In an interview with The Sunday Telegraph Mr Polman said that short-term speculators were also driving up prices. "One of the main things in food inflation is that it has attracted speculators for short-term profit at the expense of people living a dignified life," Mr Polman said. "It is difficult to understand if you want to work for the long-term interests of society." He revealed he had spoken to the European Commission's commissioner for internal markets, Michel Barnier, about the issue. Mr Polman says speculators should be forced to disclose their positions.
Unilever buys 12pc of the world's tea to make brands such as PG Tips and Liptons. It also purchases 6pc of the world's tomato supply for its leading brands such as Knorr soup and Pot Noodle. In the speech, Mr Polman will say that such is his concern about climate change and water scarcity, Unilever is reviewing whether it can sustain tomato cultivation in southern Europe. "We are becoming concerned about whether Greece and Spain will have adequate water in the coming decade to guarantee us a tomato harvest that our business needs."
New age of intervention in food prices
by Rowena Mason - Telegraph
In India, people are upset about onions. Expensive cooking oil is causing hoarding in China, a practice banned by the government. Meanwhile, flour and bread are the main source of riots in Algeria and now Jordan. Worries over food prices are gathering pace and triggering alarm among politicians across the world. For there is nothing more likely to bring down a government than ignoring starving citizens, as Marie Antoinette found to her cost during the French Revolution and the Tunisian ruler found this week when he was toppled by rioting protestors.
Rice, the main food of most Asian countries, is seeing relatively stable prices thanks to good harvests from Thailand. It is countries reliant on wheat, the biggest global staple, that are likely to see the most civil discontent, especially in Africa. Ironically, global stockpiles of wheat are higher than they have been in years, despite the fact that the price has hit a record of more than £200 per tonne in London, having risen 90pc during last year. Part of the problem is that the food isn't going where it's needed. And partly futures prices are rising on fear of supply shortages to come.
Erin FitzPatrick, an analyst at Rabobank agricultural research, says worries about unpredictable weather and wheat's link to corn prices have been driving the peaks. "We've seen pretty much across the board a dip in production and a lot of that is weather-driven," she says. "But with the demand side of the equation and economies coming back to life, forecasts are still positive. "With wheat it's fundamentally not that bullish. If you look back historically we're seeing some of the highest stock levels in a while. But there's a number of things at play. Generally prices of corn and wheat tend to move somewhat together because you can choose to plant one or the other."
Corn is the agricultural commodity expected to rise the most this year and is already more than $6 (£3.78) a bushel – the highest level since the financial crisis. It has increased by 67pc, as China started importing the grain for the first time in years and crops failed in bad weather. Farmers have therefore decided to plant corn because the price is higher, causing a drop in available acreage for wheat.
"The second thing is weather events in wheat so the availability of exports is just not there," says Ms Fitzpatrick. "There's a risk from La Niña [the climate pattern] in South America and some of the forecasts from the US still look overstated. The story is that production levels are dipping quite dramatically." It's not just corn and wheat that are soaring. When the price of grains begin to rise, the cost of feeding animals does as well. Prices for cattle, pork bellies and lean hog futures are up between 19pc and 26pc, with farmers reporting a 20-year peak.
The squeeze is only likely to continue with increasing demand for better lifestyles, including more meaty diets, from Asia and other developing regions. More extreme weather and increasing demand from a growing global population are two big underlying factors. But it's also linked to the high price of oil, used in transporting almost every commodity in the world, and manufacturing fertiliser. One consequence of fears about food prices is the likelihood that governments will start to get more involved in the market.
Ms Fitzpatrick says: "We have seen a muted re-emergence of world governments intervening in agricultural markets this year. Further supply shocks may see a return to widespread government intervention in 2011." There will also probably be a closer look at the role of financial trading in soft commodities, especially exchange-traded funds that hold physical stocks of food that could be used to feed people rather than as an investment asset.
Charles Robertson, global chief economist at Renaissance Capital, says: "Speculation certainly played a role in 2008. Traders who'd never touched soft commodities bought into the argument that the global population is growing and people are eating more meat and the story that surely we'll run out of food. One thing we can be sure about is that the debate over food prices going to get more ideological."
Gold 'Overdue' for Drop, Rice Will Gain, Jim Rogers Says
by Whitney McFerron - Bloomberg
Gold is "overdue for a rest" and probably will fall after a decade of gains that sent prices to a record, said Jim Rogers, the chairman of Rogers Holdings who predicted the start of the global commodities rally in 1999. While gold "may go down for awhile," the metal is "going to go over $2,000 in this decade," Rogers, who owns gold, silver and rice, said today during a presentation to business executives in Chicago. Gold touched a record $1,432.50 an ounce in New York on Dec. 7. The price closed today at $1,387. "I’d rather own rice," Rogers said. "I’d rather own something that’s more depressed than gold."
Agricultural commodities are "going to boom" as demand increases in developing markets, primarily in Asia, he said. All commodities will be supported by the weakening dollar, which is losing value because Federal Reserve Chairman Ben S. Bernanke is "printing money" by buying Treasuries in an effort to shore up the U.S. economy, Rogers said. "Paper money is made of cotton, and I’m long cotton, by the way," Rogers said. "One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can."
Rogers said he doesn’t own shares in U.S. companies and is short U.S. long-term treasury bonds. The Chinese renminbi may provide "almost sure profits over the next five to 10 years," he said. "In the future, it’s the stock broker who’s going to be driving the cabs," Rogers said. "The smart stock brokers will learn to drive tractors, and drive them for the farmers, because the farmers will have the money."