arch 30 12:56 PM

 Don’t Be Narrow-Minded – Via Brad DeLong, I see that Greg Mankiw seems to favor narrow banking: require banks to hold all their deposits in liquid, short-term assets, thus obviating the risk of financial crises. I’m glad to see Greg trying to think this through; but I’d argue that this is all wrong, on two levels: if it were possible, it would do away with the main purpose of banks, and anyway, it’s not possible. Where Greg goes astray here, I think, is by trying to apply Modigliani-Miller, which says that capital structure doesn’t matter. If you look at the assumptions behind that argument, you realize that it requires that all assets be perfectly liquid. They aren’t, of course — and that’s precisely why we need banks.

 EnergyScam – Thank God we have government programs like EnergyStar to help us live a greener lifestyle: But this week the Government Accountability Office reported on its test of the EPA’s testing.  GAO obtained Energy Star certifications for 15 bogus products, including a gas-powered alarm clock. Even worse: The GAO attached a feather duster to a space heater, sent the photo to the EPA, and got approval in just 11 days. How on earth could this have happened?  This is the sort of thing the government is supposed to be good at:  providing transparency and certification for private efforts.  Yet it seems they weren’t even bothering.

It’s Official – America Now Enforces Capital Controls –  It couldn’t have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls are now here and are now fully enforced by the law. Let’s parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.

$500 Billion Reserve Drain Made Crisis Worse: IMF’s Ferhani – Speaking at Central Banking’s National Asset Liability Management conference in London on Friday, Hervé Ferhani, the deputy director of the monetary and capital markets department, said: "By and large, reserve managers reduced their exposure to risk assets in a way that was similar to the behaviour of commercial fund managers. A forthcoming working paper by the IMF estimates central bank reserve mangers moved approximately $500 billion out of bank deposits during the crisis.


 Forget Greece, Germany Should Leave the Euro… So says Joachim Starbatty in the NY Times: The Greek crisis is only the first of what could be several tremors resulting from the euro’s original sin. While few are willing to say it yet, the solution is clear: the only way to avoid further harm to the global economy is for Germany to lead its fellow stable states out of the euro and into a new and stronger currency bloc.[…] If Germany were to take that opportunity and pull out of the euro, it wouldn’t be alone. The same calculus would probably lure Austria, Finland and the Netherlands — and perhaps France — to leave behind the high-debt states and join Germany in a new, stable bloc, perhaps even with a new common currency. This would be less painful than it might seem: the euro zone is already divided between these two groups, and the illusion that they are unified has caused untold economic complications.

Home Prices in 20 U.S. Cities Increased 0.3% in January – (Bloomberg) — Home prices in 20 U.S. cities unexpectedly rose in January, indicating the housing market is stabilizing as the economy expands. The S&P/Case-Shiller home-price index climbed 0.3 percent from the prior month on a seasonally adjusted basis, matching the gain in December, the group said today in New York. The gauge was down 0.7 percent from January 2009, the smallest year- over-year decrease in three years. Cheaper homes, low borrowing costs and government incentives have combined to support the housing market, which helped trigger the worst recession since the 1930s. Gains in hiring are required to overcome mounting foreclosures that are keeping pressure on prices and posing a threat of renewed declines in real estate.

[Updated] The Best F**king Books About the Financial Crisis… With a few new books out about the financial crisis, my list of "the best fucking books" about the crisis needs to be updated. By way of refresher, here is what I wrote last time to introduce the list:  I get asked all the time what the best fucking book is about the financial crisis. Well, here it is: A (partial)  list of books about the past year’s financial crisis, sorted in decreasing order of the number of times the word “fuck” appears. In the spirit of rigorous scientific inquiry, I have also provided the number of fucks per page.

. �The Sistine Chapel�(fast connections only).

Psychic FAIL

Why is the Term Risk on Long Term US Debt So High? – Steven Waldman takes a look at the yield on long term US bonds and concludes that although it’s low, it’s not really that low when you consider short term rates: There are components of this spread.  Perhaps people are worried about future inflation–but while the spread between inflation-indexed bond prices and regular treasuries is rising, it’s still rather low.  It’s also possible that people are simply anticipating that eventually, a treasury bubble driven by the global "flight to quality" will dissipate, making it harder to unload longer-maturity debt.  There’s currency risk, too, especially since many of our creditors are foreigners.  And of course, there’s the dreaded default risk.  If people stop thinking we’re good for the money, they will demand higher interest rates, and tip us into crisis.

The Mother Of All Jobless Recoveries – Oh God, more awful news about jobs. Now before you click away to read something lighter, please consider: this post is about something sad, but it makes its point with a numbered list. Easy enough, right? Right. So keep reading. This Cleveland Fed report "Are Jobless Recoveries the New Norm?" is a fascinating, lucid and distressing look at why unemployment is still at 9.7% and why it’s not going down any time soon. Read the whole thing, if you have time. But here are three keys facts I want to pull out.

  Portugal’s budget deficit for 2009 revised upwards to 9.4 pct of GDP – Portugal’s budget deficit in 2009 has been revised upwards from 9.3 percent to 9.4 percent in the first notification of the year as part of the procedure for excessive deficits for Eurostat, the National Statistics Institute (INE) said Monday in Lisbon.The projections included in the INE report also pointed to gross public debt rising from US$110.376 billion euros (66.3 percent of GDP) in 2008 to 125.909 billion euros in 2009 (76.8 percent), with figures for 2009 still provisional.

 California Treasurer Asks Six Banks for Swap Details (Bloomberg) — California’s treasurer asked six investment banks that underwrite the state’s bonds to explain why they also market credit-default swaps on them, saying such contracts may cost taxpayers by exaggerating credit risk.Treasurer Bill Lockyer asked JPMorgan Chase & Co., Bank of America Merrill Lynch, Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley to detail the extent to which they market the insurance contracts and to explain how trading in them affects the interest cost on the state’s general-obligation bonds, according to letters he released today."

Chiang: Worst yet to come for California budget crisis – State Controller John Chiang said Monday the worst of California’s budget crisis is still to come. Although lawmakers are challenged by a nearly $20billion deficit, "the bad year’s 2012," Chiang said. That year, state finances will be hit with a trifecta of pain: The temporary tax hikes approved last year will be over; federal stimulus funds will be gone; and funds that the state "raided" from local governments will come due.The deficit at that point will be some $25billion, according to Schwarzenegger administration estimates. And finances in later years aren’t great either: Last year, the Legislative Analyst Office released a report projecting a $20billion deficit every year for the next five years.

 NJ Deserves Lower Bond Rating, Merrill Lynch Says (Bloomberg) — New Jersey’s bonds should be ranked a step below those assigned by the three major credit-rating firms, as the state faces a $46 billion pension deficit and record high debt-load, Merrill Lynch analyst John Hallacy said. The state’s general obligations are rated Aa3 by Moody’s Investors Service, AA by Standard & Poor’s, and AA- by Fitch Ratings, the fourth- , third- and fourth-highest investment grades, respectively. New Jersey is the third-most indebted U.S. state according to Moody’s, and expanded its borrowings to a record $33.9 billion as of June 30, from $31.8 billion a year earlier. “We are revising our view on New Jersey’s credit in light of the state’s sizable debt load, severely unfunded pension and health-care retirement benefits liabilities, and aggressive budget assumptions for its fiscal year ending 30 June 2011 which we believe will be difficult to achieve,”

 Currency Crisis And Debasement – There has been a lot of talk recently about our country’s finances. Some now question the long-term viability of the U.S. with booming budget deficits and a national debt that is growing by leaps and bounds monthly. The national debt level was just raised to almost $12.5 trillion. Yes, trillions, not billions. In 29 years we have taken the U.S. national debt from less than $1 trillion to over $12 trillion (a 12-fold increase). What is really troubling is that the ratio of debt to GDP has exploded over the last 29 years from 34% to over 85%. During this 12-fold expansion of debt we have only expanded GDP 5.3 times. We are growing debt at twice the rate of growth of the U.S. economy. This is obviously a troubling situation.

Yuan not cause of China-US trade gap: minister – (Reuters) – Letting the yuan rise is not a solution to the imbalance in trade between China and the United States, Commerce Minister Chen Deming said. He pointed to Chinese data showing that the yuan, also known as the renminbi, rose by 21 percent against the dollar between July 2005 and July 2008, but the U.S. trade deficit with China grew by 21.6 percent during the period. "It does not help if one side, driven by its political agenda at home, puts pressure on the other with unwarranted threats of trade sanctions," Chen said. He reiterated the official view that the U.S. trade deficit has been over-estimated. He said the trade gap was a reflection of globalization, with U.S. firms moving to China to lower their costs while U.S. consumers benefit from cheap Chinese goods.

Illinois‘ rating on $23.4 billion of municipal debt cut to A- – Illinois’ rating on $23.4 billion of municipal bonds was cut one level to A- by Fitch Ratings, which cited a rising budget deficit in the next fiscal year for the second-lowest rated state after California."The fiscal 2011 budget "will not sufficiently" address the estimated general fund gap, expected to total $9.3 billion, or 33 percent of revenue, Fitch said in a report today. Fitch kept the state on a ratings watch list for a possible further downgrade from the fourth-lowest investment grade. The lower ranking may raise the state’s borrowing cost as it comes to market with more than $1 billion of new debt and investors demand a higher yield. Standard & Poor’s cut the state’s rating March 26 by one level to A+, its fifth-highest, and Moody’s Investors Service today assigned an A2 rating with a negative outlook, meaning the bonds may be downgraded."

 Shale Gas Shenanigans – In the years leading up to the crash of the Housing Bubble in 2006 and the subsequent financial meltdown in 2008, there was no shortage of people telling us America’s continued prosperity was not in jeopardy. All that talk was nonsense, of course. In 2010, the situation is eerily similar in the natural gas business. We are told that we have 100 years of supply, implying that we will still be producing cheap shale gas long after the oceans are devoid of fish. As in the pre-Housing Bubble days, a few skeptics are crying foul. There are underground rumblings that things are not on the up & up with shale gas.The first bone of contention is what the actual production costs are. The Financial Times’ John Dizard has been questioning the accepted wisdom lately— A couple of weeks ago, I quoted Ben Dell, an analyst with Bernstein Research in New York, as estimating the shale gas industry really needs a price of $7.50 to $8 [per mcf] to break even on its all-in costs of finding and producing the stuff, which would be a 60 per cent price rise [over about $5 per mcf]. Not easy for many people, or industries, to pay these days…

President Sarkozy Of France Says Europe And America Must Come Up With New Answers President Nicolas Sarkozy of France is in the United States this week to meet with President Obama to discuss Afghanistan and pressing global financial issues. Sarkozy emphasized that if Europe and America do not redesign the global financial architecture, then no other alliance will succeed. He highlighted the urgent need for an open discussion on the economic crisis and world economic regulation.“We can no longer expect a capitalist system where there are no rules, no regulation, no protectionism.”

Jobless? Blame your neighbours – ED GLAESER makes an intriguing argument this morning at Economix: cities with educated workforces have enjoyed lower levels of unemployment through this recession. That sounds incredibly mundane, but it’s not. The relationship between human capital levels and unemployment is stronger than you’d expect from just adjusting local populations for education levels. In other words, we know that unemployment is lower for individual workers with college degrees, and so we’d assume that cities with more college graduates would, on average, have lower unemployment rates. And they do. But too much lower to simply be a result of the effects of population composition.Mr Glaeser credits the same positive spillovers from high metropolitan levels of human capital that make smarter cities so productive (and highly remunerative) in the first place

Spurt of Home Buying as End of Tax Credit Looms – After several disastrous months for home sales across the country, when volume dropped by 23 percent, the pace appears to be picking up again. The number of Des Moines homes under contract in February rose by a third from the January level. The number of pending contracts jumped 10 percent in Naples, Fla., 14 percent in Houston and 21 percent in Portland, Ore.  These deals will be reflected in the national sales reports when they become final, this month or next. There is no evidence that prices have begun to move in response to the higher volume. Indeed, so many homes are coming on the market that prices might well fall further.

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