March 31 1:44 PM

No crisis in confidence—Evidence shows U.S. creditors still think U.S. debt remains safest in world – EPI Issue Brief #276 Print-friendly PDF version In recent days, the Wall Street Journal and Business Week have pointed to a slight uptick in interest rates on Treasury securities as evidence that U.S. creditors—and the bond market more generally—are beginning to worry about the increase in the federal deficit The debt rating agency Moody’s also recently indicated in the New York Times that, while their ratings for U.S. securities is still stable, the U.S. debt may be moving closer to a downgrade But if we have learned anything from the financial market crisis, it is that the bond market and credit rating agencies are not the most reliable sources for sound risk analysis. That said, the United States does borrow substantial funds from a variety of creditors, and a loss in confidence in Treasury securities could, in theory, lead to higher interest rates for government borrowing.

Chavez Cash Crunch Looms on Oil, Morgan Stanley Says – Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said. “Venezuela may be hard pressed to avoid its day of reckoning,” The country, which depends on crude for 94 percent of export revenue, has seen output plunge to 2.2 million barrels a day from 3.7 million in 1997, according to Morgan Stanley. Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said.

Paterson Witholds School Payments – Governor David Paterson has once again put off some payments that the state owes to schools, citing lack of money. Governor Paterson, who originally included the school aid money in emergency spending bills approved by the legislature, now says he’s going to withhold $2.1 billion dollars in school aid payments after all, due to "severe cash flow difficulties". This is the second time the governor has had to delay payments due to schools or local governments. The first was in December, when he and the legislature failed to agree on a complete plan to close a deficit in the current year’s budget. The money was eventually paid in January, when more revenues came in.

 NY Suspends Construction Projects In Fiscal Crisis – Gov. David Paterson is suspending hundreds of current and new construction projects because of New York’s budget woes, including a highway to Fort Drum and a major interchange on Long Island.Paterson administration officials told The Associated Press on Tuesday that all projects not paid for by federal economic stimulus funds will be delayed until the Legislature and the governor agree on a 2010-11 budget or emergency funding.The extraordinary order also tells contractors on existing projects that the state won’t fund any work after the start of the new fiscal year on Thursday until there is a budget or emergency funds. The soonest that could happen is April 7, when the Legislature returns. Or it could come April 14, when an emergency spending appropriation expires.

Could This Be Start of ‘The Great Bear Market in Bonds’? (CNBC)One firm calls it "The End of the Affair." A strategist says it’s "the beginning of the end." A trader asks, "Has the great bear market in bonds now started?"However the situation is framed, one thing is becoming clear: Investors’ long courtship with debt appears to be coming to a close,Last week’s poorly received series of Treasury auctions looks now to be a fixed-income flare, a warning shot that too much debt amid too little fiscal restraint is making the bond market frothy and ready to come to an unsightly crescendo. And the damage could hit not only Treasurys but also agency-backed bonds as well as corporates with a longer term than two or three years.

CMBS Delinquencies Increase to 6 Percent in February – The delinquent unpaid balance for commercial mortgage backed securities (CMBS) increased to $47.82 billion in February, soaring $1.87 billion from January, according to the latest Monthly CMBS Delinquency Report released Sunday by investment rating agency Realpoint, LLC.The overall delinquent unpaid balance was up almost 300 percent from February 2009, when only $11.98 billion of delinquent unpaid balance was reported. In addition, it was more than 21 times the low point of $2.21 billion in March 2007.

Italy’s High Debt, Low Growth Pose Challenge, Moody’s Warns – (Bloomberg) — Italy’s ability to tackle its high debt amid low economic growth “will be tested,” Moody’s Investors Service said. Italy is struggling to shake off a recession that saw the economy contract 5.1 percent last year, the most in at least three decades. Debt will rise this year to 117 percent of gross domestic product, the second-highest in the EU, after Greece, according to European Union forecasts. “The government faces some challenges in growing out of its high public-debt levels given the current context of low economic growth,” Alexander Kockerbeck, a Moody’s analyst, said in a report released today.

 Japan’s 10-Year Bonds Complete Monthly Loss Before BOJ’s Tankan – The increasing fiscal risk premium is bound to push yields up,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities, one of the 23 primary dealers that are required to bid at government debt sales. “The pace at which banks buy JGBs will probably slow.”The Ministry of Finance said in December it will boost total issuance to a record 144.3 trillion yen in the year starting tomorrow. Japan’s national debt will increase to 973 trillion yen by the end of March 2011, the Finance Ministry said in January. The debt level may rise to 246 percent of gross domestic product by 2014, according to the International Monetary Fund

France’s budget deficit hits record high – France’s public deficit reached 7.5 per cent of gross domestic product (GDP) in 2009, its highest level ever and more than twice the maximum agreed for members of the European Union. The French budget deficit hit 144.8 billion euros last year, according to figures released by national statistics office Insee on Wednesday. The increase soared to 80.1 billion euros more than 2008’s. Insee attributes France’s growing deficit to a sharp drop in government revenues and a simultaneous increase in public spending.

   China May Shun Treasuries, Yield to Rise, SocGen Says (Bloomberg) — China may curb purchases of U.S. Treasuries this year as its first trade deficit in 17 years leaves it with fewer dollars to invest, causing yields to climb, according to Societe Generale SA. The trade gap will reach $100 billion in 2010, driven by a 45 percent climb in imports as China’s demand growth outpaces that of other major economies, said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. He said yields on benchmark 10-year U.S. notes will hit 4.5 percent by the end of 2010, capping the biggest two-year increase since 1980-81.

Fed’s Fisher Says U.S. Can’t Ignore Effect of Deficit on Yields (Bloomberg) — Federal Reserve Bank of Dallas President Richard Fisher said the U.S. can’t ignore the effect of the growing federal deficit on Treasury yields and the outlook of investors.  “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said. “The markets, fearing the consequences of runaway deficit financing, have bid up longer-term nominal rates, resulting in a yield curve that is now historically steep.”  Fisher’s remarks underscore the view expressed last week by former Fed Chairman Alan Greenspan, who told Bloomberg Television that he’s “very much concerned” about the financial situation of the U.S. Greenspan said higher yields are a “canary in the mine” that may signal further interest-rate gains and reflect investor worry about the “huge overhang of federal debt.”

Fannie, Freddie may fill Fed void in mortgage market (Reuters) – Goodbye, Federal Reserve. Hello Fannie and Freddie. With the Federal Reserve ending its 15-month $1.25 trillion mortgage bond buying binge on Wednesday, delinquent loan buyouts by Fannie Mae and Freddie Mac could serve as the saving grace for the $5 trillion agency mortgage-backed securities market. The paydowns from these buyouts will put billions into the hands of mortgage investors for reinvestment and significantly reduce supply, mitigating the massive void the central bank will leave behind and helping keep yield spreads near record tights.

Fear Seen Driving Prices Lower than Last 20 Years – Most metro areas will see prices fall below the lowest levels of the last 20 years, according to the latest forecast from University Financial Associates of Ann Arbor. It is often stated that prices decline faster than they rise because fear is a stronger emotion than greed. This certainly proved to be the case in Detroit where 10 years of real price gains were erased in just 4 years,” said UFA in its most recent UFATM House Price Forecast.“Detroit metro was the canary in the coal mine this cycle, with falling house prices arriving earlier than in other metros,”  “Other metros that have already or will soon converge to pre-bubble real prices include Las Vegas, Phoenix, the inland California metros and many south Florida metros.”UFA’s prediction would take the national median price of a home in most markets below $101,000, the national median in 1990, according to the Census Bureau.

  States Are Insolvent; Soon They May Be Illiquid – In the New York Times, Mary Walsh looks at the sorry condition of state budgets, paying particular attention to unfunded public employee pension liabilities. She drew on a recent AEI working paper of mine that calculated the market value of such shortfalls. It’s a good article and worth checking out. Here I expand on the numbers she used to give a more complete picture of how big the financial hurdles facing Americans truly are. The chart below shows three types of debt:

• Explicit state borrowing, in the form of general obligations bonds and other debt.
• The market value of unfunded state employee pension obligations; this is generally several times higher than the value states themselves acknowledge.
• States’ shares of the total federal debt: these are calculated by assuming that states bear the federal debt in the same proportion to which they pay overall federal income taxes, such that high income taxes will tend to carry proportionately more than low-income states.

Census hiring set to boost job gains – Washington Times That is because of the granddaddy of all government programs — the census, a house-by-house head count of the population conducted every 10 years since 1790. The Census Bureau is starting to hire 1.4 million people to man offices and go door to door collecting information about everything from household income to health status.

 ) Private sector sheds 23,000 jobs in March (Reuters) – U.S. private employers unexpectedly shed jobs in March, dampening hopes about the strength of the recovery two days before the government employment report. In addition, U.S. Midwest business activity expanded less than expected in March while a gauge of New York City business conditions fell, separate reports showed on Wednesday.U.S. private employers cut 23,000 jobs in March, missing expectations for an increase in jobs although fewer than the adjusted 24,000 jobs lost in February, according to the data by a private employment service."It throws a little cold water on the idea we were going to be adding jobs in March, which is a little disappointing, people thought finally this might be the month,"

Strapped Cities Struggling to Fund Water Treatment Upgrades -There are 16,000 publicly owned wastewater treatment plants in the United States that operate 100,000 major pumping stations, 600,000 miles of sanitary sewers and 200,000 miles of storm sewers, according to U.S. EPA. That system received a grade of D- from the American Society of Civil Engineers in its latest "Report Card for America’s Infrastructure." The society noted that billions of gallons of untreated wastewater is discharged each year because of lagging investments.Hornback said many communities would be facing a difficult challenge even if the economy were more robust. Communities historically "undervalue" their water and sewer services, charging users less than is needed to keep the systems operating to modern standards."The pipes in the ground are in some cases over 100 years old,"

Some States Face Greek-Style Debt Woes – California, New York and other U.S. states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis.

Foreclosure Experts Forecast Explosive Numbers in HomelessnessForeclosure experts at USHUD.com and Heavy Hammer Inc. today warned of skyrocketing homelessness as high unemployment and foreclosure rates continue to impede economic recovery.  Citing a combination of record rental vacancies and residential foreclosure rates, Heavy Hammer Inc. CEO Michael Urbanski said true numbers of displaced Americans are masked by "assimilated homelessness," a term describing those who have lost homes or can no longer afford rent and have sought refuge with friends and family members.  "Record foreclosures, rental vacancies and home sales to multi-generational buyers, combined point to increased assimilated homelessness," said Urbanski. "With seven million jobs lost since the beginning of the recession, and unemployment hovering at record levels, households are collapsing at an alarming rate. Younger Americans are returning home and the recently unemployed are turning to friends and loved ones for help in order to keep their families off the streets."    

Foreclosure Properties May Take 5 Years To Be Absorbed Into Market –Even switching into high gear, the nation’s banks have far to go to catch up with processing an unprecedented number of foreclosures. This could potentially delay recovery for another half decade according to Housing Predictor. Although the true extent of this shadow inventory is unclear, foreclosures have topped 7 million in just the last 3 years.  The shadow inventory of homes and other residential properties exceeds 6 million, which will prolong the recovery of the U.S. housing market. The inventory of properties that have not yet been completed as foreclosures, but are under distress represent a growing inventory to be absorbed by the market.

 Attracted to Evil? – In transcranial magnetic stimulation (”TMS”), a coil of wire is placed near the head. Alternating current flowing through the coil induces a magnetic field with a strength of up to 2.5 teslas (one tesla is 20,000 times the strength of the earth’s magnetic field). The field passes harmlessly through the skull and influences the electrical signals passing among neurons in the brain. .   A new paper in PNAS used TMS to disrupt part of the brain involved in judging intention and morality.  Here is a summary: Using a powerful magnetic field, scientists from MIT, Harvard University and Beth Israel Deaconess Medical Center are able to scramble the moral center of the brain, making it more difficult for people to separate innocent intentions from harmful outcomes….

A Summary of What Bank Reform Should Be – I’ve thought about the issue for a while, and I want to summarize what the key areas for bank reform are, so that you all can know why legislation like the Dodd Bill won’t achieve much.  There are five key areas that have to be addressed to avoid “Too Big to Fail”:

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