Europe’s banks are still on ‘life support’, BIS warns –

Europe’s banks are still on ‘life support’, BIS warns –Europe’s banks have yet to come clean over bad loans and may struggle to refinance short-term debt unless the region’s bond crisis subsides soon, the Bank for International Settlements (BIS) has warned.  The BIS said in its annual report that banks on both sides of the Atlantic remain "highly leveraged and still appear to be on life support. The essential task of reducing leverage and repairing balance sheets is simply not finished. The Greek sovereign debt crisis shows just how fragile the financial system still is. "Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

New Legislative Effort to get Bankruptcy Exemption….For Guns.- Don’t let Goldman and Bank of America repossess all the guns!  “The gun wars are pretty much over, and the gun rights side won. One wonders when they’ll will figure it out.” Not so fast. There’s one last battle to be fought. A friend on the hill forwarded me the following. Supported by the NRA, Rep John Boccieri (D-OH) is pushing to allow firearms to be exempt from bankruptcy: “In those states that allow a debtor to use federal exemption law, this provision would prevent a trustee from selling a debtor’s firearms to satisfy the claims of creditors.” This amendment would make it so someone going through bankruptcy can’t have their guns liquidated and sold to pay off their bills.

The High Budgetary Cost of Incarceration

Secretary of Energy Steven Chu Confirms that Some of BP’s Oil Well Casing Has Been Demolished – Oil industry expert Matt Simmons has said for many weeks that the well casing was destroyed by the initial explosion at the Deepwater Horizon rig. He said that when oil wells blow out, the casing often shoots up above ground. He has been ridiculed by many because no one has seen well casing on the seafloor. But the Department of Energy has just partly exonerated Simmons. As the Los Angeles Times notes today: A team of scientists from the Energy Department discovered a new twist: Their sophisticated imaging equipment detected not one but two drill pipes, side by side, inside the wreckage of the well’s blowout preventer on the bottom of the Gulf of Mexico. The discovery suggested that the force of the erupting petroleum from BP’s well on April 20 was so violent that it sent pipe segments hurtling into the blowout preventer, like derailing freight cars.

Consumer Confidence Crushed –  EconomiPic – The AP details:  Americans, worried about jobs and the sluggish economic recovery, had another relapse in confidence, causing a widely watched barometer to tumble in June. The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8. June’s reading marked the biggest drop since February, when the index fell 10 points. The index had risen for three straight months since then. Both components of the index — one that measures how consumers feel now about the economy, the other that assesses their outlook over the next six months — dropped. The Present Situation Index decreased to 25.5 in June from 29.8 in May. The Expectations Index declined to 71.2 from 84.6.

This global game of ‘pass the parcel’ cannot end well – Was the summit of the Group of 20 leading economies in Canada over the weekend a step forward towards co-operation or a step backwards towards disagreement? The answer seems to be both. The call for “growth-friendly fiscal consolidation plans” provides something for everybody. But it assumes what is to be proved: that rapid fiscal consolidation will now support growth, rather than undermine it. Yet, instead of examining the outcome in detail, I asked myself a broader question: where have we got to? When I did so, I found myself thinking of the British children’s game of “pass the parcel”. In this game, a package is passed around until the music stops. Thereupon, a player removes a piece of wrapping paper and the game restarts. The winner removes the last piece of paper and secures the prize.  Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties. So here are four such games

Deutsche Bank, Commerzbank Rumored to Pass Meaningless Stress Test – Yves Smith – So it looks to be semi-official. The “stress test” label, in Europe as in the US, signifies an exercise that is designed to produce attractive report cards, as opposed to provide a valid measure of the sturdiness of a bank’s balance sheet in difficult conditions. So what is the biggest concern investors and counterparties have about European banks? Sovereign risk exposure. So what do the ECB stress tests apparently exclude? Sovereign risk exposure. From Bloomberg:

Top 20: Colleges That Offer Best Return on Investment – A college degree has proved to be a better shield than a high-school diploma in a tough labor market, but the investment can be daunting for students and parents. A new study released this week shows which colleges are most worth your money. Average student loan debt among graduating seniors in 2008 was $23,200, but research has revealed that college graduates earn more than those with just a high-school diploma. And the unemployment rate for those with at least a bachelor’s degree was 4.7% in May, compared to 9.7% for the nation as a whole and 10.9% among high-school graduates who didn’t attend college. The Massachusetts Institute of Technology topped the list with a 12.6% annual return on investment, totaling $1,688,000 over 30 years. The California Institute of Technology came in second with a $1,644,000 ROI — also 12.6% annually, and Harvard University ranked third with a 12.5% ROI, totaling $1,631,000.

Graph of the Day: Average Global Sea Surface Temperature, 1880–2009This graph shows how the average surface temperature of the world’s oceans has changed since 1880. This graph uses the 1971 to 2000 average as a baseline for depicting change. Choosing a different baseline period would not change the shape of the trend. The shaded band shows the likely range of values, based on the number of measurements collected and the precision of the methods used. Sea surface temperature increased over the 20th century. From 1901 through 2009, temperatures rose at an average rate of 0.12 degrees per decade. Over the last 30 years, sea surface temperatures have risen more quickly at a rate of 0.21 degrees per decade. Sea surface temperatures have been higher during the past three decades than at any other time since 1880.  The largest increases in sea surface temperature occurred in two key periods: between 1910 and 1940, and from 1970 to the present. Sea surface temperatures appear to have cooled between 1880 and 1910.

Another look at consumer sentiment and consumer spending – Atlanta Fed’s macroblog  – In the most recent economic forecasting survey by the Wall Street Journal, 23 percent of the surveyed economists said consumers spending more readily than anticipated is the biggest upside risk of their growth forecast for the second half of the year. So anything that can shed light on future spending habits is of particular interest. Two of the most commonly cited measures of consumer attitudes are the Conference Board’s Consumer Confidence Index and the Thomson Reuters/University of Michigan’s Index of Consumer Sentiment. A key question is, do these indicators improve consumption forecasts? Previously, economic researchers have looked at the predictive power of these indexes for consumer spending, and they generally found that the ability of consumer confidence measures to predict consumer spending largely disappeared once some other measures of economic conditions were taken into account.

Bank Stress, ECB Liquidity Withdrawal Efforts, Deflation Fears Rattle Markets Yves Smith – We’ve warned for some time that the eurozone’s sure-to-fail muddle-through approach to its structural challenges was rattling investor confidence. Worse, its insistence on wearing an austerity hairshirt was not only committing Europe to deflation, but had high odds of sucking the global economy down along with it. Given how fragile the recovery is in advanced economies, and the magnitude of the debt overhang in many nations, a downturn could easily morph into a deflationary downspiral, potentially a full blown depression.  Let’s recap of some of the troubling sightings. First is that Spanish banks in particular, along with other Eurobanks, have been on the ECB drip feed for some time. However, in a rather remarkable bureaucratic dedication to deadlines over common sense, the ECB is terminating a €442 billion one year liquidity facility on July 1. An unknown but believed-to-be-large portion of the facility was used to fund carry trades within the EU, particularly that of Spanish and Greece sovereign debt

Banks Face $5 Trillion Rollover by 2012 Banks around the world must refinance more than $US5 trillion ($5.8 trillion) of debt in the coming three years, a massive rollover that poses threats to financial stability and growth. The need to replace these funds, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth… US banks have issued $US230 billion of debt in the first five months of the year, about 60 per cent of the rate they need to achieve over the three year period. Euro zone banks have issued $US133 billion, or about 70 per cent of their needed run rate. One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. It is possible that a global desire to save more helps to blunt this effect, but even so the macroeconomic effect and the effect on asset prices will both be strongly downward.

Crisis is back with a vengeance as ECB’s sterilisation auction flops -After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose. One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity. Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night.

The High Budgetary Cost of Incarceration The United States currently incarcerates a higher share of its population than any other country in the world. We calculate that a reduction in incarceration rates just to the level we had in 1993 (which was already high by historical standards) would lower correctional expenditures by $16.9 billion per year, with the large majority of these savings accruing to financially squeezed state and local governments. As a group, state governments could save $7.6 billion, while local governments could save $7.2 billion. These cost savings could be realized through a reduction by one-half in the incarceration rate of exclusively non-violent offenders, who now make up over 60 percent of the prison and jail population. A review of the extensive research on incarceration and crime suggests that these savings could be achieved without any appreciable deterioration in public safety.  Issue Brief – PDF  | Flash

Your tax dollars at work – A reader sent a link to the following paper. I had no idea. Abnormal Returns from the Common Stock Investments of the U.S. Senate, The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993-1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive.


U.N. report:: U.S. Dollar should be replaced as International currency — The dollar is an unreliable international currency and should be replaced by a more stable system, the United Nations Department of Economic and Social Affairs said in a report released Tuesday. The use of the dollar for international trade came under increasing scrutiny when the U.S. economy fell into recession. "The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the report said. Many countries, in Asia in particular, have been building up massive dollar reserves. As a result, those countries’ currencies have become undervalued, decreasing their ability to import goods from abroad. The World Economic and Social Survey 2010 is supporting a proposal long advocated by the International Monetary Fund to create a standardized international system for liquidity transfer.

Bankruptcy revenge: Modify loan or declare bankruptcy? – Some have struggled unsuccessfully to keep their homes, and others have just walked away. Phillips decided he wanted revenge and was willing to ruin his credit record for it.  When a short sale didn’t work out as planned, the 32-year-old Chicagoan opted for Chapter 7 bankruptcy liquidation, a move that will leave Phillips with little except for the scant possessions in his one-bedroom condo. It also will leave his lender, Chase, with little except for, eventually, a condo that has lost value. Meanwhile, Phillips continues to live there, mortgage-free. "I’ve gotten past being shameful." Phillips’ move may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second "piggyback" mortgages used to buy homes.

The Fed Criticises Bloggers? – Over the last couple of days, in reviewing the news, I have noted that there is an increasing sense of panic and chaos in the world economy. Today, it seemed particularly bad. I typically look at the Telegraph, the Times, the New York Times, the Guardian, and Reddit as a daily routine, and occasionally the Economist. I am focusing on this paper by Athreya, as it contrasts nicely with the headlines. The Masters of the Universe, sitting in their ivory towers are clearly not in control. Instead, they pull their levers, enact their policy, and it all comes to nothing but more chaos. They propped up the financial system, supporting their selected ‘too big to fail’ banks, they printed money and poured it into the markets via their favoured financial institutions, and they aimed to drop interest rates to the floor. Despite this, we still see a world economy racked with volatility and close to panic.

The Third Depression? – That’s what Paul Krugman says is on the horizon.  In a sobering article in Sunday’s NY Times Mr. Krugman says policy errors are leading us right off the cliff: “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. Regular readers know my position.  I never thought the secular bear ended or that the credit crisis was over.  This has become abundantly clear as unemployment has remained stubbornly high and the credit crisis evolves into a full blown sovereign debt crisis.  The recent evolution of the Greek crisis and scare mongering of certain market participants is almost certainly walking us off the edge of the cliff.  Policymakers have misdiagnosed this crisis from the very beginning so it’s not surprising to see them continue down this same path.

Financial Armageddon: Not the Time for Happy Talk and Wishful Thinking – One of the drawbacks of living in a digital age is a pervasive, tunnel vision-like focus on "the numbers," often to the exclusion of everything else. Sure, hard data matters, especially when the topic at hand is business and finance, but that’s not the end of it. What is just as important is what those numbers actually mean, how they are interpreted, and what people plan to do as a result.If, as we’ve seen in the U.S. (and elsewhere), the statistical picture is ostensibly positive but the majority are clearly in no mood to spend or invest, then it seems to me that the soft data, as such, should be weighted much more heavily. In fact, the dark and deteriorating social mood, as revealed through first-hand accounts, anecdotal and news reports, and other means, is one of the reasons why I have remained steadfastly bearish despite all the "good news" Washington and Wall Street keep shoveling our way.

‘Double dip’ and deflation fears fuel another plunge in Treasury bond yields – The economic pessimists are winning the argument in the U.S. Treasury bond market. Yields on Treasury issues have fallen across the board  to their lowest levels in more than a year as some investors continue to seek a haven. Traders say some investors are taking their cue from budget-cutting promises made over the weekend by the world’s wealthiest nations at the G-20 group summit. The biggest countries committed to slashing their budget deficits in half by 2013.The more the industrialized nations talk about reducing spending, the greater the risk that the global economy tilts back toward recession and deflation. At least, that’s how new bond buyers see it, said Tom Di Galoma, head of  U.S. rates trading at Guggenheim Partners in New York. “This is carryover from the ‘double-dip,’ deflation outlook” that fueled heavy buying of Treasuries last week, Di Galoma said. Economist Paul Krugman has been leading the pack of analysts warning about the risk of sinking into a new morass if governments and central banks pull back on policies to boost the economy. “We are now, I fear, in the early stages of a third depression,” Krugman wrote in the New York Times over the weekend

 Record Low Interest Rates Signal Deflation, Depression – Barrons – Investors have contracted to lend to the U.S. government at returns so low as to be unimaginable just a few months ago. For instance, it was only three months ago that it was confidently asserted those returns had nowhere to go but up. Mike Lewis of Free Market Inc. bristles Fed Chairman Ben Bernanke’s "prolonged ultra-low rate strategy" will prove as disastrous as when his predecessor, Alan Greenspan tried it, which will result in a sharper-than-expected tightening to make amends.Still, even those who see the contractionary forces restraining the economy look for Treasury note yield to return to the middle of their recent road. Dave Resler of Nomura saw a "not insignificant" risk of deflation saw the 10-year Treasury moving back to the mid-3% range over the next 12 months. So did Paul Kasriel of Northern Trust, who made powerful points about weak money and credit growth and fiscal policy makers wanting to return to the good old days of the 1930s.

Safety Net Frays in Spain, as Elsewhere in Europe – NYTimes -For millions of Europeans, modest salaries and high taxes have been offset by the benefits of their cherished social model — a cradle-to-grave safety net which, in the recent boom years, seemed to grow more generous all the time. Now, governments across Europe say they have little choice but to pull back on social benefits, at least for now. Tax revenues are falling; populations are aging and rising deficits are everywhere, threatening the euro. Cutbacks and higher taxes have been announced in Ireland, Spain, Italy, Greece and Portugal. Even France, until recently a holdout, has now proposed to raise the legal retirement age to 62 from 60.  The reforms, however, may be politically explosive. In Spain, they come at a particularly hard time. The austerity measures are hitting a population that is already reeling from the highest unemployment in the euro zone — 20 percent over all, 40 percent for its young people. In some cases, entire families are surviving on the pension of a grandparent.

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