Collateral damage – more than Paul Jackson’s reputation at risk – Events during this financial crisis have repeatedly displayed a degree of disrespect for various pundits’ authority; every so often another pulpit is toppled. So spare a thought for the pundits, the most unmourned of crisis casualties. Why do they set themselves up for a fall like that, I wonder? Volunteering to be part of the collateral damage seems to be compulsive. The latest to stick his neck out is the respected Housing Wire commentator, Paul Jackson. Hang it, don’t spare a thought for him at all. He should know better than to combine a shoddy defense of document forgers with a drive by shooting of servicer critics. The starting point of the piece is the celebrated DocX document fabrication price sheet, which, having debuted in the blogosphere in early October, made it onto TV the week before last, brandished in the mitt of Rep. Maxine Walters. This is why it matters (from the class action against LPS):
Rescue-package debt seniority and the vicious cycle of rescues and emergencies – Despite its large size relative to the small Irish economy, last weekend’s bailout is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.
Global Imbalances and the War of Attrition – Back in 2005, Ben Bernanke, then (“just”) Governor at the Federal Reserve Board, coined the term “global savings glut” to describe the “significant increase in the global supply of saving” that, as he argued, helped explain the increase in the US current account deficit and the low level of global real interest rates. In short, a deliberate rise in emerging market (EM) savings from c. 2000 onward flooded the world with cheap money, helping finance an ever-widening US trade deficit and contributing to the perverse lending incentives that eventually led to the 2008 financial collapse. Five years later, Ben has a chance to restore the global savings-investment landscape; i.e. help force a “correction”, in the form of an exchange rate adjustment and/or a decline in EM net savings. The key here is to recognize that a repeat of the EM savings glut story is less feasible because of important differences between then and now. And the Fed has the capacity to make it, if not impossible, at least extremely costly.
Pay Freeze Could Cripple Dodd-Frank – Here’s just a quick example for why a pay freeze for public workers is about the stupidest policy you could put together right now. If you’re Barack Obama, you believe have engineered two signature victories through the Congress. You have a health care bill where the regulation that is key to the bill has been outsourced to state insurance regulatory shops (which is a problem), meaning that the relative effectiveness of the regulations are contingent on states allocating resources to those departments. In this time of budget cuts at the state level, that’s shaky. Then you have a financial regulatory reform bill which is incredibly dependent on effective regulation at the federal level. There’s even a new agency, housed inside the Federal Reserve, charged with consumer financial protection. In order to stay a step ahead of the bankers and to comply with the law, this agency and the others overseeing the financial sector must hire more people (the SEC wants to hire 800 more employees to meet the requirements of Dodd-Frank), and be populated with the brightest and most incorruptible minds we can find, who know the tricks and traps that the bank lobbyists will seek as cover from the law. One of the problems we had in the past was that the regulators who weren’t captured by the finance lobby actually didn’t have the smarts to keep up with them as they ran their Wall Street casino.
A hopeless Europe, unable to cope – Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow. I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six. The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.
The Impact of Public Guarantees on Bank Risk Taking: Evidence from a Natural Experiment – In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7.5% and the average loan size declined by 17.2%. Remaining borrowers paid 46 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefited more from the guarantee and that none of these effects are present in a control group of German banks to whom the guarantee was not applicable. Furthermore, savings banks adjusted their liabilities away from risk-sensitive debt instruments after the removal of the guarantee, while we do not observe this for the control group
European Officials Split Over Fund Increase, New Eurobond – European officials voiced divisions over the steps needed to stop the sovereign debt crisis as Germany opposes increasing the 750 billion-euro ($1 trillion) bailout fund and the introduction of joint European bonds. Belgian Finance Minister Didier Reynders told reporters on Dec. 4 that the fund might be expanded if ministers decide to introduce a larger permanent facility when the current temporary one expires. Luxembourg and Italy today called for the creation of joint European bonds. Both proposals were today rejected by German Chancellor Angela Merkel. European policy makers head to Brussels today for a regular meeting on concern their rescue fund may not be large enough to stop contagion spreading from Greece and Ireland to Spain. While Sarkozy and Merkel last month rejected expanding the fund, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider such a move.
Australia Floods Damage Crops, Disrupt Coal Output – Flooding and heavy rainfall in Australia damaged wheat crops, disrupted coal production and caused communities to be evacuated as eastern states prepared for further wet weather this week. The rain may cut the quality of more than 40 percent of the country’s wheat crop, according to estimates by National Australia Bank Ltd. Rio Tinto Group, the world’s third-largest mining company, said today coal mines in central Queensland state had partially resumed operation after rains. Wheat futures in Chicago rallied to the highest level in four months on concern that the weather in Australia, the fourth-largest shipper, may reduce global supply of high-quality milling grain. The rain had wiped as much as A$500 million ($496 million) off the expected A$3.2 billion value of New South Wales winter crops, state Premier Kristina Keneally said today.