12/20/2010

Is the Ireland Bailout About to Become Bear Redux? – Yves Smith – Not being an expert in either the Lisbon Treaty or the rules governing the ECB, I’m restricted in my ability to interpret an article in the Financial Times and the underlying position paper at the ECB on the legality of the Irish bailout. The Irish finance minister asked for a reading on the “draft law”, which is the Credit Institutions (Stabilisation) Bill 2010. There is a certain amount of grumpy harrumphing in the ECB response, namely, that it should have been consulted earlier and its preliminary reading has been made in more haste than it would like.  Regardless, it does not take a lot of expertise to get the drift of this gist: In particular, the ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem. For example, problems of legal uncertainty relate to the impact of, inter alia, Article 61 (effects of orders on certain other obligations) of the draft law on the rights of the Central Bank, the ECB and possibly other central banks within the ESCB, the scope of collateral rights of central banks given as security against ELA, as well as other issues. The ECB would expect that nothing in this Act would affect operations, rights or entitlements of the Central Bank or the European Central Bank, or any other central banks within the ESCB. The FT reads the big issue as being the adequacy of collateral for lending:

 Chinese growth in 2011 – For the past two months there have been very strong rumors in the markets that next year’s new lending quota was going to be set somewhere between RMB 6.5 trillion and RMB 7.0 trillion.  For comparison’s sake, total new lending last year amounted to RMB 9.6 trillion, and this year the quota was RMB 7.5 trillion.But to me RMB 6.6-7.0 trillion seemed likely to be low (and ”low” is a relative word here – compared to the years before 2009 these are actually very large numbers).  We have been telling clients for months, for example, that even ignoring the reportedly large amounts of loans shifted off bank balance sheets this year, it was very unlikely that 2010 would end with new lending below the RMB 7.5 trillion quota.  In fact by the end of November we were already over RMB 7.4 trillion, so I suspect we are going to finish the year with total new lending at pretty close to RMB 8 trillion.  Add in the loans taken off bank balance sheets and we have easily blown through the 2010 quota. Tuesday’s South China Morning Post has an article suggesting that we may have been right:

 Some lessons from recent global macro events – I’ve just attended a conference sponsored by the Reinventing Bretton Woods Committee, entitled "The International Monetary System: Old and New Debates", which took place against the backdrop of France’s chairmanship of the G-20. Numerous topics were discussed, including the deficiencies of the international monetary system, externalities of international financial capital flows, multiple reserve currency regimes, and balance of payments adjustment. I was on the panel dealing with the last topic. I made the following comments: (Or, things I would not have thought two years ago)

    • Even surplus countries can be faced with unpleasant choices (the Trilemma strikes!)
    • Exchange rate adjustment can occur without nominal exchange rate changes
    • Exchange rates matter for trade flows
    • Difficulties in monetary/exchange rate coordination do not rule out positive outcomes.
Social Security on the Table? – Bob Kuttner must have some source for this story, about Obama planning to propose Social Security cuts in the State of the Union. Let’s hope it’s just a trial balloon. I’ve written about this many, many times on the substance: this is absolutely the wrong place to cut if you’re serious about fiscal issues. It’s where the money isn’t; and in terms of securing Social Security itself, it’s deeply illogical: in order to avoid the possibility of future benefit cuts, we’re cutting future benefits. But just to repeat what Digby and others have said. this would be a political disaster on two levels. It’s not just that progressive activists would sit on their hands in disgust; Republicans would, inevitably, run ads attacking Democrats for cutting Social Security. You think that’s crazy? They just won the House in part by accusing Democrats of cutting Medicare.
 

 Money and metaphysics — Paul Krugman and Kevin Drum recently wrote about the problematic definition of “money” in the modern world.  I think this issue can be helpfully illuminating by dusting off one’s BA in philosophy and attempting a little metaphysical analysis that will help clarify what the actual issue is here. What is money? Well money is currency. And it’s easy to say what the currency of the United States of America is: dollars. So what’s a dollar? Well the word is ambiguous. But a dollar is a unit of account—you can give the price of things that aren’t dollars in terms of dollars. And a dollar is also a medium of exchange. One dollar, is a perfectly safe perfect liquid asset with a value of $1. Four quarters are a perfect safe investment in dollars. Four quarters are worth one dollar by definition so they can never lose value in dollar terms. And they’re perfectly liquid: as long as you’re in the USA, anyone will accept four quarters in exchange for goods or services valued at $1. The problem of the “broader aggregates” is that there are lots of things that have properties closely resembling those of dollars. My checking account with PNC Bank is basically perfectly safe (thanks to the FDIC) and it’s almost as liquid as quarters. The vast majority of stores will accept my debit card and there are ATM machines all over the place where I can exchange electronic checking account commitments for physical dollars.

 
Bankruptcies Falling Again – Here’s something I didn’t expect to see when I moseyed by the bankruptcy statistics at Credit Slips: Bob Lawless, who made the graph, expects them to decline further in 2011, to about 1.45 million.  Not what I would have expected with the financial crisis a few years behind us–I would have expected to see filings still rising, as families ran to the end of their resources.  1.45 million is fewer bankruptcies than the US saw in 2004 with a booming housing market and an economy and a job market growing at a pretty decent clip. This may be evidence on a question that has puzzled bankruptcy experts–was the precipitous decline in bankruptcies after the 2005 bankruptcy reform act real, or was it simply a lull before the storm?
Why Did the Feds Need to Do Health Care? – The chances of a Supreme Court ruling overturning one key provision in our new health care law–the mandate–are looking stronger.  Not good, mind you–libertarians I know are saying it’s a perhaps 40% chance, while obviously everyone else is considerably more pessimistic.  But the chances are high enough that progressives are now giving more thought to questions that were mostly ignored (by everyone but crazy libertarians preparing for a court challenge) during the debate last year.  "How does the Commerce Clause allow the federal government to regulate inactivity?"  "Where does the mandate penalty fit into its regulatory or taxing powers?" "Why does this have to be done by the federal government?" Mostly, proponents of the law seem to have figured that the answer to the first was, "D’uh!", which meant it wasn’t necessary to answer the second or the third.  My understanding is that even the rulings from friendly judges have indicated that they’re on shaky ground regulating inactivity (though they’re more open to the claim that the government is actually regulating the activity of seeking health care that follows the inactivity of not buying health insurance).  This has made it somewhat more urgent to answer the other two questions.
 
What Once was Naivete is Now Idiocy – Update: Brad DeLong appears to confirm that Obama’s inner circle would be best served by being placed in a circular firing squad, given live ammo, and being told to "do what is right." The plethora of disingenuous claims that Barack Obama "won" with the McConnell-Obama "compromise" are legend. See, for instance, the idiocy of Andrew Sullivan (of which Andrew Samwick is too generous when he describes it as "poor political tactics"; see also Brad DeLong), and the Administration’s disingenuous "what ‘we’ won" chart. The big question was how this is supposed to stimulate the economy. Those of us who argued that it would do damage noted that it was the first move. Obama has so far played (as I noted earlier): 1 g4 e5 Now, Mark Thoma discovers that he really does intend 2 f3 and then will wait for the Republican’s next move: The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

 Is regulation really for sale? – Relationships between London banks and their regulators are not especially warm just now. The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. In the future, 70% of their bonuses will have to be deferred. Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? It is a shocking turn of events. Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector. Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill. How plausible is this argument? Can benign regulation really be bought?

Cutting Social Security to Prevent Cuts in Social Security? – There is a report that Obama is considering featuring Social Security reform, including benefit cuts, in his State of the Union address:… The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats. The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address. The idea is to pre-empt an even more draconian set of budget cuts likely to be proposed by the incoming House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), as a condition of extending the debt ceiling. Bad idea. Dean Baker suggests another route: …supporters of Social Security and Medicare have to … push President Obama to announce in advance that he will never sign a debt ceiling bill that includes cuts to Social Security and Medicare, the countries two most important social programs.
 

Joseph Mason on the Myth of Good Servicers – Yves Smith – Joseph Mason has a post up at Housing Wire that not only struck both of us as more than a tad off beam, but even elicited critical e-mails from real estate industry participants. In addition, at a couple of junctures is it so unclearly written as to be difficult to parse.  The post is misguided from at least three perspectives. First, Mason claims that his take on servicing as of October 2007 was so correct that there is virtually nothing to be added. That is tantamount to saying a recommendation for urban planning for New Orleans made pre-Katrina is the pretty much the only thing worth considering now. Like New Orleans, the servicing industry has been hit by devastation, in this case a level of foreclosures that has overwhelmed the industry, that with the benefit of hindsight should have been anticipated. Mason’s 2007 paper did foresee a large increase in delinquencies, but his estimate of the cost of the crisis was $150 billion, consistent with the prevailing “subprime is contained” forecasts.  Moreover, his view of borrowers was based on the subprime ARM resets of 2007 and 2008. Many of those borrowers were simply not viable once a reset hit. Many of them have already lost their homes. One of his premises in that paper, that a mod might not leave the investors any better off, is quite different now, when loss severities are now averaging over 70%.

2011 Income Tax Withholding Tables – IRS employees must have had a busy weekend, as they already have the 2011 withholding tables that take into account the tax compromise bill signed into law by President Obama on Friday. Key changes are the end of the Making Work Pay credit and the 2 percentage point reduction in payroll taxes. Check out the tables here (PDF).

Analysis: Decline in home prices impacting small business borrowing – From the Cleveland Fed: The Effect of Falling Home Prices on Small Business Borrowing. The researchers analyze small business borrowing, and note that homes equity borrowing is an "important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances." Here is their conclusion:  Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

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