MacroScope

Hitchhiker’s guide to the intergalactic financial crisis

Pedro da Costa

Jul 27, 2012 13:14 EDT

The opening passage of Hitchhiker’s Guide to the Galaxy, Douglas Adams’ cult book, is remarkably apropos for a world caught in seemingly perennial financial crises and turmoil. It reads:

Far out in the uncharted backwaters of the unfashionable end of the Western Spiral arm of the Galaxy lies a small, unregarded yellow sun. Orbiting this at a distance of roughly ninety-eight million miles is an utterly insignificant little blue green planet whose ape-descended life forms are so amazingly primitive that they still think digital watches are a pretty neat idea.

This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.

Sound familiar? Not to worry, the author instructs us. Printed on the cover the hitchhiker’s guide itself are the words “Don’t Panic.”

Art (not) imitating life: MoMA hosts foreclosure-themed exhibit

Ellen Freilich

Jul 26, 2012 09:17 EDT

The long-awaited recovery in the housing market could finally be taking shape, some economists believe. Housing starts are up. Home sales have risen from their cyclical lows. Inventory levels are down sharply from cyclical highs. Builder sentiment is gradually improving.

But should developers, architects, marketers and financiers just hit the restart button and repeat the patterns that led to the U.S. foreclosure crisis? According to the Museum of Modern Art exhibition, “Foreclosed: Rehousing the American Dream,” the answer is no.

Instead of letting the recent crisis go to waste, the MoMA’s Architecture and Design Department and Columbia University’s Temple Hoyne Buell Center for the Study of American Architecture created some dynamic new architectural visions to address the needs of American communities.

“Foreclosed: Rehousing the American Dream” was jointly conceived and organized by Barry Bergdoll, MoMA’s chief curator for architecture and design, and Buell Center Director Reinhold Martin.

The project asked five teams of architects – including members with expertise in economics, finance, housing, and public policy – to think in new ways about relationships among land, housing, infrastructure, urban form, and public spaces. Bergdoll told Reuters in an interview:

The financial and foreclosure crisis was such a psychic shock that it created the perfect moment to have this discussion.

Hints of recession in sleepy Richmond Fed data

Pedro da Costa

Jul 25, 2012 16:57 EDT

It’s a report that gets little attention normally (We at Reuters geek out on Fed data a lot, and even we don’t write a story about it). But an unusually sharp contraction in the Richmond Fed’s services sector index for July caught the eye of some economists. The measure took a nosedive, falling to -11 this month, the lowest in over two years, from +11 in June.

Tom Porcelli at RBC says the plunge in new orders was downright scary:

Richmond Fed manufacturing got absolutely walloped in July. In fact, the all-important new orders component sank to an abysmal -25 from -7 in June and -1 two months ago. This is by far the weakest print since the recession. In fact, at no point has this metric been this low when we have not been in a recession.

To be sure, the data capture only two cycles prior to this one, but this doesn’t take away from the fact that the recent print is suggesting things could be much worse than advertised. We continue to hear how this year is “2011 all over again”, yet the data suggest it is materially worse.

from Felix Salmon:

Counterparties: The housing drag of student loans

Peter Rudegeair

Jul 25, 2012 17:20 EDT

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The Consumer Financial Protection Bureau and the Department of Education released a great new report last week detailing how the market for private student loans ballooned from less than $5 billion in 2001 to more than $20 billion in 2008. In its arc, its reliance on securitization for rapid growth, and its push to lend superfluous amounts of money to individuals with relatively low credit scores, the boom and bust in this market very much resembled the subprime mortgage market. All told, the report points out that there's more than $150 billion in outstanding private student loan debt, and that the poor outlook for jobs for recent grads is making defaults all the more likely:

In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.

And that's just private loans. The New York Fed pegs total student loan debt outstanding in the United States at $902 billion as of the first quarter of this year. Dylan Matthews notes that the median amount of student debt last year was $12,800, or about 17% of median household wealth.

Rohit Chopra, the student loan chief at the CFPB, reckons that the links between the mortgage market and the student debt market aren't just superficial – they're causal, too: "Student debt may be more intertwined with the housing market than we realise and it may prove more important every day to understand that connection," he told the FT's Shahien Nasiripour and Robin Harding. That connection may already be having an impact: In June, first-time purchasers made up 32% of homebuyers, down 2% from May. In 2011, first-time buyers accounted for 37% of all purchasers, but that's still the second-lowest level in the past decade, according to the National Association of Realtors. Regulators and realtors aren't the only ones who are noticing or who are concerned by this macroeconomic relationship. Credit Suisse's chief economist, Neil Soss, agrees with Chopra's diagnosis:

"We are trying to migrate towards a much safer underwriting standard, with let’s say 20 percent down payments required," Soss said today. "It takes a certain amount of time for people to save that up, and the more they’re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that."

If Chopra, NAR and Soss are on to something, then the proposed policy solutions that the CFPB and the Department of Education outline in their report – namely, allowing only private student debt to be discharged in bankruptcy, while federally issued student debt remains inviolable – are too anemic to have much of an effect on the broader economy. – Peter Rudegeair

Euro zone facing autumn crunch?

Spain remains the focus for the markets but here comes Greece racing up on the outside lane. Officials told us exclusively yesterday that Athens is way, way off the targets set by its bailout programme and a further restructuring will be needed. If so, it’s almost inevitable this time that euro zone governments and the ECB will have to take a hit. Are they prepared to? There’s little sign of it so far although a key ally of German Chancellor Angela Merkel said last night that a second haircut was an option.

CDU budget expert Norbert Barthle said Greece would do its level best to stay in the euro zone, and given the losses associated with its departure and the fact that it could also prove a tipping point for Spain, there are powerful reasons to hope that’s true. But, but, but it’s pretty apparent that Athens has little chance of delivering the cuts being asked of it without completely wrecking its economy even if it is cut a bit more slack. And the latter is a big “if” too. It’s hard to see Merkel telling the German public they are going to face another bill to keep Greece afloat. As Barthle said, a second debt write off “would cost us a lot of money”. He also flagged up another problem that has been aired in recent days – that the IMF would probably not stump up any more funds given Greece has not met its stipulations.

The euro zone has indicated it will keep Greece afloat through August while the troika of EU/IMF/ECB inspectors assess the situation but we could be approaching a crunch point in September or October and if we get there the big “contagion” question is back – would a full Greek default or euro zone exit (and by the way some policymakers have floated the possibility of allowing Greece to default within the euro zone because it would be slightly less chaotic) lead to a collapse of confidence in Spain?

The ESM rescue fund is in abeyance until the German constitutional court delivers its verdict in mid-September and even once in place it has only a few hundred billion euros at its disposal – not enough for a full sovereign Spanish bailout. So some big decisions may have to be taken pretty quickly such as dramatically beefing up the rescue fund and/or the ECB drops all its objections to taking on the bond market and intervenes with real muscle.

The big point about all this is that muddling through has almost had its day. Serious red lines may well have to be crossed – either by giving Greece yet more money to keep that show on the road, or by refusing to do that and having to quickly reinforce the structures to prevent Italy and Spain getting swept away in the backwash.

Interestingly, French Foreign Minister Laurent Fabius said yesterday that, while he hoped it wouldn’t be necessary, an increase in the euro zone’s firewalls or a dramatic intervention by the ECB could be needed. This morning, ECB policymaker Ewald Nowotny has suggested the ESM rescue fund could get a banking licence so that it could draw on virtually unlimited central bank funds. That proposal has been flatly rejected in the past but would be a serious game changer.

Even without the Greek factor, Spain is in serious bother. The advantage Madrid built up by frontloading its debt issuance in the first half of the year when the market was more benign has been shattered by soaring borrowing costs, climbing regional debts and higher deficit targets to the extent that it still needs to raise a further 50 billion euros this year – a target that will be very difficult without outside help. Again, October looms large. In the last three days of that month, 20 billion euros of debt matures. None of this necessarily means a full bailout is imminent. The ESM could be deployed to buy bonds in the primary market to keep Madrid afloat –- as agreed at the June EU summit — but that’s yet another call on its limited resources.

Three years after last increase, business group calls for U.S. minimum wage hike

Ellen Freilich

Jul 24, 2012 13:23 EDT

Bucking the usual tune of private sector lobbyists, a group called Business for a Fair Minimum Wage is calling for a hike in the minimum wage, saying it would boost business and the economy.

Business for a Fair Minimum Wage is a project of Business for Shared Prosperity, which describes itself as a national network of “forward thinking” business owners and executives.

The last step of a three-step federal minimum wage increase went into effect on July 24, 2009. The $7.25 an hour current minimum wage comes to just $15,080 a year for full-time work, below the poverty line.

Said the business group in support of a wage hike:

That hourly wage gives today’s minimum wage workers far less buying power than their counterparts did in 1968 when the minimum wage was at its highest value of $10.55 adjusted for inflation.

Proposals currently exist in Congress to raise the minimum wage to $9.80 by 2014 in three modest annual steps and then adjust it for the cost of living. According to Lew Prince, managing partner of Vintage Vinyl in St. Louis, Missouri:

Raising the minimum wage is a really efficient way to circulate money in the economy from the bottom up where it can have the most impact in alleviating hardship, boosting demand at businesses and decreasing the strain on our public safety net from poverty wages.

Safe for the 1 percent: FDIC often insures much more than $250,000

Ellen Freilich

Jul 24, 2012 08:52 EDT

That the U.S. Federal Deposit Insurance Corporation (FDIC) insures deposits in people’s bank accounts up to $250,000 is fairly common knowledge. What is less known is that this $250,000 cap is, in many cases, a fiction, because companies and savvy, wealthy depositors can circumvent it, or avoid it altogether.

Two examples of this “the-sky-is-the-limit” insurance are so-called TAG accounts and CDAR accounts. TAG (Transaction Account Guarantee) accounts held about $1.5 trillion as of March 31, according to the FDIC’s latest quarterly banking profile. The accounts pay no interest, so their popularity is derived from their uncapped FDIC insurance which reassures companies who need to keep large amounts of cash at hand to finance inventories and payrolls that their deposits are safe even if something goes wrong at the bank.

The FDIC is funded by the banks it insures. When it closes a bank, it uses money it has already set aside to protect depositors and absorb any losses associated with the failure. TAG accounts were forged in the fire of the 2008 financial crisis by the FDIC, the U.S. Treasury and Federal Reserve Board and unveiled in a joint press conference.

In 2010, The Dodd-Frank Act required all banks to join the program. Since then the FDIC extended the guarantee until Dec. 31, 2012, citing “lingering effects” of the financial crisis and the risk that letting the TAG program expire when the economy was weak could cause some community banks already under stress to lose deposits and risk failure.

One group opposed to the extension is the Investment Company Institute, which represents investment funds, including the money market funds that could see some of the money corporations keep in the TAG accounts for their short-term cash management needs migrate back to money markets. Other opposition comes from those who cite the “moral hazard” argument that might apply to any form of insurance.

Groups who favor an extension of the TAG program include the American Bankers Association (ABA) – which recently decided to support a two-year extension – and the Independent Community Bankers of America (ICBA), which favors a five-year extension.

Two other arguments against an extension were made early this year by Edward Yingling, a partner in the Washington office of Covington& Burling LLP and a former president and CEO of the American Bankers Association.

Darker and darker

Moody’s put Germany on notice that it might cut its credit rating and did the same for the Netherlands and Luxembourg. It cited a growing chance that Greece could leave the euro zone, and the contagion and costs that could flow from that, as well as the possibility that Berlin might have to increase its support for Italy and Spain. Both are self-evident risks and markets have not really reacted though it’s interesting timing that Spanish Economy Minister de Guindos is meeting his German counterpart, Wolfgang Schaeuble, in Berlin later. The Moody’s warning could also feed into darkening German public opinion about the merits of offering any more help to its sick partners.

German Bund futures opened just 10 ticks lower and European stocks edged higher after a sharp Monday sell-off. A jump in China’s PMI index has helped sentiment a little. The euro remains on the back foot but if it continues to fall that should actually help euro zone economies, making their exports more competitive. We’re programmed to treat government statements with scepticism but it’s hard to argue with the German finance ministry which said last night that the risks cited by Moody’s were nothing new and the sound state of German public finances was unchanged.

Nonetheless, reminders of the depth of the debt crisis are close at hand. So dislocated is the Spanish debt market that is hard to gauge what costs Spain will be required to pay at today’s T-bill auction because a combination of summer holidays and worries about the country’s finances mean trading has virtually dried up. With benchmark bond yields hitting euro-era highs on Monday, however, the debt sale of 3 billion euros in 3- and 6-month bills is likely to be expensive. Also last night, clearing house LCH.Clearnet SA  increased the cost of using Spanish and Italian bonds to raise funds via its repo service, which could put further upward pressure on already surging yields.

The trump card that Spain had – that it had issued well over half the debt it needed to in the first six months of the year – has disappeared with its 17 autonomous regions needing to refinance 36 billion euros of debt this year and many in no shape to do so, plus the looser deficit targets granted by the euro zone meaning debt can stay higher for longer. The sovereign bailout that Madrid and its euro zone partners have been striving to avoid, looks more and more likely.

Back to the Greek risk: The troika of EU/IMF/ECB inspectors returns to Athens. The euro zone has said it will keep Greece afloat through August while the inspection takes place but no one is quite sure what happens if the conclusion, the only rational conclusion, reached is that Athens needs more time and money to meet its bailout targets. The new Greek government is trying to highlight a deeper than expected recession for throwing it off course while its lenders say it is failing to push through privatizations, market liberalization and tax reforms. The government has failed so far to find nearly 12 billion euros of extra cuts stipulated by its agreement. Prime Minister Antonis Samaras is seeking an extra two years to make the cuts and reforms demanded of him. So far, there is little indication he will get it. In the end, it still looks more politically and economically palatable to cut Greece some more slack rather than push it towards default but nothing is certain. And let’s be clear, in this equation time is money. To give Athens an extra two years would effectively cost an extra 40 billion euros, according to some estimates, and who is going to stump that up?

Spanish yield curve flattens, along with Europe’s fortunes

Ana Nicolaci da Costa

Jul 20, 2012 17:00 EDT

Ten-year Spanish government bond yields hit their highest levels since the euro was created – above 7 percent – on growing doubts that the euro zone’s fourth largest economy will be able to avoid a full-blown sovereign bailout.

News that Spain’s heavily indebted eastern region of Valencia would ask Madrid for financial help reinforced concerns the country may eventually run out of funds. The rubber-stamping of a rescue package for Spain’s troubled banking sector did little to allay concerns.

Short-dated bonds came under particular pressure, flattening the Spanish yield curve further in a sign of mounting credit worries. Five-year bond yields hit a euro-era high of 6.928 percent, flirting with the widely dreaded 7 percent mark.

Charles Diebel, head of market strategy at Lloyds Bank says:

The more pressure you put on the front end … it is saying that the near-term risk of default is going up through the roof. It’s exactly the dynamic you saw in all of the other curves before they went into a bailout. You actually saw things like the Greek curve invert.

Asked when such an inversion — where short-term yields would actually surpass long-term ones — may take place for Spain, he said:

It always happens faster than you think. They haven’t got the summer, put it that way.

A summer lull?

It seems foolish to hope for a summer lull given recent history but in euro zone debt crisis terms at least, the next week looks quieter unless the markets turn savage again.

That’s not to say things are getting better – Spain’s 10-year borrowing costs are still above the seven percent level which it cannot survive indefinitely — it’s just that things aren’t getting much worse at the moment. Certainly with the Spanish bank bailout signed off as far as it can be, there’s nothing on the policy front to shake things up for a while although the debt-laden region of Valencia’s call for help with its debt hardly inspires confidence that Madrid can get things back on track.

What there is next week is a welter of evidence coming up on the health, or lack of it, of the world economy. Flash PMIs for the euro zone, France and Germany are swiftly followed by Germany’s Ifo sentiment survey and second quarter GDP figures from Britain. The Q2 U.S. growth figure also comes out on Wednesday as well as the Chinese PMI on Tuesday. The euro zone’s slide into recession is likely to be confirmed and of course Britain is already there and unlikely to clamber out despite government and central bank protestations that the country’s travails are all to do with the euro area.

The market landscape is perplexing at a first glance. Not just Germany, but France, the Netherlands and Finland are selling debt with negative yields – which denotes a high level of fear and loathing about the euro zone and wider world’s prospects – yet stocks have been buoyant. The index of leading European shares is up more than 3 percent from a July 12 low, largely due to hopes the Federal Reserve will turn on the printing presses again and because of some upbeat U.S. company earnings figures.

So you have gloomy economic news being offset by the fact that, in the markets’ eyes, it increases the chances of more central bank stimulus. That will have to come from the Fed, Bank of England and maybe China. The European Central Bank may cut interest rates further but it seems very reluctant to create more money or buy government bonds unless the euro zone crisis needle hits critical again, although if we do get a summer onslaught from the markets, it remains pretty much the only game in town, given the euro zone’s ESM rescue fund won’t be operational before September .

Whether more QE is a good idea in the long-term is a very open question. There is a profound paradox at work. Ultra-low borrowing costs should help boost consumption but are a disaster for savers and pension funds, so people will have to save even more and spend less to try and avoid an old age in poverty. Ergo, the net effect could be a further drag on consumption and therefore economic recovery. There’s the rub — further central bank action to ward off a global slump will drive the borrowing costs of “safe havens” yet lower, compounding the problem.