A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, November 27, 2012

Transcript: Two men with big deficits in credibility, and one with a surplus

The central bankers of this era are accorded reverence by the financial community and deference by others in inverse proportion to their merit. When the history of these last three decades, the 80's, 90's, 00's and into the teens, is written, these will be the clueless mandarins, practicing a monetarism that more often harmed than helped, men who because they were close to the money were assumed to know what they were talking about, but were fundamentally out of their depth.
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Alan Greenspan, a man who put the regulation of financial markets in the hands of the regulated, then said oops, I was wrong, only in words of six syllables with multiple dependent clauses, a man who insisted on historically high rates in 1999 and 2000, then historically low rates in 2002 and following, both of which caused big problems, who fomented a housing bubble and when it crashed, tried to look at the sky and say, "It wasn't me."


Forgetting that the great bulk of the current debt is a legacy of Ronald Reagan, George HW Bush, and George W Bush, and the great bulk of the current deficit grows directly out of the Bush tax cuts, the unpaid for wars in Iraq and Afghanistan, and the Great Financial Crisis.

For his part, Greenspan forgets that in 2002 he was in front of Congress arguing that the Bush tax cuts were essential, because otherwise there would be a dirth of bonds for investors to buy. That is, the threat was that the debt would go away, leaving no risk-free assets.


Better a 201(k), I guess. Not deterred by past failures, Greenspan is back predicting the future. Here he forgets that Alan Greenspan and the Greenspan commission convened under Ronald Reagan put Social Security funding on sound footing, with rate hikes and the delays in qualification that we have today. He rode the success of the Greenspan Commission into a job at the Federal Reserve.

Social Security has lasted from the 1930's to now. Arguably themost successful federal program ever. It has contributed not one nickel to the deficit or debt, and has become a problem – well, it was always a problem for the Old Guard Republicans --= but it is a fiscal issue now that the bonds have to be paid back, because the trust funds are fully invested in good U.S. Government bonds. They have big balances, all in bonds. And even now it is not really a problem.

But why is Social Security a pay-as-you-go plan? It was installed in the 1930's. What were you going to do with impoverished seniors in an impoverished Depression-era country? Tell them to invest? Where would they invest? No. You institutionalized a pension, had current taxpayers fund the current seniors (as many of the children would have had to support parents anyway) and moved ahead. Worked great. Still works great. Has nothing to do with the current deficits. Is brought up as a political ploy in a time of crisis and given credibility by the man who has the least to spare, Alan Greenspan.

Now, onto the current Fed Chairman, Ben Bernanke.

The author of QE after QE. We've put up a good recent critique from L. Randall Wray on QE, but today we want to feature Bernanke not on the trumpet, but still beating the drum for housing recovery. In the 1930's, the New Deal dealt with a very similar housing problem in a radically different way. It recognized the excess debt and brokered deals one at a time between lenders and borrowers. The Home Owners Loan Corporation. The debt was written down, secured, and housing became stable.

Bernanke has bet the house on saving the banks, dealing with the housing debt by trying to create more debt to validate the bubble prices. He and the fed are proud owners of one and a quarter trillion dollars or more of mortgage backed securities. Remember the securities markets? He is the author of zero percent interest rates. Now, most recently, he was at the Economic Club of New York whining about how credit is still not flowing, debt is still not flowing to the housing sector, at least in ways that will validate his big bets.

But here's what Ben said

Although the decline in the number of willing and qualified potential homebuyers explains some of the contraction in mortgage lending of the past few years, I believe that tight credit nevertheless remains an important factor as well. The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that lenders began tightening mortgage credit standards in 2007 and have not significantly eased standards since. Terms and standards have tightened most for borrowers with lower credit scores and with less money available for a down payment.


When lenders were asked why they have originated fewer mortgages, they cited a variety of concerns, starting with worries about the economy, the outlook for house prices, and their existing real estate loan exposures. They also mention increases in servicing costs and the risk of being required by government-sponsored enterprises (GSEs) to repurchase delinquent loans (so-called putback risk).

blah, blah, blah, here

. Importantly, however, restrictive mortgage lending conditions do not seem to be linked to any insufficiency of bank capital or to a general unwillingness to lend.

Certainly, some tightening of credit standards was an appropriate response to the lax lending conditions that prevailed in the years leading up to the peak in house prices. Mortgage loans that were poorly underwritten or inappropriate for the borrower's circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy. However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.


Yes, house prices are going up, but affordability is not, because credit is not available, and any of you who bought MBS's, oh, that's you, Ben... oops.

And now for something less disturbing

As you may remember, we at Demand Side have been saying the economy is weak, bouncing along a bottom sloped downward, with downside risks, and a likely slump after the election. We see early data from The Dallas and Chicago Feds indicating the slump is underway.

We'll see how that plays out.

Here is Nouriel Roubini

severely edited,

under the title "The Year of Betting Conservatively"

The upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: with no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs. If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months.

Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe). Economic growth in the United States has remained anemic, at 1.5-2% for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the eurozone, has already endured a double-dip recession, and now even strong commodity exporters – Canada, the Nordic countries, and Australia – are slowing in the face of headwinds from the US, Europe, and China.

Meanwhile, emerging-market economies – including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa – also slowed in 2012. China’s slowdown may be stabilized for a few quarters, given the government’s latest fiscal, monetary, and credit injection; but this stimulus will only perpetuate the country’s unsustainable growth model, one based on too much fixed investment and savings and too little private consumption.

In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. But now it is permeating the eurozone’s core. And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming “fiscal cliff,” spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1% of GDP. In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.
So, what explains the recent rally in US and global asset markets?

The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets. The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). The European Central Bank’s announcement of its “outright market transactions” program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union. The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations....

Today's podcast brought to you by the Fiscal Cliff, or at least the Fiscal Cliff panel, which we relayed from the EPS symposium, available on one of our feeds, and perhaps we'll squeeze it in on the other this weekend. Here is an excerpt. Featuring Stephanie Kelton.


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