Monthly Archives: October 2011

Proposals for the lingering housing crisis

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1. US Regulators can make it illegal for their banks, housing agencies, and other publicly supported entities to refuse to refi on the basis of appraisals and income. Those loans were made, and priced, with the understanding that when long rates fall they get refinanced at the lower rates.

2. A rent to own option where a homeowner has the option to sell his home to the govt. at the lower of his mtg balance or current appraisal before a foreclosure sale, and then rent the home at fair market rent for two years. At the end of two years the home gets offered for sale at fair market prices, and the homeowner has right of first refusal to buy it and finance it at current market interest rates if he has paid his rent as agreed.

The housing crisis is still with us only because these proposals were not implemented when first proposed in 2008.

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Presidential Candidate Herman Cain’s 9,9,9- all the German you need to know

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Yes, it is highly regressive, and, worse, the 9% Federal sales tax is a transactions tax that discourages those transactions it taxes.

And, taking him at his word, it balances the budget, which leaves the economy even more short of aggregate demand than the current tax structure, meaning unemployment would be that much higher unless it somehow drives up private sector debt expansion by $trillions per year.

Cain: I’m the Only One Who Wants to Kill Tax Code

By Jeff Cox

October 12 (CNBC) — Now that Herman Cain’s stock has been rising in the Republican presidential scrabble, he’s drawing a clear line between himself and the other candidates when it comes to taxes.

Where his fellow GOP challengers are content to tinker with the current convoluted tax code, Cain says he is the only one who wants to junk the current system altogether and come up with a simpler way that everyone can understand.

It’s all part of his 9-9-9 proposal, which he discussed on CNBC.

“Their plans or ideas all pivot off the existing tax code,” the former CEO of Godfather’s Pizza said in an interview Wednesday. “My plan is the only one that throws out the tax code and is a fresh presentation of how we raise revenue on an expanded base.”

Cain has unexpectedly become one of the Republican leaders in the crowded field. Entering the race as a virtual unknown, Cain shocked the race by winning last month’s Florida straw poll. Recent surveys from Gallup and others have him in a virtual dead-heat with Mitt Romney, the frontrunning former Massachusetts governor.

At its core, the Cain plan slaps a 9 percent flat tax — no loopholes, no exceptions — on businesses, individuals and sales.

While the exact figures have yet to be released, the candidate said he has had his plan scored by an analytical firm and he will show that it generates more revenue while stimulating growth for the ailing U.S. economy.

“No, it is not regressive,” he said. “First of all, by putting it on sales tax — that third ‘9’ — we are going to pick up revenue that we are not getting today. That helps to lower the rate for everybody including the people that are making the least amount of money.”

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In case you thought President Clinton knew how the monetary system worked

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Falls under ‘even a fish wouldn’t get into trouble if he kept his mouth shut’ ???

Bill Clinton: How to fix the economy

October 7 (CNN) — How to fix the economy and create jobs

First, Congress and President Obama can adopt strategies designed to unleash the massive amount of capital that is accumulated but not being invested. There’s some $2.2 trillion in cash in American banks that is not committed to loans. A couple hundred billion has to be held back for bad mortgages, but there’s about $2 trillion that could be used in cash reserves for up to $20 trillion in loans. So, in theory, that would take the world out of recession. And U.S. corporations have about $2 trillion more that they have decided not to invest.

SORRY, MR. PRESIDENT, LENDING DOES NOT ‘USE’ OR ‘USE UP’ RESERVES WITH TODAY’S NON CONVERTIBLE CURRENCY/FLOATING EXCHANGE RATE REGIME. THE WAY YOU SAID IT APPLIES WITH A GOLD STANDARD OR OTHER FIXED EXCHANGE RATE POLICIES.

IN OUR BANKING SYSTEM, THE CAUSATION RUNS FROM LOANS TO DEPOSITS. IF THE BANKS MADE $2 TRILLION IN LOANS TODAY, $2 TRILLION IN NEW DEPOSITS WOULD BE CREATED IN THE BANKING SYSTEM, AND RESERVES WOULD REMAIN UNCHANGED.

The second thing is to accelerate the resolution of the home mortgage crisis, which would make businesses more eager to borrow, expand and consumers more willing to spend. These kinds of financial crises typically take about five years to get over. What we’re really trying to do is beat the historical trend by getting over it more quickly. We can’t do that unless we do on a larger scale what we did in the S&L crisis, which is to flush the debt quicker.

OK, BUT REMEMBER THE S AND L CRISIS LED TO THE CRASH OF 87, WITH THE HIGH LEVEL OF DEFICIT SPENDING SUPPORTING OUTPUT AND EMPLOYMENT.

The third category includes things that will strengthen our position today and tomorrow. We need to bring back manufacturing. We need to focus on exports. We need to focus on green technologies. There are dozens of things we could do that would create jobs.

MR. PRESIDENT, DON’T FORGET THAT EXPORTS ARE REAL COSTS, AND IMPORTS REAL BENEFITS. ECONOMICS IS THE OPPOSITE OF RELIGION. WITH ECONOMICS IT’S BETTER TO RECEIVE THAN TO GIVE. REAL TERMS OF TRADE AND STANDARDS OF LIVING ARE OPTIMIZED BY IMPORTING AS MUCH AS POSSIBLE IN EXCHANGE FOR AS FEW EXPORTS AS POSSIBLE. AND THE DOMESTIC ECONOMY CAN ALWAYS BE KEPT FULLY EMPLOYED BY APPROPRIATE FISCAL BALANCE.

AND DON’T FORGET THAT GLOBALLY, WITH INCREASING PRODUCTIVITY, MANUFACTURING EMPLOYMENT IS FALLING EVEN AS OUTPUT GROWS. MUCH LIKE AGRICULTURE, MANUFACTURING WILL CONTINUE TO DECLINE IN RELATIVE IMPORTANCE WITH REGARDS TO EMPLOYMENT WITH TIME.

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Trichet comments

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As suspected:

*DJ Trichet: No Crisis Of The Euro As A Currency

He looks at the euro as a currency as per the single mandate of price stability.

*DJ Trichet: Euro As Currency Is Evidently Not In Danger

There is no euro crisis as the value of the euro has been reasonably strong.

*DJ Trichet: Fear That Non-Standard Measures Stoke Inflation Totally Unfounded

They are now comfortable that the bond buying is not inflationary as it doesn’t alter actual spending on goods and services (aggregate demand) and in fact the required austerity reduces it.

*DJ Trichet: ECB Still Against Taking Defaulted Govt Bonds As Collateral

Ok, but so far there aren’t any.

*DJ Trichet: ECB Still Against Credit Event

No reason to let any member nation default and be released from their obligations.

*DJ Trichet: Rescue Fund Must Be Operational As Soon As Possible
*DJ Trichet: EFSF Should Be Appropriately Leveraged

Implying ECB involvement as suspected .

*DJ Trichet: Govts Should Be Responsible For Making Safety Nets Work

Which requires they be backstopped by the ECB which dictates austerity in return for said backstopping.

*DJ Trichet: EFSF Shouldn’t Get Banking Licence
*DJ Trichet: Banks Must Shore Up Capital As Soon As Possible
*DJ Trichet: Govts Must Be Ready To Recapitalize Banks If Needed

All of which requires ECB as backstop directly or indirectly.

*DJ Trichet: Need Euro-Zone Fin Min, Executive Branch In Future

Which would be ECB ‘funded’ much like the US Fed/treasury relation.

*DJ Trichet: Crisis Questions Econ, Fincl Strategy Of All Developed Economies
*DJ Trichet: Working Assumption That Govts Will Overcome Crisis
*DJ Trichet: Euro Is Credible, Stable

Again, the value of the euro is telling for the ECB.

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Russia Says Close to Final Stage on China Gas Deal

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This is what I’ve proposed the US do with Canada and Mexico- long term contracts for oil and nat gas at ‘fair’ prices would stabilize prices and reduce price disruptions and inflation possibilities of all three economies.

Russia says close to final stage on China gas deal

By Gleb Bryanski

October 11 (Bloomberg) — Russia said on Tuesday it was close to the final stage of a huge gas supply deal with China, in what would be a landmark trade agreement between the long-wary neighbours.

A deal to supply the world’s second biggest economy with up to 68 billion cubic metres of Russian gas a year over 30 years has long been delayed over pricing disagreements.

“We are nearing the final stage of work on gas supplies,” said Russian Prime Minister Vladimir Putin, on his first overseas trip since announcing he was ready to reclaim the Russian presidency.

Putin is hoping his two-day visit will help broaden trade with China, which he expects to grow to $200 billion in 2020 from $59.3 billion last year.

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GS US Views: OK for Now, But Slowdown Ahead (Hatzius)

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As previously discussed, no double dip, but instead continued sequential quarter to quarter gdp growth with q4 possible better than q3 as well, helped by lower gasoline prices.

The 8.5% federal budget deficit continues to provide fundamental nominal support for GDP and the domestic credit sectors are still too weak to subtract much if they do pull back.

And it still seems to me that the chances of a euro area event reducing aggregate demand in the US are reasonably low.

US Views : OK for Now, But Slowdown Ahead

By Jan Hatzius
October 9 (Goldman Sachs)

1. After the sharp slowdown earlier in the year, the US economy seems to have grown at roughly a trend pace over the summer. Our GDP “bean count” now stands at 2½% for the third quarter, the ISM indexes are broadly stable in the low 50s, payroll employment is growing at a pace of around 100k per month, and the unemployment rate has been flat for the past three months.

2. Although the recent US growth news has generally beaten low expectations, we expect a renewed deceleration to just a ½%-1% growth pace in the next two quarters and see the risk of renewed recession at about 40%. The main reason is the turmoil in the euro area, where we switched to a recession forecast last Monday. To be sure, there is more talk in Europe about the types of action that we think would help, including a larger financial safety net for sovereign issuers (perhaps achieved by “leveraging” the EFSF), proactive bank recapitalization, and monetary easing. But policy continues to move very slowly relative to the building risks in the financial system and the deterioration in the real economy. A true turnaround in the financial situation does not yet appear to be in sight, let alone a bottoming in the real economy.

3. There are several channels through which the European crisis is likely to weigh on US growth. The impact via reduced exports is the most obvious, but it is unlikely to be very large. Exports to the Euro area account for about 2% of US GDP, so an impact of much more than 0.1-0.2 percentage point would probably require a much deeper European recession than we are forecasting. The bigger issue is the significant tightening in financial conditions and the availability of credit. Since early summer, our financial conditions index has tightened by more than 50bp, a move that might shave ½ percentage point from growth over the next year. In addition, there are some early indications of tightening credit availability including an increase in the percentage of small firms reporting in the NFIB survey that “credit was harder to get” last time they tried to borrow (the next update is due on Tuesday). Tighter credit could easily shave another ½ point or more, for a total impact from Europe on US growth of 1-1½ percentage points. Should the European recession deepen, the risk of further dislocations in the financial system and greater spillovers into the US would grow (for more on this, see Andrew Tilton’s US weekly dated September 16 at US Economics Analyst: 11/37 – Will the European Storm Cross the Atlantic?).

4. One key question is whether the European crisis—and the unsettled fiscal policy environment more generally—has caused a sufficiently large increase in uncertainty to lead companies to postpone hiring and capex decisions in a self-reinforcing manner. There is some evidence that corporate behavior may be changing, as online job ads have dropped off and the percentage of firms increasing employment in the nonmanufacturing ISM survey has declined at the most rapid pace on record over the past two months (data go back to 1997). No such deterioration was visible in Friday’s payroll numbers, but online job ads lead by a month or two and most of the ISM responses probably came after the payroll survey week, so the jury is still out.

5. The other key drag on US growth is the tightening of fiscal policy. Our baseline assumption remains extension of the employee-side payroll tax cut and passage of a small business hiring incentive; we do not assume extension of emergency unemployment benefits (although this is a close call), a further expansion of the payroll tax cut as proposed by the President, additional infrastructure spending or aid to state governments, or another foreign repatriation tax break. We also expect the Congressional “supercommittee” to agree on spending cuts and revenue increases that cover part of the mandated $1.2 trillion in savings over 10 years; the remainder will likely come via automatic cuts that take place from 2013. Overall, we view the risks around our assumption of just under 1 percentage point of fiscal drag (excluding multiplier effects) in 2012 as roughly balanced at present.

6. Even in the baseline case of no recession, we expect additional monetary easing as the Federal Reserve supplements “Operation Twist” with yet more purchases of long-term securities financed by creation of excess bank reserves (that is, additional QE). We believe that this could still boost growth a bit by further reducing the term premium in the Treasury yield curve and thereby ease financial conditions. But policymakers are clearly running into diminishing returns. If they want a bigger impact, they will probably need to supplement additional QE with changes to the Fed’s monetary policy framework. A relatively incremental version of this is the proposal by Chicago Fed President Evans to promise no monetary tightening until the unemployment rate falls back to 7%-7½% and/or inflation rises to 3%. A more radical version would be a temporary increase in the Fed’s inflation target or a move to price level or nominal GDP level targeting as discussed by Jari Stehn a couple of weeks ago (see US Economics Analyst: 11/38 – The Fed’s “Unconventional” Unconventional Options).

7. While additional easing is likely eventually, we currently do not expect a big move at the November 1-2 FOMC meeting. This is based partly on the somewhat better data and partly on Fed Chairman Bernanke’s remark in his congressional testimony that Fed officials had “no immediate plans” to ease further. Of course, since Bernanke also said that he saw the economy as “close to faltering,” it probably would not take a huge amount of new information to change his mind, but for now our best guess is that the next statement will be less eventful than its two predecessors.

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SENATORS HAGAN, MCCAIN TO INTRODUCE REPATRIATION

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Good report on this supposed ‘job creator’ here.

Hint, it’s not…

US Daily : Profit Repatriation Tax Holiday: Still an Uphill Climb (Phillips)

Published October 5, 2011

* Media reports indicate that Sens. Kay Hagan (D-NC) and John McCain (R-AZ) plan to introduce legislation to allow for a one-time tax holiday for repatriation of corporate profits from abroad. If such a plan were enacted, it would most likely increase dividend payments and share buybacks, potentially resulting in a slight easing of financial conditions. However, we would not expect a significant change in corporate hiring or investment plans: most firms with large amounts of overseas profits are likely to have adequate access to financing, so the availability of cash on hand is unlikely to be a constraint on investment at the present time.

* Repatriation legislation also still appears to face significant legislative hurdles. The most important may be its estimated cost; the official cost estimate of a repeat of the 5.25% temporary tax rate enacted in 2004 is nearly $80bn over ten years in lost revenue. A second hurdle is the interest some lawmakers have in saving such a tax break as an incentive for broader tax reform.

Shameless

DJN: US Senators Plan To Introduce Repatriation Tax Break Bill

By Kristina Peterson

October 5 (Dow Jones) — A bipartisan pair of senators plans to introduce on Thursday a bill proposing a tax break for U.S. companies that bring home foreign profits.

Sens. John McCain (R., Ariz.) and Kay Hagan (D., N.C.) will co-sponsor legislation that would create a repatriation tax holiday, reducing the corporate taxes that U.S. multinationals would pay when bringing home overseas profits, in an effort to boost the economy. Their bill, called the Foreign Earnings Reinvestment Act, would create an incentive for companies to bring back an estimated $1.4 trillion currently kept overseas, according to an advisory from their offices.

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U.S. Homebuilders’ Improving Markets Index

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Thanks, if private sector borrowing to spend is going to kick in this is as likely a spot as any:

>   
>   On Thu, Oct 6, 2011 at 10:30 AM, EDWARD LASHINSKI, ABN AMRO CLEARING CH wrote:
>   
>   Recent news that US holiday sales are expected to be up 2.8% ( http://bit.ly/nIjmtE ) as well
>   as September sales estimates exceeding estimates at 6.1% (vs. 5.1%) with 13 of 21 retailers
>   beating consensus is constructive. If tomorrow’s NFP is at all modest it will portend very
>   positively for the US economy’s improving prospects in Q4, which could be a game changer.
>   

U.S. Homebuilders’ Improving Markets Index

By Kristy Scheuble

October 6 (Bloomberg) — Following is the text of the Improving Markets Index (IMI) from the National Association of Home Builders.

Number of Improving Housing Markets Nearly Doubles in October

The second edition of the National Association of Home Builders/ First American Improving Markets Index (IMI), released today, shows 23 individual housing markets now qualifying as “improving” under the new gauge’s parameters. This is nearly double the 12 housing markets that made the list last month.

The index reveals metropolitan areas that have shown improvement for at least six months in housing permits, employment and housing prices. The following metros were listed in October:

· Alexandria, LA · Amarillo, TX · Anchorage, AK · Bismarck, ND · Casper, WY · Fairbanks, AK · Fayetteville, NC · Houma, LA · Iowa City, IA · Jonesboro, AR · Kankakee, IL · McAllen, TX · Midland, TX · New Orleans, LA · Odessa, TX · Pine Bluff, AR · Pittsburgh, PA · Sherman, TX · Sumter, SC · Waco, TX · Waterloo, IA · Wichita Falls, TX · Winston-Salem, NC

“Both the number and geographic diversity of improving housing markets expanded this month, with Iowa, Illinois and South Carolina all newly represented by one entry or more on the list,” said National Association of Home Builders (NAHB) Chairman Bob Nielsen, a home builder from Reno, Nev. “This is further evidence that, despite the tough conditions that persist in many cities, pockets of improvement are emerging in local housing markets across the country.”

“While Pittsburgh and New Orleans remain the two largest improving markets, the October IMI is heavily weighted by smaller cities in which energy and agriculture are the primary economic drivers and where the effects of the recession have been less pronounced,” said NAHB Chief Economist David Crowe. “In particular, Texas stands out for its seven entries on the improving markets list.”

Bangor, Maine, was the only area to drop off of the improving markets list in October, due to a decline in local building permits.

The IMI is designed to track housing markets throughout the country that are showing signs of improving economic health. The index measures three sets of independent monthly data to get a mark on the top improving Metropolitan Statistical Areas. The three indicators that are analyzed are employment growth from the Bureau of Labor Statistics, house price appreciation from Freddie Mac, and single-family housing permit growth from the U.S. Census Bureau. NAHB uses the latest available data from these sources to generate a list of improving markets. A metro area must see improvement in all three areas for at least six months following their respective troughs before being included on the improving markets list.

Editor’s Note: The NAHB/First American Improving Markets Index (IMI) is released on the fourth business day of each month at 10:00 a.m. ET, unless that day falls on a Friday – in which case, the index will be released the following Monday. A full calendar of 2011 release dates can be found at www.nahb.org/imi.

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