Monday, December 26, 2011

notes on the week ended Dec 24th

you probably have all heard the news by now that the House republican leadership finally OK’d a two month payroll tax cut extension, et al, which had been earlier stalemated by a House vote to oppose it which had been taken tuesdayif you recall last week, that bill to extend the expiring programs had been passed by an overwhelming bipartisan vote in the senate on saturday & boehner had indicated his house majority would follow suit, so the senate had already left town when the house GOP revolted en-masse, leaving boehner with egg on his face....since it was obvious that some kind of deal would have to be cut before year end, because there was no way they would allow the mandated 27.4% pay cut for doctors who treat medicare patients to take effect, expectations were that the tea party contingent would hold out till the last minute to extract concessions that the democrats had expected they’d have to give; however, senate minority leader mcconnell broke ranks & joined obama & the Dems in attacking the House intransigence, boehner caved in & agreed to the 2 month extension, & the house version of the bill was passed by unanimous consent, which is a parliamentary trick that allowed the bill to be snuck through as long as no one objected…(seems our legislative process functions better when most of the congresscritters are out of town)…HR 3765, the $30 billion bill obama signed friday, extends the 2% payroll tax cut cut for all those who will make under $18,350 in the next 2 months (1/6th the payroll tax cap of $110,100) but adds on a “recapture” tax of 2% for those who make over that amount; it also extends rations for the unemployed, but because the emergency rations are still based on a state’s unemployment over 3 years & the Dems werent able to tweak it, 32,000 of the long term unemployed in michigan & minnesota, states which are better off now than their 3 year jobless rate, will be limited to 79 weeks, and be cut off in february...all this is being "paid for" by an increase in the fee charged by the GSEs on the home loans they purchase, which could put another crimp in the housing market…the bill also requires that obama make a decision on the Keystone XL pipeline within 60 days, which may doom the project, as envronmental groups are convinced that forcing obama to make a decision on the pipeline without a proper review will lead to its rejection…the concession won by boehner was to establish a House-Senate conference committee to work on changes to a one-year extension of this deal, so we get to reenact this whole brouhaha in another 60 days

Existing Home Sales Revisionsthere were a number of housing related reports out this week, the most important of which was the benchmark revisions to home sales that were reported by the NAR (National Association of Realtors) over the 4 years between 2007 and 2010; as unreal as this seems, existing home sales which had been reported as being 20,629,000 over that entire period were overstated by 16% more than the 17,680,000 that actually occurred, hence they announced on wednesday that U.S. home sales from 2007 through 2010 were about 14% lower than first reported; this revision had been known to be coming for weeks, because it was announced after a number of housing analysts had noticed the discrepancy between NAR figures & data from CoreLogic & the census bureau, even so, the magnitude of it seemed to surprise most observers…the adjacent chart from calculated risk, which should enlarge, shows the size of this change by month, with blue as home sales were first reported, & red as they were revised….since the government BEA has used NAR sales figures in computing the brokers commissions & fees component of GDP, these revisions are expected to result in minor revisions to GDP growth over the period, mostly in 2007…and speaking of GDP, the BEA released their 3rd estimate of 3rd quarter GDP this week, down to 1.8% from the 2nd estimate of 2.0% and much lower than the widely reported first guestimate of 2.5% growth

so, after the prior year revisions, the NAR announced existing home sales for november at a seasonably adjusted 4.42 million rate, up from the revised & adjusted 4.25 homes sold in october, & also up from the seasonally adjusted & revised sale pace of 3.94 million homes reported sold in november 2010; a separate report from a HousingPulse tracking survey indicated 46.1% of those november sales were of a distressed nature, with short sales leading that category at 17.6% of total home purchases for the month…CoreLogic reported there was also a “shadow inventory” of severely delinquent & foreclosed homes not on the market of 1.6 million units…new home sales for november were also reported by the census bureau this week, at a seasonally adjusted annual rate of 315,000 homes; although the actual number of homes sold for the month was 22,000, a couple thousand more than last november’s 20,000, this year is still shaping up to be the worst year on record for new home salesmortgage rates across the board were again at all time lows, with the 30 year fixed loan at 3.91%, the 15-year rate at 3.21% and the one-year ARM down to 2.77%; even so, mortgage applications fell 4.9% for the weekthe census bureau also reported housing starts for november a seasonally adjusted annual rate of 685,000, up 9.3% from the october rate, and building permits for a seasonally adjusted annual 681,000 additional homes were issued in novembermulti-family starts at around 170,000 will be about 60% higher than last years record low, which in turn will result in record low multi-family completions this year…

    in matters of the foreclosure fraud settlement being pushed by the administration & the banks, the lead attorney general on that case, iowa’s tom miller, continues to postpone the date for a settlement (last week he said it would be done by christmas); meanwhile, california’s camela harris & nevada’s catherine cortez masto, who are not part of the “50 state” settlement, have announced a joint investigation into fraudulent mortgage & foreclosure practices by the same banks that miller and the administration are suggesting immunity for…late last week nevada’s masto, who had previously brought fraud charges against 3 LPS (Lender Processing Services) executives, filed suit against the firm & its subsidiaries for widespread document fraud, deceptive statements in attempts to correct document fraud, improper control over foreclosure attorneys and the foreclosure process, & misrepresentations about LPS’s services; this week california’s attorney general harris filed suit against Fannie & Freddie for not maintaining 12,000 foreclosed properties in california where the GSEs serve as landlords, and in another rare case of a public official actually trying to do his job, Steve Linick, the inspector general of the FHFA, which supervises Fannie and Freddie, has taken the results of his investigations to new york attorney general Schneiderman because he cant get anyone in the Obama justice department to prosecute mortgage related misdeeds…

there were a number of important posts this week dealing with a problem i've been trying to wrap my head around & explain in comments on other's blogs for several weeks, that being that the outstanding US debt & other safe assets are in such short supply that financial markets, & more specifically the shadow banking system, is unable to function properly...US debt, that same US debt that our lame brained policy makers & politicians damn & rant about, has a special function in the financial markets; without it, the financial markets freeze up...what's important to understand is that short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by the international banking system and by sovereign wealth funds in the same sense that you use a ten dollar bill in your wallet…thus, any contraction of the supply of the reserve currency (our treasury debt) has a negative impact on the world economy in the same manner that a contraction in the domestic money supply impacts our nation's economy (see IMF paper on this, PDF)...the adjacent chart, from the 2012 credit suisse global outlook via FT Alphavile, shows the decline in safe (AAA) assets in primary reserve currencies available to use as financial collateral & in repurchase agreements over the last decade (skipping some years); the two that dropped out with the recession’s onset were structured products (red) & agency MBS (grey); downgrades of european countries have further reduced AAA assets this year…as economist david beckworth points outthese safe assets serve as transaction assets and thus either back or act as a medium of exchange…(they) have served as collateral for repurchase agreements, the equivalent of a deposit account for the shadow banking system…the disappearance of safe assets therefore means the disappearance of money for the shadow banking system”…this problem exacerbated the liquidity crunch that developed in the European banking system a few months back which prompted the Fed’s recent action to coordinate with 5 other central banks to lower the price of dollar denominated currency swaps in order to ease ongoing bank funding strains, and this week’s ECB lending of $641B to banks via a 3 year LTRO, which, btw still doesnt seem successful as ECB overnight deposits hit a new high thursdayquality collateral has become so scarce that banks are hoarding it just as a miser would hide paper money under a mattress in times of uncertainty…but instead of creating “money” when its in short supply & needed, the world is stuck with this system of having to borrow it & pay it back; what steve roth at angry bear callsa stunningly byzantine and dysfunctional approach to managing the supply of money to the real economy that produces human-consumable goods and services (though it works out very nicely for the bankers, personally)”

reducing the debt even effects us adversely domestically; Dr Randall Wray has shown that in each of the 6 times in US history where we had a depression, it was preceded by substantial budget surpluses and significant reduction of the debt; this was a concern of the Fed & bush administration economists early last decade; it became clear that if clinton surpluses continued & our debt was paid down, the financial system would soon experience a dearth of safe assets & would begin to lock up; so the bush tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate..but now, the same bush chief economist who was the architect those tax cuts, greg mankiw, is now nefariously suggesting that US debt under obama makes the US similar to greece or zimbabwe…we really need a new word to describe government note, bill, & bond issuance, because the nature of a government issue is closer to creating needed money than it is to what the public & the airheaded congresscritters think of as "debt"...obviously, obama suffers from the same delusion, saying that the government is like a household and should also tighten its belt when times are tough...& the mistake they're all making is what's costing us this prolonged & deep recession...

this is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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