Tuesday, March 24, 2009
I will be on vacation until April 1, 2009. My body requires that I relax for a week in a warm place, and my husband requires that I take no computer....hence, no blog.
Be back in 7 days! Rebecca
I will be on vacation until April 1, 2009. My body requires that I relax for a week in a warm place, and my husband requires that I take no computer....hence, no blog.
Be back in 7 days! Rebecca
The Office of Federal Housing Enterprise Oversight released its January home price data. According to the report:U.S. home prices rose 1.7 percent on a seasonally-adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. December’s previously reported 0.1 percent increase was revised to a 0.2 percent decline. For the 12 months ending in January, U.S. prices fell 6.3 percent. The U.S. index is 9.6 percent below its April 2007 peak.What a cheery report!
The Fed's recent and extreme policies have made people nervous about inflation. They should be, but just not right now. Key central banks recently added hydrogen to their engines in the form of quantitative easing, causing high-powered money to surge. However, the multiplier is collapsing, and therefore, the new base is simply a measure to keep the money supply afloat. Some economies, though, are showing worrisome trends in their money growth rates.
The chart illustrates the 6-month annualized growth rate of the U.S. monetary base, commonly referred to as high-powered money. High-powered money is bank reserves plus currency, which does not cause inflation until it gets lent out to consumers and firms and turns into money. I like the 6-month growth rate because it captures more recent policy measures.
The chart illustrates the 6-month annualized growth rate of the broad measure of real money in the U.S., the U.K., Japan, and the Eurozone. In spite of the massive surge in the U.S. monetary base, 231% over the last 6 months, the real U.S. money supply grew just 22.6% over that same period. Can you imagine what would have happened had the Fed not eased so substantially? Troublesome deflation. The money multiplier is collapsing as banks hoard cash and consumers and firms pull back.
Furthermore, like the Fed, the Bank of England (BoE) is engaged in quantitative easing, resulting in a similar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increasing their broader measures of real money on a 6-month basis, but at a much slower rate. Admittedly, the BoJ is engaging in alternative policy measures, but the ECB and the BoJ are not pulling out all of the "easing stops" as are the Fed and the BoE.
This chart illustrates the monthly growth rate of the real measure of broad money for the same economies. The money supply data is current as of January 2009 for Japan and the Eurozone and February 2009 for the U.S. and the U.K. For now, the monthly real money supply growth rate remains above zero in the U.S., the U.K., and Japan. The European Central Bank (ECB) has let the money supply growth rate go negative; this is slightly worrisome if the trend continues.
This is a necessary policy action, given the alternative of allowing the money supply to collapse. However, John Taylor is worried, and frankly so am I. Because given the QE policies in place, the worst-case scenario or surging inflation, can only be avoided if the Fed gets its timing right. I tend to think that it will, but then again it might not.
I get a little irked when the Secretary of the Treasury writes an op-ed piece, and only paid subscribers can access it. I made a copy of Timothy Geithner's piece in the Wall Street Journal, My Plan for Bad Bank Assets, available for download here.
The Bureau of Labor Statistics released a terrible report on mass layoffs for February. The BLS defines a mass layoff event as one where a single employer lays off 50 or more workers at one time. According to the BLS:
Accordingly, the labor market is very weak, falling farther in February. However, there are signs that the mass layoff events may be nearing a peak.
The chart illustrates the annual growth in mass layoffs on a seasonally adjusted basis and on a non-seasonally adjusted basis. The seasonally adjusted mass layoffs (in persons) are up 61% over the year, marking the third consecutive month where the annual growth rate has accelerated. However, the nonseasonal growth rate is down to 83%.
Admittedly, the mass layoff growth rate is still very high, and furthermore, the series is very volatile. Mass layoffs are almost certain to remain at very elevated until the labor market works itself out. It's just that the seasonal adjustments may be masking the true situation of the mass layoff report; specifically, mass layoffs may, at the very best, not be worsening.
The reduction in layoff announcements tentatively suggests that mass layoffs may have peaked.
The chart illustrates the number of workers who lost their jobs in mass firings as a share of the total nonfarm payroll (to extract population trends from the data), and the number of announced layoffs tallied up by Forbes layoff tracker. The tracker implicitly follows mass layoffs, as most of the listed firms are laying off in bulk. Even though the Forbes layoff tracker only includes data since November 2008, it does move very positively with the mass layoff report.
To date, Forbes tracked 26,000 announced layoffs in March, down sharply from the 125,700 announced in February. I understand that March is not over, but it is almost over. So barring a 100k surge in announced layoffs over the next week, the Forbes layoff tracker suggests that the BLS March mass layoff report might show a decline in the number of persons being laid off in mass. Still way too early to tell, and mass layoffs are very likely to remain elevated throughout 2009, but perhaps we are at a peak (only in mass layoffs, which is a small share of total layoffs).
Today I compared ECB policy versus Fed policy in charts, noting that the ECB has not engaged in quanitative easing, while the Fed clearly has. Willem Buiter does a really nice job (of course) of addressing the ECB's reluctance to engage in non-traditional monetary measures, such as quantitative or credit easing policies. An excerpt from his post today on FT.com Maverecon (hat tip, reader M G):
"The fiscal hole at the heart of the Eurosystem
An entirely valid reason for the ECB/Eurosystem to refuse to engage in either outright purchases of private securities or in unsecured lending to the banking sector (or to the non-financial enterprise sector directly), is that there is no ‘fiscal Euro Area’, just as there is no fiscal EU. The absence of a fiscal Europe that matters here is a narrow one. I am not talking about the absence of a significant supranational fiscal authority in the EU (or in the Eurozone ), with significant tax, spending and borrowing powers -one capable of material system-wide fiscal stabilisation and cross-border redistribution. I am talking instead about two related fiscal vacua.
The first vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise the ECB/Eurosystem when the Eurosystem makes capital losses that threaten its capacity to implement its price stability and financial stability mandates.
The second related vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise systemically important border-crossing financial institutions in the EU or the Euro Area, or provide them with other forms of financial support.
When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person: Tim Geithner , the US Secretary of the Treasury. It is possible that no-one in the US Treasury will pick up the phone, as none of the senior political appointments below Geithner are in place yet, but Geithner clearly would be the man to call.
Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Euro Area member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose NCBs are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.
This situation is intolerable. We need a fiscal Europe, at least at the level of the Eurozone, to fill the first vacuum. If we are to fill the second vacuum, we need a fiscal Europe at the EU level also."
Read the rest of the post here, as Buiter proposes some solutions to the ECB's quandary. Hope that you are enjoying your Sunday!
As global central banks continue alternative policy measures and/or quantitative easing (raising the balance sheet beyond that required to attain a zero policy rate), the European Central Bank (ECB) is the odd man out. And recently, the ECB is being pressured to broaden its accepted collateral to include commercial paper and other stressed assets.
ECB council member Weber hinted at further rate cuts below the current 1.5% policy rate, which would bring the rate uncomfortably close to zero, but nevertheless, still by the book and using traditional monetary measures. Traditional measures include enough money creation to lower the ECB refi rate (the rough equivalent to the federal funds rate) to the target level, 1.5%. Non-traditional means would include buying commercial paper, buying government debt in excess of what is needed to attain a zero policy rate (quantitative easing), purchasing asset-backed securities, or really anything under the sun.
This is what the Fed is doing: buying (almost) everything under the sun
The chart illustrates the Fed balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, 130% to $2.09 trillion in the week ending on 3/18/09. Also notice that the composition of the balance sheet has changed drastically. The extension of bank credit (everything in the chart except for Other Fed assets, including gold, SDR's, and Treasury currency) has surged 139% to $2.04 trillion, mostly through non-traditional means.
Initially, the Fed added liquidity through traditional means, Term Auction Facility (TAF) or discount lending, but recently, and in addition to maintaining these lending programs, it is buying assets directly, including mortgage-backed securities, asset-backed securities (TALF, which only just begun), agencies, and more Treasuries (starts next week) than are needed for the (near) zero fed funds rate. See my recent post on how the Fed is shifting its focus. Basically, the Fed's balance sheet is big and holds a lot of alternative collateral and/or assets.
But not the ECB; it has done everything pretty much by the book.
The chart illustrates the ECB's balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, but by a much lesser degree than has the Fed's, just 58% to 1.83 trillion euro. Also notice that the composition of the balance sheet remains relatively unchanged. Foreign currency claims on euro residents and traditional open market operations, main refinancing operations and longer-term refinancing operations, account for the bulk of the balance sheet growth. Basically, the ECB's balance sheet is sort of big, and there is little by way of alternative collateral and no alternative assets on balance.
We will see if the ECB succumbs to growing pressures to grow their balance sheet in both size and scope.
From MarketBeat at the WSJ, The New New Plan — Same As the Old Plan.:
There is backward-looking regulation; there is forward-looking regulation; and then there's just stupid regulation. From the NY Times:
This data can be found on the Treasury's website, however, the NY Times lists total TARP appropriations, and the WSJ lists the initial recipients of TARP capital injections. All of the companies below the bold black line will not face the 90% tax on bonus payments.
Notice that the table (above) lists TARP monies received by banks, insurers, auto companies, and non-banking financial firms. And look at the list on the margin. Below the $5 billion mark are several sketchy deals, including the sum $5.5 billion aid to Chrysler and Chrysler Financial, the $2.3 billion to CIT Group, who only recently became a bank-holding company (i.e., regulated) in order to get TARP funds and was the centerfold for the securitization industry. Fannie Mae is paying bonuses, but are they on Congress' radar?
Congress is playing with fire here. The government Financial Stability Plan cannot work if the private sector is worried about the political ramifications of participating, or worse, that the government will amend the terms of any agreement six months later - and the private sector must be involved to make the deal big enough. For example, the WSJ argues that TALF is off to a slow start - the first round of TALF loan requests was $4.7 billion - in part because of the rage over the AIG bonus:One reason for the slow start: the outcry over bonuses paid by American International Group Inc., the troubled insurer that received federal bailout money. Some investors are concerned that they too could be exposed to a political storm should they make too much money from the taxpayer-funded program.
News readers are hearing a larger share of good economic news according to the Pew Research Center for the People & The Press:After months of bleak economic news, an increasing proportion of Americans now say they are hearing a mix of good and bad economic news, while fewer say they are hearing mostly bad news. As has been the case for the last few months, very few say they are hearing mostly good news about the economy.As I said this morning, the recent U.S. indicators - retail sales, housing starts, and inflation - are offering glimmers of economic hope. But the good news should probably be better described as "slightly less bad" news, as we are still in the middle of Q1 2009 and many forecasters still are calling for a decline until the third quarter of 2009.
Today's turn of events presents a story of sorts.
1. The BLS released the February Consumer Price Index (used to measure inflation). The highlight of the report is that inflation got a bounce to remain above zero over the year, 0.2%, and core inflation (ex food and energy prices) also rose 1.8% over the year. According to the BLS:
It seems like some of the economic reports are looking slightly-less foreboding these days, suggesting that the rate of aggregate decline is probably falling. Today, the Census Bureau released February's report on new residential construction:Privately-owned housing starts in February 2009 were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent above the revised January 2009 estimate of 477,000.The February bounce was 130,000 starts better than the level expected by the consensus (you can see the Bloomberg consensus here by clicking on the indicator in question), revealing some upside risk to the gloomy economic outlook if this trend continues.
Mortgage applications for home purchases remain at record lows. On a volume basis, the annual growth rate of purchase-only applications index is 45% below its level this time last year. And as we all know, this time last year was three months into the recession. This is squeezing the mortgage industry, and fraud is on the rise.
The chart illustrates the Mortgage Bankers Association (MBA) measure of purchase-only and refinance mortgage applications. The Fed and Treasury programs have successfully lowered mortgage rates by purchasing mortgage-backed securities, which has resulted in a flood of refinancing applications, 33% higher than March of 2008. However, the real demand that the government would like to grow is still anemic. The purchase-only mortgage application index is 45% below its level this time last year.
Basically, homeowners that can afford it are getting a great deal by refinancing at lower rates. Those who can't, because they are underwater or cannot come up with the capital to finance the deal, won't.
Hard times in the mortgage business has also resulted in record mortgage fraud activity according to the Mortgage Asset Research Institute. Mortgage fraud is at an all time high, loan origination is at an all-time low, and both have led to a 30% increase in fraud reports since last year. Although much of the fraud activity is primarily due to increased regulatory intervention, a trend is nevertheless developing. And the fraud is on both the demand (borrower) side, with application misrepresentation, and on the supply side (originator), with verification issues.
Seriously, how many times have we heard this same song and dance about attracting the best and the brightest? A letter from AIG Chairman and CEO Edward Liddy to Secretary Geithner:I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today. On the one hand, all of us at AIG recognize the environment in which we operate and the remonstration of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury. RW: Whatever. Liddy doesn't care about the American taxpayer. He should be focusing on the near-term health of AIG (whatever that may mean) before he starts thinking longer term and maintaining the best "talent". It seems to me that AIG is not only too big to fail, but too big to control. That's a problem...a big problem.
According to a new survey, overall well-being of Utah's population is the highest across the 50 United States. This a neat survey (and possibly a little kooky, too), as it tries to quantify unmeasurable qualities of life, like health care or work environment. Interestingly, the survey's ranking of well-being across the 50 states is only tenuously related to the ranking of real per-capita income, the economists' proxy for well-being.
Some of the results reported by Gallup are:
The chart illustrates the 15 U.S. states with the highest well-being, as measured by the survey. In economics, we commonly use real per-capita income to proxy well being with the understanding that, on average, higher per-capita income signals better access to goods and services. However, some contributors to well-being (health care, environmental control, tendency toward happiness, etc.) cannot be directly measured.
The survey is interesting, as it tries to quantify unmeasurable identifiers of well-being, including life evaluation, physical health, emotional health, healthy behavior, work environment, and basic access. The phone survey is conducted by Gallup and Healthways on a daily basis of over 1,000 adults.
I suspect that the survey doesn't interview the same adults over the course of the year (because the methodologies doesn't state this fact), which makes it slightly kooky. But nevertheless, it does paint a different picture of well-being than does the standard economic measure, real per-capita income.
This survey shows only a tenuous relationship between per-capita income and the well-being index by state.
Since the Fed and the Treasury started their respective mortgage-backed securities (MBS) purchase programs, mortgage rates are down one-full percentage point. The government intervention in the mortgage market is very big, certainly the reason that rates are tumbling.
The chart illustrates the month-end (or mid-month in the case of March) conventional mortgage rate and the net-accumulation of MBS on the part of the Federal Reserve (see the NY Fed) and the Treasury (see Table 6 of its monthly statement). The correlation is clear: the government's intervention in the MBS market, where to date the Fed has purchased $217 billion and the Treasury holds another $107 billion, resulted in a 1% reduction in the average conventional mortgage rate.
The government intervention has been sizable!
To add some perspective on the size of the intervention, the chart illustrates the annual net-issuance of Agency and GSE-backed MBS, or the type of MBS paper that the Fed and the Treasury are accumulating. In all 4 quarters of 2008, $501.5 billion of MBS was issued. Since just September (6 months ago), the Fed and the Treasury have acquired $324 billion in MBS, or 65% of the total net-issuance in 2008. That's big intervention.
If the government was not buying MBS in bulk, mortgage rates would undoubtedly be sitting above 5.03%. I imagine that low rates, alongside further price declines and the stimulus tax credit, will spur some new demand for housing. However, record job declines and the ongoing delevering of households (reducing debt burden) are likely to hamper at least part of the government's plan.
Guess what happened between the start of the recession, December 2007, and now? The federal minimum wage jumped $0.70 to $6.55. And guess what is going to happen between now and August 2009? The federal minimum wage will rise another $0.70 to $7.25 (hat tip, reader Milton R.). This probably has implications for the natural of the unemployment rate.
The chart illustrates the federal minimum wage and the unemployment rate.The federal minimum wage had gone unchanged at $5.15/hour since 1997. In Q3 (third quarter) of 2007, the minimum wage started to climb. By July 2009, the minimum wage will have increased $2.10/hour in just two years.
States have their own minimum wage laws, which are often higher than the federal minimum wage. But as you can see here, there are plenty of states that set the minimum wage either at the federal wage, below the federal wage, or have no minimum wage at all. In the latter two cases, the state rate would default to the federal minimum wage.
This is important. The surge in the minimum wage rate implies that some (I don't know exactly how much) of the 3.2% surge in the unemployment rate since December 2007 is probably structural, where the long-run level of unemployment might be higher, rather than cyclical, or due to the recession.
Two more thoughts on the Fed's fourth quarter 2008 flow of funds accounts. Tangible assets are taking a hit, but equities really got slammed.
The scatter plot relates the ratio of net-worth (wealth) to disposable income, measure of the wealth effect, and the level of personal saving since 1980. There has been a fairly strong and negative relationship between wealth and saving, suggesting that the recent destruction in household wealth has caused consumers to increase saving (i.e., reducing consumption). And furthermore, the level of saving will probably rise until equity and house prices stabilize.
The wealth effects on consumption were strong in 2008. Clearly, there are other factors here that affect personal saving; but nevertheless, the destruction of wealth is probably a dominant force dragging down real consumption for two consecutive quarters (Q3 and Q4, see Table 8 on the personal income report).
This is not good news: banks are starting to hoard cash. From Bloomberg (hat tip, reader Jay):The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.
The global central bank easing continues. The Bank of England is very near its lower bound, 0%. From Bloomberg:
Manufacturing and wholesale sales and inventory data tell the following story: inventory build likely subtracted from GDP in January; sales are anemic; firm production is still probably too high for the negative sales growth; and firms will probably be drawing on inventories for quite some time (i.e., no production).
Credit markets remain tight and corporate spreads are still at all-time highs.The chart illustrates monthly corporate spreads (measured by the Federal Reserve's Moody's seasoned Aaa and Baa yields) over the 10-yr Treasury since 1953 in basis points (bps), where basis point = yield/100. The Aaa and Baa spreads remain elevated and at record levels, or credit markets are still on red alert. Spreads generally rise during recessions with growing default risk, but current spreads are above what could be called a "recession average".
This is monthly data, and spreads started to tighten in February (see chart above). But now, corporate spreads are rising again
It is troubling for the macroeconomy that corporate spreads remain relatively unchanged from October 2008. The trend here is clear: corporate debt issuance is expensive, as the spreads to Treasuries remain wide. Until these levels fall back to the longer term average - the 2003-2007 average for Aaa is 113 bps and for Baa is 204 bps - firms will continue to scale back on debt-financed needs, i.e., investment.
According to the WSJ, markets await definitive government action: