Good reads of Sat, Sun, Mon & Tue
Catching up with some great articles that you
may have missed with the holiday weekend and start of the work week...
The Baseline Scenario
(Former IMF Chief Economist - Simon Johnson, Peter Boone - chair of Effective Intervention & James Kwak - co-founder of Guidewire Software)
“I Have 13 Bankers in My Office”
The Washington Post (hat tip Mark Thoma) has a profile of Brooksley Born, who has been credited by dozens of commentators (including us) for unsuccessfully attempting to increase regulation of derivatives in the late 1990s while serving as the head of the Commodity Futures Trading Commission. There’s much to admire, including being the first female president of the Stanford Law Review, making partner while working part-time, and, most importantly, this:
Born keeps informed, but she has other concerns, bird-watching jaunts and trips to Antarctica to plan, mystery novels to read, four grandchildren to dote on. “I’m very happily retired,” she says. “I’ve really enjoyed getting older. You don’t have ambition. You know who you are.”
Then there are the frightening flashbacks to the regulatory battles we are sure to relive this fall:
Greenspan had an unusual take on market fraud, Born recounted: “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”
Translation: Imperfections in free markets are logically impossible.
She wanted to release a “concept paper” - essentially a set of questions - that explored whether there should be regulation of over-the-counter derivatives. . . . [Robert Rubin, Larry Summers, and Arthur Levitt] warned that if she did so, the market would implode and predicted tidal waves of lawsuits.
Translation: You cannot say anything that might upset the markets.
In one call, Summers said, “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.”
Translation: The Deputy Treasury Secretary should listen to the thirteen bankers in his office...
Bloomberg
New Normal of 2% GDP Growth Coincides With Biggs
Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.
By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.
“We are transitioning to what we call at Pimco a new normal,” El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.
The Standard & Poor’s 500 Index must rise 41 percent to reach its last closing price before Sept. 15, when Lehman Brothers Holdings Inc. filed for bankruptcy, freezing credit markets. Since then, 10-year Treasury notes have climbed 4.6 percent. The disparity shows that stock investors aren’t convinced the economy and profits will grow fast enough to sustain a bigger advance.
The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.
‘New Era’
“This is going to be a new era of frugality,” Rosenberg said. “This isn’t some flashy two- or three-quarter deal. This is a secular change in household attitudes.”
The last time U.S. gross domestic product grew at an annual rate of under 2 percent over a decade was the 1930s, when it expanded at an average 1.3 percent. In the 30 years before the recession that began in December 2007, the average was 2.9 percent. Over the past 15 years, it was 3 percent..
Fed Funds Rate May Be Near Zero for Years, Fed Researcher Says
The U.S. main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, said a researcher at the Federal Reserve Bank of San Francisco.
Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years. They’re now expecting a deeper U.S. contraction than first anticipated, with unemployment of at least 9 percent through the end of 2010.
“Given a simple reading of historical behavior and the FOMC’s forecasts, it’s possible that the fed funds rate may need to remain close to zero for several years,” Glenn Rudebusch, associate director of research at the San Francisco Fed, said in a telephone interview. “It’s a rule of thumb, but there can be a lot of reasons to deviate from it.”
Rudebusch’s conclusions, contained in a paper released by the district bank today, anticipate a more accommodating Fed than expected by many economists and analysts. The median estimate of 53 economists surveyed by Bloomberg News this month is for the fed funds rate to rise to 1 percent by the end of 2010.
The researcher said he based his views in part on the so- called Taylor rule, which recommends lowering the benchmark interest rate by a certain level if unemployment rises and inflation falls. Rudebusch said he also used the FOMC’s most recent unemployment and inflation forecasts, which were released last week along with the minutes of the committee’s April meeting.
Zero Hedge
10 Year Hits 3.50%
Posted by Tyler Durden
The selloff in bonds is unstoppable. Bernanke is furiously scratching his head at this point, as he envisions the future: S&P at 2,000, and a 30 year mortgage at 20%. Brilliant
S&P To Downgrade Most Of 2005-2008 CMBS Classes, Derails TALF For CMBS
Posted by Tyler Durden
The lives of the CMSA and Chris Hoeffel are about to get a whole lot more complicated. In a report issued today by S&P, titled "U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools" Standard & Poors is issuing a Request For Comments on 'its proposed changes to its methodology and assumptions for rating U.S. commercial mortgage-backed securities." Aside from the RFC, S&P goes into detail what the changes to its rating methodology will be, and the impact from these on CMBS. The latter will immediately cause many headaches for all who rode the CMBS AAA train from 1,200 bps to 600 bps, and potentially start a selling puke shortly. In S&P's own words:
Impact On Ratings
It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.
And all this just days after the government had finally drafted what it hoped was the last and final version of its TALF term sheet...
Bruce Blog
Feldstein: Has the US Recovery Begun?
Martin Feldstein, a professor of economics at Harvard, was formerly Chairman of President Ronald Reagan's Council of Economic Advisors and President of the National Bureau for Economic Research. Feldstein is a contributing writer for Project Syndicate.
Has the US Recovery Begun?
By Martin Feldstein
CAMBRIDGE - Although the American economy is continuing to decline, it is no longer falling as fast as it was at the beginning of the year or in the weeks after the collapse of Lehman Brothers in September 2008. In that sense, it is reasonable to say that the worst of the downturn is now probably behind us.
But my reading of the evidence does not agree with that of those who claim that the economy is actually improving, and that a sustained cyclical recovery is likely to begin within the next few months. Although the stimulus package of tax cuts and increased government outlays enacted earlier this year will give a temporary boost to growth, we are unlikely to see the start of a sustained upturn until next year at the earliest.
The optimists back their claims of an earlier recovery by pointing to a variety of statistics. They note that construction activity is rising, home prices are declining more slowly, disposable personal income increased in the first quarter, consumer spending is up, and the labor market is improving.
But a careful look at these data is less reassuring. In each case, the details do not support what the headline number appears to indicate.
While total construction spending recently rose by a very small 0.3% (less than the measurement error), private construction spending actually fell and residential construction was down a much more significant 4%.
Likewise, home prices declined at a very rapid rate of 18.7% in the 12 months to March, which is not meaningfully lower than the 19% fall over the 12 months to February. And the most recent monthly decline corresponded to an annual rate of more than 25%.
Moreover, disposable personal income rose in the first quarter only because of a massive jump in tax rebates and government pension payments. In contrast, salaries, self-employment income, dividends, and interest all fell. The anomaly of rising consumption driven only by tax rebates and social-welfare payments ended in March, when consumer spending declined in response to lower employment and falling labor incomes. This was confirmed by a fall in retail sales in April.
Finally, employment continues to contract rapidly. Although the pace of decline slowed between March and April, half of that improvement was the result of an increase in government employment, owing to a one-time hiring of more than 60,000 temporary staff to conduct the 2010 census...
may have missed with the holiday weekend and start of the work week...
The Baseline Scenario
(Former IMF Chief Economist - Simon Johnson, Peter Boone - chair of Effective Intervention & James Kwak - co-founder of Guidewire Software)
“I Have 13 Bankers in My Office”
The Washington Post (hat tip Mark Thoma) has a profile of Brooksley Born, who has been credited by dozens of commentators (including us) for unsuccessfully attempting to increase regulation of derivatives in the late 1990s while serving as the head of the Commodity Futures Trading Commission. There’s much to admire, including being the first female president of the Stanford Law Review, making partner while working part-time, and, most importantly, this:
Born keeps informed, but she has other concerns, bird-watching jaunts and trips to Antarctica to plan, mystery novels to read, four grandchildren to dote on. “I’m very happily retired,” she says. “I’ve really enjoyed getting older. You don’t have ambition. You know who you are.”
Then there are the frightening flashbacks to the regulatory battles we are sure to relive this fall:
Greenspan had an unusual take on market fraud, Born recounted: “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”
Translation: Imperfections in free markets are logically impossible.
She wanted to release a “concept paper” - essentially a set of questions - that explored whether there should be regulation of over-the-counter derivatives. . . . [Robert Rubin, Larry Summers, and Arthur Levitt] warned that if she did so, the market would implode and predicted tidal waves of lawsuits.
Translation: You cannot say anything that might upset the markets.
In one call, Summers said, “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.”
Translation: The Deputy Treasury Secretary should listen to the thirteen bankers in his office...
Bloomberg
New Normal of 2% GDP Growth Coincides With Biggs
Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.
By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.
“We are transitioning to what we call at Pimco a new normal,” El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.
The Standard & Poor’s 500 Index must rise 41 percent to reach its last closing price before Sept. 15, when Lehman Brothers Holdings Inc. filed for bankruptcy, freezing credit markets. Since then, 10-year Treasury notes have climbed 4.6 percent. The disparity shows that stock investors aren’t convinced the economy and profits will grow fast enough to sustain a bigger advance.
The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.
‘New Era’
“This is going to be a new era of frugality,” Rosenberg said. “This isn’t some flashy two- or three-quarter deal. This is a secular change in household attitudes.”
The last time U.S. gross domestic product grew at an annual rate of under 2 percent over a decade was the 1930s, when it expanded at an average 1.3 percent. In the 30 years before the recession that began in December 2007, the average was 2.9 percent. Over the past 15 years, it was 3 percent..
Fed Funds Rate May Be Near Zero for Years, Fed Researcher Says
The U.S. main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, said a researcher at the Federal Reserve Bank of San Francisco.
Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years. They’re now expecting a deeper U.S. contraction than first anticipated, with unemployment of at least 9 percent through the end of 2010.
“Given a simple reading of historical behavior and the FOMC’s forecasts, it’s possible that the fed funds rate may need to remain close to zero for several years,” Glenn Rudebusch, associate director of research at the San Francisco Fed, said in a telephone interview. “It’s a rule of thumb, but there can be a lot of reasons to deviate from it.”
Rudebusch’s conclusions, contained in a paper released by the district bank today, anticipate a more accommodating Fed than expected by many economists and analysts. The median estimate of 53 economists surveyed by Bloomberg News this month is for the fed funds rate to rise to 1 percent by the end of 2010.
The researcher said he based his views in part on the so- called Taylor rule, which recommends lowering the benchmark interest rate by a certain level if unemployment rises and inflation falls. Rudebusch said he also used the FOMC’s most recent unemployment and inflation forecasts, which were released last week along with the minutes of the committee’s April meeting.
Zero Hedge
10 Year Hits 3.50%
Posted by Tyler Durden
The selloff in bonds is unstoppable. Bernanke is furiously scratching his head at this point, as he envisions the future: S&P at 2,000, and a 30 year mortgage at 20%. Brilliant
S&P To Downgrade Most Of 2005-2008 CMBS Classes, Derails TALF For CMBS
Posted by Tyler Durden
The lives of the CMSA and Chris Hoeffel are about to get a whole lot more complicated. In a report issued today by S&P, titled "U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools" Standard & Poors is issuing a Request For Comments on 'its proposed changes to its methodology and assumptions for rating U.S. commercial mortgage-backed securities." Aside from the RFC, S&P goes into detail what the changes to its rating methodology will be, and the impact from these on CMBS. The latter will immediately cause many headaches for all who rode the CMBS AAA train from 1,200 bps to 600 bps, and potentially start a selling puke shortly. In S&P's own words:
Impact On Ratings
It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.
And all this just days after the government had finally drafted what it hoped was the last and final version of its TALF term sheet...
Bruce Blog
Feldstein: Has the US Recovery Begun?
Martin Feldstein, a professor of economics at Harvard, was formerly Chairman of President Ronald Reagan's Council of Economic Advisors and President of the National Bureau for Economic Research. Feldstein is a contributing writer for Project Syndicate.
Has the US Recovery Begun?
By Martin Feldstein
CAMBRIDGE - Although the American economy is continuing to decline, it is no longer falling as fast as it was at the beginning of the year or in the weeks after the collapse of Lehman Brothers in September 2008. In that sense, it is reasonable to say that the worst of the downturn is now probably behind us.
But my reading of the evidence does not agree with that of those who claim that the economy is actually improving, and that a sustained cyclical recovery is likely to begin within the next few months. Although the stimulus package of tax cuts and increased government outlays enacted earlier this year will give a temporary boost to growth, we are unlikely to see the start of a sustained upturn until next year at the earliest.
The optimists back their claims of an earlier recovery by pointing to a variety of statistics. They note that construction activity is rising, home prices are declining more slowly, disposable personal income increased in the first quarter, consumer spending is up, and the labor market is improving.
But a careful look at these data is less reassuring. In each case, the details do not support what the headline number appears to indicate.
While total construction spending recently rose by a very small 0.3% (less than the measurement error), private construction spending actually fell and residential construction was down a much more significant 4%.
Likewise, home prices declined at a very rapid rate of 18.7% in the 12 months to March, which is not meaningfully lower than the 19% fall over the 12 months to February. And the most recent monthly decline corresponded to an annual rate of more than 25%.
Moreover, disposable personal income rose in the first quarter only because of a massive jump in tax rebates and government pension payments. In contrast, salaries, self-employment income, dividends, and interest all fell. The anomaly of rising consumption driven only by tax rebates and social-welfare payments ended in March, when consumer spending declined in response to lower employment and falling labor incomes. This was confirmed by a fall in retail sales in April.
Finally, employment continues to contract rapidly. Although the pace of decline slowed between March and April, half of that improvement was the result of an increase in government employment, owing to a one-time hiring of more than 60,000 temporary staff to conduct the 2010 census...