This post provides links to some interesting articles I have read over the past few days that you may also enjoy.
• IBD Editorials (Investors.com): America’s two-tiered recovery, May 5, 2010.
The recession is over, having ended last summer as we predicted, and now both parties will talk up recovery for different reasons. But it’s not that simple. The private sector is only now getting back on its feet. In March 2009, we predicted an imminent recovery from the brutal recession the U.S. entered in December 2007. It wasn’t a tough prediction to make: The Fed had basically started printing money, pushing short-term interest rates to zero in late 2008 and causing the yield curve to go steeply positive.
• Jesse Westbrook (Bloomberg): SEC didn’t act after spotting Wall Street risks, Documents Show, May 6, 2010.
The U.S. Securities and Exchange Commission, criticized by lawmakers for failing to stop practices that fueled the financial crisis, raised concerns as early as 2006 about the risks of Wall Street’s appetite for packaging mortgages into bonds. Officials in the SEC’s division of trading and markets wrote that collateralized debt obligations tied to home loans exposed banks to writedowns if the assets weren’t immediately sold, according to documents released yesterday by a federal panel investigating the crisis.
• Nomi Prins (The American Prospect): Shadow banking, May 4, 2010.
Despite all the noise about financial reform, the shadow banking system that helped create the financial crisis would remain fundamentally unaltered by the legislation now pending in Congress. Indeed, leveraged entities such as private-equity, venture-capital, and hedge funds get only minor regulatory attention. These barely regulated, nontransparent bastions of speculation propagated systemic risks beyond any that could be created by the banks themselves. Whether housed at banks, created by banks, or freestanding, they exist to enable speculative risk-taking hidden from either regulatory or market scrutiny while camouflaging layers of debt and enabling the complex-securitization deals that caused the financial collapse. Yet, neither the House bill passed last December nor the most recent Senate bill submitted by Sen. Chris Dodd does more than impose marginal adjustments on the shadow banking system.
• Jesse Westbrook (Bloomberg): SEC didn’t act after spotting Wall Street risks, Documents Show, May 6, 2010.
The U.S. Securities and Exchange Commission, criticized by lawmakers for failing to stop practices that fueled the financial crisis, raised concerns as early as 2006 about the risks of Wall Street’s appetite for packaging mortgages into bonds. Officials in the SEC’s division of trading and markets wrote that collateralized debt obligations tied to home loans exposed banks to writedowns if the assets weren’t immediately sold, according to documents released yesterday by a federal panel investigating the crisis.
• Nouriel Roubini (Gulfnews.com): US faces inflation or default, May 5, 2010.
Financial crises have occurred very often in history. They are caused by unsustainable bubbles that go bust, and from excessive risk-taking and debt-leveraging by the private sector during the bubble. Then in the wake of, and as part of the response to, the economic downturn, government debts and deficits grow to unsustainable levels that can lead to default or inflation if not corrected. The crisis we are going through now follows this pattern. Today there is a lot of talk about “de-leveraging”, yet the data shows that de-leveraging has barely begun. Debt ratios in the corporate sector as well as households in the US have essentially stabilised at high levels.
• Michael Pento (Real Clear Markets): The subprime rhyme with U.S. debt debacle, May 6, 2010.
The similarities between the subprime mortgage crisis and that of the coming collapse of the U.S. bond market are uncanny. In fact, Mark Twain may have had the U.S. debt market and the previous debt-fueled real estate crisis in mind when he said that “History does not repeat itself – but it does rhyme.”
• Kenneth Rogoff (Financial Times): Europe finds that the old rules still apply, May 6, 2010.
The cruel irony of the euro area’s predicament is that, in many ways, the whole exercise was designed to produce the very credit explosion that bedevils it today. After all, one of the driving motivations of the euro was to enable member states to compete with the US for a share of the global reserve currency business. Reserve currency status, in turn, is the essence of America’s “exorbitant privilege” (a term coined by Valéry Giscard d’Estaing, the former French president). The most important perk the US gets is the ability to issue debt at a lower interest rate than would otherwise be the case. Indeed, recent research suggests that simply by enhancing the size and liquidity of financial markets, the euro may have helped to lower real interest rates across Europe, and not just for government borrowers.
• Nouriel Roubini, Arnab Das and Elisa-Parisi Capone (Forbes): The Greek contagion spreads, May 6, 2010.
Even as the International Monetary Fund and eurozone have virtually finalized an unprecedented three-year financing package of 110 billion euros for Greece, financial markets remain unimpressed. The common currency continued to plunge this week, and long-term government bond yields in Greece and the periphery countries, including Italy, spiked again after a short relief rally before the agreement. The market’s lukewarm reaction to the financing package confirms our view that a traditional financing package, extended at unsustainable interest rates, will not allay solvency fears but rather lead to disorder and contagion.
• Joseph Stiglitz (Project Syndicate): Can the euro be saved? May 5, 2010.
The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession.
• Emma Ross-Thomas and Jim Silver (BusinessWeek): Why the markets are against Portugal, May 6, 2010.
Since the start of the Greek crisis, bond investors have been eyeing Portugal as next in line for a bailout – if not default. As the Lisbon stock index sank (down more than 14 percent so far this year) and the credit default swaps market ranked Portuguese debt alongside that of Lebanon, Portuguese Prime Minister José Sócrates and his colleagues fought back, swearing that their country, one of the euro zone’s poorest, would not go begging to Brussels. The markets have roundly repudiated that view. Many bondholders are now convinced that only a much larger program of fiscal austerity for the euro zone’s vulnerable southern tier will reassure them.
