by Calculated Risk on 6/16/2010 06:19:00 PM

Just a few weeks ago, new Toll CEO-designate Doug Yearley, Jr. noted:

"With demand increasing in many areas, we are very focused on growth."

Uh, nevermind ...

From Toll today (ht Brian):

Joel H. Rassman, chief financial officer, stated: ... "While much of the attention surrounding the recent decline in housing indicators has focused on the expiration of the housing tax credit, we believe our customers' buying decisions have been driven more by consumer confidence than by the tax credit. As we noted in our second-quarter earnings press release of May 26, 2010, we believe the volatility in the financial markets and the high U.S. unemployment rate continue to weigh on the nation's psyche. Additionally, in the past several weeks, concerns about the financial crisis in Europe and escalating regional political tensions, coupled with worries about the oil spill in the Gulf of Mexico and its effects on the economy and the environment have negatively impacted the outlook of American consumers.

"In the three weeks following our earnings conference call on May 26, 2010, our per-community deposits have been running about 20% behind the comparable period in last year's third quarter and our per-community traffic has been running about 3% behind. Thus, for the first six weeks of our FY 2010 third quarter beginning May 1, 2010, we are slightly ahead of last year's third-quarter pace of contracts signed on a per community basis. However, we have 21% fewer communities than one year ago.

Slightly ahead on a community bases - with 21% fewer communities. Do the math - they are running close to 20% below last year. And 40% below last year over the last three weeks (20% fewer deposits and 21% fewer communities).

"Although demand in recent weeks has been quite choppy, in general, we continue to believe that the housing market has emerged from its darkest period of late 2008 through early 2009. ... At the moment, consumers view the economic glass as half empty: volatile financial markets, global deficit concerns and the oil spill in the Gulf are all contributing to this gloom. We believe that once the employment picture begins to brighten and the economy stabilizes, consumer confidence will improve and the housing market should begin a steadier recovery."

And there you have what might be the popular Q2 meme: blame the oil spill for poor results.

by Calculated Risk on 6/16/2010 04:44:00 PM

Here is a little different story ...

From The Iceland Weather Report: Foreign currency loans deemed illegal (ht Steinn)

The Icelandic supreme court ruled this afternoon that Icelandic loans indexed to a foreign currency are illegal.

This is hugely significant for thousands of people in this country.

From The Reykjavík Grapevine: Supreme Court Rules Loans Pinned to Foreign Currency Illegal (ht Warlock)

Two cases were connected to the ruling involving car loans taken from the companies Lýsingu hf. and SP-fjármögnun that were pinned to foreign currency. With the collapse of the Icelandic crown in 2008, many people who took out such loans - at a time when the crown was strong - saw their debts double almost overnight.

It was apparently pretty common in Iceland for car and some home loans to be indexed to a basket of foreign currencies. However when the Iceland Krona collapsed, the borrower was stuck with a much higher payment (and debt) than expected. Apparently many borrowers in eastern European countries also borrowed using these "basket of foreign currency" indexes.

Reader Warlock mentions that these loans appeared cheaper than other loans, and were frequently used to buy expensive foreign autos - and the financing was also from abroad. Just another risk for some banks, especially if this ruling spreads to other countries.

by Calculated Risk on 6/16/2010 01:44:00 PM

From Dina ElBoghdady at the WaPo: Lenders go after money lost in foreclosures

Here is an excerpt:

Carlos Cortez and his wife['s] ... second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.

Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.

James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.

Tanta (my former co-blogger an a mortgage banker) sent me an email about this in 2007:

Back in my day working for a servicer ... the absolute all time last possible thing you could get me to do is send an attorney barging into court demanding a deficiency judgment if I had any reason whatsoever to fear that my own effing loan officer was implicated in fraud on the original loan application. Any borrower with half a brain will raise that as a defense, and any judge even slightly awake will not only deny the deficiency but probably make the lender pay all costs, or worse. And I'd call that justice.

It is unclear how often lenders are pursuing borrowers for deficiencies - but it is clearly happening more often now. This is one reason why people involved in short sales or considering "walking away" should consult an attorney. I suspect this is part of the reason for the recent surge in personal bankruptcy filings.

by Calculated Risk on 6/16/2010 12:41:00 PM

From the Financial Times: Spain to reveal bank ‘stress tests’ results

“The Bank intends to make public the results of these stress tests, showing estimated loan losses, the consequent capital requirements and the contribution of promised balance sheet reinforcements, so that the markets have a perfect understanding of the circumstances of the Spanish banking system,” [Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, said on Wednesday].
excerpt with permission

And from the Financial Times: Berlin agrees to release stress test results

The German government has dropped its resistance to publishing the results of bank stress tests ... A spokeswoman for the finance ministry said on Wednesday that Berlin was currently “co-ordinating” with its EU partners about how the results of existing annual stress tests could best be presented ...

Transparency is helpful - although this might show a number of banks require additional capital. In the U.S., the government provided capital from TARP until the banks could raise private capital.

Note that the EU and the UK conduct annual stress tests - this is just an issue of making the results public. I think the U.S. should conduct annual stress tests of all the largest financial institutions, and make the economic scenarios and results public every year.

by Calculated Risk on 6/16/2010 09:25:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production advanced 1.2 percent in May after having risen 0.7 percent in April. Manufacturing output climbed 0.9 percent last month, its third consecutive monthly gain of about 1 percent, and was 7.9 percent above its year-earlier level. Outside of manufacturing, the output of mines edged down 0.2 percent, and the output of utilities increased 4.8 percent. The jump in utilities reflected unseasonably warm temperatures that boosted air conditioning usage in May after uncharacteristically temperate weather in April reduced heating demand. ... The capacity utilization rate for total industry rose 1.0 percentage point to 74.7 percent, a rate 6.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 9.4% from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 73.7% is still far below normal - and 7.2% below the the pre-recession levels of 80.5% in November 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

This is the highest level for industrial production since Nov 2008, but production is still 7.9% below the pre-recession levels at the end of 2007.

Still a long way to go.

by Calculated Risk on 6/16/2010 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 593 thousand (SAAR) in May, down 10% from the revised April rate of 659,000 (revised down from 672 thousand), and up 24% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts collapsed 17.2% to 468,000 in May. This is 30% above the record low in January 2009 (360 thousand).

The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over a year.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts:
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 593,000. This is 10.0 percent (±10.3%)* below the revised April estimate of 659,000, but is 7.8 percent (±9.7%)* above the May 2009 rate of 550,000.

Single-family housing starts in May were at a rate of 468,000; this is 17.2 percent (±7.9%) below the revised April figure of 565,000.

Building Permits:
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 574,000. This is 5.9 percent (±2.2%) below the revised April rate of 610,000, but is 4.4 percent (±2.6%) above the May 2009 estimate of 550,000.

Single-family authorizations in May were at a rate of 438,000; this is 9.9 percent (±2.1%) below the revised April figure of 486,000. Authorizations of units in buildings with five units or more were at a rate of 117,000 in May.

Note that permits fell sharply, suggesting another significant decline in housing starts next month. This is way below expectations (I took the under!), and is good news for the housing market longer term (there are too many housing units already), but bad news for the economy and employment short term.

by Calculated Risk on 6/16/2010 07:11:00 AM

The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 21.1 percent from the previous week. This is the highest Refinance Index recorded in the survey since May 2009. The seasonally adjusted Purchase Index increased 7.3 percent from one week earlier, which is the first increase in six weeks.
...
“Mortgage applications for home purchases increased last week, the first increase in over a month. Refinance applications also picked up significantly over the week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “While it is clear that purchase applications in May dropped sharply as a result of the tax credit induced increase in applications in April, it is unclear whether we are seeing the beginnings of a rebound now.”
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.82 percent from 4.81 percent, with points decreasing to 0.89 from 1.02 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

The purchase index has collapsed following the expiration of the tax credit suggesting home sales will fall sharply too. This is the lowest level for 4-week average of the purchase index since February 1997.

by Calculated Risk on 6/15/2010 11:59:00 PM

From the WSJ: Currency Fall Curbs Europe's Taste for New York Property

Although there are no hard figures, the article mentions ab estimate of 15% to 20% of Manhattan condo buyers are Europeans. Apparently demand from European buyers has declined sharply.

Click on graph for larger image in new window.

This graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices. Foreign buying - especially from Europeans because of the strong euro - was one of the reasons NY house prices had only fallen 21.1% from the peak.

With the weaker euro, and a substantial number of condos coming on the market later this year, prices will probably fall further in New York.

by Calculated Risk on 6/15/2010 09:28:00 PM

Jim the Realtor thinks Bank of America was taken on this deal. This 4,374 sq ft house, on two acres, is in a great location in Rancho Santa Fe (upscale San Diego). The loan was $3.2 million, and the short sale was for $1.575 million.

This was another "5 second" listing. Some agents list short sales for less than a minute to show the bank the listing ... and then keep the entire process secret. I've heard stories of sales to relatives, friends, or the listing agent just wanting both sides of the deal. If this was listed on the open market, Jim thinks it would have sold for substantially more.

by Calculated Risk on 6/15/2010 05:55:00 PM

From DataQuick: Southland sales at 4-year high

Note: as always I ignore the median price and use the repeat sales indexes from Case-Shiller and CoreLogic.

Southern California home sales rose last month in all but the lowest price categories as buyers took advantage of tax credits and low mortgage rates. ... A total of 22,270 new and resale houses and condos closed escrow in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 9.7 percent from 20,299 in April, and up 7.2 percent from 20,775 in May 2009, according to MDA DataQuick of San Diego.

May sales were the highest for that month since May 2006, but they still fell 15.0 percent short of the average number sold in May since 1988, when DataQuick’s statistics begin. The 9.7 percent increase in sales between April and May compares with an average change of 6 percent since 1988.
...
“The important thing to remember, though, is that what we saw in May was partly driven by government stimulus,” he continued. “In the second half of the year the market will have to stand on its own again, barring new forms of government involvement. Prices will be tested if there’s any sudden move by lenders to release a flood of distressed properties.”

Foreclosure resales accounted for 33.9 percent of the resale market last month, down from 36.4 percent in April and 49.8 percent a year earlier. The all-time high for foreclosure resales – homes that had been foreclosed on in the prior 12 months – was 56.7 percent in February 2009. Foreclosure resales have waned over the last year as lenders have channeled more distress into loan modifications and short sales.
...
Foreclosure activity remains high by historical standards but is lower than peak levels reached over the last two years.

And here is the dumb headline of the day: Southern California median home price surges 22.5% (ht JBR). So what? That just says the mix changed ... and that is because the distressed sales are moving on up to higher priced neighborhood.

What matter is this is probably the high point for sales this year. This report includes both new and existing home sales, and new home sales are counted when the contract is signed (peaked in April) and existing home sales are counted when the transaction closes (will peak in May or June).

by Calculated Risk on 6/15/2010 03:47:00 PM

Last night I excerpted from a speech by St Louis Fed President James Bullard. I noted that GDI might be more useful in measuring the recovery than GDP (they are conceptually equivalent).

As a followup to that post (and also to the previous post with the forecast from UCLA-Anderson's Ed Learmer), here are two graphs looking at payroll employment vs. the change in real GDP and real GDI.

At the bottom of this post are estimates of the unemployment rate in 12 months for several growth scenarios. Note: This is similar to Okun's relationship between GDP and unemployment.

Click on graph for larger image.

The first graph shows the four quarter change in real GDP vs. the four quarter change in employment, as a percent of payroll employment (to normalize for changes in payroll over time).

The second graph shows the same relationship, but uses Gross Domestic Income instead of GDP.

There is a clear relationship - the higher the change in the real GDP or real GDI, the larger the increase in payroll employment. The R² for GDI is slightly higher than for GDP (0.80 vs. 0.74).

This shows that real GDP / real GDI has to grow at a sustained rate of about 1% just to keep the net change in payroll jobs at zero.

A 3% increase in real GDI (over a year) would lead to about a 1.4% increase in payroll employment. With approximately 130 million payroll jobs, a 1.4% increase in payroll employment would be just over 1.8 million jobs over the next year - and the unemployment rate would probably remain close to the current level (9.7%) depending on changes in population and the participation rate.

The following table summarizes several growth scenarios. The unemployment rate is from the household survey and depends on the number of people in the work force - so it cannot be calculated directly. The table uses a range of unemployment rates based on 1.6 to 2.1 million people entering the workforce over the next 12 months (a combination of population growth and discouraged workers reentering the work force).

NOTE: For those interested in understanding the differences between the household and establishment employment surveys - and why the unemployment rate cannot be calculated directly from the payroll report, see: Jobs and the Unemployment Rate

Real Growth	Percent Payroll Growth	Annual Payroll Growth (000s)	Monthly Payroll Growth (000s)	Unemployment Rate in One Year1
6.0%	3.6%	4648	387	7.6% to 7.9%
5.0%	2.9%	3718	310	8.2% to 8.5%
4.0%	2.1%	2787	232	8.8% to 9.1%
3.0%	1.4%	1857	155	9.4% to 9.7%
2.0%	0.7%	926	77	10.0% to 10.3%
1.0%	0.0%	-4	0	10.6% to 10.9%
1The unemployment rate is from the Household Survey and depends on several factors including changes in population and the participation rate.

Based on this table and Dr. Leamer's forecast of 3.4% GDP growth this year, and 2.4% in 2011, the unemployment rate would probably still be in the high 9s at the end of 2011.

I think Leamer is a little optimistic for 2010 - I'm expecting a 2nd half slowdown in GDP growth this year - and I think the unemployment rate will stay near the current level for some time.

by Calculated Risk on 6/15/2010 12:14:00 PM

From UCLA: UCLA Anderson Forecast: U.S. recovery a long, slow climb; Calif. recovery weaker than nation's

"If the next year is going to bring exceptional growth," [UCLA Anderson Forecast director Edward] Leamer writes, "consumers will need to express their optimism in the way that really counts — buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts — by not hiring workers."

The result is an economic Catch-22.

Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

A couple of key points:

Usually housing (residential investment) is a key engine of growth in a recovery, for both GDP and employment, but this time any contribution from housing will be muted. Normally in a recovery housing is a leading sector, and the pickup in residential investment leads to more jobs - and more households - and more demand for housing. This is not happening now because of the huge overhang of existing inventory. Right how the recovery is "homeless", and that means any recovery in GDP and employment will be sluggish.

The sluggish GDP growth implies that the unemployment rate will stay elevated for some time. Leamer is forecasting the unemployment rate will decline slowly to 8.6% in 2012! Ouch. However, he is also forecasting that the Fed will raise rates early in 2011, but that is very unlikely based on his unemployment rate forecast.

by Calculated Risk on 6/15/2010 10:00:00 AM

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

Click on graph for larger image in new window.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) was at 17 in June. This was a sharp decline from 22 in May.

The record low was 8 set in January 2009. This is still very low ...

This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts (May starts will be released tomorrow).

This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

Press release from the NAHB: Builder Confidence Declines in June

Snapping a string of two consecutive monthly gains, builder confidence in the market for newly built, single-family homes fell back to February levels, before the beginning of the home buyer tax credit-related surge, according to results of the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI dropped five points to 17 in June.

“The home buyer tax credit did its job in stoking spring sales and we expected a temporary pull back in the builders’ outlook after the credit expired at the end of April,” said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. “However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels.”
...
Each of the HMI’s component indexes recorded declines in June. The component gauging current sales conditions fell five points to 17, while the component gauging sales expectations for the next six months declined four points to 23 (from a one-point downward revised index level of 27 in May) and the component gauging traffic of prospective buyers fell two points to 14.

The HMI also posted losses in every region in June. The Northeast, which has the smallest survey sample and is therefore subject to greater month-to-month volatility, fell 17 points to 18 following a 14-point jump in May. The Midwest posted a three-point loss to 14, while the South also registered a three-point decline to 19 and the West fell four points to 15 from a revised May level of 19.

This suggests single family starts will decline sharply soon.

by Calculated Risk on 6/15/2010 08:30:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in June. The general business conditions index edged up from its May level to 19.6, extending its string of positive readings to eleven months. The new orders and shipments indexes were also positive and higher than their May levels. The inventories index remained near zero for a second straight month, indicating that inventory levels were little changed.
...
The new orders index rose modestly, to 17.5, and the shipments index climbed to 19.7. The unfilled orders index was negative for a third consecutive month, at -1.2.
...
The index for number of employees slipped 10 points, to 12.4, and the average workweek index climbed from zero last month to 8.6.

This came in slightly below expectations. This is more evidence that the inventory adjustment is over. Manufacturing continued to improve, although at a somewhat slower pace than earlier this year.

by Calculated Risk on 6/14/2010 11:59:00 PM

I thought these comments by St Louis Fed President James Bullard today were a little odd: The Global Recovery and Monetary Policy

"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009."

Fully recovered? Tell that to the millions of unemployed workers.

"To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate."

Uh, I don't think that is clear. The 1.25% is the level real GDP is currently below the pre-recession peak.

What he meant is it would take an annualized quarterly growth rate of about 5% in Q2 to raise real GDP the 1.25% needed to reach the previous peak.

Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined.

What he means is he thinks there is "a reasonable possibility" that the economy will grow at an annualized rate of 2.5% over the six months period including Q2 and Q3. That is possible, but I'll take the under.

Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year.

This is overlooking the weakness in Gross Domestic Income. There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The two measures are conceptually identical, but yield slightly different results.

Recent research suggests that GDI is often more accurate than GDP, especially when the economy is weak. From Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity.:

Considerable evidence suggests that the growth rates of GDP(I) better represent the business cycle fluctuations in true output growth than do the growth rates of GDP(E). ... These results strongly suggest that economists and statisticians interested in business cycle fluctuations in U.S. output should pay attention to the income-side estimates, and consider using some sort of weighted average of the income- and expenditure-side estimates in their analyses. The evidence in this paper clearly suggests that the weights should be skewed towards GDP(I) ...

Real GDI is still 2.3% below the previous peak, and if the economy grows at 3% all year, real GDI will not surpass the previous peak until Q1 2011.

by Calculated Risk on 6/14/2010 07:51:00 PM

From Kathy Jumper at the Mobile Press-Register: As oil washes ashore, property managers sharply cut condo rents (ht DaveinSV)

Property managers are offering 30 percent to 50 percent cuts at condominium units and beach houses, hoping to fill rooms and prevent cancellations in the wake of the BP oil spill.

"June has been gutted, as far as rental occupancies," said David Bodenhamer, a partner in Young's Suncoast Vacation Rentals in Gulf Shores ... "We've had $220,000 in cancellations in the last three days." ... "The problem is that even at those lower rates, we're not getting near enough takers. Reservation calls have gone to a fraction of what they would normally be on a daily basis."

I'm not sure the lower prices will make much difference. Who wants to vacation at a beach and not be able to swim in the water? Or to see (and probably smell) the oil?

The article mentions that Alabama beach resorts generate about 75% of their annual revenue in June, July and August. So this entire season is lost.

On the bright side, other resort areas are probably doing better.

When I went backpacking in the Sierra in the summer of 2008, I asked the ranger how the economy was impacting traffic. He said it was their busiest year ever! People were still going on vacation, just to less expensive destinations. With the Gulf disaster, I expect the inland mountain resorts will have a banner year.

by Calculated Risk on 6/14/2010 03:54:00 PM

Over the last year a number of analysts have predicted the Fed would raise the Fed Funds rate "soon". They have all been wrong.

The Fed's mission is to conduct "monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates". Historically the Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest.

San Francisco Fed senior vice president and associate director of research Glenn Rudebusch writes: The Fed's Exit Strategy for Monetary Policy

Rudebusch's economic letter suggests that the Fed might not raise rates until 2012 ...

Click on graph for larger image in new window.

The graph from Rudebusch's shows a modified Taylor rule. According to Rudebusch's estimate, the Fed Funds rate should be around minus 5% right now if we ignore unconventional policy (obviously there is a lower bound):

The resulting simple policy guideline recommends lowering the funds rate by 1.3 percentage points if inflation falls by 1 percentage point and by almost 2 percentage points if the unemployment rate rises by 1 percentage point.
...
Figure 1 also provides a simple perspective on when the Fed should raise the funds rate. The dashed line combines the benchmark rule of thumb with the Federal Open Market Committee’s median economic forecasts (FOMC 2010), which predict slowly falling unemployment and continued low inflation. The dashed line shows that to deliver future monetary stimulus consistent with the past—and ignoring the zero lower bound—the funds rate would be negative until late 2012. In practice, this suggests little need to raise the funds rate target above its zero lower bound anytime soon.

Rudebusch them modifies the rule taking into account unconventional policy.

Even though the funds rate was pushed to its zero lower bound by the end of 2008, considerable scope remained to lower long-term interest rates. To do this, the Fed started buying longer-term Treasury and federal agency debt securities ...

The additional stimulus from the Fed’s unconventional monetary policy implies that the appropriate level of short-term interest rates would be higher than shown in Figure 1. ... If the Fed’s purchases reduced long rates by ½ to ¾ of a percentage point, the resulting stimulus would be very roughly equal to a 1½ to 3 percentage point cut in the funds rate. Assuming unconventional policy stimulus is maintained, then the recommended target funds rate from the simple policy rule could be adjusted up by approximately 2¼ percentage points, as shown in Figure 3, and the recommended period of a near-zero funds rate would end at the beginning of 2012.

Perhaps the unemployment rate will decline faster than expected - or inflation will increase - but right now I wouldn't expect an increase in the Fed Funds rate for a long long time ...

by Calculated Risk on 6/14/2010 01:21:00 PM

From MarketWatch: Moody's slashes Greece to 'Ba1' from 'A3'

Moody's Investors Service on Monday downgraded Greece's government bond ratings by four notches to junk status of Ba1 from A3 ...

No real surprise ...

by Calculated Risk on 6/14/2010 11:03:00 AM

From Bloomberg: Economy in U.S. Slows as States Lose Federal Stimulus Funds (ht Brian)

State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 ... said Mark Zandi, chief economist at Moody’s Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.

“The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011,” he said in an interview.

I've been forecasting a 2nd half slowdown in GDP growth based on:

1) less Federal stimulus spending in the 2nd half of 2010. The decline in stimulus will probably be a drag of about 0.5% on GDP growth by Q4.

2) the end of the inventory correction. The inventory adjustment contributed 3.8% in Q4 2009 of the 5.6% annualized growth rate, and 1.65% of the 3.0% GDP growth (annualized) in Q1 2010. This will probably fall to zero - or even subtract from growth.

3) more household saving leading to slower growth in personal consumption expenditures,

4) another downturn in housing (lower prices, less residential investment),

5) slowdown in China and Europe and

6) cutbacks at the state and local level. According the Mark Zandi, this will subtract about 0.25% from GDP growth.

David Rosenberg of Gluskin Sheff + Associates wrote this morning:

"A double-dip, admittedly, is not yet a sure thing but I am definitely warming to the view."

I still think we will avoid a double dip, but I expect growth to be sluggish and choppy.

A quarter point here, and half point there ... and pretty soon you have some real drag.

by Calculated Risk on 6/14/2010 09:02:00 AM

The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain:

As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).

French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.

French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector.

Click on graph for larger image in new window.

This graph shows the exposure of bank by nationality to the risky countries.

The bailout of the risky countries is very much a bailout of the banks - especially the banks of Germany and France.

The BIS puts the numbers in perspective:

The exposures of BIS reporting banks to the public sectors of the euro area countries facing market pressures can be put into perspective by comparing them with these banks’ capital. The combined exposures of German, French and Belgian banks to the public sectors of Spain, Greece and Portugal amounted to 12.1%, 8.3% and 5.0%, respectively, of their joint Tier 1 capital. By comparison, the combined exposures of Italian, Dutch and Swiss banks to the same public sectors were equal to 2.8%, 2.7% and 2.0%, respectively, of their Tier 1 capital. Those ratios stood at 3.4%, 1.2% and 0.7%, respectively, for Japanese banks and 2.0%, 0.8%, and 0.7%, respectively, for UK banks. The exposures of US banks to each of the above public sectors amounted to less than 1% of their Tier 1 capital.

It is the German and French banks that are most at risk.