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Monday, March 08, 2010

ECB's Jürgen Stark: Lost Decade Possible

by Calculated Risk on 3/08/2010 01:15:00 PM

Jürgen Stark, Member of the Executive Board, European Central Bank, spoke at the NABE Economic Policy Conference that is being held in Arlington, Va. Stark's talk was titled: "Is the Global Economy Headed for a Lost Decade? A European Perspective".

From MarketWatch: 'Lost decade' possible for global economy, ECB's Stark says

"The failure to address long-overdue reform challenges promptly might result in a 'lost decade' for the global economy," Stark warned Monday ... "Only partial progress has been made so far, and the distortions that led to global imbalances are still present."
Despite some stability, "substantial fragilities remain and the outlook is fraught with risks," Stark said.
Stark apparently discussed the need for reform of financial oversight, flexible exchange rates (China), and more balanced trade.

Stark is also concerned about global stagflation.

And more from Reuters: ECB's Stark rebuffs European rescue fund idea

My view is another lost decade in the U.S. is unlikely, and I'm more concerned with deflationary pressures in the short term (next year or so) than stagflation.

Note: As I mentioned in the weekly schedule, Brian Sack, Executive Vice President, Federal Reserve Bank of New York will speak tonight (5 PM ET) on the Fed's Balance Sheet Policies. That is of more immediate interest!

Unemployment Rate and Level of Education

by Calculated Risk on 3/08/2010 11:06:00 AM

I haven't looked at this in some time ...

UPDATE: According to the Census Bureau, in 2008 of the 25 years and over workers population (edit):

  • 13.4% had less than a high school diploma.
  • 31.2% were high school graduates, no college.
  • 26.0% had some college or associate degree.
  • 29.4% had a college degree or higher.

    non-business bankruptcy filings Click on graph for larger image in new window.

    This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).

    Note that the unemployment rate increased sharply for all four categories in 2008 and into 2009.

    Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - but education didn't seem to matter as far as the recovery rate in unemployment following the 2001 recession. All four groups recovered slowly.

    The recovery rates following the great recession might be different than following the 2001 recession. I'd expect the unemployment rate to fall faster for workers with higher levels of education, since their skills are more transferable, than for workers with less education. I’d also expect the unemployment rate for workers with lower levels of education to stay elevated longer in this “recovery” because there is no building boom this time. Just a guess and it isn't happening so far ... currently the unemployment rate for the highest educated group is still increasing.

    For more on the impact of education here is a graphic and some links from the BLS based on 2008 data: Education pays ...

  • Bloomberg: Banks Face Writedowns after FDIC Auctions

    by Calculated Risk on 3/08/2010 09:17:00 AM

    From James Sterngold at Bloomberg: ‘On the Edge’ Banks Facing Writedowns After FDIC Loan Auctions (ht jb)

    A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month ... may trigger writedowns that weaken lenders nationwide.
    The auctions may have wider repercussions. Of the $50.4 billion in loans seized from failed banks currently held by the FDIC, 63 percent involve participations by other lenders, according to data provided by agency spokesman Greg Hernandez.

    “These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, ... “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”
    “We have a number of banks teetering on the edge, and we don’t need this problem,” [John J. Collins, president of Community Bankers of Washington in Lakewood, Washington] said in an interview.
    "This problem" is many small and regional banks are carrying loans above market value. The FDIC auction will establish market value (update: actually examiners can consider the distressed nature of the auction) - and the fear is this will lead to significant losses for many banks - and more bank failures.

    Sunday, March 07, 2010

    Short Sales and 2nd Liens

    by Calculated Risk on 3/07/2010 11:04:00 PM

    A couple of articles tonight that fit together with my earlier post: Housing: A Tale of Boom and Bust and a Puzzle The puzzle is when the banks will start moving ahead with distressed sales (foreclosures and short sales).

    First David Streitfeld at the NY Times writes about the Treasury's HAFA program: Short-Sale Program to Pay Homeowners to Sell at a Loss

    Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
    Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

    Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.

    For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.
    emphasis added
    Short sales under HAFA are much better than foreclosures for many borrowers because HAFA requires lenders to agree not to pursue a deficiency judgment (one of the key stumbling blocks for eliminating 2nds). And this is also better for the 2nd lien holders too since they get something (note: the program also includes a deed-in-lieu of foreclosure option with similar payments and requirements).

    Of course short sale fraud is also a huge concern. Streitfeld quotes economist Tom Lawler:
    Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.
    And from James Hagerty at the WSJ: Home-Saving Loans Afoot
    Rep. Frank said banks' reluctance to write down second mortgages is blocking efforts to reduce the first-lien mortgage balances of many borrowers who owe far more on their loans than the current values of their homes. ...

    Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."
    As Hagerty notes, the banks are reluctant to write down the 2nd liens because they might still have value even after foreclosure. That is because 2nd liens are recourse, and the lenders could pursue the borrower for a deficiency judgment (or sell the loans to a collector). Frequently the most cost effective course of action for 2nd lien holders is to wait and do nothing. And that is frustrating for the 1st lien holder (commonly Fannie or Freddie).

    Is $1,000 enough to get 2nd lien holders to sign off and give up the right to a deficiency judgment? I expect that the lenders will pick and choose ... but this should help.

    Update: the WSJ has a copy of Barney Frank's letter to the four large banks.

    Report: Fed to Keep Supervision Authority of Large Banks

    by Calculated Risk on 3/07/2010 08:56:00 PM

    The Financial Times reports: Big bank oversight to stay with Fed

    Chris Dodd ... is set to propose this week that the 23 largest institutions stay under the Fed’s oversight ... At issue ... was the regulation of several hundred state chartered institutions that also want to remain under the Fed’s supervision.
    “The Fed feels it is gaining some momentum,” said [an unidentified Senate aide].
    excerpted with permission
    The Fed has been lobbying hard, and according to the Financial Times, has the backing of Secretary Geithner and many of the bank lobbying associations.

    The regional Fed presidents have been arguing for the Fed to retain supervision authority too. Dr. Altig at Macroblog quotes from Atlanta Fed President Dennis Lockhart's speech last week:
    "... the Fed must play a central role in a defense structure designed to prevent or manage future crises. My key argument is the indivisibility of monetary authority, the lender-of-last-resort role, and a substantial direct role in bank supervision. Only the Fed can act as lender of last resort because only the monetary authority can print money in an emergency. To make sound decisions, the lender of last resort needs intimate hard and qualitative knowledge of individual financial institutions, their connectedness to counterparties, and the capacity of management.

    "There is sentiment in Washington that would separate these tightly linked functions that are so critical in responding to a financial crisis. Removing the central bank from a supervision role designed to provide totally current, firsthand knowledge and information will weaken defenses against recurrence of financial instability. Flawed defenses could be calamitous in a future we cannot see."
    It is probably true that supervision authority helps the Fed respond to a crisis, but what about preventing a crisis? The recent track record unfortunately speaks for itself.