US pending home sales plunged in November, raising doubts about the strength of the housing market recovery once government support expires.
The National Association of Realtors said on Tuesday that pending home sales, which reflect deals that have been signed but not completed, dropped by 16 per cent from October to November, a much steeper decline than economists had projected. Although sales are up by 15.5 per cent from a year ago, the monthly fall shows how dependent home sales have been on the popular $8,000 (€5,560, £5,000) first-time homebuyer tax credit.
November, spurring a last-minute buying spree throughout October, but was later expanded and extended to the end of April 2010. Pending sales had climbed steadily for nine consecutive months, capped by a strong October which saw them rise to their highest level since 2006 as buyers rushed to meet the deadline.
Some economists have argued that the tax credit has skewed buying patterns and “stolen” from future demand. In spite of signs of stability, high foreclosure rates continue to put pressure on the overall market.
“Once it expires in April we should expect a partial pay back in the summer and early fall,” said Michelle Meyer, an economist at Barclays Capital. “But the underlying trend is still improving.”
Lawrence Yun, chief economist at the NAR, said sales activity would pick up again ahead of the next tax credit deadline. The substantial improvement during the past year signalled the market had gained “sufficient momentum” to stand on its own.
The NAR projects that interest rates will edge higher in 2010, while prices will stabilise and more buying activity will “bring a rough balance” between buyers and sellers.
The US housing sector has given mixed signals in recent months, as buyers responded to uncertainty over government support and the stability of fundamentals. Brian Bethune, chief US economist at IHS Global Insight, said the housing market’s recovery would hinge on unemployment, as the 10 per cent jobless rate has deterred big purchases in favour of renting or consolidating. “The fundamentals are improving, but very gradually.”
In November, sales fell across the US with the steepest declines in the north-east, the mid-west and the south.
Wednesday, January 6, 2010
US pending home sales plunge
Ask your state Representatives and Senators to call for a new job creation plan.
They are asking state legislators to sign onto a letter to promote this job creation plan, the full text of which can be seen at www.progressivestates.org/jobcreation. Legislators can sign the letter at www.progressivestates.org/jobcreation or by emailing jobcreation@progressivestates.org.
Please contact your state Rep and Sen. and ask them to sign onto the letter. Once you have, please email me at JimN2010@gmail.com and let me know what they say. Democracy for the 3rd District, a local DFA group is working compile and keep track of who has/hasn't signed onto the letter in the state of Georgia and we need your help. Ask others you know to do the same.
Tuesday, January 5, 2010
Georgia State Philosophy Symposium
The annual Phi Sigma Tau symposium will be held this April. The call for papers has a deadline of 1/20, so, check your good term papers from the last 2 terms, shave them to the appropriate size, and send them in! Great keynote speaker! Potential for boundless glory and moderate prizes!As if that's not enough, there will be beverages.This is being promoted to schools throughout the southeast, so we expect a good turnout.See attached.AIC
Responses to Bernanke's Monetary Policy and the Housing Bubble speech...
The NYT reported on a talk by Federal Reserve Board Chairman Ben Bernanke in which he claimed that the low interest rates set by the Fed were not responsible for the housing bubble, but rather "lax regulation." This is taken as an exoneration of Mr. Bernanke's performance at the Fed. It isn't.
The Fed is the country's lead regulator. While the housing bubble was growing and bad mortgages were proliferating, Greenspan and the Fed insisted that everything was fine. Greenspan encouraged families to take out adjustable rate mortgages and did not even produce guidelines for mortgage issuance that banks had been expecting since the mid-90s. Greenspan and Bernanke also repeatedly disputed that there was anything out of the ordinary in the housing market, insisting that the run up in prices was driven by fundamentals.
Mr. Bernanke is absolutely right that low interests were not the cause of the housing bubble, but this hardly removes the Fed's responsibility. While all the regulators share some of the blame, the bulk of the blame for bad regulation lies with the lead regulator, the Fed.
Ben Bernanke says Federal Reserve interest rate policy after the dot.com bubble burst did not cause the housing bubble, and he delivers a strong rebuttal to John Taylor on that point. He argues the problem was with the regulation of these markets, not the low interest rates after the dot.com crash, and based upon this reading of the causes of the crisis, he believes regulation is the key to preventing bubbles. But he also acknowledges that if regulation fails to get the job done, then the Fed must step in and pop bubbles before they get too large by raising interest rates (though doubts are expressed about whether increasing interest rates would have done much to stop the bubble, hence the strong preference for regulatory solutions).
This is a big step forward relative to the Greenspan years. Greenspan argued that the Fed could not identify bubbles as they are inflating with sufficient clarity to allow policy to do much about them, he thought the Fed was as likely to do harm from raising interest rates based upon false bubble alarms as it was to prevent problems. And in any case, he believed that cleaning up after bubbles popped would be enough to avoid large downturns like we are experiencing. The best that the Fed could do given the difficulty in identifying bubbles ex-ante is to clean up after they self-identify by popping, but that would be more than enough to keep the economy from experiencing big crashes.
Greenspan's view that cleaning up ex-post would be sufficient to insulate the economy from large shocks turned out to be incorrect. He also resisted and actively dismissed regulatory interventions intended to keep the financial sector stable and keep bubbles from inflating in the first place, and this, too, was a mistake. In the past, Bernanke and other members of the Fed have also been resistant to using interest rate policy (as opposed to regulation) to prevent bubbles, so this is an evolution in the Fed's view of its role in preventing asset price bubbles from threatening the stability of the broader economy.
The Fed still strongly prefers regulatory solutions, the main problem with interest solutions are that bubbles are hard to identify, and even if you do identify them, interest rate increases affect all industries, not just the one experiencing the bubble, so the policy inflicts collateral damage (though perhaps less collateral damage than if the bubble actually pops). In this regard, I wish Bernanke would have talked about how the Fed might find better measures of growing financial market imbalances, measures that would allow it to better identify bubbles a priori. We can use interest rate and regulatory policy to fight bubbles much better and target policy more precisely if we have more certainty about the existence of bubbles as they are inflating, but that will require the Fed to develop much better measures of financial market fragility than it now has. (This is an alternative to incorporating asset prices into the index the Fed targets through its implicit Taylor rule, something that automatically raises interest rates when asset prices increase substantially and something that I've advocated in the past. Incorporating asset prices into the inflation index the Fed stabilizes is a very broad-brushed approach to the problem of fighting bubbles, so more targeted approaches are preferable). I realize that we have models saying it isn't possible to identify bubbles as they are inflating, but models aren't reality - they aren't always correct - and we won't really know until we try
Spanish interview La Vanguardia with Paul Krugman
: In your NYT article "How Did Economists Get It All So Wrong", you state what I imagine for many is the obvious, that few economists saw our current crisis coming. The Spanish economist Luis Garicano even made himself famous for a day because he was asked by the Queen of England the very question I would now like to put to you: could you briefly explain to a Spanish public why you think this was?Edward Hugh
Over the short term we want deficits...
In the face of a nose-diving stock market, frozen credit flows, rising unemployment and rapidly contracting growth in gross domestic product, Mr Obama and progressives in Congress passed the most aggressive stimulus package in history – the $787bn American Recovery and Reinvestment Act – after only a few weeks in office. It is no coincidence that, 10 months on, political debate centres around ways to hasten a recovery already under way rather than measures to contend with an economic collapse all too plausible a short time ago. GDP growth has risen from -6.1 per cent in the first quarter of 2009 to 2.2 per cent in the third quarter. Job losses, which peaked at 700,000 in January 2009, slowed to just 11,000 in November.
Now that the worst appears to have passed, many in Washington are focusing on the federal budget’s red ink. In fiscal year 2009 deficits leapt to about 10 per cent of GDP, a high not seen since the second world war. Some are calling for immediate fiscal restraint, ignoring the fact that a sudden drop in economic demand driven by dramatic cuts in the fiscal stimulus would derail recovery and hinder job creation in a still fragile economy. Others are invoking deficits to oppose reforms critical to rebuilding a strong economy – most recently the Senate’s healthcare bill, which would reduce deficits by $132bn in the first 10 years and by between a quarter and a half of a per cent of GDP over the next 10.
Today’s deficits are necessary and appropriate; they accelerate recovery. The deadlier threat lies in the long-term debt outlook. The deficit is projected to drop in the next few years, but never below 4 per cent of GDP; in 2014, the shortfall is expected to be at least $700bn. After hitting a low in the middle of the decade, it will rise for the rest of the decade and beyond. The mere anticipation of such a large, sustained deficit poses risks to financial markets and the economy, and undermines US standing. Markets, and the world, will worry about buying our debt, question investments in the US, and act with caution in fear of higher interest rates. When those deficits come to fruition, public expenditure will be siphoned from necessary services and investment into the abyss of rising interest payments on a growing debt. The debt might also leave the US unable to borrow further in the case of another crisis.
The scale of the deficit problem, and the risks it confers to sustainable economic growth, warrants the creation of a long-term plan to solve it. This means devising a path back to a balanced budget. Given the time necessary for the economy to reach full strength, and the uncertainties regarding war costs and the impact of health reform, our goal should be a budget in balance by 2020.
Such a distant goal will not be credible, however, unless today’s policymakers set intermediate targets. One should be to achieve primary fiscal balance – when government spending on current programmes equals revenues – by 2014. Overall there would still be a deficit, because we would still be paying interest on past debt, but it would be a huge step forward.
This target is simple, clear and easy to measure. Reaching primary balance would also mean US debt would cease to rise as a share of the economy – a critical milestone in returning to full health. The national debt climbed steadily under President George W. Bush; publicly held debt grew from $3,300bn in 2001 to almost $5,500bn in August 2008 as a result of tax cuts, the wars in Iraq and Afghanistan, and other unpaid for policy initiatives. By 2014 the government is projected to be paying more than $400bn annually in interest on the total debt, enough to fund the department of Veterans’ Affairs three times.
In addition to hitting primary balance in 2014 and full balance by 2020, two other measures are critical to get us back on fiscal track: specifying year-by-year steps towards those goals; and formulating a scheme to help Congress discipline its budgeting process. The former is straightforward; the latter, less so. Congress should start by passing strict pay-as-you-go provisions, which existed before the Bush administration and Congress allowed them to expire in 2002. The second step is to give the pay-as-you-go process teeth. That will include ensuring tax levels and loopholes, as well as spending, are included in rules that automatically adjust the budget in the event of excess deficit levels.
Almost everyone agrees running deficits of the size projected carries substantial risks. However, we should not jeopardise recovery by exercising fiscal retrenchment in the near term. Instead, policymakers must build a pathway that will facilitate the hard decisions required in the coming years to bring the federal budget back into balance.
Al-Qaeda targets Yemen as safe haven
A Pakistani security official and an Arab diplomat in Islamabad said they had heard reports that al-Qaeda’s leaders in the Afghanistan-Pakistan border region had ordered some of their Arab followers to head to Yemen in the past year. Western diplomats in Sana’a, however, say there is little hard evidence to suggest such a trend has yet emerged, with AQAP mainly made up of Yemenis and Saudis. There are fears, however, that Yemen could attract more extremists.
“The concern is that if the efforts against al-Qaeda militants in Afghanistan and Pakistan are effective, al-Qaeda is likely to look to relocate and Yemen will be attractive,” says a western diplomat in Sana’a. “You push down in one area and they pop up somewhere else.”
Saudis made up the bulk of the September 11 2001 hijackers, but the government initially went into denial about the threat its domestic militants posed. However, a series of attacks in 2003 and 2004 that killed dozens of westerners highlighted the threat the extremists posed to the ruling regime, forcing the authorities into action. Since then, thousands of suspects have been detained in the world’s top oil-producing region.
“After the Saudis became successful, that’s when things began to surge in Yemen,” says a western diplomat.
General Mansour al-Turki, a Saudi interior ministry official, told the Financial Times last year that al-Qaeda in Saudi Arabia could no longer organise in the kingdom. But he said the threat had shifted to Yemen, raising concerns that militants based in its poorer neighbour would launch attacks across the 1,800km border.
Saudi concern intensified after al-Qaeda in Yemen rebranded itself al-Qaeda in the Arabian Peninsula early in 2009, with the threat of strikes against the kingdom. The decision was meant to draw Yemeni and Saudi extremists under one umbrella, while also broadening the group’s dynamics beyond Yemen’s borders.
The Saudi interior ministry published a list of 83 Saudi al-Qaeda suspects living overseas. Two Yemenis were on the list, including Mr Wahayshi, who trained in Afghanistan. He is believed to be a former aide to Mr bin Laden, the founder of al-Qaeda, who was born in Saudi Arabia to a father who had migrated from Yemen.
Fears that militants would use ungoverned swaths of Yemen to organise were realised when a Saudi crossed back into his homeland in August and tried to assassinate Prince Mohammed bin Naif, Saudi deputy interior minister.
In further evidence of cross-border links, AQAP’s second-in-command is thought to be Saeed al-Shehri, a Saudi who was released from Guantánamo Bay and who moved to Yemen early last year.
Gregory Johnsen, a Yemen expert at Princeton University, said Mr Shehri brought his wife and children from Saudi Arabia last year, as if to illustrate his “comfort level” in Yemen. He says failures in Yemen are the crucial factors in al-Qaeda’s reorganisation.
“The Saudis didn’t really come south to Yemen until al-Qaeda had established themselves to a certain degree,” he says. “It’s not a case of successes elsewhere that caused the problems in Yemen; it is a case of failures within the Yemen.”
Publicity AQAP has garnered since the foiled airline attack might lure extremists to the country, experts say.
“If you have an organisation in al-Qaeda in the Arabian Peninsula that has had some success ... these successes attract recruits,” Mr Johnsen says. “If the Yemeni context had been dealt with, then there wouldn't even be this option of a safe haven.”
Nowhere is the phenomenon of a safe haven more marked than on the Afghanistan-Pakistan border, where the US intervention in Afghanistan in 2001 pushed the leaders of the Afghan Taliban and al-Qaeda into Pakistan.
Nine years later, US commanders fear sanctuaries used by Afghanistan’s Taliban in Pakistan will blunt the impact of their troop surge.
Monday, January 4, 2010
Commodities set to rise on back of global growth
Commodities prices are set to rise further this year as the global economy expands faster, the International Monetary Fund has forecast, following the biggest annual price increase for raw materials in nearly four decades in 2009.
The IMF said that commodities prices were set to remain high by historical standards over the long term as the industrialisation of emerging countries supports consumption.
“Accommodating this demand will eventually require further capacity expansion in many commodity sectors, with some need to tap higher-cost sources,” it said in a report.
In the shorter term, Thomas Helbling, an IMF economist who specialises in commodities, said global activity was widely expected to expand at a faster pace in 2010, putting upward pressure on prices.
The IMF correctly anticipated last year that the low prices of early 2009 were unsustainable, defying others who said the era of high commodities prices was over. The forecast of higher prices in 2010 could worry central bankers because of the threat of higher inflation. Importing nations’ policymakers are already concerned about natural resources’ scarcity.
"Beware the crisis around the corner"
Remember that the US authorities, acting out of concern over moral hazard, let Lehman fail. In a way, they were right. It was not too big to fail: its collapse did not imperil the payments system and its counterparties did not fold. Yet praise for that principled decision was less than universal. Many argued, and continue to argue, that it was the worst mistake of the whole saga. The authorities are unlikely to forget this when another institution – which, regardless of its size, might be “too interconnected to fail” – looks ready to topple. And everybody knows it.The precondition for big financial busts is always the same: unwarranted optimism. When everybody gets it into his head that inflation is tamed, interest rates will stay low, asset prices will keep rising and economic growth will never stop, overborrowing is sure to follow. In other words, moral hazard is only one factor reducing perceived risk. In a prolonged upswing, investors feel safe regardless – not because a bail-out will protect them from losses, but because they expect no losses.
Also, in that kind of climate people will tend to make the same mistakes. Many small banks making bad bets on property may be safer than a system with a few big ones doing the same thing – but only a little. The first small bank to fail might cause a crisis of confidence that would bring down others, and then the rest. After 2007-09, what government is going to risk finding out?
So judge the new rules by one criterion above all. In the words of a former Fed chairman, William McChesney Martin, do they take away the punch bowl before the party gets going?
Interest rates that take into account asset prices as well as general inflation are part of this, of course. But when it comes to financial regulation, the key thing is rules that recognise the credit cycle, and change as it proceeds. Most important, as argued by Charles Goodhart in these pages, capital and liquidity requirements should be time-varying and strongly anti-cyclical. In good times, when lending is expanding quickly and financial institutions’ concerns about capital and liquidity are at their least, the requirements should tighten. Under current rules, they do the opposite.
Fixing financial regulation is a hugely complex task, and the details matter. But no repair – whether it concentrates on ending “too big to fail”, on separating commercial and investment banking, or you name it – is going to succeed unless this simple principle is adopted. Financial institutions will oppose the idea, because it amounts to a tax on their growth. Of the many battles that one might fight in this area, this is one that simply has to be won.