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What We Read Today 05 June 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

The recent example of negative interest rates in Denmark suggests that banks will not change retail interest rates, which would seem to represent a third rail as far as the general public is concerned. But this precedent for a major currency is likely to get a lot of media play, which has the potential to make depositors deeply uncomfortable even if they see no immediate change in their bank's product pricing. The long-term impact of lowering the level of trust in the financial regime may be much greater than the experts anticipate.

  • Does tomorrow's ECB number matter? (Martin McGuire, Futures Magazine) This author says no matter what the ECB announced today, the die is cast. And the face showing after the roll? Bonds are going down, interest rates up! See breakdown on daily bond chart after the Read more>> jump.


  • North Korea gold taints U.S. firms (Joel; Schectman, MarketWatch, The Wall Street Journal) Large U.S. corporations, including IBM, Hewlett-Packard, Ralph Lauren, Rockwell Automation and Williams-Sonoma have disclosed that examination of relationships deep in their supply chains indicate that they may have used gold that originated from North Korea. Use of materials from North Korea, even if very indirectly, violates U.S. law.
  • The end of fish (Amy Novogratz and Mike Velings, The Washington Post) Between overfishing, pollution and increasing acidity from elevated co2 in the atmosphere (and hence in water) fish populations are challenged. This article says that the problem is primarily overfishing and that 90% of the world's large fish populations are gone. Of course the few that are left often have issues like elevated mercury content which is another tragedy of our making. Of course fish farming is replacing some of the lost wild fish but this will not help those whose subsistence living depends on wild-caught fish.
  • Everything you know about the Neanderthal is wrong (Terrence McCoy, The Washington Post) The caricature of the Neanderthal as a slow-witted, awkward, sensory-deprived, clumsy, untooled, anti-social, primitive being may be entirely wrong according to this article. McCoy wrote this column after reading Neandertal Demise: An Archaeological Analysis of the Modern Human Superiority Complex (Paola Villa and Wil Roebroeks, Plos One). This research paper concludes the archaeological record indicates no intellectual, social or tool-making differences between Neanderthals and contemporaneous homeo sapiens. Econintersect would ask: Is it possible that Neanderthals are the source of some genetic characteristics in modern humans such as blue eyes, blond hair and fair skin? After all, aren't those genes absent in modern Africans? And we would also ask if it might be possible that Neanderthals could have had functions more advanced than modern humans in such areas as smell, sight, hearing, extrasensory perception and mental telepathy (nonverbal mental communication)? That is all speculation with no known anthropological (or archaeological) basis but the thought reminds us of one of our favorite novels, written by professional anthropologists W. Michael and Kathleen O'Neal Gear, Raising Abel.

Today there are 10 articles discussed 'behind the wall'.

A new asset securitization process that might be adapted by the ECB (maybe to be announced today?) is the subject of one of the articles discussed behind the wall, along with 3 other articles about the "broken" European financial system.

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  • The case for a better functioning securitisation market in the European Union (Bank of England and ECB staff) The securitization market has contracted by 1/3 since 2009. The non-mortgage segments in total have contracted by about 1/4. This discussion suggests that improvements in data availability and disclosure ("transparency"), regulatory capital treatment, secondary market "liquidity" and cross-EU "harmonisation" are needed. See next article following for discussion of the SME (small- and medium-sized enterprise) segment specifically.


  • Repairing the transmission of monetary policy through asset-backed securitisation (Markus K. Brunnermeirer and Yuliy Sannikov, The authors assert that the Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. They propose a 'prudently designed' asset-backed securitization system as the cure. This would transform illiquid SME and consumer loans into a liquid asset class that would broaden the transmission mechanism while providing a lasting intermediation market for this segment in the Eurozone. Could this be part of the ECB action to be announced today? See also next article.
  • Lacklustre investment in the Eurozone: Is there a puzzle? (Marco Buti and Philipp Mohl, These authors take a broader view of low investment in the Eurozone, which is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. The authors say low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. Buti and Mohl list three causes of low Eurozone investment: reduced public investment, financial fragmentation, and heightened uncertainty. Remedies are suggested.

One of the problems is low bank lending which the authors suggest is the result of financial fragmentation and is restricting the supply of credit to the real economy, starving investment of its oxygen. The specifically mention initiatives by the European Commission to support long-term investment of SMEs (small- and medium-sized enterprises). This plays right into the securitization scheme of the previous paper discussed above.

The fairly good (negative) correlation between non-financial corporate debt build-up 2000-2009 and investment since is shown in the following graph. This is an illustration of deleveraging in action.


  • The I Theory of Money (Markus K. Brunnermeier and Yuliy Sannikov, A treatment is developed for a model of investing deposits from savers when the deposits are obtained from loans against assets. This is not a loanable funds model for banking. It is a study of the follow-on investments for deposits produced through bank credit creation via loans against assets as security. The "I" stands for intermediary, but in this model the intermediary function is executed after the banks have created more money. The paper is quite "hairy" with detailed math models, but the concept of modern finance is developed at very basic level. This is a reference for the article discussed two listings above.
  • $USM14 June T-Bond (Last:136^07) (Rick Ackerman, Rick's Picks) Here is a strident call for for a continuation of the Treasury bond rally. Ackerman a=says after a few more days of decline the rally has "much further to go" as "stocks unwind into bonds".

Click on chart for larger image at Rick's Picks.

  • China-Vietnam Conflict in The South China Sea (EconMatters) EconMatters contributes to GEI. China is on a roll upsetting neighbors from all directions in its aggressive stance towards territorial claims. The author thinks the U.S. has made a mistake taking sides in the South China Sea regional disputes and has created a no-win situation. China is seen pivoting away from the U.S. and toward Russia while the U.S. has gained nothing.


  • How come xxx, who graduated from YYY, did not know this? (Per Kurowski, My Voice and Noise of Subprime Bank Regulations) Kurowski points out that over-commitment to "safe" assets requiring less bank reserves than "risky" assets creates occurrences of "safe" assets becoming "risky" because of their concentration in a non-diversified portfolio. Disaster then strikes when the safe assets turn out to have been things like Greek bonds or AAA tranches of subprime mortgage securities. Kurowski points out that this real economy situation is not part of university economics courses. A link to this article was left in a comment on Teaching Economics as if the Last Three Decades had Happened (GEI News).
  • Google Offers New Encryption Tool (Nicole Perlroth, The New York Times) This could make life a lot more difficult for the N.S.A. as end-to-end encryption of individual e-mails has become much easier. Breaking 100 million (or 1 billion) individually applied encryption codes might be far beyond the capability of the government to achieve. Econintersect is imagining a future Supreme Court case appealing the constitutionality of a federal law making it a felony to use any encryption code which has not been registered with the government in advance.
  • A Tidal Wave Of Millennials Could Unlock The US Housing Market (Mamta Badkar, Business Insider) Ms. Badkar reports that 1/3 of 18-34 year-olds are now living with their parents. She suggests that 4 million new households would be formed if occupants per household returned to levels of 11-14 years ago as millennials finally move out of parents home in an improving economy.

Econintersect suggests this estimate of new demand for homes, especially for home purchase, is suffering from too much ceteris paribus. One big thing that has changed since 2000: Outstanding student loan debt has grown by the better part of a trillion dollars and now stands at more than $1.1 trillion. This greatly impairs the mortgage potential of those debtors - GEI News has estimated that if less than 30% of outstanding college loan debt is removed from the credit potential for mortgages, 2 million fewer first time home buyers will be in the market. Once you get much over 50% removed from the potential mortgage market the 4 million pent-up demand is "pent-in" by outstanding student loan debt.

A final factor that is not ceteris paribus is the aging baby boomer cohort, many retiring with little more than Social Security for income. Economic factors will force a consolidation of households from this demographic change. Econintersect has not seen an analysis of the potential for this change to impact demand for housing, but it will certainly have some impact.


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