Archive for April, 2014

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A billion shades of grey

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Arrears and foreclosures

When the global housing boom turned to bust, mortgage arrears spiked. In America, the proportion of troubled loans rose from 0.2% before the financial crisis to a peak of 11% in 2012. In Ireland 18% of all mortgages are now in arrears; by value, they account for 23% of the market.
This crisis is partly self-inflicted. In Greece and Ireland, where foreclosure is very difficult, arrears have piled up. Greece has banned almost all repossessions since 2008. That means the total cost to local banks of the property crash is still worryingly uncertain. A recent paper from the Federal Reserve Bank of Atlanta found that slowing foreclosure in America lowered, rather than supported, property prices during the crisis. Banks may need to be cruel to borrowers to be kind to the wider economy.

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Greece’s debt woes are easing
Comment Expiry Date: 

Wed, 2014-04-30

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Insatiable

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Europe’s bond bubble

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Southern Europe’s economies are in worse shape than tumbling bond yields suggest

INVESTORS have developed a remarkable enthusiasm for the European debt they once shunned. On April 10th, only two years after Greece imposed the biggest debt-restructuring in history on its private creditors, it raised €3 billion ($4.1 billion) in five-year bonds at a yield of less than 5%; the issue was seven times oversubscribed. On April 15th yields on ten-year Italian-government bonds fell to 3.11%, the lowest on record. From Portugal to Ireland, investors are piling into the bonds of the euro zone’s peripheral economies, pushing nominal yields down to levels not seen since the single currency began.
It is tempting to say that this is proof that the euro crisis is over: that years of tough reform are paying off, and that lower bond yields should soon lead to greater investment and faster growth. Tempting, but largely wrong. The outlook is far less rosy than the plunge in bond yields …

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Leviathan of last resort

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Fannie Mae and Freddie Mac

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America’s huge mortgage-market distortions seem likely to endure

YOU could argue that Fannie Mae and Freddie Mac, two “government-sponsored enterprises” (GSEs) in the mortgage business which received the biggest bail-out of the financial crisis, have paid their debt to society. At any rate, the revenues they have generated for American taxpayers since the Treasury took charge of them in 2008 now exceed the $187 billion spent to rescue them. It might be a logical time for the government to stop underwriting Americans’ personal loans. Yet the thrust of the bill to reform their status that is gaining some momentum in Congress is the opposite. For an example of how a post-crash crutch becomes a permanent financial distortion, look no further.
Federal support for mortgages started as part of the New Deal, in 1934. The Federal National Mortgage Association, or “Fannie Mae”, was made private in 1968, and was joined by a twin, the Federal Home Loan Mortgage …

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Leviathan of last resort

Fly Title: 

Charlemagne

Rubric: 

German legalism is hampering rational crisis-management

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SOME say economics in Germany is treated as a branch of moral philosophy. More often it is the worst sort of contract law. Throughout the euro crisis legal pettifogging has hampered rational policy. The German finance ministry is filled with lawyers, not economists, starting with its boss, Wolfgang Schäuble. Big decisions have often ended up at the constitutional court in Karlsruhe. The euro zone wasted time tightening fiscal rules that treated mostly symptoms (budget deficits) not causes (a deficient structure and crippled banks) and led to excessive austerity. The European Central Bank’s action that saved the euro in 2012 has recently been undermined by the Karlsruhe court, which thinks that the never-used “outright monetary transactions” (OMT) programme to buy bonds of countries that agree to reforms is …

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David Greene talks to David Wessel, of the Brookings Institution and a contributor to The Wall Street Journal, about the Earned Income Tax Credit. It’s one of the government’s anti-poverty programs.

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Can anyone stop Narendra Modi?

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Buttonwood

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Central banks will be financing governments on a permanent basis

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EVERYBODY would like a rich uncle to help them when times are hard. And that is the role central banks have been playing in recent years, easing monetary policy at a time when economic output is below trend and the scope for fiscal stimulus has been reduced.
The most controversial aspect of this support has been “quantitative easing” (QE), the creation of money to buy assets, mostly government bonds. Central banks resorted to this expedient in the depths of the crisis as interest rates approached zero. The role of QE was to provide liquidity to the system and to ensure that long-term rates did not rise too far.

The policy had the useful side-effect, as far as governments were concerned, of providing a willing buyer for their bonds at a low interest rate. To be fair, central banks did not buy in …

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