U.S. and EU authorities are expected to hammer out the definite shape of a new regulatory order in 2010 that will fundamentally change how world banks and markets operate.

Stricter limits on leverage and capital will emerge, leading eventually to slimmer profits for banks, policy analysts said. Formerly unregulated off-exchange derivatives markets will have to conform to new procedures.

Lenders’ power to package and securitize mortgages and other forms of debt will face new limits, while hedge funds — once the darlings of high finance — will face new scrutiny.

Procedural hurdles remain to be crossed by reform advocates. In the United States, the Senate has not yet approved a reform bill, but the House of Representatives has.

Banking lobbyists and Republicans are working to block reforms. Senate debate will resume this month, with analysts expecting passage of legislation in early spring. The Senate and House will then have to agree on a single measure to send to President Barack Obama. That could happen in April or May.

In Europe, EU member states and the European Parliament must still rule on a range of proposed regulations for banks, markets, insurers, hedge funds and private equity groups.

But it all looks to be on track for adoption, barring unforeseen political shocks, analysts said.

“The reform package will be more far-reaching than anything we’ve seen since the Great Depression, and there is a high likelihood it will pass,” said the Eurasia Group, a research and consulting firm that closely follows Washington politics.

“Upcoming midterm elections (in America) will encourage populist approaches,” the group said in a research note.

Source/Full Story:  Reuters

Homeowners with the best credit are the next big risk for the U.S. housing market.

An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.

“There will be continuing foreclosures, and not just subprime, it will be prime mortgages,” Shiller, a professor at Yale University, said in an interview. “This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.”

The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said.

Employers have cut more than 7.2 million jobs in the last two years, the biggest employment loss since the Great Depression. Measured annually, the U.S. jobless rate probably will average 10 percent in 2010, according to the median estimates of economists surveyed by Bloomberg. That would be the highest rate in government records dating to 1948, after rising to a 26-year high of 9.3 percent last year.

Source/Full Story:  Bloomberg.com

Treasuries headed for the worst year in at least three decades as the U.S. stepped up debt sales to help spur growth in an economy recovering from the biggest slump since the Great Depression.

The current seven-year note was little changed after a $32 billion of sale of the debt drew a yield of 3.345 percent, compared with an average forecast of 3.372 percent in a Bloomberg News survey of four of the Federal Reserve’s 18 primary dealers. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst performance since 1978.

“Sevens came in well enough given the environment, year- end, lack of liquidity; things could have been much worse,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the fact that short-term rates are exceedingly low, there’s been a grab for yield a little bit farther out the yield curve.”

The yield on the current seven-year note fell one basis point, or 0.01 percentage point, to 3.30 percent at 4:11 p.m. in New York, according to BGCantor Market Data. The 10-year note yield slipped one basis point to 3.79 percent, and the yield on the 30-year bond dropped three basis points to 4.61 percent.

Source/Full Story: Bloomberg.com

Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said in an interview with Reuters home prices will resume their decline by early next year as foreclosure sales pick up again.

“The housing crash is not over,” he said.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy as well as the rest of the world.

A setback for the hard-hit housing market could portend problems for the U.S. economy.

Home prices, as measured by the Standard & Poor’s/Case-Shiller U.S. National Home Price Index, will trough in the third quarter of 2010 after declining 38 percent, Zandi said.

The index peaked in the second quarter of 2006 and hit a trough in the first quarter of 2009, a drop of about 32 percent.

Source/Full Story: Zandi | Reuters

It sounds like a George Lopez joke.

“Times are so bad that I saw an Anglo day laborer standing outside Home Depot the other day.”

Except it’s true.

In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work.

Experts say the slow-starting but seemingly inexorable trend is occurring nationwide.

“It’s the equivalent of selling apples in the Great Depression,” said Harley Shaiken, chairman of the Center for Latin American studies at the University of California, Berkeley.

But it is not only a sign of the times, they add. If the numbers of citizens among the day laborers in cities across the country continue to grow, it’s likely to increase the ire of followers of TV host Lou Dobbs and others who will see illegal immigrants as stealing food off the tables of the nation’s native-born or naturalized poor.

Source/Full Story:  Las Vegas Sun

Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

“I thought they were money markets that were just paying more,” Calvanese said in an interview. “Nobody ever used the term ‘CDO,’ and I am not sure I would have known what that was anyway.”

Such financial mistakes, often enabled by public officials’ lack of disclosure and accountability for almost 90 percent of government financings in the $2.8 trillion municipal bond market, are costing U.S. taxpayers as much as $6 billion a year, according to data compiled by Bloomberg in more than a dozen states.

The money lost to taxpayers — when the worst recession since the Great Depression is forcing local governments to cut university funding, delay paying bills and raise taxes — is enough to buy health care for everybody in Minneapolis; Orlando, Florida; and Grand Rapids, Michigan, according to figures from the U.S. Census Bureau and the U.S. Department of Health and Human Services.

Florida county commissioners approved no-bid deals with their favorite banks in an arrangement that led to criminal convictions. Pennsylvania school board members lost $4 million on an interest-rate swap agreement they didn’t understand in the unregulated $300 billion market for municipal derivatives.

Source/Full Story: Bloomberg.com

Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days.

The Madrid research group RR de Acuña & Asociados said the collapse of Spain’s building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain’s recession will be milder than elsewhere in Europe.

RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain’s unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression.

Spanish workers typically receive 50pc to 60pc of their former pay for eighteen months after losing their job. Then the guillotine falls. Spain’s parliament has rushed through a law guaranteeing €420 a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on.

Separately, UBS said unemployment will reach 4.8m and may go as high as 5.4m if the job purge in the service sector gathers pace. There is the growing risk of a “Lost Decade” akin to Japan’s malaise after the Nikkei bubble.

Source/Full Story:  Telegraph

When those adjustments are taken into account for May 2009, the unemployment rate soars to 16.4%. That is the highest rate since the BLS began calculating the U-6 rate in 1994. While not exactly comparable, it is also higher than the BLS’s earlier and yet broader adjusted unemployment rate called the U-7. The BLS began calculating the U-7 rate in 1976 but discontinued it in 1994 in favor of the U-6 rate. In the 1982 recession the U-7 reached 15.3%, its highest level. In fact, no bout of unemployment since the last year of the Great Depression in 1941 would have produced an adjusted unemployment rate as high as today’s.

Why is the real unemployment rate so much higher than the official, or U-3, rate? First, forced part-time work has reached its highest level ever, going all the way back to 1956 and including the 1982 recession. In May 2009, 8.8 million workers were forced to work part time for economic reasons. Forced part-timers are concentrated in retail, food services, and construction; about a quarter of them are young workers between 16 and 24. The number of discouraged workers is high today as well. In May, the BLS counted 2.2 million “marginally attached” workers. That matches the highest number since 1994, when the agency introduced this measure.

With the economy in the throes of a catastrophic downturn, unemployment, no matter how it’s measured, will rise dramatically and impose yet more devastating costs on society and on those without a job or unable to find full-time work.

Source/Full Story: Dollars & Sense

Economic output shrank by 5.6pc in the 12 months to the middle of the year, according to official figures which shattered hopes that the recovery has already begun.

The Office for National Statistics said that Britain’s gross domestic product (GDP) contracted by 0.8pc in the second quarter, following the unprecedented 2.4pc fall in the first three months of the year. Economists had expected GDP – the broadest measure of the country’s economic performance – to shrink by 0.3pc.

According to calculations by Martin Weale of the National Institute for Economic and Social Research the profile of the current recession is now almost identical to the decline in Britain’s output between 1929 and 1931. The 5.6pc contraction over the past year almost matches the 5.8pc fall in the year preceding the second quarter of 1931, during which Credit Anstalt in Austria collapsed, triggering a second wave of economic seizure across Europe.

Source/Full Story:: Telegraph
Technorati Tags: Great Depression

Confidence in the world economy dropped for the first time in four months in July as government stimulus efforts showed little sign of reducing unemployment, a Bloomberg survey of users on six continents showed.

The Bloomberg Professional Global Confidence Index declined to 39.13 in July from 43.57 in June. A reading below 50 means pessimists outnumber optimists. A measure of U.S. participants’ confidence in the world’s largest economy fell to 29.5 from 36.7, the survey showed.

The MSCI World Index is down close to 2 percent since the U.S. Labor Department on July 2 reported higher-than-expected job losses and an unemployment rate approaching 10 percent. Treasury Secretary Timothy Geithner said yesterday the world will probably suffer “more than the usual” setbacks in exiting the worst slowdown since the Great Depression.

“No one can wave a magic wand,” said David Semmens, an economist at Standard Chartered Bank in New York and a regular survey participant. “We aren’t pulling out of the recession in the same way as in past recessions. The economic outlook isn’t improving as strongly as people would have hoped.”

The survey of more than 2,700 Bloomberg users was conducted between July 6 and July 10. Since the previous survey, the International Monetary Fund and the World Bank lowered their forecasts for global growth this year, while leaders from advanced nations say the recovery is too fragile to consider reversing more than $2 trillion in stimulus efforts.

Source/Full Story: Bloomberg.com

The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.

“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”

The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.

Source/Full Story: Bloomberg.com

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

Source/Full Story: FT.com

Also available at: [Taibbi] The Great American Bubble Machine (LF exclusive!) – The Something Awful Forums

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again

Sales of previously owned U.S. homes rose for a second straight month in May but were weaker than expected, adding to growing fears of an anemic economic recovery from a deep recession.

The chief economist of the National Association of Realtors, which released the data on Tuesday, said sales in some areas appeared to be slowing and warned of the danger of a “delayed” housing market recovery.

The Realtors’ group said sales climbed 2.4 percent last month to an annual rate of 4.77 million units. While that pace was below market forecasts it was the second straight month sales had risen, for the first back-to-back gain since September 2005.

Despite signs the market is stabilizing, NAR said the median national home price fell 16.8 percent in May from a year earlier, the third-largest drop on record.

A separate government report on Tuesday showed home prices fell 6.8 percent year-on-year in April after dropping 7.3 percent the previous month.

U.S. stocks fell amid disappointment with the data, which fed the view the economy’s recovery from its longest recession since the Great Depression would be tepid. Yet another postponement by Boeing Co of the inaugural flight of its long-delayed 787 Dreamliner plane also pressured stocks.

Source/Full Story: Reuters

The head of the IMF questioned on Monday any debate about when to roll back stimulus spending, saying the world economy had yet to weather the worst of a recession that claimed a record number of European jobs.

The 16-country euro zone lost a record 1.22 million jobs in the first quarter, official data showed. Employment during the first quarter fell 1.2 percent year-on-year, the deepest annual drop since measurements started in 1995.

Even if some form of economic recovery is not far off, analysts say unemployment will climb for many months to come.

Underlining the fragile state of the global economy, an influential economist said China would not see a rapid rebound and South Korea’s finance minister said its economy was still sliding, although the pace had slowed.

But in southern Italy, Group of Eight finance ministers meeting at the weekend described their economies in the most positive terms since the collapse of U.S. bank Lehman Brothers nine months ago heightened the world’s worst financial crisis since the Great Depression of the 1930s.

“Their (G8) stance is that we are beginning to see some green shoots but nevertheless we have to be cautious,” International Monetary Fund chief Dominique Strauss-Kahn said during a visit to Kazakhstan. “The large part of the worst is not yet behind us.”

Source/Full Story: Reuters