Time Bomb: US And UK Banking Regulators Force Banks To Purchase Government Debt

WASHINGTON, DC – US and European regulators are essentially forcing banks to buy up their own government’s debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.

Regulators are allowing banks to escape counting their country’s debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

“Captive bank demand can buy time and can help keep domestic yields low,” Lorenzen wrote in an analysis for clients. “However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn’t used very prudently.”

“Specifically,” Lorenzen adds, “having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations.”

The banks, though, are caught in a “great repression” trap from which they cannot escape.

“When subjected to the mix of carrot and stick by policymakers…then everything else equal, we believe banks will keep buying,” Lorenzen said.

Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt for years, he found.

Spanish banks bought 90 billion euros worth while Italian firms picked up 86 billion euros just between November and March. Even in the UK, which has avoided a debt crisis as it is outside the euro zone and able to set its own monetary policy, banks have increased holdings of gilts by 100 billion pounds over the past few years.

And in the U.S., banks, though having “comparatively low holdings” of Treasurys, have bought $700 billion of American debt since 2008.

“Ask the simple question: Why are banks buying sovereign debt when yields are either near record lows, or perhaps more interestingly, when foreign investors are pulling out?” Lorenzen wrote.

He thinks he has the answer.

For one, the European Central Bank’s [cnbc explains] Long-Term Refinance Operations provided guarantees for the debt, which Lorenzen deems a “heavily sweetened form of financial repression given the pressure banks were under” to buy.

“Banks have ended up buying bonds at yields where they would happily have sold them only a few months prior,” he said.

Moreover, banks are allowed to not count the sovereign debt against their Basel capital requirements. Also, Lorenzen argued, European banks have escaped the onus of stress tests this year, a less-than-subtle hint that authorities are willing to tolerate a bit of looseness in banks so long as they are helping to stave off a full-blown debt crisis.

“One doesn’t have to be too cynical to hypothesize that all the disclosures on sovereign exposure have become a bit of a political liability at a point in time where the only buyers in size of periphery sovereign debt are periphery banks funded by the ECB,” he said.

“As long as funding for sovereigns in markets remains in jeopardy, and as long as there is no clear move towards proper fiscal solidarity in Europe, we reckon there will be a strong political incentive to make banks captive buyers. That implies a move away from marking sovereign debt to market, away from raising risk weights, away from capital ratios that don’t risk weight assets and away from stress tests incorporating government bonds.”

For investors in bank bonds, the news is good — for now.

“As long as policy remains to sustain the status quo, bondholders should come out fine. Conversely, if the burden becomes too great, then the alternative will most probably involve a radical departure from current convention — to the detriment of bondholders,” Lorenzen said.

“We suspect this binary outcome requires a political judgement that many funds are not particularly well placed to make.” he added. “Instead of those economics, accounting and finance degrees perhaps you should have done political science after all.”

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Recession: Half Of US Households Receiving Some Type Of Government Benefits In First Quarter Of 2011

WASHINGTON, DC – 49.1%: Percent of the population that lives in a household where at least one member received some type of government benefit in the first quarter of 2011.

Cutting government spending is no easy task, and it’s made more complicated by recent Census Bureau data showing that nearly half of the people in the U.S. live in a household that receives at least one government benefit, and many likely received more than one.

The 49.1% of the population in a household that gets benefits is up from 30% in the early 1980s and 44.4% as recently as the third quarter of 2008.

The increase in recent years is likely due in large part to the lingering effects of the recession. As of early 2011, 15% of people lived in a household that received food stamps, 26% had someone enrolled in Medicaid and 2% had a member receiving unemployment benefits. Families doubling up to save money or pool expenses also is likely leading to more multigenerational households. But even without the effects of the recession, there would be a larger reliance on government.

The Census data show that 16% of the population lives in a household where at least one member receives Social Security and 15% receive or live with someone who gets Medicare. There is likely a lot of overlap, since Social Security and Medicare tend to go hand in hand, but those percentages also are likely to increase as the Baby Boom generation ages.

With increased government spending comes the need to pay for it, and if taxes aren’t going to increase that means deficits. Nearly three-quarters of Americans blame the U.S. budget deficit on spending too much money on federal programs, according to a Gallup poll last year, but when the conversation turns to which programs to cut, the majorities are harder to find. For example, 56% of respondents oppose making significant changes to Social Security or Medicare.

The more people who receive benefits, the harder it’s going to be to make cuts, and it’s never popular to raise taxes. In some respects that argues for letting a combination of tax increases and spending cuts that is set to automatically hit in 2013 take effect. There’s just one problem: the Congressional Budget Office says it would sink the economy into recession.

Letting the 2013 provisions come into force would be like dealing with a weight problem by cutting off your right arm. It may not be popular, but a long-term, well-planned diet is the only solution.

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Congressional Budget Office Predicts “Recession” Beginning In Early 2013

WASHINGTON, DC – The nonpartisan Congressional Budget Office (CBO) said Tuesday that unless lawmakers act to prevent scheduled tax increases and spending cuts at the end of the year, a recession will likely result in early 2013.

Early next year income taxes are set to go up when the Bush-era tax rates expire. Automatic spending cuts totaling roughly $109 billion triggered by last August’s debt-ceiling deal are set to hit. Meanwhile, payments to physicians under Medicare will be slashed.

CBO projects that these and other elements of the so-called “fiscal cliff” will cause the economy to contract as demand dries up.

It projected in a Tuesday report that the gross domestic product (GDP) will contract by 1.3 percent in the first half of 2013 before growing 2.3 percent later in the year. Annualized, GDP would grow just 0.5 percent in 2013.

“Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession,” the report states.

A recession is technically defined as two economic quarters of negative economic growth.

This is the first time CBO has forecast a recession resulting from the fiscal cliff. In January it saw 1.1 percent GDP growth in 2013 if policies are not dealt with.

If Congress and the White House turn off all the automatic cuts and the tax increase, growth would rise to 4.4 percent, CBO predicted in the report released Tuesday.

The CBO projections appear to go further than other policymakers have gone in stating the economic risks of lawmakers failing to act.

Fed Chairman Ben Bernanke has warned of the risk to the economic recovery.

“It’s very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there’s absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy,” Bernanke told reporters in April. “I am concerned that if all the tax increases and spending cuts that are associated with current law would take place, absent congressional actions … that’d be a significant risk to the recovery. “

Keeping the automatic cuts and tax increase in place would reduce the deficit by $607 billion in 2012 and 2013, CBO notes.

Unless future spending cuts are made, the national debt would grow at unsustainable rates and hurt long-term growth in that scenario, CBO warned.

Democrats and Republicans are in a standoff over fiscal issues and are unlikely to tackle the “fiscal cliff” until after the November elections. Lame-duck action could be limited to punting most issues into 2013 by extending current policies temporarily.

The White House said the CBO report shows that Congress should adopt President Obama’s overall budget plans.

“The President has put forth his plan to keep the recovery going now and reduce the deficit by more than $4 trillion over the next decade. Congress should act to avoid the scenario CBO lays out by putting forth balanced deficit reduction that meets the test of fairness and shared responsibility,” Office of Management and Budget spokesman Ken Baer said.

Last week, House Speaker John Boehner (R-Ohio) called on Congress and the White House to work out a long-term deficit deal and threatened not to raise the nation’s debt ceiling next year unless a greater amount of spending cuts is enacted.

In a Tuesday opinion piece in USA Today Boehner blamed President Obama for the failure to lock in a long-term fiscal solution last year.

“The president lost his courage, and the country lost its gold-plated triple-A credit rating for the first time,” Boehner wrote. “Since then, the president has been in campaign mode — playing small ball at a time when we need to address big challenges.”

House Budget Committee ranking member Rep. Chris Van Hollen (D-Md.) said the CBO warning means the Democratic path should be followed.

“It is clear that we need to act and we must do so in a balanced way,” he said.

“Given this report, Speaker Boehner’s threat to prevent the United States from paying its bills unless Republicans are able to impose additional economy-slowing austerity measures is especially reckless and irresponsible,” Van Hollen said.

House Majority Leader Eric Cantor (R-Va.) speaking on Fox News Tuesday said Congress should give certainty to the economy by canceling the scheduled tax increases now, but if it does not the public will have a clear choice in November.

“We are going to try every way we can to make sure taxes don’t go up on anybody,” Cantor said. “And so that is why we are saying this election, really, is much about the fact that if people do not want their taxes going up, they have got to vote to make sure that they don’t. And that is a vote for Mitt Romney.”

Earlier this month the House passed a bill replacing $78 billion of the $109 billion in automatic across-the-board spending cuts with a package of cuts to social programs over 10 years. Boehner has said the House will pass an extension of all the Bush-era tax rates before the election.

Those GOP actions are unlikely to be taken up in the Senate.

The White House and Senate Democrats want to end the tax breaks for the wealthy but extend them for the middle class. Democrats want the automatic spending cuts to be replaced by cuts less focused on social programs and revenue from ending tax breaks, including for oil and gas companies.

Senate Majority Leader Harry Reid (D-Nev.) said the CBO report means that the GOP should extend the middle class tax rates and come to the table ready to compromise with Democrats.

“We could avoid the so-called fiscal cliff tomorrow if Republicans would agree to extend the middle class tax cuts, which would provide certainty to millions of families and give us ample time to deal with the other challenges facing Congress at the end of the year,” he said. “If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit reduction package that asks millionaires to pay their fair share.”

Also on Tuesday, Reid wrote to Senate Republicans to say that action on debt issues appears to be “impossible” before the election so long as Republicans continue to reject any new tax revenue as part of a way to chart a new fiscal course.

“The American people want a balanced approach to fiscal policy that combines smart spending cuts with revenue measures that ask millionaires and big corporations to pay their fair share,” Reid wrote. “Yet a strict adherence to Tea Party ideology among Republicans in both the House and the Senate has so far put that balanced, common-sense solution out of reach.”

“It is imperative for both sides to rally around a long-term fiscal agreement that includes revenues,” Sen. Charles Schumer (D-N.Y.) said in a release. “A stopgap deal that just kicks the can down the road is not much better than pure deadlock.”

Deficit hawks have been hoping that lawmakers would put their differences aside and come up with a compromise along the lines of the Bowles-Simpson deficit commission, which sought to reform the tax code while trimming some entitlement benefits.

Reacting to the CBO report, the Center for a Responsible Federal Budget’s Maya MacGuineas said “you can only hope that as we march down a treacherous path between a fiscal cliff-recession and a mountain of debt, lawmakers are hard at work to come up with a workable solution, rather than taking the year off with the excuse that it is an election year.”

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Economy And Unemployment So Bad Under Obama That Millions Of Illegal Immigrants Are Heading Home

WASHINGTON, DC – Well, that’s one way to stem the tide of illegal aliens streaming across the border from Mexico.

Jack up unemployment rates to near double digits, dunk America into a double-dip recession and put us so deeply into hock with the Chinese communists that it will take generations for us to recover.

After long enough, living and working and trying to eke out bare survival in America becomes even worse than trying to get by in Mexico.

A new study from the highly esteemed Pew Hispanic Center says the millions of Mexicans who risked their lives crossing the desert to get here to the promised land for a better life have given up on the U.S.

This is no small feat. Have you ever been to Mexico? Not the ritzy beach towns with the gated resorts, but Nuevo Laredo? The dusty streets are filled with bony children selling gum and candy for just a few spare pennies.

Desperate as that little trade may have once seemed to us, at least it has the vibe of the floor of the New York Stock Exchange during the ‘90s. Nothing like that is going on anywhere on this side of the border.

Remember the axiom of big government bureaucrats: If it moves, tax it. If it keeps moving, regulate it. When, finally, under the crushing weight of taxes and regulation, it stops moving, subsidize it.

So the Mexicans have quit coming to the hopeless part of North America. Canada is just too far to walk.

Or, at least, the few final stragglers who have not kept up with America’s woes and are still sneaking into the U.S. are balanced out by all the illegal Mexicans already here who are now risking their lives to cross the desert to escape the American “dream.”

Now we know why all the politicians in Washington have finally agreed to beef up security and build a fence along the southern border. They’re desperate to keep all the Mexicans from leaving.

That’s right, who would raise their children and mow their lawns and do all of America’s dirty work if all the Mexicans left?

Authors of the Pew report call the stunning shift in migration patterns historic. Not since the Great Depression, they say, has a shift of this magnitude occurred along the U.S.-Mexico border. Not since the Great Depression?

It’s almost enough to make you pine for the good old days of rampant illegal immigration.

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2nd Depression: Government Handouts Exceed Received Tax Revenues

WASHINGTON, DC – U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression.

Households received $2.3 trillion in some kind of government support in 2010. That includes expanded unemployment benefits, as well as payments for Social Security, Medicare, Medicaid, and stimulus spending, among other things.

But that’s more than the $2.2 trillion households paid in taxes, an amount that has slumped largely due to the recession, according to an analysis by the Fiscal Times.

Also, an estimated 59% of the 308.7 million Americans in this country get at least one federal benefit, according to the Census Bureau, based on 2009 data. An estimated 46.5 million get Social Security; 42.6 million get Medicare; 42.4 million get Medicaid; 36.1 million get food stamps; 12.4 million get housing subsidies; and 3.2 million get Veterans’ benefits.

And the handouts from the government have been growing. Government cash handouts account for a whopping 79% of household growth since 2007, even as household tax payments–for things like the income and payroll tax, among other taxes–have fallen by $312 billion.

That is a tough feeding trough to take away from voters.

One of the recurring themes FOX Business has been covering is “how the world has been turned upside down – well, the business world at least,” notes FOX Director of Business News, Ray Hennessey. “In a free market, profit is generated by hard work and enterprise,” Hennessey notes, adding: “Because of the labor of the worker, companies generally have the ability to prosper and make more money, both for their employees and their owners,” which in turn creates tax revenues.

Seems like common sense, right? That’s because it is. But not in our country today. Somehow the DNA of our country is changing. Wealth creation is coming from DC, not from America’s entrepreneurs.

In short, Americans have the government, not private enterprise, to thank for their wealth growth.

Obviously, there are big implications to this.

For instance, Hennessey asks, if indeed more households have the government to thank for their wealth, does that mean those households are more inclined to re-elect politicians who are pushing for more government handouts?

Does the workforce erode because it is easier to collect a check than answer to an alarm clock each morning?

Is our competitiveness as a nation hurt because profit is generated not by American capitalism but by European-style socialism? Can we, as taxpayers, afford to carry the burden of government-sponsored wealth creation?

All this comes at a time when a growing number of Wall Street houses, including JPMorgan Chase (JPM: 44.56, -0.09, -0.20%) and Barclays Capital (BCS: 19.38, +0.25, +1.31%), Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) are cutting their U.S. GDP growth forecasts by as much as a percentage point or more.

It also comes as President Barack Obama is already in re-election mode, as he bets his massive spending will woo independents. It also comes as Standard & Poor’s has joined the International Monetary Fund and Pimco, which runs the world’s biggest bond fund, in downgrading their outlook on US debt.

The negative outlook comes as the government has added the equivalent of Germany and Russia combined in spending from the time Democrat Rep. Nancy Pelosi gaveled in as House Speaker in January 2007. The government, like never before, has put the thumb on the scale as it picks winners and losers.

Yes, the dollar rallied and Treasuries bounced higher after the news that S&P had issued a negative outlook on the U.S. debt picture. Some argued that happened because eventual austerity would slow growth, which is deflationary and in turn good for bonds.

But that ignores the flight away from rocky overseas markets toward the Treasury’s safe haven status, which drives yields down. Potential sovereign debt defaults are a huge problem in the Eurozone, particularly in Greece, where yields rocketed above 13% earlier this week.

The bullish view about U.S. bond prices also ignores the fact that the Federal Reserve has been buying Treasury bonds and notes, $600 billion so far this year, more than half of the Treasury Dept.’s issuance. That keeps a lid on bond yields. When bond prices rise, the government doesn’t have to lure investors with higher yields. When bond prices fall, the government offers higher yields to reel investors in.

The bullish view about U.S. bond prices also ignores the negative trend in the dollar, which has been weakening.

And it ignores the bond market’s brutal reaction to spending under President Bill Clinton, where yields spiked several percentage points higher beginning in 1994, rising from around 5% before topping out above 8%, before then-Treasury Secretary Robert Rubin forced austerity, leading to welfare reform.

Republicans now want to shrink the U.S. government, but Democrats want to stymie their efforts. This, after the President touted $38 billion in spending cuts as the largest in our nation’s history, just four months or so after touting the massive spending increase pushed through in the lame duck Congressional session.

And after the White House shelved the Bowles-Simpson debt commission report, a panel which the President asked for, endorsed and then ignored, hoping such hard decisions might be delayed until after the election.

President Obama had asked for the debt commission to “address the long-term quandary of a government that continually and extravagantly spends more than it takes in,” only to initially set aside the commission’s recommendations.

And earlier this year the White House first introduced a budget that would have added $6.7 trillion more in deficit spending over the next 10 years, yanking the national debt higher to more than 75% of gross domestic product, according to the Congressional Budget Office. That, until GOP Rep. Paul Ryan offered his $4.4 trillion in spending cuts over ten years, causing the President to offer $4 trillion in cuts over 12 years.

The Fiscal Times reports that “the only other time government income support exceeded taxes paid was from 1931 to 1936.” The Times notes that “government transfers of income to households started to overtake personal taxes at the start of 2008, and the gap has been widening.”

The difference between what households received and what they paid in taxes is about $125 billion, equal to a little more than “three times the amount Republicans and Democrats agreed to cut from government spending through Sept. 30,” the Fiscal Times said. Typically, the gap between government transfers and taxes runs the other way, the Times reports.

“In normal times the household sector gives about eight percentage points more of its income in taxes than it receives in direct transfers,” the Times quotes J.P. Morgan economist Michael Feroli as saying, adding that a return to normalcy, or this eight-percentage-point spread, is equal to about $1.2 trillion in income.

So the question is: What government policies will bring the U.S. labor market back to robust health, enough to drive economic growth, consumer spending — and higher tax revenues?

When will the U.S. government pull back from its intervention into the U.S. economy, so the economy can try to stand on its own?

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