reality is only those delusions that we have in common...

Saturday, October 31, 2009

week ending Oct 31

A visual history of the Federal Reserve system.

Evaluating the new tools of monetary policy - Last week I participated in a conference hosted by the Federal Reserve Bank of Boston, at which I discussed the new lending programs and asset acquisitions pursued by the Federal Reserve over the last two years. Previously I shared with Econbrowser readers empirical evidence on the effects these targeted liquidity operations seem to have had. Below I reproduce my remarks from the conference on the underlying motivation for using such measures, in which I suggested that the critical question is what was the underlying cause of the financial stress to which the Fed was responding. I distinguished between two possible interpretations...

Improving financial regulation and supervision - There were some other very interesting presentations at the conference hosted by the Federal Reserve Bank of Boston last week. Fed Chair Ben Bernanke spoke on Financial Regulation and Supervision after the Crisis while Princeton Professor Alan Blinder's message was It's Broke, Let's Fix It: Rethinking Financial Regulation. Here I summarize four key reforms these speakers addressed. (1) Capital adequacy. (2) Compensation. (3) Derivatives. (4) Resolution mechanism.

“Fed Self-Evaluation: Marking Monetary Policy to Model” - It has been frequently charged that the Fed, under Alan Greenspan and Ben Bernanke, kept interest rates too low for too long, contributing to bubbles in the stock, credit and real estate markets. The Fed has repeatedly denied that this is the case. For example in a recent blog posting, an official at one of the Reserve Banks joined the chorus in arguing that monetary policy was not to blame. He presented a chart of the actual Fed funds rate and an estimate path for the Fed funds rates based on measures of inflation, actual output relative to potential output, and the lagged Fed funds rate for the period 1988-2009...

The Fed’s Signal-To-Noise Ratio - Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand. Recent press reports alluded to the possibility that the Fed might be pondering some shift in its language, either removing or moderating its vow to keep rates low for an “extended period.” But former Fed Governor Larry Meyer, now at Macroeconomic Advisors, says all the talk about a verbal baby step toward tightening is just that.

Language Lessons at the Fed (Barron’s) TREASURIES MOVED LOWER IN PRICE and higher in yield last week following published reports Friday that the Federal Reserve was mulling a semantic change to communicate that its low-rate policy would, eventually, be changed. After showing little net change for the first four days of the week, the Treasury market sold off in reaction to an article in the Financial Times that Fed officials were beginning to consider changes in its language about its policy intentions.

Low Interest Rates May Be Here To Stay - One of the most striking features of today’s economy is that interest rates, on everything from bank loans to Treasury bonds, are at 50-year lows. Federal Reserve actions to stabilize the financial system and stimulate economic growth contributed importantly to these low rates. There is much talk lately of the need for an exit strategy to normalize interest rates and head off the return of inflation. However, “normal” interest rates are likely to be lower than most people expect, especially if the Congress and the administration can agree on a long-run strategy to control fiscal deficits.

Even the Fed Doesn't Want to Hold U.S. Dollars - This chart shows the dollar’s performance since the Fed announced its Quantitative Easing program in March. This chart tells us two things: Americans just got 15% poorer on the world stage thanks to Ben Bernanke, & a currency crisis is in the works. When the financial crisis hit, the Fed realized it would need to keep interest rates low while it attempted to bail out the banks (80% of the $200+ trillion in derivatives sitting on commercial banks’ balance sheets are related to interest rates). The problem with this is that it makes Treasuries very unattractive to foreign investors (China & Japan) who want a higher yield. Consequently, the Fed decided to pick up the slack by buying $300 billion worth of Treasuries...

Fed Ending Treasury Purchases That Helped Cap Yields - (Bloomberg) -- The Federal Reserve will complete its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs. Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt. They are less than half a percentage point higher than the day before the program was announced on March 18, even though the U.S. sold a record $1.25 trillion in notes and bonds, more than double the amount in the year-earlier period.

Treasury is right to go long - Timothy Geithner wants to lock in low rates for the government while he can, extending the maturity of Treasury debt to 72 months from 49, a 26-year low.It’s a smart move — if he can pull it off. To do so, he’ll have to increase longer-term issuance by 40 percent, to $600 billion, according to FTN Financial estimates cited by Bloomberg. That could put pressure on interest rates, nipping the recovery in the bud. It’s a risk he should take. The bigger risk is that the government continues to fund itself at the short end of the curve, requiring Treasury to roll over its obligations more frequently.

Never Send a Boy to Do a Man's Job - I must admit, Dear and Long-suffering Readers, that my first reaction to this news was of a kind with several of the sources quoted in the article: white-hot, scalding rage. I mean, what the fuck?! Tim Geithner and pals left up to thirteen billion dollars of taxpayer money just sitting on the table? Why? Because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. Oh, that's a good reason. No, really, I mean it. Dumb fucking cocksuckers.

Dead Government Walking - In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending

Our Drunken Uncle - According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor. The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters. "Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.

Debate on Deficits - NakedCaptitalism - We are going to feature a series of posts this week on the merits of the idea of using Federal deficits to stimulate an economy in severe recession or depression. The first offering is from DoctoRx, who writes at EconBlog Review...
Debate on Deficits: A Reply from Rob Parenteau - Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of the Richebacher Letter, and a research associate with the Levy Economics Institute, responds to DoctoRx’s post, “Debate on Deficits.”
All Debt is Not Created Equal: Government Debt is NOT the Same as Private Debt - A major shortcoming in an otherwise thoughtful post by DoctoRX on deficit spending is a traditional mistake in which analysts seek to analogise the expenditures of government with that of a private household or business. The government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money.

Five Things: The Debt Crisis Is Not a Conspiracy - Recently, I ran across a long-winded, chart-filled screed haranguing the Federal Reserve for single-handedly taking over the entire capital market. The claim actually made a certain kind of hysterical sense, perhaps because it appeared in bold typeface, even if it missed the point; outrage over the Fed intervening in equity markets is akin to expressing outrage over what color sack the robbers are using to haul away their loot. At what point did we all become armchair central bankers?The reality is that the Federal Reserve is simply following the debt-deflation game plan and doing exactly what the vast majority of US central bankers have always insisted they would be doing if trying to prevent a full collapse into a deflationary depression; that is, try and reflate.

Bill Gross: Assets Are $15 Trillion Overvalued And Fed Will Keep Rates At 0% Forever To Keep The Fantasy Alive - PIMCO's Bill Gross with a great monthly letter. Here are the key points:Over the past 30 years, paper asset prices rose 2X as much as they should have based on economic fundamentalsThis was the result of leverageThe asset price rise in turn pumped up the economy's fundamentals (Soros's reflexivity)The government wants to restore the "old normal" (2007) not the "new normal" (slower growth as asset prices return to trend)Therefore... The Fed will keep rates at 0% for at least 18 months into sustained 4% growthNext year, when the inventory restocking effect wears off, 4% will be tough

Bill Gross: Bonds Will Get Slammed Once The Fed Stops Propping The Market - Bill Gross is warning investors that as Federal Reserve buyback programs disappear, bonds are likely to correct. While we're sure he remains a long-term bond bull (he sort of has to be, given his job), investors should give particular weight to his warning given his strong disincentive to be bearish. "It's obvious that the programs in the United States, the Federal Reserve buyback programs ... those purchases and that purchasing power will cease within the next three to four months,"

Geithner sees dollar's reign lasting 'long time' - US Treasury Secretary Timothy Geithner said Tuesday the dollar would keep its status as the world's main reserve currency a "long time." Geithner, speaking to an investors conference in New York a day after the dollar hit a 14-month low against the euro, said: "The dollar will remain the principal reserve currency for a long time." The dollar has nosedived in recent months as investors turn away from the greenback, considered a safe haven amid economic uncertainty, amid a burgeoning recovery from a severe global slump.

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble -- Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini. “We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous

Lazard Asset Management Fund Dumps The Dollar - It was only a matter of time before asset managers said "enough" to Bernanke's plan of debasing the dollar day after day, and took appropriate measures. In a not very surprising, yet quite shocking at the same time, development, caught by Annuity IQ, Lazard's The World Trust Fund has had enough of the dollar. Lazard will "change the currency in which the Fund's shares are traded from US dollars to Sterling."

Matt Drudge vs. the Dollar - In case you hadn't noticed, Matt Drudge has become fascinated with the U.S. dollar, & it feels like Drudge has ramped up his number of stories of late. Some are arguing that Drudge is part of the cause of the dollar's decline, which seems a bit much. Others are arguing that Drudge is just helping the political right focus in on an easily-demagogued data point. I'm not going to touch either argument, but I did think it would be fun to have a look at the data. Has Drudge really upped his dollar headlining, and has it been tied to a change in the value of the dollar? To answer the question, I scraped Drudge's site back to 2002 for dollar-related headlines, of which there were 477...

Dollar Tanks After Chinese Banker Urges State To Buy More Euro And Yen - The United States dollar should retain the largest weight in the reserve, but with a smaller proportion, said Zhou Hai in an opinion piece in today's Financial News. The newspaper is affiliated with the central bank."The holdings of euro and yen should be increased to reflect China's growing trade with the European Union and Japan," Zhou wrote. "China should improve the yuan's exchange-rate mechanism and use monetary policy tools reasonably to lessen the need for passive purchase of foreign currencies."

Why Asia must eventually ditch the Dollar - Talk is cheap, and all ASEAN’s leaders did last weekend was to talk about an Asian currency zone and free trade agreement by 2015. News reports exaggerate the near-term ability to maneuver of the major players, for example, the rather overwrought report in the Times of India The last thing India wants is an Asian currency area led by China. But as America continues to monetize debt at a trillion-dollar annual rate, and the United States continues to withdraw from international leadership, Asia will have no choice but to make its own arrangements. The Obama administration, in my view, will fail to reflate the burst consumer bubble. Attempting to do so by gunning the federal deficit up to 12% of GDP and ballooning the Fed balance sheet is one of the stupidest things the United States ever has done.

China to use ASEAN meet to make Yuan an international currency - China is set to use the ASEAN meet to sell the idea of making the Yuan an international currency. It is using the sense of uncertainty over the US dollar to sell a new dream of enlarged regional trade, financial support from Beijing and reduced dependence on the volatile dollar.China has also offered to contribute nearly one-third of the $120 billion economic stimulus package being worked out by ASEAN with the stated purpose of helping member-nations reduce their dependence on the International Monetary Fund. Japan offered to cough up a similar amount so that its influence in the region is not diminished.

China and Brazil trade in yuan - Kazakhstan Today - China and Brazil have started to trade in yuan, the agency reports citing the Russian information resource NEWSru. According to NEWSru, China and Brazil established international payments in national currency of the Peoples Republic of China. Geli Corporation has already received from San Paolo a few million yuans. According to Vice President of the Brazilian branch of Bank of China, all formalities required by the local bodies of control have been met.

Turkey Dumps Dollar For Trade With Iran And China - One by one, countries are taking steps to un-dollarize their economy. The latest is Turkey.From Russian newspaper RIA:Turkey is switching to national currencies in trade with Iran and China, ending dependence on the U.S. dollar and the euro for about 20% of its commodity turnover, local media reported on Wednesday.Turkey has already switched to settlements in national currencies with Russia amid weakening confidence in the greenback as the world's major reserve currency. The move was initiated by Turkish President Abdullah Gul during his visit to Moscow in February.Turkey's decision to make settlements with Iran and China in national currencies was announced during a visit to Iran by Turkish Prime Minister Recep Tayyip Erdogan. The Turkish premier told a Turkish-Iranian business forum on Tuesday that the countries had prepared a legal framework for transition to settlements in national currencies.

International reserves and easy money helped to cause the crisis - VoxEU - How did turmoil in the US subprime mortgage market ignite a global crisis? This paper explains how emerging markets’ voracious appetite for international reserves coupled with record-low US policy interest rates and lax financial regulation to produce the large-scale creation of quasi-money subject to self-fulfilling-expectations runs. The theory suggests significant changes in Fed and regulatory policy are needed.

Adjustment and the dollar - Paul Krugman - Whenever exchange rates enter into discussion, certain zombie fallacies — ideas that you kill repeatedly, but refuse to die — inevitably make their appearance. What I’m hearing a lot now is the old line that exchange rates have nothing to do with international imbalances: the trade deficit is the difference between investment spending and savings, and that’s all there is to it. It’s a fallacy called the doctrine of immaculate transfer. So let me try killing the zombie once again.

What Triffin dilemma?! - Time and again you read that the recent global imbalances have been the inevitable corollary of the dollar’s role as a reserve currency. It’s the Triffin dilemma, they say, after economist Robert Triffin, who maintained that the country issuing the global reserve currency must be willing to run trade deficits, in order to supply the world with enough of its currency to meet the global demand for reserves. The “dilemma” arises from the fact that, the more dollars, say, are supplied to the world through US trade deficits, the more the value of the dollar is undermined, threatening its role as a reserve currency. So, as it happens, I disagree both with Triffin as well as with the premise that it’s that very dilemma that has led to the global imbalances we still see today. Here is why…

Freddie Mac’s Secrecy Pacts Face Court Test - One year after the government took over and bailed out Freddie Mac, the giant mortgage finance company, federal regulators are blocking former employees from revealing information to investors who are suing the company for fraud. In their class-action lawsuit against Freddie Mac, three big union-based pension funds charge that Freddie Mac executives defrauded investors by concealing the company’s exposure to high-risk mortgages, its mounting losses, and its inadequate capital position. Federal prosecutors in Virginia and the Securities and Exchange Commission are already investigating..

Are Big Banks Better? - Last week, Charles Calomiris wrote an op-ed in the Wall Street Journal arguing that big banks are better for various reasons. Simon wrote last week saying that Calomiris underestimated the political dimension, and that his proposed solution — a cross-border resolution mechanism for large institutions — is the policy equivalent of assuming a can opener. I wanted to look at Calomiris’s specific claims. I think I’ve already dealt with the myth that banks “need to be large to operate on a global scale—and they need to do so because their clients are large and operate globally.” Calomiris also argues that there are economies of scope

The Value of the “Too Big to Fail” Big Bank Subsidy - One outcome of the TARP and other bank rescue efforts following the collapse of Lehman Brothers in September of 2008 is that the United States has essentially formalized a commitment to a “too big to fail” (TBTF) policy for major banks. This paper uses data from the Federal Deposit Insurance Corporation (FDIC) on the relative cost of funds for TBTF banks and other banks, before and after the crisis, to quantify the value of the government protection provided by the TBTF policy.

TARP chief: Banks possibly 'in more danger now' - The banking system today may be in a more precarious position than it was a year ago, the man charged with overseeing a $700 billion bailout program said Wednesday. Neil Barofsky, the special inspector general managing the Troubled Asset Relief Program, told CNN's Wolf Blitzer on Wednesday that the government's decision to support bank mergers over the past year may have put the U.S. economy more at risk.

Why big banks hate banking - There have been no obituaries. No eulogies. No burial services. But this quarter marks the death of traditional banking at the big money-center banks. Yes, we've seen amazing earnings reports from the likes of Goldman Sachs and JPMorgan Chase this quarter, but their profits came from things like trading. From everything, in fact, but what you and I -- and certainly the preceding generation -- called banking. And it's exactly those huge profits from everything but banking that have put the final nail in the big banks as banks.

Glass Steagall on steroids now - SOS - The world desperately needs Glass Steagall on Steroids. The world's banking giants are too powerful for other players or referees. Banking must be atomized – a la America’s 1933 legislation called Glass Steagall – in order to separate high-risk investment banking from taxpayer-insured deposits. Canada does a reasonably good job of sequestering these businesses, but the facts are that excessively big banks like ours contributed mightily to the current global catastrophe.

Former Chair of Citigroup: Restore Glass-Steagall - As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.
- John S. Reed

An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility - Recently, Zero Hedge presented a snapshot analysis of the various securities that made up the triparty repo agreement involving JPM, Lehman and the Fed. We uncovered numerous bankrupt companies' equities that were being pledged as collateral for what ultimately was taxpayer exposure. To our surprise, this discovery is not an exception...

In defence of Goldman Sachs - FT - A 50-odd page presentation from the former investment bank has surfaced - prepared by three Goldman MDs for a meeting with SEC officials back in September.The document provides a detailed defence of the benefits of high frequency trading, dark pools, short-selling, exchange co-location and all those other matters now on the radar of SEC chairman Mary Schapiro. A copy is available in the Long Room here. Alternatively, you can get it on Scribd or view a partial slide show at Business Insider, who kindly drew our attention to its existence.

Goldman Lobbies Senate, Says Full Transparency Sucks - Matt Taibbi - There is a lot of crazy stuff in this document Goldman has been passing around the Senate, but the most notable is probably this passage, in which Goldman pooh-poohs the notion that complete transparency in markets creates accurate prices: For some market participants, however, the openness and transparency of the equity market actually mean they are unlikely to achieve the best price. The risk, particularly for large transactions such as those undertaken by pension funds or large mutual funds, is that other market participants will use this transparency to undercut the intended transactions

Thrills, links critical as greed in insider trading - (Reuters) - Insider traders may have taken the greed-is-good mantra to heart, but it's not the only thing that motivates them. People may be spurred to leak or misuse confidential information for many reasons: the thrill of risky behavior, financial or work pressures, ignorance about what constitutes insider trading, even the idea that you can get away with it."People who have millions and millions of dollars (can be) motivated just by being in the game and the adrenalin rush it provides," said Blake Coppotelli, a former prosecutor who now works at Kroll's business intelligence and investigations unit. "And sometimes, there is no rhyme or reason."

Wall Street adds insult to injury - Most people would have little difficulty getting by on $200,000 a year. Most people who had badly messed up on their job and put their employer in bankruptcy would be absolutely delighted to find themselves still earning $200,000 a year. That's not the way it works on Wall Street. When Kenneth Feinberg, Barack Obama's compensation tsar for bailed out companies, issued his edicts last week on executive compensation, it prompted howls of outrage in the financial industry...

Got Perfect Credit? You Could Be Charged For It! - "Flawless credit," she boasted. Yet now, her good credit habits could cost her. Earlier this month Bank of America started notifying customers like her that they will be charged a new annual fee of $29 to $99. "There is a big segment of their population that they will have never made money on, which is people who pay their bills on time every month," said Ben Woolsey, Director of Consumer Research at Citigroup is also trying out an annual fee with some card holders, and analysts expect more banks to follow their lead.

Switching banks: Learn to love the one you’re with - James Surowiecki raises some interesting points in a column in this week’s New Yorker magazine on why big US banks are getting even bigger and more powerful as a result of the financial crisis. But the key question here, he says, is why the remaining players have found it so easy to hold onto their customers, both old and new. What makes this even more curious, he notes, is that “the big banks, which have historically offered their customers worse deals than smaller banks, have not changed their ways: they pay less for deposits, charge more for loans, make billions from overdraft fees, and have jacked up credit-card rates”.

Dodd Seeks Interim Freeze on Credit Card Fees and Rates - NYTimes - Senator Dodd, Democrat of Connecticut, on Monday proposed freezing interest rates and fees on existing credit card balances until a new law took effect. Senator Dodd, the chairman of the Senate Banking Committee, said his bill was necessary because banks were raising rates “to squeeze customers” before the remaining provisions of law took effect in February.

Geithner’s Regulation Plan for Big Finance Firms Criticized - NYTimes - Describing the details of the legislation to the House Financial Services Committee, Treasury Secretary Timothy F. Geithner emphasized that the plan would give officials the tools to more tightly supervise the largest financial companies. The government would also have the authority to order companies to shed risky assets or limit trading activities if they posed a threat to the companies’ stability. But after he completed his testimony, significant parts of the plan were challenged by Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation. She raised numerous objections about the structure of a proposed council of regulators, and said that it would fall short of its goal of protecting the system from the shock of a large failure

Deal Reached on Bank Crackdown - WSJ -- A deal between the Treasury Department and a key House Democrat would give the government sweeping new powers to police the country's largest financial companies, including the ability to seize and break up failing companies and order large firms to shrink. A proposal circulated Tuesday by House Financial Services Committee Chairman Barney Frank (D., Mass.) would give the government multiple tools to crack down on companies that could pose a threat to the broader economy, part of an effort by the administration to prevent financial firms from becoming too big to fail.

Financial Services Committee and Treasury Department Release Draft Legislation to Address Systemic Risk, “Too Big to Fail” Institutions (press release)

Bair Breaks With Obama, Urges Prepaying Costs to Unwind Firms - (Bloomberg) -- FDIC Chairman Sheila Bair, breaking with the Obama administration, said U.S. financial companies should prepay into a fund the government would use to unwind large failed firms. Congress should set up a Financial Company Resolution Fund and force institutions with more than $10 billion of assets to pay before a firm collapses, Bair said in testimony prepared for a House Financial Services Committee hearing today. Investors in failed companies also should take losses, she said.

Bill Would Shift Cost of Rescuing Banks to Large Companies - NYTimes - The Obama administration and the head of an important House committee unveiled legislation on Tuesday to give the government broad new powers to shift the cost of rescues of big, troubled financial institutions from taxpayers to other large companies. The legislation, drafted jointly by Treasury officials and Representative Barney Frank, the head of the House Financial Services Committee, would create a special fund, paid by assessments on financial companies with more than $10 billion in assets, to bear the costs of big firms that fail.

Doubts greet Obama's financial oversight plan - The Obama administration on Thursday ran into skepticism from lawmakers on both sides of the aisle, as well as a key regulator, as it pushed for broad new powers to monitor risks throughout the financial system and to wind down large, troubled financial firms whose failure could endanger the economy. The criticisms included how the proposals would be funded, whether the Federal Reserve stood to gain too much influence and if the government would end up with the ability to continually bail out big financial firms without congressional approval.

Naming Systemically Dangerous Firms - As currently drafted, the Financial Stability Improvement Act of 2009 (released by the House Financial Services Committee on 10/27/09) contains several important elements for reducing systemic risk. It aims (1) to identify systemically dangerous financial firms, (2) to apply heightened regulation to these firms, (3) to establish a stabilization system to prevent or quell panic during periods of systemic distress, and (4) to create a resolution mechanism that would wind down complex financial firms when necessary. These could represent very important steps forward.Unfortunately, these reforms may ultimately be undermined by one very significant weakness – the explicit requirement in the bill that the identification of systemically dangerous financial firms by federal regulators remain entirely secret, and never be revealed to the public. This is the bill’s Achilles heel.

Congress and TBTF – Bring in the Bomb Squad - The House draft bill written by Rep. Barney Frank (D – MA) – along with several former Fed attorneys and Treasury staff and consultants — ignores fundamental reality: You don’t employ a bomb squad to sit around and wait for a bomb to explode, you engage them to dismantle it as soon as they find one. Unfortunately, this bill is one more act of sleight of hand by a congress that, to the detriment of the public, fails to see that banks are there to serve the public good and can be regulated with such a goal. Those legislators who are truly seeking to protect the public interest and to be worthy of re-election, should demand that legislation spell out, in plain English, that the entire capital structure of a TBTF institution be wiped out, and its holding company held responsible as a source of strength, before taxpayers are exposed to a single dollar of loss. If leadership won’t add such language, call your elected official and ask how much they actually receive when they agree to put on the kneepads.

The Fatal Conceit - NYTimes OpEd - Humans are overconfident creatures. Ninety-four percent of college professors believe they are above average teachers, and 90 percent of drivers believe they are above average behind the wheel.Fortunately, for those who study the human comedy, the epicenter of overconfidence moves from year to year. Up until recently, people in the financial world bathed in the warm glow of their own self-approval. Hubris in that world always takes the same form: The geniuses there come to believe that they have mastered risk. The future is an algorithm and they’ve cracked the code. Over the past year, the bonfire of overconfidence has shifted to Washington. Since the masters of finance have been exposed as idiots, the masters of government have concluded (somewhat illogically) that they must be really smart.

We're Governed by Callous Children - WSJ - The biggest threat to America right now is not government spending, huge deficits, foreign ownership of our debt, world terrorism, two wars, potential epidemics or nuts with nukes. The biggest long-term threat is that people are becoming and have become disheartened, that this condition is reaching critical mass, and that it afflicts most broadly and deeply those members of the American leadership class who are not in Washington, most especially those in business.
Scientist Monkeys Around With The Economy : NPR - Dr. Ronald Noe, a primate ethologist at the University of Strasborg, asked what would happen if you trained a low-ranking vervet monkey to do things that other vervet monkeys, even high-ranking monkeys, couldn't do?.. Now, a vervet monkey society is pretty hierarchical: high-ranking monkeys get groomed a lot, but hardly ever have to groom other monkeys. Low-ranking monkeys groom others, but never get groomed themselves. Dr. Noe's team trained a low-ranker to open a container with bits of apples in it, a skill that no other monkey had. Would it be worth anything, he wondered, in monkey money -otherwise known as grooming.

Why banks stay big - The New Yorker - Before the financial crisis, the banking industry was too concentrated and clubby. And now? It’s even more so. In the midst of the crisis, the country’s four biggest banks actually got bigger. Thanks primarily to a series of government-sanctioned mergers, they now control almost forty per cent of the country’s total banking deposits and two-thirds of its credit cards, and issue half of all mortgages. Investment banking, too, remains more or less dominated by the usual suspects, which have seen their market share grow as the number of their competitors has shrunk. Firms that were recently on the brink of collapse haven’t had to struggle to hold on to their old customers, as you might have imagined. ...also see: Notes on Why Banks Stay Big - My column this week deals with the question of why the country’s biggest banks have gotten even bigger and more powerful as a result of the financial crisis. The simple answer is that the combination of a series of mergers in the industry and the disappearance of competitors left those institutions that were still standing in much better shape than before. What I’m interested in, though, is why the remaining players have found it so easy to hold onto their customers, both old and new...

The Big Banks Should Be Broken Up - Robert Reich - And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big."

The Wisdom of King: Rational Irrationality : The New Yorker - In a previous post, I mentioned a speech that Mervyn King, the governor of the Bank of England, gave last week, in which he appeared to endorse some of the ideas for breaking up big banks that Soros, Paul Volcker, and others have been putting forward. In the United States, King’s speech hasn’t received the attention it deserves, and I thought I would post some of it. First though, some background

How Big? - You hear a lot these days that banks need to be big to serve their clients. Charles Calomiris said this morning that we can’t run the global economy with “mom-and-pop banks.” Sure, I’m willing to concede that. But how that’s a silly debating tactic. More seriously, how big do they need to be?Yves Smith, no friend of the mega-banks, says, “The elephant in the room is derivatives. The big players have massive OTC derivatives exposures. You need a really big balance sheet to provide OTC derivatives cost effectively.” How big?

Regulators Should Simplify Bank Regulation: Dimon -  CNBC video - Regulators should focus on simplifying rather than adding to bank regulations, said Jamie Dimon, CEO of JPMorgan Chase, speaking at the annual Securities Industry and Financial Markets Association (SIFMA) meeting Tuesday.In a wide-ranging conversation with television host Charlie Rose, Dimon also spoke in support of resolution authority that would let the government deal with problems that arise at banks and other companies deemed “too big to fail” without causing significant systemic risk.“We think we need a resolution mechanism,” said Dimon. “We think everyone should be able to fail—being able to fail is a good thing—but you don’t want a failure that ruins America." Video

Fed's Kohn: Worth taking time over regulatory reform (Reuters) - Officials should take their time with regulatory reforms to make sure that they "get it right" and find a lasting solution, Federal Reserve Vice Chairman Donald Kohn said on Friday."I hope we build a regulatory structure that is good for a couple of decades. I think it is worth taking our time to get it right, rather than moving quickly," Kohn said in response to a question after speaking on a panel at the Boston Fed's annual conference in Cape Cod. Kohn said he would be worried if he thought the impulse for reform was dissipating because markets were getting better, but added that he did not think this was the case

House panel passes new consumer-protection bill - A key congressional panel voted Thursday to create a federal agency aimed at protecting Americans from the predatory lending practices and other abuses that hastened the financial crisis. By a vote along party lines, the House Financial Services Committee approved a measure that would create a Consumer Financial Protection Agency to monitor mortgages, credit cards and other consumer financial products.

Governments must not bail out bondholders - The problem of “moral hazard” – which posits that actors will take excessive risks if they do not expect to bear fully the consequences of their actions – is commonly cited as a reason not to protect shareholders of bailed-out firms. But it also counsels against protecting firms’ bondholders. Thus, when a large financial firm runs into problems that require a government bailout, the government should not provide funds (directly or indirectly) to increase the cushion available to bondholders.

Dangerous Side Effects of Ultra-Easy Money - In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum - the euphoric illusions of V-shaped recoveries, the “Group-of-20” have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s largesse has been used to fund capital injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.

Regulators Prepare for the Next 'Big One' - WSJ - While the furor over bankers' bonuses has captured most of the headlines, policy makers are in the process of assigning each of the world's 25 most complex international banks to a multinational crisis-management team to draw up contingency plans if they run into trouble. But remarks from current and former officials underscore the major challenges such an effort will face. At the heart of the problem are "fundamental concerns about sovereignty."Those include the difficulty of precommitting taxpayer money in a crisis, and the multitude of national insolvency laws and resolution regimes that can make swift, unified action impossible."

Coordinating European financial supervision - VoxEU - Governments are restructuring their financial supervision systems. This column warns that the proposed new structure for European financial supervision is poorly coordinated and will not help in a systemic crisis. It discusses how the ECB might coordinate macro-prudential supervision in the euro area.

Weber Signals ECB May Start Exit With 12-Month Loans - (Bloomberg) -- European Central Bank council member Axel Weber signaled the bank may start to withdraw its emergency stimulus measures next year by scaling back its “very long- term” loans to banks. “Some of the new instruments will be needed longer than others,” Weber, who heads Germany’s Bundesbank, said in a speech in Berlin today. “From today’s perspective, the unlimited allotment in our main refinancing operations will have to be maintained for a longer period of time than the guarantee of very long-term liquidity.”

Beyond The Consensus On European Bank Credit - Well, I never thought I would have to wait very long to get some confirmation of my last post on things that could go bump in the night in France, but even I wasn’t expecting confirmation of what I was trying to get at so quickly. Now, according to The Financial Times this morning: The eurozone has reported the first year-on-year fall in bank lending to the private sector, strengthening the case for the European Central Bank to maintain its ultra-loose interest rate policy.

U.S. Bank Charge-off Rate Exceeds Great Depression (Reuters) - The rate of loan charge-offs by major U.S. banks has exceeded those seen in the early years of the Great Depression as the credit crisis continues to take a toll, Moody's Investors Service said on Monday. Bank charge-offs -- loans written off as uncollectable -- have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said.

The FDIC's Shelia Bair: "There Will Be Losses." - BusinessWeek - They’ll be more bad news though. “Banking is a lagging indicator. They’ll go through the process of cleaning up their balance sheets for at least two quarters past the end of the recession.” There are now 416 trouble banks, 106 that have failed this year. Bair said banks will see $100 billion in losses over the five year period beginning in 2008. About $60 billion has been recognized already.

FT: Great Depression-esque bad debt at US banks - This is a rather arresting chart:That’s from Moody’s, showing how the pace of charge-offs (write-offs on bad debt) for rated US banks now exceeds the early years of the Great Depression. Also of interest, the chart below, showing loan loss provisions — the amount of money banks set aside for bad loans — versus the charge-offs

The Pay Czar Is Unconstitutional - WSJ - Last week's announcement that "Pay Czar" Kenneth Feinberg slashed compensation for executives at seven large financial firms by an average of 50% stunned Wall Street, stoked the fires of populist resentment, and troubled economists. Will this government-mandated pay cut drive the most talented professionals away from these companies, endangering their recovery? Does it augur further politicization of economic decisions? Lost in the arguments over economics and political theory, however, is a more basic question: Was this action constitutional?Mr. Feinberg's ukase is the most prominent example (and not just by the Obama administration) of the exercise of power by an individual unilaterally appointed by the executive branch without Senate confirmation—and thus outside the ordinary channels of Congressional oversight. Earlier this month, the Senate Subcommittee on the Constitution conducted hearings into the constitutional basis for this practice, which many see as an end-run around checks and balances.

Pay Czar Increased Base Pay at Firms - WSJ - Treasury Department pay czar Kenneth Feinberg last week announced sharp cuts in total compensation at the finance and auto companies under his control.But while he cut total compensation by half, he substantially increased one important element -- regular salaries, according to a Wall Street Journal analysis. The move reflects the complexity of regulating something that mixes politics and economics

Happy Halloween: Pay Curbs Are a Trick on The Taxpayer, Not a Treat - By making executives at seven companies wear hair-shirts, some of the populist anger over bonuses and Wall Street may be assuaged — anger that should rightly be channeled into calls to prevent banks from engaging in risky activities. There’s no reason that banks that are back-stopped by the government should be in the securities business. Taxpayers — voters — should ignore the media fascination with pay and urge that Congress heavily regulate and tax such risky activities.

Why Do Bankers Make So Much Money? - A tenet of economics is that in competitive markets there are no economic rents. That is, people get fairly paid for their efforts, their capital input, and for bearing risk. They are not paid any more than is necessary as an incentive for production. In trying to understand the reason for the huge pay scale within the finance industry, we can either try to justify the pay level as being a fair one in terms of the competitive market place, or ask in what ways the financial industry deviates from the competitive economic model in order to allow economic rents.

Another View: The Debate Over Vilifying Bankers - Bill George, a Harvard business professor, has received numerous comments from readers after his provocative piece, “Let’s Stop Vilifying the Bankers,” appeared on DealBook. Professor George joins the debate with this response...
The Payroll Hidden In Plain Sight... is stock compensation. And it's about to become bigger, as "pay czar" Kenneth Feinberg moved yesterday to restrict pay on managers at bailed-out banks and automakers. As Joe Nocera points out in the New York Times, retention bonuses are out; guaranteed bonuses are out. But pay for performance is going to be "in," at least among those beneficiaries of government aid. It probably won't stay isolated to just those corporate wards of the state, either. There's a lot of copycat behavior present in pay practices; they always seem to infect companies faster than the flu infects kids in an elementary school.

Charitable giving has no place in the bonus debate - Telegraph - Those who become rich should feel some moral obligation to give to noble and needy causes for those less fortunate than they are. And plenty of bankers, hedge fund managers, technology billionaires and the like do just that. To encourage giving, some modest level of tax deductibility for donations serves the greater good. But that’s as far as the reasoning should go. Proponents of a sort of super tax on bonuses, for instance, should not want to reduce the levy when money is given away. Tax authorities should still collect the money and governments should decide how to spend it – however imperfectly.

IRS to rich tax cheats: Be afraid. Be very afraid (CNN/Money)-- The Internal Revenue Service detailed plans on Monday to weed out wealthy, international tax cheats with renewed urgency. IRS Commissioner Douglas Shulman said the agency recently formed the Global High Wealth Industry task force to target investors with assets "in the neighborhood of $30 million." Shulman, as he addressed members of the American Institute of Certified Public Accountants in Washington, DC., said that a more "holistic" approach was necessary to find international tax cheats, given the growth in Americans investing overseas, and the broad and complicated nature of modern financing.

The Business of Capital is Bust - Investment Bankers Aren’t Hairdressers - In a recent Financial Times article one of their feature writers opined that the main problem the world has with investment banker bonuses is jealousy rather than the unfortunate fact we’re going have to sell our children to pay off the debt their antics have mired us in. She goes on to expound on how these monetary geniuses offer unique services that deservedly command huge fees by way of an extended metaphor about hairdressers who are able to charge £300 for a haircut that doesn’t require blow-drying for a quarter. I have a local barber that does the same for £295 less. It's called a crew cut.

The Worst-Ever Credit Crunch On Main Street - That's how David Goldman describes the current situation, and he's right.These two charts from the St. Louis Fed tell the story. The first one is year-over-year change in commercial and industrial loans. It's still getting worse. The second one shows bank ownership of government securities -- i.e. the risk-free assets that banks are buying with their money, instead of lending it into the private sector.

Do banks have something to hide? - (Fortune) - The banks have taken some lumps since the economy went bad. But some believe their biggest headaches are yet to come. The pace at which U.S. commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace. Despite the optimism of lenders some observers warn that banks aren't socking away enough for a rainier day. The disconnect is particularly acute in commercial real estate, where lenders are facing a surge of defaults on commercial mortgages and construction loans made when prices were much higher and demand for space much stronger. Banks have been recognizing commercial real estate losses slowly, even though the high season for defaults isn't expected to arrive until next year. That's not the only problem. Ill-defined or inconsistently applied rules for valuing securities and handling loan modifications can make it hard to say how healthy banks really are

Once Lucrative Commercial Real Estate Industry Faces 50% Job Cuts Nationally - Imagine working 10- to 12-hour days without knowing when and if you will get paid. Or collaborating with a client for six months to find the right property, only to find out the bank that approved them for a loan has since changed their lending requirements, which means you get paid nothing for half a year of work. This is a common reality today for many commercial real estate brokers. Some industry experts predict that 50 percent of the 130,000 CRE brokers nationwide will be out of the business by 2011. These job cuts will not be due to layoffs or RIFs, but from sheer job attrition.

Enablers of the Housing Bubble -- ( chart) This is why I have always thought that the argument that "Fannie and Freddie did it" is a non-starter. Two reasons: Loans owned by Fannie and Freddie can be a problem for the government, but they are not a problem for the financial system--nobody thinks that they could create a linked domino chain of destabilizing bankruptcies. Fannie, Freddie, and Ginnie were losing market share as the housing bubble grew--not gaining it. They did not force more lax lending standards on the private market, they followed the private market down.

Recent Developments in Mortgage Finance - SF Fed - As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.

Rumors of Credit Crisis’s Death Are Overdone - In recent months, the rate of mortgage foreclosures has lagged the rate of delinquencies, indicating that banks have been reluctant to foreclose, and prompting some observers to assume that banks are now more lenient and the foreclosures will simply be averted. Indeed the FDIC has encouraged this sort of “forbearance” – which typically involves a deferral or small reduction in home payments, generally lasting about 6 months. The problem is that the majority of these deferrals ultimately end in foreclosure. This is particularly likely to be true given prevailing weakness in employment conditions. Indeed, the Office of Thrift Supervision recently reported that more than 50% of mortgages modified in the first half of 2008 have already missed at least two months of payments so far in 2009.

The Worst September For Home Sales Since 1981 (w/ chart) - Even uber-bearish housing analyst Mark Hanson was taken aback by the shortfall in home sales this morning. Even he thought that the remaining homebuyer tax credit, plus all the other stimulus out there, would produce a rise in new home sales.But no. September was the worst month since 1981.Builders, of course, will use the number as evidence that the subsidy MUST remain in place, but at this point there's probably no helping them

WSJ Quarterly Housing Survey: More Pain to Come  - “Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.The Wall Street Journal’s quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country. But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas over the next few years. Sales of those homes may depress prices further.

Goldman says US gov’t boosted home prices by 5% - According to a Goldman Sachs analysis, interventions by the US government in the housing market added an average of 5 per cent to home prices nationally. The government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common. But these artificial props won’t last forever and may have created a false bottom in the market.

A Few Unhealthy Home Purchase Statistics -- John Burns Real Estate Consulting has released some unhealthy statistics regarding new home purchases from January through mid-October 2009. 59% of sales have been dependent upon government financing programs such as FHA, VA and USDA that allow purchases to be financed at 96.5%-100% loan LTV (loan to value). The highest use of FHA financing was in Northern California (68%), while southern Florida builders reported the highest percentage of cash purchases - a good thing (22%).Two hundred and sixty-two home building industry executives from public and private companies responding to the survey also provided the following statistics, as of early October.

Residential Loan Resets (bar graph 1/06 to 9/12)

Option ARMageddon rears its ugly head - FT Alphaville - Turning now to an announcement that caught our eye yesterday, the St. Louis Fed stated that they were concerned about Option Arm and Alt-A loan delinquency rates. I am too. Attached is a chart of delinquencies in the Option ARM universe. The key takeaway from this chart is that low rates have allowed some borrowers in this type of loan to make the minimum payment and still cover at least a part of their principal or delay the time till they reach their negative amortization cap. Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms. If our economists are right about the size and timing of the Fed Funds rate hike (approx. 1% per quarter starting in Q2 next year), the impact on borrowers of these types of loans could be very significant. Those who are slightly delinquent or barely holding on could see their payments move substantially higher with the impact possible late next year.”

Detroit house auction flops for urban wasteland (Reuters) - After five hours of calling out a drumbeat of "no bid" for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag."OK," he said. "We only have 300 more pages to go."There was tired laughter from investors ready to roll the dice on a city that has become a symbol of the collapse of the U.S. auto industry, pressures on the industrial middle-class and intractable problems for the urban poor. Despite a minimum bid of $500, less than a fifth of the Detroit land was sold after four days

Yes, Housing Recovery Is Still "Mother Of All Head-Fakes" (w/video) The NAR's sales numbers this morning were a complete joke: Take a look at the numbers on a non-seasonal basisYes, the housing recovery is still the mother of all head-fakesHouse prices will start falling again when the seasonal summer dboom ends (now), and they'll fall another 10%-15% before they bottomThe continuation of the housing collapse will make the economic recovery "feeble, at best."

Existing Home Sales FALL in September 2009 - Existing Home Sales fell 5.4% last month, despite the nonsense you have read elsewhere. NAR continues to bullshit America with their garbage data and spin, month after month, with few people calling them on it. Well, I’ve had it up to here with their garbage: that was purely the result of SEASONAL ADJUSTMENTS As you can see on the NON SEASONALLY adjusted chart below, from August to September (Red Bar) Sales actually dropped. In prior years — 2005, 2006, 2007, and 2008 — there was always a big fall from August to September.

U.S. Home Vacancies Rise to 18.8 Million on Defaults  - Bloomberg -- About 18.8 million homes stood empty in the U.S. during the third quarter as banks seized properties from delinquent borrowers and new home sales fell in September. The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.4 million a year earlier and 18.7 million in the second quarter, the U.S. Census Bureau said in a report today. The worst U.S. housing crash since the Great Depression has led to a record number of foreclosures and shaved almost a third off property values. The S&P/Case-Shiller Index of 20 cities in August was 29 percent below its 2006 high, after rising for four consecutive months.

Foreclosures Hit the Unemployed Middle Class - Newsweek - There are virtually no more foreclosures that are the result of subprime lending. The demographics of the foreclosure crisis are changing and affecting people who were blue collar and entry to midlevel white collar. We're now seeing foreclosures on properties with higher loan values. Probably the single best predictor of the areas hardest hit in next wave will be where you will see rising unemployment rates. The third wave is going to involve borrowers who had adjustable rate loans, in which they had the option of deciding what payment to make including interest-only payments. These loans are going to default at ridiculous rates, and that wave will go from the middle of next year until 2011

Housing: Round Trip to Pre-Bubble Prices Underway - Popped speculative bubbles tend to retrace to their pre-bubble prices. Housing has already retraced 75% of the bubble--only 25% still to go. When it comes to post-bubble retraces, the fundamental reasons may not matter as much as the technical case for a full reversion to pre-bubble prices. (incl charts)

The home-buyer tax credit: Throwing good money after bad - The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

$8,000 Home Tax Break Update - Looks like Congress held off on extending UE benefits so they could bundle it with the tax credit and that ensures there is ZERO chance Obama will veto them packaged together. In an effort to make the new credit more confusing and less economically beneficial, the credit amount will be reduced to $7,290 (no idea who came up with that number), but it will allow for “move-up” buyers to qualify for the credit so long as they either live in their existing house for 5 years or are willing to “state” that they have (This constitutes a fairly large number of recent home purchasers who procured the loan via “stated” income).

If Government Pays Us to Spend, Then Spend We Will - Bloomberg - High unemployment isn’t the only reason the GDP celebration will be muted. Much of the third-quarter growth was manufactured. This may sound whacky, but the federal government has been paying people to spend. Honest. You can’t make this stuff up. Uncle Sam handed out your hard-earned tax dollars to prod people to scrap their old cars for more fuel-efficient models. Then there’s the $8,000 tax credit for first-time homebuyers, a program that failed to heed the lessons of the no- questions-asked-mortgage lend-o-rama earlier this decade. No one would dispute the idea that people respond to incentives: A temporary, one-time tax credit brings demand forward

FRB: FEDS Abstract 2009-42 Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market - Reverse mortgages allow elderly homeowners to tap into their housing wealth without having to sell or move out of their homes. However, very few eligible homeowners have used reverse mortgages to achieve consumption smoothing until recently when the reverse mortgage market in the United States witnessed substantial growth. This paper examines 1989-2007 loan-level reverse mortgage data and presents a number of findings. The findings have important implications to both policy-making and the economics of housing and aging.

Commission to rein in federal entitlement costs is proposed - Amid signs that health care overhaul legislation will do little to slow the growth in health care spending in the coming decade, lawmakers and Obama administration officials are considering tougher steps to rein in soaring budget deficits.One approach that's attracting widespread attention calls for creating a bipartisan commission to draft proposals to control the long-term costs of Medicare, Medicaid and Social Security. Together, the three programs account for 40 percent of all federal spending other than interest on the national debt.

$250 Checks for Social Security Recipients Overlook Reality - NYTimes - The president has proposed sending a $250 check to every Social Security recipient, the group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance; older Americans are clearly a sympathetic group. Next year, they are scheduled to receive no cost-of-living increase in their Social Security benefits. Yet that is largely because they received an artificially high 5.8 percent increase this year. For this reason and others, economists are generally recoiling at the proposal.

Age-Based Politics: David Leonhardt is upset that people on Social Security will get a $250 check from the government next year and denounces President Obama for pandering to the elderly. There is a lot of serious confusion in this piece.First, he argues that the elderly have suffered less from the downturn from other groups be comparing declines in income and employment. This is actually a much tougher question that Leonhardt implies. The elderly have accumulated assets over their working lifetime. These assets plunged in value with the collapse of the housing bubble and the plunge in stock prices. This plunge has hit the elderly far more than other groups... So, if we took a wealth-based measure of impact, we would find that the wealthy were hit hardest by the downturn. ...
Laying on bets at America's biggest pension fund - Reuters - Red flags about the growing riskiness of Calpers' portfolio also went unheeded. A consultant warned in December 2007 about the size of the fund's commitment to private equity, but the push went on. For a while, Calpers looked smart, as it borrowed money to boost returns and moved into sophisticated collateralized debt obligations, land for residential real estate, as well as commodities. But as the financial crisis unfolded last year, Calpers lost $100 billion, more than a third of its value, Calpers has not retreated, though -- just the opposite, in fact. As the entire pension industry questions what level of risk it should be taking in the aftermath of last year's financial meltdown, Calpers in June increased its target for venture capital and private equity -- what the fund's advisor itself called the highest risk, highest reward bet -- to 14 percent of overall investments, up from 10 percent.

Bond Weakling California Shows States’ Failure to Disclose Debt - Even though California has never defaulted on its debt, the state paid 1.5 percentage point more in interest -- a difference that translates into about $785 million in additional cost for taxpayers over the 30-year life of $1.75 billion in Build America Bonds. California and so many of the 50 states aren’t helping themselves get a better rate, partly because they’re not requiring municipalities to file timely financial information.

California to withhold a bigger chunk of paychecks - Starting Sunday, cash-strapped California will dig...pocketbooks of wage earners...just as the biggest shopping season of the's not a tax increase...your next paycheck arrives...withholding to affect her...billion fix for California's deficit...see their paychecks going to make ends...the state of California is taking a no-interest...

Back-Door Taxes Hit U.S. With Financing in the Dark - Bloomberg - 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

"Why State and Local Governments Need More Stimulus Funds" - The conclusion that stimulus money should not continue to flow to state and local governments seems misguided. Although these sectors are not engines of sustained job growth, government jobs can easily be preserved through additional stimulus funds. Increased federal funding to state and local governments would at worst mitigate the fall in employment and at best prevent additional job losses.

Ravitch Says States Face Total Deficits of $500 Billion in 2011 (Bloomberg) -- New York Lieutenant Governor Richard Ravitch predicted states across the U.S. would face deficits totaling as much as $500 billion in 2011 after the federal government stops paying them economic stimulus grants. Ravitch, 76, a real estate developer and former chairman of New York’s Metropolitan Transportation Authority, said the looming nationwide fiscal crisis would first become apparent as states’ credit ratings falter, making it more expensive to borrow money

Tax refugees staging escape from New York - New Yorkers are fleeing the state and city in alarming numbers -- and costing a fortune in lost tax dollars, a new study shows. More than 1.5 million state residents left for other parts of the United States from 2000 to 2008, according to the report from the Empire Center for New York State Policy. It was the biggest out-of-state migration in the country

40 States Ask FTC To Crack Down On Debt Relief Companies - Attorneys general in 40 states just asked the FTC to step up the fight against debt relief companies that mislead and overcharge consumers, like Credit Solutions of America (CSA), reports Consumer Affairs. Why are so many states going after debt relief companies? Because they insert themselves between consumers and creditors and suck up the money earmarked for creditors by promising that they're going to renegotiate payments—and then they don't keep that promise.

Debt Stress in Middle Class America - Some readers like to demonize those who get in over there heads with debt as people who lived high on the hog and had their day of reckoning come upon them. This story, forwarded from a reader, shows the picture is more complicated. Although this couple didn’t even have six months of living expenses stashed away, the sort of buffers that worked a generation ago are insufficient now. People spend longer between jobs than in the past, and if/when they do find new work, it is often at a lower level of pay than before. Job loss and major illness rather than an overly lavish lifestyle are still the biggest causes of bankruptcy. And now that the average tenure at a job has shrunken considerably, people need to have more in the way of savings, yet the high cost of unemployment means it is even harder than before to build up a big enough kitty.

Birth Date, Business Cycles, and Lifetime Income - OMB blog - As the class of 2009 is keenly aware, entering the labor market during a recession has immediate negative effects. Job offers are harder to find: according to the National Association of Colleges and Employers, less than 20 percent of the class of 2009 graduated from college with a job offer in hand, compared to more than 50 percent in the class of 2007. Yale School of Management found that an increase in unemployment produces a significant and enduring negative wage effect....a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages [for those entering the labor market that year]. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value. The long-term effect isn’t just a residual of low first-year wages: the author suggests that poor job match, lower prestige placements, and fewer opportunities for training and promotion also play a role.... [R]ecession hits young people particularly hard, knocking them off course with effects that last...

Mish: PhD's In Distress and the Unsustainable Cost of Education - In response to How Being The Slightest Bit Overqualified Can Cost You A Job I received several interesting Emails. Here is an Email from "PhD In Distress" about overqualified candidates fresh out of college with nowhere to go, competing for jobs that essentially do not exist.

Employment costs fall to record lows - The cost of employing a worker in the United States fell to a record-low level in the third quarter, the Labor Department reported Friday. For the past year, the Employment Cost Index increased 1.5%, the slowest pace since the government began tracking the data in 1982. The ECI increased at a 1.8% annual rate in the second quarter. Wages increased 1.5% in the past four quarters, down from 1.8% in the previous quarter. Benefit costs rose 1.6% compared with a 1.8% rise in the second quarter. These are both record lows.

Number of Job Hunters 65 or Older Skyrockets - It is well known that during the nation’s gale-force recession, many older Americans who dreamed of retirement continued to work, often because their 401(k)’s had plunged in value. In fact, there are more Americans 65 and older in the job market today than at any time in history, 6.6 million, compared with 4.1 million in 2001. Less well known, though, is that nearly half a million workers 65 and older want to work but cannot find a job — more than five times the level early this decade and this group’s highest unemployment level since the Great Depression.

Growth and jobs - Krugman - NYTimes - Obviously, 3.5 percent growth is a lot better than shrinkage. But it’s not enough — not remotely enough — to make any real headway against the unemployment problem. Here’s the scatterplot of annual growth versus annual changes in the unemployment rate over the past 60 years. Basically, we’d be lucky if growth at this rate brought unemployment down by half a percentage point per year. At this rate, we wouldn’t reach anything that feels like full employment until well into the second Palin administration.
Experts see rebounding economy shedding jobs - Forget a jobless recovery. The economy may be entering a recovery with job losses...."It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."

Economists Push Employer Tax Break For New Hiring (NPR) Economists disagree about a lot of things, but not about today's job market. They all say it's terrible. U.S. employers are creating far too few jobs to absorb the 15 million people who need paychecks. Now some economists are pushing an idea they say could help. They want Congress to approve a tax credit for employers who create new jobs over the next two years. Supporters say it's cheaper for the government to subsidize private employers who hire more workers than to pass huge spending packages to stimulate the economy.
Economists Push Employer Tax Break For New Hiring (NPR) Economists disagree about a lot of things, but not about today's job market. They all say it's terrible. U.S. employers are creating far too few jobs to absorb the 15 million people who need paychecks. Now some economists are pushing an idea they say could help. They want Congress to approve a tax credit for employers who create new jobs over the next two years. Supporters say it's cheaper for the government to subsidize private employers who hire more workers than to pass huge spending packages to stimulate the economy.

America's Jobs Disaster - It's always good to remember that that a healthy recovery this year, and even more a healthy economy in the future, cannot be measured simply on the basis of jobs figures, because not all jobs produce wealth. Indeed, there are good jobs and bad jobs. Good jobs create wealth and add to the productive capacity of the economy, whereas bad jobs do not.For years, the Soviet Union proudly reported unemployment rates of zero. Lost in that figure were those who were employed to do the equivalent of digging holes, followed by others paid to do the equivalent of filling them back

The Economic Bomb That Didn’t Drop - Democrats snipe at Republicans for obstructing their plans on health care, energy and Wall Street regulation. Republicans criticize Democrats for big government, overspending and high unemployment. But Neel T. Kashkari, who served both sides as a top Treasury Department official, hears something different: the quiet of the economic bomb that did not drop...

AP IMPACT: Stimulus jobs overstated by thousands - A Colorado company said it created 4,231 jobs with the help of President Barack Obama's economic recovery plan. The real number: fewer than 1,000. A child care center in Florida said it saved 129 jobs with the help of stimulus money. Instead, it gave pay raises to its existing employees. Elsewhere in the U.S., some jobs credited to the stimulus program were counted two, three, four or even more times. The government has overstated by thousands the number of jobs it has created or saved...The discrepancy raises questions about the reliability of a key benchmark the administration uses to gauge the success of the stimulus. The errors could be magnified Friday when a much larger round of reports is released. It is expected to show hundreds of thousands of jobs repairing public housing, building schools, repaving highways and keeping teachers on local payrolls.

How an Insurance Mandate Could Leave Many Worse Off - AMERICANS seem to like the idea of broadening health insurance coverage, but they may not want to be forced to buy it. With health care costs high and rising, such government mandates would make many people worse off. The proposals now before Congress would require just about everyone to buy health insurance or to get it through their employers — which would generally result in lower wages. In other words, millions of people would be compelled to spend lots of money on something they previously did not want, at least not at prevailing prices

House to Unveil Health Plan With Public Option, Millionaire Tax - (Bloomberg) -- U.S. House leaders today plan to unveil legislation that would create a government-run health- insurance program, require employers to offer coverage to their workers and impose a new tax on the wealthiest Americans. The legislation comes after three months of negotiations by House Democrats and represents the most sweeping changes to the nation’s health-care system since the 1965 creation of the federal Medicare program for the elderly. The measure would overhaul the insurance market, encourage greater use of preventive medicine and help Americans buy coverage.

Estate Tax Cuts and Deficit Hawk Hypocrites - One good way to tell the difference between a member of congress who’s genuinely concerned about the long-term budget deficit and a hypocritical jackass is to ask them where they stand on the Kyl-Lincoln $250 billion budget-busting giveaway to the children of extremely rich people. The bill now has a House counterpart. Key sponsors include Rep Artur Davis (D-AL) and Rep Shelley Berkley (D-NV)

Durbin: Progressives Forced Our Hand On Public Option - Democratic leaders were forced to include a national public health insurance option as part of health care reform by progressive Democratic senators who refused to support anything less, Senate Majority Whip Dick Durbin (D-Ill.) said on Monday.Durbin's assessment was made to a handful of reporters following the announcement by Senate Majority Leader Harry Reid (D-Nev.) that after weeks of talks with his colleagues he had determined that including a public option that states could opt out of was the best way to go.

Public Option Push in Senate Comes With Escape Hatch - NYTimes — The Senate majority leader, Harry Reid, sided with his party’s liberals on Monday and announced that he would include a government-run insurance plan in health care legislation that he plans to take to the Senate floor within a few weeks. His proposal came with an escape hatch: A state could refuse to participate in the public insurance plan by adopting a law to opt out. Even so, the announcement was a turning point in the debate over how much of a role government should play in an overhauled health care system, and it set the stage for a test of Democratic party unity.

Opting Out: Not As Simple As It Looks - Brookings Institution - "Opt-out” has become the most powerful phrase in the health care debate, thanks to Senate Majority Leader Harry Reid’s decision to include it in Senate legislation. When elected officials were searching for votes last week in favor of a filibuster-proof public option and appeared to come up short, Democratic Sens. Tom Carper of Delaware and Chuck Schumer of New York promoted the novel idea of a state-level “opt-out.” If particular jurisdictions do not like a public option, they simply can exit the government health insurance system for uninsured residents. But there are serious logistical questions in terms of implementation. How do states opt out? Must state legislatures decide or can they use public referenda to allow voters to make the decision? Regardless of whether the venue turns out to be a legislative decision or a public referendum, we should expect intense lobbying and spending from those who feel strongly about the issue. States with conservative voters or strong private health insurance companies will face strong pressure to exit the public option.

Will any states actually opt out of the public plan? - Andrew Sullivan takes a look at what will happen if the Senate actually does pass an opt-out plan and sees disaster on the horizon for the Republicans. "Imagine Republicans in state legislatures having to argue and posture against an affordable health insurance plan for the folks, as O'Reilly calls them, while evil liberals provide it elsewhere," says Sullivan. "Now, of course, if the public option is a disaster in some states, this argument could work in the long run. But in the short run? It's a political nightmare for the right as it is currently constituted. In fact, I can see a public option becoming the equivalent of Medicare in the public psyche if it works as it should. Try running against Medicare."My opinion on this is, I admit, a minority opinion, but I don't think there will be any real fight over the public option, and I think that virtually no states will opt-out.

OMB Blog - Missing the Boat on Cost Containment - As I have said repeatedly — and as my colleague, Christy Romer, is discussing today at the Center for American Progress — reducing health care cost growth is the key to our fiscal future. To anyone who has studied our fiscal facts, this central conclusion seems indisputable. And yet — perhaps because of the long-standing (and sometimes warranted) skepticism toward government, the fiscal irresponsibility of recent years, or just the generalized jaundiced view that journalists often like to project — every few days, there seems to be another commentator who fails to believe that we can pass deficit-neutral health insurance reform that also puts us on a path to reduce the deficit over the long term

Washington Post Budget Editorial is So Wrong... -- Wars and Health Care Reform Should Both Be Paid For - The Washington Post ran a budget-related editorial on Saturday (“A critical question”) that attempted to explain why it insists that health care reform not increase the deficit even though it doesn’t believe that spending for activities in Iraq and Afghanistan have to be offset. The Post’s arguments weren’t just unconvincing, they also don’t make any sense.

Healthcare system wastes up to $800 billion a year (Reuters) - The U.S. healthcare system is just as wasteful as President Barack Obama says it is, and proposed reforms could be paid for by fixing some of the most obvious inefficiencies, preventing mistakes and fighting fraud, according to a Thomson Reuters report released on Monday. The U.S. healthcare system wastes between $505 billion and $850 billion every year, the report from Robert Kelley, vice president of healthcare analytics at Thomson Reuters, found. "America's healthcare system is indeed hemorrhaging billions of dollars, and the opportunities to slow the fiscal bleeding are substantial," the report reads.

Health care: U.S. spends more, gets less - By every measure, the United States spends more money on health care than any other industrialized country: nearly five thousand dollars per capita on health expenditures. The United States spends over two and a half times the average health expenditures of the 29 other nations in the OECD (Organization for Economic Cooperation and Development), adjusted for purchasing-power parity. The next largest spender on health is Switzerland at $3,288 per capita. At the same time, the United States is lagging behind in the actual health of the population.

Snapshots: Health Care Spending in the United States and OECD Countries - Kaiser Family Foundation - Health spending is rising faster than incomes in most developed countries, which raises questions about how these countries will pay for future health care needs. The issue may be particularly acute in the United States, which not only spends much more per capita on health care than any other country, but which also has had one of the fastest growth rates in health spending among developed countries. Despite this higher level of spending, the United States does not achieve better outcomes on many important health measures. This paper uses information from the Organisation for Economic Co-operation and Development (OECD)1 to compare the level and growth rate of health care spending in the United States with other OECD countries.

Free Trade in Health Care: The Gains from Globalized Medicare and Medicaid - CEPR - The huge gap between the cost of health care in the United States and the cost in other countries with comparable health care outcomes suggests the potential for substantial gains from trade. This paper describes one mechanism for taking advantage of these gains – through a globalization of the country’s Medicare and Medicaid programs. The projections in this paper suggest that the country’s long-term budget situation would be substantially improved if beneficiaries of these two programs over the age of 65 were allowed to take advantage of the lower-cost health care available in other countries (that also have higher life expectancies than the U.S.). This could also allow them to enjoy much higher retirement incomes than they would otherwise receive.

The Defining Moment - NYTimes - Past efforts to give Americans what citizens of every other advanced nation already have — guaranteed access to essential care — have ended not with a bang, but with a whimper, usually dying in committee without ever making it to a vote. But this time, broadly similar health-care bills have made it through multiple committees in both houses of Congress. And on Thursday, Nancy Pelosi, the speaker of the House, unveiled the legislation that she will send to the House floor, where it will almost surely pass. It’s not a perfect bill, by a long shot, but it’s a much stronger bill than almost anyone expected to emerge even a few weeks ago. And it would lead to near-universal coverage.

Lessons Overlearned - Robert Reich - Barack Obama came to the White House intent on not repeating Clinton's failure to enact universal health care. Did he overlearn the Clinton lesson? Obama seems to have made all the right moves to enact something he can credibly label health-care reform: Rather than spend his political capital elsewhere, he reserved most of it for the health-care fight. This may turn out to be a mistake comparable to Clinton's overemphasis on deficit reduction. Obama's focus on health care when the economy is still so fragile and unemployment moving toward double digits could make it appear that the administration has its priorities confused.

After Reform Passes - NYTimes - Krugman - So, how well will health reform work after it passes? There’s a part of me that can’t believe I’m asking that question. After all, serious health reform has long seemed like an impossible dream. And it could yet go all wrong.But the teabaggers have come and gone, as have the cries of “death panels” and the demonstrations by Medicare recipients demanding that the government stay out of health care. And reform is still on track. Right now it looks highly likely that Congress will, indeed, send a health care bill to the president’s desk. Then what?

Long-term use of mobile phones ‘may be linked to cancer’ - A £20million, decade-long investigation overseen by the World Health Organisation (WHO) will publish evidence that heavy users face a higher risk of developing brain tumours later in life, The Daily Telegraph can disclose. A preliminary breakdown of the results found a “significantly increased risk” of some brain tumours “related to use of mobile phones for a period of 10 years or more” in some studies.

US swine flu vaccine too late to beat autumn wave - New Scientist - Obama's decision last week to label swine flu a national emergency will likely increase demand for a vaccine that is already in short supply. Yet by the time large amounts of vaccine arrive, it may be too late to stop most infections.On 23 October, Tom Frieden, head of the Centers for Disease Control and Prevention (CDC) in Atlanta, Georgia, reported that the US had received 27.4 million doses of vaccine. This is not enough even for the country's 42 million most vulnerable people: pregnant women, people caring for babies, children under 4, front-line healthcare workers and under-18s with medical problems.

Swine Flu Emergency Prompts Pro-Swine-Flu Republican Response

Running in the Shadows - Recession Drives Surge in Youth Runaways - NYTimes - Over the past two years, government officials and experts have seen an increasing number of children leave home for life on the streets, including many under 13. Foreclosures, layoffs, rising food and fuel prices and inadequate supplies of low-cost housing have stretched families to the extreme, and those pressures have trickled down to teenagers and preteens.Federal studies and experts in the field have estimated that at least 1.6 million juveniles run away or are thrown out of their homes annually. But most of those return home within a week, and the government does not conduct a comprehensive or current count

For Runaways on the Street, Sex Buys Survival - Most of the estimated 1.6 million children who run away each year return home within a week. But for those who do not, the desperate struggle to survive often means selling their bodies. Nearly a third of the children who flee or are kicked out of their homes each year engage in sex for food, drugs or a place to stay, according to a variety of studies published in academic and public health journals. But this kind of dangerous barter system can quickly escalate into more formalized prostitution, when money changes hands. And then, child welfare workers and police officials say, it becomes extremely difficult to help runaways escape the streets. Many become more entangled in abusive relationships, and the law begins to view them more as teenage criminals than under-age victims.

Federal Researchers Find Lower Standards in Schools - NYTimes - A new federal study shows that nearly a third of the states lowered their academic proficiency standards in recent years, a step that helps schools stay ahead of sanctions under the No Child Left Behind law. But lowering standards also confuses parents about how children’s achievement compares with those in other states and countries. The study, released Thursday, was the first by the federal Department of Education’s research arm to use a statistical comparison between federal and state tests to analyze whether states had changed their testing standards

CNBC Viewership Plunges 50% In October - If anyone wants to know why CNBC anchors are so pale and nervous these days, look no further. As Comcast CEO Brian Roberts considers what to keep and what to, well, cut, post his digestion of NBC Universal (assuming deal rumors are true naturally) his eyes likely cast casual nervous glances at Nielsen reports of CNBC viewership. Yet his nervousness is quite minor compared to what actual employees must be feeling after Nielsen reported a 50% plunge in CNBC vierwership in October year over year. Specifically, CNBC has experienced a massive 52% decline in overall viewers during business day hours (5 am - 7 pm), and a not much better 49% drop in its demo (25-54) in the month of October as compared to last year. Specific shows that are likely to follow the fate of Dennis Kneale's recently cancelled 8pm gobbledygook are likely the Kudlow Report and Mad Money, which are down 59% and 56%, respectively.

The GDP Mirage - BusinessWeek - The trouble is that GDP and productivity growth figures could be significantly overestimated. That's because the official statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.
CynicusEconomicus - US Economic Growth Deconstructed - I thought it might be worthwhile to return to the well worn subject of GDP growth. What we are seeing is the mirage and magic of statistics. I will explain this as clearly and simply as I am able through an analogy, and show why this is all 'magic' growth.Imagine that I am a farmer, and that my output of food is not quite enough to feed my family. As a result, I have frequently turned to my neighbour, who has each year lent me enough food to make up for the shortfall. As each year goes by, I am borrowing more and more from my neighbour, and I am starting to owe him a great amount of food overall. Finally, one year, a river floods and damages many of my crops and drowns some of my animals. My output is reduced to an even lower level, and I am going to struggle to meet my family’s needs.

Golf Cart Subsidies - WSJ - We thought cash for clunkers was the ultimate waste of taxpayer money, but as usual we were too optimistic. Thanks to the federal tax credit to buy high-mileage cars that was part of President Obama's stimulus plan, Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart. The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart. Even in states that don't have their own tax rebate plans, the federal credit is generous enough to pay for half or even two-thirds of the average sticker price of a cart, which is typically in the range of $8,000 to $10,000. "The purchase of some models could be absolutely free,"

Subsidyscope — Transportation: Analysis Shows Amtrak Lost $32 Per Passenger in 2008 - Forty-one of Amtrak’s 44 routes lost money in 2008 with losses ranging from nearly $5 to $462 per passenger depending upon the line, according to analysis by Pew’s Subsidyscope.The line with the highest per passenger subsidy—the Sunset Limited, which runs from New Orleans to Los Angeles—carried almost 72,000 passengers last year. The California Zephyr, which runs from Chicago to San Francisco, had the second-highest per passenger subsidy of $193 and carried nearly 353,000 passengers in 2008. Pew's analysis indicates that the average loss per passenger on all 44 of Amtrak’s lines was $32, about four times what the loss would be using Amtrak's figures: only $8 per passenger.

Chinese railways and speculating pig farmers - look at the nature of China’s stimulus. Most of U.S. government spending is directed at consumption—in the form of subsidies, wages, health benefits, etc. The bulk of China’s stimulus is going toward investment for future growth: infrastructure and new technologies. Having built 21st-century infrastructure for its first-tier cities in the last decade, Beijing will now build similar facilities for the second tier.China will spend $200 billion on railways in the next two years, much of it for high-speed rail. The Beijing-Shanghai line will cut travel times between those two cities from 10 hours to four. The United States, by contrast, has designated less than $20 billion, to be spread out over more than a dozen projects, thus guaranteeing their failure. It’s not just rail, of course. China will add 44,000 miles of new roads and 100 new airports in the next decade. And then there is shipping, where China has become the global leader. Two out of the world’s three largest ports are Shanghai and Hong Kong.

How to turn pig poo into green power - New Scientist ...a Danish team has analysed the various ways in which firms in that country treat pig manure and use it to generate electricity in systems such as anaerobic digesters or incinerators. In anaerobic digestion, bacteria break down waste material by warming it in an oxygen-free vessel, releasing methane which is used in gas turbines. Incinerators burn material to boil water and drive a steam turbine

China Risks Bubbles With ‘Bernie Madoff Data’: (Bloomberg) -- It’s as provocative an argument as an economist can make: China is stealing jobs. Paul Krugman did it on Oct. 22, raising blood-pressure levels around Beijing. The idea that China is siphoning prosperity from other poor nations using an undervalued currency isn’t new. It’s just that a Nobel laureate writing it in the New York Times turns heads. China should boost the yuan now. Not because Krugman wants it... China should act because as 2010 nears, its economy desperately needs a measure of restraint. Six months ago, it was still possible to give China a pass. Raising millions of people out of poverty becomes even harder in a global crisis. China’s 4 trillion-yuan ($586 billion) stimulus plan and liquidity-pumping efforts beat all expectations. The risk now is bubbles, and that’s where the yuan comes in. A stronger currency would help China control its economy today and set the stage for an even brighter future. China will regret putting quantity before quality. The 8.9 percent annual growth rate it achieved in the third quarter is impressive on the surface. Below the surface, it’s not so good.

Avoiding a U.S.-China Trade Showdown - Council on Foreign Relations - U.S. Federal Reserve Chairman Ben Bernanke has warned that the global imbalances between the United States and China must be addressed immediately to prevent future economic crises. U.S. policymakers and experts have asserted that an undervalued Chinese yuan is largely to blame for these imbalances and that China's currency should be revalued to help close the U.S.-China trade gap. Stephen Roach, chairman of the Asia branch of U.S. banking giant Morgan Stanley, says that argument is flawed. He says the undervalued yuan is a political "red herring," since currency adjustment or trade sanctions against China would not help reduce the U.S. deficit but shift the U.S. demand for imports to other more costly exporters. Instead, the United States should be pushing China to create a social safety net that would encourage its population to spend more savings on domestic consumption. Roach expresses concern the United States will enact more protectionist policies against China in response to domestic political pressure over rising U.S. unemployment and slow growth

China says investment overseas up sharply - China's investments overseas nearly tripled from a year earlier to $20.5 billion in the third quarter as companies snapped up mining and oil assets, government data showed Tuesday. Beijing is encouraging its companies to invest abroad to diversity an economy driven by exports and investment and to take advantage of sharp declines in asset prices due to the global economic crisis.

Chinese banks to fund $1.5B Texas wind farm - China took a big leap into the U.S. renewable energy market Thursday, putting up $1.5 billion for a 36,000-acre wind farm in Texas with the power to light up 180,000 homes.The project is a joint venture with U.S. Renewable Energy Group, a private equity firm, Austin, Texas-based Cielo Wind Power LP and Shenyang Power Group of China.The announcement Thursday shows how much China's own wind industry has burgeoned and comes two days after U.S. Energy Secretary Steven Chu told lawmakers that the U.S. was falling behind China and others in alternative energy investment."With a long track record for building some of the world's biggest wind farms, the U.S. is a real ideal target for foreign alternative energy investment," said Jinxiang Lu, Shenyang Power Group's chairman and chief executive.Executives would only say that the project will be located in West Texas and built within several counties.

 CIC head warns of asset price bubble - China’s sovereign wealth fund has invested about half its $110bn of available capital in overseas stocks, mining, energy and real estate, earning returns that have been “not bad” so far, the head of the fund said on Wednesday.But Lou Jiwei, chairman of China Investment Corp, warned that a “small bubble” had formed in global asset prices and said that the fund was focused on investments in commodity-related assets and real estate as a hedge against inflation and currency depreciation. Our returns at the moment are not bad,.“But I dare not say they will be good by the end of the year.” CIC has made a rapid series of investments in commodity-related companies in recent months.

Inflation in China at 15%? - Yves Smith - This tidbit, from a report on impressions of conditions in China, via a steel buyer who has been making the rounds in Asia is more significant than it appears. High inflation levels in China (and the powers that be seem to get worried when it goes over 11%-12%) is consistent with the authorities having started to ease up on stimulus, particularly pushing banks to lend. And high interest rates feed stock market speculation. Interest rates on deposits are low, so the routes for investors to preserve cash are stockpiling commodities and the stock market. But stocks often backfire as a store of value when too many people latch on to the same strategy.

Japan needs more aggression in warding off deflation - The rise of the Japanese yen between 2007 and 2009, based on the assumption that exchange rates for the second half of this year will remain at mid-2009 levels, amounts to 18.9 per cent against the US dollar and to 25.1 per cent in effective terms. The yen’s sharper advance in effective terms than against the US dollar reflects the declines of currencies of the UK, Korea and emerging economies in Asia and Latin America over this period as a whole. On top of this, the yen has advanced further over recent weeks.These currency movements will exert unwelcome deflationary pressure on the Japanese economy basically through four channels...

Asian leaders seek to reduce Western trade ties - (Reuters) – Asia-Pacific leaders called on Sunday for regional-wide free trade and other measures to reduce dependence on the United States and big Western markets as Asia leads the way out of the global economic downturn. Japanese Prime Minister Yukio Hatoyama urged Asian leaders to keep up fiscal and monetary stimulus measures even as their economies show mounting signs of recovery, saying there was "no room for complacency" and that the job market was still "dire.""At the moment the global economy is showing signs of recovery, mainly in Asia," Hatoyama told the closed-door East Asia Summit of 16 Asia-Pacific leaders in the Thai town of Hua Hin, according to Foreign Ministry spokesman Kazuo Kodama.At the meetings, held under tight security, Hatoyama found tentative support from his Asian counterparts for a proposed regional community inspired by the European Union that would account for nearly a quarter of global economic output.

Goldman Keeps $85 Oil Target on China’s Diesel Demand (Bloomberg) -- Goldman Sachs Group Inc. maintained its forecast for crude oil to reach $85 a barrel by the end of this year on “robust” demand for diesel in China, the world’s second-largest energy consumer. “Chinese oil demand is leading the way and U.S. oil demand is lagging behind,” Goldman analysts led by David Greely said in a report dated Oct. 23 and made public today. “We are likely to see a recovery in which strong emerging-market oil demand puts upward pressure on crude oil prices.” China posted a 600,000 barrel-a-day increase in refined- product demand in the third quarter as its economy grew 8.9 percent

China oil demand in fastest growth in over 3 yrs (Reuters) - China's apparent oil demand rose 12.5 percent in September from a year earlier, the sixth rise in a row and the fastest rate since June 2006, as refiners operated at record rates amid a sustained recovery in economic activity.However, the robust September rate, anticipated by some analysts, may have been inflated by a low base a year earlier when implied oil demand inched 2.3 percent as the global financial crisis began infiltrating into the world's second largest oil market.

Chinese LNG imports hit record high - China imported 788,514 tonnes of liquefied natural gas in September, customs data showed today, the highest on record since China started its first imports of the super-cooled clean fuel three years ago. The import amount, up 144% from a year earlier, was in line with industry expectations as China recently started its second import terminal in Fujian and also began bringing in gas for its third terminal in Shanghai, reported Reuters.

Energy security, eh? Korea/oil: South Korea may be doing a China. Korea National Oil Company’s C$1.8 billion ($1.7 billion) purchase of Canadian Harvest Energy Trust secures future oil supplies, like recent Chinese deals in Canada and elsewhere. With oil shortages possible in the medium term, that makes sense. But Korea can’t play rough, so KNOC must stick to countries it trusts. That makes Korea’s quest for energy security a tougher one than China’s. In a free market, there would be no need to secure oil supplies in this way — rather, they could be acquired freely on the spot market or through long-term contracts. That’s how Korea currently obtains most of its 2.14 million barrels a day in imports.

Tower of Power - TIME - In China, one doesn't have to look far to see the country's commitment to renewable energy. In cities such as Beijing and Shanghai, rooftops are now covered with solar water heaters. On the grasslands of Inner Mongolia, towering white wind turbines are popping up where only cattle, sheep and herders on horseback once roamed. While coal consumption is expected to climb more than 3% annually for the next two decades, the government has also required that electrical companies add a significant amount of alternative energy to their portfolios. With the global economy languishing, China — which is not only the world's most populous country, but also the most polluted — offers the promise that its green-energy drive can become a major source of demand for international wind and solar companies.

China Car Market to Lead U.S. for ‘Long Time,’ GM’s Reilly Says - Bloomberg- China will lead the U.S. as the world’s biggest auto market for a “long time,” and demand will grow next year even as the Chinese government reduces stimulus measures, said Nick Reilly, General Motors Co.’s head of international operations. Vehicle demand in the world’s most populous nation may increase to more than 13 million units next year from about 12.5 million in 2009, Reilly told reporters in Seoul yesterday. “I don’t see the U.S. being anywhere near that,” he said. The Chinese government cut vehicle taxes and introduced auto subsidies in rural areas earlier this year after demand plunged amid an economic slowdown. The nation’s car sales have risen more than 35 percent for six straight months, including a 90 percent jump in August.

China devours Western prop of falling oil prices - Telegraph - It used to be the case that when the Western world went into recession, oil prices would automatically fall. As the principal energy consumer, a weaker West meant the global economy needed less crude. The resulting lower energy costs would help us escape recession, easing fuel bills while allowing our central banks to cut interest rates with less fear of inflation. The world has now changed. Transport accounts for 70pc of global oil use. And China's car market just became the world's largest – with sales reaching 9.7m during the first nine months of 2009, a jaw-dropping 34pc above the same period last year

The rise and fall of oil production - Telegraph - Conventional oil powers modern economies and provides around a third of the world's energy. But many commentators forecast a near-term peak soon and subsequent decline in global production as the resource is depleted. Some expect this to lead to major economic disruption, with "non-conventional" sources being unable to fill the gap in the timescale required.

International Oil Data Gaps - The lack of consistent, comprehensive, timely, and transparent data about oil consumption, supplies, and inventories, undoubtedly hampers decision-making by market participants and allows informal and indirect measures of oil market activity to play a larger role in the markets. Most Organization for Economic Cooperation and Development (OECD) countries have centrally-organized statistical offices that are responsible for collecting oil consumption data, augmented by additional collecting by industry groups. For these countries, crude oil and oil product supplied data serve as a proxy for consumption data and are generally available monthly. For countries outside the OECD, which now represent nearly half of the world’s total consumption, oil consumption data are often not available for many months or years.

logi Energy Determines Saudi Oil Production Has Peaked - In a discussion on FS Radio, Jeffrey Brown described his analytical work with Dr. Samuel Foucher, also part of logi Energy, where they determined that annual production in Saudi Arabia has never exceeded the production in 2005 and believe it never will.Jeffrey went on to discuss his land export model and the ramifications of depleting oil fields and increasing demands within exporting countries by their own citizens. He and Dr. Foucher have determined, through deep analytics, that the exports from the top 5 exporting countries has peaked and half of all oil ever to be exported after 2005 by these countries will be exported within 4 years, by 2013. If this proves to be true, the biggest ramification for this prediction is that there will be global oil shortages in the US and other OECD countries before 2013 even at the current low demand levels. The practical application of this statement is less exports resulting in an increased likelihood of gas rationing in the US.

Saudi Arabia Stops Benchmarking Oil In West Texas Intermediate - Saudi Arabia is still pricing its oil in dollars, however we suspect this news is going to raise some eyebrows. FT: Saudi Arabia yesterday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.The decision by the world's biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world's most heavily traded oil futures contract. It is the main contract traded on Nymex..From January, Saudi Arabia will base the price of oil for its US customers on a new index developed by Argus, the London-based oil pricing company.The Argus Sour Crude Index will track the price in the physical market of a basket of US Gulf Coast crudes, including Mars, Poseidon and Southern Green Canyon

Russia’s unsustainable energy model - Russia has taken a significant step in its bid to become a dominant international energy supplier, one that has important implications for its relations with the European Union and its prospects of returning quickly to the high growth rates that have underpinned its national recovery in recent years. The model established by Mr Putin envisages Russia as an energy superpower able to convert its natural endowments of oil and gas into diplomatic leverage – if necessary by coercive means. There is no room in this vision for the niceties of international law or respect for property rights. Indeed, the possibility of a negative ruling by an arbitration tribunal looking into the Yukos case is widely believed to have prompted Russia’s withdrawal from the ECT – a futile gesture that merely confirms Russia’s provisional application of the treaty at the time of Yukos’s seizure. In its place, President Dmitry Medvedev has proposed a new international energy treaty notable for its lack of binding commitments or enforceable rules.

net energy cliff which leads to the end of capitalism (chart)

Can renewable energy save the world? - VoxEU - Can renewable energy save the world from climate change, and do so at a reasonable cost? This column says we can replace some fossil fuel power with renewable power without a major cost increase, but we cannot hope to replace a major fraction of our fossil power with intermittent power sources such as wind and solar energy unless we can develop energy storage technologies.

Hydropower industry braces for glacier-free future (Reuters) - Standing on the glacier at the source of the Rhone river, glaciologist Andreas Bauder poses next to a 3-meter high pole sticking out of the ice, and gestures above his head."This is about the melt of one month," he says, as fellow scientists drill into the ice. "I'm about two meters tall."From the Himalayas to the Andes, faster-melting glaciers spell short-term opportunities -- and long-term risks -- for hydroelectric power and the engineering and construction industries it drives.The most widely used form of renewable energy globally, hydro meets more than half Switzerland's energy needs. As summers dry and glaciers that help drive turbines with meltwater recede, that share may eventually fall

NYC sees alarming risks in natgas drilling (Reuters) - New York City's top environmental official on Friday called the risk that drilling for natural gas in the upstate region that supplies most of the city's drinking water "especially alarming."New York state recently proposed rules allowing drilling in the multistate Marcellus Shale formation. Green groups said the rules were too lax because, for example, reservoirs would not be shielded with buffer zones.New York City has spent decades fighting development near its upstate watershed, which supplies 90 percent of its drinking water.Mayor Michael Bloomberg, who stands for a third term in November, has continued this policy by purchasing land and has pledged to fight if he determines the proposed drilling could endanger the city's water

North Carolina Sea Levels Rising Three Times Faster Than In Previous 500 Years, Study Finds - An international team of environmental scientists led by the University of Pennsylvania has shown that sea-level rise, at least in North Carolina, is accelerating. Researchers found 20th-century sea-level rise to be three times higher than the rate of sea-level rise during the last 500 years. In addition, this jump appears to occur between 1879 and 1915, a time of industrial change that may provide a direct link to human-induced climate change.The results appear in the current issue of the journal Geology.

Australia coastal living at risk - Australians may have to leave coastal areas as rising sea levels threaten homes, according to a new report. The parliamentary committee report says urgent action is needed, as seas are expected to rise by 80cm (31 inches). About 80% of Australians live in coastal areas, and the report recommends new laws banning further development in coastal regions. Correspondents say the authorities are divided over whether to retreat from rising seas or defend the coastline.

Ocean Acidification May Contribute To Global Shellfish Decline - Relatively minor increases in ocean acidity brought about by high levels of carbon dioxide have significant detrimental effects on the growth, development, and survival of hard clams, bay scallops, and Eastern oysters, according to researchers at Stony Brook University's School of Marine and Atmospheric Sciences. In one of the first studies looking at the effect of ocean acidification on shellfish, Stephanie Talmage, PhD candidate, and Professor Chris Gobler showed that the larval stages of these shellfish species are extremely sensitive to enhanced levels of carbon dioxide in seawater. Their work will be published in the November issue of the journal Limnology and Oceanography.

Jon Stewart Argues That Concern About Global Warming Is Just A ‘Secular Religion’ - video - On last night’s Daily Show, host Jon Stewart heaped praise on the contrarian approach to global warming taken by SuperFreakonomics author Steve Levitt, a University of Chicago economist. Stewart was baffled by the widespread criticism of Levitt and co-author Stephen Dubner, asking, “Have you stepped on a secular religion?” Stewart, often a tough interviewer, coddled Levitt, saying, “I’m sorry you’ve taken so much s**t for it.” He blamed the uproar over SuperFreakonomics on people who “feel you are betraying environmentalism”

A Clunker of a Climate Policy, Commentary, Scientific American: The Cash for Clunkers program offers a cautionary tale for the future of climate change control. Some carbon-reduction ideas are so expensive they should play no part in the policy mix. Yet because lobbyists overrun our legislative processes... lots of terrible ideas will no doubt be advocated. Let’s make a rough calculation of how much mitigation per dollar the Cash for Clunkers program really achieved...

Novel Analysis Confirms Climate "Hockey Stick" Graph - Scientific American - The “hockey stick” graph has been both a linchpin and target in the climate change debate. As a plot of average Northern Hemisphere temperature from two millennia ago to the present, it stays relatively flat until the 20th century, when it rises up sharply, like the blade of an upturned hockey stick. Warming skeptics have long decried how the temperatures were inferred, but a new reconstruction of the past 600 years, using an entirely different method, finds similar results and may help remove lingering doubts.

Climate chief Lord Stern: give up meat to save the planet - UK Times - People will need to consider turning vegetarian if the world is to conquer climate change, according to a leading authority on global warming. In an interview with The Times, Lord Stern of Brentford said: “Meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better.” Direct emissions of methane from cows and pigs is a significant source of greenhouse gases. Methane is 23 times more powerful than carbon dioxide as a global warming gas.

Methane’s impact on global warming far higher than previously thought - Times Online - The effects of a critical greenhouse gas on global warming have been significantly underestimated, according to research suggesting that emissions controls and climate models may need to be revised Methane’s impact on global temperatures is about a third higher than generally thought because previous estimates have not accounted for its interaction with airborne particles called aerosols, Nasa scientists found. When this indirect effect of the potent greenhouse gas is included one tonne of methane has about 33 times as much effect on the climate over 100 years as a tonne of carbon dioxide, rather than 25 times as in standard estimates. Drew Shindell, of the Nasa Goddard Institute for Space Studies in New York, who led the study, said that the findings added to the importance of measures to contain methane emissions, as well as those of carbon dioxide

Fleeing drought in the Horn of Africa -- Africa is already home to one-third of the 42 million people worldwide uprooted by ethnic slaughter, despots and war. But experts say climate change is quietly driving Africa's displacement crisis to new heights. A new kind of refugee has arrived: Those forced from their home regions not by war or persecution, but by the climate. A Kenyan camp is bursting with the displaced, some of whom share their stories.

Climate change, food supply and genetically modified crops - I think higher food prices--the kind the poor will see much more than anyone reading this blog post--are one of the biggest risks from global warming. If you don't care about whether the poor eat or not, I think you will care about the civil conflict that would accompany their hunger. If GMOs solve the problem, great. But I'm kinda skeptical that they will...Here I am live at the New York Times Room for Debate

Fermi Paradox: life is extremely rare - My preferred Fermi Paradox solution is that technological societies have only a short-lived interest in roaming the physical universe. A more common explanation, now that rocky planets seem ordinary, is that life is extremely rare. I liked the way this physics professor came to that conclusion ... Information Processing: Evolution, Design and the Fermi Paradox - Stephen Hsu ... What is the time scale for evolution of complex organisms such as ourselves? On Earth complex life evolved in about 5 billion years (5 Gyr), but one can make an argument that we were probably lucky and that the typical time scale T under similar circumstances is much longer. There is an interesting coincidence at work: 5 Gyr is remarkably close to the 10 Gyr lifetime of main sequence stars (and to the 14 Gyr age of the universe). This is unexpected, as evolution proceeds by molecular processes and natural selection among complex organisms, whereas stellar lifetimes are determined by nuclear physics.  If T were much smaller than 5 Gyr then it would be improbable for evolution to have been so slow on Earth...