Fed slacker fightback - FT - Here’s further evidence that the Fed is somewhat split on the output gap theory and the amount of ‘slack’ in the US economy — and by extension, the inflation and deflation risks that face it. Slack occurs when the output gap is a negative number — when the economy is below its full potential. This would imply continued low interest rates — and perhaps liquidity ops — from the US central bank. In fact, Fed chairman Ben Bernanke has been a prime proponent of the output gap theory — saying that the amount of slack in the US economy means the risk of deflation is far higher than the risk of the inflation. Recently, however, we’ve seen a Fed governor, James Bullard, challenge this view, saying that the method of calculating traditional output gaps doesn’t take into account the idea that output may have been artificially boosted by recent (bubblicious) activity. Then Fed vice chairman Donald Kohn took aim at the output-gap detractors...
Targeted liquidity operations - Econbrowser - During the last two years, the Federal Reserve responded to problems in the financial markets through what I have described as monetary policy using the asset side of the Fed's balance sheet, replacing its traditional holdings of Treasury securities with a variety of new lending programs and alternative assets. I've been taking a look at what effect these operations seem to have had on the problems they were designed to address... (charts & analysis)
A Look Inside Fed’s Balance Sheet — 10/14/09 Update - WSJ interactice - The Fed’s balance sheet expanded for the first time in three weeks, rising slightly to $2.174 trillion from $2.120 trillion. The bulk of the increase came from more than $70 billion in new purchases of mortgage-backed securities. The Fed also expanded its purchases of Treasurys and agency debt.
The Fed's attempt to assuage inflation fears that don't need assuaging ~ There is no shortage of speeches by US central bankers these days. an excerpt from a NY Times article highlights the debate among key Fed officials about the speed and method of stimulus withdrawal once the decision to exit has been made. We are far from seeing "irrefutable evidence of a solid expansion". This debate is likely confusing the public more than anything else, or as my title puts it: the Fed is attempting to assuage inflation fears that don't need assuaging. There is simply no measured inflation concern at this time, not even over the next ten years.
TIPS Show Bernanke Isn’t Whipping Inflation Concerns (Bloomberg) -- Treasury Inflation Protected Securities are the bonds money managers can’t afford not to own. BlackRock Inc., Pacific Investment Management Co. and Vanguard Group Inc., which together manage $3.45 trillion, say investors are pouring money into inflation-linked debt even as consumer prices post the longest series of contractions since Dwight D. Eisenhower was president in 1955. TIPS have gained 7.9 percent this year, according to Merrill Lynch & Co. indexes, while Treasuries overall lost 2.8 percent. That’s the biggest outperformance since the U.S. first issued TIPS in 1997.
Debt Monetization: He's Heading for That Small Moon - from Seeking Alpha - First, let’s frame the discussion. If one defines debt monetization as simply the creation of money for purpose of buying government debt, then there isn’t a distinction between the Fed’s quantitative easing program and debt monetization. In fact, by that simple definition, there is no difference between the Fed’s normal open market operations, which often involve doing repos with Treasury collateral, and debt monetization. I don’t give a dewback's tail what you call it. I care what the effect is. Clearly there is some distinction to be drawn between old-school open market operations, today’s quantitative easing program, and full scale debt monetization, at least in terms of degrees.
When should the Fed raise rates? - Krugman - Some back-of-the-envelope scribblings:
Let me start with a rounded version of the Rudebusch version of the Taylor rule:
Fed funds target = 2 + 1.5 x inflation - 2 x excess unemployment
Right now, this rule says that the Fed funds rate should be -5.6%. So we’re hard up against the zero bound.
When should the Fed raise rates? (even more wonkish) - Krugman - Suppose that core inflation stays at 1.6% (although in fact it’s almost sure to go lower.) Then we can back out the unemployment rate at which the target would cross zero, suggesting that tightening should begin: it’s an excess unemployment rate of 2.2, implying an actual rate of 7 percent. That’s a long way from here. If inflation drops to, say, 1 percent, the Fed shouldn’t tighten until unemployment drops to 6.25%.
Q&A: John Taylor on His Rule and Fed’s Balance Sheet - WSJ - The ‘Taylor Rule’ says that the Fed’s target interest rate should be one-and-a-half times the inflation rate, plus half of the output gap (which is the percentage gap between the economy’s actual output and its potential output) plus one. Some economists want to change the coefficients, adding more or less weight to inflation or the output gap. Others want to use projected inflation numbers or output gap numbers, instead of actual numbers.
Bullard Says Lower Unemployment Condition to Tighten - Bloomberg - Federal Reserve Bank of St. Louis President James Bullard said a falling unemployment rate is a precondition for an increase in the benchmark interest rate from near zero. “You want to see the economy start to recover in all its dimensions, output and trade” before tightening, Bullard said today in a Bloomberg Radio interview in St. Louis. “We do have some of those turning around now.”
Don’t give up on quantitative easing - Sometime soon, perhaps in the spring of 2010, perhaps earlier, the Fed, the European Central Bank, and the Bank of England are likely to respond to the perceived global recovery by reducing the sizes of their balance sheets and raising interest rates on overnight loans.That would be a mistake. We can do better. The liability side of the Fed balance sheet is a narrow measure of the money supply. Backing this up on the asset side, the Fed holds gold, foreign currencies and loans to the US government....
More on When the Fed might Raise Rates - This graph shows the effective Fed Funds rate (Source: Federal Reserve) and the unemployment rate (source: BLS) In the early '90s, the Fed waited more than a 1 1/2 years after the unemployment rate peaked before raising rates. The unemployment rate had fallen from 7.8% to 6.6% before the Fed raised rates. Following the peak unemployment rate in 2003 of 6.3%, the Fed waited a year to raise rates. The unemployment rate had fallen to 5.6% in June 2004 before the Fed raised rates.
Zero interest rate policy: Treatment may be expensive - To protect the financial system from the deflation in asset bubbles, the public sector has essentially guaranteed all deposits, rescued systemically important institutions, made large liquidity injections and brought interest rates to zero or near zero under a zero interest rate policy in almost all systemically important central banks But the polices adopted to combat the crisis are creating their own problems. In the medium term, the treatment may be as expensive as the crisis...
Supply-Side Economics, R.I.P. - As all economists now know, these ideas were wrong. All economists today accept the importance of the money supply--perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth...
The Dollar Dilemma - The crisis certainly has not made the United States more attractive as a supplier of high-quality financial assets. It would be no surprise if the dysfunctionality of U.S. financial markets diminished the appetite of central banks for U.S. debt securities. A process of financial deglobalization has already begun, and it will mean less foreign financing for the United States' budget and balance-of-payments deficits. Meanwhile, the U.S. government will emit vast quantities of public debt for the foreseeable future. Together, these trends in supply and demand are a recipe for a significantly weaker dollar. And as central banks suffer capital losses on their outstanding dollar reserves, they will start considering alternatives.
Central Banks More Aggressively Reducing US Dollar Exposure In Their Reserve Portfolios - If The Independent and Robert Fisk can be dismissed as the tabloid fringe by the mainstream media and those desperately clinging to status quo, here is a piece on the diminishing dollar from the radical paparazzi known as Bloomberg news...Currencies can have significant volatility even within long term trends, due to short squeezes and official intervention. That being said, there is an interesting aspect to the currant position of the dollar as the long time, but fading, world's reserve currency known as The Prisoner's Dilemma. In a situation such as this, the country which quietly sheds dollars first takes a lesser loss on their reserves than those who hold, but also risks punishment by the US and the G7 for deviating from the consensus of central banks and their financial engineers.
Money well spent? - Economist - China realises that it cannot accumulate dollars forever. Its leaders know this. So the fact that they continue to accumulate dollars should tell us something. They are revealing their preferences, and an end to dollar accumulation clearly doesn't look as good to them as other options. One possibility is that Chinese leaders have determined that if they very gradually allow the yuan to appreciate, the losses they'll eventually take on the extra dollars they'll accumulate between now and the point at which they're no longer accumulating them will be less. If that's the case, then things seem to be more or less under control. But another possibility is that China doesn't much care about the value of its dollar reserves; rather, they look at them as money spent to obtain a desired outcome...
Marc Faber: Dollar Weakness a Symptom of Inflation in the System -- Seeking Alpha (video) "first of all, I would like to make a very clear statement. I will believe in deflation once we have a significant period of U.S. dollar strength. U.S. dollar weakness is a symptom of inflation in the system."
Jim Rogers: Coming Inflation Could Be "Worse Than The 1970s" - "The Federal Reserve has laid the groundwork for some serious inflation down the road by printing all this money," Rogers says. "So have many other central banks."Although "the U.S. government lies about inflation" in its official data, inflationary pressures are already evident in nearly everything, excluding energy, Rogers says. Inflation is "going to continue, going to accelerate," he says. "We're going to be paying more for just about everything down the road."
The inflation story – what is the evidence? - (article incl 5 charts) - There is a growing concern about an inflationary threat in the U.S. economy given the enormous monetary accommodation the Fed has put in place. As expected, there are differing opinions about this issue. First, the unemployment rate in September was reported as 9.8%; the all inclusive unemployment rate is 17%...
A Dollar Rout or More Bernanke Trickery? - There is no organic growth in the economy at present. The so-called recovery is a result of fiscal stimulus and the Fed's extraordinary liquidity injections into the financial system. True growth and prosperity do not come via the printing press. The Fed's actions are just putting more and more pressure on the dollar.
US policymakers playing with fire as the dollar continues to tumble - If inflation isn't a problem, why are investors turning their backs on the dollar? The answer, I think, relates to increased frustration with the dollar's role as the world's reserve currency. Reserve currencies become reserve currencies for good reason. They're trusted and universally acceptable. Sometimes, trust slips away, particularly if the nation issuing the reserve currency has an incentive to abuse its reserve currency status.
Embracing benign neglect - The criticism would be apt if America were deliberately contriving a depreciation, but I don't believe that's what is happening. If anything, officials in America and elsewhere are looking for, or at least accepting, government interventions to slow the market's push for a dollar decline.The case for allowing the dollar to decline seems strong to me, and the case for actively intervening to boost the dollar seems extremely weak.
Making the Case for a Weaker Dollar: - FT -“A lower dollar is desirable because it would help America achieve the right kind of recovery. The US economy is severely constrained by household and financial sector deleveraging and possibly by a permanent fall in potential growth. In the absence of another housing bubble and consumer boom, an export-led recovery is the best growth strategy the US could employ. I do not buy the strong-dollar pledges by Tim Geithner, Treasury secretary, and Larry Summers, director of the National Economic Council. They have to say that. It is the official policy line. The bond markets would go crazy otherwise. But a strong dollar is the last thing the US economy needs right now.”
Misguided Monetary Mentalities - NYTimes - Krugman - The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.
Dollar loses reserve status to yen & euro - Ben Bernanke's dollar crisis went into a wider mode yesterday as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency. Over the last three months, banks put 63 percent of their new cash into euros and yen -- not the greenbacks -- a nearly complete reversal of the dollar's onetime dominance for reserves, according to Barclays Capital. The dollar's share of new cash in the central banks was down to 37 percent -- compared with two-thirds a decade ago
Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy. “The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”
How low is 1.48 (USD/EUR)? - It is not enough to say that the US dollar has to get weaker you need to say how weak it should get, we need a number, there is a need for a medium/long-run anchor. As the chart shows, the US dollar is already weak by historical standards. Sure, it has room to get to the historical low of 2008 but was is the right reference value? Related to the point above, but more from a theoretical point of view: how much do we want to introduce price distortions (changes in relative prices via changes in the exchange rate) to ensure that the spending patterns of different countries are sustainable?
Is a Weaker Dollar What the Doctor Ordered? - Yves Smith - today’s Financial Times, makes the case that a certain amount of dollar weakness is a good thing and consistent with global rebalancing. On one level, this is a sensible and defensible view. But this view is implicitly based on the idea that the dollar will somehow find its “correct” level, more or less.
But currencies are known for their propensity to overshoot and stay for long periods at levels not warranted by fundamentals
The Dollar Is Falling, and That’s Good News - NYTimes - ANXIETY about the dollar continues to spread. The falling greenback is often seen as a sign of an impending recession or the fall of the United States from global leadership. A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list. But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency.
Currency Depreciation and Global Imbalances -- Seeking Alpha - There clearly still is a long way to go if the US is really going to raise its savings rate to some sustainable level, and I am afraid that part of the necessary policies that will lead there will cause a lot of disruption and conflict. Basically in order to raise the savings rate the US needs to enact policies that are similar in spirit to the policies that China has enacted especially during the past decade – and of course which China now needs to reverse. These involve putting into place conditions that spur output growth and constrain consumption growth.
When Money Is Worthless - The Financial Times noted a disturbing new trend - hedge fund and other investors are increasingly seeking to invest in physical commodities themselves, rather than in futures. Given the excess of global liquidity, this is not entirely surprising. It does, however, raise an ominous possibility of a supply shortage in one or more commodities, caused by investor demand that exceeds available mine output and inventory. That could potentially produce a collapse in economic activity similar to that from the 1837-41 and 1929-33 liquidity busts, but with the opposite cause.
How Much Gold Does the US Have In Its Reserves? - I spent some time reading the relevant source documents, and have decided to publish this little fact sheet here, so that one might at least be able to find some of the basic facts about the US gold holdings on the books of the Treasury and the Fed in one place, with references.Not getting into issues of where the gold is, what claims there may be on it, and what fineness it may actually be, according to the US Treasury
US budget deficit hits record $1.4 trillion: govt - The US government closed its 2009 fiscal year with a record budget deficit of 1.417 trillion dollars, some 962 billion dollars higher than the prior year, officials said Friday.The deficit amounted to 10 percent of US gross domestic product (GDP), the highest since 1945.The huge jump in the budget shortfall stemmed from both declining revenues and a massive ramping up of spending in a fiscal stimulus to jolt the world's largest economy from a prolonged recession.Receipts for the fiscal year that ended in September totalled 2.105 trillion dollars while outlays were 3.522 trillion dollars, the Treasury said.
Our Debt Will Kill Us - a cheery reminder that you can't borrow your way to prosperity--or, more bluntly, that you can't solve a debt problem with more debt.The U.S.'s current budget assumptions predict that we will need to borrow at least $1 trillion a year for the next 5-10 years. $1 trillion is actually a lot of money.The $1 trillion has to come from somewhere. U.S. consumers are now saving a bit, which will help, but they aren't saving THAT much. Our usual lenders (e.g., China) have shown signs of pulling back. The Fed can't "monetize" the debt forever, or its balance sheet will consume the entire economy.
Debt and the dollar’s demise, a compendium of concerns - FT - Here’s a stark reminder of the ticking time bomb that is the US’s federal debt — now at an $11,900bn, or $38,000 per citizen. Standard & Poor’s is now warning that the US will have to officially — and imminently — raise its federal debt limit: a reminder, Congress has raised the US debt ceiling by varying amounts 76 times since 1960. The problem has now got so bad that it now looks impossible to put the genie back in the bottle. There is no way back for the US currency and devaluation is inevitable.
The US Dollar – Don’t just do something, stand there! - It is true that excessive government deficit spending can be inflationary, and could therefore cause some impact on exchange value of dollar. But this can’t be viewed in some sort of vacuum. The size of the deficit is irrelevant in itself. There is no meaning in the terms ‘large deficit’ or ’small deficit.’ You have to relate them to the extent of labor and capital underutilization, which is a human measure of the aggregate demand deficiency. The fact that labor underutilization is now in excess of 16 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message - the deficit is not large enough.
Now is the Time for Deficit Reduction - I’ve always suspected that one reason conservatives seem so fiscally irresponsible is that they are hoping that a truly monumental fiscal crisis may provide cover for otherwise politically impossible budget cuts. In my column today I try to explain why this will never happen. By their nature it is extraordinarily difficult to get near-term savings out of entitlement programs. Thus a fiscal crisis will almost certainly lead to higher taxes since that is the quickest and most effective way of reducing the deficit in the short-run. Those who genuinely wish to avoid future tax increases should be pushing for entitlement reform now; specifically, an increase in the normal retirement age. (see forbes article)
Not A Value Added Tax!!! - The drumbeat for a value added tax has begun. Paul Volcker told Charlie Rose that the U.S. should consider a VAT or a carbon tax to get its deficit under control. Nancy Pelosi talked with Charlie Rose about the competitive advantage enjoyed by foreign automakers because of our health care costs, "They have a competitive advantage. Somewhere along the way, a value-added tax plays into this. Of course, we want to take down the health care cost, that's one part of it. But in the scheme of things, I think it's fair look at a value- added tax as well."
On Stimulus Spending, Deficit Hawks' Concern Is Misplaced - Ever since the early Clinton administration, the sophisticated, hard-headed thing has been to say that deficits matter. Bill Clinton and Robert Rubin made the case that if you care about national prosperity and social welfare, you have to balance the budget, which has the effect of reducing interest rates. Traditional liberals who wanted only to increase spending on social programs were branded as "soft."
Yes, We Can--Afford More Short-Run Deficit Spending - This is an exceptional time—a time in which many of the normal rules of the Dismal Science don't apply because, as Paul Krugman puts it, "depression economics" is in the driver's seat. The normal benefits and costs of government borrow-and-spend policies are overturned for now—and for as long as the crisis of high unemployment lasts. Yet I find that many people do not understand why arguments that make perfect sense in normal times do not apply today. Let's run through the arithmetic—first in normal times, and then in a financial crisis like this one.
The Dollar and the Deficits - Foreign Affairs - Even as efforts to recover from the current crisis go forward, the United States should launch new policies to avoid large external deficits, balance the budget, and adapt to a global currency system less centered on the dollar. Although it will take a number of years to fully implement these measures, they should be initiated promptly both to bolster confidence in the recovery and to build the foundation for a sustainable U.S. economy over the long haul. This is not just an economic imperative but a foreign policy and national security one as well.
Killing the goose - Today we look at the possibility that the fiscal path of the enormous US government deficits we are on could indeed kill the goose, or harm it so badly it will make the lost decades that Japan has suffered seem like a stroll in the park. And while I do not think we will get to that point (though I can't deny the possibility), for reasons I will go into, there is the very real prospect that the upheavals created by not dealing proactively with the problems (or denying they exist) will be as bad as or worse than the credit crisis we have gone through.
US facing massive economic ‘power shift’ with dollar’s downward spiral - The dollar's position as the world's leading reserve currency faces increased pressure as the financial crisis allows emerging economies greater influence on the world stage, analysts said."Three conclusions stand out very clearly. Firstly, the shift in economic power away from the G7 economies is continuing. Secondly, there is a growing acceptance amongst those winners that one consequence of this power shift will be to strengthen their currencies. And finally, as long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar's underlying downtrend will remain in place
Why the US dollar may strengthen in 2010 - VoxEU - Many expect the dollar to continue to depreciate over the foreseeable future. This study, with charts, suggests that it may strengthen in 2010 if the Federal Reserve exits quantitative easing sooner than its counterparts and the US economy enjoys a strong rebound.
The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates (w/Video)- Effectively we the taxpayers are now guaranteeing mortgages written by over 10,000 FHA-approved lenders, The FHA's portfolio is exploding [and] the taxpayer is now on the hook for 100% of the losses."
How big of a hook? The FHA's mortgage portfolio is now approaching $1 trillion. You can't assume all those mortgages will default but you can assume the FHA's exposure will only grow in the months ahead as politicians continue to look for ways to support the housing market. In other words, FHA is looking very much like the "new Fannie Mae."
Secret Deal Between Wall Street and Washington Shines a Harsh Light on Federal Housing Agency - While the Federal Trade Commission was receiving gut-wrenching documentation of predatory lending abuses at a unit of Citigroup, the Federal agency mandated to level the playing field for low income homeowners, the U.S. Department of Housing and Urban Development, was quietly awarding 19,968 mortgages of homeowners in distress to Citigroup to dispose of as it saw fit. HUD legally became Citigroup’s joint venture partner in at least two of the deals, retaining a minority interest.
On the government's owners - The most revealing political quote of the last year came from Democratic Senator Dick Durbin, who told a local radio station in April: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." The best Congressional floor speech of the last year on the financial crisis was this extraordinarily piercing five-minute revelation from Rep. Marcy Kaptur of Ohio on the Wall Street bailout and how the Congress is subservient to their dictates. And the single most insightful article on the financial crisis was written by former IMF Chief Economist and current MIT Professor Simon Johnson in the May, 2009 issue of The Atlantic, when he argued that "the finance industry has effectively captured our government" and detailed how the U.S. has become very similar to failed emerging-market nations in both its political and economic culture. All of that came together last night on Bill Moyers' Journal program, as Johnson and Kaptur together discussed the stranglehold which the financial industry exerts over the federal government and how that has produced a jobless recovery in which the only apparent beneficiaries are the bankers and other financial elites who caused the financial crisis in the first place.
Takes More Than Real Change to Dial this Phone: Geithner's Records - They are a small cadre of businessmen who have known and worked with Geithner for years, whose multibillion-dollar companies all survived the economic crisis with help from U.S. taxpayers. When they call, Geithner answers. He has spoken with them immediately after hanging up with President Barack Obama and before heading up to Capitol Hill, between phone calls with senators and after talking with the Federal Reserve chairman, according to a review by The Associated Press of seven months of his appointment calendars.
What’s Wrong with a Phone Call? - Yesterday Simon pointed out the AP story highlighting Tim Geithner’s many contacts with a few key Wall Street executives — primarily Jamie Dimon, Lloyd Blankfein, Vikram Pandit, and Richard Parsons — while leading the government’s rescue efforts as Treasury secretary. It’s certainly useful for the nation’s top economic official to talk to people in the banking industry, and it’s also useful for him to talk to banks that are being bailed out by the government. But the AP story did come up with a few important distinctions. Geithner talked to these Wall Street executives more than the key people in Congress — Barney Frank and Christopher Dodd — that he needs to pass his regulatory reform plan.
Geithner Aides Reaped Millions Working for Banks, Hedge Funds (Bloomberg) -- Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms. The advisers include Gene Sperling, who last year took in $887,727 from Goldman Sachs and $158,000 for speeches mostly to financial companies, including the firm run by accused Ponzi scheme mastermind R. Allen Stanford. Another top aide, Lee Sachs, reported more than $3 million in salary and partnership income from Mariner Investment Group, a New York hedge fund. As part of Geithner’s kitchen cabinet, Sperling and Sachs wield influence behind the scenes at the Treasury Department, where they help oversee the $700 billion banking rescue and craft executive pay rules and the revamp of financial regulations.
Diana Farrell And The White House Theory Of Bank Size - Diana Farrell, a senior White House official (Deputy Assistant for Economy Policy), with regard to whether our largest banks are too big and should be broken up: We have created them, and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript) Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute
Christina Romer vs Political Reality - on the two biggest pieces of macroeconomic management, the Obama administration is pursuing policies that its in-house expert on macroeconomic crisis management believed were far too timid. He’s also telling us that this was done primarily not because people disagreed with her analysis, but because they felt it wasn’t possible, legislatively speaking, to do what was objectively necessary. It’s a bit of a scary situation.One (or two) years on - they have learned nothing - The most striking item, of course, is the continued dominance of politicians by bankers. Banks are universally seen - including by bankers - as being at the heart of the problem, and having created the crisis through reckless behavior and worse. And yet, after having being bailed out at a staggering cost, in a highly asymmetrical way (the losses were socialised, but not the banks), not only have they managed to eliminate the likelihood of any meaningful regulatory change, but more importantly they have managed to maintain the fiction that finance was the reason for earlier prosperity and should thus be protected as a source of future prosperity.
Banks Threaten To Stop Lending If They're Not Allowed To Keep Off-Balance Sheet Entities - The financial sector is waging a lobbying war on Capitol Hill to delay the the implementation of a new accounting rule set to take effect at the beginning of next year. The rule would ban the use off off balance sheet vehicles to shift risk away from their bottom line.Banks love special purpose entitites because they can skim off the profits without having to set aside regulatory. And they worry that the new rule could force them to raise more capital to reserve against the assets.
Wall Street Setting New Pay Records - Just one year from the much discussed "death of Wall Street," major U.S. banks and securities firms are set to pay their employees about $140 billion this year, according to a study by the Wall Street Journal. That's a record level, just passing the pay levels of the boom year of 2007. The chart below from the Wall Street Journal shows that pay will vary across several firms, both in absolute terms and relative to earnings. Morgan Stanley, for instance, has lower revenues but has been setting aside more for compensation.
Goldman Sachs 2009 bonuses to double 2008’s; $23 billion could send 460,000 to Harvard, buy insurance for 1.7 million families - On Thursday, Goldman Sachs will announce the firm's bonus payments for 2009. Analysts expect the bonus pool to mushroom to $23 billion -- double the bonus pool paid to employees in 2008. Earlier this year, Goldman Sachs said that it had put aside $11.4 billion for bonuses during the first half of the year.
Blithe Blankfein - Lloyd Blankfein’s op-ed in the FT today doesn’t break much in the way of new ground, but it’s still worth reading closely. That’s the only way you can notice where his logic falls apart... The fact is that there are a lot of hard questions here, and Blankfein’s blithe assurances that conceptually it’s quite easy to answer them ring false to me. Especially when he never mentions the too-big-to-fail elephant in the room. Because he knows that any action on that front would harm, rather than help, Goldman Sachs.
Goldman Sachs Is Robbing Us Blind - In a world where real competition, modern technology and lack of special government standing means most American businesses have no choice but to adapt and innovate -- Wall Streets wimps only apparent skill is rigging the game. In fact, on Wall Street there have always been only two basic ways to make money. The first and most difficult: Be a great investor . The second, and seemingly preferred method, exploit those who know less than you -- and take their money, even if you have to change the laws to do so.
Another Goldman executive named to key government post as its profits skyrocket - Apparently, the U.S. government didn't have enough Goldman Sachs executives in key financial and regulatory positions, so the following happened this week: A Goldman Sachs executive has been named the first chief operating officer of the Securities and Exchange Commission's enforcement division.
MSM Reporting as Propaganda (No One Minds Our New Financial Masters Edition) - Yves Smith - I’m of two minds about taking up this theme, since stating what ought to be obvious but is nevertheless unpleasant and inconvenient is apt to get one branded as lunatic fringe.
Access journalism has created what is in many respects a controlled press. And that matters because people are far more suggestible than most of us wants to admit to ourselves.
Let us start with the cheerleading in the media over Wall Street, and in particular, Goldman earnings. Matt Taibbi, in “Good News on Wall Street Means… What Exactly?,” tells us why this is so distorted...
The Rich Have Stolen the Economy - The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.
Capitalism: An Apathy Story by Cindy Sheehan - This Thursday, in a move that would make Baron von Louis Rothschild blush with shame (or burst with pride), Goldman Sachs will announce that it is more than doubling its bonus pool. I always thought the concept of the “Welfare Queen” was eliminated during the Clinton Regime (where his SecTreas was a former chair of G S) however, Goldman Sachs has received billions of dollars in taxpayer welfare and supposedly paid that back, except for the 13 billion that was funneled through AIG to Goldman through loan guarantees. Well, wouldn't it be hunky dory if every loan we consumers took out from these banksters came with a guarantee that if we failed, our government would pay our loans off?
Joe Nocera: Subprime and the Banks: Guilty as Charged - a series of fliers and advertisements from JPMorgan Chase, advertising their latest wares. They were dated 2005, which was before the subprime mortgage boom got completely out of control. They’re still pretty sobering.
“The Top 10 Reasons to Choose Chase for All Your Subprime Needs,” screams the headline on the first one. Another was titled, “Chase No Doc,” and described the criteria for a borrower to receive a so-called no-document loan. “Got Bank Statements?” asked a third flier. “Get Approved!” In a number of the fliers, Chase makes it clear to the mortgage brokers that the bank doesn’t need income or job verification...
One in five hedge fund managers found to be misrepresenting facts - FT - One in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations, research from New York University's Stern School of Business suggests, using confidential data taken from 444 due diligence reports commissioned by investors between 2003 and.The research is likely to be a further blow to the reputation of a battered industry, which has faced increasing demands for transparency from investors in the wake of the credit crisis.
AIG Bonuses Were a Treasury ‘Failure,’ Barofsky Says - WSJ - Neil Barofsky, the special inspector general for the government's financial bailout said Wednesday that the $168 million in retention payments to American International Group Inc. represented a "failure" that occurred when the Treasury Department "outsourced its oversight" to other agencies.
Down the Rathole - The Securitization Boondoggle - The relentless financialization of the economy has resulted in a hybrid-system of credit expansion which depends on pools of loans sliced-and-diced into tranches and sold into the secondary market to yield-seeking investors. The process is called securitization and it lies at the heart of the current financial crisis. Securitization markets have grown exponentially over the last decade as foreign capital has flooded Wall Street due to the ballooning current account deficit.
Wall Street Fends Off Democrats on Risk Reforms - The deliberations of the Senate Finance Committee on health-care reform - which, understandably, have monopolized the public's attention to Capitol Hill -- have concluded not a moment too soon. On Wednesday the House Financial Services Committee begins the first congressional mark-up of legislation every bit as important: the bills that would rein in Wall Street. But there's a problem. Looking at perhaps the single most important bill the committee will consider -- the one that will regulate derivatives, the banks have nothing to complain about. The regulations don't amount to much. The peril these derivatives pose to the economy will persist.
Derivatives Lobby Links With New Democrats to Blunt Obama Plan - As President Barack Obama vowed in a Sept. 14 speech in New York’s Federal Hall to correct “reckless behavior and unchecked excess” on Wall Street, Mike McMahon and Barney Frank sat in the audience discussing how to ease proposed rules for the $592 trillion over-the-counter derivatives market. Side by side at 26 Wall St., across from the New York Stock Exchange, freshman congressman McMahon told House Financial Services Committee Chairman Frank he was worried that Obama’s derivatives plan, released in August, would penalize a wide swath of U.S. corporations and could push jobs in his home district overseas...
Doing the Wrong Things with Derivatives – Stiglitz has the Right Idea… This is a critical issue, one that is central to our current economic crisis and the debt that has saturated our society…take the time to understand what’s happening with the unregulated and untracked shadow banking world of financial engineering, profiteering, and looting. Estimates run as high as $1.4 Quadrillion (!) for the notional value of the world’s derivatives. Prior to 1990 there was basically no market whatsoever. The only agency to track a portion of the U.S.’s derivatives is the OCC (Office of the Comptroller of Currencies). They only track a PORTION of the derivatives and only those held by commercial banks. Here’s their quarter 2nd report...
Revenge of the Nerds: “This is so far over my head that it might as well be written in Martian, but it’s still fascinating in its own geeky way. A new paper by a group of Princeton computer scientists and economists uses Intractability Theory to demonstrate that a smart underwriter can deliberately construct a derivative that will implode and the buyer can never prove it.
Republicans Claim Derivatives Regulation Will Cause Job Loss And A ‘Decrease In The American Dream’ - during the markup Republicans made it abundantly clear that they oppose the legislation, claiming that it will be a “job killer,” which will ultimately cause a “decrease in the American dream.” Watch a compilation...
The Problem With Financial Services Compensation - Yves Smith - The Financial Times reports that the so-called pay czar Kenneth Feinberg, who is in charge of overseeing compensation at TARP recipients, is going to crack down on some of the bonuses paid at AIG: While I think the pay levels in the financial services industry are to a significant degree unwarranted, using pay as a quick and dirty way to appease the masses and try to forgo the needed heavy lifting of real reform and meaningful oversight is likely to be ineffective.
Bankers’ pay - The problem is not limited to the bonuses on which political debate has unhelpfully focused. It is widely agreed that variable pay must be designed to discourage risks to the economy. But current plans for regulating pay will not limit the total amount bankers extract from profits, which could instead be added to capital. In principle, other planned regulation – strong insolvency regimes and risk-sensitive capital requirements – can limit banks’ profits from risks underwritten by others. But it will take years before these are credibly enforced.
Bailed-Out Banks Raking In Big Profits - The nation's largest banks, preserved from failure by federal aid and romping in markets revived by federal aid, are racking up vast profits even as the broader economy struggles to emerge from recession. While loan losses continue to mount, the banks are making it up on Wall Street, trading in stocks, bonds and other financial instruments, and collecting fees for services such as helping companies raise money.
Calling on Big Banks to Repay Bailout Now - NYTimes - Concluding that some of the nation’s biggest banks are in good enough shape to raise capital from private investors, senior Treasury officials would like more of them to repay billions of dollars in taxpayer money that bailed them out over the last year. But many of those banks would prefer to keep the money for several more years rather than raise new money and dilute their existing stockholders.
How the Servant Became a Predator: Finance’s Five Fatal Flaws - What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
Summers: Big Finance vs. The Middle Class – WSJ - "Despite the extraordinary depth of this most recent crisis, the pattern it followed — a pattern in which instability emanating from the financial sector ultimately resulted in hundreds of thousands of middle class families who had nothing to do with the financial sector losing their jobs or much of the their savings — is disturbingly familiar,” he said at the White House this week.
Public trust has economic consequences - Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. But, unfortunately, if this loss of trust persists, it could be costly for us all. As Ralph Waldo Emerson remarked, “Our distrust is very expensive.”“Does Banking Contribute to the Good of Society?” - Yves Smith - Quelle horreur, some smart people are starting to question whether banking serves a redeeming social function. Of course, in the abstract, it does. Banking (or more accurately, extending credit) is essential for commerce. But any essential support function, if it overpriced in relationship to its true value, becomes a drag on the productive economy. And our modern system is extracting a very large toll relative to its actual worth. One argument against banking comes from Roger Bootle at the Telegraph; the other from Bill Black...
Take America back from the banks - - Reining in the financial industry's power and greed will be a long, hard-fought war. But it is one that must be fought. Those disgusted by the bank bailouts, and the bankers who brought us this recession, will have a chance to make their views known when the American Bankers Association has its annual meeting in Chicago this month. A large coalition of labour, community and consumer organisations are organising a protest at this "Showdown in Chicago".
The REAL Battle Over America's Banking System - The battle to reform the American banking system needs to include reimposing the barrier between investment banking and depository banking (Glass-Steagall), pay incentives based on what is best for Americans and not just the top executives, the end of too big to fail, and other changes which are frequently discussed by financial writers. These are vital issues.
Who Needs Big Banks? - There are two things I object to strongly. The first is this “we need big banks to serve global corporations” line. I’ve heard this before and I don’t buy it, for a number of reasons. The second is easy. The American Dream is for people, not companies. But Citigroup is the product of no one’s American Dream. When Talbott says “American Dream,” what he really means is “American Bank CEO’s Dream” — because, as we all know, CEO compensation in the financial sector is extremely correlated with assets.
The Case For Dismantling Giant Banks - These 21st century banks have become deadly systemically risky dominoes that can crush us all if they fail, or can bankrupt us all with debt if we have to bail them out. These are not country clubs. With the demise of Glass Steagall at the turn of the century, banking was placed in a new, modern, neutron era while the makeup boards of directors are back in days of the 1950's. This is a mistake fraught with peril. In our government's quest to save our system last fall, their main line of defense was to make banks bigger and more deadly. Risk is more concentrated than ever. The dominoes are much bigger and closer together than ever before. These banks are not too big to fail, they're too big to succeed ... too big to manage.
Greenspan Says U.S. Should Consider Breaking Up Large Banks (Bloomberg) -- U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said. Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York. “If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
Hulk Smash Banks (With Special Fees and Capital Requirements) - It really does seem like if even Alan Greenspan is coming around to the view that we shouldn’t allow financial institutions to grow to such enormous sizes that we really shouldn’t allow financial institutions to grow to such enormous sizes. What’s a lot less clear to me is what you can actually do, in practical terms, moving forward. Now if only someone like Alan Greenspan had been voicing these concerns back in the 1990s it would have been easy enough for regulators (like, you know, Alan Greenspan) to deny regulatory approval to the kind of mergers that gave us the superbanks of today. But while regulators can prevent big firms from merging and becoming super-big, I’m pretty sure they can’t just order Bank of America to unmerge itself.
What, exactly, are Ben Bernanke and Tim Geithner supposed to do at this point?
Arguments for Big Banks -- I understand the arguments for not breaking up or nationalizing the largest banks, both in general and in the middle of a crisis. Those arguments are predicated on it being a bad idea, either too difficult or legally impossible. One talking point that I have not heard is that large banks are good for the economy. Under what circumstances would our biggest banks be the best arrangement of the banking sector? It’s important to realize how large the largest banks are. Here is a list of the Top 50 Bank Holding Companies from the Fed. I’m going to give you two charts. One is a histogram of those top 50
The other is the top 20, with an additional column for asset size as a multiple of the size of the 20th bank...
Mark-to-Make-Believe Turns Junk Loans to Gold (Bloomberg) -- Read the financial statements footnotes first, because that’s usually where the bodies are buried. The main caveat is that the notes might not tell the whole truth either. That’s especially the case with banks. When a bank says its loans are worth much less than their balance-sheet amount, that means a large portion of its capital cushion may be illusory. Such gaps arise because loans don’t have to be carried on the balance sheet at fair value, giving lenders lots of wiggle room to play with...The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash
William K. Black - professor of economics and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").
Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency.
Rosenberg on Economy: "String of lowercase Ws for the next five years" We are starting to exhaust the keyboard for the shape of the recovery ... and reuse letters!Two different views: From Bloomberg: Rosenberg Sees Low-To-No-Growth as Kantor Vows Vigorous Economy - “It’s going to look like this whole string of lowercase Ws for the next five years,” with periods of growth followed by periods of contraction. And from Larry Kantor, head of research at Barclays Capital Inc. and former Fed economist: “We think the recovery will be sustained,” ...
Q&A: Reinhart and Rogoff on the Crisis, the ‘Mother of All Moral Hazard’ - WSJ - The two, who began their project while working at the International Monetary Fund, have just published “ This Time is Different: Eight Centuries of Financial Crisis.” The book is an early stab at analyzing that data, and measures some common elements in most financial crises, such as big run-ups in debt and, of course, hubris. (The two are making their data available to other researchers.) We took a moment to chat with them about what their work shows, and what comes next.
Memo to Investigators: Dig Deep - We may know the broad outlines, but the landscape remains littered with unanswered questions and informed suspicions about who did what to produce the breakdown. The relevant facts are still buried in the files of Wall Street firms and the regulatory agencies that utterly failed as watchdogs. The Angelides commission has the subpoena power to dig out secrets--from e-mails and private memos, and through testimony under oath--that can disclose political deal-making and ruinous financial strategies. Given the rush of events, the commission may be the public's last, best chance to get at the truth of the matter.
House Panel Begins Push on Financial Overhaul - NYTimes - Kicking off the latest chapter of this year’s Full Employment Act for K Street Lobbyists, representatives from a surfeit of industries descended on an influential Congressional committee on Wednesday as it began writing a law overhauling the nation’s regulatory system. In a lobbying season already booming with business from battles over health care, firms are also closely monitoring the debate over Washington’s response to the market crisis. The financial services industry has poured more than $220 million into lobbying in 2009
Reducing Incentives for Risk-Taking - It is now widely accepted that compensation structures in financial firms should be devised to avoid excessive incentives for risk-taking and that doing so requires tying executive compensation to long-term results and preventing cashing out of large amounts of compensation on the basis of short-term results. What long-term “results” are we talking about though? We propose that risk-taking incentives could be improved by tying executives’ pay not only to shareholders but also to those of preferred shareholders, bondholders and taxpayers insuring depositors.
‘Contingent Capital’ Idea Gaining More Steam Within Fed - WSJ - Federal Reserve Bank of New York President William Dudley said at a luncheon with bankers the idea of contingent capital “holds real promise.” Federal Reserve Governor Daniel Tarullo talked up the idea of contingent capital last week, suggesting the idea is gaining currency within the central bank. The increased frequency of public comments also suggests discussions within the Fed are pretty far along.Contingent capital would essentially allow banks to convert debt instruments into equity — or capital — in an emergency. Debt holders would likely take some sort of penalty, but the idea is that this is much better than letting the company collapse. Fed officials believe contingent capital could answer one of the most difficult questions of crisis regulation: how do you avoid the cyclicality of capital requirements, where banks tend to need more capital when it’s hardest to obtain it?
Hedge Funds Gain Clout on Capitol Hill - NYTimes - Hedge fund managers appear to have a new degree of clout on Capitol Hill in shaping legislation that will determine how they will be regulated, according to The Boston Globe.To gain that clout, industry leaders are using a congressman-turned-lobbyist, a major increase in campaign donations, and a strategy that relies heavily on advancing their own reform ideas, making them active players in the legislative process and perhaps staving off more rigorous regulation measures.
Wall Street: What Happened to Financial Reform? - Newsweek - the legislation that was originally written to safeguard consumers' financial health has been gutted so much in recent weeks that it no longer applies to real-estate agents, auto dealers, tax preparers, attorneys, retailers, or credit-rating agencies. Banks, credit-card companies, and mortgage brokers no longer have to offer the most basic financial products, such as 30-year fixed mortgages or basic credit cards, nor do they have to ensure that consumers understand the nitty-gritty of contracts and newfangled products. Worst of all, at the end of this debate, there's no guarantee that Congress will pass even the weakest version of financial reform.
Why Financial Reform Died: “Banks Run Congress” - The short answer: Key members of Congress are owned by the financial services group’s lobbyists. The longer answer: Lobbyists from the financial industry have paid hundreds of millions to Congress, the Bush and Obama administrations. (See yesterday’s Total Campaign Contributions/Lobbying by TARP Recipients)
Commentary: Credit Rating is a Case Study in Regulatory Reform - The process for delivering credit ratings, it turns out, was rotten to its core. The agencies came to view ratings, paid for by issuers, as a source of profit, rather than a service intended to provide an impartial, unvarnished view to debt purchasers. Conflicts of interest abounded, rendering relationships among issuers and credit rating agencies cozy, rather than arms' length. Ratings consequentially evolved into little more than brand advertisements offering all of the disclosure value of a highly tuned Madison Avenue pitch.
Intellectually Bankrupt, Firms Try to Squash Dissent - The issue is whether a research firm can strongly criticize a public company without the threat of a libel claim hanging over it. The use of libel laws and other legal maneuvers against financial critics is an extreme tactic and ought to be recognized as such. Except in the most blatant cases of reckless and irresponsible speech, such suits, in and of themselves, are bad for markets, bad for financial journalism, bad for expression generally, and bad for the public, which lately has ended up has ended up bailing out firms that dissenters tried to warn about.
Elliot Spitzer Lays Out Game Plan to Get Rid of the Chamber of Commerce - The U.S. Chamber of Commerce is a massive corporate lobbyist group and characterized by Elliot Spitzer as a Chamber of Horrors. Bad policies, bad legislation putting the entire nation, economy at risk is the history of this lobbying group. Spitzer suggests public pension funds put pressure on companies to stop their membership to the U.S. Chamber of Commerce, for once starving the lobbyist beast by cutting off membership fees. Spitzer argues that the U.S. Chamber of Commerce blocks legislation which is against these very state pension funds interests.
Ignorance Is Bliss - While all the talk at present is about economic corners turned and markets charging ahead, no one is paying much notice to an American economy deteriorating before our eyes. These myopic commentators seem to be simply moving past the now almost-universally held conclusion that before the crash of 2008, our economy was on an unsustainable course. If these imbalances had been corrected, then perhaps I too would be joining in the euphoria. But evidence abounds that we have not veered at all from that dangerous path.
Gore Vidal’s United States of fury - Independent - It is clear the American experiment has been "a failure". It was all for nothing. Soon the country will be ranked "somewhere between Brazil and Argentina, where it belongs." The Empire will collapse militarily in Afghanistan; the nation will collapse internally when Obama is broken "by the madhouse" and the Chinese call in the country's debts. A ruined United States will then be "the Yellow Man's Burden", and "they'll have us running the coolie cars, or whatever it is they have in the way of transport".
Soros says U.S. economy will be drag on world growth (Reuters) - Billionaire investor and philanthropist George Soros said on Thursday that the world's current "currency arrangements" are fraught with danger and that the world needs global regulation. Soros, who runs hedge fund firm Soros Fund Management and has made his reputation with bold currency bets, said the U.S. dollar ought to be falling in value against the Chinese currency to allow the United States to contain its current account deficit.
Credit Vise Tightens for Small and Midsize Businesses - NYTimes - Many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth, even as the country tentatively rises from its recessionary depths. Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board.
All aboard the commercial real estate bailout train – FT - from the Wednesday Congressional testimony of Sheila Bair, chairwoman of the FDIC, which is charged with insuring US bank deposits and guaranteeing the safety of its member banks: The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending. While financing vehicles such as commercial mortgage-backed securities (CMBS) have emerged as significant CRE funding sources in recent years, FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, and their exposure to CRE loans stands at an historic high.
Moody's Commercial Mortgages Going Bad At Record Pace - Here's the scary thing about the commercial real estate situation: It's not even starting with the second derivative improvement. Things are still getting worse faster says Moody's. The Moody’s Delinquency Tracker (DQT) measured a 41 basis point increase in the month of September. The DQT now stands at 3.64%. This represents a 310 basis points increase over the same time last year. The DQT is now nearly 350 basis points higher than the low of 0.22% reached in July 2007.
Distressed Real Estate Continues to Be a Growth Industry - Source data: Q209 data from FDIC, FFIEC. Note that for the sake of brevity and ease of understanding, I refer to loans classified as “Secured by non-farm, non-residential real estate” in the FFIEC call report as simply “commercial real estate loans”. I start with a look at all non-performing loans, then zoom into loans likely to impact the real estate market, then take a closer look at commercial real estate loans. (charts & analysis)
Fitch Sees 60% of Current RMBS Borrowers Underwater - The majority — 60% — of remaining performing borrowers within ‘06- and ‘07-vintage residential mortgage-backed securities (RMBS) bear negative home equity, meaning they are underwater on their mortgages and owe more than their houses are worth.This overwhelming presence of negative equity is hampering sustained improvement in RMBS performance, according to Fitch Ratings.“Negative equity reduces a borrower’s inventive to pay their mortgage and limits their options when faced with financial difficulties,” said senior director Grant Bailey in a statement.
Wells Sees 60-70% Loss Severity in Option-ARMs - The market can expect heavy losses among Option adjustable-rate mortgages (ARMs), a product that allowed negative amortization by letting borrowers choose to pay only the minimum monthly payment. Fitch Ratings expects significant payment shocks over the next several years as a wave of Option-ARMs recast from the minimum amount to a fully amortizing principle and interest payment. These recasts are expected to drive substantial losses among the Option-ARM sector.
Foreclosures mark pace of enduring U.S. housing crisis (Reuters) - Every 13 seconds in America, there is another foreclosure filing. That's the rhythm of a crisis that threatens to choke off hopes for a recovery in the U.S. housing market as it destroys hundreds of billions of dollars in property values a year. There are more than 6,600 home foreclosure filings per day, according to the Center for Responsible Lending, a nonpartisan watchdog group. With nearly two million already this year, the flood of foreclosures shows no sign of abating any time soon.
take your pick: U.S. Foreclosure Filings Jump 23% to Record in Third Quarter (Bloomberg) -- U.S. foreclosure filings climbed to a record in the third quarter as lenders seized more properties from delinquent borrowers, according to RealtyTrac Inc. A total of 937,840 homes received a default or auction notice or were repossessed by banks, a 23 percent increase from a year earlier OR U.S. foreclosures fall 2nd straight month - (Reuters) - U.S. mortgage foreclosure filings fell for a second straight month in September, but remained near a record high, amid ongoing and sweeping efforts to keep borrowers in their homes, a report released on Thursday showed. Foreclosure filings -- including mortgage default notices, house auctions and home repossessions by banks -- were reported on 343,638 properties in September, down 4 percent from August, but up 29 percent from the year-earlier month, real estate data firm RealtyTrac said.
Foreclosures Grow in Housing Market's Top Tiers - WSJ - About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com.The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.
Housing Is Moving Towards Disaster — It may seem to lack self-consistency, but foreclosures and pending sales both increased in the third quarter. In the face of this seemingly conflicted data, the Mortgage Bankers Association has come out with an optimistic forecast of significantly higher home sales quantities for 2010. All of these numbers do come together to paint a consistent picture. The only problem is that the picture is one of possible devastation.
Bank of America Scrambles to Provide Mortgage Relief Before Deadline - Under the Making Home Affordable program, lenders are paid with taxpayer funds to reduce borrowers' mortgage payments by lowering their interest rates, for example, or by extending the terms of their loans A progress report released last week by the Treasury Department showed that only 11 percent (about 95,000) of Bank of America's delinquent borrowers who were potentially eligible for the program had been given a loan modification.
Here Be Chickens (And They’re Roosting!) - We got a little problem here.....A progress report released last week by the Treasury Department showed that only 11 percent (about 95,000) of Bank of America's delinquent borrowers who were potentially eligible for the program had been given a loan modification...There are too many conflicting currents here, which is what will ultimately doom this program, as has doomed all the previous ones.
How many of these people who allegedly "qualify" for a modification will wind up with a sustainable mortgage if they get one? The truth is pretty ugly - without significant principal forgiveness (not "forbearance") a huge, perhaps even majority percentage of these loans are not sustainable even if modified.
Home rescue plan delaying, not solving crisis (Reuters) - Eight months later, the plan is plagued by delays, red tape and, some critics say, a reluctance by banks to do their part. Just 17 percent of eligible borrowers have had their loans modified and monthly payments cut. Hardly any have been given a cut in the amount they owe on homes which are now worth less.
That means many successful applicants are left with loans that they still will not be able to afford in the long run. So instead of resolving the housing crisis that pushed the U.S. economy into recession, America may be prolonging it and, in the process, stunting the global recovery.
A Kinder, Gentler Foreclosure - the Homeowner Preservation Office at the Treasury released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so. HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.So this really doesn't do anything, but somehow it will remove the stigma of foreclosure. Maybe they could rename "foreclosure" to something kinder like "Voluntary Economic Home Separation."
Only The Shadow - Here’s one more 16-page report on shadow inventory, with many charts and graphs: An excerpt:The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate.This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, or 135% of a full year of existing home sales.
Subprime mortgages: Myths and reality - VoxEU - The global crisis is said to have originated in the US subprime mortgage market. This report argues that many of the most popular explanations that have emerged for the subprime crisis are, to a large extent, myths.
Americans Still Delusional About House Prices - The recent upturn in house prices from April to July (3.6%) is the sharpest change in direction professor Robert Shiller has ever seen. It could signal a v-shaped recovery in house prices. Or it could be the "mother of all head fakes," as investor Whitney Tilson has described it.Robert Shiller's recent survey of attitudes about house prices suggests it's probably the latter. The survey also suggests that Americans are still delusional about the long-term trajectory for house prices.
Shiller wonders what the turnaround in house prices means - - He concludes: At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game, watching various economic indicators as well as the state of federal bailout programs — including the $8,000 first-time home-buyer tax credit that is currently scheduled to expire before Dec. 1 — in an effort to time their home-buying decisions. The sudden turn is more likely just a sign of a period of higher short-run price volatility. My take is different: I wonder if we have actually seen a sudden turn. The mix of sales has recently included fewer distressed sales. If distressed sales are fundamentally different from others, changes in the mix will influence the index. I suspected before that prices for non-distressed transactions before fell somewhat less than CSI; for the same reason, they may not be rising quite as quickly as CSI now.
A Home Price Rebound Isn’t Necessarily a Boom - THE sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking. Some clues are found in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years...
Tightening the Bankruptcy Laws in the Midst of a Deep Recession - Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.
The U.S. bankruptcy law has a means test that is meant to filter "can pay" debtors into chapter 13. It's a test that was not needed--there was no evidence of widespread abuse of the bankruptcy system--and the test is not having its intended effect--the income distribution of filers has not changed.
Consumers Falling Behind In Paying Off Debt - U.S. consumers are increasingly late paying off loans on their primary home, as the highest unemployment in a quarter of a century pushes up delinquency rates on home loans and most other types of loans, according to a monthly report by the Equifax credit bureau. Every major consumer product line, in terms of delinquency, is up again, except for (credit) cards
One industry that's booming: debt collection - In the often murky waters of the debt collection industry, United Recovery Systems in Houston is considered a "whale hunter."
In its search for clients, United isn't looking for mom-and-pop businesses with a few hundred deadbeat customers. It wants bigger fish. Its client roster includes national banks, international credit card issuers and domestic and foreign auto finance giants, each of whom count on United to make good on their bad accounts...
Consumer Credit Contracting at Record Levels - Total Consumer Credit Outstanding in the US is contracting at a year-over-rate of almost 5 percent, which is a record for the post 1960 economy. (see graph) - The challenge facing Bernanke and the Obama economic team is how to get the US consumer spending again, if they cannot be paid a living wage, and if they can no longer be encouraged to borrow beyoned their means, by using their homes as a cash machine with variable interest rates, as they were encouraged to do by Fed Chairman Greenspan.
US credit card defaults fall, but delinquencies up (Reuters) - Most of the largest U.S. credit card companies reported defaults fell in September as consumers used tax refunds and other economic stimulus proceeds to lower debts, but late payments rose, suggesting more troubles ahead in an already battered industry. The decline in defaults from record highs last month reflected a contraction earlier this year of late payments.
The Availability and Profitability of Credit Cards - wonkish study from the Cleveland Fed with multiyear charts on interest rates, profitablity, issuance and spreads, indebtedness, and financing sources...
'Unbanked' but No Longer Ignored - For years, the country's makeshift network of payday lenders and check cashers has operated with little competition or federal regulation. But as the financial crisis sparks a new wave of consumer protections, lawmakers and the private sector alike are training their sights on an industry that caters to the most vulnerable of populations: the estimated 40 million households on the margins of the nation's financial system, with limited, if any, access to banks or credit.
What Is Consumer Freedom? - A recent ad taken out by the “The Center for Consumer Freedom” marks the latest assault by business lobbyists and conservatives on the idea of consumer protection. This organization’s motto — Promoting Personal Freedom and Protecting Consumer Choice — defines consumer freedom as “the right of adults and parents to choose how they live their lives, what they eat and drink, how they manage their finances, and how they enjoy themselves.” Like other critics of consumer protection, this organization (“supported by over 100 companies,” according to its website) speaks in the name of freedom and depicts consumer protection as an assault not only on the liberty but on the intelligence of ordinary people.
House Panel Exempts Over 8,000 Banks From Oversight - NYTimes - Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans.
The 'Democratization of Credit' Is Over - Now It's Payback Time - WSJ - The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.
Improving your credit vs paying down debt - there’s a whole cottage industry which has sprung up devoted to trying to maximize credit scores, as well as ancillary industries such as Ben Stein’s evil attempt to trick people into paying $30 a month for a service they neither need nor can afford. What worries me is that the financial counselor provided by a nonprofit might well have been the person advising Ms King not to pay off her utility bill at a discount. Often these financial counselors are seconded from some arm of the financial-services industry, which has an institutional interest in people paying as much of their debts and penalties as possible.
Retail Sales Decrease in September - CalculatedRisk - On a monthly basis, retail sales decreased 1.5% from August to September (seasonally adjusted), and sales are off 5.7% from September 2008 (retail ex food services decreased 6.4%). Excluding motor vehicles, retail sales were up 0.5%...charts: (1)shows real retail sales (adjusted with PCE) since 1992. (2)shows the year-over-year change in nominal and real retail sales since 1993.
Q&A: Scroogenomics Author on the Holidays’ ‘Orgy of Wealth Destruction’ - WSJ - Now there’s a palliative from a grumpy economist who wishes everyone would spend less. It’s called, “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays,” by a Wharton professor named Joel Waldfogel. Mr. Waldfogel estimates that Americans drop close to $70 billion a year on Christmas shopping for gifts people often don’t want … baggy underwear, ugly sweaters, etc. Society, he says in the book, would be better off if people didn’t spend it.“
The September CPI with all the trimmings - Atlanta Fed blog - Yesterday, the U.S. Bureau of Labor Statistics reported that retail prices rose 2 percent (annualized) in September, and it characterized the increase as "broad based, although tempered by a decline in the food index. This observation begs an important question: What exactly does "broad based" mean here? Rent and owners' equivalent rent actually declined last month. These categories represent a shade more than 30 percent of the CPI. If you add in all the other things that showed outright price declines in September about 44 percent of the CPI fell last month.
Why Things Will Feel Worse As They Get Better: The Downside of Growing Consumption Equality - there is still evidence that income inequality has risen over the last 30-40 years and there is certainly the perception that incomes have grown more unevenly. That the numbers show that the change is smaller than we had first thought doesn’t seem to affect how largely the issue looms in public policy debates. This suggests that much of the debate on inequality is not just about inequality but also beliefs about fairness and about which social outcomes are to be encouraged or critiqued.
Ad Age White Paper: No More Joe Consumer in America -The 2010 Census is expected to find that 309 million people live in the United States. But one person will be missing: the average American. "The concept of an 'average American' is gone, probably forever," demographics expert Peter Francese writes in 2010 America, a new Ad Age white paper. "The average American has been replaced by a complex, multidimensional society that defies simplistic labeling."
Employed Taking Deeper Pay Cuts (Except on Wall Street, of Course) - Yves Smith - Deflation, anyone? One of the staples of Japan’s lost now two decades has been an unrelenting squeeze on worker wages and work conditions. New graduates used to get full time jobs. Now men are “freeters” in a sort of temp purgatory. The US version, as set forth by Louis Uchitelle in the New York Times, does look worse: you do the same job for less money. And not a little less money, but in some cases, a lot.
Income Floors Dropping -- NYTimes - Colorado plans to lower its state minimum wage — and not because officials think the minimum wage is hurting employment (the usual argument for lowering the floor). Similarly, the Center on Budget and Policy Priorities projects that next year will be the first year in three decades that Social Security checks do not increase — and not because officials think Social Security obligations are costing taxpayers too much money (the usual argument for reining in entitlements).Why are these income floors dropping, or at the very least stagnating? Deflation.
Stagnant Prices Prevent Social Security Increase - President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.
Student Loans as the New Indentured Servitude - Why is this the new form of indentured servitude? Williams gives some reasons: The prevalence of this debt, especially among the young and the poor/working classes, the transformation from a rounding error amount to a significant burden amount over the past 30 years, the length of term, the idea of mobility and “transport” to a job, debt secured not by property but by personhood, and limited legal recourse. All these characteristics are similar. The limited legal recourse is noteworthy here, since unlike most debt, it isn’t dischargeable under bankruptcy, thus it doesn’t have a natural protection for the consumer receiving credit (a protection, the original synthetic put option, that our Founders were aware of enough to make sure it was provisioned for in the Constitution).
Harvard’s Bet on Interest Rate Rise Cost $500 Million to Exit (Bloomberg) -- Harvard University’s failed bet that interest rates would rise cost the world’s richest school at least $500 million in payments to escape derivatives that backfired. Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the report said. The university in Cambridge, Massachusetts, said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.
Non-Pecuniary Benefits to Schooling - I’ve written a series of blog posts arguing that real earnings of young college grads have been falling since 2000, not just in inflation-adjusted dollars, but also relative to less educated peers. (for example, see “Earnings of Young College Grads vs College Costs” and “Yet More on Young College Grads”). Now let me give the positive case in favor of more schooling. There’s a new paper which argues that the “nonpecuniary” benefits of schooling are at least as large as the monetary benefits.
The Pension Crisis - From David Cho at the WaPo: Steep Losses Pose Crisis for Pensions - The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees....Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.
Indigent Burials Are on the Rise - NYTimes - Coroners and medical examiners across the country are reporting spikes in the number of unclaimed bodies and indigent burials, with states, counties and private funeral homes having to foot the bill when families cannot. The increase comes as governments short on cash are cutting other social service programs, with some municipalities dipping into emergency and reserve funds to help cover the costs of burials or cremations.
End the war on drugs, start the legalization (MW) In a "nation of addicts" it doesn't matter if drugs are legal or not ... where the drugs come from ... who gets hurt ... nor if we have to waste hundreds of billions fighting ineffective wars to protect suppliers ... a corrupt Afghan government, the source of 95% of the world's heroin ... or Mexico, the main traffic route for wholesalers feeding America's addicts ... or Big Pharma the biggest pusher for prescription drug addicts. When a "nation of addicts" needs a fix, they always find it.
Health Insurers Threaten Rate Hikes - Though looking forward to millions of new customers who would be compelled by the U.S. government to buy health insurance, the insurance industry is threatening to raise premiums across the board if more of its demands are not met. Industry representatives put Congress and the Obama administration on notice that if health-reform legislation doesn’t send even more new customers the industry’s way or if a windfall profits tax is included, the industry would hit businesses, individuals and the government with higher premiums, effectively defeating one of the initiative’s top goals, reining in ever-rising costs.
The Audacity of Greed: Health Insurers Just Blew Their Cover - Robert Reich - The industry hates the idea that's emerged from the Senate Finance Committee of lowering penalties on younger and healthier people who don't buy insurance. Relying on an analysis by PricewaterhouseCoopers, insurers say this means new enrollees will be older and less healthy -- which will drive up costs. And, says the industry, these costs will be passed on to consumers in the form of higher premiums. Proposed taxes on high-priced "Cadillac" policies will also be passed on to consumers. As a result, premiums will rise faster and higher than the government projects.
The Insurance Industry's Deceptive Report - In the hallowed tradition of the tobacco and energy industries, the health insurance industry has commissioned a report (pdf) projecting doom and despair for those who seek to reform its business practices. The report was farmed out to the consultancy PricewaterhouseCoopers, which has something of a history with this sort of thing: In the early-'90s, the tobacco industry commissioned PWC to estimate the economic devastation that would result from a tax on tobacco. The report was later analyzed by the Arthur Andersen Economic Consulting group, which concluded that "the cumulative effect of PW’s methods … is to produce patently unreliable results." It's perhaps no surprise that the patently unreliable results were all in the tobacco industry's favor. He who pays the piper names the tune, and all that.
The INFLUENCE GAME - Health Cry Is Tax Them, Not Us - NYTimes -- Insurance companies, unions and other special interest groups pushed back hard Wednesday against health care legislation that could cost their members billions of dollars.If they succeed in shifting the proposed taxes away from them, then Congress and the Obama administration will have all the more difficulty paying for the roughly $900 billion, 10-year plan.
Public Option Is Next Big Hurdle in Health Debate - NYTimes - As the White House and Congressional leaders turned in earnest on Wednesday to working out big differences in the five health care bills, perhaps no issue loomed as a greater obstacle than whether to establish a government-run competitor to the insurance industry. One day after the Senate Finance Committee approved a measure without a “public option,” the question on Capitol Hill was how President Obama could reconcile the deep divisions within his party on the issue. All eyes were on Senator Olympia J. Snowe, the Maine Republican whose call for a “trigger” that would establish a government plan as a fallback is one of the leading compromise ideas.
Senator Snowe on the Public Option - "The public option would be problematic," Snowe told MSNBC, "As I've said I'm against a public option because I think the government would be another vast new bureaucracy, and also create a disproportionate advantage in the marketplace. And inevitably government's not going to do it better." Does this make any sense at all? If a government run insurance company is not going to provide lower cost health insurance – how does the Senator think that it will have an advantage in the marketplace?
The ABC Dilemma of Health Reform - This question has a simple answer that plagues health care everywhere. The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it. This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem. Hence the many experiments, all of which have been deemed less than satisfactory.
Health-Care Reform: How the Bills Stack Up - In a 14-9 vote largely along party lines, members of the Senate Finance Committee approved its plan to reform the U.S. health-care system. The measure now needs to be reconciled with other proposals. A look at the three bills making their way through Congress:
New York Times: Missing in Action on Health Insurance Lobby Duplicity - Yves Smith - This time, the dubious reporting object lesson is the New York Times, on what is supposedly its most prized beat: Washington DC political reporting. The Times ran two articles that verged on sycophantic in its coverage of the health insurance industry as it moved its chess pieces on the health care reform game board. The Times acted as close to a PR outlet.
Regulatory Capture of the USDA Time to End Regulatory Capture of the USDA by the Meat Packing Industry - A couple years ago, I had a post looking at particularly egregious case of regulatory capture. I noted that the gubmint refused to allow a small meat packing company to test all of its beef for mad cow disease. The reason, of course, is that allowing the company to do so would set up a standard that the market might then expect other companies to meet. (Apparently the folks who believe in a free market don't believe companies should be allowed to compete on quality, where quality is measured through testing.)
Pressed for cash, states let inmates go early - Among new laws passed this year: Colorado now permits low-risk inmates 12 days per month of earned time instead of 10; Mississippi lifted a 180-day cap on earned time; and Oregon raised the amount of time inmates can deduct from their sentences for good behavior from 20 percent to 30 percent.
Stimulus jobs: Is the recovery act working? - (CNNMoney) - Is the largest one-time economic recovery effort in U.S. history creating jobs? According to new reports from governors across the country, it is. Republicans in Congress say it's not, and the debate is getting louder. States and other recipients of stimulus funding have handed in their first assessments of the $787 billion recovery act in recent days. While the Obama administration plans to make these reports public by month's end, some governors have released their initial evaluations.
Don't Cut The Payroll Tax - Rising unemployment is fueling support, primarily among Republicans, for the idea of temporarily cutting the Social Security tax. While superficially attractive, this is actually a dreadful idea that will not stimulate employment at all and will just make Social Security's finances more precarious. The simple idea is this. If the tax were cut, then theoretically businesses would be able to pay workers less without reducing their net wage. By reducing their labor costs, businesses will therefore hire more workers.
A look at another job market number - Atlanta Fed, w/chart - At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low. This is an especially significant issue given the large number of people who are looking for work. The ratio of the number of unemployed to the number of job openings was greater than 6 in August. In contrast, that ratio was under 1.5 in 2007 and previously peaked at 2.8 in mid-2003, suggesting that finding a job right now is extremely difficult...
Alternative Measures of the Unemployment Rate - Cleveland Fed - wonkish; also discusses Alternative Measures of Labor Underutilization and the Employment to Population Ratio
Job competition toughest since recession began - The number of job seekers competing for each opening has reached the highest point since the recession began, according to government data released Friday. The employment crisis is expected to worsen as companies stay reluctant to hire.There are about 6.3 unemployed workers competing, on average, for each job opening, a Labor Department report shows. That's the most since the department began tracking job openings up from only 1.7 workers when the recession began in December 2007.
Sorry, No Jobs, This is California (Reuters) - If you're looking for work, don't look in California. The world's eighth largest economy is still finding its feet after suffering multiple economic shocks, including a housing slump, mortgage crisis and recession. Employers in California, the most populous U.S. state, are expected to keep cutting staff in 2010 as the wider U.S. jobs market recovers.
California Budget Is Already in the Red 10 Weeks After Passage (Bloomberg) -- California Governor Arnold Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said. Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.
Are the state's rich paying their fair share? - LATimes - People earning $75,000 or less pay little or no taxes now. The same people use 99.9% of state social programs.Ergo, millions of residents of this state are getting something for nothing, and the rest pay for their freeloading. Of course I'm kidding. These are popular myths (I owe the formulation above to a reader's e-mail), not facts. Yet, like a cracked windshield, they have the power to distort almost everything we see when we turn our attention to state spending and taxation.
The Job Market, in Charts - NYtimes - You may have heard by now that the unemployment rate reached 9.8 percent in September. There are lots of other ways to gauge the health of the job market, however. Here are a few graphs that show how tough it is out there.
Getting Back To Work - Forbes - What steps should policymakers take to foster job creation and reverse the steep rise in unemployment? Here are four proposals that won't bust the budget or raise tax burdens. 1. Roll back costly benefit mandates for health insurance. 2. Suspend federal minimum wage mandates. 3. Renounce the grossly misnamed Employee Free Choice Act. 4. Experiment with how best to put the unemployed back to work and assess the results.
Bleak U.S. job market boosts military recruitment (Reuters) - Aided by a bleak job market, the U.S. military met all of its recruitment goals in the past year for the first time since it became an all-volunteer force in 1973, the Pentagon said on Tuesday. Military services have been stretched thin by conflicts in Afghanistan and Iraq, giving added weight to recruitment efforts as President Barack Obama considers sending another 40,000 U.S. troops to Afghanistan next year.
Civilians Unemployed - 15 weeks or more - chart - StLouis Fed
It Will Be Years Before Lost Jobs Return -- and Many Never Will - WSJ - The U.S. has shed 7.2 million jobs since the recession began in December 2007. How long will it take for the economy to replace them? And where will the jobs come from? The questions haunt people from the unemployed in San Francisco to officials in Washington. Economists say that when demand picks up -- as it is starting to do -- jobs eventually will follow. History shows that has always been true. But guessing which jobs will be created over the long run is often fruitless. Many of tomorrow's jobs don't exist today.
Unemployment to remain high for years - (see chart) - According to a survey of professional forecasters conducted by the Philadelphia Fed, the unemployment rate is expected to remain abnormally high for at least three more years.
Twenty-five percent of US jobs are offshorable - VoxEU - Allen Blinder - Fear of offshoring may force its way back onto policy agendas soon. This column uses a survey of individual workers to measure the offshorability of particular jobs and says that about 25% of US jobs are offshorable. Surprisingly, routine tasks are not more offshorable but those held by more educated workers are.
Sacrificing the Economy to the Volcano God - The High Priests of Economics tell us that "globalization cannot be stopped," just like the wrath of the Volcano God. We've been told that there is no alternative to neoliberal globalization other than utter ruin. The High Priests tells us that the destruction wrought by "Globalization is good" and should be embraced, and those that denounce multinational corporations are not just wrong, but dangerously wrong. There is no shortage of politicians and media outlets who will tell you that free trade agreements are a "win-win" proposition, and that they will always create more jobs than they will destroy.
Railroad Traffic Doesn’t Support Recovery Notion - Rail traffic “continues to reflect the down economy,” the American Association of Railroads said in its weekly report last Thursday, with total carloads during the week ended October 3 down 17.2% vs the same week a year ago, and 18.1% for the first 39 weeks of the year vs same period in 2008. By comparison, the weekly change a year ago vs 2007 was down 4.7%, and carloads were off 0.2% for the first 39 weeks of 2008.
Bankers Will Follow Hedge Funds to Switzerland - (Bloomberg) -- Geneva? Zurich? Perhaps even Zug, Switzerland? Between deciding whether to be long or short of the dollar, or pondering whether we are in the middle of a bear rally or a new bull market, London’s hedge funds also need to decide which Swiss canton they want to move to. A new top income-tax rate of 50 percent, coupled with heavy-handed regulations planned by the European Union, are prompting the funds to quit the British capital for somewhere more sympathetic to their hypercompetitive brand of capitalism
US trade gap unexpectedly narrows in August - The US trade gap unexpectedly narrowed in August, due to a rise in exports of services and a slump in demand for oil, commerce department figures showed on Friday. The trade deficit fell 3.6 per cent to $30.7bn from July, following a 16.3 per cent jump the prior month, which was the sharpest rise in 10 years. The August data surprised economists who were expecting the deficit to widen because of higher oil prices.
How to Become a Net Steel Exporter - NYTimes ...steel exports during August were about 975,000 tons, while imports were about 800,000 tons. It was the first month in more than half a century that the United States was a net exporter of steel. I suspect it shows just what a recession and a collapse of construction can do for the trade deficit. Data like this provide a reason to think the improvement in the trade deficit is probably over.
The Rise of the Mega-Region - WSJ - When people talk about economic competitiveness, the focus tends to be on nation states. In the 1980s, many were obsessed with the rise of Japan. Today, our gaze has shifted to the phenomenal growth of Brazil, Russia, India and China. But this focus on nations is off the mark. The real driving force of the world economy is a new and incredibly powerful economic unit: the mega-region.
Local Bond Markets: From Strength to Strength - Crisis Talk - The World Bank Group - Most emerging markets are having a better crisis than their G7 counterparts. One sign of robustness in emerging markets is the growing importance of their local bond markets. A new paper from Vox by Heiko Hesse (of the IMF) and Ismali Dalla takes a look at how local-currency bond markets are becoming a viable funding alternative for many emerging market issuers.
BBC: Food production 'must rise 70%' - The Food and Agricultural Organisation says if more land is not used for food production now, 370 million people could be facing famine by 2050. The world population is expected to increase from the current 6.7 billion to 9.1 billion by mid-century. Climate change, involving floods and droughts, will affect food production.
Gates pledges millions to African, Indian farming - Microsoft co-founder turned philanthropist Bill Gates on Thursday will unveil grants totaling 120 million dollars to promote dynamic, home-grown, sustainable agriculture in Africa and India. The grants, which will be made by the Bill and Melinda Gates Foundation working together with specialized agencies, will be announced by Gates in his keynote speech to the World Food Prize Symposium
Is international activism increasing child labour? - VoxEU - Rich-country governments and consumer groups pressure poor countries to discourage child labour through boycotts and international labour standards. Yet child labour continues unabated. This column suggests international activism may be partially to blame, because reducing the use of child labour in the formal sector decreases domestic pressures to prohibit it throughout the economy.
Strong China trade, loan figures back recovery case (Reuters) - China reported surprisingly strong trade figures on Wednesday, providing fresh evidence that the world's third-largest economy is firmly on the path to recovery and that global demand is improving too. Exports in September fell 15.2 percent from a year earlier, beating forecasts of a 21 percent fall, while imports fell just 3.5 percent -- well short of expectations of a 15.3 percent decline, the General Administration of Customs said.
China’s September data suggest that the long-term overcapacity problem is only intensifying -
The release of September trade data earlier this week was pretty interesting, although because of two or three extra working days last month, plus the very big holiday at the beginning of October which might have pushed activity into September, some of the comparisons are misleading. (But) I read the data differently (than most MSM) – not so much as evidence that demand is stronger then we thought but rather that real imports are weaker than we thought.
UPDATE: China, Russia Working On Yuan-Ruble Trade Settlement - BEIJING (Dow Jones)--China and Russia are working on ways to eventually settle their trade with the Chinese yuan and Russian ruble, senior government officials from the two countries said Tuesday. China Vice Premier Zhang Dejiang said both sides should expand local currency settlement in their border areas, and that China and Russia plan to set up a bilateral currency deal. As part of such moves, banks in China will be encouraged to set up outlets in Russia, and Russian banks will be encouraged to do the same in China, Zhang said. At the same time, Russian Deputy Prime Minister Aleksandr Zhukov said Russia and China are working on using their own currencies to settle trade instead of using the dollar and euro...
The Associated Press: Warmer ties for Russia, China with big gas deals - Russia and China are closing in on a mammoth energy deal which could insure that Beijing has the fuel to run its factories and cities and Moscow has a vast new market for its natural gas empire.Russian Prime Minister Vladimir Putin on Wednesday wrapped up a three-day visit to the Chinese capital, during which Russia signed dozens of commercial pacts worth $3.5 billion and set the framework for a separate, multibillion-dollar agreement to build two natural gas pipelines to China from gas fields in Russia's Far East.Together, those pipelines would be capable of supplying China with 68 billion cubic meters (2.4 trillion cubic feet) of natural gas annually, representing a whopping 85 percent of the gas China currently consumes.
Oil Demand in Industrialized Nations Peaked in 2005, Researchers Say - NYTimes.com - oil consumption in developed nations — including the United States, Europe and Japan — probably reached a high point in 2005, well before the current downturn, and consumption has been falling since, according to IHS Cambridge Energy Research Associates, a consulting firm. Thanks to efficiency gains in the transportation sector, aging populations and the growth in renewable fuels and electric vehicles, demand was unlikely to return to its peak level, the Cambridge Energy researchers noted. Oil demand from the 30 OECD countries represents 54 percent of the world’s oil demand.
Oil price surge worries IEA - The rapid increase in oil prices in a concern for the International Energy Agency (IEA), its executive director said today. "We have increased our predictions for demand... but data from the field is not that promising. We are watching carefully how the real economy is moving in [Organisation for Economic Co-operation & Development] countries as well as emerging countries," he added.
China's oil thirst spurs race - China's energy juggernaut is revving up, boosting global oil demand beyond what was expected and creating an opportunity for Canadian producers now focused on the U.S.Analysts recently have revised their forecasts for global crude consumption this year and next, based largely on China's resurgent economy and giving even more support for oil prices that have jumped on the back of a weakened U.S. dollar.
General Motors’ car sales surge in China - uk guardian. General Motors sold a record number of cars in China last month and sales for the first nine months of the year rose 55% to 1.3m vehicles. China overtook the US as the world's biggest car market earlier this year and is now a key battleground for manufacturers who have seen demand in established markets such as Europe and the States fall off in the global recession.
China's super-rich bounce back from financial crisis (Reuters) - China's super-rich have bounced back from the financial crisis with a vengeance, and China now has more known dollar billionaires than any other country bar the United States, according to a new report released on Tuesday. The annual Hurun Report said China has 130 known dollar billionaires, up from 101 last year. The number in the United States is 359 while Russia has 32 and India 24, according to Forbes magazine. China's rich are getting richer, with the average wealth on the list $571 million, up almost one-third from last year
China Nurtures Futures Markets in Bid to Sway Commodity Prices - WSJ - Chinese leaders are concerned that their nation's enormous economic expansion is becoming an excuse for foreign suppliers to inflate commodity costs. So, they hope to use their three futures exchanges to fight back. Government officials say the country is positioning its futures markets to be major players in setting world prices for metal, energy and farm commodities. By letting the world know how much its companies and investors think goods are worth, China hopes to be less at the mercy of markets elsewhere.
The end of affordable oil - Triple-digit oil prices - not an overextended financial system plugged into subprime mortgages - caused the current recession. I have no doubt that in the fullness of time, give us 10 to 20 years of triple-digit oil prices, and we will develop technologies to harness new sources of energy and wean ourself off our carbon dependency. Unfortunately, our rendezvous with triple-digit oil prices is not in 10 or 20 years (it's) in 10 or 12 months.
“The Future of Oil” (Video) - An informative lecture recorded at Stanford University. Roland Horne, Professor in the School of Earth Sciences at Stanford University, discusses the future of oil.
Exponential Money in a Finite World - I recently attended and presented at the Association for the Study of Peak Oil (ASPO) conference in Denver. The entire summary of everything I heard boils down to this: We are already past peak oil. While the implications are enormous, seemingly incalculable and therefore ungraspable, I truly believe that understanding the impact this will have on our economy will illuminate the future for those who take the time to internalize the details.
Why the ‘peak oil’ debate is irrelevant – New Scientist - The debate over exactly when we will reach "peak oil" is irrelevant. No matter what new oil fields we discover, global oil production will start declining in 2030 at the very latest. That's the conclusion of the most comprehensive report to date on global oil production, published on 7 October by the UK Energy Research Centre. The report, which reviewed over 500 research studies, suggests that global oil production could peak any time from right now to as late as 2030. Global production of oil is declining at a rate of 4 per cent per year in existing oil fields and we have very little to replace it with. If we want to maintain global oil production at today's level we would need to discover the equivalent of a new Saudi Arabia every 3 years. Yet discoveries of new oil fields are in decline. Even the "giant" Tiber field recently found by BP in the Gulf of Mexico "will only serve to delay peak oil by a matter of days"
Working harder and harder to keep oil production from falling - ExxonMobil has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade. The dark blue line in the figure shows the company's production each year since 1999. Four years ago, Stuart Staniford noted that ExxonMobil's 2001 annual report predicted 3% annual growth in production between 2001 and 2007. That projection appears as the red line in the graph below; didn't quite come out as planned.
Saudis want US to pay for reducing oil usage - A new gambit by the oil-dealing kingdom would have Western oil guzzlers paying for using less oil. The Saudis say it's the only way they'll be able to afford helping the fight against global warming.The NYTimes frames the Saudi idea as, "if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers." Saudi climate negotiator, Mohammad al-Sabban, described the position as a “make or break” measure for the oil-heavy kingdom in the lead-up to global climate negotiations in Copenhagen
Prickly oil-rich nation seeks submissive, wealthy multinational for lasting relationship – Telegraph -This seems to be the gist of Iran’s attempt to woo foreign investors, after its deputy oil minister told reporters that it is apparently “ready” for a relationship with the private sector. “Many companies that belong to the government now will become private very soon,” Azizollah Ramazani said yesterday at the World Gas Conference in Buenos Aires. “I think the Iranian energy sector is very interesting for foreign companies, including American companies.”
Energy crisis is postponed as new gas rescues the world - Telegraph - The World Gas Conference in Buenos Aires last week was one of those events that shatter assumptions. Advances in technology for extracting gas from shale and methane beds have quickened dramatically, altering the global balance of energy faster than almost anybody expected. Tony Hayward, BP's chief executive, said proven natural gas reserves around the world have risen to 1.2 trillion barrels of oil equivalent, enough for 60 years' supply – and rising fast.
Oil on Ice - The Atlantic - Denmark will end up reducing its annual subsidy to Greenland—about $11,000 per person, representing about 60 percent of the island’s budget. Hence the high hopes for oil revenue. Some estimates, including those of the U.S. Geological Survey, suggest Greenland’s coastal waters could hold anywhere from 16 billion to 47 billion barrels of oil, or 800,000 barrels for every man, woman, and child. That would mean a staggering leap in income for Greenlanders, who until two generations ago were mostly subsistence hunters and fishermen. Then there’s the fear that Greenland could become the Nigeria of the Arctic...
A safe operating space for humanity : Article : Nature - Although Earth has undergone many periods of significant environmental change, the planet's environment has been unusually stable for the past 10,000 years1, 2, 3. . This period of stability — known to geologists as the Holocene — has seen human civilizations arise, develop and thrive. Such stability may now be under threat. Since the Industrial Revolution, a new era has arisen, the Anthropocene4, in which human actions have become the main driver of global environmental change5. This could see human activities push the Earth system outside the stable environmental state of the Holocene, with consequences that are detrimental or even catastrophic for large parts of the world.
New fears for species extinctions - BBC - Scientists have warned of an alarming increase in the extinction of animal species, because of threats to biodiversity and ecosystems. The threats are posed by pollution, climate change and urban spread. The comments come two days ahead of a meeting of the Diversitas group of global experts on biodiversity in the South African city of Cape Town. Group members say world leaders have failed to honour commitments on reducing the loss of biodiversity. These latest warnings are stark. They point to statistics that demonstrate that the extinction rates of animal species are much higher than had been predicted only a few years ago.
Our Global Ponzi Economy - Although the functioning of the global economy and a Ponzi investment scheme are not entirely analogous, there are some disturbing parallels. As recently as 1950 or so, the world economy was living more or less within its means, consuming only the sustainable yield, the interest of the natural systems that support it. But then as the economy doubled, and doubled again, and yet again, multiplying eightfold, it began to outrun sustainable yields and to consume the asset base itself.
Can Offshore Drilling Save the Climate Bill? - the bill that Kerry and Graham are promoting is a different bill than the Waxman-Markey bill that the House approved. Although not yet fully formed, it appears to include support for both offshore drilling and nuclear energy, which the Waxman bill did not. It is really quite similar, actually, to the "all-of-the-above" approach advanced by John McCain on the campaign trail last year. Let's focus on the first of those two things: offshore drilling. How many additional votes might it buy the Democrats? There are 23 U.S. states with at least some ocean coastline; let's briefly consider the political implications of expanded drilling in each of them:
Seven reasons for optimism about the Senate climate bill - Conventional wisdom says that the Kerry-Boxer clean energy bill faces a long uphill slog against unlikely odds. Many Senators, especially those in the “center,” think it’s unpopular. They think it will raise prices during a recession. They think it will unfairly hurt their states. They see little political upside and lots of possible downside. The odds in Vegas may still be against the bill, but there are reasons for cautious optimism. Seven of them, actually.
White House Pretended EPA Email Outlining ‘Unequivocal’ Global Warming Threat Was Spam - The New York Times revealed yesterday that the White House’s global warming denial reached levels of absurdity that would be hilarious if the stakes weren’t so high. Last December, senior EPA officials tell the Times, White House officials literally refused to open the e-mail from the EPA that concluded that “greenhouse gases are pollutants that must be controlled.”
Empty Hands on the Climate, and What Obama Needs to Do - Robert Reich - Climate change legislation is moving forward -- but big polluters have shaped much of it. As I noted recently, the Waxman-Markey climate bill, passed by the House last June, gives away 85 percent of pollution permits to the nation's biggest polluters, and the "cap" it proposes on overall carbon emissions would cut greenhouse gas emissions only by an estimated 2 to 4 percent by 2020 compared to the UN reference year of 1990...
Environmental Economics: Benefit-cost analysis vs economic impact analysis - Economic impact analysis (EIA) counts up money spent, taxes paid and jobs received and proposes that they are all benefits of some activity. Benefit-cost analysis (BCA) looks more carefully at that spending and recognizes that some spending is benefit, some is cost and that taxes are simply transfers. It compares benefits to costs to determine efficient policies. It is easy to confuse benefits (i.e., consumer surplus) and impacts (i.e., spending) unless you explicitly recognize standing (i.e., whose benefits and costs count). For example, suppose a local economy gets most of its income from the outdoors (forest, beach, etc). Losing a good chunk of the outdoorsy area might reduce tourist spending and local income significantly. That tourist spending, however, will simply go somewhere else..
The Economic Effects of Reduced Greenhouse-Gas Emissions - CBO - Reducing the extent of climate change would entail substantial reductions in U.S. emissions and in emissions from other countries over the coming decades. Achieving such reductions in this country would probably involve some combination of three broad changes: transforming the U.S. economy from one that runs on carbon-dioxide-emitting fossil fuels to one that increasingly relies on nuclear and renewable fuels; accomplishing substantial improvements in energy efficiency; and implementing the large-scale capture and storage of carbon dioxide emissions.
Entergy CEO Warns Of Humanity’s Extinction If Climate Legislation Not Passed - Last week, over a hundred CEOs of American companies broke with the U.S. Chamber of Commerce to lobby Congress to “pass comprehensive climate change and energy policy legislation this year.” The U.S. Senate is now considering the Kerry-Boxer Clean Energy Jobs and American Power Act, which would set a market-based limit on global warming pollution. Participants in a Clean Energy Economy Forum at the White House included J. Wayne Leonard, the Chairman and CEO of Entergy Corporation, the utility giant based in New Orleans, Louisiana. Speaking at the White House event, Leonard called for action on climate change and clean energy not just for economic reasons but starkly moral ones
Some Coal Plants Cleanse the Air at the Expense of Waterways - NYTimes - But the cleaner air has come at a cost. Each day since the equipment was switched on in June, the company has dumped tens of thousands of gallons of wastewater containing chemicals from the scrubbing process into the Monongahela River, which provides drinking water to 350,000 people and flows into Pittsburgh, 40 miles to the north.
Pentagon, Others Start Ramping Up For Climate Change - War Games Start to Include Climate Change - U.S. military and intelligence officials are factoring the symptoms of climate change into their estimates of where and what kind of conflicts are in store.
Last time carbon dioxide levels were this high: 15 million years ago, scientists -report - You would have to go back at least 15 million years to find carbon dioxide levels on Earth as high as they are today, a UCLA scientist and colleagues report Oct. 8 in the online edition of the journal Science."The last time carbon dioxide levels were apparently as high as they are today — and were sustained at those levels — global temperatures were 5 to 10 degrees Fahrenheit higher than they are today, the sea level was approximately 75 to 120 feet higher than today, there was no permanent sea ice cap in the Arctic and very little ice on Antarctica and Greenland,"
Carbon emissions must peak by 2015: UN climate scientist - The UN's top climate scientist on Thursday urged a key conference on global warming to set tough mid-term goals and warned carbon emissions had to peak by 2015 to meet a widely-shared vision.Rajendra Pachauri, chairman of the Nobel-winning Intergovernmental Panel on Climate Change (IPCC), said the talks in Copenhagen in December must focus on 2020, a far more important target than mid-century"It is not enough to set any aspirational goal for 2050, it is critically important that we bring about a commitment to reduce emissions effectively by 2020," he said.
Russian climate goal weak as "methane bomb" ticks - Reuters - The snows are late in coming on the Arctic Yamal peninsula where moist, dark permafrost entombed for 10,000 years crumbles into the sea at the top of the world.Western scientists and environmentalists say collapsed river banks, rising tide waters and warmer winters in northwest Russia are clear signs of climate change, but they add Russia is in denial, ignoring a potentially disastrous "methane bomb".
- A complete list of everything that's caused by global warming
A new route beyond the Last Frontier - The record shrinking of the polar ice cap is turning the forbidding waters at the top of the world into important new shipping routes. Four other cruise ships also docked in Nome recently. The Coast Guard deployed its first small Arctic patrol vessels last year. Fleets of research vessels steamed north all summer, while ships surveying the vast oil and gas deposits under the Arctic seabed have talked of using Nome as a base.
Major Arctic Ice Survey Finds a Significant Drop in Ice Thickness - Yale - The Catlin Arctic Survey, carried out last spring, trekked for 73 days across 280 miles of the northern Beaufort Sea to the North Pole, determined that the average thickness of ice in the area was close to six feet. Analyzing the data, ice experts said that much of the sea ice is only about a year old, replacing the thicker ice, formed over many decades, that once covered the sea.
Arctic to be ‘ice-free in summer’ - BBC - The Arctic Ocean could be largely ice-free and open to shipping during the summer in as little as ten years' time, a top polar specialist has said.
"It's like man is taking the lid off the northern part of the planet," said Professor Peter Wadhams, from the University of Cambridge. Professor Wadhams has been studying the Arctic ice since the 1960s
Melting glaciers bring 1980s pollution revival - Nasty chemicals banned in that decade are also on the list. Unfortunately, melting Alpine glaciers are generating a revival of toxic organic pollutants. Christian Bogdal and colleagues at the Swiss Federal Institute of Technology in Zurich studied levels of pollution in sediment at the bottom of the Oberaar lake in Bern, Switzerland.The flow of pollutants into the lake peaked in the 1970s, mainly due to the production of plastics, electronics, pesticides and fragrances. The levels had declined during the 1980s and 1990s when people realised that these compounds were toxic and they were banned.
Luzhkov Takes Snow Fight to the Sky - The Moscow Times - Moscow will blast clouds from the sky this winter to save money on snow removal, a city official said Wednesday, but the plan threatens to anger the surrounding region, which would have to cope with the extra powder. Airborne snowfall prevention will save the city about 300 million rubles ($10.2 million) this winter, said Andrei Tsybin, head of City Hall’s department for public works and utilities. Moscow is ready to spend about 180 million rubles to disperse clouds “in the event of very big and serious snowfall,” he said at a news conference.
Rising Sea Levels Are Increasing Risk Of Flooding Along South Coast Of England - A new study by researchers at the University of Southampton has found that sea levels have been rising across the south coast of England over the past century, substantially increasing the risk of flooding during storms. Their work has added collectively about 150 years worth of historic data to the existing record of English Channel sea-level change and extended the data along the south coast. Their findings are published in the latest edition of the journal Continental Shelf Research.
Desperate times call for …er… repeat announcements - Gordon Brown has made quite a good speech today, outlining how he believes resuming economic growth is the key to sorting out the public finances. On this he is in tune with most economic opinion. As I have previously noted in the paper, you need to have your wits about you whenever Mr Brown starts talking new numbers. His reputation for repeat announcements, inflated claims and double counting precedes him.
House prices ‘have further 17pc to fall’ - Telegraph -The recent rises in house prices will prove to be a false dawn because of the broader problems facing the British economy, Fitch Ratings said yesterday. The ratings agency predicted that house prices in Britain would fall by around 30pc in total from the October 2007 peak, indicating that they have a further 17pc left to fall. The current average house price of £162,000 is 13pc lower than that peak, Fitch said.
Lights dim for American banks in London, but rivals rush to fill the gap - TelegraphLondon seems to be losing favour with US banks. JP Morgan and Citigroup have just followed Merrill Lynch in parting ways with their top bankers in the British capital.
EU warns UK’s debt is ‘unsustainable’ - A damning report by the European Commission on the long-term prospects for Britain's public finances warns that Britain is at "high risk" of running unsustainable debts – implying that the nation will be unable to service its debts and that only default or high inflation can relieve the burden. The Commission's 2009 Sustainability Report says that Britain will suffer a "sustainability gap" of 12.4 per cent of GDP – meaning tax rises or spending cuts amounting to close to £200bn a year.
BOE Should Buy as Much as 200 Billion Pounds in Bonds, BCC Says -(Bloomberg) -- The Bank of England should expand its bond-purchase program to as much as 200 billion pounds ($316 billion) next month to secure Britain’s recovery from recession, the British Chambers of Commerce said. “With quantitative easing, there’s still scope for some more,” David Frost, director general of the BCC, said in a Bloomberg Television interview. “This fragile recovery we’ve started to see really needs to be nurtured, so we’re saying perhaps another 25 billion pounds could be put into that.”
Talking down the pound - The UK's mountain of public and private debt overshadows the pound, as does the nagging knowledge that the size of the country's banking sector in relation to her national income is one of the highest in the world. Taken together, the liabilities of Britain's banks amount to something like 450 per cent of her gross domestic product – far higher than in the US (100 per cent) or the rest of Europe (typically 200 per cent or 300 per cent). We may not have to rescue any more banks, but no one can be quite sure. Again, unhelpfully for sterling, is the currency and maturity mismatches between the UK's external assets and liabilities, as if the whole country were a badly exposed bank.
Pity the pound - World Bank Crisis Talk: A significantly devalued dollar and pound certainly won't bode well for the eurozone's attempt to export its way out of the recession. The US has a key benefit over its British counterpart: size. Markets can abandon sterling, with little ramifications for the global economy. The same cannot be said for the dollar. Nevertheless, policymakers in the United States would be circumspect to take note of the woes on the other side of the Pond.
Why it’s a good thing the pound is weaker - One of life's current mysteries is why people are so surprised at the abrupt decline of sterling, and in particular the weakness of the past few weeks when the markets came to the conclusion that the Bank of England would like to see the rate lower. Tactically it makes far more sense to get sterling down a bit now, so that those buyers might reasonably look forward to a bounce next year. Our debt will be a lot easier to sell if we can offer the hope of a bit of currency appreciation as well.