Fed’s Strategy Reduces U.S. Bailout to $11.6 Trillion -- The Federal Reserve decided to keep pumping $1.25 trillion of new money into the mortgage market to focus on rescuing the U.S. economy as the financial system revives and banks ask for less help. The Fed is allowing some of the 10 support programs it created or expanded after the credit crisis began in August 2007 to expire or shrink. That caused the first decline in the amount of money the U.S. has committed on behalf of taxpayers to end the recession, according to data compiled by Bloomberg.
Econbrowser: Federal Reserve reverse repurchases - Here I offer some thoughts on Bloomberg's account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed's reverse repo operations. First, a little background. The traditional tool of monetary policy is an open market purchase, in which the Fed purchased U.S. Treasury securities that had previously been held by someone in the private sector. The Fed would pay for those securities by crediting deposits in an account that the selling bank had with the Federal Reserve. These reserve deposits of banks represent claims that the bank could use, if it wished, to withdraw green currency from the Federal Reserve. The traditional understanding of monetary policy was that the Fed would use open market purchases to achieve its desired objectives for the overnight interest rate and the money supply.
The Supplemental Financing Program - Cleveland Fed - "At the time, a concern about the mounting excess reserves, and thus the monetary base, began to surface. In normal times, the Federal Reserve could have drained the excess reserves by selling Treasury securities to the public. With no public market for Treasury securities, though, an alternative was created. The Treasury announced its Supplemental Financing Program (SFP) two days after the collapse of Lehman Brothers. Established to help the Federal Reserve manage the expansion of the reserve accounts being created by the infusion of new liquidity, the program is actually an extension of the typical Treasury deposits held at the Federal Reserve...
Hawkishness Dominates - Fed Watch -The spate of FedSpeak in recent days leaves one with the uneasy feeling that monetary policymakers are more willing to use unconventional monetary policy to support Wall Street than Main Street. The most hawkish appear eager to normalize policy at the earliest opportunity possible, and even the dovish, grasping onto green shoots, appear to think they have done enough to support recovery. It is as if the FOMC has concluded that the risks are now entirely one-sided toward inflation. To be sure, Bernanke & Co. have shifted direction often during the past two years. But the FOMC looks to be developing something of a blind spot with regard to downside risks to the economy, suggesting that even if the economy stagnates in a jobless recovery, the bar to further easing is very high.
Federal Reserve Eyes the US Money Market Funds - The Fed is holding a significant amount of assets on its books in the form of Treasuries. For example, the Fed has purchased an enormous amount of US Treasury issuance in the past six months as part of its quantitative easing program, aka monetization. It has also taken on tranches of mortgage debt obligations from the banks. This has added significant short term liquidity to the system, much of it held by the banks for interest at the Federal Reserve itself. At some point the Fed will wish to reduce the levels of liquidity in the system.
The Fed draining reserves? - Basically, the Fed will transfer some of its assets to the banking system via short-term loans taken out with its Primary Dealers, presumably offering standard (Treasuries) and less standard (MBS or agency bonds) assets as collateral. Reverse repurchase agreements simply slosh around the assets (MBS, agencies, and Treasuries) between the Fed and the Primary Dealers, rather than removing the assets from the Fed’s balance sheet permanently. Eventually, though, the Fed must sell the securities outright onto the open market. This is all hot air for now. How can the Fed soak up the expansionary liquidity, let alone unwind $1 trillion in assets, when the banking system is still shedding pounds?
Insatiable Demand For US Debt, or Something Else? - Recently the Fed reiterated that their $300 billion program of buying long-dated Treasury Bonds would end on schedule, meaning as soon as it hit $300 billion. Well, that's been achieved, so according to recent Fed statements, the program is over (incl graphs, balance sheet totals). This is a critical development, because the ability of the US government to continue to fund its massive deficits (at favorable rates) requires that each Treasury Auction be "well bid." The Fed has been a major participant, and so we might reasonably wonder who will fill the Fed's shoes. So according to its recent statements, the Fed is all done buying long-dated Treasuries. I say 'apparently' because the Federal Reserve website just announced its next raft of Long-Dated Treasury Purchases.
World Bank Chief Takes Shot at The Fed - WSJ- Criticism of the Federal Reserve is mounting on many fronts. Rep. Ron Paul (R., Texas) has seen his book, “End the Fed,” climb on best seller lists. And now the president of the World Bank, Robert Zoellick, is taking his shots.
In a speech delivered at Johns Hopkins University Monday, Mr. Zoellick said central banks around the world fell down as regulators. He questioned whether Congress should give the Fed any more power as it looks for ways to revamp financial sector oversight. “Central banks failed to address risks building in the new economy,” Zoellick said.
Zoellick Favors Power for Treasury, Not Fed - WSJ - World Bank President Robert Zoellick questioned the wisdom of giving the Federal Reserve more power over banks, as the Obama administration has proposed. In the text of a speech he is to deliver Monday at the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University, Mr. Zoellick says central banks around the world fell down as regulators -- and that the Treasury, which is more accountable to Congress, should be given the authority to regulate big financial institutions, not the Fed. see also: After the Crisis? (the text of Zoellick's speech)
Wink, Wink, Nod, Nod - With benign neglect with the continued depreciation of the US$ the unofficial policy of US officials, it’s been left to our trading partners to verbally jawbone a reversal. Ahead of the G7 meeting this weekend, Trichet said “excess volatility” in the FX market may have “adverse implications.” This is code for “I don’t like the Euro going straight up” and “the debasement of the reserve currency of the world is probably not healthy for global economic balance.”
Fed’s Alvarez Says Audits Could Lead to Higher Rates (Bloomberg) -- Federal Reserve General Counsel Scott Alvarez said audits of monetary policy by the U.S. Congress could lead to higher interest rates and reduced confidence in central bank policy. Congressional audits of monetary policy could “cause the markets and the public to lose confidence in the independence of the judgments of the Federal Reserve,” Alvarez told the House Financial Services Committee today in response to a question from Representative Dennis Moore, a Kansas Democrat. Alvarez said in his prepared remarks the audits would probably “chill” the central bank’s discussions on interest rates
America turning Japanese? – FT (w/ chart) - Since the middle of last year, the Fed has effectively been quantitatively easing, although in the more comprehensive and dynamic form of “Credit Easing.” The Fed concentrated on both the mix of assets it purchased and on increasing bank reserves. Combined with the other liquidity and lending programs, the Fed more than doubled its balance sheet in a matter of months. By comparison, The BoJ’s response was much less forceful, leading to prolonged stagnation in equity markets. Whether or not the Fed’s effort will inhibit similar results remains to be seen. So far, however, equity markets have acted similarly.
Auditing the Fed - Ron Paul finally got his wish yesterday and the House Financial Services Committee held a hearing on his legislation to audit the Federal Reserve. There were only two witnesses: the Fed's general counsel and Tom Woods, a historian from the Ludwig von Mises Institute. The testimony is available here I urge those curious about this issue to read both statements. I think it is abundantly clear that this is a crackpot idea. The Fed is already thoroughly audited in every area except two: monetary policy and dealings with foreign central banks. The only purpose of having additional audits of the Fed is to undermine its independence precisely with regard to these two areas. If Woods presents the best argument for doing so, the argument is very shallow indeed.
Auditing the Fed: Redux - Sorry, Dr Paul, but an audit would expose nothing. See, this is how accounting works: If the rules say 1 plus 1 equals 15 bazillion, then 1 plus 1 equals 15 bazillion, even if logic dictates that 1 plus 1 should be 2. So in the case of Federal Reserve accounting, you have a demonic hybrid of governmental, GAAP, and Bizarro World reconciliation. How in the hell could any auditor make sense of this labyrinth of madness?
Out-of-the-Box Papers by New Minneapolis Fed President - WSJ - The Minneapolis Fed has hired a very unconventional University of Minnesota professor to serve as its new president. Narayana Kocherlakota served as chairman of Minnesota’s economics department for three years. He’s written lots of out-of-the-box papers, including this one in which he argues that money is a primitive form of memory whose main purpose is to help individuals and businesses keep track of their transactions. So now that he’s at the Fed, he’ll be printing memory?
Putting Klingonomics to the Test - Arnold Kling has been promoting a macroeconomic theory he calls "Recalculation" which takes a controversial view on the efficacy of monetary policy. You can read his discussion of recalculation macro here, here, and here. Within these discussions he summarizes his view of monetary policy as follows: In the short run, the economy is going its own way, regardless of monetary policy. Higher M leads to lower V, and vice-versa. In the long run, a significant change in the rate of money creation causes a similar change in the rate of inflation. However, the lag is long and the effect on the rate of Recalculation is small and of indeterminate sign...
The hub and spoke model of money --The good that serves as medium of exchange in a monetary exchange economy is like the city that serves as the hub of a hub and spoke model of airlines. If Peoria is a spoke, and Peoria is closed, nobody can fly to or from Peoria. If Atlanta is the hub, and Atlanta is closed, nobody can fly anywhere. Money is like Atlanta; every other good is like Peoria. Let's tighten the analogy a little....
Fed Held Back as Evidence Mounted on Subprime Loan Abuses - But during the years of the housing boom, the pleas (of abuse) failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.
The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.
FDIC Seeks $45 Billion in Prepayments from Banks - From the FDIC: The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.
MarketWatch has more details: Fund to protect deposits has shrunk to low levels
FDIC Bankrupt? Uh huh. - From CNBC's "Breaking News" banner: FDIC to Ask Banks to Pre-Pay Premiums to Inject Cash Into Deposit Insurance Fund (story developing) "Ask"?
If the FDIC Is Broke, Why Are They Still Issuing Guarantees? -- The FDIC's release Tuesday gave us some serious insight into just how bad the financial situation is: the FDIC's estimates for losses continue to grow, and their time frame for replenishing the DIF (Deposit Insurance Fund) continues to be pushed out. In addition, the assets held by the FDIC are deteriorating in quality. The scariest thing to me is that the FDIC continues to try to disguise the health of the banks by using accounting tricks - like allowing them to spread out the prepayment of FDIC fees over three years when recognizing the costs, and failing to charge the banks a special assessment to replenish the DIF.
The FDIC's Clever Accounting Trick - How will the FDIC replenish its coffers without Sheila Bair suffering the indignity of groveling in front of Tim Geithner? Clever accounting.The plan is for the FDIC to require banks to pre-pay three years of assessments. As with everything else in the economy (cash for clunkers, the $8,000 homebuyer tax credit), the idea is to pull it forward.The FDIC gets the cash now, the banks take a hit -- but one that they can expense over three years, as Karl Dnninger points out -- and voila, free money.
Banks Have Us Flying Blind on Depth of Losses (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital. It failed last week. How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
Social Security Net Outflows in 2010 and 2011: Day of Reckoning Edition - Surprise! Swamped by a 23 percent increase in benefit applications fueled by a surge in early retirements (age 62-65), higher disability payment requests and declining payroll withholdings resulting from generationally high unemployment and underemployment, Social Security Administration officials for the first time in the OASDI program's history now expect to pay out more in benefits the next two fiscal years than are received in contributions.
U.S. Ratings Fraud Continues - It becomes increasingly obvious each day that it is “business as usual” for the U.S. financial crime syndicate. Bankster “bonuses” have returned to their obscene levels. Most of the “too-big-to-fail” banks have actually been allowed to get bigger. And ratings-fraud continues unabated with respect to the so-called “credit rating” agencies.This is only one of the outrageous aspects of this obvious scam. Ratings agencies are paid by the sellers of these products. Thus, the ratings agencies don't even pretend to independently evaluate these products. The companies selling these products have to explain to the ratings agency how they should value them. If a particular ratings agency doesn't supply the appropriate “rubber-stamp” for the toxic security in question, then they don't get any future business. It is a scam which is openly fraudulent, yet nothing has been done.
Moody's secretive nature described to Congress (Reuters) - Lawmakers slammed a "culture of secrecy" at Moody's (MCO.N) and expanded a credit ratings industry probe to find out why securities regulators ignored a tip that Moody's managers routinely put profits above ratings quality.The allegations about Moody's business practices came as Congress considered legislation to curtail rating companies' practices and expose them to greater legal liability if their rating assessments prove to be wrong.Lawmakers blame credit raters for fueling the financial crisis by assigning top ratings to mortgage-backed securities that later crumbled in value.
Reform the Market for Ratings Agencies - I think the larger issue with the ratings agencies isn’t so much that they’re underregulated as it is that regulations we’ve put on other actors in the marketplace have created a ratings agency cartel. The underlying the premise of the idea that private ratings agencies can work is that agencies that fail to do a good job will fail as businesses. That can’t happen if there are only three ratings agencies and it’s impossible for new competitors to enter the market
Fixing the Ratings Agencies - No question about it: over the past decade ratings agencies were, at best, negligent, and at worst, perpetrators of outright fraud. "It could be structured by cows and we would rate it" is surely one of the all-time great quotes of the bubble era. And the fact that agencies shared their models with issuers so they'd have an easier time tweaking their products to get high ratings is prima facie evidence of corruption. Slapping a AAA rating on every cobbled-together junkpile that slithered its way out of a Wall Street structured finance group certainly helped fuel the fantastic expansion of risky investments that all came crashing down in 2008.
Bill Would Make Ratings Agencies Share Liability - NYTimes - A key House lawmaker wants to make credit rating agencies responsible for each other’s assessments by holding them collectively liable for inaccuracies. A new draft bill by the lawmaker, Representative Paul Kanjorski, a Pennsylvania Democrat, includes a plan meant to address what critics contend is the crux of the current system’s problem: companies that issue securities — as opposed to investors — pay the agencies for ratings of those securities
No Reform, Just A Cosmetic Patch For A Discredited, Flawed Regime - The world's leading nations have agreed "tough new regulations" to prevent another global financial crisis, declared Barack Obama, as the two-day meeting drew to a close. The G20 has "taken bold and concerted action to forge a new framework for strong, sustainable and balanced growth". Obama's oratory was typically impressive. The trouble is, it wasn't true. No specific rules on banks' capital reserves were announced at this summit. No leverage caps were agreed. Nothing "bold" was done to lessen systemic dangers or overhaul the global regulatory regime.
Was The G20 Summit Actually Dangerous? -It is easy to dismiss the G20 communique and all the associated spin as empty waffle. Ask people in a month what was accomplished in Pittsburgh and you’ll get the same blank stare that follows when you now ask: What was achieved at the G8 summit in Italy this year? Should we just move on – back to our respective domestic policy struggles? That’s tempting, but consider for a moment the key way in which the G20 summit has worsened our predicament.
Who's in charge of the punchbowl? - Economist - REAL TIME ECONOMICS has written up a speech given by Charles Evans, president of the Chicago Fed, in which he argues that the Federal Reserve should not be in the business of bubble popping. What Mr Evans noted...Instead, he says, the job of addressing bubbles should be handled by regulators, and by rule changes that facilitate the winding down of too-big-to-fail institutions.
IMF: $1.5 TRILLION Coming In Further Bank Writedowns - Not that the market seem particularly concerned about bank health, but the IMF, in its latest Global Financial Stability Report, throws out the number $1.5 trillion for how much more debt banks have yet to write down, a large chunk of which will come from (non-UK) Europe. However, this masks, somewhat the real issue, which is writedowns as a percentage of the banking system.
I.M.F. Calls for Overhaul of Financial System - NYTimes - To head off a new chapter in the crisis, the I.M.F. called on governments to adopt regulations to strengthen bank capital and establish effective policies to clear bad loans off bank balance sheets. It also called for “great care” in winding down crisis-driven rescue policies to avoid bringing on a new crisis.
World Bank to buy distressed assets - FT -The World Bank group is set to launch a $5.5bn initiative to raise funds to buy distressed assets from banks in emerging and developing markets, in a push to clean up their balance sheets and boost credit flows. The move came as the IMF warned on Wednesday that non-performing loan ratios of emerging Europe banks could double from their current level. The IFC, the Bank’s private sector arm, will commit $1.5bn of its own funds to the new scheme and hopes to raise $4bn from partners including private sector investors.
The case for issuing SDRs regularly - VoxEU - Do IMF special drawing rights have a role in international financial reform? This column argues that SDRs should play a large role in providing additional international liquidity, substituting for a substantial share of countries’ reserve currency holdings. It says that SDR allocation offers the surest way of reducing the inconsistency in payments objectives that currently looks to be the biggest obstacle to a strong recovery in the global economy.
Glass-Steagall 2.0: The American People Deserve An Explanation - As a candidate, President Obama decried the removal of Glass-Steagall without an adequate regulatory replacement. Now, Secretary Geithner has proposed a revised regulatory structure, that relies on a super-regulator to oversee entities that are “too big to fail.” Last week, in testimony before the House Financial services Committee Paul Volcker, the former Chairman of the Federal Reserve, expressed skepticism about the concept of adequately regulating banks that were “too big to fail” and suggested a system that separated high risk activities from commercial banking. He effectively advocated an updated version of the Glass-Steagall Act, although Volcker avoided using this term. As discussed below, I agree.
Glass-Steagall 2.0? - I agree with Judson that the heart of the problem is large, complex financial institutions gambling with taxpayer money. I agree that what I describe as the strategy to "regulate the heck out of those institutions" is not a promising approach. My mantra is that we need to make failure a credible and viable option for any private firm. At some level, that requires unbundling critical systemic functions, like check processing, from risky betting functions, like taking interest-rate risk or credit risk. Whether that requires creating separate corporate entities or making a cleaner separation within firms is not clear.
FT - US banks face short-term borrowing rules - US financial regulators are working on new rules aimed at helping banks avoid the sudden funding withdrawals that doomed Bear Stearns and Lehman Brothers, officials say.The deliberations represent a deepening of the US regulatory response to the financial crisis. In recent months, regulators have focused on making sure banks have sufficient capital to withstand the kind of financial shock that hit them last year. Now, regulators are considering proposals to prevent banks from growing overly dependent on short-term borrowings...
Bernanke Supports Creation of Group of Financial Regulators - NYTimes — The chairman of the Federal Reserve, Ben S. Bernanke, told skeptical lawmakers on Thursday that the Fed should be put in charge of regulating the nation’s biggest financial institutions.Federal Reserve Chairman Ben S. Bernanke spoke during a hearing of the House Financial Services Committee on Thursday. But in a nod to critics who have expressed alarm about the Fed’s immense power during the financial crisis, Mr. Bernanke said responsibility for monitoring broader risks in the financial system should go to a council of regulators.
Funds Try to Ward Off New Regulations -- NYTimes - Hedge funds, trying to separate themselves from the big Wall Street banks, are stepping up their efforts to head off new regulation from Washington.Representatives of the industry’s main lobbying group met on Wednesday with the Treasury secretary, Timothy F. Geithner; Ben S. Bernanke, the chairman of the Federal Reserve; and Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, to lay out their views of President Obama’s sweeping package of reforms to the nation’s financial regulatory system.
Do Regulators Have Distorted Incentives?: Beatrice Weder di Mauro Roundtable at Free Exchange The Economist - The lead article by Beatrice Weder di Mauro argues that regulators need better incentives::The dog that didn't bark, by Beatrice Weder di Mauro
Followed by these responses:
Prioroties at the Top, by Mark Thoma
Devil in the details, by Charles Goodhart
No perfect solution, by Daron Acemoglu
The Danger of Capture, by Simon Johnson
Remove the culpable, by Raghuram Rajan
Better Regulators Needed, by Harvey Pitt
Uncomfortable Institutions, by Tyler Cowen
Not just a failure of markets, by Albert Alesina
Tying the Fed’s hands since regulators have a tendency to get captured, don’t let give them too much discretion — and any changes in regulatory oversight should be done explicitly, through changing regulations, rather than by nod-and-wink.Interestingly, this is exactly the route chosen by the Obama administration to implement the Credit Card Act. Rather than simply impose new rules directly on credit card companies, the Act forces the Fed to impose those rules.
The Fight to Fix the Financial System Comes Down to This – The next couple of months will be crucial in determining the shape of the financial system for decades to come. And so far, the signs are not encouraging. The Obama administration is trying to refocus our attention on regulation, beginning with the president's speech in New York two weeks ago. But in a clear indication of trouble ahead, Frank signaled his intention last week to scale back the proposed Consumer Financial Protection Agency, one of the pillars of the administration's reform proposals.
Obama’s Too-Big-to-Fail Plan Is Too Dumb to Pass (Bloomberg) - Treasury Secretary Timothy Geithner’s appearance in Congress last week to explain how President Barack Obama would overhaul financial regulation elicited the most striking sign yet that the wheels have come off the administration’s economic-policy team. The White House had proposed, and Geithner was ready to defend, such a radical expansion of government power that even Barney Frank, the ultra-liberal congressman from Massachusetts, felt compelled to object that it went too far.
Wall Street Gets Protection From Itself In Proposed New Rules - It is important for Americans to discern the difference between what the Obama administration says and Wall Street hears. Dr. B. helps us understand that while new financial regulations sound good on the surface, they really serve to preserve Wall Street's dominance at the expense of the American people.
The beginning of the end of meaningful regulatory reform - The erosion of the Obama administration’s regulatory-reform plans has now begun in earnest: At a hearing before the House Financial Services Committee, Treasury Secretary Timothy F. Geithner announced that the administration had dropped one provision in its plan for a consumer financial protection agency — a requirement for banks and other financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards. There’s no good reason for this capitulation, except for that the financial lobby has so effectively captured Congress...
Vanilla is a commodity - Do we have no fight left in us at all? Mike Konczal and Kevin Drum are excellent as always, but must we really write eulogies? Is one of the best regulatory proposals so far dead just because a single well-bought congressman says so?Extracting the vanilla from the CFPA is not, as Felix Salmon put it "the beginning of the end of meaningful regulatory reform". It is the end of the end. Vanilla products were the only part of the CFPA proposal that was likely to stay effective for more than a brief period...
Vanilla Option, Extra Scoop - Interfluidity is back (and stay back!) with a post about the vanilla option, which is highly recommended. I want to expand on two points he brings up. I’ll write about this in a geekier fashion tomorrow, but if you are buying a commodity to be delivered in the future, one that hasn’t even been made yet – cattle, apples, corn, etc. – it’s incredibly important to have it clear what the quality is of the product at the time of the bidding....
Vanilla, iced - Economist - MANY bloggers out there are lamenting the demise of a part of the Obama administration's proposed regulatory reform package that would have required financial institutions to offer "plain vanilla" products alongside their other, more complex options. The widely used example is that a bank discussing mortgage options with a potential borrower would have had to put on the table the standard 30-year, fixed-rate, no-tricks loan, alongside ARMs and Option-ARMs, and NegAms, and so on...
FT - Free us from imprudent risk-aversion - There is no reason to believe the world would be better if financial regulators provided extra incentives to those who, perceived as having a lower default risk, are already favoured by lower interest rates, or punish further those who, perceived as more risky, are already punished by higher interest rates. In fact, the opposite is probably true.According to the bank regulations of the Basel Committee, the global standard-setters for much of the world, if a bank lends to an unrated corporation then it must hold 8 per cent in equity, but when lending to an AAA rated client only 1.6 per cent will suffice. Given the high cost of bank equity, the difference between 8 and 1.6 per cent, a 400 per cent increase, entails substantial costs that increase the premiums on risk and confuse the market’s risk allocation mechanisms. The capital requirements for lending to governments, however, and I hope you are seated, is quite often zero per cent.
Economist’s View: When You Believe in Things That You Don’t Understand - Mark Thoma on In defense of financial innovation, by Robert Shiller, Commentary, Financial Times
Paul Krugman: Moral decay? Or deregulation? - David points out, correctly, that something changed around 1980 — that consumers started spending a larger share of national income and that debt began increasing. Although he doesn’t point this out, this was also when the federal government first began running substantial deficits even in good years. David would have you believe that what happened then was a decline in Calvinist virtue. But, um, didn’t something else happen around 1980? Can’t quite remember .. someone whose name begins with the letter “R”?
Yes, Reagan did it.
Mark To Myth Losers: Americans I have often written about the fraud in marking so-called "assets" to mythical values. But nowhere does the damage of this practice hit more home than it does in places like this: "Vacant homes can become havens for drug sales and other crimes. Health and sanitation is another issue when homeless people move in to properties where utilities have been disconnected. And as the weather cools, there is yet another worry -- fires started by intruders trying to keep warm in vacant homes. Those homes are the "visible side" of accounting fraud.
What Americans really want - For 15 years, average Americans have exuded optimism and energy, whether they were talking about their political preferences, their employment aspirations or simply what they had for breakfast. But that was before the economic meltdown one year ago. What a difference a year makes. Today, Americans are boiling mad, and the elites from Washington to Wall Street to West Hollywood don't get it. It can best be summarized by 12 short words in the movie "Network": "I'm as mad as hell, and I'm not going to take this anymore."
Wall Street’s Fraud and Solutions for Systemic Peril - Wall Street gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private‐label residential mortgage backed securities (RMBS). Most of the RMBS was rated "AAA," since subordinated investors absorbed the risk of a pre‐agreed amount of loan losses. But many RMBSs were backed by portfolios comprising risky fraud‐riddled loans. Most of the "AAA" investment was imperiled, and subordinated "investment grade" components were worthless. Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme.
FINRA Warns Against Fraudulent IOIs Once More... Not Even "Or Else" Follows - One of Zero Hedge's recurring concerns with market abuse has been the concept of manipulated natural Indications of Interest, or IOIs, a topic which readers can catch up on here and here. And yes, absent feedback from regulators this could have added to the ever increasing list of conspiracy theories broached by Zero Hedge. Yet ironically shortly after Zero Hedge first posted on this, FINRA came out with the following regulatory notice 09-28 from May 2009, in which the regulator "reminded firms of their obligation to provide accurate information in disseminating indications of interest."
Mortgage Electronic Registration Systems (MERS): A System Designed to Create the Mortgage Back Security Bubble -MERS claims to be a privately-held company and their function is keeping track of a confidential electronic registry of mortgages and the modifications to servicing rights and ownership of the loans. However, if you dig deeper into MERS and their shareholders you will find the same crony bankers that have led our economy off the financial cliff. Some of the shareholders include AIG, Fannie Mae, Freddie Mac, WaMu, CitiMortgage, Countrywide, GMAC, Guaranty Bank, and Merrill Lynch. It is a stunner how these same players show up in every financial war we have been dealing with.
Should Mortgages be Securitized? Like Humpty-Dumpty, mortgage securitization has taken a big fall. There is a widespread presumption that government policy, if not all the king's horses and all the king's men, should be aimed at putting securitization together again. The purpose of this essay is to question that presumption. The first section of this paper will describe how securitization worked at Freddie Mac in the late 1980s, when I worked there. This will allow me to introduce and explain the concepts of interest rate risk and credit risk in mortgage finance
From Black Scholes to Black Holes - Dharma Joint - Were a modern-day financial Rip Van Winkle to awake today having slumbered for the past 20 years, he would observe a capital market vastly different from the one he knew. Introduction: From Black Scholes to Black Holes It's been 16 years since the above noted book-a collection of essays explainging how one models the risks associated with certain derivative securities- was published and the introductory statement is more true now than then. In 1992, the notional amount of interest rate derivative exposure in US banks was about 77% of GDP. This graph shows the growth since.
Derivatives Self-Regulation? No Thanks - The industry will argue for self-regulation, which bears the same relationship to regulation that self importance does to importance. The sheer importance and size of derivative profits means that it will continue to attract the best and the brightest who will continue to play these time honoured games [of making them more opaque and complex]. Lots more here, all of which is punchy and worth reading.
Matt Taibbi – An Inside Look at How Goldman Sachs Lobbies the Senate - Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don’t have or won’t deliver to the buyer. The piece gets into all of this, so I won’t repeat the full description in this space now. But as this week goes on I’m going to be putting up on this site information I had to leave out of the Rolling Stone article, as well as some more timely material that I’m only just getting now. Included in that last category is some of the fallout from this week’s SEC “round table” on the naked short-selling issue.
Too Big to Fail: Vanity Fair - The government secretly tried to orchestrate a deal involving Goldman Sachs in the week following Lehman Brothers’ collapse and considered using the Federal Reserve to help support such a transaction, Andrew Ross Sorkin reports. In an excerpt from his forthcoming book, Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves, Sorkin reports that the deal, which was nearly consummated, would have merged Goldman Sachs and Wachovia. Henry M. Paulson, the Treasury secretary and former C.E.O. of Goldman, was deeply involved in the process.
The secret to Goldman Sachs’ good fortune - SO, is this how Goldman Sachs does it? "It," of course, is making gobs of money even when nobody else on Wall Street can. You've heard the old saying, "it's not what you know, but who you know." But I'd like to make an addendum to that old saying, which I'll explore for you today: Who you know is only important if you can get them on the phone anytime you want. It's also about the unparalleled access that Goldman Sachs had to Treasury Secretary Hank Paulson.
"Some Financial Market Conspiracies Are Real" - Nobel prize winning economist Joseph Stiglitz says that Goldman Sachs may have engaged in frontrunning. Ask a Goldman spokesman, and he or she will undoubtedly say that is a conspiracy theory. Indeed, when Matt Taibbi claimed that Goldman created every bubble since the Great Depression, a Goldman spokesman responded by calling Taibbi's essay "an hysterical compilation of conspiracy theories". Tyler Durden at Zero Hedge blew the whistle on Goldman's high-frequency trading and other frontrunning activities, and has also been called a conspiracy theorist.
Matt Taibbi – In Defense of Zero Hedge -"Let me just say that I’m always suspicious when I see articles about the motivations of journalists. I think they often reflect a misunderstanding of what journalism is all about. Journalists are supposed to be assholes. The system does not work, in fact, if society’s journalists are all nice, kind, friendly, rational people. You want a good percentage of them to be inconsolably crazy. You want them to be jealous of everything and everyone and to have heaps of personal hangups and flaws. That way they will always be motivated to punch holes in things.
In Madoff’s Wake, S.E.C. Is Told to Revamp Inquiries - NYTimes - After a blistering report on the Securities and Exchange Commission’s failure to detect Madoff’s enormous Ponzi scheme, the agency’s independent watchdog on Tuesday called for a sweeping overhaul of the S.E.C.’s investigation and enforcement practices. Two reports released by the S.E.C.’s inspector general, H. David Kotz, recommended dozens of specific changes to the way the agency evaluates tips, trains investigators and documents examinations of securities firms.
Wall Street's Growth: Like A Big Tumor - In absolute terms, most sectors grew by a factor of 80 between since 1954. But, at its peak, the non-commercial-bank financial sector had grown by a factor of 800. From Shin:The greater detail afforded by the chart in log scale reveals that the securities sector kept pace with the rest of the economy until around 1980, but then started a growth spurt that outstripped the other sectors. On the eve of the crisis, the securities sector had grown to around ten times its size relative to the other sectors in the economy. Clearly, such a pace of growth could not go on forever.
Did Bankers’ Pay Add to This Mess? - NYTimes - PROPOSALS to cap the compensation of bank C.E.O.’s have gained traction lately as a means of heading off another financial crisis. World leaders at the G-20 summit meeting last week in Pittsburgh agreed in principle to reform executive compensation, with the goals of reducing risk-seeking behavior and avoiding a future global credit shock. But will these measures work? And did C.E.O. compensation really play an important role in the recent crisis?
Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doubt - (Bloomberg) -- The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery. While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.
Video: Joseph Stiglitz: The Balance Sheet : The New Yorker - James Surowiecki spoke with Professor Joseph Stiglitz, the Nobel Prize-winning economist, about the mishandling of the financial crisis, the relationship between government and markets, and the future of capitalism around the world. They met last month at Stiglitz’s office at Columbia University.
The Dollar Share in Central Banks’ FX Reserves Resumes its Decline - Numbers newly reported from the IMF’s COFER data base show that in the most recent quarter, the spring of 2009, the share of central banks’ foreign exchange reserve holdings that they allocate to dollars resumed its downward trend. The dollar share has been gradually sliding since the beginning of the decade – perhaps because of the birth of a possible rival, the euro, in 1999, or perhaps because of the long-term path of tremendous fiscal and monetary expansion on which the United States embarked in 2001.
Is Treasury Courting Inflation? - New Republic - the WSJ informs us that, in order to keep from hitting the $12.1 billion trillion debt ceiling, the Treasury Department is winding down a one-year-old program it created to borrow funds on behalf of the Fed: Since last year, the Treasury has been selling special short-term securities and placing the proceeds in an account at the Fed. The program, known as the Supplementary Financing Program, reached about $560 billion late last year, but has since fallen to about $200 billion, where it has remained throughout 2009...The decision could also be controversial, since the program was put in place to help blunt any inflationary impact from emergency actions taken by the Federal Reserve.
Strong dollar “very important”: Geithner (Reuters) - Treasury Secretary Timothy Geithner said on Thursday that a strong dollar was very important to the United States and the rest of the world needs to be convinced Americans will be more thrifty in future.
"A strong dollar is very important to this country, I mean that, and it's very important that people recognize it," he told a news forum at the Newseum in downtown Washington.
A stronger US economy requires a weaker dollar - Sometimes economics can be helpful even if it does not allow you to make point predictions with any degree of confidence. This is the case, for instance, when it can rule out certain combinations of outcomes for different economic variables as unlikely or even nigh-on impossible. An example of such an unlikely configuration of outcomes is (a) a strong and sustainable recovery of the US economy and (b) a strong (let alone a strengthening) US dollar. To argue this point it is helpful to start with the basic output-expenditure identity from the national accounts
A Car Without An Engine - We have not yet rebuilt our economic engine, but that isn’t stopping some people from looking down the road.There’s a lot of talk of revival and V-shaped recoveries these days. But so far, the only thing holding up the economy is still government support, and I have not yet heard one good explanation of what’s going to come along to replace Uncle Sam’s helping hand. Essentially, the economy is like a car without an engine, and the government is driving the tow truck.
The recession is over but the depression has just begun - I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.
Another crash is all too possible - FT - I was in Chicago last week to participate in the International Banking Conference sponsored by the Federal Reserve Bank of Chicago and the World Bank. Compared to my two years at the Bank of International Settlements in Basel and my year at the Bank of Israel, the openness of the debate and the quality of the discussions in Chicago were refreshing. However, in the US — the epicentre of the crisis and the country that is supposed to lead the world toward reform and out of the crisis — I expected a far more forceful articulation of remedial measures. The answer to the question posed — have the rules of the global financial game really changed? — is a resounding no.
Does money contraction signal serious trouble? - Many readers think I have been talking balderdash about the money supply. Specifically, that contraction of credit and M3 money in both the US and Europe signals double-dip trouble ahead. I have dabbled in this subject from time to time. The money and credit data gave a crystal clear warning in July 2008 (as I wrote in a blog at the time). It is worth looking at the charts in that blog. They could not have been uglier. I have returned to this theme...
The Fiscal Austerity Trap - Fiscal conservatives are opportunistically looking to use the recession induced spike in the budget deficit to revive their crusade for fiscal austerity. The case for fiscal austerity is based on flawed economic analysis and it is not supported by thoughtful budget analysis. It was the wrong agenda before the crisis and it is even more wrong now. Though there is understanding of the need for budget deficits to provide short-term Keynesian fiscal stimulus, there is little understanding of the medium-term need for budget deficits to facilitate the process of private sector deleveraging and to restore growth...
Taxes and Deficits - In my Forbes column this morning I tried to explain why taxes are an important part of deficit control. If people think deficits will lead to higher taxes they will be more inclined to support deficit reduction efforts. If they don't think deficits will ever lead to higher taxes then they are going to be much less inclined to support deficit reduction.
Therefore, by opposing taxes for any reason, Republicans have made the task of deficit reduction vastly more difficult. They have effectively taken off the table the biggest reason why people might be willing to support spending cuts--to avoid tax increases.
Taxes and Deficits, Part 2 - I think I'm starting to make a bit of progress in my effort to get taxes back on the table as part of the solution to our fiscal problem. Instead of rejecting any tax increase out of hand and demanding that all of the fiscal adjustment take place on the spending side, some commentators are now conceding that taxes must rise. The question is how much, in what way, and in return for how much in terms of spending cuts. Here, here and here are my recent columns on this topic, and here, here, here and here are some commentaries.
Tax and fiscal experts say it's time to consider VAT - (CNNMoney.com) -- President Obama has been steadfast in his pledge that he won't raise taxes on those making less than $250,000. But that doesn't mean only high-income households will be subject to higher taxes.An increasing number of influential Democrats and fiscal-policy experts have signaled that lawmakers will have to get a handle on the deficit. And they recommend seriously considering the creation of a value-added tax (VAT) on top of the federal income tax.
Deflation taking root in global economies - The spectre of a crippling bout of deflation is hanging over the global economy. Fuelled by continuing overcapacity, shrinking credit, reduced corporate spending and falling consumer demand, deflation is on the rise in its old stomping ground of Japan and taking root in the battered U.S. and European economies. That deflation should be such a threat may run counter to market fears that inflation will quickly follow the massive, and costly, global effort to fight the financial crisis. But many observers see deflation as the greater threat.That's because it's harder to stamp out once it becomes embedded in an economy, as happened during the Great Depression.
The Case for Inflation -- As I have recently pointed out, there are strong arguments for ongoing deflation. But even deflationists think that – after a period of deflation – we might eventually get inflation. For example, in October, I guessed 1 1/2 to 2 years of deflation, followed by inflation. Moreover, noted deflationist Martin Weiss – after predicting for 27 years straight that we’ll have deflation – has now changed his mind, and thinks inflation is a greater short-term threat than deflation. For these two reasons – and to make clear that the inflation versus deflation debate is complicated and includes many factors – this essay will focus on the arguments for inflation.
Mission Not Accomplished - NYTimes- Krugman Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit. No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.
The 4 percent solution - Paul Krugman - NYTimes - (discusses debt and sustainable deficit) Let me take as a starting point OMB’s Mid-session review, specifically its projections for 2019. To the extent that these projections are either too optimistic or too pessimistic, what follows would have to be adjusted; but OMB is, I believe, trying to be reasonable and intellectually honest, so it’s a useful jump-off point...
Crowding in - Paul Krugman - NYTimes - I’m at two deficit conferences Wednesday — CAP in the morning, on what to do about the deficit, EPI in the afternoon, about why we need to run deficits now. I’m trying to organize my thoughts; in this post I’ll talk about the EPI issue, in the next the CAP issue. So let me start with a picture, which I’ll leave hanging for a moment...
The true fiscal cost of stimulus - Paul Krugman - NYtimes - As I get ready for the CAP and EPI events, I’ve been thinking more about the issue of crowding in. (See also Mark Thoma.) And I’m coming more and more to the conclusion that the public debate over fiscal stimulus, which views it as an agonizing tradeoff between possible benefits now and certain costs later, is wildly off base.
Krugman and the pied pipers of debt - Investors are celebrating “recovery,” but the interventions that were responsible for it are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We’ve accumulated record amounts, yet many economists tell us we need more. Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn’t acknowledge that his brand of Keynesian economics ignores the consequences of debt. If you look at a chart of America’s total debt burden, he’s leading us over a cliff.
The Magic of Multipliers - The Atlantic -Back when the stimulus was being considered, there was a lot of talk about what the multiplier of stimulus spending is. Basically, the multiplier is the effect of government spending permutating through the economy: I buy a wrench for my fighter jet from you, you hire workers, they feel richer and start shopping big screen televisions, and so forth . . Theoretically, if the multiplier is large enough, and the growth occurs in the right places, you can get enough tax revenue to pay for the stimulus spending. Sadly, empirical estimates are much smaller than the 3x or 4x multiplier you would need for this to be true. If the multiplier is one, the stimulus basically raises GDP by exactly the amount of government spending.If the multiplier is less than one, the stimulus raises GDP by less than the amount of government spending. Since you have to pay back the full amount later, and the stimulative effects are only temporary, this is probably not a good deal.
Barro on Stimulus - Barro seems to be suggesting that WWII represents a good test case for the effect of government stimulus. All in all it would seem that a massive increase in defense spending, much of which is on drafted soldiers and part of which is funded by an excess profits tax is a going to have a much lower multiplier than a more moderate stimulus that involves mainly cutting taxes, forgoing increases in state taxes, and providing funds for the short term unemployed.
Koo: Government fulfilling necessary function - American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage. Koo says it’s up to the government to make up for the private sector’s problems by spending and continuing to run deficits. Thus we would be “buying time” through government spending while the private sector has time to repair its balance sheets. If the government cuts back on its spending and stimulus, the US economy will swoon and more money will be lost than was lost during 2008-2009.
Andy Xie: Why One Bubble Burst Deserves Another - Caijing - The financial crisis taught crucial lessons about the dangers of bubbles, loose regulation and debt. It's a pity we didn't learn. Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets.
The dangers of puffing up asset bubbles -- Nouriel Roubini - THERE is a general consensus that the massive monetary easing, fiscal stimulus, and support of the financial system undertaken by governments and central banks around the world prevented the recession of 2008-2009 from devolving into Great Depression II. The crucial policy issue ahead, however, is how to time and sequence the exit strategy from this massive monetary and fiscal easing... If not reversed, this combination of very loose fiscal and monetary policy will at some point lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble...
Albert Edwards On The Upcoming Economic "Abyss" - It is the cyclical upturn that is sucking money into risk assets. This is exactly what happened in Japan in the 1990's. Japan enjoyed many decent economic and profit recoveries which regularly pushed equities and other risk assets substantially higher. But the underlying fragility of any cyclical recovery amid a secular balance sheet recession meant there were frequent lapses back into recession. This eventually drained hope away from zombie investors who then became sellers-on-rallies, rather than buyers-on-dips.
The Looming Deficit Disaster, Modeled - New Republic - Yale's Ray Fair, well-known for his economic model predicting the outcome of presidential elections, has a new forecast out on the macroeconomic effects of large budget deficits -- and it's not pretty...(summary follows
Money figures show there's trouble ahead - UK Telegraph - Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise. Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects. The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.
History, Path Dependency and Inflation/Deflation Fears - I have argued in various talks over the past year that one reason we got into so much trouble over the last decade is that memories of the Great Depression faded. Similarly, I’m fond of pointing out that the U.S. preoccupation with deflation stems from its most traumatic financial experience in the last hundred years, while the European worry about inflation stems from its most traumatic financial experience in the same period. It is classic path dependency, with how we got here dictating our response to crises. How long, however, until worries about prior price episodes fade and become less binding? When do we need to worry about our collective capacity to remember the past? A new paper tries to work out an answer...
Spain tips into depression - Telegraph - Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days. The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP.
Updated Long-Term Fiscal Deficit and Debt Projections — CBPP - The Center on Budget and Policy Priorities (CBPP) has projected the long-term path of federal spending, revenues, deficits, and debt if current policies remain unchanged. These projections have shown that deficits and debt will grow in coming decades to unprecedented levels that will not only compromise the federal government’s ability to address critical national priorities, but also pose a real threat to the U.S. economy and Americans’ standard of living.
Financial Versus Real - Let me phrase it another way. So the Fed comes in and offers cheap liquidity to financial institutions. Does that mean the financial institutions will now offer loans to industrial corporations? More of the loans will go to those that are buying “cheap” high yield debt, until the yields make no sense versus the bad default climate for companies that have issued high yield debt. Most of what the Fed has done has been to raise the prices of financial assets for now. The Fed can manufacture financial speculation easily, but has a harder time encouraging investment in plant and equipment.
In Pursuit Of The Impossible Recovery - Before this summer, LEAP/E2020's team announced that there would be no recovery in sight in September 2009, and not until summer 2010 in any event. Well indeed, contrary to the claims of the media, and financial and political circles, we confirm our anticipation. The slowdown in the speed of collapse of the global economy, at the origin of all the good news is only due to the world's enormous public financial effort of the last twelve months. But the time saved using taxpayers' money around the world should have been dedicated to redesigning the international monetary system at the heart of the current systemic crisis. Yet, besides a few cosmetic considerations and huge gifts to US and European banks, nothing serious has been undertaken, and, when it comes to the future, the every man for himself rule prevails.
Another Reason We Won't Have A V-Shaped Recovery: Jobs - In order for the U.S. economy to go roaring right back to the 3%-4% long-term growth the bulls are looking for, consumer spending will have to rebound. Consumer spending is still 70%+ of the economy, and it's hard to get a supertanker cruising along at top speed if 70% of its power is removed. In order for consumer spending to come roaring back, however, one critical thing has to happen:Consumers have to be employedIf consumers don't have jobs, they don't have much disposable income. They also can't borrow as easily (because, at least temporarily, banks have decided not to be stupid). And if consumers aren't employed, companies that sell to them can't grow as quickly, which affects the other 30% of the economy...
Early Job Cuts Worse Than First Thought, as More Companies Go Belly Up - WSJ - The loss of 263,000 jobs last month brings the total drop in U.S. employment to 7.6 million since the recession began — and revisions suggest the losses could turn out to be even steeper.Job seekers crowd around potential employers at a job fair. Total U.S. nonfarm employment as of March was probably lower by 824,000 than previously thought, or about six-tenths of a percent, the Bureau of Labor Statistics said Friday, reflecting the unusual severity of job losses during the first quarter.
Employment Report: 263K Jobs Lost, 9.8% Unemployment Rate w/ charts from CalculatedRisk Earlier employment posts today:
Unemployment: Stress Tests, Unemployed over 26 Weeks, Diffusion Index
Employment-Population Ratio, 10% Unemployment, Part Time Workers
ABI: Personal Bankruptcy Filings up 41 Percent Compared to Sept 2008
Nope, no jobs here - The Bureau of Labor Statistics has just delivered another not-at-all encouraging employment report, with payroll employment down another 263,000 for the month of September, the unemployment rate up to 9.8%, and U-6 unemployment (which includes what the BLS calls "discouraged workers" who have given up actively looking for jobs, plus "marginally attached workers" and a few other such categories) up to 17.0%.
Economic troughs, unemployment, and fed policy - Atlanta Fed - today's weak labor market report (discussed more here, here, and here) provides a reminder that thinking of the economy as being in anything other than a technical recovery at this time is likely an exaggeration. The report showed the unemployment rate inching higher to 9.8 percent—and it would have been even higher absent a measured decline in labor market participation. In the face of such a weak labor market, it is interesting to consider the relationship between the timing of a recession's end and the peak in the unemployment rate.
An Upside Down Employment Report - From the BLS, everything you would like to be heading down moved up, and everything you would like to be heading up moved down. The top line number was a net loss of 263,000 jobs in September, with the unemployment rate rising to 9.8 percent. Digging a bit beneath the headlines, the labor force participation rate fell to 65.2 percent and the employment to population ratio fell to 58.8 percent. Recent media attention has focused on U-6, which is an alternative measure of the unemployment rate designed to include marginally attached (including discouraged) workers and those employed part-time for economic reasons. It rose to 17.0 percent.
Economists React: Job Market the ‘Achilles Heel’ of Recovery - WSJ - Eleven Economists and others weigh in on the larger-than-expected number of job cuts in September amid an increase in the unemployment rate.
U.S. Job Losses May Be Even Larger, Model Breaks Down (Bloomberg) -- The U.S. economic slump earlier this year was so severe it short-circuited the government’s model for calculating payrolls, raising the risk that today’s jobs report may be too optimistic. About 824,000 more jobs may be subtracted from the payroll count for the 12 months through last March when the figures are officially revised early next year, a Labor Department report showed today. The revision would be the biggest since at least 1991. The bulk of the miss occurred in the calculations for the first quarter of this year, the Labor Department said. The economy shrank at a 6.4 percent annual pace in the first three months of 2009, the worst performance since 1982. The figures raise the possibility that the government’s calculations continue to miss the mark.
CHART OF THE DAY: Layoff Massacres Persist - We're still looking for a glimmer of hope on the employment front. There are green shoots of various size and scope everywhere, but seemingly not here. Anyway, we didn't find any in the BLS's latest survey of mass layoffs -- defined as distinct events of 50 or more employees getting whacked at a single company. After some glints of hope in July, it just spiked right back up in August.Why Are Older Workers Working Longer? - OMB - One of the most significant repercussions of the economic downturn has been its effect on the labor market. It goes without saying that too many Americans are out of work. And as you dig deeper into the data, it becomes evident that the age pattern of changes in labor force participation rates is different now than during past downturns. As the graph shows, labor force participation rates have actually increased among those near and at traditional retirement.
Retirement? Good luck with that - The destructive effects of the financial crisis may be waning, but your retirement account won't soon forget. Savers lost 40% or more in the downturn -- a collective $2.1 trillion disappeared from 401k and IRA assets in 2008 alone -- and while the recent stock market recovery may feel good, it's done little to stem a mounting crisis in the retirement system in the United States.
Without Construction, What of Blue-Collar Men? - WSJ - As today’s Journal points out, one side effect of the housing boom was that the construction industry’s growth provided an alternative route to a middle-class life for millions of blue-collar workers, filling a void left by the decades-long shrinkage of the U.S. manufacturing sector. The recession has wiped out that route, while also accelerating job losses in manufacturing — and the impact has been felt most deeply by non-college-educated men, and Hispanics.
Record Drop in Education Jobs - BusinessWeek - Today’s employment report shows that the recession has finally hit education. With the new school year starting, September education jobs fell by 0.9%, or 121K jobs, compared to September 2008. This is a record drop, based on data going all the way back to the 1950s. The chart tells the story.
The dead end kids - Young, unemployed and facing tough future - The number of young Americans without a job has exploded to 52.2 percent — a post-World War II high, according to the Labor Dept. — meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time. The number represents the flip-side to the Labor Dept.'s report that the employment rate of 16-to-24 year olds has eroded to 47.83 percent -- the lowest ratio of working young Americans in that age group, including all but those in the military, since WWII.
1,000 Companies Attacked -> 1,200,000 Jobs Destroyed - Bloomberg got an Emmy nomination in 2007 for explaining the mechanics of these hedge fund attacks. Vid is HERE. "Phantom Stock" runs 25:10. The damage is primary jobs. Permanent jobs with companies that make products or provide specialized services. The likes of bio-tech, finance and engineering, and computer systems. These attacks combine corrupt MSM lie campaigns with market dumps of "naked shorts" and counterfeit "phantom stock."- Depress stock prices --> Make millions on short-side options.-- Do a lot of it and laugh at S.E.C.
Chart of the day, hours-worked edition - Jake is on fire with employment charts this morning in the wake of the atrocious payrolls report. This one in particular is new to me, and extremely sobering.
True September Unemployment in America Reaches Towards 14%; Our System is Broken
I actually hate doing any form of analysis on the monthly unemployment figures because it is "junk in, junk out". Analyzing junk leads to useless conclusions... here are some of the basic facts...worst than expected job losses - I won't reprint the number because (a) it's a lie and (b) it will be revised down in the future hours worked at all time lows...wage growth at a measly 0.1% First, the whole notion that a $14 trillion economy can be measured on any level 3-4-5 days after a month end is preposterous...
U.S. Job Seekers Exceed Openings by Record Ratio - NYTimes - Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed. And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.
U.S. Unemployment Now Lasts Longer Than Benefits: Chart of Day -(Bloomberg) -- For the first time, the average amount of time it takes fired employees to find a new job exceeds the length of their standard unemployment benefits. The CHART OF THE DAY shows the average duration of unemployment is now 26.2 weeks, longer than the 26 weeks of state benefits normally provided to workers who lose their jobs. It’s the first time that has occurred since the Bureau of Labor Statistics began keeping records in 1948.
The brighter side of high unemployment - I'm not exactly sure why BusinessWeek contributor Gene Marks decided to e-mail me a link to his latest column, in which the self-described "entrepreneur" gloats about how high unemployment is good for his business. Having already been irritated enough by David Brooks, I can't say I was exactly in the mood for an explanation of why high unemployment is great for small businesses because now there are so many "good, bright, educated people" who are "willing -- no, let's admit -- grateful to work for less money and longer hours." Even better, the bad economy provides cover for getting rid of that "dead weight" that you were feeling too guilty to throw overboard.
Unemployment Confronts Obama Rhetoric With Chronic Joblessness - (Bloomberg) -- Full employment ain’t what it used to be. Economists since the mid-1990s have reckoned that full employment was equivalent to about a 5 percent unemployment rate, taking into account the time required to switch jobs. Now Nobel Prize winner Edmund Phelps and Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian say the fallout from the deepest recession in more than five decades is driving the so-called natural rate higher, perhaps to 7 percent.
What’s happened to Nairu? - It was reported yesterday that a number of luminaries have diagnosed a significant upwards move in Nairu, the rate of unemployment below which inflation starts kicking in — or, to put it another way, the level of unemployment which the Fed should consider to constitute “full employment”. They include JP Morgan’s chief economist Bruce Kasman; Harvard’s Lawrence Katz; and Ned Phelps, who got his Nobel for looking at such things. Against that the Fed doesn’t seem to think that Nairu has increased at all.
Welcome to the New Normal - Unemployment is high and rising. But if the recession is over, won't employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy - and the implications for both the US and world economies if we don't.
Robert Reich: The Truth About Jobs That No One Wants To Tell You - Unemployment will almost certainly in double-digits next year -- and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics' household survey, you can bet there's another either too discouraged to look for work or working part time who'd rather have a full-time job or else taking home less pay than before (I'm in the last category, now that the University of California has instituted pay cuts). And there's yet another person who's more fearful that he or she will be next to lose a job.
US Unemployment May Hit 15% in 2010: Strategist - Unemployment can go as high as 12 to 15 percent in the United States next year, as the economic situation will get worse and more banks will go bankrupt, Nicu Harajchi, CEO at N1 Asset Management, told CNBC Friday. "We expect the (unemployment) numbers to increase… we believe that going into the fourth quarter we are going to see increased unemployment and I also think that in 2010 we are going to see somewhere between 12 to 15 percent in the US," Harajchi told "Worldwide Exchange."
Wait Until 2017 Before Job Market Recovers, Report Says - NYTimes - In a depressing new report, two Rutgers professors predict that it will take more than seven years to restore the health of the nation’s labor market to prerecession levels. The report, released on Wednesday, says that even if the nation adds more than two million jobs annually over the next seven years, that will barely offset what the authors see as a giant employment deficit. The large employment deficit, the report says, was created by the loss of 7.1 million private-sector jobs since the recession began in December 2007 and by the economy’s failure to keep up with labor-force growth — that is, the increasing number of people who want jobs — during the recession.
The Mother of All Jobless Recoveries? - Nice chart via Annaly Capital, showing the “Mother of All Jobless Recoveries.” You can see why the Rutgers study showing a full jobs recovery not taking place until 2017 is very possible.
New Income Inequality Data: Surprising and Frightening -The newest economic inequality numbers, which ran counter to the expectations of almost all experts, are frightening. The Associated Press released an article titled, US income gap widens as poor take hit in recession. The opening paragraph of the article, based on recent census data, reads:The recession has hit middle-income and poor families hardest, widening the economic gap between the richest and poorest Americans as rippling job layoffs ravaged household budgets.
47% of households owe no tax - and their ranks are growing (CNN) -- Most people think they pay too much to Uncle Sam, but for some people it simply is not true.In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center. Some in that group will even get additional money from the government because they qualify for refundable tax breaks. The ranks of those whose major federal tax burdens net out at zero -- or less -- is on the rise. The center's original 2009 estimate was 38%.
American dreams - Economic mobility might be a “unifying and core tenet of the American Dream,” but the evidence suggests that the United States performs badly. That question has been worrying the Economic Mobility Project, a non-profit organisation that has been collecting data and surveying attitudes on the issue over the past few years. The Project is leading a coalition of organisations from across the political spectrum which, together, believe that “the ability of American families to move up or down the income ladder within a lifetime or from one generation to the next” is a “unifying and core tenet of the American Dream.”
Falling Tax Revenues Slam States – WSJ - "State tax revenues in the second quarter plunged 17% from a year earlier as rising unemployment and reduced spending hurt sales- and income-tax collections, according to Census Bureau figures released Tuesday. The decline was the sharpest since at least the 1960s. The biggest drop among major revenue sources was in state income taxes, which were down 28% from a year ago. Sales-tax revenues fell 9%
CHART OF THE DAY: What, You Think The Savings Rate Can’t Go Higher? - This chart should give chills to anyone hoping that Americans will stop saving and start spending again. For one thing, we're way below the personal savings rate we saw in the early 70s, let alone the savings rate in the pre-Greenspan era. Plus, as David Goldman points out, demographics isn't on our side. With the recent wealth shock and the aging population, there are a lot of folks eager to hold on to every last dollar they've got.
Consumption Up in August, Expect a Decline in September - August Personal Income rose 0.2%, 0.1% more than expected and July was revised up by 0.2%. Spending rose 1.3%, 0.2% higher than forecast and most of the gain in the durable goods category was due to the Clunker program. Durable goods purchases, which reflect auto’s, rose 5.3% vs a 1.3% gain in July. Those personal consumption figures were from August, when auto sales (make that foreign auto sales) snapped back due to the cash for clunkers.
Market Observation - Interesting Divergences - Many people (including me) have been talking about the death of the U.S. consumer. But if you look at personal consumption expenditures relative to personal income and nominal gross domestic product, both ratios have just hit new record highs. once consumers start coming to terms with the fact that circumstances won’t be returning to “normal” and the so-called recovery is an illusion, we can expect to see a dramatic about-face in spending (fifty years charts included)
U.S. Economy: Don't Stop Consuming -- We have seen the savings rate in this country go from an all time low of about zero for a while to a paltry 5% over the past year. 5%. With even a 5% reduction of money flow (and this is very simplified) our economy is dead in the water and relies on massive government spending to keep things afloat. 5%. Another crazy percent story is if home prices fall, on average, 10% almost every bank in the mortgage business is flat out busted. 10%. Notice a pattern here?
Saddled with Debt - Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP. (chart)
Home prices stabilized, but… - The S&P/Case-Shiller home price indices registered another month of increase in July. That's a critical bit of favorable news, since continued declines in home prices would mean further increases in default rates and new stresses on financial institutions. On the other hand, the decline in existing home sales for August, future rise in foreclosures already baked in the cake, inventory of unsold homes, and expected continuing increases in unemployment all raise the possibility that house prices could resume their descent. In other words, I don't see the fat lady singing just yet.
House Prices: Stress Test and Price-to-Rent This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph through July 2009 using the Case-Shiller Composite Indices
$35 Billion Slated for Local Housing - WSJ -The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families, according to administration officials.The move would further cement the government's role in propping up the housing market even as some lawmakers push to curb spending at a time of rising debt.
What Will Happen When Homebuyer Tax Credit Expires? - "Everyone coming through the door is talking about this tax credit. They know exactly what it is and when it expires, and they’re rushing." - Front page Washington Post story today on the Nov. 30 expiration of the $8,000 first time home buyer tax credit and the rush of buyers and the political debate surrounding it. The real estate industry is obviously lobbying hard for an extension and apparently there is a bipartisan proposal to maintain the credit in its current form until next June. Will the tax credit get extended? What happens to the housing market, and the banks and the economy by extension, if it doesn’t?
Don't bank on your home as an ATM (LA Times) - For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest. Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future gains...it's a place to raise your family, not your nest egg.
Massive Housing Overhang Will Swamp The Market - Chart of the Day - The latest Case-Shiller reading showed another sequential uptick in July, which is all fine and well, but watch out: There's a huge flood of houses being held back from the market, either due to bank-ownership, or loan delinquency. Check out the chart from Amherst Securities. It shows the number of delinquent mortgages that have yet to be liquidated-- a number that Amherst puts at a shocking 7 million (135% of the number of houses sold in a year right now). Eventually the houses attached to these loans have to hit the market. When they do, expect them to go at a firesale.
The Condo Glut - exerpts: In Delaware from The News Journal: Justison Landing developer to auction condos.From the Jacksonville Business Journal: Summer House condos to be auctioned. From KUOW News in Seattle: Condo Glut...And a twist in New Jersey, from the NY Times: In Jersey City, Jump-Starting Condo Sales "Stimulate"? "Jump-start"? Why not just call it "dump" or "liquidate"?
50% Of Rescued Mortgages Have Re-Defaulted - The latest data from the Office of the Comptroller of the Currency (OCC) shows that over 50% of homeowners who had their loans previously modified in order to avoid foreclosure have re-defaulted. This seems like an awfully high failure rate. As one might expect, mortgages which were given higher cuts to their monthly payments (during the modification process) have been less likely to re-default. More help prevents re-default.
Fannie Mae Serious Delinquency Rate increases Sharply - Here is a hockey stick graph ... Fannie Mae reported that the serious delinquency rate for conventional loans in its single-family guarantee business increased to 4.17 percent in July, up from 3.94 percent in June - and up from 1.45% in July 2008. Just more evidence of some shadow inventory and the next wave of foreclosures.
Leaving Affordable Mortgage May Become Winning Gambit - Bloomberg - So-called strategic defaults, in which homeowners stop paying their mortgages while remaining current on other debts, rose 128 percent to 588,000 last year, according to Experian PLC, a Dublin-based credit-checking company, and Oliver Wyman, a New York-based consulting firm. Two-thirds of those who walked away defaulted on their primary residences. You’re looking at an extremely long horizon in order to see a return of home values to where they were at their peak.
Rolling the dice on wasteful home subsidies - FEDERAL POLICIES bear some of the blame for the housing bust because they encourage leveraged bets on housing. Yet instead of reconsidering the public incentives that encourage real estate gambling, the federal government seems ready to double down, with another $35 billion in Treasury support for state agencies that subsidize borrowing, and the reauthorization of an $8,000 home buyer’s tax credit. The ship of state would do better to turn around and reduce borrowing subsidies, by lowering the million-dollar cap on the home mortgage interest deduction.
How Urban Planners Caused the Housing Bubble - Cato Institute - Between 2000 and the bubble's peak, inflation- adjusted housing prices in California and Florida more than doubled, and since the peak they have fallen by 20 to 30 percent. In contrast, housing prices in Georgia and Texas grew by only about 20 to 25 percent, and they haven't significantly declined.
This suggests that local factors, not national policies, were a necessary condition for the housing bubbles where they took place. The most important factor that distinguishes states like California and Florida from states like Georgia and Texas is the amount of regulation imposed on landowners and developers, and in particular a regulatory system known as growth management.
House prices - Safe as houses - Compare countries' house-price data over time with interacive graphic from the Economist.
Bernanke to Housing Market: Please Don't Drop Dead - As I pointed out in a post a week ago, getting Uncle Sam out of real estate is shaping up to be tougher than anyone would like. The Federal Reserve's statements since I blogged -- including this speech Friday from Fed governor Ken Warsh -- bear me out. And on top of that comes August's disappointing 2.7% decline in existing housing sales, the first drop in five months, followed Friday by a disappointing shortfall in new home sales volume. A graceful exit for Uncle appears even less likely than it did just a few days ago.
CMBStress resumes - And now a return to your normal programming — the ever-increasing amount of commercial mortgage-backed securities in delinquency…
July’s reduction in delinquent CMBS — the first monthly decrease since August 2008 — looks to have been a blip if Realpoint’s latest report on the sector is anything to go by. It shows the delinquent unpaid balance for CMBS increasing to $28.16bn in August, or a rate of 3.47 per cent, up from the $25.68bn, or 3.14 per cent rate, recorded in July. (includes the jump in chart-form)
Well-Being Higher With Certain Conditions Beyond GDP -Gallup - French President Nicolas Sarkozy encouraged world leaders last month to take part in a "great revolution" in the way countries measure economic progress. Sarkozy urged leaders to move beyond traditional economic measures such as gross domestic product (GDP) in considering their societies' overall well-being. Gallup's global surveys underscore the extent to which life quality relates to a range of factors beyond classical economic measures. Survey results from up to 138 countries indicate that measures not directly related to market production, such as social connectedness and health satisfaction, strongly relate to how respondents rate their lives.
Commentary: We Shouldn't Have Homeless Children In America - One million schoolchildren are homeless in America. That's an intolerable number, and it's likely to rise unless we do something about it. For homeless school-age children — with precarious living arrangements and the daily struggles to find food and shelter — attending school is an uphill battle. At least one-fifth do not attend school at all. Often, there is no transportation from shelters to school. And for those homeless students who do attend, they have more academic problems, are suspended twice as often, and are more likely to repeat a grade. Their math and reading scores are 16 percent lower, and only one in four graduates from high school.
Health ‘Reform’ Is Income Redistribution - WSJ - Let's have an honest debate before we transfer more money from young to old. -- the combination of a guaranteed issue, community rating and an individual mandate means that younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners. And because these subsidies are buried within health-insurance premiums, the massive income redistribution is hidden from public view and not debated.
The Pharmaceutical Umbrella - One reason for America’s drug dominance (though far from the only one) is America’s unsocialized medicine. Here, with the exception of a few programs like Medicaid and the VA system, the government doesn’t regulate the price of drugs, so when a company invents something big—the latest miracle cancer drug, say—it strikes it rich, making its executives hunger for more. Take away the profit motive, as government-run medicine often does by forcing drug companies to sell at discounted prices, and innovation will dry up. “EU policy has kept pharmaceutical price inflation equal to average consumer price inflation over the last 19 years"
Critics of ‘Cadillac Tax’ on Insurance Miss an Opportunity - NYTimes - Slowing the growth of medical spending should, in principle, be one of the more popular parts of health reform. Health care already costs the typical household about $15,000 a year, and these costs are growing far more quickly than incomes. Yet when it comes time to turn principle into policy, the same problem always crops up. Most of that $15,000 is deducted from people’s paychecks, as taxes or insurance premiums, before they ever have a chance to spend it — or to miss it. The health care they receive in exchange for the $15,000, however, is tangible. So we end up with a conundrum. We want health spending to slow, just not our own: My health care is a benefit; yours is a cost.
Special Health Care for Congress: Lawmakers' Health Care Perks - This fall while members of Congress toil in the U.S. Capitol, working to decide how or even whether to reform the country's health care system, one floor below them an elaborate Navy medical clinic -called the Office of the Attending Physician - described by those who have seen it as something akin to a modern community hospital -- will be standing by, on-call and ready to provide Congress with some of the country's best and most efficient government-run health care.
Why Would We Let Them Rig the Game? - Why is health insurance the only business that has an exemption from the Sherman Anti-Trust Act other than Major League Baseball? If the delivery of taxpayer trillions by our politicians to the banks to support their fraudulently paid bonuses hasn't shown you what our current government's values are, check this link out.Through the governmental negligence that we as voters allowed, a health care system was created in which a single health care company controls at least 30 percent of the insurance market in 95% of the country, including states like the following...
Insurance Executive Pay Curbed in Health Bill - WSJ - Democrats on the Senate Finance Committee voted Thursday to encourage limits on the compensation of insurance executives, responding to charges that expanding health insurance coverage would enrich insurance companies.The action came as the influential panel brought debate to a close early Friday morning on sweeping legislation that would overhaul the nation's health system, setting the stage for a pivotal panel vote next week on President Barack Obama's top domestic priority.
$1,900.00 or do Time (Congress excluded) - Taxation Chief of Staff Tom Barthold confirmed the penalty for failing to pay the up to $1,900 fee for not buying health insurance. Violators could be charged with a misdemeanor and could face up to a year in jail or a $25,000 penalty, Barthold wrote on JCT letterhead. He signed it "Sincerely, Thomas A. Barthold."
Health Plan Advances as Millions Spared From Fines - (Bloomberg) -- The Senate Finance Committee, ending its debate over the biggest changes in the U.S. health-care system in four decades, agreed to protect millions of Americans from the legislation’s most punitive taxes and penalties. The panel voted to spare retirees and employees in high- risk professions from a new tax on the costliest insurance plans, reduce or waive fines for people who fail to buy coverage and give states money to help insure low-income Americans.
Lobbying - I heard a fascinating presentation on lobbying yesterday. The most shocking figure was the $4 million that Senator Baucus has taken from the health and insurance sectors in his political career. This graphic from the Sunlight Foundation shows how Senator Baucus is connected to companies and associations with a vested interest in how health reform turns out. Much of it is built around his former staffers who have now become lobbyists. I know, I'm late to this party. Months ago, Ezra Klein asked the question, "Why Does Max Baucus Take this Money?"
Ezra Klein - Don't Read The Bill! - A bill is written in plain English so the legislators can actually grasp its provisions, and CBO scores that version. After passage, the bill is rewritten in legalese, and lawyers go back to make sure there are no discrepancies between the "plain English" and the legislative language. If there are, the legal language is rewritten to reflect the English. This worked for the Committee's Republicans when they chaired it, and it worked for the Democrats when they chaired it, and it pretty much worked for everyone until Senator Bunning realized that changing it could delay health-care reform by three weeks.
Considering Carper’s Public Option Compromise - Politico is reporting that Sen. Tom Carper (D-DE) is floating a new public option compromise that would “allow states to individually decide whether to create a private-insurance competitor such as a government plan and a nonprofit insurance cooperative, or to open up state-based insurance pools for government workers to every resident.” The option won’t come up during the Senate Finance Committee’s mark-up but may end up in the merged Senate bill or in an amendment offered on the Senate floor. The idea mirrors Len Nichol’s proposal to establish a series of public options based on already existing state-employer health plans (currently offered in 30 states).
Hissy Fit Of The Day (incl videos) - So, let me get this straight: the same party that's been saying the Democrats are planning to pull the plug on Grandma for months is having an epic fit of the vapors because Alan Grayson said that the Republican Health Care plan is "Don't get sick and if you do get sick, die quickly?" Really? How do they live with this much gall?
Rep. Alan Grayson May Just Fuck Your Shit Up - It's too soon to tell, but there's a good chance that Representative Alan Grayson, he of the "Die Quickly" Republican health care plan, will end up fucking your shit up. Too rich to be bought off, Grayson's been fucking with the powerful for a few years now. As an attorney, he represented whistleblowers, going after the hundreds of millions of dollars in fraud committed by contractors and others in Iraq. He told CNN in April 2006, "The development fund of Iraq was looted by war profiteers and war whores." Check out the huge ass article on him in Vanity Fair from 2007
Defeating an incumbent Republican in a previously solidly Republican district as part of the Obama wave in 2008, he's an attack dog straight out of old school progressive politics.
Matt Taibbi - Congressman who went werewolf on me now spooks Fed officials - I have personal experience with… well, let’s call it the unique personality of Alan Grayson. In his capacity as an attorney he once basically threatened to have me dismembered and have my body parts dumped in a tin canister and fired into the center of a burning supernova. And that’s actually underselling the real language he used.
Has Iran Stopped Beating Its Wife Yet? - The world is witnessing a contest to see who can act more stupidly: the Iranians or us. The sides are evenly matched. Iran has Mahmoud Ahmadinejad for a president and we have Hillary Clinton for a Secretary of State. Hillary doesn’t seem to know a nuclear weapon from a nuclear reactor; Ahmadinejad doesn’t seem to know his sitting part from his elbow.
Do you want to know why Iran has a nuclear program? It's called Peakoil, and it has global consequences - The principal lesson taught in school regarding personal finance is that everyone should have at least a five-year business plan. This is where Iran’s nuclear program comes in. You see, even though we may be under the assumption that an oil well will produce oil indefinitely, reality is much different. One of the most important observed properties of oil wells is that they follow Hubbert’s peak theory postulate, “that for any given geographical area, from an individual oil-producing region to the planet as a whole, the rate of petroleum
Oil: Iran's trump card - - Don't look for Iran to throw up the white flag anytime soon.The Obama administration is scrambling to tighten trade sanctions against Iran after the disclosure last week that Tehran was hiding a heavily fortified facility that many believe is designed to make material for nuclear weapons. But the kind of sanctions that would really hit Iran's economy - sanctions against its energy industry - are thought to be off the table because China and other nations are too reliant on Iran's oil.
The Peak Oil Downside Will Be Steeper Than The Upside - Those readers who have some passing familiarity with the concept of peak oil have no doubt seen a picture of the traditional statistical distribution known as a “bell shaped curve.” These bell shaped curves make sense to people, because in a world with finite resources, what goes up, must come down. These symmetrical bell shaped curves are however lulling us into an attitude of complacency, leading us to believe that we have decades to move off of oil. This is just not so, and this article discusses five serious reasons why this erroneous perception needs to promptly be abandoned.
Fisking Scientific American on Oil - I have now read the Scientific American article. It is perhaps one of the more, if not the most insidious of the recent media pieces on peak oil, in that it leverages the truth about technological advances in oil exploration and extraction to create a falsehood: that these technological advances increase aggregate flows in world supply. It was bad enough that the NYT piece invoked Kashagan as an example--a howler of an example really--because of course Kashagan was discovered in 2000 and not a drop of oil will flow until 2014 (at huge expense and after many western oil cos have abandoned the project after huge losses). That the NYT would invoke Kashagan as an example of recent discoveries is almost absurdist. The Sci-Am article also trades on one of the most common, recurring misunderstandings and that has to do with scale. In other words, we are always finding new oil and we have to find new oil because we are losing at least 4 Mb/day each year to decline. So we have to not only find new oil, but we have to develop it and get it flowing each year to make up for existing decline.
Pemex to produce less than 1.5Mb/d by 2017 - It will be very difficult for Mexican state oil company Pemex to produce more than 1.5Mb/d oil by 2017, independent Mexican energy analyst David Shields said in a presentation at the Green Expo in Mexico City. Production is currently just more than 2.5Mb/d, down from some 3.4Mb/d four years ago. In the case that Pemex produces less than 1.5Mb/d by 2017, the output would be barely enough to provide crude to the company's existing six refineries without considering its plans for a new one. The country would also become a net crude importer.
Oil Discoveries have been Declining Since 1964 (chart)
Energy Economics and Some Energy Myths About The 21st Century - Output in the U.S. peaked at the end of l970 at a value of about 9.5 mb/d - which is approximately the present output of Saudi Arabia and Russia, the largest producers of oil in the world. When that peaking took place there was still an enormous amount of oil onshore or directly offshore the United States. Production then dropped to 7.5 mb/d, but when the giant Prudhoe Bay field in Alaska came on line, the total output in the U.S. turned up. Unfortunately however, the previous peak was never attained. Instead, total U.S. production stopped short of that peak and once again began to decline. Today U.S. output is approximately 5.5 mb/d, and there is only one way for it to go, which is down.
Systemic Collapse: The Basics - Oil depletion is the most critical aspect in the systemic collapse of modern civilization, but altogether this collapse has about 10 principal parts, each with a vaguely causal relationship to the next. Oil, metals, and electricity are a tightly-knit group, as we shall see, and no industrial civilization can have one without the others. As those 3 disappear, food and fresh water become scarce (fish and grain supplies per capita have been declining for years, water tables are falling everywhere, rivers are not reaching the sea). These 5 can largely be considered as resource depletion, and the converse of resource depletion is environmental destruction.
The "Violence-Inducing Intoxicant" - Whether another oil crunch is looming or the price-per-barrel spikes again, two things are certain: One, petroleum demand isn't going away anytime soon. Two, it will continue to cause problems--both for the countries that need it and the often nasty regimes that produce it. Peter Maass, a contributing writer for The New York Times Magazine, examines the global impact of 'black gold' in Crude World: The Violent Twilight Of Oil. He talks to rebels, royalty, middlemen, environmentalists, indigenous activists, CEOs -- the stories that "tell the larger story of petroleum in our time."
Africa Pressures China's Oil Deals - WSJ.-- China's search for large stakes in some of Nigeria's richest oil blocks comes against a backdrop of problems in other African countries where the Asian giant has oil operations. Nigeria's oil minister and a presidential spokesman said state-owned China National Offshore Oil Corp., or Cnooc, is in advanced talks with Nigeria to take over blocks that are owned by Royal Dutch Shell PLC and other companies, but are underutilized. An official with Nigeria's state oil company said about 20 onshore blocks were on offer and that negotiations were at a late stage with some companies, including Cnooc. He said he wasn't sure exactly how much crude Cnooc was vying for, but that targeted investment would run into several billion dollars.
China becomes S.Africa's top export destination - Reuters - China overtook the United States as South Africa's biggest export destination in the first half of 2009, reinforcing the Asian country's push to build trade links with Africa. South African trade and industry department data also showed on Friday China replaced Germany as its largest country trade partner.
CIC Buys Stake in Kazakh Gas Company for $939 Million (Update3) - (Bloomberg) -- China’s sovereign wealth fund bought a stake in the London-traded unit of Kazakhstan’s state-run energy company, taking its spending on resources to at least $3.69 billion this month. China Investment Corp., which holds almost $300 billion, bought an 11 percent stake in Astana, Kazakhstan-based JSC KazMunaiGas Exploration Production for about $939 million by purchasing global depositary receipts, according to a statement dated today on the Beijing-based fund’s Web site.
Rare Earths are Vital and China Owns them All (MarketWatch) -- Rare earths may not be on most investors' radars, but they are certainly in almost any high-tech item they use -- and in the world of rare earths, China is king. The U.S. Geological Survey recognizes 17 different rare earths, materials with science-fictionesque names like lanthanum and gadolinium. They are used in everything: glass polishing and ceramics, automotive catalytic converters, computer monitors, lighting, televisions and pharmaceuticals. Without these elements, much of the modern economy will just plain shut down.
Volcker Says China’s Rise Highlights Relative U.S. Decline - (Bloomberg) -- Former Federal Reserve chairman Paul Volcker said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S. “I don’t know how we accommodate ourselves to it,” Volcker, an economic adviser to President Barack Obama, said in an interview with PBS’s Charlie Rose taped yesterday in New York. “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”
Why Volcker Should be Fired - Volcker claims that the rise of China and other emerging economies has underscored the decline in the comparative economic and intellectual leadership of the US. While such sentiment is fine for op-ed writers, it should not be acceptable for a senior economic advisor to echo this mis-information.
China moves into reserve position - The tectonic plates of the global financial system have shifted. The post-colonial order created at Bretton Woods irreparably cracked, together with Wall Street, in September 2008. Time has come to replace it. An early move in that process began on March 23, when China's central bank governor Zhou Xiaochuan called on the International Monetary Fund to expand the basket of special drawing rights (SDRs). The next move occurred on May 3, when China, with Japan, South Korea, and the Association of Southeast Asian Nations, announced a US$120 billion regional currency stabilization fund, expected to be renamed the Asian Monetary Fund.
China's Crisis Response Goes Global - Crisis Talk - The World Bank Group - China has been an essential player in fostering a global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was dearly needed. Today's conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts (see previous post). Can the Chinese government succeed in boosting domestic consumption? Are there other initiatives that China can take to put the global economy in motion? The answer to both of these questions is a tentative 'yes'.
China's economic numbers don't add up - The Chinese economy is cheerfully mad. Consider some of these econo-nuggets: New brokerage accounts are soaring, with more brokerage accounts in China than there are members of the Communist Party. Chinese car sales passed the U.S. in the first half of 2009. Beijing alone sees 1,200 new cars a day on the roads. Lending is also doing an up-and-to-the-right hockey-stick -- new lending by Chinese banks has tripled in the last year. And the country's GDP is forecast to rise a whopping 9 percent in the current year, and 10 percent the year after.Under the surface, however, things are even stranger. For example, despite the tripling in Chinese bank loans, government data shows non-performing loans declining. While that's possible, I suppose, it would be highly unusual for more lending to be safer than less.
Everything You Ever Wanted To Know About The Coming China Collapse...Here, courtesy of Pivot Capitol Managment, is the full case for a major China slowdown. Why:There's more debt in China than common figures suggest.Capital-expenditure driven growth is likely to collapse soon.The China urbanization driver is far weaker than proclaimed.GDP is full of wasteful spending.
Can the G-20 rebalance trade between the U.S. and China by resurrecting a big idea from John Maynard Keynes? - Time - Ever since every two-bit financial commentator on the planet started complaining that, a year after the start of last year's financial crisis, almost nothing had been done to prevent the next one, reform trial balloons have been floating skyward. There was the Fed's pay-regulation scheme, the SEC's new credit-rating-agency rules, Chris Dodd's super-regulator plan, Tim Geithner's proposal to raise bank capital requirements worldwide (I'm sure I'm missing some others). And now, news in the WSJ of a G-20 effort to rebalance the global economy.
Imagine when China runs a trade deficit - If current trends continue, China might swing to a trade deficitin the not-too-distant future. Given that China has enjoyed morethan a decade of strong exports, this may sound a bit far-fetched.But even if it happens, this would not necessarily be something forthe world to worry about. Some economists have recently sounded alarm bells about thepossibility of a Chinese trade deficit. They argue that if theChinese current account surplus shrinks, it would leave Beijingwith less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S.consumers?
The G20 and Why Export Dependency And Global Imbalances Matter - With the timing of the latest G20 meeting set to coincide with the run-in to the German elections acrimonious debate has not been absent, but even as the passions generated by the arrival of voting day subside, it is clear that just beneath the surface their lie some simmering problems which simply will not go away. Despite the fact that nothing is really on the table that will make that much difference in the short run, I think the structural transformation that they are carrying out at G20 level is going to be very important in the longer term in finding eventual solutions.
America as Argentina? - Dead Cats Bouncing - With Hilary Clinton as Eva Peron singing 'Don't cry for me Obama'? One of the most remarkable economic reversals over the last decade has been the impressive macroeconomic discipline shown by leading emerging markets from Brazil to India, while developed nations such as the UK and US have become increasingly reckless and profligate. While the former have been steadily re-rated by investors leading to a huge secular bull market in emerging market equities and bonds, the latter have yet to pay the price for their growing fiscal irresponsability.
New credit squeeze could hit UK, warns IMF - UK Independent - A second credit squeeze and a £200bn national "funding gap" threatens to sabotage the recovery in the British economy, the IMF warned yesterday. In its latest Global Financial Stability Report, the fund said that a combination of a soaring government deficit and the borrowing needs of British companies and consumers – coupled with a still broken banking system – would leave the UK with a national "funding gap" of 15 per cent of GDP, or around £200bn next year, much higher than in either the US or the euro area.
The BBC & household debt - The question then arises: why is debt so high? TV advertising, that‘s one reason. A new paper by Matthew Baker and Lisa George establish this very cleverly. They exploited the fact that TV’s spread across the US in the 1950s was uneven, with some areas getting it earlier than others. They show that, in those areas where TV reception arrived earlier, households were more likely to take on debt. In other words, TV - and TV advertising - contributes to household borrowing. This is because adverts don’t just raise demand for one good relative to another. They raise demand for goods generally relative to leisure. And because we can’t increase our labour supply quickly, this demand for goods leads to increased borrowing.
Bank of England Bills and Printing Money - Regular readers may remember that, some time ago, I sent some questions to the Bank of England regarding quantitative easing (QE - printing money), following an offer by the deputy governor to answer QE questions. I sent an email on July 16th, and now have a response. Before looking at the reply, these were my questions...
Asset sales & deficit fetishism - The Times reports that the government is planning to sell off assets to reduce the deficit. There’s certainly stuff available to sell: the latest national assets register estimated that the government had £294.8bn of fixed assets in 2007. Such sales are, though, a bad way of reducing borrowing. The sales are one-off, but the deficit is ongoing. They do nothing to reduce the structural budget deficit.
It's Not Just the Foreign Conservatives - It should come as little surprise that the energy and power companies want to do something about Anthropogenic Global Warming: they went through the spike in oil prices a couple of years ago as well, and saw the customer reaction. If there was any doubt that it's not just a good idea but good business as well, $150/barrel and home heating oil spikes that flood the complaint lines and see the orders decline only solidified the idea. (Not to mention that they employ many of the people who will be leading the R&D of those alternative sources, from OTEC to solar to the newer, safer generation of nuclear plants.)
Paul Krugman: Pigou, Glenn Beck, and the false case against cap-and-trade - NYTimes - Now, a key point in all this is that the emissions tax or, equivalently, the rent on emissions permits, does not represent a net loss to society. It’s just a transfer from one set of people to another — from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated. The only net loss is the Harberger triangle created by the reduction in emissions — which has to be set against the benefits of reduced pollution.
Cassandras of Climate - Paul Krugman - NY Times: Every once in a while I feel despair over the fate of the planet. If you’ve been following climate science, you know what I mean: the sense that we’re hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it. And here’s the thing: I’m not engaging in hyperbole. These days, dire warnings aren’t the delusional raving of cranks. They’re what come out of the most widely respected climate models... The prognosis for the planet has gotten much, much worse in just the last few years.... see also The textbook economics of cap-and-trade - Paul Krugman
Solar Panel Tariffs - The issue began with a short letter to United States customs officials last December from the small American subsidiary of a Spanish energy company. The subsidiary, GES USA, wanted to know what the tariff would be to import certain solar panels from China.On Jan. 9, the customs agency wrote back that the panels had become too sophisticated to qualify for duty-free import. Instead — because the panels contain a basic electronic device for safety and energy efficiency — they would be treated as electric generators, subject to a duty of 2.5 percent.
A green stimulus: tax credits for home energy efficiency - A consensus seems to have emerged in the United States that fresh thinking is needed for a targeted stimulus package that will address effectively the many connected problems the economy faces. One piece of the problem is that there has been a near-halt in construction, as it has become clear that too many homes have been built on speculation that house prices could only rise and never fall. Moreover, there has been a large decline in borrowing to finance the construction of homes and commercial buildings, as both households and businesses (even financially sound ones) have hunkered down to weather the storm...these points could be addressed by a single proposal that Congress could pass quickly and which would have an immediate effect: a personal tax credit for home improvements and renovations that increase energy efficiency...
Alternative Energy Projects Stumble on a Need for Water - NYTimes - In a rural corner of Nevada reeling from the recession, a bit of salvation seemed to arrive last year. A German developer, Solar Millennium, announced plans to build two large solar farms here that would harness the sun to generate electricity, creating hundreds of jobs. But then things got messy. The company revealed that its preferred method of cooling the power plants would consume 1.3 billion gallons of water a year, about 20 percent of this desert valley’s available water.
EPA Will Begin Regulating Industrial Global Warming Pollution In March, 2010 - Appearing at a climate summit in Los Angeles today, Environmental Protection Agency Administrator Lisa Jackson will announce the administration’s plan to regulate industrial global warming pollution, with or without the support of Congress. In May, the Environmental Protection Agency proposed global warming standards for motor vehicles, applauded by the auto industry. Under the rules of the Clean Air Act, when these regulations go into effect in March 2010, all major greenhouse gas polluters — from coal-fired power plants and oil refiners to methane-emitting landfills — are automatically subject to regulation
Unusual Arctic Warmth, Tropical Wetness Likely Cause for Methane Increase - 7thSpace Interactive - Unusually high temperatures in the Arctic and heavy rains in the tropics likely drove a global increase in atmospheric methane in 2007 and 2008 after a decade of near-zero growth, according to a new study. Methane is the second most abundant greenhouse gas after carbon dioxide, albeit a distant second. NOAA scientists and their colleagues analyzed measurements from 1983 to 2008 from air samples collected weekly at 46 surface locations around the world. Their findings will appear in the September 28 print edition of the American Geophysical Union’s Geophysical Research Letters and are available online now.
Science Report: Climate Change Speeding Toward Irreversible Tipping Points - The speed and scope of global warming is now overtaking even the most sobering predictions of the last report of the Intergovernmental Panel of Climate Change, finds a new report issued by the United Nations Environment Programme, entitled "Climate Change Science Compendium 2009.", a set of facts compiled in association with scientists around the world. This new analysis of the latest, peer-reviewed science indicates that many predictions at the upper end of the Intergovernmental Panel of Climate Change's forecasts are becoming more likely. Some events thought likely to occur in the long-term are already happening or will happen far sooner than had previously thought, the report shows.
Two meter sea level rise unstoppable-experts - (Reuters) - A rise of at least two meters in the world's sea levels is now almost unstoppable, experts told a climate conference at Oxford University on Tuesday."The crux of the sea level issue is that it starts very slowly but once it gets going it is practically unstoppable," said Stefan Rahmstorf, a scientist at Germany's Potsdam Institute and a widely recognized sea level expert."There is no way I can see to stop this rise, even if we have gone to zero emissions."
No rainforest, no monsoon: get ready for a warmer world - New Scientist - BY 2055, climate change is likely to have warmed the world by a dangerous 4 °C unless we stop pumping greenhouse gases into the atmosphere the way we do now. This is the startling conclusion of a study by the UK Met Office, unveiled at a conference in Oxford this week.
Why so soon? Because temperature rises caused by greenhouse gas emissions are expected to trigger dangerous feedback loops, which will release ever increasing amounts of greenhouse gases. Interactive feature: Explore the 4 °C world in Google Earth (.kmz file download)
Water Subsidies - Water is another of those scarce resources that we have a difficult time pricing, or pricing appropriately. A year or two ago, the southeast (including the home town) was afflicted by a pretty serious drought that shrank many of the reservoirs on which the region’s cities depend. (These reservoirs were and are already heavily taxed by very rapid population growth.) The drought and water shortage generated a whole production of misguided, indirect solutions. Local governments, obviously not anxious to increase water rates, tried out various rationing methods. The whole thing was reminiscent of quixotic efforts to control traffic congestion or parking shortages through various rules and costly enforcement efforts, rather than just pricing the scarce resource so that it isn’t overused.
Implications of Climate Change on Food Crops - In a recent study, Wolfram Schlenker and I set out to develop a better statistical model linking weather and U.S. crop yields for corn, soybeans, and cotton—the largest three crops in the U.S. in production value. Corn and soybeans are of particular interest because they are really important for global food prices and the U.S. contributes about 40% of the world’s production of these crops, and a much larger share of world exports for these crops. The goal was to find the causal links between observed climate and yields so that we might predict how yields will change as the climate changes.
UN: Climate Change Impact On Agriculture Dire (AP) - A U.N. agency warns that the climate change will badly affect agriculture and hit developing nations hardest, leading to unreliable food production and higher prices. The Food and Agriculture Organization says climate change will push food prices moderately up until 2050. After that, prices will rise more significantly in line with further increases in temperatures.
Aquacalypse Now - The End of Fish - Our oceans have been the victims of a giant Ponzi scheme, waged with Madoff–like callousness by the world’s fisheries. Beginning in the 1950s, as their operations became increasingly industrialized--with onboard refrigeration, acoustic fish-finders, and, later, GPS--they first depleted stocks of cod, hake, flounder, sole, and halibut in the Northern Hemisphere. As those stocks disappeared, the fleets moved southward, to the coasts of developing nations and, ultimately, all the way to the shores of Antarctica, searching for icefishes and rockcods, and, more recently, for small, shrimplike krill. As the bounty of coastal waters dropped, fisheries moved further offshore, to deeper waters. And, finally, as the larger fish began to disappear, boats began to catch fish that were smaller and uglier--fish never before considered fit for human consumption.
Could Food Shortages Bring Down Civilization? - In early 2008, Saudi Arabia announced that, after being self-sufficient in wheat for over 20 years, the non-replenishable aquifer it had been pumping for irrigation was largely depleted. In response, officials said they would reduce their wheat harvest by one eighth each year until production would cease entirely in 2016. The Saudis then plan to use their oil wealth to import virtually all the grain consumed by their Canada-sized population of nearly 30 million people. India's water balance notes that 15 percent of its grain harvest is produced by overpumping. In human terms, 175 million Indians are being fed with grain produced from wells that will be going dry. The comparable number for China is 130 million.
A safe operating space for humanity : Nature - Identifying and quantifying planetary boundaries that must not be transgressed could help prevent human activities from causing unacceptable environmental change. Summary: New approach proposed for defining preconditions for human development. Crossing certain biophysical thresholds could have disastrous consequences for humanity. Three of nine interlinked planetary boundaries have already been overstepped.
Post-human Earth: How the planet will recover from us - New Scientist - The Anthropocene has yet to be accepted as a geological time period, but if it is, it may turn out to be the shortest - and the last. It is not hard to imagine the epoch ending just a few hundred years after it started, in an orgy of global warming and overconsumption. Let's suppose that happens. Humanity's ever-expanding footprint on the natural world leads, in two or three hundred years, to ecological collapse and a mass extinction. Without fossil fuels to support agriculture, humanity would be in trouble. "A lot of things have to die, and a lot of those things are going to be people. In this most pessimistic of scenarios, society would collapse, leaving just a few hundred thousand eking out a meagre existence in a new Stone Age.