Exit Strategies: The IMF Recipe - In advance of last weekend’s meeting of finance ministers and central bankers from the Group of 20, the International Money Fund staff offered seven principles to guide exit strategies to “pave the way for strong, sustained and balanced economic growth” that it recommends. Among the ingredients: Don’t rush to exit. Do be clear about plans to reduce government debt over time. Central banks can raise interest rates before they unwind unconventional monetary policies. Coordination among countries — although not synchronization — is important.
G20 ministers agree on nothing - Gordon Brown suggested a financial transactions tax, causing an outcry among delegates, including apparent among his own delegation. Brown called for a new social contract between the finance sector and the rest of society. The FT reports that Mr Brown’s proposal of a global financial transactions tax was immediately rejected by the US, Canada, Russia, the IMF and the ECB. Tim Geithner said a day-by-day financial transaction tax is not something he was prepared to support, and Domique Strauss-Kahn called it an old idea whose time had passed. The meeting also failed to agree a global target of finance to combat climate change. The reports said finance ministers not only failed to agree how much money developed countries pay to developing countries to encourage them to reduce their carbon emissions, there was also failure to agree on how the money would be spent, if such agreement were ever to occur.
G20 maintains $1trn stimulus as Brown calls for global bail-out fund - The world's 20 richest nations have pledged to maintain their $1trn stimulus package to support their economies in the wake of the global banking crisis.Finance ministers from the G20 said the measures would continue until global recovery is assured.In a statement at the end of the two-day summit in St Andrews, Scotland, the ministers said economic and financial conditions had improved but recovery was "uneven and remains dependent on policy support". High unemployment remained a major concern.Gordon Brown, the British prime minister, called for a new "economic and social contract" with the world's banks to ensure that the cost of their failure would never again be borne by taxpayers.
Britain and U.S. Clash at G-20 on Financial Tax to Insure Against Crises - — The United States and Britain voiced disagreement Saturday over a proposal that would impose a new tax on financial transactions to support future bank rescues. Prime Minister Gordon Brown of Britain, leading a meeting here of finance ministers from the Group of 20 rich and developing countries, said such a tax on banks should be considered as a way to take the burden off taxpayers during periods of financial crisis. His comments pre-empted the International Monetary Fund, which is set to present a range of options next spring to ensure financial stability
G-20 Splits on Tobin, Says Banks May Pay for Bailouts (Bloomberg) -- Group of 20 governments signaled banks will be forced to cover a greater cost of future bailouts even as they split over whether that should be achieved by taxing financial trading. After spending more than $500 billion in taxpayer’s money to save banks from Royal Bank of Scotland Group Plc to Citigroup Inc., officials debated how the financial industry can be forced to pay for future rescues. The specifics sparked division, with U.K. Prime Minister Gordon Brown’s call to consider a so-called Tobin tax immediately opposed by U.S. Treasury Secretary Timothy Geithner. “It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told finance ministers and central bankers at their Nov. 7 talks. Geithner said “we want to make sure that we don’t put the taxpayer in a position of having to absorb the costs of a crisis in future.”
IMF exploring insurance levy on banks (Reuters) - The International Monetary Fund is exploring the idea of making banks pay insurance fees to fund any future rescues in the sector, IMF managing director Dominique Strauss-Kahn said on Sunday.He said such a tax would be in line with a proposal at the weekend by British Prime Minister Gordon Brown, who urged world governments to consider imposing a levy on banks.Strauss-Kahn, speaking by telephone to Reuters, said his organization was not pursuing a global tax on financial transactions -- a so-called "Tobin tax" -- which was one of several options floated by Brown.But British media reports suggesting there is a split between the IMF and Britain on the fundamental idea of imposing a levy are wrong, Strauss-Kahn said
Trading this crisis for the next - The G-20 statement contained seven principles to guide policy during the balance of the crisis period. However, the agreed to policy principles juxtaposed with US trade data suggest that the G20 may be promoting the current recovery at the expense of contributing to a future crisis. The likely existence of this trade-off can be seen by reading the G20 statement (The executive summary is reproduced here) and examining the behavior of the US trade deficit. The underlying politics also imply that probability of international economic and financial cooperation extending past the current stimulus packages is low to non-existent.
G20 leaves door open for fresh pressure on dollar (Reuters) - The U.S. dollar may come under renewed pressure from emerging market currencies and the euro after a meeting of the world's top finance officials failed to take concrete action on rebalancing global money flows.Finance ministers and central bank governors of the Group of 20 major countries, meeting in Scotland at the weekend, launched a "framework" in which they will discuss how to reduce trade and savings imbalances between nations.But their communique talked only in general terms about rebalancing economies, and implied they might not agree on specific policies for individual countries to adopt before the end of next year at the earliest
Against a transactions tax - Gordon Brown’s proposal for some sort of transactions tax seems to have been rejected by Tim Geithner, which means the idea is, in effect, dead: such a tax is only remotely feasible if applied globally. This is good. There are (at least) three arguments against such a tax. It would have done nothing to have stopped this financial crisis, and might even have made things worse. The two markets upon which a tax would impinge most - FX and stock markets - played little role in this crisis; they were, as near as dammit, innocent bystanders. What the tax might have done, though, is reduce the liquidity of mortgage derivatives. But this was, for many banks, precisely the problem
Fed's Fisher: Worried About Unintended Risks Of Very Low Rate Policy - WSJ--In a speech emphasizing the conditional outlook for monetary policy, a top central bank official said Tuesday he's mindful of the risks very low interest rates can create in financial markets. Federal Reserve Bank of Dallas President Richard Fisher was addressing the so-called "carry" trade, which takes advantage of cheap dollar borrowing costs tied to the central bank's current zero-percent interest rate stance.
Talking about Tomorrow’s Monetary Policy Today - SF Fed Economic Letter - Why do central banks issue statements about future monetary policy? As Woodford (2005) points out, the public's expectations of future policy are critical to effective monetary policy. Although central banks control current overnight interest rates, these do not matter much for economic decisions. Instead, what matters is the expected path of short-term interest rates, which influences long-term interest rates today. Thus, the ability of central banks to influence the economy today depends upon their ability to shape market expectations about the path of policy rates in the future. Using public statements to guide expectations about future short-term rates can become especially important for the kind of situation that many central banks find themselves in today, in which economies are weak and short-term rates are already effectively at zero.
Quantitative Easing Has Been A Monetary Failure - The chart below demonstrates what the implied Fed Fund rate should be today based on the Taylor Rule: a whopping -6.15%! In other words, due to the Fed's inability to charge people money to hold monetary assets (negative rates), QE is expected to inflate assets to the point where the deteriorating economic data drowns out the implied negative number. In practice, the Taylor result means that the economy is still bogged down in a deep deflationary slump. One side effect: look for Excess Reserves to keep rising so long as the direct threat of deflation not wiping out trillions of bad debts at bank balance sheets, persists. Another side effect: look for the Fed's "assets" to start growing exponentially quite soon as the deflationary threat truly takes hold.
It’s the stupidity economy - Krugman - OK, maybe a more polite way to say it is this: bad ideas are acting as serious constraints on policy. We’re in a liquidity trap, with interest rates up against the zero bound. This means that conventional monetary policy isn’t sufficient. What should we do? The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates. But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).
Are TIPS Spreads the Warning Light for Contractionary Monetary Policy? - Scott Sumner’s last few posts have been a tour de force. I didn’t need any convincing that Fed policy was too tight in late 2008, but this was based mainly on intuition and being a CNBC/Bloomberg junkie. From my window it looked as if liquidity demand was spiking and there was a flight to quality that needed to be counterbalanced. Scott gets there a slightly different route but we both freaked out about the following chart. Unlike Scott, I have hard time interpreting this as a collapse in five year inflation expectations. To be sure, that’s part of it. There was little question late last year that the CPI was about to turn negative on year-on-year basis and that any upward inflation adjustments bond holders had from the last few years would vanish.
TIPS: Inflation Is Coming! Inflation Is Coming!- The inflation expectation embedded in TIPS (Treasury Inflation Protected Securities) has jumped in recent weeks after a long slumber. After jawboning about hyper-inflation for two years, traders may finally be beginning to actually worry about it. FT: Market expectations for inflation in the US and UK have reached their highest levels since late last year amid growing investor demand for government securities that offer protection from rising prices
Inflation and Inflation Expectations - Cleveland Fed - In principle, expectations are not observable. But there are at least two sources that can be used to infer them: surveys and market-based information. Inflation expectations play a crucial role in monetary policy making. Not only do they tell policymakers something about the real expected cost of borrowing and hence the viability of investment plans, they also help policymakers gauge the public’s perception of the central bank’s commitment to maintaining a low and stable rate of inflation. Especially in the current policy environment, where the Fed has been forced by events to take unconventional actions, it is more important than ever to make sure that long-run inflation expectations are well anchored and that the policy message is well understood by the public.
What are these Fed presidents up to? - the Economist - THE Financial Times' Krishna Guha writes up some additional takeaways from his interview with St. Louis Fed president Jim Bullar...I suppose it's encouraging that Mr Bullard's view isn't the consensus, but I'd sure like to know where in the data he sees signs of either a meaningful reduction in the unemployment rate in the offing, or any market expectations of incipient inflation. Presumably, he's not just basing these views on his gut. Right?
Yellen Is More Worried About Disinflation - WSJ – SF Fed - excerpts from her remarks - The strength and durability of the expansion is in question. Some of the rebound is due to temporary government programs and a swing in inventory investment that will not provide an ongoing source of growth it may take quite a while for financial institutions to heal to the point that normal credit flows are restored. The credit crunch hasn’t entirely gone away… households have been pummeled and prospects for consumer spending are cloudy When we turn to commercial real estate, the prospects are worrisome This brings me to inflation, a topic that has been hotly debated I believe that the more significant threat to price stability over the next several years stems from enormous slack in the economy that is pushing inflation lower
What Is Inflation and How Does One Measure It? - Mish - To understand inflation, one must first understand what money is and how to measure it. Please read What is Money and How Does One Measure It? before attempting to understand what follows.Unfortunately there is no general agreement as to the definition of inflation. Here are some of the widely used definitions as noted in Inflation: What the heck is it?
Commonly Used Definitions 1.Decline in purchasing power of the currency held – 2.Rising prices in general (essentially the same as #1 although some might disagree) – 3.Rising consumer prices (CPI) 4.Rising producer prices (PPI)5.Rising prices due to expansion of money supply 6.Rising prices due to expansion of money supply and credit 7.Expansion of money supply 8.Expansion of money supply and credit. Four of those definitions refer to money supply. That brings up another issue. When one refers to "money supply" are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation?
The Fed Is Already Transparent - WSJ - The Fed produces a report and testifies twice a year before Congress about its monetary policy actions. During this testimony, the Fed is forced to explain what it has done, and elected officials question the Fed about its choices. In addition, the Fed makes the minutes from its monetary policy meetings available to the public, and Fed officials routinely give speeches explaining their approach. What's more, it is highly doubtful that the GAO has the technical competence to evaluate monetary policy. If it did try to conduct these audits, at best it would merely rehash known information. At worst, the GAO would generate confusion by offering its own analysis. The Fed's independence is critical to its credibility. During the financial crisis, this credibility allowed the Fed to take extraordinary action to prevent a possible depression without triggering inflation. But eventually the Fed will have to scale back its unprecedented monetary accommodation. When it does move to tighten monetary conditions, it must be allowed to do so without political interference.
Global Monetary Policy Outlook - Roubini - Last week was a busy one for the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). Policymaking is tricky when different asset classes are sending very different signals about the economy. However, those different signals are themselves a byproduct of policy. Which is right? While RGE leans towards the U-shaped camp, we do not expect risky assets to invert their course as long as the Federal Reserve commits to maintaining “exceptionally low levels of the federal funds rate for an extended period.” So the policy dilemma is one of having to maintain “exceptionally low rates” given the still very difficult real economic conditions, but with the danger of an increasing disconnect between risky asset valuations and the economy–which could eventually snap back and compromise economic and financial stability in the medium term.
Boom or Bust Leaves Bankers With Bum Choices (Bloomberg) -- Imagine you are a central banker. You arrive at the office each morning and scan the daily financial pages and newswires. You read that markets -- stocks, junk bonds, gold, oil -- are positively giddy due to “all the liquidity sloshing around that has to go somewhere,” or something to that effect. That would be the liquidity you created. You may be starting to feel pangs of anxiety before you’ve had that first cup of coffee. You know from your crash course in economic-survival medicine that cleaning up after a burst asset bubble isn’t as easy as it sounds. If you learned anything over the last two decades, it’s that today’s palliative can become tomorrow’s poison, that treating busts with prolonged periods of easy money leads to bigger bubbles, and that an ounce of prevention may prove to be the best cure. So what’s a policy maker to do?
Why Some Countries Are Stopping Their Stimulus- The Aussies' aggressive tightening is seen as the start of the global exit from the unprecedented liquidity governments have injected into their financial systems to avert an economic depression. It's a potentially dangerous step. No one knows exactly how a withdrawal will affect the tentative global economic recovery — just as it is not clear, even now, whether interest-rate cuts and huge stimulus spending in the U.S. and elsewhere are resulting in sustainable economic growth. The world is in uncharted territory. Policymakers are acting on the fly, without much in the way of historical precedence to guide them.
Producing Assets Uses Resources that Could Have been Used to Produce Consumption Goods and Services - At any given point in time consumption markets and asset markets compete against each other for resources. If income-earners today save more, they must today spend less, and vice-versa. Sound money allows interest rates to accurately reflect income-earners’ preferences for deferring consumption – that is, for investing resources in asset markets. The huge problem with active monetary policies – and not least with those that aim to restore prices to boom levels – is that these policies distort interest rates, causing markets to misallocate resources between consumption markets and asset markets. The upshot is the recurrent need for markets to slough off investment projects that are not sustainable over the long haul.
Global Confidence Dips as Policy Makers Begin Exit Strategies - (Bloomberg) -- Confidence in the world economy dipped in November as central banks’ actions to withdraw some emergency measures sparked concern about the strength of the recovery, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 60.3 from 61.7 in October, the highest level in the series that began two years ago. The index exceeded 50 for a fourth month, which means there were more optimists than pessimists.
"Asset Price Bubbles and Monetary policy" - Evans - Chicago Fed - I agree that the severity of the recent crisis argues against simply waiting and mopping up after the fact if and when the prices of some assets do collapse. But the type of proactive response by a central bank that I envision is not well captured by the expression "leaning against a bubble." I prefer to see policy reacting to apparent exuberance in asset markets and the problematic risk exposure this could create, rather than initiating action out of a strong conviction that these particular assets are overvalued. In addition, the expression "leaning against a bubble" evokes polices that are aimed at achieving some targeted decline in asset prices. In contrast, I view the goal of intervention as insuring that exuberance in asset markets does not ultimately threaten the financial system or contribute to financial distress.
Low Interest Rates: The Next Economic Bubble - Newsweek - When Nouriel Roubini talks, the world listens. Last week, Roubini was shouting. Writing in the Financial Times, he warned that the Federal Reserve and other government central banks are fueling a massive new asset "bubble" that—while not in imminent danger of bursting—will someday do so with calamitous consequences. Here is Roubini's argument: The Fed is holding short-term interest rates near zero. Investors and speculators borrow dollars cheaply and use them to buy various assets—stocks, bonds, gold, oil, minerals, foreign currencies. Prices rise. Huge profits can be made. But this can't last, Roubini warns. The Fed will eventually raise interest rates. Or outside events will change market psychology. Then investors will rush to lock in profits, and the sell-off will trigger a crash. Stock, bond and commodity prices will plunge. Losses will mount, confidence will fall and the real economy will suffer."The Fed and other policymakers seem unaware of the monster bubble they are creating"
IMF: Dollar Carry-Trade Creating Bubbles Around The World - The International Monetary Fund (IMF) highlighted the fact that low interest rates in the U.S., plus an apparent "one-way" bet against the dollar has created a global dollar carry-trade that is driving capital flows into emerging markets.If not handled properly, this will lead to emerging market asset bubbles, which arguably have already begun to inflate.The fact that the IMF is increasingly vocal on the subject suggests that this process is really starting to become quite substantial phenomenon in many countries.
Economists fear impact of 'dollar carry trade' - The global economy may be poised for the creation of a massive and potentially explosive “dollar carry trade” — just like the pre-crisis yen carry trade, only more frightening and potentially much bigger. The warning was issued today at a summit of Asia Pacific leaders in Singapore and comes as a diverse variety of assets have begun to display bubble-like patterns of inflation: everything from gold and copper to fine wine and Hong Kong penthouses. The dollar carry trade, whereby investors borrow dollars at near zero interest rates to fund asset-buying sprees around the world, has been lurking as a possibility since the collapse of Lehman and the extreme monetary response to its aftermath.
On Carry and Other Tales... I’m amazed with the number of academics, journalists and “pundits” in my field who keep on talking about “the carry trade” as if it’s some sort of cult… “The end of carry as we know it”… “Carry-trade silence”… “Carry makes a comeback!”…Since last week, the carry trade has also found a mother, a father and some heavyweight patrons (like the Fed) who, apparently, keep on feeding it to monstrous and potentially self-destructive proportions. I want to use this post to respond to some of the points raised in these op-eds, notably with regard to the role of policy in feeding carry trades and, in turn, asset bubbles. But before I get there, let me deal with the cult notion first...
Debunking the size of the carry trade - Historically low interest rates in the United States are, as we know, supposedly encouraging investors to put on dollar-funded carry positions. But while current interest-rate differentials might imply this is a very profitable and popular trade, Barclays Capital warned clients on Thursday it would be a mistake to assume it’s quite as common as some believe. According to the BarCap analysts, it all comes down to volatility-adjusted spreads - i.e. the risk of exchange rates moving against you. In other words, it’s only when volatility diminishes that we will really begin to see the instigation of the “mother of all carry trades“. Be warned.
Mishkin Defend Bubbles (and of Course, the Fed) - Yves Smith - The press becomes more surreal with every passing day. If we didn’t all have a stake in the outcomes, this would make for great theater. First we have the absurd spectacle of bankers claiming that they are doing God’s work. Great! Then they should be willing to do it for free. I don’t recall the Bible discussing Jesus getting eight or nine figure compensation (or what passed for it back then), and the Gautama Buddha, born a prince, gave up all the trappings of wealth. Now for those who follow the markets, we have the Ministry of Truth in action on the comment pages of the Financial Times, in the form of today’s offering, “Not all bubbles present a risk to the economy,” by Frederic Mishkin. Somehow, that headline strikes me as trying to make the case, “Nuclear wars don’t have to be bad for you.”
The Liquidity Trap Does Not Make Monetary Policy Ineffective- With short-term risk-free interest rates essentially at zero in the major developed economies, conventional monetary policy is in a liquidity trap. As a number of commentators have observed, printing zero-interest-rate money to buy zero-interest-rate assets has no real economic effect because the assets are near-perfect substitutes for money. But does that mean that central banks have lost their power? Jim Hamilton asserts that central bank purchases of other assets, with positive yields, can always create inflation, though he is silent as to whether they can affect output. In recent months, central banks have purchased large quantities of longer-term assets. These purchases appear to have been effective at pushing down longer-term interest rates, which should stimulate economic activity...
Liquidity default and market regulation - VoxEU - Liquidity and default are inseparable. Liquidity problems fuel defaults and vice versa. This column discusses the shortcomings of current regulatory proposals to address liquidity and default. It says that regulators must address “systemic markets”, not just systemic institutions, and need informative measures of financial stability.
Interest rate targeting as a social construction -- We always knew that interest rate targeting could never work in theory. But now interest rate targeting has failed in practice, and failed badly. It cannot keep inflation, and expected inflation, on target. The failure of monetary policy is not caused by anything central banks are actually doing; it's caused by central banks' way of framing what they are doing, and by the rest of us accepting that same framing. The current recession was caused by those (and that includes especially central bankers themselves) who think that central banks use an interest rate as the control instrument. It's the framing of what central banks do that caused the mess, not anything central banks are actually doing. The social construction of reality is what dunnit!
Michael Milken Sounds Warning on Sovereign Debt - WSJ - Milken noted that while the U.S. financial system nearly imploded, “for the world as a whole, 2008 was the third greatest year in wealth creation in the history of the world. The others being 1999 and 2007. If you look at Eastern Europe, South America and Asia, where countries enjoyed a 100% growth rate in wealth accumulation last year, it isn’t surprising that these countries have a hard time dealing with the headlines coming out of the United States. The U.S. is no longer the sun. We might be Jupiter in an analogy of a solar system.” Planetary observations aside, follows are what Milken regards as the five pitfalls in the U.S. system that caused the financial crisis:
"Up Against a Wall of Debt, Part II," In my latest NEWSWEEK column, I suggested that the unthinkable had become thinkable: some advanced society—say, the United States, Spain, Italy, Japan, or Great Britain—might someday default on its government debt. It wouldn't pay its creditors all they were owed or wouldn't pay them on time. Just a few days later, and completely coincidentally, the International Monetary Fund (IMF) issued a report that, without saying so, added credence to this unsettling hypothesis. The report, done by IMF staff economists, comes with the forbidding title "The State of Public Finances Cross-Country Fiscal Monitor: November 2009." And it isn't much fun to read, because it's full of tables, charts, and various ratios. But the central conclusions, buttressed strongly by all the statistics, are simple enough: the economic and financial crisis has dramatically increased the deficits and debt of most countries, and many wealthy countries are in worse shape than major developing nations.
Which big country will default first? - Of the world's six largest economies, three currently have budget and public debt positions that if allowed to fester will push those nations into bankruptcy (the seventh largest, Italy, also has a budget and debt position that is highly vulnerable, but its problems appear chronic rather than acute). Given the proclivities of modern politicians for delaying pain and avoiding problems, it is likely that festering is just what those positions will do. So which major country, the United States, Japan or Britain, will default first on its foreign debt? The other three of the six top economies, Germany, China and France, appear to have fewer problems but are not out of the woods entirely...
Fitch Says U.K. Rating Most at Risk Among Top-Rated (Bloomberg) -- The U.K.’s sovereign credit rating is most at risk among top-rated nations, Fitch Ratings said, citing concern over the country’s budget deficit. The rating faces risks because the U.K. needs “the largest budget adjustment,” David Riley, head of global sovereign ratings at Fitch, said in an e-mailed statement. “Our stable rating outlook reflected our expectation that the U.K. government will articulate a stronger fiscal consolidation program next year.” Britain last month reported the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs. The 14.8 billion-pound ($24.7 billion) shortfall compared with a deficit of 8.7 billion pounds a year earlier, the Office for National Statistics said in London on Oct. 20.
Britain the economic ’sick man of Europe’ - After decades of outperforming the continental economies, Britain seems set to become the "sick man of Europe", languishing at the bottom of the European growth league table. Official figures released by Eurostat yesterday revealed that the eurozone economies, comprising 16 of the EU's 27 member states, are now officially out of recession, having grown by 0.4 per cent in the third quarter. Of the five largest European economies, only Britain and Spain are still in recession, and even the stricken Spanish economy is performing marginally better than the UK.
Japan faces risk of ratings downgrade over debt (Reuters) - Fitch Ratings warned Japan on Tuesday to keep to its borrowing target or risk a credit rating downgrade as the finance minister acknowledged the problem and tried to reassure rattled investors by saying spending had to be cut. Japanese sovereign credit default swaps spreads have nearly doubled in the past week as investors fretted that the government faces a funding crunch over its ballooning public debt, which the International Monetary Fund says will spiral to 227 percent of gross domestic product next year, by far the worst in the G7
US Risks Following Japan's Example of Stagnancy - NYTimes - Heavy government stimulus spending and near-zero interest rates did little to end a ''lost decade'' of stagnation and mushrooming debt in Japan. Some economists and lawmakers say the U.S. may wind up following the same trajectory. Despite early signs of recovery and a strong U.S. stock market rally, fears persist that the failure to generate new jobs or ignite more consumer spending could drag the economy back into recession, or result in a protracted Japan-like period of poor economic and stock-market performance.
Peter Orszag on the Tough Specifics of Deficit Reduction - The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning. He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits. Here’s a little hint (emphasis added): Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”
The Federal Deficit Mess in a Single Sentence - WSJ - from Douglas Elmendorf, the director of the Congressional Budget Office:“The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services,” he said. Every thing else is detail. For more details.
Entitlement Spending and the Long-Term Budget Outlook - CBO Director's Blog - Entitlement spending is often viewed as a long-term budget challenge, but in fact such spending contributes significantly to the budget challenge facing the country during the next 10 years as well as the more distant future. CBO estimates that, if current laws remained in place, the federal deficit would shrink sharply during the next few years but would remain a little more than 3 percent of gross domestic product (GDP) between 2013 and 2019. Although the country has experienced persistent large deficits before—deficits during the economic expansion of the 1980s averaged about 4 percent of GDP—the budget challenge of the next decade will be especially acute in three respects...
Making Wall Street pay - The deficit hawk crew is now on the warpath, pressing the case for a big, new, national sales tax. They claim that the United States badly needs additional revenue to address projected budget shortfalls. While we may need additional revenue at some point, it makes far more sense to impose a financial transactions tax, which would primarily hit the Wall Street banks that gave us this disaster, than to tax the consumption of ordinary working families. We can raise large amounts of money by taxing the speculation of the Wall Street high-flyers while barely affecting the sort of financial dealings that most of us do in our daily lives.The logic of a financial transactions tax is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps and other financial instruments. This has very little impact on people who buy stock with the intent of holding it for a long period of time.
White House Aims to Cut Deficit With TARP Cash - WSJ - The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program -- the amount it expects to lose -- to as little as $200 billion from $341 billion estimated in August.
Do Earmarks Matter? - NYTimes - In 2008, Congress earmarked $17.2 billion for special projects. That amounts to less than one half of one percent of all Federal spending last year. The figure is less than NASA’s 2008 budget ($17.3 billion) and less than half of the $35 billion the country spent on foreign aid last year (is there a “Finland Height Modernization” program?). A recent paper found almost no correlation between the amount of pork in a given year and the size of that year’s deficit. The authors conclude: “While increasing levels of pork may be symptomatic of a larger government spending problem, they are not the underlying cause.”
More Deficit Idiocy: Politico Edition -- The discussion about deficits and debt in Washington is so colossally stupid and disingenuous that even engaging it makes me despair. But today's Politico so expertly packages together every conceivable Beltway Establishment inanity about "spending" and "deficits" into one glib little piece of analysis that I can't help myself. There's one big maddening conceptual error at the heart of this piece which is to confuse relatively substantial pieces of domestic legislation with a spending "binge." See, a government has expenditures and revenues. Miraculously, it can increase its expenditures, without increasing its deficit, if it also increases its revenues. This is called "deficit neutral" and it's what the current health care bill, in all its incarnations, is. It is what the cap and trade bill will also be.
George Will on debt and the dollar - One of the many television commercials exhorting viewers to buy gold says solemnly that it is an asset whose value "has never dropped to zero," a boast that surely sets a record for minimalism. Still, the world's appetite for gold as an investment option is intensifying. Last month, India purchased 200 tons of gold. China, too, may increasingly diversify from paper -- i.e., bonds -- into gold, One reason for all this is U.S. behavior. India's 2008 gross domestic product was $1.2 trillion, so its $6.7 billion purchase was small beer. It may, however, be a large portent: Gold increasingly looks to investors to be a more reliable store of value than governments' bonds are, especially U.S. bonds as the U.S. government threatens to pile a mammoth health-care entitlement onto the nation's Ponzi welfare state, increasing the nation's debt and borrowing.
Much of the current deficit debate is for the birds - A once-endangered species is staging a robust comeback: the deficit hawk. Hunted nearly to death during the Bush years, many varieties not seen in Washington in a decade are now perching on branches and dropping their wisdom…. Yes, deficits are large. But a lot of this debate is for the birds. It's not uncommon for senators of both parties who oppose health care reform on the grounds that it is fiscally irresponsible to call for the elimination of taxes on the estates of the ultrawealthy. Too often, deficit reduction is a form of defense—as a shield for policies they don't like.
October Deficit: $176 Billion, Monthly Interest: $22.8 Billion - For 13th month in a row, outlays trump receipts, adding to the federal government's red ink. (CNNMoney) -- October was another costly month for Uncle Sam. The Treasury Department reported on Thursday that federal coffers racked up a worse-than-expected deficit of $176.4 billion for the month. It was the 13th straight month of a reported monthly deficit. Treasury said it was the largest October deficit on record.October is the first month of the government's fiscal year, and at this reading, the Treasury is estimating that the annual deficit will hit $1.5 trillion. That would top the $1.42 trillion registered for 2009.
China Hopes U.S. Keeps Deficit to Appropriate Size (ABC News) - China hopes that the United States will keep its deficit to an appropriate size to ensure basic stability in the U.S. dollar exchange rate, Chinese Premier Wen Jiabao said on Sunday."I hope that as the largest economy in the world and an issuing country of a major reserve currency, the United States will effectively discharge its responsibilities," Wen told a news conference in Egypt. China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its more than $2 trillion stockpile of foreign exchange reserves, the world's largest, in dollar assets."
Bill Gross: China and Japan have been generating Negative 14% Returns on their Treasuries over the last year - (CNBC) Bill Gross, the founder of PIMCO now the world’s largest mutual fund company, is widely noted as one of the savviest investors in the world. Gross notes that over the last year alone the depreciating dollar means that every single Treasury purchased by China, Japan etc with a 1 to 2 % yield has essentially generated a negative 13 to 14% return. Yes, NEGATIVE 13 to 14% return. Gross goes on to discuss that countries need to look at currency direction as well as yields in determining where to invest. Gross has been telling investors to get out of US dollars before foreign central banks do since June. Now central banks have begun getting out of dollars and piling into gold. Interview by CNBC
RBI may’ve sold US T-bills to buy gold - The Economic Times - “This purchase suggests that the Indian monetary authorities are seeking to change the composition of their foreign reserve holdings, most likely diversifying away from US Treasury securities,” said Nikhilesh Bhattacharya, an economist with the research arm of ratings firm Moody’s in a report. He added that the move was prudent as India needed liquid assets as a buffer against sudden, destabilising capital outflows.
World Bank: yuan to become alternative reserve currency (Reuters) - World Bank President Robert Zoellick said on Wednesday that the U.S. dollar's role as a reserve currency was "relatively secure", but the Chinese yuan will provide an alternative over time."Over the next 10-15 years, you will see renminbi to be internationalised and provide an alternative," he said at a World Bank conference in Singapore. Zoellick also said the U.S. should not be complacent about the dollar.
World Bank Chief Economist: China Should Leave its Currency Alone - WSJ -World Bank Chief Economist Justin Yifu Lin staked out a strong position against forcing China to let its currency appreciate as a way to rebalance the world economy.“Currency appreciation in China won’t help this imbalance and can deter the global recovery,” he said in a lecture at Hong Kong University.In an interview after the lecture, he said other countries shouldn’t intervene to keep their currencies cheap to boost their export sectors, calling it the “equivalent of protectionism.”“In this global crisis, most people say we shouldn’t use currency depreciation to promote exports,” he said.
Morgan Stanley’s Roach Says Yuan Concern ‘Seriously Overblown’ (Bloomberg) -- Concerns over China’s currency policy are “seriously overblown” and critics should let the country decide how it wants to manage the yuan to ensure growth, Morgan Stanley Asia Chairman Stephen Roach said. The world’s third-largest economy is still dependent on exports for its recovery and a “sharp appreciation” in the yuan would jeopardize the rebound, Roach said in an interview in Singapore today. The government will probably maintain stimulus measures until threats to rising unemployment and social stability have faded, he said.
Obama Pledges To Tackle Beijing On Yuan - President Obama, who, since taking office in January, has resisted branding the Chinese government as currency manipulators, promised to discuss the thorny issue of the yuan, and whether it is undervalued, as part of a visit to Shanghai and Beijing. "Currency, along with a host of other issues, will come up, and I'm confident that both the United States and China can arrive at a broad set of policies that encourages trade that benefits both countries, that allows ongoing economic growth," said Mr Obama. Although vocal about the yuan during his candidacy, Mr Obama has held his tongue until now on the Chinese currency, with the US Treasury only delivering "serious concerns" about the "flexibility" of the yuan.
Europe's industry slams China over currency - I am deeply concerned about recent exchange rate developments," said Jurgen Thumann, president of Business Europe, the pan-EU lobby. "An overvalued euro is not good news for growth and is inconsistent with the commitments of the G20 countries for an orderly resolution of global imbalances. We must insist that our partners honour their commitments." He was addressing his words directly to top officials from the European Central Bank and the Eurogroup in Brussels. China has held the yuan fixed to the dollar despite its huge trade surplus through vast purchases of foreign bonds. This has allowed it to flood Europe with cheap exports, gaining market share on the coat-tails of dollar devaluation.
Yuan ‘Straitjacket’ Risks Inflating China Bubbles (Bloomberg) -- China is facing the biggest challenge to its currency policy since the start of the global recession as economists warn the peg to the dollar risks causing an asset bubble." As recently as Nov. 9, People’s Bank of China Governor Zhou Xiaochuan said he didn’t feel much pressure to let the yuan rise, deflecting calls for an increase as exports start to recover and President Barack Obama prepares to discuss the issue in Beijing next week. China’s stance risks adding to liquidity after credit surged by $1.3 trillion this year
China Signals It May Allow Currency to Rise Against Dollar - China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.In its third-quarter monetary policy report, the People's Bank of China departed from well-worn language on keeping the yuan "basically stable at a reasonable and balanced level." It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.
Dollar knocked by China renminbi hints - The US dollar fell against major Asian currencies while gold reached a new record high after China’s central bank acknowledged the case for a stronger renminbi, ahead of the arrival in Beijing of US president Barack Obama for talks expected to highlight mounting international concern over Chinese currency policy. Mr Obama’s visit, as part of an Asian tour, also comes as the US dollar hits a 15-month low on a trade-weighted basis, raising questions about its future as the global reserve currency.
US Backs Strong Dollar, APEC Remains To Be Convinced - The U.S. reiterated its support for a strong dollar Thursday, but its Pacific Rim trading partners remained skeptical, calling on Washington to stabilize its sliding currency. Finance ministers from the Asia-Pacific Economic Cooperation forum congratulated themselves for aggressive stimulus measures that have brought the global economy back from the abyss and vowed to keep the emphasis on ensuring a durable recovery
The Great Shrinking American Dollar - The American dollar is in the midst of a large fall in its value, or depreciation, as measured against other major currencies. The decline has been steady since 2002 and our currency is down about 35 percent from that peak. After strengthening slightly more than 10 percent during the global financial crisis of the past 18 months, the dollar is again falling back toward its pre-crisis lows, representing its weakest international value since 1967. But there is a definite possibility that the dollar could soon decline further or faster.
German Advisers See Risk of ‘Abrupt’ Currency Moves (Bloomberg) -- The German government’s five-person council of economic advisers said the country’s economic recovery may be threatened by “abrupt” changes in foreign- exchange rates. “After the massive global increase in U.S. dollar reserves in the past years, an uncontrolled exit, especially in emerging economies, from the U.S. dollar as a reserve currency is a possible trigger of instability in currency markets,” the body said in its once-a-year report to the government. Countries holding “high” dollar reserves should consider committing to selling their dollar holdings in a coordinated way over a longer period of time, the report said.
Qatar wants more discussion on dollar pegs - Gulf oil producers should be more willing to discuss the viability of linking their currencies to the weakening US dollar, an adviser to Qatar's ruler said. The issue has gained momentum after the dollar's slide to 15-month lows and a recovery oil price recovery that is helping economies in the world's top oil exporting region emerge from a downturn. 'I think they should be more prepared to talk about their currency pricing because what we are having now is the dollar sliding and it is having an impact on the price of currencies linked to it,' Ibrahim al-Ibrahim told Reuters in an interview.
Dollar Overwhelms Central Banks From Brazil to Korea -- Brazil, South Korea and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive as the demand for their financial assets, driven by the slumping dollar, is proving more than central banks can handle. Governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback’s slide and keep their currencies from appreciating too fast and making their exports too expensive. Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.
Bangko Sentral: Trying to kill the peso - We are told that the reason the price of gasoline is higher today than in March is because of the increase in the world price of crude oil. Yet due to exchange-rate polices, the increase in its price in the Philippines is greater than for our neighbors. Had Philippine financial authorities allowed the peso to appreciate against the dollar and take its natural course, we could be paying about 10 percent to 15 percent less for oil than we are now. The rationale for keeping the peso in the narrow band of about 3-percent fluctuation is “exchange-rate stability,” according to the Bangko Sentral ng Pilipinas (BSP).
Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests (Bloomberg) -- The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said. “I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.
Tim Geithner, double-talker - Economist - AH, THE painful contortions American leaders find themselves attempting whenever the dollar's relative strength or weakness is at issue. Earlier this week, Tim Geithner could be heard saying: I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar.But today he's writing an op-ed for the Wall Street Journal, which includes this: Depending on individual economies' circumstances, a combination of macroeconomic policy adjustments and structural reforms will be needed. Market-oriented exchange rates in line with economic fundamentals will be essential in assuring the resource and sectoral shifts to match and foster the new patterns of demand. It would be extremely difficult to find an economist who would argue that "market-oriented exchange rates in line with economic fundamentals" doesn't involve continued depreciation of the dollar
HSBC facilitates trade settlement using Chinese's Renminbi currency (Xinhua) -- The Hong Kong Shanghai Banking Corporation (HSBC) launched trade transaction service with Chinese currency Renminbi here, makes Indonesia the sixth country in ASEAN countries enjoying the service, a senior HSBC official said here on Wednesday. China will continuously play an important role as the main trade partner for Indonesian businessmen. "The Chinese government's policy to allow Renminbi as trade payment currency would improvethe trade between the two countries," Head of Trade and Supply Chain HSBC Indonesia Vincent C. Sugianto said.
Dollar Doom Loop - The American dollar is in the midst of a large fall in its value, or depreciation, as measured against other major currencies. The decline has been steady since 2002 and our currency is down about 35 percent from that peak. After strengthening slightly more than 10 percent during the global financial crisis of the past 18 months, the dollar is again falling back toward its pre-crisis lows, representing its weakest international value since 1967. But there is a definite possibility that the dollar could soon decline further or faster.
World Tries to Buck Up Dollar - Governments around the world stepped up efforts to stem the U.S. dollar's slide, as officials grow increasingly concerned about the impact of the weak greenback on their nascent economic recoveries.Thailand, South Korea, Russia and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies, traders said Wednesday, as the U.S. currency wallowed near 15-month lows. In Latin America, Brazil's finance minister said the country's currency remained too strong, sparking speculation that the government would intensify recent efforts to curb the real's ascent. On Tuesday, Taiwan banned foreign investors from parking time deposits in the country in an effort to ease upward pressure on the local currency.
IMF economists review reserve currency alternatives - (Reuters) - Policymakers should consider ways of shifting from a dollar-centric global monetary system to one with a wider range of reserve assets and some form of insurance that would reduce reserve accumulation, IMF economists say. The worst economic downturn in 70 years has revived concerns over a monetary "non-system" where the weaknesses have amplified as emerging economies built up reserves to self-insure against capital account crises in recent years, the economists say. The economists laid out their thoughts in a paper that does not commit the International Monetary Fund as an institution and essentially amounts to a review of options governments may want to consider as they seek to deliver on G20 pledges to push for a more balanced economic system
Gulf Times – World needs new financial architecture - Twenty years after the fall of the Berlin Wall and the collapse of communism, the world is facing another stark choice between two fundamentally different forms of organisation: international capitalism and state capitalism. The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise. Following the path of least resistance will lead to the gradual disintegration of the international financial system. A new multilateral system based on sounder principles must be invented. While international co-operation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order.
Why Are Banks Holding So Many Excess Reserves? - chart and Fed paper - Reserves (sometimes called bank reserves) are funds held by depository institutions that can be used to meet the institution’s legal reserve requirement. These funds are held either as balances on deposit at the Federal Reserve or as cash in the bank’s vault or ATMs. Reserves that are applied toward an institution’s legal requirement are called required, while any additional reserves are called excess…
Banks Choosing Treasury Bonds Over Loans - WSJ - You know an economy isn’t healthy when banks are using as much of their money to buy government debt as they are to make loans to businesses. That’s just what’s happening right now. According to the Federal Reserve’s latest weekly measure of bank assets and liabilities, banks held 1.37 trillion of Treasury and Fannie Mae or Freddie Mac debt securities at the end of October and $1.37 trillion of commercial and industrial loans.These trends are important for several reasons. First, this helps explain why yields on Treasury bonds are so low even with mammoth U.S. budget deficits. Credit-wary U.S. banks are helping to finance this deficit because they’re afraid to put their money anywhere else. They can still earn a good, low-risk return buy borrowing very cheap short-term money and parking it in higher yielding Treasury bonds. Second, this should help to allay some of the market’s concerns about inflation. It’s hard to get inflation when unemployment is so high. It is also hard to get it when banks aren’t lending money. This is one factor that is likely to keep the Fed on hold for some time.
Rise in Short-Term Debt Puts Banks at Risk, Moody’s Says - (Bloomberg) -- Banks are carrying more short-term debt on their balance sheets than at any time in at least 30 years, exposing them to rising borrowing costs that could undermine profits, Moody’s Investors Service said. About $10 trillion of bank debt will come due between now and 2015, with $7 trillion maturing by 2012, Moody’s analysts wrote. The figures exclude debt not rated by Moody’s. Borrowing costs may rise as lenders issue longer-term debt to replace maturing securities and as the Federal Reserve raises its target interest rate from the near-zero level it has maintained for almost a year, the analysts wrote. Banks with high levels of short-term debt are vulnerable to sudden increases in interest rates or “swings in investor confidence” that could increase the cost of capital, the report said.
Banks face increase in funding costs - "Banks around the world face increases in funding costs that could cut profits and hit their customers as they look to refinance $7,000bn-plus in short-term debt expiring in the next three years with longer-dated bonds. Institutions seeking to reduce their reliance on short-term paper will have to pay up because interest rates are likely to rise and governments will stop supporting the financial system, the study by the credit rating agency Moody’s concludes.""Moody’s estimates that a lender wanting to refinance a short-term government-guaranteed bond with 10-year paper could see costs rise nearly 7 percentage points"
Fedspeak Highlights: Lockhart Says Banks Haven’t Recovered, ‘Far From It’ - WSJ - Despite marked improvements in financial markets from a year ago and improved flow of private capital to banks in recent months, the banking system has not fully recovered — far from it. Bank credit losses are still climbing, and many banks are still capital constrained. It almost goes without saying that recovery of the banking system is crucial to the recovery of the overall economy…While the [commercial real estate] problem is serious for parts of the banking industry, I don’t believe it poses a broad risk to the financial system. However, I am concerned about the potential impact of CRE on the broader economy..
Is Our Whole Banking System Catastrophically Insolvent?- I just did a "drive-by" on B of A's latest 10-Q. It has $2.1 trillion in assets, not including cash. It is reporting $257 billion of shareholder equity. Now, BAC is over-marking the above-referenced asset by 70%. Assume across all of its assets, BAC is being generous in its marks by only 10%. This exercise implies that a true mark-to-market of BAC's balance sheet would wipe out BAC's shareholder equity. Is this unrealistic? I think, if anything, my analysis errs in the favor of BAC. Why? BAC has $159 billion of home equity loans on its books. We know that, in general, most home equity loans are probably worth nothing. Let's say BAC's are worth 50 cents on the dollar (this is generous). That adjustment alone would reduce BAC's book value by nearly $80 billion. Based on this simple analysis, I truly believe that if we could do an accurate forensic accounting at all the big banks, especially Goldman, JPM and Citi, it could be shown that they are all fraudulently overvaluing their assets and thus catastrophically insolvent.
More Extortion By The Banks -Yeah, that's a strong word.In my opinion it is also the only word that's appropriate for the circumstances: The Fed has been informed by dealers that they would be willing to enter into very sizable amounts of reverse repos with the Fed, if asked to do so, provided they could get some relief from Tier I capital constraints, MNI also understands. Ah, the old "let us lever up and we'll do it, but if it blows up, we'll then be back at the public trough for another bailout since we're too big to fail."Two words need to be spoken to these clowns by Congress; the first begins with "F" and the second with "Y".
New Bill Would Keep Public In The Dark About Threats To Financial System - Members of Congress and the general public may not be told of "potential emerging threats to the stability of the financial system," thanks to a Thursday vote by a House panel shepherding the bill that's supposed to end "too big to fail."An amendment offered by Rep. Gregory Meeks (D-N.Y.) and unanimously approved by a voice vote in the House Financial Services Committee specifically deletes a provision in the Financial Stability Improvement Act of 2009. with "potential emerging threats" replaced by "financial and regulatory developments."
FDIC Orders Banks to Prepay $45 Billion to Rebuild Deposit Fund (Bloomberg) -- U.S. lenders will prepay three years of premiums to replenish the government’s deposit insurance fund drained by the fastest pace of bank failures in 17 years, the Federal Deposit Insurance Corp. decided today.""The FDIC had set aside $32 billion for 2009 failures expected through June 30, and estimates bank failures through 2013 will cost $100 billion.The FDIC is required to rebuild the fund, used to pay depositors as much as $250,000 per account in a failure, when the balance divided by insured deposits falls below 1.15 percent. The ratio as of June 30 was 0.22 percent."
Bernanke Learns Flexibility in the Debate Over Fed’s Role - NYTimes — With the Federal Reserve under more intense attack than at any time in decades, Ben S. Bernanke, the professorial chairman of the central bank, was schooled last month in how to handle the increased political demands of his job. Reluctantly, the Fed chairman agreed to reduce his own visibility on the issue and let Mr. Frank take the lead. On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail. There will be a fight. Mr. Bernanke and the Fed has powerful political supporters, from lawmakers like Mr. Frank and President Obama. But the Fed chairman is being forced to nurture those ties as never before and to carefully map out which battles are worth fighting.
The Real Threat to Fed Independence - Henry Kaufman WSJ - - Unless we shrink large financial conglomerates, we will end up with a socialized banking system. - The Federal Reserve in coming years will probably become highly politicized and thus lose its quasi-independent status. This is because of past shortcomings in its policies and, more importantly, of difficult decisions that face it in the year just ahead.To be sure, the Fed has never been fully independent of the political process, and it shouldn't be. The president appoints the chairman and the governors of the Federal Reserve Board, and Congress must approve these appointments. So, why should we be concerned that the Fed will become highly politicized now?
Politicizing the Fed? - SENATE BANKING Committee Chairman Christopher J. Dodd (D-Conn.) insists the ambitious draft financial regulation bill that he unveiled Tuesday is not about Fed-bashing. Yes, it would transfer the Fed's consumer protection functions to a new agency. And true, whereas House Financial Services Committee Chairman Barney Frank (D-Mass.) would put the Fed in charge of "systemically important" financial firms, Mr. Dodd would create a board on which the Fed is merely represented. But the goal, Mr. Dodd says, is to enhance Fed independence by allowing it "to get back to its core enterprise."
Dodd's reform plan takes aim at the Fed - The chairman of the Senate Banking Committee on Tuesday unveiled a sweeping regulatory reform bill that would strip the Federal Reserve of nearly all of its power to oversee banks, setting up a possible clash with the Obama administration, which has argued for the central bank to play a pivotal role in addressing financial threats. The legislation promoted by Sen. Christopher J. Dodd (D-Conn.) would impose the most fundamental change in the Fed's mission since the Great Depression, leaving it responsible for little besides setting monetary policy.
Dodd Bill Would Strip Banks’ Power Over Fed Directors (Bloomberg) -- U.S. commercial banks would lose their power to appoint directors of the 12 Federal Reserve regional banks under legislation proposed by Senate Banking Committee Chairman Christopher Dodd. Under the draft bill, directors at each regional bank would be chosen by the Fed’s Senate-confirmed governors, and each board chairman would be subject to Senate approval. Currently, two-thirds of directors are chosen by private-sector banks and one-third by the Fed’s Washington-based governors. The changes, which would amend the 1913 law creating the Federal Reserve system, would shift some of the private sector’s power to name regional Fed presidents to elected officials and political appointees.
Reading the Dodd Proposals - Megan McArdle - Bruce Bartlett argues that reading the health care bill is a waste of time. Not only is it all written in legalese, but also, many of the provisions simply alter sections of other bills, so unless you have some sort of hyperlinked database, much of the language is meaningless. The same could be said of the draft financial services bill that has started circulating. I have it, but haven't looked at it yet because a friend who has--and is a security lawyer--says that it's similarly impenetrable. Did I mention it is 1136 pages?
Dodd’s Draft Regulation Overhaul — Takeaways From 1,136 Pages - WSJ - Talk about too big to fail… How about too long to read? Here’s some quick takeaways from the “Restoring American Financial Stability Act of 2009” — more to come: 1) The bill would create the Financial Institutions Regulatory Administration, which would essentially handle all regulation of banks at the national level 2) The bill would create a Consumer Financial Protection Agency. 3) The bill would create an Agency for Financial Stability, chaired by a White House appointee who is subject to Senate confirmation
Senator Dodd's super bank cop faces tough battle (Reuters) - A U.S. Senate proposal to create a federal super cop to police banks faces formidable opposition from the industry, current regulators and a senior House lawmaker who recently blasted the idea. Christopher Dodd, chairman of the Senate Banking Committee, unveiled on Tuesday his highly anticipated version of financial regulatory reform, which calls for consolidating all federal policing of banks in a new body called the Financial Institutions Regulatory Administration, or FIRA. There has been little defense of the current system, which scatters responsibility among four banking regulators.But a single federal regulator scares small banks who fear their interests will be secondary to those of financial giants, and irks current regulators who do not want to lose power
Economists Say Dodd Plan to Split Fed Powers Is Mistake - A majority of 43 economists surveyed by The Wall Street Journal says Sen. Chris Dodd is making a mistake. The chairman of the Senate Banking Committee, a Connecticut Democrat, today unveiled a plan to take most oversight of banks away from the Federal Reserve and gives it to a new bank regulator. By a 2-to-1 margin, economists said the U.S. shouldn’t adopt a system where financial regulation is separate from the central bank. The results come from the Journal’s November forecasting survey.
The Dodd bill: Generally very good - I like a very great deal of Chris Dodd’s proposed regulatory reforms, and overall the Dodd bill is I think a significant improvement on Treasury’s proposals. A good place to start is the discussion draft, but there’s a great deal going on here (the full bill is 1,136 pages), so expect lots more details to emerge in the coming days and weeks. In general I’m a fan of it, although I have reservations about the new Agency for Financial Stability, and the reduced powers at the Fed. The heart of the Dodd bill involves setting up three new agencies: the Financial Institutions Regulatory Administration, the Agency for Financial Stability, and the Consumer Financial Protection Agency. The last — the CFPA — is if anything a beefed-up version of the agency envisaged in Treasury’s proposal, and it’s a very good idea. But the first two are new.
Dodd’s reform plan - Chris Dodd’s financial regulatory reform plan goes too far in my view in stripping away powers from the Fed. It makes sense to take away the Fed’s ability to bail out individual companies under 13.3 once there is a special resolution entity in place to manage financial failures. But taking away the Fed’s banking supervision role risks robbing it of an information flow vital to deal with financial stability threats. And giving systemic risk powers to a new agency is a recipe for confusion or worse. Why? Because an economy with a systemic risk or macroprudential regulator and a separate central bank would be like a car with two drivers. Both systemic risk constraints and monetary policy work through the same credit channel. The difference is that one is targeted and the other broad based.
Why The Federal Reserve Needs To Be Independent - There are several bills that have been proposed in Congress directed at the Federal Reserve. Many people worry, rightly in my opinion, that if these proposals or others like them are passed into law, then the Fed’s independence would be threatened. Why is the Fed’s independence so important? One reason is the control of inflation. This situation opens up the possibility for a politician in control of the money supply to manipulate the economy in an attempt to increase the chances of getting reelected. But political manipulation of the money supply is not the problem most people are worried about, it’s the expected increase in the government debt that is creating the inflation worry.
Senator Dodd has Introduced a Sweeping Financial Reform Bill. Please Help Me Figure Out If Its Good or Bad, and What Its Missing - A source on the Hill sent me the following summary of Senator Dodd’s proposed financial reform bill. My source notes: The summary leaves out Sections 1201-1204, which contain serious changes to the Federal Reserve bank structures, transparency elements, and restrictions on 13(3). Comments and observations are always welcome. Dodd said at the press conference that this is a discussion draft, and that there will be room for comments and feedback in the next few weeks. The markup will begin in the first week of December.This is a fluid process and I encourage you to speak out now on the process, with as much specificity as possible. The full 1,136-page bill can be viewed at the bottom of this post.I’m too busy to really read this 11 page summary, let alone the full bill. Please help me figure out what is good, bad or just plain missing, and then let’s all phone our senators.
Dodd Regulatory Overhaul Differs From House Bill - WSJ - Sen. Christopher Dodd (D., Conn.) proposed Tuesday to merge federal bank regulators into a new agency while stripping the Federal Reserve Board of much of its bank supervisory powers.These are two of the fundamental differences between the emerging U.S. House and Senate bills to strengthen Wall Street regulation following the 2008 financial crisis.In doing so, Mr. Dodd, the Senate Banking Committee chairman, is setting himself up for a potential battle against House Financial Services Committee Chairman Barney Frank (D., Mass.) and the Obama administration on how to best overhaul the financial regulations. The House and Senate are moving the bills through committees, but Congress isn't expected to finalize the re-regulation effort this year.
A comprehensive solution to combustible markets - Barney Frank - MANY MARKET and regulatory failures led to the collapse of the nation’s financial markets last year. That collapse has led to a steep and painful recession and placed extraordinary burdens on working families. In response, the House Financial Services Committee, which I chair, is crafting a series of measures that will produce a comprehensive response by, among other things, regulating derivatives, ensuring proper mortgage lending, and making sure taxpayers never again have to take responsibility for reckless and irresponsible business decisions.
The Real Danger of ‘One Big Regulator’ (WSJ) Our current way of regulating the financial system is dysfunctional. Oversight is dispersed among numerous confusing bodies that at times have seemed to be racing each other to the bottom. Setting up One Big Regulator would end that problem. The Obama administration's plan is to have the Federal Reserve regulate banks that might pose a "systemic risk" if they were to fail. Critics suggest the Fed is too close to the banks that it would be charged with cracking down on. What's more, the Fed's main task is monetary policy, so regulating banks would never receive the attention it deserves. Let me add another objection: What if some future administration were to install as the chairman of the Federal Reserve—or as chief of whatever agency is made into the One Big Regulator—a man who really doesn't believe in the regulatory mission? What if control of the systemic regulator is handed over to a person who considers 19th-century economic arrangements to be a sort of aspirational ideal? A man who turns out to be a dedicated fan of Ayn Rand, that Nietzsche of the boardroom? A man who blows off warning signs because, in his perfect theoretical universe of rational markets, the only really systemic problem is government itself?
Where Credit Isn’t Due – NYTimes OpEd - Mr. Dodd, the chairman of the Senate Banking Committee, has proposed legislation that would immediately freeze credit card rates. “At a time when families are struggling to make ends meet, jacked-up rates can quickly create crushing debt,” he said in a statement. He also wants to extend and expand the tax credit for first-time home buyers, which was due to expire on Dec. 1. At first glance, both proposals look like pragmatic attempts to relieve the tough economic problems faced by ordinary Americans. Unfortunately, the unintended consequences of the proposals may wind up creating even worse problems.
Fed Rules Would Restrict Overdraft Fees on Debit Cards – NYTimes = The Federal Reserve announced new rules on Thursday that would sharply restrict banks and others that issue debit cards from charging overdraft fees without the express permission of the cardholder. The rules, which take effect next summer, are the latest issued by the Fed after criticism that it did not move quickly and aggressively enough to root out deceptive and abusive consumer lending practices.
The Fed gets religion (well, a little) - It's amazing the things that people and organizations will do when they perceive that their way of life or their very existence is being threatened. Such is the case with the recent announcement that the Federal Reserve will soon require banks to offer overdraft "protection" as an "opt-in" service rather than as a default choice for customers who have complained loudly about $35 cappuccinos in recent years.
Attention Lloyd Blankfein: the public purpose of banking -- It seems odd that days after we were told by Goldman Sachs’s CEO, Lloyd Blankfein, that bankers are doing “God’s work”, we are still having active debates about how to regulate these selfless apostles of capitalism. The latest foray into financial reform comes from the Senate. Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank- supervision authority. Certainly, almost anything is an improvement over the abomination that came out of Barney Frank’s committee. But we feel that the ‘race to the regulatory bottom’ could easily be solved via a simple mechanism: If you don’t fall in line with our regulatory requirements, you’re simply denied a banking license to operate in this country. Problem solved. The United States is the biggest banking market in the world. Do you think any major bank would willingly vacate this market?
In-Your-Face Influence Peddling - Based on how slowly financial reform is going, how few people and firms have been punished for indiscretions that helped bring about the worst financial crisis this century, and, most of all, how much public money has been thrown its way, its clear that that the financial industry has done a phenomenal job as far as influence peddling is concerned.That said, if it was just one industry throwing a bit of grease around, it might not be so bad. But the truth is that many of those who have been chosen to serve our interests have completely lost sight of why they were elected, and have instead become enamored with (and beholden to) myriad special interests with big wads of cash competing to win their affections (and their votes).To make matters worse, the betrayal is often not very subtle -- it's right there in your face. If you read through the following report from the Omaha World-Herald, "What's Booming in a Recession? Lobbying in D.C.,
Tougher Standards On Fund Fees May Be Near -The Supreme Court may soon issue a ruling that puts more pressure on mutual funds to justify their fees. That in turn might lead to fund boards taking action in the coming year to reduce fees -- or at least to work harder to justify the fees their funds currently charge -- for fear of being sued. That is the feeling of some observers after the court heard arguments last week in a case brought by investors against their fund-management firm.
Federal Reserve Says Judge Erred in Requiring Bank Disclosure - (Bloomberg) - The Federal Reserve said a U.S. judge erred in ruling that the central bank should identify companies that received emergency loans last year, according to court papers filed to overturn the decision. U.S. District Judge Loretta Preska improperly used the standard of “imminent harm” to a borrower’s competitive position rather than a lesser standard of “likely harm,” according to papers filed yesterday by Fed lawyers led by Senior Counsel Yvonne Mizusawa. Bloomberg News won a ruling in Manhattan federal court on Aug. 24 affirming the right of U.S. taxpayers to know about the financial firms that borrowed money.
Watchdog: Treasury And FED Failed In AIG Oversight - The fierce debate over bonuses for bailed-out executives was revived on Capitol Hill Wednesday as a government watchdog explained how some executives nearly brought down the financial system – then pocketed millions. Treasury Secretary Timothy Geithner is "ultimately responsible" for regulators failing to rein in massive bonus payments at AIG because he led the agencies that provided AIG's lifelines.
Banks to prepay FDIC for failures - The Federal Deposit Insurance Corp. will collect $45 billion from the banking industry to cover the rising cost of bank failures, an unprecedented assessment that reflects the agency's projections that the current round of failures will not peak until next year. The FDIC's board voted Thursday to require banks to pay at the end of this year the amount they would owe the FDIC over the next three years. The agency collects insurance premiums from all banks, which it uses to reimburse depositors in failed banks. In the past two years, the FDIC has seized 145 banks, compared with only three in 2007.
Too-Big-To-Fail: Regulatory Reforms of Systemically Important Institutions, Although the G20 finance ministers pledged stronger prudential regulation and financial oversight of systemically important firms at their September meeting, there is no consensus yet among regulators, lawmakers and academics on how best to proceed. Nouriel Roubini noted recently that the problem of banks being too big to fail is even bigger now than it was before the crisis: “Why don't we go to a system where they're not too big to fail to begin with? The true solution to the too-big-to-fail problem requires more radical choices. In addition to an insolvency regime, such institutions should be broken up and unsecured creditors of insolvent institutions should have their claim automatically converted into equity. A separation of commercial banking and risky investment banking should also be considered. Thus, some variant of the Glass-Steagall Act should be reintroduced.”
Too Big to Succeed - NYTimes - By the 1990s, Glass-Steagall was certainly out of date, having been bypassed by financial sector developments, astute lawyers and compliant officials. However, the principle enshrined in it — that finance should be compartmentalized to prevent problems in one sector from wreaking havoc on the whole industry — remains valid. Today, even those who most strongly supported abolition are having second thoughts. They include John Reed, former chairman and chief executive of Citigroup and the man primarily responsible for turning Citibank, a world leader in commercial banking, into a conglomerate with investment banking, insurance and broking interests. Mr. Reed recently noted the wisdom of compartmentalized ship design: “If you have a leak the leak doesn’t spread and sink the vessel.”
Too Big To Fail - That is the term for financial firms whose liabilities are implicitly guaranteed by all of us, free of charge.It is a great arrangement, for them. They get to borrow from the Federal Reserve at zero percent and make whatever bets they like. They get to keep the profits and saddle taxpayers with the losses. Through cognitive capture and campaign donations, they effectively control our regulatory apparatus and our Congress.If you are like most people, you are attached to some political ideology, and you think all of the world’s problems are caused by the “other side”. I want to try to convince you that this issue is special. I want to ask you, just this once, to join with people on all sides to declare this situation intolerable.
Yes, We Need Big Banks - As I've said before, I think the idea that "too big to fail, too big to exist" idea is just silly—it betrays a fundamental lack of knowledge about the way modern financial markets work. The pundits who push this idea love to argue that banks don't need to have huge balance sheets, and that there's no benefit to having banks with balance sheets of over, say, $400 billion or so. This argument, too, is almost adorably naïve. (It can also be refuted in four words: Long-Term Capital Management.) It's been odd to watch the debate on bank size though, because the people defending big banks in the media/blogosphere (e.g., Charles Calomiris) have somehow managed to avoid mentioning the one reason banks do actually need very large balance sheets: market-making.
Bair calls U.S. bank bailout “not a good thing” (Reuters) - Leading U.S. bank regulator Sheila Bair said on Friday that the government's capital injections into the largest banks was "probably not a good thing." Bair, the chairman of the Federal Deposit Insurance Corp, said the billions of dollars of capital infusions last year had a terrible impact on public perception of the financial industry and government regulators. "I think at the time it sounded like the right thing to do and, again, it was part of an international effort, but I just see all the problems it's created," Bair said during an interview with PBS NewsHour. "I think we would have tried to dissuade Treasury from making these capital investments."
Former bankers look to buy failing banks: report (Reuters) - Some former bankers are planning to bid for failing banks in the Federal Insurance Deposit Corp auction process, and getting financial backing from Wall Street firms like Goldman Sachs Group Inc and Deutsche Bank AG, the Wall Street Journal reported citing sources. JPMorgan Chase & Co's former Chief Executive William Harrison, former Wachovia Corp CEO Robert Steele and Herb Boydstun, former CEO of Hibernia Corp were among the banking veterans considering such plans, the paper said citing people familiar with the situation.
Wall Street Faces ‘Live Ammo’ as Congress Aims to Unravel Banks - (Bloomberg) -- Seven Wall Street lobbyists trooped to Capitol Hill on Nov. 9, hoping to convince Representative Paul Kanjorski’s staff that his plan to dismantle large financial firms was a bad idea. They walked out with a sobering conclusion, according to the accounts of two attendees who requested anonymity because the meeting was private. Not only was Kanjorski serious, he planned to offer the legislation as early as next week -- and it just might pass.
Discretion and financial regulation - An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing. It's easy to explain why. In good times, regulators have every incentive to take banks at their optimistic word on asset valuations, and therefore on bank capitalization. It is almost impossible for bank regulators to be "tough" in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A "conservative" bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank. Moreover, the examiner will be "proven wrong", again and again, until she loses her job. Bad times, unfortunately, follow good times, and regulatory incentives are to do the wrong thing yet again. When bad times come, overoptimistic valuations have been widely tolerated. In fact, they will have become very common. Overvaluation of assets leads to overstatement of capital. Overstatement of capital permits banks to increase the scale of their lending, which directly increases reported profitability. Banks that overvalue wildly thrive in good times. Fuddyduddy banks lag and their CEOs are ousted and The Economist runs snarky stories about what schlubs they are. The miracle of competition ensures that many of the most important and successful banks will have balance sheets like helium balloons at the end of a boom.
No silver bullet for too big to fail - In the United States, remedies for the TBTF problem fall into four categories of proposals: (1) break up the systemically important institutions so that individually they are not too big and the consequences of any failure are eliminated; (2) separate riskier activities into unrelated institutions whose failure will not have the same direct adverse consequences for the economy and the financial system; (3) employ a combination of regulatory modifications that either discourage excessive risk taking or establish cushions against its consequences; or (4) establish a special resolution mechanism so that the failure of systemically important financial institutions can be managed to minimize the damage to the financial system and economy without the need for a governmental rescue. Each of these remedies has its merits and supporters, but also its problems and detractors.
The Fantasy of the Clearing House Magic Bullet Yves Smith - As Gillian Tett points out in the Financial Times today, clearing derivatives centrally has come to be viewed in policy circles as a magical solution. As a result, it has not gotten the scrutiny it deserves.The reason for the enthusiasm is that, in theory, a clearinghouse would make sure all agreements were adequately backstopped, so that if customer defaulted, it would not produce cascading counterparty defaults. The clearinghouse would have enough margin and capital to absorb the loss. And observers take great comfort from the fact that no significant exchange has failed in a very long time. But that view is based on precedents that have limited relevance for credit default swaps, which is the product that is the biggest source of risk. First, the CDS market is dominated by a comparatively small number of very large counterparties. So the failure of any one would be a vastly more serious blow than any modern exchange has suffered.
FT Alphaville - David Einhorn vs the bloggers on credit default swaps - On Friday, the FT published a piece detailing David Einhorn’s objections to credit default swaps, which he first raised in a recent letter to investors.And by objections, we mean the boy-genius founder of Greenlight Capital thinks the instruments which have served him so profitably ought to be banned outright.As he put it:I think that trying to make safer credit default swaps is like trying to make safer asbestosThe FT story prompted some of the bigger guns in the econo-blogosphere to take a position on either side of the CDS divide.
Senators Propose Bill To Apply Gambling Laws To Derivatives - In describing the complex and little-understood world of derivatives trading as "a sophisticated form of gambling," three U.S. Senators proposed legislation that would enable state gambling regulators and attorneys general to examine the practice.Their bill specifically removes a nine-year-old directive that preempted state law from applying to derivatives contracts
The Money Man's Best Friend But the derivatives "reform" legislation approved by the House Financial Services Committee is a fiesta of exemptions, exceptions and twisted legalese that effectively defeat the original purpose. Who drafted this dubious piece of legislation? Bankers (or their lawyers) did. The leading sellers of derivatives are an exclusive club of five very large financial institutions--Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs--that hold 95 percent of the derivatives exposure among the largest banks (the total contract value exceeds $290 trillion). These are the same folks who toppled the global economy and compelled government to intervene with gigantic bailouts.
The Crafting of a Loophole - Now let’s see what went into this legislative sausage...(a) Everyone agrees that the unregulated “dark markets” of Wall Street’s trading in over-the-counter derivatives such as credit default swaps moved the financial crisis from major problem to total disaster. Currently, most trades in these “products” are privately negotiated on the phone, dealer to dealer. It’s appallingly risky – that’s why we have a multi-trillion dollar bailout. But because the dealers at major banks can quote different prices to different customers, with huge spreads between buy and sell quotes, the banks are making huge profits and want to keep it that way. So while congress is busy working on reform legislation, Wall Street’s lawyer-lobbyists in Washington are working hard to neutralize such efforts.
FDIC saves securitisation - FT - Remember FAS 167? The new accounting standard would eliminate qualified special-purpose entities (QSPEs) and lead to banks putting billions worth of securitised assets — mostly credit card trusts — back onto their balance sheets from 2010.The proposed rule also caused a bit of consternation among ratings agencies and analysts - with many concerned that the new requirements would mean a loss of so-called ’safe harbour’ status which to date had protected off-balance sheet securitisations. The concern was that the Federal Deposit Insurance Corp (FDIC), the organisation responsible for insuring US bank deposits, could start seizing the securitisations in the event of a bank’s bankruptcy. But, it looks like on Thursday the FDIC has decided not to go down that route...
"Powerful Interests are Trying to Control the Market" For the first few years I was doing this, I'd often complain that government regulators weren't doing enough to intervene in cases where firms had substantial market power. But this was mainly an economic worry about how market power leads to the inefficient utilization of resources. Over time, however, I've started to worry more and more about the harm that comes when large firms have the ability to exert undue influence on the political process (see health care, financial, or greenhouse gas emission reform just for starters). So I agree with this call to limit rent-seeking activities: Powerful interests are trying to control the market, by John Kay, Financial times
Bush Warns of 'Temptation' to Abandon Free-Market System in Wake of Recession - Former President George W. Bush on Thursday warned that Washington is in danger of taking the country away from free-market principles in the wake of the recession, as he defended his decision to approve a Wall Street bailout package in the final months of his term. The former president, who was outlining his vision for a policy institute to bear his name at Southern Methodist University in Dallas, warned that policymakers are taking government intervention too far in the wake of the rescue package -- though he specifically omitted naming policies like the $787 billion stimulus package, the appointment of a "pay czar" to monitor compensation and increased intervention in the U.S. auto industry.
BBC - Free market flawed, says survey - More than 29,000 people in 27 countries were questioned. In only two countries, the United States and Pakistan, did more than one in five people feel that capitalism works well as it stands. Almost a quarter - 23% of those who responded - feel it is fatally flawed. That is the view of 43% in France, 38% in Mexico and 35% in Brazil. And there is very strong support around the world for governments to distribute wealth more evenly. That is backed by majorities in 22 of the 27 countries. If there is one issue where a global consensus seems to emerge from the survey it is this: there are majorities almost everywhere wanting government to be more active in regulating business
SEC Starting to Target High-Frequency Trading - Newsweek - The arcane world of high-frequency trading, in which sophisticated investors use computer programs to buy and sell huge amounts of stocks at breakneck speeds, is one of the least understood practices in the market. It's also one of the most pervasive. Upwards of 70 percent of all equity-trading volume in the U.S. is done by high-frequency traders. Proponents say it creates valuable liquidity by quickly matching buyers and sellers. Critics say it allows banks and hedge funds with the best code writers and fastest computers to prey on less-sophisticated investors, and possibly even engage in fraud by getting ahead of orders from their own clients
To The SEC: Prove It - The SEC is laying out more details of their "bust" in the hedge fund world: The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming. ....“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said. Is it ok if you perform your insider trading in plain sight?
Wall Street Makes It Hard to Earn Legal Living: Alice Schroeder -(Bloomberg) -- A group of university students I spoke to recently asked if it was possible to make a living on Wall Street without compromising your values. I had to tell them no. Wall Street has many decent, honorable people, but they work in a system that fundamentally compromises people’s ethics. The high pay is like an anesthetic that numbs you from feeling how you are being corrupted. Not only that, many honest people who work there would agree with an even more extreme statement: It’s hard to make a living legally on Wall Street. The goal of investing is to get an edge, whereas the securities laws presume all investors should have the same information at once. If ever there was a recipe for a system rife with abuse, this is it.
How Credit Raters Fended Off Oversight From Congress and SEC - For years, the credit raters have stated that they are open to stronger supervision from Congress and the SEC. But behind the scenes they repeatedly have quashed or watered down potential government rules by arguing that, much like a newspaper editorial, ratings are protected by the constitutional right to free speech, according to a Huffington Post Investigative Fund review of congressional testimony, SEC documents and lobbying reports.The companies say they gather facts to form educated opinions about the safety of bonds. Ratings are not, the companies say, guarantees that the bonds will or will not default.
Liquidity risk charges as a macro-prudential tool - VoxEU - There is a post-crisis consensus on the need to address systemic liquidity risk and its role in propagating turmoil. This column, which accompanies the release of a new CEPR Policy Insight, refines the implementation details of a new macro-prudential tool – liquidity risk charges – to discourage systemic risk creation by banks.
Asset based reserve requirements - - Like the drunk who looks for his lost keys under the lamppost because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place. There is a better way to regulate financial markets through asset based reserve requirements which would extend margin requirements to a wide array of assets held by financial institutions. ABRRs are easy to implement, use the tried and tested approach of reserve requirements, are compatible with existing regulation (including capital standards), and would fill a hole regarding adequacy of financial policy instruments.
Amendment could neuter FASB - As Ryan Grim writes over at HuffPo, an amendment has been introduced that would put FASB under the thumb of the new systemic risk oversight council, and give the council the power to literally do away with inconvenient accounting rules that pose a problem for banks. Accountants are apoplectic. Even the Chamber of Commerce is fighting this, on behalf of their non-bank membership, co-signing a letter with the Center for Audit Quality and the Council of Institutional Investors:
How to Regulate the Banks, and other Financials - At the Treasury meeting, I commented that the insurers were better regulated for solvency than the banks. One of the reasons for that is that they do harder stress tests, and they look longer-term. So, if one is trying to regulate banks for solvency, there are two things to do: - Set risk-based capital formulas so that few institutions fail. -Make it even less likely that larger institutions fail.
Wall Street Bonuses Rise as Big 3 May Pay $30 Billion (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year. The firms -- the three biggest banks to exit the Troubled Asset Relief Program -- will hand out $29.7 billion in bonuses, according to analysts’ estimates. That’s up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The money, split among 119,000 employees, equals $250,400 each, almost five times the $50,303 median household income in the U.S. last year, data compiled by Bloomberg show.
Windfall Seen as Bank Bonuses Are Paid in Stock - NYTimes - Even as Washington tries to rein in Wall Street pay, bankers are likely to make unusually large gains on the stock grants and options they received after shares in their companies fell sharply during the financial meltdown. Banks cut bonuses last year and shifted more pay into stock and options from cash, a tactic that lawmakers supported for its emphasis on long-term performance. Within months, the financial system began to mend — partly with the help of billions of dollars in government aid — and that stock began surging in value. Some of it can be cashed in starting in just a few months.
Superstar CEOs Suck - Compensation, status, and press coverage of managers in the United States follow a highly skewed distribution: a small number of “superstars” enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the awards, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak corporate governance. Source: Ulrike Malmendier and Geoffrey Tate, “Superstar CEOs*,” Quarterly Journal of Economics 124, no. 4 - Nov 2009
Harvard Law School - Taxing Unreasonable Compensation: In my paper I argue that IRS should disallow tax deductions for unreasonable compensation paid by publicly held corporations.Section 162(a)(1) of the Internal Revenue Code allows companies to deduct “a reasonable allowance for salaries or other compensation.” The IRS has systematically interpreted “reasonable allowance” to apply only to closely held corporations, effectively concluding any amount of compensation paid by a publicly held corporation is “reasonable.” The IRS bases this interpretation on the presumed arms-length nature of the board-CEO relationship, which sets compensation at a “reasonable” level. I argue that, in light of the managerial power hypothesis, executives may exercise undue influence over the board in setting their compensation.
Theft By Other Means II: When the State Steals Property, Is It Not Theft - One key feature of Third World Kleptocracies/Police States is illegal search and seizure. Read the story below for an example on American soil. The Elites of the Savior State are making up their declining tax revenues via grabbing private property under the guise of "punishing criminals." Sounds good until the criminal is you and your crime was unpaid traffic fines.
More Attacks On Online Free Speech? Justice Department Subpoenas Site's Visitors IP Addresses - CBS reports that the Justice department has submitted a subpoena request to Indymedia.us demanding the site turn over all reader visit details on June 25, 2008. Furthermore, the Justice Department had demanded that the site do so without even disclosing the existence of the subpoena. Without even bringing up the question of just how far into the "1984" rabbit hole our society has gone based on this development, this situation raises numerous questions about the anonymity of not only Internet browsing (at least that based in the US), but the transacting in visitor records behind the scenes. If this one case has made it to the public, one wonders how many other comparable gag order-cum-subpoeans the Justice Department has sent out to other websites? Just who is this Indymedia? According to CBS it is a left-of-center amalgamation of journalists and advocates that – according to their principles of unity and mission statement – work toward "promoting social and economic justice" and "social change."
State to 'spy' on every phone call, email and web search - Telegraph - All telecoms companies and internet service providers will be required by law to keep a record of every customer’s personal communications, showing who they have contacted, when and where, as well as the websites they have visited. Despite widespread opposition to the increasing amount of surveillance in Britain, 653 public bodies will be given access to the information, including police, local councils, the Financial Services Authority, the ambulance service, fire authorities and even prison governors. They will not require the permission of a judge or a magistrate to obtain the information, but simply the authorisation of a senior police officer or the equivalent of a deputy head of department at a local authority.
Fannie, Freddie Warn on More Losses - WSJ - Fannie Mae and Freddie Mac, already reeling in red ink, are warning they could face additional losses from the weakening condition of mortgage-insurance companies. Fannie and Freddie together have required capital injections from the Treasury of $112 billion since the government took them over through conservatorship last year. Their need for government support would have been greater without collecting on claims from mortgage-insurance companies. Fannie and Freddie have received payouts of $2.3 billion and $658 million, respectively, from mortgage insurers through September this year.
Bottomless pit at Fannie Mae gets bottomless-er - Can a bottomless pit get even more bottomless-er? Fannie Mae is certainly giving it a go! The public/private mortgage firm just lost another $18.9 billion in the third quarter. That's on TOP of $101.6 billion in losses over the past two years. Result: It was forced to ask the Treasury Department for another infusion of money -- $15 billion. That would be on top of the $44.9 billion it has already received. A billion here, a billion there and pretty soon you're talking about real money. It's great to be a U.S. taxpayer, huh?
The FED And Fannie Mae: Throwing Money Down A Black Hole - Let's face it. They're bankrupt. They've been bankrupt. They continue to become more bankrupt, despite being under "conservatorship" for more than a year! In addition to losing $19 billion through operations, they also had to pay $883 million in dividends for the existing "draw" on their Treasury credit line. They propose to expand that by about 30%, which will of course increase their dividend expense on that draw by an equivalent amount, causing it to reach approximately $1.2 billion dollars next quarter.Operating losses are increasing sequentially, not stabilizing or receding.
Monetizing the housing debt - In reading the newspapers over the last eight months, since the Federal Reserve decided to print money on a massive scale in order to buy $300 billion in U.S. Treasuries along with about a trillion and a half dollars in mortgage related debt, these two groups of purchases have been viewed quite differently.The former is seen as a particularly bad thing for a central bank to be doing as this money created "out of thin air" is used to directly fund government spending, spurring comparisons to Zimbabwe and Weimar Germany where similar efforts led to hyper-inflation.However, the latter is viewed as something of a benign undertaking (by comparison, at least), widely perceived as providing needed support for housing in the U.S. by creating a market for housing debt that might not otherwise exist.
Administration Rejects Plan to Buy Fannie Mae Credits - NYTimes - The Obama administration on Friday rejected a proposal by Goldman Sachs to buy as much as $1 billion in tax credits from Fannie Mae, saying the deal would have amounted to a net loss for taxpayers. Goldman Sachs had proposed to pay cash for Fannie Mae’s tax credits, which are tied to investments in affordable housing but which the government-controlled mortgage-finance company cannot use because its losses have wiped out any tax liability for the foreseeable future.
FHA's cash reserves have dropped well below amount required by law, audit shows - For the first time since 1994, the Federal Housing Administration's cash reserves have shrunk to a point far below what is required by law and could turn negative if worst-case scenarios are factored in, according to an independent audit designed to measure the agency's financial soundness. The reserve fund, which holds excess cash beyond what the agency needs to cover future losses on its outstanding loans, had an estimated value of $3.6 billion as of Sept. 30, an sharp drop from the $15.82 billion that last year's audit projected it would have by this time. The $3.6 billion value represents 0.53 percent of the mortgages insured by FHA, well below the 2 percent ratio required by law and the 3 percent ratio maintained by the fund at the same time last year.
Housing Agency’s Cash Reserves Down Sharply - NYTimes - The Federal Housing Administration, the government agency whose loan-insurance programs have become a crucial source of support for the housing market, said on Thursday that its cash reserves had dwindled significantly in the last year as more borrowers defaulted on their mortgages. As recently as a few weeks ago, the F.H.A. had said that even under the bleakest economic forecast, its cash cushion would quickly recover. On Thursday, it abandoned that position. “There is a real risk. Nobody has a crystal ball,” Shaun Donovan, secretary of housing and urban development, said in an interview. “We recognize there is a possibility that the reserves go below zero and stay there.”
Four Signs that the Recession Continues -- Friday morning’s payroll report shows a continued problem with job creation.Most important is that hours worked stayed anemic at just 33.0 hours. The underemployment rate is 17.5%. - FHA Mortgage Exposures Balloon - Even though the Federal Housing Authority (FHA) has tightened credit standards, many mortgages issued in 2007 and 2008 are turning sour. Defaults on loans guaranteed in 2007 are at 24%, loans in the first half of 2008 about 20% sour - More Americans are walking away from their homes The trend is known as Strategic Default, where the homeowner loses their job and stops making mortgage payments because they owe more than the home is worth. - Wells Fargo bets House Prices will rise - To avoid defaults and foreclosures, Wells has decided to off-set increased monthly payments by offering effected homeowners interest-only loans to defer amortization of loans for six to ten years. The bank is betting that home prices will stabilize,
Attack of the Home Buyers’ Tax Credit – NYTimes - One reason to fret about federal anti-recessionary fixes is that they often last long after the crisis that justified their creation. According to Case-Shiller data, housing prices have been rising since May, yet Congress has just extended and expanded last year’s home buyers’ tax credit. They’ve made the program more regressive by upping the income limit for families from $150,000 to $225,000. Even more problematically, the new, but definitely not improved, tax credit now offers up to $6,500 to current homeowners who have lived in their houses for at least five of the last eight years and buy new homes. Who but a real estate agent could love this policy?
Home Purchase Tax Credit Extended: Is This Wise? -- Realtor.org indicates that the industry had extensive lobbying activities on behalf of this legislation: NAR (National Association of Realtors) members sent more than half a million letters to leaders in congress. NAR members made nearly 13,000 phone calls to Senate offices last weekend. So far in 2009, REALTORS® have spent nearly $14 million lobbying Congress. So has this lobbying actually been for the public good? I think not and the rest of this paper will try to explain my reasoning.
Temporary Jumbo Loan Limits Extended Through 2010: The temporary increased maximum loan limits originally set to expire at the end of the year will remain in place through 2010, according to the Federal Housing Finance Agency (FHFA).The limits for conforming jumbo loans eligible for purchase by the government-sponsored enterprises (GSEs) was set at $417,000 for single-family homes by the Economic Stimulus Act of 2008 (ESA) and the Housing and Economic Recovery Act of 2008 (HERA), but were set to expire at the end of 2009.Loan limits for two-, three-, and four-unit properties in 2010 will also remain unchanged from 2009 levels
Is Congress Creating Another Housing Bubble? - Though the deeply divided Congress can't seem to agree on much these days, the House and Senate did manage to come together this week, with nearly unanimous votes, to extend an $8,000 first-time home-buyer tax credit. But among economists of various political persuasions, there's widespread agreement on the Obama-backed bill: It's a horrible policy that could wind up prolonging, if not worsening, the housing crisis.The biggest problem with the tax credit, economists say, is that it could well reinflate the housing bubble that helped cause the financial crisis. The tax credit is taking taxpayer money—likely more than $45 billion of it, according to the Brookings Institution—and redistributing it to buyers and sellers of homes. "We are prolonging the adjustment of the housing market”
Home-Purchase Index in U.S. Plunges to Lowest Level Since 2000 (Bloomberg) -- Mortgage applications to purchase homes in the U.S. plunged last week to the lowest level in almost nine years as Americans waited for the outcome of deliberations to extend a government tax credit. The Mortgage Bankers Association’s index of applications to buy a house dropped 12 percent in the week ended Nov. 6 to 220.9, the lowest level since Dec. 2000. The group’s refinancing gauge rose 11 percent as interest rates decreased, pushing the overall index up 3.2 percent.
Legitimized leasebacks picking up momentum - Once it seemed like a radical idea: Let delinquent borrowers stay in their homes as renters after foreclosure. Last week it gained legitimacy when housing giant Fannie Mae said it would do just that, offering one-year leases at market rates to people who sign over their homes as a deed in lieu of foreclosure. Voluntarily surrendering homes instead of having the lender repossess them doesn't wallop the borrowers' credit as much.Fannie Mae wouldn't say how many homeowners it expects to qualify for the program, but it has backed plenty of struggling borrowers.
It Wasn't Lax Lending Standards. Really. - Here's some more evidence against the declining lending standards theory of the crisis -- and support for the claim that it was the design itself, or existence, of subprime mortgages that played a seminal role in our housing woes. In a new working paper, Dean Corbae and Erwan Quintin investigate the impact of the financial innovation that was the subprime mortgage. Maybe more importantly, they try to figure out any social benefit that may have been created by the ability to make lower down payments -- the key innovation that subprime made widely available. Corbae and Quintin report that we'd have about 50% fewer foreclosures had subprime mortgages not been made available
Retro Appraisals Raises Doubts about Lenders' Past Valuations as Foreclosure Defense - According to Retro Appraisals, 70 percent of appraisals made for mortgage financing between 2005 and 2007 were overstated and inflated. They added that mortgage brokers, real estate agents, and lenders had close contact with appraisers, and most appraisal order forms have a line item asking the borrower or agent to write down the value that was needed from the appraiser.
Cash For Craters - When you look at what you currently owe on your home mortgage versus the current appraised value, are you in-the-hole? As you sit in your living room, do you feel as if you are treading water in the bottom of a crater, staring up at the walls of seemingly insurmountable mortgage debt that now surrounds you? The economic meteor that has crushed the valuations of the U.S. housing market has created an incomprehensible financial crater for millions of American households. One observer writes that this phenomenon is the result of a defiance of the natural laws of the universe.[i] These are the millions of responsible U.S. homeowners who have become the innocent victims of the horrific impact the economic meteor shower has inflicted on individuals, families, neighborhoods, communities and regions throughout this country. They are the innocent bystanders who have experienced tangible, enduring, economic collateral damage by virtue of the irresponsible actions of other individuals, institutions, and government regulatory agencies.
Median Home Prices Fall In 3Q - A real estate group says home prices fell in eight out of every 10 U.S. cities in the third quarter of this year as heavily discounted distressed sales made up 30 percent of all deals.But home sales continued their climb, with quarterly sales outpacing the second quarter and the previous year's figures, the National Association of Realtors said Tuesday. The median sales prices of existing homes declined in 123 out of 153 metropolitan areas compared with the same period a year ago. Prices rose in the other 30 cities.The national median price clocked in at $177,900, or 11 percent below the third quarter last year.
Home Prices Are Stablizing, But Foreclosures Still Account For 20 Percent Of Sales: Zillow - CNBC: On the way down and on the way up, home prices always lag sales, but they may be beginning to catch up. A new report from Zillow.com finds home values stabilized in the third quarter of this year, as sales of new and existing homes grew. The question remains if this is a real trend or a temporary surge brought on by non-organic factors. The first-time home buyer tax credit added an additional 350,000 buyers to the housing market, according to the National Association of Realtors, and the Federal Reserve's investment in Fannie Mae and Freddie Mac mortgages and mortgage backed securities have kept mortgage rates artificially low.
Mortgage Program Gathers Steam After Slow Start - The Obama administration said Tuesday that its mortgage-modification program has enrolled one in five eligible homeowners, a sign the effort is gathering momentum after a slow start. But so far few of those trial modifications are turning into permanent fixes. Whether the program will ultimately be judged a success will depend upon how many trial modifications become permanent. To receive a permanent fix, borrowers must be current on their payments in the trial program after three months and submit a hardship affidavit and other documents.The administration won’t release figures on completed modifications until December, but so far it appears that very few trial modifications are becoming permanent, often because of a lack of documentation.
Loan Modifications: Key Numbers not Released - From Reuters: Treasury says 650,000 in trial home loan workouts [The Treasury Department] said there were 650,994 active trial modifications through October under President Barack Obama's plan to help the housing market. That was up from 487,081 ... participating through September. The Treasury did not release figures for trial modifications that have been made permanent. The key number - permanent modifications - was not released. As of Sept 1st, the Obama plan had produced only 1,711 permanent loan modifications.
WSJ on Permanent Modifications - Ruth Simon at the WSJ has some details on permanent modifications: Mortgage Program Gathers Steam After Slow Start The administration won't release figures on completed modifications until December, but so far it appears that very few trial modifications are becoming permanent, often because of a lack of documentation. In my list of possible upside surprises / downside risks for the economy, the percent of permanent modifications is related to the #1 downside risk. If few of these modifications are successful, there could be a flood of foreclosures on the market next year.
How Banks View Loan Modifications - Let’s start with the questions on everyone’s mind… Why aren’t more loans getting modified? Why is it so difficult to get the bank to modify a mortgage? Why are trial modifications ending in foreclosure? Why is it that people are consistently treated so poorly by the banks? Is it the investors that are making it hard to get a loan modification? Is the government doing enough to get banks to modify loans? And should people hire an attorney to help them obtain a loan modification, or go it alone? I think the fundamental thing that almost no one understands involves how a bank views a borrower’s request for a loan modification. Lot’s of people, including me in past articles, have said that banks simply don’t want to modify mortgages. Lot’s of people, including me, have also pointed out that servicers make more money by foreclosing than modifying loans.
Tax Refunds, Relief For Home Builders - The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery. The tax break would give companies big refunds to help make up for recent losses. Specifically, it would let large firms claim cash refunds on taxes they paid going back five years, to offset current losses. Previously, the carry-back period for large firms was two years.
Shadow Inventory Dwarfs Loan Mods - I'm back on the foreclosure bandwagon again, especially after getting the Treasury's Home Affordable Modification Program status report this morning, and its glaring omission of any information as to how many borrowers are actually keeping up with the payments on their trial modifications. But even more distressing was a report I received today from Lender Processing Services, which is a huge mortgage data aggregate. Foreclosure inventories continued their upward climb. The nation's September 2009 foreclosure rate stood at 3.12 percent - a month-over-month increase of 2.6 percent and a year-over-year increase of 88.9 percent. Among individual states, Florida posted the most troubling results with 10.4 percent of loans in foreclosure, and more than 22 percent of loans reported as non-current.
U.S. Foreclosure Filings Surpass 300,000 for 8th Straight Month - (Bloomberg) -- U.S. foreclosure filings surpassed 300,000 for an eighth straight month as unemployment made it tougher for homeowners to pay their bills, RealtyTrac Inc. said. A total of 332,292 properties received a default or auction notice or were seized by banks in October, up 19 percent from a year earlier, Irvine, California-based RealtyTrac said today. One in every 385 households received a filing. The tally fell 3 percent from September, the third consecutive monthly decline.
Tidal Wave Of New Defaults Arrives - The first wavelets of a long-dreaded tsunami of new defaults are washing up on the shores of California, Nevada and other markets where prices soared during the housing boom, bringing the nightmare of foreclosure to higher end neighborhoods that rarely see “bank-owned” yard signs. The defaults result in part from the recasting of a loan type called Option ARMS that were marketed in areas where prices were soaring during the boom. Option ARMS allowed move up buyers to get into properties they could not otherwise afford, properties that they hoped would rise in value and provide the equity necessary to refinance. These loans also carried a feature called “negative amortization.” If the homeowner opted to pay less than the full monthly amount (as virtually all did), the difference was tacked onto the principal. When the loan recasts in five or 10 years, borrowers find themselves locked into a new, much higher, set monthly payment. Now recasts are starting to come due for the first wave of option ARMs and there is some evidence the first wave of defaults is ahead of schedule. In a highly publicized report last September, Fitch Ratings predicted roughly $29 billion worth of loans would recast to higher monthly payments by the end of 2009 and an additional $67 billion would recast in 2010 and would not abate until 2012.
Median Home Prices Fall In 3Q - A real estate group says home prices fell in eight out of every 10 U.S. cities in the third quarter of this year as heavily discounted distressed sales made up 30 percent of all deals.But home sales continued their climb, with quarterly sales outpacing the second quarter and the previous year's figures, the National Association of Realtors said Tuesday. The median sales prices of existing homes declined in 123 out of 153 metropolitan areas compared with the same period a year ago. Prices rose in the other 30 cities.The national median price clocked in at $177,900, or 11 percent below the third quarter last year.
Property Values Set to Fall 49% From Bubble Peak to Long-Run Average - Price Trends / WAR OF THE WORLDS (Round # 2): If you use 120 years of data for your time horizon, and assume prices will return to the average, then our residential property bubble will fall 49% from the bubble peak to the long-run average (see above (A) aka “(X) – (Z) / 202” aka “Projected Fall Peak to Trend”). This total projected fall is less than the 60% predicted in my recent post based upon 20 years of data and a trend line drawn with the eye (click here to see that post).
S&P Cut Ratings on Record 26,387 Home Loan Bonds Last Quarter - Standard & Poor’s cut ratings on a record 26,387 U.S. residential mortgage-backed securities in the third quarter. The figure was more than double the previous quarter’s 10,459 downgrades, the New York-based ratings company said today in a statement. No bonds were upgraded last quarter, S&P said.
Housing market still faces a big glut - The lights are on in the housing market. But at more and more places, nobody's home. House prices have risen in recent months after a long plunge, according to the National Association of Realtors and the S&P Case-Shiller national index. Fewer Americans owe more than their property is worth, according to a report this week from Zillow.com. But a full-fledged housing recovery will remain elusive until the market can absorb all the houses and apartments that were built during the housing boom. And on that front, progress has been slow. About one in seven housing units was vacant in the third quarter, according to the Census Department. This year has registered the highest reading since the government began collecting such data in 1965.
Senator: 131,000 homeless vets a 'disgrace' - The Department of Veterans Affairs estimates that 131,000 veterans are homeless on any given night, Sen. Bob Menendez of New Jersey noted at a Senate subcommittee hearing on the subject. "American heroes (are) huddled over a heating grate in the shadow of the Washington Monument, or curled up on a bench by the war memorials on the Mall in Washington, or trying to find shelter in cities across America." The VA has concluded that 260,000 veterans are homeless over the course of a typical year, he added. An estimated one in four homeless men or women served in the military.
As Foreclosure Nightmares Increase, Will More Homeowners Pay Off Their Bankers in Violence? - Anger and discontent are reaching a boil as a lethal combination of economic corruption and political collusion are deleveraged across the United States. The economic crisis revealed late - capitalism's central offense: Human beings are being transparently treated if they were mere transactions. And they're going postal over it.
FT - The feedback loop of commercial real estate, regional banks and unemployment - It is no secret that the Fed is quite, quite concerned about the ongoing shakeout in the US commercial real estate market in the US, but just in case anyone missed the memos, Dennis Lockhart of the Atlanta Fed has devoted a whole speech to the subject. Here are some of the key elements of Lockhart’s address: Today, I’m particularly concerned about the interaction among bank lending, small business employment, and CRE values.To elaborate, there is a tight linkage between CRE values and jobs. In a mid-September conference at the Atlanta Fed, CRE practitioners, investors, and academics agreed that the evolution of the CRE picture will depend greatly on the path of employment.
Gloomy times for commercial real estate - Values will plunge, vacancies will rise and rents will decrease across all types of commercial property before the market hits bottom in 2010, according to the "Emerging Trends in Real Estate" forecast from the Urban Land Institute and PricewaterhouseCoopers LLP. Based on interviews with 900 industry leaders, including investors, developers and financiers, the report was released at an Urban Land Institute conference for developers, planners and other real estate professionals taking place this week at San Francisco's Moscone Center.No quick recovery is in store, the report said. "2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders," it said. "The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed."
Report: Commercial property values to plunge - Commercial real estate -- including shopping centers, office buildings and industrial property -- will hit a low point in 2010 not seen since the Great Depression, according to a national survey of real estate executives. Values and rents will plunge, and vacancies and defaults will soar across all types of commercial property before the market rebounds slowly, according to the survey and forecast compiled by the Urban Land Institute and PricewaterhouseCoopers LLC. "2010 looks like an unavoidable bloodbath for a multitude of borrowers, investors and lenders," the report said
Commercial Real Estate ‘Crisis’ Looming for U.S.: Chart of Day - (Bloomberg) - “A crisis of unprecedented proportions is approaching” in the U.S. commercial real-estate market, according to Randall Zisler, chief executive officer of Zisler Capital Partners LLC. The CHART OF THE DAY displays quarterly returns on commercial property -- apartment buildings, hotels, industrial sites, offices and stores -- as compiled by the National Council of Real Estate Investment Fiduciaries. Returns were negative for the past five quarters, the longest streak since 1992. Property prices have fallen by 30 percent to 50 percent from their peaks, Zisler estimated yesterday in a report. The plunge has wiped out the equity in most real-estate deals that relied on debt financing since 2005, he wrote.
Why This Real Estate Bust Is Different - BusinessWeek - It would be easy to write off this blowup as just another casualty in the regular boom-and-bust cycle of the $6.4 trillion commercial real estate market. But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody's/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We've never seen this extreme a correction as far back as the data go, which is the late 1960s
Bankruptcy filing is a blow to small business (CNNMoney) -- Small business credit card lender Advanta has filed for bankruptcy, five months after it cut off new lending on its 1 million customer accounts. Advanta's bankruptcy comes just one week after another top small business lender, CIT Group, filed its own bankruptcy petition. Both companies were hit with a sharp rise in defaults as the recession deepened. Advanta's default rate reached 24% in September, up from 11% one year ago, according to the company's financial filings.
No economic disaster here, folks. Just move along - Casey Mulligan, the Chicago school economist who writes a regular column for the New York Times and maintains a blog, is nothing if not consistent. But he's moved on from arguing that financial crises rarely cause woe to Main Street, or predicting that the commercial real estate sector wouldn't crash. Now he's staking an even more ambitious claim: The disastrous year we've just lived through wasn't really a disaster.
Same Store Sales Mean Less When There are Fewer Stores - Why do reporters and analysts always fail to take note of the fact that there are fewer stores this year than last year? This is important when we compare same store sales, because the stores that have survived over the year now have a larger share of retail business. In a normal year there is growth in the number of stores year to year, so flat same store sales would be consistent with rising total retail stores. With many chains having closed stores in the last year and many smaller stores having gone out of business, flat same store sales would imply a decline in total retail sales. Reporters and retail analysts should know this.
Banks Hasten to Adopt New Loan Rules - WSJ - Banks are moving quickly to restructure commercial mortgages under new U.S. guidelines that are more forgiving of battered property values and can help banks avoid bigger losses....lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced Oct. 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.
California Controller: Overview of the Commercial Property Markets - Whereas excessive and imprudent leverage fed the bubble, deleveraging not only popped the bubble, but, in the process, destroyed record amounts of equity and debt. Most deals financed with high leverage from 2005 to the present are under water. The equity is gone and the debt, if it trades at all, trades at a deep discount to face value. Most leveraged equity invested in real estate has evaporated since property prices, if marked to market, have fallen 30% to 50%. The chart [right] shows overall U.S. property total returns, quarterly (at annual rates) and lagging four quarters. This appraisal-based, lagging index shows sharp negative returns exceeding the deterioration of the RTC (Resolution Trust Corp.) period of the early 1990s.
Schwarzenegger: This year's budget gap may hit $7 billion - Gov. Arnold Schwarzenegger estimated Monday that California's budget will fall out of balance by $5 billion to $7 billion this fiscal year, on top of a $7.4 billion gap already projected for 2010-11.If true, state leaders would confront at least a $12.4 billion to $14.4 billion problem when Schwarzenegger releases his budget in January. California currently has an $84.6 billion general fund budget.
CalPERS' image takes a hit - For much of the last decade the California Public Employees' Retirement System cultivated the image of a cutting-edge pension fund -- pouring billions of dollars into potentially lucrative but high-risk investments, hounding companies to rein in executive pay and championing financial security for government workers.Now, CalPERS finds itself caught in a maelstrom of troubles that threatens its reputation as the gold standard for public pension funds.Slammed by huge investment losses in last year's meltdown of financial markets, the nation's largest public retirement plan faces questions about its long-term ability to make good on the benefits it owes more than 1.6 million workers, retirees and their families.All Californians have a stake in the fund's performance: If CalPERS' $200-billion portfolio comes up short, and state and local governments refuse to cut workers' benefits, the bill falls to taxpayers -- many of whom have no guaranteed pension benefits of their own.
Worst-case for California's budget deficit next year? $25 billion - SACRAMENTO — With high unemployment continuing to eat at California's tax revenues, and risky budget gimmicks failing to materialize, the state's deficit next year could hit a staggering $25 billion. If worst-case scenarios hold true, several insiders who track the state's financial picture tell the Mercury News, the deficit through June 2011 would be billions higher than previous estimates. Gov. Arnold Schwarzenegger's best-case estimate earlier this week was half that sum, at $12.4 billion. Assembly Republican leader Sam Blakeslee of San Luis Obispo floated a number as high as $20 billion...
California exports decline 16.3% in September from a year earlier "Many economists use California's exports as a gauge of the state's rebound potential. According to September's numbers, California still has a long way to go. The state's merchandise exports, at $10.35 billion in September, were up 3.2% from August but still down 16.3% from the same month last year, according to an analysis of Commerce Department data released Friday."
Ten most troubled states in the U.S. - The same economic pressures that pushed California to the brink of insolvency are wreaking havoc on other states, a new report has found. And how state officials deal with their fiscal problems could reverberate across the United States, according to the Pew Center on the States' analysis released Wednesday. The 10 most troubled states are: Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. Other states -- including Colorado, Georgia, Kentucky, New York and Hawaii -- were not far behind.
Additional Federal Fiscal Relief Needed to Help States Address Recession’s Impact — Center on Budget Priorities - States face a serious fiscal problem that could force them to institute additional deep budget cuts and tax increases in 2010, weakening the fragile economic recovery and harming vulnerable children, seniors, and people with disabilities, among others. The federal assistance that states received for their Medicaid programs under this year’s economic recovery legislation is scheduled to end with a “cliff” on December 31, 2010, and the assistance states received for education and other services also will be largely exhausted by then. Although that date is more than a year away, the problem is coming to a head now. Presuming they will get no more fiscal relief, states will have to take steps to eliminate deficits for state fiscal year 2011 that will likely take nearly a full percentage point off the Gross Domestic Product. That, in turn, could cost the economy 900,000 jobs next year. 
Economic Declines and State Tax Revenues (1964- 2009) - One last pair of charts, showing the impact of recessions on tax data, via the Rockefeller Institute of Government. These two shows the impact of recessions on general tax receipts, and on retail sales. In both charts, the current contraction is the worst on record for the time periods (1973, 1964 forward)
State Finance Directors Warn of More Trouble Ahead - WSJ - Michigan and California are likely to face a fresh round of budget woes when federal stimulus funds used as a fiscal crutch dry up, finance directors for the states said Friday.Short-term budget gaps have battered states as revenues plummeted during the recession. Aided by about $250 billion in funds from the stimulus package expected through the end of next year, states managed to close the gaps this year. But both finance directors, speaking at a Pew Center on the States event in Washington, were pessimistic about their states' futures beyond fiscal 2011.
‘On the Brink’, New York Must Cut, Paterson Says - NYTimes.com Gov. David A. Paterson took the rare step on Monday of addressing a joint session of the Legislature during its traditional off-season and used the speech to underscore New York’s deepening financial crisis. Mr. Paterson repeatedly used stark language to describe the gravity of the state’s economic health as he prodded lawmakers to make cuts he has proposed to programs long considered sacrosanct. “I will mortgage my political career on this plan,” Mr. Paterson told lawmakers as he warned that New York was rapidly running out of cash to meet its obligations. "We stand on the brink of a financial challenge of unprecedented magnitude in the history of this state,” he added. “This is a historic moment. We’re going to have to make historic decisions.”
New state deficit: $2 billlion+ - OLYMPIA, Wash. -- The sour economy is overwhelming the state government. Just nine months after the Legislature solved a $9 billion deficit, the state has found itself swamped in more oceans of red ink. Your confidence is low. You are spending less. Sales taxes are down. Business tax is down. The new state deficit: more than $2 billion. "Behind those numbers are real people," said Gov. Chris Gregoire. "Are kids going to school? (What about) kids that can't get aid to go to one of our universities? Families that are struggling, or senior citizens relying on going to a nursing home? So it is a very tough time for the state."
State tax revenue falls 17.8% in October "The amount of revenue the Peach State pulled in from various taxes plunged 17.8 percent in October, the Georgia Department of Revenue reported Monday. Georgia took in $1.14 billion last month, compared with $1.39 billion in October 2008." The $1.14 billion total includes $398 million in sales tax revenue (down 18.2 percent), a deficit of $4.9 million in corporate income tax revenue (down 120.8 percent), $610.6 million in individual income tax revenue (down 15.5 percent), $65.1 million in motor fuel tax revenue (down 14.2 percent) and $6 million in property tax revenue (down 31.1 percent). Through October, state tax revenue was down 15.1 percent to $4.66 billion.
Employers in Texas can expect tax hit for jobless fund - AUSTIN — Texas employers next year will pay more than twice the $1.09 billion in jobless insurance taxes they are paying this year and the tab will go up after that, according to estimates released by the Texas Workforce Commission Tuesday. Under state law, the state's unemployment trust fund is supposed to stand at 1 percent of taxable wages, or about $860 million. The fund has been depleted in the wake of high jobless claims."
An Old West Crime Makes Big Comeback- A crime as old as the West is taking off again like a stampede as cattle rustlers armed with wire cutters and cattle trailers crisscross country roads. "We've got some awful good cowboys, you know," said Marvin Willis, Texas Special Ranger. "They can load the cattle in a hurry." For the second year in a row, cattle rustling may reach record levels. There were 6,404 cattle thefts in Texas in 2008 and only 2,400 thefts in 2007, according to the Texas & Southwestern Cattle Raisers Association
Budget catastrophe escalates while law makers watch - Illinois has over 600 other municipal pensions with at least $62 billion in unfunded liabilities, aside from the five pensions guaranteed by the state. Those pensions are generally ignored and were not part of the task force report. Their deficits are reported biannually by the Illinois Department of Insurance and the reports are on their website. That $62 billion deficit figure is from the 2007 report before the markets tanked so the 2009 report will likely be much worse.
State faces major spike in pension costs - Boston, Mass. - The Patrick administration is working on a plan to avoid a portion of a projected $900 million spike in annual pension system appropriations set to begin next year, an increase that would keep the state on track to eliminate unfunded pension liabilities by 2030 while taking into account big pension investment losses. Without changes, the state is looking at a $2.3 billion pension appropriation next year, up from $1.4 billion, he said. Such an allocation would threaten state programs and services, he said. It would also add to a fiscal 2011 state budget gap estimated at up to $3 billion. The fiscal 2010 budget is already undergoing extensive and far-reaching changes to address a billion dollars’ worth of likely revenue declines and spending demands.
Get Ready for the Next Million Layoffs -- Yes, Steely Dan predicted it in 1973, when Ronald Reagan was still Governor but we thought they were talking about earthquakes at the time. This year it’s clearly California’s 49.3% budget gap and 16.2% drop in state revenue that has them leading a list of lemming states to their doom. Over 1M state and municipal employees may be getting their last checks this Christmas as 9 states face budget issues on par with California. According to The Atlantic: Nine more states are "barreling toward an economic disaster" according to a new Pew poll that sees deep service cuts and temporary tax hikes to avoid fiscal calamity.
Aging boomers strain pension funds -Since World War II, Florida has beckoned retirees looking to spend their golden years in the sun. The steady stream has made Florida the oldest state in the nation. Now, Florida is headed for an even grayer future in the Baby Boomer retirement era, state economists and demographers predict. The consequences: worker shortages and severe strains on public pensions and government services. By 2030, more than one in four state residents will be 65 or older – or 26 percent, compared to 17 percent today, the University of Florida Bureau for Business and Economic Research says"
Tracking retirement - the Economist -Educated workers aren't anxious to call it quits- THROUGHOUT the recession, economists have been speculating about the potential effect of high unemployment and reduced household wealth on retirement decisions. Would the drop in 401(k) values lead workers to put off retirement and work longer, or would dismal labour market conditions mean a rush to the exits and a wage of early retirements? So far, it seems that the answer is a bit of both, according to research from Courtney Coile and Phillip Levine: On net, we predict that the increase in retirement attributable to the rising unemployment rate will be almost 50 percent larger than the decrease in retirement brought about by the stock market crash
Pension insurer's deficit nearly doubles to $22 billion - The Pension Benefit Guaranty Corp. said Friday that its deficit had almost doubled to $22 billion in fiscal 2009 and that its exposure to future losses from weak companies had more than tripled. The agency, which insures company pension plans, reported a $11.2-billion deficit for the end of fiscal 2008. The agency said it had a $33.5-billion deficit at mid-year 2009.
Public Pensions Face Ugly Choices...Bankruptcy, taxpayer bailouts appear inevitable - States and municipalities are in deep financial trouble. Pension performance has faltered. Over a trillion dollars worth of municipal pension fund assets have been erased in the recent market meltdown. The average public pension plan is 35% under-funded, and things are getting worse. A wave of municipal bankruptcies could well follow."
Chanos says dump munis as distress mounts and ratings attacked - I have really started to dislike municipal bonds as an asset class. They have seen a huge rally along with almost every other financial asset but the underlying fundamentals are weak because of financial distress at states and municipalities. Last week, I wrote a first piece on this topic, based on some work by Philip Greenspun and Fred Sheehan. I also just wrote a piece about Ambac Financial’s likely bankruptcy, which will impact this market because of Ambac’s municipal bond guarantees. But, a Barron’s piece about Jim Chanos of Kynikos called “Short Seller: Dump Munis” piqued my interest and precipitated this particular article.
Not Music to Most People's Ears – A New Study Says American Cities Are on the Verge of a Rat Invasion While recession, foreclosure, and crumbling urban infrastructure grate on us humans, there's one pretty smart mammal who's living the life of Riley right now: the sewer rat. American cities are on the verge of a rat invasion, warns small-mammal biologist and self-described "rat pack" member Dale Kaukeinen in a new study. And redemption, it turns out, is both personal and political. "The problem of rats is just a symptom of a declining and weakening infrastructure, and it's one of the more visible symptoms of depressed cities struggling to face their problems
On a New Form of Indentured Servitude - There’s so much going on in the USA that warrants attention these days that it’s hard to know where to start. But, since I’m an economist I’m going to start here.“There are families not eating at the end of the month,” said Stephen Quinn, executive vice president and chief marketing officer at Wal-Mart Stores, and “literally lining up at midnight” at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts. The really sad thing about this blurb is that I got it from the Media & Advertising section of the NY Times. It did not come from the op-ed page, it did not come from the business section nor the politics section. It’s there because Walmart is having to work on its product mix to reflect hunger in those families.
The Poverty Trap - One basic point is that when multiple income-based programs are piled on top on one another, the implicit marginal tax rate can reach or even exceed 100 percent.
The chart above (source, via Kling) illustrates this phenomenon. It shows income after taxes and transfers as a function of earned income. Notice that as earned income rises from about $15,000 to $30,000, income after taxes and transfers is roughly flat. Indeed, it could even fall. The bottom line: If you are poor, the government is inadvertently ensuring that you have little incentive to try to improve your condition. Request to CBO: Can you please make and disseminate charts like the one above?
The Dead Zone: The Implicit Marginal Tax Rate - To say that antipoverty programs in the United States are perverted may be an understatement. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution. For many of the working poor, the implicit marginal tax rate is greater than 100 percent. The long-run consequence of undermining the positive incentive to work is, of course, the creation of an underclass acclimated to not working; the supplement of cash and noncash benefits with income from crime and the underground economy; and the government resorting to negative incentives such as mandatory work programs.
Recession Teaching Folks To Be 'Frugal Forever' - Nearly 80 percent of consumers say they've personally felt the impact of the Recession, so they're living with less. Families Are Hitting Thrift Shops, Cutting Back On Christmas, Doing Repair Projects Themselves. Americans are forced to be frugal these days. According to a survey by Parade Magazine, 50 percent say they're having trouble paying their mortgage, and 80 percent are finding ways to do more with less.
Overspending: Blame It on Your Debt Gene? - When you apply for a mortgage in 10 years, you may be asked for your bank statements, your pay stubs… and a cheek swab. At least that’s one possible implication of a new study, which reports a groundbreaking finding: that whether you carry a specific gene variant can predict your propensity to rack up credit-card debt. Specifically, Jan-Emmanuel De Neve, of the London School of Economics, and James Fowler, of the University of California, San Diego, have found that if you carry one or both “low efficiency” alleles of the MAOA gene — we’ll get to what exactly the MAOA gene is and does in a minute — the likelihood that you have credit card debt increases by 8% and 16%, respectively
Banks Put Squeeze on Customers Ahead of New Credit Rules - NYTimes - Banks are struggling to make money in the credit card business these days, and consumers are paying the price. Interest rates are going up, credit lines are being cut and a variety of new fees are being imposed on even the best cardholders.
Consumer Credit: Awful - Where are my green shoots? - Consumer credit decreased at an annual rate of 6 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3-3/4 percent. In September, consumer credit decreased at an annual rate of 7-1/4 percent. Yuck. Here's the graphical representation. Nothing good in here. The non-revolving flattened out some in September (gee, you think "cash for clunkers" might have influenced August and September?) but revolving credit - that is, credit cards - continues its base jump without any appreciable change in slope. Here's the longer-term view
Consumer credit down, but does it show deleveraging? - Credit from commercial banks and savings institutions have dropped off a cliff. When you hear people saying that banks aren’t lending, this is what they are talking about. In Q3, banks are lending again (think cash for clunkers) because nonrevolving debt is up. That’s also why GDP is up. But, nonrevolving credit lines (credit card lines) are being cut. My conclusion is largely the same as last month, namely I had anticipated more deleveraging than we are seeing. However, consumer credit is only coming down on the nonrevolving side. And given the stabilization in house prices and increases in refinancing activity, I wouldn’t expect mortgage debt levels to be down substantially. When we see Household Debt to GDP levels from Q3, they probably will not be substantially lower than they were in Q2. This does support recovery but only at the risk of continued high levels of debt to GDP
Recession Sparks Global Shoplifting Spree - One of the more surprising findings: a growing number of new shoplifters are outwardly reputable, middle-class people who are walking off with French cheeses, quality meats, cosmetics, mobile phones, clothing and other goodies that they feel they need to maintain a quality of life they can no longer afford.
Rich buying again, but middle class still hurting - American shoppers are splitting again: The affluent are finally starting to buy, picking up designer clothes at places like Nordstrom, while those on the lower economic rungs are still scrimping by, heading to Walmart for the basics. Recent earnings reports from major retailers suggest that the wealthy, who pulled back their spending the hardest during the financial meltdown last fall, are once again being enticed to open their wallets and going back to higher-end outlets.
Jobs and Pay Both Getting Worse - Each passing month, each passing quarter, the news gets no better. The economy is going nowhere.The National Federation of Independent Business Index of Small Business Optimism remains wallowing near its lowest levels since the NFIB first began this survey decades ago. In the 1980-82 recession the Index was below 90 in only one quarter. In this recession, the Index has been below 90 for six quarters. The latest NFIB survey found that the employment outlook is still anemic. The "job generating machine" of our economy, small businesses, is still in reverse. In addition to weak hiring, small business owners continued to reduce compensation at a record pace, with 11 percent reporting reduced worker compensation. The latest survey from American Express OPEN also found that employers are cutting back on Holiday presents and bonuses to employees.
Wages: A Comparison With Past Recessions - NYTimes - I’ve written before about the surprising patterns in pay during this recession. Those patterns continue in today’s report: hourly wages accelerated in October. The average hourly pay of rank-and-file workers, who make up about four-fifths of the work force, rose 5 cents, to $18.72 an hour. Here’s a comparison of inflation-adjusted weekly pay during the three worst recessions of the past four decades...
Jobless Recovery - NYTimes Editorial - As dreadful as they are, the headline numbers understate the severity of the problem. They also obscure an even grimmer fact: Unless there is more government support, it will take several years of robust economic growth — by no means a sure thing — to recoup the jobs that have been lost. The unemployment rate includes only jobless people who have looked for work in the past four weeks. The underemployment rate — which also includes jobless workers who have not recently looked for work and part-timers who need full-time work — reached 17.5 percent in October. And the long-term unemployment rate — the share of the unemployed population out of work for more than six months — also continues to set records. It is now 35.6 percent
U.S. Joblessness May Reach 13 Percent, Rosenberg Says (Bloomberg) -- The U.S. unemployment rate may rise to a post-World War II high of 13 percent in the aftermath of the recession, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto. “This is going to be the mother of all jobless recoveries,” Rosenberg said today in an interview on Bloomberg Radio. “At the beginning of the year, who was calling for unemployment to go up to 10 percent?” Rosenberg said the recession, the deepest since the Great Depression, “is truly secular in nature” and said the economy is “in a post-bubble credit collapse.”
Unemployment Trust Fund Insolvent? - Back in August of this year I did an article that showed how bad the math was with the unemployment system (Unemployment Benefits – More Math that Just Doesn’t Work/ More Data Hiding? ). Well, the math is just getting worse… back in August the total 2009 outlays had already hit a record but were well under $60 billion. Now they are approaching $100 billion, already almost 5 times the amount paid out in the year 2000 (charts and alalysis follows)
Elizabeth Warren: We Rescued The Top Of The System, Left The Bottom To Fend For Itself (VIDEO) - Elizabeth Warren, the chair of the Congressional Oversight Panel charged with monitoring the bank bailout, was on Morning Joe Friday morning to dig in to the newly released unemployment report. The numbers are bleak -- unemployment has surpassed 10 percent for the first time since 1983 -- and Warren is not surprised. "Let's face it," Warren said, "This is sort of how we went about the rescue -- we rescued at the top and we left the bottom to kind of fend for itself -- and that's showing up in the unemployment numbers." Warren went on to explain that the report is really about the guarantees the Government made to protect banks' assets while leaving the public out to dry.
Where the Jobs Aren’t: Everywhere Except Education - While U.S. jobs are few and far between in many sectors, this year-over-year data shows that if you really want to be sure your applications get no response you need be sure to avoid education.
The ‘Real’ Unemployment Rate - Say what you want about the NYTimes, it’s still a major newspaper and a major influence; if they’re putting that on the front page, it’s putting that number, 17.5%, on a lot of people’s radar. Wall Street loves to dismiss the jobless rate, because it’s supposedly a “lagging indicator,” but it’s not lagging on Main Street. It’s a leading indicator on Main Street. Without jobs, the recovery is just so much government and Fed engineering.
Shocking numbers: Real unemployment tops 22% - The true rate of unemployment for October 2009 may be 22.1 percent, not the 10.2 percent reported by the Bureau of Labor Statistics, Jerome Corsi's Red Alert reports. Unemployment at 22.1 percent, if accurate, would be at numbers not seen since peak unemployment during the 1973 to 1975 recession. Economist John Williams, publisher of ShadowStats.com, estimates that the peak of unemployment in nonfarm unemployment in the Great Depression of the 1930s would, by his methodology, have registered at 34 to 35 percent in 1933
The Glide Path Option - The Big Picture - The present contains all possible futures. But not all futures are good ones. Some can be quite cruel. The one we actually get is dictated by the choices we make. For the last few months I have been addressing the choices in front of us, economically speaking. Today I am going to summarize them, and maybe we can look for some signposts that will tell us which path we’re headed down. For those who are new readers and who would like a more in-depth analysis, you can go to the archives at www.2000wave.com and search for terms I am writing about. And I will start out by briefly touching on today’s ugly unemployment numbers, with data you did not get in the mainstream media.
seasonally adjusted U6 - (10 year chart)
Even More Unemployment Charts - These are butt ugly
The State of Franchising in the Credit-Crunched U.S. - To get to the root of why the United States is struggling toward a jobless recovery, look no further than the franchising business. In franchising, a company lends its trademark and business system to an owner-operator who pays royalties for the right to use them. Starbucks, Quiznos, Jenny Craig, Ace Hardware, Maaco, Pakmail – all are franchise businesses. In the U.S. there are more than 900,000, directly employing more than 11 million people. From 2001 to 2005, the collective payrolls at franchise operations grew by 22%, to $279 billion. But that growth rate, with its healthy spin-off of jobs, has since ground to a halt, yet another byproduct of the credit crisis that produced the recession some experts tell us is nearly over.
Getting by with a skeleton staff - Small business staffs are still shrinking, a trend likely to continue even as the economy starts to thaw. Businesses with fewer than 50 employees cut another 75,000 workers in October, according to estimates released Wednesday from payroll processor ADP. October's job losses marked the smallest number of job cuts in a single month since July 2008.
11 Million Job Buffer From Efficiency And Part Time Workers Before Even One Person Needs To Be Rehired - A startling observation out of David Rosenberg is that with the current unemployment number (whatever it may be: 10.2%, 17.5%, 90%), even assuming an end to workforce outflows, there is a buffer equivalent to almost 11 million people, consisting of increased worker productivity and massive newly-created temporary positions, that can be drawn upon before even one person of those laid off recently, has to be rehired.
Do Businesses Hate Their Workers? (Income Disparity Myths Edition) - Yves Smith - In America, it isn’t hard to answer the question in the headline “yes.” The oft recited, “Our employees are our greatest asset” is pure Orwellian prattle; most companies treat employees as liabilities, doing everything they can to minimize labor costs, getting rid of workers whenever possible. And this now extends well up into the management ranks, with most people who are still on the corporate meal ticket assigned responsibilities that would have constituted 1.5 to two jobs a decade ago. But before readers argue that this is a necessary response to globalization, the evidence does not support that view...
Mish - The New Career Path: Day Labor Work, Competing Against Immigrants - In what is described as the modern day equivalent of selling apples during the great depression, U.S. citizens are joining immigrants in store parking lots competing for a few hours of day labor at places like Home Depot. The new faces of day labor: In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work. Experts say the slow-starting but seemingly inexorable trend is occurring nationwide
More on the Looming Structural Unemployment Crisis - In my previous post, I suggested that job automation technology might someday advance to the point where most routine or repetitive jobs will be performed by machines or software, and that, as a result, we may end up with a serious structural unemployment problem. I’d like to respond to some of the objections that were raised regarding that idea.
The Changing Face of Labor, 1983-2008 - w/ charts - Over the last quarter century, the unionized workforce has changed dramatically, according to this new CEPR report. In 2008, union workers reflected trends in the workforce as a whole toward a greater share of women, Latinos, Asian Pacific Americans, older, more-educated workers, and a shift out of manufacturing toward services. "The view that the typical union worker is a white male manufacturing worker may have been correct a quarter of a century ago, but it’s not an accurate description of those in today’s labor movement...
Why Employment Might Not Fully Recover Until 2013 - Mark Thoma - The reason for the slow recovery is partly due to the depth of the recession — the deeper the hole, the longer it takes to crawl out of it — but it’s also because of the large amount of structural change that the economy must go through before it can recover. Prior to the recession we had too many resources in the housing, finance, and auto industries, and it will take time to move the people and resources who used to work in these industries into areas of the economy where they can be employed productively. And as new productive activities outside these areas arise, firms will install the best technology available. This technology will, in general, be more capital-intensive than before, and so we will need to surpass the pre-recession level of output before the demand for labor will return to its previous level. In addition, firms typically reorganize their job assignments after layoffs and discover that the same work can be performed with fewer workers and this, too, can slow the recovery period for employment relative to output.
Employment Recovery in Five Years? - The jobless recovery of 2010 may well be the jobless recovery of 2010-2015. The pacesetting econ blogger Mark Thoma writing his first post for the new CBS moneywatch.com blog "Maximum Utility" explains why, though he predicts 2013 as the full-employment mark. My bearishness comes from the realization that monetary policy can only tighten and fiscal policy can only contract in the years ahead, making any upward trend in employment happen in a contractionary context. The body economic may be climbing out of the sand at the pace of 10,000 net new jobs a day, but the macro sand will be sliding back into the hole at 8,000 jobs a day. Like that metaphor? America has not been in this situation in nearly a century, and nobody can tell you when it ends. Fortunately, we can tell you how it ends. It ends with a new economy, even more diversified as well as focused on services and knowledge work.
Will There be a 'New Normal' for Unemployment? - I expect structural unemployment to be higher than it was, particularly in the next few years. We had too many resources in housing, finance, and automobile production, and it will take time for the economy to make the necessary structural adjustments. When this is combined with continuing globalization, as well as the higher savings rate and correspondingly lower consumption expected from households in the future, both of which cause structural change within the economy, the expectation is that the new target rate of unemployment will rise above the 4 percent level it was at before the recession. Exactly how much it will rise and for how long is hard to say.
Another Argument For A Jobful Recovery - Noam's been recently floating the wacky idea that the coming employment recovery could be here much sooner than the last two jobless recoveries have led most of us to expect. I was skeptical about his argument, but here's some more evidence that maybe we shouldn't expect a worst-case scenario for job growth. DiCecio and Gascon of the St. Louis Fed have put together this chart showing how unemployment and job vacancies have deviated from their long-run averages over the past four cycles.
Who Needs Workers Anyhow? - U.S. companies increased their output in the third quarter even as they slashed working hours, driving productivity up at a 9.5% annual rate in the quarter, the Labor Department estimated Thursday. Unit labor costs - a key measure of inflation - dropped at a 5.2% annual rate in the quarter. Productivity is output divided by hours worked. Output rose 4% annualized, while hours worked plunged 5%. Real hourly compensation increased at a 0.2% annual rate. With productivity high and real compensation low, companies captured the lion's share of the benefits of higher productivity in the form of profits. Inflationary pressures remained very low. The huge increase in productivity explains why the U.S. economy could grow at a 3.5% annual rate in the third quarter even as jobs were being lost at a rapid pace.
Nobel Laureate Phelps Says U.S. Recovery Will ‘Run Out of Gas’ - (Bloomberg) -- The U.S. economic recovery will probably “run out of gas” as it heads toward a “new normal” of lower long-term growth and higher unemployment than over the previous decade, Nobel laureate Edmund Phelps said. The U.S. economy “is groggy, but it’s getting to its feet,” Phelps, who won the Nobel Prize in 2006, said in an interview with Bloomberg Television today in New York. “We’re already seeing a strong recovery, I just think that it’s going to run out of gas.”
Seasonal Posting: NYTFail, Part 2 - First, David Leonhardt argued that this recession was good for workers. Now, Floyd Norris apparently has decided to mix and match data. Norris declares: The adjustments are for seasonality. For some reason, October is the month with the largest seasonal adjustment down in jobs. So the increase in the unemployment rate does not reflect people actually losing jobs. It reflects the belief that seasonal factors should have added more jobs than they did. here's BLS data to support that adjustment. Apparently, employers traditionally hire a lot of people in October for "the Holiday Season".
Would a Jobs Credit Work? A Response to Pozen - One idea that has attracted a lot of attention is a temporary tax credit or a partial or total suspension of the payroll tax to encourage employers to begin hiring again. Robert Pozen, a thoughtful and experienced financial expert, recently provided some useful analysis of this idea, and came up with a highly targeted job creation proposal designed to provide the largest bang for the policy bucks (to minimize the impact on the uncomfortably large federal deficit). The notion is to provide a 15% tax credit, up to $100,000 per employee, for employers making net additions to their payrolls, but require that half of the new workers come from the ranks of the previously unemployed.
Why aren't President Obama's job-creation efforts more direct? - To hear President Obama tell it, he's been busy creating jobs since taking office. The $787 billion stimulus package, he said last winter, would "save or create 3.5 million jobs." The White House is touting reports from recipients of stimulus funds asserting that they have created or saved 640,000 jobs so far. Yet the national unemployment rate has now hit 10.2 percent Obama declared Friday that more action is needed. Why has a White House that talks so much about boosting employment steered clear of the most direct strategy that could keep Americans on the job? Since taking office, the Obama administration has studiously avoided paying people to go to work, which could be accomplished by subsidizing workers' private-sector employment or by creating new government-paid jobs.
Krugman on the Need for Jobs Policies - Yves Smith - Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy. Krugman holds Germany up as an example of the merits of employment oriented policies which had been the norm in America prior to the shift to “markets know best” posture (and more aggressive anti-union policies) inaugurated by Reagan
Employment Policy -- I think that there should be a combination of subsidies for new hires funded by revenues from cap and trade and an increase in the progressivity of the tax system Second, Krugman suggests that US unemployment is not just high, but much higher than it need be given the large recession and small stimulus. Note that the evidence he presents is the change in employment and unemployment in the US and Germany. One might suspect that this amounts to the US unemployment rate rising to a level similar to the German unemployment rate – that in effect Krugman is proposing that we don't accept unemployment that suddenly rises to around 10% in a recession but rather insist on such levels all the time.
Should the Government Pay People to Work Less? - My colleague wrote last June about the record for work-sharing programs. Under such programs, employers reduce their workers’ weekly hours and pay. The government then pays workers some, or all, of their lost wages. The best-known work-sharing program is in Germany, but other developed countries have adopted it, as have many American states. Now that the United States’s unemployment rate has burst through the double digits, interest in a federal work-sharing program in America seems to be growing, although concerns about its long-term effects continue. Here’s a roundup of some of the recent coverage.
Time for a New ‘New Deal’ Jobs Program - New Deal 2.0 - In the wake of the highest unemployment rate in 25 years, we asked historians, economists and other public thinkers to reflect on the lessons of the New Deal and explore new, big ideas for how to get America back to work. Randall Wray argues that the federal government should ensure a job offer to anyone ready and willing to work.
Obama Announces Jobs Summit - NYTimes - Updated President Obama announced on Thursday that he will convene a jobs summit at the White House next month, saying “the economic growth that we’ve seen has not yet led to the job growth that we desperately need.”“Millions of Americans, our friends, our neighbors, our family members are desperately searching for jobs,” Mr. Obama said. “This is one of the great challenges that remains in our economy, a challenge that my administration is absolutely determined to meet.”
The Next Stimulus Package - Earlier this week I mentioned a possible "upside surprise" for GDP in 2010: With unemployment above 10%, there will be significant political pressure for another stimulus package - especially if the economy starts to slow in the first half of 2010. This next package could be several hundred billion (maybe $500 billion) and could increase GDP growth in 2010 above my forecast. Now: From The Hill: Senator Reid tees up 2010 jobs bill. Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate. And from the LA Times: Obama announces forum -- a brainstorming session on job creation
Massive Defense Spending Leads to Job Loss - There is a major national ad campaign, funded by the oil industry and other usual suspects, to convince the public that measures to reduce greenhouse gas emissions (GHG) and slow global warming will result in massive job loss. However, the oil industry’s scare stories about job loss are never put it in any context. In these models, any government measure that interferes with market outcomes almost by definition reduces efficiency, leading to less economic growth and fewer jobs. For example, defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.
Who might run industrial policy - A long while ago, in a discussion of GDP measures, I pointed out that Hurricane Katrina would have seen an uptick in US GDP. The destruction of infrastructure, housing and other assets would have led to increased activity in the economy, as business and government sought to replace the assets that were lost. In other words, the destruction of a hurricane would appear to be a positive boon for an economy. On such logic, bombing your own cities would be good for the economy. As it is, we have seen a natural disaster replaced with a man made disaster. Each of the cars that has been scrapped early is an asset with a real value, and useful life. Just as a bridge being destroyed in a hurricane still has a useful potential lifespan, the same might be said of the cars that have been scrapped. Quite simply, the result is just the same.
AP IMPACT - Clunker Pickups Traded for New Pickups - NYTimes - The most common deals under the government's $3 billion Cash for Clunkers program, aimed at putting more fuel-efficient cars on the road, replaced old Ford or Chevrolet pickups with new ones that got only marginally better gas mileage, according to an analysis of new federal data by The Associated Press.The single most common swap -- which occurred more than 8,200 times -- involved Ford F150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F150s. They were 17 times more likely to buy a new F150 than, say, a Toyota Prius. The fuel economy for the new trucks ranged from 15 mpg to 17 mpg based on engine size and other factors, an improvement of just 1 mpg to 3 mpg over the clunkers.
Job Woes Exacting a Heavy Toll on Family Life - NYTimes - For many families across the country, the greatest damage inflicted by this recession has not necessarily been financial, but emotional and psychological. Children, especially, have become hidden casualties, often absorbing more than their parents are fully aware of. Several academic studies have linked parental job loss — especially that of fathers — to adverse impacts in areas like school performance and self-esteem.
As Unemployment Rises, Kids’ Future Dims – WSJ - Forget frugality. Want to know what the true lasting impact of this Great Recession will be? Then take a look at the kids.A parent’s job loss increases the probability that a child repeats a grade in school by roughly 15%, according to a new paper from two economics professors at the University of California, Davis.The authors also find that household earnings are reduced by about 15% in the year after a parent’s job loss, based on their analysis of data from the Survey of Income and Program Participation in 1996, 2001, and 2004, a program maintained by the Census Bureau.
Better Lunch, Better Test Scores - The UKs rather comprehensive testing let us put the proposition to the test: Their answer – a provisional one, since they are still refining the research – is that feeding primary school kids less fat, sugar and salt, and more fruit and vegetables, has a surprisingly large effect. Authorised absences, the best available proxy for illness, fell by 15 per cent in Greenwich, relative to schools in similar London boroughs. And relative to other boroughs, the proportion of children reaching Level Four in English rose by four and a half percentage points (more than six per cent), while the proportion of children achieving Level Five in Science rose by six points, or almost 20 per cent.
Social Medicine - “Wash your hands regularly.” “Cover your mouth when you sneeze.” “Throw away your used tissues.” These are some of the exhortations currently posted around London in an attempt to reduce the spread of flu. But one day, perhaps we’ll have public health campaigns of a different kind. “Be jolly: it’s catching.” Or, “Eat less: do it for your friends.” Why? Because “traditional” infectious diseases — those, like flu and tuberculosis, that are caused by viruses or bacteria — are not the only aspects of health that can spread from one person to another. Taking up smoking is contagious; so is quitting. Obesity is contagious. So is happiness. At least, these are the results coming in from long-term studies of social networks — the networks of friends and families, neighbors and colleagues that we all belong to.
House Health Care Bill Fails to Live Up to Its Goals - NYTimes - Reduce the growth of health care costs. Bend the curve. Find the game changers. Reform the delivery system. Yawn. Health care reform has always had two main goals. The first — insuring the uninsured — carries grand overtones of social justice. The second — making the health care system more efficient — can seem abstract, technocratic and a bit nerdy Certainly, a bill that can’t pass Congress won’t help anyone. But I think it’s important to step back and understand precisely what health experts mean when they argue for reforming the delivery system.
Single Payer Advocates Starting to Break Against Obama - Single payer activists are starting to break against President Obama on health care reform. On Thursday, Physicians for a National Health Program, in an e-mail message to its members, endorsed the view that "no bill is better than a bad bill. Even the public option in the House is a sham," the group said on Thursday.PNHP's John Geyman called on the House to shelve Obamacare. "The negatives far outweigh the positives," Geyman wrote.
Study: 2,266 Veterans Died Last Year Because Of Lack Of Health Care - The number of US veterans who died in 2008 because they lacked health insurance was 14 times higher than the US military death toll in Afghanistan that year, according to a new study. The analysis produced by two Harvard medical researchers estimates that 2,266 US military veterans under the age of 65 died in 2008 because they lacked health coverage and had reduced access to medical care.That figure is more than 14 times higher than the 155 US troop deaths in Afghanistan in 2008, the study says.
Goldman To Private Insurers: No Health Care Reform At All Is Best - A Goldman Sachs analysis of health care legislation has concluded that, as far as the bottom line for insurance companies is concerned, the best thing to do is nothing. A close second would be passing a watered-down version of the Senate Finance Committee's bill. A study put together by Goldman in mid-October looks at the estimated stock performance of the private insurance industry under four variations of reform legislation. The study focused on the five biggest insurers whose shares are traded on Wall Street: Aetna, UnitedHealth, WellPoint, CIGNA and Humana.
The Abortion Amendment: Could Obama Have Done More? - On some level, I don't care about the nitty-gritty details of this amendment. This isn't just about how the money is allocated or what workarounds exist. This has me so incredibly infuriated because it further segregates abortion as something different, off the menu of regular health care. It is a huge backward step in the battle to convey -- not just politically, but to women in their everyday lives -- that reproductive health care is normal and necessary, and must be there if (or, more accurately, when) you need it.
Just lay back and think of it as a Vagina Added Tax - Hey ladies! Congressman Pete Sessions of Texas thinks you should pay more for your insurance because you chose to have all that crazy plumbing with its nook and crannies down there instead of a good old fashioned American penis. This was an unhealthy choice on your part… like taking up smoking. No. Really: Rep. Pete Sessions (R-Tex.), the head of the Republicans campaign committee, caused a stir at last night’s Rules Committee meeting when he suggested that treating female-related health conditions was comparable to insurance-company imposed restrictions on smokers. “Why should a woman pay more than a man?” asked New Jersey Democrat Frank Pallone, according to the Courthouse News Service.“Well, we’re all different,” Sessions explained. “Why should a smoker pay more?” he said before interrupted. So, to sum up: your decision to own a not-penis is going to cost you
Susie Madrak: Imagine that! Blue Cross tells stockholders one thing and insurance regulators another, which leads you to wonder: Who did they lie to? - The New York State Insurance Department is looking into allegations that Cigna Corp. failed to accurately account for $5 billion in health-care premiums in its disclosures to regulators.
GOP Members Shout Down Women Members of Congress - I spent the day at the zoo rather than watching C-SPAN. And obviously the action is still happening. But this is pretty remarkable. The Democratic Women’s Caucus had a series of speakers lined up to talk in favor of the health care bill, and Republicans decided to shut them up by talking over them, endlessly interrupting with spurious parliamentary inquiries (video)
Health cooperatives: a fast lane to nationalized health care - csmonitor - Of the 1,990 pages in the healthcare reform bill passed by Congress Saturday night, page 206 is especially touted – and little understood. That's the page that creates a federal Consumer Operated and Oriented Plan (CO-OP) to establish not-for-profit, member-run health insurance cooperatives. Supporters say these health cooperatives, or HCs, will reduce costs by giving smaller buyers of insurance (such as small businesses) the ability to act as a large buyer. HCs will level the playing field, giving the "little guy" much more leverage to negotiate lower prices. They won't. What they will do is put the United States on a track toward nationalized healthcare even faster than the government-run insurance plan called the public option.
Why We Need an Individual Mandate for Health Insurance - The adverse selection problem is one of the reasons we need an individual mandate for health care insurance (i.e. a requirement that everyone must purchase insurance that is part of the proposed health care reform package). To explain how the adverse selection problem arises in these markets, note that people purchasing health insurance generally have better information about their health status than the people selling the insurance. If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them, and all of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, the process repeats and the end result is that the market breaks down and nobody (or hardly anybody) can purchase insurance.
In Health Care Bills, a Catalyst for Salaried Doctors - EVEN without a robust public option, any of the health care reform bills now under consideration would expand coverage greatly. But they would also start a competitive dynamic that would eliminate the fundamental conflict of interest that has made American health care so expensive. The United States spends twice as much per capita on health care as many other nations, yet achieves inferior outcomes by such varied measures as life expectancy, preventable deaths from specific illnesses, and infant mortality. Much of the performance gap stems from the fact that many of the nation’s 45 million uninsured fail to receive needed care.
How the Senate will whittle away at the House health care reform bill. - During House debate over the health care reform bill, Republican after Republican stepped up to denounce the legislation's intolerable 1,990-page length (text). Before it passed the House by a narrow margin of 220-215, the bill actually got a wee bit longer with the addition of a manager's amendment, a few modifications to the manager's amendment, and another amendment effectively barring private insurers who participate in the bill's new health exchange from covering abortions. That the floor vote adopting the anti-abortion amendment received not a single Republican nay suggests brevity wasn't the GOP's true concern. The thing to worry about the House health reform bill isn't what the Senate will add but what it will take away.
Overweight Americans Push Back on Health Debate - That debate has, sometimes awkwardly, focused its attention on the growing population of overweight and obese Americans with unambiguous overtones: fat people should lose weight, for the good of us all. Extra weight brings with it an increased risk of chronic disease, medical experts say, and heavier people tend to have medical costs that are substantially higher than their leaner counterparts. As a result, Congress is considering proposals in the effort to overhaul health care that would make it easier for employers to use financial rewards or penalties to promote healthy behavior by employees, like weight loss. Heavier Americans are pushing back now with newfound vigor in the policy debate, lobbying legislators and trying to move public opinion to recognize their point of view: that thin does not necessarily equal fit, and that people can be healthy at any size.
Democrats Raise Alarms Over Health Bill Costs - As health care legislation moves toward a crucial airing in the Senate, the White House is facing a growing revolt from some Democrats and analysts who say the bills Congress is considering do not fulfill President Obama’s promise to slow the runaway rise in health care spending. Mr. Obama has made cost containment a centerpiece of his health reform agenda, and in May he stood up at the White House with industry groups who pledged voluntary efforts to trim the growth of health care spending by 1.5 percent, or $2 trillion, over the next decade. But health economists say it is impossible to know whether the bills, including one passed by the House on Saturday night, would meet that goal, and many are skeptical that they even come close.
Obamacare is a Devastating Tax on the Working Class -- Mises Institute - Given the recent announcement that the government's measure of unemployment has hit 10.2 percent, and given that the official House version of Obama's healthcare plan, HR 3962, has now passed, a close examination of the effects of "Obamacare" on the labor market is important. It will be no surprise to readers of this site to learn that the Democrats' bill will seriously harm precisely those poor and uninsured citizens it is ostensibly designed to help. The harm will come by compounding mass unemployment and depriving these citizens of consumption choices.
More in U.S. Say Health Coverage Is Not Gov’t. Responsibility - More Americans now say it is not the federal government's responsibility to make sure all Americans have healthcare coverage (50%) than say it is (47%). This is a first since Gallup began tracking this question, and a significant shift from as recently as three years ago, when two-thirds said ensuring healthcare coverage was the government's responsibility.
The $900 billion mistake - The number sprang from Obama's September speech laying out his own plan on health-care reform. "Add it all up," he said before a joint session of Congress, "and the plan I'm proposing will cost around $900 billion over 10 years." There are three questions here. The first is how the Obama administration came up with the $900 billion estimate. The second is why they included it in their speech, after so relentlessly avoiding specifics until that moment. And the third is why the Hill embraced it as a hard limit rather than a general proposal
Protectionists Refuse to Consider Trade as a Way to Control Health Care Costs - It is truly remarkably that in a country where the political elite is so completely committed to "free trade" that discussions of health care never include any mention of trade as a way to reduce health care costs. It would be hard to imagine more blatant class bias. With millions of seniors already retiring to other countries, this number can be expanded enormously, with trillions of dollars of savings to the U.S. government, by allowing seniors to get a voucher for their Medicare that lets them to buy into the health care systems of other countries and split the savings with the government.
Promoting Trade Without Mentioning Currency Values: WSJ Wins Journalistic Incompetence Medal - The WSJ is shooting for a Pulitzer for journalistic incompetence. It ran a piece discussing the Obama administration's efforts to boost the economy with increased exports and never once mentioned the value of the dollar. The value of the dollar is the main determinant of the price of U.S. exports in other countries. If the dollar falls in value, the price of U.S. exports declines measured in the currency of other countries.
Trade, Globalization and the Financial Crisis - Dallas Fed - Trade, Globalization and the Financial Crisis by Mark A. Wynne and Erasmus K. Kersting The financial crisis that began in August 2007 and intensified in the fall of 2008 pushed the global economy into a severe downturn that some have called the Great Recession. World trade collapsed at a pace unseen since the Great Depression of the 1930s. The decline in trade and the protectionist instincts that invariably come to the fore in difficult economic times have raised concerns that today’s crisis may lead to deglobalization—a reversal of the globalization that has characterized the past three decades. In this Economic Letter, we will illustrate the crisis’ impact on world trade and examine the typical patterns of international trade over the business cycle. We urge caution in using trade data to estimate the extent of globalization or deglobalization. And we present evidence that international trade has fallen by more than expected given the course of the current business cycle.
Twin deficits will help gauge economic health -The United States is importing (a lot) more than it exports, creating a trade deficit, and the government is spending (a lot) more than it brings in, the cause of the budget deficit. Together, these realities are part of a global story of imbalances that probably contributed to the financial crisis and could cause yet more economic damage if they unwind in a rapid, disorderly manner.
Trade Deficit in U.S. Increases by Most Since 1999 (Bloomberg) -- The trade deficit in the U.S. widened in September by the most in a decade, reflecting rising demand for imported oil and automobiles as the economy rebounded from the worst recession since the 1930s. The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.
Weak dollar no quick fix for narrowing trade gap - A weaker dollar may boost the nation's economy by increasing exports and narrowing the trade gap - but that won't happen anytime soon. Instead, the nation's trade deficit rose in September by the largest percentage in a decade as U.S. exports grew for the fifth straight month, but imports rose faster, a government report showed Friday. That trend is likely to continue until the middle of next year, economists said. Rising oil prices and higher purchases of foreign goods by U.S. companies drove imports higher. So did more purchases of foreign parts by U.S. manufacturers, which are ramping up production in the fledgling economic recovery.
Trade, climate should be dealt with together - There is a real danger that a collision between climate policy and trade agreements could derail two critical goals: controlling climate change and expanding trade. But this danger is avoidable. We agree that it is politically unrealistic -- and unwise -- to try to enact a cap-and-trade system that puts manufacturers in the United States at a competitive disadvantage with those operating overseas that do not produce under comparable requirements. It makes no sense to impose a cost on those producing steel, autos and other goods, only to have them shift jobs and pollution to China or India -- which are wary of binding international obligations on emission reductions. The two means of "leveling the carbon playing field" in bills before Congress -- imposing additional "border charges" on carbon-intensive imports and subsidizing domestic producers -- are being criticized by many U.S. trading partners as potential World Trade Organization violations. These criticisms could lead to WTO challenges that might undermine climate and trade agreements, or to retaliation that could escalate to trade wars. Yet without some kind of border adjustment mechanisms, even if imposed after a fixed period, U.S. climate legislation is unlikely to pass.
Offshoring and composition of home employment - VoxEU - How do offshoring firms reshape their domestic workforce? This column, using evidence from German multinationals, shows a positive correlation between offshoring and the firm’s proportion of highly educated workers. Offshoring firms have relatively more domestic jobs involving non-routine and interactive tasks. But offshoring is far from the only explanation for the shift towards more educated employees carrying out more advanced tasks.
How's that rebalancing coming? - the Economist - WITH American recovery comes renewed growth in the trade deficit: You can see in the chart above that America's trade balance collapsed, along with world trade generally and oil prices, through January of this year, at which point a slow recovery began. Since February, the monthly trade gap has grown by about $10 billion. What's interesting is that the balance of trade with OPEC has deteriorated by $6 billion, and the trade deficit with China has grown by $8 billion over that time. So excluding OPEC and China, America's balance of trade has improved.
The U.S.: export juggernaut (if you don’t count oil and China) - Overall U.S. trade deficit for September: $36.5 billion. Trade deficit in petroleum products: $20.5 billion. Trade deficit with China: $22.1 billion. Overall U.S. trade surplus if you exclude petroleum and China: $6.1 billion. And so, in the spirit of EBITDA, Ajusted OIBDA and the like, I hereby propose a new metric: Trade balance before oil and China, or TBBOC (pronounced "Tupac"). Doesn't it make you feel better already?
The illusion of improving global imbalances - VoxEU - Global imbalances are shrinking at a fabulous rate. This column argues that these improvements are mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen. A global recovery will almost surely return the US, Germany, China and others to their old paths.
International trade, vertical production linkages, and the transmission of shocks - VoxEU - Output and trade flows both collapsed during the crisis, but the causal relationship is not clear. This column analyses trade flows at the sectoral level and finds that international trade transmits shocks across countries. Such spillovers raise the importance of fiscal policy coordination.
Reducing trade distortions could ease food price volatility - VoxEU - Global food price volatility is costly. This paper argues that most food price spikes are driven by major policy shifts, such as tariffs and subsidies, which result in harmful tit-for tat behaviour. It makes the case for completing the Doha round to further restrain WTO members’ unilateral actions.
Fixed rates and protectionism, 2009 edition - Krugman – NYTimes - Barry Eichengreen and Doug Irwin have a new paper challenging the conventional wisdom about protectionism in the 1930s. It wasn’t about economic ignorance, or at least not about microeconomics; it was about the attempt to escape the “golden fetters” of the exchange rate. The most protectionist countries were those that tried to keep their peg to gold; and as they say, This suggests that trade protection in the 1930s was less an instance of special interest politics run amok than second-best macroeconomic policy management when monetary and fiscal policies were constrained. Well, as it happens, I’m right in the middle of a contemporary example..
As Shipping Slows, Banks and Carriers Fear Loan Defaults - Now there is more to worry about. Banks with large shipping industry portfolios — among them Royal Bank of Scotland and Lloyds, and HSH Nordbank and Commerzbank in Germany — could face meaningful write-downs as ship owners confront plummeting charter rates from a 25 percent drop in global trade. And for Europe’s struggling banks, already plagued by a toothless economic recovery and continuing losses in real estate, the emergence of yet another questionable category of loans adds to fears that many of them are lagging their counterparts in the United States in overcoming the financial crisis.
BBC NEWS - Russian bank to cut 67,000 jobs - Sberbank, Russia's largest lender, has announced plans to cut as many as 67,000 jobs, or a quarter of its workforce, within the next five years.Around 27,000 of these jobs will go by the end of this year, the bank added. The state-controlled bank has been hit by the downturn and is implementing a widespread modernisation plan
Russia Warns of Gas Crisis If Ukraine Misses Payment (Update3) - (Bloomberg) -- Russia warned it may halt gas exports through Ukraine if the bailout-dependent former Soviet state can’t keep up payments in what is becoming an annual dispute between the two countries. “If transit countries fulfill their obligations, there won’t be any problems from our side,” Prime Minister Vladimir Putin told reporters in Moscow today. “As soon as there’s any siphoning, we’ll cut transmission.” Ukraine, which ships about 80 percent of Russian gas exports to Europe, may have to postpone payments for the fuel if it doesn’t get an International Monetary Fund tranche on time
Strong US recovery biggest threat to Australia - ASK economic guru David Hale about the worst risk facing Australia and you will get a surprising answer.''It's a really strong United States recovery,'' he said. ''The V-shape that some people are talking about. It would force the Fed to push up rates quite quickly in the second half of next year, not from zero to 1 per cent, but from zero to 2 or 3; it would reverse the big rally in the Australian dollar and it might provoke a big global stock market correction."
Trade spat heating up - THESE stories are increasingly troubling: China denounced new U.S. anti-dumping duties on steel pipes as protectionist on Friday and opened an investigation into imports of U.S.-made automobiles, about a week before President Barack Obama is scheduled to arrive for a visit. China's dollar peg is not a constraint on America's monetary policy (at least not directly). It does mean, however, that no matter how hard America tries, it can't depreciate the dollar against the renminbi. Faced with an inability to reduce a persistent trade deficit with China via natural movements in the exchange rate, American leaders are increasingly tempted to use other methods to control import volume.
China's End Run Around The US - What happens in Beijing next week will undoubtedly be important to U.S.-China trade relations. But trade developments throughout Asia will likely affect the American position in the region as much as, or more than, those meetings in Beijing. Even while it keeps up the dialogue with Washington, China is essentially doing an end run around the U.S. in Asia by pursuing a bewildering variety of free-trade pacts with its neighbors. The White House, transfixed by problems at home and its own diplomatic dance with China, trails its rival in sewing up trade deals. The result could be a trade bloc dominated by the mainland.
China Woos Africa - China announced, almost casually, that it was canceling 150 items of maturing government debt owed to it by 32 African countries. The announcement came a few days before a meeting between China's top legislator Wu Bangguo and Kenneth Marende, the Speaker of Kenya's National Assembly, to discuss cooperation between the two countries. Further, on Nov. 8, Chinese Premier Wen Jiabao was to attend the opening ceremony of the 4th Ministerial Conference of the Forum on China-Africa Cooperation to be held in Sharm el-Sheikh, Egypt. Top-level meetings between China's leaders and their African counterparts have been occurring at the frequency of at least one every month. What is Beijing up to?
Decoupling and the future of emerging economies’ growth - voxeu- Most evidence says that emerging economies remain coupled to global growth. Does that threaten their economic resilience? This column says that emerging economies’ growth is more linked to Chinese growth than that of G7 economies, suggesting that their performance is rooted in well-founded, long-term economic trends.
How short a time horizon is needed to motivate catch-up growth? - What if, in the future, for the remaining poor countries, the West (and East Asia) is so rich that catch-up takes seventy years? One hundred years? Will any poor country be bothered? Won't it all seem too far off to be worth the trouble? (Catch-up growth takes lots of hard work and savings and sacrifices of previous social norms.) Or do you believe in a technology-transfer Solow model where the maximum possible rate of catch-up growth keeps on growing? One hundred years from now, will it be plausible to imagine catch-up growth of twenty or thirty percent a year?
'Made in China' now made in Egypt - With cheap labour, investment incentives and unrestricted exports, one Chinese textile group has turned to Egypt as an ideal location to produce its ready-made garments, beating stiff competition at home.The Chinese-owned Nile Textile Group has set up shop in the Port Said free zone, overlooking the north entrance of the Suez Canal, and developed an industrial estate now hiring 600 workers, 20 percent of which are Chinese and the rest Egyptian.Cheap raw materials and favourable export conditions have given the company easy access to foreign markets.It's a bargain for the Nile Textile Group, which imports 60 percent of its basic products tax free and then sends them outside Egypt, mainly to the United States.
China's urban fixed-asset investment up 33.1% in first 10 months - (Xinhua) -- China's urban fixed-asset investment rose 33.1 percent in the first 10 months to 15.07 trillion yuan (2.21 trillion U.S. dollars), compared with the same period a year earlier, the National Bureau of Statistics (NBS) announced Wednesday. The growth rate was 5.9 percentage points higher than that in the same period of last year, but 0.2 percentage points lower than that in the first nine months, NBS spokesman Sheng Laiyun said at a press conference. Hao Daming, analyst with China Galaxy Securities, attributed the small dip to the eased growth of investment in the country's real estate sector in October.
China's industrial output up 16.1% in Oct (Xinhua) -- China's industrial output rose 16.1 percent in October from a year earlier, as the economy saw a consolidated recovery of growth with massive government spending. The increase rate was 7.9 percentage points higher from a year earlier and 2.2 percentage points higher than September, according to figures released by the National Bureau of Statistics (NBS) Wednesday. Industrial output increased 9.4 percent year on year over first 10 months this year. Although the growth rate was 5 percentage points lower than that of a year earlier, it was 0.7 percentage points higher than that of the first nine months, said the NBS.
China's retail sales up 16.2% in October - China's retail sales in October rose 16.2 percent year on year to 1.17 trillion yuan (171 billion U.S. dollars), the National Bureau of Statistics (NBS) announced Wednesday. The rise was 5.8 percentage points lower than that of a year earlier, but 0.7 percentage points higher than that in September, NBS spokesman Sheng Laiyun said at a press conference. The first 10 months saw a 15.3-percent growth in retail sales to 10.14 trillion yuan year on year. The rate was 6.7 percentage points down from the same period last year, and 0.2 percentage points up from the first nine months this year, Sheng said. "The growth is really strong," said Hao Daming, analyst with China Galaxy Securities. "The rise is mainly backed by robust consumption in rural areas, and the property and auto sectors." Hao expected retail sales would continue to pick up in the following months, and help accelerate economic growth. The government put into place a series of stimulus measures to fuel consumption, including tax cuts for auto and property purchases and introduced subsidies for home appliances in rural areas...
China’s Empty City - China’s economy is continuing to grow despite the global recession, helped by a massive government stimulus package of $585bn. But doubts remain whether such strong growth can be sustained by public spending alone.Al Jazeera’s Melissa Chan reports from Inner Mongolia, where a whole town built with government money is standing empty.
If I believed in Austro-Chinese business cycle theory - Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time. That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates. A key question is whether China needs all of this investment.
Is China headed toward collapse? - The Chinese, with their unbridled capitalistic expansion propelled by a system they still refer to as “socialism with Chinese characteristics,” are still thriving, with annual gross domestic product growth of 8.9 percent in the third quarter and a domestic consumer market just starting to flex its enormous muscles. That’s prompted some cheerleading from U.S. officials, who want to see those Chinese consumers begin to pick up the slack in the global economy — a theme President Barack Obama and his delegation are certain to bring up during next week’s visit to China. That’s one vision of the future. But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
Geithner encouraged by moves in Japan, China - BusinessWeek - Treasury Secretary Timothy Geithner said Wednesday he's encouraged by efforts in Japan and China to spur domestic demand instead of relying so heavily on American consumers -- a shift that will contribute to more stable global growth.Geithner said he sees broad recognition among governments to create policies that will lead to more balanced, sustainable growth and avoid the kind of dangerous imbalances that contributed to the world recession.
Japan Machine Orders Rise More Than Expected; Recovery May Last - (Bloomberg) -- Orders for Japanese machinery rose more than twice the pace economists estimated in September, signaling that a recovery in the world’s second-largest economy may be sustained. Orders, an indicator of business investment in three to six months, climbed 10.5 percent from a month earlier, the Cabinet Office said today in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a 4.1 percent increase.
Asia’s corporate saving mystery - IMFdirect - As Asia starts down the path to recovery, it is going to have to tackle two issues which are constraining its long-term growth potential: firms that save but do not invest and wealthy households that are reluctant to consume. At first glance, such behavior seems inexplicable and counter-intuitive. Let’s imagine for a moment you are an investor—you may well be— you put quite a bit of money into a company to back its expansion plans. Initially, these plans prove successful, and the company makes quite a bit of money. But then the firm ran out of investment ideas. What would you expect them to do? Surely, you would expect them to return the money you provided, for example by paying it out as dividends. But in the past, prosperous decade before the current downturn this hasn’t been happening in emerging Asia. Firms have been sitting on their profits, not investing them, but not paying them out in dividends, either. That is a puzzle, and a problem
Asia and the IMF: Toward a Deeper Engagement - IMF direct - Asia’s standing and influence continues to grow and the IMF is working with the region to help it meet its full economic potential as it recovers from the global crisis. In mid-November, the Managing Director of the IMF, Dominique Strauss-Kahn, begins a six-day trip to Asia. First he’s in Singapore attending the 16th Asia-Pacific Economic Cooperation (APEC) Finance Ministers’ Meeting, and then goes on to China November 16-17, one of the region’s most dynamic economies. The visit is another sign of the importance which the IMF attaches to its relationship with Asia as the region leads the world away from crisis toward global recovery. It will also provide Asia and the IMF an opportunity to deepen their engagement
Andy Xie: Why China and Japan Need an East Asia Bloc - Withering exports and asset bubbles have forced Asians – especially China and Japan -- to work harder at free trade pacts. - All kinds of proposals have been floated about creating an Asian bloc a la European Union. Bilateral and multilateral free trade agreements (FTA) have been suggested for various combinations of Asian countries. Lately, there's been a flurry of new ideas as Japan's recently installed DPJ government seeks to differentiate from the ousted LDP.By promoting ideas that lean toward Asia, DPJ's leadership is signaling that Japan wants less dependence on the United States. This position offers a hope for the future to Japanese people, whose economy has been comatose for two decades. Closer integration with Asian neighbors could restore growth in Japan.
The future of oil - The race for the world's remaining oil reserves could get very nasty. Recently, Nigerian militants announced their determination to oppose the efforts of a major Chinese energy group to secure six billion barrels of crude reserves, comparing the potential new investors to "locusts". The Movement for the Emancipation of the Niger Delta told journalists that the record of Chinese companies in other African nations suggested "an entry into the oil industry in Nigeria will be a disaster for the oil-bearing communities".
How demand for oil will change by 2030 - Economist - GLOBAL demand for oil is set to rise from 84.7m barrels per day (bpd) in 2008 to 105m bpd in 2030, says the International Energy Agency in its latest annual energy report. Transport will account for 97% of this increase as rising numbers of cars hit the roads of the developing world. Demand from these countries will overtake that of the industrialised OECD nations by 2030. By then, America, Japan and Europe will be using less oil than in 1980. But the thirst for oil will balloon in Asia—and in India and China in particular—where demand is predicted to rise by as much as 400% compared with 2008.
Oil and trouble - Economist - BACK in the spring, James Hamilton provided the economics world with one of the more interesting results of the crisis and recession—that if you took a macroeconomic model and plugged in observed oil prices through the middle of 2008, you got a near perfect forecast for output in the third quarter of 2008, nevermind the financial crisis. It suggested that the oil price spike of 2007 and 2008 was a seriously underappreciated causal factor behind this Great Recession.Mr Hamilton has updated his model now cover the period through the third quarter of this year. It does fairly well in handling the general shape and duration of the downturn, but it underestimates the recession's depth. Over the whole of the recession, things like financial paralysis and trade collapse really did have an impact.But it's important to remember that historically oil prices have helped to drive the business cycle. And with crude prices up over 100% from their recession lows, it's useful to ask whether a new crude price spike might not derail the nascent recovery.
Will rising oil prices derail the recovery? - Last April I described new research on the role of oil prices in the recent recession. Here's an update on what's happened since then.In a paper presented at the Brookings Institution last spring, I examined the post-sample forecasting performance of an equation originally published in 2003, which relates real GDP to past values of GDP and oil prices. I noted in April that if you had known in October 2007 the values of GDP through 2007:Q3 and what was about to happen to oil prices through 2008:Q2, you could have used that historical relation to predict the value of U.S. real GDP for 2008:Q3 with an accuracy better than 99.5%.
Dollar trouble, oil's bubble could derail recovery (Reuters) - The weakness in the U.S. dollar risks inflating a bubble in the oil market, which could threaten consumer spending and potentially cause a double dip recession.The greenback's decline this year has been lauded as good for America as it benefits earnings, stimulates exports and helps rebalance the U.S. economy. But runaway oil prices could be the Achilles' heel to the thesis that sees only a benign impact of a weak dollar.This year, when the dollar has been weak, oil has been strong; a weaker dollar supports oil because dollar-priced commodities become cheaper for buyers using other currencies. The inverse relationship between the dollar and crude has been remarkably tight: the 200-day correlation coefficient between the dollar index and oil is -0.94
Decline In Alaskan Crude Production Threatens Entire US Oil Infrastructure - Some interesting commentary out this morning from the IEA, in its latest survey of the oil market, pertaining to the situation in Alaska:---This summer saw crude volumes through the TransAlaska Pipeline System (TAPS) fall to a record low below 600 kb/d, leading to worries about its economic and technical sustainability. The pipeline, which takes output from the giant Prudhoe Bay oil field on Alaska’s North Slope to the Valdez export terminal in the south of the state, used to pump as much as 2 mb/d at its peak 20 years ago. Besides economics, the fear is that even lower volumes could lead to more frequent and damaging outages – a major issue for oil companies lacking alternative export routes.
International Energy Agency warns falling investment risk to economic recovery -- The global financial crisis has led to a dangerous drop in energy investment around the world which could choke off the nascent economic recovery, the International Energy Agency said.The IEA, a policy adviser to 28 mostly industrialized oil-consuming nations, estimates that the financial and economic crisis is responsible for a $90 billion drop in global oil and gas investment this year, a 19 percent cut from 2008
IEA: $10.5 TRILLION Is Needed To Avert An Energy Disaster - slide show - full-executive-summary - 10th slide crude oil needed - fields yet to be developed or found (bar graph)
Oil at $100 Doesn’t Compute as OPEC Output Pace Grows - (Bloomberg) -- OPEC is increasing output at the fastest pace in two years, adding to near-record inventories and threatening speculators betting on $100 crude with losses. The number of options contracts to buy oil at $100 by March almost quadrupled in October and increased another 5.9 percent so far this month. As traders piled in, OPEC boosted production 4 percent, or 1.1 million barrels a day, since March amid the worst global recession since World War II
Saudis Ditch NYMEX WTI - A Global Paradigm Shift - Saudi Aramco, national oil company of the world’s largest oil producer and exporter, decided earlier this month it will drop West Texas Intermediate (WTI) as the benchmark for pricing its oil for sale in the US market. The news instantly sparked speculation that other major producers would follow. Chavez (not surprisingly), reportedly already indicated Venezuela would follow Saudi’s lead adopting the new index. Several Canadian companies, who expect to use TransCanada Corp. (TRP) proposed Keystone XL pipeline to send oil sands crude to the U.S. Gulf Coast, have also expressed interest in using the Argus benchmark.
Key oil figures were distorted by US pressure, says whistleblower - The Guardian - The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by governments to help guide their wider energy and climate change policies.
FT Alphaville - Oil stat shock - What the Guardian is saying is that the IEA has been massaging its figures on account of pressure from the US government. As Morgan Downey over at Scarce Whales points out, that’s a very grave allegation indeed; the IEA after all is an OECD taxpayer-funded institution. But given the numbers of abrupt revisions the IEA has had to make to its forecasts of late would it be too much of surprise? As the Guardian states the body is expected to publish its latest World Energy Outlook on oil demand and supply on Tuesday, with the market expecting some “substantial” downward revisions to its long-term forecast for global oil demand.
Too fearful to publicise peak oil reality - It is very hard for the average person in the street to come to a sensible conclusion on peak oil. It's a subject that prompts a passionate polarisation of views. The peak oilists sometimes sound like those extraordinary Christians with sandwich boards proclaiming that the end of the world is nigh. In contrast, the the international economic establishment – including the International Energy Agency (IEA) – has one very clear purpose in mind at all times: don't panic. Their mission seems to be focused on keeping jittery markets calm.Faced with these options the majority of people shrug their shoulders in confusion and ignore the trickle of whistleblowers, industry insiders and careful analysts who have been warning of the imminent decline in oil for over a decade now.
End Of Cheap Oil, End Of Road For Ruinous Lifestyle - In 2004, writer David Owen wrote a piece for The New Yorker magazine that knocked conventional environmental thinking on its ear. His thesis was that if you look at what's important — the amount of fossil fuels burned per capita — the greenest city in the country, far and away, is New York, N.Y. Loud, smelly, gritty Gotham, the Big Apple, is greener than Portland, Seattle, Austin or anywhere in Vermont. I happened to run into Owen at a conference earlier this year, and he said he had expanded the magazine piece into a book. I wished him well but wondered if there was enough more to say to fill a book.There is. He did. "Green Metropolis — What the City Can Teach the Country About True Sustainability"(Riverhead Books) is a marvelously clear-eyed analysis of the growing energy/ environmental crisis. "Every serious discussion of the environment ... is ultimately about oil, whether it specifically mentions oil or not," Owen writes. The explosive growth and general prosperity of the past century have been made possible by the "prodigious abundance" of oil; the problems of the coming century will involve "oil's increasing scarcity and cost."
Nuclear Socialism - Brad Plumer has an interesting piece about the American right’s strangely passionate love affair with nuclear power and the impact it’s having on the climate debate in congress. What I find especially odd about it is that it’s so at odds with American conservatives’ ardor for the free market. You see this mismatch in a small sense in that their nuclear agenda in congress consists basically of asking for subsidies. But in a larger sense the issue is that the big example one can find of a country living the nuclear dream is . . . France. And it’s not just an irony or a funny coincidence, nuclear power in France is deeply tied to the genuinely socialistic (i.e., not just high taxes and a generous welfare state) aspects of the French economy
Electricity for Americans From Russia’s Old Nuclear Weapons - NYTimes - What’s powering your home appliances? For about 10 percent of electricity in the United States, it’s fuel from dismantled nuclear bombs, including Russian ones. But if more diluted weapons-grade uranium isn’t secured soon, the pipeline could run dry, with ramifications for consumers, as well as some American utilities and their Russian suppliers In the last two decades, nuclear disarmament has become an integral part of the electricity industry, little known to most Americans.
The Movie Chevron Doesn't Want You To See - I'd already read the infuriating story of Chevron-Texaco's contamination of millions of acres of Amazonian rainforest, and one man's battle to bring them to justice. It's that battle that's at the heart of Joe Berlinger's stunning new documentary, "Crude." Perhaps the most poignant scenes in the movie were statements from the indignant Chevron spokespeople, insisting on the company's innocence, as images of oil-coated streams, dying animals and cancerous children play out on the screen. (incl trailer)
Energy demand to rise rapidly without CO2 deal: IEA - The Globe and Mail - World energy consumption will rise rapidly over the next 20 years, pushing up costs and increasing greenhouse gases, unless a deal is reached to curb carbon dioxide emissions, the International Energy Agency (IEA) said on Tuesday.In its annual World Energy Outlook, the IEA said global energy demand would increase by an average of 2.5 per cent per year over the next five years if governments made no changes to their existing policies and measures.Under these circumstances, which the IEA called its reference scenario, world primary energy demand would rise by an average of 1.5 per cent per year over the next two decades.
Big Industry Wins Big with Cap and Trade: Are We the Losers? - Point Carbon, a carbon trading consulting firm, released a 16-page report in an attempt to predict what a carbon market would mean for America. While there may be a conflict of interest behind a consulting firm releasing research on a market based on pending legislation that they stand to profit from, the report lends some critical insights into how much energy companies stand to gain or lose due to cap and trade. One of the most talked about bits of information released by the report is how differently cap-and-trade will affect different states. Pacific Coast and Northeast corridor states will see a slight increase in power prices, while the Midwest, South, Great Plains, and Mountain regions will be affected much worse
Ken Caldeira: “the burning of organic carbon warms the Earth about 100,000 times more from climate effects than it does through the release of chemical energy in combustion" In the case of electricity generation, about 1/3 of its thermal energy went out a wire as electric power, the rest was released promptly as waste heat. But each molecule of CO2, during its subsequent lifetime in the atmosphere, traps 100,000 times more heat than was released during its formation. A hundred thousand is a big number. It means that running a handheld electric hairdryer on US grid electricity delivers a planet-warming punch comparable to [the heat given off by] two Boeing 747s operating at full takeoff power for the same time period. The warming is delivered over time, not promptly, but that don’t matter; the planetary heating is accrued, as accountants would say, the minute you hit the switch
Controversial new climate change results - New data show that the balance between the airborne and the absorbed fraction of carbon dioxide has stayed approximately constant since 1850, despite emissions of carbon dioxide having risen from about 2 billion tons a year in 1850 to 35 billion tons a year now.This suggests that terrestrial ecosystems and the oceans have a much greater capacity to absorb CO2 than had been previously expected.The results run contrary to a significant body of recent research which expects that the capacity of terrestrial ecosystems and the oceans to absorb CO2 should start to diminish as CO2 emissions increase, letting greenhouse gas levels skyrocket.
Warming brings early demise to Bolivian glacier - Once home to the highest ski resort in the world and now reduced to a rocky mountainside, Bolivia's Chacaltaya range bears powerful witness to the precipitous melting of glaciers.The rusting remains of a ski lift now dominate what was once the highest ski-run in the world perched on the Chacaltaya glacier at some 5,300 meters (17,390 feet) high.Only a snowy ice cap of some 50 square meters (538 square feet) remains of the magnificent Chacaltaya glacier which spread over 1,600 square meters in the 1950s. "That's all there's left: a little piece of ice that is disappearing and will last no more than a year," said Alfredo Martinez, a veteran guide and founder of the Bolivian Andean Club.
Greenland ice cap melting faster than ever - Satellite observations and a state-of-the art regional atmospheric model have independently confirmed that the Greenland ice sheet is loosing mass at an accelerating rate, reports a new study in Science. This mass loss is equally distributed between increased iceberg production, driven by acceleration of Greenland's fast-flowing outlet glaciers, and increased meltwater production at the ice sheet surface. Recent warm summers further accelerated the mass loss to 273 Gt per year (1 Gt is the mass of 1 cubic kilometre of water), in the period 2006-2008, which represents 0.75 mm of global sea level rise per year.
Global Warming -Dogs verus SUVs - The anti-doggists estimate it takes .84 hectares -- or about 2.1 acres of cropland -- to meet a a pooch's food needs for a year. There are a little over 70 million dogs in the U.S. (the Humane Society says 74.8 million, the veterinarians say 72.1 million, and the pet food industry says 66.3 million, for an average of 71.1 dogs). So by the authors' estimates it must take about 150 million acres of U.S. farmland to feed our dogs. In all, there are 440 million acres of cropland in the US -- suggesting that the equivalent of one-third of all U.S. cropland is devoted to producing dog food.
Carbon-Absorbing Mineral Gets Little Interest - Originating deep in the earth, peridotite is a part of a family — "ultramafic rock" — that reacts naturally with CO2 to form solid minerals. Last May, Krevor was the lead author of a study identifying and mapping enough ultramafic rock in the United States to sequester an enormous amount of carbon dioxide. Taking into account various land-use constraints — private property, proximity to cities, national and state parks — he and his fellow researchers found storage potential for 500 years of the country's CO2 emissions. So it's a mystery of current climate studies that the U.S. Department of Energy, the country's largest single source of funding into clean energy research and development, has awarded just one small grant, in 2003, to researchers studying mineral sequestration.
Ignitable Drinking Water? WTF (video) So exactly what is the mandate of the New York State Department of Environmental Conservation? Classic government bureaucracy
Nuclear Scars: Tainted Water Runs Beneath Nevada Desert - Nevada faces a water crisis and population boom, but radioactive waste has polluted aquifers. Over 41 years, the federal government detonated 921 nuclear warheads underground at the Nevada Test Site, 75 miles northeast of Las Vegas. Each explosion deposited a toxic load of radioactivity into the ground and, in some cases, directly into aquifers. When testing ended in 1992, the Energy Department estimated that more than 300 million curies of radiation had been left behind, making the site one of the most radioactively contaminated places in the nation
Saving Seafood From Extinction - Decades of overfishing have left many fish stocks in precarious state. Once-abundant North Atlantic fish like cod, haddock, and flounder are at only a fraction of their historic levels. The problems are not unique to the Northeast: red snapper stocks in the Gulf of Mexico are at historic lows, and at least forty other marine fish stocks around the country are either overfished or subject to overfishing.
The Fight Over The Future Of Food - The food fight takes place at a time when experts on both sides agree on one thing -- the number of empty bellies around the world will only grow unless there is major intervention now. A combination of the food crisis and the global economic downturn has catapulted the number of hungry people in the world to more than 1 billion. The United Nations says world food output must grow by 70 percent over the next four decades to feed a projected extra 2.3 billion people by 2050.