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

Saturday, December 12, 2009

week ending Dec 12

Fed's Dudley Argues For Extended Period Of Low Rates - WSJ --Federal Reserve Bank of New York President William Dudley on Monday joined other key central bank officials in saying it will likely be some time before the central bank raises rates. His comments came in a speech in which he also decried Wall Street pay levels and pushed back against congressional efforts to take away central bank powers. The economy is "slowly improving" amid rising output and moderating job losses, Dudley said. He expects next year to be a year of "more moderate growth," because the nation still faces "quite a few headwinds .

Read the fine print - Atlanta Fed -An otherwise fine article from the Wall Street Journal starts with this headline: "New York Fed Starts To Unwind Stimulus" You might casually read that headline and assume that the Federal Open Market Committee was mighty impressed by the November employment report—and quick to respond with the first stages of a reversal in the stance of monetary policy. The facts lie, however, underneath the headline. A better headline for the article would surely have been something like "New York Fed Starts to Lay Groundwork to Unwind Stimulus When Time Comes." It doesn't exactly sing, but it represents the facts.

Reverse Repo Test #3 Now A Fact: $225 Million In Liquidity Sopped Up By Fed Just a day after the second reverse repo test was conducted, the Fed has launched repo test #3: this time, as we expected, for a greater (if still notionally meaningless) amount of $225 million, compared to yesterday's $180 million. The term of this operation is just one day, compared to the 8 and 3 in tests #2 and #1. The increasing frequency of these Temporary Market Operations should be making the liquidity bulls very nervous. And as we pointed out yesterday, the notional on the repo test "can only go up" - so far we have been proven right. Yet wait for the collateral to move down from Treasurys. That's when all hell will break loose.

Bernanke Low Rates ‘Poison’ to U.S. Economy, Xie Says (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is prescribing “poison” to the U.S. economy by keeping interest rates near zero and fueling a wave of speculative capital that may cause the next global crisis, former Morgan Stanley chief Asian economist Andy Xie said....“There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”

Morgan Stanley: Fed to Raise Rates in 2nd Half of 2010 - In a research note titled: "The Fed Will Exit in 2010", Morgan Stanley forecast that the Fed will raise the Fed Funds rate in the 2nd half of 2010 to 1.5%. They are forecasting GDP to increase 2.8% in both 2010 and 2011, and for unemployment to peak in Q1 2010 at 10.3%, and decline to 9.5% in 2011. The GDP and unemployment rate forecasts are consistent with each other (see my post: Employment and Real GDP), but the real question is why do they expect the Fed to raise rates in the 2nd half of 2010 with a sluggish recovery?

Some Thoughts on Monetarism, Arnold Kling - There is absolutely no reason that I can come up with not to try an expansionary monetary policy now. If my views of money are correct, that policy will not work, but neither will it cause any harm. Often, the press writes as if the economy is on a knife edge, poised between deep depression and accelerating inflation, with only the wisest Fed "maestro" able to maintain balance. It is a stupid story whenever it is written, which has been often over the past thirty years.But now the knife-edge story is untenable. Inflation is low. Unemployment is high. Monetary expansion is called for. End of story.

Monetary Policy and the Pre-Crisis Problems in Financial Institutions - Many observers have made the case that monetary policy was too loose in the early-to-mid 2000s and, as a result, helped fuel the credit and housing boom. Some observers, however, see little role for loose monetary policy in explaining the distortions that arose in the financial system. For example, Arnold Kling's impressive paper on policies that contributed to the financial crisis finds little importance for monetary policy with regard to the bad bets and excessive leverage taken on by financial institutions during this time. While there are a number of factors that contributed to these developments in the financial system, I want to push back on the notion that monetary policy's role was relatively unimportant.

Credit booms go wrong - VoxEU -Are credit bubbles dangerous? This column presents long-run historical data showing that, over the past 140 years, episodes of financial instability were often the result of "credit booms gone wrong". Recent years witnessed an unprecedented expansion in the role of credit in the macroeconomy. It is a mishap of history that – just as credit matters more than ever before – the reigning doctrine gives it no role in central bank policies.

BIS Warns Low Rates Lead to Excessive Risk Taking - The Bank of International Settlements is taking a more public stand on a matter it took up with central bankers privately prior to the crisis, namely, that overly low interest rates stoke asset bubbles. One of a series of papers released today notes: Easy monetary conditions are a classic ingredient of financial crises: low interest rates may contribute to an excessive expansion of credit, and hence to boom-bust type business fluctuations. In addition, some recent papers find a significant link between low interest rates and banks’ risk-taking, pointing to a different dimension of the monetary transmission mechanism, the so-called risk-taking channel

Mr Trichet and the Fed - Jean-Claude Trichet has taken a stand on the future of the US Federal Reserve. Interviewed by two Belgian newspapers, he said he “would be amazed if the current debate in the United States were to lead to a Federal Reserve System that no longer had a close link with micro-prudential supervision, since this does not appear to me to be the lesson that should be drawn from the crisis at all”.

WSJ Warns That Systemic Risks Remain : CJR -The Wall Street Journal has a good column this morning warning pretty starkly about the huge risks that are still very much embedded in the financial system. Mark Whitehouse writes that “as the worst crisis since the Great Depression appears to be passing, we could be setting the stage for the next one.”That’s because we’re not really taking care of some critical (and obvious) structural issues that threaten a repeat of the last couple of years: While policy makers breathe a collective sigh of relief, they’re making little progress in addressing deeper flaws that the crisis laid bare: an unwieldy banking system, unreliable financial plumbing and a global economy that encourages and depends on heavy borrowing by the U.S.

A lonely voice against the Fed now leads a chorus - Ron Paul’s proposal would subject the Fed to unprecedented scrutiny by allowing the Government Accountability Office to audit all central bank operations, including its decisions on interest rates, lending to individual banks and transactions with foreign central banks. Fed officials and many private economists have argued strenuously against the measure, saying it would threaten economic stability by undermining the central bank's independence from political pressure.  Despite his unusual success in advancing the proposal, however, Paul is unlikely to cast a rare "yes" vote for it. That's because it is part of the bill proposing broad new financial regulation, something Paul simply cannot approve. "That's my tradition," he said. "I won't vote for a bill that's a disaster because 1 or 2 or 5 percent of it is an improvement."

Academics Spar With Populists Over Fed Audits -  A group of academic economists — including several Nobel Prize winners, leaders of respected economic journals and former Fed officials — is dialing up its call for lawmakers to drop plans to subject the Federal Reserve to more scrutiny by the Government Accountability Office, an investigative arm of Congress. In a letter to leaders on the Senate Banking Committee and House Financial Services Committee, the economists say a bill proposed by Rep. Ron Paul (R., Tex.) and Alan Grayson (D., Fla.) to let the GAO review Fed monetary policy would do “serious harm to the economy.” They warn increased congressional oversight would harm the Fed’s independence and ability to fight inflation. Some 270 economists have signed the letter, including Edward Prescott, Myron Scholes, Daniel McFadden, Fynn Kydland, Roger Myerson and Robert Engel, all Nobel winners.

Frequently Asked Questions - FRB: Speech--Bernanke - Accordingly, taking inspiration from the ubiquitous frequently-asked-questions lists, or FAQs, on Internet websites, in my remarks today I'd like to address four important FAQs about the economy and the Federal Reserve. They are:

  1. Where is the economy headed?
  2. What has the Federal Reserve been doing to support the economy and the financial system?
  3. Will the Federal Reserve's actions lead to higher inflation down the road?
  4. How can we avoid a similar crisis in the future?

Bernanke Sees Weak Jobs, Tight Credit - BusinessWeek - The Fed chief says the central bank has the tools to keep price increases in check, and that inflation could keep subsiding —Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces "formidable headwinds," including a weak labor market and tight credit that are likely to produce a "moderate" pace of expansion. "The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate," Bernanke, 55, said today in the text of remarks to the Economic Club of Washington. He said inflation remains "subdued" and might even move lower.

Blame Bernanke - guardian - As the senate debates Federal Reserve chairman Ben Bernanke's reappointment, it is striking how the media views blaming Bernanke for the Great Recession as being out of bounds. Of course Bernake bears much of the blame for America's economic collapse. He was either in, or next to, the driver's seat for the last seven years. Bernanke was a member of the board of governors of the Federal Reserve since the summer of 2002. He served a six-month stint as head of President Bush's council of economic advisors beginning in the summer of 2005 and then went back to chair the Fed in February 2006

Ben Bernanke - I caught him as he wrapped up his testimony before the Senate Banking Committee.  The key question that every Senator should have asked: is the banking system solvent? The truth is that it is not. And Bernanke is the regulator that should be saying so. Instead, he sees his role as being the nurse-maid of the ailing “too-big-to-fail” banks. And it’s costing all of us.

Bernie v. Bernanke - In this week’s Bernie Unfiltered, Senator Sanders explains his reasons for trying to block Bernanke’s reappointment:  Where was Bernanke when Wall Street was making all these risky investments and extracting wealth from working and middle-class Americans resulting in the worst financial meltdown since the Great Depression?   Where’s the money that the government gave to banks? Where’s the regulation since the collapse of the banking system? Why are these “too big to fail” institutions still around? Most importantly, Bernanke has been wrong over and over again: he predicted there would be no collapse of the housing bubble, that the subprime mortgage crisis would not have a huge effect on the rest of the economy and that employment would expand.

Fed Watch: Structural and Cyclical - For several months, I have been telling stories that decompose US economic activity into what I think of as cyclical and structural dynamics.  I believe the distinction is very important to firms, markets, and policymakers who need to be aware when one dynamic is clouding their view of the other.  I tend to view incoming data through both cyclical and structural lenses.  The employment report is a prime example.  Clearly, the steady improvement in the rate of deterioration of nonfarm payrolls since the spring follows the cyclical pattern as firms stop chasing demand down and thus stabilize their workforces.  Moreover, recent increases in temporary help hiring also points to firming labor demand in the months ahead.  It would seem that stronger growth does in fact have the desired impact on labor markets, and that fiscal stimulus helped accelerate recovery in the labor markets.   At the same time, though, one has to wonder what happens as the stimulus begins to fade?  Will there be sufficient demand from other sectors to compensate for fiscal and monetary withdrawal?

Old Dogs, Old Tricks - Matt Yglesias says it's puzzling that Ben Bernanke isn't adopting a more expansionary monetary policy in order to jumpstart the job market.  Brad DeLong says, "I am puzzled too."  A bunch of other liberally inclined economists have said similar things recently. I dunno. I guess I wish we could stop pretending to be surprised by this.  Ben Bernanke may be a specialist in economic contractions, but he's also a mainstream conservative economist.  And mainstream conservatives have always been more concerned with inflation than with unemployment.  Likewise, they tend to be opposed to entitlement spending, opposed to serious financial regulation, and opposed to expanded consumer protections.  And guess what?  Bernanke is more concerned with inflation than with unemployment and he's opposed to entitlement spending, serious financial regulation, and expanded consumer protections.This was all pretty plain several months ago, when virtually every liberally-minded economist supported Bernanke's reappointment.  So what's the point of bellyaching about it now?

Krugman: Bernanke’s Unfinished Mission - Ben Bernanke, the Federal Reserve chairman, recently had some downbeat things to say about our economic prospects. The economy, he warned, “confronts some formidable headwinds.” All we can expect, he said, is “modest economic growth next year — sufficient to bring down the unemployment rate, but at a pace slower than we would like.” Actually, he may have been too optimistic:  I don’t think many people grasp just how much job creation we need to climb out of the hole we’re in. There’s a good chance that unemployment will rise, not fall, over the next year. But even if it does inch down, one has to ask: Why isn’t the Fed trying to bring it down faster?

Bernanke Confirmation? - In our view the Fed has handled this political attack miserably. For a while the Fed’s leadership maintained a business as usual attitude. Now they have realized that they are at risk and we see chairman Bernanke in a more public role than in earlier times. His next message will be in his Washington speech on Monday. We also see this message of Fed independence coming from other sitting Fed governors and regional bank presidents and from former Fed governors like Krozner and Mishkin and Meyer. Is this counterattack enough to blunt the politics that will permanently change the Fed’s status? We believe that the answer is no. The Fed is offering too little and too late. And it is relying on giving opinions instead of citing facts that are credible in the eyes of the public.

Hypocrisy in Senate Grilling of Bernanke? - WSJ - Federal Reserve Chairman Ben Bernanke was grilled by senators in his confirmation hearing, but one economist is wondering if there might be some hypocrisy in the Senate. Kasriel writes: “One senator kept harping on the lack of regulatory discipline exercised by the Fed prior to the onset of the recent crisis. Given that the regulatory sins of omission occurred prior to Bernanke becoming Fed chairman on January 31, 2006, it seems unfair to blame him for that. Greenspan was in charge then. To the best of my knowledge, we do not have information as to how Bernanke voted, if votes were taken, on various relevant regulatory decisions. It was interesting that the senator I saw grilling Bernanke on the Fed’s lack of regulatory discipline was also a senator who voted for the Gramm-Leach-Bliley Act of 1999, legislation that, among other things, repealed the Glass-Steagall Act of 1933. You remember the rationale of Gramm-Leach-Bliley, don’t you? Innovation in our financial system was being stifled by too much regulation, such as Glass-Steagall. Senator, he who has not “sinned,” shall cast the first stone.

Bernanke: Love Me, Love Me Not - The Brookings Institution’s Douglas Elliott offers six reasons for the Senate to reject Ben Bernanke’s bid for a second term as Federal Reserve chairman and six reasons to confirm him. We’ll give you the reasons, and you can click through to see where Brookings comes out. More on the Brookings Web site.

Beat up Bernanke if You Want, Senators, but Please Reconfirm Him - Brookings - The U.S. Senate is in the process of deciding whether to reconfirm Ben Bernanke as Chairman of the Federal Reserve Board (the Fed.) Despite a great deal of anger in the Senate and the public at large toward the Fed, I concur with most observers that he will in fact be reconfirmed. I also believe this would be the smart decision. It is true that he has made mistakes, particularly during the bubble years, but it would be extremely difficult to find anyone in a position of real power around the world during that time who was free of error.

Requiem For The Dollar - WSJ - Ben Bernanke doesn't know how lucky he is. Tongue-lashings are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall St off the rocks last year a kind of fraud?  If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.

Commodity prices and the Fed - I've been discussing possible explanations for the recent tendency of the dollar prices of commodities to move together. On Friday we received a very useful data point for distinguishing between the different hypotheses. Whatever you believed about near-term world economic growth on Thursday, on Friday you should have become more optimistic than you'd been on Thursday. But what happened in commodity markets on Friday? The dollar price of almost everything fell quite dramatically. Others have suggested that inflation fears may be part of the commodity price picture. But if inflation expectations are subsiding as a result of a resumption in U.S. employment growth, it would be a very different account of inflation than the kinds of specifications popular with the Federal Reserve.

Budget Deficits, Fed Independence, and Inflation -  Thoma - Let me try to explain how monetary and fiscal policy are connected through the budget deficit.  There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that it will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). I want to look at the pressures the Fed may come under in the future, so let’s focus on the long-run debt problems and assume we are in a more normal economic environment. What will happen if the deficit continues to expand, and this begins to put upward pressure on interest rates?

Will Deficits Bankrupt Our Grandchildren? - Few subjects rival the federal budget deficit in its power to provoke muddled thinking. It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way... And most businesses won’t invest... Only government ... has both the motive and opportunity to increase spending significantly during deep downturns. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. ... When government undertakes such investments, our grandchildren become richer, not poorer. ...

In debate over nation's burgeoning deficit, a surplus of worry - This is the auction room of the Bureau of the Public Debt. On this particular morning -- Tuesday, the first day of December -- the United States is going to borrow $31 billion. The instrument in play is a four-week security. It's a Treasury bill that gives investors a place to park some money briefly with minimal risk and minimal return. At 11:30 a.m., precisely, the bidding closes. The deal is done, instantly, electronically. "It happens in seconds. Boom. We have 31 billion, they have their securities," says Keith Pallas, the auction manager. Debt is the essential fuel for a superpower that every day spends billions of dollars more than it receives in tax revenue.

How to Run Up a Deficit, Without Fear - FEW subjects rival the federal budget deficit in its power to provoke muddled thinking.  It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices.

Payback Time - Many See the VAT Option as a Cure for Deficits - Series - NYTimes - Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services. Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

Citizens Lay Down The Law On US Debt - CNN -When it comes to managing the country's purse strings, Washington gets a failing grade from several groups of citizens and experts across the country.  Those groups, part of the Concord Coalition's Fiscal Stewardship Project, went to Capitol Hill on Monday to deliver a report to their lawmakers detailing their suggestions for how best to address the long-term fiscal storm facing the United States if lawmakers do nothing.The approaching storm is not a surprise to anyone in Washington. Indeed, the debt issues threatening to consume the federal budget over time have been in the making for years. The economic crisis of the past year isn't the underlying problem, but it accelerated the timetable lawmakers face for dealing with the country's fiscal problems.

Senators Get in Motion Deficit-Cutting Panel - NYTimes - Searching for ways to get a handle on the federal deficit, the top Democrat and Republican on the Senate Budget Committee are expected on Wednesday to announce an agreement for a bipartisan commission that could recommend spending reductions and revenue increases aimed at bringing the deficit under control.Senator Kent Conrad, the North Dakota Democrat who chairs the panel, and Senator Judd Gregg of New Hampshire, the senior Republican, have, according to officials, reached an agreement for an 18-member commission, with 16 of those members coming from Congress and two from the administration. The Congressional membership would be evenly divided by party. If 14 of the 18 members of the commission could agree, their recommendations would be submitted for a vote in the House and Senate after the 2010 elections. Approval would require a supermajority.

With Fully Offset Tax Extender Bill, House Advances Important Fiscal Principle; Senate Should Follow -The House tax extender bill represents a step forward in the important effort to reinstate a pay-as-you-go norm to federal legislation — a norm that played a key role in enabling the White House and Congress to turn large deficits into substantial surpluses in the 1990s The nation is on an unsustainable fiscal path, and policymakers will soon face wrenching decisions on both spending and taxes. Over the immediate term, Congress has properly pursued an expansionary fiscal policy and needs to do more to address the weak labor market. Simultaneously, it needs to begin changing the nation’s long-term fiscal direction. The consensus in Washington that Congress should fully pay for health reform and also put downward pressure on the long-term growth in health care costs is a critical first step. Congress must return to a policy norm under which entitlement or tax legislation that costs money is financed with corresponding spending cuts or tax increases.

Sen Conrad: $1.5 Trillion Increase In Debt Limit Needed To Meet US Borrowing Through 2010 - Congress must increase the U.S. debt limit by around $1.5 trillion to ensure the federal government's borrowing needs are met through 2010, the chairman of the Senate Budget Committee said Wednesday. Sen. Kent Conrad (D., N.D.) said in order to ensure that the debt ceiling wouldn't be breached in the next 12 months, the limit on how much the federal government can borrow would need to be increased to around $13.6 trillion.

The Exquisite Pointlessness of the Conrad/Gregg Commission Proposal - I don’t think that arguing over whether we should or should not fear the proponents of a deficit commission is very productive. After all, if you look at what Conrad and Gregg have agreed to it’s clearly not going to do anything and there’s no reason for liberals to play the role of scapegoat by refusing to agree to the creation of a doomed-to-fail commission.

Baucus To Conrad And Gregg On A Budget Commission: Yo Mama - Here's the money quote: If the Chairman and Ranking Republican Member of the Budget Committee are in such broad agreement on their goals, why don’t they just skip the commission and go straight to their recommendation? That is exactly why Congress created the budget resolution and the reconciliation bill. In other words, Baucus was saying to his colleagues that, as the senior members of the budget committee, they already have the power to propose changes that will reduce the deficit.  Therefore, if you feel so strongly about this, never mind a commission, just go ahead and do it.  It's your job.

Debt vs Unfunded Liability: Entitlement Commission Bait and Switch - A bipartisan group of Senators is making a push to tie an increase in the debt ceiling to establishment of a Commission whose focus in on reducing the growth of entitlements. Now clearly Medicare spending growth at its current rate is not sustainable, which fact makes the current full-throated defense of that spending by Republicans fairly ironic, but something should be done and in fact is being done via the current HCR proposals. But pointing to the Debt Clock is not a good reason to slash away at Medicare or Social Security, because those slashes actually make that Clock run the wrong way by increasing and not decreasing Public Debt...

Debt Ceiling to be raised by $1.8 Trillion before year’s end? - In a move that would take the debt ceiling higher than previously envisioned, politicians hope to take the issue off the table for the next year or so. This large of a move would push the ceiling from $12.1 Trilllion to $13.9 Trillion, a staggering increase. My prediction is that will buy them only another year, as the exponential growth in the national debt numbers continue to go parabolic. This is a trend that is not mathematically sustainable. When this trend ends, and it will, you are going to see events that are eye opening, that’s a guarantee…

In The Dark Of Night - Debt Limit To Be Increased - It's time to face facts. Washington DC is out of control.   Spending is breaking all records, the deficit is climbing higher and higher, and the general populace is voicing graver doubts about the deficit and mounting debts even as politicians drag the country even deeper into a financial pit. In 1981 the federal debt first crossed the $1 trillion dollar mark, never to look back. And now, here in 2009, lawmakers are considering boosting it by as much as $1.9 trillion in one fell swoop with the hope (fingers crossed) that nobody will notice if they do it over the holidays.  Their calculations in deriving the $1.9 trillion number appear to not involve any considerations about what is best for the long term fiscal health of the country but whether the amount will be sufficient to make it past the mid-term elections.

Debt Limit to Be Increased By Up to $1.9 Trillion (Bloomberg) -- House Majority Leader Steny Hoyer said the chamber will vote next week on increasing the U.S. debt limit by $1.8 trillion or $1.9 trillion. The debt limit increase, raising the legal cap on government borrowing to about $14 trillion, would be the fourth in 18 months. A $1.8 trillion boost would probably be enough to prevent lawmakers from having to raise the limit again before next year’s midterm elections. Such an increase would be more than twice the size of each of the past three debt limit increases, each of which lifted the cap by $800 billion or less.

Democrats Spending Now To Save Their Seats Later -The voters have spoken: they would like 8 million jobs created now, please. And without adding a penny to the deficit, because all that debt is freaking them out. Sure, it seems like a pipe dream. But Democrats — facing double-digit unemployment and an increasingly grim electoral landscape — seem determined to achieve both, or at least lose trying.The problem for Obama is that the spending has to start paying sizable dividends for the economy and employment by next fall, or else it will be too easy for Dems to be painted as bankrupting their children's future. Congress is raising the debt ceiling now by a whopping $1.8 trillion to avoid having to raise it again just before the elections, and is creating a deficit-reduction commission. In the same vein, Democrats are trying to push through as much spending as they can now so the programs' impacts will be felt before next year's elections.

How to Reduce the Budget Deficit, Without Really Trying - The Australian economy just got bigger, thanks to the adoption of the new national accounting standard SNA08.  The revised data raise the level of nominal GDP by 4.4% for 2007-08.  As the government was quick to point out, this reduces the estimated budget deficit for 2009-10 from 4.7% to 4.5% of GDP, as well as the expected net debt to GDP ratio.

The Bond Market Is Very Calm Indeed... Since the middle of 2008 the U.S. Treasury has increased the supply of Treasury bonds held by the public by $2.5 trillion. And it has done this without moving the needle at all on either the real or nominal interest rates it has to pay.It requires a very strange mind indeed to say at this moment that the price elasticity of demand for U.S. Treasury securities right now is so high that additional fiscal stimulus is self-neutralizing...

Treasury Yield Curve Steepest Since at Least 1980 After Auction. - Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand. The so-called yield curve touched 372 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt. Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion

Depression Economics: Some Basic Fiscal Arithmetic - This is an exceptional time--a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for, as Paul Krugman puts it, not normal economics but rather “depression economics.” The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases are exceptionally large. Now, however, things are very different. Let’s run through the arithmetic--first in normal times, and then in a financial crisis-ridden environment like this one. 20091008d epi.pdf

Paper Probes Fed Nightmare — Inflating Away U.S. Debt - WSJ - While it may be the stuff of nightmares for central bankers and dollar defenders, a new paper describes how the U.S. could use inflation to reduce the burden of record-high and rising government debt. The research, published by the National Bureau of Economic Research, is based on a historical look at the interplay between rising prices and government debt burdens. It’s an issue sure to strike a few nerves, as the U.S. government’s debt moves to 50% of the nation’s gross domestic product, amid fears it could rise to 100% within the next decade. What may lie ahead evokes the experience of the years right after World War II, when the U.S. debt burden did breach 100% of GDP. Much of that weight was taken off the nation by way of inflation. If back then, the U.S. could ride rising price pressures to make its problem go away, then why not now?

Which Countries Own America’s Debt? | Computational Legal Studies (vimeo graphic)
Who Owns America’s Debt? An Dynamic Perspective on the Major Foreign Holders of Treasury Securities [2002- Present] Our Dynamic Version (Click Here for Documentation)

Exchange Rate Policies - My colleague Charles Engel has a new paper circulated by the Dallas Fed entitled "Exchange Rate Policies", which brings theory to bear on the topic. From the introduction: A debate has continued over many years on the desirable degree of foreign exchange rate flexibility. One side of the debate has sometimes made the case that the exchange rate should be freely determined by market forces, independently of any foreign exchange intervention or targeting by central bank monetary policy. This argument takes the stance that the market can best determine the appropriate level of the exchange rate.From the standpoint of modern macroeconomics, particularly from the view of New Keynesian economics, that stance is potentially selfcontradictory.

Dollar Fear Trumps Greed in Prices to Protect Against a Rebound (Bloomberg) -- Traders in the $3.2-trillion-a-day foreign-exchange market are paying the highest prices in more than a year to protect against a sudden rebound in the dollar after its worst annual performance since 2003.  That possibility may be less remote, according to Bill Gross, manager of the world’s biggest bond fund, who says a prolonged period of record-low interest rates may foster the “systemic risk” of new asset bubbles. “American investors have a lot of exposure now to foreign markets,” said Mansoor Mohi-uddin, the chief currency strategist at Zurich-based UBS AG, the largest foreign-exchange trader behind Deutsche Bank AG as measured by Euromoney Institutional Investor Plc. “If investors become risk-averse again, which happened last year due to Lehman’s bankruptcy and could happen now for a whole host of reasons, they are likely to go into less risky assets like U.S. Treasuries, which would help the dollar.”

The dollar’s fall reflects a new role for reserves - Commentary, Financial Times: I am often asked whether the ongoing decline of the dollar implies that it can no longer serve as a reserve currency. My short answer is that most countries no longer hold dollars and other currencies as traditional reserves. The role of foreign exchange balances has changed from being short-term funds used to bridge export-import gaps to being long-term investment funds. In this new world, the dollar has shifted from being almost the sole “reserve currency” of many countries to being the primary “investment currency”, a role that it will continue to play far into the future.

Metrics - Winners and Losers as the Dollar Falls - Graphic - NYTimes - Since 2002, the dollar has lost about a third of its value compared with other currencies. That doesn't sound good — and it's not, if you're a Japanese exporter or an American tourist. But it is potentially great news for American workers.Experts argue about the many effects of the dollar's fall and what it says about confidence in the American economy, with its decades-old trade deficit and mounting national debt. But there are also more predictable effects replayed in each decline.

Crisis in sovereign, commercial debt seen (Reuters) - The credit crisis that rocked U.S. residential mortgages and corporate credit markets may roil commercial real estate and sovereign debt markets next, senior investment managers said on Monday. Now that the first two waves of the global credit crisis have largely passed, the next test will come in commercial real estate markets in 2010, and then government debt markets, particularly in the United States, where public debt has soared to $53 trillion. "I think the next shoe to drop, which will be the world's biggest shoe, is the continued decline of the dollar and ultimately the breaking of the U.S. government market, which will set the other markets on another terrible path,"

Top 10 Countries Most Likely To Default (interactive slide show)

A Day Franklin Saw Coming - With a sizable contingent of suckers believing the worst of financial crisis is behind us and better days lie ahead in the stock market, it is entirely fitting that more conniving sorts slowly bleed this fantasy-ridden group in preparation for a new wave of extortion set to hit sovereign governments. Fast approaching indeed appears Act II of El Swindle Grande: an event that could simultaneously precipitate the effective bankruptcy of said sovereigns, as well as disenfranchise those whom they represent. Did you listen to the President speak before the Brookings Institute today? "There's only so much government can do," says Mr. Obama. Someone might as well place a "Crush me!" post-it on that man's forehead...

Sovereign Debt Default Is Biggest Threat - The specter of sovereign default looms large for world economies in coming years, and the debt tsunami that has engulfed countries from the United States to Dubai poses a threat to recovery, top money managers at the Reuters Investment Summit said this week. Major world economies responded to last year's steep downturns spawned by the financial crisis with big stimulus packages and by underwriting private debt obligations, causing deficits to balloon. While this helped stave off an even worse recession, high debt has the potential to strain economic resources in coming years.

Developed Countries Rapidly Blowing AAA Ratings And Entering Debt Crisis Danger Zone - Here's a fantastic chart from Moody's showing the ratings trajectory of various Western developed countries. Basically, Switzerland is the only country not to be racing headlong into the purple -- non-AAA -- zone. Under US government projections, debt service will exceed 10% of GDP by 2013, which means that by one measure the US will move out of AAA territory. But the UK, Germany and France will be headed in the same direction.If I am correct that economic weakness continues unabated through the next couple of years, the situation will be considerable worse than the Moody’s graph suggests, and governments will have difficulty funding themselves at today’s extremely low interest rates.

Moody’s Says U.K., U.S. Aaa Ratings Relatively Weaker - (Bloomberg) -- Moody’s Investors Service said its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because their public finances are worsening in the wake of the global financial crisis.  The U.S. and U.K. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings of Canada, Germany and France, analysts in London said in a report. None of the top-rated countries is “vulnerable,” or have public finances that are “stretched beyond the point of ‘no return’ to the Aaa category,” New York-based Moody’s said.

Fed’s Dudley Is Feisty on Bank Pay, Bubbles and AIG – WSJ -In a feisty and expansive speech, New York Fed President Bill Dudley says he finds it “galling” and “unfair” that employees at bailed out banks are raking in big pay packages, but he says regulators need to be careful about cracking down on it.    “This issue of compensation is obviously a hugely potent one, as there is a fundamental unfairness in what has happened over the past few years. The actions taken by the Federal Reserve and others to stabilize the financial system had the effect of rescuing many of the same financial institutions that contributed to this crisis. Many of those financial institutions are now prospering, and many of their employees will be highly compensated. This situation is unfair on its face. But it is even more galling in an environment in which the unemployment rate is 10 percent and many people are struggling to make ends meet."

Q&A: Financial Innovation -- A Blessing or a Curse? - Fama/French Forum  - Real economic risk appears to have decreased over time as global economies have become more advanced and diversified. But market risks appear to have increased due to innovative financial instruments with unexpected characteristics. Is financial innovation a good thing?

Chinese official slams banks over derivatives - A senior Chinese official who oversees the country’s largest state-owned enterprises has publicly slammed western investment banks for “maliciously” peddling complicated derivative products that caused huge losses for Chinese companies over the last year.In Beijing’s strongest criticism on the matter to date, Li Wei, vice director of the State-owned Assets Supervision and Administration Commission, singled out Goldman Sachs, Morgan Stanley, Merrill Lynch and Citigroup in a long and highly critical article in the latest issue of an official Communist party newspaper. The large losses suffered by Chinese state companies were “closely associated with the intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions,” Mr Li asserted. “To a certain extent some international investment banks were the chief criminals and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo.”

Rep. Frank Plan Would Further Limit Firms Forced To Pay Into Failure Fund - WSJ -A 135-page manager’s amendment to the financial overhaul plan that could see a vote on the House floor this week would require fewer financial companies to pay into a fund that would be used to break up and wind down failing financial companies. The House Financial Services Committee had previously set the size of companies at $10 billion assets or more. That could apply to all sorts of different companies, ranging from banks, to securities firms, hedge funds, and others.There are roughly 100 banks with more than $10 billion of assets, compared with close to 8,100 banks in total. A manager’s amendment that is expected to be approved by the House later this week would raise the size of firms required to pay into this fund to at least $50 billion

Senator Dodd to press financial reform ahead: aides (Reuters) - Senator Christopher Dodd chairman of the Senate Banking Committee, is ready to push through a controversial financial regulation reform bill with or without Republican support, senior aides said, just days before the House of Representatives votes on its own reform legislation. As momentum builds again behind a push by the Obama administration and Democrats for tighter bank and capital market regulation, analysts said banks, brokerages, insurers and other financial services businesses could face new regulatory burdens and costs."We expect that the final bill will pose significant costs and risks to the financial industry," said Dan Alamariu, an analyst at the Eurasia Group, a research and consulting firm that follows Washington politics closely.

U.S. House Debates Financial Rules Revamp Amid Clash Over Fund - (Bloomberg) -- The U.S. House will resume debate on legislation to toughen rules policing Wall Street today after lawmakers clashed over an industry-supported fund the government would use when unwinding failed systemically important firms. Republicans, who oppose the measure, called the provision for a $150 billion account a perpetual government bailout while Democrats defended it as a way to prevent taxpayers from propping up ailing financial firms in the future.

How To Kill OTC Derivatives Reform in Two Sentences,”  Have lobbyists snuck another major loophole into the OTC Derivatives bill? This week the final touches are being put on Barney Frank’s financial regulation bill – H.R. 4173 – “Wall Street Reform and Consumer Protection Act of 2009.” One of the centerpieces of this reform is Title III: Over-the-Counter Derivatives Markets Act. And one of the goals of this reform would be to get as many derivatives as possible to trade on exchanges. There are two relevant sentences for reformers from the long document. The first is on page 32: (49) SWAP EXECUTION FACILITY.—The term ‘swap execution facility’ means a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.  Now on page 89 of the amendment: (2) RULES FOR TRADING THROUGH THE FACILITY.—Not later than 1 year after the date of the enactment of the Derivative Markets transparency and Accountability Act of 2009, the Commission shall adopt rules to allow a swap to be traded through the facilities of a designated contract market or a swap execution facility. Such rules shall permit an intermediary, acting as principal or agent, to enter into or execute a swap, notwithstanding section 2(k), if the swap is executed, reported, recorded, or confirmed in accordance with the rules of the designated contract market or swap execution facility.

Wall Street Snaps Its Fingers - For months now, Congress has been stumbling through an exercise billed as “financial regulatory reform,” purportedly  dedicated to bringing law enforcement to the Wall Street Casino.  One activity notably popular among the gamesters has been the “dark markets” in the $600 trillion derivatives trading markets, not least because trades are executed on a bilateral basis between dealer and customer, with no public price disclosure, at least not until well after the fact.  However, last weekend, days before it was to come before the full house for debate, the House Rules Committee posted the final version.  A friendly veteran of such dealings quickly passed on the somber news:“…It appears the forces of darkness never rest..."

Bank-Friendly Dems Shut Down House, Threaten To Kill Wall St Reform - A group of Democrats friendly to Wall Street interests forced a delay in consideration of the landmark financial regulatory reform bill scheduled to hit the House floor on Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) told reporters in the Speaker's lobby. Frank accused the New Democrat Coalition of blocking the bill because its members are being prodded by big banks to abolish the Consumer Financial Protection Agency and to allow major financial institutions to avoid state laws tougher than federal regulations.

U.S. Government's Wimpiness with Wall Street Hits a New High - Perception is reality.  So it doesn't matter what really happened when pay czar Kenneth Feinberg agreed to exempt a bunch of AIG executives from pay caps because they whined and threatened to quit over them.  This decision just looks like yet another wimpy, lame move from a government whose policies with respect to Wall Street have defined wimpy and lame. Ever since the waning years of the Bush administration, when Washington "service" became just another rung on the Wall Street career ladder, our government has gone out of its way to protect the interests of its once and future employer.

New Rules for Congress Curb but Don’t End Paid Trips - NYTimes - Despite changes intended to curb Congressional junkets, some lawmakers and even their families continue to take trips hosted by private groups and companies that revel in their access to Washington power brokers. An examination by The New York Times of 1,150 trips shows that some of them bent or broke rules adopted in 2007 to limit corporate influence in Washington. Others exploited glaring loopholes in the guidelines.  Seizing on the loopholes, lobbyists and the companies that employ them are still underwriting trips by dozens of members of Congress, particularly those in the House, the Times review shows. The companies finance much of this travel indirectly, getting around the spirit of the rules by giving money to nonprofits, some of which seem to exist largely to sponsor trips. In fact, the rules may have had the unexpected effect of obscuring who is actually paying for a lawmaker’s junket. The rules are filled with odd contradictions. Lobbyists themselves are not allowed to pay for trips, but their corporate clients can. And lobbyists are permitted to give huge sums to nonprofit groups that can sponsor travel. They can also travel to destinations and meet the lawmakers once they get there, though they cannot go on the same plane.

Honesty and Ethics Poll Finds Congress’ Image Tarnished – Gallup - For the first time in Gallup's annual Honesty and Ethics of Professions poll, a majority of Americans -- 55% -- say the honesty and ethical standards of "members of Congress" are low or very low -- slightly worse than "senators," whose ethics are rated low by 49%. By contrast, 83% of Americans say nurses have either very high or high ethical standards, positioning them at the top of Gallup's 2009 ranking of various professions.  The percentage of Americans now believing that members of Congress have low ethics is up from 46% in 2008 and 45% in 2007, and has more than doubled since the start of the decade -- rising from 21% in November 2000 to 55% today.

Loopholes Lurk in Bank Bill - WSJ - Buried in a 239-page amendment to the U.S. House of Representatives' financial regulatory overhaul is a provision that appears to do just one thing: exempts financial-services company USAA from some of the bill's tougher provisions. The carve-out is one of a number of exceptions that allow companies to avoid fresh scrutiny envisioned by the White House, which is aiming to overhaul the nation's financial-regulatory apparatus. The beneficiaries run from corporations such as General Electric Co. and Pitney Bowes Inc. to USAA, which caters to members of the military and their families, to so-called fraternal benefit societies.

Financial Reform, or, Rearranging Chairs on the Titanic - Congress is nearing completion of its financial reform bill HR 4173 (Wall Street Reform and Consumer Protection Act of 2009), which appears to amount to shifting chairs on the deck of the sinking Titanic. The monstrous legislation is too big and too complex to analyze in a short blog. Instead I will discuss three areas in which Congress is failing to address the real issues: dangers posed by derivatives, the folly of bailing-out troubled “systemically important” institutions, and reformation of credit ratings agencies.

Financial reform bill nears passage with lots of sausage - The House Rules committee reported out a rule for hearing H.R. 4173, the Financial Stability Improvement Act of 2009. It has a number of very noxious provisions in it and I am hopeful that measures will be taken to slow this down and get the bill fixed. Many of these I wrote about last July are still in this draft.One provision many of my friends may like is at the beginning, where the act orders an audit of the Federal Reserve's actions during the financial crisis and its use of emergency powers. The text is 1,316 pages, and it will take a week to sort through all of what is in here. There is a council envisioned to decide who gets called a bank that could pose systemic risk; if you are determined to be one, you face a 15-to-1 leverage limit. Secs. 1104 and 1105 give a new council wide powers to determine what activities a financial firm can undertake, with whom they can merge, capital limits, etc...

House Financial Regulatory Reform Bill Passes — The House passed the most ambitious restructuring of federal financial regulations since the New Deal on Friday, aiming to head off any replay of last year's Wall Street failures that plunged the nation deep into recession.The sprawling legislation would give the government new powers to break up companies that threaten the economy, create a new agency to oversee consumer banking transactions and shine a light into shadow financial markets that have escaped the oversight of regulators.While a victory for the administration, the legislation dilutes some of President Barack Obama's recommendations, carving out exceptions to some of its toughest provisions.

Highlights Of The Financial Overhaul Bill - WSJ Summary

Debt Raters Avoid Overhaul After Crisis - NYTimes - When the financial crisis began, few players on Wall Street looked more ripe for reform than the Big Three credit rating agencies. It wasn’t just that Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, played a crucial role in the epochal housing market collapse, affixing their most laudatory grades to billions of dollars worth of bonds that went bad in the subprime crisis.  It was the near universal agreement that potential conflicts were embedded in the ratings model. For years, banks and other issuers have paid rating agencies to appraise securities. So as Washington rewrites the rules of Wall Street, how is the overhaul of the Big Three coming? It isn’t, finance experts say.

Non-Reform of Rating Agencies - Yves Smith - The New York Times has a generally solid piece. “Debt Raters Avoid Overhaul After Crisis,” on how pretty much nothing meaningful is being done to reform the rating agencies. That of course is particularly disturbing since there are only three agencies that count, and they do not posses anything remotely resembling the clout of the major financial firms (both their profits and the fact that they control crucial infrastructure, namely, over the counter debt and derivatives trading). But the article also has some curious omissions and misconceptions. The most glaring is that even though it depicts the proposed reforms as woefully inadequate, it undercuts that notion by rreciting the most powerful bit of rating agency PR. First, this discussion promotes the misconception that ratings agencies don’t lobby. They do, but not through the usual hired guns, who work on Congressmen. But more important, the article fails to draw the distinction between rating of structured credits, which is where the big fees came from and where the abuses occurred

Credit rating agencies: the untouchable kings of finance – Telegraph - There are any number of organisations and individuals who can be blamed for the credit crunch, but right up there at the top of any league table of culprits – along with the bankers, credit-drunk consumers, half- asleep policy makers and incompetent regulators – would have to be the credit rating agencies, those shadowy creatures that sit in judgment over the trillions of dollars of debt that swirl around the world's money markets. By assigning a top-notch, triple-A rating to many of the products that emerged from the boom in "structured finance", the credit rating agencies played a pivotal role in fostering the mad dash into sub-prime mortgage lending which eventually triggered the worst banking crisis since the Great Depression.

Chart of the day: The big banks get bigger - This chart comes from the Congressional Oversight Panel’s latest report, and it’s pretty self-explanatory. Here’s the COP’s gloss: Bank consolidation has worrisome implications for moral hazard, as long as there continues to be a perception in the market of an implicit guarantee. As a small number of banks acquire a larger share of the market and competition decreases, the systemic risk they pose rises. There will be more bank failures, and many of them will end up with the failed bank getting taken over by one of the big four. Treasury has as far as I can tell no plan at all for reversing the trend in this graph, even though a good 35% of the US banking system is now undeniably too big to fail and drenched in moral hazard.

For the feds, some Wall Street firms are too big — to punish - Forget too big to fail. In the eyes of federal regulators, many Wall Street firms are too big to punish. During the past three years, some of the nation's largest financial firms have been accused by the government of cheating or misleading clients and ripping off tens of thousands of consumers of their investments. Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the Securities and Exchange Commission that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund businesses. Among the more than a dozen firms that have gotten these SEC get-out-of-jail cards since January 2007 are some of Wall Street's biggest, including Bank of America, Citigroup and American International Group. SEC rules permit corporate lawbreakers to apply for what are known as Section 9(c) waivers from one of the agency's harshest penalties — effectively shuttering the violator's mutual fund operations — but regulators never rejected any of these firms' applications.

U.S. regulators unlikely to break up biggest banks – Reuters - The Federal Reserve already has the authority to force banks to shed businesses that pose a risk to the banking system, but that power is rarely, if ever, used.The issue of breaking up banks deemed "too big to fail" has been discussed for months as lawmakers and regulators look to reduce the chances of a meltdown like the recent financial crisis, which cost taxpayers hundreds of billions of dollars and hobbled major financial institutions.It flared up again when U.S. Representative Paul Kanjorski added an amendment to proposed financial reform legislation allowing regulators to break up healthy companies that posed a risk to the financial system.On Wednesday, the House's lead financial rule-writing panel voted to approve the amendment, and it may well pass the full House of Representatives. But it is seen as less likely to make it through the Senate. And even if it does, regulators are unlikely to use their new power, analysts say.

Politics and bank regulation don’t mix - The Federal Deposit Insurance Corp tried to seize and sell Cleveland thrift AmTrust last January but local politicians intervened. In the end, the bank still went bust 11 months later – a delay that may have increased losses to the U.S. regulator’s funds. As Congress debates banking reform, AmTrust provides a useful warning that the regulatory apparatus needs to be kept free from politics.The cost of the bank’s failure to FDIC: $2 billion. The price tag to the FDIC would’ve been lower had it acted sooner, according to the Wall Street Journal.

Geithner Dismisses Tax on Financial Transactions as Unworkable - (Bloomberg) -- Treasury Secretary Timothy Geithner, throwing cold water on a plan by congressional Democrats to tax financial transactions, said banks and other market participants would find ways to circumvent the expense. “I have not seen the version of that that I think works,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” that airs throughout the weekend. Firms are “going to move in a heartbeat to get around any tax like that.”

Volcker: ‘No Time for Return to Business as Usual’ - WSJ - Former U.S. Federal Reserve Chairman Paul Volcker, speaking to the congress of Europe’s center-right political parties in Bonn, said “this is no time for a return to business as usual” in global finance. Mr. Volcker, as he did a day earlier at The Wall Street Journal’s Future of Finance conference outside London, called for separating the business of commercial banking from the riskier business of proprietary trading and hedge funds –- offering a government safety net of deposit insurance and emergency lending only to the traditional banking business.

Volcker: Only Financial Innovation Has Been “ATM Machine” -  As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.”   He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?” It seems that Tall Paul is getting frustrated with the lack of any financial reforms. Volcker is starting to lash out at the bankers who have effectively blocked any reforms.

Ex-Fed Chief Paul Volcker's 'Telling' Words On Derivatives Industry - Paul Volcker, the chairman of President Obama's Economic Recovery Advisory Board, stunned a business conference in Sussex yesterday, saying there is "little evidence innovation in financial markets has had a visible effect on the productivities of the economy".  Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

How investment banking is like a video game - Paul Kedrosky is nominally talking about a Swedish poker player, but really he could be talking about any number of i-bankers, hedge-funders, and private-equity types: Isildur1 isn’t playing to make enough money to retire. He’s playing a video game, and trying to run up the highest score. That the score is denominated in dollars is only of nominal importance.The question is whether and how, in a world populated by such men (and they’re always men), one can alter compensation to prevent untoward risk-taking. Isildur1 poses no systemic risk; the same cannot be said of Jimmy Cayne or Dick Fuld, or even Jon Meriwether, circa 1998. If they take their compensation in stock, and that stock rises quickly, that only serves to accelerate the rate at which their high score is rising, and to encourage them to take ever-greater risks.

For Global Finance, Global Regulation - Gordon Brown and Nicolas Sarkozy  WSJ - We have found that a huge and opaque global trading network involving complex products, short-termism and too-often excessive rewards created risks that few people understood. We have also learned that when crises happen, taxpayers have to cover the costs. It is simply not acceptable for them to foot the bill for losses in a deep downturn, while institutions' shareholders and employees enjoy all the gains as the economy recovers. Better regulation and supervision are the means by which the risk to the taxpayer can be reduced for the longer term.  There is an urgent need for a new compact between global banks and the society they serve: A compact that recognizes the risks to the taxpayer if banks fail and recognizes the imbalance between risks and rewards in the banking system. A compact that ensures the benefits of good economic times flow not just to bankers but to the people they serve; that makes sure that the financial sector fosters economic growth. A compact that ensures financial institutions cannot use offshore tax havens to negate the contribution they justly owe to the citizens of the country in which they operate—and so builds on the progress already made in ending tax and regulatory havens. Therefore, we propose a long-term global compact that will encapsulate both the responsibilities of the banking system and the risk they pose to the economy as a whole. Various proposals have been put forward and deserve examination. They include resolution funds, insurance premiums, financial transaction levies and a tax on bonuses.

Britain Imposes 50% Tax on Bank Bonuses - NYTimes - As bankers revel over the return of big Wall Street paydays, the unthinkable is happening in Britain, where the government is making the most direct attack on bank bonuses anywhere in the world.  To the howls of London bankers, the British government said Wednesday that it would return money from banks to taxpayers by placing a 50 percent tax on banker bonuses of more than £25,000, or about $40,700. The British plan goes beyond the oversight of the financial pay czar in the United States because it touches all banks, whether they took government funds or not. While there has been no push to adopt a similar tax here, new record bonuses expected to be paid to Wall Street bankers in January may prompt a renewed outcry over lavish payouts, especially ones made by American banks that received government support.

The bank-recapitalization supertax  - My colleague Peter Thal Larsen has an interesting take on the numbers associated with the UK banker supertax, and how a 50% tax on a £6 billion bonus pool can generate only £550 million in revenue. What’s happening to the other £4 billion? £1 billion is going to Treasury, which gives the government a net revenue increase of £600 million. But the other £3 billion is being kept by the banks, and I can promise you that they’re not going to give it away in dividends. Instead, it will go straight into retained earnings — the purest and strongest form of capital there is. It might even help prompt the banks to lend more

British Bankers Book Flights To Geneva - WSJ - U.K. bankers are getting a large lump of coal in their stockings this bonus season. Treasury Secretary Alistair Darling said the government is planning a one-time 50% charge on bank bonuses larger than £25,000 ($40,725). Bankers are, of course, aghast, with many predicting the end of London as a global financial hub. A year ago the same U.K. government determined that President Barack Obama’s plan to cap compensation was too extreme. But with an election looming, the UK ministers have apparently had a change of heart. Now the UK leaders are going even further than their Washington counterparts. Darling is proposing not only limiting compensation, like leaders in Washington, Berlin and Paris are doing. He wants to tax the bonuses and redistribute the proceeds into government coffers.

Taxpayers face £2 trillion unfunded pensions liability - Taxpayers are facing a £2 trillion unfunded pensions liability, equivalent to more than £80,000 for every household in Britain, according to figures quietly released by the Government yesterday. In a document released on its website only a few hours before the Chancellor's pre-Budget report (PBR) statement, the Office for National Statistics (ONS) laid out the definitive cost taxpayers will have to bear for both the state old age pension and public sector pensions.

FT Alphaville - UK backs £167bn of overseas bad debt - UK taxpayers stand behind more than £167bn of toxic assets in the US, Ireland, the Middle East and beyond, it emerged as the Treasury disclosed details of what Royal Bank of Scotland has dumped in the state insurance scheme for bad debts, reports the Daily Telegraph. The Treasury on its website on Monday revealed the full make-up of the portfolio of assets now under the government’s Asset Protection Scheme

For Every Action ...The UK finance minister unveiled a nasty Christmas surprise for bankers in the City yesterday: a 50%, non-deductible tax on discretionary bonuses in excess of £25,000 (or $41,000), to be levied against their employers' net income. This scurrilous government attack against chalk stripe suits, Soho strip clubs, and London property values landed with a sickening thud in Old Blighty. Many a banker's wife summarily cancelled their holiday plans and started contacting real estate agents in Geneva. Today, Nicolas Sarkozy of France had the unmitigated gall (Unmitigated Gaul?) to pile on with a parallel policy proposal for his country's budget and an editorial in The Wall Street Journal, co-authored with famously dyspeptic Scot Gordon Brown. The fact that France agrees with the UK and is proposing a similar policy is proof positive that either La Republique has been secretly taken over by a stunted Englishman pretending to be French or the UK's Labour government is so desperate to retain power that it's turning Gaullist. Probably both.In any event, the policy—as do all new tax policies at the end of the day—has triggered a desperate surge of scurrying about by bankers and banks, as they attempt to discover ways out of the trap. Their prospects do not look good.

EU backs Gordon Brown's call for global tax on financial institutions - Telegraph - In a statement published yesterday after a two-day summit, EU leaders said a transaction levy should be contemplated as one of a range of options to renew "the economic and social contract between financial institutions and the society they serve".  José Manuel Barroso, European Commission President, emphasised the need for taxes on financial transactions, if they were to be introduced, to be global. "It wouldn't be fair that some impose very heavy burdens and others don't," he said. Tim Geithner, the US Treasury Secretary, dismissed the concept of a Tobin tax when Mr Brown mooted it a month ago. Mr Brown yesterday said he believed the idea was gaining support.

A windfall tax in the US? - Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers’ bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.

The New York Times Doesn’t Like Taxing Bankers’ Bonuses -In an article on the U.K.’s decision to impose a special tax on bankers’ bonuses the NYT told readers that the Obama administration: “have taken a more measured approach to taxing banker bonuses, after considering the effect on the government’s wider efforts to nurse the banking industry back to health and to maintain a flow of credit to consumers and small businesses.” This may be an accurate description of the Obama administration’s motives, but it is also possible that the administration was primarily concerned about protecting a powerful political ally.

Revolution and Reform - Many of us bloggers are better at criticizing than at proposing anything — especially when the world makes it so easy to be a critic. The Epicurean Dealmaker, who has sent the occasional volley of criticism my way, recently decided to deal with this head-on and wrote a “reformist manifesto,” complete with an epigraph from The Communist Manifesto, with a list of specific proposals. Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.

A Reformist Manifesto - These are concrete ideas which have occurred to me over the course of listening, reading, and participating in the debate over regulatory reform over the last many months. I claim no originality for these ideas, and I cheerfully admit that most if not all have already been put forth by thinkers and writers who are cleverer, better educated, and more eloquent than me. If I can claim credit for anything here, it is in laying out the best of these ideas in the most extreme form. Let us set the perimeter of the debate, and the dimensions of the playing field, before we start arguing over the color of the contending teams' jerseys.

We Didn’t Start the Fire - Vast herds of professional morons in the fixed income investor community apparently thought it was a brilliant idea to offer virtually limitless quantities of debt at virtually invisible interest rates with virtually zero credit protection to picayune ex-investment bankers so the latter could snap up the flower of American (and global) industry at 250% of retail. With limited exceptions, said PE types said "What the hell," and signed on the dotted line. After all, their fiduciary and professional duty to their own investors is simply to maximize returns on contributed capital. And, in the unexpected case their investments went belly up, the PE professionals and their limited partners could just hand over the keys to the failed portfolio companies to their embarrassed lenders. What was not to like?

It's Time For Wall Street To Just Shut Up - The Epicurean Dealmaker has posted a ten-point manifesto for regulatory reform. Everything on it makes sense to me, starting with point one:1) Ban political campaign contributions by the financial industry. At The Baseline Scenario James Kwak observes that "there is at least one constitutional problem and possibly two" involved in the recommendation. That's a non-trivial issue. But the financial industry's influence on legislation is equally non-trivial. There's got to be a better way. Check out the bombshell in Michael Hirsh's new Newsweek piece on Barney Frank and the perils of crafting new regulations for derivatives trading

Shock: American Bankers Association Comes Out Against Bank Reform - The American Bankers Association is glad that the House Financial Services Committee made a number of changes to a financial reform package that it requested, but, regretfully, will have to oppose the bill on the floor, the lobby said in a letter to House members Monday.The interest group first thanks the committee for including "a very important" bank-backed change to the way accounting is done -- or, more accurately, not done. The amendment the bankers are so grateful for would allow traditional accounting rules to be defenestrated when a crisis could threaten the financial system.The lobby's principal objection, however, is the creation of a Consumer Financial Protection Agency. The banks argue that consumers protections must be considered at the same time the "safety and soundness" of the financial industry is taken into account. Preventing banks from ripping people off, apparently, could hurt their ability to be profitable.

More Flexible Accounting Rules for Banks - NYTimes - Facing political pressure to abandon “fair value” accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the “decoupling” of bank capital rules from normal accounting standards, Floyd Norris writes in The New York Times. His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value — often the market value — of bank loans and other assets. In the prepared text of a speech planned for a conference in Washington, Robert H. Herz, the chairman of the Financial Accounting Standards Board, called on bank regulators to use their own judgment in allowing banks to move away from Generally Accepted Accounting Principles, or GAAP, which his board sets. “Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,”

How To Make The World's Easiest $1 Billion - Here's how to make the world's easiest $1 billion: STEP 1: Form a bank. STEP 2: Round up a bunch of unemployed friends to be "bankers." STEP 3: Raise $1 billion of equity. (This is the only tricky step. And it's not that tricky. See below.*) STEP 4: Borrow $9 billion from the Fed at an annual cost of 0.25%. STEP 5: Buy $10 billion of 30-year Treasuries paying 4.45% STEP 6: Sit back and watch the cash flow in.At this spread, you should be earning at least 4% per year on your $10 billion of capital, or $400 million. Sure, there's some risk that the Fed will grow a backbone and raise short rates, but there's not much risk. (They have an economy to fix and banks to secretly recapitalize). And in any event, if the Fed raises short rates, making your $1 billion will just take a bit longer.

Bankers had cashed in before the music stopped - Financial Times - According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. It is true that the top executives at both banks suffered significant losses on shares they held when their companies collapsed. But our analysis, using data from Securities and Exchange Commission filings, shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive.

Big Paydays for Sovereign Funds, the White Knights of the Crisis - NYTimes - The white knights that came to the rescue of banks during the financial crisis are going home, with their pockets full of bounty from their good deeds. In less than two years, many of the biggest overseas government investment funds, known as sovereign wealth funds, have reaped huge gains from bailing out financial institutions, and in turn, the global financial system.

Pay czar poised for next wave of rulings (Reuters) - The Obama administration's pay czar plans to announce on Friday his next wave of rulings as bailout recipients struggle to get out from under his thumb. Kenneth Feinberg has said these rulings will likely reduce pay for the 26th to 100th highest-paid employees at the six firms still under his authority.Those firms, all of which received "exceptional assistance" from the taxpayers, are: Citigroup Inc, American International Group, General Motors Co, Chrysler, Chrysler Financial and GMAC.Feinberg, a Washington lawyer appointed by Obama, slashed the pay of the top 25 employees at the companies under his jurisdiction in October, feeding concern that it would be difficult for the companies to retain or recruit talent.

Bailout Refund Is All About Pay, Pay, Pay - Bank of America is paying back $45 billion in taxpayer-provided bailout money, and the government now says it expects to get back $200 billion in those funds faster than it imagined. The banks are getting back on their feet, the markets have stabilized, even unemployment isn’t as bad as many feared. Great news, right? Sorry for a little rain on this parade, but take a moment to consider why Bank of America was really in such a rush to pay back the money it borrowed from TARP. Indeed, people inside the Treasury told me that the No. 1 reason offered by the firm during weeks of back-and-forth — even when it was discussed indirectly — was compensation. Bank of America was so desperate, in fact, that it diluted its own shareholders by selling new shares worth $18.8 billion to replace some of the funds it is returning.

Citigroup close to deal to repay part of TARP bailout funds - Citigroup is working to reach an agreement with federal officials to return a portion of its bailout funds, which would free the company from the government's most restrictive limits on executive pay, according to people with knowledge of the matter.The $20 billion that the bank is seeking to return covers what was given under the targeted investment program portion of Treasury Department's Troubled Assets Relief Program for large institutions whose failure could threaten the stability of the financial system. Firms receiving such "exceptional" assistance are subject to pay limits on their top 25 earners, as dictated by the Obama administration's pay czar, Kenneth Feinberg.

Supreme Court to take up corruption law - The Supreme Court this week will consider whether to apply the brakes to what critics have called a vague and limitless law that has proved essential to federal prosecutors going after corrupt politicians and greedy corporate executives. The court has taken the unusual step of accepting three cases that raise challenges to a federal anti-fraud provision that has been key to the prosecutions of former lobbyist Jack Abramoff, former Illinois governor George Ryan (R) and executives involved in the collapse of Enron.

Americans Are Furious at Wall Street - BusinessWeek - Wall Street firms are recovering—but their standing with the American public is not. The public rage directed at Wall Street banks and brokerages remains at high levels, according to a Bloomberg National Poll of 1,000 U.S. adults conducted on Dec. 3-7 by the Des Moines firm Selzer & Co. Two-thirds of Americans say they have an unfavorable view of financial executives. More than half say big financial companies, which are expected to pay record yearend bonuses, are out only to enrich themselves and also should not have received government aid. Banks that got taxpayer help through the Troubled Asset Relief Program—the $700 billion financial rescue plan passed by Congress last year—shouldn't pay any bonuses, according to 75% of those polled. And this includes 39% of respondents who say they disapprove of bonuses even when the banks have paid the government back.

Pitchfork Watch: Vigilante Justice Against Banking Interests Rising? -  We noted that all the talk of pitchforks and heads on pikes, the folks at Goldman have taken to arming themselves. But until recently, the talk was aggressive, but bodily harm was non-existent, save for an isolated (but very nasty) beating over phony mortgage mod advice. But that may be changing, per this update from Raw Story. The story reports on a rise in violent crimes overall since the downturn, so it is too early to say whether these incidents are merely in line with general trends, or signal than banksters are starting to become targets...

Obama to call on bank chiefs to boost lending - President Obama is summoning the chiefs of a dozen big banks to a White House meeting Monday to press them to do more for the economy, even as many of the firms are striving to get out from under the government's thumb. Obama is expected to tell the executives to lend more, especially to small businesses, and to support his administration's efforts to reform financial regulation, administration officials said. He may also address the continuing firestorm over excessive executive pay. The meeting -- Obama's third of the year with senior bank executives -- comes at a time of ongoing tension between Washington and Wall Street. Some administration officials and lawmakers say banks that got massive bailouts from the government aren't doing enough to lift the nation out of its economic slump. Those officials also criticized the gaudy pay packages Wall Street is handing out while unemployment soars around the country.

Will Obama Tax the Banksters? - The New Yorker - With his approval ratings dropping below fifty per cent, can it be long before President Obama looks across the pond for some advice on how an unpopular government can attempt to rally its supporters? In a sop to public anger at greedy financiers paying themselves small fortunes a year after receiving big taxpayer bailouts, the British government today announced it would tax bank bonuses at a rate of fifty per cent. The banks that issue the bonuses would pay the new tax, and the recipients would also be taxed at the regular rate of income tax, which for high earners is fifty per cent. In effect, this means all bank bonuses above about forty thousand dollars would be taxed at a punitive rate of seventy-five per cent.

No He Can’t! Why Obama Won’t Tax Bank Bonuses - The chances of the U.S. following the U.K. in imposing punitive taxes on bank bonuses appear to be slim to none. “You’ll see politicians talk about it, but they won’t actually do it,” a senior investment banker told the Wall Street Journal today. Earlier this year, when the furor over Wall Street greed was at its height, Congress actually considered such a move but quickly backed away from it. Here’s my two cents worth as to why it ain’t going to happen..

Treasury Forecasts Smaller Loss From Bank Rescue - NYTimes -  The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report.  The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That figure anticipated more financial troubles requiring intervention.

What’s behind mixed signals from Obama and Geithner on TARP? - President Obama said Tuesday that the TARP bailout program has served its purpose and is being wound down. Treasury Secretary Timothy Geithner sent a different signal Wednesday, with the gist of his message being this: Not any time soon. In a letter to Congress, Mr. Geithner said he is authorizing the Troubled Asset Relief Program (TARP) to continue through Oct. 3 next year, and that as much as $550 billion of the $700 in potential funds could be deployed. So the TARP, after having served its purpose over the past year, is going to keep on serving. What do these seemingly mixed signals mean? They’re a sign of how the politically-unpopular TARP remains a hot potato – something Washington wants to get rid of but can’t.

TARP Came "Out Of The Air" - Don't read this from today's Washington Post if you have a weak stomach or blood pressure problems.  In a remarkable story, Neel Kashkari, the many who conceived of and ran TARP for Bush Treasury Secretary Hank Paulson, admits that the $700 billion figure came "out of the air."  Here's the money quote: "It was a political calculus. I said, 'We don't know how much is enough. We need as much as we can get [from Congress]. What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?'"

Dean Baker: The Return of the TARP Hostage Takers - Since the TARP escapade worked so well, the Wall Street gang is now trying another round of hostage taking, possibly for even bigger stakes. This time the plan is go after Social Security and Medicare. The Wall Street crew knows that members of Congress are not likely to vote to gut these two hugely popular programs under normal circumstances. Under normal circumstances, members of Congress who voted to cut these programs would be looking to an early retirement: hence the hostage-taking route. The plan is to hold up legislation for raising the debt ceiling unless a provision is included for establishing a commission for the purpose of cutting future deficits. This commission in turn would be stacked with people who want to cut Social Security and Medicare...

Geithner Extends $700 Billion Bank-Bailout Program (Bloomberg) -- The Obama administration extended the $700 billion financial-rescue program until October, arguing that the U.S. must hold on to the money in case of new financial shocks. In a letter today to congressional leaders, Treasury Secretary Timothy Geithner said the department doesn’t expect to deploy more than $550 billion of the funds. The Treasury may expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an effort to jumpstart securitization markets, and will continue to use the Troubled Asset Relief Program to help struggling homeowners and small companies, he said.

Why Extend The TARP? – Treasury Secretary Geithner has told Congress he will extend the existence of the TARP program through next October, but it is not clear that every member of the House and Senate will share his goals for the fund, particularly since many of those goals are different than they were when the TARP was created a year ago.The Administration now wants to use the fund primarily to help reverse the trend of rapidly increasing home foreclosures and to give financial aid and credit to small businesses. The TARP would also remain in place in the event that the credit crisis of year ago produces any after shocks in the financial system that would require another round of capital investment in banks.

Geithner: TARP Extension Needed for Successful Exit - WSJ - Treasury Secretary Timothy Geithner defended his decision to extend the government's $700 billion financial-sector bailout, telling an oversight panel Thursday that the Obama administration remains committed to a stable financial system. "While we work to return taxpayer dollars, this administration will not waver in its commitment to preserve the stability of our financial system," he said before the Congressional Oversight Panel, one of several entities overseeing the Troubled Asset Relief Program. Further, Mr. Geithner said an extension of the program is necessary to facilitate the government's successful exit from it. He repeated several points mentioned in a letter he sent this week authorizing the TARP extension and continued to trumpet the better-than-expected returns taxpayers are earning on parts of the program.

Geithner Letter to Pelosi on TARP Exit Strategy - The full text of the letter on the Treasury’s TARP exit strategy sent by Secretary Tim Geithner to House Speaker Nancy Pelosi

Congress Fighting Over $200 Billion TARP Windfall - If an investment firm tried to spin numbers this way, its principals would immediately be rounded up by the SEC. It turns out that the TARP program--the emergency "investment" program designed to save our financial system--will lose $200 billion less than expected, according to new Treasury estimates.The program will still lose a boatload of money, of course--$141 billion--but this loss is smaller than the White House's old loss estimate of $341 billion.  So this news already has Congress fighting over what to do with the windfall.Before you pick a side in that fight, however, don't lose sight of what's really going on here. The TARP was sold as an investment, one that would produce a major return for taxpayers once a "temporary liquidity issue" in the financial sector abated (Remember that one?  It's even more comical now). 

Mythical Budget Savings from Cutting TARP - The TARP news continues fast and furious. This afternoon’s installment involves the House’s financial regulation bill, officially known as H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. That bill would make many changes to financial regulation, one of which – enhanced dissolution authority for financial firms that run into severe trouble – would cost about $10 billion over the next five years, according to the Congressional Budget Office. In order to pay for those costs, the bill would reduce TARP authority by $20.8 billion. Consistent with previous scoring decisions, CBO estimates that this provision would result in budget savings of $10.4 billion (because CBO assumes, for scoring purposes, that each dollar of reduced TARP authority translates into 50 cents of reduced outlays; for more explanation, see this earlier post.) Why is this important? Because the alleged savings are mythical.

Unemployment plan would change rules on bank bailouts - The Obama administration plans to channel money from the government's massive financial bailout program to small businesses as part of an effort to limit the political and economic damage of high unemployment. One plan under consideration involves spinning off a new entity from the Troubled Assets Relief Program that would give banks access to federal funds without restrictions, including limits on executive pay, as long as the money was used to support loans to small businesses. But officials are not yet certain whether carving the program out of TARP would be the best way to encourage banks to boost small-business lending, according to sources familiar with the matter who spoke on the condition of anonymity because the plans are not final. As an alternative, officials are prepared to ask Congress to modify TARP itself, easing the pay limits and other restrictions that would be imposed on small-business lenders taking the money, the sources said.

Don't Misuse TARP Funds - Just a quick comment on President Obama's plan to use surplus TARP money to fund various job creation measures. I think it's a bad idea. First, TARP funds were appropriated for one purpose and I think it's a bad idea to use them as some sort of slush fund even if the goal is worthwhile. Second, as I explained in my last Forbes column, I think there is enough stimulus in the pipeline and we should let it work before trying to pump more money into the economy. Third, I think it is better to use TRAP funds for deficit reduction.

House Democrats push bill to use TARP funds for homeowner mortgage relief - House Financial Services Committee Chairman Barney Frank (D-Mass.) on Monday signed on to a proposal by Rep. Maxine Waters (D-Calif.) that would channel $3 billion from the federal Troubled Assets Relief Program toward mortgage relief for jobless Americans. The measure would designate another $1 billion for a program that gives grants to state and local governments to purchase foreclosed properties and use them for more productive purposes.  The proposal is one of more than 100 proposed amendments to a sweeping financial regulatory reform package scheduled for consideration in the full House this week.

Treasury: housing aid to push TARP losses up - In a financial report on the program that accompanied a watchdog agency audit on Wednesday, the Treasury had said the program had estimated losses related to loans, equity investments and asset guarantees of $41.4 billion in its first year of operation. As additional funds are disbursed, particularly for the housing initiative, the total cost of TARP is likely to rise," the Treasury said in a statement on Thursday. The administration has estimated the program, which it has extended to October of next year, will ultimately lose $141 billion."

The “using TARP funds for stimulus” gimmick - Under current law it is not legally possible to “use” returned TARP funds for a new stimulus proposal.  The Administration and its Congressional allies want to describe their proposal this way to make it appear that their new spending does not increase the federal deficit and debt.  Even if the TARP law is changed, new government spending is just that, new government spending.  No matter what optical gimmicks are created, new spending will increase the deficit and debt.

Christina Romer Says Spending Our Way Out of Recession Is "Sensible Policy" - Christina Romer, chair of the White House Council of Economic Advisers, says some of it could come from the $200 billion the government plans to get back in TARP funds. "Obviously you don't use that directly on any of these programs but it does tell you we have made some progress in the fiscal space," she tells Tech Ticker. "And we think [this] frees up some resources that can be used to for this incredibly important priority which is putting people back to work." Only in Washington could someone get away with this kind of fuzzy math. Let's not forget that $200 billion she refers to isn't a gain we booked on our TARP investment, it's simply $200 billion we didn't lose.  It's like spending $2000 on a PC, returning the PC and then calling the refunded money a profit

Congress readies huge year-end spending bill - Congressional negotiators sealed agreement Tuesday night on sweeping spending legislation that boosts housing and heating subsidies but curbs President Barack Obama's requests for aid to Afghanistan and Pakistan.The move comes as lawmakers wrapped the budgets of nine Cabinet agencies into a $1.1 trillion spending bill they hope to complete before a stopgap measure expires Dec. 18. The measure would combine six of the dozen routine annual appropriations bills for the budget year that began Oct. 1. It combines a huge increase in foreign aid with an 18 percent cut to a program that helps states with the cost of incarcerating criminal illegal immigrants."

Lawmakers agree on $447 billion to fund government (Reuters) - Lawmakers agreed on Tuesday on a $447 billion spending bill that would fund large parts of the U.S. government for the fiscal year that began more than two months ago. Agencies from the Justice Department to the Treasury are operating on temporary extensions of last year's budget because Congress did not finish its work on spending bills before the fiscal year began on October 1."

No Escape From TARP for U.S. Banks Choking on Real Estate Loans (Bloomberg) -- As the U.S. economy pulls out of a recession and the biggest banks return to profitability, mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011.  Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York. That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.

Small businesses, small banks, big problems? - Atlanta Fed - The income generated by nonresidential/nonowner-occupied CRE has generally been falling as vacancy rates on commercial space rose, and capitalization rates–the ratio of income to valuation–have climbed sharply. The decline in CRE valuations has created a significant amount of "rollover risk" when CRE loans and mortgages mature and need to be refinanced (about $340 billion in CRE debt is estimated to mature in 2010 and 2011). At the same time, delinquency rates on CRE loans have been increasing sharply, especially for CRE lending for residential construction and development purposes. This recent Cleveland Fed report captures some of the dimensions of the banking systems exposure to CRE, as does this Wall Street Journal piece

Small Business Economic Trends… Rarely do I get to see such an honest account of small business conditions. This report is startling, never in our life times have conditions been so hostile to small business. I took the liberty of breaking a few of the charts out of this report for you. Let’s start with Sales, Expected versus Actual. Here you will find that expected sales jumped tremendously since the beginning of the year, almost like you would guess they are by listening to CNBS, but just look at how different reality turned out. Now look over at the left scale at that reality figure! That’s right, it says down almost 40%. My critique here is that we don’t get to see the raw data and so we don’t know what the baseline is. Still, there have obviously been many months in a row of decline without a like recovery...

CMBS Loan Defaults Rose to Record in Third Quarter (Bloomberg) -- Delinquencies on commercial mortgage- backed securities rose to a record in the third quarter as unemployment rose and landlords struggled to retain tenants.  The percentage of CMBS loans at least 30 days past due rose to 4.06 percent from 1.17 percent a year earlier, the Mortgage Bankers Association said today. That’s the most since the group began tracking the data in 1997. About 3.43 percent of bank- owned loans on offices, apartment buildings, shopping centers and other income-producing properties were at least 90 days past due, up from 1.38 percent a year earlier, the MBA said.

MBA Report Shows Third Quarter 2009 Commercial and Multifamily Mortgage Performance Falls in Weakened - Delinquency rates continued to increase in the third quarter for most commercial/multifamily mortgage investor groups, according to the Mortgage Bankers Association’s (MBA) Commercial/Multifamily Delinquency Report.“Commercial and multifamily mortgages continued to feel stress in the face of the weakened economy,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The deterioration in commercial and multifamily loan performance is generally in line with what is being seen in other parts of the economy, with loans backed by commercial properties continuing to perform far better than construction and development loans.”

US CMBS delinquencies hit 4.5 per cent, Moody’s says - Moody’s published the results of its latest CMBS “delinquency tracker” on Thursday and, as usual, they made for less-than-cheery reading.The rating agency said the aggregate rate of delinquencies among US CMBS conduit and fusion loans stood at 4.47 per cent as at the end of November, an increase of 46 basis points compared with the prior month. That increase was the largest yet of the economic downturn, Moody’s said. “The delinquency rate has now increased 29-fold over its low point of 0.22% reached in July 2007″, said Moody”s Managing Director Nick Levidy. “Most of this increase has occurred in 2009, as delinquencies started the year at 0.95%.”

Emerging Trends' report sees commercial real estate 'bloodbath' in 2010 - "2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders," states just one of the colorful, no-holds-barred observations in the report.  After more than a year spent in suspended animation lagging already shattered housing markets, the commercial real estate industry hits bottom in 2010, suffering a surge of painful write-downs, defaults, and workouts." In the 30 years of the "Emerging Trends'' reports, 2010 will be the worst time for investors to sell properties, the report states.

CHART OF THE DAY: The Amazing Spiraling Mortgage Delinquencies - The Mortgage Bankers Assocation is out with its latest look at loan delinquencies across a variety of investor groups.The one trend: up.CMBS has now crossed the 4% delinquency rate, though at least there are some signs of a turn, rather than just a pure straight line.

Quarter of HAMP Mods in Default Again - More than 25 percent of homeowners who have received assistance under the administration’s Home Affordable Modification Program (HAMP) have fallen behind on their new payments – a harrowing statistic that has stirred up more doubt about the effectiveness of the government’s $75 billion foreclosure prevention campaign. Citing data from a Treasury Department survey of the nation’s largest mortgage servicers, Assistant Treasury Secretary Herbert Allison told a congressional oversight panel that only “73 percent of borrowers are current in their trial plan payments,” according to a written Q&A document obtained by Reuters.

HAMP: 31,382 Permanent Mods - Update: Treasury link now working, graphic added.
From Diana Olick at CNBC: First Look: Inside The $75 Billion Plan to Save Housing - Of the 759,058 modifications started, 697,026 are still in the three month trial phase. ... Treasury reports that 31,382 trial modifications are now permanent. ... 30,650 modifications were disqualified. Olick has much more. Here is the link at Treasury. See here for a list of reports.

BofA’s dismal mortgage-modification rate - Yet more proof, if proof be needed, of Bank of America’s dysfunctionality comes in the latest HAMP report from Treasury. BofA has 1,018,192 loans eligible for modification — more than twice as many as anybody else; JP Morgan is in second place with 448,815. Of those million-plus mortgages, BofA has managed to turn the grand total of 98 into permanent modifications — a conversion rate of 0.0096%. Elsewhere, the conversion rate is much higher.

Lawmakers growing frustrated with mortgage-relief failures - Most of the struggling homeowners who have enrolled in the Obama administration's marquee mortgage-relief program still haven't proved they qualify for help, illustrating lingering weakness in the effort to aid distressed borrowers. About 70 percent of the borrowers who have signed up for the program, called Making Home Affordable, have yet to provide adequate documentation, and many homeowners continue to struggle even after their mortgage payments are lowered, industry and government officials told the House Financial Services Committee on Tuesday. The slow progress has provoked an angry reaction from lawmakers, who are growing increasingly frustrated with the program, which lowers borrowers' payments to 31 percent of their income.

Obama’s Mortgage Modifications to Fail, Amherst’s Goodman Says - (Bloomberg) -- The U.S. loan modification program is “destined to fail” because it doesn’t confront the real problem of negative home equity that is driving foreclosures, Goodman told Congress. Goodman, a senior managing director, cited the drop in home values as the main cause of defaults and urged lawmakers today to require lenders to reduce outstanding principal for borrowers who owe more than their homes are worth. Without a change, 7 million of the 7.9 million people behind on their mortgages in the third quarter will eventually lose their homes, she said. “If policies continue to kick the can down the road -- working with a modification problem that does not address negative equity -- delinquencies will continue to spiral with no end in sight,” Goodman said in testimony to the House Financial Services Committee today in Washington.

White House Loan Modification Plan Falls Flat - The Obama administration’s signature effort remains its $75 billion Making Home Affordable program, which was set up to aid as many as 4 million homeowners. But Making Home Affordable has in most ways been a crushing disappointment, housing advocates say. At the beginning of this year lenders on their own were doing far more more permanent loan modifications than the government has been able to accomplish since rolling out its program in April, noted Diane Thompson, an attorney with the National Consumer Law Center.

Fair Game - Why Treasury Needs a Plan B on Mortgages - NYTimes - AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet. “The banks are not doing a good enough job,” said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times.

Mortgage agency's growth gives fuel to risky lenders. - The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud. Yet despite these red flags the Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world -- all backed by U.S. taxpayer money.

Fannie, Freddie and FAS 166/167 - Who would have thought a new accounting standard might end up increasing prepayment speeds on US mortgages?The two US GSEs will be, like other US financial companies, adopting FAS 166/167 from 2010. The new rule is aimed at bringing off-balance sheet vehicles back on balance sheet — but it could end up having a rather interesting effect on US mortgages by way of Fannie and Freddie.

Barclays: Treasury Should Boost Fannie Lifeline to $300 Billion - WSJ - The U.S. Treasury may need to increase its lifeline to Fannie Mae beyond the total of up to $200 billion already made available if the economy deteriorates further next year, analysts at Barclays Capital said in a report Friday. By year end, Fannie and Freddie will have received a total of $112 billion of capital from the government. To keep the companies afloat, the U.S. Treasury agreed in 2008 to purchase up to $100 billion of preferred stock in each company. In February 2009, the Treasury doubled that support to as much as $200 billion in each company. The Congressional Budget Office in March said the total cost of conservatorship to taxpayers could reach $389 billion.

Fed bought $16 bln net in agency MBS in latest week - (Reuters) - The Federal Reserve bought $16.0 billion net of agency mortgage-backed securities in the latest week, the New York Fed said on its website on Thursday"The purchases brought the U.S. central bank's purchase of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to roughly $1.071 trillion since January."

Expected Mortgage Rates - With the Ten Year Treasury yield at 3.42%, I was wondering what that would mean for mortgage rates. This graph is from Political Calculations: Predicting Mortgage Rates and Treasury Yields. Using their calculator and a Ten Year Yield of 3.42%, we would expect the 30 year Freddie Mac fixed mortgage rate to be around 5.38%. Of course it is lower than expected - as it has been from most of the year - and some of the difference from the expected rate is probably due to the Fed's MBS purchases. The following table shows the difference between the expected and actual rate for the last 6 months. This suggests that mortgage rates will rise about 30 to 50 bps relative to the Ten Year Treasury yield when the Fed stops buying MBS.

Soured Loans Put Lenders on the Hook - As home loans sour at a rapid clip, mortgage finance giants Fannie Mae and Freddie Mac are aggressively bouncing back defectively underwritten loans to lenders. The result: higher loan-loss reserves for the lenders and new headwind for banks trying to escape the housing downturn. For lenders such as Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc., which are among the largest sellers of mortgages to Fannie and Freddie, this could mean buying back souring loans at a loss. Through Sept. 30, Freddie Mac put back about $2.7 billion of single-family mortgages to lenders, more than double the $1.2 billion of a year earlier.

Mortgage Insurers Deny 20-25% of Claims: Moody’s - Monolines and mortgage insurers are attempting to narrow mortgage-related losses by put-backs to originators and claims rescissions and denials, according to insurance industry commentary this week by Moody’s Investors Service.Monolines insure mortgage-related bonds, while mortgage insurers back lenders against default-related losses. The extent to which these companies are exercising put-backs and rescissions indicates loss mitigation efforts are high as the industry continues to work through distressed loans.

At Last, One Government Agency Considers Cutting Mortgage Principal For Distressed Homeowners - FDIC Chairman Sheila Bair indicated Thursday that she is exploring the idea of reducing the principal on as much as $45 billion in mortgages her agency has acquired from failed banks.That would be the first significant government attempt to employ a measure that some economists and consumer advocates have long argued is the only really effective way to stop foreclosures.Although the $45 billion in mortgages only amounts to less than half of one percent of mortgages nationwide, the move would be significant because the idea of reducing principal has been all but dismissed for the last nine months by the Obama administration.

The WSJ Does the Arithmetic: Renting Is the Key to Asset Building - The WSJ has a nice piece explaining how many homeowners will be much better off renting, even if this means defaulting on their mortgages. At the height of the bubble, many people in policy positions, who should have known better, continued to push homeownership as a way to build wealth. When the bubble burst and house prices plummeted, these new homeowners suddenly found themselves with huge amounts of negative equity. Rather than acknowledging their mistake, many of the homeownership ideologues want to keep people as underwater homeowners, even if that means paying much more for their monthly mortgage and other ownership costs than they would pay to rent a comparable home. This is good for the banks, but horrible for the homeowners. and a almost a sure way to guarantee that they don't accumulate any assets.

The Rentership Society - Mark Whitehouse writes about the advantages of renting in the WSJ: American Dream 2: Default, Then Rent Whitehouse describes one former homeowner with a monthly income of $8,300. He was paying $4,800 a month on his home and he was basically working to pay his mortgage. He was really a "debt owner" since the home was worth far less than the amount owed. He now rents a similar home for $2,200 a month and is enjoying life. The article also mentions the "stealth stimulus" from all the delinquencies: For the 4.8 million U.S. households that ... haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month .

US property market facing further pressure in 2010, according to leading economist - The meltdown of the US housing market is not over yet and property prices will soon start falling again as a flood of foreclosures looms, it is claimed. Mark Zandi, chief economist at Moody's is predicting that foreclosure sales will pick up again in the New Year and as a result property prices will resume their decline.  Property prices in many regions have been rising in recent months as foreclosure sales declined during the summer months and mortgage servicers have tried to put those facing losing their homes into the government's affordable home loan programme so that they don't lose their property.Zandi though is not confident this will continue. 'The housing crash is not over yet. Foreclosure sales will increase and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification loan,' he explained

House Flipping Makes a Comeback - WSJ - Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.  During the housing boom, millions of Americans tried to make money by buying and then quickly reselling new houses and condominiums. That kind of flipping stopped several years ago as home sales stalled amid a surge in foreclosures and curtailed lending. Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves. Investors compete mostly with other full-time professionals who monitor foreclosure auctions at county courthouses across the country. The bidders often haven't had a chance to inspect the property or determine whether it's occupied by tenants, who may be hard to evict.

How banks fail at foreclosure auctions - Buying homes at foreclosure auctions is not for the faint of heart, and James Hagerty’s WSJ article today does a good job of explaining many of the potential pitfalls — up to and including finding concrete poured down the toilet. But what really puzzles me is the degree to which banks seem to be just giving money away here: Lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower [than the mortgage balance]. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession. It seems to me that lenders are simply allowing their plum properties to be picked off by these vulture-like speculators. (And I mean that in the best possible way.) What the flippers are doing makes perfect sense; what the banks are doing makes no sense at all

Homeowners are getting hit a second time - A new foreclosure tactic, whereby lenders or debt collectors holding second mortgages freeze bank accounts or garnish pay checks of already struggling homeowners, is emerging and making it even more difficult for people to hold onto their homes. Lawyers for troubled Staten Island homeowners say they are beginning to see examples of clients who go to the bank to take out money and find that their accounts have been frozen or wiped out by other banks or debt collectors -- the entities holding second mortgages on houses already in default on the first and primary mortgage. Some are learning the lender or debt collector has already gone to court and secured a judgment to garnish paychecks. It's a move more in line with the traditional debt collection industry, which typically targets credit card debt, and it's dragging the house and what little cash reserves people often have into the foreclosure battleground. Experts say it's an end-run by second lien holders around the traditional foreclosure process, which involves only the first mortgage holder and provides important legal protections for the homeowner.

U.S. Foreclosures to Reach 3.9 Million in Second Record Year (Bloomberg) -- Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market, the Irvine, California-based company said. Foreclosure filings exceeded 300,000 for the ninth straight month in November, RealtyTrac said today.  The 7.2 million jobs lost since the recession began in December 2007 are the most of any postwar economic slump, Labor Department data show.

Loan Resets Projected to Cause Mortgage Crisis in 2010 - As many exotic adjustable rate mortgages (ARMs) are set to recast in 2010, the Consumer Mortgage Audit Center (CMAC) is projecting a mortgage crisis in 2010 as large as the subprime. Option ARMs enable borrowers to make monthly payments that are interest and principal, interest only, or just part of the interest due. After months and years of paying less than their full monthly payment of both interest and principal, many homeowners accumulate negative amortization. This means the amount of interest due on a loan becomes higher than the amount of the actual loan itself. As the majority of ARMs begin to recast in early 2010, housing bills will inflate, and many homeowners will be forced to repay the negative amortized balances."

Millions More Are At Risk Of Foreclosure Than Anyone Realizes - Most look to loan type and equity position as two of the most important factors when forecasting loan default. In fact, I believe that epidemic negative-equity is the overarching reason that the default, foreclosure and housing crisis remains in the early innings. But…negative-equity with a caveat. While negative equity is a threat in and of itself, being in an over-leveraged household debt position is the true default catalyst for most in a negative-equity position. And being over-leveraged is also the primary default catalyst for those is a positive equity position. Being in a negative-equity position with lots of top line and disposable income each month is generally more of a mental burden than a reason to fly the coop.How many homeowners are over-levered and at eminent risk of default? This answer is…a lot more than most think, especially those who got a loan from 2003-2007 due to a radical, yet subtle shift in loan guidelines across the mortgage spectrum that kicked-off the bubble-years.

Deputies witness recession's toll as evictions increase - But instead of swinging inward, the front door fell backward and hit the foyer floor with a bang, adding a discordant, cartoonish quality to the somber bank takeover. The couple who lost the East San Jose house had stripped it of every marketable object before moving out, including the handsome oak door, propping up — without hinges — a cheap blue one in its place. Aviles has seen stripped houses before on the eviction beat, but never one so thoroughly denuded: Every cabinet, sink, toilet, light fixture and even light-switch faceplate was gone. Later, the daughter of the homeowner explained, "We've sold cars, furniture, everything we could to put food on the table.''

Fed Governor Says Lenders Flee Foreclosures in Devastated Neighborhoods - Rather than foreclosing on defaulted mortgages in neighborhoods devastated by the economy, lenders are abandoning them because the cost of proceeding with foreclosure is greater than their value, Federal Reserve Governor Elizabeth A. Duke said yesterday.Anecdotal evidence suggests that these “toxic titles” have placed significant numbers of properties in a difficult state of legal limbo, she said. The increased rates of foreclosures and the related economic downturn have hastened a cycle of decreasing property values. Declines in state and local property and sales tax revenues result in even more vacant homes and deteriorating neighborhoods.

Can ARMs be swapped to a fixed rate? - Lots of other 3/1 and 5/1 ARMs are resetting over the next couple of years, which is one reason it’s important to keep interest rates low. The standard reset rate for a prime borrower is 1-year Libor + 225bp; with Libor at 1%, that works out at an extremely affordable 3.25% mortgage rate.  The problem is that these mortgages continue to reset every year going forwards for over a decade. Rates are low now, but they won’t be low forever, and when the Fed’s tightening cycle starts, there could be some very nasty mortgage shocks.

U.S. Homeowners Lost $5.9 Trillion Since 2006 Peak (Bloomberg) - U.S. homeowners have lost about $5.9 trillion in value since the housing market’s peak in March 2006 as mounting foreclosures and the recession weighed on prices, according to Almost half a trillion dollars was wiped out this year through November as housing headed for a third straight annual decline. New foreclosures and higher mortgage rates in 2010 may hinder a rebound, the property data service said today in a statement. A phenomenal amount of wealth has been erased since the housing bust,” Stan Humphries, chief economist for Seattle- based Zillow, said yesterday in an interview. “For many households, most of their wealth is tied up in real estate.”

On equity “cushions” and negative equity - A report last month indicating that almost 25 percent of all borrowers now owe more on their mortgage than their homes are worth punctuated one of the more dramatic turn of events in the ongoing credit crisis and housing bubble aftermath. Twenty five percent! It seems those home equity"cushions" that Federal Reserve economists used to talk proudly about just a few years ago have all but vanished, giving rise to the new, far less pleasant reality of "negative equity" as captured at Google Trends and shown below.

Ken Rogoff: Unemployment, Housing Will Get Worse Before They Get Better - Unemployment hovers at 10% as of November.  But our guest, top economist and noted bear Kenneth Rogoff of Harvard University, forecasts more headwinds. "It's hard to see the kind of robust recovery that's really going to generate the 10, 11 million jobs that we need to get back to where we were before it started," says Rogoff, also co-author of a new book, "This Time Is Different: Eight Centuries of Financial Folly." While admittedly surprised by November's stronger-than-expected jobs report, Rogoff predicts employment "comes back very slowly" and the unemployment rate will remain elevated for several years. 

Bolstering My Negative Outlook - Although I've spent lots of time discussing others' misguided optimism about consumer spending and the commercial real estate markets, that doesn't mean there's nothing more to say. In fact, recent posts at two blogs I follow only add to my conviction that problems in these two areas will continue to undermine prospects for any sort of meaningful economic recovery for the foreseeable future. In "Retail Sales: 'Nothing Like Last Year,'" Wall St. Cheat Sheet offers up some additional anectodal evidence (for one of my earlier posts on the subject, click here) on the sober reality of today's consumer marketplace. And in "MBA: CMBS Deterioration Continues," Reuters' Rolfe Winkler notes the latest sorry -- but not unexpected -- news from the association that represents the real estate finance industry.

US consumer credit falls again, but the decline is slowing…US consumer credit fell by a smaller-than-expected $3.5bn in October, according to data released by the Federal Reserve on Monday. Analysts had forecast a decline of $9.5bn.In October, consumer credit outstanding fell at a 1.69 percent annual rate to $2,480bn, while September’s figures were sharply revised to show a drop of $8.8bn versus the previously reported decline of $14.8bn. Consumer credit, which does not include mortgages and other real estate-related debt,  has now declined for 12 of the last 13 months.

Reuters - Chart of the day: Credit card late fees This chart comes from the Center for Responsible Lending’s latest report on the latest tricks and hidden fees in the credit card industry What you’re seeing here is the slow introduction of something called “tiered pricing” in late fees. Since 2001 or so, not all late fees have been equal: if you only have a small balance, then the late fee might be smaller. But the banks have done something rather cunning: they’ve steadily reduced their headline minimum late fee, while raising the late fee which is levied on most cardholders. As report author Josh Frank says. A top late fee tier typically starts for balances of $250 and up. Roughly 9 in 10 consumers fall into this top tier, showing that issuers are not trying to create true proportionality in their late fee system. Instead they are creating a system that suggests a low fee exists, while in reality charging almost everybody the highest fee. And that’s just the beginning of the card companies’ shenanigans...

Consumers Still Revolving Out of Credit in Oct Fed...The Federal Reserve's October G.19 Consumer Credit Report released Monday reflects the continuing, unprecedented collapse in revolving consumer credit - credit cards - which we have been chronicling throughout 2009, as outstanding debt balances fall well-below $900 billion, down $100 Large from the end of last year.And, as we suggest below, this mean-reversion trend will continue over the next decade, bringing credit card debt outstandings to below $300 billion.As of the end of October, credit card debt has fallen to 886.0 billion (NSA, $888.1 SA), a long way from the record $988.2 billion racked up at the end of 2008, just before the Systemically Important Too Big To Fail banks, which were rescued in 4Q2008 with taxpayer money borrowed from China and our other international BFFs, started biting the hands that fed them by reducing credit limits and jacking interest rates into the high 20s and beyond.

Deleveraging Consumer and Economic Growth - Consumer credit continues to decrease. WSJ reports: Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. At some point this trend NEEDS to reverse course. Can it grow again before doing so? Sure, but that would push the level to a level even more unsustainable (and painful to correct). So deleveraging or inflation? I know the preference by policy makers, but it is awfully hard to get inflation in the face of a deleveraging consumer.

Americans Owe Less, but That’s Not Entirely Good News - NYTimes - American consumers owe less now than they did a year ago. Before the current financial crisis, that would have been unthinkable.  Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007. Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5 percent from a year earlier. That number was the lowest since March 2007.Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years. There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit. As can be seen from the accompanying charts, banks’ credit card write-offs have soared, to an annual rate of 10.2 percent in the third quarter of this year.

Upper-Income Spending Reverts to New Normal - Gallup - In a sign that the new normal in consumer spending continues unabated, upper-income Americans' self-reported average daily spending in stores, restaurants, gas stations, and online fell 14% in November, reverting to its relatively tight ($107 to $121) pre-October 2009 average monthly range. Middle- and lower-income consumer discretionary spending increased by 7% last month but remained in its tight 2009 average monthly range of $52 to $61. Still, consumer spending by both income groups continues to trail year-ago levels by 20%, even as those comparables have gotten easier to match -- possibly dashing hopes that upscale retailers and big-ticket-item sales will do better this year.

Government 'Out of Bullets,' Consumers in Trouble: Whitney - The government is running out of ways to help the economy as the US faces major issues regarding credit and employment ahead, banking analyst Meredith Whitney told CNBC. "I think they're out of bullets," Whitney said in an interview during which she reinforced remarks she made last month indicating she is strongly pessimistic about the prospects for recovery. Primary among her concerns is the lack of credit access for consumers who she said are "getting kicked out of the financial system." She said that will be the prevailing trend in 2010. Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace. The Federal Reserve said Monday that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline.

Financial Armageddon: Doesn't Sound V-Shaped to Me - Aside from what I noted yesterday, reports (below) reveal that a growing number of white collar professionals are becoming homeless or scrambling for holiday retail jobs; homeless camps in some parts of the country are getting so crowded that police are seeking to ban them; consumer protection lines are experiencing a jump in calls by "desperate people having desperate needs"; and, dentists are seeing patient numbers dwindle as individuals and families cut back on check-ups and treatment. Call me cynical, but that doesn't sound like a V-shaped recovery to me. In fact, it sounds like it won't be too long before enough Americans decide that they've had enough lying and spin, bailouts for the rich and well-connected, and failures of leadership, and start taking matters into their own hands.

'Unbanked' America- About one in 13 American households doesn’t use a checking or savings account, according to a new survey from the Federal Deposit Insurance Corporation. The survey found that over a quarter — 25.6 percent — of all households either don’t have a checking or savings account at all, or have a bank account but still choose to rely regularly on “alternative financial services” like payday lenders and pawn shops.

Alleviating rural poverty - What theories and values ought to underlie our best thinking about global economic development?  Along with Amartya Sen (Development as Freedom), I believe that the best answer to the ethical question involves giving top priority to the goal of increasing the realization of human capabilities across the whole of society. We need to put the poor first.  However, I also believe that our ability to achieve this goal is highly sensitive to the distributive structures and property systems that exist in poor countries.  The property institutions of developing countries have enormous impact on the full human development of the poor.  As a result, ethically desirable human development goals are difficult to attain within any social system in which the antecedent property relations are highly stratified and in which political power is largely in the hands of the existing elites.

For Elderly In Rural Areas, Hard Times Get Harder - NYTimes - Growing old has never been easy. But in isolated, rural spots like this, it is harder still, especially as the battering ram of recession and budget cuts to programs for the elderly sweep through many local and state governments.  Wyoming, thanks to its energy boom, continues to finance programs for the elderly. But at least 24 states have cut back on such programs, according to a recent report by the Center on Budget and Policy Priorities, a Washington research group, and hundreds of millions of dollars in further cuts are on the table next year. The difficulties are especially pronounced in rural America. The elderly who remain — increasingly isolated and stranded — face an existence that is distinctively harder by virtue, or curse, of geography than life in cities and suburbs. Public transportation is almost unheard of. Medical care is accessible in some places, absent in others, and cellphone service can be unreliable.

Millions in U.S. Drink Contaminated Water, Records Show - Series - NYTimes - More than 20 percent of the nation’s water treatment systems have violated key provisions of the Safe Drinking Water Act over the last five years, according to a New York Times analysis of federal data. That law requires communities to deliver safe tap water to local residents. But since 2004, the water provided to more than 49 million people has contained illegal concentrations of chemicals like arsenic or radioactive substances like uranium, as well as dangerous bacteria often found in sewage. Regulators were informed of each of those violations as they occurred. But regulatory records show that fewer than 6 percent of the water systems that broke the law were ever fined or punished by state or federal officials, including those at the EPA, which has ultimate responsibility for enforcing standards.

Hunger, Family Homelessness On Rise In U.S. Cities - Hunger is spreading while the number of homeless families is increasing as a result of the recession and other factors, according to a report on Tuesday. The U.S. Conference of Mayors said cities reported a 26 percent jump in demand for hunger assistance over the past year, the largest average increase since 1991. Middle-class families as well as the uninsured, elderly, working poor and homeless increasingly looked for help with hunger, which was mainly fueled by unemployment, high housing costs and low wages.

Mish: One in Four Children on Food Stamps, One in Eight Overall - Every month the number on food stamps increases. Food stamp usage is now up to a record 36 million. Please consider Food Stamp Use Soars, and Stigma Fades With food stamp use at record highs and climbing every month, a program once scorned as a failed welfare scheme now helps feed one in eight Americans and one in four children.While the numbers have soared during the recession, the path was cleared in better times when the Bush administration led a campaign to erase the program’s stigma, calling food stamps “nutritional aid” instead of welfare, and made it easier to apply.There are 239 counties in the United States where at least a quarter of the population receives food stamps, according to an analysis of local data collected by The New York Times.

Fast-food standards for meat top those for school lunches - In the past three years, the government has provided the nation's schools with millions of pounds of beef and chicken that wouldn't meet the quality or safety standards of many fast-food restaurants, from Jack in the Box and other burger places to chicken chains such as KFC, a USA TODAY investigation found.The U.S. Department of Agriculture says the meat it buys for the National School Lunch Program "meets or exceeds standards in commercial products."That isn't always the case. McDonald's, Burger King and Costco, for instance, are far more rigorous in checking for bacteria and dangerous pathogens. They test the ground beef they buy five to 10 times more often than the USDA tests beef made for schools during a typical production day.

McDonald's launches $1 breakfast – Telegraph - The hamburger group is extending its Dollar Value menu to include five new breakfast items - each costing $1 (62p). The items include a sausage mcmuffin, a sausage burrito and a hash brown. McDonald's is hoping the move will bring cash-strapped Americans back through its famous Golden Arches, after like-for-like sales fell 0.6pc in November. Although the company has had a robust recession to date, senior management are keen to ensure that continues, especially with US unemployment at 10pc.

Poor Children Likelier to Get Antipsychotics - NYTimes - New federally financed drug research reveals a stark disparity: children covered by Medicaid are given powerful antipsychotic medicines at a rate four times higher than children whose parents have private insurance. And the Medicaid children are more likely to receive the drugs for less severe conditions than their middle-class counterparts, the data shows. The questions go beyond the psychological impact on Medicaid children, serious as that may be. Antipsychotic drugs can also have severe physical side effects, causing drastic weight gain and metabolic changes resulting in lifelong physical problems.

Food stamp participation by race and ethnicity - The New York Times recently posted a terrific web utility for mapping SNAP (food stamp) participation across the counties of the United States. The federal government's Food and Nutrition Service publishes only state-level SNAP data on the web, not county level. When one maps state-level data, the visual result is too blocky to communicate much information. So, the clever and hard-working New York Times data folks contacted states directly for county-level information. At a glance, one sees the layout of high rates of SNAP participation across Appalachia, the Mississippi delta and the deep south, the Texas borderlands, and remote rural parts of the West.

Why welfare reform fails its recession test - We all like to imagine that there'll be something to stop our fall if we hit hard times. ... "There's always welfare, isn't there?" Actually, no. When President Bill Clinton signed welfare reform into law, he didn't just end welfare as we knew it. For all practical purposes, it turned out, he brought an end to cash help of any kind for families with children in much of the country. While welfare reform was long ago declared a success in some quarters, it was deeply flawed from the beginning. The recession has shown how seriously unprepared it left us for hard times.

What Must Be Addressed: Rising Abject Poverty - I define abject poverty as lacking shelter and sufficient food to stave off hunger. By this simple measure, abject poverty is rising in the U.S. even as Wall Street pockets billions in bonuses, the government squanders $2 billion a day in Afghanistan and trillions more on toxic mortgage securities and other bailouts of the Power Elites.  Yes, there are homeless shelters and food stamps, but the reality of how many are living on the knife-edge financially is not captured in the usual (manipulated and massaged) government statistics.  Almost half (46%) of 2,148 consumers surveyed recently said they weren't confident they could come up with $2,000 within a month in a crisis--from savings, family, friends, credit cards or other sources.

New Underground Economy - The underground or "black" economy is rapidly rising, and the fault is mainly due to government policies.  Here is the evidence. The FDIC released a report last week concluding that 7.7 percent of U.S. households do not have bank accounts, and an estimated 21 million are underbanked. As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the US.

Temporary Help - This graph shows temporary help services (seasonally adjusted) and the unemployment rate. Unfortunately the data on temporary help services only goes back to 1990, but it does appear temporary help and the unemployment rate have been inversely correlated. The thinking is that before companies hire permanent employees following a recession, employers will first increase the hours worked of current employees and also hire temporary employees. Since the number of temporary workers increased sharply, some people think this might be signaling the beginning of an employment recovery.

Jobless Professionals Vie for Holiday Sales Work - ABC News The pay is low, the jobs temporary. Until a few weeks ago, Proctor was among the record 5.9 million Americans who have been jobless for at least six months. Now she belongs to a subset of that group: Out-of-work professionals and managers, engineers and teachers who have turned, in desperation, to holiday-season jobs as sales clerks.Retailers report a surge in applications this year from professionals who had never applied for such jobs before."You'll find Wall Street stock brokers and small business owners trying to find temporary retail jobs during the holidays,"

Quarter of workforce could become temps as contract work grows - An encouraging jobs report Friday underscored the growing prominence of temporary workers who some experts predict could constitute up to a quarter of the workforce in a few years.A big reason employers shed a far-less-than-expected 11,000 jobs last month is that temporary staffing agencies found slots for 52,000 additional workers, the most since 2004, the Bureau of Labor Statistics (BLS) said. And so-called contingent workers can cost up to 30% less than regular employees because they typically don't receive benefits such as health insurance or unemployment – a key selling point in a fragile economy

Fewer Americans Spend Full Year Employed - WSJ - A new Labor Department report sheds light on just how dim job prospects looked during the first full year of the recession. As President Barack Obama prepares to discuss the continuing effort to spur job growth today, the Labor Department said that some 3.2 million people searched for jobs last year but didn’t work at all, up from 2.1 million who did the same in 2007. The numbers come as part of the Labor Department’s Work Experience of the Population, which outlines how many people had jobs — or didn’t — last year and elaborates on how many were lucky enough to actually maintain full-time slots. Just 65.6% of American workers worked full-time last year, down from 68.4% in 2007. Meanwhile, the number of people who experienced some type of unemployment at some time last year rose to 21.2 million — 6.1 million more than a year earlier, highlighting the severity and depth of a downturn that affected everyone from retail clerks to high-finance employees.

Black unemployment keeps trending higher - While the overall unemployment rate for Americans fell in November, the jobless gap between African-Americans and all other races actually rose, continuing a disturbing trend that has many lawmakers up in arms.The black community has suffered the hardest during the economic downturn, with an unemployment rate that currently stands at 15.6%. That's a much higher rate than for all of the other races that the Labor Department tracks, including Hispanics (12.7%), whites (9.3%) and Asians (7.3%).The jobless rate for blacks has also grown much faster than for other races. The difference between the unemployment rates for blacks and whites fell to an all-time low of 3.5 percentage points in August 2007. As the economy fell into a recession, that gap rapidly grew. By April 2009, the gap hit a 13-year high, doubling to a staggering 7 percentage points.

College Degrees More Expensive, Worth Less in Job Market - TIME - Employers and career experts see a growing problem in American society — an abundance of college graduates, many burdened with tuition-loan debt, heading into the work world with a degree that doesn't mean much anymore.The problem isn't just a soft job market — it's an oversupply of graduates. In 1973, a bachelor's degree was more of a rarity, since just 47% of high school graduates went on to college. By October 2008, that number had risen to nearly 70%. Meanwhile, the unemployment rate for recent grads rose as well. It is now 10.6%, a record high.

America’s broken colleges - Kevin Carey has a must-read and very sobering article on US higher education in the latest issue of Democracy. Basically, it isn’t working, for the vast majority of people who consume it, especially if they’re poor.Throwing money at the problem won’t help and will probably hurt. Already the Pell grant program has ballooned from $2 billion to $20 billion since 1980, yet the proportion of the typical college’s tuition costs that it covers has dropped from 70% to 33%, thanks to a 500% rise in tuition rates. On top of that, most of the poor kids who go to college don’t graduate, and a very large proportion of the ones who do graduate are neither literate nor numerate to anything approaching what most of us would consider college-graduate (or even college-entry) standards.Insofar as college exists to educate, then, it’s failing.

A job is good -- a good job is better -The United States is an outlier, there's no doubt. While 177 nations guarantee paid leave for new mothers, the United States does not. While 74 nations guarantee paid leave for new fathers, the United States does not. The list goes on.  Here are the numbers.

  • Nations that ensure breastfeeding breaks at work: 132.
  • Nations that provide paid sick leave: 163.
  • Nations that guarantee paid time off to care for children's health: 48.
  • Nations that provide leave that can be used for child education needs: 41
  • Nations that provide paid leave to care for adult family members: 33
  • The United States does not guarantee any of these benefits that would help working Americans and their families.

Next Year, Employers Likely to See Surge in People Quitting -Among the indicators:-- Right Management surveyed 900 workers and found that 60 percent intend to leave their jobs in 2010.-- The 2009 Employment Dynamics and Growth Expectations Report said 55 percent of employees plan to change jobs, careers or industries “when the economy recovers.”-- surveyed 4,285 full-time, private-sector employees. Forty percent said they had difficulty staying motivated in their current jobs, and 24 percent said they didn’t feel loyal to their current employers.

Better news on the jobs front: Layoffs down, temp hiring up - Atlanta Fed - November's employment report released last week provided significantly better-than-expected numbers on the jobs front. Payroll counts declined by 11,000 last month—the smallest decline in two years—and job losses in September and October were revised down a considerable 160,000. The declining number of job cuts is showing up in some other data, too.First-time claims for unemployment insurance have shown a clear downward trend since last spring (though there was an unexpected increase during the first week of December). Claims have fallen by 200,000 since peaking in March, dipping by roughly 25,000 in the weeks following the payroll survey alone.

Employment Chart Round-Up - Okay, chart fans: Here are some of the more informative, telling and fascinating charts tha the December 4 Non-Farm payroll helped to produce (10 charts, various souces, links to more)

Recalculation, Normal Churn, and Deficient Demand, We can think of three reasons for people to lose jobs. First, normal churn, in which people shift out of declining firms and into expanding firms, with no net job loss. Second, deficient demand, where people are laid off from viable firms because of a drop in aggregate demand. Finally, Recalculation, in which nonviable firms have expanded by mistake, they shed workers, and the economy needs to figure out where those workers should go.How do we distinguish Recalculation from the other two?

From the BLS: Job Openings and Labor Turnover Summary  - There were 2.5 million job openings on the last business day of October 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 1.9 percent. The openings rate has held relatively steady since March 2009. The hires rate (3.0 percent) and the separations rate (3.2 percent) were essentially unchanged and remained low. The following graph shows job openings (yellow line), hires (blue Line), Quits (green bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and green added together equals total separations

Companies in U.S. More Upbeat on Sales Than Jobs, Surveys Show - (Bloomberg) -- Chief executive officers, supply managers and small business leaders in the U.S. said a pickup in sales next year will not lead to a surge in hiring, surveys showed.  Three times as many company chiefs anticipate sales will grow over the next six months than project payrolls will climb, according to a survey by the Washington-based Business Roundtable. A poll by the Institute for Supply Management found service companies, which account for almost 90 percent of the economy, forecast additional job cuts in 2010.  These results are in line with an anticipated slow and uneven recovery.

Surveys Show Job Openings, Corporate Hiring Plans Anemic -Mish - Inquiring minds are watching Job Opening and Labor Turnover stats for signs of life. There were 2.5 million job openings on the last business day of October 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 1.9 percent. The openings rate has held relatively steady since March 2009. The hires rate (3.0 percent) and the separations rate (3.2 percent) were essentially unchanged and remained low. This release includes estimates of the number and rate of job openings, hires, and separations for the total nonfarm sector by industry and geographic region.

Job Openings in U.S. Decreased by 80,000 in October, Labor Says (Bloomberg) -- U.S. job openings declined in October, a sign employers are reluctant to expand staff even as layoffs wane. Openings, or the number of jobs available as a percent of total employment, fell by 80,000 to 2.51 million, the Labor Department said today in Washington. The number of unfilled positions was down by 2.3 million, or 48 percent, since peaking in June 2007.

Employment-to-population ratio among men 25-54 hit all-time low in November - Here's a pretty depressing picture, courtesy of the Bureau of Labor Statistics: This means that, as of November, 19.4% of American men in their prime working years didn't have jobs. By this measure, the current job situation (for men, at least) is much, much worse than in any downturn since the BLS started measuring this stuff in 1948. Either that or there are just a lot more stay-at-home dads, grad students, and men who voluntarily spend their days playing golf or pinochle. But I think it's mostly the former.

Fed's Unemployment Projections From Mars- Mish - In the wake of last Friday's miracle job performance with unemployment dropping by .2% (see Jobs Contract 23rd Straight Month; Unemployment Rate Drop to 10.0%) let's take a look at unemployment scenarios offered by the Fed to see how realistic they are. Let's start with a look at the Fed's 2012 forecast where the band is 6.1% to 7.6%.Using Bernanke's estimate that it takes 100,000 jobs a month to keep up with birthrate and demographics, the economy will have to create 260,000 jobs every month in 2010, 2011, and 2012 to hit an unemployment rate of 6.17% by the end of 2012.

We Need 140,000 New Jobs A Month To Keep Unemployment From Going Higher - The average growth of the civilian labor force in the last twenty years (1989-2008) was 1.2% and the median also works out to be 1.2%. During the business expansion of November 2001 - December 2007, the labor force grew at an average pace of 1.1% (median =1.1%). For a steady unemployment rate, the rate of increase in employment should match the rate of growth of the labor force. Based on the average growth of the labor force in the last 20 years, it appears that roughly 140,000 jobs have to be created each month in 2010 to meet the increase in the labor force. We computed this number by using the level of employment in the household survey for November 2009 (138.502 million) as the starting point and raised the reading by 1.2% (growth of the labor force).

Employment: Conflicting Signals - - U.S. unemployment: are we at the end, or the end of the beginning, or what? Different sources give different answers, or rather, accommodate different interpretations. I think we still have a long way to go. This post comments further on ideas I considered yesterday in “In The Long Run, We’re All Temps.” First, consider the government’s report on jobs losses in November, compared to losses in May, six months earlier. (I choose six months for no particular reason, but May was one of the big months for job losses.) Selected details appear below.

On That Misleading Unemployment Rate Statistics (Once Again) - The employment survey indicated the number of people working fell but then the household survey showed a lower unemployment rate. While some say this is good news, the best I think we can say is that it does not suck as much as what we saw in terms of changes in prior months.  The phenomena of a falling unemployment rate during a period when the employment survey shows a decline can be attributed to a couple of possibilities both of which were present during November.

A Skeptic’s Take On The Jobs Report - I’m skeptical about the jobs report.Yes, it’s an improvement, certainly from the first few months of this year. Of course, let’s hope we don’t have to spend another $800 billion next year to maintain this level of, how can we put this, marginal job losses. But ask yourself this: how is it that everybody was so far off? The Bureau of Labor Statistics reported the nation shed only 11,000 jobs in November. It is contrary to virtually all other evidence concerning the labor market, including a survey by ADP which is based on hard data from a much larger sample. Because the government’s report this month is an outlier, we are not prepared to throw in the towel on our expectation of a second consecutive “jobless recovery.”Other evidence pointing to considerably weaker conditions are continued anemic readings on consumer confidence and sentiment (including specific questions concerning the labor market), employment sub-indices in ISM and other surveys, etc. Still, this is the “official” picture, and until reported otherwise by the government, these are the numbers in the books, as questionable as they may be. So that’s why everybody was so far off: because virtually every other measure of employment showed something else.

Collapse In Tax Withholdings Refutes Improvements In Either Unemployment Or Corporate Profitability - Even as the BLS and the administration are trying to cover up the real state of unemployment affairs using assorted semantic gimmicks of just what it means to be unemployed, and as companies provide adjusted EPS numbers, while actual earnings continue to collapse, the true barometer of spending, provided by the Financial Management Service, tax withholdings (net of refunds), continues to paint the truest picture of just what is really happening with both America's consumer and the corporate world. And it ain't pretty. On a rolling 12 month basis, individual tax withheld has dropped by nearly 8% YoY, from $1.42 trillion to $1.31 trillion, while company witholdings are down a whalloping 64%, from $274 billion to just under $100 billion! This is money that will never be used to pay down the skyrocketing US deficit, because both the US consumer and average US company are simply not collecting the required cash to line the Treasury's pockets

CHART OF THE DAY: Small Business Cash Crunch Fears Getting Worse And Worse
There's been a lot of discussion about the carnage at the small business level, where credit is not so freely available. Without credit, small businesses die on the vine, and without small businesses, job creation is impossible.Today's chart comes from data from DiscoverCard Small Business Watch. Each month they ask their clients how fearful they are of cash flow issues. While the number is a bit jumpy, you can see it's been on a clear uptrend all year, with November right near the worst of it.

Those unbelievable US payrolls - FT - Strong gains in temporary help jobs (usually a retail sector phenomenon) were a big factor here, so anecdotal reports of relatively soft retail sales in November may see some of these jobs rapidly removed after the end of the year, once sales have finished (if demand does not improve).We are also slightly curious about the apparent surge in government jobs, which on revision have risen by more than 50K in the last two months. When state and local finances are in such a deep mess, even the Obama fiscal package is unlikely to have generated this rapid turnaround in the public sector. More believably, goods producing, construction and manufacturing jobs all saw continued large falls.

What's Wrong with the November Employment Numbers - The BLS approach is to make an estimate of the total payroll jobs in one month, make another estimate for the next month, and subtract the two to determine the change.  They use an excellent and sophisticated survey technique to do this.  Their historical record, judged by the eventual count from the states, has been very good -- until quite recently. Let me emphasize the difficulty.  There are always non-respondents to the voluntary survey, despite the best efforts to get everyone.  If the BLS assumed that the non respondents were all lost jobs, and that the impact was proportional, we would see a loss of 13 million jobs per month, a silly result.  Instead they attempt to impute business deaths and births.  At one point, they assumed a business birth for every death.  This is the natural result from extrapolating the sample to the entire population.

Government Payroll Data Is Good, TrimTabs Begs to Differ -- As we mentioned in a blog entry Thursday, there has been a great discrepancy between initial monthly payroll data provided by the US government's Bureau of Labor Statistics and TrimTabs. Either months later or after annual revisions, the BLS data falls much closer in line with the estimates provided by TrimTabs. As we celebrate the November "great" jobs report, TrimTabs is scoffing and saying the BLS is off by a quarter million Americans. (oops) So about a year from now this "great" jobs report should be revised back down to reality but not before we can talk green shoots for a few months more. I've copied the chart we posted Thursday below, but with the November data inside

The jobs deficit - Krugman - It was truly amazing the way last week’s employment report was hailed by many people as a sign that our troubles are over. Here we are, having suffered huge job losses, and needing to make up the lost ground — and a report showing that we’re still losing jobs, but not as fast, is grounds for celebration? Anyway, I thought it might be useful to create a sort of benchmark for the level of job growth that would really count as good news.  EPI points out that when you put these numbers together, they say that to return to pre-crisis unemployment within two years we’d have to add 580,000 jobs a month. That’s not going to happen. But let’s set a more modest goal: return to more or less full employment in 5 years - which means seven lean years of depressed employment.

We’re Not Done With The Jobs Report - Amid all the wailing about sovereign debt downgrades and such, you may have missed yesterday’s jobless numbers from the Bureau of Labor Statistics. No, you didn’t miss the monthly jobs report, or even the weekly initial claims. What you missed (if you did miss it,) was the Job Openings and Labor Turnover Survey. Or, the JOLTS report.The BLS reported there were 2.5 million job openings in October, with the opening rate at 1.9%, a level that has held steady since March. That means hiring has not picked up at any pace the purported recovery began, and the ratio of more than six unemployed for every job opening remains steady. So even if you buy into Friday’s jobs report, the fact remains that hiring has not picked up, which is confirmed by the fact that long-term unemployment continues to rise.

Emergency Jobless Insurance Claims Surge By Most Ever In Prior Week - zero hedge - The number you won't hear mentioned anywhere in the Mainstream Media: 327,729. That is how many people shifted to Emergency Unemployment Compensation programs in the last week alone, hitting an all time record high of 4.2 million! So as everyone is focused on the benign picture of initial claims in the last week which was "only" 474,000, the number of people rolling off continuing benefits has exploded and is now a stunning 592,579 only in the last two week. Look for this number to keep going into the stratosphere as the 6 month continuing claims cliff keeps getting hit by more and more people who are unemployed and keep looking not only for believable change, but actual jobs to go with it.

Six Degrees of Deception - The Sixth Degree of Deception we will save until last, as our real focus today is lying’s fifth circle of hell, Government Statistics, namely the award-worthy work of fiction published Friday by the Bureau of Made-Up Labor Statistics known as the Employment Situation for November 2009. It depicts, fairy-tale-like, a U.S. U-3 Unemployment Rate of 10.2 percent and a broader U-6 rate of 17.0 percent, when, in fact as we illustrate below, the true unemployment rates are more like 15.5 percent (U-3) and, when including involutary part-time workers, 21.2 percent (U-6), which certainly are more Depression-like numbers.

Employment and Real GDP - Based on the recent trend in the employment report, the U.S. economy might start adding net payroll jobs soon. This post looks at payroll employment vs. the change in real GDP, and estimates the unemployment rate in 12 months for several growth scenarios. The first graph shows the four quarter change in real GDP and the four quarter change in employment, as a percent of payroll employment (to normalize for changes in payroll over time).  The second graph shows the same data in a scatter graph. The following table summarizes several growth scenarios. The unemployment rate is from the household survey and depends on the number of people in the work force - so it cannot be calculated directly

ISM Non-Manufacturing Shows Contraction in November - Economic activity in the non-manufacturing sector contracted in November after two consecutive months of expansion, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion. The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth.This is a grim report. According to this survey, the service sector contracted in November, and employment also contracted at about the same rate as in October

Recession's latest victim: U.S. innovation - Patent filings fell in 2009 for the first time in 13 years, worrying Silicon Valley that it is losing its place as the leader in global innovation. U.S. innovation slowed this year for the first time in 13 years as the recession cut into budgets, and costs to protect inventions rose. The number of patent filings in the United States fell 2.3% in 2009 to 485,500 from 496,886 last year, according to a preliminary estimate by the U.S. Patent and Trademark Office. That makes 2009 the first year since 1996 in which businesses and inventors filed fewer patents year over year.

Here's Why There Won't Be A V-Shaped Recovery In Jobs - Since the peak, Asha says, the recession has wiped out 7.2 million full-time jobs. 2 million of those jobs were in the auto and real-estate industries, both of which have been semi-permanently downsized.At the same time, the length of the work-week has dropped to a record low, and the number of folks working part-time because they can't find full-time work has soared. As new demand kicks in, employers will likely start by hiring temporary workers and giving part-time employees more work. This will absorb a lot of the initial slack. Only when the work-week has returned to normal will hiring of new full-time employees return in earnest.

Why it May Take Almost Seven Years for Unemployment to Reach Five Percent - How long will it take the unemployment rate to go back down to 5 percent? A rough estimate can be obtained by looking at the rate of decline in the unemployment rate after recent recessions:  In the 1981-82 recession, it took 75 months (6 and one quarter years) for the unemployment rate to reach 5 percent...In the 1990-91 recession, unemployment peaked at 7.8 percent in June of 1992 (unemployment peaked after the recession ended). It hits 5.1 percent in August 1996, 50 months later...

A LOST DECADE FOR JOBS - The jobless rate usually sees a sizeable drop during the economic recovery – and bigger recessionary spikes in unemployment are typically followed by larger declines during the first year of improving unemployment. So it would be no surprise if, a year after the unemployment rate begins to drop, it falls to the nine percent range. The real problem is that the rate of decline in joblessness slows during the rest of the economic expansion. The annual postwar pace of decline in unemployment during these periods has been reasonably uniform, the median being 0.5% a year.If that pattern persists, the U.S. economy needs to keep expanding without interruption until 2020 for unemployment to fall to its pre-recession low. Even to get back to 5%, often considered to be “full employment,” it would take a business cycle upswing lasting about as long as the record-setting 1991-2001 expansion. Should the next recession arrive earlier, as we suspect, it will take much longer

On the Consequences of Nominal Wage Flexibility - With the unemployment rate hovering above 10% and likely to stay in this range for some time, there has been a lot of discussion about what (if anything) the government should do to stimulate job creation. Following a link on Greg Mankiw's blog, I came across Gary Becker's view of the matter Becker goes on to "fully endorse" a cut in the minimum wage, but does not see this as being politically feasible at present. I found this post striking for three reasons. First, it expresses a view that is actually quite widely held among economists today, namely that if nominal wages were flexible in the downward direction, involuntary unemployment could not persist for very long

Paul Krugman: Changes in money-wages and Amity Shlaes - Not much point in going through Amity Shlaes’s latest: after having inadvertently revealed that she has no idea what Keynesian economics is, she’s back on the warpath against FDR, and me. The main line of empirical argument seems to be that FDR didn’t succeed in ending the Great Depression. Since that’s also what my side of the debate says — fiscal expansion was too cautious, and disastrously abandoned in 1937 — I don’t see what this is supposed to prove. But I think it’s worth pointing out why Ms. Shlaes thinks the New Deal was destructive of employment: namely, that it raised wages. Funny she should mention that...

Wages and recovery - Krugman - Via Mark Thoma, Rajiv Sethi argues that wage flexibility wouldn’t be much help in fighting unemployment.  Indeed — but it’s simpler than he suggests. There was a fairly extensive discussion of this issue in the econoblogosphere a year ago; here’s my quick exposition and a brief wonkish set of notes. Quoting myself: Under depression-type conditions, with short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Obama lays out job-creation ideas - President Obama outlined a response to the nation's intensifying job crisis Tuesday that encourages businesses to hire new workers by easing the flow of credit and implementing a series of tax cuts, but leaves important details -- including the cost of the plan -- to be hashed out by Congress. Obama's job-creation ideas build largely on elements of the $787 billion economic stimulus package passed this year, including tax cuts for small businesses, incentives to hire new workers and a fresh round of infrastructure spending. The president also recommended that Congress pass a "cash for caulkers" plan that would offer financial incentives for home weatherization. Senior administration officials said the program, based on the popular "cash for clunkers" automobile rebate program, would leverage hiring in construction and manufacturing -- sectors especially hard hit by the recession -- while promoting energy efficiency, resulting in long-term savings for homeowners.

Banks and small businesses: For want of a loan - The Economist - America’s best job creators are being hit by a credit crunch - IT IS basically a second stimulus, though no one wants to call it that. On December 8th President Barack Obama announced a set of proposals to address unemployment and made it clear that he wanted to use some of the unspent TARP funds (money set aside to support failing banks) to help pay for them. No precise figure was given. Some $50 billion will be spent on infrastructure projects; there will also be new rebates for home insulation and other energy-saving incentives. But the linchpin of the administration’s effort is a broad push to support small businesses.

How to pay for a jobs bill - CHRISTINA ROMER famously argued that the administration's proposed stimulus should be about $1.2 trillion in size, only to have the eventual number (between $675 billion and $775 billion) chosen by non-economist Rahm Emanuel. Time and again, crisis policy and economic policy in this recession have been shaped as much or more by politics as by economics. Things are unlikely to be much different now, as Barack Obama sends his plans for a jobs package to the Congress. One might choose any number of methods for determining how much should be spent on new jobs programmes. Additional modeling could be done, or the administration could simply decide to make up the gap between what was passed last spring and what Ms Romer initially recommended. Or one could just use whatever one finds lying around.

Why Not Regressive Taxation - The biggest problem facing low income Americans today is the paucity of job openings. There is strong reason to think that additional government stimulus could help that. Yet, the effort to increase stimulus has been stymied by concerns over the US debt-to-GDP ratio. Yet, if we look back on the past decade a low flat 5% consumption tax would have eliminated most of the debt. No doubt low income households would have been worse off paying such a tax. However, they are much worse off without the possibility of stimulus, today.

Show me the money! - Krugman - As I understand it, what the administration is trying to do is leverage an inadequate amount of money into disproportionate job creation. Hence the jobs tax credit and the cash-for-caulkers program, each of which might — might — produce many more jobs per buck than a conventional stimulus. Basically, it’s about making policy in the face of a dysfunctional Congress. But even so, it can’t be done without a significant amount of funds. If Robert Reich is right and it’s only $70 billion, it’s a Potemkin policy — all facade, virtually no substance.

Obama’s Stimulus II - TaxVox - At Brookings today, President Obama laid out his vision for Stimulus II. At first glance, this seems to be a collection of odds-and-ends, only some of which will help the economy grow and create jobs. This has the feel of a check-the-box exercise. Need to make the governor’s happy? Give them some highway money and extend direct federal aid. Searching for a few GOP votes? Help out small business—and do it with tax cuts. As The Washington Post wrote this morning in the most unintentionally funny lines of the day: "'Politics may ultimately play into the decision of how to use the unspent bailout funds,’ analysts say.” Ya think?

Cash for Caulkers could mean $12K per home - (CNNMoney) -- President Obama proposed a new program Tuesday that would reimburse homeowners for energy-efficient appliances and insulation, part of a broader plan to stimulate the economy. The administration didn't provide immediate details, but said it would work with Congress on crafting legislation. Steve Nadel, director at the American Council for an Energy-Efficient Economy, who's advising on the bill, said a homeowner could receive up to $12,000 in rebates. The proposal is part of the President's larger spending plan, which also includes money for small businesses, renewable energy manufacturing, and infrastructure.

Is Cash for Caulkers a Good Idea? - The program contains two parts: money for homeowners for efficiency projects, and money for companies in the renewable energy and efficiency space. The plan will likely create a new program where private contractors conduct home energy audits, buy the necessary gear and install it. Big-ticket items like air conditioners, heating systems, washing machines, refrigerators, windows and insulation would likely be covered.Based on earlier bills, consumers might be eligible for a 50% rebate on both the price of the equipment and the installation, up to $12,000. So far, there is no income restriction on who is eligible. That would mean a household could spend as much as $24,000 on upgrades and get half back. Homes that take full advantage of the program could see their energy bills drop as much as 20%. The program is expected to cost in the $10 billion range.

The President’s new economic proposal - This package seems driven largely by Members of Congress trying to satisfy their political need to be seen as doing something while the economy and job growth are weak. It is trying to work on two levels: 1. It’s trying to stimulate macro demand through traditional deficit-increasing fiscal stimulus measures: infrastructure and clean energy spending, plus all the transfer payments. In this respect it roughly parallels February’s stimulus law. 2. It’s trying to increase the supply of capital and labor, but to small businesses only, through the hiring tax credit, zero cap gains, and depreciation incentives.

'Jobs' a misnomer - Substituting "value-producing opportunity" would also help expose the flaws in policies such as protectionism and government make-work programs. Such policies can indeed transfer wealth from society at large to people whose jobs exist only because government relieves them of the need to participate fairly in the market process. But such "jobs" clearly are not "value-producing opportunities" -- for the amount of value that such workers produce is less than they are paid. And no society can long survive by institutionalizing such unproductive policies on a widespread scale.

The Administration’s Job Creation Proposal is Inadequate, by Thoma - This proposal is not very specific, and if it makes it through the legislative process it will likely change quite a bit. But as it stands there are three problems with it. First, it does not create jobs directly, all job creation occurs indirectly through incentives such as reduced capital gains taxes for small businesses, other measures that make investment cheaper, rebates for home weatherization, etc. The program relies upon people acting upon these incentives, which they may or may not do, and even if the incentives are acted upon job creation is likely to be slow due to its indirect nature. Second, the amount, $70 billion, is too small to make much of a difference given the size of the unemployment problem. Third, it’s disappointing that one of the best job creation/preservation measures the administration could have proposed, more help for state and local governments battered by budget problems arising from the recession, is not part of the proposal. [Summary of various types of job creation strategies]

The President's Job's Initiative Doesn't Measure Up - Robert Reich - Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn't look like more stimulus because it's not really adding to the deficit. It's coming out of savings from money already authorized to be spent on the bank bailout.

Obama's "We Got No Money" Rap - There's no fixed number of greenbacks in a vault at the Treasury that limit how much the federal government can spend. Since the US pays its debts in its own currency--it can print as many dollars as it pleases. Of course, if boosting the money supply triggers inflation, the Fed has to withdraw liquidity and raise interest rates. But that's not the problem at present. The problem is how to zap the economy back to life. The problem is how to get 16 million people out of unemployment lines and back to work. That's the real challenge. The problem is political not economic. Obama is surrounded by industry reps who are trying to scare him about the size of the deficits. But deficits aren't the problem; unemployment is. Once people get back to work and build their savings, their creditworthiness will improve, and the next economic expansion will begin. When more people are paying into the system, the deficits will come down. But the deficits won't come down if tens of millions of people are still on the sidelines and forced to cut their spending. Judging by last Thursday's speech at the "Jobs Summit", Obama still doesn't grasp this...

For feds, more get 6-figure salaries - The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data. Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted.Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector. The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

Is The Administration's Economic Thinking Incoherent? - Brad DeLong parses my piece today on the administration's struggle to create jobs while still minding the deficit and pronounces himself "increasingly bewildered about administration thinking." He raises several fair points. I figured I'd try to provide a bit more background on each one in response.

The Overstimulated Economy - Forbes - An important debate is going on among liberal economists about whether the economy needs another substantial dose of fiscal stimulus lest the unemployment rate linger at unacceptably high levels for the foreseeable future. Although I supported the original $787 billion stimulus package in February as an emergency response to a crisis situation and am even sympathetic to the idea that it should have been larger, I believe that going forward additional stimulus carries more potential risks than rewards.As I have explained in earlier columns, I believe it was only the massive spending of World War II that really ended the Great Depression. But policymakers learned the wrong lesson from this fact. They came to believe that fiscal stimulus was the appropriate response to all economic downturns.

Americans Want Government to Spend for Jobs, Send Bill to Rich - (Bloomberg) -- Americans want their government to create jobs through spending on public works, investments in alternative energy or skills training for the jobless. They also want the deficit to come down. And most are ready to hand the bill to the wealthy. A Bloomberg National Poll conducted Dec. 3-7 shows two- thirds of Americans favor taxing the rich to reduce the deficit. Even though almost 9 of 10 respondents also say they believe the middle class will have to make financial sacrifices to achieve that goal, only a little more than one-fourth support an increase in taxes on the middle class. Fewer still back cuts in entitlement programs such as Social Security and Medicare or a new national consumption tax.

Should Public-Sector Jobs Come First? - Room for Debate - NYTimes Forum
A large share of the current $799 billion stimulus package has gone to state governments, with the aim of preventing more layoffs among public-sector workers and in public education. Should saving these government and education jobs be a priority? Is there a way to establish a public program quickly enough to employ the newly jobless? Would this be an efficient way to stimulate job creation?

Additional Federal Fiscal Relief Needed - Without It, States’ Steps to Balance Their Budgets Could Cost Economy 900,000 Jobs Next Year - CBPP - 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. That’s because states — which continue to face huge budget shortfalls that they must close — are taking steps now to plan their budgets for state fiscal year 2011, which starts on July 1, 2010 in moststates. Governors will send their budget proposals to their legislatures between next month and February 2010 in almost all states. The legislatures will have to pass budgets as early as March or April in some states and by the end of June in almost all states. If states do not know they will receive additional federal fiscal relief, they will begin implementing new budget cuts and tax increases by this summer, at the latest. 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. 1 Mark Zandi, Chief Economist of Moody’s, recently warned that these state budgetary actions “will be a serious drag on the economy at just the wrong time.

State Budgets: Lots of Room on the Trash Heap - The Pew Center on the States has done a good job documenting the dysfunction in current state budgets. “Beyond California: States in Fiscal Peril” uses both political and short-term economic variables to rank the states. And it shows that while California gets all the attention because its numbers are so big, many states across the country face their own severe financial problems. Some are suffering from bad economic fundamentals (think Michigan). Others are struggling with politics (hello, Arizona).  Pew focuses on the Troubled Ten: Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois, Wisconsin and, of course, California.

Double digit unemployment in California until 2012 (Reuters) - Double-digit unemployment in California will peak this quarter and grip the state until 2012, slowing its economic recovery and threatening the state government's already fragile budget, a UCLA Anderson Forecast report said Wednesday.  The forecasting unit said the jobless rate of the most populous U.S. state, which would be the world's eighth-largest economy were it a nation, will reach a high of 12.7 percent this quarter and average 11.7 percent this year.

Aging computer system holds up unemployment checks to 117,000 Californians - LATimes - An estimated 117,000 Californians haven't received their unemployment checks -- some for more than a month -- because of what state officials blame on an archaic computer system. The people whose checks have been held up are among the neediest of the unemployed -- those who have been out of work so long that their benefits have expired. Under legislation signed by President Obama on Nov. 6, they were supposed to get unemployment checks for an additional 14 weeks or more. State Employment Development Department officials say they are doing everything they can to issue the checks, even postponing some staff furloughs to deal with the demand for services. But they say the state's 30-year-old computer system isn't programmed to recognize the extensions, requiring technicians to write new code. They hope to start issuing checks of up to $475 a week starting late next week, just days before Christmas.

State picks broker to sell off buildings - California has picked a broker to sell $2 billion worth of real estate that the troubled state hopes will plug some of its financial holes. CB Richard Ellis Group will sell 17 state office buildings in Los Angeles, Oakland, Sacramento, San Francisco and Santa Rosa. After paying off bond obligations on the buildings, the state hopes to net $660 million that will go directly into the general fund to help offset the $20.7 billion deficit projected through June 2011.

Texas unemployment tax on businesses to triple – Two-thirds of Texas businesses will see the unemployment taxes they pay per employee per year nearly triple – from $23.40 to $64.80 – under rates announced today by the Texas Workforce Commission.The minimum tax is paid by nearly 255,000 employers, or 67 percent of those who have been in business for at least a year, according to the commission.The taxes feed the state's unemployment trust fund, which has been depleted by a high number of jobless claims. The state already has borrowed about $1 billion interest-free from the federal government to help keep the fund afloat.

More unemployment benefits in millions don’t grab Florida Legislature - Even as the state borrows $300 million a month from the federal government to pay unemployment claims, a key senator said the Legislature is unlikely to consider a change in the law that could bring more than $400 million in federal stimulus money to Florida.The GOP-dominated Legislature last year rejected a “modernization” measure by Sen. Tony Hill, D-Jacksonville, that would have allowed the state to tap as much as $444 million in additional unemployment benefits by changing how it calculates benefits.

State may tax business to bail out broke jobless fund - Business owners could bear the brunt of yet another fiscal problem facing Connecticut, state and community leaders said. On Oct. 13, the state’s unemployment trust fund, money used to pay benefits to the growing number of laid-off Connecticut workers, went bankrupt. Since then, the state has been borrowing money from the federal government — so far $80 million — to make those unemployment payments.It’s estimated the state may end up borrowing upwards of $900 million through 2010. The money will have to be repaid, possibly at the expense of the state’s business community through increased unemployment taxes assessed to employers.

Task force proposes taxes, benefit cuts to fill unemployment fund - A state task force on Wednesday recommended higher payroll taxes for employers and lower unemployment compensation payouts starting in 2012 to shore up the state’s insolvent unemployment trust fund.  The compromise was reached Wednesday by a state task force of lawmakers, employers’ representatives and labor leaders. Any changes would have to be adopted by the Kentucky General Assembly. Since January Kentucky has borrowed $537 million from the federal government to pay unemployment benefits, and it is expected to continue borrowing until the employment situation improves.

Nebraska hikes unemployment tax to replenish fund (AP) -- Nebraska businesses will be hit with a sharp increase in their tax bills next year to replenish the state's unemployment fund after a year in which state jobless benefit payments more than doubled to $190 million. Nebraska is one of 33 states expected to increase its unemployment tax in 2010 in response to the sharp increase in the number of people claiming jobless aid over the past year. But the tax hike comes at the worst possible time: when a fragile economic recovery is taking shape

Big payroll tax reset weighs on Hawaii business - The tax hike is a result of lingering unemployment that’s caused a quicker than anticipated drain on the state’s jobless fund, as well as the legislatively mandated resetting of payroll taxes to pre-recession levels.The worst-case scenario is one that businesses and legislators never imagined when they worked together in 2006 to temporarily cut the payroll tax, which at the time was the highest in the nation.With the tax now scheduled to be reset in January, businesses are scrambling to get legislators to quickly find a less-damaging way to replenish the unemployment fund.

Extended Unemployment Benefits Automatically End - - The Indiana Department of Workforce Development (DWD) has officially notified the U.S. Department of Labor that Indiana has automatically "triggered off" State Extended Benefits. This program, which provided up to 20 weeks of benefits to Hoosiers, automatically activates and deactivates based on certain economic indicators. House Enrolled Act 1379 temporarily changed Indiana's indicator to a three-month average Total Unemployment Rate of six percent or higher, while the federal government paid 100% of the costs of extended benefits. Typically, Indiana's Extended Benefits program is triggered when the 13-week average Insured Unemployment Rate exceeds five percent. The Insured Unemployment Rate measures the percent of Hoosiers receiving state unemployment from the entire pool of workers covered by the unemployment insurance system. Since 100% federal funding of state extended benefits has lapsed, Indiana has reverted back to its traditional trigger and is now triggered off. Indiana's current 13-week average Insured Unemployment Rate is 3.28 percent.

In 'Quagmire,' NY Delays Debt Payments - More dire news emerged from Albany on Wednesday as Gov. David Paterson said that the state's budget deficit has turned out to be $21 billion, twice his original estimate. As a result, the state government will delay paying the debt for schools, counties, and local governments. "That is the largest escalation of a budget deficit experienced by a state in the history of the United States," he said.Gov. Paterson was accompanied by Lieutenant Governor Richard Ravitch and Budget Director Bob Megna on Wednesday at the Museum of American Finance.The governor outlined why he had to make the choices to cut out spending for certain programs. “In the next few months, we’re going to have to tighten our belts, we are going to have to fight, we’re going to have to suffer, and we’re going to have to pay, but we will win,” he said

Moody's downgrades Illinois debt ratings - Moody's Investors Service on Tuesday downgraded Illinois' general obligation bond rating to A2 from A1, citing the state's financial woes stemming from the U.S. recession. Moody's cut other Illinois ratings, affecting about $24 billion of outstanding debt, including the state's Build Illinois sales tax revenue bonds, also cut to A2 from A1. The downgrade gave Illinois the second lowest U.S. state rating from Moody's, with California having the lowest at Baa1, a Moody's spokesman said. Moody's said Illinois has yet to take action to tackle a structural budget gap of more than $11 billion, equal to about 35 percent of its expenditures.

State $200 Million Behind in Payments to Agencies Providing Care to Thousands of Older Illinoisans - Nearly 200 care providers face shutdowns, layoffs due to State's inability to pay overdue bills, leaving Illinois' seniors to fend for themselves AARP, advocates call on State to adopt urgent short-term measures or deal with the costly consequences -- Today, an alliance of advocate organizations sounded the alarm on the consequences that Illinois' social service agencies face due to the State of Illinois' failure to pay its bills. AARP and a statewide alliance of care providers called on the State to take urgent measures to prevent dozens of agencies from having to shut down, lay off hundreds of workers, and force thousands of older Illinoisans into costly and often unsafe institutional care - something that will burden the state finances even more.

Missouri Senate Facing Billion Dollar Shortage Compared to Last Year - "Senate budget writers say that the state of Missouri will likely have one billion dollars less to work with than it did prior to the 2009 legislative session. Marshall Griffin reports. The Senate Appropriations Committee is taking testimony this week from various people and agencies who want at least the same amount of funding for the next fiscal year, if not more. But committee member and GOP Senator David Pearce believes revenues will continue to trend downward"

Gregoire's budget offers no easy way out of deficit - OLYMPIA — Gov. Chris Gregoire on Wednesday proposed a state budget she said she’d never sign and talked about something she’s said she wouldn’t do — raise taxes.The plan put forth by the second-term Democrat erases much of a $2.6 billion deficit by ending major programs serving the state’s poorest and most vulnerable residents and slashing funds for public schools and college students. It eliminates the Basic Health Plan, a state subsidized health insurance program for 65,000 low-income individuals, and the General Assistance-Unemployable program which provides cash grants and medical care for some of the state’s most destitute.

State's revenue outlook gloomy, may require another proration, Knight says - AL- Even if the economy improves it probably won't improve quickly enough for the state to avoid another year of proration, according to the chairman of a state budget committee. Rep. John Knight, chairman of the House General Fund budget committee, said he expects Gov. Bob Riley will need to declare proration in the state's $2 billion General Fund budget this fiscal year. He said revenue projections are below original expectations and he would advise Riley to declare proration as soon as possible. Knight, D-Montgomery, said he did not want to project revenues but that they will likely be below $1.7 billion.

MDOT warns money running out for Michigan roads - The Michigan Department of Transportation says in a recent report that lack of money has forced it to consider dropping more than 100 road projects and a similar number of bridge projects off the drawing board from 2010 through 2014. The state could lose hundreds of millions in federal highway dollars each of the next five years because it can't raise enough to receive all its matching funds. It could go from spending more than $1.4 billion annually on highways this year with the help of federal stimulus money to less than $600 million three out of the next four years, costing thousands of highway jobs.

Schools Brace for Second Round of Decreased State Funding - LANSING, Mich. - While most Michigan public school students will be home for their holiday breaks and anticipating gifts, the school districts are preparing for what some expect will seem more like getting lumps of coal in their Christmas stockings. On December 21, the second allocation of state money is being sent to schools. The first payment decreased funding per student by about $165, and another cut is expected this time, too. Michigan Education Association spokesman Doug Pratt predicts it will be as much as $600 less per student for some schools.

Citing $1B shortfall, Gov. warns schools - New York state's main operating fund will have a negative balance of $1 billion by the end of this month, even if the state exhausts its reserves, officials announced Wednesday. State Budget Director Robert Megna revealed the shortfall as he introduced Gov. David Paterson, who delivered a speech renewing his call for the Legislature to make additional spending cuts. Mr. Megna said even if the state empties its $1.5 billion rainy day fund and delays a $1 billion payment to the state pension fund, its general fund would still end the month $1 billion short."

Pa. teachers' pension sees billions in costs ahead — The Pennsylvania Public School Employees' Retirement System says it's going to need more than $4 billion annually in additional taxpayer money in the coming years. The pension system said Friday that its projected needs will rise from $617 million this year to $1.1 billion in July, and then hit nearly $4.2 billion in July 2012. Those figures are despite a gain of nearly 9.2 percent on the system's investments for the quarter that ended Sept. 30."

Districts fret as state mulls school funds-- 10%-15% cuts loom as legislators work to wipe out $851M deficit - A dark cloud hangs over Ohio's 613 school districts as a Statehouse showdown over how to plug an $851 million hole in education funding drags on."We're in our ninth year as an excellent district with distinction. Gov. Ted Strickland's administration has estimated that a worst-case scenario could result in cuts of 10 percent this school year and 15 percent in the next.

Texas teachers fund losses will reverberate for years - The worst of the past year's financial upheaval might be over, but the fund that provides retirement benefits to Texas teachers will feel the effects for many years, actuaries said Friday. "There is virtually no way that this state can give ... a permanent increase to your retirees in the foreseeable future," said Michael Carter, an outside actuary for the Teacher Retirement System of Texas. "The depth of what the markets have done in this decade will be felt for probably at least 20 years, and it will impact what this system will be able to do," Carter said, referring to the most recent market decline and the losses that followed the technology industry bust in 2001-02.

State deficit may drain U funds - Last week’s gloomy state financial forecast could mean steep cuts to funding for the University of Minnesota. With a projected state deficit of $1.2 billion for the current biennium and a $5.4 billion deficit looming in 2012-2013, the University could see millions more in state funding cuts in attempts to balance the state budget.

State reducing student aid - Financial aid checks for many Oregon college students will be cut next year because unprecedented enrollment and increased need has outstripped the money available for state grants. This will be the second year in a row that students will receive less aid than the state initially promised them. The Oregon Student Assistance Commission, the agency that manages the Oregon Opportunity Grant, will decide today how much to cut spring term grants to balance the program’s budget.

Director sounding alarm on state's school pensions - A big problem is looming in the state pension system that is going to hit taxpayers hard, and officials can't keep pushing it off, said Mr. Clay, executive director of the Pennsylvania School Employees' Retirement System.The day of reckoning is coming.Tomorrow the PSERS board will vote to increase the 2010-11 employer contribution rate by as much as 75 percent.The worst is yet to come, as the rate may grow by as much as 700 percent over today's rate during the next five years.

Md. retiree health costs spiraling — quietly - No wonder Gov. Martin O'Malley and the legislature are ignoring the $16.3 billion in liabilities Maryland has racked up to finance generous health plans for retired state employees. By one measure, Maryland's burden for future retiree medical costs is the heaviest of any state in the country. A new report shows that the program's unfunded expense grew by $1.3 billion just in the past two years

LA city budget outlook bleak, Council committees propose police cuts - Like those of most cities, L.A.’s tax revenues continue to decline. The city’s already cut $300 million in spending this year by reducing salaries and encouraging early retirements. It still faces a $100 million deficit. Some members of the City Council want more cuts at the police department. The horizon looks even worse for L.A. The city’s number crunchers say escalating employee pension costs and sluggish revenues could put L.A. a billion dollars in the hole within three years.

Phila. $3.8 billion in bonds cut to near junk rating -Philadelphia's $3.8 billion of general obligation bonds and similar debt were reduced to BBB, or two levels above junk, by Fitch Ratings citing the sixth-largest U.S. city's debt, revenue and employee contracts. The downgrade was prompted by weaker-than-forecast financial results for the year that ended June 30, and for the first quarter of the current fiscal year, Fitch said in a report. Fitch removed its negative outlook from Philadelphia.

First-timers cram homeless shelters - The number of people who say they are homeless for the first time is increasing in metro Detroit, spurred by unemployment and foreclosures, experts say. And advocates for homeless people say these first-timers -- many who previously had jobs, cars and homes -- are straining already crowded shelters, having worn out their welcome with family and friends and being unable to come up with money for motel rooms or gas for their cars.

What Makes Cities Great -- NYTimes - Was coal a curse to Pittsburgh? Did cars destroy Detroit? Does the dominance of a single industry destroy the innovation and entrepreneurship of a region? If it does, then the economic crisis may have actually helped New York by enabling the city to avoid an over-concentration in finance. For decades, economists have debated the “ Dutch Disease” and other ailments associated with too much success. The discovery of natural gas in the North Sea supposedly helped to de-industrialize the Netherlands by raising exchange rates and making Dutch manufacturing less competitive internationally. Can some types of prosperity imperil cities as well as countries?

Local governments may have to report billions in extra debt - A federal board that sets accounting standards for local governments is leaning toward requiring that cities and counties report their pension debts in a way that could damage their ability to obtain credit. Staff for the Governmental Accounting Standards Board is eyeing a plan to make municipalities report their pensions’ unfunded liabilities on their balance sheets — which are used by lenders to determine an agency’s financial health. Currently, the unfunded liabialities are listed as footnotes. The change, already required of private financial firms, would add millions of dollars - in some cases billions – in reported debt to cities and counties.

U.S. State Revenue Fell 16% in Fiscal 2008, Census Bureau Says (Bloomberg) -- U.S. state government collections fell 16 percent to almost $1.7 trillion in fiscal 2008 from a year earlier, while spending increased 6.2 percent, according to the U.S. Census Bureau. The biggest drop came in so-called insurance trust revenue, which slid $377.7 billion, or 73 percent, the federal agency reported today. Such funds include public employee retirement systems, unemployment compensation and worker compensation funds, many financed with payroll taxes and other worker contributions, according to the bureau

Federalism and Its Discontents -  A wash in red ink thanks to the worst economic crisis since the Great Depression, state officials chaotically scrambled over the last year to keep their laboratories of democracy from exploding. With state tax revenues plummeting at the steepest rate on record, and with all except Vermont legally bound by balanced budget constraints, most governors and state legislatures were forced to dampen their local economies further by cutting services and raising taxes. The stock market collapse depleted already underfunded state pensions. Federal stimulus relief slightly dulled the pain, which nonetheless remained severe in most populous states. A majority of states cut funding for public health programs for poor, elderly, and disabled residents; reduced aid to K-12 schools and early childhood education; and slashed support for public colleges and universities.  The states are drowning. The best life-preserver that Washington can throw at them is to take over Medicaid.

Calpers Real-Estate Holdings Decline 30% During First Quarter - The California Public Employees’ Retirement System, the largest state-run U.S. public pension, saw the value of first-quarter real estate holdings decline 30 percent and is terminating contracts with some investment firms behind the loss, a consultant for the fund said. The pension fund, with $201.9 billion in assets, will report that its real estate portfolio declined by 30.1 percent during the quarter that ended Sept. 30 and by 48.7 percent from a year earlier, according to a report to be presented to the Investment Committee Dec. 14 by its consultant, Los Angeles- based Pension Consulting Alliance Inc.

Moody's Cuts Calpers, Calstrs Credit-Enhancement Programs --Moody's Investors Service (MCO) downgraded on Thursday credit-enhancement programs run by two huge California pension funds, a move that led to downgrades of bonds issued by entities including the cities of Chicago and New York.  Moody's downgraded the municipal credit-enhancement programs of the California Public Employees' Retirement System, or CalPERS, and California State Teachers' Retirement System, or CalSTRS, to Aa3 from Aaa, citing declining market values in the investment portfolios of both funds.

Economy hurting multi-employer pension plans, survey finds -  Multi-employer pension plans are facing substantial shortages in funding, according to a survey by an employee benefits organization, which is pointing its finger at “the economic crisis” as the catalyst. “The number of plans reporting an endangered or critical status has almost tripled,” said Julie Stich, senior information/research specialist at the International Foundation of Employee Benefit Plans, in a statement. Exactly 73% of multiemployer pension plans failed to meet the designation of safe status, which requires it be at least 80% funded, according to the August survey by IFEBP. This data from the 213 separate plans surveyed is a contrast to last year, when the survey revealed only 25% of plans failed to report a safe status."

Social Security's Grim Milestone: Half a Year in the Red - Data recently made public by the Social Security Administration confirm that in October, 2009, the program reached a grim milestone: six consecutive months of operating cash deficits. This is the first time Social Security has faced this situation over the entire time period, dating back through 1987, for which SSA posts the monthly data online. From May through October inclusive, Social Security’s outgoing payments have exceeded incoming program revenue, generated mostly by the payroll tax (with a smaller amount coming in via the taxation of benefits).  When a cash-deficit situation develops during a period that the program is still technically solvent, full benefits continue to be paid.  The operational deficit is effectively made up with general revenues, putting additional strain on a sagging federal budget

For Older Workers, a Reluctant Retirement - WSJ - Even though the U.S. labor market is showing signs of improvement, with a slowing number of job losses and a drop in the unemployment rate to 10% in November, conditions for older workers continue to deteriorate.The number of unemployed workers ages 55 to 64 has nearly tripled since the recession began, to about 1.6 million of the nation's 15.4 million unemployed as of November, according to the Labor Department. By comparison, the number of jobless workers of all ages has roughly doubled.The share of people age 55 to 64 who are employed -- which has been trending down for the past 18 months -- sank to 59.9% in November, an eight-year low for that month and down from 60.3% in October. The rest either want jobs and can't find them or aren't able or interested in working.

"AARP Is One Big Lie" - According to its own financial statements last year, the AARP took in $773 million in ads and royalties from private insurance companies. This doesn’t sound like some sort of grass roots group of old people doing good for the retired person. AARP is one big lie. They are supporting cuts in Medicare to the tune of $460 billion. Why? Because they collect royalties on the so-called “gap” insurance-the private insurance that Medicare doesn’t cover. The less Medicare, the more private insurance, and thus the more AARP makes

Health Care Deal in the Senate? - Megan McArdle - A lot of outlets are reporting a deal along the following lines:  Medicare buy-in for those 55 or over, some sort of non-profit quasi-public option overseen by the Office of Personnel Management, and a trigger for the public option that is arguably very unlikely to ever kick in.  With Ben Nelson's abortion amendment voted down, and Nelson saying he won't vote for a bill without very similar language, a workable compromise on a public option substitute is necessary to get the 60 votes they need. But Lieberman just sent out the following press release:"My opposition to a government-run insurance option, including any option with a trigger, has been clear for months and remains my position today. "To me, that reads like nothing with a public option trigger is going to pass.

It’s official: Democrats drop opt-out public option - After days of secret talks, Senate Democrats tentatively agreed Tuesday night to drop a government-run insurance option from sweeping health care legislation, several officials said, a concession to party moderates whose votes are critical to passage of President Barack Obama's top domestic priority. In its place, officials said Democrats had tentatively settled on a private insurance arrangement to be supervised by the federal agency that oversees the system through which lawmakers purchase coverage. Additionally, the emerging agreement calls for Medicare to be opened to uninsured Americans beginning at age 55, a significant expansion of the large government health care program that currently serves the 65-and-over population.

Reid Says Deal Resolves the Impasse on the Public Option - NYTimes - Mr. Reid refused to provide details. Other senators said the tentative agreement would sideline but not kill the “public option” championed by President Obama and liberal Democrats in Congress. Under the agreement, people ages 55 to 64 could “buy in” to Medicare. And a federal agency, the Office of Personnel Management, would negotiate with insurance companies to offer national health benefit plans, similar to those offered to federal employees, including members of Congress

Buying Into Medicare -  So now that the public option is dead, Democrats are floating the idea of letting 55-to-64 year olds buy into Medicare.  I'm not sure I understand how this works.  Problem A:  good old adverse selection.  Unlike younger people who are mostly worried about catastrophic accidents, people in this age group are mostly worried about slow-moving diseases like diabetes.  Even with an open enrollment period, people might wait until they got sick. Second problem:  administration.  One of the reasons for Medicare's much-vaunted administrative costs is that they don't need to do the ordinary sorts of customer service things that insurance companies do.  They collect premiums by deducting them from your social security check.  Third problem:  Budget deficits.

The Role of the Young in the Health Care Plan - The Chicago Tribune has an excellent story on the vital role the young play in the proposed reforms of the health care system. It's basically the same role they play in the Social Security system. That may seem cynical, but from what I can see, it's true. Current funds are used to support current spending. The article raises a question in my mind. If young people use marginal analysis with a short time horizon, how might that affect their decision to participate?

Health care loophole would allow coverage limits - A loophole in the Senate health care bill would let insurers place annual dollar limits on medical care for people struggling with costly illnesses such as cancer, prompting a rebuke from patient advocates.The legislation that originally passed the Senate health committee last summer would have banned such limits, but a tweak to that provision weakened it in the bill now moving toward a Senate vote.As currently written, the Senate Democratic health care bill would permit insurance companies to place annual limits on the dollar value of medical care, as long as those limits are not "unreasonable." The bill does not define what level of limits would be allowable...

How Do We Make The Medicare Buy-In Work? - Only a small number of lawmakers are familiar with the intimate details of the compromise and most Democratic senators have “shied away from explaining or defending their Medicare proposal, on the ground that it was being analyzed by the budget office.” But in in the last few days, key moderate lawmakers have expressed newfound skepticism about the plan. While arguments about Medicare underpaying providers and cost shifts to Americans in private coverage are largely overstated, concerns about the viability of the buy-in are certainly valid. For the Medicare buy-in to work as intended, policy makers must ensure that it doesn’t becoming a dumping ground for the sickest Americans.

Moderates uneasy with Medicare plan - Senate moderates who are the linchpin to passing a health care reform bill raised fresh worries Thursday about a proposed Medicare expansion, complicating Majority Leader Harry Reid’s hopes of putting together a filibuster-proof majority for the legislation in the coming days. Two days ago, the Medicare proposal appeared to be the elusive bridge between liberals, who were being forced to give up a public health insurance option, and moderates, who said they couldn’t vote for a bill that included one. But by Thursday, the shine had dimmed, as senators grew restless over a lack of information and declined to commit their votes until they could review the legislative language and the Congressional Budget Office cost estimate. Republicans also stepped up their criticism of the plan.

The New ‘Public Option’ Compromise And How To Improve It - Last night, Senate Democrats reached a deal to replace the opt-out public option in the Senate health care bill with a network of nonprofit insurers administered by the Office of Personnel Management (OPM)— the entity that runs the Federal Employees Health Benefits Program (FEHBP). Americans between the ages of 55 and 64 could also buy into the Medicare program before the exchanges become operational and enroll in Medicare from within an exchange. The Medicare expansion is significant but could also become significantly expensive. “For the period between 2011 and 2014, when the exchanges do open, the Medicare option will not be subsidized–people will have to pay in without federal premium assistance.” “After the exchanges launch, the Medicare option would be offered in the exchanges, where people could pay into it with their subsidies.” . At this point, it’s unknown how many Americans could afford to enroll in the Medicare program, but some back of the envelope estimates provided to the Wonk Room suggest that as many as 4 million Americans could join.

Medicare for 50-Somethings? - Room for Debate Blog - NYTimes Forum - Twelve percent of Americans aged 55 to 64 — 4.3 million people — do not have health insurance, according to the Kaiser Family Foundation. They would be the beneficiaries of a plan being pushed by Senate Democrats as part of the national health care overhaul that would allow people over 55 to buy into the Medicare program at subsidized rates if they can’t find coverage elsewhere. Does this proposal make sense as a way to protect the “near elderly,” especially as these baby boomers lose their health care along with their jobs? Or is it a back-door attempt at providing a public option that is unaffordable and adds further risks to Medicare’s fiscal viability?

The Federal Employee Health Benefits Plan - Walton Francis has a new and very substantive book on health care policy, with the exciting title: Putting Medicare Consumers in Charge: Lessons from the FEHBP.  It starts with a simple premise: During the last half-century, the United States has operated a half-dozen major health-care financing systems in parallel, each operating in its own world, and with only minimal attempts to observe and learn lessons in program A that could be useful in program B.  Francis studies one of these programs, namely FEHBP, in detail.  He portrays FEHBP as "premium support" in contrast to the "defined benefit" approach of Medicare.  On top of it all are competing private insurance plans and the details of the plan you end up with are decided by competition, combined with some regulation.  I now think of FEHBP as a somewhat indirect voucher scheme, albeit with complications.  Francis argues that FEHBP is a better model for health care reform than is Medicare and that FEHBP is better for both offering diverse programs and inducing cost control.

No Free Lunch when It Comes to Bending the Curve -  I want to draw attention to an implicit assumption among many health care reform advocates related to controlling healthcare spending: that if not for the politics involved, it would be fairly easy to rein in costs. That’s because, the argument goes, there is easily identifiable inefficiency in the way we currently spend health care dollars. There are enormous regional disparities in, for instance, per capita Medicare spending. What is more, these differences are apparently unrelated to differences in the health of the underlying populations, and they don’t produce better outcomes. Rather, the differences reflect the ways that health care providers diagnose and treat patients in different parts of the country. Politics aside (the difficulty is that one person’s wasteful diagnostic test is another’s life-saving intervention), I always was suspicious of this argument. If there are excess profits to be made, then why is it that providers in only some parts of the country go after them or successfully extract them?

House-Passed and Senate Health Bills Reduce Deficit, Slow Health Care Costs, and Include Realistic Medicare Savings — Center on Budget and Policy Priorities - PDF of this report (17pp.) - Health reform legislation that has passed the House in one form and is before the Senate in another is facing a series of attacks that, taken together, suggest the legislation would do little to control health care costs and would increase budget deficits. Many of these charges are exaggerated or simply incorrect, based on the Center’s careful analysis of the legislation.

Show workers the money: Rising health costs take a bite out of raises - We've had a pretty good discussion this year on the public option and on "death panels." But for all the hype over health-care reform, we have not done a very good job of talking about the health-care system itself -- in particular, why our system is so expensive. As a result, we're not doing a very good job of fixing it. There's still time to change that, but not much. The doomsaying is by now familiar: Left unchecked, health-care reform will bankrupt our nation. It will grow to consume every dollar of gross domestic product. And Congress isn't contemplating anything nearly radical enough to avert the emergency. The reason is not that people haven't heard grim warnings about the future. It's because they don't understand what's going on in the present. In 2009, the average employer-sponsored health-care plan cost a bit less than $13,500. But virtually no one cut a check for $13,500. Employers generally pay more than 70 percent of their employees' health-care costs. To employees, that seems like a good deal, particularly given how fast costs are growing. A "benefit," as it's called. But health-care coverage is not a benefit. It's a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. Yet workers don't know that. In fact, the information is hidden from them.

The Case for Health Care Reform  -  I believe that America's health care system should be reformed. Medicare is unsustainable. Employer-provided health insurance should never have been instituted in the first place, and it is becoming more dysfunctional every year. I would like to deal with the structural issues that bias our system in favor of specialists, fragmented care, and credentialism. Americans need to learn how to make reasonable judgments about medical procedures that have high costs and low benefits.  None of these problems is addressed by the bills in Congress. This year's health care debate is proof that top-down reform is not going to work. The more the system is politicized, the less likely it is that it will change.

Medicare Cost Shifting: Does it Happen, and How Much? - One of the arguments against letting Medicare bargain down payment rates to below average cost is that providers--especially hospitals--simply shift those costs to someone else.  The proponents of this theory tend to rather overstate the case, implying a nearly 1-for-1 transfer.  The economics are rather more complicated than that.  It is indisputably true that Medicare, on average, pays less than the average cost of caring for its patients. Conservatives often argue that this must mean that someone else is picking up the slack.  But this is not quite true.  The average cost of caring for patients is not the marginal cost of caring for them.     

Get Ready: There'll Be A Price For Health Benefits - Have your checkbooks and credit cards ready. There's a price for health care security. President Barack Obama's overhaul — now looking like it really will happen — should give uninsured Americans options they've never had before. But it won't be a free ride. As with the Medicare prescription drug benefit that passed when Republicans ran Washington, consumers will face a dizzying lineup of health plan choices — with different costs and benefits. The downside: "Sticker shock is going to come to some."

Testing, Testing - Health-care costs are strangling our country. Medical care now absorbs eighteen per cent of every dollar we earn. Between 1999 and 2009, the average annual premium for employer-sponsored family insurance coverage rose from $5,800 to $13,400, and the average cost per Medicare beneficiary went from $5,500 to $11,900. The costs of our dysfunctional health-care system have already helped sink our auto industry, are draining state and federal coffers, and could ultimately imperil our ability to sustain universal coverage.What have we gained by paying more than twice as much for medical care as we did a decade ago? The health-care sector certainly employs more people and more machines than it did. But there have been no great strides in service. In Western Europe, most primary-care practices now use electronic health records and offer after-hours care; in the United States, most don’t. Improvement in demonstrated medical outcomes has been modest in most fields. The reason the system is a money drain is not that it’s so successful but that it’s fragmented, disorganized, and inconsistent; it’s neglectful of low-profit services like mental-health care, geriatrics, and primary care, and almost giddy in its overuse of high-cost technologies such as radiology imaging, brand-name drugs, and many elective procedures.

Private Health Insurers Are on the Way to Controlling Health Care - Robert Reich - The public option is dead, killed by a handful of senators from small states who are mostly bought off by Big Insurance and Big Pharma or intimidated by these industries' deep pockets and power to run political ads against them.  To provide political cover to senators who want to tell their constituents that the intent behind a robust public option lives on, the emerging Senate bill makes Medicare available to younger folk (age 55), and lets people who aren't covered by their employers buy in to a system that's similar to the plan that federal employees now have But we still end up with a system that's based on private insurers that have no incentive whatsoever to control their costs or the costs of pharmaceutical companies and medical providers. If you think the federal employee benefit plan is an answer to this, think again. Its premiums increased nearly 9 percent this year. And if you think an expanded Medicare is the answer, you're smoking medical marijuana.

Aetna Forcing 600,000-Plus To Lose Coverage In Effort To Raise Profits - Health insurance giant Aetna is planning to force up to 650,000 clients to drop their coverage next year as it seeks to raise additional revenue to meet profit expectations. In a third-quarter earnings conference call in late October, officials at Aetna announced that in an effort to improve on a less-than-anticipated profit margin in 2009, they would be raising prices on their consumers in 2010. The insurance giant predicted that the company would subsequently lose between 300,000 and 350,000 members next year from its national account as well as another 300,000 from smaller group accounts.

The Post's Protectionism Strongs Again: It Never Heard of Foreign Doctors - The Washington Post had a front page piece that presents as a problem the possibility that health care reform, by allowing more people to get care, will over-run doctors in rural areas who already have more patients than they can deal with. The piece suggests that changes in medical education, with more focus on primary care physicians, may help the problem down the road, but that for the next decade or so there could be a real crisis.  In fact, it would take much less time to remedy the situation if the United States would adopt free trade policies with respect to physicians' services. If the U.S. had a more open door policy for qualified doctors, we could fill any gap in the supply very quickly.

The Real, the unreal, and the '. . .Ah' - Can lobbyists affect the quality of life? Test the medical waters! A lot of people understand that Congress is trying to cut the Cost of health care in this Country, although they do not understand that this Cost-Cutting refuses to touch the remuneration flowing to the health care industry. I have already proposed more Amendments to the Constitution than the number presently on the books, but We might need another one demanding that each Congressional personage must state for the Congressional Record the amount of political financial aid he has received and from whom who has an interest in the legislation, before he can cast his Vote on any bill or issue. It would mean nothing, though, as the legion of paper built up; the esteemed legislators lacking any sense of shame.

The Most Underreported Health Reform Story - Friday night the Senate gave grudging support to a provision in its health reform bill—the so-called CLASS Act, short for Community Living Assistance Services and Support. People concerned about their long-term care needs could voluntarily join a government plan which would allow them to pay premiums during their working careers. If they become disabled, they’d be entitled to a daily cash benefit, say $50, that would allow them to buy services such as a personal care attendant, home improvements that would let them stay at home, or even help pay nursing home costs. That provision, also found in the House bill, would begin to create a national long-term care insurance plan like those found in some other countries.

Do Americans Want Health Care Reform, or Not? - Polled support for the health care plan wending its way through Congress continues to crash downward in the polls.  And before you say it, it's not just Rasmussen, which has actually been pretty much in the middle of the other polls.  Here's where we stand as of today...For reform advocates, this is not good news.  At 40% approval, it probably passes.  At 30% approval--what Social Security reform enjoyed by the time it imploded--it's not going to no matter how the Senate massages their plan.  Democrats cannot pass a bill this large on a straight party line vote if the only people in the country who want it are Democrats.

Why Do So Many People Hate Health Care Reform? - Megan McArdle - It's pretty clear at this point that any health care reform which passes is going to have more voters against it than for it.  You can argue that voters aren't educated enough and that you can generate good poll numbers for individual components of the plan, but that's not really relevant. Jay Cost thinks risk aversion is a major factor: The final factor is risk aversion. Recent polling has shown that most people are satisfied with the health care system. Rasmussen recently found that 49% rate it as "good or excellent" while just 27% rate it as "poor." He doesn't mention some powerful evidence in favor of his claim:  loss aversion.  People react much more strongly to potential losses than they do to potential gains.

Healthcare Nation - President Obama's critics sometimes say that he is engineering a government takeover of health care or even introducing "socialized medicine" into America. These allegations are wildly overblown. Government already dominates health care, one-sixth of the economy. It pays directly or indirectly for roughly half of all health costs. Medicine is pervasively regulated, from drug approvals to nursing-home rules. There is no "free market" in health care.What's happening is the reverse, which is more interesting and alarming: Health care is taking over government. Consider: In 1980, the federal government spent $65 billion on health care; that was 11 percent of all its spending. By 2008, health outlays had grown to $752 billion — 25 percent of the total, one dollar in four.

Pre-Existing Condition - At present the United States has the unenviable distinction of being the only great industrial nation without compulsory health insurance,” the Yale economist Irving Fisher said in a speech in December. December of 1916, that is. More than nine decades ago, Fisher thought that universal health coverage was just around the corner. “Within another six months, it will be a burning question,” he predicted. Oh, well. What’s a century, give or take?  Health care has been on the docket longer than most Americans can expect to live, with or without it. Let’s take a quick trip back in time.

Tax Rates for Millionaires Continue to Fall - Households with incomes over $1 million paid income tax equal to 22.1 percent of their adjusted gross income in 2007. This is down from 23.4 percent in 2004. And from 30.8 percent in 1996. See the chart below. The 2007 data were just released by the Statistics of Income Division of the IRS.  The main reasons for this decline are: the May 7, 1997 cut in the capital gains rate to 20 percent; the 2001 Bush cut in tax rates (scheduled to expire at the end of 2010); the reduction in the capital gains tax rate from 20 to 15 percent in 2003; and the 15 percent rate available for qualified dividends starting in 2003. In addition to these statutory changes, the decline in the rate over the last few years can be attributed to an increasing share of millionaire income coming in the form of capital gains and dividends.

The Rich Pay Higher Taxes Than the Very Rich - Over at, Martin A. Sullivan makes an interesting observation: While generally the United States personal income tax system is (by design) progressive, at the very top of the income ladder, it is actually regressive.  That is, the richest Americans pay a lower share of their incomes in taxes than the nearly richest Americans.  The following numbers, taken from the Internal Revenue Service, show that once a taxpayer earns about $2 million in annual income, the effective tax rate starts to fall. (This has led Warren E. Buffett to observe that he pays a lower share of his income in taxes than his secretary does.)

Exclusive: IRS hires hundreds for new wealth unit (Reuters) - A new Internal Revenue Service unit set up to catch rich tax cheats hiding their wealth in complex business entities is rapidly taking shape with the hiring of hundreds of employees.The IRS high wealth unit, part of a broader effort to combat international tax evasion, is focusing on "the entire web of business entities controlled by a high wealth individual," IRS Commissioner Doug Shulman told a tax conference this week.Another IRS official told Reuters "hundreds" of people have already been hired to staff the new unit, including some from within the agency."The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals.

Almost 4 Out of 10 Americans Pay NO Income Tax - The Tax Foundation reported last week that more than 143 million individual income tax returns were filed in 2007, and 46.6 million of those returns had a zero or negative tax liability, setting a new record for the number of “non-payers.” This group represented almost one out of every three tax returns filed in 2007 (32.6 percent, see chart above), and reflects tax filers whose exemptions, deductions, and credits wiped out any federal income taxes that would have been due.

Where Do Your Tax Dollars Go? - Wondering where your federal tax dollars go? This chart, from the Center for Budget and Policy Priorities, helps lay out the answer...Here is a comparable chart that the center, a liberal-leaning research organization in Washington, created last spring to illustrate the destination of state tax dollars.

Cap and Trade vs. Taxes - Krugman and Yglesias pile on James Hansen for misunderstanding the carbon tax, but I think they misunderstand his misunderstanding. Hansen’s claim, quite justifiably, is that with a cap reducing your own emissions doesn’t reduce global emissions. Instead, it just gives other people more room to pollute. Hansen also says. Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.

A bad time for carbon tariffs - I DO understand the economic and environmental case for carbon tariffs. It's pretty clear. One country adopts an efficiency enhancing carbon tax or cap-and-trade system, which prices the negative carbon externality. Other things equal, this will lead to displacement of some economic activity to countries that haven't yet priced carbon. This will result in a suboptimal distribution of economic activity and too much carbon being emitted. If you're not sold on the theoretical case for carbon tariffs, read Daniel Gros. Also reflect for a moment on the fact that while Americans tend to think of cabron tariffs as something they'd apply to Chinese imports, they would also be something Europe would apply to imports from America. But then toss out the idea entirely, because it's sure to backfire horrendously

The Pigou Club talks to the Senate - five points:  1. Either a carbon tax or a cap-and-trade program will result in substantially lower economic costs than command-and-control regulations that mandate technologies, fuels, or energy efficiency standards. 2. Given the uncertainty of the future costs of climate policy, a carbon tax is more economically efficient than cap-and-trade. 3. Carbon allowances in a cap-and-trade program would be susceptible to price volatility.4. A carbon tax, in which the revenues are used to offset economically harmful taxes or to pay down our deficit, would substantially lower the cost of climate policy compared to a cap-and-trade program that gives away allowances for free.  5. Given the substantial potential value of offsets, there is a very real concern that offset integrity will not be maintained. This would result in a weakening of the cap, undermining its environmental benefits. Continue reading here.

Econ 101 Analysis of Cap & Trade - graphic analysis of Waxman-Markey

Senators Offer New Climate Proposals - NYTimes - Three Senators released a broadly-worded blueprint of a climate change and energy bill on Thursday afternoon that they believe can win the 60 votes needed to push the bill through next year.The proposal was timed to help persuade delegates to the United Nations climate change conference in Copenhagen that the Senate is serious about passing a climate bill and not mired in a partisan morass. The plan also calls for increased incentives for offshore oil and gas drilling and government support for nuclear power plant construction, provisions designed to win the support of Republicans and moderate Democrats. It also allows for tariffs on goods from countries that do not set strong greenhouse gas emissions limits, as long as such tariffs are compliant with global trade agreements.

New proposal would pay Americans a percent of carbon permits - McClatchy - Against the back drop of global climate change talks in Copenhagen, Sen. Maria Cantwell, D-Wash., will introduce legislation Friday that would take some of the sting out of higher energy bills U.S. consumers may face because of efforts to control greenhouse gases. Rather than the voluminous "cap and trade" bills approved earlier by the House and the Senate Environment and Public Works Committee, Cantwell's bill runs less than 40 pages and has a significantly different approach. Groups and companies ranging from ExxonMobil to Friends of the Earth have shown an interest in her bill.  Cantwell's approach is called "cap and rebate" or "cap and dividend."Under her bill, the federal government would auction off carbon shares to the nation's 2,000 or so fuel producers like coal and oil companies. Every two years, the shares would expire and, over the years, the U.S. government would offer fewer and fewer shares for sale as a way to reduce carbon consumption.Seventy-five percent of the money raised would be rebated directly to U.S. citizens. Cantwell's office estimated that an average family of four would receive a total of about $1,100 a year in the form of tax-free monthly checks

Time for some straight talking on climate change - First, let's get this straight. You cannot cut emissions without a cost. To replace dirty coal fired power stations with cleaner gas fired ones, or renewables like wind let alone nuclear power or even coal fired power with carbon capture and storage is all going to cost money. To get farmers to change the way they manage their land, or plant trees and vegetation all costs money. Somebody has to pay. So any suggestion that you can dramatically cut emissions without any cost is, to use a favourite term of Mr Abbott, "bullshit." Moreover he knows it. The whole argument for an emissions trading scheme as opposed to cutting emissions via a carbon tax or simply by regulation is that it is cheaper - in other words, electricity prices will rise by less to achieve the same level of emission reductions. The term you will see used for this is "least cost abatement".

Emissions ruling adds to US firepower - President Barack Obama has been armed with new ammunition for the Copenhagen summit on climate change following a decision on Monday by the US Environmental Protection Agency authorising a crackdown on greenhouse-gas emissions.The ruling issued by the EPA that carbon dioxide and five other gases pose a danger to human health clears the way for the agency to regulate emissions from large industrial sources without waiting for legislation from Congress. The Supreme Court ruled in 2007 that the Clean Air Act covered greenhouse gases but the endangerment finding was needed before the EPA could regulate them. Following the decision, the EPA will probably introduce regulations on car emissions early next year and then target other sources of greenhouse gases, including coal and chemical plants and oil refineries.The decision to use regulation, rather than legislation, to cut carbon emissions is politically contentious, with many business leaders and Republicans warning it could stifle the economic recovery.

Defining Success for Climate Negotiations in Copenhagen - The fact that President Obama has decided to attend the United Nations climate change negotiations in Copenhagen at the end of the two-week meetings on December 18th, rather than during the previous week on his way to Oslo to receive the Nobel Peace Prize, is important, because it increases – in my mind – the likelihood of a significant outcome from the negotiations.  However, my reasoning – as I explained in a blog post for the Financial Times – is not what most people may think.  It is a matter of what is called “endogeneity” in economics, that is, there is causality in both directions.  That’s a bit cryptic, so let me explain.

US Climate Envoy Claims We Were ‘Blissfully Ignorant’ Of The Greenhouse Effect Until Recently - In a press conference yesterday, the top climate negotiator for the United States, Todd Stern, asserted that the United States does not shoulder a “climate debt” for its historical emissions of global warming, claiming the connection between carbon pollution and the greenhouse effect was unknown until recently. Although Stern said the United States does “recognize our historic role in putting the emissions in the atmosphere that are up there now,” Stern “completely” and “categorically” rejected the concept of “climate reparations,” he said, “people were blissfully ignorant” of the implications of their pollution

Climate protesters descend on Copenhagen - CNN - The largest-ever gathering of climate protesters will assemble in Copenhagen this week for the long-awaited COP15 summit, raising the prospect of clashes with authorities as they attempt to highlight their concerns to world leaders.With up to 50,000 protesters expected to arrive over the 11-day conference, their activities are likely to be as much of a focus as the discussions on climate change taking place within the heavily-guarded venue. While representing a colorful array of perspectives, most of the protesters share a belief that the talks will fail to create adequate proposals for reducing global carbon emissions in time to prevent irreversible climate change.

A silver lining in the climate talks cloud - GLOOM AND doom predictions regarding the global climate negotiations in Copenhagen this week are fundamentally misguided. The picture is much brighter for this international conference aimed at coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012. The best goal for the talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph. This is because of some basic scientific and economic realities.

The century's defining issue: climate change - Economist - COPENHAGEN'S thunder has been stolen by the lingering effects of the global recession. The worst since the 1930s, the global downturn has occupied the mind of policymakers and public alike for most of the past two years, overshadowing other political issues, not the least of which has been climate change. But as dramatic as recent financial and economic events have been, they pale in seriousness to the challenge posed by global warming. People have already put in motion climatic changes unprecedented in human history. Over the course of this century, global temperatures could increase by as much as 6ºC. Sea levels could easily rise by a metre or more. Weather patterns will almost certainly shift, generating damaging floods and droughts, endangering vital ecosystems, and threatening geopolitical stability.

Business must champion low-carbon growth - In Copenhagen over the next two weeks, governments will attempt to hammer out an organisational framework, backed by political commitments, to limit the risks from unchecked emissions of greenhouse gases. Carrying on as we have been risks a rise in global average temperature of 5˚C or above to levels our planet has not seen for more than 30m years. Humans, who have been here for only 200,000 years, have never experienced global average temperatures on this scale. It would be likely to lead to the movement of hundreds of millions of people and extended, severe conflict. Strategies for managing the risks of climate change and for meeting the other great challenge of this century – overcoming poverty – must be intertwined and built together: if we fail on one we will fail on the other.

Will Big Business Save the Earth? - NYTimes - THERE is a widespread view, particularly among environmentalists and liberals, that big businesses are environmentally destructive, greedy, evil and driven by short-term profits. I know — because I used to share that view. But today I have more nuanced feelings. Over the years I’ve joined the boards of two environmental groups, the World Wildlife Fund and Conservation International, serving alongside many business executives. As part of my board work, I have been asked to assess the environments in oil fields, and have had frank discussions with oil company employees at all levels. I’ve also worked with executives of mining, retail, logging and financial services companies. I’ve discovered that while some businesses are indeed as destructive as many suspect, others are among the world’s strongest positive forces for environmental sustainability.

Copenhagen and International Carbon Politics - I must admit that I do not have a good grasp on how nations actually negotiate with each other on such carbon mitigation issues. Nations know their current carbon emissions (so the USA is at 20 tons of co2 per year per-capita) and we know how to multiply numbers. If carbon dioxide has a price of $35 a ton then the average American will face a $700 a year bill to continue to live his "status quo" lifestyle while the average person in China would face a $140 bill. Now, what we don't know is what would be the medium term and long term effects of this pricing on economic growth and carbon mitigation technologies.

Richest Nations Fall Short in First Copenhagen Draft (Bloomberg) -- The first draft agreement for a new climate treaty from the Copenhagen talks calls for world’s richest nations to make far steeper cuts to their greenhouse-gas emissions than they’ve pledged. The plan, obtained by Bloomberg News, says nations including the U.S., Japan and Britain must jointly reduce heat- trapping gases at least 25 percent by 2020. Their current proposals amount to an estimated 10 percent-to-17 percent drop. “It’s going to be a tense negotiation over emissions cuts for developed countries” during the rest of the talks, Jake Schmidt, international climate policy director for the Natural Resources Defense Council, a New York-based environmental group, said in an interview in Copenhagen.

Why the EU needs a border tax on carbon -VoxEU - The costs and benefits of carbon tariffs have been extensively discussed in terms of competitiveness and carbon leakage. This column says global welfare should be the focus. EU tariffs against developing country exports would increase global welfare and the proceeds from the tariff could help poorer exporting countries reduce the carbon intensity of their economies.

Kick-starting the green innovation machine - VoxEU - Mitigating climate change while maintaining economic growth will require a wide portfolio of technologies. This column says too little has been done to turn on the “green innovation machine”. It says governments in developed economies should price carbon, subsidise research, and facilitate technology transfer to developing countries.

Copenhagen Can Jumpstart Twenty Million Low-Carbon Jobs In An Interconnected World - International pursuit of low-carbon policies has the potential to create twenty million jobs between now and 2020 in low-carbon energy in eight of the world’s leading economies — including the United States, China, India, and the United Kingdom. The report—”Low-Carbon Jobs in an Interconnected World“—comes from the Global Climate Network, a unique alliance of influential think tanks, including the Center for American Progress, that is coordinated by the Institute for Public Policy Research in London.

Russia's Carbon Credits Seen as Barrier to Warming Curb - That was the headline of Tuesday's New York Times article by James Kanter.  It turns out that the collapse of heavy industry in Russia in the 1990s has given it the world's largest stock of credits to offset carbon emissions under the Kyoto Treaty. Would Russia really dump its credits on the market and drive carbon emissions prices to zero, effectively lifting carbon emissions caps around the world?

Per Capita Emissions Are a Big Deal - Any news article discussing the arguments over limits on greenhouse gas (GHG) emissions that doesn't discuss per capita emissions deserves to be thrown in the waste basket. It is impossible say anything meaningful about the debate without pointing out, for example, that the United States emits approximately four times as much per person as China and about ten times as much as India. However, but not discussing per capita emissions, the NYT and other news outlets are concealing what is really at issue in these discussions.

Breaking the climate stalemate? - VoxEU - China and other key developing countries must participate for any global carbon deal to succeed, but they make a strong case for a free pass. What can be done? This column says that they could commit now to accept pre-specified future emission reduction targets in order to effectively address these concerns.

Feeling like a rant this morning...Since Copenhagen started, all the self-centered groups with pet solutions for solving climate change have come out of the woodwork: Invest in renewables, reduce deforestation, become vegetarians, global one-child policy, invent a Dyson carbon-sucker-upper (OK, I made that one up). I have my own pet solution that could make all of these groups happy (stop laughing, I'm sure there is something out there that could make a vegetarian happy): How about a global price on carbon? Groundbreaking. I know. Make sure you spell my name right on the Nobel nomination.

India rejects Tuvalu's call at Copenhagen - India has hit back at Tuvalu during international climate talks in Copenhagen following the Pacific Island nation's insistence on a legally-binding agreement to cut carbon emissions.A number of small African and Pacific countries supported Tuavlu's call for amendments to the Kyoto Protocol that would force emerging economies to accept a legally binding treaty to slash CO2 pollution, starting in 2013. Fifteen large countries including India, China and Saudi Arabia are against the amendments.

Poll: Average citizens in China, Vietnam, Indonesia favor action on climate change, even if there are costs  - More than 13,000 people in 15 nations (most of which are developing countries) were asked a variety of questions, including whether climate change should be a concern, its urgency and what their governments should do about it. The poll also gives us a glimpse of what people in some East Asian countries – including Vietnam, China and Indonesia – think about climate change.Overall, the majority of people polled said they want their government to take steps to fight climate change – even if that means an economic cost to their country. Some of the largest majorities of people who answered this way were in low-income countries, including Vietnam.

Financing the Fight against Climate Change - George Soros - It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. Funds are needed to invest in new low-carbon energy sources, reforestation and protection of rain forests, land-use changes, and adaptation and mitigation. But there is no similar agreement on where the money will come from.  The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts, and they still need to stimulate their domestic economies. Developed countries’ governments are laboring under the misapprehension that funding must come from their national budgets. But that is not the case. They have the money already. It is lying idle in their reserve accounts at the International Monetary Fund. Spending it would not add to any country’s fiscal deficit. All they need to do is to tap into it.

Climate Scientists Around The World Debunk Wall Street Journal ‘Stalinist’ Screed - On Tuesday, the Wall Street Journal published a bizarre and vile screed by editor Bret Stephens, who compared climate scientists to anti-Semites and Stalinists, furthering the descent of the Climategate swiftboating campaign into parody. The Wonk Room has the exclusive responses to the charges Stephens made from several of the thousands of scientists working to understand the dynamics of our climate system. These scientists are participating in the American Geophysical Union’s Climate Science Q&A for Copenhagen program.  These scientists refute the charges that they are guilty of “utopianism,” “anti-humanism,” “intolerance,” and “indifference to evidence.” Their responses may be summed up by that of David S. Stevenson, a University of Edinburgh climate scientist: “Mr. Stephens is missing something here, and it is called a scientific understanding of the climate system.”

Climate rage - Krugman - Digby asks why the anti-climate-change types are so angry, then approvingly links to Amanda Marcotte, who says that it’s all about annoying liberals. The rage, by the way, is amazing. Nothing gets me as many crazed emails and comments as any reference to climate change. The anti-global-warming people are just filled with hate for anyone who suggests that maybe, just maybe, the vast majority of scientists are right. And that in turn suggests that annoying liberals isn’t the whole story; no, they’re not enjoying themselves. What I think is that we’re looking at two cultural issues. First, environmentalism is the ultimate “Mommy party” issue. Real men punish evildoers; they don’t adjust their lifestyles to protect the planet. (Here’s some polling to that effect.) Second, climate change runs up against the anti-intellectual streak in America.

Planet Worth - Goldman Sachs bets on global warming - Of all the different industry groups scrambling to shape climate policy in Washington--from electric utilities to Detroit automakers--one stands out as a bit unexpected: Wall Street. Financial giants like Goldman Sachs and JP Morgan have enlisted, all told, more than 100 lobbyists to roam the Capitol and influence the debate over how to curb greenhouse gases. There’s a reason for that: Any cap-and-trade bill that puts a limit on emissions and allows polluters to buy and sell permits will create a vast carbon market. That will mean new opportunities for financial firms to broker deals, package carbon offsets, or offer hedging instruments. And that, in turn, will mean profit. Little wonder that investment banks have been bulking up their carbon-trading desks in recent years.

Why there's no sign of a climate conspiracy in hacked emails - Forget about the temperature records compiled by researchers such as those whose emails were hacked. Next spring, go out into your garden or the nearby countryside and note when the leaves unfold, when flowers bloom, when migrating birds arrive and so on. Compare your findings with historical records, where available, and you'll probably find spring is coming days, even weeks earlier than a few decades ago. You can't fake spring coming earlier, or trees growing higher up on mountains, or glaciers retreating for kilometres up valleys, or shrinking ice cover in the Arctic, or birds changing their migration times, or permafrost melting in Alaska, or the tropics expanding, or ice shelves on the Antarctic peninsula breaking up, or peak river flow occurring earlier in summer because of earlier snowmelt, or sea level rising faster and faster, or any of the thousands of similar examples

Scientists: Decade Of 2000s Was Warmest Ever - It dawned with the warmest winter on record in the United States. And when the sun sets this New Year's Eve, the decade of the 2000s will end as the warmest ever on global temperature charts. Warmer still, scientists say, lies ahead. Through 10 years of global boom and bust, of breakneck change around the planet, of terrorism, war and division, all people everywhere under that warming sun faced one threat together: the buildup of greenhouse gases, the rise in temperatures, the danger of a shifting climate, of drought, weather extremes and encroaching seas, of untold damage to the world humanity has created for itself over millennia.

Earth more sensitive to carbon dioxide than previously thought - In the long term, the Earth's temperature may be 30-50% more sensitive to atmospheric carbon dioxide than has previously been estimated, reports a new study published in Nature Geoscience. The results show that components of the Earth's climate system that vary over long timescales -- such as land-ice and vegetation -- have an important effect on this temperature sensitivity, but these factors are often neglected in current climate models.

Arctic threats and challenges from climate change - Rising temperatures are causing the Arctic's ice sheets to melt, opening the door for an economic boom in the region but also posing a major threat to the survival of its indigenous peoples.The mercury is rising twice as fast in the Arctic as elsewhere, offering a frightening preview of what the future holds for the planet and prompting UN Secretary General Ban Ki-moon to describe the situation as "a canary in a coalmine."In what is the most visible effect of global warming, the melting ice cap shrank to a record low of 4.1 million square kilometres (1.58 million square miles) in September 2007. It risks disappearing entirely in the summer months by the end of this century, according to experts

Melting Himalayan glaciers threaten 1.3 bln Asians - More than a billion people in Asia depend on Himalayan glaciers for water, but experts say they are melting at an alarming rate, threatening to bring drought to large swathes of the continent.Glaciers in the Himalayas, a 2,400-kilometre (1,500-mile) range that sweeps through Pakistan, India, China, Nepal and Bhutan, provide headwaters for Asia's nine largest rivers, lifelines for the 1.3 billion people who live downstream.But temperatures in the region have increased by between 0.15 and 0.6 degrees Celsius (0.27 and 1.08 degrees Fahrenheit) each decade for the last 30 years, dramatically accelerating the rate at which glaciers are shrinking.

BBC - Glacier threat to Bolivia capital - Scientists monitoring the glaciers high in the Andes mountains - a key source of water - say the ice is showing signs of shrinking faster than previously forecast.  Researchers say that the glaciers are in dramatic retreat across the tropical regions of the Andes. When the rate of melting is faster than the accumulation of snow, the glaciers lose mass and no longer produce a steady flow of water. Faced with a booming population and a combination of glacial retreat and reduced rainfall, the governor of the La Paz region is even contemplating moving people to other parts of Bolivia. Water is already in short supply among the poorest communities and has become a cause of tension.

Climate pledges 'sending world towards 3.5 C rise' - Current pledges from rich and developing nations for cutting carbon pollution will stoke potentially catastrophic warming by century's end, according to a study released on Sunday on the eve of the Copenhagen climate summit. National commitments proposed so far for the December 7-18 UN conference would mean the global temperature would rise by 3.5 degrees Celsius (6.3 degrees Fahrenheit) over pre-industrial times, way over a 2.0 C (3.6 F) threshold widely considered safe, the study said. Concentrations of carbon dioxide (CO2) would hit about 650 parts per million (ppm), according to the tally published by the Potsdam Institute for Climate Impact Research in Germany and energy specialists Ecofys."The pledges on the table will not halt emissions growth before 2040, let alone by 2015"

Financial Post: The Whole World Needs China's One-Child Per Family Policy - The Financial Post has an interesting solution for the global climate change crisis: All countries should adopt China's one-child policy.Not exactly a modest proposal, the fact that this proposition is coming from such a mainstream publication is rather surprising. From the article: China has proven that birth restriction is smart policy. Its middle class grows, all its citizens have housing, health care, education and food, and the one out of five human beings who live there are not overpopulating the planet. For those who balk at the notion that governments should control family sizes, just wait until the growing human population turns twice as much pastureland into desert as is now the case…

”The UN’s future scenarios for climate are pure fantasy” - The first time that we published a report discussing the IPCC’s emissions scenarios was in 2003 when my student Anders Sivertsson presented his diploma thesis (Study of World Oil Resources with a Comparison to IPCC Emissions Scenarios). Both New Scientist (read article) and CNN (read the news article) drew attention to this work. Those responsible for the IPCC report on emission scenarios dismissed our work with the comment/excuse that too much coal exists. Some thought that I should not discuss this question since it does not benefit the climate debate. In the autumn of 2007 I was asked by the OECD whether I could write a report on future oil production. During this work the task was expanded such that I should also write a report on future emissions of carbon dioxide from fossil fuels (read the report). In May 2008 during the World Transport Forum in Leipzig I had the opportunity to deliver my report in person to Rajendra Pachuri, the current chairperson of the IPCC. Of course, I expected that the IPCC would subsequently want to contact me but they have been completely silent. The Swedish representative for the IPCC has received the report, as have political parties, individual politicians and other influential people around the world – the report is accessible for all. However, nobody appears to have reacted. It seems as though one may not criticise the IPCC.

The peak-oil debate: 2020 vision - The Economist - FATIH BIROL, the chief economist of the International Energy Agency (IEA), believes that if no big new discoveries are made, “the output of conventional oil will peak in 2020 if oil demand grows on a business-as-usual basis.” Coming from the band of geologists and former oil-industry hands who believe that the world is facing an imminent shortage of oil, this would be unremarkable. But coming from the IEA, the source of closely watched annual predictions about world energy markets, it is a new and striking claim. Despite repeated downward revisions in recent years in its forecasts of global oil supply in 2030, the IEA has not until now committed itself to a firm prediction for when oil supplies might cease to grow. Its latest energy outlook, released last month, says only that conventional oil (as opposed to hard-to-extract sources like Canada’s tar sands) is “projected to reach a plateau sometime before” 2030.

The Human Ecology of Collapse, Part One: Failure is the Only Option - It seems to me that a great deal of the confusion that grips the peak oil scene, and even more of the blind commitment to catastrophically misguided policies that reigns outside peak-aware circles, comes from a failure to ask the right questions. A great many people aware of the limits to fossil fuels, for example, have assumed that the question that needs answering is how to sustain a modern industrial society on alternative energy. Ask that, though, and you’re back in the Waste Land, because any answer you give to that question is wrong. The question that has to be asked is whether a modern industrial society can exist at all without vast and rising inputs of essentially free energy, of the sort only available on this planet from fossil fuels, and the answer is no. Once that’s grasped, other useful questions come to mind – for example, how much of the useful legacy of the last three centuries can be saved, and how – but until you get past the wrong question, you’re stuck chasing the mirage of a replacement for oil that didn’t take a hundred million years or so to come into being.

The price of oil and the macroeconomy - VoxEU - In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements. This column attributes the difference in the US to more flexible labour markets and more credible monetary policy during the Great Moderation.

Refinery Closures Push Gasoline Infrastructure To The Breaking Point - I found out that there are really two parallel pipelines. One carries only gasoline products; the other carries distillate products. The line that is running short of capacity is the gasoline pipeline. (If only one is running short of capacity, it is not too surprising that it is the gasoline line. Distillate products like diesel fuel are now in very abundant supply; gasoline is at closer to normal levels.)When I asked why demand was so high for gasoline pipeline capacity, one of the reasons mentioned was that shutdowns in refinery capacity in the Northeast were causing more demand for Gulf Coast gasoline. (If a refinery closes, it presumably will stop importing crude oil, and will also stop producing finished products such as gasoline and diesel. This supply needs to be replaced somewhere else.)In checking in the news, I see two different refineries recently mentioned with shut downs

Mexico Has Hedged Oil for 2010 at $57 a Barrel (Bloomberg) -- Mexico spent $1.172 billion to buy oil hedges for 2010, covering a possible revenue shortfall if production falls for the sixth straight year and prices don’t recover from about a five-year low. Mexico purchased put options that give it the option, not the obligation, to sell its oil for $57 a barrel next year, the Finance Ministry said in an e-mail statement today. “We want this as an insurance policy,” Finance Minister Agustin Carstens said in New York today. “If we don’t collect any resources from this transaction it’s OK because that means oil would have been above $57 a barrel.” Mexico lost out on 300 billion pesos ($23.3 billion) of oil revenue this year as production at state-owned Petroleos Mexicanos fell at the fastest rate since 1942 and crude prices fell about half since a record $147.27 a barrel in July 2008..

China ready to invest $50 billion for Nigeria oil - China is ready to invest USD50 billion to acquire 6 billion barrels of Nigerian oil reserves in a proposal made in June, a sum which could help the OPEC member fund its joint ventures with oil majors, a top adviser said. Several state-run Chinese oil firms, including CNOOC, are in talks with Nigeria about Beijing's search for proven oil reserves, which include incursions into some oil blocks held by Royal Dutch Shell, ExxonMobil and Chevron. "The application was to acquire reserves of 6 billion barrels which we are currently discussing. They are prepared to spend as much as USD50 billion," Emmanuel Egbogah, Nigeria's presidential adviser on energy, told reporters in New Delhi

BBC - China's economic recovery gathers pace - China has shown further signs of economic recovery with factory output surging and its export slump easing.Industrial output in November rose to its strongest position since June 2007, rising 19.2% from a year earlier. Consumer prices also grew year-on-year in November for the first time in 10 months. The index rise of 0.6% beat analysts' expectations of 0.4%. November's year-on-year fall in exports of 1.2% was the slowest of 2009, although growth had been expected. Imports rose 26.7% in November from a year earlier. This meant the country's trade surplus - the difference between imports and exports - narrowed to $19.9bn in November compared with $24bn in October.

Recession Elsewhere, but It’s Booming in China - NYTimes - For the first time, Chinese will buy more cars this year than Americans. Demand is so high that drivers put their names on long waiting lists for the most popular models. And it is not just cars. For more and more consumer goods, China is surpassing the United States as the world’s biggest market — from cars to refrigerators to washing machines, even desktop computers. .China is pulling ahead at this particular moment partly because Americans, debt-laden and worried about their jobs, are pulling back. After decades of gorging on consumption, Americans are saving. And the Chinese, whom economists thought were addicted to saving, are spending more. Among China’s 1.3 billion people, rising incomes are finally making large numbers of Chinese prosperous enough to make big-ticket purchases.

The difficult arithmetic of Chinese consumption - How fast does consumption need to grow in China in order for a meaningful rebalancing to take place? Probably a lot more than you think. This is arithmetically the case because China is starting from such a low base.At roughly $1.2 trillion in 2008, total Chinese private consumption is only a little more than that of France (around $1.0 trillion) and still less than that of Germany (about $1.3 trillion, not to mention the UK’s $1.4 trillion and Japan’s $3.2 trillion). This fact alone should cause us to be extremely skeptical of feverish claims about the role Chinese consumers can play in making up for any contraction in US consumption – which at roughly $9.4 trillion last year is nearly eight times the size of China’s – without even taking into account that Europe and Japan are likely to exacerbate, rather than help absorb, the contraction in US net demand.

China's leaders vow to keep stimulus, easy credit - BusinessWeek - China's leaders vowed Monday to keep economic stimulus and easy credit policies in place, while also improving the quality of the country's often chaotic economic growth.An annual economic strategy meeting, presided over by President Hu Jintao and Premier Wen Jiabao, ended as expected with calls to ensure China's recovery from the global crisis remains stable, the official Xinhua News Agency said in dispatches posted on the government's main Web site. Officials attending the three-day Central Economic Work Conference in Beijing agreed the global slowdown had added to the urgency for China to adjust its model of economic growth, which many economists say is excessively dominated by state-led industries at the expense of consumer demand.

China Lending Boom May Hamper Banks’ Asset Quality, BIS Says - (Bloomberg) -- China’s lending boom may erode the quality of bank balance sheets as a jump in lending was “unavoidably” linked to an easing of credit standards, the Bank for International Settlements said. “While strong loan growth in China has fuelled the current economic recovery, it is not without risks,” the Basel, Switzerland-based BIS said in a quarterly report published today. The credit expansion “raised concerns about excessively loose credit conditions.” The warning underscores a need for higher loss provisions at the nation’s lenders that China’s financial regulator has already identified. The agency is pushing banks to raise ratios of reserves to non-performing loans to 150 percent by the end of this year, according to the BIS.

China Curbs Property Speculators, Boosts Consumption (Update1) - (Bloomberg) -- China scrapped a tax break on property sales and extended subsidies for auto and home appliance purchases, seeking to cool speculation while sustaining a recovery in the world’s third-largest economy. The State Council will re-impose a sales tax on homes sold within five years after cutting the period to two years in January, the cabinet said in a statement yesterday. The government will scale back some tax breaks for car buyers, while continuing to fund vehicle purchases in rural areas. China’s property prices rose in November at the fastest pace in 16 months, a government survey showed today, reinforcing concern that record lending and a $586 billion stimulus package may lead to asset bubbles.

Why China’s exchange rate policy concerns us - A country’s exchange rate cannot be a concern for it alone, since it must also affect its trading partners. But this is particularly true for big economies. So, whether China likes it or not, its heavily managed exchange rate regime is a legitimate concern of its trading partners. Its exports are now larger than those of any other country. The liberty of insignificance has vanished. Naturally, the Chinese resent the pressure. At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China.

Making Room for China,-  China’s undervalued currency and huge trade surplus pose great risks to the world economy. They threaten a major protectionist backlash in the United States and Europe; and they undermine the recovery in developing and emerging markets. Left unchecked, they will generate growing acrimony between China and other countries. But the solution is not nearly as simple as some pundits make it out to be.  Listen to what comes out of Washington and Brussels, or read the financial press, and you would think you were witnessing a straightforward morality play. This story casts China’s policymakers in the role of evil and misguided currency manipulators, who, inexplicably, choose to harm not only the rest of the world, but their own society as well. In fact, an appreciating renminbi would likely deal a serious blow to China’s growth, which essentially relies on a simple, time-tested recipe: encourage industrialization.

Sit back and relax: the US and China, this is gonna take a while - China exported its way to a $2 trillion dollar fortress of F/X reserves ($USD mostly), while the US borrowed its way into a hole deep enough to spark a vast global recession. Who's to blame? Given the symbiotic relationship in the chart above, it's hard to blame any one individual, group, or even country. But blame we do. Martin Wolf, at the Financial Times, wrote an interesting article about the need for a "co-operative adjustment" of global current account deficits and surpluses. He argues the following:  China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression.

The US-China Trade War Is Here - China has slapped protective tariffs on American and Russian steel imports.This is truly a striking development given that its usually China who is accused of dumping steel in other nations. It's also hard to imagine how American and Russian steel could have a lower cost-basis than local Chinese products given their higher transportation and labor costs.  XInhua: China said Thursday investigations showed the United States and Russia had dumped oriented electrical steel on the Chinese market, and the United States had subsidized the exports. The dumping and subsidies have caused substantial damage to the domestic industry, and China will charge deposits on the imports from the two economies from Friday, according to an initial ruling issued by the Chinese Ministry of Commerce (MOC).

The surprisingly steep decline in world trade - The fact that China's smart money is now looking inward and avoiding the sector that brought it so much growth in recent years highlights a surprising and spreading new trend: deglobalization. For the last few decades, goods, services, and people have been whizzing around the world at ever-greater speeds and over ever-greater distances. The presumption was that globalization was the most efficient way to organize the world's economic affairs. But now comes the backlash, motivated by economics, politics, and the shift of wealth from West to East.

China Turns To Madison Ave For An Image Makeover - Plagued by recalls of toxic toys, poison pet food and other products, and facing rising trade barriers for its exports, China is taking a page from the American corporate playbook. It has hired a Madison Avenue ad agency to help burnish its image. In what is believed to be Beijing's first global ad campaign, a television commercial now airing on CNN in the U.S., Asia and Europe portrays satisfied consumers enjoying Chinese-made goods. It also touts the notion that China's manufacturing prowess benefits nations around the globe.

Forget the BRICs - The Economist - RUSSIA was never an emerging market in the same mold as Brazil, China, and India, but the differences between the former and its acronymous partners have become crystal clear during the global recession. China's statistics bureau reported today that Chinese industrial production grew by 19.2%, year-over-year, in November. Imports were up nearly 27%.  And at present, China's output growth in the third quarter was clocked at 8.9%. Russia's output also shifted 8.9%, year-on-year, in the third quarter. The shift just happened to be in the other direction.  Forget the BRICs; Russia and Eastern Europe are forming their own exclusive club—of economies literally decimated by the financial crisis and global downturn.

Hoover Institution - How China Won and Russia Lost - The results in each country could not have been more different. Chronically depressed Chinese agriculture began to blossom, not only for grain but for all crops. As farmers brought their crops to the city by bicycle or bus, long food lines began to dwindle and then disappear. The state grocery monopoly ended in less than one year. Soviet Russian agriculture continued to stagnate despite massive state subsidies. Citizens of a superpower again had to bear the indignity of sugar rations.
These two examples point to the proper narrative of reform in Gorbachev’s Russia and Deng Xiaoping’s China. Our narrative contradicts much received doctrine. The standard account is that China succeeded because a wise party leadership deliberately chose gradualism, retained the monopoly of the Communist Party after rebuffing democracy at Tiananmen Square, and carefully guided the process over the years. The narrative says that Russia failed because the tempestuous Gorbachev ignored the Chinese reform model, moved too quickly, and allowed the party monopoly to fall apart. This standard account is incorrect

All is not well in the Ukraine - Spraying in Russia by airplanes - Ukraine - Well the Ukraine seems to be in total chaos the government does not have a lot to say about what is happening in the Ukriane. We only get stats and a few numbers every day, other than that they seem to be silent.The new statistics and numbers show that 41 659 people got infected since the day before yesterday. That means that almost 100 000 people got infected in two days. Today's statistics are not there yet but looking at what happened from the 2nd to the 3rd we see that 452 people have now died in the Ukraine because of this plague / H1N1 spreading there.The total of number of infections grew to 1 978 951. That is almost 2million people now infected in the Ukraine.Now in Russia we are seing the same thing happening. People in Russia call it plague because the H1N1 usually dont have these symptoms. On the 3rd of December they were supposedly going to spray with airplanes and helicopters to "disinfect" the place. People were told to close their windows and boil their water before drinking it. This is exactly what happened in the Ukraine. Days before the outbreak airplanes sprayed a mysterious substance over the Ukraine.

AFP: Ukraine wants 2 billion dollars from IMF: officials - Ukraine on Friday appealed to the International Monetary Fund for a loan of around two billion dollars to overcome an "extremely difficult" financial situation, government officials said.The cash would be half of the next tranche of Ukraine's 16.4-billion-dollar standby credit from the IMF that was agreed last year, Natalya Lysova, spokeswoman for Deputy Prime Minister Grigory Nemyria, told AFP."It amounts to around 2 billion dollars," she said.Lysova confirmed comments made by Nemyria to the Financial Times published Friday afternoon describing Ukraine's current financial situation as "extremely difficult," without giving further details.

We have entered the moment when the Greek crisis is turning dangerous -  Eurointelligence - After S&P’s downgrade warning came Fitch’s downgrade decision. Greek sovereign bonds are now rated BBB+, with a negative outlook, and we are getting into a position of negative feedback loops, where downgrades raise the interest rates, which in turn makes further downgrades more likely. Spreads yesterday rose to over 220bp – still below the peak earlier this year, but up from the 170bp level early last week. The EU, according to Bloomberg, is “ready to assist” Greece, but they don’t mean assisting in bailout, but assisting in helping the Greek government correct the deficit. In other words, the EU is putting additional pressure on the Greek government. A very good analysis of the funding situation of Greek banks is in FT Alphaville

Greece put on standby for debt downgrade  - Fears over the solvency of Greece reached a new level on Monday night as Standard & Poors put the country's debt on notice for an imminent downgrade. The agency placed the country on credit watch negative, meaning it is likely to lose its A- rating within months.The news pushed interest rates on Greek bonds to their highest levels in seven months

Greece Threatens Bankruptcy, And the Eurozone - There's a lot of talk about the declining dollar, but we might better be worrying about the euro.  Greece may finally be reaching the end of its ability to borrow at any price, and what the eurozone does about this crisis--the EU is statutorily forbidden to intervene--may determine whether the euro ultimately survives. The government has borrowed more than 110 percent of the country's economic output over the years, and if investors lose confidence in the bonds, a meltdown could happen as early as next year. That's when the government borrowers in Athens will be required to refinance €25 billion worth of debt -- that is, repay what they owe using funds borrowed from the financial markets. But if no buyers can be found for its securities, Greece will have no choice but to declare insolvency -- just as Mexico, Ecuador, Russia and Argentina have done in past decades.

Ireland, Greece May Exit Euro Region in 2010, Standard Bank Says (Bloomberg) -- Greece and Ireland are among countries in an “intolerable” economic situation that may lead to bailouts and exits from the euro region before the end of 2010, according to Standard Bank Plc. The absence of a mechanism to permit so-called fiscal transfers within the 16-nation region may undermine the exchange-rate system, said Steve Barrow, head of Group of 10 foreign-exchange strategy at the bank in London. Concern some nations will need to be rescued may drive the premium investors demand to hold 10-year Greek debt instead of benchmark German bunds to 400 basis points next year, from 214 basis points today, he said. The Irish premium may also jump

'No chance' Ireland will be forced out of monetary union - - - THE Department of Finance has rubbished a claim by Standard Bank that Ireland could be heading for an exit of the euro currency.In a report out yesterday, Standard Bank said that Ireland -- along with Greece -- was among several countries in an "intolerable" economic situation that might lead to bailouts or even an exit from the euro area by the end of next year. But the Department of Finance said the Standard report was an example of completely uninformed comment, adding that there's "no chance" we would leave the euro.

Ireland Faces ‘More Pain’ on Continued Spending Cuts (Bloomberg) -- Ireland faces “more pain” after the government pledged to continue cuts to help calm investor concern that the country will struggle to pay its bills. Finance Minister Brian Lenihan, who announced pay cuts for teachers, nurses and police in his 2010 budget late yesterday, will reduce current spending by a combined 6 billion euros ($8.8 billion) over the next two years. He’s aiming to narrow the deficit to 2.9 percent of gross domestic product by 2014 from 11.7 percent this year.

President Sarkozy is absolutely right. The City has to be cut down to size - Nicolas Sarkozy has had buckets of British ordure poured over his head for his attack on the "excesses of freewheeling" Anglo-Saxon financial capitalism, asserting that the European economic model has not led to the same mistakes, and for calling for the British to adopt some good old-fashioned EU regulation. He is a little Napoleon trying to do down our greatest national asset, it is declared. He must be resisted to the last. Unfortunately for his British critics there is a small problem. Sarkozy is largely right. The City of London is now too big and too risky for a country our size.

The Real Lost Decade: Japanese GDP Edition - While EconomPic had stated that each of the last two quarter's figures looked "odd" (see Q2 and Q3 posts), there was NO clue that it was due to massive errors in their estimates. Trying to ignore this, the broader issue is what this all means with regards to the Japanese economy. Even with massive stimulus, the country can not "eek" out a positive nominal GDP print and is becoming closer and closer to the brink every month. How bad? Over the last ten years, the Japanese economy has SHRUNK in nominal terms... that is in Yen, the Japanese economy produces less now than it did 10 years ago. (GDP growth - chart)

Japan May Ban Manufacturers From Hiring Temporary Employees. - Japan may ban manufacturers from hiring temporary workers, Health and Labor Minister Akira Nagatsuma said, as Prime Minister Yukio Hatoyama seeks to fulfill a campaign pledge to shift more employment to full time. The government is preparing legislation “that will stop manufacturing firms from employing temps and encourage them to hire full-timers,” Nagatsuma said yesterday

Japan unveils $81 billion economic stimulus TOKYO (Reuters) - Japan's government agreed on a $81 billion stimulus package on Tuesday, aimed at preventing the economy from tipping back into recession as deflation persists and a strong yen threatens exports. Economists said the 7.2 trillion yen plan, equal to about 1.5 percent of gross domestic product, would not provide a significant lift to an economy dependent on overseas demand for machinery, electronics and cars.While several other economies are already debating phasing out economic stimulus deployed to fight the financial crisis, Japan continues to struggle amid chronically weak consumer demand and falling prices.

India's Growth Surge Joins China's - In N Asia we have China booming, Japan stuttering, S Korea, perhaps heading that way, and Taiwan growing. In SE Asia, Indonesia is doing well, Thailand, Malaysia and Singapore are emerging from the slump. In SW Asia we have India surging, Pakistan in trouble, Bangladesh nowhere and Sri Lanka mired in a post civil war mess. But the strength of the Asian rebound is now firmly pinned on China in the north and India in the south west.

India’s Wholesale Food Prices Rise at Fastest Pace in 11 Years - (Bloomberg) -- India’s wholesale food prices rose at the fastest pace in 11 years, underscoring the central bank’s concern that it may need to use monetary policy to stabilize inflation expectations. An index of food articles compiled by the Commerce Ministry increased 19.05 percent in the week ended Nov. 28 from a year earlier, following a 17.47 percent gain in the previous week. A measure of fuel and electricity prices rose 0.06 percent, the first increase this year, the ministry said in a statement in New Delhi today. The Reserve Bank of India is seeking a balance between supporting a nascent economic recovery and keeping inflationary pressures under control.

Food prices on the rise again, reports UN agency - 2009 – Global food prices are on the rise again, the United Nations Food and Agriculture Organization (FAO) reported today, with the agency’s Food Price Index registering four straight months of increases.According to FAO’s latest Food Outlook, the Index – a food basket composed of cereals, oilseeds, dairy, meat and sugar – averaged 168 points in November, the highest since September 2008.However, that is still 21 per cent below its peak in June 2008, the agency said in a news release. Prior to the surge in prices in 2007-2008, the Index never exceeded 120 points and, for most of the time, was below 100 points. FAO added that current market conditions are different from those that triggered the food price crisis that started two years ago.

BBC News - South Korea in $10bn Ghana homes deal - A South Korean firm has agreed to build 200,000 homes in Ghana over the next six years at a cost of $10bn (£6.1bn), Seoul officials say.Construction firm STX will set up a joint venture to share the cost of the project with Ghana's government. Seoul officials say 90,000 of the homes will be owned by the Accra government - the rest will be sold. South Korea says it intends to seek more opportunities to help build infrastructure in sub-Saharan Africa. The country, like other rich nations, has already signed various deals in Africa giving it access to farmland to help shore up food supplies

What is holding back African exports? - It has been shown that poor trade infrastructure is a key reason for Africa's weak exports. This column goes a step further and provides evidence that the delays in inland transport are the most crucial factor restricting Sub-Saharan Africa's trade. Policy makers’ focus on foreign trade policy may therefore be misguided.

Microlending Fails - The Boston Globe published an article in September, subtitled, “Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty.” …Three important randomised controlled trials were unveiled this year. In one, economists … persuaded a lender in Manila to tweak a credit-scoring computer program so that it randomly awarded or denied loans to marginal borrowers. … Male-owned businesses tended to become more profitable after a loan, and female-owned businesses did not. … The loans produced no improvement in diet or income about 18 months down the line.

What the wealth of nations is really built upon - - Dasgupta reached two conclusions. The first is that stable societies – that is, where cheats can be found and punished, if only by a refusal to do business with them in future – are a precondition for successful institutions. If every interaction is a one-off, co-operation is impossible, and all those wonderful investments in machinery, education and innovation will simply never happen. The second conclusion was that co-operation is extremely fragile. Dasgupta’s game theory suggested that even a successful, co-operative society is always at risk of breaking down. “It is easier to destroy institutions than to build them,” he argued, and cited the Watts riots and the decline of many pre-modern civilisations. The credit crisis is, arguably, another example.

No comments: