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

Saturday, December 19, 2009

week ending Dec 19

Fed exit strategy: five questions, some tentative answers - I’ve just written a piece for tomorrow’s FT looking at five key exit strategy questions facing the Fed. Just to be ultra clear to the best of my knowledge the Fed has only just begun strategising on some of these issues and has not yet decided on a concrete plan. Here are the five questions:

  • Should the Fed focus on tightening short term rates as normal or tightening long term rates through asset sales?
  • Assuming the Fed focuses on short term rates, does it need to reduce the more than $1,000bn excess reserves in the banking system substantially, early in the process and ideally before raising rates?
  • When it starts raising, should it communicate its policy stance in terms of an interest rate on bank reserves rather than a target for the fed funds rate as in the past?
  • If it starts tightening without draining the excess reserves, will it have to move more aggressively than it would otherwise have done?
  • What is the end destination in terms of the monetary policy regime the Fed wants when the exit is complete?

Stephen Roach Sees ‘Great Risk’ in Fed Exit Strategy. The Federal Reserve may cause another crisis by botching the withdrawal of liquidity from the U.S. economy, Morgan Stanley Asia Chairman Stephen Roach said. The Fed is the “weak link” among central banks and may fail to tighten monetary policy in time to stop asset bubbles from forming, Roach said at a conference in Berlin today. The Fed helped trigger the boom and then bust of the subprime mortgage market by being “quick to slash, slow to normalize” interest rates, he said. “There is a great risk in the coming exit strategy,” said Roach, a former Fed economist. “They are lacking primarily a political will to execute the exit in a timely and expeditious fashion that will avoid the mistakes of the last crisis.” The traditional view of central bankers that asset bubbles are hard to spot and deflate with rates is “ludicrous,” he said.

Thoughts on Fed's Exit Strategy: Stephen Roach vs. Mish - The Fed is fatally flawed in many ways. Stephen Roach (who I happen to like) misses a lot of them. For starters the only source of inflation is the Fed and fractional reserve lending. The best policy would be to get rid of the Fed and fractional reserve lending entirely in favor of a stable money supply. That would fix the problem of inflation once and for all. The Case Against the Fed and Fractional Reserve Lending is easily made. Please read Fractional Reserve Lending Constitutes Fraud for a brief overview.

FOMC Statement: No Change (news release from the Fed) - The Fed recognized that housing data is not as strong as last meeting. Last month they noted: "Activity in the housing sector has increased over recent months", now they are saying "some signs of improvement".
The Fed is also making it clear they intend to stick to their deadlines.
The Fed views the economy as stronger: "economic activity has continued to pick up and that the deterioration in the labor market is abating".
The Fed expects inflation to be subdued for some time

Parsing the Fed: How the Statement Changed - WSJ - The guts of the Fed’s statement following the December meeting were nearly identical to its November remarks. The central bank continues to scale back emergency programs, but makes no signal that rates are going to rise in the near term. (Read the full December statement.)

The Fed’s long good-bye - For investors trying to estimate when the Fed will raise interest rates today’s statement was a non-event.  But for analysts trying to understand the arc of Fed policy from crisis to a new normal it was a bit more interesting. The statement highlighted something that has been in train for some time but is nonetheless a critical development: the narrowing down of the tools the Fed uses to support the economy. At the peak of the crisis the Fed deployed pretty much every tool any serious economist had thought off to battle a giant shock and ward off deflation...Now it is gradually phasing out unorthodox liquidity provision, tapering off asset purchases and dropping its commitment to monitor the size and composition of its balance sheet and make adjustments as warranted.

Fed takes a leaf from the ECB’s book - The seperation principle is back - this time on the US side of the Atlantic. This is subject of longstanding debate within the Fed as well as between the Fed and the ECB. As the crisis intensified Fed officials quickly reached a consensus that it made no sense to distinguish between monetary and liquidity policy in crisis conditions when both directly and substantially influence private borrowing rates and overall financial conditions. They thought the ECB was mistaken in sticking to this distinction. But now the crisis is ebbing the idea of a seperation principle makes more sense to many (not all) Fed officials. I think this view is expressed in the statement today. Among other things, it implies that the decision to wind down liquidity programmes has no direct implications for monetary policy as we are in a two targets, two instruments regime (liquidity policy for market functioning and financial stability, monetary policy for output stabilisation and inflation.)

New insights on the lender of last resort - VoxEU - Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.

The evolving role and definition of the federal funds rate - Abstract: Over the past twenty years, the federal funds rate has evolved from being an intermediate target or indicator variable in discussions of monetary policy to the Federal Reserve’s (exogenous) policy instrument. How the funds rate is characterized has important implications for modeling, particularly in settings such as the popular Taylor Rule. Crucially, however, little investigation has been done to examine whether the funds rate meets the conditions one would require for an instrument of policy. This paper offers empirical evidence on the relationships among the federal funds rate, variables that might influence its behavior and variables of interest to monetary policy.

The Treasury’s Monetary Policy - ... today Treasury bills are not just more like money than like other assets; from a portfolio point of view, on the margin of new issuance, Treasury bills are exactly like money. Holders of short-term Treasury bills are willing to hold them without receiving interest. Issuing more short-term Treasury bills will have exactly the same effect as issuing more money, since people are indifferent between the two. For practical purposes, as long as their interest rate remains at zero, short-term Treasury bills are part of the money stock. A Treasury bill is a million-dollar bill in the same sense that a Federal Reserve note with Abraham Lincoln on it is a five-dollar bill. Conventional monetary policy, which exchanges money for Treasury bills, is ineffective because it is no policy at all: it simply exchanges one form of money for another. To put it another way, since the Treasury can issue bills that are exactly like money, it is now the Treasury that is in charge of monetary policy.

Krugman vs. Eggertsson - I am getting whiplash trying to keep up with Krugman.  Four days after insisted in a NYT Op-ed that monetary policy was our only hope, and endorsed a major program of QE, he has again reverted to the view that monetary policy is ineffective once rates hit zero.  Seems my “vindication” was too good to be true.  We’ll get to monetary policy eventually, but first I’d like to examine the way that Krugman interprets a recent study by Eggertsson.

Fed Bashing: Unfair and Costly - I ended my previous post, Jobless Recoveries: A Look Back, by raising a question; how does the same monetary policy that fosters disinflation in the general economy foster an inflationary bubble in only one sector? By easing monetary policy, the Fed intended to address a very weak labor market, a jobless recovery that threatened to turn back into recession and disinflation that threatened to morph into deflation. But, if the Fed was creating too much money, why was the money spent only on housing? It is taken as given these days that the Fed created the housing bubble.  But, as I recall, the Fed did not create the housing bubble. It was the collateralized subprime loans, not a reversal of home prices, that caused the problems. Maybe there were too many loans, but, if so many had not been bad loans, air could have come out of the bubble without devestation. Stretching for yield is one thing. Making and selling mortgage loans that were obviously bound to default is quite another thing.

Using a hammer or a wrench to pop asset price bubbles? - In a recent speech Adam Posen (a member of the Bank of England's Monetary Policy Committee) argues that monetary policy should not be used to deal with asset price bubbles. His main argument, which has been expressed before by different central bankers, is that monetary policy is the tool to deal with price stability and it is not appropriate to deal with asset price bubbles. Quoting from his speech"Just because we want there to be a policy response to a problem does not mean that the problem can be solved with the tools at hand. Again, if I have a hammer, it can be useful for all sorts of household tasks, but useless for repairing a leaky shower head – in fact, if I take the hammer to the shower head, I will probably make matters worse.

Lean Against the Credit Cycle Not Asset Prices - Adam Posen does not think monetary policy should respond to asset price bubbles by adjusting its policy interest rate. He likens this approach to a using a hammer to fix a leaky shower. Antonio Fatas weighs in and says not so fast; finding that right tool for the job can be elusive so in the meantime we should not shy from using the tools we have--imperfect as they are--in addressing asset price bubbles. All of this attention on asset prices is a distraction says William White in a recent paper. Asset bubbles are but a symptom of a deeper problem, an unleashed credit cycle. As readers of this blog know, I made this very point in comparing the deflation threat of 2003 with the deflation threat of 2009. Had the Fed been less fearful of the benign deflationary pressures in 2003 they would not have held the federal funds rate so low for so long and, as a result, there would have been less buildup of debt and thus the potential for the harmful form of debt deflation we face today

Should the Fed be the nation's bubble fighter? - That's a question recently taken up by the Wall Street Journal. Here are my thoughts. Before we can discuss this issue, we'd need to agree on what we mean by a "bubble". Here's one definition that a lot of people may have in mind: a bubble describes a condition where the price of a particular asset is higher than it should be based on fundamentals and will eventually come crashing back down. If that's what you believe, then there's a potential profit opportunity from selling the asset short whenever you're sure there's a bubble. And if that's the case, my question for you would be, why don't you do put your money where your mouth is instead of telling the Fed to do it for you? ...  And even if you're absolutely sure you know how to identify bubbles, raising interest rates as a response is, as Tim Duy observes, "a rather blunt weapon that kills indiscriminately".

Fed MBS Purchases: Over 85% Complete - Just an update on the status of the Fed's MBS purchase program. From the Atlanta Fed weekly Financial Highlights: The Fed purchased a net total of $16 billion of agency-backed MBS in each of the last three weeks, with the last one through December 2. This purchase brings its total purchases up to $1.058 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 85% complete).

Notes on Fed Policy and Financial Regulation - The Fed will continue to keep policy loose, while slowly closing down ancillary lending programs, and bloating their balance sheet with mortgage backed securities [MBS] guaranteed by Fannie and Freddie, and ultimately by the Federal Government, which gets the profit or loss from the Fed’s financing (of the mortgages at 0% interest for now). What you have is the Federal Government intervening in the MBS market, and forcing down yields, at a cost of indebting future generations (should they decide to make good on those).  This will eventually fail as a strategy.  Unless the Fed wants to keep its balance sheet permanently larger, yields on MBS will rise when they stop buying.  And, the moment that they hint that they will start unloading, rates will back up significantly.  They are too large relative to the MBS market.

Fed Can Do No More To Cut Unemployment: Greenspan - (Reuters) - The Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday. There's just so much monetary policy and the central bank can do. And I think they've gone to their limits, at this particular stage," Greenspan said on NBC's "Meet the Press." "You cannot ask a central bank to do more than it is capable of without very dire consequences,"

The Perfect Negative Indicator Weighs In - Alan Greenspan: The U.S. Federal Reserve has done all it can do to reduce unemployment former Fed Chairman Alan Greenspan said on Sunday. But didn't we just Get All That Money Back?  Greenspan's reason unemployment will go down soon: GOVERNMENT JOBS: The U.S. Census Bureau's plan to hire close to 800,000 workers by April will take several tenths of a percent off the unemployment rate, he said. Let's ignore that 800,000 temporary hires won't balance the 900,000 jobs to be lost on the state level next year…let's ignore that temporary jobs are, by definition, "frictional" and not "structural" employment....

Q&A: Ron Paul Explains Why He Can’t Vote for His Own Fed Audit - Real Time Economics - WSJ - Rep. Ron Paul (R., Texas), author of an amendment to allow the Government Accountability Office audit monetary policy decisions made by the Federal Reserve. Mr. Paul said he’s proud of the amendment but wouldn’t vote for the broader bill to overhaul financial market rules because he objects with a number of its provisions. He spoke Friday to the Wall Street Journal.

Bernanke Endorses Limited Audits of Emergency Fed - Federal Reserve Chairman Ben Bernanke, in written responses to lawmakers this month, maintained that he’s open to congressional audits of the central bank’s emergency lending programs.But he said the reviews should be narrowly tailored to avoid probing the Fed’s monetary policy decisions.”A review of the operational integrity of these facilities could be structured so as not to involve a review of the monetary policy aspects of the facility, such as the decision to begin or end the facility or the choices made regarding, the structure, scope, design, or terms of the facility,” he wrote to lawmakers including Sens. Jeff Merkley (D., Ore.) and David Vitter (R., La.) in response to written questions tied to his confirmation. (Read responses to Sens. Merkley and Vitter.)

Reviewing Ben Bernanke at the Fed - With the Senate banking committee set to vote this week on the confirmation of Ben Bernanke to a second term as chairman of the Federal Reserve, the central banker's record in battling the financial crisis is center stage. Critics suggest he's not doing enough to combat unemployment or that his support of misbehaving financial institutions only sows the seeds for future crises. "You are the definition of a moral hazard," Sen. Jim Bunning (R-Ky.) scolded Bernanke earlier this month. Supporters contend that, well, things could be worse without him.  In a recent paper, Brookings Institution economist Douglas J. Elliott dispassionately weighs the case for and against the chairman.  There's plenty to go on the negative side of the ledger.

Final Thoughts on the Bernanke Nomination and AIG - We posted a new item today that contains our final thoughts on the nomination of Ben Bernanke for another terms as Fed governor. We also feature an interview with Mike Krimminger of the FDIC on that agency’s impending draft rule regarding bank securitizations. The text of the Fed rant is below and you can read the Krimminger interview on our web site

Sen. Vitter Presents End-of-Term Exam For Bernanke -  WSJ -  Earlier this month, Real Time Economics presented questions from several economists for the confirmation hearing of Federal Reserve Chairman Ben Bernanke.  Many of the questions were addressed at the hearing, though not always directly. Sen. David Vitter (R., La.) submitted them in writing and received the responses from Bernanke, along with his own other questions.  We offer them here.

From the horse's mouth - The Economist - Brad DeLong had asked: Why haven’t you adopted a 3% per year inflation target? And Mr Bernanke responded:The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.I can't imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.

Three percent price inflation - Many bloggers are commenting on Bernanke's response to Brad DeLong's question about whether the Fed should target three percent price inflation to stimulate aggregate demand and lower unemployment.  I'll offer two points: 1. We no longer have an independent central bank in this country, at least not with Bernanke up for reappointment. 2. I still favor a two percent target (three would be fine too) for the rate of price inflation today.  But it matters when we implement such a policy.  The longer we wait, the more we miss out on its potential benefits.

With Inflation Low and Unemployment High, Bernanke Prioritizes Fighting Inflation Over Fighting Unemployment - But as you can see from Bernanke’s answer, Bernanke doesn’t think there’s nothing more he can do. Bernanke thinks there’s something he could do that would probably reduce unemployment but might make it more difficult to control inflation in the future. I think it’s a bizarre reading of the relative risks and relative benefits. But it’s one that’s in keeping with the class interests of the wealthy, and it’s hardly shocking to learn that’s what matters most to conservatives like Bernanke. I just wish we could get more attention front and center for what it is that’s happening here. Unemployment is high in large part because the policymakers with primary responsibility for achieving full employment don’t want to use the tools at their disposal to achieve that goal.

The Fed Can Help, But Fiscal Policy Is The Key To Job Creation - There are many people currently criticizing the Fed for worrying too much about inflation and not enough about employment. They want the Fed to use quantitative easing - the purchase of financial assets when interest rates are already at zero - as a means of stimulating the economy and creating jobs. I think it’s a mistake to focus on the Fed rather than on fiscal policy because the focus on the Fed takes the pressure off congress and the administration to do something about the poor state of the job market. There’s been lots written recently about how the Fed could help to overcome the employment problem with quantitative easing, and maybe it could. I’m not as convinced as many others that this will work, there are some elements of the transmission mechanism for monetary policy that are needed for quantitative easing to work that I don’t believe are very reliable, and it could create very bad employment prospects down the road if the program cannot be unwound in a timely way. And even if it does work, the time lags involved in monetary policy are very long, much longer than for fiscal policy

Bernanke Responds to Senator Bunning - Calculated Risk - Chairman Bernanke has responded (pdf) in writing to a series of question from Senator Bunning. There are questions on Fed policy, gold, the dollar, and much more. Here are a couple of questions and answers (with charts and analysis)

Bernanke Stonewalls and Prevaricates in Response to Questions by Sen. Bunning - Yves Smith -  Senator Jim Bunning gave a long, detailed, specific, and very good list of questions to Fed chair Ben Bernanke, and Bunning has posted the resulting Q&A on his website.  I find this a pretty remarkable document. While a certain amount of bureaucratic jousting is to be expected (ie, there is a level of artful dodging that I would accept as legitimate in this context, given that Bunning and Bernanke are at odds on what level of disclosure by the Fed is reasonable), there are many places where Bernanke offers substantive responses, and I find quite a few wanting and misleading, and some look to be untrue. Numbers in the text refer to question numbers from the document. What struck me is:

Bizarro World - Time Names Bernanke "Person of the Year" - I think I've already covered why Ben "Person of the Year" Bernanke should not be lauded for helping to abate (note: abate - not eliminate or solve!)  the pain from the crisis he helped create, so I'll simply say that our society has become a satire of itself.  If some alien race were watching us right now, they'd surely be laughing.

No change at the Fed, or is there? - This has got to be one of those "Bizarro World" days for Fed chief Ben Bernanke, what with the Time Magazine "Person of the Year" award, word of growing distrust among the general population, and, just in the last hour or so, a major twist in his Senate confirmation process where Senator Jeff Merkley (D-OR) said he will vote against Bernanke when the Senate Banking Committee meets tomorrow.This latest news is significant because Merkley is the first Democrat on the committee to announce his opposition to Bernanke and, while it is all but certain that the group will forward his nomination to the full Senate for a vote in January, a lot can happen over the next month.

Bernanke’s Saving’s Glut Hypothesis. Contradiction Number One - Ben Bernanke gave a talk on the reasons for the emergence of a global savings glut during the period beginning from the mid 1990s. He made specific note of the increasing value of the US dollar in the period from 1996 to early 2000. He ascribed this change to “The development and adoption of new technologies and rising productivity in the United States together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment. Bernanke's rationale for the strong US dollar from the years 1996 - 2000 doesn't appear to stand up to historical evidence. If the US benefited from such a profitable investment environment then why didn't that result in a boom in US manufacturing and a resolution of that nation's trade deficit in those years? The opposite, in fact, occurred.

You Can't Make This Stuff Up - Calculated Risk reported this gem, from the Time Magazine Person of the Year extended interview with Ben Bernanke: "What's your interest rate?  That I'm earning?  No, on your house. Do you have a mortgage?  Oh, yes, we refinanced.  Oh, perfect. When?
About 5%. A couple of months ago. Good time. Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."

Looking a Little Deeper at Bernanke’s Floating Rate Mortgage - WSJ - We did a little digging of public records and learned more. The Fed chairman was in an adjustable rate mortgage with a rate that started at 4.125% in 2004 and adjusted after five years to a rate that would be 2.25 percentage points above one-year Libor, which as of the first reset date in June was a little more than one and a half percent. That suggest his costs wouldn’t be exploding now, as the interview suggested. In fact, they’d be going down. He probably just meant the initial five year term was up. Locking into a fixed rate mortgage looks like a sensible thing for any homeowner to do with long rates at historic lows now. Of course, Mr. Bernanke isn’t any homeowner. One has to wonder what the decision to refinance implies about his beliefs about where rates are going in the future.

Bernanke Redux - Today, Clusterstock highlighted another come-on-there-is-no-way-the-Fed-chairman-could-have-said-that-you-must-be-making-it-up-for-financial-satire quote, but sadly, it's NOT from The Onion - Bernanke really said it: "Pressed by Committee chairman Chris Dodd on the matter of the carry trade, the cheap dollar being used to buy higher-returning assets, Bernanke responded that it’s only a problem for the U.S. if you think the economy is going down again, which is not the Fed’s view." WOWZA!  REALLY?!??  So, since it's not the Fed's view, it can't happen!?? Marty up! Ponziiiiiiiiiiiiiiiii.  It's almost as if Bernanke is having a "let me see if I can put my foot any deeper inside my own mouth" contest with himself!  Doesn't he know that he and the Fed have had a less than stellar record forecasting the impact of the economic crisis thus far?

October data indicate financial stress continuing to ease - Atlanta Fed - The October Treasury International Capital (TIC) data, which report on U.S. cross-border financial flows, suggested continued unwinding of a massive flight to quality that took place in financial markets in the second half of 2008. (For a detailed overview of U.S. cross-border financial flows during the recent crisis, see the comprehensive report from the Federal Reserve Board.) Cross-border private capital flows, which plummeted at the peak of the financial crisis in fall 2008, resumed as risk aversion in financial markets started to abate. On net, foreign private investors have again become buyers of U.S. assets, which has helped to increase the supply of capital in the United States.

Difficulty of Reducing Debt - Most western economies are facing the prospect of record peace time government debt levels. The EU Maastrict Criteria stated that the maximum budget deficit member countries could run is a budget deficit of 3% of GDP. Unfortunately, this target looks a bit of a joke. Though, I don’t believe in sticking to arbitrary targets, clearly these levels of debt need to be reduced, at least in the medium term, and definitely over the longer term. To give a few examples:

  • Ireland’s budget deficit runs at 14% of GDP
  • Greece at 12% of GDP
  • UK at 11-12% of GDP

The Global Debt Bomb It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation? It would ameliorate the debt bomb and help us work through the deleveraging process” – Kenneth Rogoff, Professor of Economics at Harvard, Former Chief Economist at the International Monetary Fund - Make no mistake;  there are only two viable options – a global economic depression or very high inflation. It is our contention that the policymakers have chosen the latter option and over the following years, we will experience the trauma of severe inflation.

Moody's: The Coming Sovereign Debt Crisis Of 2010 - The subject of sovereign defaults is definitely the theme of du jour. It's the question everyone will be obsessed with in 2010 -- that, and the related theme, the breakup of the Euro. Moody's, via FT Alphaville, has created a new kind of "misery index" that merely adds a country's fiscal deficit with its unemployment rate.The top of the list reads like a who's who of the names in the news these days: Spain, Latvia, Lithuania, Ireland, Greece, the UK, Iceland and the US.

The World’s Safest Sovereign Debt (Update) - top ten - Implied Ratings are calculated using a proprietary model developed by CMA and fed with CDS pricing data

The World’s Riskiest Sovereign Debt (Update) bottom ten - Implied Ratings are calculated using a proprietary model developed by CMA and fed with CDS pricing data

Public debt risk rising, tumultuous yr ahead-Moody's - (Reuters) - Sovereign debt risk is rising globally, particularly in the United States and United Kingdom, which must outline plans to manage public debt or face ratings deterioration as soon as 2011, Moody's global head of sovereign ratings said on Monday.

  • * 2010 will be tumultuous for sovereign debt
  • * US, UK top ratings losing altitude, global head says
  • * Response needed or loss of altitude will be "inexorable"
  • * Must draft a credible plan or face rating threat

Moody’s Warns Of 'Social Unrest’ As Sovereign Debt Spirals - Britain and other countries with fast-rising government debts must steel themselves for a year in which “social and political cohesiveness” is tested, Moody’s warned. In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.  It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”.

The Greatest Outpouring Of Money And Credit In History - 12.7 trillion donated to bankers, solving a problem they created, buy bonds, or gamble in the markets? Inflation on the way, could the US default on its debt? Food aid and unemployment rising together, yet another bank collapse, Dubai bailed out. The past two years have seen the greatest outpouring of money and credit from central banks and governments in history. In most countries interest rates cannot fall much lower being presently under 1% or close to zero. You might call this an attempt at fiat money recovery. As a result of pump priming for the past six months or more investors have returned to the same gambling and risk taking they engaged in before, the losses of which caused the world economy to come to the edge of the financial abyss. All sectors of investment are again affected by a casino mentality.

Full Circle Of Government Debt Default - The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve.

Australian Senator: Contingency Plan Needed for Possible “Economic Armageddon” -  THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ”economic Armageddon” which will make the recent global financial crisis pale into insignificance.Senator Joyce said yesterday he did not mean to alarm the public but there needed to be a debate about Australia’s ”contingency plan” for a sovereign debt default by the US or even by a local state government.”A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,” Senator Joyce said.

Chinese Central Banker Zhu Says Dollar Set to Weaken Further - Chinese central banker Zhu Min said that the dollar is set to weaken further and it will become more difficult for nations to buy U.S. Treasuries. “When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,” Deputy Governor Zhu said at a forum in Beijing today. The U.S. can’t expect other nations to increase their purchases of Treasuries to fund its entire fiscal shortfall, said Zhu, a former vice president of Bank of China Ltd."

Treasury Debt to Receipts Spiking - The issue is what happens when you hit the zero bound and can no longer lower rates (or when the marginal buyer is not willing to accept those lower and lower levels). The best case is lower growth as those debt levels are worked off / inflated away gradually. A worst case is when those levels reach an unsustainable level and default is brought into question (the U.S. really can't default, but bringing out the printing press just to make payments would result in a situation just as bad in my opinion). The level Steve Keen chose to look at in his latest piece 4 Years Calling the GFC (i.e. the Global Financial Crisis) was to see just how much debt the U.S. has piled up was debt as a level of GDP.

On the Choice of Maturities for New Treasury Issues - Every week the Treasury issues new securities with maturities ranging from a few days to several years.  Clearly, the Treasury has a fair amount of discretion regarding the manner in which the deficit is financed. How ought this discretion to be exercised? And how is it exercised in practice?  The issue is really quite important. A couple of weeks ago, Paul Krugman suggested that the Treasury should shift towards shorter-term maturities to finance the deficit if long term interest rates were to start rising. Two days later New York Times reported that the Treasury was in fact doing just the opposite, "exchanging short-term borrowings for long-term bonds." Without a theory (either positive or normative) of maturity choices for new issues, such proposals and actions are hard to evaluate. Furthermore, the costs of making poor judgments can be very high, both in terms of the interest burden on taxpayers, and the effects on private sector choices of changes in the yield curve.

Greenspan warns on deficit threat - Alan Greenspan, former Federal Reserve chief, warned today on the risks US social programmes - Medicare, Medicaid and Social Security - pose to the US’s ability to finance its deficits in testimony prepared for the Senate Committee on Homeland Security. For more than two centuries, we have been able to hold the level of U.S. federal debt to well below our long-term capacity to borrow.But for the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits. The challenge to contain this threat is more urgent than at any time in our history

When To Tighten Fiscal Policy? - A report on the federal debt burden due out today from the Peterson-Pew Commission on Budget Reform calls for delaying serious deficit and debt reduction until 2012, so as not to endanger a recovery; President Obama says he will start that debt-cutting with the upcoming budget, but he is also proposing what amounts to a continuation of many of this year's stimulus measures to create jobs. If an apparent recovery gathers pace in the coming months, should the government wait a year or two to confront the alarming budget projections?

In Search Of Budget Sanity: A Dispatch From The Belly Of The Beast - Red Ink Rising! That was the title of a session on the looming debt crisis I just attended at the National Press Club. The panel discussion was built around a report created by the Peterson-Pew Commission on Budget Reform and featured presentations by commission members. Comprised of Republicans, Democrats, and others, one of the key findings of the group is that the "process is broken.".  You could almost believe that Democrats and Republicans could work together to avert a catastrophe that the panel believes is less than a decade away. In fact, one of the reasons they believe the time to act is now is because things are heading south more quickly than anticipated.  For those of you interested in reading the report, you can find it here.

Bipartisan Commission Calls on Policy Makers to Tackle the Federal Debt - The Peterson-Pew Commission on Budget Reform today outlined a plan for Congress and the Administration to begin working now to significantly reduce the national debt, which is currently $7.6 trillion. Red Ink Rising, the Commission’s first report, calls on policy makers to enact both spending cuts and tax increases to shift our nation’s fiscal course...

Red Ink Rising - Today, The Peterson-Pew Commission released its first report Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, where it calls on policy makers to stabalize the national debt through a six-step plan. Crafted over the past year by former heads of the CBO, OMB, GAO, and the congressional budget committees, the plan reflects a bipartisan approach to avoiding the tremendous global risks of America's expanding debt, without destabilizing the economic recovery. Red Ink Rising is the first of two major reports to be released by the commission.

Budget Blueprint: Paths to 60 Percent - In Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, The Peterson-Pew Commission on Budget Reform calls on policy makers to stabilize debt held by the public at 60 percent of GDP. Given our current fiscal path, reaching this debt goal will not be easy. While the Peterson-Pew Commission does not endorse specific tax and spending policies to meet this goal, Budget Blueprint: Paths to 60% aims to demonstrate the types and magnitude of necessary policy changes.

U.S. needs plan to tame debt soon: experts (Reuters) - The government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday. Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country's standard of living."We will be less free if we don't tackle this,"

US National Debt Tops Limit - The ceiling was set at $12.104 trillion dollars. The latest posting by Treasury shows the National Debt at nearly $12.135 trillion.  A senior Treasury official told CBS News that the department has some "extraordinary accounting tools" it can use to give the government breathing room in the range of $150-billion when the Debt exceeds the Debt Ceiling.  Were it not for those "tools," the U.S. Government would not have the statutory authority to borrow any more money. It might block issuance of Social Security checks and require a shutdown of some parts of the federal government.

Runaway spending continues as Congress raises debt ceiling to almost $14 trillion - Despite a national debt that already exceeds $12 trillion, Barack Obama is poised to sign a bill currently working its way through Congress that would raise the debt ceiling another $1.8 trillion. This would bring the new debt ceiling to almost $14 trillion.In addition to increasing the ceiling for national debt, Congress is also in the process of passing an omnibus spending bill that will cost taxpayers $447 billion. Included in this omnibus spending bill are over 5,000 earmarks totaling close to $4 billion.When will this madness stop?

Rising U.S. debt could push up interest rates - Congress set to raise borrowing limit by $2 trillion to $14 trillion Congress is taking the final steps needed to raise the national debt ceiling from its current $12.1 trillion to make room for more borrowing. With the economy growing only sluggishly and Congress spending heavily on economic stimulus, two wars and extended unemployment benefits, the nation is running a deficit that hit a record $1.4 trillion in the latest fiscal year, adding to the national debt.That raises the question of whether the government's growing need to borrow money for operations could eventually drive interest rates higher, threatening the nascent economic recovery.

Interest due on U.S. debt: Close to $5 trillion - Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest. More than half. In fact, $4.8 trillion.If that's hard to grasp, here's another way to look at why that's a problem. In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

Government bonds face 'tumult' in 2010, Moody's warns - Many of the world’s governments borrowed and spent with abandon this year to keep their economies afloat. And investors mostly were happy to oblige, providing enough demand for sovereign bonds to keep a lid on longer-term interest rates.But now what? Moody’s Investors Service is out with a preview of the relative risk in government bonds in 2010, in a report titled “Fasten Your Seat Belts: Tumultuous Times Ahead.”The issue for investors in most government bonds isn’t the risk of outright default, because politicians and central banks can always print more money. The question is whether investors will demand much higher interest rates to continue financing governments that have dug themselves into deep financial holes.If market yields on new government bonds surge, older fixed-rate bonds issued at lower rates will plunge in value.

Using inflation to erode the US public debt - VoxEU -As the US debt-to-GDP ratio rises towards 100%, policymakers will be tempted to inflate away the debt. This column examines that option and suggests that it is not far-fetched. US inflation of 6% for four years would reduce the debt-to-GDP ratio by 20%, a scenario similar to what happened following WWII.

Anything to Avoid a More Specific Commitment to Fiscal Discipline - Congress is so unwilling to make a specific commitment to longer-term fiscal responsibility that they’d give up another short-term deficit-financed spending spree to avoid the more permanent commitment to reform itself after the binge. From tonight’s “Capitol Briefing”: House Democratic leaders, bowing to opposition from their party’s deficit hawks, have decided to move the final must-pass piece of legislation of the year without a long-term increase to the national debt and a large boost in infrastructure funding that was considered a jobs bill. It’s as if Congress is saying to its fiscal hawks:  “Well if you’re going to be that way about the lousy debt limit increase and the (obvious) need for more stimulus, forget it!…  We’ll ask later when you’re in a better mood.”

Congress Squabbles Over Debt Ceiling - WSJ - Congress is playing brinkmanship over raising the U.S. debt ceiling, with each chamber insisting on adding controversial elements to the legislation that the other opposes.House Democrats said Friday they intend to add "pay as you go" budget rules to legislation that would raise the ceiling by $1.8 trillion and ensure the U.S. doesn't default on its debt obligations. Pay-go rules, a priority of conservative Democrats, require new legislation to be paid for with spending cuts or taxes. They are intended to make it harder for lawmakers to add to the already bloated budget deficit. Such a move wouldn't be popular in the Senate. Moderate Democrats there are trying to use the debt-ceiling bandwagon to push a commission that would recommend ways to reduce the deficit and long-term debt.

Is This a Congressional Joke?: I am--in normal times--a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole. But when I look at Senators Conrad and Gregg, I don't recognize fellow members of my species. They may be glueing the feathers of deficit hawks onto themeselves, but they are birds of a very different order--doves, turkeys, chickens, whatever, but I hope they are dodos...

"President Obama Largely Inherited Today’s Huge Deficits" - What is the cause of large and continuing budget deficits? The Bush tax cuts, the wars in Iraq and Afghanistan, and the economic downturn explain "explain virtually the entire deficit over the next ten years (see chart). Notice the tiny contribution of Tarp, Fannie, and Freddie (shaded red) and the stimulus package (shaded yellow, just below the red area) to the deficit from 2012 onward. These are not the source of our long-term budget problems.  For more, see the source of the graph: President Obama Largely Inherited Today’s Huge Deficits, CBPP.

The Current Debt Is Inherited, But Future Deficits Are Chosen - The Center on Budget and Policy Priorities issued this report this week, which claims that “President Obama Largely Inherited Today’s Huge Deficits.”  The headline chart is shown above, which proves the point that President Bush’s deficit financed tax cuts and deficit-financed wars account for most of the projected deficits.  But the chart also demonstrates CBPP’s generous definition of what “today” is in “today’s huge deficits”–and that’s apparently the ten-year budget window of 2010-19, I guess another version of how “the future is now.”While President Obama inherited a bad fiscal legacy, that does not diminish his responsibility to propose policies to address our fiscal imbalance and put the weight of his office behind them. Although policymakers should not tighten fiscal policy in the near term while the economy remains fragile, they and the nation at large must come to grips with the nation’s deficit problem. But we should all recognize how we got where we are today.

The Facing Up Budget Blog - Carnival! - Facing Up to the Nation's Finances is back with a new "Budget Blog Carnival!" If you are unfamiliar, a blog carnival is an online "magazine" (blogo-zine) of sorts that focuses on a specific theme. This issue is all about the U.S. federal budget and the national debt. As always, the carnival is comprised of a non-partisan collective of blog entries. While specific pieces may have ideological roots, the overall carnival is a testament to the diverse voices present in the ongoing debate that surrounds the budget, deficit and accumulated national debt.

Congress Sends Obama Measure With 12% Average Budget Increases (Bloomberg) -- Congress gave final approval to a $450 billion spending bill for government agencies providing an average 12 percent budget increase for many programs amid what polls show is mounting public concern over federal deficits. " The measure combines six annual appropriations bills needed to fund federal agencies for the fiscal year that began Oct. 1. The House last week approved the 1,092-page bill, along with 1,351 pages of explanatory documents, which would replace a stopgap measure funding most agencies through Dec. 18.

To Congress: Your Loan Has Been Called - Leaders are considering a hike of roughly $300 billion to the nation's $12.1 trillion deficit, though the final figure has not been nailed down, congressional aides said on condition of anonymity. Democratic leaders had previously hoped to raise the limit by at least $1.8 trillion, enough to take care of the government's debt needs through the November 2010 congressional elections. What was your first hint the former $1.8 trillion increase attempt was a bad idea?  Perhaps this chart? Or was it China buying a literal zero of Treasury debt in October?

TIC Data Confirms: Foreign Appetite Gone - So the Obama Administration thinks it can issue $150 billion in new debt a month eh? Here's the question: Who is going to buy? I can tell you who isn't buying - foreigners: Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $8.3 billion. Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $43.9 billion. Foreign holdings of Treasury bills decreased $38.3 billion. This is a nasty box Ben and Timmy have painted themselves into. $150 billion of net new issue a month - a run rate of $1.8 trillion annualized thus far - while foreigners are net sellers of Treasury instruments.

Obama weighs ordering new debt commission - President Barack Obama is seriously considering an executive order to create a bipartisan commission that could weigh sweeping tax increases and spending cuts to try slash the soaring federal deficit, CNN has learned. Documents obtained by CNN show that top advisers to the president have been privately weighing various versions of a commission, and there are differing opinions about how to structure it. Officials say that some inside the administration are pushing for a narrow mandate because it's too complicated to tackle reform of the tax system and possible spending cuts to various popular programs like Social Security and Medicare all at once.

Not Another Budget Commission! - In a previous column I explained why I think another budget commission is unlikely to solve our deficit problem. Since both Congress and the Obama administration appear to have ignored my advice and are moving to establish one anyway, I want to look a little more deeply today at the problems it will be up against. First, let's take a look at a high-powered report on the federal debt just issued by the Peter G. Peterson Foundation and the Pew Charitable Trusts on the problem of rising red ink. This bipartisan commission had a year to study the issue, substantial funds and able staff support from the Committee for a Responsible Federal Budget. Moreover, it had a blue ribbon list of members including every former Congressional Budget Office director plus assorted Office of Management and Budget directors and other big names in the world of people who know the federal budget the way a proctologist knows colons. In short, the Peterson-Pew Commission had a tremendous number of advantages that a government commission would not have.

Looking for any excuse to justify a tax cut..... - As anyone who has read much of my blog knows, I find it frustrating that many recommend tax cuts like the elixirs hawked in small towns during the Gold Rush--the remedy for all fiscal ills.  Here's one more:  Chris Farrell's BusinessWeek Viewpoint, "Fight the deficit Monster with Tax Reform," Farrell starts with "daunting" numbers--the potential $12 trillion national debt level and the potential 10-year deficit of $9 trillion.  Then he admits that much of that is a reflection of temporary measures, and that though interest has gone up, so has GDP, so that the average percent of the GDP paid out as interest will actually be lower than it was in the decade from 1985 to 1994 (when we were dealing with the huge Reagan tax cut). But then he goes nutty, claiming that "simpler" tax rules can solve the problem.  Now, "simpler" in the mouth of a right-winger tends to mean cutting programs that help the poor, increasing tax welfare for the big multinationals (especially Big Finance), and providing tax cuts for the rich (like zero capital gains taxation, etc.).  What does Farrell mean?   Hmmm. Let's analyse.

Tax Cuts Might Accomplish What Spending Hasn’t - Mankiw - NYTimes - In fact, the Congress passed a sizable fiscal stimulus. Yet things turned out worse than the White House expected. The unemployment rate is now 10 percent — a full percentage point above what the administration economists said would occur without any stimulus. So what to do now? The administration seems most intent on staying the course, although in a speech Tuesday, the president showed interest in upping the dosage. The better path, however, might be to rethink the remedy.

Spending Increases v. Tax Cuts - Greg Mankiw thinks we should try a different kind of fiscal stimulus than the one passed earlier this year, a mix of spending increases and tax cuts. Some of us argued that including tax cuts lowered the bang for the buck from the stimulus package but Greg disagrees. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.Greg is citing evidence from periods when the interest rate was positive. Gauti Eggertsson asks What Fiscal Policy Is Effective at Zero Interest Rates? His abstract reads: Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. Fiscal policies aimed directly at stimulating aggregate demand work better.

Greg Mankiw, Stimulus Critic: So Wrong He's Actually Right - Greg Mankiw, a very good economist who has a habit of making vapid comments when he's not subject to peer review, keeps up the habit in today's Economic View column in the New York Times, in which he suggests that February's $787 billion stimulus (i) consisted mostly of Keynesian-type spending and (ii) appears to be a failure: Both of Mankiw's claims are questionable. First, let's take a look at what the stimulus package was actually designed to consist of: (pie chart)Some $288 billion -- 37 percent -- consisted unambiguously of tax cuts that were labeled as such. Meanwhile, $274 billion -- 35 percent -- consisted of traditional, Keynesian-type investments in infrastructure and related areas. These types of spending are easy to characterize.

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. “We have to start paying our bills eventually,”

Value-Added Taxes: Not So Foreign -  NYTimes - In my article today on value-added taxes, I noted that it’s far from a novel idea. Some version of a VAT (sometimes called a “goods and services tax,” or G.S.T.) is in use in nearly 150 other countries, in developed and developing economies alike. Malaysia is probably the most recent addition to the club, having announced a few weeks ago that it will levy a VAT in 2011. Here’s a map that shows which countries had VATs as of 2008, according to the Organization for Economic Cooperation and Development

A new paradox - Paul Krugman - According to Gauti Eggertsson's new paper on fiscal policy; the paper is here, when you’re in the liquidity trap, certain kinds of tax cuts have perverse effects. Cutting taxes on capital income, for example, encourages more saving — which is a bad thing, because we’re suffering from the paradox of thrift. In fact, reduced taxes on capital income actually end up reducing investment. So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment.

The Remarkable Ms. Warren - She’s probably already said this before, but I just saw it: “There are a lot of ways to regulate ‘too big to fail’ financial institutions: break them up, regulate them more closely, tax them more aggressively, insure them, and so on. And I’m totally in favor of increased regulatory scrutiny of these banks. But those are all regulatory tools. Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”

Financial market regulation: Stability through democratic diversity - VoxEU -Many observers blame regulatory failure for the financial crisis, arguing for closer international coordination of national regulation. This column argues for the opposite. Regulatory convergence creates instability. Instead, regulatory diversity is needed to reduce market herding and the resulting systemic risks. This diversity can be achieved through stronger democratic oversight of regulators.

Editorial - Even Bigger Than Too Big to Fail - NYTimes - The White House’s proposal to overhaul financial regulation has ideas for banks that are too big to fail. The House passed a bill last week that would require big banks to have bigger capital cushions to absorb losses. It gives the government authority to seize and dismantle big financial firms at imminent risk of failure and mandates banks to pay for a $150 billion fund to cover the costs of any future mess. It grants regulators authority to limit the operations or even break up big banks deemed too risky, even if they appear healthy.These provisions still seem vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities. If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.

More Easy Money for Wall Street - The sales pitch for financial-reform legislation pending in the House claims it would put an stop to "too big to fail" bailouts for the leading banks. The reality is the opposite. The federal government would instead be granted unlimited authority to spend whatever it takes to prop up the big boys when they get in trouble. Only in the next crisis, Congress won't have to be asked for the money. The financial rescues will be funded by the secretive Federal Reserve, not the Treasury, with money the Fed itself creates. And the emergency lending could be pumped into any financial institution in trouble--not just behemoth commercial banks but investment houses like Goldman Sachs, insurance companies, hedge funds or any other pools of private capital whose failure regulators believe would threaten the system.

How Big a Problem is Moral Hazard? - Scott Sumner writes:  "I am increasingly of the view that moral hazard is the central problem with our financial system." This is a very popular view with substantial segments of the left and the right.  To the left, it verifies the sense that banks are playing fast and loose with money that is rightfully ours.  To the right, it absolves the market of most of the responsibility for financial crises, which can now be pinned on the FDIC or some other government institution. I've been mulling over this argument a lot, and I'm just not convinced.  I go to a lot of pro-market think tank events where one speaker or another blames the financial crisis and the current recession on moral hazard, as well as basically everything else that has gone wrong in the last sixty years.  I'm afraid I don't see it.

Why Are Banks Holding So Many Excess Reserves? - UPDATE - NY FED -pdf- The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the flow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system reflects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly. from another site: The picture below shows the current state of reserves, excess and required...

Larry Summers Would Remind Banks They Owe Us; Cantor Says Banks Too Regulated - If you were hoping that either wing of the Bankers-Own-This-Place Party that controls both Democrats and Republicans would use the federal government to compel the nation’s banks to assist in economic recovery, their respective apologists sent clear messages: America’s Mega-Banks have nothing to fear from them. On ABC’s This Week, Larry Summers, to whom the banks owe a great deal, told us he thought the banks needed a reminder from the President of how much they owe the country. Meanwhile Eric Cantor said he wants Obama to assure the banks he understands that government, which last winter provided trillions to cover their reckless risks, is discouraging their risk taking. From Stephanopoulos, quoting Summers, then Cantor...

Bank Lobbyists Get Lump of Coal as Senators Call for Reinstated Glass-Steagall - WSJ - Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) plan legislation to reinstate the Glass-Steagall Act of 1933, which separated walls between investment and commercial banking. There’s no indication that the bill might eventually become law, but after comments made Tuesday by House Majority Leader Steny Hoyer (D., Md.), in which he said such a proposal might get a look in the House. That’s enough to drive bankers bonkers. The walls put up by Glass-Steagall were mostly stripped away by the Gramm-Leach-Bliley Act of 1999. The House passed a bill last week that would penalize large banks through fees, capital requirements, and potential limits on business. The bill didn’t reinstate Glass-Steagall, but it did give regulators the power, on a case-by-base basis, to separate banking and commerce operations at specific banks if certain concerns arose.

Reinventing Glass-Steagall - Reuters - With Congress already debating a sweeping overhaul of financial regulation, perhaps the most enduring regulatory stricture of the Depression era is again getting an airing in Washington. The venerable Glass-Steagall laws that barred large banks from affiliating with securities firms and engaging in the insurance business were repealed in 1999. Now, as the banks try to move on from the dreaded salary caps and the humiliation of TARP, lawmakers are wondering whether getting rid of Glass-Steagall was such a good idea. Financial giants such as Goldman Sachs could be broken up under two bills introduced in Congress on Wednesday, one with the backing of former Republican presidential nominee John McCain. Both would reinstate Glass-Steagall. Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo — to spin off investment and insurance operations, according to Demos, a progressive think tank in New York. A similar measure was offered on Wednesday by six Democrats in the House of Representatives.

Will the US Reinstate Glass Steagall ? - A Democrat and a Republican Senator, Maria Cantwell and John McCain, are trying to reinstate Glass-Steagall.Over the past year, we’ve heard some chatter about bringing back the depression era legislation that kept commercial and investing banks separate — so when Wall Street goes bust, it does not freeze Main Street banks — but no one has put details on the table yet. Cantwell has been aggressive on derivatives; Paul Volcker seems to be stepping up on this issue, so perhaps there is something actually occurring here. (Steny Hoyer in the House is also talking about bringing back Glass-Steagall).

Really, Congress Won't Reinstitute Glass-Steagall - In one of the more ridiculous news stories today, House Majority Leader Steny Hoyer (D-MD) says some Congressmen are talking about reviving the Glass-Steagall Act, which was repealed in 1999. The Depression era legislation required investment and retail banking to remain separate. Repealing the law allowed "full service" banks like Citigroup and JP Morgan to come about over the last decade. I've already written about why bringing back this law is a misguided regulatory strategy. Of course, Washington isn't known for always being sensible, so that doesn't mean anything. Still, I think there's little chance this could actually happen.

The Architecture Of The Scam - The Wall Street Journal has put forward an article that adds color to the general view I have always held about securitization, risk-shedding, and what I allege amounts to organized, systemic fraud by our "big banks." While they focused on Goldman Sachs, it is a serious error to maintain focus there as a "universal" or "sole" villain.  Quite to the contrary - the entire financial system became one gigantic fraud machine during the last 20 and especially the last 10 years. Nonetheless, let's walk through and identify the scams that were built into this model...

The Lynch Amendment: Bizarre and Confused - The Lynch amendment has to be one of the most bizarre pieces of legislation relating to derivatives I've ever seen—and that's saying something. Really, the amendment is just illogical. Introduced by Rep. Stephen Lynch, the amendment prohibits swap dealers and "major swap participants" from owning more than 20%, collectively, of a derivatives clearinghouse. Rep. Lynch appears to be deeply confused about both clearinghouses and the derivatives market. Unfortunately, the Lynch amendment has been cheered on by the blogosphere, which now reliably swoons at any mention of hurting "Wall Street," seemingly without regard for the merits of the proposal.

Weakening derivatives’ super-priority - Thanks to Brad Miller for pointing me to Mark Roe’s excellent column on super-priority for derivatives in bankruptcy: True, somebody has to win and somebody has to lose when there is not enough money to go around. But these super-priorities warp the financial industry’s incentives to avoid problems… If financial players set their deals up perspicaciously with enough collateral, they need not worry if a counterparty such as AIG or Lehman collapses, as they will be paid before regular creditors. Some players – Goldman Sachs and JPMorgan are those talked about – set up parts of their AIG and Lehman deals to take advantage of these super-priority provisions. Knowing now what can happen in a financial meltdown, other financial players will do the same in the future, making the financial system more fragile… If the derivatives and repo transactions were not so favourably treated in bankruptcy, financial players would seek other ways to protect themselves. That effort would channel them into stabilising the financial system or at least into making sure they were dealing with stable counterparties…

Who Should Be Bailed Out? - In the future, governments should not bail out failing financial institutions’ derivative counterparties, even when they provide a safety net to some of these institutions’ creditors (such as depositors). Governments should not only follow such a policy, but also make absolutely clear in advance their commitment to doing so. Communicating such a commitment clearly would induce parties to derivative transactions not to rely on a governmental safety net, but to monitor whether their partners have adequate reserves.

In Regulation We Trust? - There is nothing inevitable about the disappearance of trust. We have a choice. Societies can decide to protect trust-based ways of life by limiting the scope of developments that undermine it. The law, for example, could be used to favor institutions (like the family) that incubate commitment, and to decentralize decision-making to the maximum practicable extent. Politicians should stop treating religious belief as a “problem” rather than as a powerful social resource for good behavior.  The role of a free press should be to put pressure on public officials to behave better. But it is counterproductive to whip up such popular resentment at “abuses” as to produce precipitate changes in law or regulation, as has happened in Britain. After any such media-stoked scandal, there should be a pause to allow better norms to take root. Legislation or regulation aimed at restoring faith in the political class should be a last, not a first, resort.

A Few Things Worth Considering - All laws and regulations are only as good as the people who create, interpret, and implement them. Given the dominant strains of careerism, materialism, and narcissism among our current socioeconomic elites, this observation falls squarely on the side of those who counsel cynicism and despair. In the long run, the biggest challenge we face is not writing new laws and regulations, but rather choosing better leaders. We might approach this project first by figuring out how to raise better humans.

America is angry, but Wall Street's bankers are still living the high life - Many Americans reacted with amazement to Britain's 50% windfall tax on City bonuses. There is little chance of such a measure in the US, even though Wall Street bonus payments are expected to shoot up by around 40% to $26bn (£16bn) this year. The average employee's take-home package could reach $143,400.Just as in Britain, the wider American public is not impressed. Unemployment has topped 10%, small businesses are biting the dust in ever-increasing numbers, and with the housing market in the doldrums homeowners are set to see $500bn of property wealth evaporate this year – if they're lucky enough to avoid repossession. Reaction in Washington, however, has been curiously muted. Obama quickly backed down from a threat to cap payouts at $500,000. The White House has only initiated modest measures – the introduction of "say on pay" votes by shareholders on top-level boardroom remuneration, and the appointment of a "pay czar" whose remit to scrutinise pay contracts only extends to companies in receipt of government bailout funds."If you ask what the political viewpoint is outside Washington, people are livid…

Larry Summers Is Like a Guy Who Yells That the Sun Really DOES Revolve Around the Earth and that the Current Orbit is Just a Temporary Aberration . . . and That If We Just Wait a Little While, “Everything Will Return to Normal” - Two leading White House economic advisors – Larry Summers and Christina Romer – are giving very different views on the economy. As Fox news summarizes: “Everybody agrees that the recession is over,” said Larry Summers, director of the National Economic Council.“Of course not,” countered Council of Economic Advisers Chairwoman Christina Romer in a separate interview when asked if the recession is a thing of the past

Harvard ‘Swaps’ So Toxic Even Larry Summers Won’t Explain Them (Bloomberg) -- The oldest and richest academic institution in America needed help getting a loan right away. As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts. The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university.

Those Harvard swaps: Even more of a fiasco than we thought - Bloomberg takes a dive into the Harvard swaps fiasco today, and uncovers some pretty juicy information. For instance, check out Larry Summers’s state of mind when he was entering into the swaps:  Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”  Money? Don’t worry about money.  And Larry was certain of two things: firstly that his beloved Allston project was a go — despite the fact that he hadn’t raised the funds for it, and secondly that interest rates would rise by the time construction started. Therefore, he decided to lock in funding costs by using forward swaps.

Yes, Obama is Getting Serious About Banks. He is Now Calling Them Bad Names! – Yves Smith - Are we supposed to take this posturing seriously? The media is now peddling more and more banker-favoring narratives with a straight face.  The Columbia Journalism Review described one last week, how a little Goldman Kabuki theater to appease the peasants was incorrectly depicted as a serious move...Today, the Wall Street Journal is promoting the curious fiction that a few harsh words from Obama to the banksters has any significance aside from its hopeful PR value. But who does he think he is fooling?  But look at how this tough talk drama is played up in the Wall Street Journal: President Barack Obama lashed out at Wall Street, calling bankers “fat cats” who don’t get it, in an escalation of tensions with the industry.

Obama’s New-Found Populism: All Hat, No Cattle - President Obama is taking a sharp, populist tone with Wall Street and scolding the ways of Washington as he once again looks to the Senate to follow the House and pass one of his top legislative priorities: sweeping financial regulatory reform. It might feel satisfying to hear the President criticize “reckless”, “fat cat” bankers, but the financial reform legislation passed by the House last Friday (and lauded by the President) provides little incentive to change their behavior. In reality populism, with nothing of substance behind it, is just cynical posturing designed to mask genuine failure.

Nothing New Here - "Perhaps the greatest misconception about Barack Obama is that he is some sort of anti-establishment revolutionary. Rather, every stage of his political career has been marked by an eagerness to accommodate himself to existing institutions rather than tear them down or replace them." ~Ryan Lizza - After reading his ridiculous Rolling Stone article on Obama’s “sell-out” to Wall Street, I am persuaded that Matt Taibbi should be forced to write these two Ryan Lizza sentences a few thousand times by hand until he has absorbed their message. The problem is not Taibbi’s reporting on the administration’s actions and personnel, but with the overall interpretation he gives to the facts. No one believed that Obama was “standing up to Wall Street” when Tim Geithner and Larry Summers were appointed to top economic Cabinet and advisory posts, and everything that has happened since then is consistent with the modern Democratic Party’s accommodation with Wall Street that has been steadily intensifying for the last fifteen years or so.

Joe Bageant: The Devil and Mr. Obama - Well lookee here! An invite from my limey comrades to recap Barack Obama's first year in office. Well comrades, I can do this thing two ways. I can simply state that the great mocha hope turned out to be a Trojan horse for Wall Street and the Pentagon. Or I can lay in an all-night stock of tequila, limes and reefer and puke up the entire miserable tale like some 5,000 word tequila purged Congolese stomach worm. I have chosen to do the latter…

Obama Tells Bankers That Lending Can Spur Economy - NY Times: President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others. Meeting with executives from 13 financial institutions, Mr. Obama sent a clear message that the industry had a responsibility to help nurse the economy back to health and do more to create jobs in return for the bailout last year that kept Wall Street and the banking system afloat.  Mr. Obama also confronted the limits of his power to jawbone the industry. The heads of three of the biggest firms — Goldman Sachs, Morgan Stanley and Citigroup — did not even make it to the White House meeting in person.

Obama pushing banking execs on protection agency - President Barack Obama is asking bank executives to support his efforts to tighten the financial industry, while bankers are prepared to tell the president he should stop oversimplifying their concerns if he wants good-faith collaboration. Administration officials described the meeting as a continuation of discussions the president initiated early in his tenure and the latest push for lenders to take greater responsibility as the nation combats an economic crisis that began on Wall Street.

Wall Street Blows Off Obama Meeting, Showing Mr. President Who's Boss - President Obama didn’t exactly look thrilled as he stared at the Polycom speakerphone in front of him. “Well, I appreciate you guys calling in,” he began the meeting at the White House with Wall Street’s top brass on Monday. He was, of course, referring to the three conspicuously absent attendees who were being piped in by telephone: Lloyd C. Blankfein, the chief executive of Goldman Sachs; John J. Mack, chairman of Morgan Stanley; and Richard D. Parsons, chairman of Citigroup.Their excuse? “Inclement weather,” according to the White House...That awkward moment on speakerphone in the White House, for better or worse, spoke volumes about how the balance of power between Wall Street and Washington has shifted again, back in Wall Street’s favor.

The Bankers Summit and Some Significant No-Shows  Jesse - Some White House Banking summit. A one on one with Jamie Dimon and a few second tier, TARP-bound moneylenders. John Stumpf of Wells Fargo is running late but surely on his way. Tied up signing some last minute foreclosures. The opening topic must be how to spin 26% credit card interest rates as a consumer benefit. It appears that Goldman's Lloyd Blankfein, John Mack of Morgan Stanley, and Dick Parsons of Citgroup will not be able to make the meeting today with The One regarding executive pay and the failure to lend by the Wall Street Welfare Queens. The excuses are not the usual: end of year performance reviews, too busy with the office redecorators, trying to settle the tab at Scores, on hold with the Neiman Marcus trophy-wife and office-chippy department, making plans to fix the Superbowl. Ken Lewis of Bank of America is there. LOL. Trying to pick up an unemployment check and cop a plea.

Economies need enriched bankers - Brad DeLong, an economist at the University of California, Berkeley, points out that to bring down unemployment and restore economic vigor, government has to step in and motivate people to spend. How can government do this? By intervening in markets to support the price of risky assets, such as stocks, real estate and businesses. The only downside to this policy is that the biggest owners of risky assets tend to be banks. Thus, any policy that can fight unemployment and boost spending is likely to enrich banks and, by extension, bankers. “In effect,” says DeLong, “Obama did run for office to help out a bunch of fat-cat bankers on Wall Street. He just may not have realized it at the time.”

Out from under TARP, banks are now free to fail again - There's the president of the United States talking with the heads of the country's biggest banks, meeting to pressure banks to make more credit available to small businesses, to restructure delinquent mortgages rather than pushing them into default and to call off their lobbyists, who have been trying to water down the administration's proposal to reform and strengthen bank regulation.  At the same moment, officials next door at Treasury are putting the final touches on agreements that will dramatically reduce the legal and political leverage the administration holds over those very same banks by allowing them to repay the bailout money they received. Hello? Is this what passes for political arm-twisting and bare-knuckle negotiation at the Obama White House? In a capital where it is more important to be feared than loved, it's even worse for a president to tear into Wall Street "fat cats" one day and then let them off their leash the next.

Citi Repays TARP, Taxpayers Get Screwed - And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks. They just ditched the bad stuff--namely, pay caps--and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone). Obama can jawbone all he wants about "fat cats," but that's all he can do. Wall Street has him and the rest of Washington right where they want him: By the balls. Why does this matter?  Because, as Alan Greenspan of all people just observed, taxpayers are still on the hook for everything, and the government now has no bullets left.

Citigroup Does The Impossible: It Screws US Taxpayers AGAIN - The nausea we feel with respect to Citigroup and our Treasury Secretary just hit a new high. Perhaps it's true that civilization would have ended if we had just allowed Sandy Weill's colossal junk pile to finish blowing itself up. But at this point that seems a more attractive alternative. In case you missed it, here's the latest outrage: As of yesterday afternoon, the United States taxpayer owned 34% of Citigroup's common stock, in addition to a massive amout of TARP preferred stock. The US taxpayer did not own 34% of Citigroup's common stock by choice. We owned it because our government decided to bail Citigroup out not once, not twice, but three times. In the last of these bailouts, the Treasury Secretary Tim Geithner gave Citigroup the latest in a long series of gifts, by converting some of our preferred stock to Citigroup common stock at $3.25 a share. This conversion price was too high and resulted in an invisible bailout/gift that most people missed. It also left taxpayers with the dubious privilege of holding Citigroup common stock.

Citi’s expensive TARP exit - Citi’s paying big to exit TARP: The moves will result in a pre-tax loss of $10.1 billion that will likely be taken in the fourth quarter from accounting charges taken on the value of the repaid preferred shares and the cancelation of the insurance plan. The new stock offering, meanwhile, will severely dilute erode the value of existing Citigroup shares.Once the repayment deal is completed, it will still take several more years to clean up the financial carnage. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans

Treasury to delay selling government's stake in Citigroup after share price falls - Citigroup wants to escape government control. The Obama administration wants to cut it loose. But investors are still standing in the way. The New York bank said Wednesday that it was on the verge of raising $17 billion from investors toward repaying its federal aid, but only at a price of $3.15 per share, 20 percent lower than the price of its shares at the beginning of the week. That discount was much larger than expected, leading the Treasury Department to postpone its plans to start selling the government's 34 percent stake in Citigroup. Treasury had expected to reap a substantial profit on the shares, which it acquired at $3.25, but selling now would instead result in a loss of hundreds of millions of dollars.

Treasury Official Blames Fed For Citigroup Fiasco - A top Treasury official blamed the Federal Reserve on Thursday for Citigroup's botched attempt to raise funds to pay back its federal bailout. The finger-pointing comes a day after the market rejected the government and the Fed's assertions about the health of Citigroup, turning back the bank's effort to raise $17 billion by selling common stock. The rebuke is a blow to the administration's effort to withdraw itself from its ownership stake in major financial institutions and a reminder that many Wall Street banks, despite planning to pay sky-high bonuses this year, have yet to turn things around. Despite analysts' warnings that Citigroup still wasn't healthy enough, Treasury and the bank went ahead with the attempted payback. When Citi failed to raise the money it needed from the market, Treasury backed away from selling its shares. "Based on today's offering price, Treasury has decided not to participate in the equity offering,"

Don't Blame Citigroup For The Latest Outrage--It Was Tim Geithner's Fault - A few days ago, we flamed Citigroup and Tim Geithner for once again screwing taxpayers with the bungled TARP exit. A Wall Street friend writes to say that our scorn for Citi was actually misplaced, that it was all the Treasury's fault:Citi management has been responsible for countless prior sins, but this one belongs to Uncle Sam. I'm totally outraged and this whole thing is an example of how this mindless popular outrage at "Wall Street" for all the world's problems creates adverse consequences that hurt everyone.

Can Citigroup Flail Its Way to Solvency? -- This week Citigroup (C) announced plans to raise up to $19.6 billion in new capital. This is being done to provide the means to repay $20 billion TARP money to US taxpayers. Coordinated with the repayment, the U.S. Treasury announced plans to sell up to $5 billion of the bank’s shares, which would reduce the government's stake in the bank to less than 30%. The government currently owns 34% of Citi. This was discussed in an article by Justin Baer at But yesterday afternoon the U.S. Treasury announced it was canceling its sale because Citi is selling stock at $3.15 a share, lowering the price below what the Treasury is willing to accept. In related news, Adia, the Abu Dhabi Investment Authority, has filed an arbitration claim for at least $4 billion against Citi. Adia claims that a November, 2007 investment of $7.5 billion in C convertible preferred stock was subject to material misrepresentation.

Another View: Redefining How to Repay TARP - NYTimes - David Nason, a former assistant secretary for financial institutions at the Treasury Department under President George W. Bush, was a key architect of the TARP Capital Purchase Program and helped negotiate the original government investments in the nine biggest financial firms in the country. He contends that the financial bailout’s repayment standards need to be re-examined.

A Tax Break for Citigroup Comes With Repayment of Bailout – NYTimes -  A day after Citigroup won approval to escape the government bailout program, a special tax break that the bank received to pave the way for its exit could become a point of contention in Washington.  After months of discussions, the Internal Revenue Service granted an exemption late Friday that allowed Citigroup to preserve a $38 billion tax benefit it stood to lose if it repaid the government. The decision essentially waived a longstanding rule that disqualified certain tax breaks if a significant ownership stake changed hands in an effort to discourage outside investors from buying tax benefits.  The Treasury Department’s plans to begin selling its one-third ownership in Citigroup, along with the bank’s planned $17 billion stock offering, would have been such an ownership change.

Kucinich panel to investigate Citigroup tax ruling - A House subcommittee said Thursday that it will investigate the Treasury Department's decision to change a long-standing law so that Citigroup could keep billions of dollars in tax breaks. Rep. Dennis J. Kucinich (D-Ohio) called Treasury's action a "farce" and an "outrage" during a hearing Thursday of the domestic policy subcommittee of the House Committee on Oversight and Government Reform. Kucinich, the subcommittee chairman, said that he would demand an explanation from Treasury officials. "This committee is not going to rest until we've examined this last deal threadbare, until we have spoken to every individual associated with it, examined every communication related to it, with every person that may have had an interest in it, or who may have had some kind of a channel of influence," Kucinich said.

The Middle Class Collapse - Bankers must think we're stupid. How could they expect anyone to buy their performance at the recent White House/Wall Street confab during which, with hands on hearts, they swore allegiance to the American people? They want us to think they're Boy Scouts instead of rapacious profiteers who crashed our economy? Meanwhile, Wall Street is the direct beneficiary of bailouts which represent the largest transfer of wealth since slavery. Only this time the money is going from a struggling middle class to the super-rich. The fundamental problem is clear: Too much wealth in the hands of the few. Bankers, however, are betting that we will reject any call for redistributing wealth.

Washington Swings at Reform – BusinessWeek -The sweeping reforms that politicians promised after the collapse of investment bank Lehman Brothers have mostly been forgotten or watered down. U.S. policymakers aren't likely to break up big banks or ban exotic derivatives. "The industry is not losing as badly as it thought it might," says Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster in Washington, D.C. But investors will still have to deal with a shifting regulatory landscape. In mid-December, the House passed measures that will boost oversight of stockbrokers, credit rating agencies, and complicated investments, as part of broader reforms that include the Consumer Financial Protection Agency. The Senate will consider similar provisions early next year.

Banks: Real Reform and Pitchforks - Room for Debate Blog - NYTimes Forum - Obama told a group of bank executives on Monday that they needed to loosen lending and take other action to help the American economy. But as Wall Street banks to announce they are repaying the funds from the Troubled Asset Relief Program, freeing themselves from government oversight on compensation and pay, what leverage does the president really have? Any regulation would have to come from Congress. The House passed a banking regulation bill last week, and the Senate is working on its own version. How likely is the prospect of significant regulation of the banking industry from Washington? Douglas Elliott, Brookings Institution Yves Smith, financial analyst Megan McArdle, Asymmetrical Information William K. Black, former banking regulator Edward Harrison, banking and finance specialist

Barney Frank: ‘Maybe Bankers Should Fire the Lobbyists’ - WSJ - Bank chief executives meeting with President Barack Obama today acknowledged there’s been a “disconnect” between what they’ve said about the re-regulation of the financial industry and what their lobbyists have actually done. To the bankers’ promise to turn over a new leaf, House Financial Services Committee Chairman Barney Frank said: Prove it. “I’m not one to advocate firing people around Christmas, but maybe they should fire the lobbyists who apparently have so misrepresented their position,” Frank said in an interview.

“Wake Up, Gentlemen”  - The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved. Anyone opposed to this approach is a populist, with or without a pitchfork. Single-handedly, Paul Volcker has exploded this myth. Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen. I can only say that your response is inadequate.” Volcker has three main points, with which we whole-heartedly agree: “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.” “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”“I am probably going to win in the end”. Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

Interview with US Economic Recovery Advisory Board Chair Paul Volcker - Der Spiegel - Paul Volcker, 82, is one of US President Barack Obama's leading economic advisors. SPIEGEL spoke with him about the economic challeges facing the US, whether new taxes are needed to address public debt and how America can return to a position of economic leadership.

Volcker’s anti-Geithner, anti-Summers World Tour - “Bankers and regulators have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years. There is a lot of evidence that financial weaknesses brought us to the brink of a great depression . . . The proposed changes are like a dimple.”  That paraphrased quote above comes to us from none other than Tall Paul on his five country, eight week, Bankers Shame lecture series. The Bloomberg article its from (Regulators Resist Volcker Wandering Warning of Too-Big-to-Fail) extensively reviews the anti-Geithner, anti-Summers World Tour. Even though this is obvious, it still needs to be repeated:

Paul Volcker Picks Up A Bat - Volcker only makes substantive public statements when he feels important issues are at stake.  He also knows exactly how to influence policy – he has not been welcomed in the front door (controlled by the people who have daily meetings with the President), so he’s going round the back, aiming at shifting mainstream views about what are “safe” banks.  Many smart technocrats listen carefully to what he has to say. Speaking to a group of senior finance executives, as reported in the Wall Street Journal on Monday, Volcker made his point even more forcefully.  There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers).  Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health. Now that Paul Volcker has picked up his hammer, he will not lightly set it aside.  He knows how to sway the policy community and he knows how to escalate when they don’t pay attention.  Expect him to pound away until he prevails.

SEC To Require Broader Disclosure On Executive Pay - Federal regulators voted Wednesday to require companies to reveal more information about how they pay their executives amid a public outcry over compensation. The SEC also changed a formula that allowed companies to understate how much their senior executives are paid. At issue is how public companies report stock options and stock awards in regulatory filings. Such awards often make up most of top executives' pay.

Finreg I: Bank capital and original sin - Banks are not financial intermediaries. Their role is not, as the storybooks pretend, to serve as a nexus between savers with capital and entrepreneurs in need of capital for economically valuable projects. Savers do transfer funds to banks, and banks do transfer funds to borrowers. But transfers of funds are related to the provision of capital like nightfall is related to lovemaking. Passion and moonlight are often found together, yes, and there are reasons for that. But the two are very distinct phenomena. They are connected more by coincidence than essence.

New ice age for bankers - The international rulemaking body for the banking industry, the Basel Committee on Banking Supervision, has proposed a series of reforms that would change the nature of banking in a profound way (">Strengthening the resilience of the banking sector [282KB PDF]). Some will mutter about stable doors and horses: it was the inadequacy of the existing Basel rules which provided dangerous incentives to banks to take the crazy risks that have mullered the global economy. But be in no doubt. Although its reform paper, "Strengthening the resilience of the banking sector", may seem technical and obscure, it would turn a particular kind of high-paying, securities trading, global megabank - the institutions that created and defined the boom-and-bust conditions of the past decade - into an endangered species.

What the Frock was the reason for TARP, TALF, etc. then? - Rahm Emanuel accidentally Tells the Truth and Shames the Devil:“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”Gosh, the Administration has noticed that the banks have been "on the sidelines" (read: reaping windfall profits from tax dollars and funneling those funds to themselves).

TARP Repayments Push Geithner to Focus on Unemployment, Credit - Bloomberg - Geithner and President Barack Obama have said the $700 billion financial bailout averted an economic meltdown and will end up costing taxpayers no more than $140 billion. That is unlikely to deflect public anxiety about an unemployment rate near a 26-year high or declining bank lending. Eight of 10 Americans see joblessness as the greatest threat, according to a Bloomberg National Poll this month. In the eyes of ordinary Americans, “Geithner is going to be a Treasury secretary for the elite, not a Treasury secretary for the economy.” To fight that impression, the administration has tried to reshape TARP to help homeowners and small businesses. Results have been slow to materialize. Earlier this month, Treasury officials acknowledged a need to put more pressure on mortgage servicers to rework home loans on behalf of troubled borrowers.

TARP Leftovers? - It’s kind of silly, the talk about using unspent TARP money to “fund” anything else outside of TARP.  The TARP funds are borrowed money, and we’ve literally borrowed any of the TARP funds already spent.  Any “remaining” TARP funds that are “tapped into” will just become additional amounts literally borrowed.  Bruce Bartlett pointed this out among other troubling aspects of the talk about possible additional stimulus: It’s wrong to use such funds as “found money” that needs to be spent quickly lest it burn a hole in the government’s pocket.

Another Issue With Redirecting TARP Money - Last week I noted two challenges that Congress will face if it wants to use unused TARP money to “pay for” new spending efforts. The first is that each dollar of redirected TARP money generates only 50 cents in budget “savings” (because TARP budgeting uses credit principles that immediately recognize the potential for some money to be repaid in the future). The second is that the alleged budget “savings” are likely mythical (because the existing TARP program is on track to use much less than its full $699 billion authority). A third issue, recently pointed out to me by a friend, is that the original TARP legislation includes language that’s intended to prevent TARP money from being redeployed to other uses.

BBC News - Cleaners 'worth more to society' than bankers – study - Hospital cleaners are worth more to society than bankers, a study suggests.The research, carried out by think tank the New Economics Foundation, says hospital cleaners create £10 of value for every £1 they are paid. It claims bankers are a drain on the country because of the damage they caused to the global economy. They reportedly destroy £7 of value for every £1 they earn. Meanwhile, senior advertising executives are said to "create stress". The study says they are responsible for campaigns which create dissatisfaction and misery, and encourage over-consumption. And tax accountants damage the country by devising schemes to cut the amount of money available to the government, the research suggests.

FT - The value of bankers (and others) - Bankers should count themselves lucky that the UK and French governments are only considering a 50 per cent supertax, because their value to society is negative, says a report released today by the New Economics Foundation. To me, the report is a perfectly sensible attempt to describe the externalities - the difference between the private value and the social value - that are embodied in different jobs. But it is combined with numbers that appear to be complete guesses alongside some horrible howlers. But the underlying idea is sound and the implication is clear. It is a perfectly reasonable task of governments to discourage jobs where social value is less than the private value and vice versa. By this logic, if the social value of a job is strongly negative, it should be outlawed.The logic continues that if elite bankers - or any other profession - don’t like the idea of state intervention along these lines, they will be able to find well-remunerated jobs elsewhere in the economy, since we are told they are superstars and are worth every penny they earn.

Hospital Cleaners Are Worth More Than Bankers (and Quelle Surprise, Bankers Destroy Value!) - A provocative report by the New Economics Foundation has made an effort to put a price tag on the broader costs and benefits of various types of work. As quoted in the Financial Times, the leader of this effort put it:  Pay levels often don’t reflect the true value that is being created. As a society, we need a pay structure which rewards those jobs that create most societal benefit, rather than those that generate profits at the expense of society and the environment.

A Long Shadow Over Small Banks - BusinessWeek - As the nation's largest financial institutions scramble to pay back their bailout money, some regional banks may be on the government dole until at least 2011. Lending for offices, malls, hotels, and similar properties averages more than a third of loans at 35 of the biggest regional players with federal funds, according to an analysis by Bloomberg BusinessWeek . By comparison, such debt averages 9.5% of loans at Citigroup and Wells Fargo, And with defaults at a 16-year high and rising, the worst may be yet to come.

Agencies in a Brawl for Control Over Banks - WSJ -- In the darkest days of the financial crisis a year ago, Sheila Bair was hailed for having predicted the housing bust. Today, the chief of the Federal Deposit Insurance Corp. is fighting for her agency's future. Connecticut Democrat Christopher Dodd, the Senate Banking Committee chairman, has proposed revoking almost all of Ms. Bair's powers to supervise banks, as part of a sweeping financial-regulation bill now under consideration in the Senate. That would leave Ms. Bair in charge of an agency whose primary role is to clean up banks after they fail, with little part in monitoring them before problems erupt. So, Ms. Bair has been working for months to beat back the idea.

FDIC Approves Giving Banks Reprieve From Capital Requirements - (Bloomberg) -- The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets. Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books. “We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” she said at a board meeting Washington.

FDIC's Bair takes the "Over" - On Saturday I wrote that I'd take the "over" - more bank failures in 2010 than 2009. This is primarily because many FDIC insured banks are overly exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans. FDIC Chairwoman Sheila Bair is also taking the "over". From CNBC: Worst of Bank Failures Isn't Over Yet: FDIC's Bair = Bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry, FDIC Chair Sheila Bair told CNBC.... Bair did not quantify how bad the failures would get but said the worst isn't over yet for institutions that will suffer even as the economy

Sheila Is "Concerned": She Should Be! - The latest piece of stupid to come out of Ms. Bair's mouth was this morning on CNBS and summarized on Bloomberg: Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending. “There needs to be well-managed risk-raking to get the economy going again,” Bair said today in a Bloomberg Television interview at the White House, prior to a meeting of bank chief executive officers with President Barack Obama. Right.  But here's the problem, in a nutshell - the banks are still hiding losses - big losses.Where?  The second mortgages are sitting on bank balance sheets and they are, for loans that are underwater on the first, worth exactly zero!

‘Substantial’ Bank Losses Are Needed to Fix Housing (Bloomberg) -- Banks will need to take “substantial” writedowns on home-equity loans to enable loan modifications that will allow the U.S. housing market to recover. The government’s mortgage-modification program will fail to avert many of the 9 million to 10 million looming foreclosures because it doesn’t reduce principal for borrowers, about a quarter of whom owe more than the current values of their houses, Laurie Goodman, a mortgage-bond analyst at Amherst, said today in a Bloomberg Radio interview. “It’s important to realize the largest second-lien holders are the largest banks, and there’s going to have to be some very substantial writedowns if you go to a principal-reduction program,” Goodman said. “And this is going to have to be addressed head-on.”

Remember How We Bailed Out The Banks So They Could Keep Lending?  - They missed that part:             (net lending chart)

The loan dilemma - Barack Obama wants the banks to start lending again: This is something I hear about from business owners and entrepreneurs across America — that despite their best efforts, they’re unable to get loans.I would love to see some empirical data on this, because I suspect that insofar as lending volumes have dropped, it’s more a function of reduced demand than newly-recalcitrant bankers. Tom Lindmark points to a Deutsche Bank survey of small businesses which puts availability of credit way down the list of problems, and “poor sales” easily at the top. During the credit boom, maybe small businesses, facing a drop-off in sales, would try in the first instance to cover the gap by taking out a bank loan. But nowadays people are much more aware of the dangers involved in taking out a loan you can’t afford to repay: if your business is losing money, borrowing more only makes matters worse. Borrowing for productive investment makes sense; borrowing to cover an operating shortfall does not.

Damned If You Do, Damned If You Don't - We had a major financial crisis because banks made bad loans with high leverage.  We yelled at the banks for causing all these problems, and we yelled at them for not exercising sound risk management.  Now, they're trying to be prudent and not lend money to people who won't be able to easily pay it back, but the American economy is like a crack addict in need of a fix - so we're yelling at the banks for not lending enough - for being TOO prudent. We've become addicted to easy credit - but people forget that the current, tighter credit situation is not abnormal - it's the reversion to the mean!  The orgy of credit and appetite for risk that fueled the growth of the last 10 years is what was abnormal.  This is the single most important realization for policymakers to wake up to.

Rosenberg: We've Barely Begun The Deleveraging Process - HOW FAR INTO THE DELEVERAGING PROCESS ARE WE? Early innings. From the peak, the level of nonfederal debt has deflated by $260 billion. Some of this has been either paid down, written off, modified, defaulted on or some combination of the four. No matter. As Chart 1 illustrates, and employing Bob Farrell’s first Market Rule on the time- honored trend towards mean reversion, this develeraging process that began two years ago is really in its infancy stage. The current level of U.S. outstanding nonfederal debt is $27 trillion, which is astounding both in absolute terms and even more so relative to nonfederal GDP — a 206% ratio. It is down fractionally from the 208% peak, but here is the rub. If mean-reversion means that we get back to some norm of the 1990s, then we are talking about the need to extinguish $8 trillion of nonfederal debt. The only question is how this happens, not if. If we’re talking about mean reverting to the very stable trend of the 1960s and 1970s, then the credit contraction is very likely to exceed $11 trillion.

Insurers May Lose $10 Billion on Commercial Property (Bloomberg) -- U.S. life insurers, a group led by MetLife and Prudential Financial, may post $10 billion in losses tied to commercial real estate over the next three years, Moody’s Investors Service said.  Defaults on property loans and declines in commercial mortgage-backed securities will “dampen earnings,” the ratings firm said in a statement. The loss estimate was increased from $7 billion earlier in the year, Robert Riegel, managing director at Moody’s, said in an interview today.  Life insurers use policyholder premiums to lend to property owners and buy commercial mortgage-backed securities. 

Financial Rules Bill Permits Commercial-Mortgage Debt Loophole - (Bloomberg) -- Legislation passed last week by the U.S. House, intended to curb the type of lending that threatened to unravel the economy, would allow issuers of bundled debt to pass off all the risk to third parties. The bill, which requires banks to retain 5 percent of the credit risk on loans being sold as bonds, has an exemption that applies if an outside investor buying the securities most susceptible to losses “provides due diligence on all individual loans.” That practice is one of the linchpins of the commercial-mortgage backed bond market. Policy makers’ efforts to overhaul credit markets include proposals aimed at aligning financial institutions’ incentives with those of investors. The collapse of bonds linked to souring subprime mortgages sparked $1.7 trillion in writedowns and credit losses worldwide, according to data compiled by Bloomberg. The market for commercial-mortgage securities has long relied on a third party to police underwriting and kick out bad loans

4 Big Mortgage Backers Swim in Ocean of Debt - NYTimes - Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support. AIG, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state. And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them.Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Fair Game - Lawsuit Reveals the Problems Inside Wall Street’s Mortgage Machine - DURING the lending mania, as Wall Street’s mortgage machinery hummed and the money poured in, millions of loans were bought and sold, zipping across town or around the world. Now that this giant factory is pretty much shuttered, details are emerging about how its assembly lines actually operated. And as a dispute between two European banks and Bank of America indicates, the revelations aren’t pretty.  People familiar with the mortgage machine’s innards say problems were industrywide.

How the US Government Funds Mortgage Fraud - The Centre for Public Integrity and the Washington Post investigate Ginnie Mae: 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, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. 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.

How smaller banks would have helped shrink the CDO market - The WSJ has new details on how banks would pass CDO risk between each other in an improbably long chain.  The risk, here, originated with Countrywide. It then got moved to South Coast Funding, whence it moved to Merrill Lynch, and thence to European banks, who sold it on to Goldman Sachs, who in turn passed it on to AIG. When the music stopped, AIG bore the brunt of the losses. The obvious question here is why the chain was so long: why couldn’t Merrill (or even Countrywide) just insure the mortgages with AIG itself, instead of sending them off on a long and winding road to end up in the same place

FHFA eyes more aid for Fannie, Freddie-Bloomberg -  (Reuters) - The U.S. Federal Housing Finance Agency, may ask the U.S Treasury before the end of the year for an increase in the $400 billion lifeline provided to Fannie Mae  and Freddie Mac, Bloomberg said, citing people familiar with the talks. The FHFA could not immediately be reached for comment by Reuters outside regular U.S. business hours. Fannie Mae and Freddie Mac, which together own or guarantee half of all U.S. mortgages, were seized by the U.S. government and put into conservatorship in September 2008.

Fannie Freddie May Need Another $400 Billion Taxpayer Assistance - Mish - Remember the ridiculous claim that taxpayers would not lose a dime on Fannie Mae or Freddie Mac when they were seized 16 months ago? It's certainly no surprise in this corner but Fannie, Freddie Overseer May Seek More Treasury Aid: Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year. The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets

The Fannie and Freddie show continues... and continues - Bloomberg is reporting that Fannie Mae and Freddie Mac's regulator is renegotiating the terms of the housing agencies' financial rescue with the Treasury Department. According to unnamed people "familiar with the talks," this renegotiation could include increasing the size of the agencies' $400 billion lifeline—so far, Fannie Mae has tapped $60.9 billion and Freddie Mac $50.7 billion—and possibly cutting the dividends the agencies pay to Treasury on the borrowed money. Things at Fannie and Freddie are still a mess, it seems. That makes me wonder why in some 1,300 pages of thoughts on how to reform the financial sector last week, the U.S. House of Representatives didn't mention Fannie or Freddie once.

Fannie’s Christmas Present – A Delayed Repo - I was struck by the following announcement from Fannie Mae. Being the nice guys that they are, Fannie is giving homeowners a few more days before they get tossed on the street. I have not seen that the other D.C mortgage lenders have followed Fannie’s lead, but I am sure they will. Freddie Mac, FHA, FDIC and the Federal Home Loan banks are also “nice” guys who are also in the foreclosure business. What’s the sense of chucking people out in the cold over the holidays? We are supposed to be a compassionate people with a compassionate government. I am not sure that those who get this two-week reprieve will really be enjoying the Christmas spirit. Waiting for the axe to fall does not fit in with the plum pudding and presents thing.

Wall Street Bet that Feds Would "Paper Over Mistakes" -  In the commentary quoted below, "LTCM" stands for the Long-Term Capital Management hedge fund. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels. This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware.A similar bomb exploded in 1998, when LTCM blew up. The policy response to the LTCM debacle is instructive; more than anything else it solidified Wall Street's belief that there were little if any real risks to risk-taking. With $5 billion under management, LTCM was deemed too big to fail because, with nearly every major firm copying its money losing trades, much of Wall Street might have failed with it.

Why Is The Fed Happy Buying All Those Mortgages? Because You're Guaranteeing Them!  - Despite the huge and unprecedented rise in the Federal Reserve’s exposure to mortgage backed securities, the Fed says that it is unlikely to face any losses because it is only buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae.This is meant to reassure policy makers and the public that the Fed is prudently protecting its balance sheet against losses. Protection against losses at the Fed is important to the public for three reasons.Fed profits are an important source of revenue for the US Treasury...Losses at the Fed could hurt its flexibility when it comes to policy decisions...A faltering Fed will sap confidence around the world in the US, making it harder for both private and public institutions to raise capital in both debt and equity markets.

Rates Are Low, but Banks Balk at Refinancing - NYTimes -  Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government. Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out. The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement. Refinancing could save owners hundreds of dollars a month, which could be spent, saved or used to pay down debts. Extra spending would help lift the economy, and lower payments might spare some people from losing their homes to foreclosure.

Mortgage Originations to Fall 16% in 2010 as Stimulus Ends (Bloomberg) -- Mortgage originations probably will decline 16 percent next year as the homebuyer tax credit expires and the Federal Reserve winds down purchases of mortgage-backed bonds, according to a report by Keefe, Bruyette & Woods Inc.  Lending may drop to $1.6 trillion in 2010 from $1.9 trillion this year, Bose George and Jade Rahmani wrote in a research note today. The volume of refinancings will decline after the end of the Fed program in March boosts rates, and home purchases will “taper off” after the tax credit expires in April.

Freddie Mac Residential Home Prices 1970 -2009 (peak and trendline graph)

Refinance Activity and Interest Rates - The Mortgage Bankers Association's (MBA) current forecast for refinance activity in 2010 is $693 billion, and falling further in 2011 to $591 billion. The MBA is currently estimating 2009 refinance originations will be $1,246 billion - so they expect activity to fall almost in half. This gives me an excuse for a graph or two (as if I need one).

Great deals on mortgage modifications, including 2% interest - Nearly 80% of all loan modifications resulted in lower payments in the second quarter (the latest figures available), according to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision. That's up from just over 50% three months earlier. Still, just a paltry 4% of all homeowners in need of workouts are receiving them.When loans are made affordable, borrowers are less likely to default. A year after modifications, according to the OCC report, just 34% of borrowers whose loan payments had been reduced 20% or more had redefaulted compared with 63% of borrowers whose payments had been left unchanged.

Obama’s mortgage mod plan lets bankers reject borrowers and auction their houses without any written notification -  Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.  These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won't get help after all.

Obama's standardized short-sale plan could help troubled homeowners -- If you're in trouble on your mortgage and can't get a loan modification, check out the Obama administration's standardized short-sale plan that's scheduled to roll out in the next several months. The program, outlined Dec. 1 by the Treasury Department, is an attempt to streamline what has traditionally been a contentious, time-consuming process by requiring lenders and others to use nationally uniform documents, timelines and financial incentives. A short sale involves a lender or investor agreeing to collect less than the balance owed on a mortgage debt out of the proceeds of a negotiated sale of the property. Often a short sale is the last alternative to foreclosure available to distressed homeowners and banks.

Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise - (Bloomberg) -- Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers. Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier.

Million Dollar Homes Defaulting At Twice National Rate - While first-time buyer credits and government backed mortgages have kept the moderately priced end of the housing market on life support, the same is not true of more expensive housing- especially in the million dollar plus range. A nearly frozen luxury market along with a tough economy means that more and more McMansion owners are going into default: (Bloomberg) — Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers. “The rich aren’t as rich as they used to be,”

Moody’s Reviews $143 Billion of Jumbo-Mortgage Bonds - Moody’s Investors Service placed $143 billion of jumbo-mortgage bonds under review for downgrades ... The revisions were prompted by “the rapidly deteriorating performance of jumbo pools in conjunction with macroeconomic conditions that remain under duress,” Moody’s said.  An “overhang of impending foreclosures will impact home prices negatively,” with values likely to decline 9 percent more ... U.S. unemployment will rise to peak at about 10.6 percent ...

Bank of America defends performance in Making Home Affordable mortgage modification program - Bank of America, the country's largest mortgage lender, on Wednesday defended its performance in the federal foreclosure relief program, saying that far fewer of its customers are eligible for the plan than government estimates indicate and that it is working to cure any deficiencies. The bank has come under criticism for lagging behind competitors in signing up borrowers to the program, known as Making Home Affordable. By November, Bank of America had registered only 15 percent, or about 160,000 customers, of the more than 1 million delinquent borrowers who are potentially eligible, according to Treasury Department data. That is a far smaller percentage than competitors such as J.P. Morgan Chase and Citigroup.

Expected Returns: Americans Not Benefiting From Record Low Mortgage Rates - The Fed has kept mortgage rates artificially low through its direct MBS purchases. While economic orthodoxy would suggest these low rates would stimulate economic growth, the truth is it has done very little for our economy. Notice how banks are balking at refinancing at current rates, which reflects their assessment of current economic conditions and the solvency of consumers. Keep an eye on the behavior of banks moving forward, as it will be a key indicator of what banks are seeing on the economic front.  In the graph below, notice how mortgage rates have historically been at much higher levels. If inflation starts to become a problem, we are likely to see much higher mortgage rates, which will absolutely crater the housing market.

Refinancing with Negative Equity:  If the loan to be refinanced was held by a bank, then it might make sense for the bank to refinance the loan (this lowers the bank's risk of default). However the "lender" might be a servicing company and the loan may have been securitized. Then it is impossible to refinance because the current holders of the note would be paid off, and no new lender would make a loan greater than the value of the collateral...

The Illusion of Recovery - Talk about a devastated landscape... Any which way you look, the housing numbers are relentlessly bad.  For example, 23% of U.S. homeowners owe more on their mortgages than their properties are worth, according to the Wall Street Journal.  They possess, in the vivid lingo of the housing industry, “underwater mortgages.”  Among them, 5.3 million households have mortgages that are at least 20% higher than their home’s value, 520,000 of whom have already received default notices.  In the meantime, home-loan delinquencies and home repossessions are now at record highs.  According to the Los Angeles Times, by the end of September, “one in seven U.S. home loans was past due or in foreclosure,” and the chief economist for the Mortgage Bankers Association expects the number of foreclosures to keep rising deep into 2010. Worse yet, foreclosures on large rental-unit buildings are also on the rise.

Can Foreclosures Be a Neighborhood’s Best Friend? - Cleveland Fed - Rampant foreclosures present a dichotomy for communities. On the one hand, foreclosure can deal a crushing blow to the American Dream of homeownership, and it certainly can accelerate the decline of neighborhoods. But often overlooked is the other hand: Foreclosure can sometimes serve as a useful tool to stave off community blight. Using the proper legal tools, older industrial cities can use foreclosure to acquire property that otherwise would become vacant or abandoned. As a result, crisis can be transformed into opportunity—the rare opportunity to rethink redevelopment and land use.

Underwater mortgage, foreclosure, home loan payments - Are you stupid not to walk away from an "underwater" mortgage, even if you can make the payments? How to avoid foreclosureLaw professor Brent T. White thinks the answer may be yes.White doesn't actually use the word "stupid" in his recent paper, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis." Instead, the University of Arizona prof blames emotion for clouding homeowners' judgment.White asserts that the real reason more homeowners don't default is because of shame, guilt and fear, fed by misinformation about foreclosure's effects promulgated by the government, lenders and the media.

Debtor's Dilemma: Pay the Mortgage or Walk Away - WSJ - Should I stay or should I go? That is the question more Americans are asking as the housing market continues to drag. A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests. A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it  is no longer convenient.

Strategic default and the duty to shareholders - Megan McArdle thinks strategic default by underwater homeowners is not okay. I would like to agree with her. I think that if we structured the economy so that I could agree with her, we’d have both a better world and a more prosperous economy. But, in the world as it is, in this mess as we’ve made it, her position is beyond unfair. Businesses walk away from contracts all the time, whenever the benefits of doing so exceed the costs under the terms by which they are bound. Let’s recall Milton Friedman’s famous essay, The Social Responsibility of Business is to Increase its Profits. In 1970 when Milton Friedman published these words, I think they must have seemed a bit radical and weird. But today this view is triumphant, both in theory and in practice. Mainstream theory and law views a corporation as a “nexus of contracts” between consenting individuals.

10% of underwater homeowners would walk away, survey finds - LATimes -A new national survey looking at the phenomenon of strategic defaults, in which homeowners choose foreclosure over continuing to pay on underwater mortgages, has found that nearly one out of 10 homeowners say they would walk away if they felt financially vulnerable and owed more on their homes than they were worth.The telephone poll of 1,000 homeowners, conducted for Reecon Advisors, publisher of Real Estate Economy Watch, revealed that most would choose other options: 61.7% would talk to their lenders about modifying loan modifications, 44.3% would try to sell and 25% would rent out a room to help meet expenses. To what extent homeowners are underwater also plays a role in the decision making process.

Morgan Stanley’s Commercial Jingle Mail - Here is a fascinating twist on the underwater homeowner walking away fromt heir bad purchases: This time, its Morgan Stanley.They spent over $8 billion on commercial property in 2007 — the peak of commercial real estate in the US. Now, they are going to preemptively “Walk Away” from five San Francisco office buildings, letting them go back to the lenders.The buildings Morgan Stanley is giving up are :One Post- 201 California St.- Foundry Square-  I60 Spear St.- 188 Embarcadero...So this is now a new category of real estate financing: Preemptive “Walks Away” from bad CRE purchases.

Housing Starts in November: Moving Sideways - Total housing starts were at 574 thousand (SAAR) in November, up 8.9% from the revised October rate, and up from the all time record low in April of 479 thousand. Starts had rebounded to 590 thousand in June, and have moved mostly sideways for six months. This is both good news and bad news. The good news is the low level of starts means the excess housing inventory is being absorbed - a necessary step for housing (and the economy) to recover. The bad news is economic growth will probably be sluggish - and unemployment elevated - until residential investment picks up.

‘Shadow Inventory’ of U.S. Homes Climbs, Report Says -  (Bloomberg) -- The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic. The “shadow inventory” rose from 1.1 million a year earlier. Such properties include those taken over by banks and mortgage companies and those where the loans are at least 90 days delinquent, the Santa Ana, California-based research firm said in a report today. The number of unsold homes listed for sale was 3.8 million in September, down from 4.7 million a year earlier, First American said.  Unemployment in the U.S. is helping drive foreclosures, which may slow the real estate recovery as more houses come on the market. Total inventory -- including the shadow supply -- was 5.5 million in September, down from 5.7 million a year earlier.

Home Prices Without Fed Support - The big test for home prices will come next spring when the U.S. starts to withdraw from the market. The U.S. housing market has been on government life support for much of 2009. Thanks to the feds' bounty of tax credits, purchases of mortgage securities, interest-rate cuts, and home loan programs, new and existing home sales are up. The median home price rose, to $177,900. What happens in 2010 depends on whether the market can stand on its own.

Feldstein: House Prices to Fall Further - From Bloomberg: Harvard’s Feldstein Says U.S. Economy Still Mired in Recession  Restrained consumer spending suggests “2010 is going to be a very weak year,” said Harvard University economics professor and former NBER president Martin Feldstein “Thrift in the long run is a very good thing, but increasing thrift as you come out of a recession is going to be a drag." ...Regarding the residential property market ... Feldstein said the Obama administration’s effort to revive the housing market is a failure and home prices will continue to decline.

Deutsche Sees House Prices Falling Another 10 Percent - When the credit crisis began, credit rating agencies created models predicting how bad things may actually get, in terms of how far down home prices would fall in America. At that time, mortgage finance players assumed this was a worst-case scenario, with an outside chance of coming true.Today, Deutsche Bank researchers say these predictions will likely become a reality, with the total peak-to-trough decline of US home prices hitting nearly 40%. In the current outlook, they say home prices will drop a further 10 to 12% from current levels.The results are part of a nationwide projection that represents a weighted average across 100 individual metropolitan statistical areas (MSAs).

CPI and Falling Rents - From the BLS report on the Consumer Price Index this morning: The index for all items less food and energy was unchanged in November after rising 0.2 percent in October. The heavily weighted index for shelter, unchanged in October, declined 0.2 percent in November. Within the shelter group, the indexes for rent and owners' equivalent rent both declined 0.1 percent and the lodging away from home index fell 1.5 percent.Owners' equivalent rent (OER) decreased at a 1.5% annualized rate in November, and has decreased at a 1.1% annualized rate over the last three months. OER is the largest component of CPI, and helped keep core CPI unchanged in November. Based on reports of falling rents - and a record high vacancy rate, OER will probably continue to fall for some time, keeping core CPI low and possibly negative next year.

Poll Finds 2 Million Unemployed Lost Their Homes - A New York Times/CBS News poll released Monday found that 26 percent of unemployed Americans surveyed have been threatened with evictions or foreclosure since losing their jobs and 13 percent have lost their homes for not paying their mortgage or rent. Those who have been looking for a job for six months or more are even more likely to have been threatened with foreclosure, according to the survey conducted on December 5 through December 10.With 15.4 million Americans currently unemployed, some 4 million would be at risk of losing their homes and 2 million would have lost them, if the survey’s findings proved to be true on a national level. Total foreclosures in 2009 are expected to exceed 3.5 million, according to RealtyTrac

How Banks Fleece the Unemployed - U.S. banks have figured out a way to squeeze some extra dollars from those who can least afford it, the unemployed.  Here’s how it works. In the past two years, states have been overwhelmed with unemployment claims. Always eager to serve, America’s banks offered a deal the states couldn’t refuse.  Sign a contract — which won’t cost you a dime — and send us your weekly unemployment funds, the banks said. In return, we’ll issue our VISA or MasterCard debit cards to your laid-off workers, on which we’ll post their benefits electronically.  Thirty states signed on with the usual suspects— Citi, Wells Fargo, JPMorgan Chase, BofA. More states are lining up. The banks profit from interest earned on the funds the states deposit with them until the money is posted onto the debit cards. Then there’s the money the banks get from retailers where the unemployed shop with their cards — from 2 percent to 3 percent per transaction.But such sums are not large enough, it seems. So the banks have figured how to extract more money from the millions of unemployed now using the debit cards. The devil’s in the fees...

Credit card chargeoffs rise in November (Reuters) - Most U.S. credit card companies reported charge-offs rose in November after two months of declines in a sign that consumers remain under stress, sending shares down industrywide.In a regulatory filing on Tuesday, JPMorgan Chase & Co, the largest U.S. issuer of Visa-brand credit cards, said charge-offs -- loans the company does not expect to be repaid -- rose to 8.81 percent in November from 8.02 percent in October.It was the largest increase among the biggest credit card issuers, but not the only one.Capital One Financial Corp said its charge-off rate rose to 9.60 percent from 9.04 percent, and Discover Financial Services said its rate rose to 8.98 percent from 8.54 percent.

Americans Are Finally Saving. How Did That Happen? - NYTimes - This was the year of the return to financial sobriety — if you judge such things by the nation’s personal savings rate. That rate — which was 4.4 percent in October, according to the Commerce Department’s Bureau of Economic Analysis — subtracts what we collectively spend from what we make and then expresses the result in percentage terms. In 2009, it has ranged from a low of 3.4 percent in February to a high of 6.4 percent in May, which was the highest figure since 1993

Joblessness Causing Crisis, Cutbacks and Stress for Unemployed Americans -- Forty-six percent of Americans who have lost jobs in the current recession say it has created a major crisis in their lives with 69 percent adding that it has increased their stress level, according to a New York Times/CBS News poll conducted Dec. 4-10. Forty percent said loss of jobs had led to minor crises in their lives while 13 percent said it had not resulted in a crisis. Fifty-five percent of unemployed Americans have had trouble sleeping, 48 percent reported bouts of anxiety or depression, and 48 percent have had more arguments with family and friends. Thirty-eight percent say they have seen changes in their children's behavior as a result of their joblessness, the survey found.An overwhelming majority (93 percent) say they have cut back on luxuries, necessities or both. Fifty-four percent cut back on doctor's visits or medical treatments, 53 percent borrowed money from family or friends and 60 percent have tapped into their savings to help get by. More than three-quarters have cut back on vacations.Six in 10 find unemployment benefits insufficient to cover the cost of basic necessities.

Initial Jobless Claims in U.S. Unexpectedly Increase - Continuing claims increased by 5,000 in the week ended Dec. 5 to 5.19 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Today’s report showed the number of people who’ve use up their traditional benefits and are now collecting extended payments jumped by about 144,000 to 4.73 million in the week ended Nov. 28. Seventeen of the 50 states and territories where workers are eligible to receive the government’s latest 13-week extension have begun to report that data, a Labor Department spokesman said.

Job losses send disability claims soaring - According to the Social Security Administration, which runs the two main federal disability programs, new claims for disability benefits rose nearly 17 percent nationwide in fiscal year 2009, to 3 million. Disability filings are projected to rise another 10 percent in fiscal 2010, to 3.3 million new claims.These applicants aim to join the roughly 12 million Americans who received disability benefts at a total cost of $161 billion in fiscal year 2009, according to the latest figures from Social Security.

The Jobless, in Their Own Words - Video Feature – NYTimes - The New York Times invited respondents of a recent poll to submit videos describing how unemployment had affected them.

Do Jobs Really Cure Violence? – NYTimes - Does giving a man a job stop him from becoming a political insurgent? The generally accepted wisdom is that it does. In fact, the U.S. and other western powers have distributed millions of dollars of foreign aid in the hopes of reducing political violence and instability. But a new working paper from Eli Berman, Joseph Felter, and Jacob Shapiro may force policymakers to reevaluate this strategy. The researchers looked at unemployment and political violence against both the government and civilians in Iraq and the Philippines. They find that unemployment is actually negatively correlated with attacks against the government and statistically unrelated to insurgent attacks against civilians. The authors explore several explanations for the negative correlation and find some evidence that high unemployment may lead to a more difficult environment for insurgents, decreasing violence.

Initial Claims + Continuing Claims + EUC (000s) - 1967 to 2009 chart

Poll Reveals Havoc of Unemployment on Workers and Family - NYTimes - More than half of the nation’s unemployed workers have borrowed money from friends or relatives since losing their jobs. An equal number have cut back on doctor visits or medical treatments because they are out of work. Almost half have suffered from depression or anxiety. About 4 in 10 parents have noticed behavioral changes in their children that they attribute to their difficulties in finding work.Joblessness has wreaked financial and emotional havoc on the lives of many of those out of work, according to a New York Times/CBS News poll of unemployed adults, causing major life changes, mental health issues and trouble maintaining even basic necessities.

The New Hard Times (Video) - Depression-like series from The New York Times

Unemployed and Fearing a Fall in Class - Economix Blog - NYTimes - One of the more striking findings from the New York Times/CBS News poll of unemployed adults released Monday was the number of respondents who said they felt at risk of falling out of their current social class. Nearly half of those surveyed expressed this concern, which seems to get to the heart of the level of fear created by this recession and the degree of economic upheaval being experienced by the unemployed. Two of those who said they feared falling out of their social class were interviewed afterward and asked to elaborate.Unemployment rate for older workers hits record level - While there were rays of hope in the recently released jobless report, statistics show that one segment of the population remains overlooked and underserved. The number of unemployed individuals age 55 and older rose to 2,082,000 in November, up 54 percent from November 2008 and the most since the Bureau of Labor Statistics started keeping records for specific age groups. Experts say older job seekers are faced with unprecedented challenges, and many are on the verge of crisis.

Steele’s Economic Plan: Take Away Unemployment Benefits - This morning on NBC’s Today, RNC chair Michael Steele said that in order for banks to start lending to small businesses, the federal government should reduce the unemployment tax. Steele’s solution to fixing the economy is to take away benefits from those who have lost their jobs. If these taxes are reduced, who will pay? Rather than raid unemployment benefits, the Obama administration is proposing to assist small businesses through funding from the TARP program, which Republicans also oppose. This isn’t the first time Republicans have sought to limit funds to unemployed Americans. Before the Senate passed its jobless benefits package last month, Senate Republicans held up the bill for four weeks, which prevented more than 200,000 Americans from receiving the benefits

Unemployment Insurance in a War Bill - Next week, the warfunding bill that was passed in June will come up for a final vote, as part of a larger military bill that is part of a still larger spending package. How would any member of Congress dare to vote against such a thing? Well, just in case any of them might begin to consider it, our congressional "leaders" will include in the war funding bill a special treat: funding for unemployment insurance (plus possibly COBRA health and food stamp benefits, tax breaks for small businesses, and funding for state and local governments). How's that for alluring lipstick?

Unemployment Rate Decreased in 36 States in November - In general the unemployment rates declined in November along with the national rate, however the unemployment rate hit new record highs in Florida and South Carolina. From the BLS: Regional and State Employment and Unemployment Summary  Regional and state unemployment rates were generally lower in November. Thirty-six states and the District of Columbia recorded over-the-month unemployment rate decreases, 8 states registered rate increases, and 6 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia.

Less than Mets the Eye - For one thing, the number of people claiming emergency unemployment benefits has surged nearly 500 percent since November of last year.Moreover, the claims data fails to account for those who have exhausted their benefits, or who are ineligible because they still have one of the two or more low-paying jobs they need to survive. The same can be said for other statistics that suggest the economy is stabilizing or even improving. In "Housing 'Shadow Inventory' Rises," The Economic Populist points to one example: The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September

Op-Ed - The Do-It-Yourself Economy - NYTimes - The Great Inflection is the mass diffusion of low-cost, high-powered innovation technologies — from hand-held computers to Web sites that offer any imaginable service — plus cheap connectivity. They are transforming how business is done. The Great Recession you know. The “good news” is that the Great Recession is forcing companies to take advantage of the Great Inflection faster than ever, making them more innovative. The bad news is that credit markets and bank lending are still constricted, so many companies can’t fully exploit their productivity gains and spin off the new jobs we desperately need.

No Credit. No Economy. - “The great American consumer deleveraging continues,” our colleagues at The 5-Minute Forecast observed yesterday. “The Fed announced that consumer credit shrank for a record ninth month in a row in October.”Consumer credit, as we all know, drives a big chunk of consumer spending, which drives a big chunk of the American economy. Ergo, no credit; no economy.But consumers are not the only borrowers between the Atlantic and the Pacific who contribute to economic activity. Commercial and industrial (C&I) borrowers also play a large role. The dots are pretty easy to connect here: When C&I lending is growing, businesses are expanding. And that means rising profitability and employment. When C&I lending is falling, however, businesses are contracting.This is the unfortunate condition that now prevails

Small Business Confidence Plunges — Where Will Jobs Come From? - Two-thirds of job creation in postwar recoveries came from small business. And small business is in terrible shape. The only comprehensive poll of small business sentiment is the Discover Small Business Index. Its most recent poll shows a collapse of confidence between October and November, with a majority of small business owners having cash flow problems. The Discover Small Business Watch index fell 12 points in November to 76.5 from 88.5 in October.

The Recovery Is Faltering - As the summer was turning into a fall, there was a really brief period when it was super-cool to believe in the V-shaped recovery.There were all kinds of op-eds written about this bravely optimistic idea. But something happened.The data from October and November has not been particularly strong. The V-shaped recovery is beginning to look more U-shaped or - gasp - W-shaped. See the evidence for yourself >> (slide show)

CFO SURVEY: JOBS OUTLOOK BLEAK AND CREDIT TIGHT, BUT OPTIMISM IMPROVES - pdf -  U.S. companies expect to reduce domestic workforce by 1.6 percent in 2010, while the number of outsourced jobs will increase. Two-thirds of companies say their employment will not return to pre-recession levels until 2011 or later.  Among companies that recently instituted furloughs or reduced workforce, overtime, wages, 401(k) matches, or company contributions to health and other benefits, most say these cuts will not be restored in 2010.

High Unemployment is Here to Stay - Newsweek - You know things are bad when the nation loses 11,000 jobs in November and Americans are overjoyed. Sure, unemployment has come down a meager 0.2 percent to put us at 10 percent, but that's still the worst level in decades. And more important, there's no real end in sight. Even if jobs start to come back sooner than expected—which may happen as more stimulus money starts to kick in—U.S. unemployment is likely to remain high for years to come, as much as 7 or 8 percent even into 2014. "The average American will not be better off in five years—unemployment will remain high and wage growth will continue to be flat," says George Soros, who forecast an "age of wealth destruction" four months before the crisis hit.

Jobs, Jobs, and Green Jobs - A scary realization came to me while thinking about my children’s future the other day. There’s no guarantee of jobs for all the people in the world. As a global trading network, we may have become so efficient in making shoes, shirts, and automobiles that there’s no need for everyone to manufacture things or even to serve each other any longer. A “jobless recovery” they call it. What kind of recovery is that? The New York Times points out in a recent editorial (NYT, October 4, 2009) that the continuous job losses in the U.S. are unprecedented since 1939. We have lost jobs for 21 straight months, a total of 7.2 million since December 2007. But this doesn’t even count the poor folks who have dropped out of the system, after searching for 27 weeks and given up hope.

Where the Jobs Will Be - Economix Blog – NYTimes - Employment is expected to grow by 15.3 million, or 10.1 percent, over the next decade, according to new projections from the Bureau of Labor Statistics. Professional and related occupations and service occupations will account for more than half of the jobs: Bureau of Labor Statistics Numbers are in thousands. Within those broader categories, the occupations projected to add the most jobs are registered nurses (582,000 jobs), followed by home health aides (461,000) and customer service representatives (400,000).

It's the Jobs, Stupid - “It’s the economy, stupid,” became a successful campaign slogan in 1992 as then-presidential-candidate Bill Clinton seized upon a mostly accurate perception of George H.W. Bush as being out of touch. Belatedly the Obama administration is beginning to realize “it’s the jobs, stupid,” as more than eight million positions have evaporated since December 2007, nine million now involuntarily are working part time and a record 5.6 million of the more than 15 million jobless have been unemployed more than six months. When Stimulus III (ARRA 2009) was unleashed in February, we were assured its $787 billion of deficit spending quickly would stem the jobs hemorrhaging.The delayed effects of this third fiscal stimulus  no doubt will influence the Administration’s plans for yet another government stimulus program sometime early next year, say $500 billion or so, to help plug massive budget holes in politically important, highly populated coastal and Midwest states, and to provide for some form of a government jobs program.

STEERING CLEAR OF ECONOMIC 'SUICIDE'.... There's been no shortage of talk in recent weeks about shifting the economic focus away from recovery efforts and towards deficit reduction. About two weeks ago, for example, a Washington Post report suggested President Obama and his team want to spur job growth, but they're principally concerned with keeping the deficit in check. Since then, we've seen ample evidence to the contrary. The president, this week, said, "[I]f we can't grow our economy, then it is going to be that much harder for us to reduce the deficit.  This morning, leading members of the White House economic team agreed that job creation and economic growth have to take precedence.

Christie Romer: Obama economic adviser pitches job stimulus - A White House economic adviser says it would be "suicide" for the government to focus exclusively on the deficit when the economy is sorely in need of jobs. Christina Romer says money freed up from the repayment of financial bailout funds gives the government the leeway to boost try to employment while seeking to control the deficit over the longer term. She says "no one is talking about raising taxes" during a recession to pay for the proposed new stimulus plan.

Build America Bonds - President Obama shares his “yes we can” catchphrase with the cartoon construction worker – and the Build America Bonds of his stimulus package have proved a success. About $65bn of Babs, federally subsidised, taxable bonds issued predominantly by state and local governments, will be sold this year, with more than $100bn expected next. The Treasury pays 35 per cent of issuers’ interest payments. So the higher-yielding bonds have appealed beyond the buyers of traditional tax-exempt municipal bonds, providing cut-price funding for infrastructure projects.But, as with every builder’s estimate, costs will tend to escalate. As of last week, estimates Municipal Market Advisors, the Treasury had committed to pay $900m a year, net of income taxes on coupons, on Babs issuance of $62bn. That looks expensive relative to the tax breaks on traditional muni bonds.

White House turns its focus to next six months of spending - The largest stimulus program in the nation's history is starting to move into a new phase: Out with the rescue, in with new spending to create jobs. Top White House advisers said Wednesday that most of the economic stimulus spent so far has helped prop up the states, paying for food stamps, Medicaid and filling budget gaps that kept police officers, firefighters and teachers employed. In 2010, most of the remaining recovery spending will be funneled into projects that build roads, lay high speed rail, install broadband in rural areas and fund research at health institutions. White House economist Jared Bernstein acknowledged that most of the jobs created or saved so far have been public sector jobs. One of the largest areas of jobs saved so far included some 300,000 teachers that kept their jobs.

FDR couldn’t do it - Franklin Delano Roosevelt was a liberal president, allowed by crisis to go further in turning the purpose of the United States to the aid of the least among Americans than any president before or since. He spoke frankly of his commitment to the poor and downtrodden. Before he had campaigned on hope and now he campaigned on achievement. And he won, thumpingly. He promised to go further and do more. And yet within less than two years his program stood dead in the water.

US Begins Handing Out Broadband Stimulus Funds - US Vice President Joe Biden began dishing out the first installment Thursday of more than seven billion dollars set aside in the stimulus package to expand access to high-speed Internet broadband. Biden, at an event in the southern state of Georgia, announced 183 million dollars in investment in 18 broadband projects in 17 states. The spending is the first of two billion dollars in grants and loans to be made available for broadband projects by the administration of President Barack Obama over the next 75 days.

U.S. House Approves $154 Billion Jobs Bill, Debt Limit Increase - (Bloomberg) -- The U.S. House approved a $154 billion economic-aid package and a $290 billion increase in the legal limit on government borrowing as the chamber wrapped up its legislative business for the year. The lawmakers voted 218-214 yesterday to raise the debt ceiling to $12.394 trillion, the fourth such increase in 18 months. Hours later, the House approved on a 217-212 vote the new spending for infrastructure projects, extended unemployment benefits and aid to state governments. The chamber also passed a $636 billion defense budget bill yesterday. All three measures await Senate action.

Calculated Risk: House Approves Next Stimulus - From Reuters: U.S. House approves $155 billion jobs bill - This includes: More infrastructure spending  The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion.  Extends COBRA subsidy to 15 months Extends unemployment benefits for six months (that expire at the end of the year).  Aid to states: States would get $23 billion to pay 250,000 teacher salaries and repair school buildings, and $1.2 billion to pay for 5,500 police officers ... $23.5 billion to help pay their share of federal healthcare programs for the poor. The bill doesn't include: Proposed hiring tax credit - Cash-for-caulkers.

House Jobs Bill Could Make General Electric’s Amtrak Wish Come True - The House is poised to take up a jobs bill later today that provides $37.3 billion in new transportation spending, including $27.5 billion for roads, $8.4 billion for transit ... and a holiday gift for General Electric?  GE's transportation division recently joined its main labor union in a lobbying campaign aimed at winning federal money for Amtrak to buy its lower-emissions locomotives, which are catching on in China but not in the U.S. And tucked into the new House jobs bill is language that appears to give GE the opening it has sought.

"Dollar Crisis" author: 2010  Will Bring More Stimulus - After predicting in his 2003 book "The Dollar Crisis" that the U.S. property bubble would trigger a global recession, Richard Duncan's new book argues that governments will have to keep stimulating their economies because U.S. demand for cheap goods will not return. Duncan is part of a group of economists like Marc Faber, Nouriel Roubini and James Grant, who believe the financial crisis is a symptom of something structurally wrong with the US economy that will not be solved by the end of recession.Would cutting the minimum wage raise employment? - It seems that more and more Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage. So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

On the Distribution of Gains from Government Action - Greg Mankiw has written a thoughtful post making the case for an investment tax credit. I was struck in particular by the following passage: The cash-for-clunkers program is thought by many to have promoted, or at least accelerated, car purchases.  An ITC would be similar, but it would apply to business investment rather than personal cars.  Instead of targeting a very narrow, politically favored industry, it encourages investment broadly.  It should have positive effects on aggregate demand in the short run and positive effects on aggregate supply in the medium and longer run. The cash-for-clunkers program bothered me not only because it targeted a specific industry but also because it distributed gains among consumers on the basis of criteria that were very arbitrary.

Cutting Wages Won't Help - Conservatives are using the recession to revive their long-standing opposition to the minimum wage. The argument they are making this time is that cutting the minimum wage will add substantially to employment, and this is starting to get some attention in the press. But a cut in the minimum wage would likely make things worse, not better.  Why?  I may be oversimplifying too much, but basically when things are bad -- when firms cannot sell all that they are (or could be) producing -- a cut in the wage does not generate any new employment, it simply reduces income. Why hire more people when you aren't selling anywhere near to existing capacity? In fact, the reduction in income from the fall in wages makes it even harder to sell the goods that are (or could be) produced, and that will cause firms to lay off even more workers, which lowers income even more, and a downward spiral ensues.

Should we cut the minimum wage? - Yes.  Bryan Caplan has the answers: Paul [Krugman] does address the real balance effect, but he still ignores the main arguments I've made before: 1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts.  2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their mattresses, wage cuts still boost aggregate demand.

I Disagree with Paul Krugman about the Minimum Wage - I winced typing that title, since it is not wise to disagree with Paul Krugman and since I am going to argue that cutting the minimum wage can cause increased employment. Before going on, I stress that I oppose cutting the minimum wage as the logic of my argument suggests making the tax code more progressive. I think what we need right now is a more progressive tax code. OK so first Krugman argues that, when in a liquidity trap cutting all wages equally will not cause increased employment. Only here does he respond to the obvious criticism. I assert it depends on how you measure employment. The standard assumption is that labor is uniform and can be measured by a number. The plain fact that some people are paid more than others is handled by assuming that they are more able in every way so their wage per efficiency unit of labor is the same.

Minimum Wage Cuts: What Are Economists Arguing About? -  Andrew Gelman peers into the land of economists from the land of statisticians and wonders why everyone is arguing over a policy that will never ever happen. It probably looks a little like listening to two cancer doctors argue over whether we could cure a poisonous bite from an alien. “What?!? Why are you arguing about that? Don’t you have cancers to cure?” I think I can help explain some of the underlying impulsion going on here. I apologize in advance for the gross generalizations that follow.

Fix it and forget it: Index the minimum wage to growth in average wages - 24pp pdf-  Economic Policy Institute -  Since its inception during the Great Depression, the minimum wage has provided an essential labor market protection for this country’s lowest-paid workers. However, the erosion of its real value over the last four decades has reduced its effectiveness as a tool for rewarding work and reducing poverty. A minimum wage set at 50% of the average production worker wage simply restores it to where it was 40 years ago, and allows it to once againhelp lift the living standards of working families and reconnect their economic fortunes to those of the rest of America’s workforce. Further, indexing the minimum wage to average wages is the surest way to ensure that the minimum wage maintains its value relative to the overall wage structure moving forward. It will help to reverse the trends toward increasing inequality and to restore income growth for millions of working families. These new steps for the minimum wage are a crucial component in the effort to ensure that the benefits of economic growth are shared broadly across the workforce.

Is Rising Income Inequality a Problem? -  In the American Prospect today, Dalton Conley argues that income inequality doesn't really matter much.  What matters is increased government spending on the poor so they have the same opportunities as everyone else.  Bruce Bartlett comments: At the risk of getting Conley's membership in the liberal club revoked, I think he is right. I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn't impose any actual costs on anyone as long as the pie is not fixed.  I agree that inequality per se is probably overemphasized by liberals.  But I think that both Conley and Bartlett miss something essential.

Should Taxes be Progressive? - Personally, I'm not much on redistribution simply to make outcomes more equal. But there are (at least) three reasons to depart from this. First, when there is change such that makes one group better off at the expense of another as has happened recently with globalization, and when redistribution can leave everyone better off, then redistribution is justified.  Second, I think everyone should have equal opportunity to be a CEO or a hedge fund manager, or whatever they want to be. However, the playing field is far from level and there is a lot more we could do on this side of the equation. Not everyone will be a CEO of course, or achieve their dream job whatever it might be, but everyone should have an equal chance to be one of the winners. Third, for me at least, progressive taxation is justified by the equal marginal sacrifice principle (the last dollar paid should cause the same amount of disutility for everyone). Thus, even if opportunity is equal, and even if there were no winners and losers to worry about, justification for progressive taxation would remain. I think a more progressive tax structure than we currently have is needed to equalize the disutility of paying taxes.

I Pay Your Salary, Tax Deadbeat - There are plenty of federal workers among the ranks of tax delinquents, according to new Internal Revenue Service data. The numbers were previously reported by WTOP, a Washington radio station. More than 276,000 federal employees and retirees owe a total of $3 billion in income taxes they failed to pay in 2008. Anthony Burke, a spokesman for the Internal Revenue Service, said that the numbers cover tax filers who were unable to pay their tax obligations and are not on payment plans with the I.R.S., and does not include people believed to have criminally evaded their taxes.

Estate Tax Expiration Sets Up Battle on Retroactive Restoration - (Bloomberg) -- The imminent expiration of the federal tax on multimillion-dollar estates and a pledge by congressional Democrats to renew it retroactively next year marks a new phase in an ongoing battle over the levy. Senate Finance Committee Chairman Max Baucus yesterday said Congress will seek to restore the tax retroactively in 2010 after Republicans objected to his efforts to adopt a stopgap measure to extend the current law for three months. The tax now yields about $25 billion in revenue annually. The levy, on the books since 1916, is scheduled to lapse for a year on Jan. 1 under the provisions on a tax-cut bill enacted in 2001. It then would be reinstated in 2011. The collapse of a last-ditch effort by Democrats to pass even a temporary extension surprised those on both sides of a debate that has raged for more than 15 years over whether to end what opponents term the “death tax”.

TaxVox: The Estate Tax Debate: Watch the Rate, Not the Exclusion - It is almost 2010, and Congress is scrambling to figure out what it is going to do about the estate tax. In some perverse way, it’s fun to watch lawmakers dive into a mess largely of their own making. But as you do, don’t be distracted by the argument over the size of estates that should be excluded from tax, or whether the rules are extended for one year or two. The real argument is over the rate. That’s where the bucks are. Most everyone knows the tragic-comic back story by now. The big Bush tax cut of 2001 steadily cut the inheritance tax until 2010, when it is scheduled to disappear entirely. Then, bizarrely, in 2011 the tax will come back to life, reverting roughly to what it was in 2000. This is, of course, impossible.

WSJ/NBC Poll: Wage Worries Trump Unemployment Fears - Americans are more worried that their overtime will be slashed or their wages will be cut than they are about losing their jobs.Just 15% of people surveyed in the latest WSJ/NBC News poll said it’s likely that they, or someone in their household, could lose their job. The majority, 72%, said it’s only somewhat or not very likely that will happen. (Read the full poll story here.) Instead, they were more concerned that their overtime hours or bonuses would be slashed. A full 29% said it was likely compared to 52% who said it was just somewhat or not very likely.

The Perfect Negative Indicator Weighs In - Alan Greenspan: The U.S. Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday. But didn't we just Get All That Money Back?  Greenspan's reason unemployment will go down soon: GOVERNMENT JOBS: The U.S. Census Bureau's plan to hire close to 800,000 workers by April will take several tenths of a percent off the unemployment rate, he said. Let's ignore that 800,000 temporary hires won't balance the 900,000 jobs to be lost on the state level next year. And let's ignore that temporary jobs are, by definition, "frictional" and not "structural" employment....

America's Race to the Bottom - Most of the upticks following our latest national downturns have been dismal enough that economists have had to invent a new term for them. The phrase is "jobless recovery", and the implications are as ugly as they sound. What it means is that GDP rises, but life remains crappy for real people with real jobs. If they're lucky enough to have one, that is. Where does the money from rising GDP go, then? Funny you should ask. It goes exactly where it's been going for the last three decades. Not to the public, and not to raising the living standards of ordinary folks. But, rather, to the über-class.

Americans Grow More Pessimistic on Economy, Nation’s Direction. - Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery. Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.  The mood among members of Obama’s own Democratic Party has shifted most dramatically: While Democrats remain the most positive, the proportion saying the country is on the right track dropped to 58 percent from 71 percent in September. Among independents, 26 percent say the country is on the right track, down from 29 percent in September.

  Are Americans a Broken People? Why We’ve Stopped Fighting Back Against the Forces of Oppression - Have consumerism, suburbanization and a malevolent corporate-government partnership so beaten us down that we no longer have the will to save ourselves? Can people become so broken that truths of how they are being screwed do not "set them free" but instead further demoralize them? Has such a demoralization happened in the United States? Do some totalitarians actually want us to hear how we have been screwed because they know that humiliating passivity in the face of obvious oppression will demoralize us even further? What forces have created a demoralized, passive, dis-couraged U.S. population? Can anything be done to turn this around? Can people become so broken that truths of how they are being screwed do not "set them free" but instead further demoralize them?  Yes. It is called the "abuse syndrome."

When misery is the only option - Yesterday I lamented the dearth of optimism regarding the global economy, in spite of the fact that several emerging markets are having a relatively good crisis. Alas, analysts at Moody's have disregarded my plea. In today's Economix, Catherine Rampell points us to a revamped "misery index", which traditionally measures the sum of the unemployment and inflation rates. Since today's inflation rates are relatively low, Moody's has substituted inflation with national fiscal deficits.  The result? A lot of misery on the European periphery...

Utility Shutoffs Climb by 5% Despite Doubling of U.S. Aid - WSJ - The number of households that had their utility service disconnected for nonpayment rose 5% in fiscal 2009, despite a doubling of federal emergency-bill assistance and lower utility rates in many parts of the country.According to the National Energy Assistance Directors Association, some 4.3 million U.S. households were disconnected for nonpayment in fiscal year 2009, as federal assistance more than doubled to $5.1 billion. More than 8 million households got emergency-bill assistance in 2009, up nearly a third from the 6.1 million in 2008.

Unemployment and Schooling -- Almost half [of unemployed workers] have suffered from depression or anxiety. About 4 in 10 parents have noticed behavioral changes in their children that they attribute to their difficulties in finding work.  We study the relationship between parental job loss and children’s academic achievement using data on job loss and grade retention from the 1996, 2001, and 2004 panels of the Survey of Income and Program Participation. We find that a parental job loss increases the probability of children’s grade retention by 0.8 percentage points, or around 15 percent. After conditioning on child fixed effects, there is no evidence of significantly increased grade retention prior to the job loss, suggesting a causal link between the parental employment shock and children’s academic difficulties. These effects are concentrated among children whose parents have a high school education or less.

Many children left behind - Economic Policy Institute - After achieving some gains in student test scores in the early part of the decade, the nation’s schools have seen progress stall since 2007. The figure charts the changes in test scores on the Trial Urban District Assessment (TUDA) for fourth grade math, nationwide and at the country’s three largest urban school districts. Although the exact results vary, there was generally a rise in scores between 2003 and 2007. But those gains either slowed dramatically or completely stalled between 2007 and 2009. The tests, part of the same National Assessment of Educational Progress series administered to all states, are widely considered the best in standardized testing because they are more rigorous than most state-administered tests.

Child hunger an increasingly complex problem - Researchers here have also been at the leading edge in trying to fathom the effects of a scarcity of food. Even when children are not hungry, studies have found that slight shortages of food in their homes are associated with serious problems. Babies and toddlers in those homes are far more likely to be hospitalized than children in families with similar incomes but adequate food. School-age children tend to learn and grow more slowly, and to get into trouble more often. Teenage girls are more prone to be depressed or even flirt with thoughts of suicide. Solving the problem is further complicated by its subtle nature. "Most people who are hungry are not clinically manifesting what we consider hunger. It doesn't even affect body weight,"

A bleak future for black children - Economic Policy Institute - The future for black children and youth is worrisome. Even during supposedly "good" economic times too many black children grow up facing severe economic disadvantage. This normally bad situation is being made considerably worse by the recession. From 2007 to 2008, the country experienced a historic rise in the number of households that did not have consistent and dependable access to sufficient food. The U.S. Department of Agriculture (USDA) calls these households "food insecure."  In 2008, 10.7 percent of white households were food insecure, but 25.7 percent of black households were in this condition. Although the official 2009 USDA data is not yet available, it is likely that the numbers of food insecure households increased by a large amount this year. Hunger is a problem in itself. But it also matters because of the long-term harm it causes, particularly in children. Children growing up in food insecure households are more likely to be in poor physical and psychological health. They have more behavioral problems and do worse in school.

Too bad you can't tax stupid  - The city of Pittsburgh is apparently looking to tax college tuition in order to pay the pensions of retired public sector employees. In a way, this is an impressive feat; it would actually be difficult to design a less optimal use of taxing and spending. Maybe if you directly taxed literacy and used the money to subsidize illiteracy it would be worse. You could tax good parenting and subsize child abuse. Maybe if you taxed recycling and subsidized pouring motor oil into bodies of water it would be worse. Either way, impressive feat, Pittsburgh.

Nearly half of Detroit's workers are unemployed - Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can't find a job or are working fewer hours than they want. Using a broader definition of unemployment, as much as 45 percent of the labor force has been affected by the downturn. And that doesn't include those who gave up the job search more than a year ago, a number that could exceed 100,000 potential workers alone.  Officially, the unemployment rate in Detroit was estimated at 27 percent in October. But that number does not include people working part-time who want full-time work, nor does it include "discouraged" workers, who have stopped looking for work. It also doesn't include people who have gone back to school rather than search for a job.

Gordon to request bailout for Phoenix - Phoenix Mayor Phil Gordon is in Washington, D.C., today, pressing Obama administration officials and members of Congress to loan his AAA-bond-rated city hundreds of millions of dollars to build sewers, bridges, educational facilities and other capital projects. Phoenix, Arizona's largest city, closed a record $270 million general-fund budget deficit earlier this year, but the current-year shortfall has widened again by another $105 million because of falling tax revenue. Funding for capital projects also has plunged as well."

Panel rips S.D. budget’s ‘gimmicks’ - If city leaders are unwilling or unable to fix San Diego’s ongoing budget deficit, then voters will have to do it for them by adopting ballot measures to force the city to fire workers or drastically cut services, according to a report being released today by a citizen task force.The report, which recommends 12 actions to avoid municipal bankruptcy, is critical of “budgetary gimmicks” proposed by Mayor Jerry Sanders and given final approval yesterday by the City Council to close a $179 million budget deficit. More than 50 percent of that gap was filled by using one-time solutions, such as skipping reserve payments and delaying projects.

California debt costs to surpass $10 bln-Treasurer (Reuters) - California, the largest borrower among U.S. states, may see its debt interest costs nearly double to over $10 billion in 2020, the state treasurer reported on Monday. General fund debt service on outstanding bonds, authorized but unissued bonds and proposed water bonds is set to peak in fiscal 2020 at $10.45 billion, compared with a current level around $6 billion, and stay near that level through fiscal 2028, Treasurer Bill Lockyer said in a presentation for the state legislature.

California May Look Abroad to Sell Bonds as Sales Get ‘Harder’ (Bloomberg) -- California, the most-populous U.S. state, may begin seeking to sell its bonds to overseas investors after the sale of $36 billion of debt this year has made it more difficult to raise money, Treasurer Bill Lockyer said. California’s bond sales this year paid for projects from roads to stem cell research, and included $8.8 billion of short-term securities due next year that closed temporary gaps in the state’s tax collections. The sales came as its credit rating, now the lowest among U.S. states, was cut because of budget deficits resulting from the recession. “We are running out of tricks,” Lockyer told a committee of the state Assembly at a hearing in Sacramento. “Shortly we are going to have to go international to sell California bonds. I don’t know how expensive that is going to be.”

California Taxes Fall Short of November Target by $439 Million - California’s finances resumed a decline in November, adding to the state’s resurgent deficit as Governor Arnold Schwarzenegger readies a spending plan that will need to erase a $21 billion gap. California, the most populous U.S. state and the largest municipal bond issuer, collected $439 million less revenue in November than what was estimated in July, Schwarzenegger’s Department of finance said yesterday in a report. The decline leaves revenue $1 billion behind projections halfway through the fiscal year.

The $11.5 Billion Pension Albatross is Costing You Mega-Bucks - The combined deficit of the City’s two major pension plans is $11.5 billion! This represents $8,200 for each and every household in Los Angeles, $7,200 for every registered voter, and about $40,000 for every person that voted. On the other hand, the City, with its head in the sand, pretends the deficit is only $4.6 billion, a mere $7 billion difference. This is because the City relies on the “Actuarial Value” of its investments which is about $7 billion more than the market value of the same investments. 

Bad data, unfounded fears fueled pension crisis - Some other states are also wrestling with retirement costs. But California is the only one that allows nearly all public safety workers to retire at age 50 with 90 percent of their salaries.The Register found that decisions to expand public safety pensions were backed by bad financial assumptions, pushed by self-serving administrators and buoyed by unproven arguments that the generous retirements were needed to keep police and firefighters on the payroll."The attitude was, 'Hey, we have a ton of money, let's give it away," said Marcia Fritz, president of the Foundation for Fiscal Responsibility, a pension reform group in Sacramento. "There weren't a lot of deep thinkers there."

CalPERS may boost long-term care premiums by 22% - CalPERS said the rate hike is necessary because of heavy investment losses and the disproportionate number of people drawing benefits compared to those paying in. "This is a painful decision for the board, particularly in light of the current economic challenges our members are facing," Priya Mathur, chairwoman of the health committee, said in a news release Tuesday. "However, we have a fiduciary duty to ensure the long-term sustainability of this program." 

California's Troubled Waters: Satellite-Based Findings Reveal Significant Groundwater Loss in Central Valley — New space observations reveal that since October 2003, the aquifers for California's primary agricultural region -- the Central Valley -- and its major mountain water source -- the Sierra Nevada -- have lost nearly enough water combined to fill Lake Mead, America's largest reservoir. The findings, based on satellite data, reflect California's extended drought and increased pumping of groundwater for human uses such as irrigation. "This is leading to declining water tables, water shortages, decreasing crop sizes and continued land subsidence. The findings have major implications for the U.S. economy, as California's Central Valley is home to one-sixth of all U.S. irrigated land and the state leads the nation in agricultural production and exports."

States Scramble to Close New Budget Gaps (WSJ) Previous Fixes Fall Victim to Sagging Revenue, Political Fights and Court Rulings; Ohio Finds Itself $851 Million Short - Many states eliminated expected deficits earlier this year with budget cuts, tax increases, short-term borrowing, accounting moves and planned gambling expansions. But despite a slight improvement in the U.S. economy, states are now finding those measures didn't go far enough. The patches used by states on their ailing budgets just months ago are now failing. Ohio lawmakers were expected late Thursday to vote on a compromise reached with Gov. Ted Strickland to avoid cutting education budgets an average of 10% on Jan. 1. In Arizona, lawmakers met in a special session Thursday -- their fourth on the budget this year -- to grapple with a new deficit. And in New York, Democratic Gov. David Paterson said Sunday he would postpone paying $750 million of state bills to avert a cash crunch.

Weekly wrap: Governors offering dire spending plans - One by one, America’s governors are beginning to prepare their constituents for a dark year ahead, even as the economic recovery gets under way. With many legislatures convening in a few weeks, governors are offering bleak budgets for the next fiscal year calling for deeper spending cuts and, in some cases, tax increases. Their despair is plain. They say they already have cut spending to the bone and do not want to have to increase taxes on people still suffering from the effects of the recession. But tax revenues are still in free fall in many states, and the federal economic stimulus money is running out.

Corporate taxes and union wages - VoxEU - Painful tax increases will be necessary to restore fiscal balance after exiting the crisis. This column shows that wages are higher in US states with lower corporate income taxes – a reminder that efforts to tax firms more heavily create burdens that will be distributed among stakeholders, including many groups that governments otherwise attempt to help, such as workers.

N.Y. Governor Delays $750 Million of Local Aid to Conserve Cash (Bloomberg) -- New York Governor David Paterson said he is ordering $750 million withheld from aid payments this month to schools, local governments and health insurers to avert a cash squeeze after the Legislature in the third-most populous U.S. state didn’t cut spending as much as he wanted. Lawmakers’ $2.77 billion plan for reduced outlays and generating additional revenue approved earlier this month isn’t enough to ease the state’s December fiscal bind or close an estimated $3.2 billion deficit for the year ending March 31, Paterson said at a news conference yesterday in New York City. “Because of the inaction of the Legislature,” the state’s cash “may be temporarily exhausted” leaving it with insufficient resources to pay bills on time, Paterson said.

Governor Paterson Cuts Payments To Schools - As Paul Krugman put it, states that cut spending in a time of recession are like 50 little Herbert Hoovers.Well, welcome to New York State, whose governor just slashed payments to schools and local authorities in a bid to keep the state solvent. DailyNews: New York City will lose at least $84 million in funding under Gov. Paterson's plan to withhold payments to keep the state afloat this month.Saying the "day of reckoning" for cash-strapped New York state is here, Paterson announced Sunday he is unilaterally withholding 10% of nearly $1.9 billion in school and municipal aid funding that was to be paid Tuesday.

Texas State sales tax revenue plunge persists. -Texas collected $1.7 billion in sales taxes last month, down 14.4 percent from November 2008. It was the tenth month in a row of year-over-year declines and the sixth consecutive month of double-digit percentage drops. State Comptroller Susan Combs said Friday that collections were down in all categories, including retailing, oil and gas production and construction.

Budget cuts: State to trim spending today - The five-member State Budget and Control Board - consisting of the governor, two legislators, the state treasurer and comptroller general - will decide today how much the state will trim spending. New revenue estimates say South Carolina will take in less than was expected when lawmakers passed the state's $5.3 billion spending plan in June. The cut, expected to take an equal percentage from all state agencies, will be at least $120 million.

Colorado tax revenue drops by $40 million more - Colorado revenues fell by an additional $40 million over the past three months, bringing this year's shortfall to $601 million. Budget officials told state lawmakers Friday the recession appears to be over in Colorado, but the economic recovery will be long and rocky. Previous forecasts showed the state would have a $560 million shortfall this fiscal year. A budget shortfall of $1.5 billion is predicted for next year unless lawmakers take quick action when they convene in January.

Fight looming over unemployment fund (MD) Faced with an unemployment insurance fund that could go bankrupt because of the recession, Gov. Martin O'Malley's administration on Thursrday proposed tapping into federal funds in a move that also could require businesses to pay substantially more per employee. The governor's plan is to pursue a bill to seek $126.8 million in federal stimulus money to stave off bankruptcy and reduce employers' financial obligation by $83 million.

TN unemployment fund may need a loan - The state probably will borrow about $20 million early next year to keep its unemployment trust fund solvent, as it deals simultaneously with a seasonal dip in taxes from employers and Tennessee's still-high rate of joblessness. The latest projections for the fund show it running out of cash sometime in the first three months of next year, leaving a shortfall that would not be covered until April, despite a tax increase passed last spring.

Taxpayers' pension tab starts spike. - Pennsylvania's school districts will see their retirement costs increase by more than 70 percent next year as the first symptoms of the state's public pension crisis begin to be felt. The Public School Employees' Retirement System trustees on Friday approved an employer contribution rate of 8.22 percent for the 2010-11 budget year, a 12-year high for the system and a 72 percent jump from the 4.78 percent contribution rate in place now. That means taxpayers will have to spend $1.1 billion next school year for teachers' pensions, or almost $500 million more than this year

Pennsylvania's "Nightmare Solution" for Gov't Layoffs Guaranteed To Backfire - Given unsupportable runaway spending and pension promises that cannot be met, it should be no surprise that Pennsylvania, like every other state, is running out of money. The crisis has come to a legislative showdown and Pennsylvania Governor Rendell is warning of massive layoffs. Amazingly, Governor Rendell thinks casinos are the solution. Please consider Rendell warns of 'minimum' 1,000 layoffs: "Gov. Ed Rendell made it clear Thursday that if a bill authorizing blackjack, roulette and other games at the state's casinos isn't approved by Jan. 8, he will lay off "a minimum" of 1,000 more state employees to cover a projected $250 million hole in revenue. "The Legislature is on notice. We've got to reach closure."

Bill would let N.J. towns put off pension payments - For the second consecutive year, New Jersey towns could skip half of their required pension payments under a bill proposed by Sen. Sandra Cunningham, a Hudson County Democrat. The deferred contributions would have to be paid back to the state's beleaguered pension system over 15 years. The plan would provide short-term savings, but increase the fund's long-range deficit and add to future municipal-budget costs. The idea would be to give towns and counties some immediate budget relief, alleviating the pressure on them to cut services or hike taxes as state and local governments cope with depressed revenues "The state's seven pension funds had a $34.4 billion deficit as of June 30, 2008, the last date evaluated by actuaries. That's more than the annual state budget. The shortfall has undoubtedly grown since then, because towns were allowed to defer half of their required pension payments in the previous budget, and Corzine provided only a small fraction - less than 10 percent - of what the state owed in the current spending plan.

Medicaid faces major cuts - Wisconsin may be forced to cut $1 billion from health care plans - The state may be forced to cut more than $1 billion over the next 18 months from BadgerCare Plus and other health care programs for the disabled, elderly and low-income families. The shortfall comes at a time when more people are turning to BadgerCare Plus because of the state's battered economy. About 700,000 people were enrolled in BadgerCare Plus alone on Nov. 30, an increase of more than 70,000 since the start of the year. At the same time, state tax revenues have plummeted because of the economic downturn.

People with health care are healthier - The Economist - THE debate over health care reform has tended to focus on the nuts and bolts of potential policies—how they'll affect the deficit, what will happen to premiums, what incentives employers providing coverage will face, and so on. That's all important information to have, of course. But one thing that's worth remembering is that reducing the share of Americans without health insurance will save lives. Matt Yglesias links to a study of American health outcomes...He doesn't stop there. As he notes here and here, a lack of coverage contributes directly to negative health outcomes, including unnecessary deaths.

Health Insurance and Death -If “no health insurance means bad health care” or “bad health care can lead to death” were some kind of wildly counterintuitive propositions at odds with sound theory, then I think we might have good reason to doubt the results of the above studies. But in fact they’re perfectly intuitive results that accord perfectly with, among other things, the elementary economic theory that says people wouldn’t pay for health insurance unless it provided something of value. The bulk of empirical studies also seem to confirm this. Lack of insurance is associated with low-quality health care which is associated with enhanced risk of death.

Rising Longevity: Can We Afford It? - Medicare's problems are even worse than official projections show due to increasing longevity. To the extent that health reform improves health quality, won't that make the problem worse? Suggestion to Congress: Why not include rise in the age to qualify for Medicare as part of the health reform legislation? At least raise it to the same age as necessary to qualify for full Social Security benefits (i.e., to 67 from 65).

Gatekeeping may not be cost effective - Restricting access to specialists through "gatekeeping" does not significantly reduce specialist referrals and is not necessarily cost effective, a new study has said (New England Journal of Medicine 2001;345:1312-7). Gatekeeping in the United States is the process of requiring insured patients to see a primary care doctor for an initial assessment and examination before being allowed to consult a specialist. As in the NHS in the United Kingdom, the US primary care doctors may choose to treat the patients themselves or to refer them for specialist care. The system has been widely embraced by both health maintenance organisations and traditional insurers as a cost containment method.

Study shows health care spending spurs economic growth - As the national discussion of health care focuses on costs, a new study from North Carolina State University shows that it might be more accurate to think of health care spending as an investment that can spur economic growth. The study also shows that government projections of health care costs and financing may be unduly pessimistic. "Health care spending should be viewed as an investment in future capital, contributing to a productive workforce, rather than merely as an expenditure," says Dr. Al Headen, associate professor of economics at NC State and a co-author of a paper appearing in the Dec. 15 issue of Proceedings of the National Academy of Sciences.

A Few Words on Health Care Reform and Medicare Buy-In -  From Ezra Klein: “[Doctors] should be forced to work in a way that doesn’t hurt society. That, after all, is the guiding principle behind the insurance reforms: Insurers will have to live with a market that society can live with. Similarly, providers will have to live within a market that society can afford. That will mean a strict budget, at least within the federal programs … “It’s that or national bankruptcy. And the problem, if left untreated, will only get worse, and the eventual correction, when it comes, will only be more severe."  Am I being hypocritical in allowing Ezra Klein to use the words “national bankruptcy?” I don’t think so, because as I said in the earlier post, the long-term debt problem is, and always has been, about health care costs.

US Agency Sees More Health Spending With Reform (Reuters) - U.S. healthcare spending would rise by about $234 billion over the next decade under the Senate Democrats' overhaul bill and some of the proposed savings might never be achieved, a U.S. agency said in a report released on Friday. It was the latest in a series of reports issued by the agency that oversees Medicare that cast doubt on some of the savings claims made by Democrats about one of President Barack Obama's top domestic priorities.Republican opponents on Friday seized on the report to underscore their message the sweeping healthcare reform will raise costs and hurt Medicare benefits.

Can We Afford It? - NYTimes - Republican critics have a fiercely argued list of reasons to oppose health care reform. One that is resonating is that the nation cannot afford in tough economic times to add a new trillion-dollar health care entitlement.  We understand why Americans may be skittish, but the argument is at best disingenuous and at worst a flat misrepresentation. Over the next two decades, the pending bills would actually reduce deficits by a small amount and reforms in how medical care is delivered and paid for — begun now on a small scale — could significantly reduce future deficits. Here is a closer look at the benefits and costs of health care reform

‘Disaster’ Health Plan Breaks Obama Cost-Cut Vow in CEOs’ View - (Bloomberg) -- President Barack Obama’s $1 trillion health-care overhaul won’t buy corporate America relief from medical costs that more than doubled in the last decade, chief executive officers of more than a dozen U.S. companies said. Private companies, providers of benefits to 132 million Americans, will see little savings from legislation under debate in Congress, CEOs at United Parcel Service Inc., Safeway Inc. and Verizon Communications Inc. said in interviews over the past two weeks. The measures are more likely to add expenses, through taxes and fees on employers who don’t offer affordable coverage, said Ellen Kullman, chief of DuPont Co., the world’s third-largest chemical maker.

The Health Bill Is Scary - WSJ - I recently suggested that seniors will die sooner if Congress actually implements the Medicare cuts in the health-care bill put forward by Senate Majority Leader Harry Reid. My colleagues who defend the bill—none of whom have practiced medicine—predictably dismissed my concern as a scare tactic. They are wrong. Every American, not just seniors, should know that the rationing provisions in the Reid bill will not only reduce their quality of life, but their life spans as well.

Better Cost Control in the Health Bill?- This counts as good news for anyone worried that health reform does not yet do enough to control costs: Senator John D. (Jay) Rockefeller IV, Senator Joe Lieberman, and Senator Sheldon Whitehouse have introduced an amendment to strengthen the Independent Medicare Advisory Board (IMAB)… I mentioned last week that Mr. Rockefeller was likely to offer an amendment on the Medicare advisory board and said the big question would be how far he would go. The answer seems to be: very far. My initial reading suggests the amendment would fix all of the major problems with the advisory board in the current Senate bill.

Can the Senate Pass a Health Care Bill Before Christmas? - Megan McArdle - The Democrats desperately want to pass a health care bill through the Senate before Christmas, so that it can go through conference and be voted in early next year.  The Senate is saying they can do this.  Here's what I don't get:  what about the CBO score? Unless they actually just strip the bill back to the last version to get a full score, then they'll be voting blind.  Maybe if that's what Lieberman asks for, you can tack on something Stupak-like and get to 60 with an essentially unchanged score (for all the heat of the debate, the amount of money involved is trivial).  But is that exactly what Lieberman and Nelson are asking for?  We still don't know what's in this mythical deal.  If there are any material changes, it will simply not be possible to push this thing through the Senate before Christmas, at least not if you want to know what it's going to cost.

Senate health-care bill unlikely to include Medicare buy-in - Senate Democratic leaders appeared poised Monday night to abandon efforts to create a government-run insurance safety net in their push for health-care reform, as they attempted to close ranks around a bill they hoped would win the backing of all 60 members of their caucus.  Democratic negotiators had already disappointed liberal lawmakers by jettisoning a full-fledged public insurance plan a week earlier. Last night, party leaders conceded that a key portion of the compromise they crafted to replace the public option -- a proposal allowing people as young as 55 to buy into Medicare -- also did not have sufficient support from Democratic moderates to overcome a likely Republican filibuster.

Slouching Toward Health Care Reform - Robert Reich  - Real reform has moved from a Medicare-like public option open to all, to a public option open to 6 million without employer coverage (still in the House bill), to a public option open only to those same people in states that opt for it, or about 4 million (the original Harry Reid version of the Senate bill), to no public option but expanded Medicare (the Senate compromise) to no expanded Medicare at all (the deal with Joe "I love all the attention" Lieberman).  In other words, the private insurers are winning and the public is losing.  Pharmaceutical companies are winning as well.

Is the Senate health-care reform bill still worth passing? - This was, for progressives, a frustrating vote. But it is not reason enough to oppose the bill, either.The core of this legislation is as it always was: $900 billion, give or take, so people who can't afford health-care insurance suddenly can. Insurance regulations paired with the individual mandate, so insurers can't discriminate against the sick and the healthy can't make insurance unaffordable by hanging back until the moment they need medical care. The construction of health insurance exchanges so the people currently left out of the employer-based market are better served, and the many who will join them as the employer system continues to erode will have somewhere to go.

Illusions and bitterness - Krugman - There’s enormous disappointment among progressives about the emerging health care bill — and rightly so. That said, even as it stands it would take a big step toward greater security for Americans and greater social justice; it would also save many lives over the decade ahead. That’s why progressive health policy wonks — the people who have campaigned for health reform for years — are almost all in favor of voting for the thing. The argument about the evil of the individual mandate is,as Jon Cohn says, all wrong.  And the truth is that health care reform was probably doomed to be deeply imperfect. As Ezra Klein pointed out a few weeks ago, we’re basically in a hostage situation: progressives really, really want to cover the uninsured, while centrists whose votes are needed can take it or leave it. So the centrists have a lot of power — which in the case of Joe Lieberman means the power to double-cross and indulge his pettiness.

Schieffer: Health Debate No Longer About Care - CBS News - What Democrats hope are the final days of debate before the Senate votes on its health care reform bill "is the legislative process at its very worst," CBS News Chief Washington Correspondent Bob Shieffer said Friday night. Schieffer told "CBS Evening News" Anchor Katie Couric that the debate now isn't about health care any more. "This is about partisanship, about getting votes, about backroom deals," Schieffer said. "It's about politics."

Sleazy Sewers and Healthcare Reform - In essence, this reinforces all of the worst dynamics of Washington.  The insurance industry gets the biggest bonanza imaginable in the form of tens of millions of coerced new customers without any competition or other price controls.  Progressive opinion-makers, as always, signaled that they can and should be ignored [...] Most of this was negotiated and effectuated in complete secrecy, in the sleazy sewers populated by lobbyists, industry insiders, and their wholly-owned pawns in the Congress.  And highly unpopular, industry-serving legislation is passed off as "centrist," the noblest Beltway value.

Howard Dean: Health Care Bill 'Bigger Bailout for Insurance Industry Than AIG' - ABC News - Obama said he likes the Senate health care compromise and wants it passed by Christmas, but he faces a revolt from some liberals who say the health care bill has been gutted to appease insurance companies.  This is a bigger bailout for the insurance industry than AIG," former Democratic National Committee chairman and medical doctor Howard Dean told "Good Morning America's" George Stephanopoulos today. "A very small number of people are going to get any insurance at all, until 2014, if the bill works. "This is an insurance company's dream, this bill," Dean continued. "This is the Washington scramble, and I think it's ill-advised."

Sickening Bonuses - Wall Streeters aren't the only ones raking it in. Hospital presidents and CEOs also collect fat bonuses and "incentive payments," even as health-care systems cry poverty, claiming they struggle to break even against government cutbacks, tightwad insurers and skyrocketing costs. While warning of layoffs and slashed patient services, hospitals shower their execs with bonuses and perks including chauffeurs, first-class air travel, tuition for their kids and country-club memberships.

Healthcare's Home Stretch - With the public option now out of the healthcare bill, is it still worth passing?  Regular readers will be unsurprised that I think the answer is pretty firmly yes—and that liberals who now want to pick up their toys and hand reform its sixth defeat in the past century need to wake up and smell the decaf.  Politics sucks.  It always has.  But the bill in front of us—messy, incomplete, and replete with bribes to every interest group imaginable—is still well worth passing.  First, here's me a few months ago:

Op-Ed - The Hardest Call - NYTimes - The first reason to support the Senate health care bill is that it would provide insurance to 30 million more Americans. The second reason to support the bill is that its authors took the deficit issue seriously. The bill is not really deficit-neutral. It’s politically inconceivable that Congress will really make all the spending cuts that are there on paper. But the bill won’t explode the deficit, and that’s an accomplishment.The third reason to support the bill is that the authors have thrown in a million little ideas in an effort to reduce health care inflation. The fact is, nobody knows how to reduce cost growth within the current system. The authors of this bill are willing to try anything. You might even call this a Burkean approach. They are not fundamentally disrupting the status quo, but they are experimenting with dozens of gradual programs that might bend the cost curve.

Pass the Bill - Krugman - NY Times: A message to progressives: By all means, hang Senator Joe Lieberman in effigy. Declare that you’re disappointed in and/or disgusted with President Obama. Demand a change in Senate rules that, combined with the Republican strategy of total obstructionism, are in the process of making America ungovernable.  But meanwhile, pass the health care bill. But let’s all take a deep breath, and consider just how much good this bill would do, if passed — and how much better it would be than anything that seemed possible just a few years ago. With all its flaws, the Senate health bill would be the biggest expansion of the social safety net since Medicare, greatly improving the lives of millions. Getting this bill would be much, much better than watching health care reform fail.

If Health Reform Fails, America’s Innovation Gap Will Grow - NYTimes - In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.” It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance. Some of them would have moved to companies where they could have contributed more, and others would have started their own businesses.

Matt Welch admits that the French health care system is much better than ours - Reason magazine in general and  Editor in Chief Matt Welch in particular "oppose ObamaCare" and favor moving toward "market reforms" of the US health care system: "For a dozen years now I’ve led a dual life, spending more than 90 percent of my time and money in the U.S. while receiving 90 percent of my health care in my wife’s native France. On a personal level the comparison is no contest: I’ll take the French experience any day. ObamaCare opponents often warn that a new system will lead to long waiting times, mountains of paperwork, and less choice among doctors. Yet on all three of those counts the French system is significantly better, not worse, than what the U.S. has now."

That Tap Water Is Legal, But May Be Unhealthy - NYTimes - The 35-year-old federal law regulating tap water is so out of date that the water Americans drink can pose what scientists say are serious health risks — and still be legal.  Only 91 contaminants are regulated by the Safe Drinking Water Act, yet more than 60,000 chemicals are used in the US. Scientists have scrutinized thousands of those chemicals in recent decades, and identified hundreds associated with a risk of cancer and other diseases at small concentrations in drinking water. But not one chemical has been added to the list of those regulated by the Safe Drinking Water Act since 2000.

Fastest Food Inflation Since Riots Means Milk Up 39% -  (Bloomberg) -- Falling production in commodities from rice to milk is bad news for just about everyone except investors.  Rice may surge 63 percent to $1,038 a metric ton from $638 on Philippine imports and a shortage in India, a Bloomberg survey of importers, exporters and analysts showed. The U.S. government says nonfat dry milk may jump 39 percent next year, and JPMorgan Chase & Co. forecasts a 25 percent gain for sugar. Global food costs jumped 7 percent in November, the most since February 2008, four months before reaching a record, according to the United Nations Food and Agriculture Organization.

The Only Human Crisis - Various pundits have been putting forward candidates for the big human crisis confronting us. They all agree that something is, but can’t settle on one or another. Throw a dart. Is it human rights? Terrorism? How about “the economy?” Not many people talking about the fisheries, though you could make a good case for a collapse of the ocean biosphere. Or how about one that effects us all -- climate change? The crisis facing humanity is not any of those. The crisis is “waking up.”

Scepticism's limits - The Economist - So, after hours of research, I can dismiss [climate denier] Mr Eschenbach. But what am I supposed to do the next time I wake up and someone whose name I don't know has produced another plausible-seeming account of bias in the climate-change science? Am I supposed to invest another couple of hours in it? Do I have to waste the time of the readers of this blog with yet another long post on the subject?... Well, here's my solution to this problem: this is why we have peer review. Average guys with websites can do a lot of amazing things. One thing they cannot do is reveal statistical manipulation in climate-change studies that require a PhD in a related field to understand. So for the time being, my response to any and all further "smoking gun" claims begins with: show me the peer-reviewed journal article demonstrating the error here. Otherwise, you're a crank and this is not a story.

Identifying a fair deal on climate change – VoxEU - Over a billion people live without basic electricity. This column calculates the emissions required to make basic energy services available to all and to grant developing countries’ citizens future access to energy services equal to those enjoyed by rich countries’ citizens at comparable stages of development. These calculations imply some very stark, very different implications for burden sharing. Moreover, they mean that meeting aggregate global emissions targets without sacrificing developing countries basic energy needs will require revolutionary improvements in the technology.

Copenhagen Prognosis: towards a safe climate future - Among it’s key conclusions are that: - Emerging scientific results suggest that greenhouse gas (GHG) emission reductions targets currently being tabled are not consistent with the expressed political will to protect humanity against high risks of devastating climate impacts and significant risks of self-amplifying global warming.- Based on the available carbon budget, and if we are to have a good (75 per cent) chance for warming to stay below 2°C, global GHG emissions would almost certainly need to decline extremely rapidly after 2015, and reach essentially zero by midcentury.- There is no evidence suggesting it is impossible to rise to this challenge. To the contrary, the growing body of analytical work examining such scenarios at the global and regional level suggest it is not only technically feasible but also economically affordable, even profitable. - The Prognosis addresses head on the issue of an equitable deal, and goes on to describe some of the ways in which deep emission cuts are practically and economically feasible

Selection bias in climate policy cost estimates - VoxEU - A review of the estimates of climate policy costs produces biased estimates for the more ambitious objectives – such as those compatible with the 2°C of the EU and the G8 – since only the most optimistic results are reported for such targets. This column shows that unbiased estimates predict highly variable costs for the most difficult scenarios.

Most back a treaty on global warming - A solid majority of Americans support the idea of a global treaty that would require the United States to reduce significantly greenhouse gas emissions, a USA TODAY/Gallup Poll finds, although many also express concern about the potential impact on the economy.The results provide some encouragement for President Obama, who attends the United Nations conference on climate change in Copenhagen on Friday. By 55%-38%, those surveyed endorse a binding accord to limit the gases tied to global warming.By a lopsided 7-1, however, Americans say the administration should put a higher priority on improving the economy than reducing global warming. And they are split on the likely economic impact of enacting new environmental and energy laws to address climate change: 42% say they will hurt the economy; 36% say they will help.

U.S. bears oilsands burden, ex-PM says - COPENHAGEN–The United States should shoulder some of the "burden" for Canadian greenhouse gas emissions as the chief recipient of energy from Alberta's oilsands, former prime minister Paul Martin says. The former Liberal leader and long-time finance minister spoke to the Star at his Copenhagen hotel hours after arriving in the Danish capital, which is hosting the two-week climate change summit.The development of the oilsands is giving Canada a black eye here, and the issue is being targeted by environmentalists, European politicians and even provincial and municipal officials from other regions of Canada.

Climate talks stall over requirements for rich nations - Global climate talks ground to a halt Monday morning when a large bloc of developing countries complained that rich nations are abandoning the pact that has governed climate policy for more than a decade, though work continued behind the scenes.
The group of developing nations, known as the G-77, accused the United States and other industrialized countries of forsaking the Kyoto Protocol, the climate agreement that imposes emission limits on nearly every developed nation.

Copenhagen Climate Talks SUSPENDED, In Chaos, As Countries Walk Out Of The Conference - Africa has pulled the emergency cord to avoid a train crash at the end of the week. Poor countries want to see an outcome which guarantees sharp emissions reductions yet rich countries are trying to delay discussions on the only mechanism we have to deliver this - the Kyoto Protocol.  This not about blocking the talks - it is about whether rich countries are ready to guarantee action on climate change and the survival or people in Africa and across the world."Australia and Japan are crying foul while blocking movement on legally binding emissions reductions for rich countries. This tit for tat approach is no way to deal with the climate crisis."

Developing Nations Derail Cophenhagen - Megan McArdle - I haven't been covering Copenhagen, because it has been abundantly clear to me from the beginning that nothing would be achieved.  Everyone's looking at the US . . . and the US Congress can't even deliver on pitifully small reduction targets.     But there has been one interesting development: the continuing emergence of developing nations as a bargaining bloc.  This first became a major issue during the Doha round of WTO negotiations, which were essentially scuttled by developing nations banding together to refuse the things the developed countries wanted (financial services liberalization), and demand things the developed nations didn't want to give (deeper cuts in agricultural protections).  Now we're seeing the same thing at Copenhagen.  Developing countries started the week by refusing to participate unless rich countries make deeper cuts.  Since China, the world's largest emitter, is involved, this is pretty much a deal breaker.

China and U.S. Hit Strident Impasse at Climate Talks - NYTimes - COPENHAGEN — China and the United States were at an impasse on Monday at the United Nations climate change conference here over how compliance with any treaty could be monitored and verified.  China, which last month for the first time publicly announced a target for reducing the rate of growth of its greenhouse gas emissions, is refusing to accept any kind of international monitoring of its emissions levels, according to negotiators and observers here. The United States is insisting that without stringent verification of China’s actions, it cannot support any deal.

I predicted this with my noncooperative, asymmetric, sequential game-theoretic model* - The Group of 77, which represents developing countries as well as large emerging economies such as Brazil, India and China, has walked out of the climate change negotiations Monday, a Brazilian diplomat said. The group walked out of the main discussion group, accusing industrialized countries of an attempt to kill the 1997 Kyoto Protocol, which mandates rich nations, but not developing countries nor the U.S., to cut greenhouse gas emissions, a person close to the talks said. ...A Nigerian delegation official said a key reason for the walk out was underfunding from rich nations. He said the European Union offer for €7.2 billion ($10.6 billion) in short-term funding was "pathetic."

I continue to cover the Copenhagen climate conference - It’s crunch time in Copenhagen. The conference appears to be in deadlock just as world leaders are arriving to sort out the final details—little progress has been made on any of the substantive issues, in the WSJ. The climate conference risks descending into “farce,” says U.K. climate minister Ed Miliband, in The Guardian. China seems increasingly pessimistic, ruling out any chance of a deal at this meeting, in the WaPo. So if you’re looking for a scapegoat for the probable collapse of the climate talks, look no further than the G77 group of developing countries, in the NYT.

Chaos and Uncertainty in Copenhagen? - It should not be surprising that the outcome remains in doubt, because of some basic economic realities.  First of all, keep in mind that climate change is the ultimate global commons problem, because greenhouse gases uniformly mix in the atmosphere.  Therefore, each country incurs the costs of its emission-reduction actions, but the benefits of its actions are spread worldwide.  Hence, for any individual nation, the benefits it receives from its actions are inevitably less than the costs it incurs.  Second, addressing global climate change will be costly and it raises profound distributional implications for the countries of the world.  In particular, addressing climate change at minimum cost (i.e., cost-effectively) requires that all countries take responsibility for their emissions going forward, and indeed necessitates that all countries control at the same marginal abatement cost.

Obama Presses China on Rules for Monitoring Emissions Cuts – NYTimes - President Obama called on world leaders to come to an agreement on climate change, no matter how imperfect, and pressed for an accord that would monitor whether countries — primarily China — are complying with promised emissions cuts.  Speaking just hours after arriving here for what is supposed to be the last day of difficult talks to address global warming, and clearly frustrated by the absence of any agreement, Mr. Obama was both emphatic and at times impatient

Clinton: US would help raise billions on climate -- U.S. Secretary of State Hillary Rodham Clinton sought to put new life into flagging U.N. climate talks Thursday by announcing the U.S. would join others in raising $100 billion a year by 2020 to help poorer nations cope with global warming. The $100 billion figure, the first offered by Washington in discussions here over long-term financing, falls short of what some experts suggest will be needed. Yvo de Boer, U.N. climate chief, said talks would focus on the "adequacy" of that target. Clinton made the offer contingent on the 193-nation conference reaching a broader agreement, including on the issue of "transparency" - demanding a Chinese commitment to allow some kind of oversight to verify its actions to control emissions of carbon dioxide and other greenhouse gases.

Clinton's Copenhagen Announcement 'Was Naked Blackmail' - I was just at Hillary Clinton's press conference and desperately wanted to ask her a question – or six. She said that the U.S. would contribute its "share" to a $100-billion financing package for developing countries by 2020 – but only if all countries agreed to the terms of the climate deal that the U.S. has slammed on the table here, which include killing Kyoto, replacing legally binding measures with the fuzzy concept of "transparency," and nixing universal emissions targets in favor of vague "national plans" that are mashed together. Oh, and abandoning the whole concept (which the U.S. agreed to by signing the UN climate convention) that the rich countries that created the climate crisis have to take the lead in solving it. Unless every country here agrees to the U.S. terms, the Secretary explained, "there will not be that kind of a [financial] commitment, at least from the United States."

Barack Obama's Speech Disappoints and Fuels Frustration at Copenhagen - Barack Obama stepped into the chaotic final hours of the Copenhagen summit today saying he was convinced the world could act "boldly and decisively" on climate change. But his speech offered no indication America was ready to embrace bold measures, after world leaders had been working desperately against the clock to try to paper over an agreement to prevent two years of wasted effort - and a 10-day meeting - from ending in total collapse .Obama, who had been skittish about coming to Copenhagen at all unless it could be cast as a foreign policy success, looked visibly frustrated as he appeared before world leaders.He offered no further commitments on reducing emissions or on finance to poor countries beyond Hillary Clinton's announcement yesterday that America would support a $100bn global fund to help developing nations adapt to climate change.

Only Private Sector Can Meet Finance Demands of Developing Countries - This afternoon, the main session of the Copenhagen talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the “finance question,” as it’s called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050! ... I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments.

Copenhagen 'must consider oil producers' interests' - Saudi Arabia's oil minister called on Friday for any resolution taken at the climate summit in Copenhagen that could affect oil demand to include measures that "reduce the effects" on oil producers."Any measures that might affect oil demand should be accompanied by a counter-measure that minimises their effects on oil producing countries," Ali al-Naimi said in comments published by the Saudi-owned newspaper Al-Hayat."Our objective ... is to protect our interests," he added.Naimi, who is attending the international climate summit, insisted that Saudi Arabia "was not against reducing carbon emissions, quite the opposite."But he warned that "the world must develop and that is not possible without energy," adding that it would take 100 years before renewable forms of energy can meet 40 percent of global demand.

A divided UN conference recognizes climate deal - The U.N. climate conference narrowly escaped collapse Saturday as bitterly divided delegates agreed after all-night talks to recognize a political compromise that President Barack Obama brokered with China and other emerging powers.The Copenhagen Accord was bogged down for hours by protests from delegates who felt they were excluded from the process or said the deal didn't go far enough in cutting the greenhouse gas emissions that cause global warming.After a break, the conference president gaveled a decision to "take note" of the agreement instead of formally approving it. Experts said that clears the way for the accord to begin even though it was not formally approved by the conference.

Global Warming Treaty Likely to Be Delayed Past 2010 (Bloomberg) -- United Nations climate envoys may drop a plan to complete a binding global-warming agreement by the end of 2010, as two weeks of talks in Copenhagen overran their deadline with no framework to forge a treaty. A draft accord prepared in the Danish capital omitted a requirement that nations adopt “one or more legal instruments” to fight global warming during a UN meeting planned in Mexico City in November. The 2010 limit was in an earlier draft today. “The big obstacle is the gap between developed and developing countries; We’re playing ping-pong,” Haimoude Ould Ahmed, a senator from Mauritania, said in an interview in Copenhagen. “We’ll have to prolong the talks into the night and tomorrow morning. We’re worried. We had many hopes.”

Climate Pact Falls Short – WSJ - Leaders of the U.S., China and other major economies said late Friday that they had tentatively reached a new climate accord, though they said the pact wasn't aggressive enough to meaningfully curb greenhouse-gas emissions and merely set up a future round of negotiations to hash out the details.The announcement followed a hectic day of diplomacy that included a series of closed-door meetings in which President Barack Obama tried repeatedly to persuade leaders of other countries, particularly China, to commit to a deal. But the Copenhagen Accord leaves key questions unanswered. And it will likely have little immediate impact on companies in the U.S. and elsewhere that had hoped for more certainty about the future of regulation to curb greenhouse-gas emissions. The agreement was still subject early Saturday morning local time to approval by nations at the conference. Several negotiators said they hoped diplomats would work toward a more-detailed agreement in U.N. meetings next year.The Copenhagen agreement contained no specific targets for greenhouse gas emissions by 2050. A proposed 50% cut that was in earlier drafts was removed.

Non-Binding "Sham Agreement" Reached At Copenhagen. “Rich Countries ... Sought to Bribe and Bully Developing Nations" - Climate negotiations in Copenhagen have yielded a sham agreement with no real requirements for any countries. This is not a strong deal or a just one -- it isn't even a real one. It's just repackaging old positions and pretending they're new. The Copenhagen Accord is not legally binding and - apparently - does not specify either target emission reductions or monetary contributions of various countries. Here is a copy of the actual Copenhagen Accord (notice that the Appendices for target emissions and monetary contributions are blank).

Copenhagen climate conference: Leaked UN document shows deal could still lead to catastrophic global warming - The document is an internal briefing paper drawn up by the UN Framework Committee on Climate Change that is in charge of the talks.  It says that even the most ambitious emission reduction targets currently offered by developed and developing countries, including the EU and US, would set the world on course for warming of around 5.4F (3C).  This could cause a rise in sea levels, droughts, floods and mass extinction of species. Kumi Naidoo, the executive director of Greenpeace International, said the document is a “smoking gun” that puts pressure on world leaders to increase targets on cutting greenhouse gas emissions.

Copenhagen Negotiators Bicker and Filibuster While the Biosphere Burns - First they put the planet in square brackets, now they have deleted it from the text. This is no longer about saving the biosphere: now it's just a matter of saving face. As the talks melt down, everything that might have made a new treaty worthwhile is being scratched out. Any deal will do, as long as the negotiators can pretend they have achieved something. A clearer and less destructive treaty than the texts currently being discussed would be a sheaf of blank paper, which every negotiating party solemnly sits down to sign. This is the chaotic, disastrous denouement of a chaotic and disastrous summit. The event has been attended by historic levels of incompetence. Delegates arriving from the tropics spent 10 hours queueing in sub-zero temperatures without shelter, food or drink, let alone any explanation or announcement, before being turned away. Some people fainted from exposure; it's surprising that no one died. The process of negotiation is just as obtuse: there's no evidence here of the innovative methods of dispute resolution developed recently by mediators and coaches, just the same old pig-headed wrestling

Why Copenhagen Is A Failure - Before and during Copenhagen (and after, too, we can be sure), politicians and central bankers across the globe have worked tirelessly to return the global economy to a path of growth.  We need more jobs, we are told; we need economic growth, we need more people consuming more things.  Growth is the ever-constant word on politicians' lips.  Official actions amounting to tens of trillions of dollars speak to the fact that this is, in fact, our number-one global priority. But the consensus coming out of Copenhagen is that carbon emissions have to be reduced by a vast amount over the next few decades.  These two ideas are mutually exclusive.  You can't have both.

Ocean Acidification Rates Pose Disaster for Marine Life, Major Study Shows - The world's oceans are becoming acidic at a faster rate than at any time in the last 55m years, threatening disaster for marine life and food supplies across the globe, delegates at the UN climate conference in Copenhagen have been warned. A report by more than 100 of Europe's leading marine scientists, released at the climate talks this morning, states that the seas are absorbing dangerous levels of carbon dioxide as a direct result of human activity. This is already affecting marine species, for example by interfering with whale navigation and depleting planktonic species at the base of the food chain. Ocean acidification - the facts says that acidity in the seas has increased 30% since the start of the industrial revolution. Many of the effects of this acidification are already irreversible and are expected to accelerate, according to the scientists.

Scientists warn of 30ft rise in sea level due to 2C of global warming - GLOBAL warming of only 2C could lead to sea-level rises that would submerge the Netherlands and Bangladesh, a report in the journal Nature has warned. Scientists at Princeton and Harvard universities in the United States carried out a new analysis of the geological record of the Earth's sea level.Their research revealed that the polar ice sheets are vulnerable to large-scale melting, even under moderate global warming scenarios. According to the analysis, an additional 2C of global warming could commit the planet to 20ft to 30ft (about six to nine metres) of sea-level rises over the long term. Coastal areas where hundreds of millions of people live would be inundated, the US scientists warned. It would permanently submerge New Orleans and other parts of southern Louisiana, much of southern Florida and other parts of the US east coast, much of Bangladesh and most of the Netherlands unless unprecedented coastal protection were carried out

50 reasons why global warming isn't natural - Short Sharp Science - New Scientist
A British newspaper today published a list of "100 reasons why global warming is natural". Here we take a quick look at the first 50 of their claims - and debunk each one.

Michael Roberts: I have not seen a single cogent explanation for why uncertainty about climate change implies inaction is the optimal policy - Via Brad Delong, Mark Kleiman tells us that "If anyone tries to tell you that uncertainty about climate change is a reason for inaction, he’s either a fool or a scoundrel. Probably a bit of both." That may be a little strong.  But if there is a cogent explanation for why uncertainty means we should do nothing, I have no idea what it may be. Brad Delong is a more precise.  He writes:There is one set of circumstances in which uncertainty is a reason for inaction: (a) the measures you would take would be expensive, (b) the measures you would take will be irreversible, and (c) you will get a lot of new information soon to help you judge the situation better.  That set of circumstances does not apply here.

Tie CO2 Tax to Temperature - John Tierney relays today what seems like a very sensible idea from economist Ross McKitrick, tie a carbon tax to the temperature.  If the temperature rises the tax goes up, if the temperature does not rise (as McKitrick, a climate change skeptic thinks) the tax will stay at a low level.  Temperature of the troposphere would be measured by satellite at the equator and averaged over a period of time.  (More here and a more detailed version here).

The real inconvenient truth - The "inconvenient truth" overhanging the UN's Copenhagen conference is not that the climate is warming or cooling, but that humans are overpopulating the world.A planetary law, such as China's one-child policy, is the only way to reverse the disastrous global birthrate currently, which is one million births every four days.The world's other species, vegetation, resources, oceans, arable land, water supplies and atmosphere are being destroyed and pushed out of existence as a result of humanity's soaring reproduction rate.Ironically, China, despite its dirty coal plants, is the world's leader in terms of fashioning policy to combat environmental degradation, thanks to its one-child-only edict.

Population control called key to deal - COPENHAGEN: Population and climate change are intertwined but the population issue has remained a blind spot when countries discuss ways to mitigate climate change and slow down global warming, according to Zhao Baige, vice-minister of National Population and Family Planning Commission of China (NPFPC) . "Dealing with climate change is not simply an issue of CO2 emission reduction but a comprehensive challenge involving political, economic, social, cultural and ecological issues, and the population concern fits right into the picture," said Zhao, who is a member of the Chinese government delegation. Many studies link population growth with emissions and the effect of climate change.

Three centuries of climatic variation and the world income distribution - VoxEU - Hot countries tend to be poorer. This column uses the cross-century, cross-country variation in climatic temperatures to estimate the effects of historic temperature upon current incomes. The negative relationship between current temperature and income appears due to temperature variations in the 18th and 19th centuries. That suggests that the consequences of climate change may be felt for a very long time.

AGU update: US stock market believes in climate change - Although public scepticism about climate change appears to be on the increase, it looks like the stock market is paying attention to the phenomenon. Since the mid-1990s, stocks in large energy companies have fallen in response to announcements by NASA about record temperature results. That's according to Jesse Anttila-Hughes of Columbia University, US, at the American Geophysical Union Fall Meeting in San Francisco. Anttila-Hughes believes traders saw NASA's news as adding to the scientific evidence about climate change and increasing the probability that we'll need to act to cut greenhouse gas emissions, something that is potentially problematic for the carbon-intensive energy industry. NASA's announcements of years that had seen record high global temperatures led to drops in share values of around four per cent, wiping out about $3 billion in total each time. Share prices began to respond to each piece of news almost immediately.

These Revolutionary Times - Energy Bulletin - The reader should understand that I am not prone to tirades or behaviors that could be described as radical. I avoid confrontations and by disposition am a peacemaker—or, depending on one’s perspective, a wimp. But something happened this year. ...Perhaps it was triggered by feelings of ineffectiveness and frustration......“Yes, but isn’t revolution too much?” you say. “Why a change so radical? Who wants to take that risk?” In our own time it is fair to ask why a revolution is necessary when we have progress, increased technological efficiency and the organic, environmental and sustainability movements to help with the change ahead. Here’s why. What we commonly call progress has produced some of the very problems we expect progress to solve

Natural Gas: New Environmental Rules Could Cloud Prospects – BusinessWeek - Although natural gas is certainly one of the cleaner fuels, compared with coal or crude oil, there are other concerns when it comes to its environmental impact, both real and alleged. Most of those revolve around the use of water when drilling in unconventional gas reservoirs such as the Marcellus Shale that snakes through the Appalachian Mountains. There have been serious cases of water contamination near drilling sites in seven states, but so far there's no conclusive proof the cause is the fluids used in hydraulic fracturing, the drilling process used to release gas trapped in compressed rock formations such as the Marcellus Shale

Widespread oil theft by drug traffickers deals major blow to Mexico's government - Drug traffickers employing high-tech drills, miles of rubber hose and a fleet of stolen tanker trucks have siphoned more than $1 billion worth of oil from Mexico's pipelines over the past two years, in a vast and audacious conspiracy that is bleeding the national treasury, according to U.S. and Mexican law enforcement officials and the state-run oil company. Using sophisticated smuggling networks, the traffickers have transported a portion of the pilfered petroleum across the border to sell to U.S. companies, some of which knew that it was stolen, according to court documents and interviews with American officials involved in an expanding investigation of oil services firms in Texas.

World’s Top Polluter Emerges as Green-Technology Leader - WSJ - China looms large over the global climate summit in Copenhagen, where Chinese officials are pressing the U.S. and other rich nations to accept new curbs on their emissions and to continue to subsidize poor nations' efforts to adopt clean-energy technology. China is the world's biggest source of carbon emissions. Less understood is the way China is now becoming a source of some of the solutions.China's vast market and economies of scale are bringing down the cost of solar and wind energy, as well as other environmentally friendly technologies such as electric car batteries. That could help address a major impediment to wide adoption of such technologies: They need heavy subsidies to be economical. The so-called China price -- the combination of cheap labor and capital that rewrote the rulebook on manufacturing -- is spreading to green technology.

China outstrips US as center for IPOs - China has outstripped the U.S. in the amount of money raised from stock listings, underscoring the region's stronger economy and a resurgence in investment.  Companies have raised nearly $52 billion from initial public offerings on exchanges in Hong Kong and mainland China so far this year, according to financial research firm Dealogic. That's about twice as much as the some $26.5 billion in American IPOs. Hong Kong alone has drawn more than $27 billion this year, making the southern Chinese financial center the world's top city for equity capital raising for the first time, according to Dealogic's records

China Faces Crash Scenario - Mish - Problems in China continue to mount. Money supply is growing rampantly out of control, property prices are in a bubble, exports are weak, commodity speculation is pervasive, and GDP growth is more of a mirage than real. Please consider China Monthly New Loans Are 294.8 Billion Yuan, Above Forecast New local-currency loans totaled 294.8 billion yuan ($43.2 billion), compared with 253 billion yuan in October, according to data released by the People’s Bank of China on its Web site today. The median forecast of 19 economists in a Bloomberg News survey was 250 billion yuan. M2, the broadest measure of money supply, rose a record 29.74 percent in November from a year earlier.

Is urban migration the solution to China’s problems? - For a lot of analysts, it seems that the phrase “urban migration” is the correct response to many of the problems you might identify with China’s growth model.  Is there a real estate bubble?  No there isn’t because urban migration will create a near infinite future demand for residential and commercial real estate.  Does China under consume?  Yes but urban migration will raise consumption rates. This latter claim was highlighted in a Tuesday article in the South China Morning Post, which claims that “President Hu Jintao’s pledge yesterday to spur urbanisation and domestic demand next year has been seen as an attempt to tackle the growing problem of industrial overcapacity.” 

China's Problems - Dan Drezner points to a piece in the New York Times about growing discontent with China in the developing world: I don't have any lengthy comment about this, other than the obvious: China looks scary to some people today because they project its current growth rates into the far future and then assume that everything else in the world will stay the same. But as China becomes more highly developed, it's going to encounter the same problems maintaining growth that everyone else does. What's more, it's going to start developing a lot more rivals, both overseas and nearby. It's only going to get worse for them in the future.

The disaster of “Chimerica” – Can both sides be losers? - Zhang Hongliang is an economist that has been writing blog articles concerning China’s economic and financial situation since 2006 and his blog articles have received widespread attention, especially for his biting criticism of “Chimerica” and the harm that it has done to China. He says that Chimerica is nothing more than a cyclical continuation of a colonial-style economy,  In a recent blog article, Zhang writes: First, the US used dollars to get China’s goods, then they used bonds to get China’s dollars, and now they want to use stocks to get back their bonds, lastly, they will use the stocks to make China in debt; eventually China is not only handing over goods to the US in vain, not only handing over US dollars to the US in vain, but China will eventually be in debt to the US

Making room for China in the world economy | VoxEU - Policymakers blame the undervalued RMB for the global imbalances. Here one of the world’s leading development economists argues that the undervalued currency boosts China’s growth, and this, in turn, is good for the world’s recovery and the alleviation of poverty. China could maintain its growth without trade imbalances if it could introduce industrial subsidies to offset a rising yuan. It is better to subsidise tradables directly than to subsidise them indirectly through the exchange rate. This may run afoul of WTO rules, but that doesn’t diminish the economic case for the policy.

How to assess the renminbi’s undervaluation - VoxEU - Must China let its exchange rate appreciate to reduce global imbalances? This column says the appropriate yardstick to measure currency undervaluation is based on the Balassa-Samuelson effect. That measure says the renminbi is undervalued by only 12%. A gradual renminbi appreciation will be sustained only if Chinese corporate and public savings are lowered.

Yuan Can Be ‘3rd Pillar’ of Finance System, Yam Says (Bloomberg) -- Hong Kong’s former central bank chief Joseph Yam said that the yuan can become the “third pillar” of the global monetary system as deteriorating public finances erode confidence in the dollar and the euro. Large budget deficits and public debt, and structural problems in the financial system, mean that the two pillars are not resting on sound foundations,” he said at a financial conference today in Beijing. “There is a need for a third currency to serve as a third pillar, which would also give an opportunity for the two weak pillars to heal.”

*The End of Influence* - The subtitle is What Happens When Other Countries Have the Money Here is an excerpt: The Asian export-led growth model must -- over time -- transform itself to domestic consumption and prosperity models.  The American borrow-and-import model will also have to shift -- again, this takes considerable time -- to a model of consumption-at-the-level-you-produce.  And the need to keep the confidence of those who have the money that their money is well placed in the United States serves as a constraint on U.S.  policy in a way that it has never been before.

Gulf Monetary Council to Tackle Single Currency Peg, Launch - A Gulf monetary council will be tasked with deciding on the peg of a proposed single currency among Saudi Arabia, Bahrain, Qatar and Kuwait and timeline to launch the currency, Kuwait's foreign minister said on Tuesday. "Whether this currency will be pegged to the dollar or a basket or something else is a technical matter that will be decided by the monetary council," Sheikh Mohammed Al Sabah said at a press conference at the end of a meeting of the Gulf Co-operation Council in Kuwait. "The council will be tasked with setting a number of standards, such as the percentage of deficit to gross domestic product."

Gulf petro-powers to launch currency in latest threat to dollar hegemony - The Arab states of the Gulf region have agreed to launch a single currency modelled on the euro, hoping to blaze a trail towards a pan-Arab monetary union swelling to the ancient borders of the Ummayad Caliphate. The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts.... The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency – dubbed “Gulfo” – is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. “The US dollar has failed. We need to delink,”

UAE set to eschew Gulf single currency -Dubai’s woes make it unlikely the UAE will rejoin the plan for Gulf monetary union any time soon. The Gulf co-operation council - Saudi Arabia, Kuwait, Qatar and Bahrain, the UAE and Oman - will meet over the next three days in Kuwait, where a single regional currency is likely to be discussed. The UAE pulled out of the plan in May in protest at the Saudi siting of the proposed joint central bank. Kuwait, about to take over presidency of the GCC, has said the location would not be reviewed. Financial problems in Dubai might make a regional bloc more attractive for the UAE in the long-term. But for now the UAE, which accounts for a quarter of regional GDP, would be joining from a position of weakness.

Monetary policy: Time for true quantitative easing - Japan has declared the return of deflation. The country already holds the record for the number of consecutive years of deflation (seven, until 2006). Since its banking problems started after the bursting of the asset bubble of the 1980s, Japanese growth has remained below potential for almost twenty years.  So when the Bank of Japan’s policy board scheduled an emergency meeting at the start of this month, some expected bold measures to stimulate demand, banish deflation and end the recession. The government had raised the stakes as its finance and deputy prime ministers demanded more action from the BoJ, even a return to a policy of ‘quantitative easing‘. All hopes were dashed when the central bank said it would merely “encourage a further decline in longer-term interest rates” by standing ready to lend Y10 trn in three-month loans exclusively to commercial banks. This, apparently, reflected the central bank’s will to “continue to do its utmost as central bank” to combat deflation.The latter claim is hard to swallow. Japanese commercial banks already have access to more short-term lending from the central bank than they need. The BoJ has also so far ignored the more activist monetary policy example of its Western peers.

Japan’s Recovery Too Weak to Spur Domestic Demand, Tankan Shows (Bloomberg) -- Japan’s small businesses, the employers of 70 percent of the workforce, signaled that the economy’s export-led revival is too weak to spur spending by companies and consumers.  An index of sentiment at small manufacturers will worsen to minus 42 in March from December’s minus 40, the Bank of Japan’s quarterly Tankan survey showed yesterday. Large companies plan to cut spending 13.8 percent in the year ending March 2010, the second-worst projection on record.

Nowotny Signals No Need to Raise Rates in First Half (Update1) - (Bloomberg) -- European Central Bank council member Ewald Nowotny indicated he sees no need to raise interest rates in the first half of 2010 as inflation pressures stay muted. “Our interest rate decisions are to be seen in connection with our price stability goal and in this context I do not see major threats for price stability in the near future,” Nowotny, 65, said in an interview in Vienna. The comment was in reply to a question whether economists were correct to assume no increases in the first half. There is no “strong need” to shift policy in the absence of inflation pressures, he said. The Frankfurt-based central bank is starting to withdraw emergency measures designed to fight the financial crisis as the euro-region economy recovers from its worst recession since World War II. While President Jean-Claude Trichet says the ECB has no immediate plan to raise its benchmark rate from the current 1 percent, officials have given themselves room to do so next year if necessary.

BoE’s inflationary bias should raise concern - UK inflation has come in above estimates once again. Despite the deepest recession in half a century, consumer prices have barely fallen. The Bank of England may feel pleased to have avoided deflation, but its persistent inflationary bias is storing up trouble.There’s always an excuse. This time, it’s petrol and clothes prices which have caused the main measures of inflation to come in a notch above expectations. The run of falling readings is clearly over, and the Retail Prices Index, the best measure of the cost of living, is now rising again.RPI’s peak-to-trough fall was just 1.6 percent, while the Consumer Prices Index — the measure used for the BoE’s inflation target — never fell below 1 percent. This might be seen as a triumph for the BoE’s Monetary Policy Committee, but in reality it shows just how deeply embedded inflation is in the UK economy, even during a vicious recession

Miles Says It’s Natural for BOE to Consider Deposit Rate Move - (Bloomberg) -- Bank of England policy maker David Miles said that it’s “natural” for officials to consider changes to the interest rate paid on commercial bank reserves at the central bank. “It’s a potential tool that one could use,” Miles said at an event in London today. “I’m open-minded about whether it’s something we should embark on but it’s perfectly natural that it should be something that would be considered, and that’s where we are.” Policy makers discussed lowering the deposit rate in November, saying that a reduction could “ease monetary conditions further.” The central bank didn’t make any announcement on the rate at its Dec. 10 meeting, when policy makers stuck to their plan to buy as much as 200 billion pounds ($325 billion) of bonds. In November, Miles had supported an extension of the program to 215 billion pounds.

Britain's deficit 'almost certain' to pass £100bn mark - Britain's gathering debt crisis is set to pass another alarming milestone this week when government borrowing smashes the £100billion mark for the first time in a single year. City economists fear that the total will hit 12 figures when details of the public finances in November - always a bad month for the national coffers - are published on Friday.

UK Shows How To Destroy A World-Class Industry - Pensions were once a national specialty for the UK. But two changes of rules in a tax year that is already under way add up to a massive blow to the idea of self-provision for old age. Short-term fiddling destroys confidence in long-term savings, and the Chancellor of the Exchequer’s latest moves betray the ruling Labour party’s intellectual bankruptcy on this subject. The rule changes in April’s Budget destabilized that reform. For those earning over £130,000 this year, calculating the tax relief – and thus whether it’s worth contributing to a pension – will require the skills of an accountant, thanks to the “anti-forestalling” measures brought in ahead of the new 50pc top tax rate.

FT - Britain’s dismal choice: how to share the losses - The UK is poorer than it thought it was. This is the most important fact about the crisis. The struggle over the distribution of the losses is going to be brutal. It will be made more so by the second most important fact about the crisis: it has had a huge effect on the public finances. The deficits are unmatched in peacetime.

Moody’s Warns Of 'Social Unrest’ As Sovereign Debt Spirals - Britain and other countries with fast-rising government debts must steel themselves for a year in which “social and political cohesiveness” is tested, Moody’s warned. In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.  It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”.

Gone With the Windfall - NYTimes-  In Britain the first shots have just been fired by Alistair Darling, the chancellor of the Exchequer, our very own, very unlikely Wyatt Earp. On Wednesday he introduced a windfall tax of 50 percent to be paid by banks on discretionary bonuses above $40,000. (France is considering a similar tax.) So if a banker receives a million-dollar bonus, his bank will have to hand over $480,000. And he still pays income tax on the full million. The idea is nice and simple. It is intended to encourage banks to retain cash, perhaps as a buffer against hard times. This makes a pleasant change from the depressing use of taxpayers’ money for the same purpose, which seems to be the current policy.

U.K. bonus tensions grow as regulator says leave - Tension over a tax the U.K. government has made on banker bonuses grew as a top regulator reportedly said it wouldn't be bad if banks departed the country. Several banks -- and other City institutions like broker-dealer Tullett Prebon that aren't necessarily impacted by the tax -- have made noises about parts of their British-based staff outside the country after Chancellor Alistair Darling announced a tax on 50% of banker bonuses above 25,000 pounds, or roughly $40,000.

France Matches Britain With 50 Percent Bonus Tax – NYTimes - Finance Minister Christine Lagarde said Wednesday that France would impose a 50 percent tax on banks for bonuses paid next year that exceed $40,050, matching a British announcement last week to appease public outrage and limit pay in the financial sector.The British levy applies to discretionary cash bonuses paid by all banks operating in Britain, Ms. Lagarde did not specify which banks would be hit in France, speaking to reporters in Paris after a meeting of the cabinet, Bloomberg News reported.“Banks will be taxed on bonuses that they distribute in 2010 above 27,500 euros,” Ms. Lagarde said. “It is now a British and French proposal.” She said the government will propose a law in January to enact the tax. Go to Article from Bloomberg News »

Germany Plans Big Increase in Borrowing - The new center-right German government's first budget sees a record of €85.8 billion (about $125 billion) in new borrowing next year and a spending rise of around 10.5%, according to 2010 budget figures seen by Dow Jones Newswires. The increased spending is the result of rising social welfare costs as a result of the weak economy. When including spending for financial sector bailouts and other extraordinary measures, total new debt will reach around €100 billion, said a finance ministry official, who declined to be named. New debt will next year reach a "level not seen in the history of the Federal Republic of Germany,"

French big loan to promote education, investment (Reuters) - The French state will raise 35 billion euros ($51.33 billion) to fund strategic investments in the coming months, with the priority given to higher education and research, President Nicolas Sarkozy said on Monday.  Shrugging off criticism that France was taking on too much debt, Sarkozy told reporters the money was needed to modernise French universities, promote training and boost the economy.

Regulators to give banks Basel grace period: sources (Reuters) - Global regulators will give banks a grace period before forcing them to implement stricter capital rules, three people said on Wednesday, easing concerns that lenders might need to issue massive amounts of shares in the near future.The committee is expected to publish proposals this week for stricter financial regulations in response to the credit crisis, and there had been fears that if banks had to implement the new rules quickly, they would have to raise substantial capital.The three people with knowledge of the matter said the committee would stick to its plan to gradually implement changes starting in 2012, but will give banks a transition period to help them adjust to the rules

Swedes want to join euro - A majority of Swedish voters would vote to adopt the euro for the first time since a referendum turned down such a move six years ago, a poll by the national statistics office showed.Of those polled, 43.8pc would vote in favor, according to the poll published by Statistics Sweden on its Web site. That compares with 42.1pc in the same poll in May. Forty-two pc want to keep the krona, compared with 42.9pc in the earlier poll and 14.2pc were undecided. Statistics Sweden surveyed 6,398 people between October 28 and November 25. The margin of error was 1.2 points.

Euro-area banks may see $269 billion in write-offs -  Banks in the 16 nation euro-zone may write off 187 billion euros ($269 billion) of assets between now and the end of next year, the European Central Bank said Friday. Increasing write-downs on exposures to commercial property and the inclusion of write-downs on securities issued by Central and Eastern European countries led to a total estimate of losses between 2007 and 2010 of 553 billion euros, an increase of 65 billion euros from an estimate made in June.

Spain tops ‘misery index’ - - Spain tops a new "misery index" that combines unemployment rates with budget deficits, according to forecasts from Moody’s Investors Service. Ireland appears in fourth place on the sovereign-risk outlook for 2010, behind Spain, Latvia and Lithuania. Of the Group of Seven economies, the UK is set to be the most miserable, in sixth position, edging out the United States by two places. The Moody’s gauge follows a tool created by US economist Arthur Okun in the 1970s which adds unemployment and inflation rates to grade how miserable an economy is. The new method is “a good measure of the challenges facing some economies in the coming decade,” the Moody’s economists wrote in the report.

Pain in Spain - Krugman - NYTimes - And yet more on wages and employment. In response to this post, one commenter asks why I say that wages need to fall in Spain.  We — that is, the United States — have a floating exchange rate. Spain, however, being part of the euro zone, does not. Its wages are too high compared with those of other eurozone members, now that the housing boom and massive capital inflows are over. If Spain still had a peseta, I’d say devalue it; since it doesn’t, wages have to give.

Is Austria Set To Join The Honourable Company of PIIGs? - The Austrian arm of the Bavarian bank Bayern LB, was nationalized on Monday for the symbolic price of three euros. This unexpected action brought to the world’s attention something which has been obvious to some of us for a very long time: namely that all is not well with Austria’s banking system, and it is not well for one very simple reason - over-exposure to Central and East European Markets. Of course, when some of us first started pointing the problem out, we were roundly rebuked from all quarters, what a ridiculous idea! Izabella Kaminska had a reasonable review of how the arguments were being marshalled back in January here, while Paul Krugman attracted the wrath of all Austria back in April by, as this blogger puts it, stating the obvious. When will the world of officialdom wake up to the fact that when economists warn of impending dangers, this is not done to cause harm, but in an attempt to try to stop more damage being done? 

Greece defies Europe as EMU crisis turns deadly serious - Euroland's revolt has begun. Greece has become the first country on the distressed fringes of Europe's monetary union to defy Brussels and reject the Dark Age leech-cure of wage deflation.  While premier George Papandreou offered pro forma assurances at Friday's EU summit that Greece would not default on its €298bn (£268bn) debt, his words to reporters afterwards had a different flavour. "Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state," he said. Were we to believe that a country in the grip anarchist riots and prey to hard-Left unions would risk its democracy to please Brussels?

Europe Needs Action Not Words From The Greek Finance Minister As the Economist points out, and as I personally can confirm (since I am constantly having to alter and update my excel sheets), Greek government statistics are notoriously unreliable - indeed, I would say that along with the Bulgarians the Greek statistical agencies are the joint worst in the entire EU. But rarely can the numbers have seemed more erratic and subject to such sharp revisions as they have been in recent months. Following the election of the new government in October (who obviously decided to get as much of the bad news out of the way as quickly as possible) we suddenly learnt that far from having been being “spared” the worst of the global economic contraction, the Greek economy in fact entered a period of negative growth in the first quarter of 2009 (shrinking by 0.5% on the quarter instead of growing by 0.3% as the stats office had previously “estimated”) wherein it is has subsequently remained. And of course given the size of the correction the Greek economy is now entering it is likely the economy will stay in this mode for some considerable time to come. And as if that wasn’t shocking enough, the forecast for this year’s budget deficit more than doubled overnight, from 6% to 12.7% of GDP.

FT » To loud applause…. . . he announced a 90 per cent tax on bonuses for senior bankers in the private sector and a ban on bonuses for executives at public sector corporations. Obviously we are not talking about Alistair Darling, but Greek prime minister George Papandreou, who, after the markets closed on Monday night, outlined his plan to get the country’s finances back in shape (along with some populist banker bashing). And it’s quite some diet.

Is Greece already defaulting?  - The FT leads with the story that European pharmaceutical companies have complained about non-payment for drugs and other medical products of up to €7bn from the Greek public health system. We have learned only this week that there is no such thing as double-entry booking in Greek hospitals for example. The article said no regular payments had been received from the Greek health ministry since 2005, when a settlement was reached on outstanding bills from earlier years.

A New Version of the Weak Euro Meme - Now, with all the other pressing topics I currently have on my plate I would normally have quietly passed this one by, had it not been for the fact that earlier in the week, over at the Economist, they came up with a similar “saving grace” for a partial Greek default. I can think of a thousand and one different ways in which the euro might lose some of its current strong value, I can even imagine a goodly number of those which might be decidedly positive, but what I can’t for the life of me accept is that one of them would be the sort of economic, financial and political chaos which we may now be about to see in Greece.

Greece hit by strikes as debt crisis grows - The financial turmoil engulfing Greece intensified today as thousands of workers backed by militant trade unions went on strike, and international confidence in the economy plummeted following a second downgrading of its creditworthiness in as many weeks.In a sign of the mass resistance the socialist government can expect, Greeks took to the streets to protest at austerity measures that the EU deems crucial if the country is to avoid financial collapse.

ECB Must End Moody’s Veto on Greek Debt, Goldman Says (Bloomberg) -- The European Central Bank should revise its collateral rules after a series of rating downgrades left Moody’s Investors Service holding a veto over Greece’s access to ECB loans, Goldman Sachs Group Inc. said. “This is a bizarre and ultimately untenable situation for the ECB,” said Erik Nielsen, Goldman’s chief European economist in London, in a note late yesterday. “Unless we get a major improvement in the Greek fiscal outlook during the next few months, the ECB would want to rectify the situation.” The eligibility of Greek government bonds is in doubt after Standard & Poor’s on Dec. 16 joined Fitch Ratings in downgrading its debt to BBB+. A Moody’s cut to Baa1, a move of three notches from the current grade, would mean Greek bonds won’t be accepted by the ECB if it reverts as planned to its pre-crisis collateral rules in a year’s time.

Don’t Worry About Greece - The latest round of fretting in global debt markets is focused on Greece (WSJ; Greece).  This is misplaced. To be sure, there will be a great deal of shouting before the matter is formally resolved, but the Abu Dhabi-Dubai affair shows you just where Greece is heading. The global funding environment will remain easy for the foreseeable future.  This makes it very easy and appealing for a deep pocketed friend and ally (Abu Dhabi; the eurozone) to provide a financial lifeline as appropriate (a loan; continued access to the “repo window” at the European Central Bank, ECB). Of course, there will be some conditions – and in this regard the Europeans have a big advantage: the Germans.

Drug Money Saved Banks In Global Crisis Claims UN Advisor -  Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer. Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result. This will raise questions about crime's influence on the economic system at times of crisis.

The Fight Against Money Laundering and Terrorist Financing - iMFdirect - The international community has made the fight against money laundering and terrorist financing a priority. The IMF is especially concerned about the possible consequences of money laundering and the financing of terrorism on our members’ economies and on international financial stability. The IMF’s Legal Department has the lead on the Fund’s work in combating money laundering and the financing of terrorism, and our work includes assessments of countries’ compliance with the international standard on anti-money laundering and combating the financing of terrorism (AML/CFT), technical assistance, research, and policy development. Building on the results of our recent work on the risks from money laundering and the macroeconomic impacts of money laundering and predicate crime, we are seeking to integrate AML/CFT more fully into the Fund’s surveillance and Financial Sector Assessment Programs (FSAPs).

Be careful of accounting identities Yesterday Krugman had a post claiming that freer trade would not boost demand, and hence would not promote recovery from the current recession. I am going to take issue with his argument, but first let me acknowledge the areas where we agree. The Washington Post editorial was very weak. And the two free trade agreements would not significantly impact the macroeconomy. Nevertheless, I am worried that people will draw the wrong inferences from the argument that he makes. I will argue that his analysis here can only be defended if you assume that fiscal stimulus is also ineffective. Of course Krugman doesn’t think fiscal stimulus is ineffective

Why Do German And Japanese Manufacturers Innovate More? - First, because the Europeans and Japanese rely so heavily on overseas markets, where the prices of their products can fluctuate owing to factors beyond their control, like exchange rates and tariffs, their manufacturers are forced to focus on quality and technological superiority. Technological advantages remain even when an exchange rate cuts against you. By contrast, American companies have always had a huge domestic market, so they could afford to mostly compete in terms of price. Second, because labor markets tend to be less flexible and hourly labor costs tend to be higher in Europe and Japan (consider Germany's famously powerful industrial unions), manufacturers there couldn't traditionally cut costs very easily even if they wanted to. Whereas American manufacturers could often lower costs simply by lowering wages or axing employees, the Germans and Japanese had to either make their workers productive or have them produce more valuable products.

Trade and the labour market in the US - VoxEU - Public concerns regarding globalisation remain as economists still do not agree on trade’s effect on the labour market. This column focuses on the effect of increased trade on permanent income shocks experienced by workers in the US. It suggests that increased import penetration is associated with increased risk to worker incomes.

The Unrelenting Pressure of Protectionism: The Global Trade Alert's Third Report - The third report of Global Trade Alert is published today. What follows is a summary of the main public policy findings of this Report, which can be downloaded from here. It contains:

  • The latest assessment of protectionist dynamics at work in the world economy, with a focus on the second half of 2009
  • A focus on the Asia-Pacific region: a separate assessment of who is imposing what forms of protectionism in that region
  • An analysis showing the differential impact of crisis-era beggar-thy-neighbour policies on the exports of the leading sectors of the Japanese economy.
  • A comparison between the products and trading partners targeted by antidumping investigations before and during the crisis.
  • Accounts of the impact of the crisis on the trade policy priorities of China, India, and Russia.

The Coming Shortage Of All The World's Most Important Industrial Metals - In an excellent presentation, André Diederen presents an argument that all of the world's important industrial metals are dwindling, and that despite increasing explortation budgets, our sources of them are becoming rare and more concentrated. We present, via The Oil Drum, Diederen's presentation Global Resource Depletion: Metal minerals scarcity and the Elements of Hope. Now, see the charts – >

Fastest Food Inflation Since Riots Means Milk Up 39% -  (Bloomberg) -- Falling production in commodities from rice to milk is bad news for just about everyone except investors.  Rice may surge 63 percent to $1,038 a metric ton from $638 on Philippine imports and a shortage in India, a Bloomberg survey of importers, exporters and analysts showed. The U.S. government says nonfat dry milk may jump 39 percent next year, and JPMorgan Chase & Co. forecasts a 25 percent gain for sugar. Global food costs jumped 7 percent in November, the most since February 2008, four months before reaching a record, according to the United Nations Food and Agriculture Organization

Soaring food prices threaten India's stability - Surging food prices in India threaten to trigger political unrest as concerns mount that rising inflation across the broader region will crimp Asia’s economic recovery. Food prices soared by 19.95 per cent in the year to December 5, according to Indian Government figures published today. The increase in the cost of staples such as rice and wheat, which has far outpaced wage increases, followed the worst monsoon in nearly four decades.  The increases faced by Indian housewives mirror pressures that have raised concerns among China analysts.

Current account deficit widens in Q3 (Reuters) - The current account deficit widened as expected in the third quarter to $108 billion, largely driven by a big trade shortfall, a Commerce Department report showed on Wednesday. The deficit rose from a downwardly revised $98 billion in the second quarter and was in line with analysts' forecasts for a third quarter shortfall of $108 billion. The third-quarter deficit equaled 3 percent of gross domestic product, up from 2.8 percent in the April-June period, a Commerce Department official said. The current account is the broadest measure of total U.S. trade with the rest of the world, covering goods, services and income transfers."

Handing Over Goods for Promises - There is a lot of stress in the global economy as it attempts to reconcile economies that must export, no matter what, with those that must run deficits, no matter what.  The exporters take in debt from the nations that borrow in order to make books balance.  I don’t know when that system will break, but it will break, delivering losses to the exporters, much as that happened in the era of mercantilism.That said, when the exporters lose, so will the countries that relied on the cheap financing, including the US.  Interest rates will be higher, and the US economy will be that much weaker, aside from exporters benefiting from a weaker dollar.  This may not take place for years, but it will eventually happen. In other words, the cheap finance that the US has will eventually fail.  I don’t know when that will be, but eventually the world will tire of handing over goods for promises.


Dusty said...

The Federal Reserve may cause another crisis by botching the withdrawal of liquidity from the U.S. economy, Morgan Stanley Asia Chairman Stephen Roach said. Wait..didn't this company help drive us into the friggin ditch?

The last official act this morning by the nimrods in the Senate was to increase the debt ceiling..woo hoo! ;)

Happy freaking holidayz!

rjs said...

there was a lot of talk a few weeks back that they would try to raise the ceiling by 1.9 trillion, to get that issue past the midterm elections...

with the Fed's balance sheet nearly tripled during the crisis, the withdrawal of liquidity from the system would certainly be easy to botch; too soon, and it snuffs any recovery we might have, too late, you get too much inflation...

...and you & BnC have a happy, too...

TomCat said...

Off topic, Merry Christmas to RJ and all here!