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

Saturday, December 26, 2009

week ending Dec 26

Conducting Monetary Policy when Interest Rates Are Near Zero – Cleveland Fed - This Economic Commentary explains the concerns that are associated with the combination of deflation, low economic activity, and zero nominal interest rates and describes how monetary policy might be conducted in such a situation. We argue that avoiding expectations of deflation is key and that the monetary authority needs to demonstrate an unequivocal commitment to preventing deflation. We also argue that price-level targeting might be a good device for communicating such a commitment.

Conducting Monetary Policy when Interest Rates Are Near Zero: Will it Work? - Thoma - I have been more skeptical than most about the ability of quantitative easing to stimulate output and employment, so I thought I'd counter that with this explanation of how QE works, what might go wrong, and some of the evidence in its favor. My doubts come on two fronts. The first is the ability of QE to affect long-term real rates, and the evidence is somewhat favorable on this point, though not 100 percent compelling. It does seem that the Fed can lower long-term real rates, mortgage rates in particular, though why we want to stimulate investment in new housing in the aftermath of an housing bubble is a question we might want to ask. My second objection is related to this - even if we do lower long-run real mortgage rates, will that stimulate new investment in housing given the inventory problem that already exists, and given the condition of the economy? I'm doubtful, and that doubt extends generally. That's why I've emphasized fiscal policy, and that is what my objection is mostly about. The focus on the Fed has made it appear that monetary rather than fiscal policy is our best bet at this point. Monetary policy might be able to help for the reasons explained below, so I have no objection to trying, but fiscal policy needs to take the lead.

The Cleveland Fed is getting close - The previous post linked to Mark Thoma, and here is another interesting post by Mark.  It contains a very good article discussing the advantages of price level targeting over inflation targeting.  That is something I have been emphasizing all year.  But there is just one problem: One drawback of a price-level target is that it necessitates stimulating the economy whenever prices fall—no matter what the cause. For example, an expansion driven by a positive supply shock would naturally put downward pressure on prices and upward pressure on the real rate, but few economists believe that monetary policy accommodation is helpful in such a situation. An inflation target can potentially be changed, to respond to unusual economic conditions,but a price-level target has the advantage of responding according to a very simple and easy-to-understand rule. Hmmm, supply-shocks...

Fed’s Bullard: ‘Too Early’ to Change ‘Extended Period’ Language - James Bullard, president of the Federal Reserve Bank of St. Louis, says in an interview with the Wall Street Journal that the economy is turning the corner, and while he doesn’t see the Fed raising short-term interest rates in 2010, he wants to consider other steps to tighten policy if the economy heats up, such selling mortgage backed securities. “We might get 4% growth in the current quarter,” Mr. Bullard said. “That would be welcome and it would be stronger than the third quarter this year and hopefully it would set up some good momentum for the first half of 2010.” Mr. Bullard is a voting member of the Federal Open Market Committee in 2010, meaning he is one of five of the twelve regional bank presidents who get a formal say in the direction of monetary policy.

NY Fed: Federal Reserve Will Indeed Be Able to Raise Rates - A new paper by the Federal Reserve Bank of New York offers some empirical support to the view among senior Federal Reserve officials that they do have the technical means to raise interest rates when needed, despite some naysayers who caution there is too much money in the system to do so effectively. The Fed has pumped $1 trillion into the banking system in the past year, which in theory means all of that cash floating around in the financial system puts downward pressure on bank lending rates, interfering with the Fed’s ability to raise rates as the economy improves to fend off inflation. But there is a way around it: The Fed can pay banks interest on bank reserves of unused cash. That puts the Fed in a position to bid up rates if and when it chooses to, even if there’s a lot of cash in the financial system. The New York Fed paper argues that the Fed could get its target fed funds rate to 2% or higher even if there were $800 billion of extra cash in the banking system.

Martin Wolf answers your questions: - The Fed and QE -  We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the fourth question, from Andrew Flowers of Atlanta, Georgia. Martin’s response is below. Andrew Flowers: Why is the Federal Reserve refusing to do more to stimulate aggregate demand? That is, why hasn’t quantitative easing (QE) been expanded? Ben Bernanke would probably answer that current limits on QE are to insure inflation expectations are well-anchored. But do you believe inflation expectations would become unanchored if the Fed expanded QE?

Estimating the Impact of the Fed's Mortgage Portfolio - Some of the big questions looming about the Fed’s exit strategy are if, when, and at what pace the Fed should draw down its huge portfolio of mortgage backed securities (MBS). At its meeting last week the Federal Open Market Committee announced that it is continuing its MBS purchases at a “gradually slowing pace,” but that will still leave $1,250 billion in MBS on its balance sheet at the end of the first quarter. Another, more long-term, question is whether such price-keeping operations—a term used by Peter Fisher who once ran the trading desk at the New York Fed—should be a regular part of monetary policy in the future. Brian Sack, who now runs the trading desk, concludes in a recent speech that they should be.

John Taylor says that the Fed could sell its MBS without having a material impact on interest rates - His blog post is here. I will download  the paper when I get into the office tomorrow. But one thing from the blog post strikes me as strange: he uses spreads on agency debt as his measure of credit risk. But the very fact that the Fed has purchased MBS could produce a perception that the government is standing behind the debt--as the Fed exits, so too might this perception. I would also imagine that the low current interest rates mean expectations about prepayment are unusual at the moment, and that the most common methods for pricing the mortgage call option might not be appropriate either.

The Fed Has Officially "Spread" Itself Too Thin - Recently there has been much speculation that the US government will do anything, anything, to rekindle the housing bubble. Even if that means providing Option ARMs at blue light special prices and hiring Angelo Mozillo as Mortgage Czar. Yes, those very same Option ARMs which banks' balance sheets are still expecting to be neutron bombed by, courtesy of the long gone days when there was private sector mortgage origination risk. Now that all the mortgage exposure is borne by taxpayers, we decided to analyze how the ARM spread to the traditional 30 Year Mortgage has moved throughout the year. Somehow we were not surprised that the 30 Yr - 1 Yr ARM spread for Freddie Mac just hit a record wide this past week. The government is presumably actively encouraging borrowers to approach the GSEs, and using the same NINJA protocols, to ask, nay, demand, an Adjustable Rate Mortgage. Who cares what happens one year down the line? Certainly not the US government which has $3 trillion in T-Bills to roll by this time next year.

Should, or Can, Central Banks Target Asset Prices? - pdf - Should, or can, central bankers target asset prices in their conduct of monetary policy? Over the past year, central bankers have engaged in a financial fire brigade in the aftermath of the bursting of the U.S. subprime mortgage bubble. But how difficult is it to identify bubbles and to avoid moral hazard without, from time to time, engaging in a fool’s errand? In 1996, for example, Alan Greenspan in a famous speech before the American Enterprise Institute called the stock market “irrationally exuberant.” The level of the Dow was 6,500 (compared to over 10,000 today in the aftermath of the worst financial crisis since the 1930s). As White House economic advisor Larry Summers has noted, “Greenspan’s declaration was of a bubble that wasn’t.” Of course, years later Americans became irrationally exuberant about housing. That turned out to be a bubble that was. To what degree should central banks attempt to target asset prices? Is effective asset price targeting even possible?

Fed's approach to regulation left banks exposed to crisis - Federal Reserve Chairman Ben S. Bernanke assured the bankers and businessmen gathered that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans.  Bernanke, who was in charge of regulating the nation's largest banks, told the audience that these firms were not at risk. He said most were not even involved in subprime lending. And the broader economy, he concluded, would be fine. "Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market," Bernanke said. "The troubled lenders, for the most part, have not been institutions with federally insured deposits."  He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

The Fed’s regulatory errors - Reuters - Appelbaum and Cho have a very clear-eyed summary of where the Fed screwed up in terms of bank regulation over the past few years. Two things are clear: that the Fed had the power to prevent the excesses that banks got involved in over the course of the Great Moderation; and that it didn’t even come close to beginning to wield that power until after the Great Moderation had become the Great Recession and it was far too late.The list of reasons why the Fed was so lax is a long one.The question is whether, given all these failures, it’s remotely realistic to hope or believe that the Fed can change its spots and become a smart and strong regulator with teeth. Fed governor Daniel Tarullo, who has been appointed by President Obama to overhaul the Fed’s approach to regulation, thinks it can. My feeling is that he’s more right than wrong. It seems improbable, to say the least, that anybody else could do a better job than the Fed

Paul Krugman: A strange complacency - Many people have written about this WaPo article on the Fed’s failure to foresee the crisis. I was particularly struck by the complacency over housing prices. I mean, there had just been an enormous increase in prices; the dotcom bubble was fresh in our memory; simple indicators like the price-rent ratio were flashing red. How could they have been so sure nothing was wrong? And I was particularly struck by this part: In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.  The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke....

Rewarding failure at the Fed - guardian.uk - While millions of Americans have lost their jobs, Washington allows Federal Reserve chairman Ben Bernanke to keep his - The Senate finance committee overwhelmingly voted to approve Ben Bernanke for another four-year term as Federal Reserve board chairman. This is a remarkable event since it is hard to imagine how Bernanke could have performed any worse during his last four-year term. By Bernanke's own assessment, his policies brought the US economy to the brink of another Great Depression. This sort of performance in any other job would get you fired in a second. But for the most important economic policymaker in the country it gets you high praise and another term.There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002.  If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession. It was also entirely predictable that the collapse could lead to a financial crisis of the type we saw, since housing was always a highly leveraged asset, even before the flood of subprime, Alt-A and other nonsense loans that propelled the bubble to ever greater heights.

Bernanke Then and Now - Courtesy of Sen. David Vitter (R–La.), Brad DeLong gets the chance to ask Ben Bernanke why he's not willing increase the Fed's inflation target from 2% to 3%: I think this answer demonstrates pretty well why it's entirely possible to say both (a) Bernanke's background made him extremely well suited to play a crisis management role in 2007-08 and he did a good job at it, but (b) he's not the right guy to lead the Fed going forward.  What we're likely to need over the next few years isn't a crisis manager, but someone who unwinds the Fed's position gradually and takes its role in boosting employment more seriously.  But Bernanke is a mainstream conservative, and mainstream conservatives have always been more concerned with inflation than with unemployment.

TIPS Give Way to Inflation as Deflation Yields Drop  - (Bloomberg) -- The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way to start withdrawing cash pumped into the economy since 2007. The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months. Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week.

Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else - As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season. If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

The Inflation Bomb Hiding On The Fed's Balance Sheet - However much it infuriates people like Paul Krugman to hear analysts warn about inflation while the economy is still sputtering along joblessly, there is good reason to worry about the ability of the Federal Reserve to prevent the massive build up of the monetary base from resulting in out of control inflation.One of the sources of the growth of the monetary base has been the $1 trillion of purchases of mortgage backed securities by the Fed. Much of that hasn’t yet made its way into the broader economy, and instead sits on bank balance sheets. Actually, much of it is on deposit with the Fed itself, where banks can earn risk-free interest instead of lending it to home buyers at risk of losing their jobs or businesses still suffering from diminished consumer demand. When the economy begins to recover, the Fed will need to reduce the monetary base to prevent all those dollars from flooding the market and triggering hyper-inflation. For some sources of monetary expansion this is relatively straight forward—the Fed can simply shut down various monetary easing facilities that operate like loans to banks. Banks will have to hand dollars over in exchange for the collateral they posted to participate in the lending facilities.But things are not as easy when it comes to the mortgage backed securities the Fed purchased this year...

Sorry Folks: The Fed's Mortgage Program Is Inflationary - In our earlier lengthy post about the inflationary dangers arising from the Federal Reserve’s mortgage securities purchase program, several of our readers thought we were confusing growth of the monetary base with growth of the money supply. We weren’t. Let’s make this very simple. Under the Fed’s traditional strategies to ease a liquidity crunch—lending from the discount window, increase repo auctions—the Fed increases the monetary base. This means that the reserves at banks increase—as the chart to the left shows. But it doesn’t mean that the supply of money in the broader economy increases.If banks start to lend out money and bring down the reserves, the Fed can increase the cost of its overnight lending to banks or halt other lending programs to rapidly reduce the reserves and slow lending. Essentially, the Fed has a call option on the dollars it has put into the system. When inflation heats up, it exercises the option.

Treasury Yield Curve Steepens to Record Amid Growth Outlook (Bloomberg) -- The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented sales of government debt.  The difference between 2- and 10-year Treasury note yields increased to 281.4 basis points before the government announces Dec. 23 how much it plans to auction in 2-, 5- and 7-year securities next week. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt. A report tomorrow is forecast to show the world’s largest economy expanded in the third quarter.

Uncharted Waters - It does not matter how you measure it, the US Treasury yield curve is at its steepest level ever.  Away from that, the value for expected five-year inflation, five years from now is at its highest level ever, excluding the noise that we had as our markets crashed in the fourth quarter of 2008. This concerns me.  Anytime we hit new extremes on critical financial variables, it makes me think, “What next?”  Treasury yield curve slope and inflation expectations are fundamental.  Reaching unprecedented levels is a big thing. Could the US Government ever face the possibility that it could not meet its obligations?  I think so, and a record wide yield curve is one of the things that I would see prior to such troubles.

The Yield Curve’s Wide Again; So What? - So some hay is being made about the Treasury yield curve hitting a record width, but it really may not mean all that much in the current economy. The spread between the two-year and 10-year Treasury bonds was nearly 3% percentage points, and other measures are also hovering in record territory. From the Journal: The interest-rate development is good news for banks, which normally borrow at short-term rates and lend at long-term rates. The bigger the difference, all else being equal, the bigger their profit. Higher profits mean banks can refill their coffers, which have been drained by bad debts, and return to health. But all else is not equal. Short term rates have actually been on the floor for at least a year, and banks have enjoyed a fat spread, but that hasn’t spurred any return to lending; that’s been a major sore point for the economy and the White House, which has done everything but ordered banks to lend out money (ah, if only we had a command economy!) to no avail. The problem isn’t the yield curve. The problem is banks are still sitting on a mountain of debt that could very likely still turn “bad,” and there just isn’t a lot of demand for credit when consumers and businesses are still working off that mountain of debt they acquired during the Big Con Decade.

Top Ten Reasons Why the Yield Curve Will Flatten (Hint: This Is a Different Sort of Recession) - As I told Larry Kudlow on CNBC Monday night, the employment recovery will be poorer than the market appears to expect, for reasons I’ve posted on this site during the past two weeks. The yield curve is at record steepness. I think that’s an overreaction. In fact, the steep yield curve in the present environment is NOT a harbinger of recovery — it’s a brake on recovery because it encourages banks to own Treasuries rather than risky assets (see below). Here are my top ten reasons to expect the yield curve to flatten. (with charts)

Some Further Comments on Maturity Choice - In an earlier post, I discussed the issue of maturity choice for new Treasury issues, arguing that it affects not only the cost of financing the debt but also the shape of the yield curve, the extent of private sector maturity transformation, and the value of the currency (for instance if foreign lenders have different preferences over maturities relative to domestic lenders.) In many respects, therefore, the Treasury performs actions that are normally considered to be within the purview of the Federal Reserve. But while Fed policy is subject to extensive debate, as is the size of the deficit, there seems to be very little discussion of the manner in which the debt is financed by the Treasury. Andy Harless has recently written a long and thoughtful post that deals with related issues. The post is worth reading in full...

Googling "Inflation targeting" and "fiscal stimulus" - I'm encouraged by a recent uptick in discussion about inflation targeting among some influential economists. Brad Delong asks whether it's "time for some hand-forcing at the Fed." This in response to a very nice post by David Beckworth, which was partly in response to Bernanke's  unconvincing answer to Brad Delong's question to Bernanke about why the Fed isn't targeting a 3% inflation rate. Paul Krugman then compares Ben Bernanke to Montague Norman. Mark Thoma still thinks the focus should be on fiscal stimulus rather than inflation targeting or quantitative easing I can understand why economists would be worried about announcing a new inflation target and vigorously enforcing it with bond purchases. Unhinging inflation expectations from a very stable 2.5 percent could have unanticipated consequences. I see no reason in which a modest increase in the inflation target could be bad thing.  So I wonder, what is Ben Bernanke's loss function?  What is the scenario in which changing the inflation target would be a bad thing?  How bad would it be?  And what odds does he place on inflation targeting being a bad thing as opposed to it being a good thing, as most models indicate it would be?

Why don't we observe (macroeconomic) black holes? - At the very least, we should certainly see any economy being sucked into one. So where are they? Why don't we ever see any? If the economy gets too close to a black hole, it can't escape, and is sucked into a deflationary death-spiral. If nominal interest rates are at or near zero, and so at their lower bound, any deficiency of aggregate demand causes increased deflation, which in turn causes increased expected deflation, which in turn causes higher real interest rates, which in turn reduce aggregate demand, which in turn causes increased deflation...and so on. The price level and real output should both fall to vanishing point. Money in a black hole should have infinite value, yet nobody will buy anything with it.Theory does not predict that black holes will happen. But it does predict that they can happen. And commonsense says that, sooner or later, anything that can happen will happen. So where are they? Why can't we see them? We sure have sailed our macroeconomic spaceships close enough to the boundaries of predicted black holes plenty of times. Why didn't any economy ever get sucked into one, and collapse into an infinitely valuable pinpoint?

Can there be financial black holes/debt deflationary spirals? - My own take, I can think of 4 variables which can help prevent the prevalence of black holes 1. growing population 2. growing productivity 3. growing trade 4. constant influx of new technology or products An economy with high indebtedness, that cannot be paid for due to a lack of all 4, can probably experience a so-called financial black hole. In other words, my take on it is that we have so far avoided any instances of deflationary spirals because the world has always been growing somehow somewhere.

Martin Wolf answers your questions:- Multi-year deflation in asset prices - We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the fifth question, from a reader who wishes to remain anonymous. Martin’s response is below. Anonymous: With the government indirectly supporting asset prices, to what extent is the current economic situation like Japan’s at the start of their lost decade, and is it likely that a multi-year gentle deflation in assets prices may occur?

"Monetary Policy" Transfers Your Children's Future Earnings to the Financial Elite - The monetary-policy terminology of "quantitative easing" and "bail-out" is a masterstroke of propaganda, for it purposefully masks an unprecedented transfer of wealth from future taxpayers to the Financial Power Elite. I want to be crystal-clear here: what Bernanke & Co. represent as "monetary policy" is in fact a massive transfer of wealth from future generations of U.S. taxpayers to Wall Street and the banking/mortgage industries. The propaganda is purposefully designed to distract our attention from the fact that "monetary policy" has fiscal consequences for future taxpayers--unprecedented mountains of Federal debt which must be serviced over a generation in which interest rates will rise.

Can Inflation Be Managed? -- Between 1946 and 1955, the debt/GDP ratio was cut almost in half. The average maturity of the debt in 1946 was 9 years, and the average inflation rate over this period was 4.2%. Hence, inflation reduced the 1946 debt/GDP ratio by almost 40% within a decade.  Two thoughts. One, the Treasury has been financing the debt on a short-term basis. Makes sense given the yield curve but it might be a decision that we come to rue. Two, the authors of the study say this implies slightly higher inflation rates for a shorter period of time in order to accomplish the same thing. One wishes that it was that easy to turn the inflation switch on and off and, as economists are wont to do, they neglect to factor in the likely behavior of politicians. When the bill comes due, count on the politically easy inflation road, expect it to be significant and don’t be surprised if it roars out of control thus bringing us to the next recession.

Picking Up Nickels in Front of the Steamroller - DeLong - Okun gaps, monetary accommodation, speculator overoptimism, bailouts, carry trades, bubbles, and taking away the punchbowl before the party really gets rolling. Alas! A risk neutral model, but still one that I think is of considerable use in clarifying a whole bunch of issues...pdf

Brad DeLong's Dangerous Modeling - From a short paper he calls Picking up Nickels:...The paper comes very close to giving an Austrian account of business cycles, with part of the process consisting of the monetary authority keeping interest rates too low for too long. The paper comes close to saying that government bank policy creates moral hazard with adverse consequences. The paper comes close to saying that there is a major time inconsistency problem with bailouts--the incentive to bail out is stronger ex post than ex ante.The paper comes very close (more than close) to saying that we would be better off if the monetary authority did not try to eliminate all cyclical unemployment.

Moving away from stimulus happy talk to focus on malinvestment - Credit Writedowns - One choice was a deflationary spiral and the associated economic dead weight loss of a non-equilibrating global economy in Depression.  The other choice was a soft depression cushioned by fiscal (and monetary stimulus). About a year ago I wrote an ode to Keynesian economics called Confessions of an Austrian economist in which I said that I choose fiscal stimulus to cushion the downturn and prevent a depressionary spiral. The thinking was this: if government buoys the economy, the effects of deleveraging and the bankruptcy of large systemic players need not create a deflationary spiral that leads to a deadweight loss, social unrest or the usurping of democracy by populist autocrats. But, I am going to move away from the happy talk about fiscal stimulus and re-focus on malinvestment (I have never really talked much about monetary stimulus as a solution).  I am sure many of you saw this coming when I wrote “Stop the Madness now!” last month and I have been signaling my realignment with posts like “A few thoughts about the limitations of government.”  

Is Criticism of the Bernanke Fed Justified? -  While I expect Bernanke will be reappointed, there is growing opposition from three groups, all of which are concerned about the Fed’s commitment to fight inflation. The first group is libertarians such as Ron Paul: ... If he could, he’d abolish the Fed entirely. The second group is the financial community as exemplified by this recent WSJ editorial: ...So the libertarians and the financial community are both worried that the Bernanke Fed will not be aggressive enough in its fight against inflation. That is in contrast to the third group that opposes Bernanke, the populists. This group is worried that the Fed will pay too much attention to inflation: ...

We need more inflation because we need more AD - Mark Thoma has a new post over at CBSMoneywatch.com where he asks why so many economists are now criticizing Bernanke for failing to raise the Fed’s inflation target.  At one point he challenges economists who do favor higher inflation to come up with a model that would justify this policy.  Thoma doesn’t think that new Keynesian models featuring price stickiness are applicable to the current crisis, which he says is caused by banking problems, not price stickiness.    I think Thoma’s views are probably pretty widespread, but I also think his article perfectly illustrates how the subject of inflation targeting can lead economists astray.  The answer to the question he raises is actually very simple; we need more inflation because we need more AD.  Ah, you might be thinking, but how do you know we need more AD?  Thoma seems to think we do. I would think that it is pretty obvious that the economy could use a bit more aggregate demand.

Confused Public Opinion Underscores Need for Fed Action - I think Mark Thoma reaches a smart conclusion here about the need for macroeconomic policy to reflect epistemic humility rather than an effort to prove some particular theoretical view. He says “we should try everything that has a reasonable chance of working. That means quantitative easing, new spending on infrastructure, tax cuts to encourage investment and hiring, make work programs, whatever it takes to get both the economy and people working again.” But this argument is embedded in a piece that’s primarily an attack on people urging the Federal Reserve to do more. I’m obviously not a macroeconomist, so I can’t really say that I have a particularly strong view about whether monetary or fiscal measures are likely to have a greater impact on aggregate demand. That said, as a licensed, bonded, and certified professional political pundit I do feel very strongly that aggressive monetary measures are more realistic, which is an important part of my calculus...

Bernanke’s Inflation Comments Resonate I asked about the amazing comment from Federal Reserve Chair Ben Bernanke about inflation and job growth. It’s probably the most explosive technocrat-speak paragraph in recent memory,  So let’s boil it down. The Federal Reserve has two main roles – price stability and maximizing employment. This isn’t abstract: the Humphrey-Hawkins Act of 1978 requires the Fed to maintain full employment. So when asked why he isn’t engaging in actions that would move the country toward full employment, Bernanke acknowledges that a higher inflation target would stimulate “spending and output,” which leads to economic growth. But he then says that he cannot do so, because of the threat that setting a higher inflation target might lead to higher inflation than that down the road. In other words, the threat of inflation is more crucial than the reality of double-digit unemployment. This is appalling on so many levels, the biggest being that Bernanke is content to leave a generation behind – near-term joblessness hurts the young’s earning capacity over time – to keep faith with the banks.

Should Bernanke Be Reconfirmed? -  Mr. Bernanke’s problem is that he says he won’t help big banks when they next get into trouble. But is this plausible? To be fair, Mr. Bernanke does not refuse to talk about the problem that is widely known now as “too big to fail” or the repeated boom-bust-bailout cycle that is increasingly referred to in official circles as the “doom loop.” But, when asked what will break this loop, his answer is weak:  In other words, “if big banks should fail in the future, we’ll take them over and impose meaningful losses on creditors.” But this is simply not plausible. And don’t take our word for it. Look at the probability of default implied by the credit-default swap spreads for Bank of America.  The market view is that Bank of America, despite all its problems and a risky balance sheet, is only slightly more likely to default than is the United States government.  The market view for all other major United States banks is essentially the same.

A More Honest Look at TIME Person of the Year Ben Bernanke - In TIME’s cute video “Why TIME chose Ben Bernanke” the video says Person of the Year is “not an award.” Rather, it’s the person who has “most influenced the news during the past year — for good or for ill.” Fair enough. 2009 was a year of financial crisis (again) and Bernanke’s position as Wizard of Oz necessarily means he most influenced the news. But beyond that single point, TIME spills some serious ink and camera time negligently declaring Bernanke our financial lord and savior. On this note, TIME is as embarrassingly wrong as the Nobel Prize Committee was when awarding the Commander-in-Chief of a warring nation the previously coveted Peace Prize.TIME should do a survey and ask the ~17% under-employed how well Bernanke has done at his legally mandated job to pursue “maximum employment, stable prices, and moderate long-term interest rates.” They should then move to the second bullet point in the Federal Reserve’s mission statement and ask whether Bernanke properly supervised and regulated “banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” Since bank failures have broke into the triple digits and consumer credit got wildly out of control, I think we can pencil in another capital F.

person of the year my foot! bernanke "failed miserably" chris whalen says: But does Bernanke deserve to be "Person of the Year"?  "Absolutely not," says Christopher Whalen, managing director of Institutional Risk Analytics. "On a personal level I have great sympathy for Chairman Bernanke but he's made such a pig's breakfast of this whole situation." Unlike those who praise Bernanke for bringing the economy back from the brink of the abyss, Whalen says all he's done is "saved the dealer community" from themselves by overseeing a massive taxpayer-funded bailout of the financial community.  A former staffer at the New York Fed, Whalen also says Bernanke "failed miserably" in maintaining the Fed's independence from both the banks and from politics. Rather than merely lending money to the Treasury, Bernanke put the Fed directly in the middle of the 2008 bailouts - most notably of AIG, Whalen recalls. "By taking the lead [Bernanke] undermined the Fed's independence," he says. "He really intervened not so much in the financial markets but in American politics. He gave Bush and Paulson a pass -- they didn't have to take responsibility for the crisis and they hand[ed] the ball to Barack Obama."

Bernanke ARM OK, Head "Explodes"? - Bernanke misspoke in the recent TIME magazine interview: Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to. Bernanke did have an adjustable rate mortgage, but it did not "explode". "explode" has a very clear meaning when discussing mortgages; it means that the borrower's mortgage payment has increased sharply. An ARM can "explode" for two reasons. Neither applied to Bernanke. (From the WSJ: Looking a Little Deeper at Bernanke’s Floating Rate Mortgage ) So Bernanke refinanced into a loan with a higher interest rate and with a larger mortgage payment for the security of a fixed rate. This suggests he thinks fixed mortgage rates have bottomed (otherwise he could have paid less on his mortgage, at a 3.75% interest rate, and then refinanced next year). He did not "have to do it".

Ben and his Avatar - I can’t help noting the coincidence of Bernanke’s nomination as both “Man of the Year” and “The Definition of Moral Hazard” in the same week as the release of Avatar... And while Ben has probably settled on which “body” he belongs to, representatives of the voting public have yet to make up their mind....1) Does the Fed have a comparative advantage in supervising financial institutions? 2) Does the Fed’s role as banking supervisor help inform monetary policy and make the latter more effective? 3) Is the mandate of banking supervision critical for the Fed’s effective execution of its non-monetary policy roles, notably its role as a lender of last resort (LoLR)? So let’s take these one by one. The weakest argument in support of the Fed as banking supervisor is, in my view, that the Fed has a comparative advantage in fulfilling that role.

Bernanke and the Corruption of Washington Culture - There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002. At a point when at least some economists recognized the housing bubble and began to warn of the damage that would result from its collapse, Bernanke insisted that everything was fine and that nothing should be done to rein in the bubble. If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession. It was also entirely predictable that the collapse could lead to a financial crisis of the type we saw, since housing was always a highly leveraged asset, even before the flood of subprime, Alt-A and other nonsense loans that propelled the bubble to ever greater heights. Of course as the bubble expanded, and the financial sector became ever more highly leveraged, the risks to the economy increased enormously. Through this all, Bernanke just looked the other way. The whole time he insisted that everything was just fine.

Seven Years at the Fed: Bernanke in his own words — “Some rather interesting quotes from our esteemed Fed Chief from the past few years regarding why the Fed’s approach to dealing with banks is the right one (back in 2006!), about when he’ll take away the ‘punchbowl’ (answered like a true politician), why the Fed is just as clueless about prices as you and me and in the same breath in the same clip about how the Fed’s gonna crack down on those evil subprime lenders (back in 2007), why financial supermarkets are great (also 2007), and finally how the Fed solved the inflation problem forever (back in 2003).” (series of videos)

Some Things to Consider Before Reappointing Bernanke - It is important to remember that the preamble of the Federal Reserve Act lays out a dual mandate for the Federal Reserve System: (1) provision of "an elastic currency" and (2) "effective supervision." While the former provides short-term stability in the form of a lender of last resort (during crises) and of a reliable refinancing channel for banks (in normal times), the latter is intended to promote long-term stability. Unfortunately, supervision has always been seen as a secondary duty of the Federal Reserve System. The Fed, which is now overwhelmingly populated by economists (probably the least qualified to supervise banks), has too often ignored its dual mandate in favor of a single policy objective -- managing price stability – which, importantly, was never the intended role of the Fed. Chairman Bernanke continues this tradition. First, he (along with Governor Mishkin) is the main proponent of inflation targeting. Since 1999, he has been a strong advocate of purely focusing interest-rate settings on meeting an inflation target, while ignoring output growth and asset-price volatility. The models "showed" that price stability is the holy grail of policy goals that guarantees high (and stable) economic growth and financial stability. During his tenures as Governor and Chairman, this view has been at the core of his policy choices, and financial fragility has been largely left aside. Thus, from 2006, he continued Greenspan's policy of raising policy rates to fight a presupposed looming "high" inflation, without any regard for an economy already extremely fragile. These policy actions contributed tremendously to systemic risk by pushing financial institutions and households into more leveraged positions (the worst mortgage originations occurred in 2005 and 2006, when the fed funds rate target was rising fast) and by creating large payment shocks on exotic mortgages. In addition, Chairman Bernanke did not consider the relevance of systemic risk until mid-2008, while many economists, journalists and bloggers from the financial community had been warning about the huge problems since 2005 at least.

Simple Answers to Simple Questions (Bernacke Edition)Matt Yglesias is being obtuse as he feigns confusion as to why Senate Republicans are voting against Bernacke despite Bernacke's promise to tie the anchor of 10% unemployment around the Democrats' necks for the next five years.   it’s somewhat baffling to me that six Republicans on the Senate Banking Committee voted no on his nomination. Bernanke’s approach, at the end of the day, makes GOP wins in 2010 and 2012 very likely.   To have it both ways --- get ahead of bash the bankers crowd that is legitimately pissed off @ 10% unemployment and a decade of no-wage gains already and the prospect of another decade of stagnant wages (if we are lucky), and get the policy that will produce 10% unemployment... smart politics on the part of the Republican Party.

How Should the Government Debt be Financed? - Treasury is now financing more of its debt long-term. If you’re worried (as I am) about the persistence of a weak and potentially deflationary economic environment, then you should be critical of the Treasury’s policy. By increasing its maturities the Treasury is essentially following a tight-money policy exactly when a loose-money policy is needed.  The Treasury, of course, has its reasons. Officials expect interest rates to rise over the next several years and would like to lock in today’s low rates, to limit how much it will cost to service the national debt over a longer horizon. I’m skeptical, however, of the assumptions underlying these reasons.

Am I Now, or Have I Ever Been, a Deficit Hawk? - In a word, yes, but Stan's thoughtful post prompted me to think again about what it means to be a deficit hawk.  With some further reflection, I think there are two incentive problems that dominate all others on domestic policy. One of these problems is that the federal deficit serves as a mechanism to facilitate the use of future taxpayers' income to buy votes for elected officials today.*  To be a deficit hawk is to be vigilant against all possible instances where that may occur.  Our political system creates many opportunities for it.  I think my best statement on the problem was How to Advise on Fiscal Policy, posted in July 2007. Exerpts...

Inflating Away the Debt? - The estimated impact of inflation on today's debt/GDP ratio is larger than in the mid-1970s but not as large as in the mid-1940s. If inflation were 5% higher, the debt/GDP ratio would be about 20% lower, a debt ratio of 43.4% instead of 53.8%....Today, a much greater share of the public debt is held by foreign creditors - 48% instead of zero. This large foreign share increases the temptation to inflate away some of the debt. Another important difference is that today's debt maturity is less than half what it was in 1946 -3.9 years instead of 9. Shorter maturities reduce the temptation to inflate. These two competing factors appear to offset each other

Senate Votes to Increase U.S. Debt Ceiling by $290 Billion - (Bloomberg) -- The U.S. Senate cleared legislation increasing the U.S. debt limit by $290 billion before recessing for the year. The vote today was 60-39 to raise the limit on federal borrowing to $12.39 trillion, enough to tide the government over for about two months. The House approved the legislation Dec. 16. The measure, which would be the fourth debt-limit increase in 18 months, now heads to President Barack Obama for his signature. The Senate’s Democratic leaders had to settle for the short-term increase following conflicting demands among their rank-and-file over proposals to reduce the government’s budget deficit. Some lawmakers threatened to withhold their votes for a bigger increase in the debt ceiling unless Congress created a commission to cut government spending.

Congress Raises Debt Ceiling To $12.4 Trillion - The Senate voted Thursday to raise the ceiling on the government debt to $12.4 trillion, a massive increase over the current limit and a political problem that President Barack Obama has promised to address next year.The Senate's rare Christmas Eve vote, 60-39, follows House passage last week and raises the debt ceiling by $290 billion. The vote split mainly down party lines, with Democrats voting to raise the limit and Republicans voting against doing so. There was one defection on each side, by senators whose seats will be on the ballot next year: GOP Sen. George Voinovich of Ohio and Democratic Sen. Evan Bayh of Indiana. Sen. Jim Bunning, R-Ky., did not vote.

RBI cuts dollar holdings in forex reserve to 50% - The dollar holdings in India’s foreign exchange reserves are probably around 50 per cent as the Reserve Bank of India has diversified reserves in favour of non-dollar currencies as the trend is globally. The RBI appears to have been one of the leading central banks in this diversification away from the falling dollar. “Our analysis suggests that India holds not more than 50 per cent of its reserves in dollars, as against 59 per cent for other emerging markets (where the allocation has been disclosed) and around 64 per cent for the advanced markets,”  Within the overall ambit of safety and liquidity, RBI has had to take a very pro-active stance in reserves allocation to protect its own balance sheet against potentially serious valuation losses, which last fiscal reached a huge $37.7 billion,” he pointed out.

Brazil Has ‘No Reason’ to Add (Dollar) Reserves, Freitas Says (Bloomberg) -- Brazil should pare back its dollar purchases in the foreign-exchange market because the currency’s world-beating rally is fading, said former central bank director Carlos Eduardo de Freitas. He said that while the bank should keep intervening in the currency market to smooth out swings in the real, it needs to reduce those purchases to stem the 16 percent surge in its foreign reserves this year, Freitas said.  “It’s a totally logical moment for the central bank to stop buying reserves,” Freitas, who was part of the central bank’s monetary policy committee from 1999 to 2003, said in a telephone interview from Brasilia.

Former Soviet Nations Aren’t Banking on the Dollar -- The dollar is not king in most former Soviet nations. In its place, Gallup surveys this year show residents in 12 of 15 countries are more likely to view their own local currency or the euro as the most profitable and safest to keep their money in. For decades the U.S. dollar has been the world's reserve currency, often desired by many (including those in many former Soviet countries) over their own. But the dollar's weakness in recent years has made it less attractive and may help explain why, with the exception of Uzbekistanis, Belarusians, and Tajikistanis, residents in so many former Soviet countries see their own currencies or the euro as the safest. People in some of these countries, such as Kazakhstan and Armenia, still exhibit more faith in their own currencies than any other asked about -- even though they've seen their local legal tender lose value this year.

Flaherty Says China, Russia May Raise Canada Holdings - Canada’s Finance Minister Jim Flaherty said China, with the world’s largest currency reserves of $2.3 trillion, may be poised to buy Canadian dollars as it seeks to shield its reserves against the U.S. dollar’s decline. “It does not surprise me that China and Russia would take greater positions in the Canadian dollar than they have previously,” Flaherty, 59, said during an interview in his office in Ottawa. “I would expect countries looking around the world to invest in market currencies that are reliable.”

Dollar Share of New Reserves Dropped Last Quarter, Barclays Says - Central banks reduced purchases of U.S. dollars in the third quarter, possibly cutting them to a record low of less than 30 percent of new foreign-exchange reserves, Barclays Capital said in a note to clients. Global central banks probably bought $50 billion in the quarter, out of some $250 billion of reserves that were added in the period through transactions, Barclays said, citing calculations based on data from the International Monetary Fund and U.S. official reports.

PBOC's Fan sees dollar depreciating in long term (Reuters) - The U.S. dollar will continue to depreciate over the long term and the world's largest economy is expected to remain sluggish for a long time, said Fan Gang, an adviser to the Chinese central bank. "This crisis is a U.S. dollar crisis, which takes a relatively long time to clear up. The problem involves the U.S. currency and U.S. debt; eventually it has to be solved through U.S. dollar depreciation," Fan, a member of the People's Bank of China's monetary policy committee, told a financial forum on Monday. He said it would typically take two years for an economy to recover from a crisis. As only a year had passed, it was too early to say whether the U.S. economy had emerged from the financial crisis.

Gravity will drag the $US - The US dollar ($US) is on a roller coaster. And since S&P downgraded Greece to BBB+, the dollar has been on the rise. One can attribute the recent shift in the $US to many things - improving US economic conditions, return to risk, or relative weakness in other G7 countries, whatever. But what is clear, is that the dollar's gaining some strength, 4.7% since the beginning of December on a trade-weighted basis. But this is not sustainable. As economic recoveries diverge (i.e., the G7 recovery is expected to be slower than that in key emerging markets), the dollar will likely fall. That's just gravity, and a necessary condition for sorting out global trade flows. The chart illustrates the effective value of the $US, which is a composite index of the value of the $US against US trading partners

Bipartisan Group To Hold Hearings on Financial Crisis - A bipartisan commission formed by Congress to investigate the financial crisis is scheduled to hold its first public hearings in January, part of a series that could influence pending financial-regulatory legislation.The report, and possible interim reports issued by the commission, could influence an ongoing debate over the shape of financial-regulatory legislation making its way through Congress. Some Republicans have complained that lawmakers are seeking to revamp regulations before they understand the root causes of the crisis, and they could argue that Congress should wait until the commission’s work is done.

More on the Budget Commission - In my Forbes column this morning I criticize the budget commission being established by Congress as the price for raising the debt limit. Echoing what Stan has said earlier, I think such a commission will be ineffective because the American people are not yet ready for serious deficit reduction measures. I cite recent polls showing that while people say they want a balanced budget, they also want lower taxes and higher spending. The following table, which was left out of the column for some reason, illustrates this point. Pew asked people if they wanted higher spending. lower spending or no change for various budget items. As one can see, only foreign aid got as many as a third of people favoring a cut. These and similar data can be found here.

Can We Get the Nationalistic Jingoism Out of the Budget Debate? - The focus groups must have found that saying that much of the government debt is held by foreigners got people really scared, because the deficit hawks keep citing this fact. Ruth Marcus does it today in the Post, telling readers that: "When the economic crisis hit, the country enjoyed the fiscal flexibility to respond with massive spending to counter the downturn. Next time, our capacity to whip out the national checkbook may be constrained by foreign creditors." Of course whether the country as a whole (not just the government) borrows from abroad depends on our trade deficit, not the budget deficit.

$45 billion: a sour-tasting decade of out-of-control political spending - Add up every nickel and dime recorded by the Federal Election Commission and state election commissions in this decade now ending. Result: Americans have given more than $24.2 billion in campaign contributions to federal and state incumbents and challengers. The $24.2 billion spent on campaign contributions is only part of the story. Over the past decade, $23 billion has been spent by corporations, labor unions, and other special-interest entities to lobby Congress and federal agencies, according to records aggregated by the center. More than $45 billion has been spent in the decade now ending to influence legislation and regulation at state and federal levels of government. It’s only conjecture, of course, but it’s hardly likely that the bulk of those billions of dollars was intended to improve the lot of the 99 percent of adult Americans who did not make campaign contributions or made gifts of less than $200.

Heed the great stabiliser’s words on banking - How does one give a wake-up call to the Masters of the Universe? Very little progress has been made in the reform of banking regulation, even after the worst banking panic for 80 years. In Britain we will have to wait for the general election before we get a new government, capable of taking new decisions. There is however a very interesting debate taking place in the United States. Paul Volcker, who is the head of President Obama’s economic recovery advisory board, has supported Senator John McCain’s proposal for a return to the Glass-Steagall banking regulation. Under the Glass-Steagall banking act of 1933 the United States based its banking regulation on a statutory separation between investment banks and commercial banks.

What went wrong and how can we fix it? - Why did the economy get so badly off track? ...What needs to be done to return to solid growth? ...What were the market failures that led to the destabilizing expansion of credit in the early part of the decade? ...What can be done to address the problems that came out of this mess?…..Introduce a legal mechanism whereby large financial institutions that are not commercial banks (such as AIG or Bear Stearns) can be liquidated in an orderly manner without bankruptcy or bailouts, analogous to the authority that the FDIC currently has to take over failing banks. Subject the banklike functions of investment banks and structured investment vehicles (that is, the activity of borrowing short and lending long) to the same capital requirements as standard banking. Require either mortgage originators or the mortgage securitizers to retain 5 percent of the product they create. Move the trading of financial derivatives like credit default swaps to centralized exchanges where they would be subject to a robust regime of regulation including conservative capital requirements, margins, and reporting requirements. I would also recommend adding stop-loss provisions that regulators could use to limit the promises made and losses suffered by systemically important financial institutions as a result of their trading in financial derivative contracts. Set guidelines for individual compensation systems at systemically important financial institutions in order to better align the personal rewards of traders with the interests of shareholders and the public.

Trading Shares in Milliseconds - With the rise of automation, the bulk of U.S. stock trading has moved from the once-crowded floor of Manhattan’s New York Stock Exchange (NYSE) to silent server farms run by exchanges and broker-dealers across the country: the proportion of all trades that the NYSE handles has shrunk from 80 percent in 2005 to 40 percent today. Trading is now essentially a virtual art, and its practitioners put such a premium on speed that NASDAQ has considered issuing equal 100-foot lengths of cable to the brokers who send orders to its exchange servers. A shorter cable will have shorter latency. A longer cable will have longer latency. As absurd as it sounds, the speed of light is a factor to consider for these strategies.

New Accounting Rule Delayed -- Banks were saved in March when mark to market rules were overturned. Now another occurrence of "magic powder dispersion" is saving them again. An article by Silla Brush at The Hill.com (here) describes an announcement Friday (December 18) by the FDIC  that banks can delay up to one year the implementation of a new accounting rule from the FASB (Financial Accounting Standards Board) that will force the end to a manipulation banks have been using to hide risky assets. The ruse that has been used involves what are called SIVs (Special Investment Vehicles) that are high risk assets the banks place off the balance sheet. The new rule, which takes affect January 1, 2010, requires all such assets be brought onto the banks' balance sheets. The FDIC announcement, in effect, delays the enforcement of the accounting practice in bank regulation and therefore allows banks to continue buying time to try to figure out how to deal with the stress of this "new honesty". There may be up to a trillion dollars of SIVs that are affected. When these are brought under the rules of accounting, it is likely that many tens of billions of dollars of additional bank capital may be required for banks to maintain required capital ratios.

Reforming credit rating agencies - We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the second question, from Kevin P.Gallagher. Martin’s response is below. Kevin P. Gallagher: In the US, and to some extent the EU, credit ratings agencies will remain largely unscathed in financial regulatory reform packages. How can we prevent another crisis, or mitigate one, without fundamental reforms of the CRAs?

Some Things Went Bump in The Night Last Week (Bank Regulatory Shenanigans Edition) - Secondly, banks will soon have a VERY big equity hole! Haven’t seen any analysis of how the new Basel bank capital calculations would affect US bank regulatory capital but if Credit Suisse’s back of an envelope calculation is right for Eurobanks (they will need EUR 1.1 Trillion of extra capital of one sort or another), then a crude read-across is that American banks need another $400Bn of capital, of one sort or another. I am ignoring ridiculous basket cases like Citi. This is based on Eurobanks representing about 50% of the world banking asset base, with US banks acounting for another 15%, and on the assumption that US and Eurobanks have been gaming their capital requirements so the same overall extent. (Yves comment: the assumption in the US is that US banks are further along on their writedowns than the Eurobanks are, but given that the US banks just got an expected break from the FASB re not having to implement a rule change that would have required them to consolidate their off balance sheet entities, that cheery assumption may not include those lovely “qualified special purpose entities”).

House Democrats: Transactions Tax ‘Very Much’ On The Table For 2010 Deficit Reduction - Despite a flurry of opposition from financial services lobbyists and Congressional representatives from trading centers, the push to implement a financial transactions tax has not yet been shelved, according to House Democrats. “There is considerable support for it,” Rep. George Miller (D-CA) said, adding that the tax is “very much” on the table for deficit reduction next year.  The revenue potential for such a tax is not insignificant, as a new report from the Center for Economic and Policy Research (CEPR) shows. According to CEPR, a .5 percent tax transactions tax would raise about $353 billion annually.

GOP critics in Senate shaping financial overhaul bill - Senate Banking Committee chairman Christopher Dodd, who one month ago proposed an overhaul of financial regulations that was hailed by many consumer activists, has all but jettisoned that proposal following Republican objections and has initiated talks for a new approach designed to satisfy some of his fiercest GOP critics. Dodd’s strategy has raised concerns among consumer activists who were counting on him to come up with a tougher bill than the one recently passed by the House, and now worry that the entire measure will be weakened.But the Connecticut Democrat, in an interview in which he laid out his strategy, said it would be too risky to launch another legislative effort that might repeat the Senate’s experience with in the health care debate, in which single senators have forced major rewrites or threaten to defeat the measure.

Derivatives Overhaul Has Failed - WSJ - The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets. But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges.

Financial instruments could be spiked with unfindable risks - The research focused on collateralized debt obligations, or CDOs, an investment tool that combines many mortgages with the promise of spreading out and lowering the risk of default. The team examined what would happen if a seller knew that some mortgages were "lemons" and structured a package of CDOs to benefit himself. They found that the manipulation may be impossible for buyers to detect either at time of sale or later when the derivative loses money. It is now standard wisdom that a major culprit in the 2008 financial meltdown was use of simplistic mathematical models of risk at financial firms. This paper, released as a working draft Oct. 15, suggests that the problems may go deeper."We are cautioning that even if you have the right model it's not easy to price derivatives,"

How Much Would Better Disclosure Help? - In the past, I've tried to explain what I believe the difference is between good regulation and bad regulation. In short, good regulation is that which enhances knowledge and competition, both of which make markets function better. Bad regulation is that which restrains competition and stifles innovation. I've focused a lot on the idea that firms must be able to fail in order for the competition to work. Less government interference also helps to prevent single firm or industry dominance. But I haven't written as much about the knowledge or information aspect. I think that's also very important.

South Korea’s G-20 Challenge - On January 1, South Korea takes over the G-20 chairmanship from the United Kingdom. Korea is not the first emerging market to chair the G-20, but it is the first to do so since the global financial crisis. And it is the first to do so since the G-20 emerged as the steering committee for the world economy.  G-20 chairs can have considerable influence. They coordinate the group’s work. They organize its meetings. Like most committee chairs, they have significant agenda-setting power. President Lee should give priority to four issues, starting with financial reform, a problem that Brown targeted but did not solve. Progress here has been inadequate, despite much talk.  The window of opportunity for financial reform is now closing, and business-as-usual will only result in more crises and more bailouts. South Korea must therefore do everything it can to reinvigorate the debate.

Investment banks and leverage: The new normal - Even though some of the big investment banks are raking in profits, a new report from Moody’s questions whether “reliable repairs” have been made to these companies’ business models. The ratings agency then runs through some of the key ratios it will be following to gauge the health of the wholesale investment banking units at the largest financial firms. One of the simplest metrics, gross leverage, is also the most telling. The scale of deleveraging at the pure-play investment banks is striking, as is the fact that high-flying Goldman Sachs and Morgan Stanley (the green line in the chart) were once practically indistinguishable from credit crunch casualties Bear Stearns, Lehman Brothers and Merrill Lynch (yellow line) as far as gross leverage was concerned.

Is Goldman really a bank? Would some tax increases make sense right away? - As economists claim that we are coming out of our Great Recession, and Bernanke opines that getting (nonexistent) inflation under control is more important than doing something to prevent 10% unemployment from plaguing the country for at least a half-a-decade to come and as Congress moves to enact puny banking reforms that paper over real problems, maybe it's worthwhile to consider just what the big "investment banks" turned bank holding companies like Goldman make their profits from in the first place.  A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks.  That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk.  That advantage may amount to as much as 48% of the TBTF banks' profits this year Where else does Goldman's profits come from?  Why, their high-speed trading desks--financed by all that Fed stimulus to banks and that guaranteed lower cost of borrowing.

Goldman Sachs Responds To Zero Hedge - A week ago we posed several questions to Goldman managing directors Lucas van Praag and David Viniar. Earlier today we received a broad response. We present it in its entirety for our readers. We will provide our counter-response shortly.

Taxpayers Help Goldman Reach Height of Profit in New Skyscraper - (Bloomberg) -- In the first six months of 2010, about 6,000 employees of Goldman Sachs Group Inc. will take a break from their spreadsheets and move across the southern tip of Manhattan to a new 43-story, steel-and-glass skyscraper. The building was a bargain -- and not just because the final cost is expected to be $200 million less than the $2.3 billion price the company had estimated when construction began in November 2005. Goldman Sachs also benefited from the government’s determination to avoid losing jobs in lower Manhattan after the Sept. 11, 2001, terrorist attacks. Building a new headquarters cater-cornered to where the World Trade Center once stood qualified the firm to sell $1 billion of tax-free Liberty Bonds and get about $49 million of job-grant funds, tax exemptions and energy discounts. Henry Paulson, then Goldman Sachs’s chief executive officer, threatened to abandon the project after delays in addressing his concerns about safety. To keep the plan on track, state and city officials raised the bond ceiling to $1.65 billion and added $66 million in benefits. The interest expense on the financing is about $175 million less over 30 years than if the company had issued corporate debt at the time, according to data compiled by Bloomberg.

Banks That Bundled Bad Debt Also Bet Against It - NYTimes -Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm. Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

Is there a Goldman CDO scandal? - The big story on this slow news day is the NYT’s 3000-word story on Goldman and synthetic CDOs, which now has a formal response from Goldman itself.  There are a couple of things which jump out, here: firstly that Goldman was structuring synthetic mortgage-backed CDOs as early as 2004, and secondly that it held on to the short side of those deals for years. Remember that by their nature, synthetic CDOs have equal-and-opposite long sides and short sides. Anybody buying these things from Goldman knew that someone else was betting the opposite way But does that mean, as the NYT article says, that Goldman’s decision to take the short side of the CDOs “put the firms at odds with their own clients’ interests”? No, it doesn’t....

Why Goldman could go short mortgages -  Goldman never had much in the way of net mortgage exposure to begin with, and could therefore turn bearish quite easily. Banks which had tens of billions of dollars of illiquid mortgage bonds on their balance sheets, by contrast, had no real way to put on a bearish bet. More generally, pure investment banks, like Goldman, always claim to be in the moving business as opposed to the storage business. Today’s NYT story shows that there are limits to how true that is — Goldman had significant long-term mortgage exposure which it hedged by building up a short position in synthetic CDOs. But at least its net position stayed very small. Competitors like Merrill Lynch, by contrast, found themselves taking enormous amounts of mortgage-bond exposure onto their own balance sheets just because no one else was willing to buy the lowest-yielding tranches of their mortgage bonds. It was that exposure which ultimately doomed the bank.

Janet Tavakoli: Response to Goldman Sachs - The New York Times published a Christmas Eve expose of Goldman Sachs's so-called "Abacus" synthetic collateralized debt obligations (CDOs). They were created with credit derivatives instead of cash securities. Goldman used credit derivatives to create short bets that gain in value when CDOs lose value. Goldman did this for both protection and profit and marketed the idea to hedge funds. Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article, I wrote about Goldman's key role in the AIG crisis; it traded or originated $33 billion of AIG's $80 billion CDOs. AIG was long the majority of six of Goldman's Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest "investment grade" rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers. Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing "profits?" The answer is that they sold a lot of "hot air" disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.  If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been choked off years earlier. Instead, Wall Street was chiefly responsible for the "financial innovation" that did massive damage to the U.S. economy.

Fiduciary Duty and The Victim Mindset  - I wanted to avoid writing this post because anytime you write a story defending Goldman Sachs you have to deal with uneducated, moronic criticism from members of the Ignorati spouting what they've read on the internet about vampire squid.  This post is a defense of Capitalism.  However, it is certainly not advocating a license to say "Caveat Emptor"   as an excuse allowing any seller or provider of goods and services to plug the buyer of said services with crappy quality.  I'm not advocating a society or fiscal system where it's the Wild West in terms of justifying all behavior with "Hey - buyer beware, you should have known"  when the consumer buys a faulty good or an investment that loses money.  I'm not pushing for an Ayn-Randian pure capitalist free for all (not in this post at least!) where the strong devour the weak and leave them to wither and die. However, what I am advocating, as I've been advocating all along, is a return to the era of personal responsibility - a return to the realization that mortgage holders are not victims, that consumers are not victims, and that we can't just continue to castigate the Big Bad Banks as the cause of all our financial woes if we want to have any hope at all of righting our sinking fiscal ship.

Goldman, Deutsche, and the Destructive Use of Synthetic CDOs Come Into Focus - There has been a tendency to lionize subprime shorts, with no consideration to the destruction they left in their wake. While I am not opposed to stock shorting (all it takes is the uptick rule to prevent bear raids), shorting via CDS is quite another matter, particularly since, with CDS, the exposures are typically a multiple of the value of the cash bonds. Given the levered nature of a short via CDS, this creates a very big incentive for the CDS holders to see if they can take action to make events turn out their way.  Now that may seem like a peculiar characterization; how could people who shorted subprime have done damage? After all, the housing market is huge. But CDS made the exposures to subprime going bad much bigger than the size of the market, and the parties on the wrong side of the bet were often highly levered players like big capital markets firms (per the BIS, with only 3-4% equity on average) and insurers.

“Body Count From Goldman Actions Crosses Into Criminal Territory”  - Readers may have noticed Janet Tavakoli’s recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable of this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

Blankfein, Dimon Will Be Among First to Testify at Financial Crisis Panel (Bloomberg) -- The chief executive officers of JPMorgan Chase & Co., Goldman Sachs Group Inc., and Morgan Stanley will headline the inaugural hearing of a congressional panel investigating Wall Street’s financial crisis. JPMorgan’s Jamie Dimon, Goldman’s Lloyd Blankfein, and Morgan Stanley’s John Mack will testify next month in Washington, Financial Crisis Inquiry Commission Chairman Phil Angelides said in a telephone interview yesterday. Bank of America Corp.’s incoming CEO, Brian Moynihan, has been invited and is expected to appear as well, Angelides said. “There’s no question that these institutions were at the center of this storm, not to make any prejudgments about their role in it,” Angelides said. He called the witnesses “key leaders who have been involved in the financial crisis.”

The Parable of the Unmerciful Bankers - I learned this week that the bonuses and extra compensation paid to the executives at the big banks are on track to exceed the 2007 level of $162 billion (even after some banks, like Goldman Sachs, have switched compensation packages away from cash and into stock bonuses). At the same time, the Center for Responsible Lending estimates that the bonus pool of just one of these big banks would have been enough money to prevent or significantly delay foreclosure for all 2.3 million people who lost their homes last year. And what about loan modifications to help homeowners stay in their homes? To date, Bank of America has agreed to fewer than 100 permanent home loan modifications. Amazing.

Citigroup ‘Lottery Ticket’ May Pay U.S. Lowest Return (Bloomberg) -- Warrants the U.S. holds in Citigroup Inc., once the most valuable bank in the nation, may provide the lowest return for taxpayers who stepped in with $45 billion to save the company when no one else would. The Treasury Department, which delayed plans to sell Citigroup shares after a Dec. 16 offering priced them below what the agency paid, may get no more than $179.3 million for the warrants, based on estimates from Nomura Securities International Inc. Goldman Sachs Group Inc. paid $1.1 billion to buy back warrants, and JPMorgan Chase & Co.’s netted $936.1 million. Both banks received less federal money than Citigroup. The value of the 465 million Citigroup warrants may depend on whether buyers think the stock can quintuple from its current price. Almost half the warrants, which convey the right to exchange them for common stock at $17.85 a share, will be worth converting only if Citigroup gains 425 percent by October 2018 and attains a market value of more than half a trillion dollars, a level no U.S. bank has ever achieved.

4.22 Citi Shares For Each Person in the World - A comment on Zero Hedge today offered up an interesting stat -- that there are 4 shares of Citigroup for each person on the planet. Wow. We looked at all US stocks and found that Citi has by far the most shares per person on the planet. With 28,260,770,000 shares outstanding and 6,692,030,277 people in the world in 2008, the Citi shares/person ratio is 4.22. There are only four other US stocks that have enough shares outstanding to give every person in the world at least one share -- General Electric (1.59 shares/person), Bank of America (1.48), Microsoft (1.33), and Pfizer (1.21).

No More Tarp for Citi, But TBTF Lingers - That may as well have been the first bullet point on the news releases announcing Citigroup Inc.'s plans for repaying the Troubled Asset Relief Program and canceling a loss-sharing agreement with the government on more than $300 billion of loans and securities. For while Citigroup gets to escape the pay czar, and the Treasury Department gets to claim a key victory, the taxpayer gets no relief from the burden of too-big-to-fail institutions — only a "debt of gratitude" from Citigroup Chief Executive Vikram Pandit and a promise that the company will do more to help homeowners and other borrowers in need. The real bullet points atop Citi's release were confined to logistics...For its part, the Treasury Department dispensed with bullet points altogether, getting right to this statement: "We are pleased that Citigroup is moving ahead with plans to pay the taxpayers back. But really, it is only explicit support for Citigroup that is being transferred into the private sector. And even that may be overstating things, if the government ends up having to swoop in again with a rescue that shifts the burden right back onto taxpayers.

FBI Probes Hack At Citigroup - The Federal Bureau of Investigation is probing a computer-security breach targeting Citigroup Inc. that resulted in a theft of tens of millions of dollars by computer hackers who appear linked to a Russian cyber gang, according to government officials. The attack took aim at Citigroup's Citibank subsidiary, which includes its North American retail bank and other businesses. It couldn't be learned whether the thieves gained access to Citibank's systems directly or through third parties. The attack underscores the blurring of lines between criminal and national-security threats in cyber space.

Show Us the E-Mail - NYTimes -A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.’s financial products division collapsed — ultimately requiring a federal bailout of $180 billion — those who had been prospering from A.I.G.’s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.’s counterparties have failed without taxpayer support? The three of us, as experienced investigators and prosecutors of financial fraud, cannot answer these questions now. But we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Before releasing its regulatory clutches, the government should insist that the company immediately make these materials public. By putting the evidence online, the government could establish a new form of “open source” investigation.

Bank Bail Outs Proved to be "inside job" - What a surprise, it's not what you know, but who you know especially if you want billions in free money to cover your screw up. A new study from University of Michigan Professors Ran Duchin and Denis Sosyura found that the financial institutions who has the strongest political "ties" received the largest bail outs.

TARP Deadbeat List Grows to 55- From the WaPo: Number of delinquent bailed-out banks rises A growing number of the recipients face financial problems and have been unable to pay the government. Fifteen banks failed to make the required payments in May, federal data show. The number climbed to 33 banks in August, and 55 banks that failed to make the dividend payments due Nov. 17.  Here is the report from the Treasury. And in excel format under Dividend and Interest Reports. Remember when the TARP capital was supposed to only go to "healthy" financial institutions?

More bailed-out community banks failing to pay U.S. dividends - A growing number of community banks that got federal bailouts are failing to pay quarterly dividends they owe to the government, including two banks that got aid after congressional intervention on their behalf, according to data released Monday by the Treasury Department. Fifty-five banks failed to make dividend payments in November, a 67 percent jump over the number of delinquent banks three months earlier. The missed payments reflect the struggles of many community banks, which have not benefited from the Wall Street windfalls that have helped return the largest banks to profitability. Many smaller banks focused their lending on real estate development in recent years, particularly in the suburbs of sprawling Sun Belt cities. The banks now are losing money as developers default on those loans.

TARP double standards: Credit union and development financial institutions get short end of stick - Yves Smith -  With Obama’s popularity ratings plunging, one would think an obvious step would be for the Administration to move forward with measures that have good PR value and carry little political and budget risk. Yet, as Marshall Auerback noted, the Obama Administration is increasingly all hat, no cattle, making lofty popular sounding promises and not following through. Last week’s object lesson was a show of a new, tough posture toward banks on 60 Minutes, which followed up by a tame meeting at the White House with the perps, with one participant describing the session as a “PR stunt”. A longer time frame version of the same pattern appears to be underway with an initiative Obama announced October 21 to support lending to small businesses....

Happy Holidays From The Banks - Never mind President Obama's audacity of hope. It's the audacity of the banks that takes your breath away. A recent report that Citigroup and Goldman Sachs may have received preferential treatment getting doses of the swine flu vaccine was enough to give Ebenezer Scrooge the yips. Then came news that in order for us to get back the taxpayer bailout money we loaned it, Citigroup is receiving billions of dollars in tax breaks from the IRS. And there's a new study this week, "Rewarding Failure," from the public interest group Public Citizen, revealing that in the years leading up to the financial meltdown, the CEOs of the 10 Wall Street giants that either collapsed or got huge amounts of TARP money were paid an average of $28.9 million dollars a year.

Charities Criticize Online Fund-Raising Contest by Chase - JPMorgan Chase is coming under fire for the way it conducted an online contest to award millions of dollars to 100 charities. At least three nonprofit groups — Students for Sensible Drug Policy, the Marijuana Policy Project and an anti-abortion group, Justice for All— say they believe that Chase disqualified them over concerns about associating its name with their missions. The groups say that until Chase made changes to the contest, they appeared to be among the top 100 vote-getters. “They never gave us any indication that there was any problem with our organization qualifying,” said Micah Daigle, executive director of Students for Sensible Drug Policy. “Now they’re completely stonewalling me.” Three days before the contest ended, Chase stopped giving participants access to voting information, and it has not made public the vote tallies of the winners.

Obama Urges Smaller Community Banks to Lend More Freely - NYTimes (Reuters) — President Obama met with bankers from smaller community banks on Tuesday to urge them to increase lending to small businesses and vowed to help the process by cutting regulatory red tape. “The pendulum might have swung too far in the direction of not lending,” Mr. Obama told reporters after meeting with 12 bankers from across the country.“If we can get that balance right, there are businesses and communities out there that are ready to grow,” he said.Last week, Mr. Obama met with the heads of the country’s largest lenders after publicly castigating big bankers as fat cats, and earlier in December there was a White House jobs meeting.

Deposit Insurance Fund, UNoffcially - Reuters - Total Insured Deposits, Unofficially. When the world was falling apart, FDIC increased deposit insurance limits….to $250,000 for individual non-retirement accounts and unlimited for business transaction accounts. But those increases were treated as “temporary” and so left out of FDIC’s total. Since the $250,000 limit was extended to 2013 — decidedly not “temporary” — FDIC started collecting that data from its member banks. The data was published for the first time in Q3.So in Q3, the official figure — which includes $250k limits — jumped from $4.8 trillion to $5.3 trillion. Throw in the $761 billion insured by the transaction account guarantee program and you’ve got a total of $6.1 trillion of insured deposits. Compare to Q3 ‘08. Back then, before all the emergency measures, the total was $4.5 trillion. So the increases added $1.6 trillion, or 34%, to the total.*

Why Aren’t Banks Lending? They Are Being Rational - President Obama met with a dozen small banks yesterday, urging them to keep lending. He did not have to tell that to this group — about 6500 mostly AAA rated, regional and community banks — who have been happily lending away. Its how they earn their money.T he larger banks, on the other hand, are the ones who have cut back lending dramatically. This is especially true of the 10 biggest banks.Why? Its the rational thing to do. These banks STILL have to much debt, too little capital. They books are festooned with bad loans, which, thanks to our corrupt Congress, they no longer have to disclose appropriately. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off.

Bankers’ Behavior - Do the bailed-out banks owe a debt to society for being saved? Here are a few answers :  “Banks have a terrible image problem..but their main obligation is to shareholders who want them to be strong so they don’t have to suffer this crisis again.”-Robert Litan, Senior fellow, Brookings Institution_____________“They are largely responsible for the crisis and have a moral responsibility to fix it. Not with money, but by addressing ‘too big to fail’ by becoming much smaller. To block reform and change is simply unacceptable.”-Simon Johnson, Economics and management professor, MIT_____________“The banks owe a primary duty to shareholders. But it’s the government’s job to establish the incentives that determine private-sector behavior…Obama and Congress have failed to do this. Banks are an easy target, but TARP was a moronic program.”-Marshall Auerback, Global portfolio strategist, RAB Capital

“It’s Certainly Not For A Lack Of Effort" - The fundamental divide in opinion regarding our financial system is: Are the people running “large integrated financial groups“ hapless fools, buffeted by forces beyond their comprehension and control; or do they know exactly how to ensure they get the upside and the awful, sickening downside is borne by society – including through high unemployment. Some light was shed on this issue by Monday’s meeting at the White House or, more specifically, by who didn’t turn up and why.  Of the dozen bank CEOs invited, Vikram Pandit was supposedly busy trying to extricate Citi from TARP and asked Dick Parsons to attend instead. However, three executives – Lloyd Blankfein, John Mack, and Dick Parsons himself – did not show up in person and had to join by conference call. But really there are three possible interpretations...The implication is inescapable..These three executives – who were, in some sense, the primary audience for the president’s remarks – did not really want to attend.  They do not see the need to show deference or even respect.  They won big from the crisis and that is now behind them.  As they move on (and up), there is nothing – in their view – that the executive branch can do to hold them back.

Instead of lending, banks focus on covering losses - President Obama has been demanding that banks start lending again, but the unstated secret is that banks are not lending much because they are busy paying back their government aid and covering losses of $1 trillion or more on defaulting loans.  Banks and the administration all but abandoned efforts to clean up their immense toxic-loan problems through the bank bailout program earlier this year, and instead have been hastening to settle accounts. All of the top banks have repaid their bailout funds to free themselves from public scrutiny and government interference, and the Treasury has been trumpeting the return of $164 billion in bailout funds by year's end.

AIG, Fannie Mae, Freddie Mac and GMAC: “Long-Term Wards of the State” - These companies 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. 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.

U.S. Uncaps Support for Fannie, Freddie - WSJ - The U.S. Treasury said it would provide capital as needed to Fannie Mae and Freddie Mac over the next three years, effectively opening its checkbook to the government-controlled companies in a bid to reassure investors in their debt.Treasury also will end its purchases of the companies' mortgage-backed securities and terminate a never-used short-term liquidity facility set up for the firms and the Federal Home Loan Banks. And it moved to allow the companies to shrink their giant portfolios of mortgage securities more slowly, though it said it was still "committed to the principle" of reducing the portfolios.Treasury announced the moves in a Christmas Eve press release, a week before its authority to change the terms of its agreements with the companies was set to expire.

Fannie/Freddie support increased  - No better time than Xmas Eve to announce the expansion of the administration’s housing slush fund. Previously, Fan and Fred each had a $200 billion credit line from Treasury. Though they’ve drawn only $111 billion so far, the administration thought it prudent to offer unlimited support … just in case.  (Bloomberg) The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.The two companies…have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy - WSJ - The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday. The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each. Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s."The timing of this executive order giving Fannie and Freddie a blank check is no coincidence, the Christmas Eve announcement was designed "to prevent the general public from taking note."

Freddie Mac portfolio extends slide in November (Reuters) - Freddie Mac's mortgage investment portfolio shrank in November while the rate of delinquencies on the loans in guarantees escalated, the U.S. home funding company said on Wednesday. The unpaid principal balance of its mortgage-related investments fell at a 12.9 percent annual rate last month to $761.8 billion, for a 5.8 percent through the first 11 months of the year. The delinquency rate on its single-family mortgage portfolio jumped 18 basis points to 3.72 percent in November

U.S. Commercial Property Falls to Lowest in 7 Years - (Bloomberg) -- Commercial property values in the U.S. declined in October to the lowest level in more than seven years as unemployment reduced demand for apartments, offices and retail space. The Moody’s/REAL Commercial Property Price Indices fell 1.5 percent in October from September to the lowest since August 2002. Prices were down 36 percent from a year earlier and are 44 percent below the peak in October 2007, Moody’s Investors Service Inc. said in a statement.  Values are dropping as U.S. unemployment climbs and consumers cut spending. Office vacancies may approach 20 percent next year as employers hold off hiring.

FDIC Draws Brisk Bidding on Loans by Failed Banks - Investors are jostling for the chance to buy a $1.1 billion package of commercial real-estate loans extended by failed banks, as these once-toxic assets attract growing interest. More than a dozen investors, including Texas banker Andrew Beal, have submitted bids to the Federal Deposit Insurance Corp. for the portfolio of loans held by Franklin Bank, IndyMac Bank and other failed lenders, according to people familiar with the matter. But the portfolio represents only a fraction of the real-estate loans held by the FDIC and the volume is mounting as more banks fail.

Good Thing the U.S. is Getting Into Commercial Real Estate - A new Senate bill that just passed committee would drive the creation of more science parks around the U.S. Specifically, the bill would allow the Secretary of Commerce to guarantee up to 80% (!) of loans over $10m for the construction of science parks. Whoa, good thing that. After all, we don't have nearly enough vacant office space in the U.S. Rates are only running at a near-record 16.5% (according to Reis), with many cities at 20% vacancy and higher. And commercial real estate loans extant are merely teetering and threatening to bring down the regional banking system, so adding a few million more square feet will just give the system a helpful shove into complete insolvency.

CHART OF THE DAY: Supbrime Delinquencies Continue To Soar - The latest data out of the Officer of the Comptroller of the Currency is not promising. Seriously delinquent mortgages increased in every category in Q3. Regular prime mortgages haven't exploded higher, but good old fashioned subprime and alt-A continue to blast to new heights

Mortgages Delinquencies Jump; More Than 1 Million Foreclosures in Process - Americans' mortgage woes continued to get worse in the third quarter. Just 87.2% of U.S. mortgages were current in the third quarter, a decrease of 1.5% from the previous quarter, according to the OCC and OTS Mortgage Metrics Report released Monday. The Office of the Comptroller of the Currency and the Office of Thrift Supervision report covers 34 million loans totaling $6 trillion in principal balances, about 65% of the U.S. mortgage market. Serious delinquencies jumped to 6.2% of mortgage-servicing portfolios, an increase of 16.7% from the previous quarter. The number of prime borrowers in trouble continues to mount as 3.6% of prime mortgages were more than two months behind on payments, more than double the number in default a year ago.

Serious U.S. mortgage delinquencies up 20 percent - Serious delinquencies among U.S. prime mortgages rose nearly 20 percent in the third quarter from the prior quarter, as the percentage of current and performing mortgages fell for the sixth consecutive quarter, banking regulators said on Monday. The report by the Office of Comptroller of the Currency and the Office of Thrift Supervision, which are part of the Treasury Department, covered about two-thirds of all U.S. mortgages. It found 3.6 percent of prime mortgages -- those made to the most credit-worthy borrowers -- were seriously delinquent in the third quarter. That was more than double the year-ago quarter and up nearly 20 percent from the 2009 second quarter.

Borrowers with modified loans falling into trouble (AP) -- One of the biggest challenges to ending the foreclosure crisis is this: A surprising number of homeowners who get their monthly payments reduced fall behind again within a year. When borrowers get into financial trouble, lenders have several ways to help. They can offer grace periods, longer repayment schedules, lower interest rates or reduced balances. But nearly 40 percent of homeowners who had their monthly payments cut by 20 percent or more last year were delinquent again within a year, according to a report Monday from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. With the economy still weak and employers continuing to cut jobs, "even if you've gone through a modification, your situation may deteriorate," said Fred Phillips-Patrick, director for credit policy at the thrift office.

Hamp, what is it good for? - In addition to the difficulty of converting temporary mortgage modifications into permanent ones, one of the big question marks hanging over the US Treasury’s Home Affordable Modification Plan is the redefault rate. That is, the percentage of homeowners who redefault on their modified mortgage. FT Alphaville has mentioned before that in cases of severe negative equity, it might make more sense for a homeowner to make a couple of Hamp-reduced interest payments on his or her mortgage and then walk away. The US Treasury hasn’t given an official default rate for the programme yet, but figures like 25 per cent and 50 per cent have been bandied about.

Lower loan payments = fewer redefaults for homeowners (CNN/Money) Only 18.7% of borrowers who had their loans modified in the second quarter were delinquent three months later, according to a banking regulators' report released Monday. This compares to 30.7% of borrowers in the first quarter. Why the sharp drop in redefaults? Regulators attribute it to their March directive that urged financial institutions to make sure the loan modifications they do are affordable and sustainable. As a result, the percentage of modifications that decreased monthly payments shot up to 78.3% in the second quarter, from 53.5% in the first quarter, according to the report issued by the Office of Thrift Supervision and the Comptroller of the Currency.  Before, many servicers just tacked late payments and interest onto the end of the loan, not actually lowering the amount owed. So borrowers who couldn't afford the loan before couldn't afford it after modification, either.

interfluidity - Norms of credit - Megan McArdle has responded to my earlier piece on strategic default. Before offering a substantive reply, I’d like to emphasize that my piece was not intended as a “slap down”.  I often disagree with Ms. McArdle, but she is a talented writer whom I’ve enjoyed for years. Moreover, I think I share McArdle’s deep concern, that a collapse in the norms of commerce will leave us with more cumbersome and substantively worse means of regulating ourselves than we’ve had in the past. We disagree, I think, about who is responsible for the putative collapse, how far along it is, and what we ought to do going forward to regain a desirable equilibrium. I think that the collapse is already upon us, and that the proximate cause is a failure by businesses — especially though not uniquely in the FIRE industries — to live up to tacit social bargains. I blame that in part on a corrosive but remunerative ideology that denies those bargains bind at all. I suspect Ms. McArdle would tell a different story.

If billionaires don't feel guilty about walking away from their debts, should homeowners? - Blogger Megan McArdle expressed disdain for people who chose to indulge themselves on consumer goods and services while not keeping current with their mortgages. Mortgage Bankers Association CEO John Courson wondered about "the message they will send to their family and their kids and their friends?"  Strategic defaults are the American way, and I'm not talking about strapped middle-class borrowers. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time. Morgan Stanley, for example, is a gigantic corporation. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them.

Strategic default: a soldier’s perspective - While we were away, about halfway through our deployment, the crash began and something mysterious had gone horribly wrong with the machinery of America. The small equity positions these men has invested in their respective residences were wiped out in a matter of months. By the time they were close to returning to these homes the men were all badly underwater by over one hundred thousand dollars and, what was worse, the Army had reassigned them. They would be required to move promptly upon redeployment. They were simply not in a position to hold out, wait for prices to go back up in the long term, and continue making monthly payments. Unfortunate professional timing had compelled them to buy at the top and sell at the “bottom”. Wasn’t the avoidance of precisely this “fire sale” scenario the purported rationale for the bailouts of the financial institutions? But no extension for families, it seemed....

Do Appliance Sales Signal the Start of Housing Uptick? - Its funny how two people can look at the same data point and draw opposite conclusions. Take as an example some recent data on appliance sales. In Q3, Best Buy reported a 10% jump in sales of major appliances (refrigerators, stoves, washers, dryers) at stores open at least a year, versus a 21% drop for the year-ago period. Some analysts are suggesting this provides “a glimmer of hope in housing.” I disagree. My explanation involves two factors: Underwater homeowners unable to move, and Deflation. The average home buyer of the past decade is likely not so underwater as to be willing to walk away;  yet they don’t qualify for a mortgage mod. For most of these folks, their best option is to hunker down where they are, and ride the housing collapse out. If you know you are stuck somewhere for five years (or longer), then you probably want to make that stay as comfortable as possible. Given the big drops in prices of major appliances — aka Deflation — an upgrade or replacement becomes a simple way for any family to raise their standard of living.

Stacked Deck Against Homeowners - Homeowners facing foreclosure who have been the victims of fraud have little hope of obtaining justice or financial restitution. That was the message of Lionel Ouellette, executive director of the New York City-based advocacy group Changer. Certainly many homeowners knowingly took out loans they could not afford, and others either committed fraud or were complicit in fraudulent schemes. However, vast numbers facing foreclosure were victims of complex predatory lending scams and deceptive sales practices that violate a number of federal and state laws. Mortgage brokers frequently forged borrowers' loan documents without their knowledge and inveigled them into taking out loans they could not afford and should not have been eligible for. Another common scam involved banks, sellers and appraisers conspiring to inflate the appraisal of a house so that a buyer could be conned into buying it for much more than it was worth. And in some cases, mortgage brokers who did not clearly explain to borrowers the terms of "high cost" mortgages (loans padded with fees above an established threshold) were violating the federal Truth in Lending Act.

For The First Time, One Million Mortgages At National Banks Are In Foreclosure In A Single Quarter - Yesterday, the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) released their latest home mortgage data, which covers the third quarter of 2009. The OCC and the OTS compile data on mortgages held by national banks and thrifts, which account for about 65 percent of mortgages nationwide, and the numbers show just how ugly the housing crisis still is:[T]he percentage of current and performing mortgages dropped for the sixth consecutive quarter to 87 percent of the servicing portfolio, serious delinquencies rose to 6.2 percent, and foreclosures in process surpassed 1 million mortgages.

As Foreclosure Nears, Home Fixtures Start to Vanish - NYTimes - “Stripping House — Before Foreclosure,” the ad declared, offering potential buyers the cabinets and countertops, the sinks and toilets, the doors, the appliances, the sprinklers. Even the palm and citrus trees in the yard were for sale, with a catch.“You dig,” the author advised.In Nevada and other states hit hard by the housing crisis, stripping fixtures and appliances from homes in foreclosure has become commonplace. Craigslist, the Web site for classified ads, functions as a bazaar where stripped items are sold openly. Often, the stripping is not done by strangers. It is done by the owner, just before the bank forecloses on the mortgage and takes the property back.

Foreclosed homeowners get revenge through vandalism (Video) - Losing one's home to foreclosure can be one of the worst experiences anyone can go through. Emotions run high, including anger. In some cases, that anger can lead troubled homeowners to do drastic things."They're mad at the bank so they take it out on the house," said George Roddy, of the Addison based Foreclosure Listing Service. From the outside, the house looks attractive, but inside it's another story. Most of the walls have gaping holes, as though someone took a sledgehammer or kicked in the walls. Roddy said interior damage can be a common sight after foreclosures.

Another Big Gain in Existing-Home Sales as Buyers Respond to Tax Credit - Existing-home sales rose again in November as first-time buyers rushed to close sales before the original November 30 deadline for the recently extended and expanded tax credit, according to the National Association of Realtors, Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4 percent to a seasonally adjusted annual rate1 of 6.54 million units in November from 6.09 million in October, and are 44.1 percent higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million

Hangover and not the movie - In a hangover from the tax credit induced binge in the July thru Oct period, Nov New Home Sales, which measure contract signings which were likely done when the extension of the tax credit was uncertain and thus believed to be unattainable at the time, totaled 355k annualized, 83k below forecasts and down from 400k in Oct (revised from 430k). It’s at the lowest level since April. Bottom line, with the artificial lift from the tax credit (where half of buyers are 1st time for existing homes and many were able to take advantage), its become very tough in gauging true demand. Come summer, after the tax credit expires and the Fed is done buying MBS, we’ll know.

Why U.S. Home Sales Are Both Up and Down - Developments – WSJ -  Tuesday, the market cheered a surge in existing-home sales. Then comes today’s news that new-home sales slid 11.3% in November, falling to the lowest level since April.Up, down. Up, down. What gives?Though the two reports both concern home sales in November, they aren’t really in synch and so aren’t comparable. The National Association of Realtors records existing-home sale data when the home closes, while the government records new-home deals when contracts are inked.For home resales, there is typically a lag of a month to six weeks between the signing of contracts and the closing. So most of the November sales reported by the Realtors are based on decisions buyers made in September or October. At that point, lots of people were scrambling to buy homes in time to qualify for a tax credit that was due to expire Nov. 30. (It was later extended through April 2010.)For the new-home sales, the decisions were made in November, when there was no such scramble to qualify for the tax credit.

Ratio of Existing to New Home Sales at Record High - Here is more on the "distressing gap" between existing and new home sales. The following graph shows the ratio of existing home sales divided by new home sales through November. This ratio has increased again to a new all time high.  The ratio of existing to new home sales increased at first because of the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The recent increase in the ratio was partially due to the timing of the first time homebuyer tax credit (before the extension) - and partially because the tax credit spurred existing home sales more than new home sales.

5% Down Payments Are Back As Mortgage Companies Swing For Fences Again - At this rate, we'll be back to no-money-down mortgages with three-year-teaser rates by spring. Ruth Simon, WSJ: Some mortgage insurers and lenders are beginning to relax their down-payment requirements, in a sign of increased confidence in the housing market. The changes, which are being done on a market-by-market basis, mean buyers in some parts of the country can now borrow 95% instead of 90% of a property's value. Until recently, mortgage companies had tighter standards for these markets because of falling home prices. "We are feeling better about the economic condition of the marketplace," said Michael Zimmerman, senior vice president of investor relations at mortgage insurer MGIC Insurance Corp. Borrowers who want to finance more than 80% of a home's value must typically purchase mortgage insurance

LoanPerformance: House Prices Fall 0.7% in October = The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance: Annual Home Prices Continue to Depreciate  On a month-over-month basis ... national home prices declined by -0.7 percent in October 2009 compared to September 2009. "We are continuing to see improvements in the year-over-year home price change as prices have remained relatively stable since April," Prices are now falling again. It might take a month or two for this to show up in the Case-Shiller index because it is an average over three months. This graph shows the national LoanPerformance data since 1976. January 2000 = 100.The index is off 7.9% over the last year, and off 30.1% from the peak. The index has declined for two consecutive months (-0.16% in September and -0.68% in October). I'll have some comparisons to Case-Shiller later, but it appears house prices are now falling again.

More on Falling House Prices - Yesterday I mentioned that the Fed's favorite house price index showed prices fell in October. However most people follow the Case-Shiller index, and the October Case-Shiller house price index will not be released until next Tuesday. Although Case-Shiller is an average of three months, I think that index will probably show a price decline too. The following graph shows the LoanPerformance index (with and without foreclosures) and the Case-Shiller Composite 20 index in real terms (all adjusted with CPI less Shelter). Notice the LoanPerformance price index without foreclosures (in red) is now at the lowest level since September 2002 in real terms (inflation adjusted).

Surging Shadow Inventory Means Actual Housing Inventory Has Barely Budged At All - A new report from FirstAmerican Core Logic offers an update on shadow housing inventory. Here are the key stats: As of September 2009, First American CoreLogic estimated there was a 1.7‐million‐unit pending supply of residential housing inventory, up from 1.1 million a year earlier. Pending supply, sometimes referred to as “shadow” inventory, estimates real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago. The months’ supply measures how quickly the inventory will run off given the current sales rate.

Home Prices Face Test Without Fed Support - BusinessWeek - 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. The big test comes this spring. The Federal Reserve says it will stop buying mortgage-backed securities by the end of March, a program that has helped make home loans more affordable and spurred sales. The market may also suffer a setback if the central bank hikes interest rates, as some economists predict. With foreclosures expected to jump, Moody's (MCO) Economy.com estimates home values will fall 7.8% in 2010. The U.S. also plans to phase out the popular home buyer's tax credit by April. Right now first-time buyers get $8,000 and repeat buyers $6,500. As first-time buyers rushed to capitalize on the credit before its original yearend expiration date, purchases of existing homes surged; in October they were up 23.5% over the previous year to reach their highest levels since February 2007

Biggest losers: Where Americans aren't moving - California (1) - For years more people have fled the Golden State than have arrived. In the year ended July 1, California was the country's biggest loser, with nearly 100,000 more residents leaving than moving in.Still, that was an improvement over earlier losses: In 2006 the net decline was 313,081. Much of that improvement came from the housing bubble bursting. Homes became harder to sell as thousands of foreclosures sat on the market. As a result, many Californians stayed on rather than sell their homes at a loss. Mobility in the weak economy has declined in general, according to demographer Greg Harper of the Census Bureau. There's no point in moving to find work if few jobs are available in most parts of the country.

Mind the Gap: Why NY Fed Economists Expect Homeownership Rate To Keep Falling - After rising for a decade, the U.S. homeownership rate peaked at 69 percent in the third quarter of 2006. Over the following two and a half years, as home prices fell in many parts of the country and the unemployment rate rose sharply, the homeownership rate declined by 1.7 percentage points. The current decline in the homeownership rate is approaching in magnitude the 2.3 percentage point decline observed in the early 1980s. How much more will it fall? To address this, New York Federal Reserve Bank economists propose the concept of the “homeownership gap” to gauge the downward pressure on the homeownership rate.Their estimate of this gap suggests that the measured homeownership rate will likely experience significant downward pressure in the coming years.

Ny Fed: The Homeownership Gap - From NY Fed economists Haughwout, Peach, and Tracy: The Homeownership Gap. The authors argue that the official homeownership rate from the Census Bureau is overstated in the sense that owners with significant negative equity act more like renters. The authors further argue that the official homeownership rate will probably follow the homeownership gap to lower levels. "This situation is likely to put downward pressure on future homeownership rates, and has potentially important implications for the maintenance of the housing stock, the stability of neighborhoods, and future household saving behavior." A falling homeownership rate has significant implications for homebuilders and construction employment.

Manhattan Rents Fall as Tenants Take Advantage of the Recession - Manhattan rents fell as much as 7 percent in the year ended Dec. 15 as the recession enabled some tenants to live in larger apartments for less. In buildings attended by doormen, rents for studio apartments dropped 7 percent to an average of $2,247 a month during the 12-month period, according to a report by the Real Estate Group of New York. One-bedroom apartments with doormen fell 5.6 percent to $3,262. “Renters have welcomed the discounts on doorman units,” the report said. “Whatever prices do, vacancies will follow.”

Report: Housing Prices Could Tumble Again If More Foreclosures Aren't Prevented - Foreclosure prevention efforts need to become vastly more effective or housing prices will resume their tumble, according to a new report by Credit Suisse analysts.The report concludes that some 4.2 million homes are currently estimated to be heading into foreclosure next year, and that of those, three out of four -- or 3.2 million foreclosures in all -- need to be prevented to stabilize the housing market.So far, government and private success rates have been nowhere close to that.About 31,000 homeowners have received permanent relief under the Obama administration's mortgage modification program. Part of the administration's $75 billion effort, the plan aims to help troubled homeowners modify their mortgages into sustainable monthly payments relative to income.

Mortgage-Bond Yields Jump to 4-Month High, Boosting Loan Rates (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities climbed to the highest in four months, signaling interest rates on new home loans may extend a rebound from record lows this month and blunt a housing recovery. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds climbed 0.10 percentage point to 4.51 percent as of 4:58 p.m. in New York, the highest since Aug. 21, according to data compiled by Bloomberg.  The yields have climbed from 3.9 percent on Nov. 30, a seven-month low, suggesting a similar increase in mortgage rates. The gain today mostly tracked a rise in benchmark Treasury yields, as stocks advanced and a report showed sales of existing U.S. homes increased more than forecast in November.

After Record Lows, Mortgage Rates Headed Up in 2010 - CNBC - Mortgage rates have inched upward in the last weeks of 2009, and that trend will continue through 2010. The question is how high they will go."If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right," says Mark Zandi, chief economist at Moody's. "I don't think there's any question rates are headed up."Rates are still historically low heading into the new year. The average fixed rate on a 30-year mortgage was 4.94 percent the third week of December. But that's higher from the record low of 4.71 percent the week of Dec3.

Another Mortgage Meltdown Dead Ahead - In the short term, a catastrophic deflation is quite possible. But in the long term, extremely high levels of inflation are now inevitable. Over the next two years, Alt-A and Option ARM loans face massive resets. Even with today’s low interest rates, most of these home loans will see their monthly payments adjust far higher. The result: loan losses and write-downs will balloon for banks, and mortgage holders will get hit with another wave of homeowner defaults.

Here's Why The Economy Is Going To Suck Wind Next Year - Writes Frank: "So now the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."The biggest single factor in foreclosures is negative equity coupled with unemployment. That makes sense, because if you could sell your house and get some equity, you would.As I have written in past letters, we are going to see a significant increase in mortgage resets in 2010, which will result in even more foreclosures. There is a lot more pain to come. This is not an environment that is typical of past recessions. There is a lot of deleveraging to be done, both as banks write off bad debts on homes and as consumers walk away from mortgages badly underwater.

The Small Business Carnage That Shows The Real Reason Jobs Aren't Being Created In America - (slide show)

Mauldin: The Age of Deleveraging - This recession was caused not by too much inventory but by too much credit and leverage in the system. And now we are in the process of deleveraging. It is a process that is nowhere near complete. While the crisis stage is over (at least for now), there is still a lot of debt to be retired on the consumer side of the equation, and a lot of debt to be written off on the financial-system side. And this is true in Europe as well, and maybe more so; but today we will look at some data in the US.

Young Adults May Be Saving After All – NYTimes - Despite all the signs that young adults are becoming ever more dependent on their parents, they may be O.K. when it comes to saving, according to a study to be published early next year in The Journal of Consumer Affairs.The study found that while those under 30 generally saved less than older adults in real dollars, when adjusted for factors like income levels, more young adults than older adults said they spent less than their income. The researchers found that about 61 percent of 25-year-olds and 58 percent of 35-year-olds said they would be spending less than their income, compared with about 56 percent of 45 and 55-year-olds who said the same. Spending less than one’s income was assumed by the researchers to mean saving.

Recession? Teenagers Get It, and Are Cutting Back - NYTimes -  After a year of observing their parents pinch pennies and fret about the economy, the nation’s teenagers may be coming to grips with reality. Sales are down sharply in recent months at nearly every major retail chain catering to teenagers, and interviews with teenagers suggest that the reasons go beyond their own difficulty finding part-time jobs.  Last month, stores that specialize in clothing and accessories for teenagers were the worst-performing sector in all of retailing, posting a 7.8 percent year-over-year sales decline.

Even more evidence that people respond to incentives - A few years ago, Human Resources Development Canada (HDRC) ran an experimental project to see how single parents on welfare responded to changes in their budget constraint. It has long been known that single mothers on social assistance are particularly vulnerable to the welfare trap: not only are their payments clawed back as they earn wage income, they risk losing their non-monetary benefits. In many cases, these parents face marginal income tax rates of well over 100%.  So the HDRC came up with the Self-Sufficiency Project (the SSP), which provided income supplements to single parents (almost without exception, these were women) who, after having received social assistance for at least a year, found full-time work. These premiums were quite generous: a participant could receive up to $12,000 a year, thus doubling what she might otherwise have earned at a job that paid minimum wage. Here's the graph of the employment status (source) of the randomly chosen group of single parents who were offered the chance to participate in the SSP

Personal Income And Spending Numbers Disappoint - Today, the Commerce Department released November's personal income and spending results. Oddly, most articles I've seen this morning are celebrating that last month's personal income growth was the biggest gain in six months. If you look a little deeper, however, the numbers aren't very impressive. For starters, today's numbers didn't live up to expectations. According to the Wall Street Journal, although personal income grew by 0.4% in November (the biggest increase in six months), economists expected a 0.5% increase. The story is the same for spending. It increased by 0.5%, while economists predicted a 0.6% increase.  But these numbers don't tell the whole story because inflation isn't taken into account. In real dollars, those increases look far less impressive. The chart below from the news release includes inflation-adjusted numbers in "Chained (2005) dollars

Recession slammed domestic migration - Earlier this year, I compared US migration with that in Canada - one healthy, the other not so much. As a sequel to the story, the Census released its figures for migration into 2009, and the pattern in the US has worsened (you can download the data here). The picture of American mobility is one of people/workers/households with essentially nowhere to go. Unemployment is ubiquitously high, and the housing market is lousy - can't sell your home, can't get a job. This Great Recession dragged net-domestic migration (moving within the US borders) down in all regions of the country.

Credit Cards Crank Up Abusive New Fees - “As reform accelerates so will the inventiveness of our fees, rates and gouging,” a fake industry spokesman says in the video. “Much like the ‘inactivity fee’ gives you the opportunity to be charged for staying out of debt, the ‘cardless fee’ with charge you for not having a credit card at all.” (Click here to watch the animation.) Indeed, the Center for Responsible Lending contends that’s exactly what’s happening in an ominous new report called: Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate.

Is Investment Depressed by an “Anti-Business” Climate? - The National Journal asks for reactions to a recent blog post by Greg Mankiw regarding the reasons why US investment has fallen sharply. I agree with Greg that the dominant empirical fact about investment is its procyclical volatility (the main reason investment has been depressed for the last two years is that the economy has been depressed), and also that the recent credit crunch made it worse.   But I don’t agree with a third item on his list: “the policy environment seems adverse to business.”   As in many areas, it is when we get to the politics that I disagree.  Greg cites trade policy, fiscal imbalances, and energy costs, in support of his proposition that the current policy environment is anti-business.    Let’s consider each of the three.

Small-business bankruptcies rise 81% in California - As credit lines have shrunk and consumers have cut back on spending, thousands of small businesses have closed their doors over the last year. The plight of struggling firms has been aggravated by the reluctance of banks to lend money, said Brian Headd, an economist at the Small Business Administration's office of advocacy. "While bankruptcies are up, overall, small-business closures are up even more," Headd said. California has been particularly hard hit. The latest data show small-business bankruptcies up 81% in the state for the 12 months ended Sept. 30, compared with the previous year. Filings nationwide were up 44%, according to the credit analysis firm Equifax Inc. The actual number of small businesses in trouble is probably higher, experts said, because many owners file for personal bankruptcy rather than seek protection for the business.

Another View: Forget Ideology. Let’s Fix the Economy - NYTimes - Government involvement — or if you prefer, “meddling” — often stirs up philosophical debate. But from where I sit, as one of the guys who helped G.M. live to fight another day, it is clear that pragmatism is still very much the order of the day. In the interest of full disclosure, I don’t like the government getting involved in the private business sector. But in this case, the government saved the domestic, and possibly the worldwide, auto industry. And that’s not hyperbole. Had G.M. and Chrysler gone down, I’m convinced that the global auto industry’s highly interdependent supply chain would have crashed as well, halting production lines for virtually all automakers for months or even years. The economic and social cost would have been catastrophic – and that’s not counting the potential domino effect on many other industries.

When Trucks Stop, America Stops -  Commercial truck traffic is vital to our nation’s economic prosperity and plays a significant role in mitigating adverse economic effects during a national or regional emergency. Our economy depends on trucks to deliver ten billion tons of virtually every commodityconsumed—or nearly 70 percent of all freight transported annually in the U.S. In the U.S. alone, this accounts for $671 billion worth of goods transported by truck. Add $295 billion in truck trade with Canada and $195.6 billion in truck trade with Mexico and it becomes apparent that any disruption in truck traffic will lead to rapid economic instability. The unimpeded flow of trucks is critical to the safety and well-being of all Americans. However, it is entirely possible that well-intended public officials may instinctively halt or severely restrict truck traffic in response to an incident of national or regional significance

The Protocol Society - NYTimes - In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.  A protocol economy has very different properties than a physical stuff economy. For example, you and I can’t use the same piece of metal at the same time. But you and I can use the same software program at the same time. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend toward equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.

Female Degrees vs Male Degrees, US and Canada (bar graph)

My lazy American students - By the time students are in college, habits can be tough to change. If you’re used to playing video games like “Modern Warfare’’ or “Halo’’ all night, how do you fit in four hours of homework? Or rest up for class? Teaching in college, especially one with a large international student population, has given me a stark - and unwelcome - illustration of how Americans’ work ethic often pales in comparison with their peers from overseas. My “C,’’ “D,’’ and “F’’ students this semester are almost exclusively American, while my students from India, China, and Latin America have - despite language barriers - generally written solid papers, excelled on exams, and become valuable class participants. Chinese undergraduates have consistently impressed me with their work ethic, though I have seen similar habits in students from India, Thailand, Brazil, and Venezuela. Often, they’ve done little English-language writing in their home countries, and they frequently struggle to understand my lectures. But their respect for professors - and for knowledge itself - is palpable. The students listen intently to everything I say, whether in class or during office hours, and try to engage in the conversation.Too many 18-year-old Americans, meanwhile, text one another under their desks (certain they are sly enough to go unnoticed), check e-mail, decline to take notes, and appear tired and disengaged.

Studying Young Minds, and How to Teach Them - NYTimes - For much of the last century, educators and many scientists believed that children could not learn math at all before the age of five, that their brains simply were not ready.  But recent research has turned that assumption on its head — that, and a host of other conventional wisdom about geometry, reading, language and self-control in class. The findings, mostly from a branch of research called cognitive neuroscience, are helping to clarify when young brains are best able to grasp fundamental concepts.  In one recent study, for instance, researchers found that most entering preschoolers could perform rudimentary division, by distributing candies among two or three play animals. In another, scientists found that the brain’s ability to link letter combinations with sounds may not be fully developed until age 11 — much later than many have assumed.

Topic one - Income distribution and the crisis - We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the first question, from Dirk Brouwer of the Netherlands. Martin’s response is below. Dirk Brouwer, Amstelveen, The Netherlands: How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

The Inequality-Bubble Link - Ruccio points out that Martin Wolf doesn’t understand the inequality-bubble link: Here’s a good question for Martin Wolf, the chief economics commentator for the Financial Times: How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market. The amazing thing is, Wolf can’t come up a good answer: I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble.

Personal Income And Spending Numbers Disappoint - Today, the Commerce Department released November's personal income and spending results. Oddly, most articles I've seen this morning are celebrating that last month's personal income growth was the biggest gain in six months. If you look a little deeper, however, the numbers aren't very impressive. For starters, today's numbers didn't live up to expectations. According to the Wall Street Journal, although personal income grew by 0.4% in November (the biggest increase in six months), economists expected a 0.5% increase. The story is the same for spending. It increased by 0.5%, while economists predicted a 0.6% increase. But these numbers don't tell the whole story because inflation isn't taken into account.

Time to privatize the Postal Service? – latimes - The U.S. Mail covers everyone regardless of preexisting conditions (like living in the sticks), a public option that could disappear if contractors took over.There's been a lot of talk about a public option for health insurance. But what about the public option for mail?The U.S. Postal Service offers universal coverage -- that is, it guarantees that mail can be sent and received by everyone, regardless of preexisting conditions, such as living in the boonies.It also loses tons of money.In its most recent fiscal year, which ended Sept. 30, the postal service lost $3.8 billion. That's after losing a total of $7.8 billion over the previous two years.

Geithner's Baa Humbug to Job's and Labor - "Ebenezer: Since you ask me what I wish sir, that is my answer. I help to support the establishments I have named; those who are badly off must go there."  GEITHNER: "My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy.

They're All Against Jobs - Sen. Fritz Hollings - Who is against jobs in the United States? The big banks, Wall Street, the Council on Foreign Relations, the Business Roundtable, the United States Chamber of Commerce, the National Retail Federation, Corporate America, the President of the United States, Congress of the United States. Everyone is crying for jobs, but no one seems to understand why there aren't any. And the reason for those opposing jobs is money.

Ford Offers Retirement, Buyouts to All Hourly Workers With at Least a Year of Service - Ford Motor Co. has offered buyout or retirement incentive packages to all of its 41,000 U.S. hourly workers as it tries to further reduce its factory work force.Ford, the healthiest of Detroit’s three automakers and the only one to avoid government aid and bankruptcy protection, still has more workers than it needs to produce cars and trucks at current sales levels, said company spokesman Mark Truby.He would not say how many workers Ford expects to take the packages, which include cash payments and other incentives such as vouchers to buy cars and short-term health insurance coverage.

Manufacturing Employment Falls to Record Lows, But Productivity Soars to Record High Levels - Here’s some pretty grim news about U.S. manufacturing -- employment in that sector fell below 12 million this year for the first time since 1946, and is now at the lowest level (11,648,000 manufacturing jobs in November) since March of 1941 (see chart, BLS data here). Since the onset of the recession in December 2007, manufacturing employment fell for 24 consecutive months, as the U.S. economy shed an average of 89,000 manufacturing jobs each month for the last two years.  From the peak manufacturing employment of 19.55 million jobs in 1979, the American manufacturing workforce has shrunk by more than 40%, as almost 8 million manufacturing jobs have been eliminated over the last thirty years, with almost 6 million of those losses taking place just since 2000. And there’s nothing to suggest that the trend won’t continue, so we can expect a continued contraction of U.S. manufacturing employment.

Unemployment and Excess Capacity - The excess capacity series is defined as 100 - capacity utilization rate. The unemployment series is the civilian unemployment rate. (see graph) The excess capacity series (red line) peaked in June of this year, and has been moving downward ever since. If the pattern in the two most recent recessions holds, those in 1990-91 and 2001, the peak in the unemployment rate will come between 16 and 19 months after the peak in excess capacity, i.e. around a year from today (though prior to 1990 the peaks were coincident).As an inspection of the unemployment series in the graph shows, the unemployment rate bounces around even when it is trending upward or downward. So it's hard to tell from one month's data whether the downward tick in the unemployment rate is temporary and unemployment still has a ways to go before peaking (as in the last two recessions), or a sign that a turning point has been reached and things are getting better (which would represent a reversion to the more coincident movement in the two series observed before 1990).

Job prospects - Krugman - Mark Thoma has a nice chart relating excess capacity in manufacturing to unemployment: This offers a slightly different take on an issue I’ve been worrying about for a long time: recoveries don’t seem to be what they used to be. Mark points out that in pre-90s recessions, rising capacity utilization — which coincides with the official end of the recession — was also marked by falling unemployment, right away. Since then, however, unemployment has seemed to follow the turnaround in capacity utilization only with a long lag. Why the change? I argued in the piece above that it reflects, at least in part, a change in the nature of recessions...earlier recessions were preceded by sharp rises in interest rates, as the Fed tried to choke off inflation. But later recessions took place in a low-inflation environment, in which booms died natural deaths from overextended credit and overbuilding.

Not Exactly Bullish - Chief financial officers, corporate treasurers, and other finance professionals are in a unique position. They see what is happening on Main Street's front lines. They have first-hand knowledge of what the banks are up to and day-to-day conditions in credit and other markets. They have access to raw data and strategic plans that allow them to gauge how things really are in corporate America. With that in mind, I think most people would agree that their views should carry a bit more weight than the "smart money" types who are using cheap government loans to speculate in over-priced stocks and other risky investments and who are betting on the V-shaped recovery that ivory tower economists and Wall Street strategists love to pontificate about, but which is more permabull fantasy than anything else. So, are the finance pros bullish? Well, not exactly: "Finance Pros Don't See U.S. Companies Hiring Until 2011"

Still Nervous, Many Businesses Are Hiring Temporary Workers - NYTimes -The hiring of temporary workers has surged, suggesting that the nation’s employers might soon take the next step, bringing on permanent workers, if they can just convince themselves that the upturn in the economy will be sustained.  As demand rose after the last two recessions, in the early 1990s and in 2001, employers moved more quickly. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for four months, the economy is growing, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again. The rising employment of temp workers is not all bad. However uncertain their status, they do count in government statistics as wage-earning workers, adding to the employment rolls and helping to bring down the monthly job loss to just 11,000 in November.

More on Temporary Help - First a chart that is being circulated by some of the more optimistic forecasters: This chart compares the monthly change in temporary help services (shifted 4 months into the future) and the monthly change in total employment. Sure enough temporary help tends to lead total employment. A number of analysts are now forecasting a surge in employment in early 2010 partially based on this chart. I've been forecasting a strong second half for GDP since late Spring, so I'm not surprised about the pickup in Q3 and Q4 GDP. This increase in GDP has been driven by the stimulus spending, some inventory restocking, and some export growth. But my concern is about 2010. If the recovery stalls or even slows - as I expect - then employment will not pick up sharply.

States' jobless funds are being drained in recession - The recession's jobless toll is draining unemployment-compensation funds so fast that according to federal projections, 40 state programs will go broke within two years and need $90 billion in loans to keep issuing the benefit checks.  The shortfalls are putting pressure on governments to either raise taxes or shrink the aid payments. Debates over the state benefit programs have erupted in South Carolina, Nevada, Kansas, Vermont and Indiana. And the budget gaps are expected to spread and become more acute in the coming year, compelling legislators in many states to reconsider their operations. Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps.

As Slump Hits Home, Cities Downsize Their Ambitions (WSJ) Projected deficits are especially deep in some places and tax revenues could be pinched for years as consumers turn thrifty and real-estate prices remain diminished. That means the relatively painless measures such as borrowing, deferred payments to pension plans and scattered layoffs that have been used during past episodes of fiscal strain are unlikely to be effective in some cities. In the decade through 2008, municipal tax revenues grew at a rate of 6.5% a year, faster than the overall economy's 5.1%, unadjusted for inflation. Those revenues have started to slip. A national tally isn't yet available, but state tax collections fell 11% across 44 states in the third quarter of 2009, from the same period a year ago, according to a report by the Nelson A. Rockefeller Institute of Government.

State borrows $1 billion to pay out unemployment benefits - The state of Illinois has been forced to borrow $1 billion from the federal government since mid-summer to help cover unemployment benefits, and some estimates are that the figure could go as high as $8 billion by 2012. It is basic math resulting from a harsh recession. State figures show $4.1 billion in unemployment benefits were paid through the end of November, or nearly double the figure for all of 2008. “The trust fund just eclipsed $1 billion. It is borrowing, and I’m not trying to split hairs, but it is drawing on a line of credit from the federal government,” Greg Rivara, spokesman for the Illinois Department of Employment Security, said Tuesday.

State still looking for jobs - Florida was among the states hit hardest by the recession, suffering through 2009 with staggering housing defaults and high unemployment. On a more positive note, the state ranked fourth in jobs created or saved (29,321) because of help from the federal government, according to the Government Accountability Office.But any jobs gained or saved were swamped by the 284,000 lost during the last year. The state's unemployment rate remained at 11.5 percent in November — above the national rate of 10 percent and much worse than the state's 7.2 percent rate from a year ago, according to the U.S. Bureau of Labor Statistics.

Rise in unemployment compensation tax could hurt job creation - For the state of Alabama, it's time to raise more money for the state's rapidly depleting unemployment compensation fund. That means employers will pay a lot more in unemployment compensation taxes starting Jan. 1. But the timing of that tax increase couldn't be worse, experts say. It comes at a time when many hoped employers might hire more workers — an action that not only will be more expensive but also more difficult as employers have to find additional money to pay the higher assessments for the workers they already have.

Oklahoma Sets Unemployment Claims Record in 2009 - Oklahoma has paid out more than $575 million in unemployment claims so far this year, a record as the number of jobless in the state remains near a 21-year high, a spokesman for the Oklahoma Employment Security Commission said Wednesday. Spokesman John Carpenter said that last week, the state paid $23.72 million in benefits on 74,814 jobless claims, down slightly from the week before when it paid out $23.77 million on 74,845 claims — a new weekly record. The state paid just $182.6 million in unemployment benefits in all of 2008.

Looming unemployment-tax hike divides N.J. officials - A tax increase that could cost employers $1 billion is needed to replenish New Jersey's depleted unemployment-insurance fund, according to Gov. Corzine's labor commissioner. With large shortfalls in the fund expected for several years, David Socolow said, the state needs to let an automatic tax increase take effect July 1 to rebuild reserves. Once the fund recovers, a process likely to take several years, taxes would begin to fall to previous levels. The fund, which temporarily aids workers who lose their jobs, is expected to have a $1.2 billion deficit on March 31. That would move the tax rate on employers, beginning in July, to the highest level allowed.

State prepares to tackle its latest deficit - -- Six months into the leanest fiscal year in memory, Gov. Arnold Schwarzenegger and California legislators soon will begin wrestling with a new state spending plan -- and a new budget deficit. And while revenues are in relatively short supply, there is an abundance of aphorisms applicable to the looming budget battle. Things are never so bad that they can't get worse. Lawmakers and the governor spent much of 2009 cobbling together a way to close a $60 billion budget deficit, with the full realization that whatever they did, it wouldn't be enough to fend off a new deluge of red ink in 2010.  Sure enough, the nonpartisan Legislative Analyst's Office estimated last month that the state now faces a $20.7 billion gap between what it can expect to collect in revenues and spend over the next 18 months.

Schwarzenegger to seek federal help for California budget- Facing another huge deficit, the governor wants $8 billion or threatens massive cuts in social services. He also plans to renew push for offshore oil drilling." "If Washington does not provide roughly $8 billion in new aid for the state, the governor threatens to severely cut back -- if not eliminate -- CalWORKS, the state's main welfare program; the In-Home Health Care Services program for the disabled and elderly poor, and two tax breaks for large corporations recently approved by the Legislature, the officials said. Schwarzenegger also will propose extending a cut in the state payroll that is scheduled to expire this summer. That cut has translated into 200,000 state workers being furloughed three days a month, the equivalent of a 14% pay cut.

What Happens When California Defaults? - The worst case would be the mother of all financial crises. According to the California State Treasurer’s office, California has over $68 billion in public debt, but the Sacramento Bee’s Dan Walters has tried to count total California public debt, including that of local municipalities, and his total reaches $500 billion. Whatever the amount, the impact of default could be larger than the debt amount would imply. Other states – New York, Illinois, New Jersey, for example – are in almost as bad shape as California, and they could follow California’s example. The realization that a state could default would shock markets every bit as much as when Lehman Brothers failed. Given the precarious state of our economy and the financial sector, another fiscal crisis would be disastrous, with impacts far beyond California’s borders.

The Big-Spending, High-Taxing, Lousy-Services Paradigm - The recession will eventually end and California’s finances will improve, say the optimists. Given the state’s pervasive political bias against efficient and effective public services, however, the question is whether its finances will ever get truly well. States that have grown accustomed to thinking of the engine that drives their economies as an inexhaustible resource find it tough to compete again for what they thought would be theirs forever, and to plan budgets for lean years that turn into lean decades. Instead, they invest their hopes in a deus ex machina that will rescue them from the hard choices they dread. For California’s governmental-industrial complex, a new liberal administration and Congress in Washington offer plausible hope for a happy Hollywood ending. Federal aid will replace the dollars that California’s taxpayers, fed up with the state’s lousy benefits and high taxes, refuse to provide. Americans will continue to vote with their feet, either by leaving California or disdaining relocation there, but their votes won’t matter, at least in the short term. Under the coming bailout, the new 49ers—Americans in the other 49 states, that is—will be extended the privilege of paying California’s taxes. At least they won’t have to put up with its public services.

Arizona close to bankruptcy Over the weekend Arizona state lawmakers approved a budget for fiscal year 2010. Governor Jan Brewer said that these are, "the worst financial days ever." Arizona still faces a $1.5 billion dollar deficit this year, and a projected $3.4 billion dollar shortfall next fiscal year. Arizona State Representative Linda Lopez says Arizona is so close to bankruptcy, we could follow in California's footsteps. April tax returns could come in the form of IOUs, instead of a check.

Is Ohio headed for financial disaster? - The budget compromise reached by Ohio lawmakers fixes the immediate budget deficit, but some local state leaders worry it is only delaying the problem.  A large part of the solution was to delay tax decreases that had been planned for this year. The governor has promised the reductions will take place during the next budget cycle. But Hottinger said it is not going to be feasible to reduce taxes in two years, when the deficit is larger. "The governor insists it is a delay, but that is totally disingenuous," he said.

Rendell: Might have to close Pa. museum, parks - Gov. Rendell yesterday upped the ante in his bid to balance the state budget, saying that without a table-games bill he would have to close the State Museum of Pennsylvania and some state parks in addition to laying off at least 1,000 more government employees.Rendell last week said layoffs of 1,000 more state workers were "imminent" if no gambling bill was on his desk by Jan. 8. The bill - the final unresolved part of the state budget the governor signed in October after a 101-day impasse - would bring in $250 million in license fees and taxes that Rendell said is necessary to keep the government running.

Gov. Corzine announces $839M in cuts to help close N.J. budget gap -- Gov. Jon Corzine today detailed $839 million in cuts and savings to help the state close a budget gap of nearly $1 billion.Corzine said he will ask schools to use up $260 million in surplus, wipe out the remaining $100 million in contributions to the state pension fund, and cut $479 million in other spending. At the same time, the state will pay for $350 million in other mid-year spending on programs such as Medicaid, senior property tax relief and tuition grants, and restore cuts to municipalities that he had announced earlier this month

New Jersey Leads Municipal Bond Downgrades as State Aid Shrinks (Bloomberg) -- Bond ratings of New Jersey towns and cities are being reduced faster than in any other state as property values slide 11 percent and Governor Jon Corzine lowers municipal aid to cope with a $1 billion budget deficit.  Moody’s Investors Service cut ratings on $592 million in general obligation debt issued by 14 municipalities since October, about four times the rate for neighboring New York, the second-most indebted state, according to data compiled by Bloomberg. New Jersey’s per-capita personal income of $51,358 last year was exceeded only by Connecticut, according to the U.S. Commerce Department’s Bureau of Economic Analysis.  With the U.S. jobless rate hovering around 10 percent and tax revenue dwindling, the downgrades in New Jersey, the most- densely populated state, may be the start of a national trend...

Road-funding crisis looms for N.J. - The day of reckoning for New Jersey roads and mass transit is drawing closer, with no indication from Gov.-elect Christopher J. Christie about how he hopes to replenish the nearly empty fund for transportation projects. The state Transportation Trust Fund is projected to run dry by June 2011, leaving the new governor with two unsavory options: borrow more money or raise taxes and tolls. So far, he has said he is against both. Christie, who argued against additional debt during his gubernatorial campaign, approved a decision by the Transportation Trust Fund Authority this month to borrow $1.2 billion, bringing the fund's debt to about $11.6 billion. The new borrowing should provide enough money to pay for transportation projects for the six months

Rural Mich. counties turn failing roads to gravel - Some Michigan counties have turned a few once-paved rural roads back to gravel to save money. More than 20 of the state's 83 counties have reverted deteriorating paved roads to gravel in the last few years, according to the County Road Association of Michigan. The counties are struggling with their budgets because tax revenues have declined in the lingering recession.  The counties estimate it takes about $10,000 to grind up a mile of pavement and put down gravel. It takes more than $100,000 to repave a mile of road. Reverting to gravel has happened in a few other states but it is most typical in Michigan.

More budget hits on the way for Hawaii - Gov. Linda Lingle, trying to close a $1.2 billion budget deficit through June 2011, said yesterday that she would delay tax refunds from April until July and ask state lawmakers to scoop hotel-room tax revenues that now go to counties.  Lingle would also raise taxes on insurance commissions, stop paying life insurance premiums for state workers and retirees, and end the state's reimbursement of some Medicare costs for the spouses of retired state workers. The governor preserves the state's rainy day fund and the hurricane relief fund as options in the event the economy does not improve and the deficit grows larger.

U.S. States Look Abroad for Debt Buyers - U.S. state governments, seeking to expand the pool of potential lenders as their borrowing balloons, are beginning to look offshore. Illinois has registered bonds for sale in Europe as part of a $3.5 billion offering next week. New York State is considering tapping into foreign demand, and California Treasurer Bill Lockyer said last week that his state, the largest muni bond issuer, is considering peddling its taxable debt abroad.The focus for foreigners are a new form of taxable municipal debt called Build America Bonds, which were created as part of the nation's economic stimulus plan.

Denial of Aid Averts N.Y. Insolvency, Paterson Says (Bloomberg) -- New York Governor David Paterson said he will argue in court that making payments to school districts this month would render the third-most populous U.S. state insolvent. “We are operating really under a fundamental precept that’s really beyond the law: you can’t spend money that you don’t have,” the governor said at a news conference today at his Manhattan office, responding to a suit challenging his authority to withhold the funds.

Schools need post-stimulus plan, comptroller warns - ALBANY — School districts in New York face a funding gap of at least $2 billion when federal stimulus money runs out in less than two years, possibly leading to an average property-tax increase of 7.7 percent, state Comptroller Thomas DiNapoli warned Monday.  Lawmakers and Gov. David Paterson agreed to use $700 million in federal stimulus money to avoid cuts in school aid when the fiscal year started in April. This month, lawmakers used nearly $400 million in stimulus money designated for next year to help fill this year's midyear budget deficit. DiNapoli said in a report Monday that unless the federal aid is renewed or replaced by state aid, schools will be hard-pressed to make up the loss of revenue. DiNapoli said about $2.8 billion in federal stimulus money went to schools this fiscal year, of which $1.6 billion restored education aid that was to be cut.

New York goes broke, pension by pension  - 275,000 retired NYC employees — including 69,775 teachers, 44,290 cops, 17,404 firefighters and 13,664 others — cost city taxpayers $6.7 billion this year, as officials dipped into the general revenue to make up pension-investment shortfalls. That’s up from only $703 million in 2000. By 2016, taxpayers will be on the hook for $12.3 billion. New York City pensions, which increase each year whether the stock market rises or falls, threaten to hit the city “like a tsunami,” one expert said.  Today, some 40,000 current transit workers have to put in 25 years on the job. They pay 2 percent a year, but can still retire at age 55. Most city employees contribute 3 percent of their pay for only the first 10 years. Pension benefits fattened under then-Mayor Rudy Giuliani. Between 1998 and 2001 — when the city was raking in pension-fund investment profits — the Legislature approved many costly giveaways, including annual cost-of-living hikes that average about $300.

New York Housing Authority Cuts Off New Section 8 Vouchers - NYTimes -  One of the key housing programs that helps low-income and other needy New Yorkers afford their apartments has been effectively cut off for thousands of families. City officials announced Thursday that they had stopped issuing new federal rent subsidy vouchers and were terminating the vouchers of 3,000 families who had yet to fully use them. They said they were taking those steps because of federal budget cuts and an increased demand for the vouchers in today’s economy.The city’s public housing agency, the New York City Housing Authority, typically gives out thousands of vouchers every year through the Section 8 program. Poor, elderly and disabled tenants who receive the vouchers live in private apartments and pay about 30 percent of their income toward rent, with federally funded vouchers making up the difference.

Stadium Boom Deepens Municipal Woes (NYT) Years after a wave of construction brought publicly financed stadiums costing billions of dollars to cities across the country, taxpayers are once again being asked to reach into their pockets.  From New Jersey to Ohio to Arizona, the stadiums were sold as a key to redevelopment and as the only way to retain sports franchises. But the deals that were used to persuade taxpayers to finance their construction have in many cases backfired, the result of overly optimistic revenue assumptions and the recession...“Anyone looking at this objectively knows it’s a train wreck,”

Public braces for pension-fund bill  - In a sort of “OK news/bad news” announcement, the state agency that oversees the teacher pension fund reported an impressive 9.18 percent return on investments from July through September. But that came after a precipitous drop of 26.4 percent during the four previous quarters – a loss of nearly $20 billion from a fund that, two years ago, topped $67 billion. The huge prior losses coupled with the comparatively scant recent gain will make real what many had predicted all year: a big jump in the amount school districts must pay into the pension fund starting July 1. How that hits taxpayer pocketbooks depends on the district. The contribution rate hike – from 4.78 percent of payroll to 8.22 percent – has been long-anticipated.

Billions in pension payments loom for struggling state budgets (PBS audio) - Now, in a weak economy, what may be a ticking time bomb for many states, cities and towns: hundreds of billions of dollars in pension liabilities that are currently underfunded. In California, Governor Arnold Schwarzenegger warned just this week that his state will need billions more from the federal government for basic operations, even as longer-term pension requirements loom. "NewsHour" correspondent Spencer Michels reports.

U.S. local government pension costs exceeds $530 billion - U.S. state and local governments face more than $530 billion in unfunded public pension liabilities and most do not have funds set aside to pay for them, a government report showed on Wednesday.  As of June, state governments were on the hook for around $405 billion and 39 of the country's largest local governments must come up with around $130 billion for their other post employment benefits, the U.S. Government Accountability Office said. The report said unfunded state liabilities ranged from as low as $71 million in Arizona to $62 billion in California.

Firms Still Sick on Pensions (WSJ) The market rally has been a healing experience for many investors. But companies with battered pension funds may be feeling ill for some time. About $400 billion in pension assets held by Standard & Poor's 500-stock index companies reporting on calendar years, or about 27% of assets, evaporated in last year's market crash, estimates David Zion of Credit Suisse Group. That created some big deficits on future obligations that companies need to cover starting in 2010. As a result, the total pension deficit for calendar-year companies probably has narrowed only slightly in recent months, to $270 billion, from $298 billion at the start of the year, estimates Mr. Zion. By law, companies have to make contributions toward closing those deficits over a seven-year period. Barring a new bull market, investors should count on plenty of that cash coming out of companies' pockets.

Beware the Taxpayer Bailout of Underfunded Teamsters Pension Funds - Mish - This was going to be a "quick" post on the pending bankruptcy of YRC, the nation's largest trucking company. Instead, I have been digging around for several hours as the story morphed into a spiderweb of pension obligations culminating in a Ponzi scheme sponsored by representative Pomeroy to bailout private pension plans at taxpayer expense. Let's kick this off with the headline that first grabbed my attention. Bloomberg reports YRC Has Until Yearend to Corral Bondholders, Avert Bankruptcy. ...then... flashback May 15, 2009: Troubled trucker YRC to seek $1 billion pension bailout...The deeper inquiring minds dig, the messier and messier this gets. Please consider H.R.3936 - Preserve Benefits and Jobs Act of 2009...

Our Coming Medicare Debacle - Now what?  We still have a gigantic budget deficit pressing on us from Medicare.  Yes, you say you made serious Medicare cuts.  Then you turned around and spent that money on expanding coverage.  So the Medicare deficit, which will be $100 billion and growing in 2019, will still exist.  There will also be growth in the portion of Medicare that is currently paid for out of general revenue, putting further upward pressure on our deficits.  It's impossible to say exactly how much that $100 billion will be growing every year, but $15-20 billion seems like a reasonable estimate, as least during the senescence of the Baby Boomers.  This is why the argument that "If we can't make these cost cuts, we can't cut Medicare costs, so we're doomed anyway" is such a silly, facile argument. "Medicare cuts" are not some undifferentiated substance, which one consumes or doesn't as if they were cigarettes or baby carrots.  Medicare cuts range from easy to hard, and we just used up the easiest ones--cuts which, if you'll notice, weren't all that easy.  Doing this bill means it will be even harder in the future to cut Medicare, because the cuts we will have to make will almost definitionally mean deeper service cuts, and greater political controversy.  

Report: Vaccine Advisers Had Financial Conflicts - A new report finds that the Centers for Disease Control and Prevention did a poor job of screening medical experts for financial conflicts when it hired them to advise the agency on vaccine safety, officials said Thursday.Daniel R. Levinson, the inspector general of the Department of Health and Human Services, found that the centers failed nearly every time to ensure that the experts adequately filled out forms confirming they were not being paid by companies with an interest in their decisions. The report found that 64 percent of the advisers had potential conflicts of interest that were never identified or were left unresolved by the centers. Thirteen percent failed to have an appropriate conflicts form on file at the agency at all, which should have barred their participation in the meetings entirely, Mr. Levinson found. And 3 percent voted on matters that ethics officers had already barred them from considering

Gauging the Odds (and Costs) in Health Screening - To begin, it’s important to understand that patients who aren’t at high risk for cancer might have several reasons to choose against being screened for it. “Should I Be Tested for Cancer?,” a 2004 book by H. Gilbert Welch, a Dartmouth Medical School professor, provides a dispassionate discussion of these issues. First, it is the nature of cancer screening that there are a lot of false positives, or what Dr. Welch calls “cancer scares.” For women in their 40s, the risk of a false-positive mammogram is on the order of 10 percent each time they take one. If women are tested regularly for many years, many will thus have at least one cancer scare. A second reason for not being tested is that you might not always want to know you have cancer. That may sound crazy, but it’s not. For example, if you are old enough, you might not want to know that you have prostate cancer, which is typically slow-growing. Most men, if they live long enough, will get prostate cancer — we know this from autopsies of men over 70 who died from something else.

What a Group to be In - Per the Health at a Glance Chart Set, Powerpoint, available here: All OECD countries have achieved universal or near-universal health care coverage, except Turkey, Mexico and the United States. And it's even more impressive when you go to Slide 36 (whose header is quoted above) and realise that the Public Coverage in those three states is:
Mexico: 82.5
Turkey: 67.2
United States: 27.4

Senate Preparing for Cloture on Health Care - Megan McArdle - So there's now about a 90% chance that the health care bill will pass. The irony of this is that this bill is great for me personally.  I'm probably uninsurable, and I'm in a profession where most people now end up working for themselves at some point in their career. So mandatory community rating is great news for me and mine. But I think that it's going to be a fiscal disaster for my country, because the spending cuts won't be--can't be--done the way they're implemented in the bill.  We've just increased substantially the supply of unrepealable, unsustainable entitlements.  We've also, in my opinion, put ourselves on a road that leads eventually to less healthcare innovation, less healthcare improvement, and more dead people in the long run.  Obviously, progressives feel differently, and it will never be possible to prove the counterfactual.  So there you are.  Alea iacta est. I sure hope I'm wrong.

Payoffs for states get Harry Reid to 60 votes - Ben Nelson’s “Cornhusker Kickback,” as the GOP is calling it, got all the attention Saturday, but other senators lined up for deals as Majority Leader Harry Reid corralled the last few votes for a health reform package. Nelson’s might be the most blatant – a deal carved out for a single state, a permanent exemption from the state share of Medicaid expansion for Nebraska, meaning federal taxpayers have to kick in an additional $45 million in the first decade. But another Democratic holdout, Sen. Bernie Sanders (I-Vt.), took credit for $10 billion in new funding for community health centers, while denying it was a “sweetheart deal.” He was clearly more enthusiastic about a bill he said he couldn’t support just three days ago. Nelson and Sen. Carl Levin (D-Mich.) carved out an exemption for non-profit insurers in their states from a hefty excise tax. Similar insurers in the other 48 states will pay the tax. Vermont and Massachusetts were given additional Medicaid funding, another plus for Sanders and Sen. Patrick Leahy (D-Vt.) Three states – Pennsylvania, New York and Florida – all won protections for their Medicare Advantage beneficiaries at a time when the program is facing cuts nationwide.

Entrenchment Provisions in the Health Care Bill - Jonathan notes that the health care bill includes certain “entrenchment” provisions, and asks, “can the current Senate bind future Senates in this way?”  If I understand the bill correctly, it creates an independent board that recommends ways to limit Medicare payments.  These recommendations go to the president, who in turn is supposed to submit them to Congress.  Congressional procedures are likewise constrained.  The Senate, for example, cannot debate the proposal for more than 30 hours; there are limits on House procedures as well.  The idea seems to be to constrain filibustering and other parliamentary maneuvers that would defeat cost-saving legislation in the future.  As Jonathan notes, the bill further provides that these constraints cannot be overturned by majority rule but require a 2/3 supermajority. Can Congress bind itself in this way?  As it happens, I have written a paper on this topic.  The short answer is “no,” or at least, no one thinks that Congress can bind itself in this way.

Healthcare Stocks EXPLODE Higher After Big Vote On Reform - (chart) Wow, look at the spike the big healthcare stocks made the morning after the big late night "reform" vote.The gains have moderated a bit, but it kinda tells you all you need to know, doesn't it?

Seeing Public Subsidy (Not Public Option) Investors Flock to Health Insurers - HuffPost - Investors are seeing the Senate's version of health care reform as a massive public subsidy for insurance companies -- and as a result, are sending the sector's stock prices shooting up, up, up. Stripped of a government-run insurance plan, the bill would give tens of millions of Americans no option but to start paying hefty premiums to private companies.

Obama Claims Not to Have Campaigned on Public Option - Color me confused as to why Barack Obama would tell the Washington Post he didn’t campaign on a public option when he fairly clearly did: In fact, though the public option wasn’t a regular part of his stump speech, Obama appointed the public option’s intellectual father, Jacob Hacker, to his health care advisory committee, and his campaign’s health care white paper prominently featured a government run plan, with no mandate requiring uninsured people to buy insurance. The bill he will likely sign next year will do the opposite.  Who is supposed to be made to feel better by this line anyway? Who’s it supposed to persuade?

Health Interests Spend More Than $600 Million to Sway Congress (Bloomberg) -- More than $600 million has been spent so far this year trying to influence U.S. lawmakers working to overhaul the health-care system, reports show. The health industry spent $396 million through Sept. 30, more than any other industry and up 9 percent over the same period a year ago, according to the Center for Responsive Politics, a Washington-based research group.  Those numbers don’t include spending on lobbying by insurers such as the Blue Cross and Blue Shield Association and its member companies, which spent $16.7 million in the first nine months of 2009, compared with $16.2 million in all of 2008.

Arianna Huffington: The Senate Health Care Bill: Leave No Special Interest Behind – …This typifies the current thinking of the "Don't let the perfect be the enemy of the good" crowd. Unfortunately, there are three faulty premises at work in this line of reasoning. First, that those who oppose the bill do so because it's not perfect (as opposed to because it's a hot health care mess). Second, that the bill is, well, good (as opposed to a total victory for Pharma and the insurance industry -- witness the spectacular spike in health care stocks following Monday's vote).Third is the premise that this is as good a bill as we can get right now, and we can always go back and improve it later.It doesn't work that way. We heard the same kinds of sentiments about No Child Left Behind when it passed in 2001. Backers on both sides of the aisle had problems with it, but both sides celebrated it as a major step forward -- and promised to make it better in the future.

Health plans' impact confuses constituents and lawmakers - McClatchy - Will health insurance premiums go up or down under House of Representatives and Senate health-care plans? It's hard to say, and it depends on who you are.Will the plans "bend the cost curve," as Democrats so badly want? Maybe, but again, there's no easy answer. The health-care legislation scheduled for a Senate vote early Thursday is a 2,000-page plus grab-bag of ideas and strategies, and a lot of senators are as confused about its potential impact as the general public is."It has to be complicated," said Timothy Jost, a law professor at Washington & Lee University in Lexington, Va., because it overhauls a complex system that involves one-sixth of the American economy.

Simulating single-payer - Krugman - When I first began writing a lot about health care, I often found myself taking the pro-single-payer position against people who argued that it was better to work through private insurance companies. I took to arguing that Massachusetts-type plans were, in fact, just imperfect, somewhat inefficient ways of simulating the results of a single-payer system. And if I thought there was any chance of creating Medicare for All any time in the next decade, I’d be pushing for single payer now. But what actually seems possible — not in the distant future, but tomorrow morning — is the passage of a Massachusetts-type plan for the United States. And now my argument cuts the other way: what we’re getting will, in its overall results, work a lot like a single-payer system. It will be an imperfect, inefficient simulation; but those on the left who decry it as terrible, evil, nothing but a giveaway to the insurance companies are missing the very real good it will do.

A Reckless Health Care Bill That Nobody Believes In – WSJ - A bill so reckless that it has to be rammed through on a partisan vote on Christmas eve. Mr. Obama promised a new era of transparent good government, yet on Saturday morning Mr. Reid threw out the 2,100-page bill that the world's greatest deliberative body spent just 17 days debating and replaced it with a new "manager's amendment" that was stapled together in covert partisan negotiations. Democrats are barely even bothering to pretend to care what's in it, not that any Senator had the chance to digest it in the 38 hours before the first cloture vote at 1 a.m. this morning. After procedural motions that allow for no amendments, the final vote could come at 9 p.m. on December 24.

Nurses explain how health bill could make crisis worse 'Unchecked influence of health industry lobbyists' means bill could be weakened in the future, union's reps say - The newly-formed nurses' "mega-union" has issued a scathing indictment of the Senate health bill expected to be voted on this week, calling it a "deeply flawed" piece of legislation that could make the US health care system's problems worse. National Nurses United, the US's largest nurses' union since it was formed earlier this month, issued a statement Monday implying that it doesn't support the health care reform bill championed by the White House and Senate Majority Leader Harry Reid.

The Senate Bill Saves Families Money - Kaiser Health News - It’s certainly true that, under the terms of the Senate bill, insurance would cost more and cover less than many of us would prefer. But would it really produce little social progress? Is it really worse than nothing? One way to answer this question is by comparing how a typical family would fare with reform and without. At my request, MIT economist Jonathan Gruber produced a set of figures, based on official Congressional Budget Office estimates. The results tell a pretty compelling story, particularly when put in human terms: this chart showing health care cost projections for a family of four - with the Senate health care reform bill, and without it.

Bending the Federal Health Cost Curve (Maybe) - Buried deep in CBO’s cost estimate of the new Senate health bill is a striking conclusion: CBO believes that the health bill would eventually reduce the federal commitment to health care. In short, the bill would eventually bend (or, at least, lower) the federal health cost curve (including both spending and tax subsidies).That conclusion comes with two crucial caveats: CBO’s estimates into future decades are subject to great uncertainty and assume that the legislation executes exactly as written. As CBO itself points out, that latter assumption is shaky — Congress will undoubtedly revisit health care repeatedly in coming years and may well decide to soften the spending reductions and tax increases specified in the bill.Still it is striking that the bill, as written, might reduce the federal commitment to health beyond the first decade. That certainly distinguishes it from the previous version of the Senate bill.

Would Reform Bills Control Costs? A Response To Atul Gawande - Atul Gawande, MD, is one of the best medical writers of our time. I subscribed to the New Yorker just so I could read him.  I reached eagerly for my New Yorker when I heard he had an article there. I was deeply disappointed. What worries me is that his article will be used to support a political campaign to gloss over the failure of proposed legislation to significantly moderate health expenditure growth. Gawande acknowledges that the cost of health care “…will essentially devour all our future wage increases and economic growth.  The cost problem, people have come to realize, threatens not just our prosperity but our solvency.”  “So what does the reform package do about it? …Does it institute nationwide structural changes that curb costs and raise quality? It does not. Instead what it offers is …pilot programs.”

The Hospital That Could Cure Health Care - The Cleveland Clinic is a model of high-quality, cost-efficient medicine in action, that has miniaturized robotic tools that can repair a heart valve, a computer system that allows doctors to read patients' charts from anywhere in the world, and the last word in networked, interactive supply closets. A century after Henry Ford began building cars on an assembly line, the hospital has brought that technique to medicine, updated to reflect the latest thinking on "continuous-cycle improvement."

Firms Warn of Cuts to Benefits - WSJ - Some of the biggest employers in the U.S. are warning that a provision in the Senate's proposed health-care overhaul could lead to cuts in retiree benefits and a sharp reduction in reported earnings next year. Companies including Boeing Co., Deere & Co., MetLife Inc. and Xerox Corp. plan to lobby Democratic leaders to drop the provision, which would change the tax status of payments for retiree health benefits. Democrats identified the change as a way to help pay for the health-care overhaul.  It would raise about $5.4 billion over 10 years -- a relatively small slice of the bill's overall cost -- according to estimates. The AFL-CIO has joined the corporate giants in an unusual alliance to warn the provision would encourage companies to drop drug benefits for million of retirees.

Democrats Face Challenge in Merging Health Bills - NYTimes — Even as the Senate took a significant step toward passing its version of a sweeping overhaul of the health insurance system before Christmas, Democrats were grappling Monday with deep internal divisions over abortion, the issue that most complicates their drive to merge the Senate and House bills and send final legislation to President Obama.  In the House, advocates and opponents of abortion rights and conservative Democrats have made clear that they object, for different reasons, to the Senate’s compromise language on abortion. Interest groups on both sides of the spectrum — Planned Parenthood on the abortion rights side, Catholic bishops for the anti-abortion rights camp — also oppose the abortion provision in the Senate bill, leaving Speaker Nancy Pelosi with a challenge in rounding up the votes she needs in the House.

Let’s Just Say “No” - The Senate and the Obama Administration want to pass the Senate version of health care reform by Christmas Eve. In the end, the Senate probably will pass a bill. The nation, however, would be a lot better off if the Senate did not vote. Here’s why.First, this legislation has become no more than a (bad) effort at insurance reform. It does not encompass any serious approach to reforming health care itself, which is by far the bigger problem.Second, as health insurance itself it is a bad approach. As a small example, it does not even increase competition by allowing cross-state competition by insurers. So it guarantees 50 smaller state markets, each run by a somewhat different state insurance bureaucracy, most of the markets being too small to support real competition. Third, the myriad of small projects and experiments included in the bill and intended to try out various approaches to health care reform all add up to nothing....Fifth, this bill will not slow down health care cost growth. There is absolutely no one in the known universe whether for or against this bill who in private would not agree with that statement...

Q+A: What does the Senate healthcare bill do? (Reuters) - A sweeping healthcare reform bill appears headed for passage in the U.S. Senate after surviving a test vote early on Monday morning. The bill has been criticized by some liberals who complain that without a new government insurance option it will not provide meaningful reform and by conservatives who say it costs too much.Here are some questions and answers about the Senate bill.

Nightly Business Report . Who wins, who loses in Senate health bill - PBS - After pushing for years for help for Libby, Montana residents, many of whom suffer from asbestos-related illnesses from a now-closed mineral mining operation, Baucus inserted language in a package of last-minute amendments that grants them access to Medicare benefits. He didn't advertise the change, and it takes a close read of the bill to find it. It's just one example of how the sweeping legislation designed to remake the U.S. health care system and extend coverage to 30 million uninsured Americans also helps and hurts more narrow interests, often thanks to one lawmaker with influence or bargaining power.Here's a look at some other winners and losers in the latest version of the legislation, which was expected to survive an initial test vote in the Senate around 1 a.m. Monday.

Numerical notes on health care reform - A couple of notes to address complaints about the Senate bill from the left and the center. (There’s no use addressing complaints from the right; in general, the safest thing when dealing with crazy people is to avoid eye contact.) For people on the left who think this is all a big nothing, consider the subsidies. From the Kaiser Health Reform Subsidy Calculator, here’s the percentage of insurance premiums on the individual market that would be covered by subsidies at different levels of income measured as a percentage of the poverty line (all calculations are for a family of 4 headed by a 40-year-old):

When the Changes Could Take Effect - WSJ - For consumers, the most confusing part of the health-care bill may be when -- and if -- they will see its benefits.Under the Senate bill scheduled for a vote Thursday, a slate of provisions designed to be immediately visible to consumers would kick in six months after the bill takes effect.But those changes wouldn't affect people who stay in employer health plans. For people who buy insurance on their own, the provisions would only have an effect when they buy a new policy. And one of the health bill's most widely debated features -- a mandate that most Americans obtain health insurance or pay a fine -- won't take effect until 2014.

Governement Healthcare: Trust Buster, or Cartel Builder? - In the comments over at 11D, Russell Arben Fox argues that the government is necessary to curb monopoly power on the part of providers: The idea that you need government to break up monopolies is standard liberal political economy, but I cannot imagine a situation in which it is more misplaced.  Doctors do not have a monopoly over us--I do not bargain with the AMA for my health care, and as someone who has been uninsured with expensive medical conditions, I've seen no evidence that they are able to implement cartel pricing.  Ditto hospitals outside of rural areas where the majority of us do not live. And yet they exercise something like cartel power.  Why?  Because they spend half their time negotiating with the government.  And when you negotiate with the government, you do indeed negotiate as a cartel, with your trade association.  Everywhere else, insurers negotiate with providers individually--hospital networks are probably the largest bargaining bloc.

For Their Next Trick - WSJ - Look for House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to try to circumvent the traditional conference committee process by which the different versions of health care reform passed by each house will be reconciled. If so, it will be the latest example of violating principles of transparency and accountability in the single-minded pursuit of legislative victory.Conferences involving members from both houses are messy things. They are usually conducted in public and often televised, and can produce a compromise version of the bill that leaves rank-and-file members tempted to vote against the final version. That could be perilous in the case of health care since it's likely to pass without a vote to spare in the Senate and the House's version passed by only five votes.

Health Care: All Over But The Secrecy - McClatchy Newspapers point out that the real action on the health care bill will take place in the murky world of conference committees, which–like many other things on the Hill–don’t really work the way your father’s (or, for that matter, your) American government textbook says they do: To most Americans, the conference process is an enigma, rarely taught in history or civics lessons. On Capitol Hill, however, it’s a tradition steeped in late-night, closed-door deals and howls of protest from the frozen-out minority party. “Probably the best part of the sausage-making process is the least understood and the most important,”

Medical Loss Ratio Revisited: Cost and Coverage Controls that Work. - Back on July 28th I posted on what I considered to be the most important provision of the original House Tri-Committee Health Care Bill in Sec 116: Golden Bullet or Smoking Gun. Smoking Gun referred to the belief by Republicans that this bill was designed to ultimately transition to Single Payer, and Golden Bullet to my belief that they were right, that if you forced private insurance to give up its predatory business model that ultimately they would abandon less profitable markets just as they did in the heyday of managed care. Over the course of the summer and fall the language of Sec 116 was displaced and minimized in a way that restricted it only to policies issued before the establishment of the Exchanges and so make it almost useless in the bigger picture. But then a near miracle happened at the last minute, the Team of Ten inserted Section 2718 "BRINGING DOWN THE COST OF HEALTH CARE  COVERAGE". MLR Regulation was back, and better the ever. Text from the Manager's Amendment and commentary below.

Why the House-Senate conference should lose the tax on high-value "Cadillac" health insurance - It's widely agreed that health reform's best remaining hope for "bending the cost curve" downward is the proposed 40 percent excise tax on "Cadillac" health plans in the Senate bill that passed early Dec. 24. These Cadillac plans are defined as any health insurance policy valued at more than $8,500 (for an individual) and $23,000 (for a family). A Dec. 22 Washington Post editorial praised the Cadillac tax as "an essential element of the package." A letter to the White House signed by 23 distinguished economists said it is "critical" because it "offers the most promising approach to reducing private-sector health care costs." Even the Center on Budget and Policy Priorities, a nonprofit that focuses relentlessly on how legislation affects low-income people, extended a (qualified) benediction. But the more I learn about the Cadillac tax, the more I'm convinced of its poor design. The tax will, over time, put the brakes on health insurance costs. But it will also put the brakes on health insurance benefits. Meanwhile, it probably won't put sufficient brakes on doctor and hospital bills, which are the chief source of medical inflation.

Why The Supreme Court Should Strike Down Health Care Reform’s Individual Mandate - Barack Obama claims that the individual mandate to purchase health insurance is not a tax. If he is right, he may be dooming a central piece of the health care reform making its way to his desk.Critics of the Obama administration say that the individual mandate—the rule requiring individuals to purchase health insurance or face stiff penalties—is a regressive tax that will hit the middle classes on whom he promised not to raise taxes. Obama says it isn’t a tax at all.But if we accept Obama’s argument that it isn’t a tax, the individual mandate is likely to be unconstitutional. Under current Supreme Court precedents, the government enjoys wide latitude when it comes to exercising its taxing authority. Indeed, there may be nothing left at all of barriers to taxes other than something that could be viewed as a bill of attainder. Any generally applicable tax probably passes constitutional muster.

Let illegal immigrants buy into health plans - Neither the House nor the Senate version would pay for health care for those who are in the country illegally -- although it could be argued that, to the extent they land in emergency rooms without health insurance, everyone ends up footing that bill. The question is whether those who are in the country illegally should be permitted to purchase, entirely with their own money, insurance policies available on the newly created exchanges. The House measure would permit such purchases. The Senate would not -- and the White House has unfortunately come down on the Senate side.  The real solution to the problem of illegal immigration is, of course, comprehensive immigration reform. Until then, millions of people are and are going to remain in the country illegally: The Congressional Budget Office projects there will be about 14 million who are not elderly in 2019. Of those, according to the CBO, almost 60 percent, or 8 million, will be uninsured. If some are willing and able to purchase insurance through the exchanges -- and the CBO estimates that a few million would -- it makes no sense to bar them from doing so.

Fast, cheap, happy health care - So, I’ve had this nagging cough the past couple of weeks. After a while, I realized it wasn’t going away on its own. I called up my doctor, and his assistant said: He can’t see you until after the New Year. So, I scoured the Internet looking for an alternative and stumbled across the Minute Clinic. You’ll find it over behind the potato chips at the CVS. The website said most visits take about 15 minutes. No appointment necessary. Most insurance taken. It even listed the prices. $62 for a minor illness exam. A friendly staffer told me to use the touch screen and enter my information. Literally 30 seconds after I was done, she called me in. She asked some questions, did a few tests and seemed as capable as any medical professional I’ve encountered elsewhere.... suggested an antibiotic regimen and told me I could get the prescription filled there or at another pharmacy. Twelve minutes.

The Coming U.S. Doctor Shortage – BusinessWeek - Presuming Congress passes some version of a health-care bill and it is signed into law, some 30 million currently uninsured people will suddenly find themselves with access to doctors. But there may not be enough doctors to see them. In 1997, lawmakers placed a cap on the number of medical residencies—hospital training required for all doctors—in order to contain costs under Medicare, which pays for most of these training slots. Today the U.S. is in the grip of a nationwide doctor shortage, brought on by an aging population demanding access to specialists. Medical schools have stepped up to the plate, announcing plans to add 3,000 new positions for first-time students by 2018. But because the residency cap is still in place, these efforts may not be sufficient. The health-care overhaul is certain to compound the problem by flooding doctors' offices with newly empowered medical consumers. "Do the math," says Steven M. Safyer, president and CEO of Montefiore Medical Center in New York. "You give millions more people insurance, and it adds up to a much worse shortage."

Dean, Lieberman point to Obama for public option's death - A consistent narrative is emerging from various sides of the health care debate: the White House is largely responsible for the removal of the popular public option from the reform legislation. Two key players in the debate -- Howard Dean and Sen. Joe Lieberman (I-CT) -- have essentially agreed with Sen. Russ Feingold's (D-WI) declaration on Sunday that "the lack of support from the administration made keeping the public option in the bill an uphill struggle." In an MSNBC appearance Monday, Dean reversed his opposition to the Senate bill from last week, but didn't equivocate when asked by host Norah O'Donnell whether "the White House is in part to blame for the death of the public option." "Yes," Dean said, without hesitating.

Leadership, Obama Style, and the Looming Losses in 2010: Pretty Speeches, Compromised Values, and the Quest for the Lowest Common Denominator -  The conventional wisdom from the White House is those "pesky leftists" -- those bloggers and Vermont Governors and Senators who keep wanting real health reform, real financial reform, immigration reform not preceded by a year or two of raids that leave children without parents, and all the other changes we were supposed to believe in.  Somehow the president has managed to turn a base of new and progressive voters he himself energized like no one else could in 2008 into the likely stay-at-home voters of 2010, souring an entire generation of young people to the political process. It isn't hard for them to see that the winners seem to be the same no matter who the voters select.

Understanding Obamacare - The debate in Washington this fall ought to have been about why the United States has the worst health-care system in the developed world, why Americans pay twice the Western average to maintain that system, and what fundamental changes are needed to make the system better serve us. But Democrats rendered those questions academic when they decided the first principle of reform would be, as Barack Obama has so often explained, that “nothing in our plan requires you to change what you have.” This claim reassured not just the people who like their current employment benefits but also the companies that receive some part of the more than $2 trillion Americans spend every year on health care and that can expect to continue receiving their share when the current round of legislation has come to an end. The health-care industry has captured the regulatory process, and it has used that capture to eliminate any real competition, whether from the government, in the form of a single-payer system, or from new and more efficient competitors in the private sector who might have the audacity to offer a better product at a better price.

Axelrod promises to push for drug re-importation after healthcare reform - A senior White House adviser said Sunday that the Obama administration will push forward on safe re-importation of pharmaceutical drugs after the healthcare reform bill is finished.As a candidate in 2008, President Barack Obama promised to allow cheaper drugs to be re-imported into the United States from Canada and other countries. He also co-sponsored legislation that would allow re-importation as an Illinois senator. The Pharmaceutical Research and Manufacturers of America, a key White House ally in the healthcare reform push, has lobbied heavily against re-importation, though, and would likely not support the final bill if it was included in the package.

Overreaching leaves Obama with few friends - Perhaps it is the spirit of the season, but my empathy receptors are in overdrive for poor Barack Obama. All he wanted for Christmas was a health-care reform bill -- and all he got was a lousy insurance industry bailout that few can love. Lefties hate it because there's no public option and no Medicare buy-in for those 55 and over. Righties hate it because requiring that Americans buy private insurance or face penalties means taxpayers will have to hand over more of their hard-earned dollars (assuming they have a job) to the government.  And so things seem to have turned for Obama. Left-leaning Democrats suddenly are wondering: Who is this guy? What happened to the liberal dream-maker who was going to provide health care to every person in the country while hand-feeding grateful polar bears basking on vast expanses of restored sea ice?

Climate Change Affects More Than Polar Bears (PHOTOS) - Since writing a book about the changing Arctic with that image on its cover I've run into a lot of the angry people. The sad bear is just a symbol of liberals who put animals before people: let nature takes its natural course and if that means the bear goes extinct that is just fine. It is nothing to do with us and certainly not worth spending a lot of money to stop. Well, I have a message for all these guys. The Arctic is getting angry too. Climate change may seem as if it is a worry just for the people who want to "save the planet" but really it is about saving our current standard of living. And once you get the Arctic angry it will go for a long, slow revenge. No sudden disasters that can be ended quickly if we all rally to action. The Arctic will go for a thousand years of endless pressure, unstoppable and inevitable, that humans are just hopeless at dealing with collectively: you only have to look at the delay and bickering of Copenhagen after more than a decade of climate negotiations.

Global Warming Hike May Be Steeper: Research - Global temperatures could rise substantially more because of increases in carbon dioxide in the atmosphere than previously thought, according to a new study by US and Chinese scientists released Sunday. The researchers used a long-term model for assessing climate change, confirming a similar British study released this month that said calculations for man-made global warming may be underestimated by between 30 and 50 percent.The new study published online by Nature Geoscience focused on a period three to five million years ago -- the most recent episode of sustained global warming with geography similar to today's, a Yale University statement said.This was in order to look at the Earth's long-term sensitivity to climate fluctuation, including in changes to continental icesheets and vegetation cover on land.More common estimates for climate change are based on relatively rapid feedback to increases in carbon dioxide, such as changes to sea ice and atmospheric water vapour.Using sediment drilled from the ocean floor, the scientists' reconstruction of carbon dioxide concentrations found that "a relatively small rise in CO2 levels was associated with substantial global warming 4.5 million years ago."

Scoop: NIWA says greenhouse gas methane on the rise again - NIWA says greenhouse gas methane on the rise again. The concentration of methane in the atmosphere is rising, according to measurements made by NIWA. NIWA has today released measurements from its globally significant Baring Head station showing that southern hemisphere atmospheric methane increased by 0.7% over the two-year period 2007–08. While this increase may not sound like much, it is about 35 times more than all the methane produced by New Zealand livestock each year.

Primates face extinction by climate change - Monkey species will become ‘increasingly at risk of extinction’ because of global warming, according to new research, published this week. It reveals that populations of monkeys and apes in Africa that depend largely on a diet of leaves may be wiped out by a rise in annual temperatures of two degrees Celsius. Lead author of the paper is Dr Amanda Korstjens from BU’s Conservation Ecology & Environmental Change who carried out the research in collaboration with colleagues from Roehampton and Oxford Universities. They suggest that the species most at risk are the already endangered gorillas and colobine monkeys. Their paper, published online by Animal Behaviour, pinpoints which species are most threatened by climate change in a series of new global maps.

Fewer migratory birds in Dutch woods due to climate change - All insect-eating migratory birds who winter in Africa and breed in the Dutch woods have decreased in numbers since 1984. This has been revealed by research conducted by the University of Groningen, the SOVON Dutch Centre for Field Ornithology, Statistics Netherlands (CBS), Radboud University Nijmegen and Alterra, published on 16 December in the Proceedings of the Royal Society B: Biological Sciences. This decline is dramatic for certain species: nightingales have declined by 37 percent, wood warblers by 73 percent and Ictarine warblers by 85 percent.Due to climate change, spring is starting earlier and earlier in the year. On average, trees are in leaf two weeks earlier than 25 years ago, and the caterpillars who eat the young leaves are also appearing two weeks earlier.

Discontinuous Behavioral Responses  to Recycling Laws and Plastic Water Bottle Deposits - NBER - This article examines the effects of recycling and deposit laws on consumer recycling of plastic water bottles using a nationally representative sample of 2,550 bottled water users. Economic theory predicts individual behavior that gravitates toward extremes—either diligent recycling or no recycling at all. This pattern is borne out in actual recycling behavior. Both water bottle deposits and recycling laws foster recycling behavior through a discontinuous effect that converts reluctant recyclers into diligent recyclers. More stringent recycling laws have a greater effect on recycling rates. The efficacy of these interventions is greatest for those who would not already recycle and especially for those in lower income groups or who do not consider themselves to be environmentalists.

Mammals may be nearly half way toward mass extinction— If the planet is headed for another mass extinction like the previous five, each of which wiped out more than 75 percent of all species on the planet, then North American mammals are one-fifth to one-half the way there, according to a University of California, Berkeley, and Pennsylvania State University analysis. Many scientists warn that the perfect storm of global warming and environmental degradation -- both the result of human activity is leading to a sixth mass extinction equal to the "Big Five" that have occurred over the past 450 million years, the last of which killed off the dinosaurs 68 million years ago.By combining data from three catalogs of mammal diversity in the United States between 30 million years ago and 500 years ago, UC Berkeley and Penn State researchers show that the bulk of mammal extinctions occurred within a few thousand years after the arrival of humans, with losses dropping after that.

Alaska coast erosion threat to oil, wildlife (Reuters) - A portion of Alaska's North Slope coastline is eroding at a rate of up to 45 feet (14 meters) a year, posing a threat to oil operations and wildlife in the area, according to a new report issued by scientists at the University of Colorado.Warmer ocean water has thawed the base of frozen bluffs and destroyed natural ice barriers protecting the coast, causing large earth chunks to fall each summer, the scientists said."What we are seeing now is a triple whammy effect," study co-author Robert Anderson, an associate professor at the University of Colorado's Department of Geological Sciences, said. "Since the summer Arctic sea ice cover continues to decline and Arctic air and sea temperatures continue to rise, we really don't see any prospect for this process ending."The scientists studied coastline midway between Point Barrow, the nation's northernmost spot, and Prudhoe Bay, site of the nation's biggest oil fields. The erosion, if it continues, could ultimately be a problem for energy companies such as Exxon and BP

Technology Review: Global Warming vs. the Next Ice Age - Global warming is an inescapable issue for our age. But 180 years ago, most scientists believed that Earth had been steadily cooling since it was formed. When Louis Agassiz presented the concept of a Great Ice Age to the Swiss Society of Natural Sciences in 1837, his suggestion that the planet had turned colder and then warmed up again was met with skepticism and even hostility, triggering years of fierce scientific debate before the idea was accepted. Exactly why our planet occasionally cools down has taken more than a century to work out. Now we know that cyclic gravitational tugs from Jupiter and Saturn periodically elongate Earth's orbit, and this effect combines from time to time with slow changes in the direction and degree of Earth's tilt that are caused by the gravity of our large moon. Consequently, summer sunlight around the poles is reduced, and high-­latitude regions such as Alaska, northern Canada, and Siberia turn cold enough to preserve snow year-round. This constant snow cover reflects a great deal of sunlight, cooling things down even more, and a new ice age begins.

Scandal Under Our Noses - The cuts in emissions that countries are proposing here are nowhere near good enough to meet even their remarkably weak target of limiting temperature rise to two degrees Celsius. In fact, says the UN in this leaked report, the cuts on offer now produce a rise of at least three degrees, and a CO2 concentration of at least 550 ppm, not the 350 scientists say we need, or even the weak 450 that the U.S. supposedly supports.In other words, this entire conference is an elaborate sham, where the organizers have known all along that they’re heading for a very different world than the one they’re supposedly creating. It’s intellectual dishonesty of a very high order, and with very high consequences.

Talk About a Climate Catastrophe - At stake was the Copenhagen Accord, an interim political agreement cobbled together by Barack Obama via some frenzied diplomacy during his one-day visit Friday. Obama left before the final vote—somewhat ironically to beat a snow storm descending on D.C.—but he sounded confident that the accord would be adopted. Instead, in the wake of his departure, a small group of developing countries, including Sudan and Venezuela, rebelled, decried the process by which the accord was produced, and insisted that they would not allow it to be adopted. Since the UNFCCC process requires unanimity to move forward, Danish Prime Minister Lokke Rasmussen could only look on, bewildered, as country after country restated its position in increasingly emotional terms. At one point, Sudanese official Lumumba Stanislas Dia-ping, chairman of the Group of 77 poor nations, compared the accord to the Holocaust. Then things went downhill. Many hours later, after contentious debate, confusing proposals and counterproposals, and an extended adjournment filled with hushed huddles, the session ended with the somewhat baroque decision that the COP would "take note" of the accord rather than formally adopting it, effectively exempting Sudan and its allies.

Copenhagen chaos sets world on track for 3.5 ˚C - Meanwhile, a team of climate scientists who have been calculating how the pledges to cut emissions translate into temperature rises over the coming century, and were waiting for the final text to update their models, were left baffled. The accord fails to commit any countries to new emissions cuts. An annexe simply lists existing commitments as "information"."We have nothing to calculate," said Michiel Schaeffer of Climate Analytics. "It's as though the last two years have not happened."With no new commitments on the table, and loopholes still wide open, Schaeffer and colleagues find that the world is on track to warm by 3.5 ºC by 2100, and concentrations of carbon dioxide are set to rise to around 700 parts per million – far above the 450 ppm scientists say constitute the limit for keeping global warming below 2 ºC.

Copenhagen climate summit: Five possible scenarios for our future climate - With talks in Copenhagen descending into chaos, the prospects for stabilising temperatures below 'dangerous' levels look increasingly slim. Here are five possible scenarios for our future climate...With a 5C rise, global average temperatures would be hotter than for 50m years. The Arctic region sees temperatures rise much higher than average – up to 20C – meaning the entire Arctic is now ice-free all year round. Most of the tropics, sub-tropics and even lower mid-latitudes are too hot to be inhabitable. The sea level rise is now sufficiently rapid that coastal cities across the world are largely abandoned. Above 6C, there would be a danger of "runaway warming", perhaps spurred by release of oceanic methane hydrates. Could the surface of the Earth become like Venus, entirely uninhabitable? Human population would be drastically reduced.

What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord-The original purpose of the conference had been to complete negotiations on a new international agreement on climate change to come into force when the Kyoto Protocol’s first commitment period comes to an end in 2012.  But for at least the past six months, it had become clear to virtually all participants that such a goal was out of reach — and the COP-15 objective was publically downgraded in mid-November to a non-binding agreement by heads of state at a meeting in Singapore of the Asia-Pacific Economic Conference. I begin by describing what were reasonable expectations going into the Copenhagen negotiations and appropriate definitions of success for COP-15, and then turn to the unprecedented process which unfolded over the final 36 hours of the conference.  Next, I describe the fundamental architecture of the sole product that emerged – the Copenhagen Accord – and describe its key provisions, with an assessment of each component.  I close with an examination of the major pending issues and the available procedural routes ahead.

Dismal outcome at Copenhagen fiasco - FT Editorial - An empty deal would be worse than no deal at all, said the White House before Mr Obama travelled to the Copenhagen summit. As the meeting ended, Barack Obama was calling the Copenhagen accord – the emptiest deal one could imagine, short of a fist fight – an “important breakthrough”. Mr Obama’s credibility at home and abroad is one casualty of this farcical outcome. The agreement cobbled together by the US, China, India, Brazil and South Africa is merely an expression of aims. It recognises the scientific case for keeping the rise in global temperatures to 2°C. It calls on developed countries to provide $100bn a year in support of poor nations’ efforts by 2020, but without saying who pays what to whom. It appears to commit none of the signatories to anything. Many developing countries were bitter about this result. Europe may wonder why it has been airbrushed out of the picture. The meeting as a whole could not bring itself to endorse this vacuous proclamation. It took note of it. One wonders how a conference to conclude two years of detailed negotiations, building on more than a decade of previous talks, could have collapsed into such a shambles. It is as though no preparatory work had been done. Consensus on the most basic issues was lacking. Were countries there to negotiate binding limits on emissions or not? Nobody seemed to know. From the start, the disarray was total.

How do I know China wrecked the Copenhagen deal? I was in the room - Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: China wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful "deal" so western leaders would walk away carrying the blame. How do I know this? Because I was in the room and saw it happen.China's strategy was simple: block the open negotiations for two weeks, and then ensure that the closed-door deal made it look as if the west had failed the world's poor once again. And sure enough, the aid agencies, civil society movements and environmental groups all took the bait. The failure was "the inevitable result of rich countries refusing adequately and fairly to shoulder their overwhelming responsibility", said Christian Aid. "Rich countries have bullied developing nations," fumed Friends of the Earth International.

Pentagon pollution ignored at climate change conference - In evaluating the U.N. Climate Change Conference in Copenhagen -- with more than 15,000 participants from 192 countries, including more than 100 heads of state, as well as 100,000 demonstrators in the streets -- it is important to ask: How is it possible that the worst polluter of carbon dioxide and other toxic emissions on the planet is not a focus of any conference discussion or proposed restrictions? By every measure, the Pentagon is the largest institutional user of petroleum products and energy in general. Yet the Pentagon has a blanket exemption in all international climate agreements.The Pentagon wars in Iraq and Afghanistan; its secret operations in Pakistan; its equipment on more than 1,000 U.S. bases around the world; its 6,000 facilities in the U.S.; all NATO operations; its aircraft carriers, jet aircraft, weapons testing, training and sales will not be counted against U.S. greenhouse gas limits or included in any count.

Underestimating the costs of climate change policy is not helpful - One of the things about blogging is that you never know what posts will be jumped on or how they will be interpreted. This post about the Suzuki-Pembina report is a case in point: both sides of the debate seemed to think that I was offering aid and succor to the cause of the climate change deniers.  The real problem is that there seems to be a systematic tendency to downplay the economic costs of climate change policies This may be part of a communications strategy based on the belief that an honest discussion of the economic costs of climate change policy is something to be avoided. But if Climategate has taught us anything, it is that the power of the environmentalist argument rests entirely on its intellectual integrity.

Rudd leaves Denmark with a rotten deal - The Australian- TO secure a Copenhagen Accord Kevin Rudd sold out Australia's long-term negotiating interests and accepted the full cost of any future climate change agreement. During the Copenhagen conference the Prime Minister claimed "if every country pulls its weight we can secure the agreement which we need in Australia's national interest".But that isn't what the accord delivers. Instead, countries such as Australia offered all their bargaining chips to get China and India to commit to an agreement that obliges them to offer nothing in return.And now that the accord has failed to attract the consensus required for it to be formally adopted as a decision of the conference, the Prime Minister has committed us to a worthless agreement while declaring that Australia is prepared to put all its bargaining chips on the table.

Republicans Thrash Climate Scientists in the Court of Public Opinion -the Washington Post and ABC released the latest in a set of public opinion findings that have not only shown growing skepticism about mainstream climate science in the US, but now, negative views of environmental scientists in general. More specifically, here’s what the new survey found. Forty percent of Americans don’t trust what scientists have to say about the environment; among Republicans, it’s nearly 60 percent. Both numbers are an increase from polling results in the past; and for the public in general, a significant part of the change seems to be coming among political independents. By seizing upon “ClimateGate” and directing concerted fire against the scientists involved, Republican politicians, activists and global warming “skeptics” and denialists have now arguably caused more damage to the scientific community than the Bush administration did.

We're all anarchists now - The 193 governments that met at Copenhagen were unanimous about one proposition. And it’s a remarkable one - that whereas anarchy is a bad idea within national borders, it’s a good idea across borders. If laws could only be reached by the unanimous agreement of all individuals, the rich and powerful would only consent to be bound by them on terms onerous to the poor. The problem of collective action means that people won’t agree to contribute to public goods, preferring that the cost of doing so falls upon someone else. And on top of this is the sheer difficulty of getting lots of people to agree to anything.However, all of these problems were evident at Copenhagen.  Which poses the challenge to the 193 governments: if anarchy is a bad idea at local levels, why is it a good idea at an international one?

My Christmas wish: a not-completely-stupid debate on climate change policy  Here are the ingredients:

  • A recognition that climate change is a real problem that has to be addressed.
  • A recognition that the costs of climate change policy cannot be shuffled off to hate-objects such as oil companies and Albertans. 
  • An honest discussion of what the costs of an effective climate change policy are.

Is that too much?

World must prepare for climate migration, IOM warns - The International Organization for Migration warned on Friday the world must prepare for a mass increase in climate-linked migration as leaders battled to save a deal on global warming in Copenhagen. "Climate change and environmental degradation are already triggering migration or displacement all over the planet," the IOM warned on the critical last day of the Denmark summit, which coincides with International Migrants Day. Right now, "it is the world's poorest countries that are bearing the brunt" of the migration, said the Geneva-based body, calling for leaders to make "greater efforts, beyond Copenhagen," to tackle the complex issue. IOM director general William Lacy Swing said experts still struggle to measure the number of people worldwide who choose to leave or are driven from their homes because of climate change and environmental degradation. But he said the IOM has established beyond doubt that environmental migration "is a growing trend" and that "climate change, demographic trends and globalization all point to more migration in the future."

The Nuclear Industry Will Settle for 25-30 New Plants by 2030 -- To meet the current goals for greenhouse gas emissions, the U.S. would have to build 187 new nuclear plants by 2050, according to former New Jersey Governor Christine Todd Whitman, who now co-chairs the Case Energy Coalition, which advocates increased nuclear power in the U.S.But the industry will settle for 25 to 30 by 2030, she said. That would be enough to meet the expected growth in demand for electricity in the U.S. while keeping nuclear around 20 percent of the mix. The U.S. currently has 104 reactors.Although a commercial reactor hasn't been built in decades here, a new wave of reactors appears to be becoming financially, technically and politically possible, she added. 32 new nuclear plants at 21 sites have already been proposed for the U.S."It can be done. They've done it in the past, building four to five a year," she said. The first new reactor might go up in the U.S. in six to seven years.

Energy scarcity and not peak oil needs global focus - By 2050 there may be 10 billion people demanding energy — a daunting prospect, considering that of today’s 6.2 billion people, nearly 2 billion “don’t even have electricity — never flipped a light switch, says Keith O. Rattie, the CEO of Questar Corporation. Rattie projects the global energy demand will in fact grow 30 to 50 percent over the next 20 years and there are no near-term alternatives to fossil fuels.And this is an interesting conclusion — and cannot be overlooked in the idealism that seems to have got hold of some. The fact is that wind and solar power combined are just one-sixth of 1 percent of American energy consumption. Nuclear? The United States and other rich nations endorse reducing world carbon emissions 80 percent by 2050. But Oliver Morton, a science writer, says that if nuclear is to supply only 10 percent of the necessary carbon-free energy, the world must build more than 50 large nuclear power plants a year. Currently five a year are being built. In fact the issue is where all this energy is going to come from?

US Companies Shut Out As Iraq Auctions Oil Fields - Those who claim that the U.S. invaded Iraq to get control of the country's oil reserves will be left scratching their heads by the results of last weekend's auction of Iraqi oil contracts: Not a single U..S. company secured a deal in the auction of contracts that will shape the Iraqi oil industry for the next couple of decades. Two of the most lucrative of the multi-billion-dollar oil contracts went to two countries which bitterly opposed the U.S. invasion — Russia and China - while even Total Oil of France, which led the charge to deny international approval for the war at the U.N. Security Council in 2003, won a bigger stake than the Americans in the most recent auction.

India Starts a Water Fight - Newsweek - Pakistan is dragging its feet in the fight against the Taliban because it sees the Islamists as a check on its archrival, India, whose influence in Afghanistan is growing. What alarms Pakistan most is the possibility that India will gain control over the water from two Afghan rivers that flow into the volatile Pakistan border regions, where water shortages could inflame local insurgencies. Indian investment in Afghanistan has doubled since 2006, to $1.2 billion, and up to 35 percent of that is going into canals for local irrigation, as well as hydroelectric dams that will supply power to Iran and Turkmenistan, India's gateways to Central Asia and the Gulf.

The financial crisis and Europe’s financial trilemma - VoxEU - Current practice of national crisis resolution is threatening the EU’s single banking market. The financial trilemma suggests that policymakers can only choose two out of the following three objectives: financial stability, financial integration, and national financial policies. This column argues that EU burden-sharing rules among governments can save the single market.

International Economic Update - Dallas Fed - Private Demand Still Weak in the Advanced Economies - While emerging markets enjoyed robust growth in the third quarter, private demand is still lagging in the advanced economies, whose positive growth was mainly due to government spending and net exports. Despite the recovery in oil prices, inflation is expected to remain mild over the next few years. Monetary policy rates are low for now; quantitative-easing measures are expiring in some countries and expanding in others.GDP Growth Third-quarter real GDP was positive in the advanced economies, with the U.K. the notable exception (Table 1). Even in the U.K., growth is expected to turn positive in the fourth quarter, while third-quarter GDP was revised up from an initial estimate of –1.6 percent. Much of the growth we are currently seeing is driven by fiscal and monetary stimulus, with private demand yet to take hold.

Insecure Securities - For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment.  Most of these private securities were sold to oil-exporting countries and Europe, in particular Germany, Britain, the Benelux countries, Switzerland, and Ireland. China and Japan shied away from buying such paper.  As a result, European banks have suffered from massive write-offs on toxic American securities. According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010, with the lion’s share of losses being of US origin.

Société Générale Predicts Global Economic Collapse In Two Years Time - Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.  In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.  "As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report

Bankruptcy and Fiscal Collapse: The Global Economic Crisis will experience a Tipping Point in Spring 2010 - LEAP/E2020 believes that the global systemic crisis will experience a new tipping point from Spring 2010. Indeed, at that time, the public finances of the major Western countries are going to become unmanageable, as it will simultaneously become clear that new support measures for the economy are needed because of the failure of the various stimuli in 2009 (1), and that the size of budget deficits preclude any significant new expenditures.  If this public deficit « slip knot » which governments gladly placed around their necks in 2009, refusing to make the financial system pay for mistakes (2) is going to weigh heavily on all public expenditure, it is going to particularly affect the social security systems of the rich countries in always impoverishing the middle classes and the retired, and setting the poorest adrift (3).

Rich-country debt: Playing Ponzi - The Economist - IN 2009, the G20—a group of the world’s largest economies—edged out the G8 as the pre-eminent forum for tackling the world’s economic ills. Advanced economies, which aggressively stimulated demand and are forecast to experience weak GDP growth next year, contrast starkly with the G20’s developing countries. After some gentle fiscal stimulus, these countries are on track for strong growth next year. The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations. With governments struggling to rein in their finances, rating agencies are becoming increasingly twitchy; rich countries such as America and Britain are fearful of losing their hallowed triple-A status.

Fitch warns that Britain and France risk losing their AAA rating - Telegraph
Highlighting the "unpleasant fiscal arithmetic" facing states across the Old World, Fitch said that none of the "arguably" benchmark AAA states can safely rely on their top rating for much longer. Public debt in both Britain and France will reach 90pc of GDP by 2011, higher than the 80pc (net) level when Japan lost its AAA rating earlier this decade. Japan's error at the time was the failure to set out any serious plan to rein in spending, a lesson that the Europeans need to study closely. "The UK, Spain, and France must articulate credible fiscal consolidation programmes over the coming year, given the budgetary challenges they face in stabilising public debt. Failure to do so will greatly intensify pressure on their sovereign ratings," it said.

London Exodus to Geneva Runs Into Housing, School Shortages  (Bloomberg) -- Geneva, touted as a haven for London bankers facing heavier U.K. taxes, may lure fewer than predicted thanks to a housing shortage, crowded schools and a 44 percent income-tax rate. Barclays Plc President Robert Diamond this month joined a chorus of financial leaders in arguing that the U.K.’s 50 percent tax on bonuses would drive bankers away from London. The Swiss Private Bankers Association said the “arbitrary” tax will boost the allure of Geneva, whose bankers oversee about 10 percent of the world’s foreign-held private wealth. “It’s a joke, it’s lobbying,” said Tim Dawson, an analyst at Geneva-based brokerage Helvea AG. “People are dreaming if they think the London investment banking world is going to move. There is more office space in Canary Wharf than in the whole of Switzerland,” he said, referring to London’s second financial district.

In Ireland's deep budget cuts, an omen for the US? - Like other heavily indebted nations around the world, Ireland is borrowing vast sums from foreign investors to plug its budget deficit. Fearing that the country will buckle under the weight of so much debt, the Irish have an answer: Put the government on a diet.  More than $4 billion in cuts coming into effect after New Year's Day will slash salaries for 400,000 government workers while making painful reductions in benefits for such groups as widows and single mothers to the blind and disabled children. A tax targeting rich Irish nationals living overseas -- dubbed the "Bono Tax" in the Irish press -- will help restock empty coffers at home.  Such drastic steps have put Ireland on the front lines of a global battle against runaway government spending and exploding budget deficits in the wake of the financial crisis. The world's richest nations, according to the Organization for Economic Cooperation and Development, are more indebted than at any time in at least the past 50 years.

In Hungary the Financial Crisis has picked up a Second Wind - At the beginning of this month the Hungarian parliament accepted the government's latest budget through a vote that more or less ran along party lines. In much the same way as the country is politically divided along two main rival camps, so too economists view the budget in either one of two ways: either the latest Hungarian budget is indicative of the government's commitment to reform and has brought the country back from the brink of disaster, or the budget seeks to sink the country further into the mire of recession by making an already bad situation worse. Indubitably, most investors and international institutions are of the former view; most Hungarians, on the other hand, fear the latter to be closer to the truth.

German union warns of 750,000 job losses - Berlin - Germany's biggest industrial union warned Tuesday of the threat to 750,000 jobs in the nation's key engineering sector with Europe's biggest economy facing only a muted recovery from recession. Indeed, a leader of the powerful IG Metall union Detlef Wetzel told the daily Berliner Zeitung that despite the expected modest economic pickup next year between 20 and 30 per cent of the German engineering sector's capacity would not be utilized.  "We see about 750,000 jobs in danger in the short term," Wetzel told the newspaper with IG Metall counting among its 2.4 million members workers employed in several of Germany's major exporters including carmakers such as Daimler AG and Volkswagen AG.

Moody's 'axe blow' to rating on Spanish debts - Telegraph - Spain's media called the move an "axe blow", fearing a domino effect through the country's debt markets. Credit default swaps measuring the risk on Spanish sovereign bonds jumped 10 basis point to 101 yesterday. Moody's downgraded a third of the entire stock of Spanish mortgage bonds or "cedulas" – covered bonds deemed safer than US sub-prime securities – but also made from debt that is sliced into packages. Most were cut from AAA (Aaa) to Aa1. They are largely owned by German or French banks and pension funds. The agency said the Spanish savings banks that issued the bonds are heavily exposed to Spain's property crash. Moody's said it had based its stress test on assumptions of a 45pc fall in house prices.  The scale of yesterday's action is huge, roughly equal to a trillion-dollar downgrade in US terms.

Erste Basel-bothered is Austria - It looks like Austria has one more thing to worry about: The Basel banking reforms. Part of the Committee’s proposals to `purify’ common equity Tier 1 capital for banks involves excluding minority interests from the regulatory measure. This is not a good thing for many banks — but there seems to be a particular consensus forming that this is an especially `not good thing’ for Austria’s banks.An automatic implementation of these proposals suggests the Austrian banks alongside SA and Israeli may be most impacted

Euro 'Diktats’ risk terrorist response across Southern Europe - Telegraph - Greece's Revolutionary Struggle detonated a car bomb at the Athens Stock Exchange in September. Citigroup's branches have been targeted twice this year. In Milan, the Informal Anarchist Federation (FAI) planted 2kg of dynamite last week at Bocconi University, the symbol of the free market in Italy. The FAI left a note threatening a "bloodbath" for capitalists. Security forces have issued alerts for the Milan bourse, Unicredit, and Barclays. Italians have begun to ask whether their country is returning to the 1970s, the "years of lead" when the Red Brigades murdered ex-premier Aldo Moro. The FAI is no friend of Europe either. It sent letter bombs earlier this decade to the heads of the Commission and the European Central Bank and to the European Parliament. In Spain, Barcelona's anarchists have been conducting a low-level campaign against bank cash machines, supermarkets, and firms such as Manpower. Valencia and Galicia have seen a wave of attacks. "Activities by left-wing and anarchist terrorists and extremists are increasing in quantity and geographical spread in the EU," said Europol.

Russia Cuts Interest Rates For 10th Time This Year - Russia’s central bank Friday unveiled its 10th interest rate cut of the year, with economists expecting more gradual trims in the coming months as policymakers try to stimulate the country’s blighted economy.The central bank said it is reducing its benchmark refinancing rate to 8.75 percent effective from Monday, from 9 percent. The minimum one-day repo rate will be cut to 6 percent from 6.25 percent. “The decision to cut rates is expected to soften the factors restraining economic revival and will secure the stability of the growing trend” of gross domestic product,” the regulator said in a statement. The Russian economy shrank by 10 percent in the first half of the year in the country’s worst recession in a decade.

It Keeps Going and Going... Like the infamous Energizer Bunny, the marketing icon and mascot of Energizer batteries in North America, efforts to create new barriers to cross-border commerce keep going and going. That is despite warnings by experts about the risk of a tit-for-tat trade war, the lessons of history, and repeated claims by government officials worldwide that they are adamantly opposed to protectionism. In "US Lawmakers Push Tough New 'Buy American' Bill," Agence France-Presse details the latest such push -- right here in the old US of A:

US vs China: Watch the power game play out - Dr. Marc Faber - And so I believe that to get out of this mess, they will monetise and they will have all kind of stimulus packages and they will lead to high inflation and the standards of living of the typical household will go down and it will enrich a few people the elite essentially on Wall Street. But then to distract the attention, the US will escalate its war efforts and then all thing will collapse. But, you know, it can be in ten years time, could be in five years time, could be in three years time, could be 12 years time, who knows but that is essentially my long term very negative view.

China banks need $73bn capital in 2010: Regulator - Chinese banks may need to raise about 500 billion yuan (USD 73 billion) from the capital markets next year as rapidly expanding loans weaken their financial strength, a senior banking regulator said, marking the first official estimate of banks' near-term fund-raising. China's new loans surged to record levels in the first half of this year and, despite an easing in the second half, are likely to remain relatively high by historical standards next year at 7.5 trillion yuan, according to a Reuters poll of 20 analysts. The massive lending, aimed at sustaining China's economic growth, would cut banks' capital adequacy ratios, a key measure of their ability to absorb losses.

Social unrest ‘on the rise’ in China - BBC - The country is grappling with more acute social problems than ever before, according to a report from the Chinese Academy of Social Sciences. Crime is also up, despite a nationwide campaign to shore up social stability. Although continued economic growth has provided a greater number of jobs, China has seen more social conflict in 2009 than before.  The report on China's social trends sounds a stark warning to policy makers.  The authors believe deep resentment has been accumulating over the past few decades against unfairness and power abuses by government officials at various levels.

Repression in China - What is involved in advocating for "legality" and "individual rights" for China's future? Most basically, rights have to do with protection against repression and violence. These include freedom of association, freedom of action, freedom of expression, freedom of thought, and the right to security of property.  History makes it clear that these rights are actually fundamental to a decent society -- and that this is true for China's future as well. Moreover, each of these rights is a reply to the threat of violence and coercion.

China Raises GDP Estimates, Closing in on Japan as Second-Biggest Economy - (Bloomberg) -- China raised its 2008 growth estimate to 9.6 percent from 9 percent and said this year’s quarterly figures will increase, narrowing the gap with Japan, the world’s second-biggest economy. Gross domestic product was 31.405 trillion yuan ($4.6 trillion) last year, the statistics bureau said at a briefing in Beijing today. That compares with a previous 30.067 trillion yuan and the World Bank’s estimate of $4.9 trillion for Japan.  China’s expansion will be more than 8 percent in 2009, according to government officials, and the nation is poised to overtake Japan next year, International Monetary Fund projections show.

China’s Looming Demographic Problem Moves Steadily Up Over The Radar - As the Economist point out, the impact of so many years of one child per family policy is going to be significant, and while changing it now will be too late to avoid short term damage, in the longer term such a change is essential, if the country ever wants to return to some kind of structural stability. SINCE the 1970s China’s birth rate has plummeted while the number of elderly people has risen only gradually. As a result its “dependency ratio”—the proportion of dependents to people at work—is low. This has helped to fuel China’s prodigious growth. But this “demographic dividend” will peak in 2010. China’s one-child policy will keep birth rates low, but as life expectancy continues to increase, so will the dependency ratio, reducing the country’s potential for growth. The government could yet salvage the situation by loosening its one-child policy. More children would increase the dependency ratio until they were old enough to join the workforce, but reduce labour shortages in the long term.

China’s Export of Labor Faces Growing Scorn - Series - NYTimes China, famous for its export of cheap goods, is increasingly known for shipping out cheap labor. These global migrants often work in factories or on Chinese-run construction and engineering projects, though the range of jobs is astonishing: from planting flowers in the Netherlands to doing secretarial tasks in Singapore to herding cows in Mongolia — even delivering newspapers in the Middle East.  But a backlash against them has grown. Across Asia and Africa, episodes of protest and violence against Chinese workers have flared. Vietnam and India are among the nations that have moved to impose new labor rules for foreign companies and restrict the number of Chinese workers allowed to enter, straining relations with Beijing.

Change the bathwater, keep the baby -  Atlanta Fed - What have we learned from the experience of the last two years? The Wall Street Journal offers up one discouraging conclusion: "For much of the past century, America has served as the global model for the power of free markets to generate prosperity…"In the 2000s, though, the U.S. quickly went from being the beacon of capitalism to a showcase for some of its flaws… "But one thing is certain: America's success or failure over the next decade will go a long way toward defining what the world's next economic model will be." One of the article's implied alternatives for the world's next economic model seems a bit of a stretch: "The troubles in the U.S. stand in sharp contrast to the relative success of other countries, notably China. With a system that is at best quasi-capitalist, China's economic output per person grew an inflation-adjusted 141% over the decade, and hardly paused for the global crisis, according to estimates from the International Monetary Fund. That compares with 9% growth in the U.S. over the same period."

The Great Leap - What's happening in China is at once awe-inspiring and monstrous. Its mixture of planning and markets, autocracy and federalism, competence and corruption both supports and refutes every argument one could make about models of political economy. There is a risk, after two weeks in a country of 1.3 billion people, of falling prey to false certainties: like a traveler airlifted onto the top of Mt. Kilimanjaro who returns home to tell everyone that Africa is covered in snow. We did, however, have an opportunity to speak with dozens of members of the Chinese elite: officials, academics and businessmen. And China happens to be a country where the elites hold tremendous power. Indeed, they seem to have seamlessly melded Leninist vanguardism with American-style best-and-brightest meritocracy

The Next Wave Of Chinese Binge Commodity Buying Begins - China is set, yet again, to start trading dollars for hard assets en masse. This is despite claims that the country already has too much in the way of hard assets. That's how commited they are to this diversification (after all, it's not like there are any other paper currencies to move into.  from the Telegraph UK: On Wednesday, traders claimed the Chinese Ministry of Commerce recently said that the country should increase its imports of commodities for its strategic reserves at an "appropriate" time. Dealers took this as a hint that the country could start buying in the New Year.  According to brokers, the reserve targets are said to be 1m tons of aluminium, 400,000 tons of copper, 400,000 tons of zinc, and 20,000 tons of nickel, as well as the equivalent of 90 days' oil consumption .

China to become world's second largest power producer- China's electricity generation capacity will increase to 860 million kilowatts at the end of this year, the second largest after the US, an official said on Friday. The nation's power grids coverage has become the world's largest with fast expansion of ultra-high voltage network, Xinhua reported. New energy, such as nuclear and wind power, played an increasingly important role, Zhang Guobao, head of the National Administration of Energy, said at a national-level meeting organised by the China Electricity Council. The government has pledged to increase the capacity of new energy like nuclear and wind power to 15 per cent of the total energy production in the country by 2020.

China’s Excess-Capacity Nightmare - Back in 1958, the year of China’s ill-fated “Great Leap Forward,” Chairman Mao had big plans for the steel industry. While production had been just over five million tons in 1957, he expected the country to catch up with or even surpass the United States by 1962, producing 80-100 million tons per year, and to reach 700 million tons per year by the mid-1970’s, making China the undisputed world leader. All this was to be accomplished using small “backyard steel furnaces” operated by ordinary people with no particular technical expertise. Today, Mao’s dream of catching up with the rest of the world has been realized, albeit a bit behind schedule, not only in steel making, where annual capacity has reached 660 million tons, but in many other sectors as well. In 2008, China ranked first in steel (about half of world production), cement (also about half), aluminum (about 40%), and glass (31%), to take just a few examples. The country topped the US in auto production in 2009, and remains second only to South Korea in shipbuilding, with 36% of global capacity.

China’s Guy Lafleur Problem: Got ‘Em, Got ‘Em, Got ‘Em, Got ‘Em -  I got to thinking about Guy Lafleur, excess hockey cards and trade this morning in reading a piece about China’s excess capacity problems. Check this excerpt:Based on the NDRC’s figures, [China’s] 2008 capacity utilization rates were just 76% for steel, 75% for cement, 73% for aluminum, 88% for flat glass, 40% for methanol, and 20% for poly-crystalline silicon (a key raw material for solar cells). The current project pipeline also implies less than 50% utilization for wind-power equipment manufacturers in 2010. …The problem is that much of the so-called “blind” and “redundant” investment that Beijing would like to eliminate has the strong support of local governments, whose primary concern is with generating GDP growth in their jurisdictions, regardless of whether the means of achieving it make any economic sense.

Don't Overlook India's Consumer Market For China's - Urban consumers in India will likely drive more global business than their Chinese counterparts while India's rural development far outpaces China's - The problem is that while China is building wonderful infrastructure, its top-down state-led model of development (not to mention the artificial suppression of the yuan) structurally impairs domestic spending. For example, according to China expert Minxin Pei, because three-quarters of the country's capital is reserved solely for the 120,000-odd state-controlled entities and tens of thousands of their subsidiaries, 40 to 50 million privately owned businesses are left to fight for the scraps. This means that a relatively small number of well-connected insiders and their associates benefit. Business profits tend to bulk up state coffers rather than the pockets of the vast majority of Chinese. Wage and income growth, even for China's urban residents, have measured around half the level of GDP growth over the past 15 years.

On the Effects of Chinese Inflation - Bloomberg has a great piece up about Andy Xie, former Morgan Stanley economist who posits that China will head into inflation because of their monetary and fiscal policies.  If true, it is my opinion that a bursting of a China Bubble will decrease demand across the world.  The world depends on a China with increasing demands for all kinds of raw goods. My view is that China is stretching itself too far economically.  The powers that be chose too fast of a growth path, and inflationary consequences will come, and spread to assets in China, as well as Western nations. In the long run, there is no free lunch.  No country can permanently force the rest of the world to do their bidding, whether that is buying up debt, or buying goods or services.  Eventually the terms of trade change, and either value is delivered, or trade collapses after a default. Be aware.  The global economy could shift down dramatically if China has to slow down its economy because if inflation

Govt fights to reel in real estate prices - China vowed on Friday to build 1.8 million low-rent homes and 1.3 million low-priced houses next year in a bid to curb rocketing house prices. Beijing will also tighten land purchase rules to prevent hoarding, which also drives up the price of real estate. "The property price surge this year is mainly due to too much speculative buying and inadequate construction of homes for low-income families," Jiang Weixin, minister of housing and urban-rural development, said during a work conference in Beijing. Five ministries, including the Ministry of Finance and the central bank, announced on Thursday a new policy that sets the down-payment requirement for land purchases at 50 percent of the total price. In addition, property developers must make a full payment for land purchased from the government within one year of the sale agreement. Developers will not be allowed to buy additional land if they fail to meet the requirement.

Japan Plans $11 Billion In New Stimulus Spending - WSJ -Japan's finance minister unveiled a plan Tuesday to earmark 1 trillion yen ($10.97 billion) in the national budget for the fiscal year beginning in April to rejuvenate jobs growth, support local economies and help small businesses. The move demonstrates how the government, faced with falling public approval and increasingly entrenched deflation, is trying to spur growth ahead of an upper-house election next year. One of the key architects of economic policy, Deputy Prime Minister Naoto Kan, said the government's economic team will finalize the stimulus plan by the end of Wednesday.

Japan unveils record $1 trillion budget- TOKYO: Japan unveiled a record 92.29 trillion yen ($1 trillion) budget on Friday for the next fiscal year, reflecting the prime minister's campaignpledge to boost spending for child support and slash wasteful outlay for public works. The budget for the year starting in April 2010 came as Japan's economy, the world's second-largest struggled to shake off its worst recession since World War II amid deflation. ``This budget is to protect lives. I made all my efforts to secure budgets to support child-rearing, employment, the environment and welfare,'' Prime Minister Yukio Hatoyama told a news conference after his Cabinet approved the budget. Spending on social welfare, which includes expenditures of monthly child allowances one of Hatoyama's key election promises will jump by 10 percent from the initial budget of the current fiscal year to 27.3 trillion yen, a Finance Ministry official said.

Debt level enters danger zone - FAMILIES have plunged dangerously into the red - for the first time owing more in household debt than the entire economy earns in a year. The record credit binge – fuelled largely by the first-home buyer's grant – means every adult, on average, owes more than $74,000. The extraordinary rise in debt means we now owe more per person than the US, the one-time credit capital of the world where household debt stands at just under $50,000 per person. Reserve Bank figures show personal debt now equates to 100.4 per cent of Australia's annual GDP, one of the highest ratios in the developed world.

Majority In Asia Pacific To Keep On Enjoying The Good Life Through 2010 - Eat, drink and be merry -- and join the majority of people in the Middle East, Africa and Asia Pacific who intend to keep on enjoying the good life in the coming year. Dining and entertainment were the top areas most of the people surveyed across the Asia Pacific and the Middle East said they were going to keep spending on over the next six months -- regardless of the global economic climate. It was also as one of the top three spending priorities for Africa respondents, according to a MasterCard survey that canvassed 24 markets spanning these regions. The survey showed 16 markets out of the total ranked having fun and a meal out as their top discretionary, or non-essential, spending priority, a figure that includes many Australians, Chinese, Indians, Thais and Egyptians.

The globalization of “extend and pretend” - It seems the entire world is just biding its time, waiting and hoping that asset values return to the lofty heights achieved a few years back and that people resume their mid-decade spendthrift ways. If you wait long enough, it just might work, though that theory will surely be put to a stern test in Dubai. Based on this Reuters story it looks like that's the plan.

3 comments:

Dusty said...

Aren't the MBS's the toxic ones?

I think I am more depressed than when I starting reading this post. Thanks! ;)

rjs said...

while i link to stories from MSM, the financial and econ bloggers cut thru the happy pablum that they feed us and tell the real story...obviously the MBS, being backed by underwater mortages, arent worth the paper they're printed on, but the real toxicity is in the credit default swaps on them, often in large multiples of the debt itself...if you really want to be depressed, catch "the formula that killed wall street" and the derivatives bubble links on the sidebar, to get a sense of the real fix theyve got us in...

TomCat said...

Happy New Year to RJ and all here.