Federal Reserve earned $45 billion in 2009 - Wall Street firms aren't the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government. The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury. The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy -- though there remains a risk of significant losses in the future if the Fed sells some of its investments or loses money on its stakes in bailed-out firms.
The Fed’s earnings - Neil Irwin has worked out that the Federal Reserve earned $45 billion in 2009, thanks to the steep yield curve that it engineered and its move into higher-risk, higher return securities. This is good news: all that money is being dividended back to the public fisc, keeping the deficit that little bit lower. Essentially all that $45 billion was earned by one profit center, the New York Fed: the rest of the Federal Reserve system is basically cost centers. Now if the New York Fed was a commercial investment bank, it would pay half of that money out in bonuses. Let’s be conservative and call it $21 billion. The New York Fed has 3,000 employees, which means that the bonus pool would work out at $7 million per employee: a full order of magnitude greater than the equivalent number at Goldman Sachs. Of course, making money is much easier when you can print the stuff.
Time For An Audit...Or Some Competition - At first I thought a recent Washington Post article regarding 'earnings' at the Federal Reserve was a joke. But it appeared in the business section, and there weren't any "gotcha!" retractions the next day, so I assume it was meant to be serious. First of all, the word 'earnings' implies that value was created and/or something was at risk. Neither applies to the Fed. Let's review the process by which they 'earned' money in 2009. We'll simplify this by examining just one of their activities, the purchase of Treasury debt.
- Step 1: Using keystrokes, create $300 billion out of thin air.
- Step 2: Buy Treasury notes and bonds with the $300 billion.
- Step 3: Collect interest from the US government on those notes and bonds.
- Step 4: Report record 'earnings.'
- Step 5: Wash, rinse, repeat.
Fat Fed Profits Do Not Create a Healthy Economy - 1) Inflate the size of my balance sheet by 2.5x over last year, all through borrowing at really low rates.2) Increase my interest spreads by ~50% over last year. means:3) I only increased my profits by ~50% over last year??! I would have thought that profits would have more than tripled. Such is life for the Fed. The crisis was a time that led me to write pieces like The Liquidity Monopoly, where the Fed, FDIC, and Treasury played favorites in the economy, and starved the portions of the economy not dominated by large firms, particularly with banks and autos. My main point is that the Fed should have earned a lot more. Where did it all go? It will be interesting to see a detailed rendering of the Fed’s finances when this is done. Did they realize losses on some of the assets that they bought?
What Caused the Fed’s Record $45 Billion in Earnings for 2009? – Thoma -The Federal Reserve system is supposed to be independent from Congress for the most part, and in order to prevent Congress from using the power of the purse to influence monetary policy and other decisions, the Fed is allowed to fund itself from its monetary policy actions. How does it do this? When the Fed changes the money supply, it does so by buying and selling government bonds or other financial assets. For example, when the Fed buys a bond, it gives newly created money to the owner of the bond to pay for it. That increases the amount of money in the hands of the public and increases the quantity of bonds held by the Fed.The bonds that the Fed purchases earn money for the Fed in three ways. First, the Fed receives the scheduled interest payments on the bonds. Second, the Fed realizes capital gains and losses on the bonds it holds. Third, if bonds reach maturity while the Fed is holding them, it receives the repayment of the principal along with the interest that is due.
In 2009, the Federal Reserve Bought 80% of U.S. Debt?! - Via: Pimco: Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009. Now, however, the Fed tells us that they’re “fed up,” or that they think the economy is strong enough for them to gracefully “exit,” or that they’re confident that private investors are capable of absorbing the balance. Not likely.
The Ultimate Shell Game: The Federal Reserve Funds 91% Of 2009 U.S. Deficit - In the current hodge podge of abstract finance, it is easy to get lost in the numbers and lose sight of the forest for the trees. Which is why we provide the ultimate simplification: In calendar (not fiscal) 2009, the US grew its budget deficit by $1.47 trillion. In the same time, the Federal Reserve grew its securities holdings from $500 billion to $1.85 trillion, a $1.34 trillion increase. Keeping it simple: 91% of the budget deficit increase in 2009, under the authority of President Obama, was funded by the... United States.
The end of free money - "The next thing now, then, is how are we going to normalize rates. We are at emergency levels, but we are no longer in an emergency situation. So it's a question now of timing and magnitude."At present, federal fund futures -- which provides a gauge of market expectations for U.S. Federal Reserve interest rates -- are pricing in a policy rate of 0.90% by the end of 2010, up from its current target range of 0% to 0.25%. That means markets are expecting roughly 75 basis points to nearly a full percentage point in interest rate hikes. A similar instrument in Canada pegs the Bank of Canada's overnight rate to rise 100 basis points, to 1.25%, in the same timeframe.
Fed officials say need firm recovery before hike - Two top Federal Reserve policy-makers said on Wednesday that the U.S. central bank will need to be certain the economic recovery is firmly in place before tightening its monetary policy stance. New York Federal Reserve Bank President William Dudley and Chicago Federal Reserve Bank President Charles Evans said continued credit problems and a high rate of unemployment are constraints on the U.S. economic recovery.."I think that we are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens, then it's unlikely that we would be changing policy," Chicago Federal Reserve Bank President Charles Evans told reporters
Fed’s Dudley Says Rates May Stay Low for as Long as Two Years (Bloomberg) New York Federal Reserve Bank President William Dudley said short-term interest rates may remain low for at least six months and possibly for as long as two years. “Short-term rates are going to stay low for a considerable period of time to come,” Dudley said yesterday, according to the transcript of an interview with PBS Television’s Nightly Business Report. The policy of keeping borrowing costs low could remain in place “at least six months,” Dudley said. “It could be a year from now, two years from now. It’s going to depend on how the economy develops.”
Balance sheet ties Fed's hands, forecaster says - The Federal Reserve's bloated balance sheet could become a big liability in coming years if inflationary pressures explode, a top forecaster warns. "They've created a monster that they don't fully appreciate," said Ray Stone, chief economist at Stone & McCarthy Research and the winner of the December Forecaster of the Month award from MarketWatch. "They have a portfolio management problem." The Fed has taken on more than $1 trillion in assets -- mostly mortgage-backed securities -- as it's struggled to keep the financial system operating. The Fed's balance sheet has grown to $2.2 trillion from about $900 billion before the financial crisis.
Lessons of 1937 - Bruce Bartlett reminds us that the "Great Depression" was actually two recessions, from 1929-33, followed by a recovery and then a second recession in 1937. This second recesssion was attributable to a tightening of monetary and fiscal policy. While Bartlett believes the mistake is unlikely to be repeated, there are some "hawkish" rumblings coming from parts of the Fed. I discussed a similar argument from CEA chair Christina Romer in a post last June. The lessons of 1937 were also the subject of a recent Paul Krugman column.
It’s Not About Interest Rates Yet - Fed Watch - Incoming data continue to support expectations that the Federal Reserve will hold rates at rock bottom levels for the foreseeable future - likely into 2011. But interest rates should not be the focus of policy analysts. The Fed will manipulate policy via the balance sheet long before they fall back to the interest rate tool. The question is whether or not the slow growth environment is sufficient to persuade the Fed to hold the balance sheet steady or even expand the balance sheet beyond current expectations. And there always remains the third option, favored by a minority of policymakers - withdraw the stimulus now that growth has reemerged. At this point, I suspect the Fed will stick with the hold steady option.
Fed’s Bullard Says Asset-Purchase Adjustments Main Policy Issue (Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said the main challenge for U.S. policy makers will be to adjust the asset-purchase program so as to continue supporting economic growth without stoking inflation. The Fed should retain flexibility by adopting a “state- contingent” policy that would allow for the adjustment of such purchases as new information becomes available, Bullard, who votes on monetary policy decisions this year, said today in prepared remarks for a speech in Shanghai. He said it was “disappointing” that markets focus more on interest rates instead of the Fed’s quantitative monetary policy. U.S. central bankers switched last year to asset purchases and credit programs as the primary tools for monetary policy, including buying mortgages and government securities to reduce borrowing costs and stimulate growth. The Fed has expanded its balance sheet to $2.24 trillion at the end of 2009 from $858 billion at the start of 2007.
Fed's Lacker favors asset sales as path to exit (Reuters) - Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, said on Friday he favored selling some of the assets on the central bank's balance sheet as a way to withdraw stimulus when the time comes."I thought asset sales made sense to look at first," he said, reiterating comments made previously.His view points to a divergence of views on the matter within the central bank. Other top Fed officials, like Janet Yellen of the San Francisco Fed, have indicated they favor raising the interest rate the central bank pays on bank reserves
Fed's balance sheet liabilities hit record (Reuters) - The U.S. Federal Reserve's balance sheet rose to a record level in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed. The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.274 trillion in the week ended January 13 from 2.216 trillion in the prior week.
Fed’s Rosengren on mortgage rates - Boston Fed chief Eric Rosengren thinks mortgage rates will rise by 50 to 75 basis points in the spring as the Fed stops buying MBS.That puts him on the high side of the internal Fed debate - various committee members see the likely impact in the 25 to 75 basis point range.I suspect Bernanke - who has talked about the impact of MBS purchases in stock rather than flow terms - favours the low end of that range.But all committee members agree they have little visibility ex ante so they will wait and see how it pans out. That suggests they will be very unlikely to make big adjustments to rate guidance until they can see where the dust settles in the mortgage market.
When independence begets accountability - Atlanta Fed blog - Today's online edition of the Wall Street Journal sums up the state of political play in the realm of monetary policy and central banking: "Politicians are taking bolder actions to influence monetary policy, signaling that the global financial crisis may end up reining in the independence of many central banks… By pure coincidence, Dennis Lockhart, president of the Atlanta Fed, offered his thoughts on these exact developments in a speech today before the Atlanta Rotary Club:"I'm referring to the 'audit the Fed' amendments that were passed in the House and introduced in the Senate. The audits would be performed by the Government Accountability Office (GAO)… The Fed has no argument with audits in the conventional meaning of the term. We're already subject to many audits by the GAO and external auditors. The Journal article notes the consensus of students and practitioners of monetary policy… … a view on which President Lockhart elaborates…
Fed's Fisher:'Many Roadblocks' to Getting Econ to Full Steam - Dallas Federal Reserve Bank President Richard Fisher said the U.S. economy faces "many roadblocks" to full recovery, as well as two "obstacles" to removing those roadblocks. Those obstacles are the nation's "fiscal predicament" and congressional threats to "politicize" the Fed, said Fisher, who warned that the latter could lead the United States down a road to "ruin." He warned that if Congress takes away the Fed's independence, it will inevitably lead to inflationary policies of the likes of Weimar Germany or Argentina. Contrary to Fed Chairman Ben Bernanke's recent assertions that past monetary policy had little to do with the financial crisis, Fisher said the Fed had contributed to the crisis by keeping interest rates "too low, too long." But he said that does not justify subordinating policy to more congressional control.
Endorsement and steerage for Basel package - FT - The Central Bank Governors and Heads of Supervision yesterday welcomed progress made by the Basel Committee on Banking supervision, suggesting five areas of particular focus for the banking standards expected by the end of this year.The Group of Central Bank Governors and Heads of Supervision (”the Group”) is the oversight body of the Basel Committee on Banking Supervision and comprises the same member jurisdictions. The Group welcomed the dual approach of the Committee’s December proposals : a micro focus on the level and quality of capital and liquidity standards, and a macro focus on systemic risk and procyclicality.
The letter and the spirit of monetary policy -If there was one major disappointment with Bernanke’s speech at the AEA meetings last weekend it was his choice to fight insular battles will equally insular arguments. Part of the reason was tactics of course. Inane criticisms arguably deserve a commensurate response. But it’s also a big letdown for an audience that longed for much more substance than the difference between the consumer price index and its PCE counterpart. Indeed, the very fact that different inflation metrics often send divergent signals about the “right” path for interest rates highlights the weakness of a monetary policy framework narrowly fixated with product price inflation and/or output gaps—a fixation the Fed still seems to possess. The second big letdown was the sly arguments Ben offered to absolve the Fed from causing the house bubble.
Inflation Targets and Financial Crises, by Andy Harless: There are basically four ways to deal with the possibility of severe financial crises. First, you can just cross your fingers, hope such crises don’t happen very often, and live with the consequences when they do. Second, you can publicly insure and regulate your economy heavily in an attempt to minimize the risk and severity of such crises. Third, you can have your central bank monitor the fragility of general financial conditions and “take away the punch bowl” when it thinks conditions are in danger of becoming too fragile. Fourth, you can have your central bank target an inflation rate that is high enough to give it a lot of room to respond to a crisis (or an incipient crisis) by cutting interest rates far below the inflation rate.
Against a separate resolution fund - VoxEU - There are calls to establish a separate resolution fund to deal with future financial crises. This column says such a fund is not desirable. It likely would be procyclical, counterproductive, and give a false sense of safety. Rather, governments should levy Pigouvian taxes on the financial system to address negative externalities.
Taylor: The Fed and the Crisis: A Reply to Chairman Ben Bernanke - WSJ - Many have expressed the view that monetary policy was too easy during this period. They include editorials in this newspaper, former Fed policy makers, and academics. But Mr. Bernanke focused most of his time on my research, especially on a well-known policy benchmark commonly known as the Taylor rule. This rule calls for central banks to increase interest rates by a certain amount when price inflation rises and to decrease interest rates by a certain amount when the economy goes into a recession. My critique, which I presented at the annual Jackson Hole conference for central bankers in the summer of 2007, is based on the simple observation that the Fed's target for the federal-funds interest rate was well below what the Taylor rule would call for in 2002-2005. By this measure the interest rate was too low for too long, reducing borrowing costs and accelerating the housing boom. The deviation from the Taylor rule was the largest since the turbulent 1970s.
John Taylor Rips Apart Bernanke Claim That Fed Policy Did Not Cause Bubble - A must read op-ed from John Taylor, the Stanford professor best known as the inventor of the famous Taylor Rule, rips apart Bernanke's recent defense of Fed policies in the 2002-2005 period, which claimed that the Fed was not responsible for the housing bubble. Bernanke, who pushed the blame for the bubble on indefinite interpretations of the implications of the Taylor Rule, and whose chairmanship of the Fed will be lost should he not be formally reconfirmed by the end of January, loses ever more credibility when considering Taylor's response that the Chairman "said that international evidence does not show a statistically significant relationship between policy deviations from the Taylor rule and housing booms. But his speech does not mention that research at the Organization for Economic Cooperation and Development in March 2008 did find a statistically significant relationship." Furthermore, Taylor blasts Bernanke's catch-all solution that new regulation will prevent such bubble in the future: "it is wishful thinking that some new and untried macro-prudential systemic risk regulation will prevent bubbles."
FT.com - Ben Bernanke has learnt so little - In his first speech of the year, Ben Bernanke commends policymakers (including himself) for their “forceful responses...that have] avoided an utter collapse of the global financial system.” However, Mr Bernanke isn’t taking any responsibility for taking us to that brink. The prolonged period of low interest rates after the technology bust, he maintains, was justified because the recovery was weak and there was a risk of deflation.Did ultra-low rates have the unintended consequence of inflating a housing bubble? Absolutely not, says Mr Bernanke. Given quiescent inflation, interest rates weren’t inappropriate. Besides, house prices started to take off in the late 1990s before the easy money era. The Fed chief cites a recent paper by his own staffers that reports “only a small portion of the increase in house prices earlier this decade can be attributed to the stance of US monetary policy”. The Fed researchers arrive at this institutionally comforting conclusion by using the same econometric models that failed to identify any connection between low rates and the incipient housing bubble at the time. These models have grandiose names, such as “vector autoregression” and “dynamic stochastic general equilibrium”, and employ complex statistical formulae that are beyond the comprehension of laymen. The fact these models were of no use in forecasting the financial crisis is conveniently overlooked.
More on Bernanke's AEA Speech - Here are more responses to Bernanke's AEA speech where he defended the Fed's low interest rate policies in the early-to-mid 2000s. These responses are consistent with my own thoughts on Bernanke's speech. Finally, it is worth noting that Brad DeLong acknowledges that the federal funds rate may have been too low at the time. However, he has a hard time seeing how the low interest rates could have been an important contributor to the housing boom.
(1) John Taylor in the WSJ
(2) John Taylor on Economics One
(3) David Papell at Econbrowser
(4) John Hilsenrath at WSJ [update: video]
(4) Mark Thoma & Vernon Smith on Economist's View
(5) Josh Hendrickson at Everyday Economist
Bernanke Challenged on Rates' Role in Bust - WSJ - Federal Reserve Chairman Ben Bernanke says low interest rates engineered by the Fed in the early 2000s aren't to blame for the housing boom and bust. But he hasn't convinced fellow economists. Two surveys conducted by The Wall Street Journal this week found many economists believe low rates did contribute to the bubble.In a monthly survey of mainly Wall Street and other business economists, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke and said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't.
How Do You Get More Vulnerable to Economic Collapse Than the Great Depression? - In September of 2008 Federal Reserve Board Chairman Ben Bernanke ran to Congress telling them that if they did not immediately approve $700 billion for the TARP that the economy would completely collapse. According to the NYT, he told Congress yesterday that: "stripping the Fed of its powers would leave the financial system more vulnerable to collapse." The NYT should have pointed out how bizarre Mr. Bernanke's assertion is in the wake of his previous claims that, under his guidance as Fed chairman, the economy had been brought to the brink of total collapse. In effect, Bernanke is claiming that the economy would have performed even worse than having been brought to the brink of complete collapse with an alternative regulatory structure.
Obama, Bernanke Need Miracles to Weather 2010: Caroline Baum -(Bloomberg) -- If 2009 was a year for massive government intervention in the private economy and a full-court press on health-care reform, 2010 will be a time for weaning the nation from life support and evaluating what worked and what didn’t, and hopefully doing less of the second. Specifically, it will be a time to test the validity of certain economic principles, such as the notion that government needs to spend money to save money. Already the Obama administration has been embarrassed, by shoddy data and sheer hubris, into rejiggering its measure of “jobs created or saved” as a result of the $787 billion fiscal stimulus. Now it’s even mushier. All jobs funded by the American Reinvestment and Recovery Act will be counted, even if they predated the cash infusion. Here are some other areas that bear watching.
Volcker: Fed Must Retain Bank Supervisor Role - In particular, Volcker, a highly influential former Fed chairman, said the Fed needs to retain its current bank supervisory role, taking issue with legislative proposals to strip it of those powers. Speaking at a luncheon sponsored by the Economic Club of New York, Volcker said the Fed “needs both the ability to identify” problems in the financial sector “and the instruments to deal with them.” “In acting as lender of last resort, it must know its counterparties and know them well,”
Bernanke Gets Desperate (Fed Letter) - Bernanke gets desperate, pens letter to Dodd & Shelby acknowledging 'shortcomings in oversight', while begging for a continued seat at the regulatory table. This gem slipped under the radar yesterday, but that shouldn't diminish its significance to Fed watchers. Bernanke is definitely getting nervous. The WSJ called the letter a 'rare move' by a sitting Fed Chairman.---Complete Fed Letter (pdf) >>
Mark Thoma: Should the Fed Have a Large Role in Bank Regulation?: I know you are tired of hearing me make this point, and that many of you disagree, but maybe you'll be convinced by Paul Volcker? Should the fire code designers, inspectors, and enforcers be part of the fire department, or housed in a separate, independent agency? Does, for example, the knowledge inspectors gain about the risks of fire in various buildings along with knowledge about the nature of those risks (e.g. of spreading to particular adjacent buildings) help firefighters plan a more effective response if a fire does break out? Conversely, does the knowledge that firefighters have help the inspectors to know what to regulate and what to look for during inspections? Are there economies of scale from consolidation, e.g. if we want experts on how fires spread from building to building present among both inspectors and firefighters, is it most efficient and effective to concentrate this expertise in a single agency?
Richmond Fed’s Lacker upbeat - But Mr Lacker does point out three risks to the economic recovery: the growing federal budget deficit, failure to establish clear limits to the federal financial safety net and … increased oversight and political accountability of the Fed. Some observers argue that the financial reform agenda should include changes in the role and governance of the Federal Reserve. One proposal would extend the GAO’s authority to audit Fed operations to include monetary policy decisions. Other proposals would alter our governance structure by making Reserve Bank directors and/or presidents political appointees. I believe such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability.
Bernanke Confirmation Jitters - Ben Bernanke will be confirmed by the Senate for a second term as Fed Chair, but the market is already jittery that it won’t happen by the end of his term at midnight, January 31. That has set off quite a behind-the-scenes debate whether Fed Vice Chair Don Kohn would take over temporarily until the Senate voted. Kohn would be as good a temporary replacement as they come, but I can assure you that the markets would plunge on February 1st anyway. I believe this will all be moot when the Senate votes just in time, but Senate leadership staff confirm that no vote has been scheduled yet.
Economists’ Views on Interest Rates, Housing Bubble - WSJ - The Wall Street Journal surveyed economists who are part of the National Bureau of Economic Research’s Monetary Policy Program and asked them whether low interest rates caused the housing bubble. Here is a sampling of their responses, which represents their views and not the NBER: (a dozen responses)
Fed's Bullard Admits To Bubble Blowing..... and what's worse, makes clear they won't stop - and why. Indeed, what James Bullard has done with this speech is both destroy the claims of Bernanke that low interest rates didn't cause the bubble (remember, Mr. Bullard is a Fed President) but at the same time he pulls down the curtain on exactly why The Fed ignores bubbles! Specifically, Bullard noted that monetary policy necessarily affects asset prices and interest rates. “Historically this did not appear to create prolonged run-ups in asset prices, but changes in the recovery of employment in the past two recessions led the Fed to keep interest rates low for a long time,” he said. “Both periods featured prolonged increases in certain asset prices: for technology in the 1990s and housing in the 2000s. (so) You did see an increase in inflation - a big one. The Fed simply defined it out of existence by refusing to count it!
FDIC chief puts blame on Fed for crisis (FT) The Federal Deposit Insurance Corporation laid much of the blame for the financial crisis at the door of the Federal Reserve at an inquiry that causes fresh problems for the US central bank. Sheila Bair, chairman of the FDIC, which insures depositors against bank failures, said on Thursday that the Fed waited seven years to use fully its powers to regulate subprime lending. The typically forthright written testimony from Ms Bair to the second day of the hearings from the new Financial Crisis Inquiry Commission pits one of the most politically powerful regulators against one of the weakest. The Fed is under attack on multiple fronts in Congress with attempts to conduct sweeping audits of the central bank and remove much of its regulatory role.
Dead-Wrong about the Bubble - Here is an Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble: The housing bubble has precipitated a severe, and possibly catastrophic, economic crisis, so I thought it would be useful to put together a list of pundits and experts who were dead-wrong on the housing bubble. They were the enablers, and deserve to be held accountable. People also need to know (or be reminded of) which pundits/experts should never be listened to again. The list includes only pundits and (supposed) experts. That means the list doesn't include policymakers such as Alan Greenspan and Ben Bernanke, because however wrong they may have been, policymakers—and especially Fed chairmen—are undeniably constrained in what they can say publicly. I strongly suspect that both Greenspan and Bernanke honestly believed that there was no housing bubble, but alas, we'll never know for sure....
Fed Paper Details the Global Borrowing Boom - The household borrowing binge that preceded the housing bust wasn’t just a U.S. phenomenon, a new paper by the Federal Reserve Bank of San Francisco shows. Reuven Glick and Kevin Lansing show household debt as a percentage of disposable income grew to especially high levels in places like Ireland, Denmark and Norway between 1997 and 2007. Not surprisingly, those countries have been going through their own consumption busts as households try to bring their debt levels back down to manageable levels. The picture shows household debt as a percentage of disposable income:
Those job numbers - But here's what's interesting: the Fed's policy under Ben Bernanke seems intentionally geared to high unemployment for the next several years. In theory, the Fed is supposed to aim for full employment and stable prices or very low inflation. Fed policymakers anticipate that unemployment will remain well above 9 percent through the end of 2010 and well above 8 percent through the end of 2011 -- even though they expect inflation to remain very low. ... In theory, the Fed could reduce unemployment more quickly by printing even more money, buying even more securities and driving down long-term rates even further. If you believe that "full employment" is about 5 percent, as the Fed does, unemployment would probably have to drop quite a bit from its current level of 10 percent before inflation became a threat. So why not do it?
Holding off inflation, blowing bubbles - The Economist - IF YOU haven't already, set aside a few minutes to read this week's Briefing, which asks whether bubbles might not be inflating thanks to loose monetary policy. I'll summarise the arguments briefly. Central banks have taken steps, including interest rate cuts and quantitative easing, to flood markets with liquidity. These steps were designed to boost the broader economy, but they have had the (not entirely unwelcome, from the central bank's point of view) side effect of pushing up asset prices. Key ingredients for bubble inflation are still missing; private credit isn't expanding and optimism remains constrained, but if central bank policies were to remain as they are, bubbles would inevitably be generated. The conclusion, however, is that this won't end up happening. Unmentioned is a third possibility—that central banks will preemptively address market concerns about asset price growth without real growth and will withdraw support...
Bubble warning - The Economist - Markets are too dependent on unsustainable government stimulus. Something’s got to give - THE effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets. For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.
The danger of the bounce (the Economist) Once again, cheap money is driving up asset prices - The past three decades have been good for skyscraper-building. The cost of borrowing money, in nominal terms, has fallen sharply (see chart 1). Small wonder that one bubble after another has appeared in financial markets, with the subjects of investors’ dreams ranging from emerging markets and technology stocks in the 1990s to residential housing in the decade just ended. Nor is it surprising, with money so cheap, that consumers and companies have indulged in regular borrowing sprees. When investors borrow money in order to buy assets, they push prices even higher. But this also makes markets vulnerable to sudden busts, as investors sell assets to pay their debts. The credit crunch of 2007-08 was the result of this process..
Federal Reserve Seeks to Block Release of U.S. Bailout Secrets - (Bloomberg) -- The Federal Reserve will ask a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history. The U.S. Court of Appeals in Manhattan, after hearing arguments in the case today, will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP. Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg.
Why Such a Deep Recession? - I would suggest that explaining the depth of the recession is a challenge for just about any macroeconomist. There is no well-established theory that can explain how we got to 10 percent unemployment.If you are a Yale Keynesian, you would have been able to tell a good story when the S&P 500 stock index was down near 800. But it has gone back up over 1000, which means that Tobin's q is doing ok, which means that investment should be doing ok. It is not. If you are what Greg Mankiw calls a macroeconomic "engineer," meaning that you believe in macroeconometric models, then you have to explain why unemployment today is higher with the stimulus that what the models predicted without the stimulus. Next, we have the theory that even a little deflation is a horrible thing. Mark Thoma points to an essay by Andy Harless, which takes that argument to its logical conclusion, namely, that the Fed was too tight under Alan Greenspan.
U.S. to Boost TIPS Issuance - WSJ - The government on Monday is set to ramp up the sale of bonds that provide protection against inflation, known as TIPS, with its biggest offering in five years.In a bid to meet the demands of big creditors such as China and Japan and keep its funding costs low, the Treasury will kickstart this year's offerings of Treasury Inflation-Protected Securities by selling $10 billion in 10-year notes.With this auction, the total market value of TIPS will top $600 billion for the first time since the government started selling the debt in 1997
Has the invention of TIPS made hyperinflation less of a threat? - The WSJ reports that the Treasury Department is making its biggest offering of inflation linked bonds in five years today: With the total U.S. government debt held by the public at $7.8 trillion as of last week, $600 billion is still small beans. But if the TIPS share grows, it will get harder and harder for our U.S. government to inflate its way out of its burgeoning debt burden. That is, if all a country debt is in fixed rate bonds (as was the case for the U.S. before 1997), inflation shrinks the size of that debt relative to the overall economy and, more to the point, tax revenue. If all the debt were in inflation-linked bonds, inflation wouldn't reduce the debt load at all.
Report Warns About Public Debt - U.S. policymakers must prevent a rapidly ballooning public debt from rising above 60% of the nation’s output over the next decade, two nonprofit think tanks said in a report released Wednesday. U.S. debt, which has grown to more than 50% of gross domestic product from around 40% of GDP only two years ago, will inevitably rise further in 2010 as the government fights the economy’s downturn, said the National Research Council and the National Academy of Public Administration in a report.
High U.S. debt means slower growth, history suggests - A new report that reviewed 200 years of economic data from 44 nations has reached an ominous conclusion for the world's largest economy: Almost without exception, countries that are as highly indebted as the United States is today grow at sub-par rates. The report, "Growth in a Time of Debt," was written by two respected academic researchers who recently published a thick book on eight centuries of economic crises. The study by Carmen Reinhart and Kenneth Rogoff - well-regarded economists from the University of Maryland and Harvard University, respectively - found statistical breaks at different points in the relationship between a country's national debt and its gross domestic product. GDP is the broadest measure of a country's trade in goods and services. When a nation's debt exceeds 60 percent of its GDP, its growth rate slows precipitously, the study found. When that ratio exceeds 90 percent, nations' economies barely grow, and can even contract.
Yes, Deficit Hawks CAN Have Their Cake and Eat It, Too - Last month the Committee for a Responsible Federal Budget, another fiscal policy group who could easily be considered part of those organizations “like” PGPF, responded to Stan Collender’s “break up with the deficit hawks” post with a post of their own that basically said “Huh? Are you talking about us?! Since when did we ever say (as you claim, Stan) that we must: “reduce the federal deficit at all times no matter what”, or that we are “against everything all the time that increases the deficit”? So in that spirit of defensiveness and on behalf of my employer, the Concord Coalition, let me chime in with my own “Huh?” Certainly the Concord Coalition does not “perpetuate” that “false dichotomy” between the goals of short-term economic stabilization and those of longer-term fiscal responsibility–because we do not believe those goals are mutually exclusive....
Supply Siderism Just Won't Die, Or Even Go to Philadelphia - I wish the Wall Street Journal wouldn't publish things like a column arguing that the late 1990s surpluses stemmed from the capital gains tax cuts. It's just not true, for reasons that Bruce Bartlett ably outlines: the increased revenues from the capital gains tax just aren't great enough to account for the majority of the boost. You might posit some sort of supply-side effect, but it would have to be implausibly large to generate the lion's share of the surplus, plus some of the increase in capital gains revenue--perhaps all of it--was due not to cutting the tax rate, but to secular changes in the the equity markets.
US faces grim future without action to curb debt: study - The US economy is heading down a path of lower living standards and diminished confidence without action to stem the massive budget deficit, a group of prominent researchers said Wednesday. The panel said the country faces difficult choices on tax increases and spending cuts to achieve a more sustainable fiscal balance."The federal government is currently spending far more than it collects in revenues, and if current policies are continued, will do so for the foreseeable future," said the report from the National Research Council and National Academy of Public Administration. "No reasonably foreseeable rate of economic growth would overcome this structural deficit. Thus, any efforts to rein in future deficits must entail either large increases in taxes to support these programs or major restraints on their growth -- or some combination of the two."
CBO’s Budgetary Treatment of Fannie Mae and Freddie Mac - After the U.S. government assumed control of Fannie Mae and Freddie Mac—two federally chartered institutions that provide credit guarantees for almost half of the outstanding mortgages in the United States—CBO concluded that the institutions had effectively become government entities whose operations should be included in the federal budget. In contrast, the Administration, which ultimately determines what is included in the budget, considers Fannie Mae and Freddie Mac to be nongovernmental entities for federal budgeting purposes. Because of the differing budgetary treatments, CBO’s and the Administration’s budget estimates related to the entities were quite different for 2009 and over the 2010-2019 period. A background paper released today describes CBO’s budgetary treatment of Fannie Mae and Freddie Mac and the methods CBO used to estimate their costs.
Estimated GSE Losses = $448 Billion - Laurie Goodman is a well regarded expert on securitization and MBS. She is the former UBS mortgage analyst — Institutional Investor #1 ranked — and is now at Amherst Securities (Bloomberg video here). In a 17 page report released Tuesday, Goodman tried to estimate the total losses that the now-government-owned GSEs will accrue. This is not an abstract question: Since the Christmas Eve massacre when the Treasury department removed all government caps on aid to Fannie/Freddie, Uncle Sam aka the taxpayers are on the hook for unknown amounts. Given the GSE’s hold $5.5 trillion dollars in mortgages, the potential losses are $100s of billions, if not trillions of dollars.
The consequences of nationalising private sector losses - In Growth in a Time of Debt, presented at the AEA 2010 Annual Meetings in Atlanta (www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=460) Carmen Reinhart and Kenneth Rogoff study the link between different levels of debt and countries’ economic growth over the last two centuries. The paper reviews 200 years of economic data from 44 nations and reaches the conclusion that countries that are as highly indebted as the UK and US will, at the end of the crisis, grow at sub-par rates. While there is a discontinuity in the data (growth is affected only over a certain debt threshold) the findings are ominous. One explanation is fairly straight forward: more resources are diverted away from the private sector. Governments do not create, but consume wealth.
US must cut spending to save AAA rating, warns Fitch - Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders. Brian Coulton, the agency's head of sovereign ratings, said the US is shielded for now by its pivotal role in global finance and the dollar's status as the key reserve currency, but the picture is deteriorating fast enough to ring alarm bells. "Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US's 'AAA' status", he said
Obama wants record $708 billion for wars next year (AP) - President Barack Obama will ask Congress for an additional $33 billion to fight unpopular wars in Afghanistan and Iraq on top of a record $708 billion for the Defense Department next year, a request that could be an especially hard sell to some of the administration's Democratic allies.The extra $33 billion in 2010 would mostly go toward the expansion of the war in Afghanistan. Obama ordered an extra 30,000 troops for that war as part of an overhaul of the war strategy late last year.Military officials have suggested that the 2011 request would top $700 billion for the first time, but the precise figure has not been made public.
Administration considers forcing investors into Treasury debt - The Obama administration appears to have come up with a novel way of financing trillion-dollar budget deficits – demanding IRA and 401(k) holders buy trillions of dollars in Treasury bonds. With the Treasury needing this year to see another $1 trillion in debt to finance the anticipated federal budget deficit, and the Federal Reserve about to discontinue its 2009 program of buying Treasury bonds for the Fed's asset portfolio, the Obama administration is scrambling to find ways to sell government debt without having to raise interest rates. Bloomberg reported Friday that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity
R Bonds R Bad 4 U - But where there is chaos and confusion, some in our government will seek to create a “solution.” The ill-defined solution that sounds a bit like a Stable Value Fund is what is getting called “R Bonds.” Here’s the idea: for those with 401(k) or IRA balances, if they should retire, and not decide what to do with the money, the assets would get automatically get placed into a Retirement Bond, and for two years, the retiree would receive income. They can opt out before that happens. If after two years they still don’t decide, the income continues. There is nothing mandatory about this program, should it come into existence; people who are asleep about their finances may find themselves trapped in it, at least for a time.
What Karl Rove got wrong on the U.S. deficit - David Axelrod - Of all the claims Rove made, one in particular caught my eye for its sheer audacity and shamelessness -- that congressional Democrats "will run up more debt by October than Bush did in eight years." So, let's review a little history: The day the Bush administration took over from President Bill Clinton in 2001, America enjoyed a $236 billion budget surplus -- with a projected 10-year surplus of $5.6 trillion. When the Bush administration left office, it handed President Obama a $1.3 trillion deficit -- and projected shortfalls of $8 trillion for the next decade. During eight years in office, the Bush administration passed two major tax cuts skewed to the wealthiest Americans, enacted a costly Medicare prescription-drug benefit and waged two wars, without paying for any of it. To put the breathtaking scope of this irresponsibility in perspective, the Bush administration's swing from surpluses to deficits added more debt in its eight years than all the previous administrations in the history of our republic combined. And its spending spree is the unwelcome gift that keeps on giving: Going forward, these unpaid-for policies will continue to add trillions to our deficit
The Right Target: Stabilize the Federal Debt: A stable debt-to-GDP ratio should be the goal for achieving fiscal sustainability. The “fiscal gap” — defined here as the average amount of program reductions or revenue increases that would be needed every year over the next four decades to stabilize the debt at its 2010 level as a share of the economy — equals 4.9 percent of projected GDP. That is a very large amount. To eliminate that gap would require a 28 percent increase in tax revenues or a 22 percent reduction in program (non-interest) expenditures over the entire 40-year period from now to 2050 (or, more realistically, a combination of tax increases and spending cuts). It is, of course, both unrealistic and unnecessary to solve the next four decades’ problem all at once. But policymakers should act soon to start stabilizing the debt as a share of the economy in the medium term (i.e., over the next decade). The longer they wait after the economy has recovered, the more painful and severe the budget and tax policy changes ultimately will need to be.
Floating all boats | The Economist - When the Bretton Woods agreement collapsed in the early 1970s the three leading economies of America, Germany and Japan accepted that their currencies would float against each other. So it has been ever since.The period since the Bretton Woods system fell apart has also seen enormous bubbles in asset markets, a huge expansion of the financial sector and a rapid rise in consumer debt. These developments are no coincidence. Floating exchange rates and booming asset markets have reinforced each other.Previous exchange-rate systems had been linked, directly or indirectly, to gold. The aim was to put a constraint on the ability of governments to debase their currencies by printing money. The corollary was that countries found it hard to fund trade deficits for long.With floating exchange rates, the trade constraint was removed. This allowed America to enjoy its long-running deficit.
Conservatives claim Obama's policies are weakening the dollar. Let's examine the evidence. - It's an article of faith among many analysts that the U.S. dollar is in trouble. The response to the financial crisis, they say, has debased the currency. The culprits are the Federal Reserve, which slashed interest rates to zero, printed money, and vastly expanded its balance sheet, and the Obama administration, which has run up huge deficits by embracing Keynesian efforts to stimulate the economy. But like so much of what conservatives have been saying recently about the economy and economic policy, this weak-dollar argument ignores current data and recent history
Dollar has hit bottom, China says - The Globe and Mail - An investment strategist at China's $300-billion (U.S.) wealth fund said the world's third-largest economy now had a say in the exchange rate of the U.S. dollar, which it expects to rise while the yen should fall further.The comments by Peng Junming triggered a rally in the U.S. dollar.“I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further,” he told an academic forum. “The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.”The U.S. dollar rose more than half a yen close to 92.40 yen on the news, then pared gains after Mr. Peng said his speech at the Chinese Academy of Social Sciences reflected personal views. The euro slid against the dollar and gold dropped before rebounding slightly.
Rate rise stress tests must be more severe, banks warned - US banks must ensure they are ready to deal with sudden massive rises in interest rates, regulators warned yesterday. The Federal Deposit Insurance Corporation, the Federal Reserve Board and four other federal financial regulators released an advisory urging banks to overhaul their interest rate risk policies, and warning that the current low rate environment should not blind them to the risk of severe and rapid rate increases.In particular, the regulators say, banks should project their interest rate exposure over at least two years, and five to seven years for some products with embedded options. Typical interest rate stress test scenarios - a rapid shift of 200 basis points in the yield curve, for example - are generally too mild, the advisory note warns. Instead, institutions should examine their exposure to 300bp and 400bp moves.
Yield curve can’t drive profits if banks won’t lend - A steep yield curve is supposed to mean fat profits for banks. It hasn’t.Worried that interest rates have nowhere to go but up, they’re stockpiling cash and securities while letting loans dwindle. It turns out banks won’t lend till rates rise. The trouble is, if rates rise bank capital will take another hit, leaving them little to support new lending. The yield curve is a proxy for the difference between short-term rates at which banks borrow and long-term rates at which they lend. In theory, a “steeper” curve means a wider profit margin. As the following chart shows, bank profit margins aren’t keeping pace with the steepness of the curve.(Click here to enlarge chart)
What we can learn from Japan’s decades of trouble - Twenty years ago, the conventional wisdom was clear: Japan was the world’s most successful high-income country. Few guessed what the next two decades held in store. Today, the notion that Japan is on a long slide is conventional wisdom. So what went wrong? What should the new Japanese government do? What should we learn from its experience? What has gone wrong? Richard Koo of Nomura Research points to “balance sheet deflation”. According to Mr Koo, an economy in which the overindebted devote their efforts to paying down debt has the following three characteristics: the supply of credit and bank money stops growing, not because banks do not wish to lend, but because companies and households do not want to borrow; conventional monetary policy is largely ineffective; and the desire of the private sector to improve balance sheets makes the government emerge as borrower of last resort. As a result, all efforts at “normalising” monetary and fiscal policy fails, until the private sector’s balance-sheet adjustment is over.
Dangerous liaisons: US rates and emerging market spreads – VoxEU - Emerging markets have undergone structural changes that reduced their exposure to a global tightening, but they are still affected by US rates. This column suggests that positive US economic surprises that bring forward the undoing of quantitative easing and steepen the US Treasury yield curve may translate into wider emerging markets spreads. US economic strength may play a welcome sobering role in the surge of emerging market assets.
Ambulance economics: A new CEPR Policy Insight - The world economy has had a heart attack. “Ambulance economics” is about the immediate reanimation process, i.e. the fiscal stimulus. This column introduces a new CEPR Policy Insight that reviews practical aspects of fiscal stimulus policies, noting especially the inevitable trade-offs involved. It discusses the relationship between a long-term public debt problem caused usually by demographic factors and the need for short-term fiscal stimulus for Keynesian reasons. Also, it analyses critically seven common arguments against fiscal stimuli.
When Greed Is Not Good - Plainly, they all failed in the financial crisis. Compensation and other types of incentives for risk taking were badly skewed. Corporate boards were asleep at the switch. Opacity reduced effective competition. Financial regulation was shamefully lax. Predators roamed the financial landscape, looting both legally and illegally. And when the Treasury and Federal Reserve rushed in to contain the damage, taxpayers were forced to pay dearly for the mistakes and avarice of others. If you want to know why the public is enraged, that, in a nutshell, is why. American democracy is alleged to respond to public opinion, and incumbents are quaking in their boots. Yet we stand here in January 2010 with virtually the same legal and regulatory system we had when the crisis struck in the summer of 2007, with only minor changes in Wall Street business practices, and with greed returning big time. That's both amazing and scary. Without major financial reform, "it" can happen again.
The Other Plot to Wreck America - THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at Amsterdam.
Moral Bankruptcy - Stiglitz - IT IS SAID THAT A NEAR-DEATH experience forces one to reevaluate priorities and values. The global economy has just escaped a near-death experience. The crisis exposed the flaws in the prevailing economic model, but it also exposed flaws in our society. Much has been written about the foolishness of the risks that the financial sector undertook, the devastation that its institutions have brought to the economy, and the fiscal deficits that have resulted. Too little has been written about the underlying moral deficit that has been exposed—a deficit that is larger, and harder to correct. We allowed markets to blindly shape our economy, but in doing so, they also shaped our society. We should take this opportunity to ask: Are we sure that the way that they have been molding us is what we want?
U.S. Regulators Wishing for the Derivatives Fairy - The U.K.’s Financial Services Authority (FSA) released a report on OTC derivatives market reforms in December. In contrast to most government reports I’ve read on the subject, this one is thoughtful and arrives at pretty well reasoned judgments. It recognizes the trade-offs involved. In contrast, on this side of the water, from the Chairman of the FSA’s U.S. counterpart, the CFTC, we get drivel like this. He’s said it all before. Arguendo ad AIG. Horror stories about interconnections. Completely misleading conclusions based on outrageously inappropriate analogies between impossible to price toxic assets like MBS-based CDOs and vanilla swaps. Assertions that end-users don’t know their own economic interests, and subject themselves to the predations of a “small group of derivative dealers.” Wildly misleading insinuations that clearing will reduce interconnections in the financial system. Similarly wildly misleading insinuations that OTC trades are not collateralized.
Paul Krugman: Percents And Sensibility- This is actually a very broad problem with all accounts of the crisis that try to exonerate the private sector and place the blame on the government and/or the Fed: none of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional financial markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess? This logic applies, as Brad suggests, to all attempts to explain the crisis in terms of excessively low Fed funds rates for a few years.... I find myself thinking of the old comedy routine in which a doctor tells his patient, “You’re a very sick man; the least shock could kill you” — whereupon the patient lets out a strangled cry and drops dead.
The Financial Crisis Inquiry Commission: Ready For A Breakthrough - The Financial Crisis Inquiry Commission (FCIC) holds its first public session on Wednesday. When the FCIC was established in May, the prevailing wisdom was that the hearings and final report would be dry and rather inconclusive. But the debate around Big Banks has started to shifted markedly, particularly in recent weeks. Anger about bonuses is increasingly expressed by the most mild-mannered policy experts. The administration itself is proposing some sort of excess profits tax on the biggest banks. And – most important – our top bankers have their tin ears prominently on display. In the Daily Beast, I suggest exactly how the Commission can put this moment to productive use...
Questions for the Big Bankers - Today, the Financial Crisis Inquiry Commission, which Congress established last year to investigate the causes of the financial crisis, is scheduled to question the heads of four big banks — Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. The Op-Ed editors asked eight financial experts to pose questions they would like to hear the bankers answer.
Ten Questions For The Bankers - zero hedge - A terrific list of questions that the FCIC should ask banker executives, conceived by the trio of Eliot Spitzer, William Black and Frank Portnoy.
Financial Crisis Inquiry Commission Hearing - The Banking Big Boys are testifying this morning in front of the FCIC. You can find the 22 specifics on the FCIC's website. I'm watching this hearing, where MS's John Mack, JPM's Jamie Dimon, GS's Lloyd Blankfein, and BAC's Brian Moynihan are testifying, and one thing stands out in contrast to previous testimonies that have been held in front of Congressional panels: The FCIC commissioners are more concerned with actually getting answers to their questions, which is refreshing, since usually we see the members of the House Financial Services Committee or the Senate Banking Committee firing off grandstanding questions in 3 minute time frames without even intending to get real answers. The FCIC is made up of civilians, some of whom were previously elected officials.
Drill, Baby, Drill: Reviewing The Advice To The Financial Crisis Inquiry Commission - The NYT has a collection of potential questions for the Financial Crisis Inquiry Commission (FCIC) to ask four of the country’s leading bankers today. Some of the proposed questions are technical or even philosophical. These are interesting, but hardly likely to be effective. I like where Yves Smith is going: what kind of bonuses were paid for trades on which firms ultimately lost money? Bill Cohan and David Walker, coming from very different perspectives, are also pushing on issues related to compensation structure in general and bonuses in particular. Serious debate is just beginning – drill down into how bankers at Too Big To Fail firms really pay themselves, and you will be amazed at what you start to see more clearly.
Is the Angelides Commission Structurally Flawed? - A commission is a great format for something like Watergate, where a crime clearly was committed; the open question was did the President authorize it? This was a narrow focus, and one where persistent questioning of witnesses could shed light. Here, it is not clear that crimes were committed. In fact, I will hazard to say comparatively few crimes were committed, even though the result was the greatest looting of the public purse in the history of man. The big impediment is that the worst practices took place in the unregulated or barely regulated parts of the market, so conduct that is clearly wrong by any standard of common sense or decency is still permissible. The second is that the obviously criminal activity involved mere foot soldiers (mortgage fraud, which was an originator problem as well as a borrower issue) or are likely to have a veil drawn over them
The Financial Crisis Inquiry Commission: Bankers vs. Lawyers? - The Financial Crisis Inquiry Commission, a panel created by Congress to look into the causes of the financial crisis, holds its first hearing today. But, as the Wall Street Journal points out, its members aren’t exactly neutral investigators... & CBS’ Jill Schlesinger points out that although the panel attorneys are “counterbalanced” by others on the panel, “if these guys are asking questions to the FCIC witnesses primarily to create a permanent record to be used later to sue these firms, we’re not going to get very far in the regulatory reform process.” That’s absolutely true.
The Citi Never Weeps - On the first day of the Financial Crisis Inquiry Commission, Phil Angelides demonstrated a gift for powerful and memorable metaphor: accusing Goldman Sachs of essentially selling defective cars and then taking out insurance on the buyers. Lloyd Blankfein and the other CEOs looked mildly uncomfortable, and this image reinforces the case for a tax on big banks – details to be provided by the president later today. But the question is: How to keep up the pressure and move the debate forward? If we stop with a few verbal slaps on the wrist and a relatively minor new levy, then we have achieved basically nothing.
Big Bank Executives Admit Missteps at Hearing - WSJ - Comparing Wall Street titans to shady car salesmen, a committee investigating the financial crisis grilled the nation's top bankers Wednesday in the latest example of Washington's smoldering anger at an industry many there feel hasn't atoned for its role in the slump."It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars," said former California state Treasurer Phil Angelides, chairman of the Financial Crisis Inquiry Commission, while questioning the chief executive of Goldman Sachs Group Inc.Bank CEOs did acknowledge their role in the crisis. "It has been clear how poor business judgments we have made have affected Main Street," said Brian Moynihan, Bank of America Corp.'s CEO. But the executives as a group also hedged that position considerably by spreading the blame to policy makers and the economy as a whole.
A Call for More Regulation at Fiscal Crisis Inquiry - NYTimes - Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, and Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, agreed on several recommendations for regulatory reform, including regulation of over-the-counter derivatives. In addition, they said, financial institutions should not reach the point where they are deemed “too big to fail,” because a government bailout or a market collapse are the only possible outcomes. “The financial crisis calls into question the fundamental assumptions regarding financial supervision, credit availability and market discipline that have informed our regulatory efforts for decades,” Ms. Bair told the 10-member bipartisan panel, the Financial Crisis Inquiry Commission
Leaders of SEC and FDIC say agencies' failings contributed to financial crisis - The heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corp. said that shortcomings in their agencies, coupled with flaws in the larger regulatory system, contributed to the period of great boom and even greater bust. "Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," FDIC Chairman Sheila C. Bair said in written testimony to members of the bipartisan Financial Crisis Inquiry Commission, which is investigating the causes of the financial meltdown. "Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing."
A Job Well Done - At today’s hearings, Jamie Dimon said “We didn’t do a stress test where housing prices fell.” Kevin Drum is astounded: Wow. By 2006, housing prices were nearly double their trend growth levels and JPM never even considered a scenario in which they might fall. Just wow. The really jaw-dropping thing, though, is that even in retrospect Dimon has been a nearly perfect CEO and JP Morgan basically a perfectly-run company. During the boom, they all got filthy rich. During the bust, a bunch of their competitors went out of business. Thanks to the bust millions of people around the country are now unemployed. Hundreds of thousands of children have been pushed below the poverty line and are suffering consequences from it that will last a lifetime. The entire younger generation is going to suffer because of the massive debt-overhang. But Dimon and the Morgan crowd are still getting filthy rich in part thanks to government emergency measures designed to mitigate the crisis. And this is not because Morgan had tons of foresight. They didn’t even consider a scenario in which housing prices might fall. It’s an idiotic mistake. The exact same mistake that everyone else made. But they made it to a somewhat lesser extent than their leading competitors. So rather than suffering, they’re benefitting.
Bankers without a clue - Krugman - In its first panel, the Financial Crisis Inquiry Commission grilled four major financial-industry honchos. What did we learn? Well, if you were hoping for a Perry Mason moment — a scene in which the witness blurts out: “Yes! I admit it! I did it! And I’m glad!” — the hearing was disappointing. What you got, instead, was witnesses blurting out: “Yes! I admit it! I’m clueless!” O.K., not in so many words. But the bankers’ testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that’s important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer.
‘Sorry’ still seems to be the hardest word on Wall Street - Goldman Sachs Chairman Lloyd Blankfein still doesn't get it. Blankfein, called to Washington on Wednesday to testify before the federal Financial Crisis Inquiry Commission, made it plain that he was done apologizing. Unemployment is at 10 percent and Americans are suffering because of the meltdown he and his colleagues helped create. But Blankfein's firm, generously bailed out by taxpayers, has already returned to its ways of greed. Next week, Goldman, the most powerful firm on Wall Street, will report its bonuses for 2009, and through the first nine months of the year it had set aside nearly $17 billion for compensation -- roughly on par with 2007, when Blankfein was paid a record $68 million as his firm led the country off an economic cliff.
The FCIC needs to analyze the failure of Fannie & Freddie - Today was day one of the Financial Crisis Inquiry Commission hearings. After eight hours of hearings I have a lot of subject matter but little time for writing. So I want to highlight one important point, with more to come over the next few days. Today the Commission heard from and asked questions of the heads of four large financial institutions that survived. I commented at today’s hearing that I am even more interested in learning about the failures than about the survivors. To understand the causes of the financial and economic crisis, I place a higher priority on understanding why Bear Stearns, Lehman, Indy Mac, WaMu, Merrill, and AIG failed, and why BofA, Citi, and others would have failed but for direct government support. In our investigative work the commission needs to spend more time on failure analysis. At the top of my failure analysis list are Fannie Mae and Freddie Mac.
Bill Moyers Journal: David Corn and Kevin Drum - MOTHER JONES journalists David Corn and Kevin Drum offer a hard look at the obstacles to real reform of the financial industry. (video & transcript)
Crisis Wasted: Serious Wall Street Reform Unlikely, With or Without Dodd - Christopher Dodd's planned resignation from the Senate - where he chairs the Banking Committee -- has cast even more uncertainty on prospects for Wall Street reform. The news would seem to another obstacle on the rocky road toward substantive reform, but some are hoping Dodd will now feel free to be more aggressive. As I wrote Wednesday: Dodd "remains chairman of a powerful committee and might feel empowered to come down harder on Wall Street in his waning days in an effort to salvage his ‘legacy' - and because he won't need any more campaign contributions."
Bring Back Glass-Steagall (WSJ) Last month, Sens. Maria Cantwell and John McCain proposed a measure that would revive parts of the old Glass-Steagall Act, the 1933 law that separated investment from commercial banking. After having been diluted many times over the years, Glass-Steagall was largely repealed in 1999, permitting a wave of consolidation in the financial industry. The latest crisis has provoked a new debate over the old regulatory regime. Nobel laureate economist Joseph Stiglitz has argued that the repeal of Glass-Steagall had an "especial role" in making the financial calamity of 2008 possible. Former Fed Chairman Paul Volcker, currently the head of the President's Economic Recovery Advisory Board, has called for a new separation between commercial banking and riskier financial activities.
A mistake that will make banks riskier - Robert Pozen – FT - Republican senator John McCain and Democratic senator Maria Cantwell agree on the solution to preventing the next financial crisis – reinstate the Glass-Steagall restrictions on the activities of commercial banks. Most importantly, they would prohibit commercial banks from underwriting offerings of stocks and corporate bonds. It’s easy to understand why this legislative proposal is gaining political momentum. Politicians from both parties want to reduce the size of banks so they will not be too big to fail. Thus, banks should jettison their securities arms because underwriting stocks and bonds is generally perceived as too risky for institutions with government-insured deposits.However, this general perception is not supported by the actual experience of banks during the last few years. Indeed, the reinstatement of Glass-Steagall would increase the likelihood that the government would bail out a large financial institution in the future.
You have to laugh at the outright stupidity of this man: Attorney General Eric Holder said a new inter-agency task force is focussing on halting fraud involving mortgages, securities, economic stimulus programs and government bailouts. Riiiight. "To those who see victimization of others as an avenue to wealth, take notice: If you fabricate a financial statement, if you propagate an investment scheme, if you are complicit in an act of financial fraud, you are writing your ticket to jail," Holder said. Wake me up when the big investment banks are served with a hundred criminal complaints - each. When the ratings agencies are served with a similar number. When Fannie and Freddie's executives are indicted for material misrepresentation of the quality of paper they were buying. When the hundreds of mortgage brokers, real estate agents who pressured appraisers to "hit the number" and homeowners that falsely claimed income they didn't have are all prosecuted.
Lawmaker presses NY Fed on AIG payment details - Reuters A U.S. lawmaker said on Sunday he is seeking more information from the New York Federal Reserve Bank about its controversial emails on insurer AIG's bailout, saying he was shocked that the disclosures were never brought to then-bank president Timothy Geithner's attention. U.S. Rep. Darrell Issa, the California Republican who last week distributed email exchanges over AIG's decision not to disclose specific payments to banks in a December 24, 2008 Securities and Exchange Commission filing, released a letter from the New York Fed responding to the controversy.In the letter, New York Fed general counsel Thomas Baxter said Geithner, now U.S. Treasury Secretary, had no involvement in the deliberations about the disclosures -- consistent with statements he made last week.
Issa Says Someone Must Be Held Accountable for AIG ((Bloomberg) -- Darrell Issa, the lawmaker looking into the Federal Reserve Bank of New York’s efforts to limit American International Group Inc. disclosures during the credit crisis, said the government must hold someone responsible. “Who do we hold accountable for these lost billions, and what’s wrong with the system that the New York Fed can hand out your tax dollars in these quantities and not think it’s particularly important to make sure it’s the right amount,” Issa, a California Republican, said today in an interview on Bloomberg Television. “I think the American people deserve somebody’s head on a platter.” E-mails obtained by Issa show the New York Fed requested in 2008 that AIG withhold information from public filings about payments to banks.
Geithner Subpoena: House Committee Wants AIG Emails, Phone Logs - A House committee probing bailout deals has subpoenaed the Federal Reserve Bank of New York for correspondence from Treasury Secretary Timothy Geithner and other officials.The House Oversight and Government Affairs Committee is examining New York Fed decisions that funneled billions of dollars to big banks including Goldman Sachs Group Inc. and Morgan Stanley.Geithner was president of the New York Fed at the time. He approved decisions involving the money from the bailout of failed insurer American International Group Inc., according to an earlier watchdog audit. The subpoena demands e-mails, phone logs and meeting notes from Geithner; Stephen Friedman, who succeeded him as New York Fed president; New York Fed general counsel Thomas Baxter; and Sarah Dahlgren, the New York Fed's top manager on AIG.
Geithner in the hot seat | Analysis & Opinion | Reuters - The New York Fed has announced that its decision to try to squelch AIG disclosures had nothing whatsoever to do with Tim Geithner. Who was the president and CEO of the bank at the time, and is famous for his attention to detail. But Geithner had every opportunity, both at the Fed and at Treasury, to agitate for greater transparency and for the release of even more emails. He never did so, and my feeling is that if nobody asked him about the AIG disclosures it was because there was no need to do so: his attitude to such things was clear. It’s going to be very interesting to see Geithner’s congressional testimony on this subject. The Fed statement hints at one of those “I had no idea what my subordinates were doing” defenses, which is going to look pretty bad. But what alternative does he have? “The US public couldn’t handle the truth”?
Enough With The Government Cover-Ups - Forbes - It has come to light recently that American International Group withheld important information about its dealings with financial counterparties in the lead-up to its collapse and bailout by the Federal Reserve. What is most troubling about this episode is that it was officials at the Federal Reserve Bank of New York--not AIG--who seem to have orchestrated the secretive and potentially illegal activities. Moreover, the actions by the regulator were uncovered only through an investigation conducted on behalf of the House Oversight and Government Reform Committee. Were it not for the doggedness of the committee’s ranking Republican member, Darrell Issa of California, the public would be none the wiser.Is this what it has come to in America: Public officials making policy via cover-ups, secret deals and government coercion? It seems so. If we don’t demand a full investigation into this type of behavior and criminal prosecution where appropriate, we should expect more of the same in the future.
The future of Tim Geithner - U.S. cabinet members tend to lose their support the same way a person goes broke — slowly, then all at once. Timothy Geithner, the embattled U.S. Treasury secretary, still has President Obama’s confidence. Still, he has bled enough that this year could well be his last. The rap against Geithner is that, as New York Federal Reserve president in 2008, he worked with former Treasury boss Henry Paulson and used AIG as a conduit to pass bailout money to struggling financial firms such as Goldman Sachs and Deutsche Bank. Critics also say that since joining Team Obama, Geithner has pushed an impotent financial reform package that fails to limit the size or complexity of U.S. financial institutions. Emails from the New York Fed’s outside lawyers add to the impression that the bank tried to keep significant details of the AIG bailout from becoming public knowledge…
latest aig revelations one more reason why geithner's got to go - The latest revelations about the New York Fed's actions in the AIG bailout make one thing clear: Treasury Secretary Tim Geithner must go. Geithner must go not just because of the emails showing that his New York Fed ordered AIG to keep details of the bailout secret, but because of many other decisions and policies he has championed in the past two years. These decisions and policies have consistently put the interests of Wall Street ahead of the interests of the taxpayer, and they have undermined the public's confidence in the government at a time when the country needs it the most.Tim Geithner's defense of his actions continues to be, in effect, "We had to do it or the world would have ended." This isn't good enough. It is also, at the very least, debatable.It is true that Tim Geithner made many of his decisions in the midst of a crisis, and we do not doubt that his intentions were good and that he was doing the best he could. But this does not rinse his hands of responsibility for his decisions or their ongoing ramifications.
Tim Geithner Out? - The New York Post takes a huge shot at him here. I still don't see Geithner leaving, however, due to the lack of a credible replacement. Larry Summers could easily step in, but how is he ever going to get Senate confirmation? Same goes for every other viable private sector figure because they all come out of Wall Street or banking and, therefore, are politically if not ethically tainted. Paul Volcker is too old and everyone else I can think of is a Republican. So, like it or not, I think Obama is stuck with Geithner until we are well past the economic and financial crisis.
Hank Greenberg Tells WSJ Goldman Sachs Behind AIG’s Collapse (Bloomberg) -- Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported. “It certainly wouldn’t be difficult to come to that conclusion,” Greenberg is quoted as telling the newspaper yesterday. Greenberg blamed new standards for credit-default swaps -- pushed by Goldman or Deutsche Bank AG, he said -- and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse, the newspaper reported.
Cerberus Capital: Literally Blood-Sucking the Poor to Make Their Billions - Cerberus Capital, one of Wall Street’s most notoriously ruthless leveraged-buyout firms (or “private equity firms” in PC-speak), recently made a $1.8 billion killing on its human plasma investment, a company called Talecris. Talecris was purchased for a mere $82.5 million just four years earlier, meaning Cerberus made 23 times its investment on human plasma. This was accomplished by the most savage, heartless means possible: by paying peanuts to impoverished human plasma donors, who increasingly come from Mexican border towns to blood-pumping stations set up on the American side, jacking up the price of plasma by restricting supply (a lawsuit filed by the Federal Trade Commission accused Cerberus Plasma Holdings of “operat[ing] as an oligopoly”), and then selling the refined products to the most desperately ill—patients suffering from hemophilia, severe burns, multiple sclerosis and autoimmune deficiencies. The products cost so much—one, IVIG (intravenous immunoglobulin) cost twice the price of gold as of last summer—that American health insurance companies have been dropping or denying their policyholders in increasing numbers, endangering untold numbers of people.
Too big to fail fail? - Krugman - I’m puzzled by what David Warsh says about me (not for the first time): There are meliorists, practical-minded reformers representing a broad array of banking, financial and economic types. who believe that American banks must be large in order to compete in global markets. They think that efficiency and safety can be achieved through a combination of higher capital ratios, greater transparency, and improved consumer protection. I’m pretty sure I’ve never claimed that US banks need to be big to compete in international markets — it’s not at all what I believe, and I am, after all, the guy who spent years denouncing the whole concept of competitiveness. Where did that come from? Anyway, I have a quite different problem with the idea that breaking up big banks is the key to reform: I don’t think it would work.
If Government Won’t Break Up the Giant Banks, Let’s Do It Ourselves - As everyone knows, the economy cannot permanently recover and truly stabilize until the giant banks are broken up. The top independent experts agree that the “too big to fails” are a drain on the economy and put the entire system at risk.The giant banks aren’t lending much to the people who need it. Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition.But the government – instead of breaking up the giant banks who aren’t lending to the people who need loans – is trying to prop them up using permanent bailouts. See this, this, this and this. So let’s pull our money out of the too big to fails and put it into small community banks and credit unions.
Why Obama must take on Wall Street, by Robert Reich - It has been more than a year since all hell broke loose on Wall Street and, remarkably, almost nothing has been done to prevent all hell from breaking loose again. ... Bankers are still making wild bets, still devising new derivatives, still piling on debt. The big banks have access to cheap money, courtesy of the Fed, so bank profits are up and bonuses as generous as at the height of the boom. And, of course, American taxpayers are out some $120bn, while millions have lost their homes, jobs and savings. What happened to all the tough talk from Congress and the White House early last year? Why is the financial reform agenda so small, and so late? Part of the answer is that the American public has moved on. A major tenet of US politics is that if politicians wait long enough, public attention wanders.
Obama Plans to Raise as Much as $120 Billion From Bank Fees - (Bloomberg) -- President Barack Obama plans to impose a fee on banks expected to raise about $120 billion in order to help recoup losses from the Troubled Asset Relief Program, according to an administration official. The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who request anonymity. The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
Banks Brace for Bailout Fee - WSJ - Much remains uncertain about how such a fee would work. The administration is wrestling with who should pay, when it should be implemented and what would happen if banks pay more than the government-bailout program ultimately loses. Auto makers aren't currently targets of the fee idea. The Obama administration is aiming to hit banks with a fee to recoup losses associated with the government's bailout of financial firms and the auto industry, administration officials say.The White House hopes the fee will soothe the public's anger at financial firms. Most big banks that received public funds have repaid the government, but the industry is seen by many as having survived thanks to taxpayer support, and is now enjoying a profit rebound as the economy struggles. This month, many large banks will resume paying big bonuses to employees.
Simon Johnson: Bank Tax Arrives: The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector. But the details are deliberately left vague – perhaps “not completely decided” would be a better description. The NYT’s Room for Debate is running some reactions and suggestions. The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses. We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance. In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks.
Taxing the Banks - News that the Obama administration is planning to propose a (still-undefined) bank tax has already elicited a number of not-very-good arguments against the tax. It seems to me, though, that there is one plausible argument for why the tax is not a good idea, namely that with the financial sector still shaky it’s a mistake to be taking tens or even hundreds of billions of dollars out of it. There is, after all, something a little odd about the government planning to take billions in capital out of the banks less than a year after it insisted—appropriately—that the banks had to raise billions in capital if they wanted to stay in business. To be sure, the capital ratios of the big banks—the ones that would presumably be subject to the tax—look reasonably good right now, but if the last couple of years have taught us anything, it’s that financial institutions (and regulators) are generally going to underestimate how much of a buffer they need for when things go bad.
Obama to Banks: “Too Big to Fail = Right Size to Tax - Mr. Obama’s idea is fairly simple: Tax the 20 largest financial institutions (see below). Barry thinks this concept will do more than just penalize the firms that brought our financial system to the brink of failure and raise some sorely needed revenue in the process. He thinks the tax will modify behavior in the executive suites on Wall Street almost as much as would a sackful of regulatory changes. In short, he sees this proposal as a way of giving banks an incentive to shrink themselves. Becoming smaller institutions may or may not turn the targeted 20 into better banks, but it will lower their systemic risk profiles. Pushing regulation through the front door may have become impossible due to this corruption; However, a TBTF tax can be passed because it raises money to close the deficit. It will be difficult to vote against, given all the undirected anger against banks and wall street during big bonus time.
The Proposed “Federal Crisis Responsibility Fee” - Brookings - President Obama this morning announced a new “Federal Crisis Responsibility Fee” to recoup the taxpayers’ expected losses from the Troubled Asset Relief Program (TARP). Approximately 50 banks and similar firms with $50 billion or more in assets would be charged a total of roughly $9 billion a year for at least 10 years. The fee would run for longer if required to fully recover the TARP costs. The proposal broadly makes sense from both a political and a policy perspective. The politics are obvious - right now the public is extremely angry at bankers and would support measures up to shooting and then burning them. There is a strong imperative for politicians and regulators to show that they are on the public’s side and not the banks. This is particularly important as banks are about to announce near-record bonus payments, which the public will find galling.
Bank Tax: A Roundup of Reactions - I’m still trying to figure out whether the “financial crisis responsibility fee” that the administration is proposing would promote the stability of the financial system and/or broader economy — or if it’s just, as one economist I spoke with put it, a “bad banker tax,” an effort for President Obama to prove his banker-hating bona fides to America. In the meantime, here’s a roundup of some of the reactions so far:
A Reason to Be Skeptical of Bank Tax Plan - It’s hard to argue against the fairness of President Barack Obama’s proposed tax on banks to recoup the costs of last year’s bailouts. On logical grounds, though, there is a reason to be skeptical. Administration officials worry about a credit crunch and want banks to lend more. Banks don’t lend out of thin air — they need liabilities on the other side of their balance sheets to fund new loans. The proposed tax would assess a 0.15% levy on bank liabilities (minus insured deposits.) Taxing bank liabilities after their big bailout might be fair. And as the administration notes, it might be a deterrent to banks against about taking on too much leverage and taking on unwise risks. But it’s not an incentive to lend, something to remember the next time they’re getting bashed for worsening the credit crunch.
Bank Taxes, GM, and Chrysler - Today's story is "Obama to Unveil Proposal on Bank Taxes" from the WSJ, regarding taxes/fees the Administration will assess to the big financial firms.I just want to focus on one quote from the article: "The taxed firms are expected to pay the cost of bailout money that went to General Motors Co. and Chrysler LLC, which are exempt from the tax. The administration official defended the omission by contending that U.S. auto makers collapsed in part because of a financial crisis of the banks' making." Wow - talk about a mis-statement of the truth. That statement could be rewritten as follows: "U.S. auto makers collapsed in part because of a financial crisis of their own banks' making." Blaming the collapse of the automakers on the banks ignores the fact that before there was the bust there was a boom!
Administration Bank Tax Plan: An Empty Populist Gesture by Design? – Yves Smith - With its talk of new taxes on banks, is Team Obama reverting to its now well established pattern of crony capitalist giveaways with the occasional phony populist reform as an increasingly ineffective disguise? The extraordinarily unenthusiastic, perhaps inept by design, discussion of its plans to tax banks in some yet undetermined manner certainly says so. Obama’s formal presentation often uses what I believe NLP calls hypnotic speech. It sounds wonderfully uplifting while you are listening, but when you get done, you scratch your head, because there was so much abstraction and imagery relative to content that very little of substance is said. This “we need to appease the peasants” logic tells all. It says the Administration is so profoundly captured by the banksters that it sees nothing wrong with what is happening, save the political fallout.
Too Big Too Fail Tax - Yesterday, the news broke about a tax on the large banks — it was ostensibly designed to close the deficit. Instead, I’d like to rename it the Too Big Too Fail Tax (TBTFT) What I found interesting about the tax is the somewhat misleading way it has been premised — namely, that it is payback for all of the Non-TARP subsidies the banks have been enjoying at the expense of the taxpayers. Further, went the MSM narrative, such a tax at a time of populist outrage over big bonuses is a slick political move calculated to assuage the angry masses.I am not sure how clever the Obama brain trust is — so far, the answer has been “Not very” — but there is an opportunity here for a third basis for this tax. Let’s call it the TBTF tax.
The Purpose of a Bank Tax - I am against levying a special tax on banks in order to recoup losses on TARP and AIG. On the other hand, I am in favor of levying a special tax on TBTF banks in order to recoup the costs to the government of the now-implicit guarantee. Unlike commentators such as Nicole Gelinas, I am unconvinced that there was a significant moral hazard component to the housing bubble; as Lehman shows, there was no guarantee that the banks would not be allowed to fail. However, unlike commentators like James Surowiecki, I am pretty convinced that there is now substantial moral hazard in the financing of the larger banks, the fact is, creditors are expecting us to bail them out. Which means lenders are more likely to help them get into trouble, from which they will need to be bailed out.
The Bank Tax - President Obama has proposed a special tax levied on large financial institutions. In general, I am skeptical of narrow-based taxes, as they feed a particularly nasty kind of politics, where the majority gangs up on a minority. And I am turned off by the populist rhetoric coming from the administration, which suggests the issue pits Wall Street fat cats against ordinary Americans. Nonetheless, on the economic merits, there may be a case for the bank tax. One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy--a contingent subsidy, but a subsidy nonetheless. In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk.
Thoughts on the Bank Tax - I’m in favor of the bank tax; what’s not to like about extracting $117 billion from large banks to pay for the net costs of TARP? But it’s by no means enough. Simon covered the main points earlier this morning, so I’ll just add three comments....Why $117 billion? ...The tax isn’t going to prevent a future financial crisis. And it isn’t going to hurt any bankers, at least not very much. Basically it will get passed on to customers...Because it’s a flat tax with a cliff at $50 billion in assets, it isn’t going to provide an incentive for banks themselves to get smaller; Bank of America is not going to break itself into 45 pieces to avoid a 6 bp asset tax.
From Obama to Europe with love- It’s been nearly 24 hours since US president Barack Obama unleashed details of his bank levy on Wall Street. That means we are starting to get some estimates from analysts on the cost of the tax, which would begin on June 30, 2010, and is based on a percentage of banks’ liabilities less insured deposits. The FCRT, aimed at recouping bailout monies from US banks, applies to financial companies with more than $50bn in assets, but intriguingly, also affects foreign banks with significant US subsidiaries. Here are some rough numbers from Evolution Securities.
The Obama Financial Tax Is A Start, Not The End - The flurry of interest this week around ways to tax Big Banks is important, because officials in the US are – for the first time – recognizing that reckless risk-taking in our banking system is dangerous and undesirable.But the possibility of a tax on bonuses or on “excess profits” that are large relative to the financial system should not distract us from the more fundamental issues. Mr. Bernanke and Mr. Geithner need to admit that the Federal Reserve and New York Fed played a key role in creating this problem through misguided policies. They were part of the regulatory failure, not independent of it. When you keep interest rates very low and let balance sheets explode under your watch, we’ve seen how things fall apart.
Will the Administration's Proposed Bank Tax Create a Moral Hazard Problem? - Thoma - Yesterday, the Obama administration proposed a Financial Crisis Responsibility Fee to recoup the cost of the bailout. Many people have claimed the tax will do two things, modify bank behavior and generate revenue the government can use to reimburse taxpayers for the cost of bailing out the financial system. However, as I noted here, the behavioral modification story is difficult to embrace because the size of the tax banks will pay compared to, say, the bonuses the give out each year is relatively small. It won’t be very painful for banks to pay this tax. But there is another way in which the tax could affect bank behavior. This has to do with the fact that the “tax” is more properly termed an insurance payment that is being paid after the event rather than the more usual case of being paid before the disaster happens
Wall Street Thinks You Are a Jealous Little Malcontent - After thinking it over, and listening carefully to the discussion on financial television and the news today in reaction to the proposal for a special bank tax, I can come to no other conclusion. Wall Street thinks that the American people, who came to their aid after the collapse of a monumental and most likely fraudulent bubble, are jealous little malcontents. They believe that the public wants to limit the bonuses paid by Wall Street because they are just jealous. Or stupid and petty. At least they wish to leave their viewers and readers with that impression.That's the long and short of it. You, average working stiff and retiree, are just a jealous little malcontent who envies the great success of the financial sector, much like some foreign agitator who attacks the West because they envy its freedoms. And you are seeking retribution, revenge. That is what this bank tax is all about, retribution.
Obama’s “Get Tough on Banks” Again Tries to Play the Public for Fools - Yves Smith - Today, Obama said to the banking industry, “We want our money back and we’re going to get it.” Has he forgotten that possession is nine-tenths of the law? While Uncle Sam is normally able to defeat such long odds, all bets are off with our “Speak moderately and carry no stick” President. The fact that Obama is finally, after months of open intransigence by the big capital markets firms, saying a few mildly critical words is supposed to signal a change of posture. But he is clearly begging: “I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or your citizens but by rolling back bonuses.” Hint: urging gets you nowhere with this crowd.
Will banks pass on any new fee? - If and when the Obama administration unveils its new tax on banks, will the banks just turn around and pass that extra cost onto consumers? Matthew Yglesias and Ryan Avent both make the case that if big banks raised the cost of banking with them, that would be a feature rather than a bug. We want the big banks to get smaller, and if they become more expensive, then that will help shrink their market share. Might the fee at least reduce the amount of cash that the banks have available for lending? Yes. But this is a large reason for levying the tax in the first place. America’s fiscal and monetary policy during the crisis involved recapitalizing the banks in the hope and explicit expectation that they would turn around and lend that money into the real economy. They didn’t do that, so it makes sense to take some of that money back — certainly that part of it which is basically just windfall due to Fed policies.
The bank tax is just an increase in cost of funds - Here’s one more way to look at the new bank tax, courtesy of the equity analysts at Oppenheimer & Co: it basically has the same effect on the banks hit by it as would a 15bp rise in the Fed funds rate. And much like an increase in Fed funds, it’ll simply end up getting passed through to customers in the form of higher loan rates. Which doesn’t mean that lending will fall — in fact, the Oppenheimer analysts reckon that any decrease in lending will be “barely measurable”, and will come about mainly in the form of lower demand for loans rather than less supply of credit from the banks. Meanwhile, an anonymous “senior industry leader” from the murky depths of the financial-services industry emerges to inform Politico that lending could be hit to the tune of $1 trillion as a result of this fee. Don’t believe it.
Only one cheer for banking levies - Am I alone in feeling increasingly uncomfortable with the the global clamour for new taxes on banks and bankers? Do I feel sorry for put-upon investment bankers with new tax demands? No. Am I comfortable with the greed culture in Wall Street and the City of London? No. is Barack Obama justified in asking for taxpayers’ money back? Of course. But there are two issues that nag away at me. First, as I have previously written, seeking to tax banks for state insurance is something of a counsel of despair, implying global efforts to improve financial sector regulation will fail. And second, I am worried about the incidence question: who will pay bank taxes? It seems far from obvious that it will be the owners or employees of banks.
Bailout Watchdog: Shutting Down TARP To Be Tricky, Government Does Not Have Plan To Address 'Too Big' - Of all the problems that plague TARP -- including its lack of transparency and disclosure, shifting goalposts, and an unclear purpose -- there's one that has government auditors most concerned: the administration's failure to articulate how it's going to eliminate the implicit taxpayer-funded guarantees backstopping the nation's biggest financial firms. That's one of the conclusions raised in a new report released Thursday by the Congressional Oversight Panel, detailing the challenges faced by the administration as it attempts to shut down the unpopular bailout program. Though slated to end in October, the government will likely continue to hold hundreds of billions of dollars in private assets beyond then. Unwinding those positions will be tricky. The panel wonders if the Treasury is up to the task.
So what are banks for, anyway? - Sometimes a picture says it best. This graph from our colleagues at Angry Bear is introduced with the caption: What was the job of banks in 2009? This chart tells me that the whole notion of Obama’s approach to the banks is fundamentally flawed. The Administration has operated on the assumption that the financial crisis is no more serious than some clogged plumbing — a bit of Draino in the form of government handouts and guarantees should be sufficient to get credit flowing again. Time will allow market mechanisms to restore the true, higher, value of “legacy” assets. Once the banks are healthy, the economy will recover. Well, this chart tells me that these premises are totally wrong. Many financial institutions are probably insolvent and need to be closed; assets must be analyzed carefully to figure out their profitability potential and the true financial state of financial institutions; an investigation must be open to determine responsibility among top managers.
Big banks claim government isn't helping anymore. Not exactly. -The big bankers are in the news again, and they're steamed. CEOs will testify before the Financial Crisis Inquiry Commission. Meanwhile, the industry is pushing back against plans from the Obama administration to tax large banks as part of an effort to recoup bailout costs. JPMorgan Chase CEO Jamie Dimon, bristling at criticism of his hardworking bankers, told employees: "I am a little tired of the constant vilification of these people." Wall Street's big shots have had enough They've paid back their TARP money—which, some of them say, they didn't need anyway—with interest. They've got the government off their balance sheets, so now the government should stop meddling with them. But the big American banks aren't nearly so independent as they would have us believe. JPMorgan Chase, Goldman Sachs, and their peers are still benefitting hugely from significant post-crisis subsidy programs that boost their profits. I'm talking mostly about the Temporary Liquidity Guarantee Program.
Indirect Subsidies Are Bailouts, Too - Dan Gross at Slate pushes back against the false notion that the banks have paid back all their bailouts—a nasty little lobbyist-planted meme that the press needs to nip in the bud. I noted this morning that The Wall Street Journal editorial columnist Holman Jenkins is already, unsurprisingly, on this train. As Felix Salmon and Simon Johnson pointed out in The Huffington Post, the TARP is hardly the only bailout Wall Street has received, benefited from, or caused. Much of the recession can be laid at its doorstep, as can the need for hundreds of billions of dollars in stimulus.Gross looks at the indirect costs and benefits of the bailouts, specifically the Temporary Liquidity Guarantee Program, which allowed banks to issue debt by guaranteeing it. That enabled them to issue it when nobody would buy it and now it enables them to pay less for it than they would without Uncle Sam’s benevolent backstopping of it.
Goldman Sachs CEO on getting rescued again now – yes the government would - You know, shareholders and bond holders would get wiped out, but we’d keep our jobs, salaries, bonuses and stuff but, you know, the system is still fragile today and you really need us so just trust me. And btw – don’t bother with that fancy, schmancy financial regulation stuff. Seriously – trust us. Watch say essentially that at Huffington Post: “I think tomorrow in the context of this environment, at some level the government would intervene.” “Because of the fragility of the system,” Blankfein said, the government would be forced to step in.
FT.com - Taxing banks - the global state of play - Special taxes on banks are catching on - but moves around the world are disparate and show few signs of coordination so far, either in detail or in ambition.
- The US is planning a levy over the next few years to recoup the full cost of the Tarp bail-out fund. As such it is a retrospective charge for services offered.
- The UK’s supertax on bankers’ bonuses was intended to curtail bonus payments. As an attempt to change incentives, it seems to have failed, with banks suggesting they will still pay bonuses, thereby allowing the UK to tax foreigners with the risk that banking operations move away from London.
- France is implementing a similar 50 per cent tax on traders’ bonuses. Other countries, such as Switzerland, have rejected any levies on banks or bonuses.
- The International Monetary Fund has the job of trying to reconcile these different approaches
FDIC advances plan to penalize banks for risky practices - The Federal Deposit Insurance Corp. advanced a proposal Tuesday to penalize banks for risky compensation practices despite public opposition from other federal banking agencies, exposing tensions among senior officials over the government's proper role in shaping pay practices. Popular outrage over Wall Street paydays has failed to generate significant momentum in Washington to limit the amounts bankers are paid. Instead, regulators and politicians are battling over the more modest idea of pushing companies to tie pay to long-term performance. The FDIC, which collects fees from all banks to repay depositors in failed banks, is considering a plan to reduce the fees paid by companies that take specified steps such as paying bonuses in the form of stock that cannot be sold immediately. Banks that don't comply would face higher fees..
FDIC’s Bair Blasts Other Regulators for Reluctance on Banker Pay Plan - For anyone who thought the federal regulators were all on the same page regarding the best way to police compensation at banks, think again. Tension behind the scenes spilled into a nasty exchange of words at a public meeting of the five-member Federal Deposit Insurance Corp. board of directors. The long and short of it: FDIC Chairman Sheila Bair and two other board directors support proposing a new policy that would tie the fees banks pay for deposit insurance to the risk-profile of the compensation plans at those banks. In other words, if the bank pays executives in a way that the FDIC feels encourages dangerously risky behavior that could ultimately lead the bank to fail, then the FDIC can charge them more for deposit insurance. Comptroller of the Currency John Dugan, whose agency regulates national banks, and Office of Thrift Supervision acting director John Bowman, whose agency regulates federal thrifts, strongly disagreed with the proposal.
Why Vilifying the Banks Matters - When does an industrialist become a robber baron? Or a savvy businessman become a profiteer? Or a banker become a “fat cat”? At what point does success become privilege?While these questions may seem silly, economic history suggests that they're far from immaterial.In his Buzz & Banter earlier today, Sean Udall wrote “While I don’t like seeing the banks continually vilified my bank thesis is only changed on a huge FASB mistake…”While I would like to share his optimism regarding the banks, I'd offer that vilification matters. For as long as banks have existed, the industry has suffered from a perception problem. From the money changers in the temples to Mr. Potter in It’s a Wonderful Life, banks and bankers have been reviled…
Rep. Welch: It’s Time to Tax Bonuses at Banks That Got Bailout Funds -WSJ - President Barack Obama’s proposal to levy a bank fee to recoup bailout costs does not appear to be dampening demands for more dramatic action on Capitol Hill. Rep. Peter Welch (D., Vt.) introduced legislation Tuesday to slap a 50% tax on bonuses in excess of $50,000 paid to employees of any bank that received bailout money. The proceeds would be lent to small businesses struggling to find loans from commercial banks. Welch argues that in no way can the banks claim that record profits recorded last year were their doing. They were able to borrow at near-zero interest rates, and then invest in markets that were severely depressed by their recklessness.
Banks lift executive salaries, cut bonuses - Reuters - Most banks have increased basic salaries and cut bonuses for executives in response to calls for leaner compensation packages after the financial crisis, according to a survey by consultancy Mercer. Four fifths of respondents in a survey of 61 banks and other financial services firms said they had made or plan to make changes to annual bonuses and short-term incentives.Some 65 percent of banks had increased basic salaries, while 88 percent decreased the weighting of bonuses in their compensation mix, according to the study. Banks were blamed for rewarding excessive risk-taking with generous bonuses and fostering a short-term culture, which led to the financial meltdown. Only 41 percent of respondents said they had significantly limited or eliminated one-year bonus guarantees for executives, however, while 64 percent had done so for multi-year bonus guarantees.
For Top Bonuses on Wall Street, 7 Figures or 8? - NYTimes - Everyone on Wall Street is fixated on The Number. The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry has ever seen. Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.
God is dead. Marx is dead. And bonuses are back from the dead. - With the bonus battle reaching new heights of frenzy, this piece in the WSJ from Professor Macey of Yale Law School jumped out. An excerpt: "These paychecks are highly rational from the shareholders' perspective...[the] bonuses are big and they are unremittingly linked to performance. What Mr. Obama and others apparently fail to understand is that the banks' own shareholders benefit from these huge performance bonuses. The bonuses are paid to those who make large profits for their employers—that is, they are linked to performance." This is, of course, the linchpin of the we-have-to-pay-this-much-or-the-talent-will-walk argument. But what is this "performance" measure that anyone curious to ask about is hard pressed to find defined in mainstream media?
Ha Ha Ha (bonus time) It’s bonus time on Wall Street! Rejoice, indebted, jobless people of America! The bankers are laughing! Even if all the lies of our government fall down on us like cold rain, at least the reflected glory of our banks can trickle down upon us like sunshine! The big joke is now permanent. The Bailout is permanent. The laughing banks are insolvent. They’ll never be solvent again. They’re loading up their balance sheets with new gambles to ensure their insolvency forever in the absence of the Bailout. They’ve received guarantees from the government, and have guaranteed every counterparty, that their position is impregnable. They will loot and loot and loot the people into slavery if that’s what it takes.
Record Bank Bonuses Based On Record Bank Fraud - This bonus bonanza is based on two simple factors: Zero % money, courtesy of the Fed, and a massive accounting fraud — one that happens to be legal. Ask yourself how hard it is for any finance firm to make money — risk free! — when they can borrow from the Federal Reserve at a rate of zero, and then turnaround and “lend” that same cash to the Treasury (buying bonds) at 3% ? Thanks to the Congressionally mandated FASB rule changes back in March of 2009, Mark-to-Market was replaced with Mark-to-Make-Believe. We do not if these banks are actually profitable (GS), whether they are barely solvent (Chase/JPM), somewhat insolvent (BofA) or totally bankrupt (Citi). Given the lack of transparent accounting, we simply do not, and cannot, know.
Too Big to Jail? - MAYBE WALL STREET should open a casino right there on the corner of Broad, because these guys simply cannot lose. After kneecapping the global economy, costing millions their homes and livelihoods, and saddling our grandchildren with massive debt—after all that, they're cashing in their bonuses from 2008. That's right, 2008—when amid the gnashing of teeth and rending of garments over the $700 billion TARP legislation (a mere 5 percent of a $14 trillion bailout; see "The Real Size of the Bailout"), humiliated banks rolled back executive bonuses. Or so we thought: In fact, those bonuses were simply reconfigured to have a higher proportion of company stock. Those shares weren't worth so much at the time, as the execs made a point of telling Congress, but that meant they could only go up, and by the time they did, the public (suckers!) would have forgotten the whole exercise. It worked out beautifully: The value of JPMorgan Chase's 2008 bonuses has increased 20 percent to $10.5 billion, an average of nearly $6 million for the top 200 execs. Goldman's 2008 bonuses are worth $7.8 billion. And why are bank stocks worth more now? Because of the bailout, of course. Bankers aren't being rewarded for pulling the economy out of the doldrums. Nope, they're simply skimming from the trillions we've shoveled at them. The house always wins.
Wall Street May Reduce Compensation to Avoid Outcry (Bloomberg) -- Wall Street firms, facing pressure from lawmakers and shareholders to rein in pay, may report smaller bonus pools because of lower fourth-quarter revenue and mounting public outrage, analysts say. Banks have announced plans to pay more in stock and defer cash payments to satisfy regulators’ calls to tie pay to long- term performance. They will still face public anger over the size of bonus pools after the Troubled Asset Relief Program injected capital into the major financial institutions during the crisis. President Obama yesterday called bank bonuses “obscene” as he proposed a levy on as many as 50 large financial firms to recoup all the U.S. bailout money.
The Big Bank Theory - Wall Street bankers, along with the rest of the players in the financial industry, like to think of themselves as swashbuckling capitalists. They battle cutthroat competition with one hand and oppressive government bureaucracy with the other. In reality, the financial industry is deeply dependent on the government. Far from the rugged, go-it-alone types they wish they were, they are more like well-dressed, coddled adolescents. And this is true in good times and bad.These dependencies are entrenched, and, despite loud protests to the contrary, the removal of government from the financial sector is not really on the agenda.
In London, Banks Are Bristling at Strict New Rules on Pay - NYTimes — A tough new requirement by Britain’s securities regulator that top banking executives and earners must defer 60 percent of their total compensation for a three-year period is pushing some American banks with extensive London operations to say that they just won’t take it anymore. As a result, a number of foreign banks operating here — JPMorgan Chase and Goldman Sachs in particular — have begun to reassess their once cast-iron commitments to using London as a major financial hub and operations center.
The case for a supertax on big bank bonuses - The big banks are pre-testing their main messages for bonus season, which starts in earnest next week; leading executives are still arguing out the details of the optics.The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009. The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses. Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.
2009 Credit Card Segment Results: JPMorgan Chase - Credit Card Fee and Interest Income Soar as Nation's Largest Credit Card Company Hammers the Customers Who Bailed It Out in 2008 - While we are waiting for the December Federal Reserve G.19 Consumer Credit report due February 5th, which will confirm 2009's complete collapse of Revolving Consumer Credit resulting from millions of the insolvent and near-insolvent 60 percent or so of Americans who carry credit card balances month-to-month but who desperately are trying to reduce the hideous debt-shadow which has remained long after the afterglow has faded from years of restaurant meals, trips to Disney World, flat-screen televisions, college tuitions and entrepreneurial forays, inquiring minds may care to put JPM Morgan Chase's full-year card services results under the microscope. In JPM's January 15, 2010 earnings release, on pages 18-20 of its Earnings Release Financial Supplement, the nation's largest credit card company by cards and balances details the sorry state of what in better years was its most profitable segment.
Optimism Dips At Small Businesses - Small business owners aren’t optimistic yet, the latest monthly survey by the National Federation of Independent Business found. The NFIB index fell 0.3 points in December to 88. That’s up from the lows of March 2009, but has been below 90 for 15 months. “Optimism has clearly stalled in spite of the improvements in the economy,” the NFIB said. NFIB Chief Economist William Dunkelberg added, “Continued weak sales and threatening domestic policies from Washington, have left small business owners with little to be optimistic about in the coming year.”
Raiding the Retirement Fund to Keep Your Business Afloat - Financial advisors view retirement savings -- which are protected in the event of bankruptcy -- as a sacred cow and rarely recommend using it to fund a business. Yet for some, it's the only option they have left. Business owners should never use retirement money to fund a company that is losing money. An owner desperately hanging on isn't looking objectively at the viability of their business. "Before ever tapping into retirement money, get your accountant to give you an honest assessment," Abalos recommends. A recent survey of 2,000 small businesses owners by consulting firm Information Strategies found that 74% said they would tap into their 401(k) to keep cash flowing through a revenue slowdown or if they needed the money to expand business. Entrepreneurs are also using retirement money to fund startups, because small business loans and venture capital are scarce.
CFPA can’t arrive fast enough for the elderly - Reuters - Odd that AARP is only just now throwing its support behind the proposed Consumer Financial Protection Agency, after the House watered down many key provisions in its reform bill. WSJ’s Michael Crittenden reports that the lobby group for retirees wrote a letter to Senators Dodd and Shelby of the Senate Banking Committee which said:When seniors are defrauded or otherwise taken advantage of, the results are particularly devastating since they gernerally are beyond or near the end of their earning years. (no link)Too true.The elderly are great targets for financial scam artists. The creeping fog of dementia is the obvious reason.Less obvious is how many elderly fall victim simply because they’re lonely.
Consent-Only Overdraft Protection: Maybe Not So Great - Starting on July 1st, the Federal Reserve has required banks to get consent from customers before enrolling them in overdraft protection programs so they can experience the excitement of cascading overdrafts. The problem is that consumers may be trading overdraft fees for insufficient funds fees and good old-fashioned bounced checks...and end up worse off in the long run. Bob Sullivan at the Red Tape Chronicles (who will be at our next Consumerist meetup on January 21) looked at financial life under the new rules, and offers advice based on your financial situation.
Look Who's Peeking at Your Paycheck (wsj) You may think your income is private information. But the credit bureaus may have your number. And starting in February, your income—as estimated by the bureaus—may be used to help determine whether you get a new credit card. The Federal Reserve issued its final rules related to last year's Credit Card Act, which, among other things, will require credit-card companies to consider an applicant's income or assets and current debts before approving credit. To provide flexibility, however, the Fed said that issuers can use "a reasonable estimate" of income or assets based on "statistically sound models."
Consumer Protection Agency in Doubt - WSJ - Senate Banking Committee Chairman Christopher Dodd is considering scrapping the idea of creating a Consumer Financial Protection Agency, people familiar with the matter said, an initiative at the heart of the White House's proposal to revamp financial-sector regulations.The Connecticut Democrat, who announced this month that he wouldn't run for re-election this year, has discussed the possibility of abandoning the push for a new agency during negotiations with key Senate Republicans as a way to secure a bipartisan deal on the legislation, these people said.
Don't kill the Consumer Financial Protection Agency - The WSJ is reporting that Christopher Dodd is flirting with giving up on the idea of a stand-alone Consumer Financial Protection Agency. The House's financial-reform bill included such an agency, albeit in a form watered-down from what the Obama Administration initially envisioned. According to the WSJ, Dodd will only agree to take the agency out of the Senate version of the bill if some other, existing federal agency (like Treasury) gets a new, stronger consumer-protection division. That would be a bad trade. Getting a stand-alone agency is important. Here's why…
Will Dodd kill the CFPA? - Bloomberg has confirmed the WSJ report that Chris Dodd is seriously considering dropping the Consumer Financial Protection Agency from the Senate’s financial-reform bill. This is hugely depressing news, since it’s predicated on a complete fallacy:“The most effective solution to strengthen consumer protection is to keep the regulation of the bank and the products it sells within the same regulator,” Er, no. As anybody with a bank account knows, there are many, many cases in which the interests of the bank and the interests of its customers are opposed to each other. A bank regulator exists to keep the banking industry safe and sound, and the more money a bank can squeeze out of your customers — to their personal detriment — the better the financial position of the bank in question.
Is Getting Rid of "Floors" on Credit Card Interest Rates Actually Bad for Consumers? - Megan McArdle - Felix Salmon and I find ourselves on different sides of a debate over credit card rates--and he is taking the side of the banks. Felix is worried about an impending rule against putting "floors" on credit card interest rates: If you're worried that consumers can't find their way through a maze of complicated products, then there's a limit to how many features they can have, even if those features make consumers better off. A LIBOR+3.5% card with a 10% floor is a hard product to explain in a simple rate sheet, and arguably harder for consumers to follow. I actually don't find the prospect of the floors all that worrying, from a consumer point of view. Experts tell me the evidence shows that most consumers who carry balances are surprisingly savvy about their interest rates
Consumer Credit Declines for Record 10th Straight Month - The Federal Reserve reports: Consumer credit decreased at an annual rate of 8-1/2 percent in November. Revolving credit decreased at an annual rate of 18-1/2percent, and nonrevolving credit decreased at an annual rate of 3 percent. This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 3.9% over the last 12 months - and falling fast. The previous record YoY decline was 1.9% in 1991. Consumer credit has declined for a record 10 straight months - and declined for 13 of the last 14 months and is now 4.5% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit...
Consumer Credit Plunges Record 8.5% In November - Consumers have been hoarding cash and doing little spending. Finally, that tactic has paid off, as Americans have reduced their overall combined debt by 8.5% or $17.49 billion.Analysts had only been looking for a drop of $5 billion.It's the largest drop ever. Marketwatch: This is the record tenth straight monthly drop in consumer credit. Consumers have retrenched since the financial crisis hit in full force in September 2008. Credit has fallen in every month except January 2009. Economists surveyed by MarketWatch expected consumer credit to decline by $3.9 billion. In the subcategories, credit-card debt fell $13.7 billion, or 18.5%, to $874.0 billion. This is the record 14th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell $3.8 billion or 2.9% to $1.59 trillion.
The Great Paydown - November Revolving Consumer Credit Falls Off the Cliff in Latest Fed G.19 - Nearly $14 Billion Month-Over-Month Decline Annualizes to Unprecedented 18.5% Plunge - Credit cards remained firmly in shoppers' wallets during the all-important holiday season shopping orgy which kicked off shortly after midnight the day after Thanksgiving, and revolving consumer credit tallied by the Federal Reserve plunged an unlikely annualized 18.5 percent on a seasonally adjusted basis, falling $13.7 billion in the month according to its monthly G.19 Consumer Credit report issued Friday, January 8th. Year-over-year revolving credit now has declined more than $100 billion, both SA and NSA, and balances outstanding have retreated every month in 2009, again unprecedented, with every likelihood of falling again in December's report due the first week of February.
Can Your Comments Affect Your Credit? Yup. - Did you know that everything you and those in your network do and discuss online may be compiled and provided to creditors? If your settings are tuned to public, it's true. This includes your Facebook status updates, Twitter "tweets," joining online clubs, linking a Web site, and even posting a comment on a news blog (such as, well, this one). It's fascinating stuff. Here is my full story that came out today, Social networking: Your key to easy credit?, but in brief -
Weekly ABC Consumer Confidence Plummets By 11% As Holiday Bills Arrive Following Weak Payrolls Number - The ABC Consumer Confidence index plummeted last week, falling from -41 to -47, sustaining "one of its steepest one-week drops in the last quarter century, following last week’s troubling jobs report with an all-hands retreat from what had been a tentative positive trend in consumer attitudes." At -47 the index is essentially at the average 2009 level of -48, and far below the average since 1985 of -12. As far as the US consumer is concerned, this recession is far from over.
One In Eight Dollars In Receivables During November Collection Period Has Been Written Off As Uncollectable - Taking a playbook straight from Wall Street, consumers maxed out their store-branded retail cards and decided simply to not pay them in November-December. And even that could not prevent December retail sales from coming it at below expectations: one wonders just what it is that will drive the retail dynamo that ever more clueless pundits on CNBC claim will boost 2010. Here are the facts: "Fitch notes that in December more than one in every eight dollars of receivables was written off as uncollectable during the November collection period on an annualized basis." Well, at least the government (if not private retailers) got something out of this and managed to revise November sales slightly higher. Good luck repeating this. One knows when a "rating agency" tells you things are bad and getting worse, it behooves one to listen:
CPI Only Rose on Things You Use Every Day - The MSM is ecstatic about our low inflation in December. Just one problem. Housing makes up 43% of the CPI calculation. Gasoline makes up 3% and food makes up 8% of the CPI calculation. So, the government tells you there is no inflation because your house price is declining and new car prices are declining. Meanwhile, anyone who lives in the real world has seen gasoline prices rise 53% in the last year, clothing prices jumped 4.8% in December, and food at home jumped 3.6%.
Commodity Prices and The Consumer - Since the start of 2010, the rally in commodities has been a boon for companies and investors in the Energy and Materials sectors. Consumers, on the other hand, are increasingly feeling the impact on their wallets. In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008. We then multiplied the changes by the annual per capita consumption of each item. When the line is in positive territory, commodity prices are acting as a tax on consumers, while readings in negative territory are indicative of a windfall for consumers. Although this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers' wallets over the last 24 months.
We've only just begun to deleverage | The Economist - THE new print edition is now up online, and this week's Economics focus highlights a McKinsey study on deleveraging. The short version of the study is: there's more of it to come. If we focus on America, for instance, we see that for households and in the commercial real estate sector it is very likely that additional steps will be taken to bring liabilities in line with income. The necessity of continued balance sheet repair among households will act as an anchor on job growth. Employment in retail trade and similar sectors just isn't going to bounce right back; consumers will be too tied down handling debt service.
Here's Why The Financial System Isn't Out Of The Woods, And Still Has A Ton Of Deleveraging To Do - A recent report from Deutsche Bank's Bill Prophet, entitled "Alternative Universe," foretells a story of approaching disaster and even goes so far as to say "the health of the US commercial banking system will inevitably get worse before it gets better. And this has undeniable consequences for the rates market, if not Fed policy."The reason? Bank balance sheets have hardly shrunk at all. This applies to both commercial and residential real estate. Says Prophet on RMBS:Nevertheless, we find it inconceivable that these assets are being marked anywhere close to their recoverable value, and the reality is that commercial bank exposure to them is as large now as it was 12 months ago. And in fact when we look at the entire $2tr portfolio of residential real estate assets on bank balance sheets (which would of course include the home-equity loans shown above), we reach a similar conclusion. Namely, as of the end of Q3-’09, the value of “home mortgage” assets has declined by just 1.6% from the end of ‘08 (see Chart 7). Similar to CRE, these assets could be worth hundreds of billions of dollars less than where they are currently being marked.
U.S. House Prices to Income: 1989-2009 - The following chart shows the ratio of U.S. housing prices to income for various major cities from 1989-2009. If we say bubbles exists in cities where that ratio is more than two standard deviations outside its long-run average, we still have residential real estate bubbles in Seattle, Portland, New York and Miami. On the other hand, bubble condition no longer exist in Dallas, Denver, Las Vegas, Los Angeles, Phoenix and San Francisco (!).
Moody's Puts $572.7 Bln In Alt-A RMBS On Watch For Downgrade - Moody's Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions. The rating agency said Alt-A loans that are 60 or more days delinquent "have increased markedly" since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets. Ratings agencies have been cutting their ratings on billions of dollars of RMBS deals after revising the amount of losses expected. The changes have occurred as delinquencies continue to climb and home prices keep falling. Moody's said it now projects, on average, cumulative losses of 14% of the original balance for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. The updated loss projections will have the greatest impact on senior securities issued in 2005, the firm said.
Walkaways, Pay Option ARMS Hit Banks Bad - A lot of reports out today collectively gave me a very bad feeling about the state of our current housing recovery. First, Amherst Securities Group took a look at Pay Option ARMs. Only 9 percent of these loans had full documentation from the borrower and 76 percent were originated in California, Florida, Arizona and Nevada, our four disaster states for housing. It should therefore come as no shock that they are suddenly approaching subprime in their delinquency status. Not soon after I saw that report, another flew into my "In" box from Fitch ratings: "Overall, prime RMBS 60+ days delinquencies rose to 9.2% for December 2009, up almost three times compared to the same period last year. Then there was the report I received last night from Lender Processing Services...
More Homeowners Struggling As Option ARMs Reset Higher - Thousands of American homeowners are starting to see their monthly mortgage payments skyrocket, dealing a fresh blow to the already shaky housing recovery. The widely feared reset of thousands of option adjustable-rate mortgages—where both interest and principal payments rise sharply—is already leaving many homeowners struggling to keep a roof over their head. "It's going to kill off housing," "We have pretty close to 500,000 option ARM payments going higher in California over the next couple of years. The impact of the higher payments will be devastating for homeowners who are having trouble now making ends meet."
Recasting Mortgages Worth $47 Billion Will Increase Defaults - Thousands of homeowners who have been making payments on interest only mortgages are in for a rude shock this year. Their monthly payments are about to rise 15 percent on average, forcing many into default and foreclosure. Fitch Ratings today forecast that $47 billion worth of prime and Alt-A Interest only loans are due to recast this year to require full principal and interest payments, placing additional stress on U.S. homeowners. Over the next two years, a total of $80 billion of prime and Alt-A loans, and a total of $50 billion Subprime loans are due to recast,”60-day delinquency rates have rise over 250 percent in the 12 months following previous recasts for prime and Alt-A loans.”
When banks refuse to modify mortgages - Paul Kiel has an important story today on something I was not aware of at all: banks converting trial loan modifications into… trial loan modifications. This violates the government’s guidelines, but it seems that the likes of Chase and Wells Fargo are doing anything they can to avoid doing what is clearly envisaged in the government plan: transforming all trial modifications to permanent modifications if the trial-mod payments are made in full and on time for three months. This screams “bad faith” to me. Up until now I’ve reckoned that a lot of the incompetence at mortgage servicers was due to incompetence rather than outright malice, and that they were simply overwhelmed by the volume of distressed mortgages they have to deal with...
More than 13% of Mortgages Delinquent or Foreclosed in November: LPS - One in every 7.5 homeowners either fell into delinquency or foreclosure as of November 30, 2009, according to the December mortgage monitor report from Lender Processing Services The total amount of delinquencies reached a record high 9.97%, a 5.46% increase from the previous month and a 21.29% increase from November 2008. In a sign that homeowners continue their struggle to meet their monthly mortgage payments, loans falling into more severe delinquent categories reached 5.01% through November, compared to 1.52% of loans improved toward a current status.Compare that to November’s mortgage monitor report, when 4.02% of current mortgages through December 2008 fell into delinquency by October 2009.
Ten Percent of Wealthier Homeowners are Delinquent on Their Mortgages - The percentage of wealthier homeowners who are delinquent two months or more on prime, jumbo mortgages tripled in 2009to nearly ten percent, according to the latest data from Fitch Ratings. The report is yet another sign that the housing crisis and the negative equity it has caused is climbing upscale to some of the wealthiest neighborhoods in America. Should the trend continue, foreclosure yard sales will become commonplace in the cul de sacs and gated neighborhoods of the nation’s most exclusive communities. California and Florida are leading the way. The five states with the highest volume of prime jumbo loans outstanding (California, New York, Florida, Virginia, and New Jersey)account for approximately two-thirds of the delinquencies.
RealtyTrac: 2009 was Record Year for Foreclosure Filings - Press Release: RealtyTrac® year-end report shows record 2.8 million foreclosure filings in 2009 The RealtyTrac® Year-End 2009 Foreclosure Market Report™, which shows a total of 3,957,643 foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — were reported on 2,824,674 U.S. properties in 2009, a 21 percent increase in total properties from 2008 and a 120 percent increase in total properties from 2007. The report also shows that 2.21 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006. Foreclosure filings were reported on 349,519 U.S. properties in December, a 14 percent jump from the previous month and a 15 percent increase from December 2008 — when a similar monthly jump in foreclosure activity occurred.
Principal cuts on lender menus as foreclosures rise - Efforts by U.S. banks to help distressed homeowners have focused mainly on temporary fixes such as interest-rate reductions that may only put off the day of reckoning, despite policy makers wanting them to do more.Banks may be forced to resort to a remedy they’ve been trying to avoid – principal reductions – as another wave of foreclosures looms and payments on risky loans rise. While interest-rate reductions or extending loan terms reduce homeowners’ monthly payments, they don’t give much comfort to borrowers who owe more on their homes than their properties are worth. Borrowers who don’t have equity in their homes are more likely to hand over the keys when they run into trouble. The 25 percent plunge in residential real estate prices from their 2006 peak has left homeowners underwater by $745 billion, according to research firm First American CoreLogic – a number that tops the government’s $700 billion bailout for banks.
Pushing down mortgage principals - When the Obama administration inherited the housing mess, it had a difficult choice: give banks incentives to make voluntary loan modifications or bail out underwater homeowners. Treasury Secretary Tim Geithner testified last month about the administration's approach, saying: "This is a conscious choice we made, not to start with principal reduction. We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness." I can't fault this logic. As distasteful as corporate bailouts are, homeowner bailouts reek of unfairness. I bought at the top of the market, putting down 15 percent and hoping for the best. Let's say my neighbor saved for a 30 percent down payment, putting off vacations and other indulgences. Anything the government did to reduce my principal would be fundamentally unfair to my neighbor.
Big Banks Accused of Short Sale Fraud - In order for a short sale with two loans to happen, the second lien holder has to drop the lien. If they don't, and there's no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan. In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn't have to agree, but more and more are doing so. That's all legal. But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.
Strategic Mortgage Defaults: A Growing Trend - As many homeowners find their property values underwater, some are finding relief by deliberately walking away from their mortgages and choosing to pay other debts first. A consulting company working for financial institutions, Oliver Wyman estimates that 16% of current foreclosures are of mortgage borrowers intentionally walking away, choosing to pay other debts first and stick it to the bank. Other financial firms estimate the rise in walkaways is as high as one in four. The walkaways are concentrated in five of the worst states impacted by the foreclosure crisis, California, Florida, Arizona, Nevada and Hawaii.
Don’t Strategically Default on your Mortgage - There is a false notion that because firms default when it is in their economic interest to do so, so should homeowners whose mortgages are greater than the underlying house value. First, firms can’t so easily enter Chapter 11 — a firm must not be able to raise cash to make a debt payment, and the assets of the firm are worth less than the liabilities. If a firm can’t pass both tests, the bankruptcy court should refuse the filing, forcing the firm to sell assets to make a payment. To use this analogy for defaulting on a home mortgage, it is one thing to take out a mortgage in buying a home, having reasonable margins for error, and then disaster hits, and the mortgage payment can’t be made. It is quite another thing to have the capacity to make the mortgage payment, and default.
Housing Hangover in the Sun Belt - The Census Bureau recently released estimates of state-level population changes, which showed a decline in the growth of some Sun Belt areas. The growth of much of the Sun Belt has been achieved through vast amounts of construction providing low-cost, high-quality homes for ordinary Americans. New construction has declined by more than two-thirds during this recession, and this drop in new building has led to a fall in the population growth of the places that had been building most. This shift should remind us that America’s future is being determined, in no small part, by its housing industry and that events that affect the supply of housing ripple throughout America. The chart below shows the relationship between housing units and metropolitan-area population growth from 1970 to 2000
US Mortgage Originations Seen Plummeting- MBA (Reuters) - U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade as home refinancing demand sinks with rising mortgage rates, the industry's main trade group said. Lenders will underwrite $1.28 trillion in home loans this year, down from $2.11 trillion in 2009, the Mortgage Bankers Association said in its annual forecast on Tuesday. That would be the lowest since $1.14 trillion in 2000. The forecast was downgraded from December, when the MBA predicted originations would fall about 24 percent. New purchase originations are expected to rise slightly to $776 billion from $742 billion in 2009. Refinance originations, however, are seen plunging to $502 billion this year from $1.372 trillion last year.
In One Short Month, MBA Now Sees 2010 Mortgage Originations Plummeting By Even More - It appears the shit in housing is about to re-hit the fan. While in December, the Mortgage Brokers Association anticipated an already staggering 24% drop in mortgage originations, a mere month later they now see the drop to be 40%. And all this occurring with Q.E.'s MBS purchases set to expire in less than 3 months. With mid-term elections coming, someone better line up more bailouts, stimuli and subsidies pronto. The American dream of middle-class homeowner debt slavery must continue. And if anyone still thinks Q.E. is ending... Interest rates are expected to rise when the Federal Reserve completes its pledge to support the mortgage securities market with $1.25 trillion in purchases.
Boston Fed Chief Expects Mortgage Rates To Rise This Spring - Eric S. Rosengren, president and chief executive of the Boston Fed, said in an interview at The Courant that he expects [mortgage] rates to rise when the [Fed MBS purchase] program ends — or before, as the end approaches. "Actually, I've been surprised that we haven't seen more of a backing up already," Rosengren said. "You maybe would have thought you would have seen rates move up more quickly than they have, but nonetheless that is a concern." The mortgage rate increase of one-half to three-fourths of a percentage point from the end of the Fed program would happen regardless of any Fed action in interest rates, Rosengren said.
Housing Forecast: More Foreclosures, Home-Price Declines – TIME - The decimated housing market may get considerably worse before it gets better, according to housing-industry professionals, who expect foreclosures and home-price declines to continue pressuring the sector through at least the first half of 2010.The biggest problem will likely be a flood of inventory hitting the market from rising foreclosures, says Bob Curran, a managing director at Fitch Ratings. With a mountain of specialized adjustable-rate mortgages, known as option ARMs and certain Alt-A mortgages, slated to reset over the next 12 to 18 months and unemployment projected to hit 10.5% this year, the number of homeowners defaulting on their mortgages is expected to surge. At least $64 billion in option ARMs will reset in 2010 and another $68 billion in 2011, according to First American CoreLogic, a real estate and mortgage-data company.
Property Taxes Clobber Hurting Homeowners - After suffering 30 percent or greater losses in the value of their homes last year, homeowners are looking forward to a silver lining this year in the form of lower property taxes as assessments adjust to the new real estate reality. Unfortunately, for millions there may be no silver lining. Nationally, property tax revenues rose 6.2 percent in 2008 according to the National League of Cities, but increased only 1.6 percent last year as property assessments, which are usually conducted every three years, reflected lower values. Saddled with budget crises rooted in the recession and reliant on property taxes for 30 to 40 percent of their budgets, local governments across the country are responding to the threat to their bottom line by raising taxes.
NY property taxes rose $2.5B in 2009 - New Yorkers paid $2.5 billion more in property taxes from 2008 to 2009 despite widespread drops in property values, according to The Business Council of New York State Inc. The research wing of the Albany-based lobby found taxpayers paid $46 billion in property taxes in 2009, a 6 percent increase from the total bill in 2008.
The Costs of “Extend and Pretend” - For months now, Calculated Risk has been criticizing the policy of “extend and pretend”–the practice of pretending that real estate loans are still worth their full value, making modifications so that borrowers can avoid going into default, so that banks don’t have to recognize losses on their assets. Here’s one story about “zombie buildings”–office buildings, in this case. Also an article in The American Prospect about extend and pretend when it comes to multi-unit residential buildings. Expensive condo towers are now “see-through” buildings. Another problem is apartment complexes that were bought by private equity firms and flipped to developers during the boom with plans to evict the low-rent tenants and replace them with high-rent tenants; the high-rent tenants never arrived, the developers can’t make their loan payments, and no one is maintaining the buildings for the remaining tenants. One of the underlying problems is that developers have an incentive to hang on and hope for a return to prosperity that will deliver the promised condo buyers or high-rent tenants–in other words, betting on another boom.
Manhattan Apartment Rents Drop 9.4% Amid Job Cuts (Bloomberg) -- Manhattan apartment rents dropped 9.4 percent in the fourth quarter from a year earlier as Wall Street jobs vanished in the recession. The median rent fell for all apartment sizes except two- bedrooms, which were little changed, according to a report today by broker Prudential Douglas Elliman Real Estate and appraiser Miller Samuel Inc. A separate tally by broker Citi-Habitats Inc. showed the average apartment price declined 7.3 percent for the year. The company didn’t report medians. New York City lost 25,200 finance jobs in the 12 months ended Nov. 30 and the unemployment rate climbed to 10 percent, curbing tenants’ appetite for bigger and more expensive apartments. Joblessness also forced landlords across the U.S. to cut prices as the nationwide vacancy rate reached a record 8 percent in the fourth quarter, New York-based research firm Reis Inc. said Jan. 7.
Real estate study cites rental vacancies at 30 year high - A new commercial real estate study shows apartment rental vacancies are at a 30 year high nationwide. Some property owners say they have not changed their policies in years. Others say they are willing to adapt to help tenants find a place to call home. If you've thought about renting, this could be the time to do it. The national trend shows the apartment vacancy rate rose to the highest level it's been in 30 years, giving potential renters a lot of options.
Commercial Property Market to Favor Tenants in '10 - The commercial property market is coming off its worst year in decades, and the woes are expected to deepen before a turnaround takes hold.Experts anticipate vacancies for office, industrial, retail and apartment properties will continue to rise. Rental rates are expected to fall. And prices, already down 40 percent from the peak of the market in 2007, are projected to decline even further.That means many commercial landlords will struggle to keep their properties leased and tenants will have the upper hand."For tenants that need space, this is the time," said Bob Bach, chief economist for Grubb & Ellis. "They'll have a great choice of options and in some cases they'll have options in buildings they could not have afforded or that were simply not available to them when the market was stronger."
Banks' Credit Woes Rise as Buildings Empty - Commercial real-estate problems may be about to douse the recent rally enjoyed by regional banks. As banks start releasing fourth-quarter earnings this week, the losses and reserves tied to commercial real-estate loans could spike even higher than some analysts think. Regional banks could get hit hardest, given typically greater exposure to commercial property than their bigger peers. The stress is building. This month, market researcher Reis Inc. announced sharp declines in rents and occupancies in all property classes, giving landlords less cash flow to service debt. Foresight Analytics estimates delinquencies on commercial real-estate loans held by banks will rise to 9.47% in the fourth quarter from 5.49% a year earlier
Commercial Real Estate Crisis a Slow-Motion Train Wreck – TIME - For about a year now, we've been hearing that commercial real estate is the next shoe to drop, the next big financial debacle. And for about a year now, the oft-predicted crisis has stubbornly refused to materialize. It's not that everything's fine in the commercial real estate business. Everything's awful and will probably get more awful. But unlike 2008's Wall Street panic, this particular financial unraveling looks as if it will play out over a period of years, not weeks."It's a train wreck in slow motion," says Richard Parkus at Deutsche Bank. "Because it's in slow motion, people get this sense that it's really not happening. It is happening." To get a sense of just how the train wreck is unfolding, I took a tour last month of the warehouses and industrial parks of eastern Los Angeles County.
Commercial Property Owners Prepare for Expected Collapse of Commercial Real Estate Market - The residential property market has slowly made progress toward recovery, but the commercial real estate market isn’t off the hook. As predictions appear universally bleak, many real estate experts continue to expect a steep decline in this market. “The last several years have seen liberal lending in the commercial market,” “Though not as pervasive or severe as in the residential market, this reckless lending is possibly more threatening to our economy.” According to the Emerging Trends in Real Estate 2010 report, issued by the Urban Land Institute and PricewaterhouseCoopers, most investors will recognize massive losses in the commercial real estate market. Value declines will eventually total 40 to 50 percent of market highs, and surveys in the report indicate 2010 will be the worst time for investors to sell properties in the report’s 30-year history
Commercial Real Estate Delinquencies Are Up 5x Already And They Still Won't Peak Until 2012 - FItch is not optimistic about a peak in commercial real estate delinquencies. Here are some new notes from the firm Of the five main property types, each has seen an increase in delinquencies of over 195% since December 2008, ranging from multifamily with 196% increase, to hotel, with a 1,175% increase. Delinquency rates for these properties are as follows (along with total dollars delinquent versus total dollars delinquent as of December 2008): --Office: 2.66% ($3.9 billion vs. $603.5 million); --Hotel: 9.13% ($4.6 billion vs. $363.7 million); --Retail: 4.25% ($5.7 billion vs. $1.2 billion); --Multifamily: 7.54% ($5 billion vs. $1.6 billion); --Industrial: 3.57% ($851.3 million vs. $186.2 million). There are currently 25 delinquent loans greater than $100 million, compared to four in December 2008.
Bludgeoned Commercial Real Estate Has Begun To Entice Chinese Bottom Feeders - This is a good sign: disastrous US commercial real estate market is finally getting low enough to attract Chinese "bottom feeders."Of course, there will be plenty of bottom feeders or vultures looking for opportunity, both foreign and domestic.But cash-flush Chinese are natural buyers.And you'd hope that the presence of bottom feeders means we're near a bottom.FT: Market participants warn that the activity represents “bottom-feeding” by opportunistic investors whose strategies could be derailed by rising interest rates. Also, sums are tiny compared with the debts that need refinancing. Nevertheless, the growing interest from investors is a sign of stabilisation, making it less likely that worsening commercial real estate conditions will sink banks and choke off a US recovery.
Demand overwhelms program to prevent homelessness - Now housing advocates want Congress to boost the program's $1.5 billion funding as the vast need for more assistance becomes evident nationwide. The Homelessness Prevention and Rapid Re-Housing Program is expected to help 600,000 people by moving some from homeless shelters into their own apartments and by providing rent payments to prevent others from being evicted. Because the assistance is temporary — usually for three months to 18 months — the program tries to target people who are most in need and can who can return to self-sufficiency within a few months. Experts say the initiative breaks new ground in federal housing policy by focusing more resources on preventing homelessness and getting people back on their feet, rather than just feeding and warehousing the destitute.
One in Eight Americans Receives Food Stamps (Reuters) - Some 37.9 million people -- one in eight Americans -- received food stamps to help buy food at latest count, the government said on Tuesday as enrollment set a record for the ninth month in a row. Food stamps are the primary federal anti-hunger program. It helps poor people buy groceries. The economic stimulus package boosted benefits by $80 a month for a family of four. Participation has surged since the financial-market turmoil more than a year ago and has set a record each month since December 2008. The Agriculture Department said enrollment reached 37.9 million in October, the latest month for which figures are available, up 746,000 from the previous month.
Social Mobility in America Matt Zeitlin flags an important remark by Florida tea party Senate candidate Marco Rubio in a recent NYT Magazine profile: “This is the only society in history where your future is not determined by where you were born,”The conservative view that the United States is the home par excellence is interesting because I’m pretty sure it’s something they’re not lying about. It’s a source of genuine confusion. But as Matt says, it’s completely false: Federal Reserve Bank of Chicago has a paper which says that “estimates of intergenerational mobility are significantly lower for families with little or no wealth.” He also points to CAP’s research on the subject.
Links on inequality and the macroeconomy - My choices regarding what links to include here are likely to be quirky and seem one-sided. Usually when I append links to a post, I try to be fair about including perspectives I disagree with. But the broad inequality debate is more than I want to cover here. I'm interested in the question of how inequality effects macroeconomic stability and growth. Most defenses of economic inequality that I know address different issues, or simply presume that a tension between equality and growth-enhancing incentives outweighs any other effect. So my collection is unbalanced.
Recession Pushes Up Law School and Graduate Studies - NYTimes - It took longer than some experts expected, but the recession and the resulting shortage of good jobs have spurred a jump in applications to law schools and a growing interest in graduate programs. The number of people taking the Law School Admissions Test, for example, rose 20 percent in October, compared with October 2008, reaching an all-time high of 60,746. And the number of Americans who took the Graduate Record Examination in 2009 rose 13 percent, to a record 670,000, compared with the year before, according to the Educational Testing Service, which administers the test. The increase is a sharp reversal from 2008, when the number fell 2 percent even though the recession was already under way.
Larry Summers, Robert Rubin: Will The Harvard Shadow Elite Bankrupt The University And The Country? - Harvard lost $11 billion from its endowment last year, plus another $2 billion by gambling with operating cash and $1 billion in bad bets on interest rate fluctuations. Harvard had been borrowing vast sums to leverage its assets and to expand its physical plant; its president, Lawrence Summers, had described as "extraordinary investments" what ordinary people would call crushing debt. The only way to balance the looming deficits was through huge investment returns. The speculating worked for a while, but when the bubble burst, Harvard was left almost insolvent. A presidential resignation might have been expected, but Summers, the president most responsible for Harvard's unsustainable growth plan, had resigned already--he is now a top economic adviser to Barack Obama.
Amid recession, some colleges look at students' wealth - WP - Before the recession, most of America's wealthiest and most selective colleges and universities were following policies designed to increase the numbers of low- and moderate-income students on their campuses. First, they evaluated applications without consideration of parents' ability to pay, a practice known as "need blind" admissions. Second, if students qualified for financial aid, many of these colleges promised to meet their full demonstrated need. But while about two dozen of the country's top-tier colleges and universities are maintaining these policies, at schools just below this tier, admissions are becoming more "need aware." These schools are now making some admissions decisions with an eye to an applicant's ability to pay, and some are unofficially reserving new seats for those who can pay full freight. Meanwhile, the top public universities -- the Chapel Hills, Ann Arbors and Berkeleys -- are moving to enroll larger numbers of out-of-state students, who pay higher tuition and therefore tend to be wealthier than in-state students.
Job woes, debt to curb retail comeback - experts (Reuters) - U.S. retailers are in for a much better year as the economy improves, but stubborn unemployment and high consumer debt levels will limit the extent of the recovery, industry experts said on Monday. Moody's Chief Economist Mark Zandi said the economy's improvement would pick up speed this year. He forecast that sales for the 2010 holiday season would rise 3 percent to 4 percent from 2009."We're going to be pleasantly surprised by Christmas 2010," Zandi said at a National Retail Federation conference in New York.But an unemployment rate that appears stuck at around 10 percent has some chief executives concerned about the recovery's long-term prospects, despite optimism that consumer spending turned a corner after retailers last week reported December sales above expectations."The big negative is the high level of unemployment and we don't see it getting better in the near term,"
Face of joblessness is looking older - The percentage of men age 55 and older who were unemployed and job hunting last year hit its highest rate since the U.S. record series began in 1948. That 8.2 percent peak doesn’t look too bad compared to the overall jobless rate of 10 percent. But the Urban Institute’s Retirement Policy Program sees cause for alarm. In a series of reports released Friday, the social and economic research institute detailed the financial consequences of high unemployment rates for older workers. (The unemployment rate for women age 55 and older was slightly lower than men’s, but it still was twice as high as it was in 2007 before the recession began.)
Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising - (Bloomberg) -- An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing above 10 percent in December, economists said. Had the labor force not decreased by 661,000 last month, the jobless rate would have been 10.4 percent, according to economists including David Rosenberg at Gluskin Sheff & Associates in Toronto and Harm Bandholz at UniCredit Research in New York. “The actual unemployment rate is higher than shown by the official numbers,” About 1.7 million Americans opted out of the workforce from July through December, representing a 1.1 percent drop that marks the biggest six-month decrease since 1961, the Labor Department report showed. The share of the population in the labor force last month fell to the lowest level in 24 years.
Labor Force Participation Rate - There have been a number of comments about the recent collapse in the labor force participation rate. The rate has declined from 65.4% in July to 64.6% in December. If the participation rate was at the same level as in July, the unemployment rate would probably be around 10.8%. This graph shows the total participation rate, and for men and women, starting in 1948. Although there are still far more men in the labor force than women (we are talking labor force, not payroll jobs!), the participation rate for men has been declining for decades. The participation rate for women was increasing steadily until the late 90s, and has decreased slightly since then. However, since July, the participation rate for both men and women has fallen sharply. For men, the rate has fallen from 72.0% to 71.0%, or a decline of 801,000 men.
An Alternative Unemployment Rate.... at 11.7% - The labor force has declined (chart) at the fastest pace over the last 12 months in more than 50 years. Which causes the unemployment rate to skew too low as the labor force is the denominator in the unemployment rate. Lets solve this problem shall we? The chart below shows the labor participation rate and the rolling five year average of that rate. The key takeaway is that over the past 60 years there has been a huge secular shift as woman entered the workforce (more on that from Calculated Risk here), which effectively ended the "norm" of a single worker household. With that denominator... EconomPic Unemployment Rate (chart)
David Rosenberg: Forget The Unemployment Rate, The Real Nightmare Is The EMPLOYMENT Rate - David Rosenberg has A LOT to say about this morning's miserable jobs report. Actually, in his latest note he unloads a whole bunch of charts to show that the unemployment rate is even worse than you think it is.Here they are in all their glory. The most striking one, we think, is the last one, that shows that the employment rate is just 58.2% . For every 100 people, 41.8 aren't working, a brand new low.
Job Openings in U.S. Fell by 156,000 in November (Bloomberg) -- Job openings in the U.S. fell in November to the lowest level in four months, a sign employers are reluctant to expand staff even as payroll reductions waned from earlier last year. Openings declined by 156,000 to 2.42 million, the second- lowest level since records began in 2000, the Labor Department said today in Washington. The number of unfilled positions was down 50 percent since peaking in June 2007. “It confirms the suspicion that most of the improvement in non-farm payroll employment has been due to reduced firing and not renewed hiring,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “This is the last shoe to drop for the recovery in the labor market and we’re still waiting.”
Why legal aliens don't drag down the wages of the native-born | The Economist - IF CONGRESS has any sense, it will pass immigration reform this year. That's the topic of this week's column.A new report from the Centre for American Progress, an Obamaphile think-tank, finds that comprehensive immigration reform would add $1.5 trillion to America's GDP over ten years.Not everything that raises GDP is a good idea. Reihan Salam, a conservative writer, pointed out to me yesterday that annexing Canada would raise GDP by a lot. But it would have serious downsides, such as Americans having to find out where Canada is.Similarly, plenty of Americans have doubts about the idea of making the American economy larger by allowing more people in. Blue-collar workers, in particular, fear that Mexicans will undercut them.
Policies for Increasing Economic Growth and Employment - CBO - CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been. In a previous report and testimony, CBO identified three key criteria for judging policy options for spurring economic growth and increasing employment:
What causes mass unemployment? - Today we consider the causes of mass unemployment of the sort that most nations are enduring at present. This also involves the consideration of the relationship between wages and employment. This is an area in economics that has been hotly contested across paradigm lines for years. Mainstream economic commentators still claim that the employment situation can be improved if wages are cut. They are wrong – mass unemployment arises when the budget deficit is too low. To reduce unemployment you have to increase aggregate demand. If private spending growth declines then net public spending has to fill the gap. In engaging this debate, we also have to be careful about using experience in one sector to make generalisations about the overall macroeconomic outcomes that might accompany a policy change.
BLS: Near Record Low Job Openings in November - From the BLS: Job Openings and Labor Turnover Summary There were 2.4 million job openings on the last business day of November 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 1.8 percent. The openings rate has held relatively steady since March 2009. The hires rate (3.2 percent) and the separations rate (3.3 percent) were essentially unchanged in November. The following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.
Competition for Positions Intensifies as Job Openings Decline - As the ranks of the unemployed continue to swell, the competition for open positions is intensifying, according to new data from the Labor Department. The government’s Job Openings and Labor Turnover survey showed that there were nearly 6.4 unemployed workers, on average, for each available job at the end of November, up from 6.1 in October. Layoffs and discharges were down 3.5% from October at 2.1 million, but the number of job openings was also lower, falling 6.1% to 2.4 million.
Labor Force Participation Rate - There have been a number of comments about the recent collapse in the labor force participation rate. The rate has declined from 65.4% in July to 64.6% in December. If the participation rate was at the same level as in July, the unemployment rate would probably be around 10.8%. This graph shows the total participation rate, and for men and women, starting in 1948. Although there are still far more men in the labor force than women (we are talking labor force, not payroll jobs!), the participation rate for men has been declining for decades. The participation rate for women was increasing steadily until the late 90s, and has decreased slightly since then. However, since July, the participation rate for both men and women has fallen sharply. For men, the rate has fallen from 72.0% to 71.0%, or a decline of 801,000 men.
Discouraged workers just isn't a new phenomenon - I agree with his and Crudele's point on Goolsbee (I find the latter's performance in the Administration more disappointing than any other economist's.) Geraghty makes the point: Even when the economy starts creating jobs in bunches, you’re going to see the unemployment rate stay steady or perhaps even increase as these folks who dropped out of the labor force jump back in. The size of the U.S. civilian labor force in the third quarter of 2009 was 154,235,000; in the December figures it is 153,059,000. That’s 1,176,000 people who stopped counting towards the unemployment figure. Right now, the Obama administration's economic management is getting graded on a curve, because hundreds of thousands of frustrated out-of-work citizens are treated as nonentities under our usual statistics.
Number of long-term unemployed hits highest rate since 1948 - On Friday, in the December unemployment report, the Bureau of Labor Statistics said the number of people out of work for 27 weeks or more hit 6.1 million Americans, or 40 percent of all 15.3 million jobless. This is the most since 1948, when the data was first recorded, according to the Department of Labor. On average, it now takes 20.5 weeks to find a new job – double the amount of time in the 1982-83 recession. Many of the long-term unemployed are older workers, but some are the very young who were the first fired. A significant percentage of them don’t have a college degree, but some do. And many of them are now so discouraged they have lost their belief that a job exists for them. “It’s a real risk to the workplace,” “We may be creating a permanent group of people who think there are no jobs out there, who feel they are shut out of the system.”
Unemployed? Brace Yourself, It Could Last Another Four Years - A report from the Congressional Budget Office (CBO) forecasts that U.S. unemployment won't break below 8% until some time during 2012.The main reason is that they don't expect the steep V-shaped recovery characteristic of normal recessions. Yes the economy is recovering, but it will take years before things are normal again.CBO: Deep recessions can be followed by steep recoveries, driven by firms’ decisions to stop liquidating inventories and to replace capital equipment when demand stops fall- ing. However, several factors suggest that this recovery will be weaker than usual: Fiscal and monetary policy will not be providing the same boost to economic growth that they often have during the early stages of recoveries; financial and housing markets remain fragile; and con- sumers may want to rebuild their savings after large losses in stock and housing wealth. In addition, improvements in employment will probably lag well behind growth in demand and production, in part because that growth is expected to be slow.
A jobless decade - The Economist - IN DIGGING through last week's employment report for something I'm working on I came across this depressing statistic: in December of 1999, there were 130.5 million employed Americans, and in December of 2009, there were 130.9 million employed Americans. Obviously, the peak and trough of the business cycle don't line up exactly, but the country grew by nearly 30 million people over that time period. To end the decade with employment just 400,000 higher is an awful result.
Lost Decade: Reason to Expect Better? - NYTimes - At the end of 1999, the Labor Department counted 110 million private sector jobs. The figure for the end of 2009, announced today and subject to numerous revisions before we get a final figure, was 108.4 million. That is a decline of 1.4 percent. During the same period the country’s population climbed by about 9.8 percent.Since World War II, there had never been a 10-year period with fewer private sector jobs at the end, but this decade was a perfectly bad one. The great 1990s boom was ending with employers desperate for help. Just as the 1990s boom set us up for disappointment, the 2000s bust may be leading the way to positive surprises.
Jobless rate to stay above 8 percent until 2012: CBO (Reuters) - The U.S. unemployment rate, currently at 10 percent, is unlikely to drop below 8 percent before 2012 unless Congress takes further steps to boost the economy in the short term, the non-partisan Congressional Budget Office said on Thursday.The estimate is likely to give increased urgency to Democratic lawmakers' efforts to create jobs before they face voters in November. The House of Representatives passed a $155 billion jobs bill in December and the Senate is expected to act in coming weeks. CBO's estimate shows unemployment is likely to remain high for several years as the country gradually recovers from the worst downturn since the 1930s. The unemployment rate stood at 4.9 percent before the recession took hold in December 2007.
Bank Economists Expect Slow Growth, High Unemployment - The U.S. economy will recover this year, but growth won’t be strong enough to bring down unemployment substantially, bank economists said Friday.The American Bankers Association said in a statement the consensus of bank economists is for an annualized GDP growth rate of around 3.1% throughout 2010. They see core inflation, which excludes volatile food and energy prices and is closely watched by the Federal Reserve Board, at 1.2%. “This growth would be just above the economy’s long-term trend, but not enough to reduce the unemployment rate much below 10% by year end,” the group said.
Here comes the jobless recovery - THIS week, your blogger is in the print edition discussing the likelihood that the current recovery will be jobless. The answer, I conclude, is yes; the strongest job sectors can't add workers fast enough, and consumer-side employment will be very slow to recover until households clean up their balance sheets. As it happens, they've also got me in front of a microphone discussing the piece and the broader context. You can have a listen here: By "no silver bullet" I mean that there are underlying problems that can't necessarily be addressed by government policy. In particular, the American economy is probably not going to run at full speed until household indebtedness is less of a problem, and that fix is going to take time.
Payrolls and paradigms - Krugman - NYTimes - Here’s the way I think about the economic news: each piece of data tells us something about which model of recovery is right. More specifically, each disappointing piece of data strengthens the case of the pessimists.From the beginning, there have been two schools of thought about the likely path of recovery. One school — strongly represented among Wall Street economists — said that the 2008-2009 recession should be compared with other deep US recessions: 1957 (the “Edsel” recession), 1974-5, 1981-2. These recessions were followed by rapid, V-shaped recoveries. The other school of thought said that this was a postmodern recession, very different in character from those prior deep recessions, and that it was likely to be followed by a prolonged “jobless recovery”. Added to that were worries based on the historical aftermath of financial crises, which tends to be prolonged and ugly.
America slides deeper into depression as Wall Street revels – The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters. Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism. The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.
SocGen's Albert Edwards: Why You Should Be Freaked Out By The Divergence In The Household And Establishment Jobs Data - Take a look, via ZeroHedge: The 85,000 decline in December's non-farm payrolls jolted (briefly) the markets back to reality. For it had almost been forgotten in the post-November payroll euphoria that we remain in the midst of a long-lasting balance sheet recession. Yet surprisingly weak though the December payrolls were, this disappointment pales into insignificance compared with the massive 589,000 decline in employment as measured by the Household Survey (the monthly Employment Report contains surveys of both Households and Company Establishments each month). Typically the employment measure preferred by the markets is the payroll data collected from the Establishment Survey, as it tends to be less volatile on a monthly basis (but the unemployment rate data is derived from the alternative Household Survey).
AB notes on the December Employment Situation - (charts & analysis) The monthly shift in the December nonfarm payroll is practically a mirror image of the month that initiated the cyclical downturn, January 2008 when the payroll fell 72k (after revisions). Not because of the similar level values, but because of the mix: it is the goods-sector employment that is dragging the aggregate number, whereas the service-sector is just barely below zero. Actually, the private sector services payroll, 80% of the total service payroll, hired 17,000 more workers in net in December. The volatility over the last two months has been driven primarily by the service sector. As illustrated in the chart below, the first-difference of the goods-sector payroll is approaching the coveted "0" threshold level, but at a much slower pace that is its service counterpart.
For the Unemployed, New Job Often Means a Pay Cut - NYTimes - It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost. In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less -- and contribute less to the recovery. Worse for those affected, people hired at lower wages in a tight job market tend to lag behind their peers for years, sometimes decades. For example, workers laid off during the 1981-82 recession earned 20 percent less than people who remained in a job -- even 20 years after they were rehired, a Columbia University study found.
STIMULUS WATCH: Unemployment unchanged by projects - A federal spending surge of more than $20 billion for roads and bridges in President Barack Obama's first stimulus has had no effect on local unemployment rates, raising questions about his argument for billions more to address an "urgent need to accelerate job growth."An Associated Press analysis of stimulus spending found that it didn't matter if a lot of money was spent on highways or none at all: Local unemployment rates rose and fell regardless. And the stimulus spending only barely helped the beleaguered construction industry, the analysis showed.
Industrial Production: Don't Get Fooled by the Weather - The Federal Reserve Board reported that industrial production increased by 0.6 percent in December. This would ordinarily be good news, except that a closer examination showed that manufacturing output actually shrank slightly for the month.The December increase was driven almost entirely by a 5.9 percent jump in output at utilities. This tells us about the weather across the country in December, but it doesn't tell us much about the state of the economy.
The end of America’s car-loving culture? - The U.S. vehicle fleet shrank by 4 million cars and trucks -- almost 2 percent -- last year. For the first time since World War II, Americans scrapped more cars and trucks than they bought. American’s dumped 14 million vehicles compared to the 10 million new cars sold, according to a recent report by the Earth Policy Institute. One significant factor in America’s downshift is that fewer American teenagers are getting their driver's licenses. The number of young people with licenses peaked at 12 million in 1978 and is now under 10 million, says the same report. Several factors, like young people socializing on the Internet, living in urban areas where cars are unnecessary and taking on more debt such as college loans, which can affect credit needed for a car, are decreasing the number of young car consumers.
The (missing) road work/jobs connection - I've read through that headline-grabbing AP report on the impact of stimulus-funded road and bridge spending on employment about five times, and I'm still not entirely clear what the AP's reporters discovered. But I think it's this: That there was no correlation between the movement of county unemployment rates and the presence or absence of stimulus-related construction projects in each county. Unemployment rates can be a tricky measure—they'll often rise in counties where the economy is getting better, because an improving economy lures formerly discouraged locals back into the labor force So I'm not sure the AP study really proves anything at all. Still, it makes sense that road projects wouldn't be massive job creators...
AP Misses the Transportation Stimulus Jobs Forest for the Trees: According to AP's analysis, "a surge in spending on roads and bridges has only barely helped the beleaguered construction industry." That's what my math teachers used to call comparing "apples and oranges." Referring to the "construction industry" when transportation stimulus spending is only designed to help the transportation construction industry... highway and road construction... totals about 258,000 jobs out of... 132 million jobs... [nd] transportation stimulus dollars make up only 7% of that nearly $800 billion package. But, when we drill down to the transportation construction industry, the most appropriate basis for analysis, we find Recovery Act spending making a real difference... highway and street construction spending in November was 5.7% higher than it was in November a year ago, and other public transportation construction spending was up 18.8% from a year ago...
Census Jobs May Jump-Start U.S. Employment Rebound in 2010 (Bloomberg) -- The 2010 census couldn’t have come at a better time for the U.S. economy. The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year. The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained. Money earned by the clipboard-toting workers going door-to-door to verify the government population survey is likely to be spent, giving the economy an extra lift.
Census as Jobs Program Still not Good Enough - It would appear that the administration has decided that the 2010 census is the latest stimulus program. In yesterday's writeup of the poor employment numbers, Bloomberg wrote up a "talking head" or two as pointing out there would be a boost to the economy from hiring over a million census workers. I pointed that out as cheerleading in my post on the jobs data, titled: Jobs Friday: More Establishment Cheerleading as Hard Times Continue, but did not imagine that the census effort would actually merit its own story. But it did, and it's easy to imagine that this is part of an effort to keep people's hopes up that prosperity is right around the corner, if it's not here already
There Are Now More Government Employees than Goods-Producing Workers in the US - For the first time there are decidedly more government employees than goods-producing (manufacturing) employees in the US according to the Department of Labor. This chart is from The Mess That Greenspan Made here. The reason for this is not the growth of government jobs but rather the drastic shrinkage in US based manufacturing employment while government employment remains resilient. As a percent of the population, the number of government employees is now about 9% which is slightly lower than it was in the 1970's. The Service sector dominates. There is a nice chart showing goods-producing, government, service, and non-employed percentages from EconomPicData here.
Response to the critics - Mark Thoma had some critical comments on Bob's and my Financial Times piece: He misunderstands. Bob's the one in the forecasting business. His forecast, which makes sense to me, is 3.8% GDP growth in 2010, implying average monthly jobs growth of 240,000. This would ordinarily be consistent with an unemployment rate of around 8.5% by the end of 2010, but the unemployment rate is a goofy variable that's difficult to forecast. The dramatic plunge in the labor force participation rate in recent months could mean that even an impressive rate of employment growth would have little impact on the unemployment rate. It is possible that growth will be slower or faster; much slower growth means a jobless recovery, faster growth leads to the forecast that we won't endorse. Both seem to us equally likely, but the probability is not 50-50 - the mass of the distribution of likely outcomes, we think, is in the range described above. Even a very optimistic scenario with employment growth of 300,000 per month leaves labor markets in bad shape in 2010-11. But I don't think any combination of policies would be capable of significantly improving on that rate of growth (and I'm sure the Fed doesn't think so either), so trying to stimulate growth beyond that would be fruitless.
2009: A Year of Teenage Employment Infamy - Between the months of November and December of 2009, 589,000 jobs disappeared from the U.S. economy. Of these jobs, 47,000 (8.0% of the total 589,000) were lost by teens, who now represent just 3.20% of the entire U.S. civilian labor force of 137,792,000 individuals. 57,000 jobs (9.7%) were lost by young adults Age 20-24, who as a group make up 9.0% of the U.S. workforce, while the remaining 485,000 were lost by Americans Age 25 and higher. Since total employment levels peaked in the United States in November 2007, over 1.5 million teen jobs have disappeared, while more than 1.6 million jobs for young adults Age 20-24 have vanished as well. When combined, these two youngest age groups account for nearly 36.8% of all job losses since the beginning of the current recession in December 2007. (analysis and 4 excellent charts)
Did You Need a PhD For That? - Sigh...."The recession is not over," said Michael Intriligator, professor of economics at the University of California, Los Angeles. He predicted economic output would not return to pre-crisis levels until 2013, while the job market would not fully recover until 2016. No, really? Actually, I don't think the job market will recover at all, if you define "recover" to be "return to a level of employment as a percentage of those working-age adults consistent with when we actually made things - that is, the 1960s and 1970s." Why not? So-called "globalism" and "populism", which is better defined as "people voting for the politician who promises them the biggest handout."
Even in a Recovery, Some Jobs Won't Return - WSJ - Even when the U.S. labor market finally starts adding more workers than it loses, many of the unemployed will find that the types of jobs they once had simply don't exist anymore. The downturn that started in December 2007 delivered a body blow to U.S. workers. In two years, the economy shed 7.2 million jobs, pushing the jobless rate from 5% to 10%, according to the Labor Department. The severity of the recession is reshaping the labor market. Some lost jobs will come back. But some are gone forever, going the way of typewriter repairmen and streetcar operators. Many of the jobs created by the booms in the housing and credit markets, for example, have likely been permanently erased by the subsequent bust.
Unemployment: The 2010 Time Bomb - American employers eliminated 4.2 million jobs in 2009 and sent unemployment soaring into double digits for the first time in more than a quarter century. Since the fall of last year, the official jobless rate has been over ten percent, while the unofficial rate (taking in the severely underemployed and those who have given up looking) has been over 17 percent. And, despite the ridiculous "green-shoots" speculation of the Obama administration and overblown "recovery" fantasies of the financial media that has blown every major economic story of recent years, the situation is getting worse....
The whipsaw effect continues - Technically, the recession is over. Yet the latest jobless figures explain why Main Street is still suffering. People simply don't feel comfortable enough to spend. The numbers show a national unemployment rate of 10 percent in December; higher, if you include the discouraged job-hunters who dropped out of the tally. It's worse in some places, such as Oregon, among some demographic sectors, such as teens and minorities, and in some sectors, such as construction. In this gloomy landscape, negative reinforcement is everywhere. In downtown, a high-rise in the heart of downtown is frozen in its early stages of construction, a tower captured in amber. Empty storefronts line the busiest streets. Each week brings news of more layoffs and hiring is sluggish. Meanwhile, the average length of unemployment -- 29.1 weeks in December -- is the highest figure recorded in more than 60 years
AP analysis: Sun Belt struggles to begin recovery - On the surface, economic stress in some of the Sun Belt's hardest-hit counties appeared to ease in November. But beneath some positive numbers is a region struggling to rebound from the damage of the housing crisis and recession, according to The Associated Press' monthly analysis of economic stress in more than 3,100 U.S. counties. In Riverside County, Calif., the nation's 11th-most economically stressed county, unemployment dipped slightly in November. But that was due mainly to seasonal hiring by retailers -- hiring that didn't extend past the holidays. Likewise, unemployment in counties in Arizona and Nevada, two states hammered by the recession, also dropped in November -- but only because they lost jobseekers who moved away or gave up hope. Once people stop looking for jobs, they're no longer counted as unemployed.
Business tax for unemployment benefits to rise by 50% - The ripple effects of job losses in Arizona continue: Unemployment-insurance taxes paid by Arizona businesses will rise an average of 50 percent in 2010, which could further stall hiring. Without the tax increase, and a loan from the federal government, the state trust fund used to pay out unemployment benefits would be empty within months.The increase translates to about $50 per employee for the year, bringing the average annual per-employee cost to about $146. For a company with 250 employees, the annual cost of the unemployment-insurance tax will rise to $36,400 from about $23,800.
Arizona puts state buildings on sale today to plug huge deficit - Arizona's state buildings -- including the Capitol, the governor's office, the state hospital and state prisons -- go on sale today as the financially pressed state tries to raise money to plug a $4.5 billion deficit. The state hopes to raise $732 million, The Arizona Republic reports. The state expects to fetch $18.5 million each for the House and the Senate buildings. The state archives building should go for $29.5 million, the huge prison in Florence is likely to sell for $123 million, and the executive office tower, or governor's office, is pegged at $43 million.
Arizona treasurer says checks will bounce amid budget crisis - Arizona state legislators go back to work Monday in an attempt to battle the nearly $1.5 billion dollar deficit."The February school payment we can't make, February payroll there's no money there," said State Treasurer, Dean Martin. Martin said unless the capitol buildings are sold before the end of the month, there will be no more money meaning, "If they continue to issue checks without having money from the sale of the buildings, I have to bounce them." That's because Martin said spending has increased double digits during the first two years of the recession, while revenues were dropping at the same rate."
"Recession or No Recession, State Tax Revenues Remain Negative," - Rockefeller Institute - Another Double-Digit Decline in Third Quarter 2009; Weakness Extends to End of Year - 18pp pdf - Overall State Taxes and Local Taxes - During the third quarter of 2009, total state tax collections as well as collections from two major sources — sales tax and personal income — all declined for the fourth consecutive quarter. Overall tax collections in the July-September quarter fell by 10.9 percent from the same quarter of the previous year.1 We have compiled historical data from the Census Bureau Web site going back to 1962. Both nominal and inflation adjusted figures indicate that the first three quarters of 2009 marked the largest decline in state tax collections at least since 1963. (see chart - other recessions)
States of Suffering - Economix Blog - NYTimes - The downturn continues to gnaw away at states’ budgets, a new report shows. During the third quarter of 2009, total state collections fell 10.9 percent from the same quarter the previous year, according to the Rockefeller Institute of Government. That is the fourth consecutive quarterly decline. Corporate income taxes took the biggest hit, falling 22.6 percent on a year-over-year basis.Local taxes have fared a little better, since they generally rely on more stable real estate tax revenues. But at the state level, the first three quarters of 2009 represented the largest decline in state tax collections since at least 1963.
New York Ends December $205 Mln In Red; $3 Bln Deficit Seen - New York State's general fund ended December $204.6 million in the red, the first time that has happened, State Comptroller Thomas P. DiNapoli said.He also forecast in his December cash report an "uphill battle" for the Empire State in the final quarter of its fiscal year, which ends March 31, saying another shortfall of about $3 billion is anticipated. Given a December shortfall, the general fund would need to borrow from other funds in the state's Short-Term Investment Pool, "Once the last financial cushion is depleted, the riskier and scarier it will be if there is an unanticipated further downturn."
Rendell warns of $500 million budget deficit - Pennsylvania could face a budget deficit of more than $500 million in the next fiscal year, but could be helped with an improving economy and an extension of stimulus-related Medicaid benefits, Gov. Rendell said yesterday. Rendell commented on the 2011 budget after a conference call with reporters boasting that Pennsylvania had raised $900 million in a bond offering on Wednesday. Pennsylvania obtained an interest rate of 3.13 percent on the bonds, the state's lowest rate since 1968, state officials say.
Minnesota deficit reaching crisis point - According to the Minnesota Management and Budget Agency, the state of Minnesota's projected budget deficit for the current 2010-11 biennium will be $1.203 billion, and it will be $5.426 billion for the 2012-13 biennium. Those are enormous numbers. In addition to reduced revenues, a large portion of these deficits are the result of excessive spending. During the past 50 years, spending in our state has increased an average of 10 percent a year, 21/2 times the rate of inflation during the same time period. That's a huge problem
State may force schools to lend it $1B - In a sign of the gravity of the state's fiscal crisis, Minnesota budget officials may force public school districts to loan the state money so that it can continue paying its bills. Gov. Tim Pawlenty's administration could withhold nearly $1 billion in state aid payments to public schools through May, to ensure the state's checkbook doesn't run dry, under a plan unveiled Wednesday at a legislative committee meeting. The state already has the legal authority to do so, although it has never exercised it
California’s Credit Cut by S&P Amid Budget Deficit (Bloomberg) -- California’s credit rating on $64 billion of general obligation bonds was cut by Standard & Poor’s today as the most-populous U.S. state faces renewed strains over a $20 billion budget deficit. Gabriel Petek, a San Francisco-based S&P analyst, said the rating was lowered one level to A-, the seventh-highest investment grade. He said the company has a negative outlook on California debt, a sign its standing may decline further. The rating company also cut $13.3 billion of other state debt, including that backed by lease payments. “This is probably the beginning of a lot of negative press the state is going to get,”
California's debt rating cut again on budget woes - LATimes - California’s only remaining A-level credit grade from a major ratings firm is in greater danger as the state’s budget woes deepen yet again.Standard & Poor’s today cut its rating on California’s $64 billion in general-obligation debt to A-minus from A and warned that the outlook was “negative,” meaning another reduction could loom.S&P cited new concerns about the state’s finances given a “severe fiscal imbalance and the impending recurrence of a cash deficiency if the state’s revenue and spending trajectories continue.” Scrambling to close a $20-billion budget gap, Gov. Arnold Schwarzenegger has proposed a number of one-time fixes -- including having Uncle Sam pony up nearly $7 billion in federal aid. Yet the state’s chief budget analyst believes the odds of getting that much help from the U.S. are “almost nonexistent.”
County Budget: "A Crisis of Gargantuan Proportions" - NBC Los Angeles - The Los Angeles County budget is looking grim. County supervisors said today that they will not be able to handle drastic cuts expected from the state without making severe service cuts."Clearly this is a crisis of gargantuan proportions," said Supervisor Mark Ridley-Thomas.Most of the cuts proposed by Gov. Arnold Schwarzenegger involve health and social services. Unless the federal government bails out the state, hundreds of thousands of people face reductions or even the loss of welfare checks, in-home care, medical services and mental health help, the supervisors said.The proposed cuts are "terrifying to all of us," said Supervisor Gloria Molina in today's board meeting. The proposed elimination of CalWORKS alone would end state support to 165,000 families with 318,000 children in the county, she stated.
LA's midyear budget shortfall hits $175 million - Los Angeles Councilman Bernard Parks revealed that the city's revenue shortfall hit a staggering $175 million halfway through the fiscal year. Parks, chairman of the City Council's Budget and Finance Committee, said tax and fee collections were short $75 million in the first quarter and $100 million in the second quarter.The shortfall could mean layoffs and furloughs — even for city employees who thought their jobs were protected by a recent labor deal. Nor can the city expect to see the typical second and third quarter boost in revenue, Parks said. "In my judgment, there's little expectation that you're going to see this revenue figure turn around during this fiscal year,'' he said
Shortfalls For U.S. Cities Could Reach $56 Billion (Reuters) - U.S. cities will face a collective budget shortfall of at least $56 billion over the next two years, with the current recession not seen hitting bottom until 2011, according to a report on Wednesday. The National League of Cities said that because economic recoveries in cities lag national ones by about two years, the pain from the recession that began in 2007 could continue for years to come. The collective shortfall could reach $83 billion through 2012, the league said. Cities will seek to cure revenue declines and spending pressures with higher service fees, layoffs, unpaid furloughs, and drawing on reserves or canceling infrastructure projects, the report said. Many cities have already used these options as the recession has worn down their finances
Market losses worsen state pension liabilities Funding shortfalls in West Virginia’s public pensions worsened by $2 billion during the past budget year, after Wall Street’s meltdown erased years of gains. The Consolidated Public Retirement Board announced unfunded liabilities totaling $7 billion. The plan that provides benefits to 29,245 retired state teachers suffered the worst hit. Investment losses left it just 41 percent funded.
The Sky Is Falling Before Schedule. Again. - Bruce Krasting tells us The sky is falling the sky is falling Social Security has run out of money 30 years before it was supposed to happen. He writes: I think that the recession of 08 and 09 and the anticipated high unemployment (low employment) in 2010 has crippled the Fund. Nothing short of a major overhaul can turn it around at this point. The damage has been too great. He tells us the Trust Fund has a surplus of 2 and a half trillion dollars. That's 2,500 billion. Yet he is convinced that a 5 billion cash shortfall this year "has crippled the Fund." Other things being equal (they are not), that 5 billion shortfall would take 500 years to deplete the Fund. The Fund will run out of money long before that for other reasons... but those other reasons were understood and planned for a long time ago.
State's budget hole could pass $3 billion - Growing Medicaid caseloads, falling property tax revenue and other budget woes mean the state is now in an even deeper budget hole than experts were predicting last fall. That likely means layoffs for state workers, Senate budget chief JD Alexander warned Wednesday. In September, the state's top economists estimated that next fiscal year, Florida would come up $923 million short of meeting its most critical needs, such as in public schools and the courts. Factor in other expenses the state usually covers — such as health care for low-income organ transplant patients — and the predicted shortfall rose to almost $2.7 billion.
Georgia Medicaid deficit could exceed half-billion dollars - On Thursday, Community Health Commissioner Rhonda Medows announced that the state’s Medicaid shortfall for Fiscal 2011 will be in the neighborhood of $635 million. That’s a 33 percent increase over the $477 million shortfall the state faced last year. One observer noted that when combined with the temporarily enhanced 3:1 federal match for Medicaid expenditures, this amounts to a total $2 billion shortfall. The result could be “devastating” for the state’s hospitals and health care providers, the source said.
NY Leads States Seeking Federal Bailout on Costs for elderly who use Medicare, Medicaid - The governor of New York and other big states are in talks to get the federal government to take over health care costs for the elderly poor who get benefits through Medicare and Medicaid. Gov. David Paterson and Lt. Gov. Richard Ravitch say they have spoken with officials in California and other big states to try to build a coalition. The savings to New York alone would total the projected deficit for the next fiscal year of about $8 billion. California's Medicaid director says his state is interested in the proposal as long as it reduces state costs.
Lack of Medicare Chief Is a Strike Against Health Reform - NYTimes - The White House will offer plenty of reasons for the delay: the derailment of Tom Daschle’s candidacy as White House health adviser, the nitpicky nature of the Senate confirmation process, the likelihood that Republicans would use any nomination to slow health reform. But consider what the next head of Medicare — officially, the administrator of the Centers for Medicare and Medicaid Services — will be facing whenever he or she is finally named. First will come that confirmation process. Then the person will have to learn the workings of an agency that oversees a budget $200 billion larger than the Pentagon’s. And finally there will be the small matter of helping to oversee big chunks of the most ambitious domestic policy legislation in decades.
Learning From Europe - Krugman – NYTimes - As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism. Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works
How the White House Used Jonathan Gruber’s Work to Orchestrate the Appearance of Broad Consensus - The White House is placing a giant collective bet on Gruber’s “assumptions” to justify key portions of the Senate bill, which they allowed people to believe was independent verification. Now that we know that Gruber’s work was not that of an independent analyst but rather work performed as a contractor to the White House and paid for by taxpayers, it should be made publicly available so others can judge its merits. Gruber began negotiating a sole-source contract with the Department of Health and Human Services in February of 2009, for which he was ultimately paid $392,600. The contract called for Gruber to use his statistical model for evaluating alternatives “derived from the President’s health reform proposal.” It was not a research grant, but rather a consulting contract to advise the White House Office of Health Reform, headed by Obama’s health care czar, Nancy-Ann DeParle, to “develop proposals” for health care reform.
Another Fissure on the Left Flank for Health Care Bill - In what is becoming a typical pattern for the Obama administration, right wing opponents of some of his initiatives (like reappointing Bernanke) are finding common cause with progressives, an alliance that seemed unthinkable a mere year ago. While the left is generally behind the health care reform bill, support is far from universal. And a key group is about to throw a spanner in the works. Unions are not happy about the bill. From the New York Times:….. labor leaders are fuming that President Obama has endorsed a tax on high-priced, employer-sponsored health insurance policies as a way to help cover the cost of health care reform. And as Senate and House leaders seek to negotiate a final health care bill, unions are pushing mightily to have that tax dropped from the legislation. Or at the very least, they want the price threshold raised so that the tax would affect fewer workers.
Will President Obama defend the 'Cadillac tax' to cut health-care costs? - The White House meeting between President Obama and labor leaders focused on one of the most contentious -- and most sensible -- aspects of health reform: the proposed tax on employer-provided, high-value health insurance plans. The Senate version of the health-care bill would impose a 40 percent excise tax on insurance at or above $23,000 annually in 2013; the House contains no comparable measure. This so-called Cadillac tax would be paid by insurers but presumably its costs would be passed on to those who purchase such policies, both corporations and workers. For no particularly good reason, the U.S. tax code asks workers to pay taxes on any wages they receive -- but when they receive benefits in the form of health insurance, they do not have to pay any taxes on them. This forces people who don't get health insurance at work to subsidize those who do. People in the higher tax brackets benefit the most. The system is regressive, in other words -- and it encourages excess spending on health care.
Democrats, Unions Reach Deal on Health Tax - WSJ - Democratic negotiators acceded to union demands for a scaled-back tax on high-end health-insurance plans, exempting union contracts from the tax until 2018, five years beyond the start date for other workers. The tax on high-value insurance plans was included in the Senate's version of the bill but not the House's, and has been one of the main unresolved issues as Democrats work to combine measures passed by the two chambers late last year. Unions, as well as many House Democrats, are fiercely opposed to the tax on "Cadillac" insurance plans, which they say will hit many middle-class workers and undermine benefits won by unions.
The (mostly) unchanged excise tax: The excise tax is virtually unchanged. The major elements of the excise tax are, first, the threshold at which plans begin getting taxed, and second, how quickly that threshold grows. In the Senate bill, the tax begins on family plans costing $23,000 a year, and that sum grows at the rate of inflation in the Consumer Price Index plus one percentage point (so if inflation that year was 3.3 percent, the threshold would grow by 4.3 percent). In the excise tax deal announced today, the threshold becomes $24,000, and the growth rate is exactly the same. The basics of the tax are virtually unchanged.... [I]nsofar as the prospects for long-term cost control go, the excise tax works the same way it did in the Senate bill, applying to virtually all the plans it applied to in the Senate bill, and growing at the same rate -- which is slower than the rate of medical costs -- as it did in the Senate bill...
Democrats Make 'Signficant Progress' on Health Talks - WSJ - President Obama and top congressional Democrats reported "significant progress" toward an agreement on a final health bill Wednesday after negotiations at the White House that stretched for more than eight hours.The intense day of talks signaled the White House's drive to quickly pass a bill so it could shift its focus to other issues, including job growth. In a joint statement, the president, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said they were "encouraged and energized" after making progress in bridging the remaining differences between the two health-care bills passed late last year by the House and Senate.
Dodd, Dorgan, and Discontent in the Senate: It's worked before. In 1993 then–House majority leader Richard Gephardt paid a call on a Republican backbencher named Newt Gingrich. Gephardt said: "We have a health-care plan. What's yours?" Gingrich said, "Our plan is to defeat your plan and win the next election." Which is what happened in 1994...
Health Bill Can Pass Senate With 51 Votes, Van Hollen Says (Bloomberg) -- Even if Democrats lose the Jan. 19 special election to pick a new Massachusetts senator, Congress may still pass a health-care overhaul by using a process called reconciliation, a top House Democrat said. That procedure requires 51 votes rather than the 60 needed to prevent Republicans from blocking votes on President Barack Obama’s top legislative priorities. That supermajority is at risk as the Massachusetts race has tightened.
Poll: More Think Health Care Reform Isn’t Ambitious Enough: The internals of the new CBS poll suggest that more people think reform doesn’t go far enough in multiple ways than think it goes too far. The CBS poll finds that Obama’s approval rating on health care has dipped to 36%. But the poll also asked whether people think the reform proposal, in various ways, goes too far, is about right, or doesn’t go far enough.... In every one of those polled — covering Americans, controlling costs, and regulating insurance companies — more think the bill doesn’t go far enough. To be sure, Americans seem close to evenly divided on the question of whether the proposal goes too far or not far enough. But the latter category outnumbers the former, suggesting that the desire that reform be more ambitious is a key factor driving dissatisfaction with Obama — even though that possibility is rarely discussed by the big news orgs or by top-shelf pundits.
The Insurance Industry Plays Both Sides - TIME.- In a terrific piece of reporting, National Journal's Peter Stone has revealed that even as the health insurance industry was publicly supporting the Obama Administration's drive for health care reform last summer, it was secretly funding ads against it during that crucial period: That money, between $10 million and $20 million, came from Aetna, Cigna, Humana, Kaiser Foundation Health Plans, UnitedHealth Group and Wellpoint, according to two health care lobbyists familiar with the transactions. The companies are all members of the powerful trade group America's Health Insurance Plans.The funds were solicited by AHIP and funneled to the U.S. Chamber of Commerce to help underwrite tens of millions of dollars of television ads by two business coalitions set up and subsidized by the chamber. Each insurer kicked in at least $1 million and some gave multimillion-dollar donations."There's no question that AHIP has quietly solicited monies from their members which were funneled over to the chamber for their ads," said a source. The total donated by the health insurers, according to one estimate, was as much as one-quarter of the chamber's total health care advertising budget.
Quelle Surprise! Health Insurers Pretended to Play Nice, Lobbied Against Reform - Yves Smith - The headline above would normally be seen as “dog bites man” save for the fact that during the health reform debate, the insurers went to considerable lengths to profess they really, really had changed their ways and were now going to be good corporate citizens. But it was pretty clear that this change of heart was just a charade. After all, if Obama was going to give the industry the store, they had to look like nice guys. You don’t give massive subsidies to people who are obviously predatory, unless they are from the financial services industry and thus can credibly threaten to destroy the economy. And from the insurance industry’s standpoint, what’s not to like about the new program?
Married Couples Pay More Than Unmarried Under Health Bill - Some married couples would pay thousands of dollars more for the same health insurance coverage as unmarried people living together, under the health insurance overhaul plan pending in Congress.The built-in "marriage penalty" in both House and Senate healthcare bills has received scant attention. But for scores of low-income and middle-income couples, it could mean a hike of $2,000 or more in annual insurance premiums the moment they say "I do."The disparity comes about in part because subsidies for purchasing health insurance under the plan from congressional Democrats are pegged to federal poverty guidelines. That has the effect of limiting subsidies for married couples with a combined income, compared to if the individuals are single.People who get their health insurance through an employer wouldn't be affected. Only people that buy subsidized insurance through new exchanges set up by the legislation stand to be impacted. About 17 million people would receive such subsidies in 2016 under the House plan, the Congressional Budget Office estimates.
Retail Clinics:Affordable, Convenient ER Alternative - Hospital emergency room (ER) use is both costly and timeconsuming. Often, however, the ER is the only way to reach a physician after hours. As a result, patients overuse emergency rooms: Of the 119 million visits to hospital ERs in a given year, 55% are for nonemergencies. A 2006 survey of California hospitals found that nearly half of ER patients (46%) thought they could have resolved their medical problem with a visit to their primary care physician, but were unable to obtain timely access (see chart above). Increasingly, however, patients have less costly and more convenient options for routine medical needs - retail clinics and urgent-care clinics. ~ "Retail Clinics: Convenient and Affordable Care"
Doug Henwood: That consumption binge? It’s mostly health care: Everyone knows that American consumers have been on a binge for the last ten or twenty years. Data connoisseurs could even tell you that the consumption share of GDP rose from an average of 64% in the 1980s to 70% in 2007–8. But while the numbers are accurate, they’re not really telling the story of a binge. Much of the rise has come from spending on health care, not flat-screen TVs. Graphed nearby is a history of the consumption share of GDP, with and without health care spending.... Note the relative flatness of the “ex-medical care” line—its recent level is actually below 1960’s—compared with the relentless ascent of the “total” line.... [A]t the end of 1978, consumption was 61.5% of GDP; in the second quarter of 2008, it had risen to 70.3%, or 8.8 points. Well over half that increase, 5.0 points, came from spending on medical care. The share of GDP devoted to spending on goods actually fell by 4.7 points over that 30-year period
How to Cure 1 Billion People?–Defeat Neglected Tropical Diseases - Scientific American - A group of seven tropical diseases, mostly caused by parasitic worms, afflict a billion impoverished people worldwide. They seldom kill directly but cause lifelong misery that stunts children’s growth, leaves adults unable to function to their fullest, and heightens the risk of other diseases.Fortunately, they can be easily treated, often with a single pill. Various agencies and foundations are collaborating to deliver these drugs, although they have reached only about 10 percent of the population so far. The U.S. has its own neglected parasitic diseases that affect millions of rural and urban poor.
The Americanization of Mental Illness - For all our self-recrimination, however, we may have yet to face one of the most remarkable effects of American-led globalization. We have for many years been busily engaged in a grand project of Americanizing the world’s understanding of mental health and illness. We may indeed be far along in homogenizing the way the world goes mad. “We might think of each seperate culture as possessing a ‘symptom repertoire’ — a range of physical symptoms available to the unconscious mind for the physical expression of psychological conflict,”
Factory Farmed Meat Can Trigger a Global Pandemic That Wipes Out Sixty Percent of Those Infected - Currently H5N1 kills approximately 60% of those it infects, so you don't even get a coin toss chance of survival. That's a mortality rate on par with some strains of Ebola. Thankfully, only a few hundred people have become infected. Should a virus like H5N1 trigger a pandemic, though, the results could be catastrophic. During a pandemic as many as 2 or 3 billion people can become infected. A 60% mortality rate is simply unimaginable. Unfortunately, it's not as far-fetched as it sounds. Both China and Indonesia have reported sporadic outbreaks of the H5N1 bird flu in pigs and sporadic outbreaks of the new pandemic virus H1N1 in pigs as well. Should a pig become co-infected with both strains, a hybrid mutant could theoretically arise with human transmissibility of swine flu and the human lethality of bird flu. That's the kind of nightmare scenario that keeps virologists up at night.
Monsanto GM Corn Linked to Organ Damage in Animals - Yves Smith - One of my friends is a biomedical engineer who gave up doing science because it involved too much drawing of lines through scatter diagrams to claim the existence of relationships in order to keep the grant money coming in. She got a law degree, and worked for the National Institutes of Health, Big Pharma, a buyout firm, and served as general counsel of a public company before joining a firm with a well regarded FDA practice. She is also the antithesis of a health food neurotic. She believes red wine and cheese are major food groups, likes chips, eats candy now and again. But if the subject of genetically modified food comes up, she will sputter for a minute or two and and bite her tongue. “That stuff should be banned. They are conducing a massive experiment on the public with no consent and no controls.”A new study published in the International Journal of Biological Sciences suggests her concerns may be well founded.
One in Eight Americans Receives Food Stamps – CNBC - Food stamps are the primary federal anti-hunger program. It helps poor people buy groceries. The economic stimulus package boosted benefits by $80 a month for a family of four.Participation has surged since the financial-market turmoil more than a year ago and has set a record each month since December 2008. The Agriculture Department said enrollment reached 37.9 million in October, the latest month for which figures are available, up 746,000 from the previous month.
2010 Food Crisis for Dummies - If you read any economic, financial, or political analysis for 2010 that doesn’t mention the food shortage looming next year, throw it in the trash, as it is worthless. There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.
The Coming World Famine: Will 2010 Be The Year The World Runs Out Of Food? - A "perfect storm" of circumstances is coming together that is leading many agriculture experts to predict that we will soon be experiencing a worldwide food crisis of unprecedented magnitude. Will 2010 be the year that the world runs out of food? Record setting droughts, exploding populations and crippling crop failures all over the world are combining to set the stage for a potentially devastating food crisis in the coming year.Even in such technologically advanced times, the reality is that the food supply is not immune to droughts and plagues. Even the United States has been dramatically affected. Just consider the following examples.....
America's Dwindling Water Supply - Americans are the world's biggest water consumers. By the time we go to bed, we've used up to 150 gallons. By comparison, people in the U.K. use a quarter of that - 40 gallons of water a day. The Chinese average just 22 gallons per day. And in the poorest countries like Kenya, people use less than the minimum 13 gallons to cover basic needs. CBS Reports: Where America Stands Scientists have never measured the exact amount of water available in the U.S., but they're concerned enough that they've just launched a new government study to find out. Experts do agree: Demand is greater than supply. And 36 states face water shortages in the next three years.
Kenya fishermen see upside to pirates: more fish - Kenya – People here have one thing to thank Somali pirates for: Better fishing. In past years, illegal commercial trawlers parked off Somalia's coast and scooped up the ocean's contents. Now, fishermen on the northern coast of neighboring Kenya say, the trawlers are not coming because of pirates."There is a lot of fish now, there is plenty of fish. There is more fish than people can actually use because the international fishermen have been scared away by the pirates," said Athman Seif, the director of the Malindi Marine Association.
BIODIVERSITY: A Tipping Point on Species Loss? - Humanity is destroying the network of living things that comprise our life support system. While this sawing-through-the-branch-we're-perched-on is largely unintentional, world leaders can't say they didn't know what's going on: 123 countries promised to take urgent action in 2003 but have done little to stem the rising tide of extinctions in what's known as the extinction or biodiversity crisis.Species are going extinct at 1,000 times their natural pace due to human activity, recent science has documented, with 35 to 40 species vanishing each day, never to be seen again. "The question of preserving biological diversity is on the same scale as climate protection," German Chancellor Angela Merkel said in a speech in Berlin Monday
US Cult of Greed is Now a Global Environmental Threat - The average American consumes more than his or her weight in products each day, fuelling a global culture of excess that is emerging as the biggest threat to the planet, according to a report published today. In its annual report, Worldwatch Institute says the cult of consumption and greed could wipe out any gains from government action on climate change or a shift to a clean energy economy.Erik Assadourian, the project director who led a team of 35 behind the report, said: "Until we recognise that our environmental problems, from climate change to deforestation to species loss, are driven by unsustainable habits, we will not be able to solve the ecological crises that threaten to wash over civilisation." The world's population is burning through the planet's resources at a reckless rate, the US thinktank said. In the last decade, consumption of goods and services rose 28% to $30.5tn (£18.8tn).
JP Morgan still financing mountaintop removal mining - In the wake of the publication of an extremely high-impact article in Science magazine which says that mountaintop removal mining has enormous environmental impacts which can’t possibly be mitigated, the campaign against JP Morgan Chase’s financing of such activity is heating up again: JPMorgan Chase has been funding six of the top eight coal mining companies responsible for mountaintop removal coal mining in the United States. Recently, its investment bank underwrote more than $1 billion in new financing to Massey Energy, the largest mountaintop removal coal mining company. The practice of mountaintop removal mining is egregious in the extreme: the Economist, for instance, has said that “the underlying question is why America allows this practice at all”.
Pacific Islanders Bid to Stop Czech Coal Plant - NYTimes -PRAGUE (Reuters) - A small pacific island state's challenge to a Czech coal-fired power plant extension some 6,000 km away on grounds it could harm its environment could open a new front in the fight over global climate change. Micronesia has filed a plea with the Czech environment ministry using a measure designed originally to settle disputes between near neighbours but which could spur others to do the same when opposing power plants, environmental advocates said. Micronesia noted CEZ's coal-fired plant at Prunerov in the north of the republic was the 18th biggest source of greenhouse gases in the European Union, emitting about 40 times more carbon dioxide than the entire Pacific island federation. The Transboundary Environmental Impact Assessment request also argued that Prague has failed to provide and asses all potential impacts and possible alternatives to minimize adverse affects of power plants -- something Micronesia said was required under Czech law.
Oceans losing ability to absorb greenhouse gas Like a dirty filter, the Earth's oceans are growing less efficient at absorbing vast amounts of carbon dioxide, the major greenhouse gas produced by fossil-fuel burning, reports a study co-authored by Francois Primeau, UC Irvine Earth system science associate professor. The oceans largely kept up when carbon dioxide emissions began soaring in the 1950s, but the absorption rate has slowed since the 1980s and dropped off even more noticeably since 2000, according to the recent study in the journal Nature.Here, Primeau answers questions about the research, which suggests the oceans may not be as reliable as previously thought at guarding against global warming.
Avoiding dangerous warming by 2100 'barely feasible' - Even with all the green power we muster, preventing dangerous climate change by the end of the century is "barely feasible". So says an analysis of how fast low-carbon energy sources can be introduced. For a 50:50 chance of keeping a global temperature rise within 2 °C by 2100, we must halve emissions by 2050. This is the message of climate models by Keywan Riahi of the International Institute for Applied Systems Analysis in Laxenburg, Austria, and colleagues. That means 70 per cent of global energy production must be zero-emissions by 2050. To see if that target was realistic, the team used factors such as the average rate of technology diffusion in the past. Our prospects are poor even if we roll out sources like wind and nuclear power as fast as we can, plus any new ones that become available before 2050.
Large changes in climate likely over next century, daily carbon dioxide measurements suggest - Researchers studying climate now have a new tool at their disposal: daily global measurements of carbon dioxide and water vapor in a key part of Earth's atmosphere. The data are courtesy of the Atmospheric Infrared Sounder (AIRS) instrument on NASA's Aqua spacecraft and confirm the mainstream scientific view that large changes in the climate are likely over the next century. AIRS temperature and water vapor observations have corroborated climate model predictions that the warming of our climate produced by carbon dioxide will be greatly exacerbated -- in fact, more than doubled -- by water vapor
Trees invading warming Arctic will cause warming over entire region, study shows - Contrary to scientists' predictions that, as the Earth warms, the movement of trees into the Arctic will have only a local warming effect, University of California, Berkeley, scientists modeling this scenario have found that replacing tundra with trees will melt sea ice and greatly enhance warming over the entire Arctic region. Because trees are darker than the bare tundra, scientists previously have suggested that the northward expansion of trees might result in more absorption of sunlight and a consequent local warming.But UC Berkeley graduate student Abigail L. Swann, along with Inez Fung, professor of earth and planetary science and of environmental science, policy and management, doubted this local scenario because, while broad-leaved trees are dark, they also transpire a lot of water, and water vapor is a greenhouse gas that is well-mixed throughout the Arctic.Taking account of this in a standard model of global warming, the researchers discovered that, while broad-leaved trees do absorb some additional sunlight, the water vapor they pump into the atmosphere causes a more widespread warming
Arctic permafrost leaking methane at record levels, figures show - guardian.co.uk - Scientists have recorded a massive spike in the amount of a powerful greenhouse gas seeping from Arctic permafrost, in a discovery that highlights the risks of a dangerous climate tipping point. Experts say methane emissions from the Arctic have risen by almost one-third in just five years, and that sharply rising temperatures are to blame.The discovery follows a string of reports from the region in recent years that previously frozen boggy soils are melting and releasing methane in greater quantities. Such Arctic soils currently lock away billions of tonnes of methane, a far more potent greenhouse gas than carbon dioxide, leading some scientists to describe melting permafrost as a ticking time bomb that could overwhelm efforts to tackle climate change.They fear the warming caused by increased methane emissions will itself release yet more methane and lock the region into a destructive cycle that forces temperatures to rise faster than predicted.
Hans Joachim Schellnhuber, PNAS, Vol. 106(49), Tipping elements in the Earth System - The Earth System (ES) is defined as the conglomerate formed by human civilization and its planetary matrix. The climate machinery is a formidable subsystem that comprises vast domains of the atmosphere, hydrosphere, biosphere, and pedosphere, involves innumerable intertwined processes, and generates fairly robust dynamical patterns like the Hadley cell. This machinery still operates in the “Holocene mode,” which emerged ≈10 ka ago and is characterized by a distinctive distribution of ice sheets, wind regimes, ocean currents, biomes, and deserts, something that can be perceived as the environmental face of the Earth. Although one of the ES components mentioned above, the global economy, is about to inadvertently transform that face through massive emissions of greenhouse gases (GHGs) and the so-induced planetary warming, one other crucial component, the human brain, struggles to advertently preserve it by constructing clumsy institutions like the United Nations Framework Convention on Climate Change. The ultimate objective of this convention is to avoid dangerous climate change, a target that can be operationalized with the help of recent scientific evidence including the results presented in this Special Feature...
Major Antarctic glacier is 'past its tipping point' - New Scientist - A major Antarctic glacier has passed its tipping point, according to a new modelling study. After losing increasing amounts of ice over the past decades, it is poised to collapse in a catastrophe that could raise global sea levels by 24 centimetres. Pine Island glacier (PIG) is one of many at the fringes of the West Antarctic ice sheet. In 2004, satellite observations showed that it had started to thin, and that ice was flowing into the Amundsen Sea 25 per cent faster than it had 30 years before.Now, the first study to model changes in the ice sheet in three dimensions shows that PIG has probably passed a critical "tipping point" and is irreversibly on track to lose 50 per cent of its ice in as little as 100 years, significantly raising global sea levels.The team that carried out the study admits their model can represent only a simplified version of the physics that govern changes in glaciers, but say that if anything, the model is optimistic and PIG will disappear faster than it projects
Huge Chunk of Ice Cracks Up Off Antarctica - In less than a day, a chunk of ice bigger than Rhode Island broke away from Antarctica and shattered into many pieces this week. NASA's Aqua and Terra satellites captured the event, at the Ronne-Filchner Ice Shelf, in a series of photo-like images on Jan. 12-13. The long, narrow tongue of ice is a bridge of sea ice linking the A-23A iceberg to the Ronne-Filchner Ice Shelf in West Antarctica. The ice bridge is fast ice, or sea ice that does not move because it is anchored to the shore. Compared to an ice shelf, the sea ice is a thin shell of ice over the ocean.
Blogs from the Earth Institute - World Bank blog - Columbia University’s Earth Institute has created a site grouping four different blogs from its researchers and staff: State of the Planet, Climate and Energy, Water, and Millennium Villages. Its Director, Jeffrey Sachs, is blogging there occasionally, among many others.
The end of consumerism: Our way of life is 'not viable' - The stark warning comes from the renowned Worldwatch Institute, a Washington-based organisation regarded as the world's pre-eminent environmental think tank. Its State of the World 2010 report published this week outlines a blueprint for changing our entire way of life. "Preventing the collapse of human civilisation requires nothing less than a wholesale transformation of dominant cultural patterns. This transformation would reject consumerism... and establish in its place a new cultural framework centred on sustainability," states the report."Habits that are firmly set – from where people live to what they eat – will all need to be altered and in many cases simplified or minimised... From Earth's perspective, the American or even the European way of life is simply not viable."
IEA Says Developed-World Oil Demand Already Looking Weaker Than Expected - Some interesting commentary this morning from the International Energy Agency, which released its latest oil market outlook.While the organization sees global aggregate demand basically unchanged from its last forecast, it's reducing its estimates for OECD demand, despite the harsh winter and attendant demand for heating oil.Forecast global oil demand remains virtually unchanged for both 2009 and 2010, as weaker preliminary data for the OECD offset more buoyant readings in non‐OECD countries. Global oil demand is expected to average 84.9 mb/d in 2009 (‐1.5% or ‐1.3 mb/d year‐on‐year) and 86.3 mb/d in 2010 (+1.7% or +1.4 mb/d versus the previous year). Growth continues to be driven by non‐OECD countries, most notably in Asia. Oil demand recovery in the OECD is likely to remain sluggish, despite a bout of recent cold weather.Naturally, the picture is a bit better in the non-OECD developing world, yet even there it's not all roses. A big part of the expected growth is owed to expected continuing Chinese stimulus.
Oil Demand Seems to be Moving Up - Are Higher Prices around the Corner? - Until now I have anticipated that we would not revisit the levels of production that we were at when oil reached $147 a barrel (which was in July 2008) for at least another year. Depending on how you view these levels of production, that pessimism about the growth or regeneration of the world economy for which this might be considered to act as a proxy appears that it might be too conservative a view. We may well exceed the current maximum values by sometime this summer, when we usually see peak annual demand.The question will then become one of the availability of the market to meet the higher levels of demand, and can this be done without returning to the high prices that were encountered the last time around. And with those questions comes the slightly longer term one as to how much higher world oil production can be raised, before we bump into a physical production limit.
Jevons’ Law: Enforcing the Age of Energy Decline – Part 1 - The subsequent development of the triple expansion steam engine, which was markedly more efficient, made ocean going steam ships viable. Consumption of coal again escalated, as Jevons had predicted. This dynamic has now played out in several technologies, notably: • The development of modern fan jet engines for aircraft that have increased efficiency (passenger mile per unit of fuel) of jet airliners by 3 fold from the Boeing707 to the Airbus380. The result – rapid growth of air travel and fuel used. • The development of modern high efficiency coal fired power plants. The result – exponential growth of electricity used and greenhouse gas produced. • The development of efficient and powerful computers that can be manufactured very cheaply. The result – exponential growth of the amount of energy used for manufacture and running of computers.
Officially, Peak Non-Opec in 2010. Really? -- You will recall the big dust up between the Guardian newspaper and IEA Paris in November of last year. The newspaper broke the story that the international energy agency had either been fudging data or at the very least downplaying data, in an effort to diminish the urgency of peak oil. The Guardian claimed to have statements from not one but two whistleblowers, either working or previously working inside IEA. More sensational was the claim for motive: the IEA had been putting sunny forecast spin on top of the data at the request of US government in Washington. While the actual claims of the whistleblowers have never been adjudicated (and likely never will be), the more relevant takeaway from the incident is that IEA rather importantly suggested that Non-OPEC production would peak in 2010. As I wrote back in November, we needed no whistleblower to deduce the absurdity of an energy agency that claims a 2010 peak in Non-OPEC–which produces 60% of global supply–while maintaining that global peak would not arrive until after 2030. That is just silly. I bring this up today because the EIA in Washington this week, at least on the matter of Non-OPEC, appears to be in agreement with IEA that peak arrives this year:
What Happens When the Wells Run Dry? - One nagging question that the industrial world has been asking itself since the discovery of the first oil well is what happens when the wells begin to run dry. The answer is relatively simple to imagine. We had a dry run, so to speak, when Dubai’s economy tanked a few years ago. And although the causes of Dubai’s ills and ails were financial and not oil related, the drama which unfolded gave us a watered-down version of what might transpire if and when the oil wells stop producing. But before we run the Armageddon tape that the world will stop functioning because of lack of oil, let’s all take a deep breath and think again. The oil companies, the people who manufacture cars and airplanes and legions of scientists and inventors have all been planning for that day. And as far-fetched as it might seem to some of us, that day will undoubtedly come, very probably within our lifetime.
US raises concern over China oil policy - "We are pursuing intensive dialogue with the Chinese on the subject of energy security, in which we have raised our concerns about Chinese efforts to lock up oil reserves with long-term contracts," David Shear, deputy assistant secretary of state for East Asian and Pacific affairs, told the House Armed Services Committee yesterday. "We will continue to engage them on this subject at very senior levels," he told the panel, which was holding a hearing on recent security developments in China. Shear was responding to questions by Republican Roscoe Bartlett, who said he was worried that the Chinese were "aggressively buying up oil all over the world" and might not share it with other countries in the future. China, the world's second-largest oil consumer, has been pressing ahead with efforts to secure long-term access to natural resources such as oil and minerals to help fuel its rapid economic growth. China has been encouraging state-owned oil companies to expand upstream investments abroad and to increase crude stockpiles
Tehran urges Moscow to use national currencies in energy deals - Iran and Russia should switch to their national currencies in joint oil and gas projects, Iranian Deputy Oil Minister Hossein Noqrekar Shirazi said in Moscow on Wednesday as part of bilateral talks with Russian Deputy Energy Minister Sergei Kudryashov on a long-term plan of energy cooperation. Heading a 20-member delegation, Shirazi attended a meeting of the Russian-Iranian working group on cooperation in the oil, gas and petrochemical spheres in Moscow, intended to map out a plan for both countries' energy cooperation in the long run, the Islamic Republic of Iran Broadcasting reported
The End of Retirement | Energy Bulletin - “When do I call my children home?”My friend asked me that question two years ago after I gave him a thorough explanation of what the decline of oil production meant for our civilization. Like many modern parents, his children were spread around the continent, or traveling the world, and he could instantly see how important his family working together was going to be in the future.His question is a very good one and represents one way we might all want to consider relating to The Long Descent.Before discussing that, a small detour is in order.
Iraq Could Delay Peak Oil a Decade - With the emphasis on the could. I have been associated with the view that the stagnation of oil supply growth from late 2004 on was likely to be the onset of a "bumpy plateau" of oil production - that oil production would not go too much higher, although it wouldn't decline quickly either. You can see articulation of this point of view, for example, at old Oil Drum pieces like Why Peak Oil is Probably About Now, and Hubbert Theory says Peak is Probably Slow Squeeze. Generally, events of the past few years have been reasonably kind to this point of view. The major producers (eg Russia and Saudi Arabia) seemed to have more-or-less reached production plateaus. Overall global production bumped up a little in late 2007 and early 2008 in response to the very high prices, but not much. Similarly it fell in 2009 in response to the great recession, but not much. Bumps on the bumpy plateau, it has seemed to me (and this would be even more true if you looked at the data ex-biofuels). Now production is going up again.
Pickens Shelves Texas Wind-Power Project – WSJ - T. Boone Pickens, the oilman and clean-energy booster, shelved his massive wind-power project in Texas even as he stepped up his push to increase the use of natural gas for transportation.Cheap natural gas, the lack of electricity-transmission lines and the lingering credit crunch have combined to take the shine off large-scale renewable-energy projects, and those factors led Mr. Pickens to halve his $2 billion wind-turbine order with General Electric Co., said a spokesman for Mr. Pickens's Mesa Power LP.
Biodiesel industry on hold after tax credit runs out - The biodiesel industry is revving up efforts to reinstate the U.S. biodiesel tax credit, warning that as many as 23,000 jobs could be at risk if lawmakers don't revive the program that expired at the beginning of 2010. Usually made from byproducts of soybean processing for cattle feed, biodiesel received a $1 per gallon credit, which expired as the year ended.The subsidy, in place since 2004 and last extended in October 2008, has helped biodiesel grow as an affordable blending component of petroleum-based fuels.Despite Washington's promotion of "green" jobs, the biodiesel industry could instead deliver green-collar layoffs if the program isn't revived, industry proponents argue.
The Unintended Ripples from the Biomass Subsidy Program - It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy. But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels, shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.
Trade Deficit Increases in November - The first graph shows the monthly U.S. exports and imports in dollars through November 2009. Both imports and exports increased in November. On a year-over-year basis, exports are off 2.3% and imports are off 5.5%. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Import oil prices increased to $72.54 in November - up 85% from the low in February (at $39.22).
November trade deficit increases to $36.4 billion - The U.S. trade deficit jumped to the highest level in 10 months as an improving U.S. economy pushed up demand for imports. However, exports rose as well, boosted by a weaker dollar, supporting the view that American manufacturers will be helped by a rebounding global economy. The Commerce Department reported Tuesday that the trade deficit jumped 9.7 percent to $36.4 billion in November, a bigger imbalance than the $34.5 billion deficit economists had forecast. Exports rose 0.9 percent, the seventh consecutive gain, as demand was up for American-made autos, farm products and industrial machinery. Imports, however, rose a much faster 2.6 percent, led by a 7.3 percent rise in petroleum imports.
Buy American: "Anti-China Backlash" Coming, Gerald Celente Says - Recent import/export data show China replaced Germany as the world's largest exporter in 2009, and the U.S. as the world's biggest auto market. In 2010, China's surging economy is set to supplant Japan as the world's second largest. With the global economy still in trouble, especially in U.S. Europe, China's rise is spurring a "real anti-China backlash," according to Gerald Celente, director of the Trends Research Institute. "Those who have the gold rule [and] a lot of people don't want to see China rule." In addition to U.S. tariffs on Chinese tires and rolled steel, Celente says there are already more than 200 different trade barriers erected globally, with more to come: "You're going to see ‘Not Made in China' become a slogan around the world," he predicts. (Side note: on a recent trip to San Juan, I noticed a few stores in the old part of the city promoting their lack of Chinese-made goods.)
"Buy American"? Then Why Not "Buy Virginia"? - National/state/county/city/neighborhood borders are just imaginary lines on a map, and voluntarily restricting one choices to trade on only one side of an imaginary line called a national border ("Buy American") makes as much as sense (none) as restricting one choices to trade on only one side of an imaginary line called a state border ("Buy Virginia"), or trade on only one side of a county border ("Buy Fairfax County"), or a city border ("Buy Falls Church"), or a neighborhood ("Buy Dupont Circle"), etc. Bottom Line: Trade and voluntary exchange are win-win outcomes and it doesn't matter whether the buyer and seller are on the same side, or different sides, of imaginary lines. Enjoy your coffee, tea, hot chocolate and orange juice, your diamond jewelry, your iPod, and your ski vacation in Canada, or cruise in the Caribbean, etc.
How much longer will our Chinese food be delivered? - The Globe and Mail - Food and energy are intertwined at many levels, not the least of which starts right at the production stage. Behind the green facade of the farm gate lies one of the most energy-intensive industries in the world. From fertilizer to farm machinery, most modern agriculture is really about making hydrocarbons edible. No matter what the crop, the most important input is always energy — and it’s getting to be more so every day. Driven by ever greater fertilizer use and farm mechanization, energy represents half the cost of growing wheat, and over 40 per cent of the cost of growing corn or sorghum. That should tell you right away that a world of rising energy costs translates directly into a world of rising food costs. And that’ll be even truer in the future. Arable land has not increased in over a decade and virtually every model of global warming predicts that it will in fact decrease. And while Monsanto and other friendly producers of genetically modified seed claim that their laboratories keep crop yields rising, the real reason is energy. Those green fields in Iowa run on about five and half gallons of oil per acre.
Krugman v China - World Bank PSD Blog - Anyone familiar Paul Krugman's writings is aware of his dissatisfaction with China's currency policy. Here's an excerpt from a January 1st op-ed.... Evan Osnos, the New Yorker's China correspondent, has found an official Chinese rebuttal to Krugman, written in the English edition of the Global Times: ...Judging by today's eye-popping Chinese export figures, I don't expect this debate to end anytime soon.
China's 2009 Trade Surplus Falls A Record $100 Billion - After posting a record crude-oil import month in December, as well as the second highest iron-ore import month in history, China's program economy is roaring back to life, even if the imports are actually sitting in full warehouses, used to build empty cities that consume negative electricity, make washing machines that never launder anything except the government's flawed economic statistics, and create cars that somehow use up ever-less gasoline. Of course, when the government has trillions in increasingly worthless excess dollar foreign reserves that have to be used up for something, it is no wonder that the Chinese government is buying anything and everything it can stockpile, and that can't be devalued by Tim Geithner, hand over fist. As for exports: courtesy of the dollar peg, which makes China's exports as cheap as the US' (assuming the latter had much of anything to export besides financial innovation), China had no shortage of counterparties to purchase its $1.2 trillion in 2009 exports. Yet despite all this, China's trade surplus plunged a record $100 billion, or 34%, to $196 billion from 2008's $296 billion.
The Big Mac index: Taste and see | The Economist - Burgernomics shows the Chinese yuan is still undervalued (bar graph) THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.
China on Track - The Car Industry In my last post of just a few days ago, in a broad (and rather rambling) review of the world economy, I discussed Chinese mercantilism, and also the shift of wealth to the East. One commentator quire reasonably pointed out that I was lumping together too many economies, which is entirely fair. However, within the discussion, I did single out China, and that is because the economic power developing in China is founded, in part, upon mercantilist policy. This, and the rise of China, have been longstanding themes, and I have sometimes faced criticism, in particular the size of the US economy in relation to China is given as a reason for my over-egging the pudding. There is little doubt that, per individual, the average wealth that remains in the US far exceeds that of China, though the current economic adjustments are seeing that differential shrinking. However, having said this, the speed at which China's economy is growing is quite astounding. I return to this subject, as a couple of articles captured my attention...
China's Exports Increase, Possible Renminbi Appreciation Seen in 2010 - From the Financial Times: China’s exports rise as economy picks up: Exports climbed 17.7 per cent last month from a year earlier and imports shot up 55.9 per cent, according to official figures released on Sunday. ...The article quotes Rothman arguing that the Chinese government has been waiting for three things before resuming appreciation of the renminbi: 1) economic recovery in China, 2) stabilization in Europe and the U.S., and 3) sustained Chinese export growth (for several months). Rothman thinks the first two have happened, and that if export growth continues, the Chinese will allow the renminbi to appreciate later this year.
China becomes world's biggest exporter - guardian.co.uk - China completed a resurgent 2009 with a huge rise in exports establishing China as the world's biggest exporter, ahead of Germany, for the first time. The juggernaut Chinese economy also revealed record monthly imports of crude oil and a vast renewed appetite for iron ore and copper.Trade in December, according to figures from China's customs office, showed a massive 17.7% year-on-year jump in exports, dramatically outpacing a forecast for 4% growth. The huge increase came after 13 months of decline.Crude oil imports averaged more than 5m barrels a day for a month for the first time in December, up by more than a fifth from November, as the country sucked in raw materials at a faster pace than expected.Imports jumped by 56%, pushing China's overall trade surplus in the month down by 4% from November instead of the expected 3% increase.
China Is Already the World's Second Largest Economy - Relying on exchange rate measures of GDP, the Washington Post tells readers that China will soon pass Japan as the world's second largest economy. In fact, using the far more meaningful purchasing power parity measure of output, China long passed Japan. It's economy is now close to twice the size of Japan's. China now buys more cars than the United States each year, it has more computers with Internet access than the United States and twice as many cell phone users.
China's trade balance points to inflation - The Customs Administration announced record trade flows in and out of China in December. Specifically, exports grew at a 17.7% annual pace, while imports surged 55.9% over the year. This is a remarkable one-month rebound; reported export growth beat consensus expectations by a factor of 3.5 (+ 5% export growth and + 32.5% import growth, according to Bloomberg).China is experiencing robust domestic demand growth, as illustrated by the surge in imports. Furthermore, there is likely significant price pressure built into this report since the data are measured in nominal $USD. The December trade report suggests that inflation pressures are underway in China's economy; expect a big jump in coming inflation reports.I wouldn't be surprised if the government allows the yuan to appreciate sooner, rather than later, in light of this report.
China banks eclipse US rivals - Chinese banks have cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values. China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three. Over the past six years, the average price-to-book value of the biggest 50 banks has halved from two to one. This means that investors believe the average bank is worth no more than the value of its balance sheet. Most western banks are trading at well below their book value. But investors are attaching a growing premium to emerging markets banks, led by China Merchants, the most highly rated of the biggest 50 banks by market capitalisation, on a multiple of 4.3, according to Bloomberg data.
China Now Has Enough Cash Built Up To Buy 20% Of The S&P 500 - Chinese foreign exchange reserves jumped 23.3% in 2009, hitting a mind-blowing $2.4 trillion notes 24/7 Wall St..To put this into perspective, the S&P 500's total adjusted market cap is just $13.5 trillion according to the latest data sheet from Standard & Poor's. That means China's forex reserves could buy 18% of the S&P500.Furthermore, if they were to keep growing at the current rate within five years they could theoretically buy half of the S&P500. Now that could be some seriously massive fund flow, even if it isn't likely to happen or even possible.
China May Overheat With 16% Growth, Government Researchers Say - (Bloomberg) -- China’s economy may grow as much as 16 percent this year with accelerating inflation and the risk of a property bubble unless policy makers reduce stimulus measures, government researchers said today. “If the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010,” Yao Zhizhong and He Fan, economists with the Chinese Academy of Social Sciences, said in an article published in the official China Securities Journal. Local media reported today that new lending surged last week. A stronger-than-estimated trade rebound in December may give policy makers more room to pare stimulus measures after record lending in 2009. The central bank last week guided three- month bill yields higher for the first time since August and may lift the benchmark one-year lending rate to 5.85 percent by year-end from 5.31 percent, economists forecast. China’s exports grew 17.7 percent last month from a year earlier, the first increase in more than a year, and imports rose to a record, customs data showed yesterday. Gains were boosted by a low base for comparison in 2008.
BBC News - China property prices accelerate - Chinese property prices rose at their fastest annual rate in 18 months in December, official figures show. Real estate prices rose by 7.8% from a year ago - up from the 5.7% annual rise seen in November and renewing fears that an asset bubble is developing. Chinese authorities have expressed concerns that property prices are rising too fast. On Tuesday, China's central bank announced measures to curb lending in order to reduce real estate investment. Lending boomLast year, Chinese banks issued $1.5 trillion (£932bn) in loans in order to boost economic growth - with a large proportion being used to invest in property. One of the leading rating agencies, Fitch Ratings, has been among those expressing concern over the trend, arguing that too much lending could harm the banking sector as well as the property sector. "Fitch is concerned about an eventual deterioration in banks' asset quality, amid the loan growth acceleration in 2009," the ratings agency said.
In China, fear of a real estate bubble - With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped. The Chinese government is worried, too. On Sunday, the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second home must make a down payment of at least 40 percent. For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.
China Cuts Amount Banks Can Lend, in Sign of Inflation Worries As it orders banks to lock up more cash, Beijing is demonstrating it is on guard against asset bubbles that can accompany inflation. The initial impact may be to knock back China's stock market, which gained 80% last year according to the Shanghai Composite Index. A sharp spike in bank lending starting in late 2008 was the central element to Beijing's effort to escape the global financial crisis. The forceful policy may have worked too well, allowing companies to gorge on easy credit and speculate on properties and stocks.
FT.com | Money Supply | China tightens quicker than expectations - The People’s Bank of China has raised the yield on 20 billion yuan ($2.9 billion) of one-year bills by about 8 basis points (bps) to 1.8434 per cent after holding it steady in the previous 20 auctions, compared with a median forecast among traders that it would go up by just 4 bps. It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring it will draw net funds from the market this week.Last week the Chinese central bank surprised the market by pushing up the yield on its 3-month bills by about 4 bps to 1.3684 per cent, sending stocks and commodities lower on worries about tougher “fine-tuning” of monetary policy
Goldman: Chinese Government Tightening Is Way Behind The Curve, Inflation Will Explode
While the Chinese government will attempt to tighten its monetary policy in 2010, it will likely be too little too late, according to latest research from Goldman Sachs' Helen Qiao. This means Chinese inflation could explode: We see increasing risks of stronger aggregate demand and higher inflation. We believe the rapid recovery in external demand and stimulus from insufficient monetary tightening in the near future will likely cause the output gap to close and turn positive earlier than we previously expected. As demand growth outstrips its long-term potential, especially when measured by industrial and electricity production (given the complication of GDP reporting), inflationary pressures will likely build. While we believe policymakers have already started to adopt tightening measures to absorb liquidity and will probably resume control on loan extensions soon, the pace and magnitude of the tightening could still be insufficient to rein in inflationary pressures.We raise our inflation forecasts due to the deteriorating outlook on the growth-inflation nexus
Managing China’s crisis management - China’s “Central Economic Work Meeting,” comprising top government decision makers, recently chose to continue the expansionary fiscal and monetary policy launched in the last quarter of 2008. But it also called for greater emphasis on transforming China’s development pattern and rebalancing its economic structure. The move thus signaled the start – well ahead of other countries – of China’s “exit” from crisis-driven economic policies. Indeed, China should accelerate its change of course. While expansionary policies have succeeded in ensuring a V-shape recession, their medium and long-term effects are worrisome. First, China’s crisis management has made its growth pattern, marked by massive investment demand, even more problematic. China’s investment rate is extremely high in comparison with other major economies, and has been increasing steadily since 2001, creating first overheating and then overcapacity. Second, China’s external imbalance may also worsen...
China Ends U.S.’s Reign as Largest Auto Market - (Bloomberg) -- China supplanted the U.S. as the world’s largest auto market after its 2009 vehicle sales jumped 46 percent, ending more than a century of American dominance that started with the Model T Ford. The nation’s sales of passenger cars, buses and trucks rose to 13.6 million, the fastest pace in at least 10 years, according to the China Association of Automobile Manufacturers. In the U.S., sales slumped 21 percent to 10.4 million, the fewest since 1982, according to Autodata Corp. China’s vehicle sales have surged since 1999 as economic growth averaging more than 9 percent a year has helped automakers including General Motors Co. and Volkswagen AG compensate for slumping demand in the U.S. and Europe. The market will likely remain the world’s largest, even as sales slow this year on a reduction in tax cuts, according to Booz & Co.
Although Chinese car factories are working 24/7, they still fail to reach demand - Nissan Motor Co.’s factory in central China is making cars almost 24 hours a day, yet Pan Xiaowei still waited three months for her new Tiida compact to arrive at the dealership. China overtook the U.S. last year as the world’s largest automobile market with sales surging 46 percent to 13.6 million, according to the China Association of Automobile Manufacturers. Nissan, Ford Motor Co. and Honda Motor Co. are running their Chinese factories at full capacity, with overtime and weekend shifts, and still can’t deliver enough cars. About 99.7 percent of cars made in China through November last year were sold, the association said. Foreign automakers are expanding assembly lines as buyers in secondary cities beyond Beijing and Shanghai benefit from government subsidies of at least 5 billion yuan ($732.5 million), a sales tax cut and 8.9 percent economic growth.
China's economy: Not just another fake - The Economist - CHINA rebounded more swiftly from the global downturn than any other big economy, thanks largely to its enormous monetary and fiscal stimulus. In the year to the fourth quarter of 2009, its real GDP is estimated to have grown by more than 10%. But many sceptics claim that its recovery is built on wobbly foundations. Indeed, they say, China now looks ominously like Japan in the late 1980s before its bubble burst and two lost decades of sluggish growth began. Worse, were China to falter now, while the recovery in rich countries is still fragile, it would be a severe blow not just at home but to the whole of the world economy.The similarities between China today and Japan in the 1980s may look ominous. But China’s boom is unlikely to give way to prolonged slump
China to report double-digit GDP growth in Q4 - REUTERS FORECAST: Median +10.9 pct in Q4 vs +8.9 pct in Q3. Seventeen analysts participated in the survey and the range was from 10.0 pct to 12.0 pct.FACTORS TO WATCH: China is expected to return to double-digit economic growth in the fourth quarter of 2009, partly due to a low comparison base in the fourth quarter of 2008, when GDP growth dipped to 6.8 percent.China's exports were particularly strong in December last year, rising 17.7 percent after 13 months of annual decline.If the GDP growth in the last quarter proves to be stronger than expected, Beijing could move even more aggressively to manage inflation, following an unexpected increase in deposit reserve requirements announced on Tuesday.MARKET IMPACT: Economists and analysts are widely expecting a strong GDP growth rate, and the fourth quarter data could confirm mainstream views that the Chinese economy has recovered. That in turn could lead Beijing to quicken its pace in exiting its crisis-mode policies, including fiscal stimulus and loose monetary policy.China's domestic stock market could fall if strong GDP data led to further government tightening. But strong GDP data might be interpreted as a positive news for the commodities market because it would reflect healthy underlying demand for energy and resources.
China Censors Google's Threat to Pull Out of China In the wake of Google’s threat to pull its business completely out of China, the entire world is responding, including Chinese Internet companies, U.S. Secretary of State Hillary Rodham Clinton and the Chinese government — in the form of censorship. A quick recap: Yesterday, in a lengthy blog post, Google revealed that it was the victim of sophisticated attacks against its infrastructure, originating from China (possibly from the Chinese government itself).The targets were the Gmail accounts of Chinese human rights activists. As a result of these attacks — along with Google’s discovery of already compromised Google accounts — the company has decided to not censor its search engine, even if it means being kicked out of China.
Google’s fight: US-China lock horns Sydney Morning Herald - GOOGLE'S fight with Chinese censors risks escalating into a fullblown US-China showdown over cyber warfare, as claims emerge about the unprecedented scale of Chinese attacks on US commercial and defence systems. The Chinese-originated attack on Gmail accounts of human rights activists, which Google said had partly prompted its threat to leave China, was "probably insignificant" compared with the "theft" of source code and data from Google and at least 33 other leading technology companies, said a consultant briefed on the cyber attacks. The details coincided with claims that the FBI had tracked more than 90,000 Chinese-originated attacks last year on the Defence Department alone.
Google vs. CCP: All the possible WHYs - Chinayouren Poll- I know, there are other news in the World, and I am probably not paying enough attention to them. But I can’t help it, I’ve been overclocking for the last 48h trying to understand Google’s decision, I have read every single article appeared on the internet since. And I still don’t get it. I want to make this a collaborative page, I will keep it on top and I would appreciate comments with clues and POVs I might have missed. The objective is to come up with reasonable hypothesis and then cross out the wrong ones. I will also add interesting bits of info below as they come out:
Soul Searching: Google’s position on China might be many things, but moral it is not - How exciting! Google has issued a statement saying it’s un-censoring its search results in China! And it’s threatening to pull out of the country completely, in retaliation for an alleged (and, we’re led to infer, government-backed) attempt to hack the Gmail accounts of Chinese dissidents! Meanwhile, Google slowly provocatively moves photos of Tiananmen tanks back onto its Chinese image search. Unsurprisingly for such a bold move, Google’s statement – that it would no longer be bowing to Chinese censorship, having spent four years doing precisely that – has sparked debate amongst my esteemed friends and colleagues in the blogosphere.On one side, Robert Scoble has congratulated Google, almost unconditionally. “Google has EVERY INCENTIVE to kiss Chinese ass,” he says, “that’s why this move today impressed me so much.” And to those who say that Google’s behavior to date has been overly sympathetic to the Chinese government? Um, he’s sorry…Why 'Made in China’ is a mark of shame – Telegraph - They say that the first step on the road to recovery is to admit you have a problem. Only now, as the public becomes aware that the "Made in China" label is tainted with a huge number of shoddy and dangerous products, are companies beginning to understand there is a serious problem. The next step is to ask: why do Chinese manufacturers behave so badly?
China’s Not a Superpower…and won’t be anytime soon, according to Minxin Pei, who says its political and economic situation is more precarious than it looks. With the United States apparently in terminal decline as the world’s sole superpower, the fashionable question to ask is which country will be the new superpower? The near-unanimous answer, it seems, is China. Poised to overtake Japan as the world’s 2nd largest economy in 2010, the Middle Kingdom has all the requisite elements of power–an extensive industrial base, a strong state, a nuclear-armed military, a continental-sized territory, a permanent seat on the United Nations Security Council and a large population base–to be considered as Uncle Sam’s most eligible and logical equal. Indeed, the perception that China has already become the world’s second superpower has grown so strong that some in the West have proposed a G2–the United States and China–as a new partnership to address the world’s most pressing problems....Yet, despite such undeniable achievements, it may be too soon to regard China as the world’s next superpower.
Why China's Economy Will Grow to $123 Trillion by 2040 - Foreign Policy - In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China's per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a superrich country in 2040. Although it will not have overtaken the United States in per capita wealth, according to my forecasts, China's share of global GDP -- 40 percent -- will dwarf that of the United States (14 percent) and the European Union (5 percent) 30 years from now. This is what economic hegemony will look like.
China Is Making Bets on Concentrating Solar Power - NYTimes - As it moves rapidly to become the world’s leader in nuclear power, wind energy and photovoltaic solar panels, China is taking tentative steps to master another alternative energy industry: using mirrors to capture sunlight, produce steam and generate electricity. So-called concentrating solar power uses hundreds of thousands of mirrors to turn water into steam. The steam turns a conventional turbine similar to those in coal-fired power plants. The technology, which is potentially cheaper than most types of renewable power, has captivated many engineers and financiers in the last two years with an abrupt surge in new patents and plans for large power operations in Europe and the United States. This year may be China’s turn. China is starting to build its own concentrating solar power plants, a technology more associated with California deserts than China’s countryside. And Chinese manufacturers are starting to think about exports, part of China’s effort to become the world’s main provider of alternative energy power equipment.
'Rare earth' shortage threatens green revolution - The key to a low carbon future is not negotiations in Copenhagen but mud and minerals in China. All low carbon technologies, from wind turbines to electric cars and low energy lightbulbs, use elements known as 'rare earths'. And 95 per cent of these are found in China. Earlier this year the Chinese decided to restrict export of these essential metals and minerals and now a shortage is predicted which could effect the development of green technologies. 'Rare earth' processing in China is a messy, dangerous, polluting business. It uses toxic chemicals – acids, sulfates, ammonia. The workers have little or no protection, but rare earth elements like yttrium and cerium are prized for their magnetic properties, and high conductivity. Low carbon technologies, the key implementing to a deal in Copenhagen, depend on them. Green campaigners love wind turbines, but the permanent magnets used to manufacture a three megawatt turbine use about two tonnes of 'rare earth'.
Jim Hansen vs. Cap and Trade — NASA climate scientist Jim Hansen has a new book out about climate policy, with excerpts in this month's issue of The Nation. And in my view, he's got a pretty good policy idea: tax carbon, and use the revenue to give out rebates in equal, per capita shares to every US citizen. It's a twofer -- the carbon tax helps drive down emissions, and the rebate makes sure that it's fair to middle- and lower-income folks who'd otherwise bear the brunt of the tax. If I were the globe's climate czar, Hansen's tax-and-dividend plan is one of the top 5 to 10 ideas I'd give serious consideration.
The Optimal Eurozone and the Optimal Dollar Zone - There has been a lot of discussion recently over the potential break-up of the Eurozone. Commentators such as Martin Wolf, Paul Krugman, and even the ECB have highlighted problems in some of the periphery nations of the Eurozone that could cause them to eventually abandon the Euro. As Krugman notes, this discussion is ultimately based on theory of the optimal currency area. Some of Krugman's readers have been asking him what are the implications for the United States from this theory. I happen to have a paper [ungated version]that looks at this very question. In the paper I frame the issue this way:
Rehn to propose economic ‘high representative’- Europe's economic recovery depends on greater fiscal co-ordination and speaking with a single voice at global economic fora, Olli Rehn, the EU's incoming economic and monetary affairs commissioner, told MEPs at a parliamentary hearing yesterday Two concrete points to emerge from the hearing were Rehn's insistence on the adoption of the EU's new financial supervisors and the creation of a single EU representative to participate in international economic fora like the G20. Rehn said he would be issuing a recommendation for a single representative in the coming months
Changing Times: Global Governance Reform and the IMF - The economic and financial crisis of the past two years has placed in high relief profound changes in global economic and financial realities. Most notably, the crisis has underscored the shift in relative economic weight in favor of dynamic emerging market economies. In response, the G-20— a grouping that includes both advanced and large emerging economies—has stepped forward as the premier political venue for addressing economic and financial policy challenges. These changes are exerting significant influence on the evolution of global governance, and they directly involve the IMF in two concrete ways. First, new advances are taking place in multilateral economic policy cooperation, with Fund participation. Second, realignment of Fund governance has been put on a fast track, with delivery scheduled for January 2011
Britain's recession the steepest for 88 years - Times Online - Britain's economy fell last year at the sharpest rate since 1921, despite hopes that it finally emerged from recession in the last three months of the year, according to a respected economics forecaster. The National Institute of Economic and Social Research (NIESR) said today that its latest estimate showed that GDP rose by a modest 0.3 per cent in the final three months of 2009 compared with the third quarter. That means that, for the year as a whole, the economy contracted by 4.8 per cent, a bigger fall than in any year of the Great Depression and the biggest contraction for 88 years. However, NIESR went on to say that signs of a recovery were starting to emerge after the economy bottomed out in March last year after 12 months of sharp falls.
UK banks face $10bn bill from US over bailouts - Three British banks may have to pay more than $10 billion (£6 billion) to the US Government as part of its crackdown on financial institutions bailed out by taxpayers. Royal Bank of Scotland, which is 84 per cent owned by the Government, may be on the hook for almost $1 billion to the US over the next decade under a stringent new levy announced by the Obama Administration yesterday. Barclays could face a total bill of about $5.6 billion over ten years, while HSBC may have to hand over $3.8 billion, Joseph Dickerson, an analyst at Execution, calculated as the details of the US levy emerged. The three UK lenders were scrabbling to clarify their exposure to the tax, proposed by President Obama to claw back billions of dollars from banks that have been saved from collapse by state support
The “other” imbalance and the financial crisis - VoxEU - Global imbalances have been suggested as the root cause of the global crisis. This column argues that another imbalance is the guilty party. The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the US financial system and its incentives. This structural problem can be alleviated if governments around the world explicitly absorb a larger share of the systemic risk.
Business Formation Tumbles 10% in Wealthiest Countries - The number of entrepreneurs starting new businesses dropped 10% in the wealthiest nations last year and fell 24% in the U.S., according to a report released Wednesday. Throughout the world, would-be entrepreneurs reported greater difficulty in obtaining financial backing for their start-up activities, especially from informal investors– families, friends, and strangers,” says Bill Bygrave of Babson College, one of the founders of the Global Entrepreneurship Monitor, which issued the report.
The spectre of sovereign default returns to rich world (Financial Times) Since 2007, Organisation for Economic Co-operation and Development government deficits have risen by 7 per cent of gross domestic product to just more than 8 per cent, and debt, excluding contingent liabilities, has risen by about 25 per cent of GDP to just more than 100 per cent. The biggest increases have occurred in Iceland, Ireland, the US, Japan, the UK, and Spain. There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint. In several European Union member states, the threshold has already been breached. The spectre of sovereign default, therefore, has returned to the rich world. Default does not have to mean outright debt repudiation. It can mean some type of moratorium on interest payments, and the restructuring of loan terms. Richer nations are assumed to be above such measures, but not in extreme circumstances. The US abrogated the gold clause in government and private contracts in 1934, and in 1971, it abandoned the gold standard altogether. Default can also occur through inflation, currency debasement, the imposition of capital controls, and the imposition of special taxes that break private contracts. Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default.
Sovereign Bonds Seen as Riskier Than Corporates - The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies. It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit. Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.
Eurozone monetary policy in uncharted waters - VoxEU - The global crisis forced central banks to take unconventional measures. This column says that the ECB’s “enhanced credit support” helped support the transmission of monetary policy by reducing money market term spreads. The substantial increase in the ECB’s balance sheet also likely contributed to a reduction in government bond term spreads and a somewhat flatter yield curve.
German Growth Slowed to Near Zero in Fourth Quarter - NYTimes - The economics minister, Rainer Brüderle, told reporters in Berlin that the economy was nearly stagnant in the fourth quarter after growing by 0.7 percent in the third. Mr. Brüderle spoke just after the Federal Statistics Office reported that German output declined 5 percent in all of 2009, led by a 14.7 percent drop in exports. The statistics agency did not give an official figure for fourth-quarter growth.Economists said that the slower growth at the end of the year was partly the result of the expiration of cash-for-clunkers incentive programs in Germany and in other countries, which had been driving sales of Volkswagens and other cars.
Federal Statistical Office - Germany experiencing serious recession in 2009 - WIESBADEN – The German economy shrank in 2009 for the first time in six years. With –5.0%, the decline in the price-adjusted gross domestic product (GDP) was larger than ever since World War II. This is shown by first calculations of the Federal Statistical Office (Destatis). The economic slump occurred mainly in the winter half-year of 2008/2009. Over the year, there were signs that the economic development would slightly stabilise on the new, lower level. In 2008 the GDP had slightly been up by 1.3%, in 2007 by 2.5% and in 2006 even by 3.2%.
German President Angela Merkel Just Dropkicked The Euro - It's hard to be a euro-bull, when the President of Europe's most important economy, Germany, is a euro-bear: Bloomberg: German Chancellor Angela Merkel said Greece’s mounting budget deficit risks hurting the euro, saying the currency faces a “very difficult phase.”Merkel, speaking at a private forum hosted by Die Welt newspaper yesterday, questioned the fiscal discipline of other countries using the euro, according to a transcript posted on the German government’s Web site today.“The Greek example can put us under great, great pressures,” she said, according to the transcript. “Who will tell the Greek parliament to please go ahead and pass a pension reform? I don’t know that they’ll be enthusiastic about Germany giving them instructions.”A few months ago, you couldn't find a dollar bull to save your life. Now they're everywhere. These days, you can't find anyone bullish on the euro, even Thomas Friedman says it's the currency he'd short.
UK, Germany, France at Greater Default Risk Than Top Companies - Throughout the financial crisis we’ve witnessed governments stepping in to backstop and rescue failing corporations with loans and bailouts… now imagine the reverse. For the first time, judging by the cost of insuring against a debt default, “the market has started to price in a bigger probability of default among industrialised countries than among investment grade companies.” According to the Financial Times: “This development reflects the market’s current obsession with sovereign risk. The same thing applies in the bond markets where investors are no longer willing to regard the debt of an increasing number of developed world governments as risk free. These countries have taken on huge private sector debts in their efforts to reverse the economic downturn and bail out the financial sector.
Europe cannot afford a Greek default - The eurozone cannot afford to make an example of crisis-hit Greece. Claims by officials and politicians in the currency bloc’s fiscally more robust economies that the Greeks will have to find their own way out of the crisis are not credible. They ignore the fact that Greece’s problems cannot be solved by it alone. Nor would a Greek default be the cleansing experience that many people in the stronger member states appear to imagine. If the eurozone fails to support Greece or makes the terms of any bail-out politically impossible for the country’s authorities to meet, Greece could default on its sovereign debt. The eurozone would then face a big problem. The financial markets would quickly turn their attention to other euro bloc economies with unsustainable fiscal positions and poor growth prospects. Italy, Spain and Portugal would find themselves paying dramatically higher borrowing costs, raising the likelihood of further fiscal crises. Such a scenario would almost certainly deter the European Union’s remaining central and eastern European member states joining the eurozone any time soon. And the political fallout would be huge.
Moody’s Says Greece, Portugal May Face ‘Slow Death’ (Bloomberg) -- The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said. While the two countries can still avoid such a scenario, their window of opportunity ”will not be open indefinitely,” Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22. The premium that investors demand to hold Greek debt instead of German equivalents is six times more than it was two years ago, and the spread has doubled since 2008 in the case of Portugal. Greece had the largest budget deficit in the euro region last year, more than four times the European Union limit of 3 percent of gross domestic product. Portugal’s debt load will account for 85 percent of GDP this year, according to the European Commission.
Iceland, or Size matters - A short background: One bank, Icesave, which had many clients in England and Holland, owes these clients some $6 billion, a sum the Iceland government is held responsible for and initially seems to have agreed to pay. The people of Iceland, all 320,000 of them as it were, have started questioning why they should pay for foreign investors' losses with banks with whom they have no connection other than that they happen to be located in their country. Britain's decision to put Iceland on some terror alert list because of the banking affair is likely a big factor in this, as well as in the decision by the president to let the people decide in a referendum on February 20 whether they want to pay back the losses of foreign investors who had accounts with Icesave only so they could get a few basis points more interest on their funds. It doesn't look like they will. The prevailing sentiment these days among the geysers can best be summarized like this: "We may be small, but we ain't your bitch".
Pimco Says BOJ May Sell Yen, Buy Debt to Spur Economy (Bloomberg) -- Pacific Investment Management Co., which runs the world’s biggest bond fund, said the Bank of Japan may need to sell yen or buy long-term government bonds in “unlimited amounts” to combat deflation. “Japan’s problem is deflation, not inflation as far as an eye can see,” wrote Paul McCulley, a member of the investment committee, and Tomoya Masanao, the head of portfolio management for Japan, in a report on the Pimco Web site. “An ‘all-in’ reflationary policy is what is needed,” according to Pimco, which is based in Newport Beach, California. Japan’s economy shrank in the third quarter to the smallest since 1991, unadjusted for prices, spurring Sony Corp. Vice Chairman Ryoji Chubachi to warn that deflation may cause a recession by squeezing corporate earnings. The yen fell against all 16 most-traded currencies last year on speculation the Bank of Japan will be the last major central bank to raise interest rates as it tries to spur growth. Working with the Ministry of Finance, the BOJ would be “printing the necessary yen” required for the currency sales
U.S. Judge Freezes Argentine Central Bank Accounts - (Reuters) - A U.S. judge has frozen accounts held in the United States by Argentina's Central Bank, deepening a legal and political row over the Argentine government's plan to use foreign reserves to repay debt. Speculation had grown in Argentina in recent days that some holders of defaulted government bonds could try to get Central Bank funds embargoed because of a plan to use $6.6 billion in foreign currency reserves to service the nation's debt. Economy Minister Amado Boudou said the embargo, which responded to a lawsuit by two funds holding defaulted Argentine bonds, was damaging the government's drive to carry out a debt swap but said the exchange remained on track.
Chile signs up as first OECD member in South America - Chile will become the OECD’s 31st member and its first in South America under an accession agreement signed today in Santiago by OECD Secretary-General Angel Gurría and Chilean Finance Minister Andrés Velasco. Chile will formally become an OECD member once its parliament ratifies this agreement.Chile’s acceptance for OECD membership marks international recognition of nearly two decades of democratic reform and sound economic policies. For the OECD, Chile’s membership is a major milestone in its mission to build a stronger, cleaner and fairer global economy.
Brazil vs India: Why both need to save more - Rebecca Wilder compares the growth challenges facing Brazil and India. In short, both countries need to increase their savings rates in order to boost overall investment and, in turn, worker productivity. Brazil in particular must re-arrange its consumption/savings relationship, as the share of investment as a percentage of GDP has changed little over the past decade. Brazil's experience is in sharp opposition to India, which continues to increase overall investment, primarily through increased FDI. Nevertheless, India, with its burgeoning labor supply, would benefit from even more investment, ideally through increased savings
World Development Indicators 2009 -World Bank blog - The World Development Indicators is the World Bank's premier annual compilation of data about development. The 2009 WDI includes more than 800 indicators in over 90 tables organized in 6 sections: World View, People, Environment, Economy, States and Markets, and Global Links.WDI online database available for subscribers. Selected indicators can also be accessed for free with the quick query.
Map of Development Activities Worldwide - World Bank blog - A while ago we wrote about the World Bank's Geo, a very useful Google map to browse WB's projects, news, statistics and public information centers by country. The online directory AiDA (Accessible Information on Development Activities), has now put together a similar Google map with information about development activities. By clicking on a country we can see a summary of the development activities taking place there, classified according to Sector, Agency and Donor.
Grab Your (Online, Pre-Press) Version of the World Development Report 2010 Now -World Bank blog - An advance version of the World Development Report 2010: Development and Climate is now available online. With a focus on climate change and its negative impacts on vulnerable populations, this year's Report also covers innovation and technology diffusion, land and water management, and other important factors for accelerating development. This version is not final and may be subject to further changes. The final WDR 2010 will be out in October.
The Urban Economy - The value in economically dynamic cities is the people that populate them. Where once, firms would pay high land prices to be near coal deposits or harbors, based on the economic advantages those amenities conferred, they now pay high land prices to be near talent. This yen to concentrate in particular areas has a number of dynamics. Firms want to be near customers and clients. Workers want to be near firms. Firms want to be near workers. Where there are lots of firms and workers, there will also be businesses serving those workers — in business and in the provision of consumption opportunities — and those services attract additional firms and workers. Everyone wants to be where everyone is, and it’s tough for anyone to go somewhere else because somewhere else is where people aren’t.The result is an urban geography that’s very lumpy. People clump together, because there are gains to doing so. But what makes a successful clump changes over time. The economics that underpinned the older manufacturing economy supported clumps that don’t necessarily make economic sense today. With declines in transportation and communication costs, it became affordable to move plants away from expensive city land, and that’s precisely what many businesses did. In cities that were also home to a substantial knowledge economy sector, this ultimately proved to be a boon. By outsourcing their manufacturing (and later, their back office) components, firms could reduce the overhead on the offices of those who still needed to be in the city, improving margins (and making more room in the city for others who needed to be there, thus increasing the return to everyone of being in the city). The result is a world where the key to urban success is a critical mass of workers with high levels of what economists like to call human capital. And because there are returns to scale at work, there is an element of the zero sum here. Or to put it another way, the world where every big city has its own fair share of talent is not a stable equilibrium; it will decay into a world with haves and have nots. And indeed, that’s what we have seen in recent decades. Educational levels in cities one hundred years ago strongly predict educational levels in cities today. And cities with high shares of college graduates have absorbed more than their share of new college graduates in recent decades.