Why The Fed's Next Act Could Be It's Hardest - For more than a year, central bankers from Washington to Warsaw have kept the world economy on life support by pumping massive amounts of liquidity into the global financial system. Now comes the hard part: Removing the tubes without killing the patient. For 2010, the hot topic for the guardians of financial stability will be how to engineer an exit strategy that reduces the burden on the taxpayer without risking a double-dip recession. Stock investors seem increasingly confident that it can happen, but it's far from certain such a delicate procedure can be successful. The amount of stimulus thus far is staggering. The Federal Reserve and other U.S. agencies have lent, spent, or guaranteed $8.2 trillion in emergency funds to resuscitate growth. The Fed's balance sheet has picked up $2.24 trillion of assets, a gain of 142% since the beginning of 2008.
Fed Proposes Term-Deposit Program to Drain Reserves (Bloomberg) -- The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system. The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Fed Chairman Ben S. Bernanke is preparing tools and strategies to shrink or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales. Term deposits may help policy makers “assert operational control over the federal funds rate” once they raise the interest rate from the current range of zero to 0.25 percent,
Fed exit strategy: Let banks set up CDs -(AP) -- The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later. Under the proposal, the Fed would offer so-called "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.The proposal comes as no surprise. Federal Reserve Chairman Ben Bernanke and other Fed officials have repeatedly said the creation of so-called "term deposits" -- essentially the equivalent of CDs for banks -- would be one of several tools the Fed could use to drain money from the economy when the time is right.
Federal Reserve Officials Discuss Limited Bond Sales to Help Exit Stimulus (Bloomberg) -- Federal Reserve officials are considering a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet as part of a range of tools for withdrawing record monetary stimulus. The Federal Open Market Committee discussed asset sales at its November meeting, with some members in favor and others warning that it would cause “sharp increases” in longer-term interest rates, according to minutes of the meeting released Nov. 24. A middle route now being studied would allow small amounts of bonds to be unloaded at announced times.
Term deposit facility - Econbrowser - On Monday the Federal Reserve proposed a new term deposit facility that would allow the Fed to borrow directly from private institutions. Here I offer some thoughts on how this fits into the Fed's long-term plans and what its implications for the rest of us might be. Let's begin with some background on how we got here. The Fed's conception has been that the core problem we have been going through was a credit crisis-- banks stopped lending and institutions stopped buying mortgage-backed securities, as a result of which businesses and consumers could not borrow adequate amounts. The Fed's goal was to step in where private lenders would not, with the Fed initially lending directly to private banks through a new term auction facility and to foreign central banks through currency swaps, supporting issuers of commercial paper through the commercial paper funding facility, and lending broadly through a number of other new facilities. (includes Fed balance sheet charts)
Withdrawing Support - The Economist - EZRA KLEIN notes that the Fed is plowing ahead with its planning for withdrawal of monetary supports for the economy, like: The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later. Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy. The Fed's commitment to undo its interventions is already having an effect. In expectation of more of these moves to come (as well as, perhaps, increases in interest rates) markets have been bidding up the dollar, which has busily appreciated during the month of December. That, in turn, will deprive the American economy of a potential source of demand—growth in consumption of American exports thanks to the effect of a weak dollar. More bluntly, we're seeing a move toward contractionary monetary policy at a time when unemployment is at 10%. Funny that.
The truth about all those excess reserves -- The Economist - ONE of the biggest challenges facing the Fed is widespread ignorance about how it actually operates. Inflation is falling, unemployment is 10%, yet some people think it’s running an inflationary policy because an extra $1 trillion of reserves are in the banking system. The misperception has only grown with yesterday’s announcement that the Fed would offer “term deposits” to banks as a way of draining some of the excess reserves its emergency operations have created. The move has been widely reported as aimed at keeping banks from lending the reserves out, which would spur inflation. This has brought differing reactions depending on whether you think the Fed should be worried more about inflation or unemployment. Ezra Klein and my colleague across the hall think the latter, and are thus critical of the move. I sympathise with their point of view but some clarity about what the Fed is doing is in order. For starters, the volume of reserves has almost no significance for the growth of bank lending and inflation.
Fed Offers New CD; Chairman Bernanke is still confused - As reported in the NYT yesterday, the Fed has decided to offer banks an interest-paying CD. So far, so good. However, the argument offered by the Fed to justify this "innovation" is that it needs to start mopping up reserves in order to prevent inflation. This blog has published a number of pieces explaining why there is no need to worry about the trillions of dollars of reserves and cash created by the Fed to deal with the run to liquidity set-off by this crisis (see here and here). As and when banks decide they do not want to hold reserves, they will retire their loans at the discount window and will begin to purchase higher-earning assets. As this pushes up asset prices (reducing interest rates), the Fed will begin to unwind its balance sheet—selling the assets it purchased during the crisis. Retiring discount window loans plus purchases of assets from the Fed will eliminate undesired reserve holdings. It is all automatic and nothing to worry about or to plan for....
The Monetary Base is exploding. So what? - Mankiw - An article in Saturday's Wall Street Journal says that some big-league investors are betting that inflation will rise significantly. The reason? "The nation's exploding monetary base is a harbinger of inflation." Is this right? Probably not. It is true that the monetary base is exploding. See the above graph. Normally, such surge in the monetary base would be inflationary. The textbook story is that an increase in the monetary base will increase bank lending, which will increase the broad monetary aggregates such as M2, which in the long run leads to inflation. That is not happening right now, however. The broader monetary aggregates are not surging. Much of the base is instead being held as excess reserves. But, you might ask, won't the inflationary logic eventually take hold as the economy recovers and banks start lending more freely? Not necessarily....
Why hasn't the Fed been targeting two or three percent inflation? - I've been thinking about this question more and I've come up with a speculative possibility. Right now banks are earning their way back into profitability by playing the spread. They're paying close to zero on deposits and earning fair sums on long-term loans. So let's say we move from zero expected short-term inflation to three percent short-term expected inflation. The nominal short rate rises to three percent and the real short rate remains more or less constant. Long rates would go up a bit but not much, since beyond the short run there is already an expectation of moderate inflation. In sum, the spread between short and long rates might narrow. Here is the key point: from the bank's point of view, what is the correct measure of the real rate of interest? Is it defined by the nominal rate relative to the expected growth in the CPI? I doubt it. When you're near the bankruptcy or nationalization constraint, it's often nominal profits that matter (relative to fixed nominal liabilities, accounting standards, capital standards, etc.), not "real profits" defined relative to the CPI. In sum, maybe three percent expected inflation conflicts with the desire to rapidly recapitalize banks through maintaining a wide interest rate spread. Maybe we need that zero nominal short rate or at least the Fed thinks we do.
Taxpayer Burden Eases to $8.2 Trillion as Obama Supplants Fed (Bloomberg) -- Congress and the Obama administration are taking a bigger role in the rescue of the economy from the Federal Reserve, shifting the strategy to stimulus spending from central bank lending. The amount the Fed and U.S. agencies have lent, spent or guaranteed has fallen 15 percent since September to $8.2 trillion, the lowest in a year, based on data compiled by Bloomberg. Spending on infrastructure, tax breaks and other fiscal measures account for 52 percent of the total, up from 39 percent in March, as central bank loan programs are phased out. The change marks a new phase of public intervention in the economy. Congress and the administration’s $4.2 trillion portion, which amounts to 30 percent of everything produced in the country this year, also complicates any future exit strategy. It may be tough for elected officials to quit spending, prolonging the bailout and adding to the federal budget deficit.
Will Economists Ever Learn? - Prior to the recent crash of financial markets, there was a widespread belief that monetary policy was all that was needed to stabilize the economy. However, one important thing we learned recently is that central banks are not all powerful. They cannot prevent all large downturns in the economy and they cannot, on their own, always provide the help that is needed to stabilize the economy. How did we come to have so much faith in monetary policy? Why did we assume that monetary policy alone would be enough to stabilize the economy always and everywhere, that fiscal policy was no longer needed as a stabilization tool?
Today in "Economists Are NOT Totally Clueless" (Interlude; Part 2 of 3 or 4)- Tyler Cowen can count: "In sum, maybe three percent expected inflation conflicts with the desire to rapidly recapitalize banks through maintaining a wide interest rate spread. Maybe we need that zero nominal short rate or at least the Fed thinks we do.... I also regard this as a somewhat gruesome hypothesis. It means that "Main Street" is paying for "Wall Street" in at least two ways: high unemployment and inability to earn much on one's savings".... And Ryan Avent points out the next piece of that puzzle: "More bluntly, we're seeing a move toward contractionary monetary policy at a time when unemployment is at 10%." I can't think of a scarier way to end the year. Sorry about that. Best wishes for 2010—we're all going to need them.
What's the Fed Thinking? - Via Ryan Avent, here is Ezra Klein. The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later. Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy. Not a good sign. On the other hand, at least Summers has Fannie and Freddie continuing to pump mo' money into the economy...
Rope Limit - Think of the Fed buying $1 trillion of MBS, and the US Treasury buying $220 billion of MBS. Why should our government borrow to own mortgage loans? (For these purposes, I count the Fed as a part of the government.) The government is trying to support residential real estate prices, rather than letting the system clear by letting prices fall further, and letting the financial system absorb large losses. This is just my gut felling but as the US government has acted over the last month, borrowing and offering guarantees with abandon, amid economic weakness and a wide yield curve, I have been surprised by the continued widening of the yield curve. It is as if the US Government has finally reached its “rope limit,” the line in the grass where the dog can go no further
Foreign central bank US debt holdings fell-Fed - Foreign central banks' holdings of U.S. Treasuries and agency debt at the Federal Reserve fell in the latest week, data from the U.S. central bank showed on Monday. The combined holdings of Treasuries and agency securities by foreign central banks at the Fed fell $4.97 billion to a total of $2.954 trillion in the week ended December 23. Treasuries held by overseas central banks at the Fed fell $1.412 billion to total $2.185 trillion. Foreign central banks' holdings of securities issued or guaranteed by the two biggest U.S. mortgage financing agencies, Fannie Mae (FNM.P) and Freddie Mac (FRE.P), fell by $3.557 billion to $769.433 billion in the latest week. The full Fed report can be found here.
Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits - If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale. Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to Morgan Stanley. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade. Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.
Divergent Views on Treasury Yields in 2010 - Here are a couple of stories with very different views ... From Bloomberg: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits:The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade...And the LA Times has comments from PIMCO's El Erian: El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff.
Maturity Diversification - In an earlier post I linked to a provocative proposal by Andy Harless in which he argues that the Treasury should be shortening the maturity structure of government debt. His reasoning is roughly as follows: 1)At current interest rates, money and bills are virtually identical assets: holders of bills are requiring no compensation for the additional liquidity or safety that money would provide...2)In addition to its expansionary effects, a shift to shorter maturities on government debt should lower the expected value of the costs of debt service, since there is a liquidity premium to be paid on longer term bonds...3) Maintaining long maturities to insure against this risk would be hedging against good news, assuming that an unexpected increase in short term rates would signal a more rapid recovery than is currently forecast. That's his argument, if I understand it correctly. The proposal is similar in some respects to one made recently by Joe Gagnon, in which he argues that the Fed should be buying substantial amounts of long term debt. Both proposals would result in roughly the same mix of short and long term securities in the hands of the public, and would lower long term interest rates.
Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else - As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season. If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead condition.
Eyes Wide Open And Pedal To The Metal - Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Now, let's be clear: it's entirely unclear who the buyer of the $2.06 trillion will be. Not only do the usual suspects, China, Japan, have increasing doubts about amassing USD denominated paper including Treasuries, Japan also plans to be as aggressive a seller as the US. And of course there are many other countries who desperately need to sell sovereign bonds in order to pay for get their often already accepted and implemented budgets. And that's just the nation states. Corporations and lower levels of governments, in every nook and cranny of the planet, wants to sell you their debt. Badly.
“2010: Foreseeable and Unforeseeable Risks ~ The Room For Policy Error is Enormous” - I do not share Treasury Secretary Geithner’s confidence in the policies the Obama administration “put in place” to effect this recovery, and I will not champion them. In fact, many of the policies put in place only mask unresolved issues. So, I am quite concerned about the secondary effects resulting from this global financial meltdown. There are significant unrealized losses still in the pipeline. The full effects of this global financial meltdown have not been felt yet. Policy measures and legislation passed to date to stabilize the financial crisis in 2008-09 have primarily been aimed at saving the dysfunctional big banks and preserving the OTC Debt and Derivatives markets.
FED FOCUS -The coming Great Inflation, real or imagined (Reuters) - A historic economic crisis has left Americans with plenty of things to worry about. But is inflation one of them? And is there a risk that fretting over higher prices may actually bring them about? The answers to these questions will help define the timing of the Federal Reserve's pullback from an unprecedented level of monetary stimulus, deployed to combat the worst financial panic since the Great Depression. In justifying its pledge to leave interest rates near zero for the foreseeable future, the Fed takes comfort in inflation expectations, which policymakers deem comfortably restrained. On the surface, that appears true. The most recent Reuters/U of Michigan consumer survey showed a 0.2 percentage point decline in expected inflation one-year out, to 2.5 percent. Yet beneath the weak economic backdrop keeping prices in check, economists and consumers are increasingly uneasy about the prospect of a continuous loss of purchasing power -- the very definition of inflation.
U.S. Dollar Takes Temperature of Troubled World - (Bloomberg) -- How is one to explain the wild gyrations in the international exchange value of the U.S. dollar in recent times over the past year or so? During one month it is falling fast, in another it is rising just as fast. Since early December, it has risen about 5 percent against the yen -- not a weak currency these days -- and almost as much against the euro. Some older-fashioned bankers must be yearning for the days of fixed exchange-rates. Alas, no more. So it is not just the U.S. dollar and other currencies, but also the spot prices of oil, gold and other commodities that fluctuate wildly in the world markets. In sum, we live in a world of fiscal trading doubt. So it is all markets, markets, markets. Sell the dollar short on Monday, buy it back on Tuesday. No wonder the big banks want to reward their smartest, fastest traders with epic bonuses. What goes up, must come down, until it goes up again. Even the mighty American currency is no exception here.
Coming Soon: The Bill for the Massive U.S. Debt - Americans could be in for a rude awakening in coming months when they discover the true scope of the massive national debt racked up by the U.S. government. In fact, the $1.6 trillion deficit expected for 2010, which is above 10% of gross domestic product (GDP), is only the beginning. The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the U.S. Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36% of the government's marketable debt - about $1.6 trillion will mature in the next 12 months. That leaves the government in the same undesirable position as a lot of people who took out adjustable rate mortgages (ARMs) - forced to refinance short-term debt at higher interest rates for the long term.
2010 Will Be Worse - The year 2010 is likely to be the pivotal year where pundits stop referring to the recession and begin openly talking about a depression. Our economic problem is rather simple to describe: There is too much debt relative to income and/or wealth. Below is a single graph that depicts the condition of our economy. It shows total debt of the U.S. as a percentage of GDP from 1870 forward. The debt figure includes all private and public debt. It does not include liabilities associated with unfunded government mandates like Social Security and Medicare. (Note: according to the U.S. trustees of these funds, the present value of the liabilities is about $106 trillion. Including them would boost the ratio below to nearly 1,000%.)
What a Sovereign-Debt Crisis Could Mean for You - WSJ - Investors in sovereign bonds, those issued by governments, are getting rattled. Greece's bonds have just been downgraded by Standard & Poor's. The Gulf emirate of Abu Dhabi has been forced to step in to rescue creditors of Dubai World, a corporation owned by the Dubai government. Prices to insure other government bonds, from Iceland to Venezuela, have ticked up. Prof. Rogoff and his longtime collaborator Carmen Reinhart, at the University of Maryland, probably know more about the history of financial crises than anyone alive. The pair have just published their broad survey of financial crises, "This Time Is Different: Eight Centuries of Financial Folly" In an era when most "analysts" rely on maybe 30 or 40 years' worth of financial history—and then only that of the U.S.—the authors' knowledge of financial crises and government bond defaults going back to the Spanish empire and before offers a richer perspective.
A Way to Share in a Nation’s Growth - Robert J. Shiller - Commentary, NY Times: Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product. Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated...
The return of GDP bonds - GDP bonds are the instrument that refuses to die: Robert Shiller has resuscitated them in the NYT this weekend, this time with equity-like characteristics. Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P. There are lots and lots of reasons why this is a bad idea, not least the fact that measuring the rate of increase of GDP is vastly easier than measuring GDP itself. Bonds like the ones pushed by Jonathan Ford are at least linked to the GDP growth rate; Shiller’s bonds, by contrast, are linked to actual nominal GDP, and that’s a much harder number to pin down. But much more seriously, Shiller’s “trills” would be incredibly — and unhelpfully — volatile, as David Merkel explains. That fact becomes immediately obvious the minute you realize that if expected long-term nominal GDP growth ever rose above the yield on a sovereign perpetual bond, the value of a “trill” would be infinite
Not so Cheap Trills - What would you pay for a bond that offered to pay you $1/year, but would increase its payment by 3.4% each year? Assume that bonds that offer no increase in payment, but offer $1/year currently yield 4.4%, for a price of $22.73. Assuming there is no doubt about the creditworthiness of the issuer, one should be willing to pay $94.48 for the bond increasing its payment at 3.4% per year, accepting an initial current yield of 1.06%. That is part of the idea behind bonds that Dr. Schiller is proposing. These bonds called trills would: Pay one trillionth of GDP as interest each year. Would be full faith and credit bonds of the US Government. Would be consols — perpetual bonds that never pay the principal back....In summary, trills are a bad idea. They are just another way for the government to suck in a lot of money in the short run, while paying out far more forever.
Do We Need A Value-Added Tax To Solve Our Long-Term Budget Deficits? - Abstract - The U.S. budget is on an unsustainable path. That is because Social Security, Medicare, and Medicaid, which together constituted almost one half of noninterest spending before the recent stimulus plan, are all growing faster than tax revenues. If these programs are not reformed, tax burdens raised, or other spending decimated, deficits and the national debt will explode. It is difficult to imagine solving the entire budget problem by slowing spending growth, because benefits would then be far below those previously promised. It is equally unlikely that tax increases could solve the whole problem because the tax burden would then be so far above any ever experienced by Americans. To the extent that tax burdens are to be increased, there are three options. Tax rates could be raised in the existing system, but that would be extremely inefficient. Tax reform might raise revenues more efficiently, but that is excruciatingly difficult politically. That leaves the possibility of a brand new tax and a VAT is a very likely candidate.
The Case For the Millionaires Surtax - Greg Mankiw links a former student courageously trying to protect the rights of Millionares not to pay more taxes here. Here's the thing -- there are no reputable studies on the elasticity of the effect of tax changes on total taxes collected, and there's no logical reason that that number should necessarily, a priori, be less than one. Here's why: in 2007, there were 495,000 tax returns filed for millionaires. That means a significant fraction were corporate CEOs, CFOs, finance people, and professional athletes/best-selling textbook authors/TV celebs. Peyton Manning makes about $30 million a year -- let's explore his potential behavioral responses to changes in taxes....Of course, Peyton Manning is going to play 16 NFL games and the playoffs even if you raise his taxes considerably. The same is true of a wide variety of other professions -- corporate execs usually have two choices, they can choose to work or not work -- there are no part-time CFO jobs, and it's probably tough to be a "part-time" hedge-fund manager as well... ..
Stop, you're killing me – Krugman - Eight and a half years ago, when I dubbed the first Bush tax cut the Throw Momma from the Train Act of 2001, I didn’t really think that we’d get to the point where there would be strong financial incentives for wealthy heirs to bump off their parents before the legislation expired, and the estate tax was reinstated. I expected one of two things to happen: Democrats would restore a sensible estate tax, or Republicans would achieve the political dominance needed to permanently abolish the tax. As John Belushi would have said, however, But NOOOOO. Instead, it’s really happening.
Rich Cling to Life to Beat Tax Man -Nothing's certain except death and taxes -- but a temporary lapse in the estate tax is causing a few wealthy Americans to try to bend those rules. Starting Jan. 1, the estate tax -- which can erase nearly half of a wealthy person's estate -- goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life's most trying episodes only more complex. "I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?" Currently, the tax applies to about 5,500 taxpayers a year. So, on average, at least 15 people die every day whose estates would benefit from the tax's lapse. The macabre situation stems from 2001, when Congress raised estate-tax exemptions, culminating with the tax's disappearance next year. However, due to budget constraints, lawmakers didn't make the change permanent. So the estate tax is due to come back to life in 2011 -- at a higher rate and lower exemption.
Die Now - If you’re single, not in great health, and are worth a lot but not a really huge lot, you could do your heirs a favor and die today or tomorrow. Sure, you may want to hang around to ring in the New Year but that could cost the beneficiaries of your will a chunk of change. Wait a minute, you say, wouldn’t it be better to wait a few days and die in 2010 when, because the Senate didn’t act, the estate tax will disappear for a year and all inheritances will pass free of federal taxes? That’s true, as I discussed a couple of weeks back, but only if you’re really wealthy—worth more than $3.5 million ($7 million if you are married). If your estate totals between $1.3 million and $3.5 million, it’s cheaper—from a tax perspective—to die this year. The little wrinkle causing that oddity is the 2010 limitation on “step-up in basis.”
Greg Mankiw Demands Justice for Lazy Rich Kids - Manks links his own CEA Chair speech on why estate taxes need to be abolished. Until yesterday, a $10 million estate would get taxed at less than 30%. Greg's first argument was that the estate tax is not actually that progressive, b/c, even though it only falls on the ultra-rich, sometimes the kids of the ultra-rich are uber-lazy, and hence not rich until they get their inheritance. Your aunts aren't worth $30 mill? Don't worry, Greg says that "the repeal of the estate tax would stimulate growth and raise incomes for everyone, even those who never receive a bequest." You see, Greg Mankiw, Harvard man, is just looking out for the little guy who is too dumb to look out for his own interests. "The average worker" Greg says, "has little reason to know that his weekly paycheck is smaller because of the existence of the estate tax." Greg then goes on to argue that repealing the estate tax will raise revenue... That's it. Greg Mankiw is almost too stupid for me to blog, even in jest. There is just no conceivable way behavioral responses to the estate tax are that strong.
Congress Amends Laws of Nature for 2010 - Just when you thought Congress would never solve its tax and spending problems, it has taken a bold step forward: It has suspended the laws of nature and arithmetic starting January 1, 2010. Just wait until you see what it has in mind. Make 2010 Deaths Retroactive to 2009 - Reduce the Deficit by Giving Government Money Away Through 2010 Roth Conversions - Spend Medicare Savings Twice Starting in 2010 - Unite Keynesians and Supply-siders in 2010
“Is Our Tax System Helping Us Create Wealth?” - David Cay Johnston looks at changes in the tax burden for high income and lower income taxpayers since 1961. The bottom line: 90% of the population did not do well over this time period: Is Our Tax System Helping Us Create Wealth?, by David Cay Johnston, Commentary, Tax Analysts: ...We have data on the 400 highest-income taxpayers only from 1992 to 2006, and then only thanks to Joel Slemrod of the University of Michigan and others who had these data analyzed, and the Obama administration, which overturned the George W. Bush policy of treating the data as a state secret...
Might Krugman's polemic prediction about Enron vs. 9-11 ever come true?, - I look at our financial and economic system in dumbfounded awe as to how it all works. We shovel trillions of dollars into banks, stocks and mutual funds, rarely knowing the first thing about how well the underlying companies are managed or how profitable they are or what they are truly doing with our money. But then I look at recent history and I wonder how the long history came to be. Honest and transparent are not adjectives that come easily to mind when looking at our modern financial system and events over the last decade. This is why, back in 2002, Paul Krugman made what I think was his most polemic prediction ever: I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.
After the Bailouts, Washington's the Boss - WSJ In 2010, Americans will get a clearer picture of how Washington has changed the economy.Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.One thing is clear: The government is a much bigger force in today's U.S. economy than it was before the financial crisis. "The frontier between the state and market has shifted," says Daniel Yergin
The Fairness of Financial Rescue - DeLong: Whatever the cause, when the risk tolerance of the market crashes, so do prices of risky financial assets. Everybody knows that there are immense unrealized losses in financial assets, but no one is sure that they know where those losses are. To buy – or even to hold – risky assets in such a situation is a recipe for financial disaster. So is buying or holding equity in firms that may be holding risky assets, regardless of how “safe” a firm’s stock was previously thought to be. This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system, which is sending a peculiar message to the real economy. The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky. But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. And if the decline in nominal wages signals that there is an excess supply of labor, matters only get worse. General deflation eliminates the capital of yet more financial intermediaries, and makes risky an even larger share of assets that had previously been regarded as safe. Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.
What Iceberg? A Director Can Glide to the Next Boardroom - NYTimes - Directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae have not all been banished from other boardrooms. In many cases, directors just seem to skate away from company woes that occurred on their watch. To some investors, this is an example of the refusal of those involved in the debacle to accept responsibility for it. Whether you are talking about top executives loading up on leverage, regulators who slept while companies took on titanic risks or mortgage lenders that made thousands of dubious loans, few in this crowd have acknowledged culpability. Taxpayers and shareholders, meanwhile, who had nothing to do with the problems, are left holding the bag.
What’s a Bailed-Out Banker Really Worth? - When Feinberg announced his pay packages in late October, he found a way to give something to everyone. The public enjoyed a measure of revenge: Feinberg’s ultimate rulings looked hard-nosed when compared with what the executives used to make. Yet the leaders of these failed companies still ended up winning big paydays — an average of $6.5 million to each Bank of America executive and $6.2 million to those at Citigroup. Meantime, the Obama administration looked tough on fat-cat compensation, even as it quietly cajoled Feinberg to ease up on some of the restrictions he wanted to impose. Feinberg’s power was limited from the start and is now fading as quickly as it rose up last spring amid the furor over huge bonuses given to bailed-out executives
Fed And Treasury Put ‘Intense Pressure’ On Feinberg To Make Exceptions For Big AIG Bonuses - With 2009 coming to a close and the stock market having rebounded from its March low, “Wall Street is ready to pat itself on the back for its huge gains with big bonuses.” Despite the brouhaha caused by bonuses in the last year — and the role that perverse pay incentives played in bringing about Wall Street’s collapse — large financial institutions have been setting aside billions for bonus payments, and in 2009 may eclipse the record compensation levels of 2007
Economists Are Trained To Ignore The Real World - As I have repeatedly noted, mainstream economists and financial advisors have been using faulty and unrealistic models for years. See this, this, this, this, this and this. And I have pointed out numerous times that economists and advisors have a financial incentive to use faulty models. For example, I pointed out last month: The decision to use faulty models was an economic and political choice, because it benefited the economists and those who hired them. For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways. Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.
For Wall Street, Questions About Regulation and Renewal - NYTimes - After staging one of the most remarkable comebacks in business history — because of taxpayer lifelines and other support from Washington — the giants of the banking industry are entering a new phase of the postbailout period. But at this pivotal moment, big questions loom: Will the economy stage a robust recovery or just muddle along? Will the stunning rally in the stock market last? As the debate rages over how to prevent future crises, will Washington impose tough new rules on banks? More important, will banks fundamentally change the way they do business, or simply carry on as before?
Wall Street Waits as SEC Fails to Bring Madoff-Inspired Reforms - (Bloomberg) -- Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, said she wanted to show that her agency was cracking down after missing Bernard Madoff’s $65 billion Ponzi scheme. In May, she proposed that almost 10,000 money managers undergo surprise inspections to make sure they weren’t ripping off clients. “Investors are looking to the SEC to assure the safekeeping of their assets,” Schapiro said at the time. “We cannot let them down.” On Dec. 16, she settled for something less sweeping. Schapiro joined four other commissioners in approving a rule that requires about 1,600 U.S. fund managers to submit to unannounced audits, 83 percent fewer than seven months ago. The revision came after lobbying by fund companies, including executives from T. Rowe Price Group Inc., who met with Schapiro, and Legg Mason Inc., who met with another commissioner, SEC records show.
Not So Radical Reform - BusinessWeek - How New Democrats and Wall Street are watering down financial regulation in Congress - The New Democrats' fingerprints are all over the final House bill. Lawmakers rejected a mortgage "cram-down" amendment, which would have given federal judges the power to extend loan terms, lower interest rates, and cut principal for bankrupt homeowners. Although lawmakers ultimately voted to create a consumer protection agency, the New Democrats succeeded in stripping the proposal of some components. Under the bill, real estate agents, auto dealers, and other nonfinancial companies won't fall under the purview of the agency. And the largest banks won't have to offer plain-vanilla credit-card and mortgage products.
Bankers Get $4 Trillion Gift From Barney Frank: David Reilly – Bloomberg - Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders. I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt. If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.
Treasury plans to inject around $3.5 billion into GMAC The Treasury Department plans to announce as early Wednesday afternoon that it will give GMAC Inc. around $3.5 billion in additional capital, sources told The Detroit News. Detroit-based GMAC and the Treasury Department have been in talks for months to finalize the amount of money the company would receive. The Treasury Department said earlier this year it would invest up to $5.6 billion more in GMAC -- on top of $13.4 billion GMAC has received over the last year. GMAC spokeswoman Gina Proia declined to say how much the company expected to get.
Economix: Lessons Learned but Not Applied - In the 1990s, the Clinton administration amassed a great deal of experience fighting financial crises around the world. In a speech to the American Economic Association in 2000, Lawrence H. Summers — the primary strategist during the crisis — put it this way: “Prompt action needs to be taken to maintain financial stability, by moving quickly to support healthy institutions. The loss of confidence in the financial system and episodes of bank panics were not caused by early and necessary interventions in insolvent institutions. Rather, these problems were exacerbated by (a) a delay in intervening to address the problems of mounting nonperforming loans; (b) implicit bailout guarantees that led to an attempt to “gamble for redemption”; (c) a system of implicit, rather than explicit and incentive-compatible, deposit guarantees at a time when there was not a credible amount of fiscal resources available to back such guarantees; and (d) political distortions and interferences in the way interventions were carried out…” Mr. Summers now heads the White House National Economic Council and is the Obama administration’s top economic adviser. He is surrounded by experienced staffers from the 1990s...
The Cash Committee: How Wall Street Wins On The Hill - Financial regulation's long slog through Congress has left it riddled with loopholes, carved out at the request of the same industries that caused the mess in the first place. The banking committee is the second-largest in Congress and is known as a "money committee" because joining it makes fundraising, especially from donors with financial interests litigated by the panel, significantly easier. The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as "frontline" members, have been given precious spots on the committee. They have individually raised an average of $1.09 million for their 2010 campaigns, according to the Center for Responsive Politics; by contrast, the average House member has raised less than half of that amount.
Inside the legislative sausage factory, banking committee edition - Grim and Delaney have the must-read story of the day, on the politics of the House financial services committee. It’s long — 6,500 words, spread over three pages — and it took five journalists in all to piece it all together. Do read the whole thing, but in a nutshell, the problem is that the committee is far too big, weighing in with 71 members: when was the last time that you ever saw a 71-member committee which ever got anything done. To make matters worse, a large proportion of those 71 members are conservative Democrats in marginal seats facing Republican opponents. They want to be on the committee because it’s an easy way to monster campaign donations, with freshmen representatives raising over $1 million apiece if they sit on the committee. That’s twice as much as if they don’t. And once they’re on the committee, they tend to be pretty friendly to Wall Street and its lobbyists.
What to do about those danged bank lobbyists -- Barry Ritholtz has a good summing-up of a new paper (pdf) by three IMF economists on the link between lobbying and risk-taking by lenders. The gist: Firms that made the riskiest loans spend the most on lobbying Congress. The Huffington Post also has an epic new examination of what it calls "the cash committee"—the House Committee on Financial Services. The general takeaway here is that Congress is a bit, ahem, compromised when it comes to dealing with the financial sector. It's compromised in dealing with lots of other industries too, of course, but the finance-insurance-real-estate crowd is bigger and richer than any other industry, plus it just caused the worst economic downturn since the Depression.
Getting Corporate Money Out Of Politics Must Become #1 Priority - It is so clear now what our system has become. The wealthy have a lock on our politics, and we can't help but see it. It is in the way of getting anything done. It is blocking our ability to do anything about our urgent problems like health care, climate change, financial reform, and of course the low-wage, everything-to-the-top structure of our jobs. The other day I wrote, Concentration Of Wealth = An Influence Lock On Our Politics, We have now reached the point where wealth is at least as concentrated as it was in 1929. With similar consequences. Just how concentrated is the wealth and income? The L-Curve website graphically illustrates the disparity. Here's how it works. ... [click through to read this part] . . .
Senate banking committee leaders close to a deal on financial regulatory reform - "There is a political imperative on both sides of the aisle to get a financial reform bill done before the election" in the fall, "This is about incumbents being able to tell their constituents that they are not going to allow another financial crisis." President Obama declared financial reform one of his major legislative priorities this summer as he unveiled a package of proposals that would effect the greatest increase in federal oversight of the financial industry since the Great Depression. His administration pushed Congress to take action by the end of the year, and the House passed a bill containing most of the president's proposals earlier this month. Dodd, who is guiding reform legislation through the Senate, initially said he also planned to produce a bill this year. But Dodd and other Democrats decided not to adopt the administration's proposals on key issues, and they entered into time-consuming negotiations with Republicans. The House bill was passed without any support from the minority party, but that is a more difficult battle in the Senate,
War on Wall Street as Congress Sees Returning to Glass-Steagall - (Bloomberg) -- A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc. Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking. Those walls came down with passage of the Gramm-Leach- Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.’s acquisition of Merrill Lynch & Co.
JPMorgan’s Dimon Called Darling to Reject Bonus Tax (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told U.K. Chancellor of the Exchequer Alistair Darling that his 50 percent tax on banker bonuses would unfairly penalize the U.S. bank, a person close to the firm said. Dimon, 53, mentioned plans to build European headquarters in London’s Canary Wharf for 1.5 billion pounds ($2.4 billion) as an example of the New York-based company’s commitment to the city, the person said. JPMorgan is considering dropping the Canary Wharf plans because of the bonus tax, the Financial Times reported today, citing an unidentified bank executive.
What use short selling? - Reuters - Now I don’t think that this exercise is particularly harmful on a societal level, and at the margin it can help to make markets more liquid and efficient. But I can’t help but think of the opportunity cost of having all these intelligent and perspicacious people playing around on stock markets, rather than going out and putting that intelligence and perspicacity to more socially-beneficial use. It’s not just short-sellers, either: most financial professionals are essentially parasitical on people who genuinely add value in the real world.
Betting Against All of Us - NYTimes - During the bubble, Goldman Sachs and other financial firms created complicated mortgage-related investments, sold them to clients and then placed bets that those investments would decline in value. The practice, detailed in The Times allowed Wall Street to profit handsomely as its clients tanked. It also amplified the financial meltdown, spreading the losses to pretty much everyone. These deals are now the targets of various government and industry-led investigations. It may turn out that some or all of the products and practices were not illegal, in part because the derivatives at the heart of the transactions have been largely deregulated since 2000. There are several outrages here...
“Is Blaming AAA Investors Wall-Street Serving PR?” - In my view, Goldman, and a host of other clever bankers, are deliberately obscuring one of the most important points about modeling, CDOs and sophisticated investors. One of their defenses against the tremendous losses these products delivered amounts to “caveat emptor”: everyone is a grown up and should have known what he was buying. But that conveniently obscures a critically important fact: for so-called ABS CDOs (the kind made from asset backed securities, meaning tranches of either residential or commercial mortgage bonds), 75% to 90% of the deal was rated AAA. And these ratings did not depend on the insurance provided by AIG or monolines; those ratings were issued on the CDO as concocted by the packager/underwriter.
Pinnacle Notes are blasting off again! - A year ago, I wrote a post dissecting Morgan Stanley's Pinnacle Notes Series 9 and 10 - a structured product that abruptly imploded at the peak of last year's financial crisis. It's the most popular JRE post ever, and it was even picked up by the Financial Times The notes blew up not because they hit their stated default triggers, but because the underlying collateral - an ugly low tranche of an ugly synthetic CDO - completely evaporated. The investors - most of whom had bought the product because they'd been told it was low risk and just like a term deposit - were understandably pissed. FT's Sam Jones rightly wrote: The bottom line though, is that this kind of product should never have been made available to retail investors, and no sane regulatory authority would have allowed it to have been. ...but instead of cracking down on banks selling gnarly structured credit products to aunty-and-uncle retail investors, the MAS crawled into their shell and said "it's not our problem". And surprise, surprise - the exact same thing has happened again.
On Goldman’s (and Now Morgan Stanley’s) Deceptive Synthetic CDO Practices (aka Screwing Their Customers) - Yves Smith - Goldman is trying to diffuse the increasingly harsh light being turned on its dubious practices in the collateralized debt obligation market, with the wattage turned up considerably last week by a story in the New York Times that described how a synthetic CDO program called Abacus was the means by which Goldman famously went “net short” subprime. We’ve mentioned Abacus repeatedly because AIG wrote guarantees on at least some of the Abacus trades. One of the things that has been frustrating in watching this debate is the peculiar propensity of quite a few observers to defend Goldman and its brethren, and to argue, effectively, caveat emptor. Remember those Pintos that turned into fireballs when rear-ended? The pets that died from pet food laced with melamine from China? No one suggested that the buyers of those products were at fault.I’m deliberately using extreme examples, but as we proceed, you will see they are not unreasonable. Those products did not fail by design. By contrast, Goldman wanted its Abacus trades to fail. That was the most profitable course of action for them. They were net short, this was no mere hedge of a long position but a trading bet. And those CDOs did turn out to be big turkeys
Those evil synthetic CDOs - Yves Smith has another long broadside today against Goldman Sachs, Morgan Stanley, and any other bank which made money on synthetic CDOs. She links approvingly to yesterday’s NYT editorial, which concludes: Unsavory and dangerous practices like firms betting against their clients need to be thoroughly investigated. They won’t end until Congress adopts ambitious financial reforms. Narrowly speaking, this is false on both counts. What we’re talking about here is simply the world of structured products, in which broker-dealers use derivatives to create financial products for which their clients have some need or demand. Because derivatives are a zero-sum game, it’s trivially true that any bank selling such a product to its client is, at least in the first instance, betting against that client. If the client wins, the bank loses, and vice versa. Such practices may or may not be unsavory and dangerous, but they don’t need to be thoroughly investigated: everybody knows how derivatives work.What’s more, such practices aren’t going to end if and when Congress adopts ambitious financial reforms. Structured products are with us, and they’re here to stay. Personally, I would be very happy if they disappeared. But both the banks and their clients are utterly convinced that these derivatives are very useful things...
Goldman Sachs denies betting against its clients on CDOs - Goldman Sachs has moved to justify spending millions of dollars short-selling some of the financial products it made and sold to clients. In a rare statement of defence, the American investment bank has offered a detailed explanation of its dealings in mortgage-backed products, particularly regarding collateralised debt obligations (CDOs), in the years preceding the financial crisis.
Pricing a CDO – Not only Bad Math, Bad Computation too - A working paper, Computational complexity and informational asymmetry in financial products, sheds some light on the complex mathematical models upon which credit default obligations and other derivatives are based. What Arora et al. prove is not only are many derivative mathematical models impossible to compute, never mind in real time, because they require more computing power than the world possesses, the missing information to run a mathematical model is a very good place to cheat with. To understand what CDOs, derivatives are, see this post, complete with video tutorials. For some background on the mathematics behind derivatives, read We Want the Formula and this one on some of the probability functions.
It’s impossible to price a CDO - The discussion about Goldman’s synthetic CDOs just happens to coincide with a separate thread about a working paper by four researchers at Princeton, who seem to have a solid mathematical demonstration that CDOs simply can’t be priced: the amount of computing power necessary to do so just doesn’t exist. Robert Oak has a good English-language explanation of the implications of the article: it boils down to the idea that if Goldman was loading up its synthetic CDOs with nuclear waste, there’s a good chance that its clients couldn’t have worked that out. Not because they were insufficiently sophisticated, but just because there aren’t enough computers in the world to do so. It’s possible to overstate the connection between the paper and the events that happened at the height of the credit bubble.
Synthetic CDO's, Spanish 21 and Sports Betting As expected, my last post, "Fiduciary Duty and the Victim Mindset" sparked a lot of discussion. I've done my best to respond to with clarifications of why I think my post is reasonable and accurate. I had the epiphany this morning that the proper analogy with these CDO's lies in sports betting. I left the following comment (edited slightly here) on another blog this morning:"To me, financial markets are not unlike sports bookmaking. In the bookie world, you have the "Squares" who are analogous to the retail investors. These are the guys who say things like "oh man - Tom Brady is wicked pissah - the Pats are SO totally gonna cover the 7 point spread," with little or no reasoning or analysis to back up their decision. They also might be guys who pay someone else (like a newsletter writer) to pick games for them (of course, these newsletters are almost always scams) Then there are the professionals - I actually know a guy who was one of the biggest NFL bettors in the 80's. He still handicaps NFL games - he spends 30 hours+ a week analyzing the different matchups, weather, psychology, etc.
Small Chinese Company Tells Goldman To Take A Hike, Refuses To Pay $80 Million In Derivative Losses It appears that even after thoroughly dominating the US legislative, judicial and executive branches, the long tentacles of the squid have been no better than the Mongolian hordes at overcoming the Chinese Wall (which is ironic seeking how easy it is to ignore the same construct internally between the firm's prop and flow traders). In the meantime, half a world away, a small Chinese power generator, Shenzhen Nanshan Power, is blatantly refusing to honor contracts with Goldman Subsidiary J. Aron for $80 million in derivative losses, and it appears that China itself has decided to stand behind the small company. Reuters reports:
Firms Fight Big Banks Over $20 Billion In Frozen Notes - Hundreds of businesses are fighting to recover billions of dollars tied up in frozen auction-rate securities, a year after Wall Street firms agreed to $60 billion in settlements over the collapsed market for the investments. Some 400 companies that sank their free cash into the investments hold more than $20 billion of auction-rate securities that can't be sold or are sharply reduced in value. That is forcing the holders to restrain their spending, thus creating yet another drag on the economy as it struggles to recover.
Banks will keep slashing costs in 2010. - Faced with a flurry of new regulations out of Washington and sluggish loan activity that's hurting revenue, lenders are expected to have little choice but to continue tightening their belts next year. What's even more troubling however, note experts, is that banks now face a whole new set of fees and rules next year that pose a big threat to their bottom line. One of the biggest problems is the $45 billion in insurance premiums that banks had to pay to the Federal Deposit Insurance Corp. this year, to help prop up the dwindling fund used to cover bank failures. Banks will have to account for a third of that money in fiscal 2010.
Will Americans Reclaim Our Nation in 2010 From the Thugs and Con Artists? - The giant banks are treating the American Citizen like we work for them, are holding the economy hostage, and are taking our deposits and using them to speculate in casino style gambling. They've bought and paid for Congress and the White House. See this, this and this. Will Americans exercise our power - see this and this - or become serfs to a permanent banking royalty? An economist says the healthcare bill "is just another bailout of the financial system", and lawyers say that it is unconstitutional. Will we defeat this giveaway to the insurance giants, or become permanent slaves to mandatory insurance requirements?
More Americans stashing money at home - LATimes - Though U.S. banks are federally protected, economic turmoil has some, especially younger generations, turning to creative hiding places to store their cash. Never mind that this year, U.S. bank and credit union accounts of up to $250,000 are covered by the Federal Deposit Insurance Corp., which was established in 1933 to combat so-called bank panics. As Americans face a triple whammy of declines in the stock, housing and job markets, they're looking for financial security. And some of them are indulging their fears by stuffing bills that had been destined for saving accounts into re-purposed peanut butter jars and tampon boxes and fire-resistant safes.
Credit card charge-off rate climbs again - More U.S. credit card users fell further behind on their payments in November, Moody's Investors Service said. The credit card charge-off rate, as measured by Moody's Credit Card Index, rose to 10.56 percent last month after falling for the two previous months. October's charge-off rate was 10.04 percent. The charge-off rate measures those credit card account balances written off as uncollectable, as an annualized percentage of total outstanding principal balance. The record-high of 10.76 percent was reached in June. The delinquency rate also rose, to 6.2 percent in November from 6.1 percent in October. That includes all payments that are 30 to 180 days late but have not yet been written off. This figured peaked at 6.4 percent in March.
Why credit-card interest rates won’t be capped - What happens if you cap credit-card interest rates at 16%? Yes, at the margin, the amount of credit extended on credit cards would fall. That’s a feature, not a bug. But would it fall dramatically? Pamela Yip quotes Odysseas Papadimitriou: “If you cap the interest rate, it’s not like people are going to have lower interest rates than they do now,” said Odysseas Papadimitriou, chief executive and founder of Evolution Finance Inc., which operates CardHub.com. “Instead, everyone who has an interest rate below 16 percent will continue to have the same interest rate and everyone who has above 16 percent will not have access to credit any longer.” Papadimitriou previously was senior marketing director at Capital One, so he has some insight into how card companies work.
Banks roll out new check, card fees - The nation's banks will be bombarding customers with new fees and products in 2010 as they try to replace more than $50 billion in revenue wiped out by new rules that clamp down on certain business practices. So far, the changes are mostly concentrated in checking accounts and credit cards. In addition to attaching new fees to old products, banks are introducing new types of accounts that they hope will reel in new customers and reduce their funding costs. For plastic, the new rules go into effect in February as part of the Credit Card Act of 2009. The rules will limit some interest-rate increases, require more disclosure to customers and prohibit banks from raising interest rates on current balances unless a customer is at least 60 days behind in a payment.
Transmission of Crisis from Home Mortgages to US Credit Freeze - WorldBank blog - The bursting of the housing bubbles in the United States, as reflected in a surge in defaults and foreclosures since mid-2006 in the US, resulted in a plunge in the prices of MBSs — assets whose value ultimately comes from mortgage payments. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt (US financial firms lost over $1 trillion by Dec. 2008). This problem is especially severe because households, corporations, and government took on so much debt during the bubble years (that debt cumulated to over 400% of US GDP and about 450% of UK GDP). Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.” The US financial system is being crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Should the government put these financial firms in receivership/conservatorship or nationalize, or bring in foreign banks and private investors or have a public-private partnership to take over the US banks and insurance firms?
Treasury removes cap for Fannie and Freddie aid -- The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years. Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter. By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.
Mortgage Anxieties Mean Fannie-Freddie Limbo as Fed Pulls Back - (Bloomberg) --Fannie Mae and Freddie Mac, the linchpins of the American housing market, continue to bedevil the U.S. financial system. In February 2003, their regulator issued a report saying the companies were taking on too much risk by using implicit government backing to plunge deeper into the mortgage market. Five years later, regulators seized the mortgage-finance companies. Since then, leaders from former Federal Reserve Chairman Alan Greenspan to Warren Buffett have argued the companies can’t be sustained in their dual roles -- a for-profit enterprise beholden to shareholders and a tool of housing policy -- and should be nationalized or sold. Nothing has happened. Instead, Fannie Mae and Freddie Mac, which buy home mortgages from banks and package them into bonds sold to investors, have been bailed out with $1.5 trillion in direct and indirect government aid. The Obama administration is banking on the companies to help end a three-year housing slump.
Agency FICO Redline? A Question to Ask - The US Treasury Department’s Christmas Eve announcement confirming massive new support for the Agencies had the following as the last sentence: "Recent announcements on the tightening of underwriting standards by Fannie Mae, Freddie Mac, and the Federal Housing Administration, demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance." I believe that this is a very mistaken assumption by Treasury. Take them at their word on this regarding the tightening of standards. I can confirm that all of the Agencies have “independently” (Every thing is coordinated in D.C.) announced that they are tightening standards. It is impossible to quantify that promise at this point. I believe there is some teeth to this. However there is no connection to the actions by the Agencies and an increase in lending by the “private market”. That is not going to happen.
Why Christmas Eve?, by Tim Duy: One would think that policymakers would treat the day before Christmas as sacrosanct, if not for the sake of their employees, but to avoid the endless conspiracy theories that naturally arise when you partake in activities that look like they are intended to fly under the radar. Has US Treasury Secretary Timothy Geithner learned nothing in his long tenure serving
Goldman Sachs the people of the United States of America? Ignoring the wisdom of the ages, Geithner made what appears to be unlimited funds available to Freddie Mac and Fannie Mae on the day when most of the nation is more concerned about getting presents under the tree than the policy machinations of Washington. But do we really care? Is this really a new news, or just a matter of questionable timing? Would the same announcement today have raised the ire of the blogoshpere? To get at this issue, we should back up to a New York Times article a few weeks back
Treasury and GSEs: A Failure to Communicate - Last Thursday, Treasury issued an Update on Status of Support for Housing Programs. One of the key points was to increase the cap on Treasury's funding commitment "to accommodate any cumulative reduction in net worth over the next three years".... Why not just be explicit and explain the reasons for the change? ... Why did Treasury release this on Christmas Eve with essentially no explanation. This has just lead to speculation and confusion. Why not be explicit? Why should we have to guess?
Will Continued Stealth Bailout of Housing Produce Unwanted Side Effects? - Yves Smith - The Treasury Department, as reported by Bloomberg, and commented on by Rolfe Winkler and Huffington Post (among others) noted, considerably increased its Freddie and Fannie safety net, by removing all limits on the amounts on offer (an increase from a ceiling of $400 billion) and simultaneously allowing the two GSEs to increase their balance sheets near term. Previously, they had been required to shrink their portfolios by 10% per annum; now it is their ceiling which will be lowered by 10% a year, and that ceiling is much higher than their current exposures ($900 billion versus roughly $760 billion for Freddie and $770 billion for Fannie as of the end of November). A stunner reported at the same time was that Treasury bought $220 billion of MBS last year, in addition to the massive Fed purchases. The timing of the announcement (Christmas Eve) was designed for it to receive as little notice as possible, already a bad sign. Skeptical observers focused on two possible explanations: first, that losses at the GSEs will be high, troubling investors, and the offer of unlimited support will calm them. Freddie and Fannie debt is now de facto a full faith and credit obligation of Uncle Sam, as if there was any doubt of that once the conservatorship was announced. But the idea that nearly $300 billion of firepower (the agencies had used roughly $110 billion of an authorization of $400 billion) is troubling.
“What Are We? – Stupid?” - I was disappointed with the Christmas Eve ditties from Treasury and FHFA re: the Agencies. To be honest, I was appalled. The two releases contained significant information. The timing was obviously an attempt to slip in some bad news while everyone is drinking eggnog. Treasury ponied up for another $200b for Fannie and Freddie and the management of these entities are getting serious paychecks. Of course that backfired. The blogs, and yes, the MSM disintegrated those that sent the emails out on Christmas Eve. The smell that these announcements have created is not likely to go away anytime soon.
My landlord, the state - The Christmas Eve nationalization of Fannie Mae and Freddie Mac (or at least removing any doubt about their futures) has John Palmer dismayed: My guess is that these agencies will become bloated agencies of rent-seekers throughout the US. It would take another Reagan-type sweep to de-politicize the mortgage insurance business.Tom Petruno is puzzled why investors are buying shares in this company because private shares will eventually be worth zero. I think it's an example of the greater fool theory. When the Treasury statement says they are "retaining flexibility" to not unwind their participation in the mortgage market, can there be any doubt that the Federal government is not being honest in saying it wants "the private market ... to provide a larger source of mortgage finance."
And in the meantime, the delinquent mortgages in Fannie's portfolio continue to rise...
Kucinich et.al.: Prove It (Fannie/Freddie "Outrage") - So now Mr. Kucinich comes out with this regarding the Christmas Eve "announcement" from Treasury: "This cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U.S. taxpayers and acting as a back door [Troubled Asset Relief Program]," Mr. Kucinich said in a statement released by his office. Mr. Garrett and Bachus echoed these sentiments. So sirs, what do you intend to do about it, given that as things stand right now this certain CAN be and WILL BE used to purchase toxic assets at inflated prices and WILL result in the transfer of the losses to the US Taxpayer, acting as, indeed, a back-door "TARP"!
Fannie, Freddie, and full faith - Paul Krugman - NYTimes - I think it adds to our understanding if you think of Fannie and Freddie as being, in effect, in the same business as the Fed these days. That is, if you think about what the Fed is doing when it engages in “quantitative easing” — expanding its balance sheet by buying unconventional assets — you realize that it’s part of a broader provision of credit to the private sector by governmental or quasi-governmental agencies, which are ultimately financed or at least backstopped by public debt. Why do this? Part of what depressed the economy during the financial crisis was a widening spread between government debt and private borrowing costs — not just in things like the TED spread, but also in mortgage rates
Fannie, Freddie Changes - There has been much more on the Dec 24th press release from Treasury. First on the timing: It’s in the law: the Treasury’s authorization in [Housing and Economic Recovery Act (HERA) of 2008] to alter the terms, conditions and amounts under any agreements (such as the PSPAs) to purchase Fannie or Freddie obligations expires December 31, 2009. After that date, new authorization would be required from Congress. As far as why uncap Fannie and Freddie even though the current caps looked sufficient: We’ve all seen how politics - even the agendas of a small minority - can stall lawmaking by the majority. Read the law (HERA): if a deficiency goes unfunded, the deficient enterprise goes into receivership. Also, the WSJ writes: A Treasury representative said the bailout caps were suspended "specifically to ensure continued confidence in Fannie Mae and Freddie Mac, but were not based on any considerations" related to an expansion of the administration's loan-modification program.
U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says - Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.
Are Banks Scamming Fannie? You remember the announcement that Fannie and Freddie would have an "unlimited" credit line from Treasury to cover shortfalls and buy-outs of defaulted loans from MBS, right? Well then, read this from the forum: After the Fannie news came out this weekend, a friend called me and his brother works for Chase Mortgage. He told me that Chase is redoing stated income loans and instead of actually appraising the home, they are going back 3 years on the homes valuation in order to get the loan processed. Then they are selling these mortgages to Fannie Mae. Yes, that's an anecdotal claim, but if true can someone explain to me how this isn't out-and-out fraud?
Fannie, Freddie and the Struggles of HAMP - It is possible that the Treasury directive on Wednesday to extend the review period for all active HAMP trial modifications until at least Jan 31, 2010, and the announcement on Thursday to uncap the potential losses for Fannie and Freddie are somewhat related. There is a possibility that the Treasury is planning on introducing a principal reduction component to HAMP in January, and this could lead to significantly larger losses for Fannie and Freddie (just speculation on my part). There has been no announcement yet, and even if this is proposed it might only apply to Fannie and Freddie related loans, and not private MBS (the number of Fannie/Freddie loans compared to private MBS varies significantly by servicer).
Little Relief for New Yorkers at Risk of Foreclosure - NYTimes - Ten months ago President Obama announced a $75 billion program to keep as many as four million Americans in their homes by persuading banks to renegotiate their mortgages. Lenders have accepted more than one million applications and cut three-month trial deals with 759,000 homeowners. But they have converted just 31,000 of those to the permanent new mortgages that are the plan’s goal. In New York City, where 20,000 homeowners faced foreclosure this year, a recent study by the Center for NYC Neighborhoods found that lenders have offered new or trial mortgages to just 3 percent of the homeowners who have sought help.
Second Chances: Subprime Mortgage Modification and Redefault - NY FED - 41 pp pdf - Using data on subprime modifications that precede the government’s Home Affordable Modification Program, we focus our attention on those modifications in which the borrower was seriously delinquent and the monthly payment was reduced as part of the modification. The data indicate that the re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.
Government Housing Support Update - As everyone knows there has been a massive government effort to support house prices. Some of this has been aimed at limiting supply (modification programs, various foreclosure moratoria), and some has been aimed at increasing demand (tax credit, lower mortgage rates, loose lending standards). To help keep this straight, here is a list of the status of a number of 8 programs:
U.S. Loan Effort Is Seen as Adding to Housing Woes - The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes. As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.
New York Times Takes Aim at Treasury Mortgage Mod Program - Yves Smith - Are we going to finally start seeing some pointed mainstream media coverage of the Administration’s limp wristed, industry-favoring financial “reform” plans? The object lesson of the day is Peter Goodman’s story at the New York Times on the Treasury’s mortgage mod program, which was old Bush/Paulson wine in new bottles. And mirabile dictu, the headline of the article is refreshingly blunt: “U.S. Loan Effort Is Seen as Adding to Housing Woes.” While no one has said as much, Home Affordable Modification Program, like the Paulson Hope Alliance Now, looks designed to work very narrowly within existing securitization rules to so as to minimize the odds that any mortgages modifications under the program could be challenged in court. However, the resulting program is an abortion. It gives little in the way of real benefits to borrowers. So called “permanent mods” are in fact only a five year payment reduction, which makes sense only if the borrower believes both his income will improve markedly between now and then...
More ammo for the bazooka - Treasury has reloaded its bazooka and stands ready to shock and awe the housing market. Though, Standard & Poor’s/Case-Shiller data showed a fifth month of improvement yesterday, analysts still expect prices to fall 10 percent or more next year as various government supports wind down. Political pressure ahead of midterm elections will likely force the administration to do something in response and Treasury’s Christmas gift of nearly unlimited support for Fannie Mae and Freddie Mac gives them a powerful weapon to do so. But it will be a tough fight as artificial, government-sponsored demand dries up. The housing tax credit — $8,000 for first-time buyers, $6,500 for move-up buyers — ends in April. Meanwhile, the Federal Housing Administration plans to tighten its loose lending standards as its reserve fund has dwindled. Moreover, mortgage rates may head higher as the government ends purchases of mortgage-backed securities. Treasury’s $220 billion buyback program ends this week. The Federal Reserve’s $1.25 trillion program ceases in March. And then there’s the continuing flood of Treasuries to finance the federal deficit. Morgan Stanley estimates that could drive 30-year mortgage rates back above 7.5 percent, an effective 40 percent increase in the cost of financing home purchases. That looks high, but even a smaller jump will drive buyers from the market and force house prices down. But the biggest threat may be foreclosures. Credit Suisse expects 4.2 million next year...
Fannie Mae, Freddie Mac on track to buy delinquent mortgages, analysts say - The U.S. government's expanded capital backstops and portfolio limits for Fannie Mae and Freddie Mac increase "the prospect of large-scale" purchases by the companies of delinquent mortgages out of the securities they guarantee, according to Credit Suisse Group analysts. The Treasury Department announced Thursday that the two mortgage-finance companies, which were seized by the United States almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. It reworked caps on Fannie Mae and Freddie Mac's mortgage-asset portfolios to require the holdings to fall to $810 billion each by Dec. 31, 2010, rather than about $690 billion. "This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence,"
Freddie Mac economist: 6% Mortgage rates by end of 2010 - From the WaPo: Freddie sees mortgage rates hitting 6% in 2010 [T]he average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac...The key catalyst for interest rates going forward will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. ... the Fed has committed to winding down the program by March....Amy Crews Cutts, deputy chief economist at Freddie Mac, said interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did.
Fannie Mae: Delinquencies Increase Sharply in October - Here is the monthly Fannie Mae hockey stick graph ... Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.98% in October, up from 4.72% in September - and up from 1.89% in October 2008. "Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio
US Housing Market Recovery Damped By Still-Rising Delinquencies - Investors appeared to take a report on flat U.S. home prices in stride Tuesday, but still-rising mortgage delinquencies signal more foreclosures, damping hopes that the housing market is recovering. "Delinquencies are a precursor to foreclosures," said Cameron Findlay, chief economist at LendingTree.com, in an interview Tuesday. "We're not seeing any decreases in delinquencies, which is very concerning." More strapped borrowers are falling behind on their monthly payments during the recession as unemployment hovers around 10%. Late Monday, Fannie Mae (FNM) said serious delinquency rates in its conventional single-family-home mortgage portfolio rose to 4.98% in October from 4.72% the previous month
Fresh Worries on Housing Cloud Fragile Economic Recovery - NYTimes - Just as the economy is finally beginning to strengthen, the real estate market is showing new signs of deterioration. Prices slipped in many cities in October, new figures show, despite low mortgage rates and a generous tax credit meant to spur sales. Now rates are starting to rise, making it harder for many buyers to afford a house, and the tax credit seems to be losing its capacity to lure them into the market.The renewed worries about housing come against a backdrop of improvement in the broader economy. Surveys suggest consumers are growing more confident. That better mood probably helped improve holiday retail sales. The number of people joining the ranks of the jobless is dwindling, while the hiring of temporary workers is up, a traditional harbinger of recovery. Still, economic growth for the third quarter was more modest than originally reported; it was revised down to an annual rate of 2.2 percent from 2.8 percent.
Housing Market Remains Oversupplied At 860,000 Units - The housing market remains oversupplied by 860,000 units when compared to a 10-year average inventory and the overhang represents a direct contradiction to the spirit of Tuesday's headlines describing new data from the National Association of Realtors. If you view the chart above you see supply exceeds long-term inventory averages by 32% -- a significant hurdle despite a count of months-of-supply inventory which is just 12% above average and is practically normal (see below). The disconnect in the measure of excess between units for sale and months of supply suggests a logical problem with the data.
Millions More At-Risk of Default Than Most Think – Why Millions More Homeowners are At-Risk - Most Think Up to 20 Million Borrowers may be in Imminent Risk - While negative equity is a threat in and of itself, being in an over-leveraged household debt position is the true default catalyst for most in a negative-equity position. And being over-leveraged is also the primary default catalyst for those is a positive equity position. Being in a negative-equity position with lots of top line and disposable income each month is generally more of a mental burden than a reason to fly the coop.How many homeowners are over-levered and at imminent risk of default? This answer is…a lot more than most think, especially those who got a loan from 2003-2007 due to a radical, yet subtle shift in loan guidelines across the mortgage spectrum that kicked-off the bubble-years.Yes, even Prime full-doc borrowers in 30-year fixed mortgages with 20% equity who got their purchase or refi from 03-07 are at much greater risk than most think. Being over-levered was condoned – all the lenders, investors and loan programs operated in the same manner.
NYC Court Official Slams Lenders For Failing To Modify Mortgages: ‘What’s The Holdup?’ - Recently, the Obama administration has increased its verbal assault on banks and mortgage lenders that are failing to get troubled borrowers into sustainable modified mortgages. The banks have been firing back that borrowers themselves are to blame for the lack of progress, with the favorite claim being that borrowers aren’t doing their part in getting the appropriate documents together. New York City is one of a handful of states and cities that force lenders to come to court and meet with borrowers before finalizing a foreclosure.
Don’t trust those servicers - Michael Powell has real-world examples of why it’s really just better to walk away than it is to try to deal with evil and/or incompetent mortgage servicers....What we’re seeing here is the mortgage equivalent of credit-card sweatboxes: servicers who make sure to drain homeowners’ savings before they foreclose, since they know that they won’t chase homeowners after foreclosure, even in recourse states. By holding out the promise of a modification tomorrow, they make sure to squeeze every ounce of blood out of the homeowner before finally snatching the home away anyway.
A Different Type of Recession - Our recession predictably continues to be one in which real gross domestic product and spending outperform the labor market. This pattern differs from the 1980-82 recession and suggests that public policy could be doing a better job this time of raising employment. At this time a year ago, with the three quarters of G.D.P. data that was available, I explained how this recession had followed a pattern described decades ago by Paul Douglas, the senator and economics professor. Professor Douglas said that a labor crisis would hurt spending but only in a ratio of 7 to 10. That is, for every 10 percentage points that employment and hours worked fell, total output and spending would fall 7 percentage points. Equivalently, one side effect of a labor crisis would be to raise employee productivity and real hourly wages, because productivity is the ratio of output to labor Since then, four more quarters of data have become available to further test this theory.
Slight Rise in Home Prices Masks Signs of Weakness - The Standard & Poor’s/Case-Shiller home price index, a widely watched measure of housing markets in 20 metropolitan areas, rose 0.4 percent from September on a seasonally adjusted basis. It was the fifth consecutive month that prices were up, but the rate of increase has dropped sharply from the impressive gains of the summer. Analysts said the government’s extensive and expensive effort to prop up the market was showing signs of fatigue.A tax credit for first-time buyers has been extended until spring, but the urgency that buyers showed this summer is draining away. The Federal Reserve has pushed down rates to the lowest level in decades, but says that program will end by March 31.
A Look at Case-Shiller, by Metro Area (December Update) - wsj - The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, rose a seasonally adjusted 0.4% in October from September. But it was flat on an unadjusted basis as the monthly gains seen earlier in the year faded. The index declined 7.3% from a year earlier. For the 19th straight month, no area in the 20-city index posted a year-over-year price gain. Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change — just click the column headers to re-sort. See the full S&P/Case-Shiller report. Read the full story.
Case-Shiller House Price Graphs for October - S&P/Case-Shiller released their monthly Home Price Indices for October this morning. This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - some sites report the NSA data.
Case-Shiller: Housing Recovery Still Weak, October Decline Of 7.3% Slightly Worse Than Forecast - For the second month in a row, the Case-Shiller numbers came in weaker than expected.On a year-over-year basis, the 20-city index fell 7.3% in October, a bit worse than the 7.1% analysts had expected.On a sequential basis, the price index was up .4%, though gains were only seen in 11 of the 20 cities covered.But maybe there's a bull case to be made. What we aren't seeing is the huge drop-off in prices that many had predicted when the summer buying season ended.Granted, we're providing unprecedented support to the housing market right now in the form of quantitative easing, the tax credit, and at least 6 other programs. So all that has to be considered. But the index is obviously showing some signs of stabilization, even if our feverish v-shaped dreams from earlier this year aren't coming to fruition.
latest Case-Shiller report on home prices.
California, two views – The Economist - THE lastest Case-Shiller home price data are out, for the month of October. Both the 10-city and 20-city indexes showed small increases, and at 7.3% the year-over-year decline in home prices is the smallest since October of 2007. Of the 20 cities followed by Case-Shiller, 11 saw rising prices from September to October (this is all based on the seasonally adjusted index numbers). Leading the way forward were the three California metropolitan areas included in the index. Here is the price path of those three cities beginning in 2000: And here are price data for those same cities since May of this year (adjusted so that May = 100):(see charts)
House Prices: Stress Test, Price-to-Rent, and More - This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts). The Stress Test scenarios use the Composite 10 index and start in December. House prices are 10.7% higher than the baseline scenario, and 20.6% higher than the more adverse scenario. In October 2004, Fed economists wrote a letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph through October 2009 using the Case-Shiller Composite Indices (SA)...And finally, here is a graph of the LoanPerformance index (with and without foreclosures) and the Case-Shiller Composite 20 index
NY Fed Economists Foresee Steep Decline in Homeownership - A new study by economists at the New York Federal Reserve suggests that “effective” homeownership rates have fallen as much as 25 to 45 percent below actual homeownership rates in metropolitan markets that have been hit hardest by falling property values.Nationally, homeownership peaked at 69 percent in the third quarter of 2006, but the official homeownership rate “will experience significant downward pressure” in the coming years, according to the staff report as dramatic increases in negative equity reduce incentives to own rather than rent. Lower property values create incentives for homeowners to behave more like renters than owners, the economists argue, creating an effective homeownership rate of 63.6 percent I the first quarter of 2009, 3.9 percent below the measured rate. Owners suffering negative equity are financially stretched, have less of a motive to maintain their properties. New_York_Fed_on_Homeownership.pdf
Home sweet rental - NYPOST - The current economic environment is making a strong case that renting a home and smartly investing your savings can be just as rewarding. When making the decision to buy vs. rent, people usually consider several factors -- the rent vs. mortgage payment being the primary question. But there are other financial factors to consider, including: * Your insurance premium. * Property taxes * Maintenance * Utilities * Yard work, pest control, remodeling, etc. And let's not forget those initial costs that always seem to add up to more than you expect: * A down payment of at least 15 percent, which is $90,000 on a $600,000 home. * Closing costs, usually 5 percent of loan amount, or another $25,000. * Initial remodeling costs. Remember that you are completely out of that cash down payment you made because even if you sell, homeowners usually roll over that initial down payment into a new house for tax purposes. Cash is king and many prefer having cash in the bank.
Apartment renters win as vacancy rate climbs - Christmas will stretch into 2010 for apartment renters, who are benefiting from an epic collapse in the rental market and generous concessions.Landlords are offering tenants up to six months of free rent, flat-screen TVs and new appliances. They're also slashing monthly rates and easing application standards. Rents fell a record 3.5% in 2009 after factoring in freebies, according to MPF Research. MPF projects prices will fall an additional 2% next year as an improving housing market and a tax credit for first-time home buyers attract more renters. Nationwide, apartment vacancy is 7.8%, up from 4.8% at the end of 2007, says MPF Vice President Greg Willett
The Benefits of Buying a House - James Altucher has a lengthy column on why you should rent rather than buy. Shorter version: there are a lot of hidden costs, and outside of the bubble, housing has not historically been a great investment. The phenomena that made it a great investment for some people will not indefinitely continue to push prices up; most of them have played out. Over the long run, housing prices cannot grow much faster than incomes. I agree with all of this. But these articles, and the homeownership-skeptics (of which I am sort of one) often give short shrift to the benefits of owning. Renting has hidden costs, too. ..
Loan delinquency rate for U.S. hotels is soaring (AP) Like many home-owners, hotels are having trouble repaying their lenders. They have been offering enticements all year: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights. Nonetheless, occupancy has dropped an average of 10 percent, and hotel loans have begun falling into delinquency more rapidly than any other kind of commercial real estate debt. At the same time, more hotels are opening, leading to an oversupply that is likely to keep room rates low for at least a year. Five times more hotel loans are behind on payments this year than in 2008
Hotels: Worst Year Since Great Depression - In terms of the occupancy rate, 2009 was the worst year since the Great Depression (close to 55%). And last week was no exception with Smith Travel Research reporting the occupancy rate fell to 33.8 percent - the lowest weekly occupancy rate on record. This graph shows the occupancy rate by week for each of the last four years (2006 through 2009 labeled by start of month).
Restaurant Index Shows Contraction in November - The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.0 in November – down 0.5 percent from October and tied for its second-lowest level on record. In addition, November represented the 27th consecutive month below 100, which signifies contraction in the current situation indicators. Click on graph for larger image in new window.
Moodys CRE Price Index Continues to Decline (Graphs) The Moody’s/REAL Commercial Property Price Index measured a 1.5 percent decline in prices in October. The National All Property Type Aggregate Index now stands 36.4 percent below the level seen one year ago. The peak in prices was reached two years ago, in October 2007, and prices have since fallen 43.7 percent. The index stands at 108 through the end of October. Its peak level was 192 in October 2007. Commercial real estate prices are now back to September 2002 levels.
CRE: Office Space Update - Talk about a low effective rent. Not only is the tenant getting two years free rent, but the tenant improvements are about 4 years of rent (the lease is triple net, so the tenant is also paying taxes, insurance and maintenance). And the tenant can cancel after 7 years ... the landlord is mostly just covering expenses. To review - at the end of Q3, Reis reported the national office vacancy rate rose to 16.5% in Q3 from 15.9% in Q2. We should have the Q4 numbers in early January. This graph shows the office vacancy rate starting 1991.
House Prices Will Fall More: There Is Historical Data - The NYT quotes economist Karl Case as saying that we have no historical basis for analyzing a situation of falling house prices. In fact, we do. Nationwide house prices have historically tracked the overall rate of inflation. House prices hugely outpaced inflation in the decade from 1996 to 2006. To get back to their trend level, house prices have to fall by about 15 percent. Given the record nationwide vacancy rate, it seems virtually certain that house prices will resume their decline next year. The biggest question is whether house prices overshoot on the downside, falling below their trend level.
Three Reasons Home Prices Are Heading Lower - After four months of gains, home prices flattened in October. Worse yet, industry insiders think that they'll soon start to fall. But most forecasts predict price declines in 2010, with possible losses ranging from anywhere from 3% on up. Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%. "We've seen recent price stabilization because of low mortgage interest rates and the impact of the first-time homebuyers tax credit," said Pat Newport of IHS Global Research. "But there are really good reasons to think prices will now start going down." There are three main reasons for the reversal: a coming flood of foreclosures, rising interest rates and the eventual end of the tax credits
Are Homes now “Cheap”? - Brett Arends wrote in the WSJ today: Latest Home Price Data Is Good News for Buyers Homes are now cheap. Mr. Arends does write that homes are not cheap everywhere, but his main argument is: If you buy an average home today, and take out a 30-year mortgage at 5%, the annual bill for interest and repayment of principal will come to about 19 times typical weekly earnings ... He then provides a chart that shows this is the lowest level since the early '70s for this metric. Well, allow me to retort.
House Prices and the Unemployment Rate - Here is a comparison of real house prices and the unemployment rate using the LoanPerformance national house price data (starts in 1976) and Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter. This is an update to a post earlier this year. Click for larger graph in new window. In the early '80s, real house prices declined until the unemployment rate peaked, and then increased sluggishly for a few years. Following the late 1980s housing bubble, real house prices declined for several years after the unemployment rate peaked.
Reader Poll Results: Economic Outlook for 2010 - Calculated Risk - Here are the results of the reader poll. Thanks to the 4,518 people who participated! The first question was the outlook for GDP growth in 2010. Readers who participated in the poll tend to be pessimistic, with 57% expecting a double dip recession, and another 30% expecting real GDP growth to be below 2% in 2010. The second question concerned the unemployment rate at the end of 2010 (December 2010). Most poll participants (70%) are expecting the unemployment rate to be at or above 10% at the end of 2010. I think it might be close, but I agree with the majority on the unemployment rate (still double digits in Dec 2010). There will be a temporary positive impact from the 2010 Census, and I expect another stimulus package (labeled a "jobs package") to be announced in the next few months - and maybe that will push the rate down below double digits.
Consumer Confidence - Better? - I love the headline from Bloomberg: Dec. 29 (Bloomberg) -- Confidence among U.S. consumers rose in December for a second month as pessimism over the outlook for jobs diminished. It did? The share of consumers who said jobs are plentiful fell to 2.9 percent from 3.1 percent, according to the Conference Board. The proportion of people who said jobs are hard to get decreased to 48.6 percent from 49.2 percent. Ok, so jobs are less "plentiful" but are "less hard to get"? That's improvement.... how? (By the way, 3% of people believing that jobs are "plentiful" is pretty-much indistinguishable from zero, no?)
Is The Government Misrepresenting Unemployment By 32%? - The suddenly very prominent topic of Unemployment Insurance, whether it pertains to Initial Claims or to Emergency Unemployment, has one very useful characteristic: it is based on "money", specifically money outflows from the US treasury which goes to fund the weekly "paychecks" of those that have not been in the workforce for well over a year. Which is why when we looked at the Daily Treasury Statement data we were very surprised: because it indicates that the government could be underrepresenting employment data by up to 32%!
How Important Is Structural Unemployment? - There is a more compelling, more market-based explanation that borrows insights from Austrian-style economists. It focuses on the changes that the modern labor market has undergone, and explores the possibility that recessions now cause structural, as opposed to cyclical, changes in hiring. Cyclical changes are responses to the business cycle: companies across all industries tighten their belts and start laying off employees when austerity threatens, but then rehire the workers they laid off when good times roll again. A structural change in the labor market, on the other hand, occurs when hiring patterns change not as a function of economic fluctuations, but because of shifts in the economy's production that reallocate workers among industries. In other words, a mismatch between what consumers demand and what producers are making necessitates a shake-up in the mix of industries.
Why would unions oppose a basic income? - The Berkeley Electronic Press has a new journal: Basic Income Studies. The Basic Income - also known as the Guaranteed Annual Income (GAI) in Canada - is a proposal that I'm very much favourably disposed to, even though I'm not familiar with all of the technical details. I took a look at its inaugural issue, and I'm glad I did. One article struck me in particular: Yannick Vanderborght's "Why trade unions oppose basic income". Why would unions - who often take pride in their commitment to progressive goals - object to a basic income policy? Vanderborght offers some reasons for thinking that a BI would increase the bargaining power of unions. So the first question should be: do unions oppose a BI?
Michigan Forces Business Owners Into Public Sector Unions - Ms. Berry owns her own business—yet the Michigan Department of Human Services claims she is a government employee and union member. The agency thus withholds union dues from the child-care subsidies it sends to her on behalf of her low-income clients. Those dues are funneled to a public-employee union that claims to represent her. The situation is crazy—and it's happening elsewhere in the country. A year ago in December, Ms. Berry and more than 40,000 other home-based day care providers statewide were suddenly informed they were members of Child Care Providers Together Michigan—a union created in 2006 by the United Auto Workers and the American Federation of State, County and Municipal Employees.
‘Stay Union-Free’ Pushed by Target, Michaels - (Bloomberg) -- Companies are rallying to fend off a so-called card-check law sought by labor leaders and backed by President Barack Obama. While the bill stalled in Congress this year as health- care legislation dominated debate, anti-union groups say they expect the president and Democrats to deliver next year on a compromise version of the legislation. “As we approach the 2010 elections, the unions are really going to want their pound of flesh,” “Even if we defeat the card-check bill, it’s entirely possible that other changes to the National Labor Relations Act will come up, and some of those will likely make it easier to organize the workplace.” Companies have added anti-union videos to training programs, required employees to sit through anti-union meetings and hired outside labor-relations consultants as a pre-emptive strike against a union organizing campaign.
The Long Decline of the American Economy - American companies fed the public the notion, which has rarely been questioned, that a company's responsibility is solely the financial welfare of its stockholders. Products and services are no longer the goal of business; they are merely means to profit. That reducing quality leads to greater profits quickly became evident. One fewer olive in each jar, one flimsy part in a complex device, one inefficient procedure in a manufacturing process, built-in obsolescence, built-in short product life-cycles, engineered high failure rates. The American quality standard became, "Junk"! For more examples, see my paper, America on the Dulling Edge. To ensure that American consumers would buy this junk, a number of other policies were advanced—declining employee wages so that consumers could not afford to buy more expensive imported produces, unenforcement of immigration laws and the introduction of special visas such as H1B1s so that the workforce would expand putting even further downward pressure on wages, restrictions on the ability of American workers to organize, and finally the offshoring of production. None of these policies could have succeeded without the complicit cooperation of America's orthodox economists and government.
HSBC Chairman: Taxpayers Will Be Saddled With Banker Debts And Rising Unemployment For Years - HSBC Group Chair Stephen Green recently sat down with German magazine Der Spiegel and talked about the future of the world's economy, the moral responsibility of bankers, and his Christain faith (he's an Anglican minister). It's one of the more honest accounts we've read of the crisis from the perspective of a banking chief.Among other things, he calls the period leading up to the crash -- characterized by huge profits through the sale of overly complex instruments -- 'disgraceful'. Der Spiegel:
Older workers working longer; labor-force participation falling - The BLS released its employment and labor force projections for the period 2008-2018. The report highlights a more diverse and slower growing labor force stemming from a falling labor-force participation rate. Some headline findings of the report are: The projections show an aging and more racially and ethnically diverse labor force, and employment growth in service-providing industries...and...Projected employment growth is concentrated in the service-providing sector, continuing a long-term shift from the goods-producing sector of the economy. ...and...Occupations that usually require a postsecondary degree or award are expected to account for nearly half of all new jobs from 2008 to 2018 and one-third of total job openings. Among the education and training categories, the fastest growth will occur in occupations requiring an associate degree.
Technology Predictions Are Mostly Bunk - WSJ - 'Tis the season for predictions, so "Information Age" bravely goes out on this limb: Most technology predictions for 2010 won't come true. The more we learn about how innovation happens, the less straight the lines of advance look. Charles Duell, commissioner for the U.S. Patent Office, in 1899 said, "Everything that can be invented has already been invented." It's worth recalling, especially in a gloomy year like the one drawing to an end, that the opposite is true: The more we invent, the more we invent. Knowledge grows on itself. So here are the rest of my Top 10 Worst Technology Predictions, which prove that when it comes to tech, optimism pays
With Scant Jobs, Grads Create Their Own - Faced with an unemployment rate of 16% for 20- to 24-year-olds, a growing number of recent college and grad-school graduates are launching their own companies, according to anecdotal evidence from colleges, universities and entrepreneurship programs around the U.S.This push toward entrepreneurship among young people is likely to continue as employers plan to hire 7% fewer graduates from the class of 2010 than they hired from the class of 2009, which saw a nearly 22% drop in hiring from the class before, according to a recent report from National Association of Colleges and Employers. The annual average percentage of all job seekers starting their own businesses increased to 9% through the third quarter of 2009.
Job Losses Cut Into U.S. Driving - Lower gasoline prices didn't drive Americans to spend more time on the road in 2009, in part because people who lost their jobs stopped commuting. Motor travel was expected to increase in 2009 after a jump in prices at the pump and the economic downturn led drivers to cut back a year earlier. In 2008, U.S. highway officials didn't record a year-over-year increase for the first time in 25 years. But a tally of miles driven by U.S. passenger and commercial vehicles for the 12 months ending in October, the latest available, indicates that drivers still avoided their cars in 2009.In fact, it is possible that final 2009 numbers from the Federal Highway Administration will show that Americans drove fewer miles than in 2008. And the 2009 total will clearly come in well below 2007's high-water mark.
The pace of change - An economy built upon constant and relatively free innovation is inherently difficult to sustain in a democracy. This is not so much a matter of anti-market ideology as of the painful realities of economic change. Innovation forces change, and the pain involved tends to be felt immediately while the benefits are usually diffuse and harder to perceive in the short term.It is therefore natural for people to organize to prevent the spread of significant innovation. The original Luddites were cotton weavers who, in the throes of Britain’s Industrial Revolution, responded to their displacement by automated weaving technology directly: They smashed looms. In America, people in similar situations rarely assault property en masse, but they do form political coalitions to pass laws that restrict innovation. It is understandable that the enormous waves of innovation always sweeping over a dynamic free-market economy will arouse great unease and opposition. But for that economy to prosper, the unease and opposition must be overcome.
The Best Jobs In America - And the winners are...Great pay and superior growth prospects. Work that's meaningful. Those are some of the qualities we looked for when selecting America's best jobs. More • See the top 100
- 1. Systems Engineer
- 2. Physician Assistant
- 3. College Professor
- 4. Nurse Practitioner
- 5. IT Project Manager
- 6. CPA
- 7. Physical Therapist
- 8. Network Security Consultant
- 9. Intelligence Analyst
- 10. Sales Director
Even as economy mends, a jobless decade may loom - The decade ahead could be a brutal one for America's unemployed - and for people with jobs hoping for pay raises.At best, it could take until the middle of the decade for the nation to generate enough jobs to drive down the unemployment rate to a normal 5 or 6 percent and keep it there. At worst, that won't happen until much later - perhaps not until the next decade. The deepest and most enduring recession since the 1930s has battered America's work force.The unemployed number 15.4 million. The jobless rate is 10 percent. More than 7 million jobs have vanished. People out of work at least six months number a record 5.9 million. And household income, adjusted for inflation, has shrunk in the past decade. Most economists say it could take at least until 2015 for the unemployment rate to drop down to a historically more normal 5.5 percent. And with the job market likely to stay weak, some also foresee another decade of wage stagnation.
The manufacturing shibboleth - The Economist - HAVE noticed an interesting line of argument developing on the American left—a reaction, I think, to America's current predicament of high unemployment and lingering trade imbalances. It goes something like this: American used to manufacture things but it doesn't any longer. When it did, worker wages grew rapidly, the middle class was strong, there were no trade deficits, and the economy was more stable. Now that it doesn't, all these economic ills have befallen this once proud economy.The New Republic's Noam Scheiber developed these themes in a story and blog posts. And now, the American Prospect has a special report entitled, "Made in the USA: Reviving American Manufacturing (before it's too late)".The pieces within the report are filled with blanket assertions unaccompanied by much in the way of supporting evidence.
When Does the Senate Take This Up? - from Calculated Risk 12/17/2009 House Approves Next Stimulus: From Reuters: U.S. House approves $155 billion jobs bill. More infrastructure spending: Extends COBRA subsidy to 15 months. Extends unemployment benefits for six months (that expire at the end of the year). Aid to states: "States would get $23 billion to pay 250,000 teacher salaries and repair school buildings, and $1.2 billion to pay for 5,500 police officers... $23.5 billion to help pay their share of federal healthcare programs for the poor." Not nearly enough in the way of aid to states, but it is a start. Unfortunately, the senate is unlikely to add to state aid: governors cut ribbons and then run against senators for their seats, so the senate has a strong political incentive to try to keep the states cash-strapped.
The ARRA's Boost to the GDP Growth Rate Ends in Two Quarters - Menzie Chinn sends us to: Peter Hooper (2009), "Drivers and Drags: US Macroeconomic Setting for 2010," Global Economic Perspectives (New York: Deutsche Bank; December 18): Drivers of growth Fiscal stimulus is a key near-term driver. Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.
Stimulus timing - Krugman - One thing that often becomes clear when we talk about prospects for next year — which worry me — is that there’s a lot of confusion over the timing of stimulus impacts. Even well-informed people will say things like “we’ve only spent a quarter of the money, so let’s wait and see what happens.” Menzie Chinn tried to get at this confusion recently; here’s my take. Let me work with a stylized numerical example. It doesn’t quite match the real stimulus — there’s no distinction between spending and tax cuts, and it tails off much faster than the real thing. But I think it’s close enough to make the point. Here’s the table:
Age of diminished expectations - Krugman - “Economy poised for surge as most accurate economist see U.S.” reads the Bloomberg headline. So it’s a major disappointment to read what Bloomberg considers a “surge”: 3.5 percent growth in 2010. Um, that’s really subpar for recoveries, let alone recoveries from deep slumps: Or put it this way: during the Clinton years — a 8-year stretch — the average rate of growth was 3.7 percent. Growth at the pace Dean Maki predicts should be enough to bring unemployment down — but not by much. And his prediction is “among the highest” among 58 economists. I hope he’s right, although my money is still on the more downbeat views of the Goldman guys. Still, it’s amazing how we’ve defined economic success down.
The psychological effects of recession - We've all heard about people who became tightwads for life because they lived through the Great Depression, no matter how much money they earned in later years. In a recent working paper for the National Bureau of Economic Research Giuliano and Spilimbergo of the International Monetary Fund, examined the political and psychological effects that milder, more-recent recessions have had on American citizens. Giuliano and Spilimbergo made use of the General Social Survey, which has recorded political attitudes among the American public since 1972. The specific questions they explored were whether living through a recession in one's "impressionable years"--defined as 18 to 25--influenced Americans' views on the merits of economic redistribution; on whether financial success resulted largely from hard work or from luck; and on faith in public institutions. Attitudes were analyzed by region, to account for geographical discrepancies in American economic performance.
The Rise Of The Preppers: America's New Survivalists - In the past, survivalists and conspiracy theorists might go out into the woods, live out of a bunker, waiting (or sometimes hoping) for the apocalypse to hit. It was men, mostly; many of them antigovernment, often portrayed by the media as radicals of the likes of Oklahoma City bomber Timothy McVeigh. In the late 1990s, Y2K fears brought survivalism to the mainstream, only to usher it back out again when disaster didn't strike. (Suddenly, unused survival gear began showing up in classifieds and on eBay.) A decade later, "preppers" are what you might call survivalism's Third Wave: regular people with jobs and homes whose are increasingly fearful about the future—their paranoia compounded by 24-hour cable news. "Between the media and the Internet, many people have built up a sense that there's this calamity out there that needs to be avoided,"
Gun sales boom in '09 - While other industries have suffered massive losses during recession-ravaged 2009, the firearms business seems to have had one of its best years in recent memory. Concerns about personal safety in a crippled economy and worries that Washington, D.C. democrats would limit firearms sales prompted a gun buying frenzy this year, local and national industry insiders say. "It's ironic that we've experienced what we call the `Obama effect,"' said R.J. Kirschner, founder of Top Gun Training Centre in the Lytle Creek area. "The President has been the most effective economic stimulus for the firearm industry."
The Invisible Homeless In The Suburbs - You don't see them standing on corners rattling cups for change. You don't see them holding up cardboard "Will Work for Food" signs at busy intersections. They are the thousands of homeless families in the suburbs that shuffle from couch to couch at the homes of friends and relatives, or sleep in cars, shelters, businesses and rundown motels--people who have ended up scratching and clawing for day-to-day existence in the cold shadows of homelessness.
The Racial Diversity of Hunger - Everyone knows that Oakland is diverse. Probably more people from more races and nationalities live in the city than anywhere west of New York or north of Los Angeles. But before we celebrate diversity, think of its most diverse places. Some of them are surely the lines of hungry people lining up for food.Oakland has many food pantries — programs run primarily by churches on a shoestring. Church elders are often found at the Alameda County Community Food Bank's huge warehouse out by the airport, buying as much food as they can for as little money as possible. They worry that the bags of cans and produce they distribute will run out before everyone in line gets one.
Christina Romer on Job Creation - It's looking as though the recovery of labor markets will follow the pattern of the last two recessions and lag significantly behind the recovery of output. Additional fiscal policy measures could be used to help employment markets recover faster, so this statement Making job creation a priority, by Christina Romer about the administration's plans to create jobs is good to see. But how much of a priority will job creation be for the administration given that it has other things it would like to accomplish? The amount of political capital that the administration is willing to use to push an expanded version of this legislation forward will say a lot about its true commitment to job creation.
The single most important thing Democrats could do for jobs - The arcane rules and regulations governing the 51-vote budget reconciliation process made it a tricky path for health-care reform. But they make it perfect for stimulus. After all, what's dearer to the budget than spending money and changing tax rates?There are three ways to use the budget reconciliation process for further stimulus. The first is to include a reconciliation "directive" in the next budget. The second is to use the directive that was included in the 2010 budget for health care. And the third is to pass a new directive into the 2010 budget. Because I don't want your eyes to glaze over before you reach the conclusion, I'll put it up at the top: If Democrats want to do this, they can. They can do it on their timetable, and they only need 51 votes.
Budget Cuts Pushing Governments Toward Four-Day Week - WSJ - Growing budget deficits are prompting some state and local governments to consider a four-day work week for government workers, and in some cases even for school kids.Utah is the only state in the nation with the four-day work week, but governors in Iowa and Washington have started touting the idea as a way to save money. Legislators in New York have floated a similar idea while Mesa, Ariz. –- profiled in this WSJ story on cities grappling with budget problems –- has already switched to the four-day, 10-hour workday.Here’s the idea: By having employees work four days instead of five, cities and states save on energy and building maintenance costs. (Utah implemented its four-day work week two years ago to offset rising gas prices.) Commuting traffic is reduced, less gas is consumed and in Utah the program has been shown to reduce overtime because few employees want to stick around after an already long day.
Which states are facing the worst budget deficits in 2010? - The national economy may be in recovery, but most states haven’t yet hit bottom – and many are already facing massive budget gaps halfway through their fiscal year, despite basing those budgets on dismal forecasts. “Unless you’re North Dakota, you’re probably a state that has had some degree of difficulty or crisis involving finances,” says Arturo Pérez, a fiscal analyst with the National Conference of State Legislatures (NCSL), which released its survey of state budget situations earlier this month. “It’s the worst situation states have faced in decades, perhaps going as far back as the Great Depression in some states.” The result: furloughs, deep cuts to state programs and services, fee and tax hikes. Heading into 2010, here are some of the states facing the toughest fiscal challenges:
As Slump Hits Home, Cities Downsize Their Ambitions - The specter of lean budgets for years ahead has some of the nation's 89,000 local governments rethinking what services to provide and how to pay for them. This means higher taxes and fewer services. These cuts matter greatly to the economy at large.. Local government spending accounts for 8.8% of the nation's total output. More Americans work for cities, counties and school boards than in all of manufacturing.
Public-Transit Passengers Face Rough Ride - Public transportation will be more crowded and more expensive this year as big-city transit systems across the country respond to severe budget pressures. Funding from state and local governments -- a key part of budgets for transit systems -- has been cut and ridership is down overall, prompting transit officials to trim service and raise fares at a time when many customers are pinched themselves. San Francisco is raising fares for commuters this month. Chicago will lay off workers and eliminate bus routes in February to avoid fare increases. New York City is planning to wind down free and reduced-cost student fares starting in September. And Washington, D.C., is proposing to decrease the frequency of trains.
Investors see farms as way to grow Detroit -- On the city's east side, where auto workers once assembled cars by the millions, nature is taking back the land. Cottonwood trees grow through the collapsed roofs of homes stripped clean for scrap metal. Wild grasses carpet the rusty shells of empty factories, now home to pheasants and wild turkeys.This green veil is proof of how far this city has fallen from its industrial heyday and, to a small group of investors, a clear sign. Detroit, they say, needs to get back to what it was before Henry Ford moved to town: farmland."There's so much land available and it's begging to be used," said Michael Score, president of the Hantz Farms, which is buying up abandoned sections of the city's 139-square-mile landscape and plans to transform them into a large-scale commercial farm enterprise."Farming is how Detroit started," Score said, "and farming is how Detroit can be saved."
Total State Tax Collections (WSJ) State revenues fell 11% in the third quarter of 2009 versus the same period a year ago with big drops in sales and income taxes, according to a report released by the Census Tuesday. The report shows state and local governments are only now catching the full brunt of the recession. (See total state tax collections table for the third quarter of 2008 and the third quarter of 2009.)
State Sales Tax Numbers: The Truth Appears - Leave it to the WSJ to report the truth - and then try to paper over it: Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue. The WSJ then goes on to opine: State and local tax revenues tend to lag behind the downturns as well as the upturns in the economy because of the time it takes for collections to catch up with depressed store sales and diminished incomes. This is true for income taxes. It is absolutely false when it comes to sales taxes. I can state that it is an absolute fact that sales tax returns are filed and monies are remitted MONTHLY - if there is an upturn in business - an actual upturn - it shows up NOT MORE THAN ONE MONTH LATER in sales tax receipts. Period.
New Jersey employers can expect large unemployment-tax increase in July - New Jersey employers should expect to contribute more to the unemployment-fund tax in July -- which could force businesses to pay between $300 and $1,100 more per employee. The increase is meant to raise $1 billion for the state unemployment fund.The program funding the state's laid-off workers is broke. The tax meant to bolster it is not likely to come down for years, according to an online report by The Star Ledger.
Transportation Debt Burdens N.J. - The New Jersey Transportation Trust Fund Authority has new-money bonding capacity this fiscal year and next, but by July 2011, the start of fiscal 2012, its entire $895 million annual appropriation will be needed to cover principal and interest payments on the TTFA's nearly $11 billion of existing debt. That will leave officials looking for new ways to support road, bridge, and mass-transit construction throughout the state.
Nobody Gets Fired Except Governors in Recessions (Bloomberg) -- Any expectation that state and local governments would use the worst fiscal crisis since the Great Depression to reduce their biggest expenditures is proving to be wishful thinking. Companies have cut 7.3 million jobs, 6.29 percent, since business employment peaked at 115.8 million in December 2007. State and local governments kept adding jobs through August 2008 to 19.8 million and have since cut 132,000 positions -- 0.66 percent, according to the U.S. Labor Department. Blame it on education, which accounts for 53 percent of the total number of government employees on the job. When it comes to something like class size, Americans don’t think bigger is better.
Build America Bond Subsidy Shift May Fuel $130 Billion in Sales - (Bloomberg) -- Sales of Build America Bonds, the fastest-growing part of the U.S. municipal debt market, may double to $130 billion in 2010 as states and cities rush to borrow before Congress can change federal subsidies. Lawmakers might retool the program to treat transportation debt more generously than other issues, Ron Wyden, the Oregon Democratic senator who proposed the bonds as an “experiment” six years ago, said in an interview. The U.S. government pays 35 percent of interest costs on taxable borrowing for local public works.
California Watch: Will California Default on Bond Debt in 2010? - As 2009 comes to a close, California's economy remains severely weakened by the effects of almost two years of recession. Economists predict that 2010 won't be any better, as the state faces a $20.7 billion dollar budget deficit, some 60-plus legislators seek re-election or look to switch houses and talk of the state defaulting on its debt obligations has sent legislators and public officials behind closed doors to discuss the ramifications. In 2009, lawmakers and the governor labored for much of the year to close $60 billion in deficits, using budget tricks, cutting programs and raising some taxes.With many of their ideas either having been exhausted, including borrowing local tax revenues, or state employee furloughs that have been challenged in court by labor unions, the pressure of the election will compound the process of approving a new state budget by June 30
Judge Rules Some State Furloughs Illegal - California Gov. Arnold Schwarzenegger acted illegally by placing tens of thousands of state employees on unpaid furloughs three days a month, an Alameda County judge said Thursday in a ruling that could require the financially reeling state to cough up months of back pay. Superior Court Judge Frank Roesch said Schwarzenegger had ignored legal restrictions on furloughs, interfered with operations of agencies like the Department of Motor Vehicles, and achieved questionable savings. Schwarzenegger's office announced immediately that it would appeal.
New York's DiNapoli says state's cash to hit all-time low (Reuters) - New York State's comptroller said on Tuesday the state's cash resources will reach an all-time low after $3.5 billion in payments are made on Wednesday. Comptroller Thomas DiNapoli said in a statement that the state "is literally down to petty cash" as it faces a $1.3 billion Medicaid payment and $2.2 billion in property tax relief and school aid payments on Wednesday. Those payments could push the state's closing cash balance into negative territory for the first time in at least 15 years, depending on how much revenue the state takes in on Wednesday, according to Jennifer Freeman, a spokeswoman for DiNapoli. As of Tuesday, New York had only an estimated $3.2 billion of cash on hand.
State faces fiscal abyss New York is about to achieve a dubious milestone: For the first time in history, the state's main bank account is poised to end the year in the red. After months of plunging revenues and weeks of budget battles, New York had a negative balance of $174 million in its general fund on Wednesday, with nearly $1 billion in bills owed by day's end. Every sign pointed to the account still being in the hole when 2010 begins. To fill the gap, New York will be forced to rely on its own version of overdraft protection by raiding its short-term investment pool -- a kind of statewide checking account. But that account itself is dangerously low, with only about $800 million on hand, compared with a balance in more flush years of as much as $16 billion.
The Recession Begins Flooding Into the Courts - New York State’s courts are closing the year with 4.7 million cases — the highest tally ever — and new statistics suggest that courtrooms are now seeing the delayed result of the country’s economic collapse. New York’s judges are wading into these types of cases by the tens of thousands, according to the new statistics, cases involving not only bad debts and soured deals, but also filings that are indirect but still jarring measures of economic stresses, like charges of violence in families torn apart by lost jobs and homes in jeopardy. T]he broad impact of the recession is clear in hundreds of thousands of new cases across the judicial system, including people challenging their real estate taxes, home foreclosures, contract disputes and family offenses.
Fitch Rates Illinois' $3.5B GOs 'A'; Assigns Watch Negative --Fitch Ratings has assigned an 'A' rating and placed on Rating Watch Negative $3.466 billion of State of Illinois general obligation bonds (GOs) taxable series of January 2010. The bonds are expected to sell via negotiation on Jan. 8, 2010. In addition, the 'A' rating on $19.4 billion of outstanding Illinois long-term GOs is also placed on Rating Watch Negative, as are ratings related to the state based on its appropriation, as noted at the end of this commentary. --The Rating Watch Negative placement reflects the magnitude and persistent nature of the state's fiscal problems and will be resolved after an assessment of the extent to which the state addresses its funding imbalances in the context of the legislative session that begins in February and the development of a budget for fiscal year 2011.
Pa. budget struggles continue - Pennsylvania's budget woes resemble a neverending story. State government enters a new year having major fiscal challenges with shortfalls in monthly revenue forecasts, a drop in federal stimulus aid and the Rainy Day Fund tapped out. The national recession is taking its toll on Pennsylvanians. About one-half million state residents are jobless while 1.3 million depend on food stamps to tide them over. The mid-fiscal year report by the governor's budget office identifies a number of challenges facing Rendell and state lawmakers.
Pennsylvania tax revenue down more than $2 billion - Pennsylvania state tax revenue fell in comparison to last year, largely due to its residents earning and spending less, according to third-quarter data released Tuesday by the U.S. Census Bureau. The Quarterly Summary of State and Local Tax Revenue reported Pennsylvania had third-quarter tax revenue of $6.64 billion, down 6 percent from $7.09 billion in the third quarter of 2008. Year-to-date, Pennsylvania tax revenue totaled $23.08 billion in 2009, down 9 percent from $25.24 billion in 2008.
Kentucky Budget Shortfall Could Exceed $1.5 Billion - Kentucky could be facing a budget shortfall of more than $1.5 billion over the next two years because of the economic recession, Gov. Steve Beshear said Tuesday. "We face a challenge much greater than many had anticipated," Beshear said at a Capitol news conference. "Obviously, this is going to require, more than ever before, a cooperative, bipartisan working relationship between the legislature and the governor's office if we are going to continue to move this state forward." The Democratic governor didn't rule out the possibility of furloughs or layoffs among the state's nearly 34,000 employees
Md. home assessments to fall an average 19.7% - Nearly all Maryland homeowners due to receive new property assessment notices being mailed today will see a lower assessed value on their houses, reflecting what officials say is the largest decline in the state assessment office's history. On average, residential property values dropped 19.7 percent over three years, according to C. John Sullivan, director of the state Department of Assessments and Taxation. Many homeowners will not see corresponding declines in their tax bills come July 1, however, officials warned, unless local governments reduce the tax rate, which is unlikely because they need the revenue.
Governor: State workers should pay more pension costs - In the late 1990s, at the peak of a long bull market, lawmakers in Mississippi - as did those in many other states - sweetened the public pension system. With revenues thin and agencies facing significant cutbacks, Barbour said the time has come for employees to pick up a larger share of their pension costs. He called the retirement system "excessively generous."
Taxpayers may be picking up the tab for pensions - Getting a pension? For many retirees in private and public service, they never contributed a dime for it, but taxpayers may end up on the hook paying for it. Florida's Retirement System, for example, is in trouble today since it's only 88 percent funded. One woman I spoke to recently, with no pension, says she'll probably have to work forever, "unless something comes up like I win the Lotto." When General Motors declared bankruptcy many of it's retirees went into the Private Benefit Guaranty Corporation, a Federal agency. WDBO Consumer Warrior Clark Howard says first comes the shock, "they will take a big cut in their pension benefits from the government payments."
Falling Interest Rates To Drive Up US Pension Costs Next Year --Falling interest rates will force U.S. companies to spend more on their pension plans next year, eroding corporate profits already under pressure from an ailing economy. What is known as the discount rate, which is applied to the present value of pension-plan assets to lower companies' future pension obligations, is expected to decline by as much as 30% next year because of lower interest rates on the corporate bonds used as the benchmark for the rate.The higher pension expenses are coming at a particularly bad time for companies that have been resorting to cost reductions to meet investors' profit expectations amid sluggish customer demand.
Phased Retirements Are Growing More Popular - Amid the economic turmoil, interest in phased retirement is on the rise. For employees, these programs offer a way to ease rather than plunge into retirement, which can pay psychological and financial dividends. Many employers, like Abbott, are introducing phased-retirement programs to prepare for mass retirements among baby boomers, an eventuality the recession has only delayed. The goal: to persuade near-retirees to stick around long enough to teach colleagues how to do their jobs. Other employers are implementing these programs to pare payroll costs while minimizing layoffs. In a survey released in July, the nonprofit Families and Work Institute in New York found that 77% of 400 employers contacted had taken steps to reduce their labor and operation costs during the previous 12 months. Of those, 7% said they were relying on phased-retirement programs.
Day of Reckoning for Social Security as FY2010 Rec... - Social Security Adminstration officials admitted several months ago FY2010 and FY2011 tax receipts would fall below outlays by about $10 billion each fiscal year, advancing a day of reckoning for the social retirement program by at least six years after projecting such a day would not arrive until 2016 only half a year ago. Based on November's Monthly Treasury Statement, SSA officials may have been wildly optimistic. Through the first two months of the 2010 fiscal year, Social Security Retirement, Survivor and Disability benefit payments have surged 10 percent to $113.7 billion compared with $103.5 billion over the first two months of FY2009, while tax receipts fell a half-percent to $96.9 billion in FY2010 versus $97.3 billion in FY2009. Social Security officials report applications for early retirement (age 62) benefits and disability benefits increased more than 20 percent for both categories last year. The forward element of Baby Boomers turned 62 beginning nearly three years ago and a big increase in early retirement benefit requests may signal either desperation to access what might be a sole, or primary, source of income in a 10-percent-plus unemployment landscape or a fear that waiting a few more years to qualify for higher benefit payments may backfire if benefits are (likely) cut in the future.
Dave Johnson: Save Social Security - 10 Questions for the Deficit Commission - It is possible that there is going to be a “deficit commission” to look for ways to reduce our country’s budget deficits. I have some questions for them to ask to help get things started in the right direction: (with embedded charts)
Retiree income datapoint of the day - The group of people hit hardest by interest rates are those used to living on interest payments. “The elderly and others on fixed incomes have been especially hard hit,” reports Stephanie Strom. But just how hard have they been hit? “The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”
Doubling Your Money while Earning 0.01 Percent - From Stephanie Strom at the NY Times: At Tiny Rates, Saving Money Costs Investors " ... what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters ... cut in their incomes,” “What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said [Bill Gross of PIMCO] ... Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.
Jackson Health's finances continue to deteriorate - As of Oct. 31, Miami-Dade's public hospital system had 20.8 days of cash to pay its bills, including payroll and keeping the lights on. Its governing body, the Public Health Trust, has set 20 days as the lowest Jackson should go. ``When it gets below 20 days, that's when I declare an emergency,'' said Frank Barrett, chief financial officer. He said he's already talking to county administrators on getting an advance for payroll if the system runs out of cash. ``They're aware of my cash-flow situation,'' Barrett said in a telephone interview Tuesday. ``They're not going to let me miss payroll'' for the 12,200 employees who work in the system. The projections for next year are far grimmer.
Health Cuts With Little Effect on Care - NYTimes - Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. Several hospitals have closed, and others have shrunk. In 1996, the region had 4.8 hospital beds for every 1,000 residents. Today, it has about three. Hospital care has been, in a word, rationed.Neither the House health reform bill nor the Senate version would impose any such reductions on the nation’s hospitals. But the basic idea behind the bills’ cost-control measures is similar. They would try to slow the growth of medical treatments, be it through new rules for Medicare, a Cadillac tax on the costliest insurance plans or other measures.So take a glimpse at what our future may look like:
Paul Waldman: Ten Things to Watch in the Health-Care Reform Conference - If you only watch television news, you might think that the conferees tasked with merging the House and Senate bills really only need to work out the public option and the abortion provisions. The truth, though, is that those matters are pretty much settled. There will be no public option, and the Senate's incredibly restrictive language on abortion will probably win out over the appallingly restrictive House version. There are oodles of provisions in both bills, but here is a quick guide to what else we should watch out for as the conference committee does its work. How these questions are settled will help determine just how good this reform will end up being:
Catholic Group Supports Senate on Abortion Aid - NYTimes -In an apparent split with Roman Catholic bishops over the abortion-financing provisions of the proposed health care overhaul, the nation’s Catholic hospitals have signaled that they back the Senate’s compromise on the issue, raising hopes of breaking an impasse in Congress and stirring controversy within the church. The Senate bill, approved Thursday morning, allows any state to bar the use of federal subsidies for insurance plans that cover abortion and requires insurers in other states to divide subsidy money into separate accounts so that only dollars from private premiums would be used to pay for abortions. Just days before the bill passed, the Catholic Health Association, which represents hundreds of Catholic hospitals across the country, said in a statement that it was “encouraged” and “increasingly confident” that such a compromise “can achieve the objective of no federal funding for abortion.” An umbrella group for nuns followed its lead.
Why the health care bill is worth passing - - One could recoil in disgust at the inefficiency and incoherence of the process—at the fact that private insurers will continue to make billions a year providing services the government has shown, via Medicare, that it can provide on its own. But, messy as the reform plans are, they can still dramatically transform the system for the good. Reform would guarantee that tens of millions of people who don’t have insurance will get it, and that people who have insurance now won’t have to worry about losing it. And, by writing community rating and universal access into law, Congress will effectively be committing itself to the idea that health care, regardless of risk, is a right. If a little incoherence is the price of that deal, it’s worth paying.
In (Very Reluctant) "Defense" of the Insurance Mandate - Over at FireDogLake, they have a petition to kill the Senate bill. It has one of those list of ten reasons for doing so. The first: Forces you to pay up to 8% of your income to private insurance corporations - whether you want to or not When I read that, I had to think hard about what it is they were talking about -- there's certainly nothing in any bill I've read that says you have to pay 8 percent of your income to the insurance companies whether you want to or not.It turns out to be some Death-Panel quality spin. What are they actually talking about? The Senate bill requires everyone to have insurance, or pay a penalty. But, if the cost of getting insured exceeded 8 percent of your income, then the fine would be waived.The maximum penalty is 2 percent of adjusted income, which is probably around 1.4 percent or so of the average person's gross pay. That money would not go to "private insurance corporations," but would in fact defray the costs of the uninsured on our public health system.
Top Ten Reasons to Kill the Senate Health Care Bill” - Yves Smith - I got pushback on a post I put up yesterday critical of the health care reform bill from readers who pointed to the fact that folks like Paul Krugman and Al Franken were supporting it meant it must be at least OK. Well, it isn’t, and don’t delude yourself into thinking that. Why did health insurance stocks rise to all time highs when the bill was passed? The Senate bill isn’t a “starter home,” it’s a sink hole. It needs to die so something else can take its place. It doesn’t matter whether people are on the right or the left — once they understand the con job that’s about to be foisted on them, they agree. That’s why Harry Reid and President Obama are trying to jam it through as fast as they can, before people get wise. This list still misses a few very bad features. For instance, most have fallen for the “preexisting conditions” bit...
Idiocy - I get spam: From: President Barack Obama to Markos--As we head into the final stretch on health reform... I urgently need your help to keep this 50-state movement for reform going strong. Please donate $5 or whatever you can afford today: http://my.democrats.org/... Let's win this together, President Barack Obama Really? All we have to do is send the DNC $5 and we get ponies? The same DNC that is enabling corporatist Democrats to water down and destroy any hope for health care reform? That DNC? This is so freakin' obnoxious I can hardly stand it. We are about to get a turd of a "reform" package, potentially worse than the status quo. We have the insurance industry declaring victory, Republicans cackling with glee, and the administration is using that piece of shit to raise money?
Transparency in health care pricing doesn't come easily - The health care reform bill before the U.S. Senate would require hospitals to publicize their standard charges for services, but New Hampshire and Maine have gone much further in trying to make health care costs more transparent to consumers. New Hampshire and Maine are the only states with Web sites that let consumers compare costs based on insurance claims paid there. In New Hampshire, the price variation across providers hasn't lessened since the Web site went live in 2007. The link is here. You'll find the background data from New Hampshire, and a study, here. Here are some anecdotal accounts. Here is a CBO background paper on the topic.
Answering Some Questions on the Tax Treatment of Health Insurance - As a matter of tax policy, I favor eliminating the exclusion of health insurance premiums from taxable income. So does Jon Gruber. I think economists can agree on this because of the reasons indicated in the original articles and comments -- it promotes spending on health care that may be wasteful. We could finance quite a lot of expansions in coverage with a chunk of the $200 - $250 billion in foregone tax revenue. We would also make the tax code more progressive in the process. What I am criticizing in these posts is a proposal to selectively eliminate it for the most expensive health insurance plans without regard to whether the expense is due to the design of the plan or the expected health expenditures of the insured population based on their health status.
'Cadillac' tax isn't a tax -- As we prepare for the final round of debate over health reform, perhaps the most contentious issue will be financing. Both the Senate and House agree that most of the financing for reform should come from scaling back overpayments to Medicare insurers and providers, as well as excise taxes on some of the sectors that will most benefit from 30 million newly insured consumers. But the two houses remain apart on where to find the remaining dollars. In the Senate, the gap is closed by relying on the "Cadillac tax," a 40 percent assessment on insurance plans with premiums of more than $8,500 for singles and $23,000 for families. In the House, the gap is closed with a surtax on those earning more than $500,000.
The Hidden History of the Health Care Bill - To understand the extraordinary Republican bitterness attendant on Senate passage of the health care bill, it is necessary to remember that the strategy that at last delivered universal health insurance for the United States was devised in Massachusetts in late 2004 by Mitt Romney, a Republican governor in the early stages of seeking his party’s presidential nomination. The Democrats, jiu-jitsu fashion, turned the initiative to their own advantage, having owned the issue since the Truman administration. In doing so, they achieved a goal that had eluded them for sixty years. The GOP’s conservative wing is correspondingly enraged. Meanwhile, Congressional Republicans cast only a single vote (in the House) for a plan that their would-be standard-bearer devised. Internal storms now threaten to disable the party for many years to come.
Republican Rigidity - Forbes - It's an article of faith among right-wingers, especially the tea party crowd, that all of the United States' ills happen because Republicans in Congress don't stand for principle. They believe that whenever you compromise with evil, the result is evil, so every politician should support conservatives' principles come hell or high water, damn the torpedoes.The right-wing solution to the uninsured is simply to define them out of existence. As Dr. John Goodman, one of John McCain's health advisers, explained to the Dallas Morning News last year, "The next president of the United States should sign an executive order requiring the Census Bureau to cease and desist from describing any American--even illegal aliens--as uninsured….So, there you have it. Voila! Problem solved."
Gingrich: Republicans ‘Will Run On An Absolute Pledge To Repeal This Bill’ - Yesterday, Minority Leader Mitch McConnell (R-KY) refused to acknowledge that Republicans would campaign in future elections on a platform of repealing health reform, but former House Speaker Newt Gingrich predicted that Republicans would exploit the bill’s late implementation date to “run on an absolute pledge to repeal the bill“: I suspect every Republican running in ‘10 and again in ‘12 will run on an absolute pledge to repeal this bill. The bill–most of the bill does not go into effect until ‘13 or ‘14, except on the tax increase side; and therefore, I think there won’t be any great constituency for it. And I think it’ll be a major campaign theme. (Watch it)
Is ‘Community Rating’ in Health Insurance Fair? - One controversial feature of the health reform bill winding its way through Congress is “community rating.” The term has a mellow ring but is apt to be divisive. It allows opponents of the legislation to claim, with a straight face, that it will substantially drive up health insurance premiums. It also allows proponents to claim, with a straight face, that the measure will drive down premiums and provide coverage to Americans who otherwise could never have afforded it.“Community rating” refers to the practice of charging a common premium to all members of a heterogeneous risk pool who may have widely varied health spending for the year. It inevitably makes chronically healthy individuals subsidize with their insurance premiums (rather than through overt taxes and transfers) the health care used by chronically sicker individuals.
Economist Says Health Care Bill “Is Just Another Bailout Of The Financial System” - For example, economist L. Randall Wray writes: Here’s the opportunity, Wall Street’s newest and bestest gamble: there is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.
The New Robber Barons - Previously, Marcy Wheeler noted the unsavory blending of the private interests of health insurance companies with the power and hand of the US government: It’s one thing to require a citizen to pay taxes–to pay into the commons. It’s another thing to require taxpayers to pay a private corporation, and to have up to 25% of that go to paying for luxuries like private jets and gyms for the company CEOs. It’s the same kind of deal peasants made under feudalism: some proportion of their labor in exchange for protection In this case, the federal government becomes an appendage to do collections for the corporations. Marcy termed this being “On The Road To Neo-feudalism” and then followed up with a subsequent post noting how much the concept was applicable to so much of the American life and economy, especially through the security/military/industial complex so intertwined with the US government. Marcy Wheeler is not the only one recently noting the striking rise in power of corporate interests via the forceful hand of US governmental decree..
Why We Have a Health Care Cost Problem and Why It Will Only Get Worse: Other People's Money- Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. The chart above shows why we have a health care cost problem. Patients have little direct connection in paying for their care, and their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.
Can Consumers Make Rational Health Care Choices? - I won’t pretend to have a comprehensive answer to that question; it’s a pretty big one. But I do think the best evidence we have indicates that when health insurance comes with high deductibles and co-pays, consumers do on average make rational health care choices by reducing their health care expenses with almost no adverse health effects. This is the result of the famous $50 million RAND Health Insurance Experiment, a study which is old news to people who read about health care policy. Or so I thought anyway. Economist Paul Ginsburg seems to disagree, and finds the state of the literature ambiguous...
Drugs Are Cheap, Except in the U.S. - The Washington Post discussed the cost of the Obama's administration's plans to close the "doughnut hole" gap in the Medicare drug benefit. The piece never mentions the fact that the United States pays far more for prescription drugs than any other country because it gives drug companies unlimited patent monopolies, allowing them to charge whatever price they want during the period in which they are granted a legal monopoly. By contrast, every other wealthy country restricts the ability of drug companies to exploit this monopoly by negotiating lower prices. If the people in the United States paid the same prices for drugs as people In Canada or Germany, then the doughnut hole could be eliminated and the drug benefit would cost less than it does currently.
Cardiologists Sue Sebelius Over Medicare Fee Cuts - Heart specialists filed suit against Secretary of Health and Human Services Kathleen Sebelius in an effort to stave off steep Medicare fee cuts for office-based procedures such as echocardiograms. The lawsuit charges that the government's planned cutbacks will force thousands of cardiologists to shutter their offices, sell diagnostic equipment and work for hospitals, which charge more for the same procedures. "What they've done is basically killed the private practice of cardiology."
Unhealthy habits are what's killing us. - For all the money Americans spend on health care (60 percent more per person than any other advanced country), Americans are not an especially healthy people. Life expectancy at 50 in the U.S. ranks 29th in the world, three years behind world leader Japan, one and a half years behind Canada. Other indicators -- infant mortality, life expectancy at birth -- look even worse. This poor performance is often blamed on the fact that millions of Americans lack health insurance. But as a recent paper for the National Bureau of Economic Research found, the U.S. -- despite its kludgy health insurance system -- does a remarkably good job of extending disease-fighting treatment to all. So if the U.S. health system does such a good job saving its middle-aged and elderly sick, why do Americans die comparatively young? Answer: because Americans are much more likely to get sick in the first place. And that likelihood owes very little to the health care system and a great deal to the bad choices American individuals make. If you eat too much, exercise too little, drink too much, smoke, take drugs, fail to wear a seat belt or ignore gun safety, there is only so much a doctor or hospital can do for you.
Why "Healthcare Reform" Is Not Reform, Part I There are two fundamental reasons why the "healthcare reform" which passed the U.S. Senate on Christmas Eve is a simulacrum of reform: it does nothing to lower cost or limit the diversion of national wealth to a few cartels, nor does it address the food-diet-nutrition-lifestyle causal chains which are dooming the nation to an explosion of preventable chronic disease and diminishing lifespans. Here are two documentaries you need to see: Borrow, rent, or buy, whatever it takes, but see these: Food, Inc. (film) - King Corn (film) And two more which directly address the fast food industry: Super Size Me (film) - Fast Food Nation (film) The central tenet of the Survival+ critique is that no problem can even begin to be solved without an integrated understanding of the interlocking chains of causality which create the problem. In the U.S., healthcare costs are exploding for a number of powerful reasons, but the most important one is the deterioration of the citizens' health which can be causally traced to the nation's deteriorating food supply, diet, nutrition and fitness--all integrated parts of a massively unhealthy lifestyle.
American Exceptionalism Strikes Again - This chart from National Geographic combines several data sets which require a little bit of puzzling out, but which come together in one whopper of an illustration. Line colour indicates whether the nation has universal health coverage (blue) or not (red.) There are only two red lines -- Mexico and the USA. Looking at these, you would hope to achieve a low lefthand starting point (low cost), a high righthand point (high longevity), and a thick line (lots of doctor visits.) The USA line looks like it was drawn by someone who got the instructions backwards -- a very high lefthand starting point (huge cost), a mediocre righthand point (middlin' longevity), and a hairlike line thickness (scanty doctor visits, less than 4 per year.) Who gets the healthcare bargain on this chart? Japan is the most striking, with the highest lifespan (almost 83 years), and a visit a month or more to the doctor, at a cost of about $2,600 per capita -- one-third the US cost.
The Economist: Russia, China, Mexico At 'High Risk' Of Social Explosion Next Year
While the world economy is rebounding, knock-on effects from the downturn are still being felt. Another 60 million people will lose their jobs, globally, in 2010 according to The Economist. 200 million people risk falling into poverty. Thus the new year brings with it heightened potential for social unrest as, for many, financial difficulty wears on.The Economist: But poverty alone does not spark unrest—exaggerated income inequalities, poor governance, lack of social provision and ethnic tensions are all elements of the brew that foments unrest.Mexico, Russia, and China are particularly at risk. One can imagine that social powder kegs are slow burning. Economic inequalities or perceived injustices start to simmer when problems first emerge... but explode much later as people exhaust other avenues of hope. Chart via The Economist
Banana Wars - NYTimes - China’s growth stands as a beacon for the power of trade. But others that have hitched their economic strategy to trade, like Mexico, have found prosperity elusive. Despite growing banana exports, both the Latin American banana exporters and Europe’s impoverished former colonies remain poor. One thing we have learned over the past 15 years is that trade is necessary but not sufficient for development. Countries also need investment in infrastructure, technology and human capital. They need credit. They need legitimate institutions — like clean courts to battle monopolies — and help building them. Putting up a few barriers against banana imports, or tearing a few of them down, can’t do it all.
How the status quo can kill: the example of free trade - There is a fault line running through the left. It becomes particularly visible when a debate ignites over whether President Obama has “sold out.” A number of issues have become combustible agents for these conflagrations, most especially the financial bailout, the decision to escalate in Afghanistan, and most recently, the President’s perceived unwillingness to fight for “real reform” in health care. Glenn Greenwald has noted The underlying divisions in the healthcare debate in which Greenwald references a recent article in The New Republic by Ed Kilgore, Managing Editor of The Democratic Strategist. In my own diaries and comments on DailyKos, in which I have been extremely critical of the President’s economic and financial policies, which I see as working to preserve the status quo, I certainly see a pattern. It appears to me that many of those who argue against me in defense of the President’s policies are vested in the status quo. A few have made comments with references to their careers in finance or law, and it reminds me of the observation by early twentieth century progressive Upton Sinclair, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Or as one commenter noted in a blog elsewhere that took an extreme position on HCR, “They don’t want to connect the dots, because they are part of the picture.” And there is one economic policy above all others that they believe in. Free trade.
Tanker Glut Signals 25% Drop on 26-Mile Line of Ships (Bloomberg) -- A 26-mile-long line of idled oil tankers, enough to blockade the English Channel, may signal a 25 percent slump in freight rates next year. The ships will unload 26 percent of the crude and oil products they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of $30,000 a day next year, compared with $40,212 now, according to the median estimate in a Bloomberg News survey of 15 analysts, traders and shipbrokers. That’s below what Frontline Ltd., the biggest operator of the ships, says it needs to break even.
Study: Black Markets Protect European Economies - European researchers have concluded that a big enough shadow economy can protect a country from recession. The Financial Times reports: Unofficial, or “shadow”, economies can help shield European countries during a recession – but illicit activity has to be on a sizeable scale, according to report by Germany’s Deutsche Bank.Countries with a high prevalence of moonlighting builders, unrecorded cash transactions, missing invoices, tax evasion or illegal activities such as drug dealing, have seen smaller contractions during Europe’s worst downturn since the 1930s than more honest neighbours, researchers at the Frankfurt-based bank have concluded.
European Loans Posted Third Straight Annual Decline (Bloomberg) -- Loans to households and companies in Europe posted their third straight annual decline in November as the economic slump curbed credit demand and made banks more reluctant to lend. Loans to the private sector fell 0.7 percent from a year earlier after a drop of 0.8 percent in October, the European Central Bank said today. M3 money supply, which the ECB uses as a gauge of future inflation, shrank 0.2 percent in November, the first decline since records began in January 1981, after increasing 0.3 percent in October. Europe’s economy emerged from the worst recession in more than six decades in the third quarter after governments stepped up spending and exports rose for the first time in one-and-a- half years. The ECB has cut its benchmark rate to a record low of 1 percent and is flooding banks with cash to revive lending. Growth is likely to remain muted unless credit flows improve and companies and households increase spending. “Credit growth will likely hover around zero well into 2010,” said Juergen Michels, chief euro-region economist at Citigroup in London. “However, the ECB will continue its policy of a cautious unwinding of its non-standard liquidity measures.”
The Worst May Not Be Over for Europe - Day by day, fears are growing that Greece or another weak country may default on its sovereign debt obligations, forcing the richer countries in Europe to ride to the rescue or risk having one or more of its most vulnerable members leave the 16-nation euro zone. Many European economists discount such a fracture as a remote possibility. But that doesn’t mean Europe has safely emerged from crisis. Instead, it faces a longer-term challenge to restore the fiscal credibility of at least half the countries that use the euro. The true test for the world’s largest common currency zone, analysts say, will be whether it can withstand the economic, political and social strains once the European Central Bank begins to raise interest rates in response to economic improvements in Germany, France and other Northern European countries.
Europe’s Vast Farm Subsidies Face Challenges - NYTimes - The last time the European Union decided the future of its 50 billion euro agricultural aid program, in 2005, the deal was cut behind closed doors in a luxury suite at the five-star Conrad Brussels hotel. France and Germany joined forces in secret to protect the program against cuts until 2013, outmaneuvering Tony Blair, the British prime minister, who was left fuming over the generous subsidies. Now, 2013 is closer at hand and a new round of maneuvering has begun to reshape the richest system of agricultural handouts in the world. At stake are a host of delicate — some would argue intractable — issues that have hardened to the point where resolution will be all the more difficult: Who should receive the subsidies? What is their purpose? Is there a way to tie payments to a crackdown on fraud and corruption? Can they be more directed at small farmers instead of multinational conglomerates?
French public debt hits record -- France's public debt soared to a record high level in the third quarter in response to anti-crisis stimulus spending and now amounts to about 75.8 percent of gross domestic product, the INSEE statistics agency said Wednesday. The third quarter debt ratio was up by 1.9 points from the second quarter and well in excess of the 60 percent stipulated in the Maastricht Treaty that established the financial basis of the eurozone.The French government has predicted that the ratio will reach 77.9 percent by the end of 2009 and 84 percent in 2010.
VAT Rise Will Mean Months Of Stagflation - UK Telegraph - Households must brace themselves for a painful period of stagflation-lite in the opening months of 2010 as the VAT cut comes to an end and squeezes incomes across the country, experts have warned. Inflation will rise significantly above the Bank of England's 2pc target and consumer spending will drop by 0.7pc in the opening months of next year, in the first taste for British households of the period of austerity that is an inevitable consequence as the Government puts its books in order in the coming years, according to the Centre for Economics and Business Research.
The Prospects for Global Imbalances: A View from the IMF - Following up on recent posts (, , , ,  ) Here's another take on the prospects for resolving global imbalances, from Blanchard and Ferretti, "Global Imbalances: In Midstream?" : IV.B. Lower - Global Imbalances in the Future- What will happen in the future depends on how long the factors we just listed will be in play [oil price decline, asset price busts, increase in home bias, the hit to durable consumption and investment goods demand]. Below is reproduced the IMF World Economic Outlook's October 2009 forecast for current account balances.
Australians are now the biggest borrowers in the world - Australia’s Reserve Bank changed roles from Roadrunner to Wile. E. Coyote with ease. Australians now owe $56000 per head, compared to $44,000 for Americans. It's a pretty hideous story. Our “recovery” and “growth” turn out to be debt based. Like one of the cartoons where the coyote keeps running for a while over going over the cliff, Australia’s debt is now more than GDP. 90 per cent of that debt is tied up in mortgages. The rest is various forms of personal debt. What's much worse is that these figures have apparently been sitting around for a while, gathering accolades, not concern.
Outsourcers Go Global - India's IT sector, born out of the forces of globalization, is undertaking some globalization of its own. In search of new sources of rapid growth, the country's outsourcing giants are aggressively expanding beyond their usual stomping grounds into the developing world, setting up programming centers, chasing new clients and hiring local talent from Santiago in Chile to China's far-west metropolis of Chengdu. Through geographic diversification, Indian companies hope to regain some momentum after a dismal year, at the same time becoming even tougher competitors to IBM, Accenture and other industry leaders. India's companies "clearly realize that if we want to be global players, we need a presence in emerging markets,"
Japan: Twenty Years Later - From The Times: Japan pledges to end economic spiral - Japan’s four-month-old Government ... today vowed to enlarge the economy by 150 trillion yen (£1 trillion) ... The Democratic Party of Japan said that the scheme would deliver annual real GDP growth of at least 2 per cent between now and 2020 and ... is thought to be an attempt by the Government to quash rising domestic fears over the country’s gargantuan mound of public debt. The debt equates to about 180 per cent of GDP and will probably hit 200 per cent in the wake of the record budget announced last week. Halfway through the Government’s ten-year plan, Japan's debt relative to GDP may rise to 246 per cent, according to analysts from the International Monetary Fund.
Japan's per capita GDP remains lowly 19th among OECD members - The Japan Times Online -Japan's nominal gross domestic product per capita stood at $38,371 (about ¥3.96 million) in 2008, ranking 19th among the 30 member states of the Organization for Economic Cooperation and Development, the government said Friday.The ranking, unchanged from 2007, equals the lowest level for Japan since 1971, when comparable data became available, according to the Cabinet Office. Yen-denominated nominal GDP shrank from the previous year as a result of the economic slowdown but the GDP figure in dollar terms expanded as a result of the yen's appreciation against the U.S. currency.
Chinese economy overtakes Japan - The fast-growing emerging economy had been expected to surpass Japan next year, but the transition looks to have happened in 2009, based on China's new growth estimates. Its statistics bureau said that China grew by 9.6pc – rather than 9pc – in 2008, meaning its economic output was 31.405 trillion yuan, or $4.6 trillion (£2.9 trillion), last year. According to the World Bank, Japan's annual output was the equivalent of $4.9 trillion last year, but it is expected to shrink by 6.6pc this year. Meanwhile, Chinese officials project that its economy will grow by more than 8pc this year. It means it is likely that China became a larger economy than Japan some time in the second half of this year.
China may surpass Germany as world's biggest exporter - Despite the sluggish demand from overseas, China will probably surpass Germany as the world's largest exporter in 2009, said the Ministry of Commerce. The MOFCOM also predicted the exports in 2009 will drop by 16.5 percent from a year earlier, which means that the nation is expected to export goods worth $1.19 trillion in 2009 and that December is expected to witness the first year-on-year growth of as high as 10 percent since last November."The year 2009 was the hardest in the Chinese trade history, but the nation has made positive achievements," said Zhong Shan, vice-minister of commerce, during the China Economic Forum held in Beijing.
China Manufacturing Grows at Fastest Pace in 20 Months, Cementing Recovery (Bloomberg) -- China’s manufacturing expanded at the fastest pace in 20 months in December, cementing the recovery in the world’s third-biggest economy. The Purchasing Managers’ Index climbed to a seasonally adjusted 56.6, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. That compares with 55.2 in November and the median 55.4 estimate in a Bloomberg News survey of seven economists. The boost to Chinese manufacturing from subsidies for home- appliance purchases and tax rebates for exporters will continue this year as the government extends policies to counter the financial crisis. China’s growth will accelerate to 8.8 percent in 2010, four times faster than the U.S., as the world economy expands 2.4 percent, the United Nations forecast last month.
Economy grew 9.6% last year - China's economy grew by 9.6 percent, 0.6 percentage points more than earlier estimates, in 2008, the National Bureau of Statistics (NBS) said on Friday after discovering that the service sector had played a greater role than thought earlier. The NBS economic census results also show that the country achieved greater success in reducing its energy intensity, or the amount of energy used to generate each unit of GDP, last year. It used 5.2 percent less energy per unit of GDP, much less than the 4.6 percent as reported earlier. The country set a goal to cut energy intensity by 20 percent during the 11th Five-Year Plan (2006-10). Preliminary calculations show energy intensity could be 17 percent lower than the 2005 level by the end of this year, falling by another 4 percent next year, he said, and dismissed concerns over the country's ability to achieve that goal.
Hong Kong can play role in promoting RMB internationalization: SAR chief - (Xinhua) -- Hong Kong could exert its advantages as an international financial center to promote the RMB into becoming a regional or even international currency, said Donald Tsang Yam-Kuen, chief executive of Hong Kong Special Administrative Region (SAR) Tuesday. Hong Kong has been playing the role as a "testing field" in the RMB's internationalization, Tsang said when he delivered a speech at the Beijing-based Chinese Academy of Governance. The city has involved in the establishment of the system QFII and QDII, the circulation of the RMB overseas and the currency's function expansion, the implementation of currency swap agreements, as well as the RMB cross-border settlement, according to Tsang.
Renminbi set to replace US dollar for trade in Asia Pacific - The Chinese renminbi is taking on an increased role in the Asia-Pacific region, and is expected over time to replace traditionally dominant currencies such as the US dollar and the euro for certain transactions. Advertisement Chinese government policy changes have enabled Asian corporates to settle trades with their Chinese counterparts in renminbi. And increased intra-Asian trading volume may lead Beijing to also consider allowing other trade-related insurance and derivatives denominated in renminbi to be done offshore, according to bankers and regulators in Hong Kong Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority (HKMA), said Beijing is studying the idea of introducing more renminbi-denominated investment products in Hong Kong, expanding on the authorities’ approval for renminbi-denominated bonds issued by mainland financial institutions being made available for Hong Kong investors. Currently, the renminbi is not fully convertible, but the Chinese government has made a number of arrangements with various countries so that trades between China and these countries could be settled directly in renminbi, instead of US dollars.
China-Asean Free-Trade Agreement Takes Hold, Spares Popcorn, Toilet Paper (Bloomberg) -- A free-trade agreement between China and Southeast Asia comes into force today, consolidating a sixfold surge in economic activity over the past decade between countries representing a quarter of the world’s population. The agreement expands a limited 2005 trade area between China and the 10-member Association of Southeast Asian Nations, scrapping tariffs on about 90 percent of goods. By 2015, duties must be cut to no more than 50 percent on “highly sensitive” items, including ambulances in Brunei, popcorn in Indonesia, snowboard boots in Thailand and toilet paper in China.
In Southeast Asia, Unease Over Free Trade Zone - NYTimes When the clock strikes midnight on New Year’s Eve, China and 10 Southeast Asian nations will usher in the world’s third-largest free trade area. While many industries are eager for tariffs to fall on everything from textiles and rubber to vegetable oils and steel, a few are nervously waiting to see whether the agreement will mean boom or bust for their businesses.Trade between China and the 10 states that make up the Association of Southeast Asian Nations has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more. The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.
Chinese Dynamics Mean Exploding Global Inflation - When China appreciates yuan in response to 2010 Food Crisis, it will do more than damage the US treasury market. More importantly, “cheap Chinese consumer goods” will stop being so cheap anymore. Prices will jump at Walmart and other retailers around the world, leading CPI numbers everywhere into the double digits.”
China Property Bubble May Lead to US-Style Real Estate Slump - Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.
China: US Dollar Important For Reserves; 2010 Key Year - BEIJING (Dow Jones)--The U.S. dollar will continue to be a key reserve currency in the near term and the main asset in China's foreign-exchange reserves, but diversifying the country's reserves "appropriately" will help spread out risk, China's forex regulator said Thursday, reiterating Beijing's currency stance as the year closes.
IMF:Global Reserves Up; Dollar Share Of Allocated Reserves Slips - WSJ -Data released by the International Monetary Fund on Wednesday showed global official foreign exchange reserves rose to $7.52 trillion at the end of the third quarter from $7.18 trillion at the end of the second quarter.Allocated reserves stood at $4.43 trillion, up from $4.27 trillion in the previous quarter. The amount of allocated reserves held in U.S. dollars stood at $2.73 trillion, an increase from $2.68 trillion in the second quarter but below the $2.81 trillion recorded in the third quarter of 2008.The data showed U.S. dollar reserves account for 61.65% of allocated reserve holdings, a decline from 62.82% in the previous quarter.
China to Stay the Course on Currency, Wen Says - NYTimes - Prime Minister Wen Jiabao of China struck a defiant note Sunday about the country’s exchange rate policy, saying the government would not give in to foreign demands that it let the renminbi rise in value. Mr. Wen said in an interview with Xinhua, the official Chinese news agency, that the currency was facing growing pressure to appreciate, but he insisted that China was committed to keeping it stable, having virtually pegged it to the dollar since the global financial crisis worsened in the middle of last year. “We will not yield to any pressure of any form forcing us to appreciate,” he said. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” The renminbi is known informally as the yuan.
If China Is Worried About Inflation, It Could Raise the Value of the Yuan - A WSJ article reporting on comments by Chinese Premier Wen Jiabao noted his concerns about inflation. Later it discussed the possibility that China would increase the value of the yuan. Remarkably, it never noted that raising the value of the yuan would reduce import prices and therefore offset inflationary pressures. For example, if the yuan were to rise by 20 percent against the dollar and other currencies, then as a first approximation oil and other import prices would fall by 20 percent.
Exchange Rate Policy as Monetary Policy -Dean Baker thinks that if the Chinese are really worried about inflation that they should consider giving in to longstanding American demands to let their currency appreciate vis-a-vis the dollar. This is true. But I think it highlights a broader and more interesting point. China’s currency peg is, in effect, a kind of monetary policy. The question isn’t why is China running such loose monetary policy, the question is why aren’t the western central banks running looser policy ourselves along the lines of the Gagnon Plan or price-level targeting or a higher inflation target or a nominal GDP target.In China, if unemployment goes to ten percent the government is going to get overthrown. So the Chinese government is doing everything possible to prevent mass unemployment. The question should be why our own democratically elected government isn’t doing the same?
Chinese New Year, Krugman, NY Times: ...China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged ... at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.
Macroeconomic effects of Chinese mercantilism - Krugman - For something I’m working on: we know that China is pursuing a mercantilist policy: keeping the renminbi weak through a combination of capital controls and intervention, leading to trade surpluses and capital exports in a country that might well be a natural capital importer. We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap. But how big is the impact? Here’s a quick back-of-the-envelope assessment
Leveling Up or Leveling Down With China - I hesitate to disagree with Paul Krugman about something like this, but I think today’s column on the US/China currency imbalance would benefit from adding in a distinction he doesn’t draw. When it comes to getting the US and Chinese currencies in a different alignment, it seems to me that it matters whether we’re talking about doing that through more expansion in the United States, or through more tightening in China. There’s good reason to believe that policy is too tight in the United States. Unemployment is very high. Inflation is very low. The “Taylor Rule” tradition indicates that the Fed’s normal response to this level of economic activity would be to try to achieve a -5 percent interest rate. There’s not really much reason to believe that policy is too loose in China. Growth is below the recent trend. Inflation is not accelerating.
Blog Topic of the Day: China - Thanks to Krugman, I see that China is the blog topic of the day. My two cents about the issue is that China's policy, of piling up massive reserves and undervaluing its currency, is extremely smart industrial policy. Any trade model of increasing/dynamic returns will yield the conclusion that infant industry protection is a good idea for developing countries. And anyone who was around during the Asian Financial Crisis knows that having a mountain of US Treasuries can be of help in a pinch. Despite the above logic, however, Larry Summers is on record calling Chinese currency manipulation "stupid". Hopefully, he realizes that, in reality, it isn't stupid, and second, that this is something the US should fight.
U.S. International Trade Commission rules in favor of U.S. steel industry on subsidized Chinese imports - The U.S. International Trade Commission ruled Wednesday that a surge of subsidized Chinese steel has harmed or threatens to harm the U.S. industry, acting in one of the largest trade cases ever involving the two countries. The volume of the steel pipes imported from China more than tripled from 2006 to 2008, rising from $681 million to $2.8 billion, according to the most recent Commerce Department figures. The case means that the United States can collect duties on the Chinese imports. "This is great news for the U.S. steel industry," said Roger Schagrin, an attorney for the U.S. steelmakers and the United Steelworkers union. The case also promises to heighten U.S.-China trade tensions, which were aggravated earlier this year when the Obama administration imposed a tariff on imported Chinese tires
WSJ's "Chinese Slapped in Steel Dispute" Rewrite: "Americans Slapped in Steel Dispute" -
U.S. steelmakers won U.S. consumers who purchase products made with steel and American companies that purchase steel as an input lost a case over Chinese steel imports, as the U.S. International Trade Commission voted that the domestic industry has been damaged industries that use steel have been subsidized too generously by cheap steel from China Chinese producers. The ruling Wednesday will result in duties of taxes on American companies and consumers of between 10% and 16% on future imports of Chinese steel pipes used to extract natural gas and oil. It is the latest in a string of trade decisions against China, the U.S.'s largest trading partner the American consumer and U.S. companies that voluntarily purchase products from China for their low cost and high quality.
We are at risk of a trade war - and the West has most to lose – Telegraph - The global economy now badly needs an over-arching "trade round" – a worldwide deal to boost international commerce, while keeping protectionism in check. After all, it was the rash of tariffs and quotas imposed in the aftermath of the 1929 Wall Street crash that put the "Great" in the "Great Depression". While economically disastrous, such measures also provoked the mutual loathing and extremism that sparked the Second World War. Even such obvious lessons from history are lost on today's politicians. As the realities of recession bite and unemployment rises, our so-called leaders reach for the protectionist comfort blanket, telling voters that shutting out the world "saves jobs". Over the last year, the US – the global "free-trade champion" – has imposed 46 separate protectionist measures on goods and services crossing its borders. The EU, disgracefully, has implemented 90. The likes of China and India have retaliated, introducing 51 and 29 new anti-trade measures respectively. Little wonder that world trade volumes remain 13pc below their pre-sub-prime peak.
Obama’s Lost Face - Why did Chinese premier Wen Jiabao choose to publicly humiliate Barack Obama at Copenhagen? In their eyes, and in those of much of the world, he has lost face, and with it, power and influence. While getting widespread play overseas, this story has been kept very quiet by our disinterested, nonpartisan media (I haven't seen it mentioned in any major U.S. outlet). After promising to meet the Messiah at 7:00 p.m., Premier Wen stood him up in favor of a meeting with the leaders of India, South Africa, and Brazil. Rather than wait, a no-doubt infuriated Obama stalked into the room in question and demanded, "Are you ready to see me, Premier Wen?" No word on Wen's reaction, though he did submit to a discussion on the spot that evidently sealed the release of the immortal and glorious Copenhagen Quasi-Agreement on Climate Change. So with Barack Obama, we've reached the point where the leader of record of the most powerful state in history has become a man you can casually stand up. But the question remains: Why?
China vows unswerving efforts to promote climate talks - China will make unswerving efforts and work jointly with the international community for the completion of the Bali Roadmap negotiations at the Mexico climate talks next year, a senior official said Saturday. Xie Zhenhua, vice minister of the National Development and Reform Commission (NDRC), told Xinhua that China, as it has always done, would continue to play an active and constructive role on that front.Also head of the Chinese delegation to the Copenhagen climate conference, Xie said developed countries bound by the Kyoto Protocol should confirm their second-phase emission reduction targets as soon as possible.
China’s 863 Program, a crash program for clean energy - In 2001, the 863 Program launched a “clean coal” project, and Yao Qiang, a professor of thermal engineering at Beijing’s Tsinghua University, was appointed to the committee in charge. He said that its purpose is simple: to spur innovation of ideas so risky and expensive that no private company will attempt them alone. The government is not trying to ordain which technologies will prevail; the notion of attempting to pick “winners and losers” is as unpopular among Chinese technologists as it is in Silicon Valley. Rather, Yao sees his role as trying to insure that promising ideas have a chance to contend at all. “If the government does nothing, the technology is doomed to fail,” he said.
France’s Highest Court Strikes Down Carbon Tax - Earlier this year, France enacted a carbon tax of €17 per ton (approximately $25), which was to go into effect January 1, 2010. But this morning, the Constitutional Council, which passes on the constitutionality of laws, rejected the tax. Much like our own House of Representatives with the cap-and-trade bill, the French evidently crammed the carbon tax bill with exemptions for politically connected industries and businesses, with the net result that only consumer purchase of gasoline and heating oils would really take a hit.
Senate Democrats to W.H.: Drop cap and trade - Bruised by the health care debate and worried about what 2010 will bring, moderate Senate Democrats are urging the White House to give up now on any effort to pass a cap-and-trade bill next year. “I am communicating that in every way I know how,” said Sen. Mary Landrieu (D-La.), one of at least a half-dozen Democrats who've told the White House or their own leaders that it's time to jettison the centerpiece of their party's plan to curb global warming. The creation of an economywide market for greenhouse gas emissions is the heart of the climate bill that cleared the House earlier this year. But with the health care fight still raging and the economy still hurting, moderate Democrats have little appetite for another sweeping initiative — especially another one likely to pass with little or no Republican support. “We need to deal with the phenomena of global warming, but I think it’s very difficult in the kind of economic circumstances we have right now,” said Indiana Democratic Sen. Evan Bayh, who called passage of any economywide cap and trade “unlikely.”
Sack Goldman Sachs' Cap-and-Trade - The revolving door between Washington and Wall Street has produced a new scheme to fleece the public. “Cap-and-trade” is the heart of the Obama Administration’s plan to slow global warming and reduce our dependence on fossil fuels. Permits to emit a “capped” amount of carbon dioxide will be traded on Wall Street by big-time players like Goldman Sachs. Cap-and-trade was anointed hero status for helping reduce pollution from power plants, specifically acid rain from the sulfur in coal. Seldom have accolades been less deserved. Indeed, this “success” story is a case of calling black white. Here, in essence, is how it worked. Congress passed a law, Title IV of the Clean Air Act, capping sulfur emissions from power plants at 50% of 1990 amounts. Utilities reducing emissions more than half could sell excess reductions to other utilities, which then did not need to reduce pollution. Physical changes were simple. Many power plants switched to low-sulfur Wyoming coal and a few installed scrubbers. Sulfur emissions were reduced almost 50% in 20 years. Great success? Hardly...
The Frustrating Politics of Climate Inaction - Lisa Lerer’s Politico piece on how moderate Senate Democrats don’t want to do a cap-and-trade bill is extremely frustrating. Neither Mary Landrieu nor Ben Nelson nor Evan Bayh nor Kent Conrad nor Mark Pryor seems to want to say that they don’t think climate change is real. Nor do they want to say that they don’t think it’s a problem. Nor do they want to say that they don’t think it’s a problem caused by emissions of greenhouse gases. Nor do they want to deny that legally binding caps on greenhouse gas emissions are the only reliable way of reducing greenhouse gas emissions. But it’s also clear that none of them want to say something like “voting for legally binding caps on greenhouse gas emissions would be the right thing to do, but for selfish reasons I choose not to.” But they also don’t want to vote for legally binding caps on greenhouse gas emissions. So you’re left with . . . well . . . it’s not really clear what it is you’re left with.
On issues like global warming and evolution, scientists need to speak up - The central lesson of Climategate is not that climate science is corrupt. Instead, the controversy highlights that in a world of blogs, cable news and talk radio, scientists are poorly equipped to communicate their knowledge and, especially, to respond when science comes under attack. This isn't a new problem. As far back as the late 1990s, before the news cycle hit such a frenetic pace, some science officials were lamenting that scientists had never been trained in how to talk to the public and were therefore hesitant to face the media. Scientific training continues to turn out researchers who speak in careful nuances and with many caveats, in a language aimed at their peers, not at the media or the public. Many scientists can scarcely contemplate framing a simple media message for maximum impact; the very idea sounds unbecoming.
Governor Of Katrina-Ravaged Louisiana Tries To Block Regulation Of Global Warming Pollution - Even as the Senate argues whether to pass clean-energy legislation, the Environmental Protection Agency (EPA) is finally moving to regulate global warming pollution. One of the leading opponents to the EPA’s proposed regulations, slated to go into effect in March, 2010, is Louisiana governor Bobby Jindal (R-LA). On Monday, Jindal “and the secretaries of the Louisiana Department of Natural Resources and Louisiana Economic Development filed objections with EPA Administrator Lisa Jackson,” claiming the Supreme-Court-mandated standards “will certainly have profound negative economic impacts
Are You Sure You Want a Building Weatherization Public Option and Mandate? - Free Exchange rightly criticizes Ted Gayer at Brookings for his argument is that if households and firms are forgoing a profit opportunity (the supposedly profitable decision to weatherize buildings), then cap-and-trade will not work because these same households and firms will ignore all of the cost-saving profit opportunities that cap-and-trade is meant to induce. His reasons that: “If cap-and-trade does not drive down costs, then EPA regulators might feel justified in imposing inflexible, command-and-control regulations to reduce greenhouse gas emissions. Why establish a flexible, market-based approach when consumers and firms (but apparently not analysts) lack the ability to identify and act upon the least costly means for reducing pollution?”
Climate Activists Jailed For Saying ‘Coal’s Killing West Virginia’s Communities’ - Four climate activists are being held in a West Virginia jail for protesting how coal mining is killing the people and land of their state. On Tuesday, December 29, four activists with Climate Ground Zero — a grassroots campaign of non-violent civil disobedience in southern West Virginia to address mountaintop removal coal mining — were arrested for trespass at their homes in Rock Creek, West Virginia. According to Climate Ground Zero, the four activists remain in police custody in the Southern Regional Jail in Beaver, WV. They have yet to see a magistrate and have not been informed of their charges, other than trespassing, which, if proven, would result in a maximum one-hundred-dollar fine.
PG&E Customer Revolt may threaten rollout of Obama's Smart Grid- Consumer backlash and cost concerns may cause delays in the nationwide rollout of “smart” utility meters at the center of the Obama administration’s $8 billion push to update the U.S. electricity grid. PG&E Corp., owner of California’s largest utility, halted meter installations in Bakersfield, north of Los Angeles, after hundreds of customers complained that readings weren’t accurate. The meters, part of a so-called smart-grid initiative billed as clearing the way for more renewable-energy use, are designed to help consumers conserve power during periods of peak demand
A Convenient Delusion - The same sort of public relations wizardry that once convinced a sizeable portion of Americans that cigarette smoking was harmless, that Saddam Hussein had weapons of mass destruction and had a hand in the 9/11 attacks, that Al Gore claimed to have invented the internet, and that John Kerry's war record was fraudulent, is now convincing an increasing number of our citizens that global warming is at least of little consequence, or, at most, a massive hoax. This trend is reported by the Pew Research Center which, in August, 2006, found that 77% of the public believed that there is solid evidence that the earth is warming. In October, 2009, that number had dropped to 57%. In the same period, the percentage of those who denied that there is such evidence increased from 17% to 33%. An early Pew poll found that "global warming ranked dead last among 40 concerns ranked by the 1503 respondents to the poll." Unfortunately, facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence. Here are some of those stubborn facts
Global warming increasing malaria - Global warming has caused a seven-fold increase in cases of malaria on the slopes of Mount Kenya, a British-funded research team has found. A 2C increase in average temperatures around the mountain in the past 20 years has allowed the disease to creep into higher altitude areas, where the local population of four million has little or no immunity. The researchers, funded by the Department for International Development (DfID), found that the average temperature in the Kenyan Central Highlands had risen from 17C in 1989 to 19C today. Before the 1990s malaria was absent from the region because the parasite that causes it can mature only above 18C. However, malaria epidemics began among the population as average temperatures went over the 18C tipping point. The number of people contracting malaria during these epidemics has increased seven-fold in the past decade.
2010: Sunspots or CO2? - Over the past few years, sunspot activity has gone down while CO2, well, hasn't. Result: A slowdown in temperature increases (if not a decrease). What will happen if sunspot activity goes up? We might be about to find out. 2009 is ending with a flurry of sunspots. Indeed, if sunspot 1039 holds together for the rest of today (prediction: it will), the month of December will accumulate a total of 22 spotted days and the final tally for the year will look like this:
The Patagonia Problem - - Home to some of the world's largest fresh water reserves and one of the planet's few remaining truly unspoiled wilderness areas, Chile's Patagonia is now facing a potentially rapid industrialization with plans for a massive scale hydroelectric project that would see both the Pascua and Baker rivers with a total of five dams. Transmission lines will be clearcut through over 2,300 km of wilderness paralleled by a new highway. Together these would pass through 14 legally protected natural areas spanning half the length of the country. Ironically Patagonia would see all of the impact and almost none of the proposed benefits. Activist and third generation Patagonian farmer Segundo Cardenas equates it to repairing one part of the country by destroying the other half.
Op-Ed - Off to the Races – NYTimes - Today, we need the Earth Race: who can be the first to invent the most clean technologies so men and women can live safely here on Earth. Maybe the best thing President Obama could have done here in Copenhagen was to make clear that America intends to win that race. All he needed to do in his speech was to look China’s prime minister in the eye and say: “I am going to get our Senate to pass an energy bill with a price on carbon so we can clean your clock in clean-tech. This is my moon shot. Game on.” Because once we get America racing China, China racing Europe, Europe racing Japan, Japan racing Brazil, we can quickly move down the innovation-manufacturing curve and shrink the cost of electric cars, batteries, solar and wind so these are no longer luxury products for the wealthy nations but commodity items the third world can use and even produce.
The Oil Drum - Trade, Transportation, and the Chinese Finger Trap - The idea for this post originated on a recent errand to Fleet Farm to buy a replacement spark plug for my dad's chain saw. I discovered there are not one or two kinds of spark plugs but hundreds, depending on the type of machine they go into. The plugs were made by a variety of companies, some domestic, some foreign but none from my state (currently Wisconsin). As I noticed this, I looked around the dozens of aisles and hundreds of shelves at the thousands of products and 'saw' for the first time how complex our import/export system has become. And the fact that my dad couldn't cut our firewood without that certain sparkplug reminded me of Liebigs law of the minimum, or in the vernacular - something is only as good as its weakest link. I couldnt help wondering how much oil was embodied in those spark plugs: their parts, their manufacturing, their delivery to central Wisconsin, etc. While my research didn't discover this answer, it did result in my viewing trade, transportation, and our society's consumption habits in a different light.
The Unquenchable Thirst: Taxing America’s Oil Addiction - In the U.S., our dependence on oil not only makes for wealthy oil companies, it also supports our federal, state and local governments. Gas taxes add up quickly and some areas of the country are taxed more heavily than others. However, one surprising thing holds true: The government profits even more from our oil addiction than the super-rich oil companies do. Click to Enlarge
What If The EIA's Energy Outlook Were Written By An Honest Person? - You’d get out your crayons and your graph paper, and starting with your most recent data, you’d plot a nice, steady 1.5% global growth rate for energy demand over the next 25 years.You’d do something similar for supply so that it matches demand at prices that also climb at a nice steady rate. For oil prices, call it, oh, how about 0.4% per year? That sounds pretty good.You’d draw basically flat lines into the future for all the fuels dominant today, since you know they have serious challenges ahead, and then draw sharply rising lines for the latest and greatest technology, projecting enormous growth rates for things like shale gas and enhanced oil recovery.You’d be sure to count all possible supply from new sources — like a new gas pipeline from Alaska — even if those projects don’t yet exist. Hey, it could happen! You would not, however, factor in any CO2 reduction, because policies to control it don’t exist.Naturally, you’d assume that the next 25 years would show gradual economic growth, so there wouldn’t be any troublesome issues like credit availability or depressed consumer demand to worry about. In sum, you’d present a picture of the future that looks like a continuation of the best parts of the past, with none of the bad parts.
AFP: Ukraine facing 'serious problems' paying for gas: Gazprom - The head of Russian gas giant Gazprom said Friday that Ukraine had cut back on purchases of Russian gas since mid-December and appeared to be facing serious cash problems."Ukraine is experiencing serious problems with payment," Alexei Miller said on Russia's Vesti channel in comments carried by the Ria-Novosti news agency.Ukraine has until January 11 to pay for gas, according to Gazprom, which has cut off supplies to the country over unpaid bills repeatedly in the past. Prime Minister Vladimir Putin has repeatedly said that Russia will cut gas supplies to Ukraine again if the struggling ex-Soviet nation fails to pay for its energy supplies. If Gazprom acts on its warning, the cuts would come amid intense campaigning for Ukraine's presidential election on January 17.
Blood Rare Earth Metals? - Rare earth metals, which are used by many green technologies, seem to be having some of the same problems historically associated with diamonds and other precious stones: they come almost entirely “from some of the most environmentally damaging mines in the country, in an industry dominated by criminal gangs". Since these metals are used frequently for green technologies, the kinds of consumers who are the end-buyers of rare earth metals are probably the kind who will place a high value on minimizing the environmental and social costs...
China Redirects Trillions Of Gallons Water To Arid North - China is embarking on one of the biggest hydro-engineering projects in world history, but is being forced to navigate some troubled waters along the way. Scheduled to be finished in 2050, the plan to link China's four main rivers and redirect trillions of gallons of water from China's tropical southern mountains to its arid northern plains will have taken 100 years from conception to completion. The theory is simple enough – as Chairman Mao Tse-tung observed in 1952: "The south has plenty of water and the north lacks it, so if possible why not borrow some?" – but the reality is a truly daunting tangle of technical and logistical challenges.
Africa: Drying, Drying, Disappearing… Lake Chad was bigger than Israel less than 50 years ago. Today its surface area is les than a tenth of its earlier size, amid forecasts the lake could disappear altogether within 20 years.Climate change and overuse have put one of Africa's mightiest lakes in mortal danger, and the livelihoods of the 30 million people who depend on its waters is hanging by a thread as a result. An unprecedented crisis is looming that would create fresh hunger in a region already suffering grave food insecurity, and pose a massive threat to peace and stability, experts say. "If Lake Chad dries up, 30 million people will have no means of a livelihood, and that is a big security problem because of growing competition for smaller quantities of water," "Poverty and hunger will increase. When there is no food to eat, there is bound to be violence."
Powerless Nepal loses lustre as New Year destination - (IANS) Slapped with a 51-hour weekly power outage from Wednesday and a warning that next month it could go up to 12 hours a day, Nepal has begun to lose its lustre as a holiday destination, especially for the budget tourist from India who crosses over the open border by bus.The Nepal Electricity Authority (NEA) Tuesday announced that due to the power-generating rivers drying up and the demand for energy increasing, it would enforce between seven to eight hours of blackout daily.In the coming days, NEA warned that it could rise to 12 hours daily.
The science of catastrophe: tsunamis and how they work – latimes - How tsunamis occur. In the Sumatra area, tectonic plates meet in a subduction zone -- a place where the boundaries of one plate are forced beneath the other plate. The Indo-Australian plate is sliding northeastward (about 2.8 inches a year) and dipping under the Eurasian plate, along a fault line called the Sunda megathrust which runs southwest from Myanmar down Indonesia toward Timor.Tremendous geological strain builds over many decades until a section of the megathrust gives way. This rupture causes the oceanic plates beneath Sumatra to lurch forward suddenly, by many yards, in a big earthquake.If the ocean floor ruptures, it suddenly moves a massive amount of water. This is what happened in the earthquake that caused the deadly Indian Ocean tsunamis of December 2004.Major quakes that rupture the ocean floor are usually shallow quakes occurring at a depth of less than 44 miles. The quake that caused the 2004 tsunami was about 20 miles below the seafloor.
Russia in secret plan to save Earth from asteroid: official - Russian scientists will soon meet in secret to work on a plan for saving Earth from a possible catastrophic collision with a giant asteroid in 26 years, the head of Russia's space agency said Wednesday."We will soon hold a closed meeting of our collegium, the science-technical council to look at what can be done" to prevent the asteroid Apophis from slamming into the planet in 2036, Anatoly Perminov told Voice of Russia radio. The Apophis asteroid measures approximately 350 metres (1,150 feet) in diameter and RIA Novosti news agency said that if it were to hit Earth when it passes nearby in 2036 it would create a new desert the size of France.
Computer-aided design for life itself - FIRST it was planes, trains and automobiles that benefited from computer-aided design technology. Now, as synthetic biologists attempt to build artificial life forms, a CAD system has been developed to allow them to redesign the stuff of life much faster and more easily. Deepak Chandran and colleagues at the University of Washington in Seattle developed Tinkercell to allow biologists to meddle with the components of, say, a bacterium, and simulate the effect the change has (Journal of Biomedical Engineering, vol 3, p 19). The package has a library of the components of life, from which users can pick different cells, membrane proteins, fluorescent proteins, enzymes and genes to create their organism. Tinkercell can then simulate the life form to see if it functions as expected.
Why are modern scientists so dull? - Question: why are so many leading modern scientists so dull and lacking in scientific ambition? Answer: because the science selection process ruthlessly weeds-out interesting and imaginative people. At each level in education, training and career progression there is a tendency to exclude smart and creative people by preferring Conscientious and Agreeable people. The progressive lengthening of scientific training and the reduced independence of career scientists have tended to deter vocational ‘revolutionary’ scientists in favour of industrious and socially adept individuals better suited to incremental ‘normal’ science. High general intelligence (IQ) is required for revolutionary science. But educational attainment depends on a combination of intelligence and the personality trait of Conscientiousness; and these attributes do not correlate closely. Therefore elite scientific institutions seeking potential revolutionary scientists need to use IQ tests as well as examination results to pick-out high IQ ‘under-achievers’. As well as high IQ, revolutionary science requires high creativity. Creativity is probably associated with moderately high levels of Eysenck’s personality trait of ‘Psychoticism’. Psychoticism combines qualities such as selfishness, independence from group norms, impulsivity and sensation-seeking; with a style of cognition that involves fluent, associative and rapid production of many ideas. But modern science selects for high Conscientiousness and high Agreeableness; therefore it enforces low Psychoticism and low creativity. Yet my counter-proposal to select elite revolutionary scientists on the basis of high IQ and moderately high Psychoticism may sound like a recipe for disaster, since resembles a formula for choosing gifted charlatans and confidence tricksters. A further vital ingredient is therefore necessary: devotion to the transcendental value of Truth. Elite revolutionary science should therefore be a place that welcomes brilliant, impulsive, inspired, antisocial oddballs – so long as they are also dedicated truth-seekers.
Marginal Revolution: Are Old Scientists Less Innovative? ...instead of young scientists getting grant funding to go off and do whatever they want in their twenties, they're working in a lab where somebody in his forties or fifties is the principal investigator in charge of the grant. They're working as apprentices, almost, under the senior person. If we're not careful, we could let our institutions, things like tenure and hierarchical structures and peer review, slowly morph over time so that old guys control more and more of what's going on and the young people have a harder and harder time doing something really different, and that would be would be a bad thing for these processes of growth and change. I'd like to see us keep thinking about how we could tweak our institutions to give power and control and opportunity to young people. Here is a graph from Jason Hoyt showing how much the average age of NIH grant recipients has already increased.
Adult Learning: How to Train the Aging Brain - NYTimes - I LOVE reading history, and the shelves in my living room are lined with fat, fact-filled books. The problem is, as much as I’ve enjoyed these books, I don’t really remember reading any of them. I don’t just forget whole books, but movies I just saw, breakfasts I just ate, and the names, oh, the names are awful. Who are you? While it’s tempting to focus on the flaws in older brains, that inducement overlooks how capable they’ve become. Over the past several years, scientists have looked deeper into how brains age and confirmed that they continue to develop through and beyond middle age. What is stuffed into your head may not have vanished but has simply been squirreled away in the folds of your neurons.
As college costs rise, loans become harder to get - The upheaval in financial markets did not just eliminate generous lending for home buyers; it also ended an era of easy credit for students and their families facing the soaring cost of a college degree. To pay for higher education, most Americans had come to rely on a range of financial products born of the Wall Street boom. Nearly all of these shrank or disappeared in the storm that engulfed the stock and debt markets. Lenders have raised rates and tightened standards, dramatically limiting the availability of home-equity loans and private student loans. College savings accounts, known as 529 plans, had acute losses in the downturn. And a new law, set to take effect Feb. 22, will bar students younger than 21 from getting credit cards on their own. Loans offered with federal backing were the lone form of student debt to expand, but only because the government stepped in last year to prevent this business from collapsing under the pressure of the credit crunch. Still, the most common type of federally backed loan has a limit of $5,500 a year, not enough to pay for most four-year programs.
The finish line - For quite a long time the United States had a global advantage in its educated population. No more. (see chart) The US now ranks low among OECD nations for percentage of adults with a baccalaureate degree. And the increases in this percentage witnessed in the United States in the 1950s leveled off in the 1970s. These facts have major consequences -- both for quality of life in the United States for individual citizens and for the ability of the US to compete globally in a knowledge-based economy. Bowen, Chingos, and McPherson have completed another important piece of research on the current social realities of higher education in the US with Crossing the Finish Line: Completing College at America's Public Universities. This research goes significantly beyond the prior important work Bowen and his collaborators have done. Here they have shifted focus from the issue of access (the core issue in Equity and Excellence in American Higher Education) to degree completion, and they have shifted from elite private colleges and universities to public universities -- flagships and regionals. The book is mostly concerned with first-time freshmen, but also provides valuable data on the educational careers of transfer students. The heart of their research here is the creation of a pair of large databases of students that permit tracking the outcomes of a large student population over time. They have collected data on several hundred thousand students who entered universities in 1999. One data set is the "flagship" database including records of over 120,000 students enrolled in 21 leading public universities. The second is the "state systems" database with over 60,000 students enrolled in 47 regional campuses in four states.