How the Federal Reserve earned its profit - I was curious to take a look at the details behind the following story: The Federal Reserve Board on Tuesday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $46.1 billion of their estimated 2009 net income of $52.1 billion to the U.S. Treasury. This represents a $14.4 billion increase over the 2008 results. (analysis with several charts) the difference between what the Fed has been doing in 2009 and true quantitative easing is that under the latter strategy, the Fed would be funding the MBS purchases with zero-interest money, with the intent of the operations indeed being to get that cash into circulation rather than trying to construct a device to persuade banks to hoard it. The problem with the Fed's preferred tactic-- borrowing short and lending long-- is the same as that facing anyone else who plays that game: are you sure you're going to be able to continue to roll over the short term debt or liquidate your long position when the playing field changes?
Why the Fed is Buying Mortgage Securities - The Fed is now the world's biggest carry trader. In Hamilton's view, the Fed's huge injection of bank reserves, on which it pays interest, amounts to borrowing from those banks at the short-term rate. It then lends long term in the mortgage securities market. This is what the Savings and Loans did back in the good old days. They borrowed money short term at 3 percent and made mortgage loans at 6 percent. It worked really well until the mid-1970's, when interest rates moved up. Those 6 percent mortgages don't look so sweet when short-term money costs 10 percent. Long-term mortgage rates are now lower than they were in the heyday of the S&Ls. Taxpayers bore some of the cost of the S&L blowup. We stand to bear all of the interest-rate risk that the Fed is taking.
Fed to End Overseas Dollar 'Swaps' - WSJ - The Federal Reserve is on track to end a program begun during the financial crisis that provides U.S. dollars to institutions overseas through foreign central banks. In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1. Before the crisis, many foreign financial institutions depended on short-term money markets to borrow dollars to fund their holdings of U.S. dollar assets, like mortgage-backed securities. These markets froze when the crisis hit and many foreign banks and investors found themselves short of the dollars they needed to finance their holdings. The central banks stepped in, with the Fed offering dollars to foreign central banks like the Bank of England and the European Central Bank, which in turn lent dollars to financial institutions in their local markets. The move helped to stem the credit-market panic.
IMF Chief Cautions Against Early Stimulus Exit - WSJ - The International Monetary Fund's top official Monday acknowledged faster-than-expected global economic recovery, but cautioned governments against paring their anti-crisis measures too quickly, saying doing so could set off another downturn. IMF Managing Director Dominique Strauss-Kahn noted that private sector demand is "still very weak" in most nations, while jobless rates could rise in the U.S., Europe and Japan in the months ahead.
Bernanke invites an audit - latimes - Federal Reserve Chairman Ben S. Bernanke, apparently seeking to mollify critics as he awaits Senate confirmation on his reappointment, said Tuesday that he welcomed a government audit of the central bank's role in the intensely unpopular bailout of American International Group Inc.In a letter to the head of the Government Accountability Office, the investigative arm of Congress, Bernanke offered to "make available to the GAO all records and personnel necessary to conduct this review." Bernanke said he would invite a full review by the GAO "to afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress."
Gee, More Duplicity (Is Someone's Nomination In Trouble?) - Bernanke has apparently changed his tune on AIG and The Fed: (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the central bank would welcome a “full review” of its aid to American International Group Inc. by congressional auditors and make all necessary records and personnel available to them. To afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress, the Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG,” Bernanke said today in a letter to Gene Dodaro, acting head of the Government Accountability Office. The Fed released the letter. So what's the difference between this and a full audit of The Fed?
Bernanke on the Outs too? - Roll Call has a piece. So does the WSJ and Huffpo , which is below. From the Huffpo: Opposition To Bernanke Growing In Wake Of Mass. Vote: Sanders - UPDATE: HuffPost's Jeff Muskus and I polled as many senators as we could find Thursday after posting this story.The question: Would they commit to reconfirming Federal Reserve Chairman Ben Bernanke. We found 26 senators in all. Half were undecided; one wouldn't say; three were outright nays; only nine were firmly in the aye column.
Fed's Bernanke Faces Tighter Vote in Senate - Ben Bernanke's confirmation for a second term as Federal Reserve chairman will go down to the wire and could be a closer vote than seemed likely just a few weeks ago.Mr. Bernanke's current term as Fed chairman expires at the end of the month, and a Senate confirmation vote has been pushed off until next week at the earliest. Mr. Bernanke met with Senate Majority Leader Harry Reid Thursday as Democratic and Republican leaders surveyed senators to tally votes on the nomination. Mr. Bernanke needs 60 supporters to win approval for another four-year term. "A few Democrats have publicly said they won't vote for Mr. Bernanke's appointment, so you need Republican support," said Senate Majority Whip Richard Durbin
Bernanke Suddenly in Trouble - It looks like Ben Bernanke’s confirmation vote is suddenly in jeopardy. I kind of doubt his doubters will ultimately have the guts to spike such a Village priority as his re-confirmation but I find the Bernanke-love kind of mysterious. The appeal of Ben Bernanke is that there really is basically nobody who’s better qualified on paper to lead the Fed in this time of crisis. But the problem is that he’s steadfastly refused to apply his own ideas for boosting growth. It’s bizarre. Of course his nomination sinking would, at this point, have some unpredictable macroeconomic consequences all on its own.
Bernanke's Reconfirmation Chances Fall - Thoma: I didn't want to be right about this (video from 12/17/2009): Libertarians and populists are against Bernanke Update: What happens if he is not reappointed before his term ends on 1/31/2010?:
Even The Fed Chairman Doesn’t Have Job Security - It seems hard to believe that Congress would not approve the President’s choice for the Federal Reserve, but the uncertainty of it is hanging in the air, after the confirmation vote was delayed to next week. Some time next week. The Fed chairman’s term expires Sunday. Let’s just say it wouldn’t exactly send the right message to the rest of the world, and the bond market especially, should Congress vote Bernanke out. You have to expect a good amount of this is just posturing, something Congress does better than any other group on the planet. But, you know, wars tend to start with a single, errant shot.
Don't Block Ben!, by Brad DeLong: I wish Boxer and Feingold had not done this: Boxer, Feingold Come Out Against Fed Chairman Bernanke - WSJ.com: Ben Bernanke faced ebbing support for a second term as Federal Reserve chairman as more senators adopted a populist, antibank stance even as the White House launched a public push to defend his candidacy. The erosion of support crossed party lines. Two Democratic senators facing re-election in November, Barbara Boxer of California and Russ Feingold of Wisconsin, on Friday joined two Democrats and an independent who previously announced their opposition. Ten Republicans say they, too, will oppose Mr. Bernanke. Alarmed that there might not be the 60 votes in the Senate needed to extend Mr. Bernanke's term beyond its Jan. 31 expiration, the White House entered the fray publicly for the first time, with officials trying to win support among Democratic senators...
The Bernanke Conundrum - Krugman - A funny thing happened on the way to the Bernanke confirmation: the vote in Massachusetts turned an easy coronation into a tough fight. And this isn’t one of those cases where everyone who knows something is on one side. Look at two of my favorite econobloggers: the very judicious Calculated Risk says “We can do better”, while Brad DeLong says, “Don’t block Ben.” Where am I? Right now, I’m agonizing — which isn’t a place I ever expected to be, and not just because Bernanke hired me at Princeton...
Senate Moves Slowly on Bernanke Vote - Senate Majority Leader Harry Reid hasn’t yet filed cloture (to limit debate and overcome a filibuster) on Ben Bernanke’s nomination for a second four-year term as Federal Reserve chairman, pushing a vote into next week at the earliest. Does that suggest anything about Bernanke’s prospects? Probably not, even if the delay might feed speculation on Capitol Hill and Wall Street. Given the Senate upheaval after the Republican victory in Massachusetts, the focus on scheduling a central bank nominee’s confirmation surely dropped a bit in the leadership office. But Sen. Bernie Sanders (I., Vt.), who is leading the charge among liberals to fight the nomination, thinks the Massachusetts outcome will influence the Bernanke vote in another way. In a statement Wednesday, Sen. Sanders said he senses “growing opposition” to the nomination in light of the Massachusetts “wake-up call” for Democrats
Senate Dems Not Sure They Can Get Enough Votes to Reconfirm Bernanke - Amidst the voter anger at Wall Street and Washington, D.C., ABC News has learned that the Senate Democratic leadership isn't sure there are enough votes to re-confirm Ben Bernanke for another term as chairman of the Federal Reserve. Sanders, Sen. Jim Bunning, R-Ky., Sen. Jim DeMint, R-S.C., and Sen. David Vitter, R-La., have all put holds on Bernanke's nomination, requiring 60 votes to proceed to a vote.
Is Ben Bernanke in trouble? - the Economist - IT HAS widely been assumed that Ben Bernanke's reappointment would more or less sail through the Congress—that there might be hard questions and lots of finger wagging, but with the final vote never in doubt. In the suddenly fluid political environment, that's no longer so clear: The confirmation of Ben S. Bernanke to a second four-year term as chairman of the Federal Reserve ran into further trouble on Friday, as two more Democratic senators said they would vote against him. The White House came to Mr. Bernanke’s defense Friday, but the Senate majority leader, Harry Reid, is believed to be struggling to come up with the 60 votes necessary to confirm Mr. Bernanke before his term as chairman expires on Jan. 31.
Getting Bernanke Out The Worst Possible Way - So it seems like Bernanke renomination might be in trouble. The ire that lawmakers seem to have for Bernanke is, of course, hypocritical. Basically, everyone agreed that banks needed to be shoveled money lest the economy melt down, but no one wanted to take responsibility for it. So, the Fed, which had both the tools to do this and the necessary political insulation, shoveled tons of money to banks and now Bernanke is taking heat for it. And while this is unfair and silly, it makes sense. What’s depressing about this situation is that there is a case to be made against Bernanke’s nomination and it seems like no one (in the Senate) is making it. Bernanke is not just the technical wizard in charge of value-neutral central banking policy, he’s probably the most important economic policy maker in the country. And, he has the policy preferences of, not surprisingly, the moderate-to-conservative Republican that he is. Which means that he’s quite concerned about inflation and has rejected expansionary, unemployment-lowering policies which he can implement because of inflation concerns. The best positive case for Bernanke is that he did a good job when shit hit the fan. Which is true, but sort of irrelevant...
Bernanke's Nomination in Trouble - Congressional Democrats seem to have decided, along with the President, that the key to electoral success is to be seen beating up on anyone in the financial community. As a result, Bernanke's nomination for another term as Chairman of the Federal Reserve is now in serious jeopardy. I see the political logic, but the economic logic is pretty poor. Bernanke didn't become Fed chair until 2006, long after it was realistically possible to do much about the bubble except wait for it to pop. He shepherded us through the financial crisis without another Great Depression--maybe not perfectly, but no Fed chair would have been perfect. Moreover, whatever he did that wasn't popular, he clearly did with the connivance of Congress. Congress wanted him to pump money into banks; they just didn't want to take political responsibility for it. If they'd really objected, they could have amended the Federal Reserve Act at any time and stopped him cold.
Tally of Senate Vote Count on Bernanke Confirmation -- Federal Reserve Chairman Ben Bernanke’s confirmation has become less clear in recent days as more Democratic senators have come out in opposition to his reappointment. The Wall Street Journal and Dow Jones have compiled a tally of senators who have declared their intentions for the confirmation vote based on interviews with the senators or their offices. Amid the threat of a filibuster, Bernanke needs the support of 60 senators for his nomination to succeed.The current tally: The remainder of the senators haven’t officially commented.
- Voting “Yes”: 26 (18 Democrats, 8 Republicans)
- Voting “No”: 15 (4 Democrats, 10 Republicans, 1 Independent)
- Officially Undecided: 21 (13 Democrats, 7 Republicans, 1 Independent)
Questions That Ben Bernanke Must Now Answer - Update: the Senate needs to hold a new hearing for Ben Bernanke – here’s the full proposal.Ben Bernanke’s reconfirmation as chair of the Federal Reserve is in disarray. With President Obama having launched, on Thursday morning, a major new initiative to rein in the power of – and danger posed by – our leading banks, key Senators rightly begin to wonder: Where does Ben Bernanke stand on the central issue of the day? There are three specific questions that Bernanke must answer, in some convincing detail, if he is to shore up his weakening cause in the Senate.
If not Ben, then who? - I wish that those who are trying to block Bernanke would let us know a better alternative--I can't think of one. Bernanke is smart, honest, and while he made mistakes, he showed a great deal of flexibility (and a willingness to learn) in response to the crisis. The best evidence suggests to me that we were indeed on the brink, and he gets a lot of credit for pulling us back. I guess that I am especially mystified that the Republicans would oppose him, unless they are hoping to put the country on a new downward spiral before the midterms (I like to think they even they are not that cynical).
Greenspan Backs Bernanke - WSJ - Alan Greenspan issued the following statement amid the recent turmoil over Fed Chairman Ben Bernanke’s confirmation: Ben Bernanke is far and away the best person to lead the Fed going forward. He should be reconfirmed as soon as possible.
Scandal: Albert Edwards Alleges Central Banks Complicit in Robbing the Middle Classes? - Mr Bernanke’s in-house Fed economists have found that the Fed wasn’t responsible for the boom which subsequently turned into the biggest bust since the 1930s. Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that “there was no housing bubble to go bust”? The reasons for the US and the UK central banks inflating the bubble range from incompetence and negligence to just plain spinelessness. Let me propose an alternative thesis. Did the US and UK central banks collude with the politicians to ‘steal’ their nations’ income growth from the middle classes and hand it to the very rich?
STILL LOOKING FOR LOANS - A month ago we discussed why the dearth of loans is especially troublesome at this point in the economic cycle. The news that Fed Chairman talked today with Sen. Majority Leader Harry Reid in an effort to change the state of frozen lending isn't exactly encouraging, even though that's exactly the goal. "I believe more pressure needs to be applied to banks to lend money to small businesses and keep more Americans in their homes," said Reid said after his confab with the Fed head. You can lead a horse to water, but can you beat him over the head to make him drink? Meanwhile, at the other end of Pennsylvania Ave., the White House is trying to put a lid on big banks assuming "reckless risks." So why isn't any one smiling yet?
Why the Fed should regulate banks - George Cooper asks whether or not banks should be regulated by the central bank, noting drily that “America sees salvation in replicating the failed British banking experiment while Britain sees salvation in returning to the equally discredited American model”. He adds: I am happy to make my small voice heard in support of Mr Volcker. He is right when he says “It simply doesn’t make sense, as then Fed Chairman Mariner Eccles complained during the Great Depression, that the efforts of the Federal Reserve to ease money be to some degree frustrated by overzealous banking regulators determined to restore bank capital and assure strong lending standards.” For this reason it is best to view monetary policy as requiring both interest rate and regulatory policy levers.
NY Fed Chief: 'We entered the crisis with an obsolete regulatory system’ - Willam C. Dudley, president of the NY Fed, today called for a systematic financial risk oversight framework, in which the Fed would play a key role. “The financial system is simply too complex for siloed regulators to see the entire field of play, the prevent the movements of financial activity to areas where there are regulatory gaps, and, when there are difficulties to communicate and coordinate all responses in an timely and effective manner…I believe that the Federal Reserve has an essential role to play.” And what of earlier Fed failures? His speech, after all, comes just a week after Sheila Bair, chairman of the FDIC, told an inquiry that “much of the crisis may have been prevented” if the Fed had not waited seven years to put in tough rules to regulate subprime mortgage lending.
New York Fed Sets Up Unit to Handle Bailout Balance Sheet - The Federal Reserve Bank of New York said Thursday that it has created an arm to oversee the parts of its balance sheet acquired in efforts to bail out failing Wall Street firms. In a press release, the bank said this new group would be called the Special Investment Management Group, and it promoted Sarah Dahlgren to executive vice president to lead the group. Dahlgren, a long-time staffer, was previously in charge of the New York Fed’s relationship with American International Group Inc., the troubled insurer that was bailed out by the central bank to protect the financial system.
And Next Mark Will Ask for A Pony - Slowly moving back into everything, and so catching up with Mark Thoma's use of Paul Volcker as his latest line of Defense of Giving the Fed More Regulatory Power. (Amusing in itself, given Volcker's description of the Fed before he was Owned by the Obama Administration.) I like Thoma (a lot more than he likes me) and his professional work is clean and clear. (Judging by his videos, he's also the second best college-level Econometrics teacher I've ever seen—and it's no crime to be behind Peter Loeb in that regard.) But he's an Incurable Optimist, especially in his blogging.
John Taylor Interview - by Mark Thoma -John Taylor answers a few of my questions in one part of an interview at Big Think (transcript and video of entire interview, video broken into parts). My biggest disagreement with his answers comes when he says it's time to start "letting interest rates rise appropriately and reducing the amount of quantitative easing," a theme that appears repeatedly in his answers to my questions and to those submitted by others. It's far too early for that, and if anything the Fed should be doing more to combat the slow recovery of labor markets. Where we agree the most is when he says the most important unresolved questions in monetary economics are about the connections between the financial sector and monetary policy. [As a lead-in, Dean Baker asks the first question below, and my questions follow. Questions were emailed in advance of the interview.]:
Rancor Aimed at Fed Brings Out Unusual Defender - When the head of one of New York’s top unions was named chairman of the Federal Reserve Bank of New York’s board last year, more than a few observers’ jaws hit the floor. After all, what was the head of a union, a man who represents everyday working stiffs, doing at the helm of the regional central bank most entwined with Wall Street? Never mind that the board of any Fed regional bank is not involved in any meaningful level of policy making. New York AFL-CIO President Denis Hughes’s appointment was a head-scratcher that led to conspiracy theories. Now in yet another ironic twist: At a time of intense populist anger at the central bank, Hughes is one of its strongest defenders.
Basel, Faulty? - The international banking regulations known as the Basel II Accord have come in for some stick, given the fallout from the banking crisis of 2008. This is, on the face of it, a bit unfair given that Basel II hasn’t yet been fully implemented in most countries and anyway was designed to try to head off some of the problems that have occurred. Still, most observers reckon that Basel II wouldn’t have prevented the crisis and the tendency of regulators, like generals, to fight the last war means that proposed changes won’t help. Whatever causes the next crisis it won’t be the same as the last one and while regulators are busily building a Maginot Line to stop one kind of problem they’re unlikely to notice that they’re also incentivizing banks to invade Belgium, or at least find a way to go around the new regulations. We need a new kind of regulation, one that recognises we can’t stop the disease, but that it can be contained if we act quickly enough.
The Bogey of Inflation - How real is the danger of inflation for the world economy? Opinion on this matter is divided between conservative economists and official bodies like the IMF and OECD. The IMF and OECD project very low inflation rates over the next few years. But former US Federal Reserv e Chairman Alan Greenspan warns of inflationary dangers. Some bond markets, too, seem to expect sharply higher inflation. Which view is right has big implications for policy. If inflation has succeeded recession as today’s main problem, governments should withdraw their stimulus policies (money out of the economy) as soon as possible. If recession remains the problem, the stimulus policies should stay in place, or even be strengthened.
Will the Fed Use Its Whole Arsenal Against Inflation? - mankiw - NYT - IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple. Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods. A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.
Two Worlds Exist Simultaneously... One world is the real world, which exists all around us. The other world exists only in Greg Mankiw's head, and is filled with big, terrifying "inflation monsters". In the real world, savvy bond traders are forecasting low inflation as far as the eye can see. In Greg's head, it's no different than the Miami condo market circa 2006. Just the latest bubble. I'll give Greg the mike: "The Federal Reserve has also been rapidly creating money." Now let's see what the Federal Reserve's Balance Sheet Says (in millions):
Dec 30 2009: 2,278,896
Jan 6 2010: 2,275,340
Jan 13 2010: 2,284,693
Money Supply Charts - shadowstats (M3 down) The Fed ceased publishing M-3, its broadest money supply measure, in March 2006. The SGS M-3 Continuation estimates current M-3 based on ongoing Fed reporting of M-3’s largest components (M-2, institutional money funds and partial large time deposits) and proprietary modeling of the balance. See the Money Supply Special Report for full definitions
My TIPS, Treasuries, and Inflation Model — II - I spent some time today updating my Treasury yield curve and inflation model. Anytime a new Treasury note/bond is issued, or we get a new CPI figure, or a coupon payment date passes, the model must be updated. Though I made some technical improvements to the program at the same time, what impressed me was the change in the forward inflation curve since I last wrote on the topic less than a month ago. The big change is that inflation expectations rise continually out to 2038. Now the TIPS curve only goes out to 2032, so the extrapolation should be discounted. But the last time I wrote, inflation expectations peaked in 2022.
The Federal Reserve Printing Press Destroyed Your Wage Gains Last Year - After adjusting for inflation, average U.S. weekly earnings fell by 1.6% in 2009, which was the worst gap between wages and inflation since 1990.This happened as consumer prices shot up 2.7% during the year. Even core inflation, which excludes food and energy since their prices can bounce around, rose 1.8%.Overall, this level of inflation is considered tame by economic standards, but it would have actually been far lower, or even negative (deflation) had the Federal Reserve not stepped in to boost liquidity in the financial system and slashed interest rates to near-zero.
Taking On The Fed - What The Deflationists Are Missing - An interesting article by Ambrose Evans-Pritchard came my way the other day. It’s worth a read, if for no other reason than that he paints an appropriately dark picture of the current state of the U.S. economy. You can read it here. While I very much share Mr. Evans-Pritchard’s view that the global economy is far from out of the woods, our views diverge in that he sees devastating deflation speeding our way down the tunnel. Readers of any duration know that we see devastating inflation. While we could both be right, with deflation first and inflation later, I’m not so convinced. For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years.
US Crosses the Bernholz Line -- Hyperinflation Early Warning Signal - Economic historian Peter Bernholz has identified that inflation starts to take on hyperinflationary characteristics some time after the deficits of a country as a share of government expenditure rise above a third and stay there for several years. According to Bernholz, the great hyperinflations of France, Germany, Poland, Brazil, and Bolivia all occurred after deficits reached that magic percentage or higher (In Bolivia, it reached 91%). The United States crossed over the Bernholz line last year.Japan is even deeper into the warning despite concerns of many that it has a deflation problem. Ambrose Evans-Pritchard writes: 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade...
Debating the Phillips curve - Researchers at the SF Federal Reserve Bank published a report today arguing that, in serious downturns (but not in normal times), the beleaguered Phillips curve proves useful. The Phillips curve, of course, shows an inverse relationship between employment and inflation - a concept which garnered increased scepticism, inside and outside the FOMC, over the past few decades. But, the researchers say, now that we’re in a deep recession, the Phillips curve is, again, useful. “Our findings suggest that the high level of the unemployment rate over the past year likely contributed to the substantial declines in the inflation rate, as the Phillips curve would predict,” the researchers wrote.
Official: Fed says there is a magic bullet for inflation. Maybe. - Bill Phillips, whose eponymous curve had been thoroughly roughed up by Milton Friedman by the time I studied it, was far more interesting than the relationship between unemployment and inflation which made him famous fairly well-known. All in all, it is somewhat bizarre that it is but the "Phillips Curve" for which he is principally remembered: And so it is the San Francisco Fed has put together another of its informative, if not lively, Economic Letters called Inflation: mind the gap (from which the above chart). It fits topically into the current, broader, inflation versus deflation debate. The broad conclusion is that the Phillips Curve would have worked pretty well since 2007 (disruptive economic times suit it, apparently) and, moreover, it suggests inflation will continue to fall - assuming continuing stubbornly high unemployment.
Inflation fears - Is it reasonable to worry about inflation in the current environment? With unemployment likely to stay near 10% for the next year, it is hard to imagine wage inflation returning any time soon. In October I illustrated a simple Phillips curve relation that could be used to forecast the inflation rate over the next two years as a function of the realized inflation rate over the previous five years along with the current unemployment rate. The figure below updates that forecast using the December unemployment numbers. The relation is still calling for deflation, not inflation, over the next two years.
Inflation Myth and Reality - In total, the quantity of U.S. government liabilities forced into the hands of the public has soared by $3.62 trillion - an increase of 61% since the third quarter of 2007. Keep this figure in mind as various pittances are reported to be returned from TARP funds provided to various financial institutions. Likewise, remember that any interest "earned" by the Federal Reserve on the assets it holds is interest that is either implicitly or explicitly paid by the Treasury, and is returned thereto. Of course, this figure will get progressively larger as government revenues fall substantially short of outlays, and can be expected to do so for years to come. It is in this context that we should consider inflation risks over the coming decade. At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, my impression is that this complacency is probably well-founded, but only because we are likely to observe a second wave of credit losses that will create fresh "safe-haven" demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years.
Did the US Treasury See the Inflation Nutters Coming? - I have a column in today’s Business Spectator arguing that the global debate about whether monetary and fiscal stimulus will prove inflationary reflects poorly on the credibility of policymakers. One of the lasting effects of the discretionary policy responses to the global financial crisis may be the damage it will do to the credibility of monetary and fiscal policy frameworks. David Merkel has updated the inflation expectations implied by US Treasuries, noting that ‘rapidly rising long-term inflation expectations indicate that the average investor does not trust monetary policy to succeed over the next 20+ years’. At the same time, Merkel argues that since this outcome is already priced, the US Treasury may well be taking the inflation nutters for a ride:
There’s one country that took Andy Harless’s advice - I have relentlessly argued that the Fed made a huge mistake in mid-2008 by not targeting NGDP at about a 5% growth trajectory, level targeting. If they had done so, the recession would have been far milder. I know of only one country that stayed away from the ever lower inflation obsession of the major central banks. The Bank of Australia. Australia had about 4% inflation in their GDP deflator and 7.4% NGDP growth between 2000:2 and 2008:2. With a much higher inflation and NGDP trend rate going into the crisis, they we able to avoid the zero interest rate bound. And by the way, for those who think nominal shocks don’t explain real events like the recent recession, Australia was the only major developed economy to avoid a recession last year. Indeed they haven’t had one since 1991. They are called ‘the lucky country,” but I have argued that their culture lacks our puritanical obsession with inflation.
Extend And Pretend; Or Why The Inflation/Deflation Debate Is Largely Irrelevant - Regardless who ends up right in the [deflation/inflation] debate, one thing is certain - the Fed will without an iota of doubt mismanage the current "exit" process and the outcome will certainly be one which will further imperil the economic and political future of this country, as whether we end up with deflation, inflation or alternatively, stagflation, the days of King Dollar are numbered, and with it the zombified trance that America's middle class has helped its mindless trudge through the past decade. And if there is anything a ruling elite fears more than anything, it is the shift of the silent majority into a very vocal one. Facilitating this form of political suicide is the insanity which will be the current banker bonus season - allowing bankers to extract massive taxpayer capital arising from direct middle-class funding in the form of interventions, and dollar debasement in the form of the steep yield curve (funded through $2 trillion in Fed security holdings), on the back of imaginary marks-to-market which are there to "justify" Wall Street's record profits, with the complicity of the regulators and the accountants, is merely yet another transient house of cards which just like the housing bubble, will inevitably topple.
Father Knows Best - It is difficult not to come away with the impression that the many officials and quasi-officials issuing forth from the Federal Reserve and the Treasury (hereinafter the "Treserve") to defend from all enemies, foreign and domestic, the current structures that define these institutions richly enjoy and leverage the complexity, opacity and inscrutability in which they have cloaked themselves. That the Treserve's cadre now traverse through a complex weave of dim shadows, crossing the dark tendrils of financial and regulatory obscurity with practiced ease is a function of... well... the great deal of practice they have had at it. In fact, one immediately recognizes something of the smug smirk that finally emerges in the third act of the pool hustler's successful performance when confronted with the expression on the faces of cadre seniors engaged with woefully outmatched citizens (or even legislators) as they deliver commentary like the following...
Fitch: Large AAA Must Set Out More Fiscal Consolidation In ‘10 - The large 'AAA' sovereign borrowers - like the US, UK, France and Germany - have 'exceptional financing flexibility', Fitch Ratings said today, but warned this is not enough to maintain their current rating.The major AAA states must set out further credible consolidation plans in 2010 to secure their triple-A ratings, the ratings agency announced today in its 'Sovereign Review and Outlook' for 2010:"While current ratings incorporate a further substantial rise in public indebtedness, all major AAA sovereign governments need to articulate more credible and stronger fiscal consolidation plans during the course of 2010 to underpin confidence in the sustainability of public finances over the medium term and the commitment to low and stable inflation".
Debt and Deleveraging: the Global Credit Crisis and its Economic Consequences - The recent bursting of the great global credit bubble not only led to the first worldwide recession since the 1930s but also left an enormous burden of debt that now weighs on the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging. McKinsey Global Institute has launched a research effort to understand the growth of debt and leverage before the crisis in different countries, the economic consequences of deleveraging, and the practical implications for policy makers, financial regulators, and business executives. In the course of the research, MGI created an extensive fact base on debt and leverage in each sector of ten mature economies and four emerging economies. In addition, MGI analyzed 45 historic episodes of deleveraging, in which an economy significantly reduced its total debt-to-GDP ratio, that have occurred since 1930.
McKinsey On Sovereign (De)Leveraging and Untenable Debt Loads - The McKinsey consultants have performed an in-depth empirical study tracing the history of (de)leveraging in both the developing and developed world, at both the corporate, financial institution and consumer levels, and the corresponding offset at the sovereigns. Amusingly, analysts read the "improvement" in the credit picture at various private sectors, while completely ignoring the vertical spike in new sovereign debt issuance. If you were wondering why everyone is on pins and needles every time there is a new UST auction, now you know: in the zero sum game of credit transfer, any improvement in the former is purely as a result of the largess of the later. A funding crisis in Greece, which at this point seems a certainty will likely start off the long-awaited European domino action which will begin at the FX level, and slowly migrate to default risk for all European countries. Once that happens, risk will promptly migrate away from Eurozone, and travel west over the Atlantic. In that regard, we still consider US CDS as very cheap...
Debt and Deleveraging - Mckinsey Global Report - 94 pp pdf
Forecast: Debt to dwarf GDP - Former budget office chiefs say 'something has to give'A blue-ribbon panel that includes three former heads of the Congressional Budget Office is telling President Obama and the Democrat-controlled Congress that the federal deficit must be cut now or the national debt within about two generations will be 600 percent of the gross domestic product. "The debt level of the United States is unsustainable, something has to give," said Rudolph Penner, former head of the CBO and co-chairman of a report issued last week by the National Research Council and the National Academy of Public Administration. The report concludes federal deficit spending is so out of control that unless Obama and Democrat leaders on the Hill make changes now, debt in 2080 will be six times what the nation produces.
The Post Just Can't Resist Editorializing on the "Skyrocketing" Budget Deficits - The Post yet again could not resist the urge to editorialize on the deficit in a news story, referring to it as "skyrocketing." Of course the debt is increasing rapidly as a result of the downturn caused by the economic mismanagement of Alan Greenspan and Ben Bernanke, but if the economy recovers as predicted, then the deficits will shrink to more reasonable levels in the near future. Terms like "skyrocketing" belong in editorials, not news stories in serious newspapers, unless they are direct quotes.
Debt Ceiling Fight: It's Back - The country's legal debt limit will need to be raised again -- and soon. The Senate on Wednesday will debate just how high. The proposed increase is likely to be north of $1 trillion and could be as high as $1.8 trillion. The goal is to boost the limit enough so that the issue need not be revisited before next year, and in any case not before the November mid-term elections. The debate follows on the heels of an 11th hour short-term increase passed by the Senate on Christmas Eve. That vote raised the ceiling by $290 billion to $12.394 trillion -- enough to cover Treasury's borrowing needs through mid-February.Democratic leaders could only get support for a short-term boost because a bipartisan group of Senate fiscal hawks have said they would not vote through a long-term increase until lawmakers adopt a "credible process" to curb the growth in U.S. debt.
Democrats To Seek Stunning $1.9 Trillion Increase In Debt Ceiling To $14.3 Trillion | zero hedge - Senate Democrats are to seek an increase to the federal government's borrowing limit by $1.9 trillion lifting the total amount the U.S. government can owe to $14.294 trillion, several congressional aides said Wednesday. The increase is forecast to support the federal government's borrowing needs the end of 2010, one Senate Democratic aide said. The borrowing hike comes fast on the heels of a $290 billion increase to the debt ceiling agreed to by lawmakers at the end of 2009.
Debt Burden Now Rests More on U.S. Shoulders - NYT - THE United States government borrowed more money than ever before in 2009, but its largest lender — China — sharply reduced the amount it was willing to lend. The United States Treasury estimated this week that during the first 11 months of last year China raised its holdings of Treasury securities by just $62 billion. That was less than 5 percent of the money the Treasury had to raise. That raised its holdings to $790 billion, leaving it the largest foreign holder of Treasury securities — Japan is second at $757 billion and Britain a distant third at $278 billion. But China’s holdings at the end of November were lower than they were at the end of July. Not since 2001, when China was still a relatively minor investor in Treasury securities, had the country shown a decline in holdings over a six-month period.
White House, Democratic lawmakers cut deal on deficit commission - Faced with growing alarm over the nation's soaring debt, the White House and congressional Democrats tentatively agreed Tuesday to create an independent budget commission and to put its recommendations for fiscal solvency to a vote in Congress by the end of this year. Under the agreement, President Obama would issue an executive order to create an 18-member panel that would be granted broad authority to propose changes in the tax code and in the massive federal entitlement programs -- including Medicare, Medicaid and Social Security -- that threaten to drive the nation's debt to levels not seen since World War II.
Obama to Create Bipartisan Panel to Study Deficit - NYTimes - President Obama plans to create a bipartisan commission to make recommendations to Congress on ways to reduce the federal budget deficit under an agreement reached Tuesday night at the White House. The agreement is tentative, pending consultations between Congressional leaders and some House and Senate lawmakers. Some details remained in flux. But according to people familiar with the deal, in principle it commits Democrats to work with Republicans to do what they have not been able to do for a decade through the regular process: compromise on spending cuts and tax increases to produce reductions in annual deficits that, under George W. Bush and now Mr. Obama, have reached the highest levels since World War II
Deficit Commission Redux - It seems that in lieu of the statutory deficit commission that Kent Conrad and Judd Gregg wanted, they’ve instead reached some deal whereby Barack Obama will appoint a commission by executive order. I’ve gotten some mail in my inbox from progressive groups trying to organize against this, but for the life of me I can’t see why. This just remains such a clunky concept that it’s hard to imagine anything coming of it. As best I can tell, the way this meeting will go is that the presidential appointees will say “let’s have a balanced package of tax hikes and spending cuts” then the ones appointed by congressional Republicans will say “no, no tax increases allowed.” Maybe one or two of the congressionally appointed Democrats will say Social Security should be off the table. And then we all go home.
Commission to the Rescue! - It looks like President Obama is going to create the bipartisan commission to cut the deficit that Kent Conrad and Judd Gregg have been pitching–except that now Judd Gregg is against it. According to the original Conrad-Gregg plan, the commission would have eighteen members–eight named by Congressional Democrats, eight by Congressional Republicans, and two by the administration, for a ten-eight split; if fourteen of the eighteen could agree on a deficit-reduction plan, Congress would have to vote it up or down without amendments. The Conrad-Gregg proposal is expected to be voted down in the Senate. So instead, Obama would appoint a commission by executive order, with six people named by Congressional Democrats, six named by Congressional Republicans, and six named by the administration, including at least two Republicans–for a ten-eight split; if fourteen of the eighteen could agree on a deficit-reduction plan, Congress would vote it up or down without amendments; however, Congress could separately choose to amend it.
One More Thing . . . . . . on that deficit commission. If I were Peter Orszag, I would be tearing my hair out. It’s obvious, and I’ve said it before, but I’ll say it again. The big long-term national debt problem is all about health care. This chart is from the January 2008 Budget and Economic Outlook of the Congressional Budget Office–for those keeping score, that’s one year before President Obama took office. It shows projected federal spending as a percentage of GDP. The situation has gotten worse since then–overwhelmingly because of lost tax revenues due to the financial crisis and recession, not “big government” as some would have you believe–but the change over the last year is a rounding error compared to that huge light-blue wedge of Medicare and Medicaid.
Obama Puts Social Security on the Chopping Block - Hope for lasting liberal change was washed away on Tuesday—not just with the loss of the Democrats' super-majority in the Senate, but with a closed-door deal that would lead to cuts in bedrock liberal programs such as Social Security, Medicare, and Medicaid. While Massachusetts voters were casting their ballots to install Republican Scott Brown in Ted Kennedy’s Senate seat, President Obama was hammering out an agreement with Democratic leaders to support a commission on the deficit with the power to propose reductions to entitlement programs. This proposal represents a capitulation to conservatives in both parties, and leaves liberals surrendering not only on health care, but on the core achievements of the New Deal and the Great Society.
AARP sent me this message --Did you know that next week the Senate will vote on an amendment that could mean the future of Social Security and Medicare would be decided for us without an open and public debate? I just told my senators to oppose the Conrad-Gregg amendment, which if passed would give a special commission the power to propose drastic cuts to the programs that millions of seniors depend on: Medicare, Medicaid, and Social Security.
Sakakibara Says Slower U.S. Recovery May Hurt Dollar - (Bloomberg) -- Eisuke Sakakibara, formerly Japan’s top currency official, said the global economic recovery may slow in the second quarter, pushing Japan into a double-dip recession and weakening the dollar to 85 yen. “Should the U.S. experience a relatively weak rebound from spring to summer there’s a high possibility the dollar will drop,” said Sakakibara in a Jan. 15 interview in Tokyo. Japanese Finance Minister Naoto Kan and U.S. Treasury Secretary Timothy F. Geithner probably have an unwritten agreement to let the market set the dollar’s level, said Sakakibara, who became known as “Mr. Yen” during his 1997-1999 tenure at the Ministry of Finance for his efforts to influence the currency’s level through verbal and actual intervention in the markets. Kan and Geithner might change their approach should the dollar approach 80 yen, he said. Talk about the adjustable peg, man! - “Theoretically, Bretton Woods is an international pool of the goodwill of nations subscribing to the agreement.” Which translates roughly as, “Nobody on the news desk here knows what the hell it is.” For an oldie (from four years ago! the Internet is no longer young!) on what Bretton Woods was about, see below, originally from here.
China May Buy Less U.S. Debt on Dollar Drop, Researcher Says - (Bloomberg) -- China, which cut Treasury holdings by the most in five months in November, may reduce purchases further on concern the dollar will decline, said Liu Yuhui, an economist at the Chinese Academy of Social Sciences.The Asian nation’s investors, the biggest foreign holders of U.S. government debt, trimmed holdings by $9.3 billion in November to $789.6 billion, a Treasury Department report showed yesterday. The decline came even as Chinese foreign-exchange reserves swelled $61 billion in the month."
China seeks new ways to use FX reserves - official (Reuters) - China will look for new ways to invest the world's largest foreign exchange reserves this year to generate higher returns, a senior regulatory official said on Thursday.It would be a challenge for the country not just to preserve but to increase the value of the $2.4 trillion stockpile, said Guan Tao, head of the international balance of payment department at the State Administration of Foreign Exchange (SAFE). In 2008, Beijing transferred $200 billion from the foreign exchange reserves to sovereign wealth fund China Investment Corp as part of efforts to seek higher returns.
Can ALL assets be overvalued? - I saw the cover of the Economist this morning. The usual lovely picture, plus the headline "Bubble Warning; Why Assets are overvalued". I think there's a theoretical problem, or maybe a conceptual problem, with saying that all assets are overvalued. It's not quite as bad as saying that all kids are above average, but it's getting close. If you value an asset only in terms of the income it can give you (or the rent it can save you paying, if we are talking about houses), then it makes sense to say that some assets are overvalued, because we mean by that "overvalued relative to other assets". But if you say that all assets are overvalued, then overvalued relative to what?
Don't bubbles burst when pricked? - Economists' ideas about bubbles aren't very clear. We can define a bubble theoretically, but we can't explain why they sometimes exist, sometimes don't exist, or why they sometimes start and stop existing. And we are not very good at identifying bubbles, even perhaps in hindsight. And even when we do say something is or was a bubble, all we are really saying is that we can't think of any plausible fundamental explanation of the time-path of prices, as Scott Sumner argues. That doesn't mean there wasn't one; just that we don't know what it is.
IRS to Expand Audits as Cash Runs Low -- The Internal Revenue Service, trying to recoup some of the estimated $14 billion that companies underpay in employer taxes a year, plans to wage a three-year campaign to audit 6,000 businesses.The cash-strapped government, which separately said it wants to put a levy on large financial firms that received bailouts, will zero in on worker classification, fringe benefits, reimbursed expenses and executive compensation. The selection of the audited companies will be random, and both big and small businesses will be scrutinized.
Among Democrats, Calls To Extend Bush Tax Cuts - Some want President Barack Obama to extend tax cuts for now scheduled to expire at the end of 2010, arguing that a tax increase could hinder . "I think there is a certain logic to leaving well-enough alone for now, given the fragility of the economic recovery," said Rep. Gerry Connolly (D., Va.). " It's a question of prudent judgment and timing."White House officials are preparing to unveil their 10-year budget plan on Feb. 2, which will include a decision on what to do about the pending expiration of tax cuts enacted under President George W. Bush. Asked in recent days about the tax cuts for the wealthy, administration officials have insisted that Obama won't propose extending the tax cuts for the wealthy."That's not something we have contemplated, and I don't think that's a necessary act," Treasury Secretary Tim Geithner said in an interview with CNBC last week.
IRS Head Uses Paid Preparer, Says Tax Code Too Complex - From the Wall Street Journal: Steve Scully, the C-SPAN host, asked [IRS Commissioner Douglas] Shulman if he prepares his own taxes. Shulman smiled slightly and said, "I use a preparer." Scully asked why, to which Shulman smiled and said, "Uh, I've used one for years. I find it convenient and I find the tax code complex, so I use a preparer."
Fed’s Dudley: Banking System Remains Under Strain - WSJ - Federal Reserve Bank of New York President William Dudley flagged the uneven recovery of the financial system Wednesday, in comments that also said central bank policy was aimed at trying to help that healing process continue. “The capital markets have recovered” but “the banking system is still under quite a bit of strain,” Dudley said. For banks, “it is a healing process, it will take some time,” and that’s “one of the reasons why we have our monetary policy setting where it is,” Dudley said. His comments followed formal remarks in which the policy maker argued attempts by Congress to audit the Fed’s monetary policy decisions and take away regulatory powers could ultimately make the institution less effective at helping the economy.
Engineering Financial Stability, by Robert J. Shiller The severity of the global financial crisis ... has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. To do that, we must advance the state of our financial technology. In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin. This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system...
Designing a systemic risk warning system – VoxEU - Economists largely neglected systemic risk in the financial sector. This column discusses how governments should gather data about systemic risk and assess its implications. It says the new European Systemic Risk Board is far from the ideal – it is too big, too homogeneous, and lacks independence.
Sheila Bair Exposes Wall Street’s Power Grab: Angelides Commission Hearings, days 1 and 2 - You almost could hear the bankers heave a sigh of relief when Haiti’s earthquake knocked the Financial Crisis Inquiry Commission hearings off the front pages. To understand their game plan, the Commissioners had to wait for the second day of the hearings, when Sheila Bair of the Federal Deposit Insurance Corp. (FDIC) spelled it out. Their first order of business is to make sure that the Federal Reserve Board is designated the sole financial regulator, knocking out any more activist regulators – above all the proposed Consumer Financial Products Agency that Harvard Professor Elizabeth Warren has helped design. Wall Street also is seeking to avert any thought of restoring the Glass-Steagall Act in an attempt to protect the economy from having merged retail commercial banking with wholesale investment banking, insurance, real estate brokerage and kindred arms of high finance.
Financial Crisis Inquiry Commission Turns Up the Heat - If you're not scared as hell, you should be. Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. They also have me wondering this: where the hell are the media? ... Yesterday, day two of the hearings, maybe a dozen reporters attended, fewer than were at for the press conference afterward. What did they miss? For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps (CDS) market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure.
I'm Dancing as Fast as I Can - Let there be no mistake: Mr. Dimon, Mr. Mack, and Mr. Blankfein are not stupid or uninformed. (The jury is still out on What's-his-name.) They are damn smart; scary smart, in fact. You don't get to the top of the greasy ladder of a major global investment bank's executive suite by being dull, incurious, or lethargic. People like that get sliced to ribbons and thrown into the chum bucket in my industry before they reach Managing Director, if they ever get inside in the first place. These guys got game, people. Serious game. You would be foolish to doubt it. But they also have absolutely no interest whatsoever in the whys and wherefores of the financial crisis, the proper size and role of banks and investment banks in the domestic economy, or the moral imperatives inherent in stewarding the financial plumbing undergirding the daily lives and livelihoods of six billion people. For one thing, they don't have time to worry about such things. Most of a senior bank executive's time is consumed competing against other scary-smart investment bankers and executives at other firms, who are hell-bent on grinding his bones into dust beneath their bloody heels, while trying to prevent his own firm from flying apart under the internal stresses generated by thousands of egotistical prima donnas all scrapping for more than their fair share of the pie. There is too much going on, and unrelenting change comes too fast and furious to allow quiet contemplation of the order of things.
The Financial Crisis Inquiry Commission is Interviewing the Wrong People The Financial Crisis Inquiry Commission is currently interviewing bank CEOs in order to examine the cause of the current financial crisis. So far, it sounds like the bankers are very concerned about their bonuses and are shirking off the cause of the financial crisis as a nothingburger.If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people. They need to interview the line workers. Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.
Please, sir, may we have some justice - Maxine Udall - So you see it isn’t just about the money. If it were, then the investment bankers who appeared before the Financial Crisis Inquiry Commission would still have much to answer for. But it’s about more than money. It’s about the moral side effects of market transactions and exchange. Morally clueless investment bankers have trashed the fabric that binds us together as a nation. They have sent a message loud and clear that short-sighted, immoral cluelessness that serves only one’s own short-run self-interest is what is rewarded. That unearned wealth, power and prestige have more political and economic currency than the hard-earned trust, confidence, and lower profit margins of honest businessmen embedded in, committed to, and serving their customers and their communities.
When Greed Is Not Good: The financial services industry, once so frightened that it scurried under the government's protective skirts, is now rediscovering the virtues of laissez faire and the joys of mammoth pay checks. Wall Street has mounted ferocious lobbying campaigns against virtually every meaningful aspect of reform, and their efforts seem to be paying off. Yes, the House passed a good bill. Yet it would have been even better but for several changes Financial Services Committee Chairman Barney Frank (D., Mass.) had to make to get it through the House. Though the populist political pot was boiling, lobbyists earned their keep. I expect they'll earn more... a once-in-a-lifetime opportunity to build a sturdier and safer financial system is slipping away. Let's remember what happened to health-care reform (a success story!) as it meandered toward 60 votes in the Senate. The world's greatest deliberative body turned into a bizarre bazaar in which senators took turns holding the bill hostage to their pet cause (or favorite state). With zero Republican support, every one of the 60 members of the Democratic caucus held an effective veto—and several used it. If financial reform receives the same treatment, we are in deep trouble, both politically and substantively...
A Bomb Squad for Wall Street - Gather round people, today we are going to discuss the highly opaque but hugely important topic of “O.T.C. derivatives,” or securities that derive their value from other securities and are traded between institutions “over-the-counter,” rather than on an exchange where they can be more closely regulated and monitored. Examples of such derivatives are an option to buy a stock in the future at a fixed price set today and credit-default swaps, a form of insurance against the future default of a bond.Admittedly, this subject can be tough sledding. But it’s important to keep up — having some understanding of these securities is essential to coming up with a way of regulating them, which in turn is vital to helping to prevent another financial crisis.
OTC Derivatives Reform, Part 1 - A few weeks ago, Mike Konczal wrote a couple of posts about OTC derivatives reform that I want to address. One was called, "An Argument for Exchanges and Swap Execution Facilities." If you haven't read Mike's post, then you should probably go read it first. It's a change from the position he had taken quite publicly eight days before, when he proclaimed that a key goal of financial reform was "to get as many derivatives as possible to trade on exchanges," and told a scare story about how lobbyists (unnamed, of course) had "snuck another loophole into the OTC Derivatives bill." Mike based his story on a change in the definition of a "swap execution facility" in the final version of the House financial reform bill, which Mike claims "could, quite simply, be a telephone over which two people trade a derivative."
Breaking the Banks The following expresses my personal views, not those of the SEC or its staff.A few months ago I wrote a post entitled “Why do bankers make so much money?” A corollary question is, “Why do the largest banks make so much more than other banks?” Addressing this question can help us solve the problem the largest banks pose for systemic risk, and open a channel for demands to curb their outsized profits. Profits that, by the way, are not exactly coming from producing real goods like steel or flat screen TVs. Goldman Sachs might stand foremost in Matt Taibbi’s view as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”, but all of the largest banks are increasingly seen as machines of wealth transfer, devising ways of pulling money from your pocket into theirs.
How the big banks rigged the market - The next stage must be scrutiny of the structural distortions that allow these institutions to rack up such huge profits. Broadly speaking, the leading players in at least three areas of investment banking – wholesale markets, underwriting and mergers and acquisitions – have been operating natural oligopolies. Their profits have been in significant part a reflection of the absence of robust competition. There are different reasons for this in the different areas of business – what economists call asymmetries in some and market dominance in others. But as long as they are not addressed, the banks will make profits – or more accurately, extract rents – out of all proportion to any contribution they make to the wider economy. During the good times no one worried too much about these oligopolies.
Law Meant to Curb Lobbying Sends It Underground - “All the increasing restrictions on lobbyists are a disincentive to be a lobbyist, and those who think they can deregister are eagerly doing so,” said Jan Baran, a veteran political lawyer who has been fielding questions from clients hoping to escape registration. “It is creating some apparent contradictions.” The number fell by nearly 2,000 by the fall of last year.The falloff began shortly after Congress passed a sweeping ethics and lobbying law that imposed on registered lobbyists both heavier reporting requirements and potential criminal penalties. The law required lobbyists to report four times a year instead of two, and to detail any campaign contributions and certain meetings with public officials. The law also made it a crime for registered lobbyists to provide gifts or meals to lawmakers or their aides.
Destructive creativity - Paul Krugman Blog – NYTimes -I don’t always agree with Naomi Klein, and I don’t always disagree with David Frum, but Klein wins this one hands down: Frum worries that financial regulation might crush “the creativity of the system,” Klein counters that “we could all do with them being a little less creative.”This is usually framed, less colorfully, in terms of “financial innovation”, but the point needs to be repeated again and again: at this point, there is no reason to take it on faith that cleverness in the financial industry is a net social good.
So Much For FASB (Wells And Others) - Well, so much for the FAS 166/167 announcement that was supposed to end the off-balance-sheet games. The new accounting standard requiring banks to bring assets back on balance sheet had a negligible impact on Wells Fargo. Despite having over $2.0 trillion of off-balance sheet assets, Wells consolidated just $10 billion of risk-weighted assets when the new standard took effect January 1. (See slide 17 in the bank’s supplemental earnings release) Grrrrr..... The "Volcker Rule" is a good thing, and we should (and must) stand behind President Obama in implementing it. But if the games with off-balance sheet "assets" are not addressed we will be right back where we started in short order.
$64.2 Billion Payday Seen for Wall Street -- NYTimes - New York’s financial sector will pay $64.2 billion in bonuses this year, up from an estimated $57 billion in 2009, though this year’s amount would still be about $19 billion less than the amount paid out in 2008, the state budget division forecast on Tuesday in its revenue outlook.New York’s economy is led by financial and insurance companies and Wall Street usually accounts for about a fifth of its tax collections. But banks and brokerages are trying to quell public outrage over bonuses, partly by paying their workers with stock. That can delay the tax bill by as much as five years, the state budget director, Robert L. Megna, told the Legislature, Reuters reports.
Goldman Sachs staff must wait to hear size of bonuses - Goldman Sachs is to delay telling its 32,000 employees the size and structure of their bonuses - expected to average more than £380,000 each - until next week amid rumours of internal wrangling about how to tackle the chancellor's bonus tax. Staff at the highest-profile Wall Street bank had been expecting to learn details of their annual payouts by this week. But, while the bank will publish its figures on Thursday, it is understood that staff - who usually receive details of their individual payments a day or two before the formal figures - will have to wait until next week - possibly as late as 28 January to be told their personal bonuses.
Bankers’ pay in America: Disconnected - On Friday, much was made of the fall in compensation as a share of revenue in JPMorgan’s latest quarterly results. With other large American banks reporting results this week, might we see a similar pattern? Are bankers so chastened that they are accepting lower pay? Yes and no. Michael Mayo, a financial services analyst who testified at the Financial Crisis Inquiry Commission last week, explained how a lower share of pay in relation to revenues may not tell the whole story. Compensation at banks has risen moderately as a share of revenue in recent decades. But when loan-loss provisions are taken into account, recent pay packages appear a lot more generous. According to FDIC data, compensation as a share of revenue at commercial banks is the highest it’s been in nearly 60 years, after accounting for provisions.
200 Bank Failures Expected in 2010 - Washington has so thoroughly botched its supervision of the banking industry that 200 banks are likely to fail this year — easily surpassing last year’s 140 bank failures … inevitably involving the greatest bank losses in history … and already costing the FDIC ten times more than the great S&L and banking crisis of the 1980s did. I am not basing these conclusions on conjecture. They come straight from official sources. Specifically …In her testimony before the Financial Crisis Inquiry Commission on Thursday, FDIC Chairman Blair attacked the Fed under Greenspan for causing the housing bubble and subsequent debt crisis with its highly stimulative, low interest rate policy of the 2000s. She slammed virtually all of Washington for allowing banks to establish a huge, high-risk “shadow banking system.”
The bidding war for failed banks - The FDIC's bid documents historically have laid bare the inside workings of government-assisted transactions in the bank and thrift space. They do not offer the detailed narratives found in the deal background sections of proxy statements but instead stick to the facts, such as who is making the offer and the terms.With 140 failures in 2009, a complete record of every bidding war that took place would certainly shed light on who is gunning for embattled institutions and what they are willing to pay. However, the FDIC in mid-2009 began paring down its disclosure to just the winning bid.
Chris Whalen: We're Still In For A Banking Bloodbath - A big week of bank earnings accelerates midweek with results expected from Morgan Stanley, Bank of America, US Bancorp and Wells Fargo on Wednesday, followed by Goldman Sachs, American Express and Capital One Financial on Thursday.So what should investors expect? More revenue disappointments, such as those already posted by JP Morgan and Citigroup, according to Chris Whalen of Institutional Risk Analytics."Right now the total egg - credit -- is shrinking," Whalen says. "The bank side is not a source of growth. Can you pull it out on the capital market side? Maybe, but I'm not sure where that comes from" given many of the big banks have loaded up on low-risk securities in the aftermath of 2008's bloodbath.
Debunking The $34.1 Billion Too Big To Fail Subsidy - A few days ago I criticized Dean Baker’s estimation that government is subsidizing large banks to the tune of $34.1 billion dollars by implicitly designating them “too big to fail”. Dean was kind enough to provide me with the FDIC data he used in his paper, and after looking at the data I’ve concluded that his estimates are even more speculative and unsound that I first though; it is unfortunate that they seem to be becoming conventional wisdom.
How Retirees Saved the Banks - Editorial NYT - Here’s what’s happening: By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities, and earn a nice spread between their cost of funds and Treasury yields. At the same time, banks are awash in deposits, much of it from investors who have pulled their money out of riskier investments. With money rolling in, big banks don’t need to compete with one another for savers, which further depresses the interest on offer. The result is presumably healthier banks and certainly poorer savers.
Restoring Faith in Financial Markets - John Bogle - In short, far too many of our corporate and financial agents have failed to honor the interests of their principals—the mutual fund investors and pension beneficiaries to whom they owed a fiduciary duty. The ramifications were widespread—for the failure of money managers to observe the principles of fiduciary duty played a major role in allowing our corporate managers to place their own interests ahead of the interests of their shareholders.
Fed sits on big paper profits from AIG contracts - The Federal Reserve is sitting on billions of dollars in paper profits from its controversial effort to unwind credit insurance contracts that AIG provided to banks such as Goldman Sachs, people familiar with the matter said. The Fed rescue has generated criticism because the banks received 100 cents on the dollar for credit insurance they bought from AIG on collateralised debt obligations – financial instruments that promise the buyer cash flows from pools of bonds or loans. This had led to claims that AIG’s rescue was a “backdoor bail-out” of big banks. Continue reading: FT
FT As Shameless Fed-Booster, Runs Incredible Claims re Results on AIG Assets - Yves Smith - It starts with the headline: “Fed makes ‘a killing’ on AIG contracts“. Huh? That says the Fed made money, a lot of money. But read the article, and the claim is patently ridiculous:The Federal Reserve is sitting on billions of dollars in paper profits from its controversial effort to unwind credit insurance contracts that AIG provided to banks such as Goldman Sachs, people familiar with the matter said…. Yves here. So who are these people? Presumably at the Fed, or BlackRock, the asset manager. Hardly independent, in other words. But when you dig, the representation is vastly worse than even this lame bit of cheerleading suggests.
What's Still Hidden In AIG's Files? - As federal hearings into the cause of the financial crisis got underway this week, attention has focused on one key outstanding question: Whether the giant insurer American International Group committed fraud in the run-up to its $182 billion bailout. The records of AIG's actions presumably are contained in company documents and e-mails. Some of those records have been obtained and published by news organizations and congressional investigators. But some lawmakers and former financial prosecutors argue that most details remain unknown and should be made public--an idea resisted so far by congressional Democrats and AIG's regulators. The little the public knows about AIG's bailout pertains to the company's use of $25 billion in government money to buy back toxic securities from Wall Street's big banks.
New emails show AIG mulled bank payment disclosures (Reuters) - The New York Federal Reserve Bank actively worked with bailed out insurer AIG to build a case against disclosing details of AIG's payments to banks just days after the insurer considered making them public, documents released late on Saturday showed.Lawyers for the Fed bank, which had taken over a pool of AIG assets as part of a $180 billion government bailout of the insurer in 2008, advised that AIG maintain a "confidential treatment request" from the Securities and Exchange Commission, according to emails provided by Rep. Darrell Issa, a U.S. lawmaker probing the matter.A separate batch of emails made public earlier this month showed that New York Fed had advised AIG not to disclose the payments in a securities filing in late 2008.
So Why is the Fed So Desperate to Keep Maiden Lane III Details Secret? - Yves Smith - Bloomberg reports the lengths to which the Fed has gone to try to keep the details of Maiden Lane III, the entity created to buy drecky CDOs from AIG counterparties who received 100% credit default swap payouts. Get a load of this, the Fed was arguing that info IN THE PUBLIC DOMAIN should be treated as confidential! The Ministry of Truth in action: After media reports that month named some of AIG’s counterparties, AIG executives wrote a draft of a letter to the SEC saying that it intended to withdraw its January request for confidential treatment. Later that March, the New York Fed sent edited versions of another request for confidentiality and provided arguments to help AIG make the case. The SEC granted confidential treatment in May of 2009. This whole affair puts the Fed in a bad light indeed. The article details how the AIG, pushed by the Fed, made four efforts with the SEC to get information regarding the AIG payouts and Maiden Lane III purchases redacted. AIG seems reluctant, and the SEC, to its credit, did not roll over. And the arguments made by the Fed are rubbish...
AIG Took Four Tries on Filing as Fed Asked to Withhold Data - (Bloomberg) -- American International Group Inc. submitted four rounds of regulatory filings in six months, with more than 1,000 redactions, as the Federal Reserve Bank of New York pressed the insurer to withhold data about bailout payments to banks. The insurer made an initial filing on Dec. 2, 2008, about Maiden Lane III, the taxpayer-funded vehicle that bought assets from AIG’s trading partners. After the Securities and Exchange Commission asked for more information, AIG amended December filings three times. The last set of amendments, in May 2009, included more than 400 redactions, and the SEC granted the company permission to withhold the omitted data until 2018. According to e-mails released this month, AIG was asked to limit what the public knew about the Maiden Lane transactions. The payments have been called a “backdoor bailout” by lawmakers because banks, including Goldman Sachs Group Inc. and Societe Generale SA, were reimbursed at 100 cents on the dollar for mortgage-linked securities that had declined in value.
Timothy Geithner, I Call Your Bluff - The Treasury responded to reports that the New York Fed asked AIG to suppress and delay facts about the bailout. Meg Reilly, a Treasury spokesperson claimed: "In the transaction at the heart of this dispute...the FRBNY [Federal Reserve Bank of New York] made a loan of $25 billion which is on track to be paid back in full with interest." She claims the loan is currently "above water." In the first place, that loan is not the heart of the dispute. Nonetheless, the FRBNY should immediately release the details of all of the Maiden Lane III assets backing that loan and show the current prices BlackRock has placed on them. Based on the current market, it is extremely likely that the loan is underwater.
Fed Secrecy Claims Bogus, Redacted AIG Bailout Details Already Public - Yves Smith - The SEC agreed to let AIG keep Maiden Lane III information secret until 2018, since it “qualifies as confidential commercial or financial information.” The Fed argued earlier this week that “If such information were to become available to traders in such securities, traders would be able to use such information to their advantage, and undercut the ability of Maiden Lane III to sell those assets for the maximum total return, to the detriment of taxpayers and AIG.” We now show that this argument is worthless. Nearly all of the deleted information can be reassembled from sources that are publicly available. The traders whom the Fed professes to find worrisome have access to far more information...
Lawmakers Request GAO Audit On AIG Bailout In a letter today, House Oversight and Government Reform Committee requested that the Government Accountability Office — the auditing arm of Congress — launch a “broad investigation” into the federal aid to AIG. The lawmakers asked for “a full review of all aspects of federal assistance” through the Fed, Treasury or any other government entity from 2007 to the present. Included in the review, they said, should be an examination of (1) AIG’s payments to counterparties of credit default swap contracts and specifically whether the decision “left money on the table” (2) Who made the decision to pay counterparties at par and under what authority (3) The decision not to disclose the identities of those counterparties until March 2009 and why (4) The decision not to allow AIG to file for bankruptcy protection and (5) The implications of the AIG bailout for future federal aid to private firms.
AIG Timeline Of Events - For all who want to get up to speed on next week's political theater involving AIG, Tim Geithner, Goldman Sachs' Stephen Friedman, Goldman Sachs' Bill Dudley, Goldman Sachs' Lloyd Blankfein, and the endless taxpayer bailouts, here is a terrific timeline for everything relevant to the AIG soap opera. Courtesy of Bloomberg.
Obama to Propose New Limits on Banks – WSJ -President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country's biggest banks, marking the administration's latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials. The past decade saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.
Volcker makes his move - Dare I hope? The teaser in the WSJ about a big announcement from Barack Obama tomorrow sounds almost too good to be true. A cap on the size of financial institutions! A ban on risky investments in things like hedge funds and private equity! A real wall between commercial banking and speculative prop trading! The banks of course will scream blue murder, while at the same time trying to say that those kind of walls exist already. But they can’t have it both ways. I’m also fascinated by the fact that Paul Volcker’s fingerprints are all over this announcement, while the names of Larry Summers and Tim Geithner are nowhere to be seen. Has Volcker done some kind of an end-run round Summers while no one noticed?
Obama Proposes New Bank Regulations The White House wants commercial banks that take deposits from customers to be barred from investing on behalf of the bank itself—what's known as proprietary trading—and said the administration will seek new limits on the size and concentration of financial institutions. ... Banks shielded from risk through federal-deposit insurance, or aided in financial crises by low-interest loans from the Federal Reserve Board, would no longer be allowed to engage in trading unrelated to their customers' interests, one senior administration official said. Under the proposed rule, commercial banks would be prohibited from owning, investing in or advising hedge funds or private equity firms. Bank regulators would not be simply given the discretion to enforce such rules. They would be required to do so.
Obama Offers Up The Volcker Rule – WSJ - Stock in former Fed chairman Paul Volcker is soaring after the cigar chomping, inflation-grappling former Fed chief stood shoulder to shoulder with President Obama Thursday.Not only did the big man get primo face time at the event, the first words of the Whitehouse statement announcing the new push were literally “President Obama joined Paul Volcker …” And that’s not all! Obama told the assemblage: I’m proposing a simple and common-sense reform, which we’re calling the ‘Volcker Rule’–after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so–responsibly–is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.
BBC: Obama to break up banks - Banking reforms do not come bigger than those proposed today by President Obama.In an echo of the break up of banks that was imposed in the United States after the Great Depression, he wants a limit on their overall size and he also wants them banned from three activities that in recent years have been central to many of them.He is pushing for them to be prohibited from involvment in hedge funds, from buying and selling whole companies in what's known as private equity and from buying and selling securities for their own benefit on so-called proprietary trading desks.In simple terms, he wants to prevent banks from taking speculative risks to generate colossal profits, while knowing that if their bets go wrong taxpayers will pick up the bill.
Tucker, Obama and the banks - Shortly after Barack Obama proposes breaking up deposit taking banks that engage in too risky business, up pops Paul Tucker, Bank of England deputy governor with responsibility for financial stability, to remind everyone that banking-style risks emerged all over the financial system in recent years, with little or no relationship to whether the entity was a deposit taking institution or not. This was far from a deliberate spoiler, the speech was in the diary well before anyone knew of the latest US plans. But Mr Tucker is also far from a “break up the banks and you solve the too important to fail problem” advocate even though his boss subscribes to the view. The timing is awkward because it will appear to some as a spoiler.
Obama's New Banking Regulations Leaked To Insider Traders - Last night it seemed like a surprise when the WSJ reported that Obama was about to wage war on Wall Street with new limitations on bank size, leverage, and prop trading.But it wasn't a surprise to everyone!Regional banks made a monster move yesterday -- defying the market selloff -- and though it was hard to explain at the time, in retrospect it makes absolutely perfect sense.A crackdown on big, conglomerate financial institutions benefits smaller, plain-vanilla banks, and boring trust companies.Here, take a look at the state of financials as of 2:00 yesterday. You'll notice that all the winners are winners of today's news:
Three cheers for Obama’s banking reforms - Let’s go through the press release line by line: President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President’s economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers. Note here how Geithner and Summers just become part of “the President’s economic team”, while Volcker gets top billing. This is, as Simon Johnson says, an important change of course — and it’s one which is being supported by both Dodd and Frank, so there’s a good chance it can pass
Make that two cheers for Obama - In public, Barack Obama was stern and tough: Never again will the American taxpayer be held hostage by a bank that is too big to fail…The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers, it’s not good for the economy. And through this policy, that is an outcome we will avoid… if these folks want a fight, it’s a fight I’m ready to have. In private, however, according to Simon Johnson, a very different message is being sent about how much smaller the Obama administration wants America’s biggest banks to be. The answer: no smaller than they are now — even after the wave of panic-induced M&A at the height of the financial crisis.
The End of Moral Hazard? - The financial Twitterverse has been abuzz this morning with speculation as to what the administration was going to propose? Yes, yes . . . they're going to sweat down Too Big to Fail banks. But how? Some commentators thought the gist would be HULK SMASH BANKS!!! Others predicted it would be a minor tweak on the measures already proposed. Now we know. The administration's new proposal has two core pieces, both of which are at least somewhat novel. First, banks that have access to the discount window will not be able to trade for their own account. That means no prop trading desk. No owning hedge funds or private equity funds. No investments of any kind to make profits for your shareholders. Financial institutions can make profits by servicing clients, or they can make profits by investing for their own book. But they can't do both.
Obama Proposes Volcker-Style Financial Reform - It looks like the political winds have shifted away from Tim Geithner/Larry Summers and toward Paul Volcker/Elizabeth Warren: Obama to Propose Limits on Risks Taken by Banks, NYTimes: President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities...The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker... The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. ... Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors.
White House Statement on Obama Bank Regulation Plan - WSJ - The proposal would: 1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit. . 2. Limit the Size- The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.
The Faces Of Larry Summers And Paul Volcker Say It All - Long marginalized, Paul Volcker got his long-time wish to limit bank risk taking today when President Obama announced a proposal to limit banks' private-equity bets. A beaming Volcker stood next to the President for the roll out: Larry Summers, by contrast, didn't look happy. He, of course, has been a chief proponent of deregulation
‘Volcker Rule’ Vindicates Former Fed Chief’s Regulations Push - (Bloomberg) -- Paul Volcker didn’t lose confidence when the Obama administration initially cast aside his argument to separate banking from trading in its plan for a new financial-regulatory system. “I’m sure he’ll recognize the wisdom of my view sooner or later,” Volcker said an interview with Bloomberg Television last April, referring to Lawrence Summers, President Barack Obama’s chief economic adviser. Volcker was vindicated yesterday when Obama proposed limiting trading activities of financial institutions to prevent another crisis, adopting recommendations of the 82- year-old former Federal Reserve chairman. Obama called it the “Volcker Rule.” “This represents somewhat of a shift from the positions of those in the administration in favor of deregulation,” said Joseph Stiglitz, a Nobel laureate and frequent critic of the administration. “Volcker has been pushing for this for a year, and it was one of my biggest disappointments that his idea wasn’t picked up by decision-makers until now.”
Assorted Thoughts on Financial Regulation - The financial regulatory reform debate is starting to kick into high gear, and I hope to bang out a post on financial reform this weekend. But in the meantime, here are a few general (and somewhat random) thoughts relating to financial reform: It's true that the idea that "what's good for Wall Street is good for America" has been disproved, but that does NOT prove the opposite—that is, it doesn't prove that "what's bad for Wall Street is good for America." It's frightening how many commentators fail to grasp this distinction. Which brings me to... Cutting into Wall Street's profit margins shouldn't be an explicit goal of financial reform. In most instances, enacting sensible regulation based on an objective weighing of the evidence will lower Wall Street's profit margins anyway. But the fact that the Street is going to profit from a particular regulatory change doesn't necessarily make the regulatory change ineffective, or insufficiently "tough on Wall Street."
A Few More Assorted Thoughts on Financial Reform - The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately. Regulators are woefully understaffed; this is fact. Obama has proposed banning banks' prop trading desks and internal hedge funds. I'm fine with that, as long as it's done properly. From a P&L perspective, this is obviously bad for the Street. From a public policy perspective though, there's really no compelling reason why the banks need to have prop trading desks or internal hedge funds. But you can't simply prohibit banks from buying and selling securities for their own account, because that's precisely what market-makers do.Just to clarify, when I said Obama's announcement was a "fairly transparent political stunt," I wasn't criticizing the Obama administration. We live in a political world, and political stunts are often useful. If I were Rahm Emanuel, I'd
be a dick have done the same thing.
Off With Their Heads - At last the Obama administration seems to be contemplating a decisive move against America’s banking elite. Following the recent electoral setback in Massachusetts the proposals laid down by former Federal Reserve chairman, Paul Volcker, to reduce the market power of the banks, are being dusted off. Ordinarily, if an industry plunges into crisis, you expect a serious shake-up. Even if there was some bad luck mixed in with manifest incompetence, the presumption generally is: if your company requires a government rescue, top management needs to be replaced. The US treasury has for many years consistently advocated such principles – both directly and through its influence with the IMF – when other countries have got into trouble. But in the case of the US banking industry, nothing, at least until now, has happened at all. Most of the pre-crisis executives in big banks have remained in place, and very little has changed in terms of risk-control practices, or remuneration. Why was the administration so conservative?
Banks’ Size, Trading Would Be Limited in Obama Plan to Reduce Risk-Taking (Bloomberg)-- President Barack Obama, tapping into voter anger over bank bailouts, called for limits on the size and trading activities of financial institutions in order to reduce risk-taking and prevent another financial crisis. The proposals, to be added to an overhaul of regulations being considered by Congress, would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds. He also proposes expanding a 10 percent market-share cap on deposits to include other liabilities such as non-deposit funding to restrict growth and consolidation
Obama to Propose Rules to Restrict Proprietary Trading - Yves Smith - Bloomberg reports that Obama will announce provisions to limit the proprietary trading activities of banks. This all sounds well and good, in fact, I’ve advocated prohibiting prop trading (you’d need pretty active monitoring of overnight positions to make sure it has not simply been moved back to order flow desks). It is not a socially productive activity and has no place in firms enjoying government backstops. But how do you “limit” prop trading in firms that have international operations? Without the famed “harmonisation” with the UK and EU, I’m curious as to how this can be implemented as to not be circumvented (the UK bonus tax fiasco is an embarrassing reminder of blood-minded the industry is about preserving its perquisites).
Glass-Steagal, Part Deux - Krugman - So what do I think about the new White House initiative on limiting bank size and restricting the activities of depository institutions? 1. It’s OK as part of a broader financial reform, and is a good sign that the WH is getting ready to rumble with the banks. but 2. I’m from Missouri — show me. Actually, that’s a lie: I’m from New Jersey by way of New York, but whatever. I liked the Treasury reform plan from last spring, too. What remains to be seen is how much fight there is behind it.
A question about the Volcker-Steagall Act - After a year of seemingly shouting in the wilderness, Paul Volcker finally got his druthers this morning. The Obama administration is going to push for a breakup of modern Wall Street. Or at least a bunch of restrictions to wall off risky, profitable stuff from the nuts and bolts that keep the financial system going. Which may not be able to get through the Senate anyway. In fact, failing to get this through the Senate may be exactly what Obama's political strategists want—a popular cause to bash the Republicans with in the fall midterm elections.But let's take the (still-pretty-vague) proposal at face value. It would restrict "the market share of liabilities at the largest financial firms" to what they are, um, now. And it would ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.
A closer look at the Volcker rule - There are two big questions overhanging the Volcker/Obama announcement yesterday: will it be enacted, and if it is, will it make any difference. If you look at Obama’s rhetoric during the announcement (”if these folks want a fight, it’s a fight I’m ready to have”), the enemy is Big Finance — and certainly the Republicans would not look good if they attempted to filibuster a bill like this. The real problem, however, is the Democrats, who are surely more desperate for financial-industry money than ever, given yesterday’s Supreme Court ruling, and who have in recent years raised much more money from Wall Street than Republicans have.
New Bank Regulation - I wanted to resist commenting about the "Volcker Rule" until the details were finalized, but let me just spit out a few things. First of all, I spent time on both sides of the business on Wall Street - on the "sell side," on a customer-related trading desk, and on the "buy side" at an internal hedge fund at the same firm - a large, generally commercial bank. The second part of my job description would be pretty clearly banned under the proposed rule changes. You know what - it's kinda hard to argue with that. I was just discussing it with a friend of mine who trades in a purely proprietary group at a large commercial bank. He wrote to me, "but there is very little risk in a group like this - you think we caused the financial crisis?" And no - neither his group or any group like his caused the crisis, but I explained to him that the higher level concept of the group was the problem - he was trading MY deposits - that's just not what The People want.
So. Farewell then, proprietary trader – Telegraph - Last week it was the bank levy, this week President Obama has proprietary trading in his sights. It is an obvious target. Proprietary traders use banks’ own capital to take positions in the market . It is by definition a risky business, but then banking is about taking risk. (After all, if banks didn’t take any risk, they wouldn’t lend any money to anyone, and that is hardly the political objective of financial reform.) However, proprietary trading has always been controversial, not least among banks’ own clients, since it means that banks may be trading against their customers’ positions. It also contributes to volatility in bank earnings, since it can produce big gains one quarter and big losses the next. Proponents will argue that it is a perfectly acceptable activity in a well managed bank. The problem is that such institutions have proved to be fewer in number than we originally thought.
Bronte Capital: What is proprietary trading? - This plain vanilla bank has interest rate risk. If rates rise their funding costs will rise relative to their asset yield. If rates fall their assets will refinance. Their funding cost might also fall – but at the moment the funding cost seems pinned by the zero-bound. Some hedging of interest rate risk here seems entirely sensible. Banks (and more often S&Ls) have failed in the past because they failed to hedge this sort of interest rate risk. However as both the assets and liabilities are of uncertain duration there is no way of knowing just how much hedging is required. There is a choice here – it is a proprietary choice (in that the bank will trade off hedging costs against profits). And there is no easy way to legislate that choice away.
The Volcker Rule: A Good Idea Whose Time Hasn't Come? - day after the Obama administration proposed its new set of financial rules, reality is setting in. I'm not seeing anyone who thinks it's particularly dangerous to split off prop trading from client service, or to impose limits on total bank liabilities. But there's a lot of skepticism that anything like this can pass. Folks like Chris Dodd and Chuck Schumer will have a lot to say about this, and they aren't interested in making life difficult for their constituents in the financial services industry--especially not Dodd, who's going to need his friends after he retires. Economics of Contempt thinks it's a political stunt that is going to quietly die in committee. Felix Salmon points out that the devil is in the details on the prop trading ban…
Obama’s Move to Limit ‘Reckless Risks’ Has Skeptics - NYTimes The president’s proposals to place new limits on the size and activities of big banks rattled the stock market, but banking executives were perplexed as to how his plan would work. Indeed, many insisted the proposals, if adopted, would do little to change their businesses. Moreover, it was unclear if the twin proposals — to ban banks with federally insured deposits from casting risky bets in the markets, and to resist further consolidation in the financial industry — would have done much if anything to forestall the crisis that pushed the economic system to the brink of collapse in 2008. Mr. Obama appeared to be leaving crucial details to be hashed out by Congress, where partisan tussling has already threatened another reform the president supports — the creation of a consumer protection agency that would have oversight over credit cards, mortgages and other lending products.Wall Street figures, many caught off guard by the news, reacted cautiously. “I am somewhat skeptical about how much the federal government can actually regulate,” said John C. Bogle, the founder of Vanguard, the mutual fund giant. “We need to try, but all the lawyers and geniuses on Wall Street are going to figure out ways to get around everything.”
Big Banks Have Already Figured Out The Loophole In Obama’s New Rules - Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business.The key phrase is “operations unrelated to serving customers.”
Can Goldman really dodge the Volcker rule? - Dick Bove seemed to think so earlier, saying “buy” Goldman, just as the stock fell 5 per cent. Meanwhile, Krishna Guha, over on the FT’s Money Supply blog, asks a fair question: can’t Goldman (and Morgan Stanley, for that matter) simply give up their bank charters and therefore avoid all the proposals on proprietary trading, hedge funds and private equity? The answer seems to be: just let ‘em try! If the Volcker rule, in whatever legislative shape it eventually takes, were to let the likes of Goldman off the hook — while simultaneously dismembering its few remaining competitors — it is quite likely that rioting would break out on American streets.
Repeat After Me: Lending is Risky - It's amazing to me that people are still referring to commercial banks and thrifts as "safe and boring operations," even though 140 commercial banks/thrifts failed in 2009, and the number of banks on the FDIC's "problem list" has risen to a whopping 552. Commercial banking is inherently risky — in all loans, there's a risk that the borrower won't pay you back. Just ask all the commercial banks and thrifts that lent most of their deposits out in the form of commercial real estate loans.
Mean Street: Obama is Killing America by Killing Wall Street - Deal Journal – WSJ - What has become of America? Today, Goldman Sachs CEO Lloyd Blankfein announced record annual profits of $13.4 billion for his bank. He has repaid the U.S. taxpayer $11.42 billion for taking TARP money he didn’t want.He will contribute another $6.4 billion in taxes to the general public. And within weeks, if President Obama gets his way, Blankfein has a good shot at becoming the most hated man in our nation. Apparently, this is now how we treat success in America. We damn it, and then we punish it by enacting loopy, politically expedient measures such as caps on Wall Street trading and principal investments.Why is our country so self-destructive?
Obama’s Plan To Be Judged By A Goldman Breakup - As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 percent of gross domestic product, or roughly $150 billion?If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting -- ever so gently -- the deckchairs on the Titanic.
The Volcker banking plan? - Obama proposes a new banking plan and everyone is commenting for instance here is Simon Johnson. The plan seems to involve limits on bank size and limits on proprietary trading. Some time ago I decided not to "chase around" all the different banking plans on tap. First, it would make me dizzy, and second it is hard to evaluate the plans in their early forms. But here are some general questions you should ask about any plan:
Glass-Steagall vs. the Volcker Rule - For the second time in less than 80 years, the nation’s commercial banks are being told to stick to their knitting. Their knitting is taking deposits, handling checking accounts, lending money and managing the nation’s payment system. Twice now, they have ventured beyond these standard activities, gotten into trouble and almost brought down the financial system. The solution in the 1930s, and once again now, is this: get out of the sideline businesses that caused so much trouble. Those sidelines were different in the 1930s than they are now. And while people talk of re-enacting Glass-Steagall Act — the solution that helped resolve the 1930s crisis — what President Obama proposed this week is a somewhat different animal, worthy of its own name.
The End of Wall Street as We Know It -- Newsweek - After ignoring Big Paul for a year, Obama finally listened. The result is the end of Wall Street as we know it. Surrounded by economic heavyweights called into the White House, President Obama announced today before the TV cameras that he wasn’t announcing anything new. At least that’s what his top administration officials indicated to the media in a “background” phone call intended to put the best possible spin on things. The administration officials declared that the new—whoops, I mean, additional—proposal today was in the spirit of what they themselves had already put forward last June and what the House and Senate, in consultation with the Obama-ites, had already inserted in their bills.That’s the official story. It’s utter nonsense.
On Bullshit - I try to stay positive, Dear Readers, I really do. But then I stumble on unmitigated codswallop like this, from industry lobbying group The Financial Services Forum, in response to President Obama's announcement today of new proposed regulations governing the banking sector: No, no, no. A thousand times no. Well, okay, I do agree that some regulatory agency needs both statutory authority and the institutional capability (and cojones) to liquidate large financial conglomerates the next time one or more of them trip over their own dicks, which I guarantee will happen sooner than any of us expect. It would also be a pleasant surprise if someone in authority actually decided to supervise these mongrel idiots, instead of going on golf outings with them every six weeks and approving their regulatory fitness reports over cocktails. But the assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock.
Obama Bank Curbs May Not Leave U.S. Financial System Much Safer (Bloomberg) -- President Barack Obama’s proposal to impose limits on commercial banks may win him support on Main Street and shake up Wall Street without doing much to make the financial system safer overall. The plan, which is still lacking in details and must be approved by Congress, aims to make the banks more secure by forcing them to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms. “It’s the right direction,” said Henry Kaufman, president of Henry Kaufman & Co. in New York and a former vice chairman of Salomon Inc. The danger is that such risky activities could simply migrate to big non-bank financial institutions, leaving the system as a whole no better off. Banks also might try to make up for the loss of profits from proprietary trading by lending more to risky borrowers such as real estate developers, threatening the federal safety net, said Martin Baily, a former White House economist now with the Brookings Institution in Washington.
Economists React: Is Obama Bank Plan a Good Idea? - WSJ - Economists, lawmakers, bloggers and others weigh in on President Barack Obama’s bank-regulation plan. (15 individual statements)
Reactions to the Bank Proposal - NYTimes - Excerpts of reactions from around the econoblogosphere to the administration’s (still somewhat hazy) bank proposal: (15 more individual statements)
FT Alphaville – The Volcker rule, the US analysts react (part I) - And how. We’ve got a range of analyst opinion for you on Friday morning, in reaction to President Barack Obama’s sweeping proposals to reform Wall Street. Opinion is still rather divided however.
FT Alphaville – The Volcker rule, the European analysts react (part II) - Next up on our compendium of analyst reaction — some commentary from the European analysts. And, as with the US banks, it’s notable that opinion is also rather divided about the potential impacts of Obama’s financial reform proposals on European banks.
Obama Is Seen as Anti-Business by 77% of U.S. Investors, Global Poll Says (Bloomberg) -- U.S. investors overwhelmingly see President Barack Obama as anti-business and question his ability to manage a financial crisis, according to a Bloomberg survey. The global quarterly poll of investors and analysts who are Bloomberg subscribers finds that 77 percent of U.S. respondents believe Obama is too anti-business and four-out-of-five are only somewhat confident or not confident of his ability to handle a financial emergency. The poll also finds a decline in Obama’s overall favorability rating one year after taking office. He is viewed favorably by 27 percent of U.S. investors. In an October poll, 32 percent in the U.S. held a positive impression.
Policy Pivot on Banks Followed Months of Wrangling – WSJ - For nearly a year, President Barack Obama's economic team resisted measures to restrict the size and activities of the biggest U.S. banks. Two days after Democrats suffered a devastating election loss in Massachusetts, the White House rolled out a proposal to do just that.The policy's evolution took months, according to congressional and administration officials. Prompted by the cajoling of former Federal Reserve Chairman Paul Volcker and other respected voices, dissenters in the administration—notably Treasury Secretary Timothy Geithner and White House economics chief Lawrence Summers—gradually dropped their opposition.
To President Obama: FOLLOW THROUGH NOW! - Oh, so Bwarney doesn't like the bank reform eh? He got suitably "informed" (are they down to rank bribes with $100 bills - out of sequence - in envelopes yet?) I'm sure by the banksters lobby about 30 seconds after President Obama showed up on TV this morning. Well I have an answer for that problem if Bwarney doesn't want to play ball. See, President Obama doesn't need him to. He can fire Turbo "I cheated on my taxes" Timmy - after all, the recently-announced rules should prohibit him from receiving his paycheck anyway - and replace him with Paul Volcker. Mr. Volcker can then do what Congress won't through the back door. You want to be a Primary Dealer and bid on Treasury Auctions? Cool - divest first, then come talk with us. Until then we'll run our auctions directly and you won't make the FICC revenues off your arbitrage (which is a huge, captive, and virtually guaranteed "free money" source.)
Geithner aired concern on bank limits-sources - Reuters - - U.S. Treasury Secretary Timothy Geithner has expressed some skepticism behind closed doors about the broad bank limits proposed on Thursday by his boss, President Barack Obama, according to financial industry sources. The sources, speaking anonymously because Geithner has not spoken publicly about his reservations, said the Treasury chief is concerned the proposed limits on big banks' trading and size could impact U.S. firms' global competitiveness. He also has concerns that limits on proprietary trading do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said
What did Geithner say? - Various news reports that Tim Geithner is privately opposed to the new Obama bank plan — which isn’t that much of a surprise, but he should not be talking about it (if he is). What we do have is this PBS interview, in which he certainly isn’t doing much to back the concept. The correct answer to “In essence are you saying that big banks need to be broken up” is “Yes”; add some qualifiers if necessary — “we’re not talking about a sudden disruption, but about new rules of the game, but the eventual goal is smaller banks that aren’t engaged in inappropriate activities” or something like that. As it was, Geithner might as well have had a chyron underneath as he spoke, with the words DON’T WORRY, WE’RE NOT GOING TO TAKE ANY REAL ACTION. I don’t know what’s really going on here, but Obama needs to find some officials who can talk about taking on Wall Street as if they mean it.
Secretary Geithner Needs To Get With The Program - The details of the new White House banking policy are somewhat vague and in places borderline incoherent – e.g., what exactly does “The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms…” mean (from point 2 in yesterday’s short and poorly edited statement)?But the general principle behind our ”Volcker Rule” is clear. Here’s what President Obama said, “Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.” Whatever you think of that notion or the exact wording, this clearly implies that banks will get smaller. Secretary Geithner apparently does not get this (transcript).
Are Geithner's Days Numbered? - Andrew Leonard thinks so. (See here. Also here.) Geithner's political tone-deafness is becoming a serious liability to Obama. The problem with replacing him, as I have said earlier, is finding someone who is qualified, confirmable and not connected to Wall Street. Given that half the top political appointees at Treaasury are still awaiting Senate confirmation, I think Obama may be stuck with Geithner no matter how low his stock falls. Is there a potential replacement who has paid his taxes, has populist leanings, knows Wall Street but isn't part of it, who wouldn't be filibustered by the Republicans? I'm sure Obama would welcome suggestions.
An Antitrust Investigation of the Banks? - In the aftermath of the Massachusetts special election, the White House is set to announce a major change of strategy on financial reform, with the president to propose new legislation that will limit the size and complexity of banks. Such legislation is unlikely to pass the Senate. In fact, the approach to financial reform before Tuesday was to trade away some parts of the House bill — including perhaps the potential new consumer protection agency for financial products — in return for sufficient Republican support to pass a bill in the next month or two. But fresh from their success in the Democratic heartland, the Republicans will be less inclined than before to compromise in any meaningful way. Fortunately, there is an alternative — one laid out neatly by Krishna Guha of The Financial Times on Tuesday. Instead of pursuing the issue of those “too big to fail” financial institutions exclusively through legislation, the administration could begin instead one or more serious antitrust investigations into the behavior of our biggest banks.
And Now Comes The Part Where We Tax The Living Sh#$ Out Of The Banks - Thursday’s announcement by the US administration of a “Financial Crisis Responsibility Fee” has turbo-charged an already heated debate – not just on the merit of an incremental tax on banks, but also on its design and the distorting manner in which it could impact on individual institutions.While interesting, these are no longer the relevant issues. We have left the realm of what should happen and are now embarked on what is going to happen. Specifically, Thursday’s announcement marks the beginning of the era of banks being targeted for selective incremental taxation in advanced economies round the world
Extend bank tax to do the business - President Obama proposed a tax on the country's largest banks to help recover the money lost under the Troubled Assets Relief Programme (Tarp). This tax is a positive step. However, it will not come close to recovering the losses incurred in the bailouts and it will do almost nothing to change the way that the banks do business. For this we will need a larger financial speculation tax. First, it is necessary to be clear on the extent of the losses incurred in the bailouts of the financial system. The losses in the Tarp are currently pegged at close to $120bn, mostly due to the bailout of AIG, the giant US insurance company. This money was virtually a direct handout to several large banks, But these losses are far from the complete picture with the Tarp.
Is It Time for Obama to "Pick a Fight with the Banks"? - I don't put much of the blame for the financial crisis on the bad incentives embedded in executive pay structures. But that doesn't meant that pay structures didn't contribute to the problem. And it certainly doesn't mean that executive pay is justified by productivity, or that there are no important market failures associated with the way executive pay is structured. Which opens the door to ask the question, is it time for Obama to pick a fight with the banks? The question is how to construct a political strategy that will allow us to get as much done as possible. It may be that aggressively going after big banks can create public support for reform, support that would be difficult for politicians of either party to ignore. But there's also a chance that such a strategy will harden the resolve of those now opposed to reform making it harder to get anything done at all.
Smarter ways to punish a banker - Anger is a poor basis for policy. The administration is assuming that if banks object to the levy, it must be good. This is only half right. Arousing protests from the banks is a necessary condition of intelligent reform, but not sufficient. Banks would howl about serious proposals for higher, and cyclically adjusted, capital ratios, for example – but that change would actually affect their future behaviour.
Greg Mankiw for the Bank Tax: The problem of implicit subsidies is now far more widespread. We have in effect turned much of the financial system into government-sponsored enterprises. What to do? We could promise never to bail out financial institutions again. Yet nobody would ever believe us. And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time. Alternatively, we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.... [I]t is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.
Buffett and the bank tax | The Economist - THE Oracle of Omaha is not a fan of the proposed tax on large banks:“I don’t see any reason why they should be paying a special tax,” said Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., in an interview on Bloomberg Television today. Supporters of the plan to tax the banks “are trying to punish people,” he said. “I don’t see the rationale for it.” But Mr Buffett should know better.... It's interesting that he says: Look at the damage Fannie and Freddie caused, and they were run by the Congress...Should they have a special tax on congressmen because they let this thing happen to Freddie and Fannie? I don’t think so.The reference to Fannie and Freddie is instructive.
Op-Ed: David Stockman- Taxing Wall Street Down to Size - NYTimes - WHILE supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too. Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick — a levy of only 0.15 percent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.
Obama Tax Prompts Put-Upon Bankers to Break Out the Violins – BusinessWeek - The keening from the banking industry in response to the Obama Administration's proposal to levy a special $90 billion tax on the largest banks is almost touching. It's unfair. It's punitive. It's vindictive. Worst of all, banks won't pay the fee anyway. Their customers will."Using tax policy to punish people is a bad idea," said JPMorgan Chase (JPM) Chief Executive Jamie Dimon in remarks after a Financial Crisis Inquiry Commission hearing in Washington earlier in the week. "All businesses tend to pass their costs on to customers."
Wall St. Weighs a Constitutional Challenge to a Proposed Tax -In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks ... [and]has hired a top Supreme Court litigator to study a possible legal battle ... Privately, executives at several large banks said they believed a legal battle was doomed to fail in Washington and risked escalating public rage over the bailouts of the banks.
Looting Alert: Big Banks Threaten Constitutional Challenge to TARP Fee - Yves Smith - The brazenness of the financial services industry knows no bounds. The latest sighting comes in the form of a leak (or a plant? of the fact that Securities Industry and Financial Markets Association which is considering mounting a constitutional challenge to the proposed TARP fee of 15 basis points of uninsured liabilities announced last week. So why is SIFMA giving this idea any consideration?I have three possible answers: one is that the banksters have become so accustomed to getting everything they want that they are not prepared to be inconvenienced, and are willing to throw any and every possible roadblock to make that stance clear. A second possibility is that they see this sort of fee as establishing a precedent they do not like (more on that soon), and are therefore willing to engage in a disproportionate response to make sure it goes nowhere. The third is that this is simply Kabuki drama
Big Banks Hire Big Gun To Fight TARP Tax - The New York Times reports the bank industry is preparing to fight the Obama administration’s proposed TARP tax and fight it rather vigorously. “A top Supreme Court litigator,” Carter G. Phillips, has been brought in by Wall Street’s lobbying group to work out whether the tax might be “unconstitutional.” That’s something the administration and outside legal experts are dubious about, the paper reports. The hire defies the president’s plea to bankers that, “instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities.” A phalanx of lobbyists it is, then.
Return Our Investment - WALL STREET is considering legal action to prevent President Obama from imposing a new tax on bailed-out financial institutions. Because the law that created the Troubled Asset Relief Program compels the government to recoup the bailout money, it’s unlikely that banks will succeed in avoiding recompense. So rather than debate the constitutionality of the proposed tax, it is far more productive to design the best possible repayment plan. The administration aims to raise $90 billion over the next 10 years, which would do much to offset TARP’s estimated $117 billion losses. We therefore suggest taxing banks based on the difference between their assets at the end of August 2008 and their current level of capital. After all, the support these firms received was based on the size of assets before the financial panic began, not the size of those assets today. The tax we propose would allow the government to effectively collect insurance premiums now that should have been charged ahead of time.
Big banks' pathetic argument that bank tax is unconstitutional - The big banks are considering challenging President Obama's proposed tax on very large banks and financial institutions in court as unconstitutional. Let's see if I have this right. The Federal Reserve deciding unilaterally, without public debate, to assume hundreds of billions of dollars of financial companies' liabilities, spent hundreds of billions to buy mortgage-backed securities and potentially expose taxpayers to massive losses: That's totally constitutional. Congress passing a law suggesting that a small portion of the bailed-out financial industry, which is still benefitting from massive government subsidies, pay a fee for running huge balance sheets: That's unconstitutional.
The legal and necessary bank tax - John Carney has a post up today saying that the bank tax is unconstitutional; it’s incredibly unconvincing, not least because he ignores the fact that the tax is required by law. Far from being an ex post facto appropriation, it was entirely foreseeable — and necessary — from the day the TARP bill was passed. His other criteria for the tax being unconstitutional don’t pass much muster either. It’s severe, he says, just on the grounds that it’s a tax which raises revenues. Well yes, that’s the whole point. But it’s not confiscatory: if the banks are paying $145 billion in bonuses this year, they can pretty obviously afford a tax designed to raise $90 billion over ten years.
TRB vs Carney on the Big Bank Tax - My argument is a simple but elegant one: Since neither the construction nor the operation of TARP or its sister programs was constitutional to begin with, it is an absurdity to argue that the addition to this program of a new recompensatory feature violates the constitution. This would be like arguing about what color a unicorn's tail is supposed to be. The Too Big To Fail Tax is simply the continuation of an unnatural progression that began the moment Bush's team decided that the banks themselves were sacred. Once we tripped down into that gulch, the constitution became irrelevant to the bailout and by extension, to anything that came after the initial effort to save and support companies with taxpayer dollars.
Unofficial Problem Bank Lists Increases to 584 - This is an unofficial list of Problem Banks compiled only from public sources. CR NOTE: This was compiled before the 5 bank failures today. There was a "timely" Prompt Corrective Action issued against Charter Bank, Santa Fe, NM and the bank was seized today!
How Supposed Free-Market Theorists Destroyed Free-Market Theory - When consumer credit contracts are buried in so much legalese that even experts can’t understand all the terms – I heard one former CEO of a top financial company admit privately that his lawyers couldn’t explain various mortgage terms and conditions — how can anyone believe the mortgage contract represents meaningful free choice? What consumer is able to weigh the benefits and costs of individual financial product features buried in the fine print and decide what to take and what to leave? Now that products and fine print have become so perverted and incomprehensible, how can anyone expect contracts to steer the market in economically efficient ways?
Who Bears the Costs of Post-Crisis Recovery? - For over a year now, I have been advocating a Swedish rather than Japanese approach to crisis. The Swedes decided to protect their banking system at all costs; the Japanese protected their banks at all costs. That subtle distinction is the difference between a rapid recovery and a slow, agonizing one.Some people think this is an academic debate — a distinction without a difference. However, when you see who bears where the actual costs of this fall, it is apparent that the it is an enormous difference.Unfortunately, the US (mostly) went the Japanese route. Exceptions are the automakers and a handful of FDIC closed banks. Instead of waxing philosophical, let’s look at who pays the costs of this – and who does not….
Small Business Group Rebukes Obama Administration Over TARP - WSJ - Small businesses are saying thanks, but no thanks, to the Obama administration’s plans to refocus the Troubled Asset Relief Program on boosting lending to small firms.The National Federation of Independent Business today released a letter supporting an amendment by Sen. John Thune (R., S.D.) that aims to end the Treasury’s ability to spend any uncommitted TARP funds. Senators are trying to add the amendment to a broader bill raising the U.S. debt ceiling. “The full $700 billion that was originally allocated for TARP is no longer needed and should not be used as a bucket of money for the Treasury Department to create new federal programs"
Business Does Solidarity - For a glimpse at what makes the US Chamber of Commerce such an effective force for reactionary politics, you really need to read this post from my colleague Pat Garofalo. Big banks have a problem. They want to block the creation of a Consumer Financial Protection Agency so that it’ll be easy for them to rip people off. But big banks aren’t popular. They are seeking to “move the spotlight off the unpopular commercial banks and mortgage lenders that are the target of the legislation and muster a roster of more sympathetic opponents.” How do you do that? Well, getting the Chamber of Commerce to mobilize some small businessmen to act as your fronts helps
The CEO Pay Slice - In our recent research, we studied the distribution of pay among top executives in publicly traded companies in the United States. Such firms must disclose publicly the compensation packages of their five highest-paid executives. Our analysis focused on the CEO “pay slice” – that is, the CEO’s share of the aggregate compensation such firms award to their top five executives. We found that the pay slice of CEOs has been increasing over time. Not only has compensation of the top five executives been increasing, but CEOs have been capturing an increasing proportion of it. The average CEO’s pay slice is about 35%, so that the CEO typically earns more than twice the average pay received by the other top four executives.
Franklin Roosevelt’s First Inaugural Address: A Fitting Reminder For Our Crisis Today - "Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone." "There are many ways in which it can be helped, but it can never be helped merely by talking about it. We must act and act quickly. Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."
Obama Wades Deeper Into Banking Debate - NYTimes - President Obama on Tuesday stepped into the middle of a fierce lobbying battle by reinforcing his support for an independent agency to protect consumers against lending abuses that contributed to the financial crisis. The president’s move also signaled a tougher line and a more direct role as Congress weighs an overhaul of banking regulationThe financial industry and Congressional Republicans have singled out the administration’s proposed consumer agency in particular, hoping to greatly weaken if not kill it. With liberal Democrats and Web commentators fighting just as hard for a strong independent office, the issue is becoming the central flashpoint in the debate over regulation.
Will The Banks Win Again? Bailout Watchdog Rallies Support For Consumer Protection Agency
The battle in the Senate over a proposed consumer financial protection agency is the final show-down between banks and American families, bailout watchdog Elizabeth Warren wrote to supporters Monday night. The outcome "will show whether we are going to let the industry continue to write the rules -- to keep the cops off the beat -- or whether the financial crisis actually changed something."Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is said to be considering dropping the proposed independent agency from the Senate's financial reform bill.
Call to Action: Fight Now for Vital Consumer Protections » Elizabeth Warren - The story of the financial crisis has a thousand twists and turns, but the basic narrative is easy to follow. The financial industry wrote rules that allowed it to act recklessly. The industry captured agencies that were supposed to regulate it, taking cops off the beat and funneling enormous resources into the political process to make sure there wouldn’t be any new cops. Then, with no laws to hold them back, the banks made hundreds of billions of dollars on the sales of deceptive products.The final chapter will show whether we are going to let the industry continue to write the rules — to keep the cops off the beat — or whether the financial crisis actually changed something.
Banks See a Leveling Off of Bad Consumer Loans - NYTimes - Since the financial crisis hit, banks have chipped away at the mountain of mortgages and credit card debt looming over struggling Americans. At last, those efforts appear to be paying off, at least for the banks. At some of the nation’s largest lenders, the number of consumer loans that are going bad is starting to level off. And while no one is declaring a full-scale recovery, executives at big banks sound optimistic that the worst may soon be over. “Credit quality appears to be stabilizing, if not improving,” The good news for banks is not quite so good for many consumers, however. Given their losses on loans, banks have stanched the flow of credit, particularly by reining in the number of new loans issued and by tightening underwriting standards. In recent months, the rate of losses has started to moderate.
Consumer prices up 2.7% year-over-year - The Labor Department reported a 0.1 percent rise in consumer prices from November to December and, largely due to much lower energy prices in late-2008, annual inflation is rising, now at +2.7 percent, with a menacing trajectory as shown below. Of course, many will dismiss the higher year-over-year inflation rates as transitory, however, higher energy prices will be with us for at least the first half of the year as long as current energy prices remain relatively high.
Consumers are squeezed as inflation outpaces wages - The spending power of families is being squeezed, government data showed Friday, highlighting doubts about consumers' ability to drive the economic rebound.Workers saw their inflation-adjusted weekly wages fall 1.6 percent last year — the sharpest drop since 1990 — even as consumer prices rose only modestly. Slack pay and scarce job growth, along with tight credit and a rising savings rate, are holding back spending. That's hindering the recovery.For some families, the overall inflation rate last year — 2.7 percent — understates their burden. Many are struggling with surging costs for health care and college tuition, both of which have been galloping far above the overall inflation rate.Energy led consumer prices higher last year, offsetting the biggest drop in food costs in nearly a half century, the Labor Department said Friday. Core inflation, which excludes the volatile food and energy sectors, rose 1.8 percent. That's the second-smallest rise in four decades.
The sweetest usurious bastards - Rent-to-buy is how you buy a TV or a couch on credit when you do not even qualify for a credit card. The business model is disarmingly simple. You have shops with 200-300 stock keeping units (running the shop is not the business). They sell things on a very simple mark-up basis. The advertised price of the thing (a TV, a couch) in the shop is 100 percent mark-up on the invoice price. However the real price is 48 monthly (or more realistically 208 weekly) instalments based on recovering 400 percent of the invoice price. If the TV wholesales for $1000 then the monthly instalments add to $4000. The shopkeeper is not remunerated based on the sales of the shop – but rather how well they maintain “credit”. These are RENTAL contracts – so that the ownership of the TV does not pass on “purchase” but only after the payment of the last “rental payment”. This gives the shopkeeper the right to repossess the TV after a single missed payment.
ABC Consumer Confidence at Three Month Low - The decline in weekly consumer confidence as measured by ABC will not end. From -41 two weeks ago, this number has now fallen a dramatic 8 points to -49. And add another double-dip data point: after respondents were evenly split between those who think the economy is getting better and those who saw deterioration on December 13, 2009, the spread has surged with 36% now seeing a worsening while those who think things are getting better is now 24% - the worst reading since June 2009. People have just about had enough of change they can believe in.
Consumer Anger Rising Fast: Chargebacks -- On the forum there is a report of a number of merchants dropping credit card processing entirely due to rampant (and bogus) chargebacks. Does anyone remember my Tickers on "Is The Government a Felon or a Cop" posts? Go read 'em again. One of the more recent had this to say: If the people cannot find justice within the government's apparatus, are they to sit quietly and ask "Please Sir, may I have another (beating, rape, robbery, take your pick)?" Or should we expect that at some point - perhaps not now, but perhaps not far down the road either, the people will have had enough. They will rise and take care of these matters in their own way - and there won't be much in the way of a "fair trial." I've yet to see boiled rope or guillotine blade futures listed by the CME, but is this sort of redress for grievances really that far in our future?
Feeds the Rich, Buries the Poor - Americans have a choice. They can allow their government to bully and threaten them into conforming to their view of reality like Winston Smith or they can go down swinging like Cool Hand Luke and Randall McMurphy. The cowboy spirit of the Old West is what is required today. We need tough hardened individualists who are willing to say enough is enough. Our government has been corrupted by weak men slithering around the halls of Congress soliciting for money, an evil banking cartel creating fiat money, corporate fascists paying off criminals in Washington DC, and the military industrial complex enforcing Washington’s power across the globe. The country longs for an Andrew Jackson or a Dwight Eisenhower. Instead we are stuck with Harry Reid and Nancy Pelosi. The citizens of the country have chosen a false security in place of liberty and freedom.
More Than Half of Wealthy Americans Fear Outliving Savings, Survey Finds (Bloomberg) -- A majority of wealthy Americans said they’re concerned that they won’t have enough retirement income to last through their lifetimes, according to a Bank of America Corp. survey. The survey said 53 percent are concerned about making sure retirement assets will last. Fifty-nine percent of retirees also said rising health-care costs are a concern. More than half of non-retired respondents made some adjustments to their lifestyles last year, such as spending less on personal luxuries or giving less to charities, and 29 percent said they expect to retire later than originally planned, the study said.
How the CFPA would stop neg-am mortgages - Beer and Numbers asks for the grounds on which a consumer financial protection agency would ban a particular negative-amortization mortgage. I can think of a few. First of all, the spreadsheet which BN helpfully provides is, as he notes, extremely misleading: it shows only the minimum monthly payments. It doesn’t show what happens to the principal amount outstanding if you make the minimum payment. It doesn’t show what happens to your minimum payment if you actually make the minimum payment every month, and then reach the limit of how much your loan principal is allowed to rise. Secondly, any self-respecting CFPA would insist on big fat warning signs to be plastered all over any negative-amortization mortgage. If you pay less than the interest amount, the amount you owe will rise. If you hit the upper limit on the amount you owe, your minimum monthly payment will be at least $X. If your only source of income is a regular paycheck, this product is not for you.
Total Credit Market Debt as a Percentage of GDP (60 yr graph)
GOP-linked company tracks online users’ ‘loan-worthiness’ - Want a bank loan? Get yourself more Facebook friends -- but make sure they pay their bills on time. Banks are beginning to look at user accounts on Facebook, Twitter and other social networking sites to determine if an applicant is loan-worthy, raising privacy concerns as well as questions over whether a person's online friends, likes and dislikes can actually measure their financial stability. Everything a person does publicly on their social-networking accounts can be found by market researchers if the user's privacy settings allow it. Researchers are now looking at a person's online conversations, the groups they join, products they look at and even who their friends are to determine loan-worthiness.
Barney Frank Proposes Replacing Freddie Mac and Fannie Mae - NYTimes - “I believe this committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” Mr. Frank said at a hearing on executive compensation issues. “That’s the approach, rather than the piecemeal one.” Mr. Frank, a Democrat from Massachusetts, was once long one of the staunchest supporters of Fannie Mae and Freddie Mac. The two companies, which have been run by the government since they almost collapsed in September 2008, have been kept afloat with $112 billion in federal aid. Late last year, the Obama administration pledged to cover unlimited losses through 2012 for both companies, lifting an earlier cap of $400 billion.
Oh, The Truth Is The Banks Are Insolvent? (Still) Gee, what have I been saying now for over two years? (Bloomberg) -- The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year. None of the lenders holding a combined $1.05 trillion in the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain “committed” to joining, Meg Reilly, a department spokeswoman, said in an e-mail. Amusing. My view as expressed somewhat-recently on this issue can be found here: They are sitting on over a trillion of dollars of this paper (about $1.1 trillion to be exact) and several hundred billion is severely impaired or even worthless.
HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS - In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes. FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
Federal Government Will Allow Purchases of Foreclosures with FHA Loans - The US Department of Housing and Urban Development will allow homebuyers to use FHA-insured financing to purchase foreclosed properties starting February 1, 2010. The one year waiver program will only apply to forward mortgages and includes conditions to protect borrowers from predatory "flipping" practices. Shaun Donovan, secretary of the US Department of Housing and Urban Development (HUD), will temporarily permit buyers to use FHA-insured financing to purchase real-estate owned (REO) property to stave off vacancies
FHA Aims to Tighten Credit Without Hurting Economy - WSJ - Now, as FHA commissioner, Mr. Stevens has to decide how many others to let through that door. Souring FHA-insured mortgages are threatening the agency's finances. Congress is pressuring him to tighten the easy-money standards that once helped people like him, and he is expected to announce revisions as early as this week. But raising the credit bar could have a dangerous side effect. In many of the nation's hardest-hit housing markets, the FHA backs around half of all new home loans. If the agency pulls back too quickly, the nascent housing recovery could fizzle, endangering the economy.The dilemma puts the 52-year-old former mortgage banker squarely in the middle of the debate over how much the government should do to prop up the housing market, and how much risk taxpayers should take on to do it.
FHA Boosts Insurance Premiums to Cushion Defaults - In a move to shore up the FHA's beleaguered balance sheet, Commissioner David Stevens on Wednesday announced big changes at the government mortgage insurer that now backs about half of all home loans to the nation's minorities. The FHA will raise the up-front Mortgage Insurance Premium, paid by borrowers, from 1.75 percent to 2.25 percent as well as request legislative authority to increase the maximum annual MIP that the FHA can charge. This is the second time in two years that it has raised the premium. In addition, in order for new borrowers to qualify for the 3.5 percent down payment program, they will now be required to have a minimum FICO score of 580. Borrowers with a lower score will be required to put down at least 10 percent.
FHA's dilemma - back loans, stay solvent -But now 1 in 6 FHA borrowers nationwide is behind on payments, and the FHA's backup reserve fund is below the congressionally mandated minimum. The delinquencies have led to concerns by members of Congress and a call by FHA administrators for program changes by the end of January. As reforms are being debated, the FHA is trying to strike a delicate balance. The agency must ensure that its program remains solvent, while not making changes that are so restrictive that they knock a large number of buyers out of the market - and stymie the burgeoning housing recovery. "The people I know who are trying to buy a home for the first time have strong salaries and credit, but they don't have the 20 percent for a down payment,
FHA: Nice Try, NO DONUT - This is a move in the right direction:The premiums FHA charges to insure mortgages will rise to 2.25 percent from 1.75 percent this year, the agency said in a statement yesterday. Borrowers who have credit scores below 580 will also have to make down payments of at least 10 percent, and allowable seller concessions will be cut by half. NOT ENOUGH. Look, how many times do I have to repeat it? It is called HISTORY and it demands the following standards for affordable, SUSTAINABLE mortgage lending: The issue is sustainable payments and limitation of leverage. The front and back end ratios provide for sustainable payments and the down payment limits leverage to no more than 5:1:
- 28% maximum front-end ratio (PITI and other direct housing expenses)
- 36% maximum back-end (DTI) ratio
- 20% down payment, all in cash.
Here's Why The New FHA "Fix" Won't Really Fix Anything - While it is very good news that the FHA has woken up to the disaster it has been building by enabling some of the worst mortgages, their solution is badly guided.Yesterday the FHA said that it will allow most borrower’s to make down payments of as little as 3.5 percent when they take out a loan. But it is tightening the screws on those with a credit score of less than 580, who will to make a down payment of at least 10 percent.The idea is that the FHA shouldn’t be insuring the riskiest kinds of loans—high loan to value mortgages—going to the riskiest borrowers. In the future, only relatively safer borrowers will get the riskiest loans.But we’re not confident that the FHA has really employed any intelligence when it comes to the issue of default risk. In the first place...
Investors Flipping Out - San Francisco Chronicle discusses the surge in investor buying at the Court House steps, and the changes to the FHA rules that allow the resale of homes in less than 90 days (see HUD Changes FHA Rule for Flipping). From the Chronicle: Investors dominate home flipping, auctions House flipping, a quick-buck scheme pursued by amateurs and professionals alike during the real estate boom, now is dominated by investors willing to pay all cash, who troll auctions for foreclosures that banks are gradually trying to siphon off their books.
Short Sale 'Fraud' Follow - Our investigation into allegations of short sale fraud by some of the nation's major lenders certainly struck a nerve in the lending community, but it also served to show me just how uneducated many in that same community still are, even today. It's clear from the dozens and dozens of comments on the blog page that many mortgage professionals still aren't sure how exactly short sales work, and what is and is not legal. Due to some technical difficulties on air Friday, I was unable to show a couple of MLS listings that were sent to me that clearly, on the public listing, demanded cash to the second lien holder outside of settlement as part of the transaction. Just so you know, that's illegal. And then just a few minutes after the story aired Friday, I received another email from my whistle-blower:
ALT-A: "Here It Comes" - I have often commented that we're nowhere near done with the mortgage explosions, and that where subprime was bad, those loans made in 2005-2007 to people who lied about their incomes - which is 90% of those who took out "ALT-A" loans - were going to be a catastrophe. Well, as Kirk said, "here it comes" Moody's Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions. The rating agency said Alt-A loans that are 60 or more days delinquent "have increased markedly" since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets. That's a cool half-a-trillion worth. And guess what this means for loss rates?
Obama Mortgage Modification Recipients Fall Behind 25% of Time, Drop Out - About 25 percent of homeowners who received trial loan modifications through President Barack Obama’s main foreclosure prevention plan are failing to keep up with their new reduced payments, the Treasury Department said. At least 196,000 borrowers have missed some or all of their required payments, according to comments Treasury officials made on a conference call today and calculations from government data. An additional 115,000 homeowners who started trial repayment plans last year have either dropped out or been kicked out of Obama’s Home Affordable Modification Program, the officials said. “None of these programs have really been a success,”
Why The Administration's HAMP Anti-Foreclosure Program Will Be A Failure - Much hope had initially been placed in Obama's Home Affordable Modification Plan (HAMP) whose purpose was to keep millions of homeowners out of foreclosure. Yet a recent analysis by Moody's senior director Celia Chen demonstrates that out of the 3 to 4 million loans that the administration had hoped would benefit from HAMP, at most 1 million will experience a foreclosure benefit, and more realistically, this number would be a mere 400,000, less than 1% of all U.S. first mortgages. In its analysis of HAMP beneficiaries, Moody's collaborated with Equifax to create a loan-level data set, which started with the approximately 55 million first mortgages identified as active as of January 31, 2009, and subsequently filtered down to 8.2 million loans that meet the preliminary eligibility criteria....
Are Mortgage Modifications Pushing More People Underwater? - Most mortgage modifications have involved reduced monthly payments for borrowers. But often such reduced monthly payments don’t come pain-free: In October, about 72 percent of modifications increased the unpaid balance of the loan, according to a report released Wednesday by the State Foreclosure Prevention Working Group: ...Why would the principal increase, when the whole goal seems to be to make the mortgage more affordable to a troubled borrower so he or she can avoid foreclosure?“Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification,” the report says.
HAMP Changes Coming - But what changes isn't exactly clear ... From the NY Times: Treasury Weighs Fixes to a Program to Fend Off Foreclosures ... Unless I'm missing something, the only change to be announced next week, mentioned in the article, is allowing borrowers to use pay stubs to verify income, as opposed to providing tax documents. That doesn't make much sense since it is pretty easy to provide tax documents, and underwriting in arrears is one of the keys to the program (the failure to document income was one of the problems with nontraditional mortgages). This sounds like another delaying tactic.
Writing down the principal on mortgages - It's obvious that the economy still isn't doing well. Furthermore the rate of foreclosures won't peak until the end of 2010. On top of that, most observers agree that the Obama mortgage modification plan has been a failure. That all said, I'm surprised that so few commentators have leapt on the "we should write off some of the principal" bandwagon. It's not currently a bandwagon at all. I know that a) this idea is WRONG, b) it is terrible for the long run rule of law, and c) it is EVIL and UNFAIR. It's also one of the few suggested economic remedies that might have worked or maybe could still work.
Taking on the Banks With Mortgage Cramdowns - I haven’t been one of the people endlessly beating the drum for principle-modification for people with “underwater” mortgages since it seemed to be off the table. But with the White House deciding to turn in a more populist direction vis-a-vis the banks, Pat Garofalo is right that it should be put back on the table. Given that we’re still in a period of ongoing economic distress, it seems to me to make a lot of sense to focus on something that will help people in concrete ways in the near term. Better regulation for the future is nice, but if there’s going to be a big fight it’d be nice to actually have some specific ways in which it would benefit people
Foreclosure Program Has No Plans to Reduce Mortgage Principals - WSJ - Despite increasing pressure to take more aggressive steps to keep troubled borrowers in their homes, the Obama administration said Wednesday that it had no immediate plans to alter its foreclosure-prevention program by increasing its reliance on reducing loan balances. The administration's statement came as attorneys general and banking regulators in 14 states warned that policy makers needed to do more to stem the tide of foreclosures.
Principal Reduction and Walking Away - A couple of quotes from an article in the WSJ: Is Slashing Mortgage Principal the Answer? ... Assistant Treasury Secretary Michael Barr ... suggested that there would be a risk that such a [principal] program would change a lot of borrowers’ behavior. “Most people, most of the time, make their mortgage payments ... even if they’re underwater,” Mr. Barr noted. “You have to be quite careful not to design a program that induces more people to walk away” ... This is a major concern. A couple weeks ago I posted: New Research on Mortgage Modifications and Principal Reduction
Yes, It's Okay To Walk Away From Your Mortgage As many Americans begin to realize that it will be many years (if not decades) before their houses are worth what they owe on them, the idea of walking away from your mortgage is going mainstream. Not surprisingly, the mortgage industry is doing everything it can to prevent this, including telling homeowners that they have a "moral obligation" to pay. But do they? There's no universal answer here, but in most cases, the answer is "Yes, it's okay to walk away." The reason is that you and your lender engaged in an arms-length transaction in which both parties balanced competing interests and spelled out their obligations in a clear, signed contract. And unless that contract states that you have a "moral obligation to pay," you don't have a moral obligation to pay.You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating. And now it turns out that both of you made a bad decision.
Mortgage Default Is A Patriotic Duty - I read a mysterious statement the other day.“My data show that between 1890 and 1990 real home prices actually didn’t increase,” said Robert Shiller, in Newsweek (Dec 30, 2009), Why We’ll Always Have More Money Than Sense.We have all been in a long state of delusion. Our psychosis is simple. We are married to real estate which increases in value. I can get rich. You can too.The belief in increasing values of real estate is the president of our financial crisis. Now we know he didn’t deserve the office. The price will be paid. We can all confirm the high stupidity of the crowd which we are in. Of course I’m a member, but I’ve decided I’m done, and you have too.Now we are cured. Or some are.If real estate is a “flat” asset, with price changes created only by inflation, and not true increases in value, than you know we still have quite a big fall to go ahead of us. And if we don’t fall, that’s almost certainly worse. The graph above shows Case Shiller through the third quarter of 2009. The numbers are adjusted for inflation.
First American CoreLogic: House Prices Decline in November - The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance: Home Prices Continue to Depreciate On a month-over-month basis ... national home prices declined by 0.2 percent in November 2009 compared to October 2009...Including distressed transactions, the HPI has fallen 30.0 percent nationally through November from its peak in April 2006. Excluding distressed properties, the national HPI has fallen 21.8 percent from the same peak. This graph shows the national LoanPerformance data since 1976. January 2000 = 100.
Housing Starts Decline in December - Total housing starts were at 557 thousand (SAAR) in December, down 4.0% from the revised November rate, and up 16% from the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Click on graph for larger image in new window.Starts had rebounded to 590 thousand in June, and have moved mostly sideways for seven months. Single-family starts were at 456 thousand (SAAR) in December, down 6.9% from the revised November rate, and 28 percent above the record low in January and February (357 thousand). Just like for total starts, single-family starts have been at around this level for seven months.
Homebuilders Turn to Private Equity for Financing (Bloomberg) More than 40 U.S. homebuilders have teamed up with private equity firms to acquire and complete unfinished subdivisions as banks cut construction lending. The investments will pay off for the builders and their investors if the prices are low enough and the locations are in areas where demand is recovering, said Megan McGrath, a home building industry analyst at Barclays Capital Inc. in New York. Managers of at least 22 funds raised $12 billion in 2009 for development projects and other residential real estate deals, Bloomberg BusinessWeek magazine reports in its Feb. 1 issue, citing data compiled by Bloomberg, Institutional Real Estate Inc. of San Ramon, California, and Real Estate Alert, an industry newsletter in Hoboken, New Jersey. Those firms have invested with at least 42 builders, the data show.
Still More Hotels Being Completed During Slump - Even with occupancy rates at record lows since the Great Depression, there are still a number of hotel projects being completed. It takes a number of years to build a new hotel, and all these projects were planned during the bubble years. This has significant implications for non-residential investment and construction employment in 2010. As these large projects are completed, there will be more construction job losses, and less investment in non-residential structures. And it definitely doesn't help the occupancy rate to have more rooms!
Rents, occupancy fall in 4th quarter Both national and Bay Area rents have fallen steadily for the past five quarters, said apartment data specialist RealFacts of Novato. Nationally, the average monthly rent was $933, down from $994 a year earlier, while the occupancy rate is 91.3 percent, compared with 92.2 percent a year ago. The biggest rent declines in the Bay Area were for units that cannot accommodate roommates ... Average rents fell 9.5 percent for studios and 10.9 percent for junior one bedrooms compared with a year ago, RealFacts said.
Commercial Mortgage-Backed Debt Sales to Stay Below $15 Billion - (Bloomberg) -- Sales of commercial mortgage-backed securities will likely remain below $15 billion in 2010 as borrowers struggle with declining property values, according to analysts at Barclays Capital and JPMorgan Chase & Co. Debt sales backed by skyscraper, hotel and shopping mall loans may be as low as $10 billion this year, according to JPMorgan. Barclays Capital forecasts more transactions, reaching about $15 billion during the period. The U.S. government has committed to reviving the $700 billion commercial-mortgage backed bond market amid plunging property values and a lending pullback. A record $237 billion of the debt was sold in 2007, compared with $12 billion in 2008 and $1.4 billion last year, according to data compiled by JPMorgan.
Commercial real estate woes 'looming' The effects of the recession are passing for some industries, but not for the commercial real estate business, a panel of experts said Tuesday. Beach Co. president John Darby called the problems for the industry “looming” as millions of commercial loans nationwide become due for property owners who owe more than what their buildings or land are worth. He cited a Deutsche Bank report from April that predicted two-thirds of the commercial real estate loans expected to mature before 2018 won’t qualify for refinancing without a major infusion of cash.
Outlook remains grim for commercial real estate - Expect another year of rising vacancies, declining property values and distressed sales in the local commercial real estate market. That's the message from Colliers Turley Martin Tucker in its annual State of Real Estate report. CTMT forecasts more upheaval and pain for property owners in 2010 as tenants continue to look for savings on their real estate and consumers continue to pull back. New developments will be rare, as will investment sales of the non-distressed variety. Office and retail, which have the most ground to recover, likely will continue to lose tenants and see values erode.
Housing Starts, Vacant Units and the Unemployment Rate - The following two graphs are updates from previous posts with the housing start data released this morning. The first graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units. The second graph shows single family housing starts and unemployment (inverted). (The first graph shows total housing starts). You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts.
Policies for Increasing Economic Growth and Employment: Interestingly, the two policies that have the maximal (and mean of range) impact on employment are "Increasing aid to the unemployed", and "Reducing Employers' Payroll Taxes for Firms That Increase Their Payroll". Both of these have larger impacts than measures that take away revenue streams from Social Security.
Jobs Not Created - This CBO report on job creation leaves me a bit angry — not at CBO, but at SAOs (senior administration officials). Here’s a chart showing CBO estimates of jobs per buck from various employment-creating policies. What’s notable is that CBO gives pretty high marks to a job-creation tax credit, which is something a number of people, especially at EPI, have been calling for for a while. I endorsed the idea a couple of months ago, believing that it was one of the few measures Congress might pass that could actually have a noticeable impact on employment at relatively low budget cost. But the idea was never taken up, and my understanding is that this was due to skepticism on the part of those SAOs.
Falling Short on the Economic Stimulus - WSJ - Fourteen months ago most of us would have bet that the U.S. unemployment rate today would be something like 7.5%, that it would be heading down, and that the economy would be growing at about 4% per year. Well, we have been unlucky. Unemployment is not going down but going sideways—we hope that it is still not going up. And the unemployment rate is not 7.5% but 10%. More important, perhaps, is that the expectation is for 3% real GDP growth in 2010.That leaves us with two major questions: First, why has the outcome thus far been so much worse than what pretty much everyone expected in the late fall of 2008? And second, why is the forecast going forward for growth so much slower than our previous experience with recovery from a deep recession in 1983-84?
Paul Krugman: What Didn’t Happen: Why was the stimulus underpowered?.... Their political judgment may or may not have been correct; their economic judgment obviously wasn’t... in late 2008 and early 2009 the Obama team was focused on little else. The administration wasn’t distracted; it was just wrong.The same can be said about policy toward the banks. Some economists defend the administration’s decision not to take a harder line.... But the light-touch approach to the financial industry further entrenched the power of the very institutions that caused the crisis.... And it has had disastrous political consequences: the administration has placed itself on the wrong side of popular rage over bailouts and bonuses.
Marty Feldstein is a joke... Here is his pathetic defense of the size of stimulus, while an attack on the stimulus itself. Reminds me of those who supported the invasion of Iraq, but it was just the Bush goons who messed it up...The problem with the stimulus was the size. The problem was that Obama listened to Larry Summers, who doesn't know what he's talking about, and so Summers listened to his thesis adviser, who also doesn't know what he's talking about. I'm going to go out on a limb and say that Harvard Economics Professors lack the inate ability to do economic policy. Before anyone gets mad and accuses me of prejudice, let me remind you that I'm not saying anything about how smart they are on average, I'm just saying that the tail properties of the distribution is such that none actually know WTF they are talking about... Millions of Americans are out of a job because of it.
Fiscal Stimulus - Unlikely To Work in the Real World. - Fiscal stimulus could work in a world where politicians never acted in their own self interest. Fiscal stimulus could work in a world where we could quickly and accurately predict the severity of recessions. Fiscal stimulus could work in a world where we do not have to conduct environmental assessments and have competitive bidding on projects. Fiscal stimulus could work in a world without political checks and balances. We do not live in such a world; it does not help to pretend that we do.
Krugman: Curb your enthusiasm - As a followup to my previous post, Professor Krugman points out that Q1 2002 GDP growth1 was originally reported as 5.8% with rising unemployment. Good point.Although Q1 2002 GDP growth was later revised down to 3.5%, it is another good example of a "GDP blip" driven by changes in inventory (inventory changes added 2.63% to the final 3.5%), with weak underlying demand (PCE was 1% in Q1 2002 - and stayed weak into 2003).Krugman notes "at the time there was much unwarranted celebration (unemployment didn’t peak until summer 2003)." I expect some unwarranted celebration this time too - and the unemployment rate to continue to increase.
HuffPost Interviews Joseph Stiglitz: 'We're More Strict With Our Poor Than With Our Banks' - During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector. Never one to mince words, Stiglitz, who served as the Chief Economist at the World Bank and on President Clinton's Council of Economic Advisers, has said the meltdown has resulted in a kind of "ersatz capitalism" in America. He has also repeatedly called for a second round of fiscal stimulus to support struggling Americans. We recently sat down with Professor Stiglitz to discuss his new book "Freefall: America, Free Markets And The Sinking of The World Economy", and how the Obama administration should go about reshaping our economy.
We Are A Better Nation Than This - America today is characterized by excess, anger, mistrust, polarization, increasing pessimism, self-interest, and a lack of accountability. Of even greater concern, we are becoming a nation that is accepting the unacceptable. In October 2008 when unemployment hovered between 6% and 7%, Barack Obama declared that we were in the middle of "an economic emergency:" With an unemployment rate now in double digits and at least 50% higher than the level in October 2008, President Obama says "there is only so much government can do." Meanwhile, millions of people are suffering in a crisis of our own making. A crisis that is the result of what Paul Krugman recently called "the dysfunctional nature of our own financial system." Yes, the President has proposed additional spending to create jobs, but few authorities expect that it will have a significant impact on our actual level of employment. But, few believe this program will have a meaningful impact. Robert Reich writes, "the chances of unemployment being 10 percent next November are overwhelmingly high." At the same time, the Administration’s housing program is a complete failure, and the nation faces massive foreclosures. As joblessness continues, one in eight mortgages is in default or foreclosure, and half of all mortgages may be underwater within a year. There do not appear to be any serious proposals to keep people in their homes as owners, so an even greater housing crisis may occur later this year or in 2011. It’s the elephant in the room that no one wants to discuss.
Unemployment Rate Increased in 43 States in December - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally higher in December. Forty-three states and the District of Columbia recorded over-the-month unemployment rate increases, four states registered rate decreases, and three states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia. This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).
Initial Claims Misses Estimate By 42K, Emergency Compensation Explodes By 652K Over Last Week - After the double dip in new home sales and NAHB confidence, we are starting to see the beginning of the end of the improvement in firings: initial claims in the week ended January 16 came in at 482,000, higher than the estimate which expected a number of 440,000, which was supposed to be an improvement from the prior week's 446,000. But by far the worst news was EUC, or Emergency Unemployment Compensation, which as even Mr. Liesman acknowledges now is important, which shot up by a stunning 652,364 to 5,654,544. The end-beginning of the year transition sure caught the DOL offguard.
A Growing Underclass - NYTimes - Slowly but surely, longer-term unemployment seems to be becoming the norm. While layoffs are slowing, the number of job openings of job openings relative to the unemployed population were still at a record low in November. That means that those who have already been laid off must spend longer and longer periods looking for work. Take a look at the make-up of the unemployed last month, compared with a year earlier:In December 2008, 22.9 percent of the unemployed had been out of work for at least 27 weeks. A year later, that portion rose to 39.8 percent. That translates to having about 4 percent of the total civilian work force categorized as long-term unemployed.Here’s a look at how many weeks the average jobless person has been jobless for:
US unemployment rate for blacks projected to hit 25-year high - Unemployment for African Americans is projected to reach a 25-year high this year, according to a study released Thursday by an economic think tank, with the national rate soaring to 17.2 percent and the rates in five states exceeding 20 percent. Blacks as well as Latinos were far behind whites in employment levels even when the economy was booming. But throughout the recession, the unemployment rate has grown much faster for African Americans and Latinos than for whites, according to the study by the Economic Policy Institute. Moreover, the unemployment gap between men and women has reached a record high -- with men far outpacing women in joblessness.
Blacks in Retreat - NYTimes - The historic gathering in 1963 at which Dr. King delivered his famous “I Have a Dream” speech was officially called the March on Washington for Jobs and Freedom.Jobs and freedom. In America, you can’t have one without the other. Democrats are in deep trouble right now — just a year after their giddy celebration of Barack Obama’s ascendance to the presidency — because so many millions of Americans are out of work, unable to find the gainful employment that would unlock the door to a stable future for themselves and their families. The president and his party may be obsessed with health care, but unemployed and underemployed Americans want a job. Why this has been so hard for the Democrats to realize, I can’t say.
Almost half of young black people are jobless, says study - Almost half of black young people are unemployed after a big rise in the group's jobless rate since the recession began, a study showed today. An analysis by the Institute for Public Policy Research showed that unemployment among black people aged between 16-24 was well over twice the 20% rate of unemployment among white young people.Mixed ethnic groups saw the biggest increases in unemployment, rising from 21% in March 2008 to 35% in November 2009, the research revealed.Total youth unemployment currently is close to 943,000 - almost one in five 16-24-year-olds - a 15-year high.
In a Tough Job Market, Teens Are Suffering Most. - Proportionally, more kids have lost jobs in the past few years than the entire country lost in the Great Depression. The retail and construction sectors, which are usually key employers of young workers, have been among the hardest hit. Manufacturing, another typical job source for those lacking a higher education or even a high school degree, is not the force in the economy it once was. The result: the teen unemployment rate neared 28% in October before falling slightly the next month. That's the highest ever recorded since the Federal Government began tracking it, and it's almost triple the 10% rate for all workers.For much of the past 60 years, the proportion of 16-to-19-year-olds who held jobs — either part or full time — was around 40%. In fact, in 2000 it was a relatively high 45%. In all, nearly 7.3 million teens were getting a regular paycheck. From 2000 to early 2008, overall employment rose by about 10 million jobs. Teen employment headed in the other direction. By early 2008, teen employment had dropped by more than 1.5 million
Jobless Rates Rise for Couples With Children, Census Says - NYT - Assessing the recession’s impact on families, the Census Bureau said Friday that unemployment rates for couples with children under age 18 had doubled from 2007 to 2009. The increase was higher for two-parent families than for single parents, according to figures from the March 2009 Current Population Survey. The loss of jobs also meant that the percentage of couples with children in which both parents had jobs declined, more often than not because the husband was out of work. In 2007, in 67 percent of those married-couple households, both parents worked. By 2009, the percentage had declined to 59 percent. The decline was greater among black and Hispanic couples than non-Hispanic white ones. Among those black couples, 12 percent reported that only the wife was employed, the highest of any of the ethnic and racial groups measured.That trend was apparently reflected in another statistic: the number of stay-at-home mothers was lower last year than it was in 2008.
The Living Standards of the Poor -- Part I - Last week, I spent some time looking at the living standards of the middle class, showing that they have improved notably over time and giving evidence that they are better than or comparable to middle-class lifestyles in other industrialized nations. I will be returning to this issue in a later post in order to address the “two-income trap” argument of Elizabeth Warren, which was raised by Reihan Salam and by Rortybomb. For now though, I want to talk about the living standards of the poor. It’s important to make the distinction between trends (which I’ll discuss today) and absolute levels of material well-being (which I’ll discuss in a later post) because things can have improved a lot at the same time that they are still not all that great. To represent “the poor,” I’ll look at the 20th percentile — the household that is doing better than 20 percent of other households but worse than 80 percent of them. You’ll have to trust me that my research indicates the story would be similar if I were talking about the tenth percentile.
Temporary gains - MIT News - While the U.S. economy struggles, one form of employment is on the rise: Temporary jobs. In December, the country lost 85,000 jobs overall, but added 47,000 temp positions, according to the Bureau of Labor Statistics. Increasingly America relies on these contingent employees — or “disposable workers,” as BusinessWeek put it in a recent cover story. For many workers, these jobs are stop-gap measures, but social scientists have long floated another idea: That temp positions help low-skill workers to acquire experience and eventually join the permanent workforce in better long-term jobs. Now, a new working paper co-authored by MIT economist David Autor throws cold water on that notion. Not only do many temp employees struggle to find long-term or “direct-hire” work, the study says, but holding a temp job generally lowers a worker’s employment and income prospects over time.
Before Betting on a Jobs Rebound, Know Your Bet - Floyd Norris had a column in the NYT yesterday noting that recessions with sharp job declines tend to be followed by sharp rebounds. This has been a past pattern, but it is likely not to hold in this case because the nature of the downturn is different. The past downturns would brought about by the Fed raising interest rates to slow the economy and reduce inflation. This pattern made it easy to set the stage for the recovery. The Fed lowered rates setting off a surge of construction of purchases of cars and other durable goods
Americans See Economic Recovery a Long Way Off - Gallup - Americans are thinking in terms of years, not months, when pondering how much longer it will be before the U.S. economy starts to recover. The vast majority (67%) believe it will be at least two years before a recovery starts, and nearly half (46%) think it will be at least three years. The findings are from a USA Today/Gallup poll conducted Jan. 8-9. With a full third of Americans (34%) saying it will be four or more years before a recovery starts, the mean response is 4 ½ years -- putting the average predicted onset of recovery well into 2014.
It's jobs, not discouraged workers - Atlanta Fed - Though they represent only a small fraction of the overall labor force (roughly 0.3 percent on average from 1994 through 2007), discouraged workers have received a good deal of attention lately (here, here, and here, for example) because of the dramatic increase in their numbers during the current recession.The term "discouraged workers" refers to individuals who are out of the labor force and respond to Bureau of Labor Statistics surveys stating that they are not looking for work because they believe no work is available, could not find work, lack necessary schooling or training, or face discrimination based on age or other factors. The run-up in the number of discouraged workers is of particular concern to some because of the possibility that all these people (an additional 522,000 since the beginning of the recession) will come flooding back into the labor market, driving the unemployment rate even higher as soon as perceptions of job prospects begin to improve.
Where the Jobs Are - There are jobs out there for individuals with plenty of experience. There are opportunities for Americans with skills and training that might have cost tens of thousands of dollars and required many, many hours to acquire. There are ways for unemployed professionals and white-collar workers to be productive again. In "Census Staff's Cream of Crop," the Cincinnati Enquirer tells us all about it.The U.S. Census Bureau suddenly is finding itself with the most highly skilled, highly educated workforce in its 220-year history - thanks in part to a struggling economy that's produced millions of jobless people eager to work. Locally, the bureau already has recruited engineers, former corporate vice presidents, college professors and radio disc jockeys to help manage the 2010 census, which will attempt to count everyone in the country beginning in March.
"Census Staff's Cream of Crop" - Hicks, 66, of North Avondale, has a Ph.D. in political science from Columbia University. She speaks French, Arabic, Thai, Spanish, Italian and German.In her career at the U.S. State Department, she was tapped at age 29 to run the American consulate in Nice, France - gaining diplomatic celebrity as she dined with Princess Grace of Monaco and had a side career as a recording artist.She's a former University of Cincinnati political science professor, and the scholarship that goes to the top female graduate student in arts and sciences bears her name. She ran the Cincinnati office of the Federal Reserve Bank, chaired the region's transit authority and now owns an international multicultural consulting business whose clients have included Procter & Gamble and Delphi Automotive. Now, she's working as a partnership associate for the U.S. Census Bureau - a temporary, part-time job in which she gets paid by the hour to work with minority groups, immigrant communities and neighborhood leaders to educate them on the importance of the 2010 census
In Unions, Government Workers Surpass Private-Sector Workers - Many people, when they hear the phrase “union worker,” probably imagine someone who works on an assembly line. But such blue-collar jobs are probably no longer representative of the typical union man or woman. For the first time in American history, the majority of the nation’s union members are government workers, rather than private-sector workers, according to a Bureau of Labor Statistics report released today. This is despite the fact that there are five times more wage and salary workers in the private sector.
The Decade Ahead In Jobs - Roll over the circles for each industry below to compare 2008 employment levels with those projected for 2018. The largest circles represent major employment sectors. click for interactive graphic, Source: U.S. Bureau of Labor Statistics
Joblessness Across the U.S.: December Unemployment Rates by State - WSJ - See a full interactive graphic. Just four states recorded a drop in the unemployment rate for December, indicating that though the labor market continues to inch toward stabilization widespread job growth still hasn’t arrived. Earlier this month, the Labor Department reported that the unemployment for the nation as a whole held steady at 10% in December from a month earlier. Just 16 states and Washington D.C. have higher jobless rates than the national average.
Two Dozen States’ Unemployment Funds in the Red, Nine More Within Six Months The unemployment insurance system is in crisis. A record 20 million Americans collected unemployment benefits last year, and so far 25 states have run out of funds and been forced to borrow from the federal government, raise taxes or cut benefits. Using near real-time data on states' revenues and the benefits they pay out, we've estimated how long their trust funds will hold up. And while states’ poor fiscal planning is a serious topic on its own, our unemployment insurance tracker also follows the increasing human toll: so far businesses in 36 states face tax increases this year, ranging from a few dollars per worker to more than a thousand. Six states have moved to cut, freeze or otherwise restrict benefits, a number that is likely to increase. (See our breakdown of states’ projected increase in taxes and cuts in benefits.)
Unemployment Insurance Tracker (interactive graphic) -The unemployment insurance system is in crisis. A record 20 million Americans collected unemployment benefits last year, and so far twenty-five states have run out of funds and been forced to borrow from federal government, raise taxes, or cut benefits. In many other states the situation is deteriorating fast. Using near real-time data on state revenues and the benefits they pay out, we estimate how long state trust funds will hold up. Click on a state to find the latest, plus historical data, and details on tax increases and benefit cuts.
2010 speeches are bleak for most governors - With nearly three-quarters of their seats up for election this year, the nation’s governors are setting the stage for 2010 by warning that the economic downturn is far from over in the states, where tax collections are weak, unemployment is surging and the likeliest outcomes will be unpopular tax hikes and sharp budget cuts. An analysis by Stateline.org of the 27 state of the state speeches delivered by governors so far this year leaves no doubt that the recession — which many economists believe ended late last year — has not yet turned the corner into a quick recovery for most states.Governors are using their annual speeches to brace state lawmakers and voters alike for another year of deep budget cuts, which will be made all the more difficult because the “easy cuts,” as they like to say, have already been made.
Interactive: Is Your State A Debt Disaster? - Forbes - California and states in the Northeast and Midwest are piling up debt, and the economic outlook for many of these states is weak. Roll over the map to see how your state stacks up.
California budget crisis could tie up thousands of public works projects— Public works projects worth hundreds of millions of dollars could be in jeopardy starting this summer — and possibly for years to come — because of California's continuing budget crisis, state financial officials warn. Wednesday, the Treasurer's Office renewed its concerns that a long political squabble over the state's $20 billion deficit could keep California from selling enough bonds in time to pay for ongoing projects. Without a budget in place by July, officials say, the state will have little hope of enticing investors to purchase its debt.And beyond that immediate problem may loom an even larger one: Even if the state does make it to the market this spring, skittish investors may be less than eager to buy what the state is selling. Already, California doesn't have enough bond revenue to pay for all the projects voters have approved
California May Issue IOUs Again If Budget Not Fixed - California Controller John Chiang said he may have to use IOUs for the second year in a row to pay some government bills unless politicians close the $20 billion budget deficit facing the most-populous U.S. state. Chiang, the elected Democrat who pays the government’s expenses, said in a letter to Governor Arnold Schwarzenegger and legislative leaders today that California faces another potential “cash crisis” in July if lawmakers can’t reach a budget agreement before the fiscal year ends June 30. By July 29, California will have $1.1 billion less than it needs to pay its bills should lawmakers stall, he said.
California isn't the only state facing big budget woes - State and local governments have cut 132,000 jobs since August 2008, the center says. Fiscal problems appear most acute in California, whose general obligation bonds were downgraded this week after Gov. Arnold Schwarzenegger declared a fiscal emergency.The state has already said it will increase tuition by a third in the University of California system, among other cash-raising moves. At one point, it was projected to spend nearly 50% more than it stands to garner in revenue in this fiscal year, by one count. California has asked for federal help and warned it could run out of cash in March.And California's not the only state facing an almost unfathomable shortfall. Like California, Arizona and Illinois face budget gaps above 40% of projected general fund spending, according to Pew data. Alaska, Nevada, New Jersey and New York face gaps of at least 30% of their planned general fund spending by the end of this fiscal year. A dozen more states face a fiscal 2010 budget gap of between 20% and 29%.
Wage Freeze for Government Workers - If Josh Barro had not written this: As states and localities continue to fight budget crises, they have an opportunity to close gaps by freezing employee wages. Because public employee compensation rose too fast over the last three years, they should be able to do this while retaining quality employees at least as well as they could back in 2006....then I would have. It's crazy to be giving people pay increases in the teeth of huge deficits. Thanks to Scott Sumner for the pointer. Sumner takes the opportunity to tell the sticky-wage story of macroeconomic fluctuations: there is a coordination problem. If you are a factory worker you can't save you job merely by making your wage flexible, you need to make all wages flexible.
Senate GOP: Cut all public workers' pay, benefits - LANSING, Mich. – Teachers, professors and state and local government workers should take a 5 percent pay cut later this year and remain at that level for the next three years to help save taxpayers money, Senate Majority Leader Mike Bishop said Tuesday.The Republican from Rochester said he is proposing a constitutional amendment to go to voters in August that would suspend collective bargaining rights and allow the pay cut to take effect.Another constitutional amendment would require that all public employees pay 20 percent of their health care premiums unless they participate in a health savings account or wellness program. If they did, they would have to cover 15 percent of their premiums.It's all part of a plan Bishop said would save the state about $2 billion, enough to eliminate the estimated $1.6 billion deficit in next year's budget. Schools and local governments could see hundreds of millions more in savings, he added."We cannot afford the government that we have today," he said.
As America hopes for recovery, Michigan needs whole-scale reinvention - The Economist - Michigan was once a Canaan, rich with jobs in the car industry. “Detroit is the largest city of opportunity in the world,” declared a city directory in the mid-1920s. In 2010 Michigan is America’s most vivid portrait of despair, with an unemployment rate of 14.7%, almost five points above the national average. The state is not short of ideas. From Detroit’s grey streets to the lovely bays along the Great Lakes, it teems with plans for future prosperity. However, recovery is only a distant goal. The interim will be full of hope and disappointment. Michigan, its fate yoked to that of carmakers, must observe its own dismal calendar. The state has lost jobs in every year since the middle of 2000 (see chart), the longest stretch since at least the 1930s according to economists at the University of Michigan.
Restoring Cleveland - The Economist - University Circle is home to Cleveland’s most cherished cultural and public-service gems, institutions built with the wealth of Ohio’s long-gone industrial era of steel and manufacturing: the Cleveland Museum of Art, Severance Hall, Case Western Reserve University and the city’s famous hospital district, centred on the Cleveland Clinic. But encircling this oasis of gentility, the six surrounding neighbourhoods languish, home to 43,000 mostly black residents living in households where the median income is $18,500. A wave of recent foreclosures and the perennial signifiers of urban decay abound—drugs, crime and intractable unemployment. Despite the millions spent on job-training programmes this ring of impoverished neighbourhoods remains a gloomy gauntlet to be run by the 45,000 workers driving into the area daily, and a safety threat on evening outings to the Cleveland Orchestra.
Increasing numbers of New Yorkers need help getting enough to eat - The Economist - According to the Food Bank for New York City, an estimated 1.3m New Yorkers now rely on soup kitchens (which provide hot meals) and food pantries (which give away food). The number of people having trouble paying for food has increased 60%, to 3.3m, since 2003. New Yorkers with children are among the most vulnerable to food poverty. Almost half of all New York City households with children have difficulty affording enough food. A staggering one in five of the city’s children, 397,000 small people, rely on soup kitchens—up 48% since 2004. At a recent City Harvest mobile market in the Bronx, plenty of children queued up for free produce. City Harvest delivers “rescued” surplus food from restaurants, farmers and wholesalers to a network of 600 soup kitchens, food pantries and shelters, and says 62% of its distribution points saw an increase in visits in 2009
Gov. David A. Paterson of New York Seeks Huge Cuts – NYTimes - Gov. David A. Paterson proposed on Tuesday what would be the largest cut to school aid in more than two decades and nearly $1 billion in new or increased taxes and fees as he unveiled his budget, a plan that is likely to be the first chapter in a prolonged battle with the Legislature. Searching for new sources of tax revenue amid a fiscal crisis, the governor proposed legalizing mixed martial arts, allowing the sale of wine in grocery stores, taxing bottled soft drinks, taxing cigarette sales on Indian reservations and deploying speed-enforcement cameras in highway work zones. He even proposed charging fees to many families that enroll in an early intervention program for children with autism, attention deficit disorder and other special needs, and delaying one of his signature achievements — a plan to increase monthly welfare allowances.
Paterson: Budget Has $1 Billion In New Taxes - Under Plan, NYC Aid Would Be Slashed By $800 Million; New Soda And Cigarette Tax Proposals Already Angering Masses - Governor David Paterson said Tuesday that the days of profligate spending in Albany are over and that starting immediately lawmakers must participate in an "age of accountability." That said, the governor's new budget has $1 billion in new taxes and nearly $800 million in cuts for New York City. The words certainly sounded good. "Our revenues have crumbled and our budget has crashed and we can no longer afford this spending addiction that we have had for so long," Paterson said.
Florida's expected budget shortfall grows to $3 billion in 2010-2011 - Plummeting property values, rising numbers of poor people needing health care and a decline in the value of the state's pension fund are among the budget woes lawmakers are grappling with as they prepare to craft this year's spending plan. In September, state economists estimated the state would be about $2.7 billion short in paying for all its expenses in 2010-2011. That would include a $900 million shortfall for its most pressing needs, such as schools and courts. Last week, the economists revised their estimate and it is even more dire, with the new total budget gat expected to be $3 billion and the new critical-needs shortfall anticipated at $1.5 billion.
Culver looks to D.C. for help in reducing budget burden - Iowa Gov. Chet Culver is looking for more help from the federal government to patch up education and health care spending. Culver asked a Senate appropriations subcommittee on Thursday for a second round of economic stimulus money. Later, he appealed to the Obama administration to ease rules for existing aid that could force the state to reverse some spending cuts. The governor told the Senate panel that Congress should extend federal unemployment benefits and provide more aid to states for education, Medicaid and other needs.
Illinois Fiscal Crisis - The state of Illinois is in a very difficult financial situation. The state not only has a $5.7 billion deficit, it is not paying many of its bills. The state owes the University of Illinois over $400 million dollars. There are fears that the University won`t be able to make payroll in March without some action. It is reported that some state employees are having to pay their medical bills when they receive services because doctors aren`t being paid by the state. The state owed $5.1 billion in unpaid bills at the end of 2009. That number doesn`t include an estimated $1.4 billion in Medicaid and group health care bills that haven`t been processed and another $2.25 billion in short-term loans that are due.
Illinois enters a state of insolvency - As Illinois' fiscal crisis deepens, the word "bankruptcy" is creeping more and more into the public discourse."We would like all the stakeholders of Illinois to recognize how close the state is to bankruptcy or insolvency," says Laurence Msall, president of the Civic Federation, a fiscal watchdog in Chicago. While it appears unlikely or even impossible for a state to hide out from creditors in Bankruptcy Court, Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it's not generating enough cash to pay its bills. ... "I would describe bankruptcy as the inability to pay one's bills," says Jim Nowlan, senior fellow at the University of Illinois' Institute of Government and Public Affairs. "We're close to de facto bankruptcy, if not de jure bankruptcy."
Illinois Careens Toward Bankruptcy.- The latest count puts Illinois’ unpaid bills at around $5 billion – a contentious fact among the state’s gubernatorial hopefuls. The question is: what can Illinois do about its near-bankrupt status? Answer: not much. Federal bankruptcy protection doesn’t apply to states, so there's no way for Illinois to hide from its creditors. And none of Illinois politicians are willing to make the tough choices needed to close the budget gap, like raising taxes or cutting spending, Crain’s notes. Indeed, Illinois is not taking in cash, its liquid assets have dipped below $1 million at times, Comptroller Dan Hynes said, and the state is supposed to pay $5.4 billion into its pension fund next year and $10 billion the year after that...
Pension fund proposal draws rage from state employee union - The proposal calls for limiting growth of state government spending and would require all surplus revenue to go toward the annual Illinois state contribution to the pension system. The institute said it is not advocating a change in the system for current beneficiaries, but future state employees would be required to contribute more to their retirement plans. Many private-sector companies have reduced or eliminated pension benefits. The proposal drew rage from some state employee unions. “They are right wing anti-government radicals,” said Anders Lindall, spokesman for the American Federation of State County and Municipal Employees. Lindall said the proposal neglects to mention important facts “because they don’t square within their political goals”.
Illinois' pension bond is a gamble, and a desperate one at that - When you take out a mortgage to buy a house, that's sensible borrowing. When you max out your credit card to pay the mortgage, that's rolling the dice. For the second time in seven years, Illinois has executed a similar fiscal gamble, issuing bonds to pay some of the debt it owes to state pension funds. The state is already in a fiscal hole, with a budget deficit estimated at $11 billion, and the new borrowing risks digging it even deeper. With Gov. Pat Quinn and the Legislature unable to agree on a package of tax increases and spending cuts, however, kicking the problem into the future looked like the easy way out. So, earlier this month, the state sold $3.5 billion in taxable bonds that it must repay over five years.
Billion dollar headache: Looming pension liability worries state officials - The financial problems for the state these days all seem to begin with the letter 'b.' The state's current operating budget deficit is $2.6 billion, a situation that has state lawmakers scrambling to find program cuts and tax increases to balance the ledger. But Republicans in the Legislature are sounding the alarm about another billion-dollar problem looming for Washington - the unfunded liability in the state's pension system. That number now stands at about $6 billion, they say. "Pensions aren't a sexy way to spend money," said state Sen. Joseph Zarelli, R-Ridgefield. "To me it's an obligation. We have to pay that debt." The state's actuary and treasurer also say they're concerned about the situation.
Unfunded Benefits Dig States’ $3 Trillion Hole (Bloomberg) -- Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What’s peculiar is the relative inattention to the balance sheets of state and local governments. Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable. Unfunded promises are the equivalent of government debt. The burden of promises made by state governments to their employees -- effectively an invisible wealth transfer from future taxpayers to current and prospective public-sector employees -- amounts to about one quarter of U.S. gross domestic product.
CalPERS' investments underperform in 2009 - Heavy losses in real estate holdings battered 2009 investment returns at California's giant public pension fund, although the portfolio overall rose in value for the year. The California Public Employees' Retirement System earned an 11.8% return on its portfolio as global stock markets recovered from the collapse of 2008, the fund said Tuesday. The portfolio had dived 27.1% in 2008. But the gain for 2009 was far below CalPERS' internal benchmark of 21.2%, which is based on the performance of broad indexes of investments similar to what the fund owns.CalPERS said its real estate holdings plunged 47.5% for the year, compared with a 15.4% drop for its benchmark index of property investment returns."
Millions needed for city pensions - Just when San Diego city officials thought they had closed a $179 million budget gap, another has opened up because more money will be needed to pay for employee pensions. The city will have to contribute $231.7 million to the retirement fund in the fiscal year that starts in July. That’s up $19 million from the forecast used when the last budget gap was closed in December. The increase is a result of the fund’s investment losses and more employees signing up for pension benefits because of fears they will be cut. A new report from the city’s pension system indicates that the city has 66.5 percent of the money it needs to cover promised pensions — the lowest level since 2004. The amount the city lacks to meet its long-term pension liability is $2.1 billion as of June 30, up from $1.3 billion in June 2008.
A retirement-fund paradox - David Merkel is insightful when it comes to a huge status-quo bias in retirement funds. If we have a lump sum, we’re loathe to convert it to a guaranteed income, even when we value the guaranteed income that we do have extremely highly. I suspect that one of the problems here is that it’s almost impossible to tell whether or not you’re getting ripped off when you’re buying an annuity. Unless and until a vibrant and competitive market emerges in such things, you might end up buying a million-dollar lemon with substantially all of your life savings, and no one wants to do that.
Boomers see retirement later, less likely (Reuters) - People just starting to consider retirement are less optimistic about their ability to stop working than older people, but many still want to move when they reach traditional retirement age, according to a survey commissioned by homebuilder Pulte Homes Inc. Of those who turn 50 this year, 41 percent say they will never be financially capable of retiring and 23 percent have not even started to save, Pulte revealed here this week. The study compared attitudes toward retirement by older and younger baby boomers, the massive age cohort born between 1946 and 1964 whose sheer size makes it a prize demographic
Georgia Faces Huge Medicaid Gap - ATLANTA -- Georgia faces a huge gap in Medicaid funding in the coming fiscal year. State Health Commissioner Rhonda Medows told a legislative budget panel on Thursday that the state is projecting a $506 million gap in state moneys for the health program for the needy. The recession has caused enrollment in the program to soar. Medicaid rolls jumped 7.7%from June 2009 to 2010. The state will also see hundreds of millions of dollars in federal stimulus dollars and tobacco money evaporate. Medows said Thursday that she cannot cut enough to fill the gap. She urged legislators to adopt Gov. Sonny Perdue's proposal, which would charge hospitals and health insurance plans a 1.6 percent fee on their total revenues.
Smoking Bans: Who Wins and Who Loses (Hint: It’s Not Who You’d Think) - A very good paper from a few years ago landed a punch to the public health argument for smoking bans by showing that they increase drunk driving. A paper in the new AEA Applied Economics Journal provides the knockout blow with evidence of another, arguably worse, health externality caused by smoking bans. They argue that laws that ban smoking in bars and restaurants do not actually decrease the amount of secondhand smoking that people are exposed to, just the distribution of who gets exposed.
Taxing Marijuana As a Grand Political Bargain - Polls show support for legalizing marijuana: Eight in 10 Americans support legalizing marijuana for medical use and nearly half favor decriminalizing the drug more generally, both far higher than a decade ago...And a separate proposal in California to legalize and tax the drug cleared a legislative committee last week. A Field poll there in April found 56 percent support for the idea, which its backers say would raise $1.3 billion a year. I would not be surprised if California legalizes marijuana as a grand political bargain - the state government desperately needs the money. Liberals would get legalized marijuana, conservatives would see less pressure on having taxes rise.
Don’t Shelter Your Children: Coping With Stress As A Child Develops Resilience And Emotion Regulation As An Adult - We already know that "suffering builds character", but a new study suggests that it may do a lot more than that. Successfully coping with stress at an early age may significantly increase your chances of being a more resilient adult, as well as strengthen your ability to regulate emotions.
Obama: Senate Shouldn't 'Jam' Through Health-Care Legislation – WSJ - President Barack Obama expressed support for scaling back a health bill to "core elements," the first indication that the White House might be backing away from the type of broader overhaul that Congress had been working on. Mr. Obama told ABC News that lawmakers should "move quickly to coalesce around" parts of the health-care bill that both parties can agree on, "core elements" that include insurance reform. Some Democrats had earlier discussed rushing the health bill through the Senate before Republican Scott Brown, the Massachusetts victor, took his seat, but Mr. Obama rejected that option."Here's one thing I know and I just want to make sure that this is off the table: The Senate certainly shouldn't try to jam anything through until Scott Brown is seated," Mr. Obama said. "The people of Massachusetts spoke. He's got to be part of that process."
The fallout: Democrats rethinking health care bill - Republican Scott Brown’s upset win in Massachusetts Tuesday threatened to derail any hopes of passing a health reform bill this year, as the White House and Democratic leaders faced growing resistance from rank-and-file members to pressing ahead with a bill following the Bay State backlash. Democratic leaders insisted they planned to press ahead with health reform, and met late into Tuesday night in Speaker Nancy Pelosi’s office. But they made no decisions about how to proceed, now that Brown has swept away the Democrats’ filibuster-proof 60-vote majority in the Senate. Their options are few, and extremely complex, mostly involving legislative tactics that would be difficult to pull off in the best of circumstances, let alone at a time when members are worried they could be the next Martha Coakley – a seeming Democratic shoo-in laid low, in part, by health reform.
Insurers Now Focus of Democrats’ Health Talks - Congressional Democrats said they were focusing on toughening regulations on the health-insurance industry in a bid to assemble a scaled-down, more populist health-care bill after the party's defeat in Massachusetts. House Speaker Nancy Pelosi said she didn't have the votes to pass the health-care overhaul approved by the Senate, but left open the idea of working from the Senate version while excluding provisions in it that many House members opposed. Ms. Pelosi said Congress must prevent insurers from denying policies to people with pre-existing health conditions or dropping people's coverage once they become sick. She also called for a repeal of the industry's antitrust exemption and for the imposition of new caps on insurers that limit their profits. Those provisions are part of health bills already passed by the House and Senate.
Barney Frank Deals Potential Death Blow to Obamacare - The following was read on MSNBC by Rachel Maddow, and I transcribed it off the screen: “I have two reactions to the election in Massachusetts. One, I am disappointed. Two, I feel strongly that the Democratic majority in Congress must respect the process and make no effort to bypass the electoral results. If Martha Coakley had won, I believe we could have worked out a reasonable compromise between the House and Senate health care bills. But since Scott Brown has won and the Republicans now have 41 votes in the Senate, that approach is no longer appropriate. I am hopeful that some Republican Senators will be willing to discuss a revised version of health care reform because I do not think that the country would be well-served by the health care status quo. But our respect for democratic procedures must rule out any effort to pass a health care bill as if the Massachusetts election had not happened. Going forward, I hope there will be a serious effort to change the Senate rule which means that 59 votes are not enough to pass major legislation, but those are the rules by which the health care bill was considered, and it would be wrong to change them in the middle of the process.”
Fools On The Hill - Paul Krugman – NYTimes - First of all, the strategy of playing Republican-lite, and hoping that you’ll be left alone, has been tried — and failed disastrously. Remember 2002? Second, David Axelrod is right: the campaign against HCR has been based on lies, and the only way to refute those lies (and stop them from being rolled out again and again) is to pass the thing, and let people see it in action. It’s too bad startup is delayed under the Senate bill — but even so, that’s what you have to do. Finally, Democrats have to realize that politics isn’t just about where you stand on issues, it’s about perceptions of a party’s character. The rap on Dems has always been that they’re wimps — and giving in on such a central part of the party’s agenda, emerging from two years in power with nothing major to show for it, will play right into that perception.
Why you can’t do just the health insurance reforms - Some in the House are floating the idea of splitting up either the House or Senate health bills into component parts and passing them individually. Some may see this as a way to get partial substantive wins. Others may hope the component bills die in the Senate so they can blame Republicans in November. This strategy does not work substantively. There is a health insurance reform that could be done individually. The tax code and health insurance rules could be changed to make health insurance portable. You or your new employer would have to pay the full premium, including the part that was previously subsidized by your employer.
Krugman: The Choice - So, House Democrats have a choice: do they pass the Senate bill, or do they go back to the drawing board and spend several months cobbling together a plan that’s worse in almost every dimension, generating thousands of stories about hapless Democrats — and almost surely find that Senate Republicans block the new plan, too. Guess which way they seem to be leaning. Maybe they’ll come to their senses over the next few days. It would be really helpful, of course, if Democrats actually had a party leader — you know, the president or someone.
And the failure stories begin - If you want to see why letting health-care reform die is a bad idea, look no further than Michael Scherer's story tallying up "Five Ways Obama Went Wrong." Scherer hammers Obama for taking on too much, overestimating his mandate, assuming voters would trust the government, and more. But it's a story that wouldn't have been written if health-care reform had passed, as was expected before Martha Coakley's campaign collapsed. These stories are a function of outcomes, not objective assessments of performance. If health-care reform dies, the media will try and explain the Democrats' failure. That means they'll spend a lot of time talking about what Obama has done wrong....
Health Reform: Killing a Plan Bush Might Have Loved - George Bush could have proposed the Senate health bill. If he had, those Republicans who now loathe the measure would be at the barricades defending it. And those Democrats who backed Obama-care for the past year would have been hoisting their pitchforks and demanding its demise.Leave aside the million details that are grist for the Washington policy mill and think for a minute about the framework of this bill. As I’ve written before, it is pretty simple and not very radical. At its core is a health system that relies on employer-based private insurance to cover most working people. The old would continue to be insured by Medicare and the poor would be covered by Medicaid, just as they are today. The changes: Insurance companies would have to offer coverage to all, regardless of pre-existing conditions; everyone would have to obtain basic coverage or pay a penalty; exchanges would enhance the individual insurance market; the government would subsidize premiums for those who cannot afford them, including both individuals and small businesses; and Congress would take some small steps to slow the growth of health costs. None of these ideas are new and most used to sit comfortably in the GOP mainstream. The Senate bill mimics the framework of the 2006 Massachusetts health reform, an idea that was pushed by Republican then-Governor Mitt Romney and, as we know by now, was supported by new Massachusetts Senator Scott Brown. This is what Romney said about the bill after it passed: "Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced." Sound familiar? The Bay State model was so important in the Washington debate that congressional health negotiators privately described their road to a final bill as “going down Massachusetts Avenue.”
The Trouble with Cost Containment - Long-term care facilities face multiple pressures thwarting cost containment attempts.The nursing homes have three types of patients:rehab: typically younger post orthopedic surgery or cardiac care, short stayjoint hospice patients: who are to be provided comfort care while dyingtrue long-term care residents: typically an 84 year-old with multiple chronic conditions, unable to live in a residence and who will likely die in the facilityPatients #1 and #2 are pretty clear cut as to costs and treatments. #3 is a problem.The facility is in a vise created by regulators, physicians, families, residents and malpractice lawyers. Too much aggressive care is a waste of money and often violates patient wishes. But some family members want aggressive care.
Global Health Care Errors, Fraud Costs $260B Annually, Report Finds - A report released Monday finds $260 billion - or 5.59 percent of annual global health spending - is lost annually to health care errors and fraud, Reuters reports. For the study, the European Healthcare Fraud and Corruption Network (EHFCN) and the Center for Counter Fraud Services (CCFS) at Britain's Portsmouth University, "reviewed 69 exercises in 33 organizations in six countries to measure healthcare fraud and error losses," the news service reports. "The combined expenditure assessed was more than 300 billion pounds ($490 billion) and the experts extrapolated their findings from Britain, the United States, New Zealand, France, Belgium and the Netherlands to get a global picture," Reuters writes, adding that the WHO's "latest estimate of global healthcare expenditure was $4.7 trillion"
The Greek tragedy deserves a global audience - The Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine. Other eurozone members are also under pressure to slash fiscal deficits. What might such pressure do to vulnerable members, to the eurozone and to the world economy? Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits – the UK, for example – Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency.
Bringing stability to the Stability and Growth Pact - Last week, a report by the European Commission (the EU’s executive arm) on the egregious shortcomings of Greek budget statistics sent Greece’s sovereign CDS spreads to levels only below those of Dubai, Vennie and Argentina! Without wishing to belittle statisticians, I’d like to suggest that, from a policy perspective, the focus on Greece is a convenient distraction from the much bigger problem facing the eurozone: The fact that the Stability and Growth Pact (SGP), both by its design and its implementation, has failed to bring stability to the eurozone (I’ll leave “growth” aside for now). Instead, the institutional framework underpinning the European Monetary Union (EMU)—of which the SGP is a critical component—has been responsible for the imbalances within the eurozone that are now undermining its stability.
Greece May Need to Do More on Debt, EU Ministers Say - (Bloomberg) -- European finance chiefs said Greece may have to step up its efforts to tackle a fiscal crisis that threatens to spread to other countries across the region. The Greek government “is going to do all what is necessary” to reduce its budget shortfall, Spanish Finance Minister Elena Salgado told reporters today in Brussels before leading a meeting of European Union counterparts. While Greece’s deficit-cutting proposals “are a step in the right direction, we’ll have to see whether they’re enough,” Luxembourg’s Jean- Claude Juncker said late yesterday. Greece last week presented its plan to push down a budget deficit that is still more than four times the EU limit of 3 percent of gross domestic product. Moody’s Investors Service said today that the plan’s success “cannot be taken for granted”
ECB prepares legal ground for euro rupture as Greek crisis escalates - Fears of a euro break-up have reached the point where the European Central Bank feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union. This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor. ECB chief Jean-Claude Trichet upped the ante, warning that the bank would not bend its collateral rules to support Greek debt. “No state can expect any special treatment,” he said. He might as well daub a death’s cross on the door of Greece’s debt management office. The yield on 10-year bonds has touched 6pc, the spreads ballooning to 270 basis points above German Bunds. Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs.
DB: Greek Debt Default Would Be Bigger Than Argentina, Russia -A Greek default would be bigger than the ones of Argentina and Russia and risk a "vicious circle" of contagion in Europe, according to Jim Reid of Deutsche Bank, Bloomberg reports.The news agency says Greece has double the debt that Russia and Argentina had combined when they defaulted in 1998 and 2001, since it has 254 billion euro of debt outstanding, compared with the 51 billion euro Russia defaulted on and the 57.2 billion euro on which Argentina missed payments."The numbers involved are far greater than the Russian and Argentine defaults," said Jim Reid, head of fundamental strategy at Deutsche Bank in London. If Greece΄s position continues to deteriorate, Europe is "risking a vicious circle similar to what we saw in finance prior to the banking bail- outs,"
The Debt Snowball Problem - Well, in simple plain English the above equation - which in fact comes from the recent Danske Bank report on EU Sovereign Debt- means that movements in the critical debt to GDP level depend both on the level of the annual fiscal deficit (the primary deficit, on which so much attention is currently focused in the Greek case) and on changes in the ratio between the value of the stock of debt and the value GDP. The key term is the one in brackets, and it is often referred to as the “snow-ball” effect on debt - the self-reinforcing effect of debt accumulation (or de-cumulation) arising from the difference between the interest rate paid on public debt and the nominal growth rate of the national economy.
Iceland Credit Risks Rise ‘Considerably,’ S&P Says (Bloomberg) -- Iceland’s credit risk may rise “considerably” as the island faces the threat of a shelved emergency bailout and a government collapse, Standard & Poor’s said. “The risk is there that the program will fall apart and with that, the downside risks would increase very considerably,” Moritz Kraemer, S&P’s managing director for Europe, the Middle East and Africa, said in a Jan. 15 telephone interview. If the outlook for the bailout program doesn’t improve, “it’s quite possible” the government will collapse. President Olafur R. Grimsson’s Jan. 5 decision to block a U.K. and Dutch depositor accord called into question the continued disbursement of a $4.6 billion loan from the International Monetary Fund and the Nordic countries that Iceland needs to avert default. Fitch Ratings cut the island’s credit grade to junk the same day and S&P said it may lower its BBB- rating to non-investment grade within a month if the rejection halts bailout flows.
Germany approves 2010 budget with record new debts - Germany's new center-right Cabinet approved a 2010 budget plan on Wednesday that includes record levels of new debt and higher government spending as the country seeks to safeguard its recovery from recession.The budget puts spending at euro325.4 billion ($475 billion), a 7.3 percent increase on this year's planned outlay of euro303.3 billion. It foresees new borrowing of euro85.8 billion ($125 billion) - about euro48 billion more than this year, and the largest figure since World War II.
Sovereign debt faces years of sub-par returns, says Pimco - European sovereign bond issuance is likely to keep rising until 2017, according to a survey by Bloomberg, meaning investors will have to get used to low returns from the asset class for years to come. ‘This is the continuation of the great financial crisis. The main economic event of 2009 was that various banks were busy fixing their balance sheets, but now the focus is on the risk associated with sovereign debt. This may be the beginning of a downward journey for sovereigns, evidence of which we have already seen,’ he said. He thinks other countries may follow the likes of Greece, Ireland and Spain into trouble.
Sovereign defaults top 2010 risk hitlist (Reuters) - The risk that deteriorating government finances could push economies into full-fledged debt crises tops a list of threats facing the world in 2010, according to a report by the World Economic Forum. Major world economies have responded to the financial crisis with stimulus packages and by underwriting private debt obligations, causing deficits to balloon. This may have helped keep a worse recession at bay, but high debt has become a growing concern for financial markets. The risk is particularly high for developed nations, as many emerging economies, not least in Latin America, have already been forced by previous shocks to put their fiscal houses in order, the WEF think tank said in its annual Global Risks report ahead of its meeting in Davos, Switzerland.
DAVOS PREVIEW: problems pile up for post-crisis world (Reuters) - The world economy is back from the brink after a mammoth $5 trillion in fiscal and monetary stimulus but the list of things for the rich and powerful to worry about in Davos next week is longer than ever. Perhaps the biggest unknown for 2010 is how smoothly the world's central banks can withdraw the monetary crutch that buoyed markets in 2009. Beyond that, the worsening finances of both governments and individuals raises the spectre of sovereign debt defaults and may also mean the next leg of the crisis is social, Klaus Schwab, executive chairman of the World Economic Forum that organises the Davos gathering, said on Wednesday. "As a consequence of the debt situation of governments, of the fiscal situation of governments, we will have certainly squeezed public and private households and we will have increased unemployment figures," Schwab told a news conference.
Going to Davos to Redesign the Planet - How would you try to change the world if you had the chance? What would you propose to global leaders to make humanity better off? The Global Redesign Initiative is one of the core themes of next week's annual meeting of the World Economic Forum in Davos, Switzerland. I made a suggestion and got invited to Davos to discuss it. That's not an endorsement of my proposal by the WEF, but I am certainly looking forward to going next week! My proposal is that the world's knowledge should work for all of humanity. Some folks call newly developed knowledge "intellectual property," but this obscures the fact that we don't treat ideas and content the same way as we treat a house or land. We give inventors and authors a time-limited qualified monopoly on their creations to encourage them to bring them to other people through dissemination and commercialization, where appropriate. But, the whole point of the concept of intellectual property is that it's supposed to benefit society, that there is a balancing act between society's interest and self-interest.
Japanese debt fears could spark global sovereign debt meltdown - Borrowing is set to surpass tax revenues as the Japanese government’s most important source of income this year, raising fears that even the slightest increase in bond yields could spark a global sovereign debt crisis.The land of the rising sun has long been proof that countries can run up debts while avoiding a crunch date, but as it finances deteriorate, it is being hit by the double whammy of falling demand for Japanese government bonds. The country’s demographics, which proved beneficial in the 1990s, as the ageing population invested heavily in JGBs in the run-up to their retirement, are now working against it. As these people move into the decumulation phase, they are selling down their bond holdings and the household savings ratio is set to fall below zero.
The Risky Rich - Nouriel Roubini - Rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The US and Japan might be among the last to face the wrath of the bond-market vigilantes: the dollar is the main global reserve currency, and foreign-reserve accumulation – mostly US government bills and bonds – continues at a rapid pace. Japan is a net creditor and largely finances its debt domestically. But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed. The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP. The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan. At least European voters are willing to pay higher taxes for their public services. If America’s Democrats lose in the mid-term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetizing the fiscal deficits would then become the path of least resistance: running the printing presses is much easier than politically painful deficit reduction.
Debtor Nations: The Debt Bomb Facing the World - BusinessWeek - If policymakers focused their attention in 2009 on dragging the global economy out of recession, this year looks likely to center on reining in the massive piles of government debt built up by big bailout packages. Failing to wrestle down the fiscal debt monster could stall the nascent worldwide economic recovery.Already this year, international rating agencies have warned about unsustainable budget deficits in Greece and Ireland, and most members of the euro zone have sailed past the 3% budget deficit cap required for membership in the common European currency. Government debt ratios in the U.S. and Britain could take decades to return to normal levels.Countries are fiendishly trying to tackle the problem. On deck for this year are spending cuts, tax increases, and other belt-tightening measures designed to corral overstretched government accounts. Yet politicians must balance tougher fiscal policy with maintaining continued support for weak domestic production. Economists fear pulling back too soon could ruin attempts to reignite the economy.Click on to see how indebted some of the world's largest countries are—and who are the deepest in the red—as well as what they're doing to deal with the problem.
The Global Debt Bomb - Forbes - The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell--for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery. Traders like Bass could make a lot of money betting against sovereign debt the way they shorted subprime loans at the peak of the housing bubble. National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceding five years. The U.S. has allowed the total federal debt (including debt held by government agencies, like the Social Security fund) to balloon by 50% since 2006 to $12.3 trillion. The pain of repayment is not yet being felt, because interest rates are so low--close to 0% on short-term Treasury bills. Someday those rates are going to rise. Then the taxpayer will have the devil to pay.
The debt crisis in graphs - Telegraph (slide show) - Economies will find the painful process of deleveraging harder than in previous crises because of the global nature of this one, according to a new report from management consultants McKinsey. In a wide-ranging study of 45 debt crises since the Great Depression of the 1930s, McKinsey finds that the episodes of belt-tightening on average lasted between 6 to 7 years. The study also found that 10 sectors in five different countries are the most likely to be focused on paying down debt over the next few years:
Leaders Prepare For Disappointment in Europe - WSJ - With warnings of another slowdown in the euro-zone economy and powerful head-winds in the U.K., policy makers this week appeared to be preparing consumers and investors for disappointment. Juergen Stark, a member of the European Central Bank's policy council, said that the recovery in the 16-country euro zone could lose traction in the first part of this year. "It is likely that the first half of 2010 will go more slowly than in the second half of 2009," . "This doesn't mean a double-dip recession, but more in the character of a gradual and bumpy economic recovery over the next quarters," Mr. Stark said. Private domestic demand in the euro zone has been persistently weak, leaving economies to rely unduly on temporary life-support from government stimulus programs and export demand from Asia and the U.S. Without them, Europe's nascent recovery is in trouble.
Eurozone inflation thrills - FT - Since the launch of the eurozone more than a decade ago, inflation in the region has, typically, been pretty stable. But the European Central Bank is having to get used to the volatility created by rapidly-changing oil and food prices. Its January monthly bulletin highlights the latest challenge: “base effects” - the impact of changes in prices 12 months earlier - are going to exert significant upward pressure on annual inflation rates during 2010, even though price pressures remain extremely weak (and, some might argue, the risk of deflation has not totally disappeared). ECB economists calculate that base effects from energy and food components will push headline inflation up by 1 percentage point in the period from November 2009 to November 2010.
Income and Distribution Comparisons - This is a set of very useful data on income and inequality from the OECD Factbook. To make it fit on my blog I’ve had to reproduce the charts in somewhat cramped and hard to read form, but if you click on each image you’ll see a larger version: ... On the top, you see the median income in different OECD countries. As far as the United States is concerned, this looks similar to what you see with per capita GDP. If you apply Purchasing Power Parity adjustments to the data, Americans, where people devote a lot more time to working for money, earn a lot of money. We are, however, beaten out not only by Luxembourg’s tax haven but also by the Swiss. Most galling of all, the median Dutchman makes more money than the median American even though the Dutch barely work at all ...At the bottom decile, things look totally different. The poorest ten percent of Americans are in about the same shape as the poorest Greeks or Czechs. Even the UK, which is not normally thought of as pursuing especially egalitarian or statist policies has poor people doing way better than ours. Our rich people, however, are kicking ass. That the median Canadian earns slightly less than the median American doesn’t account for the fact that the median Canadian also gets free health care on top of that
The U.K. Is About To Crash Along With The Sovereign-Default PIIGS - Portugal, Italy, Ireland, Greece, and Spain, are the 'PIIGS', and they're teetering on the brink of sovereign default. Yet the world needs to come up with a new acrononym fast because the U.K. is rapidly joining their ranks.Check out the chart below, taken from a Citi report. It shows each nation's credit default swap spread vs. its 'DDI', which is basically just a measure of financial condition. (Citi: 'The “DDI” averages the debt/GDP ratio and deficit/GDP ratio of each country and calculates each country as a % of the average')The U.K. looks just as bad as the most notorious sovereign debt potential disasters:
Fitch: UK Plan To Halve Budget Deficit Too Slow - The UK government plans to halve its deficit by the fiscal year ending March 2014 from an expected 12.6% of gross domestic product in the fiscal year ending March. But Brian Coulton, Fitch Ratings' Head of Europe, Middle East and Africa Sovereigns and Global Economics, told investors that that four-year timescale is too slow.... In May, fellow agency Standard & Poor's placed the U.K.'s AAA credit rating on a negative outlook and said a downgrade could follow if a credible debt reduction plan isn't in place after a general election due by June 3.
A UK money supply shock - The Bank of England on Thursday published provisional estimates of broad money (M4) and credit (M4 lending) for December, noting that the former fell 1.1 per cent on the previous month.Meanwhile, December also saw a sharper than expected annual rise in CPI of 2.9 per cent.According to Richard McGuire, senior fixed income strategist at RBC Capital Markets the M4 fall was the largest monthly drop since records began in 1982.The measure took the year-on-year rate down from 9.2 per cent to 6.4 per cent — its lowest reading since October 2003.An increase of 0.9 per cent on the monthly figure had been expected
King Says ‘Undesirably Low’ U.K. Money Supply to Curb Inflation - (Bloomberg) -- Bank of England Governor Mervyn King said “undesirably low” money supply growth will curb inflation and return it to the 2 percent goal, suggesting he’s not yet ready to unwind emergency stimulus. “Provided monetary growth remains well under control --and remember at present it is undesirably low -- inflation should return to target in the medium term,” King said in a speech at Exeter University in England late yesterday. The recent pickup in inflation “should be temporary,” he said. Bonds dropped after data yesterday showed the inflation rate jumped the most since at least 1997 in December, posing a challenge to policy makers as they consider when the economy will be strong enough to endure higher interest rates. King also suggested that the bank’s task is complicated by doubt on how fast the next government will cut the record budget deficit.
Standard Life Warns U.K. Over Credit Rating - The U.K. government's triple-A credit rating is "extremely vulnerable" and the economic and political situation "highly toxic," one of Britain's largest money-management firms warned Monday. Standard Life is the latest asset manager to express concern about the U.K.'s ballooning public-sector debt and the risk that it will lose its status as one of the world's most creditworthy borrowers. Standard Life manages £156.5 billion ($254.45 billion) of assets, according to its Web site.
Chinese super-rich eye London homes - Times Online - According to a world wealth report published by Merrill Lynch and Capgemini last year, the number of dollar millionaires in China outstripped the number in the UK for the first time in 2008. Only the US, Germany and Japan now have more millionaires. “The influx of Chinese wealth [to Europe] has been primarily in the London market,” said Aaron Simpson, founder of Quintessentially, the luxury concierge service that has offices in Shanghai, Beijing and Hong Kong. “People feel that it’s on an upward trend and it’s a good time to buy. A lot of people come to take advantage of the private healthcare.” Simpson said three mainland Chinese clients were looking for properties to buy in London with budgets ranging from £8m to £17m
50-year decline in housing affordability - The BBC website has a summary of the key points in a report issued by the Halifax about the housing market over the last 50 years. The main headline is that houses have become less affordable, with the average annual price rise of 2.7% outstripping the 2% annual rise in incomes over the period. There have been 4 periods of boom in house prices: 1971-73, 1977-80, 1985-89, and 1998-2007, with the greatest acceleration in the last decade. In 1959 the average house cost £2,507 (compared with an average price in December 2009 of £162,103 according to Nationwide Building Society) and about 14% of them did not have an indoor toilet.
UK sovereign sukuk? Yes, no, maybe … Reuters - Given that a general election looms and parties are out to get as many votes as they can, I half- expect grand promises to expand the Islamic financial sector, which is still growing despite the crisis.At an event hosted by law firm Norton Rose, both major British political parties went out of their way yesterday to stress London’s superiority in matters of Islamic finance — but neither was willing to expand on what it lacks most: a sovereign sukuk. If the UK issued a sukuk (roughly described as an Islamic bond) it would
Eastern European immigration 'has hit low-paid Britons' | UK news | The Observer - An "unprecedented" influx of some 1.5 million eastern European workers into the UK over the past six years is likely to have had a negative impact on the wages of the lowest-paid British workers, according to a major report ordered by the Equality and Human Rights Commission (EHRC).While the report, written by the Migration Policy Institute, claims the contribution of the new migrants to the UK's economy is "probably small but positive", it concludes that there is evidence that "the recent migration may have reduced wages slightly at the bottom end of the labour market, especially for certain groups of vulnerable workers". It also claims there is a risk that the recent influx "could contribute to a 'low-skill equilibrium' in some economically depressed local areas".
Russia: Fitch raises outlook to stable - Fitch Ratings has today revised the Russian Federation’s ratings outlook to stable from negative. This means Fitch has changed its view that a sovereign rating downgrade is likely. A stable outlook means no ratings change is expected.
Ukraine cenbank: IMF funds not for state budget - Ukraine’s central bank will not give $2bn of IMF funds to the government to finance the state budget, though is willing to sell the foreign currency in exchange for the Ukrainian hryvnia. “The central bank is ready to sell any necessary amounts of foreign currency to the finance ministry to secure the government’s external payments, if necessary,” the central bank said in a statement on its website (not yet translated).
New IMF, Same Old Problems - WSJ - For the past couple of years, the International Monetary Fund has been thumping its chest that it has changed and is ready to take the lead on global economic issues. A report by the IMF’s independent evaluation office, which is charged with critiquing the institution, suggests the IMF still has a long way to go. Only a minority of officials in the richest, most powerful countries, found the IMF’s analyses “compelling,” the evaluation group found.IMF staffers working on rich countries were also frustrated. When analyses were critical, the rich countries “discouraged” IMF staffers from talking to the press, according to the evaluation group. “A desire (reinforced by [IMF] management) to avoid displeasing the authorities, was a fact of life for staff working on the advanced countries, and a challenge to the independence of their analysis,” the reports said.
Italy to Require Anyone Who Uploads Video to the Internet to Obtain Government Authorization - New rules to be introduced by government decree will require people who upload videos onto the Internet to obtain authorization from the Communications Ministry similar to that required by television broadcasters, drastically reducing freedom to communicate over the Web, opposition lawmakers have warned. The decree is ostensibly an enactment of a European Union (EU) directive on product placement and is due to go into effect at the end of January after being subjected to a nonbinding appraisal by parliament. Opposition lawmakers held a press conference in parliament to denounce the new rules — which require government authorization for the uploading of videos, give individuals who claim to have been defamed a right of reply and prevent the replay of copyright material — as a threat to freedom of expression.
Consumption Prospects and Rebalancing - In several previous posts, I've emphasized the importance of future US consumption behavior in determining whether the global imbalances shrink, or revert to their pre-crisis configuration.    An IMF SPN by Lee, Rabanal, and Sandri weighs in on the question of consumption. From the executive summary: U.S. household consumption declined sharply in late 2008, marking a departure from the trend of a steady increase in U.S. consumption as a share of income since the 1980s. Combining econometric and simulation analysis, we estimate that this departure will be sustained beyond the crisis: the U.S. household consumption rate will likely decline somewhat further from its current level, as the saving rate rises to around 6 percent of disposable personal income (from nearly 5 percent in 2009). Compared to the pre-crisis years (2003â€“07), this saving rate implies a decline in U.S. private-sector demand on the order of 3 percentage points of GDP.The paper (also discussed by Free Exchange) provides a nice summary of relevant statistics:
Dubai's Debt Could Be as Much as $170 billion - The total debt of cash-strapped Dubai could be as much as $170 billion, much higher than earlier reported, according to a report by EFG-Hermes regional investment bank. "The total debt held by Dubai Inc could well be in the range of 130-170 billion dollars," the bank said in its 2010 UAE Yearbook, a copy of which was received by media on Tuesday. Dubai Inc is a term used to refer to the Dubai government and its government-related entities. Dubai shook world markets in November when it said it wanted to request a freeze on debt repayments by its largest and most-indebted conglomerate, Dubai World. At the time, Dubai's total debt, including that of its state firms, was reportedly 80 billion dollars, with Dubai World owing 59 billion dollars.
Some Dubai World creditors may offload loans: report - Some creditors to Dubai World, which is currently restructuring $22 billion of debt, are seeking to offload loans to reduce their exposure to the conglomerate, the Financial Times reported. The sellers are believed to be mostly some of the smaller international banks which are unhappy with the restructuring process, according to a Dubai-based banker cited by the daily. Dubai World is currently in talks with its creditors to finalize a formal standstill agreement that would last for six months, during which the conglomerate will further restructure its debt pile. Bank creditors often opt to sell their loans at a discount, allowing distressed debt funds to build positions and possibly influence the restructuring process.
The Global Financial Crisis: Lessons Learned and Challenges for Developing Countries - Peterson Institute for International Economics - In these remarks, I first offer my perspective on the causes of this crisis and how this crisis differs from previous global financial crises. This is a necessary precondition to learning the appropriate lessons from the crisis. Otherwise our lessons will be off-target or incomplete. Second, I offer some key relevant lessons under five headings: too good to be true is probably false; be better prepared; the myth of self-insurance; the role of the International Monetary Fund (IMF); and the future of globalization.
Worker Productivity Grows in Emerging Markets - For many years now, emerging economies like China and India have been able to draw business from the developed world by promising multinational companies cheap labor. A new report by the Conference Board shows the competitive threat is taking on a new dimension: Workers in emerging markets aren’t only cheap, their productivity is growing by leaps and bounds. The Conference Board compared productivity trends across 111 countries and found an upsurge in output per worker in developing economies while developed country productivity slows.
Parametric estimations of the world distribution of income - VoxEU - World poverty is falling. This column presents new estimates of the world’s income distribution and suggests that world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa. Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world.
The Unproven Tradeoff of Growth and Inequality - First, it’s not obviously true that the more free your markets, the faster you grow. Denmark, for example, has a higher GDP per capita than the United Kingdom (though lower than the United States). Maybe that’s because of oil and natural gas, so I’ll just say that you’d have to do some real analysis to prove that point. Also, as Kestenbaum pointed out in the podcast, the United States had extremely high top marginal tax rates during a period of very high growth after World War II. It would not shock me if you could find a regression showing that smaller government correlates with higher growth; but it would also not shock me if you could find a regression showing that greater income disparity correlates with lower growth
Regulating the poor out of a car - I had tweeted over the weekend on a story that the Tata Nano, which is sold for $2500 in India, is being fitted with safety and emissions features that will drive up its cost to $8000. We must not forget that the Nano is first and foremost a car for India, a country of about one billion people where fewer than two percent own a car. It was instigated by Ratan Tata, the chairman of the Tata conglomerate, India’s biggest corporation, in a gesture that looks as much philanthropic as business savvy. Watching the way whole families travel on motorcycles—rider, pillion passenger, and two children hanging on—and noting the terrible toll in road deaths involving two-wheelers, Tata called for a safer four-wheeled vehicle that bike riders could afford.
The Giant Vampire Squid's Journey to the East - Matt Taibbi’s Giant Vampire Squid was created in the recesses of 17th century London, for Goldman Sachs is but one of many; but, unlike Frankenstein’s monster, the Giant Vampire Squid is not a fable. It is as real as are its appetites and victims; and, although now badly wounded, the Giant Vampire Squid is still alive—and it’s headed east. The West, now indebted and drained of its wealth by the Giant Vampire Squid, is no longer its optimal venue. The emerging markets in the East with their high savings rates and largely untapped markets look to be its next victim—or at least appear to be so.
There Can Be No Bubble in China and the Madness of the Nobility - Just now on Bloomberg Television Peter Levene, the former Lord Mayor of London and distinguished chairman of Lloyds of London, said that there is no bubble in China because "China is so big, their domestic markets are so big, you cannot have bubbles there." Interesting theory. Of course China is in a financial bubble. It has been caused by years of pegging their currency at an artificially low rate to stimulate exports, multiplied by a state banking system that acted with command and control subsidies. And of course the US can been exporting monetary inflation for years through its dollar reserve currency. Someone had to absorb it. But it is what China does next, how they react to the bubble, how they manage the consequences of their financial engineeering, that matters. The US has been in several bubbles of late, and is handling them rather badly, as a result of their tolerance for Mad Hatters like Larry, Tim, and Ben in key policy positions.
Time to cage inflation tiger, say experts Economy chugs along at good pace, but some red lights ahead Even as China is set to achieve its targeted goal of 8 percent growth in gross domestic product (GDP) for 2009, economists have stressed that tackling high inflation should be the top priority for policymakers this year. Inflation is likely to accelerate to more than 5 percent before the middle of this year and reach 8 percent in the second half, Erwin Sanft, head of mainland and Hong Kong equities research at BNP Paribas, was quoted by Bloomberg as saying yesterday. China's GDP will surpass the 8 percent year-on-year growth in 2009 and continue to surge in 2010, Yao Jingyuan, chief economist of National Bureau of Statistics, said on Sunday. That confirms the consensus forecast by economists, although none of them are willing to estimate the actual growth figures.
Inflation in China is not necessarily a bad thing - Yesterday, the release of key economic indicators in China produced headlines like this: China Targets Inflation as Economy Runs Hot. The table below lists the full release, including the consensus expectations (Bloomberg's survey) for each statistic. (Here is the link for the actual data release.) The inflation pop sparked a lot of market angst yesterday. Of course, this is just a single data point; but if inflation does build, and the government insists on maintaining its tight peg against the $US, then inflation will do what US consumers and Asian savers have not: reverse trade flows. Specifically, and holding all else equal, sizable inflation in China would drive up the value of its real-exchange rate (REER), where the REER is the nominal exchange rate adjusted for relative prices in China versus its trading partners - faced by the Chinese.
Vietnam central bank lowers reserve ratio - Just as China raises its reserve ratio for banks, Vietnam has lowered theirs. The State Bank of Vietnam has lowered the mandatory reserve ratio from 7 to 4 per cent for deposits of less than a year, and from 3 to 2 per cent for longer deposits. (China raised its ratio from 5 to 5.5 per cent, effective today.) The Vietnamese change will be effective from February. The change suggests increased confidence and risk appetite by the Vietnamese central bank, as banks will have a smaller capital buffer in difficult times
China growth quickens, points to tighter policy (Reuters) - Gross domestic product expanded 10.7 percent between October and December, compared with a year earlier, below market expectations of 10.9 percent but up sharply from a revised 9.1 percent in the third quarter. "Obviously the month-on-month growth momentum is very strong," said Xing Ziqiang, an economist at CICC in Beijing. "So I think the chances for us to see an interest rate rise in the first quarter are increasing." For all of the year, the economy grew 8.7 percent. That handily exceeded the official target of 8 percent, a goal deemed the minimum needed to preserve social stability and one that some skeptics dismissed as fanciful well into 2009.
China's economy roars ahead - CHINA'S economy was 10.7% larger in the fourth quarter of 2009 than it was a year earlier, a rate of growth that beat estimates. In December, industrial production grew 18.5% and retail sales increased 17.5%. Based in part on China's performance, that World Bank revised up its expectations for global growth in 2010, from 2% to 2.7%. Of course, the government economic supports that helped produce this recovery haven't come without some side effects: Banks lent out US$14.58 billion in new mortgages in Shanghai in 2009, a 1,600% increase from the previous year, the South China Morning Post reported. Of the total, US$5.7 billion went to buyers of new properties and US$8.88 billion to those buying second-hand properties, according to the People's Bank of China. Average prices of Shanghai homes rose 68% from 2008.
China's home mortgage lending up 48% in '09: central bank - China's yuan-denominated individual home mortgage lending rose 1.4 trillion yuan ($204.98 billion) in 2009, up 47.9 percent from the previous year, said a report issued by the People's Bank of China, the central bank, on Wednesday.The growth rate was 37.4 percentage points higher than the previous year, said the report on China's investment flow in 2009.Meanwhile, the yuan-denominated property development lending gained 576.4 billion yuan in 2009, up 30.7 percent year on year, and the growth rate was 20.4 percentage points more than the previous year, the report said. The total mid-term and long-term loans in foreign and domestic currency expanded 7.1 trillion yuan in 2009, up 43.5 percent from the previous year, and the growth rate was 23.4 percentage points more than the previous year.
SAFE official encourages stronger capital controls - China Economic Review - Guan Tao, head of the international payment department of the State Administration of Foreign Exchange, over the weekend stated that stronger capital control were essential to maintaining stability in the Chinese currency and price level, reported the South China Morning Post. Fear of increased foreign capital inflows due to the global recovery have forced Chinese regulators to seek more targeted measures as a cumulative US$60 billion in hot money has flowed into China since September and the monthly inflow is anticipated to double as the yuan strengthens in 2010. Economists expect Beijing to effect more stringent monetary policy measures in the coming months, including an increase in the required reserve ratio.
China tells banks to halt loans - Chinese regulators have told some banks temporarily to halt lending amid growing fears of asset bubbles and inflation. The push to curb credit growth follows frenetic lending activity by Chinese banks that raised concerns about overheating in the economy. The crackdown prompted stock market falls around the world as investors worried about the impact of China’s tightening on its growth. Traders said such concerns added to fears over the outlook for Greece, which is struggling to fund the eurozone’s biggest deficit. See also FT Alphaville on China’s property bubble.
China Asks Some Banks to Limit Lending on Insufficient Capital (Bloomberg) -- China has told some banks to limit lending and will restrict overall credit growth in the nation to 7.5 trillion yuan ($1.1 trillion) this year, banking regulator Liu Mingkang said. Some lenders failed to meet regulatory requirements including those for capital and were asked to rein in credit, Liu, chairman of the China Banking Regulatory Commission, said in an interview today in Hong Kong. The regulator hasn’t asked all Chinese banks to limit lending, he said without identifying those that had been told to do so.
Chinese buy more U.S. assets than U.S. buys in China - For the first time, Chinese investment in U.S. companies has eclipsed U.S. purchases of Chinese entities, a trend analysts say is fueled partly by depressed American assets.In 2009, Chinese buyers snapped up $3.9 billion of U.S. assets, nearly four times the level in 2008, says Dealogic, a data-tracking firm. By comparison, U.S. buyers plowed $3 billion into Chinese entities last year, down 80% from 2008.It's too early to tell whether this pattern will hold. Chinese buyers represented only 3% of the $118.7 billion in U.S. foreign investment last year. Yet China ranked as the ninth-largest foreign investor in the U.S., and among the minority that increased its stake amid a sputtering global mergers-and-acquisitions market.
Do the data support Krugman’s China bashing? - From Beijing, things look rather different. China’s merchandise exports have collapsed from 36% of GDP in 2007 to around 24% last year. China’s current-account surplus has fallen from 11% to an estimated 6% of GDP. In 2007 net exports accounted for almost three percentage points of China’s GDP growth; last year they were a drag on its growth to the tune of three percentage points. In other words, rather than being a drain on global demand, China helped pull the world economy along during the course of last year.Foreigners look at only one side of the coin. China’s imports have been stronger than its exports, rebounding by 27% in the year to November, when its exports were still falling. America’s exports to China (its third-largest export market) rose by 13% in the year to October, at the same time as its exports to Canada and Mexico (the two countries above China) fell by 14%.
Assertive China goes a great leap too far - The possibilities that spin from the Google-in-China and China-in-Google story are potentially game-changing, and they may reveal more about vulnerabilities in China than the rest of the world. Sources who have been briefed on the investigation say the cyber-hacking that prompted Google to step towards pulling out of China was more about theft of source code than tampering with Gmail accounts. Censorship was also important, but a separate issue.Google says the cyber attacks originated in China. A report by iDefense, a cyber intelligence firm, says 33 other major US firms were also hacked from a "single foreign entity consisting either of agents of the Chinese state or proxies thereof". At the same time, US intelligence leaks say US defence systems are facing an unprecedented surge of attacks from China. One implication of this evolving Google-plus story is that China's new assertiveness on the world stage could already be drifting into over-reach. The Obama Administration bent over backwards to accommodate China's legitimate aspirations but may now take a different tack.
Google Hackers Targeted Source Code of More Than 30 Companies - A hack attack that targeted Google in December also hit 33 other companies, including financial institutions and defense contractors, and was aimed at stealing source code from the companies, say security researchers at iDefense. The hackers used a zero-day vulnerability in Adobe Reader to deliver malware to many of the companies and were in some cases successful at siphoning the source code they sought, according to a statement distributed Tuesday by iDefense, a division of VeriSign. The attack was similar to one that targeted other companies last July, the company said.
Google.cn is going rogue - Within 12-hours of Google's dramatic announcement about possibly pulling the plug on Google.cn, some serious changes were visible in the Chinese version of the search engine - the 'self-censorship' has gone, and Google.cn was clearly going rogue. Firstly, the auto-suggest function on Google.cn reappeared. This got disabled after last summer's major crackdown on web pornography and indecency in China, which saw Google.cn getting publicly humiliated and reprimanded on state-TV's news programmes. Essentially, the auto-suggest was suggesting some highly, ummm, suggestive phrases, and Google quickly pulled that feature. Also visible on the newly 'liberated' Google.cn is that text and image searches are now showing some highly sensitive photos and page results, which were definitely not appearing before this week's ultimatum from Google to the Chinese authorities.
Google Says It’s in Talks With China on Search Engine - Google Inc. said it has begun talks with the Chinese government about the company’s plan to stop censoring results from its search engine, after saying it may quit the country because of cyber attacks. Google will hold more talks with Chinese authorities “in the coming days,” it said in an e-mailed response to questions today. The operator of the world’s most-popular search engine last week said it plans to operate an unfiltered search-engine service in China -- a move that may lead to the company closing down its offices in the country -- pending talks with the government. The California-based Internet company said its computer system faced a series of “highly sophisticated” attacks that originated in China.
Google Sends Right Message to China’s Police State (Bloomberg) -- Here’s hoping Google Inc. makes good on its threat to quit China. It’s time someone in the U.S. stopped coddling the Chinese police state. The American government can’t, or won’t. Though Google is late coming around as an advocate of free speech in China, it still deserves applause. The company said last week it would stop censoring its Chinese search engine, Google.cn, as the communist government dictates -- and might even close the business. Google got religion after discovering that last month hackers -- read Chinese government technicians -- tried to access accounts of, and managed to steal information from, human-rights activists who used Google e-mail. Hackers went after at least 20 other companies’ computers, Google said, inluding Adobe Systems Inc., the leading maker of graphics design software;
Google squirts water-pistol at China’s Great Firewall amidst hypocrisy - China’s foreign ministry said last Thursday that: “China welcomed international internet companies to conduct business within the country according to the law”. Well, that’s all well and good if the Chinese authorities are protecting users from viewing porn and overt sedition but the assumption of the foreign Press has been that the hacker attacks were orchestrated by the Chinese government to carry out investigations against human rights activists.That sort of practice is, of course, unacceptable to us in the West, but doesn’t it smack of hypocrisy? There’s something awkwardly deceiving about Google’s moral stance on China when its corporate motto “do no evil”, an anachronism now but perhaps a catchy shibboleth in its time, is an almost obscene declaration of double standards while it retains data mining to service ad revenues, coupled with surveillance, digital profiling and personal intrusion.
Why America and China will clash: The reason that the Google case is so significant is because it suggests that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong. The US has accepted – even welcomed – China’s emergence as a giant economic power because American policymakers convinced themselves that economic opening would lead to political liberalisation in China.If that assumption changes, American policy towards China could change with it. Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition. Combine this political disillusionment with double-digit unemployment in the US that is widely blamed on Chinese currency manipulation, and you have the formula for an anti-China backlash.
Will China squeeze the West on rare earth metals in the coming decade? Back in August the NY Times ran an article on rare earth metals which prompted us to set up an ongoing FirstRain saved search on the issue. The results of this ongoing report show the growing concern that China will need everything it is producing and it may be only a matter of time until the West is cut off from critical rare earth metals. For example from IEEE Spectrum this month: “A single country, China, mines more than 95% percent of the world’s supply of rare earth metals, found in permanent magnets, phosphors, lasers, capacitors, and superconductors. As recently as 2004, China used less than half of the rare earth metals it produced, but according to an estimate by the Industrial Minerals Co. of Australia, in Mount Claremont, China’s domestic demand will overtake its production in less than 10 years. Now Beijing is considering banning exports of some rare earth elements and limiting shipments of others to 35 000 metric tons a year, which would immediately threaten not just electronics manufacturing across the globe but also hybrid vehicles. A Toyota Prius, for example, requires about a kilogram of neodymium for its electric motor and as much as 15 kg of lanthanum for its battery pack.”
A new Chinese backyard? - THE Yomiuri Shimbun reports here, and Japanese diplomats have confirmed they believe it is true, that China is thinking about applying to take over Japan's refuelling mission in the Indian Ocean that was scrapped after the Democratic Party of Japan (DPJ) won power late last August. The mission was meant help in the international effort against al-Qaeda, by refuelling navies blocking gun-running and other shenanigans by sea. The DPJ argued that Japan's involvement breached its pacifist constitution. The issue became one of several straining ties between the United States and Japan, both of whom will wear forced smiles when they celebrate the 50th anniversary of their security alliance tomorrow. America has long emphasised the importance of the mission. The exquisitely uncomfortable question now is whether it deems the mission important enough to invite China to take it up.
Will China Rule the World - All of which raises the question of whether China will eventually replace the US as the world’s hegemon, the global economy’s rule setter and enforcer. Martin Jacques is unequivocal: if you think China will be integrated smoothly into a liberal, capitalist, and democratic world system, Jacques argues, you are in for a big surprise. Not only is China the next economic superpower, but the world order that it will construct will look very different from what we have had under American leadership. A world order centered on China will reflect Chinese values rather than Western ones, Jacques argues. Beijing will overshadow New York, the renminbi will replace the dollar, Mandarin will take over from English. Gone will be the evangelism of markets and democracy. China is much less likely to interfere in the internal affairs of sovereign states. But, in return, it will demand that smaller, less powerful states explicitly recognize China’s primacy (just as in the tributary systems of old).
How green is China? - VoxEU - China’s economic growth has profound environmental implications. This column estimates the household carbon emissions of China’s major cities. We have used individual and institutional data to measure household carbon emissions across a sample of 74 Chinese cities. We have found that the “greenest” cities based on this criterion are Huaian and Taizhou while the “dirtiest” cities are Daqing and Mudanjiang. However, even in China’s brownest city, Daqing, a standardised household emits only one-fifth of the carbon produced by a standardised household in San Diego, America’s greenest city.
Memo to IPCC: Please reanalyze ALL of your conclusions about melting ice and sea level rise - Good news: The Himalayan glaciers will probably endure past 2035. Bad news: If we don't reverse our emissions trend soon, their disappearance is likely to become irreversible before then. MEMO TO IPCC: If you are going to review the apparently mistaken claim in your 2007 report that the Himalayan glaciers would melt by 2035 — please review all of the latest scientific literature and observations on that subject AND please update your equally outdated sea level rise projections.MEMO TO MEDIA: It isn’t news that the 2007 projections by the UN Intergovernmental Panel on Climate Change are not accurate. The real news is that the 99% of their “mistakes” are UNDERestimates of likely impacts. Indeed, they lowballed the sea level rise projections so badly that even the Bush administration rejected them within a year (see “US Geological Survey stunner: Sea-level rise in 2100 will likely “substantially exceed” IPCC projections).
Black Soot May Speed Himalayan Glacier Melt : Discovery News - Himalayan glaciers, which supply drinking water to more than a billion people, may be threatened not only by warming from greenhouse gases, but also by soot generated far below on the plains of India, Pakistan, Nepal and Bangladesh. Researchers believe that high levels of soot over the vast plains to the south and west of the Himalayas may be speeding the melting of glaciers in two ways.The first involves changes in weather. According to the researchers' models, beginning each year in April, high soot levels in the atmosphere absorb sunlight, warming the air.As the monsoon season starts in May, the warmed air draws in extra moisture and pulls it over the Tibetan Plateau. This process drops increasing amounts of rain on the glaciers, according to the models, speeding their melt.As the glaciers thaw, the dark ground beneath the snow absorbs more heat, which also encourages the melting effect.
NYT: Past Decade Warmest Ever, NASA Data Shows - The decade ending in 2009 was the warmest on record, new surface temperature figures released Thursday by the National Aeronautics and Space Administration show. The agency also found that 2009 was the second warmest year since 1880, when modern temperature measurement began. The other hottest recorded years have all occurred since 1998, NASA said. James E. Hansen, director of NASA’s Goddard Institute for Space Studies, said that global temperatures varied because of changes in ocean heating and cooling cycles. “When we average temperature over 5 or 10 years to minimize that variability,” said Dr. Hansen, one of the world’s leading climatologists, “we find global warming is continuing unabated.”
NASA: 2009 tied for 2nd-warmest year, 00s hottest decade too - As the past year's temperature data came in, it became increasingly clear that 2009 was going to be a very hot one unless something unexpected happened in the latter months of the year. Something unusual did in fact happen, but it only ended up shifting warm and cold air around. As a result, when NASA completed its analysis of 2009's surface temperatures, the year ended up in a statistical tie with a handful of others as the second warmest on record. According to NASA's methods, the warmest year on record was 2005, and 2009 shares the second-warmest title with 1998, 2002, 2003, 2006, and 2007. No surprise, then, that the past decade was also the warmest record, a finding that's far more indicative of climate change than any given year's results.
Marginal Revolution: The "health care betrayal" and Waxman-Markey - If there's one lesson from the health care debacle, it is that Waxman-Markey was and is a dead end. Many of us objected to the bill on the grounds that it supports a lot of phony offsets for twenty years, imposes lots of costs and regulation in the meantime, and then never really does much to help climate change, given the difficulties of political precommitment. I believe that people with these objections, such as myself, were viewed as "obstructionists" by many or as people who were simply looking for an excuse not to support the bill. But the idea that Congress was just playing around, and had no real will to address the problem, should now be much, much more credible. For all the talk about Waxman-Markey as a "framework," I see plenty of reasons -- all the more now -- to think Congress never meant to follow through.
Senator Aims to Keep E.P.A. From Regulating Climate-Altering Gases - NYTimes - In a direct challenge to the Environmental Protection Agency’s authority, Senator Lisa Murkowski, Republican of Alaska, introduced a resolution on Thursday to prevent the agency from taking any action to regulate carbon dioxide and other climate-altering gases. Ms. Murkowski, joined by 35 Republicans and three conservative Democrats, proposed to use the Congressional Review Act to strip the agency of the power to limit emissions of greenhouse gases under the Clean Air Act. The Supreme Court gave the agency legal authority to regulate such emissions in a landmark 2007 ruling.The agency has declared carbon dioxide and other greenhouse gases to be a threat to human health and the environment.
Australia faces the “permanent dry” — as do we. - The story of Australia’s worst dry spell in a thousand years continues to astound. Last year we learned, “One farmer takes his life every four days.” This year over half of Australia’s agricultural land is in a declared drought. Unless we take start leading on climate action soon, America faces the same fate: In April, Science (subs. req’d) published research that “predicted a permanent drought by 2050 throughout the Southwest” — levels of aridity comparable to the 1930s Dust Bowl would stretch from Kansas to California. What causes this climatic disaster?According to the study, as the planet warms, the Hadley Cell, which links together rising air near the Equator and descending air in the subtropics, expands poleward. Descending air suppresses precipitation by drying the lower atmosphere so this process expands the subtropical dry zones. At the same time, and related to this, the rain-bearing mid-latitude storm tracks also shift poleward. Both changes in atmospheric circulation, which are not fully understood, cause the poleward flanks of the subtropics to dry. And that is separate from recent research that finds “future reductions in Arctic sea ice cover could significantly reduce available water in the American west” (subs. reqd). With the Arctic melting at a stunning rate, the West is facing a double drought whammy from climate change.
Populate and pollute | Herald Sun - AUSTRALIA would find it much easier to meet its climate change targets if it slashed the migrant intake, a Monash University report says. The study said the Federal Government was in a difficult policy situation because record immigration was undermining its efforts to cut greenhouse gas levels.Net immigration rose to 285,000 last year, almost triple the number five years ago.Australia will have a population of about 35 million by 2050 given current migration and fertility trends.Monash demographers Dr Bob Birrell and Dr Ernest Healy have analysed Treasury forecasts for carbon emissions to determine the part played by the population boom.
World leaders make new call for clean energy commitments - World leaders raised a fresh alarm on global warming Monday, urging international action to increase use of clean energy at a four-day forum that opened in the oil-rich emirate of Abu Dhabi."If we don?t act now, our coral reefs and rainforests will die, desert countries will become unbearably hot and low lying countries like the Maldives, will slip beneath the rising seas," said the president of the Maldives, Mohammed Nasheed."Tackling climate change is not like dealing with other global issues, such as trade or disarmament. We do not have the luxury of time to meet, year after year, in endless negotiations," the leader of the low-lying Indian Ocean nation told participants at the World Future Energy Summit.
Jeff Rubin At ‘The Business of Climate Change’ (video) - Jeff Rubin, the former Chief Economist of CIBC World Markets, speaks at The Business of Climate Change conference. Mr. Rubin predicts $225 per barrel oil by 2012 and with it the end of globalization, a movement towards local sourcing and a need for massive scaling up of energy efficiency.
Alaska faces Exxon Valdez clean-up conundrum - More than 20 years after tens of millions of litres of oil spilt from the tanker Exxon Valdez, significant amounts of the black stuff remain hidden under the surface of Alaska's beaches. Is the remaining oil harmful, or safely degraded? Should it all be cleared up? The debate is dividing researchers. Hasn't all the oil been cleaned up already? Not all of it. Some remains in layers beneath the beaches of Prince William Sound, which bore the brunt of the spill. A study by Michel Boufadel of Temple University in Philadelphia, Pennsylvania, and Hailong Li of China University of Geosciences (Nature Geosciences, DOI: 10.1038/ngeo749) suggests that oil is persisting because microorganisms are poorly supplied with oxygen in these layers and are unable to degrade the oil.
Monthly OPEC Surplus Oil Production Capacity Data Now Available - With the release of the January 2010 Short-Term Energy Outlook, the Energy Information Administration (EIA) extended its published monthly data series for surplus crude oil production capacity for members of the Organization of Petroleum Exporting Countries (OPEC) back to 1991 (see figure below). This is a frequently requested data series, because surplus production capacity is a key factor in understanding oil market trends and in forecasting world oil prices. Low and falling surplus production capacity generally characterizes a tight market and firming prices, while a high and rising level of surplus production capacity may signal a loose market balance and weakening prices.
The Oil Drum - Oil, Gas, and Electric Power: Some Issues for 2010 - It seems to me that the current recession is very much energy-related, and is likely to continue. The recession is occurring because the current US “system” (individual homes, private cars, many imports) was built for cheap ($20 barrel) oil and gas, and cannot function well using expensive oil and gas. I expect that the recession will experience some ups and downs, but will generally be worse by the end of 2010. Government revenues will continue to decline, making it increasingly difficult to support subsidies for renewables and to provide funding guarantees for nuclear and wind.
Have We Reached Peak Oil? - Remember the summer of 2008, when oil was approaching $150 per barrel and topping the headlines? The oil story quickly faded to the background when the financial crisis hit full-steam that September; we had bigger things to worry about in terms of the potential collapse of the worldwide financial system. Meanwhile, the deepening recession greatly reduced demand for oil. But while the world is awash in an excess supply of oil at the moment, I am convinced that the supply/demand balance of oil over the longer term is a critical issue that bears watching. Oil is so important because it is, at the moment, the primary source of transportation fuel, and transport costs affect the entire economy. Low oil prices cut the cost of doing business and help reduce geographic barriers, while high oil prices act as a "tax" on the entire system and force us to act more locally.
China and India Push Hard Down On the Petro Keynesian Gas Pedal :: Warnings of fast and massive overheating of the Chinese economic miracle, with similar warnings starting to be heard for the Indian economy, underline the basic common driver: Petro Keynesian growth in 2010. Unlike the more massive and more ineffective 'tax-and-spend' programs employed in the US, in Europe and Japan since late 2008, the classic Keynesian solution of spend now but tax later, or inflate and devalue later, the Chinese and Indian anti-recession programs have spent strategic resources estimated at about USD 750 billion for combined spending by both countries have been channelled to growth tweaking, low inflation, high multiplier spending in the sectors and processes that can and do accelerate economic growth. Chindia per capita oil and resource consumption is close linked to GDP growth. It will go on rising, fast, as the OECD slowly shakes out of its recession trough. Quite soon, this will bring back unfond memories of the 2007-2008 sequence on world commodity markets. This is already shown by the US commodities trading watchdog, the CFTC, expressing public concerns about "speculation"
Jumpstarting Energy Independence - More recently David Goodstein, professor of physics at Caltech, in his 2004 book, Out of Gas: The End of the Age of Oil, looked at Hubbert's research and more recent data and concluded that global demand for black gold will shortly exceed the world's ability to produce it. Goodstein also predicts that alternative energy sources - of the type DOE is funding in this latest round of grants - may be too little and too late to stave off serious disruptions to our way of life."Civilization as we know it will come to an end sometime in this century unless we can find a way to live without fossil fuels," Goodstein cautions.In the face of such a calamitous possibility, DOE's decision to fund innovative, early career scientists - to the tune of $150,000 a year for five years in the case of university researchers, and $500,000 a year for the same period for DOE's up-and-coming, in-house talent - is an important step in the right direction
Oil Prices and Domestic Petroleum Exploration and Wells Investment - In late 2008 we discussed that the dramatic decline in oil prices would lead to a sharp decline in domestic investment in petroleum exploration and wells. Sure enough domestic investment was cut by 50% in the 2nd half of 2009 ...The following graph compares real oil prices (data from the St. Louis Fed, adjusted with CPI) and real investment in petroleum exploration and wells in the U.S. (data from the BEA).This doesn't include investment in alternative energy sources. Not surprisingly there is a strong correlation between oil prices and investment. With oil prices now around $80 per barrel again, domestic investment will probably increase in 2010
Oil windfalls and living standards: New evidence from Brazil - VoxEU - Does the “resource curse” exist? This column presents new evidence from Brazil. Municipalities that receive oil windfalls report significant increases in spending on infrastructure, education, health, and transfers to households. However, the windfalls do not trickle down and much of the money goes missing. Indeed, oil revenues increase the size of municipal workers’ houses but not the size of other residents’ houses.
Oil in Haiti - Economic Reasons for the UN/US Occupation This article was first published in October 2009. - Oil in Haiti and Oil Refinery - an old notion for Fort Liberte as a transshipment terminal for US supertankers - Another economic reason for the ouster of President Aristide and current UN occupation (Haiti's Riches:Interview with Ezili Dantò on Mining in Haiti) There is evidence that the United States found oil in Haiti decades ago and due to the geopolitical circumstances and big business interests of that era made the decision to keep Haitian oil in reserve for when Middle Eastern oil had dried up. This is detailed by Dr. Georges Michel in an article dated March 27, 2004 There is also good evidence that these very same big US oil companies and their inter-related monopolies of engineering and defense contractors made plans, decades ago, to use Haiti's deep water ports either for oil refineries or to develop oil tank farm sites or depots where crude oil could be stored and later transferred to small tankers to serve U.S. and Caribbean ports. This is detailed in a paper about the Dunn Plantation at Fort Liberte in Haiti.
Haiti and U.S. Sugar Policy - So, here's the basics of U.S. sugar policy. Like other agricultural policies, U.S. sugar policy got its start in 1934 during the Great Depression. With prices of agricultural commodities (and everything else) plummeting, the government wanted to support prices in an effort to support farmers' incomes. After all, back then, a lot more of us were farmers, and unlike today, most farmers were poor. A lot of what the government did back then, even if it had good intentions, probably did more harm than good. People were hungry too, and one thing they did was destroy crops and limit agricultural production in an effort to support prices, which didn't help people to eat. But these policies probably did help to support farm incomes. And to some extent they still do. But an important thing to realize is that sugar was different. It was (and is) different from the other commodities because the U.S. imports a lot of it. Thus, to support prices, the government did not need to limit domestic production as much as it needed to limit imports.
One Quarter of US Grain Crops Fed to Cars - Not People, New Figures Show | One-quarter of all the maize and other grain crops grown in the US now ends up as biofuel in cars rather than being used to feed people, according to new analysis which suggests that the biofuel revolution launched by former President George Bush in 2007 is impacting on world food supplies.The 2009 figures from the US Department of Agriculture shows ethanol production rising to record levels driven by farm subsidies and laws which require vehicles to use increasing amounts of biofuels. "The grain grown to produce fuel in the US [in 2009] was enough to feed 330 million people for one year at average world consumption levels," said Lester Brown, the director of the Earth Policy Institute, a Washington thinktank ithat conducted the analysis.
Peak phosphorus | Energy Bulletin - As farmers and gardeners know, phosphorus is one of the three major nutrients required for plant growth: nitrogen (N), phosphorus (P) and potassium (K). Fertilizers are labelled for the amount of N-P-K they contain (for example 10-10-10). Physicist Déry applied the technique of Hubbert Linearization to data available from the United States Geological Survey (USGS) to phosphorus production in the following: The small Pacific island nation of Nauru, a former phosphate exporter.The United States, a major phosphate producer. The world.He tested Hubbert Linearization first on data from Nauru to see whether he could have predicted the year of its peak phosphate production in 1973. Satisfied with the results, he applied the method to United States and the world. He estimates that U.S. peak phosphorus occurred in 1988 and for the world in 1989.
Jim Rogers: Food shortages coming (CNBC Video) Co-founder of the Quantum Fund and Chairman of Rogers Holdings, Jim Rogers, spoke with CNBC to discuss the financial state of commodities. What's his view? Well, agricultural commodities will go through the roof and food shortages are coming.Rogers added, reports Daily Finance, that farmers cannot get loans to buy fertilizers, even though there are large shortages in several areas, which he feels is a significant buying opportunity for investors. If the economy ever rebounds then commodity prices will go up because of increased demand. If the economy continues to slump then central banks around the world will continue to print money at vast levels, while commodities will be used as a hedge against inflation.
Millions Against Monsanto - After years of complaints from the Organic Consumers Association and our allies, the Department of Justice is investigating how big biotech and food corporations, including Monsanto, are monopolizing and controlling our seeds, food and farming. On November 13, 2009, the Obama Administration opened a public comment period that closed on December 31, 2009, seeking comments and information about how corporate control of the food system affects average Americans. Organic Consumers Association members concerned that Monsanto and Big Food corporations have inordinate and dangerous power over where our food comes from and how it's produced, sent 8954 letters to the Department of Justice last month. Here's a bit of what they had to say.
Engineered maize toxicity claims roundly rebuffed - MONSANTO, the giant of genetically modified crops, has for the first time been forced to release raw data from toxicology studies it carried out on three strains of its modified maize. An external analysis of the data claims it shows that eating the maize could result in damage to the liver and kidneys, but this has been dismissed as unsupportable by a government agency and independent toxicologists. With legal help from Greenpeace and the Swedish Board of Agriculture, researchers at the Committee of Research and Information on Genetic Engineering, a French anti-GM lobby group, forced Monsanto to release the data from studies in which rats were fed with the three varieties of maize for three months.
Birth Of Production and The End of Life - The historical contradiction of agriculture has always been how its proliferation destroys the ecological conditions which made its existence possible. As civilization has expanded, it has converted wilderness into grazing and farm land, and ultimately, barren desert. The natural world takes the form of a cycle, but civilized man has turned this cyclic process into a resource to exploit. Instead of a cycle, the nature-human relationship becomes a linear transfer of life and energy one way, and pollution and destruction the other way. “Agriculture is the birth of production... The land itself becomes an instrument of production and the planet’s species its objects.”
Plant loss 'leads to fewer bees' - The decline of honeybees seen in many countries may be caused by reduced plant diversity, research suggests. Bees fed pollen from a range of plants showed signs of having a healthier immune system than those eating pollen from a single type, scientists found. Writing in the journal Biology Letters, the French team says that bees need a fully functional immune system in order to sterilise food for the colony. Other research has shown that bees and wild flowers are declining in step. "We found that bees fed with a mix of five different pollens had higher levels of glucose oxidase compared to bees fed with pollen from one single type of flower, even if that single flower had a higher protein content," he told BBC News. Bees make glucose oxidase (GOX) to preserve honey and food for larvae against infestation by microbes - which protects the hive against disease.
Biodiversity nears 'point of no return' - The decline in the world's biodiversity is approaching a point of no return, warns Hilary Benn. In this week's Green Room, the UK's environment secretary urges the international community to seize the chance to act before it is too late. Our ecological footprint - what we take out of the planet - is now 1.3 times the biological capacity of the Earth. In the words of Professor Bob Watson, Defra's chief scientific adviser and former chairman of the Intergovernmental Panel on Climate Change (IPCC), we are in danger of approaching "a point of no return". So the action we take in the next couple of decades will determine whether the stable environment on which human civilisation has depended since the last Ice Age 10,000 years ago will continue.
Monkey see, monkey calculate: How are primates' brains wired for math? - Scientific American - Like a lot of humans, monkeys might not be able to do calculus. But a new study shows that they can learn and rapidly apply abstract mathematical principles. Previous work has shown that monkeys and birds can count, but flexible applications of higher mathematic rules, the study authors asserted, "require the highest degree of internal structuring"—one thought largely to be the domain of only humans. So researchers based at the Institute of Neurobiology at the University of Tubingen in Germany set out to see whether rhesus monkeys could learn and flexibly apply the greater-than and less-than rule.
Slime Mold Beats Humans at Perfecting Traffic Networks - Since the best city planners around the world have not been able to end traffic jams, scientists are looking to a new group of experts: slime mold. That's right, a species of gelatinous amoeba could help urban planners design better road systems to reduce traffic congestion, a new study found. A team of researchers studied the slime mold species Physarum polycephalum and found that as it grows it connects itself to scattered food crumbs in a design that’s nearly identical to Tokyo’s rail system. Slime mold is a fungus-like, single-celled animal that can grow in a network of linked veins, spreading over a surface like a web. The mold expands by dividing its nuclei into more and more nuclei, though all are technically enclosed in one large cell.
Bacteria are more capable of complex decision-making than thought - It's not thinking in the way humans, dogs or even birds think, but new findings from researchers at the University of Tennessee, Knoxville, show that bacteria are more capable of complex decision-making than previously known. The discovery sets a landmark in research to understand the way bacteria are able to respond and adapt to changes in their environment, a trait shared by nearly all living things, and it could lead to innovations in fields from medicine to agriculture.In the long-term, the researchers think that scientists will be able to take the findings, published in the Proceedings of the National Academy of Sciences, and use them to tailor medicines in new ways to fight harmful bacteria or to find enhanced ways to use bacteria in agricultural or other applications.