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

Saturday, January 9, 2010

week ending Jan 9

Total Federal Reserve Bank Credit (30 year hockey stick graph) - the Fed's Balance Sheet

Fed’s Tools for Easing Stimulus Include Asset Sales, Kohn Says - (Bloomberg) -- Federal Reserve Vice Chairman Donald Kohn said the central bank has “no shortage” of tools for pulling back record levels of monetary stimulus, from raising the interest rate it pays on reserves to selling assets. “The appropriate use and sequencing of these tools is under active discussion by the FOMC,” Kohn told the American Economic Association’s annual meeting in Atlanta yesterday. “We will be able to unwind our actions when and as appropriate.” Fed officials are discussing a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet. The Federal Open Market Committee debated asset sales at its November meeting, with some members in favor and others warning that it would cause “sharp increases” in longer-term interest rates

Incoming FOMC Voters Keep Hawk-Dove Balance Mostly Intact - The new year brings a new set of voters to the Federal Open Market Committee, but the tilt of the committee won’t change much as hawks are replaced by other hawks and doves by other doves.The Federal Reserve’s interest-rate-setting body will spend much of the year weighing whether to tighten policy — as futures markets expect — while the economy recovers. But the new voting lineup probably won’t tilt the balance much from the 2009 FOMC. The four presidents of regional Fed banks joining the rotation this year are James Bullard of St. Louis, Thomas Hoenig of Kansas City, Sandra Pianalto of Cleveland and Eric Rosengren of Boston. They’ll join the eight permanent voters on the FOMC — seven governors of the Federal Reserve Board  and the New York Fed president. Every Fed policymaker, including presidents who are not voting this year, gets a voice at the table. But regional bank presidents tend to draw a bit more attention when they’re voters.

Fed Disagrees About Withdrawing Stimulus - WSJ - Federal Reserve officials squabbled about how to proceed with a program of mortgage-backed-securities purchases at their December meeting, with some saying a weak economy could warrant expansion and at least one arguing for scaling back, according to minutes of the meeting released Wednesday. The minutes show some officials worried the housing recovery could be cut short next year when the Fed stops buying mortgage debt and when other federal support programs end.

FOMC Debates Asset Purchases, Inflation as Economy Strengthens -(Bloomberg) -- Federal Reserve officials discussed whether the economy is strong enough to allow their $1.73 trillion of asset purchases to end in March and differed over the risk of inflation, minutes of their last meeting showed. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates, while one person sought a reduction, according to minutes of the Dec. 15-16 meeting of the Federal Open Market Committee released in Washington yesterday. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. The Fed’s debate is intensifying while Chairman Ben S. Bernanke and his colleagues are trying to withdraw unprecedented stimulus and emergency lending programs without impeding efforts to sustain a recovery.

Fed members in disagreement over when to end bond buys - (Fortune) -- How much should the Federal Reserve support the bond markets? The question, which has animated investors lately, was the subject of a debate at December's Fed meeting, according to minutes from that meeting released Wednesday.The minutes showed that a few officials on the Fed's policy-setting committee contended it "might become desirable at some point in the future" for the Fed to expand its purchases of certain bonds, should the tepid economic recovery cool further. The Fed has said it has already reached its target for Treasury purchases and aims to wind down the other programs in the first quarter.

Fed Minutes Show Division on Emergency Steps - NYTimes - Despite extensive government intervention in the housing market, some policy makers at the Federal Reserve are worried that even more might need to be done.  The minutes of the Federal Open Market Committee’s mid-December meeting, released on Wednesday, reflected a lingering wariness about the strength of the recovery in light of high unemployment and substantial slack in the economy.  At the same time, unease is growing that a tentative comeback in the housing market could fall apart as a tax credit for home buyers expires and the Fed’s program to hold down mortgage rates comes to a close.

FOMC Discussed Expanding Purchases If Economy Weakens (Bloomberg) -- Federal Reserve officials last month debated increasing and extending asset purchases should the economy weaken, with a few favoring the move and one seeking a reduction, minutes of their last meeting showed. Policy makers also differed over whether risks are greater that inflation will speed up or slow down too much, the Fed’s Open Market Committee said today in minutes of its Dec. 15-16 meeting. Some officials said “quite elevated” slack in the economy would damp prices, while others saw a risk of faster inflation from the Fed’s “extraordinary” stimulus. “To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and place,” the minutes said. - QE: a stock or flow concept? - I am struck by the similarity of the disagreements on both sides of the Atlantic as the active process of quantitative easing (or credit easing) seems to be coming near to an end. Krishna wrote in today’s FT about arguments within the Fed over whether it is the quantity of money created to purchase mortgage backed securities from Fannie Mae and Freddie Mac that matters for boosting the economy and the US housing market or whether it is the continued flow of those purchases. On our UK pages, Dan Pimlott teased out the same argument over the Bank of England’s purchases of government bonds. This is an incredibly important issue, theoretically and practically, and though some people have very strong views, no one really knows how or whether unorthodox monetary policy works.

Hoenig: Fed Must Tighten Policy 'Sooner Rather Than Later' A veteran U.S. Federal Reserve official said Thursday the central bank shouldn't wait long to tighten the stance of monetary policy in order to keep longer-run inflation pressure contained, in what appears to be a recovering economy. "The ballooning federal deficit must be controlled and reduced," because if it isn't, "eventually, there will be pressure put on the Federal Reserve to keep interest rates artificially low as a means of providing the financing," Hoenig said. And that would be a recipe for hyperinflation, he warned.

The 2010 Outlook and the Path Back to Stability, by Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City: ...Policy Challenges Ahead As I have indicated, a key contributor to the economic recovery is the extraordinary fiscal and monetary stimulus provided by governments and central banks around the world. In the U.S., we have seen the largest fiscal stimulus in history... While these policy actions have been instrumental in helping to stabilize the economy and financial system, they must be unwound in a deliberate fashion as conditions improve. Otherwise, we risk undermining the very economic performance we hope to achieve. In the case of fiscal policy, the ballooning federal deficit must be controlled and reduced

FOMC Minutes: Expect Slow Economic Recovery - Here are the December FOMC minutes. Economic outlook exerpts:  economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further.... most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time... The housing sector showed continuing signs of improvement, though housing starts had leveled out after increasing earlier in the year and activity remained quite low. Businesses seemed to be reducing the pace of inventory reductions...

Tidbits From FOMC Minutes for Fed Wonks - 1)  some of the mortgage backed securities and Treasurys that the Fed has purchased in the past year have begun to mature or get prepaid. For now, the markets group at the New York Fed has marching orders to let these securities mature without reinvesting the cash proceeds it gets in return. 2) The New York Fed is still a ways off from being ready to use its mortgage backed securities portfolio in “reverse repo” operations, in which it uses the securities as collateral for cash loans. 3) Fed staff gave officials several presentations on what determines inflation — a source of much internal debate in the past year. One issue is whether lots of slack in the economy can be expected to drive down inflation. The more you believe in slack as the key inflation driver, the longer you’d like to keep interest rates near zero and ramp up other stimulative programs..

The Federal Reserve Still Doesn’t Know How To Get Rid Of Excess Liquidity Re: The Wall Street Journal –  Fed Proposes Tool to Drain Extra Cash ; Bloomberg. – Fed Proposes Term-Deposit Program to Drain Reserves The Federal Reserve – Notice of proposed rulemaking; request for public comment. (see Fed balance sheet chart) Comment: We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan. The fact is they have no plan and are still throwing everything on the wall to see what sticks. From the November 4 FOMC minutes participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee’s strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve’s balance sheet. Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals.

Sorry Ben Bernanke: Your Inflation Fighting Scheme Won't Work - You’ve probably heard that the Fed has proposed a new program that will act like CDs for bank reserves.The plan is to have the Fed issue the term deposits to banks, with maturities up to one year. The hope is that these Fed CDs will encourage banks to park reserves at the Fed rather than lending them out, keeping the huge amounts of money locked up as excess reserves from entering the economy through loans and triggering inflation. Give them credit for bold action. Nothing like this has ever been tried before. If it worked, it would take the Fed’s control of bank lending to an entirely new level. By raising and lowering the rates on the CDs, the Fed could potentially micro-manage bank lending behavior to an extent unimaginable before our crisis.It’s far from clear that the plan will work in the way the Fed hopes. In the first place, the CD program is likely to be too small to matter. The plan could also run into trouble with politicians. There is still a lot of criticism of the banks for not lending enough. The entire point of this program is to keep money out of the lending stream.

St. Louis Fed - Inflation May Be the Next Dragon To Slay - By most metrics, the recent recession was the longest and deepest since the 1930s. Some analysts believe that the Federal Reserve's and the federal government's aggressive actions to assist and stabilize the economy and fragile credit markets prevented an even worse outcome than actually occurred. Now, with economic and financial conditions on the mend, many analysts are turning their attention to the legacy of these actions.Foremost among the concerns of many is how to design a strategy that does not on the one hand raise interest rates prematurely, thereby prematurely nipping the economic recovery in the bud, while on the other hand does not keep rates too low for too long, thereby creating conditions that lead to a surge in inflation or inflation expectations. What's needed is an effective policy to prevent the unprecedented monetary stimulus from becoming a destabilizing influence on price stability. Another key is accurately predicting inflation over the next few years.

Rate Hike Expectations Getting Ahead of the Fed? - Analysis by Bloomberg Multimedia. Ben Bernanke keeps saying he’ll hold interest rates “exceptionally low” for “an extended period.” There are good reasons to take Bernanke at his word. Based on Fed precedent, a rate hike could easily be at least a year away. Over the last year, investors continued to look for a near-term increase despite being proved wrong again and again. Why might these expectations continue to be wrong? The Fed adjusts rates based on its view of inflation, which in turn depends in large part on slack in the economy and inflation expectations according to the majority of Fed Open Market Committee members. (see interactive graphics)

FT Alphaville - The defining feature of 2010 will be…Reverse repos. - That’s according to Morgan Stanley’s chief European strategist Teun Draaisma, who reckons the moment the Fed starts to drain excess reserves from the system will be the point at which a 10 per cent equity market correction begins.Now, the New York Fed conducted its first test of reverse repurchase agreements — selling assets such as Treasuries to dealers for cash with an agreement to buy them back later at a slightly higher price — last month. And Draaisma thinks the Fed will go live in March, at which point it will be time to put on the tin hat…

The Once and Future Fed Policy Error?” - Monetary policy is center stage as the Fed pursues highly accommodative policies in order to generate a recovery and rebuild the financial system. However, some market participants are questioning the Fed’s ability and willingness to exit the current highly accommodative stance in a timely manner. Unfortunately, the market skeptics have history on their side. Three important points about the Fed’s ability and willingness to adjust policy in a timely fashion can be gleaned from the chart (FRED FEDFUNDS) of the Fed Funds rate and the 10 year (constant maturity) Treasury yield with recessions indicated by the vertical gray bars. Prior to the recession that started in 1980, the Fed was still raising the Fed funds target at or close to the cycle peaks; Prior to the trough of 1980, the Fed was still cutting rates at or past the cycle troughs ; For the period prior to 1980, the amplitude of the interest rate cycles was getting progressively larger.

Federal Reserve warned on interest rates - Tom Hoenig, president of the Kansas City Fed, on Thursday warned against keeping rates too low for too long. “Experience both in the US and internationally tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future,” he said. Mr Hoenig rejected Mr Bernanke’s argument that the Fed decision to keep rates low after the dotcom crash did not contribute meaningfully to the housing and credit bubble. “Low interest rates contributed to excesses,” he said.  Arguing that economic data are always mixed during the early stages of a recovery, he called on the Fed to “more evenly weigh our short-run concerns against the longer run costs”. Separately, the Financial Times can reveal that the optimal interest rate in the US has moved above zero, according to a rule of thumb for monetary policy cited by Federal Reserve chairman Ben Bernanke last weekend. The rule of thumb is a version of the so-called Taylor rule, which relates interest rates to unemployment and inflation.

1937 Again? - Predictably, talk of deficit reduction and the Fed's exit strategy from easy money have raised fears that we may repeat the errors of 1937. As my new Forbes column explains, the 1937-38 recession was brought about by sharply tighter fiscal policy--the budget went from a deficit of 5.5% of GDP in FY1936 to virtual balance in FY1938, an extraordinary tightening of fiscal policy over a very short period of time. (Shows what you can do when there are no entitlement programs to deal with.) At the same time, the Fed doubled reserve requirements, thus sharply tightening monetary policy. The result was that after several years of solid real growth, real GDP fell 3.4% in 1938.As far as Fed policy is concerned, I see no evidence of tightening and belive that it will be very slow and deliberate about doing so once it starts. I think the odds that the Fed will stay too easy for too long are much greater than that it will tighten too much, too soon.

More Worries about end of Fed MBS Purchase Program - From the WSJ: Fed Plan to Stop Buying Mortgages Feeds Recovery Worries: The Federal Reserve's pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course. The authors review the concerns described in the minutes of the December FOMC ... some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve's agency MBS purchases wind down... I think it is likely that the Fed will stop buying MBS by the end of March - and then react to whatever happens ...

Jobs Report Damps Expectations of Fed Rate Increase - Friday’s jobs report damped expectations in financial markets that the Federal Reserve will raise its benchmark federal funds rate by midyear. By the close of trading Friday, futures contracts implied there was just a 22% chance of a rate hike by June. Fed officials are expecting a recovery that produces spotty job growth in its early stages. The latest report is in keeping with that view and is likely to leave Fed officials committed to their pledge that interest rates will stay low for “an extended period” as they prepare for a policy meeting later this month.

Do We Really Need More Stimulus? - I hear voices saying that if the unemployment rate is above 9.9% in February, then they'll support more Stimulus, but as of right now, the Fed and Admin are on the right path... For reasons I've explained before, we are not likely to still be above 10% unemployment in February simply because January and February are always really low employment months, and so we'll get huge positive seasonal adjustment factors when, since we've already got so much unemployment, is not likely to hold this year. What I'd like to know is, if the Fed does an extra $500 billion of QE now, and the labor market completely turns a corner the rest of January and February, what exactly do we lose? After all, if things start to get better quickly, they could just reverse that $500 billion...

From Woodford to DeLong On Monetary Policy Rules - John Taylor - Many excellent pieces were written, in my view, including several by Michael Woodford of Columbia and Vasco Curdia of the New York Fed on adjusting policy rules during financial crises. 2009 also saw the release of the 2003 FOMC transcripts with telling references to the Taylor rule by Ben Bernanke. Columns by Michael McKee of Bloomberg and Gene Epstein of Barron’s were clear and insightful. At the other end of the spectrum was Brad DeLong’s recent Taylor rule blog post, which unfortunately contains serious errors...

Income During Inflation - The Federal Reserve has worked overtime to convince the public that it has saved the economy from a meltdown, but with unemployment at a 26-year high and the dollar tanking, it's a hard sell. What most people easily understand is that the Fed has produced a monetary time bomb. Since August 2008 the monetary base (bills in circulation plus bank credits at Federal Reserve banks) has increased by 137%. If not defused, this bomb will eventually explode into inflation. We are told by Fed Chairman Ben S. Bernanke and other members of the Fed's bomb squad not to worry. They assert that they know how and when to disarm the bomb.Such assertions are a stretch. After all, it was the Fed's ultraloose monetary policy and disregard for the value of the greenback that fueled the asset bubbles that burst and set off the panic and subsequent destruction of jobs and wealth.

Bizarro Press Release From the Federal Reserve - You'll be reading a lot about this one tomorrow.  A list of regulators, including "the Board of Governors of the Federal Reserve System (FRB), the FDIC, the National Credit Union Administration (NCUA), the OCC, the Office of Thrift Supervision (OTS), and the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee put out a press release today  urging banks to stress test their interest rate exposure.  If the Regulators need to lecture the big boys on managing interest rate risk, don't we have a huge problem?  Isn't the job of the banks to know how to manage this risk?  Is the whole press release an effort by the Regulators to "bluff" the market? In any case, I found the conclusions on page 9 to be the most interesting, among them: "Reduce levels of IRR exposure."  Really?  Great idea!  But... ummm.. how exactly?  By buying interest rate derivatives to shift the exposure to someone else?  I feel like I just discussed that - oh wait - I DID!  GS "hedging" its AIG exposure buy buying protection on AIG from someone else...

U.S. Warns Banks to Guard Against Rate-Rise Risks (Bloomberg) -- U.S. regulators including the Federal Reserve warned banks to guard against possible losses from an end to low interest rates and reduce risk or raise capital if needed. “In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates,” the Federal Financial Institutions Examination Council, made up of agencies including the Fed and the Federal Deposit Insurance Corp., said in a statement today. Several U.S. central bankers have called for raising interest rates at a faster pace than increases in the past, while the Fed hasn’t said when or how quickly it plans to lift short-term borrowing costs from a record low.

Monetary Policy and the Housing Bubble - Speech - Chairman Ben S. Bernanke  - At the Annual Meeting of the American Economic Association, Atlanta, Georgia PDF version (354 KB)

Fed Chief Edges Closer to Using Rates to Pop Bubbles (WSJ) Federal Reserve Chairman Ben Bernanke cracked the door open a bit more to the idea of raising interest rates if a new financial bubble emerges. He also mounted a vigorous defense against critics who say it was the Fed's low-interest-rate policies over the past decade that caused the last housing bubble. Instead, he said, the problem was lax regulation, which permitted banks to issue a slew of exotic mortgages that households later had trouble paying.

Rate hikes not best way to burst bubbles: Bernanke (Reuters)  Federal Reserve Chairman Ben Bernanke said on Sunday that vigorous financial regulation would have been the best way to restrain the housing bubble that helped cause the deep recession, but said policy makers can no longer rule out monetary policy to curb the buildup of risk. In a speech defending the Fed's rock-bottom interest rates in the early 2000s, a policy many say fueled a runaway housing boom that triggered a devastating crisis when it went bust, Bernanke said regulatory and supervisory actions, rather than rate hikes, would have been more effective ways to check the run-up in house prices.Bernanke and the Fed face sharp criticism over actions leading up to the crisis. Bernanke's renomination as Fed chairman faces an unusual degree of opposition, and the Fed's responsibilities stand to be curtailed if congressional proposals become law.

Monetary Policy and Asset Bubbles in 2010 - Ben Bernanke said that monetary policy played at most a small role in the U.S. housing bubble and that financial regulatory policy is the appropriate tool for preventing harmful asset price bubbles in the future. I agree with these conclusions, but I suspect that many do not, even within the world of central banking. Brad DeLong described a simple model of a bubble caused by a central bank that holds the short-term interest rate below its long-run equilibrium in order to offset a shortfall in aggregate demand, i.e., to fight a recession. This bubble is caused by the "carry trade." Speculators borrow at the low short-term interest rate to purchase a long-term asset at a price above its long-run expected value. They know that the asset price will fall when the central bank raises the interest rate at some future date, but in the meantime they can earn income above their cost of borrowing, However, if speculators incorrectly assume that they are smart enough to sell before the price of the long-term asset falls, or if they believe that the government may bail them out when the asset price falls, then there will be a bubble -- the asset price will rise too high. DeLong assumes that the bursting bubble causes a decline in social welfare equal to any bailout plus an amount proportional to the squared losses of the speculators.

Bernanke Says Regulation Came ‘Too Late’ to Curb Housing Bubble (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.  “The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said yesterday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.  Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee Chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.

Lax Oversight Caused Crisis, Bernanke Says (NYT) Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.  Mr. Bernanke’s remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress. “Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,”

Bernanke Still Does Not Understand Credit Crisis - The buzz this morning seems to be all about Bernanke’s speech yesterday, defending Greenspan’s ultra-low rates, and lamenting the lack of regulation and poor supervision over mortgages. Unfortunately, it appears to me that the Fed Chief is defending his institution and the judgment of his immediate predecessor, rather than making an honest appraisal of what went wrong.  As I have argued in this space for nearly 2 years, one cannot fix what’s broken until there is a full understanding of what went wrong and how. In the case of systemic failure, a proper diagnosis requires a full understanding of more than what a healthy system should look like. It also requires recognition of all of the causative factors — what is significant, what is incidental, the elements that enabled other factors, the “but fors” that the crisis could not have occurred without. (Yes, I laid all this out in the book).

Bernanke in Atlanta - Krugman - Ben Bernanke gave a somewhat odd speech at the American Economic Association meetings. Not a bad speech, and certainly not stupid. But defensive, I think, in the wrong way. I agree with Bernanke that Taylor-rule based criticism of the low-interest policy of 2002-2004 is off base. There were compelling reasons for low rates; saying that the rates were too low based on the coefficients John Taylor basically pulled out of thin air in 1993 gets you nowhere.I also agree that lax regulation of unconventional mortgages was a bad thing. But Bernanke should have been more forthright about the Fed’s undoubted failures: Greenspan’s rejection of advice about the risks of subprime lending, and the failure of top officials, BB included, to recognize the housing bubble in real time.

Answering the wrong questions - The Economist - BEN BERNANKE'S speech (PDF) to the American Economic Association is up and available online. It's a talk on monetary policy and the housing bubble which some will find controversial, but which strikes me as more or less on the mark. Policy rates were not too accommodative during the bubble years given broader macroeconomic conditions, including weak economic growth and the threat of deflation. Careful study of the issue seems to indicate that the inflation of the housing bubble was not due to low policy rates so much as it was to major expansions in the type of mortgage products available to consumers, a relaxation of lending standards, and huge capital inflows from foreign lenders. As evidence for these positions, Mr Bernanke cites a few key facts. First, initial payments tend to vary much more with mortgage-type than with policy rates (cutting the fed funds rate by 100 basis points likely won't save you nearly as much money as moving from a standard ARM to a negative amortisation ARM). And second, he notes, the housing boom was global in nature, which suggests that American monetary policy was not to blame (or at least not primarily to blame). He therefore concludes that the main lesson we are to draw from the bubble is that monetary policy should not be used to pop bubbles, but regulation should be more vigorous. This conclusion strikes me a blindingly obvious and uninteresting. It answers the wrong question, in my opinion.

FT Opinion - Is Ben Bernanke descended from the Bourbons? - Behind his white beard, Federal Reserve chairman Ben Bernanke has a wry sense of humour. On reading his recent speech to the American Economic Association, in which he defended the Fed’s actions during the housing bubble, I initially suspected it was a practical joke. Rather than conceding that he and his predecessor, Alan Greenspan, made a hash of things between 2002 and 2006, keeping interest rates too low for too long, he said the Fed’s policies were reasonable and the main cause of the rise in house prices was not cheap money but lax supervision. Searching in vain for a punch line, I was reminded of Talleyrand’s quip about the restored Bourbon monarchs: “They have learned nothing and forgotten nothing.” ..his unwillingness to admit the Fed’s role in inflating the housing and broader credit bubble raises serious questions about his judgment.

Did the Fed Cause the Recession? - Thoma - I have been more defensive of the Fed's actions both before and after the crisis started than most, and I want to talk about why recent criticism of Bernanke and the Fed for their failure to use regulatory intervention to stop the housing bubble is correct, but perhaps directed at the wrong target. First, though, let me make clear that I do not share Bernanke’s view that the Fed’s low interest rate policy did not the cause of the financial crisis. He points to a global savings glut as the source of the liquidity that inflated the bubble, and regulatory failures that allowed that liquidity to become concentrated in high risk investments within the mortgage market. My view is that it wasn’t one or the other, the global savings glut and the Fed’s low interest rate policy worked together to provide the liquidity that fueled the bubble. I don’t think that the Fed’s policy was a mistake given what they knew at the time, and given the condition of the economy after the crash — and that is, essentially, Bernanke’s argument — but I don’t think it’s correct to say that policy played no role at all in the financial crisis. But the main problem was, as Bernanke suggests, a failure of regulation. But I don’t think the Fed is the only one to blame for that mistake, the blame is much broader.

Did Greenspan Add to Subprime Woes? – WSJ - Alan Greenspan was arguably the country's most powerful financial cop in his 18 years as chairman of the Federal Reserve. But Mr. Greenspan's regulatory record has received far less scrutiny than his management of the economy.That may be changing. A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed's broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. Democrats in Congress are now turning up the heat on regulators, especially the Fed, for failing to do more to stamp out those practices, and the Fed appears increasingly likely to overhaul its approach.

Bernanke Absolves Greenspan--And Himself - Forbes - Federal Reserve Chairman Ben Bernanke gave an important speech in Atlanta over the weekend. He defended the Greenspan Fed, saying the policy of low rates in the early 2000s did not cause a bubble in housing.Bernanke made three main arguments. First, the Fed might have been too loose as determined by actual inflation measurements, but not if measured against the Fed's forecasts for "core" inflation. Second, even if the Fed was too loose, home prices rose more than expected given the historical link between monetary policy and home prices. And third, home prices increased in many countries around the world.  These are weak arguments. From 2001 to 2006, the Fed held interest rates substantially below both the growth rate of nominal GDP (real GDP growth plus inflation) and yields on long-term Treasury notes. So regardless of whether you use contemporaneous economic data (GDP) or expectations about the future (as seen in the yield curve), the Fed was too loose. Second, no matter how fancy the statistics, any link between monetary policy and home prices is just a long-term average. Therefore, by definition, a bubble is abnormal.

Taylor Disputes Bernanke on Bubble, Blaming Low Rates (Bloomberg) -- John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble. “The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta. Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he said the Fed’s monetary policy after the 2001 recession “appears to have been reasonably appropriate” and that better regulation would have been more effective than higher rates in curbing the boom. Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006. “It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Bernanke’s Taylor rule (that chart, again) - I wrote a piece in today’s paper flagging up the fact that the version of the Taylor rule cited by Bernanke in his AEA speech has recommended a positive interest rate since mid-2009. This raises the question of whether the Fed is still pinned to the zero bound (ie it would be running negative rates if it could) or whether a relatively modest upside forecast revision could lead to early rate hikes. (see graph) The calculation used by Bernanke - based on Fed forecasts over four quarters using PCE to measure inflation with equal coefficients for both sides of the dual mandate - suggests the Fed is not pinned to the zero bound any more and that the ideal interest rate is a fraction above zero. Which implies that a mid-sized forecast upgrade could start discussion of rate hikes.

Bernanke grades the Fed - Fed Chair Ben Bernanke's observations on monetary policy and the housing bubble have received a lot of attention. Like many other commentators (e.g., Arnold Kling, Paul Krugman, and Free Exchange), I agree with Bernanke's conclusions, but only up to a point. I certainly agree with Bernanke that institutional problems were a more important factor than the level of the fed funds rate. However, it would be very hard to argue that the Fed's targeted interest rate made no contribution. Bernanke frames most of his discussion in terms of the aggregate inflation rate and aggregate level of output, with the purpose of the Fed's targeted interest rate taken to be achieving a desired outcome for those objectives. But I would suggest that monetary policy does not have the ability to move all industries and all prices uniformly together. By keeping interest rates low, the Fed doesn't boost all activities, but instead preferentially stimulates particular sectors, housing investment being perhaps the single most important example.

Bernanke: Monetary Policy and the Housing Bubble - Ben Bernanke says Federal Reserve interest rate policy after the bubble burst did not cause the housing bubble, and he delivers a strong rebuttal to John Taylor on that point. He argues the problem was with the regulation of these markets, not the low interest rates after the crash, and based upon this reading of the causes of the crisis, he believes regulation is the key to preventing bubbles. But he also acknowledges that if regulation fails to get the job done, then the Fed must step in and pop bubbles before they get too large by raising interest rates (though doubts are expressed about whether increasing interest rates would have done much to stop the bubble, hence the strong preference for regulatory solutions). This is a big step forward relative to the Greenspan years. (this article includes Bernankes presentation, charts & references)

Bernanke and the bubble - Krugman - Following up on a point I made in Atlanta (along with many others), David Leonhardt takes Ben Bernanke to task for failing to concede that the Fed, himself included, missed the bubble.  But it’s actually a bit worse than that: Bernanke’s presentation suggests that the Fed is still using some of the flawed methodology that helped it miss the bubble. Way back when, here’s what I wroteMany bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.... When I wrote that I was thinking in particular of studies at the Fed that tried to rationalize aggregate national prices, but clearly had no explanation of the much bigger price increases in coastal areas...

Bernanke Goes for the KO and Misses - Ben Bernanke came out swinging today throwing some hard punches at those critics who say the Fed's monetary policy was too accommodative in the early-to-mid 2000s. He does so by throwing the following four-punch combination of arguments: (1) economic conditions justified the low-interest rate policy at the time; (2) a forward looking Taylor Rule actually shows the stance of monetary policy was appropriate then; (3) there is little empirical evidence linking monetary policy and the housing boom; and (4) cross country evidence indicates the global saving glut, not monetary policy was more important to the housing boom.  I find his arguments far from convincing on all four points for the period 2003-2005 and here is why...

Low interest rates weren’t to blame for the housing bubble - That was one of the themes of Ben Bernanke's speech to the American Economic Association yesterday. And this is the nifty chart he used to make his case. Change in house prices is plotted on the vertical axis, so countries with bigger bubbles appear closer to the top of the chart. Right off the bat, that's pretty interesting—the U.S. run-up was by no means the most drastic. The further left you go on the chart, the looser policy was from 2002 through most of 2006. By that measure, the U.S. had some of the easiest money in the developed world—hence the criticism that low interest rates stoked the housing bubble. But that's not the conclusion you'd draw from this chart. As Bernanke pointed out yesterday, 11 of the 20 countries studied saw bigger housing bubbles than the U.S. while also having tighter monetary policy. The overall relationship between house prices and monetary policy, as expressed by that gray line, is as one would expect. The line's downward slope shows that tighter monetary policy goes with lower house-price appreciation—but the result is very slight and actually isn't statistically significant. Differences in monetary policy only explain 5% of the variability in house-price appreciation across countries.

But Ben, A Bubble Has No National Boundaries - Ben Bernanke is showing himself to be more of a Big-Government politician than a scientist. In his latest speech, he has tried to defend the actions of his predecessors by claiming that their easy-money monetary policy only holds five percent of the responsibility for the high real estate prices that ignited the boom-and-bust bubble that almost broke the back of the global economy.  According to his analysis, 30 percent of the responsibility goes to what he has been calling the "global savings glut." The other 65 percent, he says, belongs to the inferior standards of the US mortgage market. Therefore, his argument seems to be saying that if we cure the standards we cure the problem. He attempts to prove his point by demonstrating through charts that other countries had even looser monetary policy than the US, and yet they did not show a worse real estate boom; therefore, he concludes, loose monetary policy does not cause bubbles. But his logic is flawed.

A “Tell” from Bernanke? - I did a piece on Saturday about Central Bankers and the words they use to influence markets and economies. I said, “Beware the Subtleties”. I ended with the following regarding announcements in the coming year from the Federal Reserve: “We’re going to get a ton of the ‘subtle’ stuff. It’s the subtle stuff that worries me. That will move markets too.” One day later and the first example of Fed Speak 2010 is available. Chairman Bernanke gave a speech Sunday morning in Atlanta. It was long winded. It did not read well either. Possibly being in the audience and watching the slides may have helped. After all he is the Man of the Year. See if you can wade through this.

Bernanke on Monetary Policy and the Housing ‘Bubble’ - Reporting on Fed Chair Ben Bernanke’s speech to the American Economic Association has focused on his suggestion that ‘we must remain open to using monetary policy as a supplementary tool for addressing those risks’ associated with asset price inflation.  However, the rest of his speech makes clear that Bernanke views this as very much a second-best option.  The WSJ quotes Dale Jorgenson on what was missing from Bernanke’s speech: Mr Bernanke should have laid more blame at the feet of Congress for encouraging reckless mortgage lending with its support of Fannie Mae and Freddie Mac and other policies meant to increase home ownership.

What Bernanke Didn't Say - From Fed Chairman Ben Bernanke: Monetary Policy and the Housing Bubble And reports on the speech: From the WSJ: Bernanke Says Rate Increases Must Be an Option. From the NY Times: Bernanke Blames Weak Regulation for Financial Crisis.Dr. Bernanke said that monetary policy (a low Fed Funds rate) was probably not to blame for the housing bubble, and he used data from other countries to make this argument: "the relationship between the stance of monetary policy and house price appreciation across countries is quite weak". ... however, Bernanke didn't discuss if non-traditional mortgage products contributed to housing bubbles in other countries. Bernanke didn't discuss how the current regulatory structure missed this "protracted deterioration in mortgage underwriting standards" (even though many people were pointing it out). And Bernanke didn't discuss specifically how the new regulatory structure would catch this deterioration in standards.

Bernanke: We Didn't Do a Good job Regulating, so Let Us Regulate More - I'm willing to believe that my interpretation of this speech is inaccurate, but here's the evidence: Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices... others have taken the position that policy was appropriate for the macroeconomic conditions that prevailed, and that it was neither a principal cause of the housing bubble nor the right tool for controlling the increase in house prices... conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary...regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.

If the Fed Missed That Bubble, How Will It See a New One? - NYTimes - If only we’d had more power, we could have kept the financial crisis from getting so bad. That has been the position of Ben Bernanke, the Federal Reserve chairman, and other regulators. It explains why Mr. Bernanke and the Obama administration are pushing Congress to give the Fed more authority over financial firms. So let’s consider what an empowered Fed might have done during the housing bubble, based on the words of the people who were running it. In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”  The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power.

Krugman on Land Use Regs: Brookings vs. Wharton Measures - Paul Krugman rightly notes that one of the key differences between the metropolitan areas that experienced housing bubbles and those that didn't is that the bubble cities tend to have much more restrictive land use regulations. Land use is actually an area of policy/law which, for some odd reason, I've always enjoyed a great deal (and which I'm looking forward to getting back to, once we make it to the other side of this financial crisis). Land use is the only area of law that can rival finance in terms of complexity (which I thrive on), as well as real world policy relevance. In any event, Krugman cites the Brookings survey of land use regulations in his post.  I've uploaded the Wharton database here, in case you're interested (which you should be).

No to Bernanke - Bernanke claims that he is getting serious about consumer protection, yet he has lobbied against the Consumer Financial Protection Agency, which everyone who is serious about consumer protection wants. I’m disappointed that Bernanke would stoop to this kind of misleading rhetoric. The other thing is a lot of talk about systemic risk. Yes, systemic risk is important. But all the words I hear about it, and the fact that the importance of systemic risk is one of the few things that everyone can agree on, are making me start to worry. Specifically, I wonder if a lot of regulatory apparatus aimed at systemic risk will serve as a distraction from old-fashioned regulation of individual institutions. Yes, it’s true that the thing that hit us in 2008 was systemic risk. But it’s also true that regulators already had the power to supervise risky activities–and didn’t. Talking about systemic risk is a way of passing the buck... I’ve been on the fence about Bernanke’s confirmation, mainly because I’m not so optimistic we’ll get anyone better from a policy standpoint, and we could certainly get someone worse from the standpoint of intelligence, knowledge, thoughtfulness, and work ethic. But now that I’ve read this speech, I’m against confirmation.

Bernanke's Ivory Tower Doesn’t Have a Mortgage (Bloomberg) -- You can almost hear the collective sigh of relief emanating from the Federal Reserve Board in Washington, and the nearby offices of Alan Greenspan, to Fed chief Ben Bernanke’s elegant, econometric argument that low interest rates didn’t cause the housing bubble. The Fed, in other words, is guilty of one count of regulatory oversight failure. As to the charge of using interest-rate policy to inflate the housing bubble that burst and destabilized the entire financial system, the defendant is not guilty. It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it. I know Bernanke has given this issue a great deal of thought and devoted the Fed’s resources to finding the correct answer. Still, the defense sounds like something out of an Ivory Tower, divorced from reality…

Helicopter Drops Are FISCAL Operations - Given all the chatter in the blogosphere about "Helicopter Ben" Bernanke, it's probably time to look more carefully at the actual accounting behind so-called "helicopter drops of money," made famous years ago by Milton Friedman. As most everyone knows, the idea behind a hypothetical helicopter drop is that the central bank would essentially drop currency from a helicopter in an effort to stimulate aggregate spending. One could modernize the story and presume that the central bank credits X number of dollars to the bank (deposit) accounts of all (or even some) individuals. And while traditionally it's been presumed that it would be the Fed that would be dropping money from the helicopter(s), it could just as easily be action taken by the Treasury – e.g. by requiring the Treasury to take an overdraft on its account at the central bank via mandate from Congress and the President.  Let's look at both of these scenarios—helicopter drops of currency and credits to deposit accounts—to see how they affect the balance sheets of a representative private individual that is the recipient of the increased currency or deposit.

Ben Bernanke Looks In Mirror, Sees Barney Frank - Mish - Fed chairman Ben Bernanke is back at it again, pointing the crisis finger at everyone but himself. To be sure there are plenty of congressional clowns deserving of a Babe Ruth style "big point", but the biggest point belongs straight at himself. If you want to wade through 36 pages of self-serving claptrap, please consider Monetary Policy and the Housing Bubble by Ben Bernanke.

Krugman Sees 30% to 40% Chance of Second U.S. Recession as Stimulus Fades (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.  “It is not a low probability event, 30 to 40 percent chance,” Krugman, an economics professor at Princeton University, said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.” Krugman, 56, said the Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices.

Economist Argues Fed Debt Purchases Boost Lending - In a crisis, the price of securities — mortgate-backed, Treasury debt, packages of loans, etc. — fall to fire sale prices, well below fundamental values, he says. Banks with the wherewithal to make new loans or buy securities that prefer to buy securities because the opportunity for profit is so tempting. (See Goldman Sachs and J.P. Morgan Chase profits from securities trading in the recent quarter.) “Because asset prices are out of whack,” he said, “injecting capital into banks doesn’t restart lending.” Banks simply use the money “to buy underpriced securities… to speculate.”“Financing of new investment by banks [via lending to business] is always competing with speculation. If speculation is more attractive, it is going to draw the attention of banks,” he argued. The solution: The Fed or the government should buy a lot of securities, so many of them that the price rises and the banks no longer find them attractive for speculation and lend instead

Senate panel nears agreement on role of Fed - Reuters As Congress moves to reform U.S. financial regulation, key senators are nearing bipartisan agreement on stripping the Federal Reserve of its authority to supervise banks, two people familiar with the matter said. Dodd, in charge of shepherding reform legislation through the Senate, has introduced a bill aimed at preventing a recurrence of the 2008 financial crisis that shook economies worldwide.  Dodd's bill met opposition from Republicans on his panel. Lawmakers from both parties are tearing the measure apart to find consensus on how to regulate everything from banks to the $450-trillion over-the-counter derivatives market.But there is broad agreement among committee members to curb the Fed after it intervened repeatedly in the financial crisis to help troubled firms like insurer AIG.

Is The Fed Juicing The Stock Market? - Is the Fed manipulating the stock market?  TrimTabs CEO Charles Biderman seems to think so, and he makes a strong case for his theory in an article at Biderman focuses his attention on the mystery surrounding the stock market's 9-month rally and asks, "Where is the money coming from?"  After all, the market cap has increased by more than $6 trillion since March 9. That amount of money should be fairly easy to trace; right? Wrong. According to Biderman, the money did not come from (a) companies ("which were a huge net sellers") (b) retail investor funds,  (c) retail investors, (d) foreign investors, or (e) pension funds.

Is The U.S. Government Buying Stocks? - As I pointed out in December 2008, Nouriel Roubini wrote the month before that the government might buy U.S. stocks: The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation. Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he's talking about. Now, Charles Biderman, CEO of TrimTabs, argues that the government may, in fact, have been buying stocks to prop up the stock market. Given that 25% of the top 50 hedge funds in the world use TrimTabs' research for market timing, it is a credible source...

Time for Fed to disprove PPT conspiracy theory - The massive stock-market rally in the past nine months is mostly due to secret government buying of stock-index futures, a respected stock-market analyst said Tuesday. Charles Biderman, chief executive of TrimTabs Investment Research, is the latest and most credible person to charge that the Federal Reserve and the Treasury (in league with top Wall Street firms) is rigging the stock market on a daily basis. The only logical explanation for the extent of the rally, he suggested, is secret buying by a government committee known colloquially as the Plunge Protection Team. It's like the dark matter that astrophysicists conjecture must be there, even if we can't detect it. The PPT was established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate the government's response to market meltdowns. It consists of the Fed chairman, the Treasury secretary, the head of the Securities and Exchange Commission and the head of the Commodity Futures Trading Commission.

The Fed’s culture of secrecy - If and when the Fed embarks upon its soul-searching project, it shouldn’t just look at its regulatory failures and its inability to spot or care about the housing bubble. It must also think long and hard about its culture of secrecy, which seems generally designed to further the interests of its big-bank shareholders while keeping the public as ignorant as possible. Hugh Son has the story of the lengths to which the Fed and its Davis Polk lawyers were consistently telling AIG to disclose as little as possible, even as the SEC was asking for more transparency from the publicly-listed corporation. Was the Fed demanding secrecy because, as Henry Blodget says, it wanted to keep the “outrageous” details of the government bailout a secret? Yes, that’s probably part of it.  But mostly I suspect that this was just a knee-jerk thing, with Fed officials (yes, Tim Geithner, that means you) and their lawyers always wanting to tell the public only what they wanted the public to know, and to keep everything else secret.

Treasurers Embrace Pay-in-Kind Bonds as Ghost of Lehman Fading  (Bloomberg) -- Companies are selling debt with terms last seen before credit markets froze, showing why the world’s biggest bond fund manager says another bubble may be brewing. Two years after credit markets seized up, treasurers are luring investors to junk bonds that returned a record 58 percent last year, as measured by Bank of America Merrill Lynch indexes. U.S. sales of $162 billion beat the all-time high of $149 billion in 2006, Bloomberg data show. The rally means “choices are limited and the value is diminishing,” according to Bill Gross, who runs the world’s biggest bond fund.

The Price of Casino-Like Finance Is Higher Than We Think - The longest term and most severe damage from the finance casino will not be from government deficits required to shore up too-big-to-fail banks and insurers. It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it. The first distortion is the past diversion of some our best technical and mathematical minds away from physics, engineering, biology, chemistry, and, yes, even economics, to financial modeling, risk analysis, and all the other marvelous tools of speculation and gaming. Over the last 20 years or so, the financial sector has been diverting our future scientists and mathematicians into creating new derivatives aimed at managing risk (ha!) and into developing creative investment instruments aimed at obscuring risk. The second long-term distortion is similar to the first. Maxine is thinking of all those bright, young, energetic people who came out of some of our best universities and opted to go to work for investment banks, not in technical jobs, but as traders, ratings specialists, analysts, again to support the conversion of trillions of dollars into chaff. Many of them might have gone on to graduate degrees in chemistry, biochemistry, physics, engineering, biology or medicine. Graduate work in psychology, sociology, English, history, political science, public health would have added more value than destroying wealth across the globe. Instead of a workforce that gained diverse skills that might one day transform the world in positive and substantive ways, we have a surfeit of MBAs with concentrations in finance and empty houses on overgrown lots...

More on freshwater economics - This is the problem we face today.  Free marketarianism has been accepted as God's Truth for decades.  And the financial crisis has shown it to be a bunch of hocus-pocus, with the rabbit up the magician's sleeve accounting for the magical interlude.  Complete focus on self-interest results in casino banking, corporate interests that ravage the environment for a penny more's profits, and managers/CEOs who are so out of touch with reality that they think, e.g., that it is absurd to suggest that a half a million for being an investment banker is sufficient pay.  So we've got a lot to do to counter this casino speculation.  Treasury and Congress putting my proposed New Year's resolutions into effect would help.  Educators spurring students to think more deeply rather than accept trivialized views of human society would help.  And a stiff bill of financial regulation that takes the casino out and puts the safe back in would be a really important boost towards evening the balance between casino-thinking corporate powerhouses and ordinary people.

Today in Economists are NOT Totally Clueless (Interlude 2; Part 4 of 5) - I hate the phrase “casino capitalism.” It’s rather unfair to casinos, which know how to do risk management: make an offer that is close to fair, enough to cover your expenses, and offer non-monetary benefits (inexpensive food, table-service drinks, floor shows, etc.) so that even the losers enjoy the experience. Unless you forget that Atlantic City is a dreary place in the Winter, it’s a license to print money.  Capitalism, on the other hand, thrives because people have a dollar, a dream, and the inability to calculate odds correctly. (This is a good thing—at its worst, it leads to more frictional unemployment as those dreams fade or are restructured.)...

Hopes of a Chastened Capitalist - But I also considered myself a fan of free markets, open competition and minimal government regulation. I like the dynamism of the marketplace -- the constant turbulence, the risk-taking and the periodic drama of little-known start-ups toppling Goliaths. Microsoft over IBM in personal computers. Google over Microsoft in web-based services. Those things happen, and the public has generally benefitted. But the wanton recklessness on Wall Street that nearly wrecked the economy has exposed the limits of laissez faire thinking. It’s clear that banks and Wall Street firms played central roles in the catastrophe. There really were a lot of crooks out there. The free market did not self-correct; it essentially self-destructed. Rational self-interest did not save the day. What saved the day, if indeed it’s been saved, was massive government intervention.

Hoenig Talks Sense On Casino Banks - Thomas Hoenig, President of the Kansas City Fed, has been talking sense for a long time about the dangers posed by “too big to fail” banks.  On Tuesday, he went a step further: “Beginning to break them, to dismember them, is a fair thing to consider.” Hoenig joins the ranks of highly respected policymakers pushing for priority action on TBTF, including some combination of size reduction and/or Glass-Steagall type separation of casino banks and boring banks. As Paul Volcker continues to hammer home his points, more policymakers will come on board.  Mervyn King – one of the most respected central bankers in the world - moves global technocratic opinion.  Smart people on Capitol Hill begin to understand that this is an issue that can win or lose elections. Ben Bernanke still refuses to address ”too big to fail” directly and coherently...

Out of the Gate with a Bang - Fed Watch - If you were looking for a final, cataclysmic collapse of the US economy, you remain disappointed. To be sure, the fallout from the financial crisis is severe, with the palpable wreckage evident in the bottom line, a rate of underemployment at 17.2%. Yet even the most diehard pessimist could not fail to recognize the numerous signs of a cyclical turning point in the second half of 2009. And those signs continued into the new year with today's ISM release. The bulls had reason to run with these numbers; the near term outlook appears baked in the cake. Yet the near term is not an interesting question, in my opinion. The interesting question is what will emerge in the second half of the year. Is the first half a head fake? And, more importantly, where will incoming data lead policymakers, particularly at the Fed? My expectation remains that the Fed will wait until the medium term uncertainty is lifted before raising interest rates, which would be well into the back half of this year if not into 2011.  But that might not be the ball to watch; policymakers probably worry about the size of the balance sheet more than the level of interest rates.

Krugman: Beware the Blip - From Paul Krugman at the NY Times: That 1937 Feeling - The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary ... Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” ... Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up. Which brings us to the still grim fundamentals of the economic situation....

Harvard’s Feldstein: Economy Might Run Out of Steam in ‘10 - WSJ - Veteran economist Martin Feldstein, of Harvard University, is not sure the U.S. economy will escape a second trip back into recession in the new year. Feldstein, who is also the emeritus president of the National Bureau of Economic Research, tied this risk of a renewed downturn after the worst recession in decades to a poorly conceived government stimulus effort. “I supported the idea we needed to have a fiscal stimulus, somewhat to the dismay of my conservative friends,” Feldstein said Sunday at a meeting of the American Economic Association in Atlanta. But the design of the stimulus was put in the hands of congress and it was poorly done, which meant it “delivered much less” in actual stimulus than its nearly $800 billion price tag suggested it should

Paul Krugman Sings Song of Economic Gloom - wsj -Against a climate where most expect a recovery and where policy makers are laying the groundwork for an eventual unwind of the unprecedented stimulus of the last two years, Krugman reckons the odds are good that years of moribund activity lie ahead for the U.S. “I’m deeply worried about what comes from here,” Krugman said, speaking at the American Economic Association’s annual conference in Atlanta Monday. Recoveries caused by an unwinding of excessive financial sector borrowing are typically “slow and painful” but they also usually are joined by a currency devaluation that helps drive up exports. In this experience, the U.S. is also facing a deleveraging crisis. While the dollar has been under pressure, it has done so in an environment of weak global growth. As a result, Krugman said, the U.S. is unlikely to get the sort of export growth that traditionally is the engine of recovery. That’s true even with a currency under pressure.

Krugman: CRISES  Here is Professor Krugman's presentation to the Allied Social Science Associations this coming Monday: CRISES - Krugman discusses several currency crises and compares them to the current U.S. deleveraging cycle. Here is an excerpt (picking up near the conclusion): Plunging prices of houses and CDOs ... don’t produce any corresponding macroeconomic silver lining. ... This suggests that we’re unlikely to see a phoenix-like recovery from the current slump. How long should recovery be expected to take? Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is ... forever.

Richard Koo, who is so close, is still wrong - In an earlier post I highlighted why predicting what will happen in the future is so difficult. Geither, Obama, and Summers have no idea how the monetary system works and therefore are unpredictable in whether they will act to improve the situation or make it worse. Richard Koo, who understands the situation in Japan (which is very very similar) quite well still makes suboptimal recommendations because he too does not understand how the financial system works. Here's him in an article in Barron's...He's correct in saying that massive fiscal stimulus saved Japan...Koo does not talk about all the terrible malinvestment that the Governments fiscal spending did. The US should simply implement a payroll tax holiday until inflation starts to tick up....the US will need even higher deficits.

The Economy’s Lost Decade - To hell with Japan, we have already had our lost decade — or at least so says the Washington Post. And, it was more than just the stock market that lost ground over the past 10 years:• Job growth was essentially zero;• Economic output (GDP) was weak.• Household net worth (inflation adjusted) fell as stock prices stagnated;• Home prices declined in the second half of the decade• Consumer debt skyrocketed. Here is how the 2000’s compared with a few other decades:  click for larger graphic

U.S. Economy Likely to Perform Poorly Over Next Decade - WSJ -The U.S. economy is this decade likely to perform as poorly as the one that just ended due to higher savings by more cautious Americans and a less qualified labor force, several top economists said Sunday. The world’s largest economy is expected to see between 2009 and 2019 growth in gross domestic product - a broad measure of economic activity - close to the annual average of 1.9% seen between 1999 and 2009, economists said. That marked the worst performance since the 1930s, the decade of the U.S. Great Depression. The economic recovery seen from the second half of 2009 has been driven by a government stimulus that will be fading in 2010, warned Martin Feldstein, a Harvard University economist and former Reagan administration economist. “It’s easy to be dismal about the U.S. economy,” ...

US Growth Prospects Deemed Bleak In New Decade (Reuters) - A dismal job market, a crippled real estate sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation's leading economists said on Sunday. Speaking at American Economic Association's mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion: They are slim. Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.

Roubini v. Gross on Outlook for 2010 - I saw this item on RGE Monitor (Nouriel Roubini’s blog) and was gobsmacked: Ahem, this sounds like a pretty aggressive call to follow a global momentum trade fuelled by cheap liquidity. Roubini was on the opposite side of this call last time. He now argues for riding the bubble and (presumably) plans to people when to get out. The problem is that a lot of investors in 2007 knew the markets were overheated, yet were confident they could get out in time. And we know how that movie ended.  Why should this time be any different? Bill Gross’ January newsletter, which is not yet on line, also sees the markets as liquidity driven, and reaches a conclusion that differs from RGE Monitor’

U.S. Treasuries Post Worst Performance Among Sovereign Markets - (Bloomberg) -- Treasuries were the worst performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion of notes and bonds to fund extraordinary efforts to bolster the economy and financial markets. Investors in U.S. debt lost 3.5 percent on average through Dec. 30, according to Bank of America Merrill Lynch indexes, the biggest annual slide since at least 1978. The 10-year Treasury yield reached its highest level in six months yesterday before a Labor Department report next week forecast to show payrolls were unchanged in December after the U.S. economy lost jobs in every month since January 2008.

Funds cut US and UK bond holdings - The world’s biggest investment funds are cutting exposure to US and UK government bonds amid fears that rising public debt and the withdrawal of central bank support for their economies could scupper the global recovery.The funds fear that a big rise in government bond yields, or interest rates, triggered by market concerns about public finances, could quickly feed through to higher mortgages and business borrowing costs. As yields rise bond prices fall, devaluing the funds’ holdings. Pimco, one of the world’s biggest bond funds with $940bn under management, warns that the record levels of government bond issuance in the US and UK and the end of loose money will put financial markets under intense pressure.Other big funds, such as BlackRock, Barings Asset Management and Standard Life Investments, also warned of the danger of a US and UK government bond market sell-off.In contrast, many fund managers are more upbeat on the eurozone markets because the European Central Bank’s support programmes have been less aggressive and inflationary expectations are lower.

U.S. Savings Rate Falls to Depression-Era Levels: Chart of Day -(Bloomberg) -- Government deficits have caused the U.S. savings rate to turn negative for the first time since the Great Depression, and the gap is widening even as households and companies put away more money than ever before. The CHART OF THE DAY shows net savings, adjusted for depreciation and changes in the value of business inventories, as a percentage of gross income. This rate is provided by the Commerce Department on a quarterly basis since 1947, when the chart begins. Annual figures go back to 1929. The savings shortfall widened to negative 2.3 percent in the first three quarters of last year from negative 0.2 percent in all of 2008. Before 2008, there hadn’t been a full-year drop since 1934, the last year of a four-year period when rates were below zero.

Willem Buiter warns of massive dollar collapse – Telegraph - The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter. Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US. The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Promise to Trim Deficit Is Growing Harder to Keep - NYT - President Obama is making final decisions on his budget for next year and is still promising to outline a path to substantially lower federal deficits. But on nearly every front, that goal has gotten harder since his first budget a year ago. The savings Mr. Obama once projected from winding down the war in Iraq are being eroded by a bigger buildup in Afghanistan than he had initially contemplated. A deeper recession and slower recovery than the administration initially forecast have increased the tab for economic stimulus measures beyond the original $787 billion package, adding hundreds of billions of dollars for programs like unemployment relief and tax credits for homebuyers.

U.S. Budget Deficit May Exceed $1 Trillion for Years, Kos Says (Bloomberg) -- The U.S. government will be plagued by record budget deficits for the foreseeable future, said Dino Kos, managing director at Portales Partners LLC in New York. “It’s hard to see anything happening in Washington,” Kos said today in an interview on Bloomberg Radio. “It seems without a crisis there’s not enough will” to trim the gap. In fiscal 2009, the budget deficit exceeded $1 trillion for the first time and “the risks are it will remain above $1 trillion for a very long time,”

Is 2010 The Dawning Of A New Budget Age Of Aquarius? - Not only does the economy appear to be recovering and concern is starting to shift from the need for more stimulus to the need to think about future inflation, but (appropriately or not) last year created some pent-up political demand for deficit reduction.  Blue Dog Democrats think a deficit reduction effort is owed to them for all they supported in 2009.  The White House has been saying for months that reducing the deficit will be its budget mantra in 2010.  Republicans have been insisting that deficit reduction is what's needed.  Some major overseas buyers of Treasuries have been saying they need to see some progress on the deficit this year. And the U.S. bond market seems to expect deficit reduction and, if it doesn't happen, it may express its disappointment with higher interest rates at the precise time they could damage the recovery. But it's not at all clear that having the budget moon, stars, and planets in alignment means the same thing it has before.

Deficit, Budget Woes Need Solutions as U.S. Nears the Precipice (WSJ) The Obama administration has a lot to wish for in 2010, including a new health-care system and a sustainable economic recovery. But even if those wishes come true, policy makers face an even bigger problem in the new year and beyond: convincing the world that the U.S. government can get its finances back in order. The administration expects the federal budget deficit to add up to more than $10 trillion through 2019, or about 6% of the decade's gross domestic product, a broad measure of economic activity. Under those forecasts, Mr. Auerbach estimates, by 2026 the U.S. public debt will exceed 108.6% of GDP -- a record it set in 1946. To make matters worse, the "trust funds" the government has set aside to pay Medicare and Social Security benefits will be exhausted in 2017 and 2037, respectively, after which a big chunk of benefits will have to be paid from current taxes

US Avoids Technical Default By Three Days (zerohedge) On December 24, the Senate passed a vote by a razor thin margin (with not a vote to spare) to raise the Federal debt ceiling from $12,104 billion to $12,394 billion. The actual debt ceiling increase took effect on December 28. And as the chart below shows, the Treasury's cash flow projections were spot on: 3 days later, and the debt subject to limit surged to $12,254, a jump of over $200 billion in 2 days, and a whopping $150 billion over the old debt ceiling. Three days is all the buffer the administration's reckless spending spree has afforded this country to avoid bankruptcy. Had one more Democratic vote dissented from the stopgap measure, the US would now be in technical default. There is just $140 billion left before the revised debt ceiling is breached. We hope for the country's sake that Bill refunding in January is massive, because as we already pointed out, on January 7th we expect another ~$130 of new Treasuries to be announced for auction by January 15th.

A 10-year plan to close the budget deficit - The scale of the deficit problem, and the risks it confers to sustainable economic growth, warrants the creation of a long-term plan to solve it. This means devising a path back to a balanced budget. Given the time necessary for the economy to reach full strength, and the uncertainties regarding war costs and the impact of health reform, our goal should be a budget in balance by 2020.  Such a distant goal will not be credible, however, unless today’s policymakers set intermediate targets. One should be to achieve primary fiscal balance by 2014. Overall there would still be a deficit, because we would still be paying interest on past debt, but it would be a huge step forward. This target is simple, clear and easy to measure. Reaching primary balance would also mean US debt would cease to rise as a share of the economy – a critical milestone in returning to full health.

The Trill is Gone - This should be my last post on Trills.  Let me begin it by suggesting that we sell all of our national parks (and other land owned by the US Government) to the Saudis in exchange for forgiveness of our debts.  What’s that you say?  We are selling our patrimony?  How dare we sell our precious resources to exploiters/foreigners?  Uh, times are tough, and much as we make paper promises, eventually something hard and enduring has to back them up.I feel the same way about Trills.  If the US Government ever were to sell trills, it would be the same as selling away a share in the take from the IRS in perpetuity.  Selling shares in the IRS, ridiculous, right?  Well, that is what a trill is — selling a share of the IRS.

Dems Versus the Deficit - With the economy stumbling towards recovery -- we'll know more after this week's unemployment numbers are released -- deficit worriers and those with a political ax to grind are complaining about the budget shortfall and the accompanying national debt, and placing blame on President Barack Obama and the Democratic Congress.  Yesterday, John Podesta, the president of the Center for American Progress who headed Obama's transition team, and CAP's top economic expert, Michael Ettlinger, published an op-ed arguing in favor of a deficit-reduction target: A balanced budget in 10 years, beginning with a goal of a "primary balance" in 2014. (A primary balance is when government receipts and outlays match up, and the deficit consists entirely of interest payments on the national debt.)  Current budget forecasts suggest we'll nearly reach this goal in 2019, when the difference between all non-interest spending and revenue is projected to be .6 percent of gross domestic product, and interest payments on debt will be 3.4 percent...

Reserves Are Revised Upward, the Dollar Share Declines - Perhaps the most startling thing about the new COFER data on reserves released by the IMF is not the declining dollar share in total reserves, but rather the fact that reserves have risen relative to where we thought they were [0]. The change is entirely due to the upward revision in unallocated reserves by emerging market and LDC central banks. This point is shown in Figure 1. Total reserves were revised up $381 billion in 2009Q2, as were total emerging market/LDC reserves, and unallocated emerging market/LDC reserves. The revision in total reserves constituted a 5.5% change – quite substantial. A straightforward interpretation of the data also reveals a continued -- and exacerbated -- decline in the identified US dollar share of total reserves.

Three Ring Currency Circus: China, Japan and the US - So China's gonna zig while Japan zags and the US, umm, lags.As I documented in my earlier post, Japan is bent on weakening the Yen in an effort to recharge its export industry. China, on the other hand, is beginning a tightening program to chill out the real estate speculators and curb inflation. As any economist will tell you, China is the world heavyweight champ when it comes to currency market manipulation intervention. Through a process of issuing large amounts of renminbi to buy US dollars/ bonds, then issuing central bank bills to claw some of the excess renminbi back, China is able to keep their currency weak which stokes the competitiveness of its exports and preserves jobs.My message here is a simple one: We are watching the greatest three ring circus in experimental economics history.In the left ring, Japan is in Yen debasement mode under the stewardship of their 6th Finance Minister in less than 2 years. In the right ring, China is now attempting to cool off their wildly successful stimulus program with a tightening cycle. And not to be left out, in center stage, Bearded Ben is trapped between a not-quite-so-successful monetary stimulus plan and a mongoloid recovery that has only triumphed thus far in the juicing up of commodities, stocks and junk bonds

Sarkozy says world currency disorder unacceptable (Reuters) - Disorder among world currencies has become unacceptable and France intends to make it a major subject of its presidency of the G8 and G20 in 2011, President Nicolas Sarkozy said on Thursday. France has been at the forefront of European complaints about the strength of the euro against other currencies. It is the second time in as many days that Sarkozy has called for currency issues to be at the centre of international economic discussions. "There cannot be financial, economic and social order until we put an end to currency disorder."

Government debt - FT - As government debt soars, you have to pinch yourself to remember that only 10 years ago investors worried that western government bond markets were shrinking so fast that they might disappear. There was even talk that triple AAA rated corporate bonds would eventually replace Treasuries as global debt benchmarks. Indeed, in 2000 net global issuance of government debt was a mere $250bn. This year alone the UK will issue a third more than that; Eurozone governments almost six times as much. It has been an open question how long this can continue before investors go on strike, rising indebtedness saps economic growth, and inflation takes off.  (But)After examining the record of 44 countries for more than 200 years, Kenneth Rogoff, former International Monetary Fund chief economist, and Carmen Reinhart, a colleague, found little link between rising public debt and higher inflation in developed countries.They also found little relationship between debt and economic growth – so long as gross public debt stayed under 90 per cent of gross domestic product. That gets the US and the UK, with debt to GDP ratios of 84 per cent and 72 respectively, off the hook for now.

Chart of the day: Negative net national savings - The personal savings rate might be going up, but that’s just thanks to the hundreds of billions of dollars which the government is borrowing and transferring to the private sector to save. (Not the most efficient use of borrowed funds, it must be said.) Overall, the net national savings rate is at its lowest level since the Depression, and it’s falling: it’s now an astonishing -2.5% of national income. Any guesses for when it might be positive again, and who’s going to repay all of this borrowing?

Explain This to IRS: Tax Agency Is $32 Billion Short - The Internal Revenue Service suddenly reduced the amount of revenue it reported from delinquent collections by $32 billion, or about 27 percent, providing little information about what happened to the money, according to a report released Wednesday morning. "There is an astonishing lack of transparency as to what is included in these revenue figures and how they are computed," said National Taxpayer Advocate Nina E. Olson as part of her annual report to Congress. "The failure to highlight and explain revisions of such magnitude erodes confidence in IRS's data reporting." The IRS reported more than $121 billion in delinquent tax collection revenues from 2005 to 2007. But in its 2008 IRS Data Book, it quietly revised the number downward to less than $89 billion. Olson's report said that was part of a larger picture of the IRS now having a handle on what type of collection activities really bring in revenue.

Controlled-Burn Inflation  - The following expresses my personal views, not those of the SEC or its staff. Suppose all the Good Guys (Joe Consumer and Homeowner) are loaded with debt, and suppose that this debt is payable to the Bad Guys (Rich People and Foreigners). What can you do about it? Oh, and also suppose that the debt is mostly in nominal terms. Answer: You inflate.  We cringe when inflation is mentioned. Maybe it is from the horror stories of hyperinflation; maybe it is from memories of the inflationary episode of the mid-1970s.? But I am not talking about hyperinflation, or even inflation in the double digits. Rather, a controlled burn inflation, something that is, say, in the six or seven percent range. Something that will drop the debt burden by twenty or thirty percent after a few years.

This is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise.

GMAC Says Lender Will Post $5 Billion Quarterly Loss - GMAC Inc., the auto and home lender bailed out by the U.S. government three times, said its combined fourth-quarter loss was about $5 billion as the company tried to stanch losses from mortgages. GMAC cited a previously disclosed $3.8 billion pretax charge tied to revaluing “higher-risk mortgage loans” that it intends to sell. The estimated quarterly loss was the fourth straight and may boost the full-year deficit above $10 billion for the Detroit-based firm, which is now majority owned by taxpayers.

The Next Six Bailouts? (ABC News)

  • Fannie Mae and Freddie Mac - Late last month, the Treasury Department strengthened those suspicions when it announced that it would remove a $400 billion cap on Fannie and Freddie aid.
  • Federal Housing Administration - The FHA is now backing loans that would have made a crooked subprime mortgage broker blush in the heyday of the housing bubble.
  • AIG - Barry Ritholtz, the author of 2009's "Bailout Nation," says "AIG continues to be a problem child,"
  • Citigroup: Citigroup recently freed itself of the tens of billions it owed to the federal government, but Ritholtz said it could return to the taxpayers' trough this year.
  • States: The Obama administration's 2009 stimulus package included $53.6 billion to help states avoid cutbacks and layoffs in education and public safety. But that wasn't enough to stop some states from falling headfirst into budget shortfalls.
  • Pension Benefit Guaranty Corporation -  insures the pensions of more than 44 million American workers. Even before the financial crisis hit, the PBGC was in trouble

More Bank Accounting Flexibility -"Facing political pressures to abandon 'fair value' accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the 'decoupling' of bank capital rules from normal accounting standards. His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value--often the market value--of bank loans and other assets. ... 'Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,' Mr. Herz said in a prepared text. 'Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,' he added. 'And conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulator...The banks want "flexibility" to conceal insolvency. I'll say it: the PCAOB and Big 87654 either aid and abet securities fraud or are so incompetent they should be sent back to Accounting 101. These cowards sit and do nothing while insolvent entities like Citibank march on consuming public funds. Bank "regulators" conceal what they want

Paul Volcker: The Lion Lets Loose – BusinessWeek - There has been chatter in recent months about Paul Volcker, the chairman of President Barack Obama's Economic Advisory Board, being muffled by the Administration—especially when it comes to his views on bank regulation. But that hasn't stopped Volcker from taking his argument for separating commercial and investment banking on the road, scolding bankers in Britain in early December and telling politicians in Germany that "this is no time for a return to business as usual." The former Fed chairman has also been hard at work leading a panel that will report back to the President early next year with proposals for tax reform. And at 82, he recently got engaged. We talked at Volcker's Manhattan apartment on Dec. 29.

Hedge funds should be regulated, says Joint Forum = A report requested by the G20 recommends hedge funds should be subject to minimum risk measurement standards and reporting requirements. Minimum initial and outgoing capital requirements should be imposed on systemically relevant hedge funds. The Joint Forum - an international panel from the banking, insurance and securities industries - has released its report snappily named the “Review of the Differentiated Nature and Scope of Financial Regulation”. It is 132 pages of assessment and recommendation on the regulation of the financial sector. The Forum found surprising and growing levels of convergence in regulation. But it points out areas of risk and makes 17 recommendations, summarised below.

Beware the crisis around the corner - The response of US and other authorities to the emergency is unfinished business and needs continuing attention – but in 2010, if the crisis continues to ease, the danger is that politicians will relax and minds will wander from the need for new financial rules.The next model of US financial regulation is unclear. Important as the regulatory organisation chart may be, however, it is not the key thing. The rules regulators apply are what matter. The need for better rules is greater now than before the crisis. Critics of the US government say its response has made another financial collapse more likely – and they have a point. They worry about institutions that are too big to fail. The authorities encouraged consolidation as a way to restore short-term stability, but at what cost in the longer term? Attacking this concentration, critics say, is crucial.One way to do this, they argue, is to restore the Glass-Steagall separation of commercial and investment banking. Create a heavily regulated, safe, utility-like system of deposit-taking banks and fence it off from the more lightly regulated casino of the securities markets. You would get institutions that are both smaller and more conservatively run. It sounds plausible, but the debate over a new Glass-Steagall is unhelpful. The degree of interest in the idea is puzzling. After all, the financial collapse did not show that universal banks are more hazardous than separated commercial and investment banks. If anything, it showed the opposite.

Federal Reserve President Announces "Dismemberment" Of Large Financial Institutions Should Be Considered - Bad news for fixed income market monopolist Goldman Sachs. Kansas City Fed President Thomas Hoenig, in response to a question from University of Maryland Professor Carmen Reinhardt said "dismembering firms is a fair thing to consider." Hoenig further clarified that regulators "have people who are experts who understand what's going on inside institutions who could figure out how to carve out" some parts of a financial institution if they are taking undue risks with taxpayer backing." Surely, we expect Lloyd Blankfein to comment promptly on how even the Federal Reserve is now thoroughly underappreciating the divine nature of its prop/flow-focused business model, and how originating the proactively entire volume of OTC quote flow is just a natural side effect of completely cornering the CDS, bond and loan market.

Geithner’s New York Fed Told AIG to Limit Swaps Disclosure -(Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show. AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee. The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms. “It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,”

Geithner’s Stained Past Leaves Future In Question - The latest revelation surrounding Tim Geithner has generated a spirited debate among your humble Market Talk editors: if and/or when will the Treasury Secretary get the boot? Before we answer that question, here are the details. The NY Fed, when under Geithner’s leadership, reportedly told AIG to limit disclosures on CDS payments made to banks during the height of the financial crisis. Bloomberg has the scoop, citing emails between the NY Fed and AIG. Bloggers have been all over this story, ripping Geithner for his cagey, often-times evasive manuevering:

Tim Geithner's NY Fed told AIG to keep quiet about $105bn paid to banks - The New York Fed, under Mr Geithner's leadership until he was appointed US Treasury Secretary in January 2009, instructed the troubled insurer to withhold details of the payments from the American public, which bailed out AIG by as much as $182bn at its financial nadir.  According to a series of emails obtained and made public by Congressman Darrell Issa, AIG had planned to inform investors in a regulatory filing published on December 24, 2008, that it had paid counter-party banks owed money at a rate of 100 cents on the dollar. The banks were owed the money for credit-default swaps they had entered into, mainly on behalf of clients.  "It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Congressman Issa.

Lawmakers Press for Geithner Testimony on AIG (Reuters) - Two prominent U.S. lawmakers on Friday called for U.S. Treasury Secretary Timothy Geithner to testify to help determine if the New York Federal Reserve Bank improperly influenced insurer AIG to withhold information on its payments to banks after a government bailout. Representative Spencer Bachus, the top Republican on the House Financial Services Committee, and Elijah Cummings, a Democrat on the House Oversight and Government Reform Committee, requested their respective panels hold hearings on the matter. The requests came after email traffic between lawyers for New York Fed and AIG released on Thursday showed the Fed sought to alter the disclosures in late 2008, when Geithner was still in charge of the bank. Among information New York Fed lawyers sought to delete from proposed Securities and Exchange Commission filings was details of payments to banks with taxpayer funds in which institutions would get 100 percent of par value for credit default swaps being liquidated, according to the emails.

NY Fed Told AIG to Hide Details of Swaps Payouts to Banks - Yves Smith -This latest revelation confirms the Fed’s commitment to secrecy and, although troubling, at this point should come at no surprise. The most important element is that AIG itself determined it should provide information about its swaps transactions (the ones it settled at 100 cents on the dollar at the New York Fed’s instigation and approved by Geithner) because it was an SEC required disclosure. Thus the Fed required AIG to violate SEC regs. The clear intent was to hide the extent of the subsidies that flowed from the Fed and Treasury to the recipient banks (recall AIG also received TARP funds). Charming.

Geithner’s dubious AIG cover up - Let me add a few words to Yves’ last post because I don’t think she was explicit enough about what’s going on here. This was looting and a cover-up plain and simple. A quick review: Damaging e-mails have revealed that Treasury Secretary Timothy Geithner urged AIG to withhold crucial information about the deterioration of its financial condition in the lead up to its demise.  This will put further political pressure on Geithner, who has already been exposed for his dubious role in the Lehman Brothers bankruptcy.

Aig And Geithner: More Lies? - In a letter to Darrell Issa and Edolphus Towns the NY Fed's General Counsel asserted: “Matters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner,” Thomas Baxter, general counsel of the New York Fed, said yesterday in a letter to Representative Darrell Issa, a California Republican, and Edolphus Towns, Democrat of New York. “In my judgment as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president.” Geithner, who helped orchestrate the bailout of AIG when he led the New York Fed, is now Treasury Department secretary.  Oh really?An article over on Seeking Alpha makes the following assertion via documentary evidence: "Note that there should be no discussion or suggestion that AIG and the NY Fed are asking to structure anything else at this point."The assertion is made that this is Geithner's own handwriting.  NY Fed Officials say he was not involved. Well, that deserves investigation.

The New Geithner-AIG Emails Are Merely The Tip Of The Iceberg – Spitzer, Black - In a December New York Times op-ed, we called for the full public release of AIG email messages, internal accounting documents and financial models generated in the last decade. Today, a Bloomberg story revealed that under Timothy Geithner’s leadership, the Federal Reserve Bank of New York told AIG to withhold details from the public about its payments to banks during the crisis. This information was discovered when emails between the company and the Fed were requested by representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.The emails requested by Issa span five months beginning in November 2008. If five months of emails reveal information key to our understanding of the aftermath of the crisis, imagine what 10 years of emails could contribute to our understanding of its causes. We believe the AIG emails and other internal company documents are the ‘black box’ of the financial crisis. If we understand the failure of AIG, we will more fully understand the crisis - what caused it and more importantly how to prevent it from happening again.

Tim Out - Sheila and Debt Relief In? - I don’t think the current flap relating to the deliberate ‘non-disclosure’ of information relating to AIG is that big a deal. When the full history of this period is finally told (it will take awhile yet) this particular transgression of Mr. Geitner will look small by comparison. But Mr. Geithner has outlived his usefulness. He is too connected to the bailouts of 08. Bear, Lehman, AIG, TARP and even QE are all part of his legacy. That makes Tim a lightening rod. Too many Americans hate that part of our history. I believe that Ms. Bair will introduce a very large program of PRICIPAL debt relief for borrowers. This program will start with the D.C. mortgage lenders Fannie, Freddie and FHA. It will be forcibly extended to the private sector lenders. (They already have significant reserves on a lot of this.) I hate this development. But I think it is the ‘right thing to do’.

FDIC nibbles nicely at bank risk - Reuters - Sheila Bair looks to be leading the regulatory race to the top. The agency she oversees, the Federal Deposit Insurance Corporation, has recently unveiled a handful of clever ideas to contain risky bank behavior and protect the nation’s deposit insurance fund. Rival watchdogs fighting for turf will find it difficult to ignore FDIC’s latest tactics.Generating the most buzz is a sensible plan to tie the amount that banks pay for deposit insurance to the riskiness of their compensation plans. Banks with schemes that favor short-term gains would pay more than those that, for example, include multi-year claw-backs on bonuses. The agency will vote on the plan next week.

Small Banks, Regulators, Fight Over Capital - WSJ - Regulators are requiring many small banks to set aside extra capital because of an unusual mortgage-bond shopping spree that began as housing-market trouble was brewing. Many of the bonds got reduced to "junk" status by credit-rating firms as homeowners' mortgages began to default in growing numbers, causing expected losses in the bonds. But some banks say their bonds will eventually turn a profit despite grim ratings. The extra capital requirements, some bankers say, are an unnecessary burden that will crimp their ability to lend.

“All Serious Economists Agree” - The most remarkable statement I heard at the American Economics Association meeting over the past few days came from an astute observer – not an economist, but someone whose job involves talking daily to leading economists, politicians, and financial industry professionals. He claims “all serious economists agree” that Too Big To Fail banks are a huge problem that must be addressed with some urgency.  He also emphasized that politicians are completely unwilling to take on this issue.  On this point, I agree – but is there really such unanimity among economists?  I ran his statement by a number of top academics over the past day and – so far – it holds up.

Don’t Forget Financial Sector Reform - iMFdirect - There is a broad consensus on at least one conclusion from the turmoil of the past few years: Fundamental changes are needed in the global financial sector. Some of these changes seem relatively clear:

  • Risk management of many financial firms needs strengthening
  • Compensation schemes need to be re-evaluated
  • Capital standards need to be bolstered
  • Regulation needs fundamental reform
  • Supervision needs to be improved
  • And financial institutions’ balance sheets need to be freed of the burden of impaired assets

FACTBOX: 5 financial reforms missing from U.S. Congress bills | Reuters - Below is a summary of five proposals excluded from a bill approved last month by the House of Representatives, and from a draft bill being debated in the Senate Banking Committee: *mortgage "cramdown," the idea is opposed by the banking industry, which won a victory last month when an amendment was defeated… Tighter regulation of credit rating agencies -- such as Moody's Corp, Standard & Poor's and Fitch Ratings -- The Securities and Exchange Commission and the Commodity Futures Trading Commission regulate financial markets so inextricably linked that they should be one…. The two giants of U.S. mortgage finance -- Fannie Mae and Freddie Mac -- need a major overhaul… Several congressional Democrats have introduced a bill to cap credit card interest rates, but the measure is not included in either of the main House or Senate packages.

Financial crisis panel seeks bankers' testimony - washingtonpost - The commission appointed by Congress to examine the causes of the financial crisis is to hear testimony Wednesday from the heads of four of the nation's largest banks, as the panel begins a year-long investigation that its chairman described as an effort to figure out "what the heck happened." Philip Angelides, chairman of the Financial Crisis Inquiry Commission, said he planned to hold a series of public hearings, conduct hundreds of interviews and request or subpoena information from companies and government agencies.

Good Idea Coming - One striking aspect of the public debate about the future of derivatives – and how best to regulate them – is that almost all the available experts work for one of the major broker-dealers. Larry’s proposal is intriguing.  He thinks the government should set up its own arms-length labs (or sponsor nonprofit research organizations to do the same) that would concentrate on testing financial derivative products in test bed-type settings.  This would not, of course, be the same as trading in real markets.  But with today’s computer resources and plenty of unemployed finance talent at hand, it should be possible to develop individual people and a broader organizational capacity able to test the effects of various kinds of derivatives on customers, as well as on overall financial system stability.

Global Financial Regulation Overhaul Seen In 2010 - (Reuters) - Global financial regulation has changed little since the 2008 banking crisis, but that won't be the case much longer. U.S. and EU authorities are expected to hammer out the final shape of a new regulatory order in 2010 that will fundamentally change how world banks and markets operate. Stricter limits on leverage and capital will emerge, leading eventually to slimmer profits for banks, policy analysts said. Formerly unregulated off-exchange derivatives markets will have to conform to new procedures. Lenders' power to package and securitize mortgages and other forms of debt will face new limits, while hedge funds -- once the darlings of high finance -- will face new scrutiny.

New Dems Met With Wall St. Execs While Pushing to Weaken Financial Reform - A group of moderate Democrats held private meetings this fall with executives from Goldman Sachs and JP Morgan Chase, while in the midst of pushing successfully to water down landmark legislation designed to beef up regulation of the financial industry. In mid October, members of the New Democrat Coalition (NDC), a caucus of pro-business Democrats, traveled to New York City. According to an emailed itinerary HEREfor the trip drawn up by an event planner working for the group and obtained by TPMmuckraker, members met on October 12 with executives from Goldman, and the following day with execs from JP Morgan. Sandwiched between those events was a fundraiser HERE]for the New Dems, and a meeting with CEOs from Marsh and McLellan Companies, a consulting and insurance firm. Based on the itinerary, the Goldman meeting was to be attended by Reps. Joe Crowley and Scott Murphy of New York, and Gabrielle Giffords of Arizona. The JP Morgan meeting was to be attended by Reps. Crowley, Murphy, Melissa Bean of Illinois, John Adler of New Jersey, and Jim Himes of Connecticut -- a former Goldman banker. Crowley serves as NDC's chair, and Bean as its vice chair.

IMF study links lobbying by US banks to high-risk lending - Powerful American banks spending lavishly on lobbying are more likely to engage in high-risk lending and their shares have performed less well than others, a groundbreaking study by the International Monetary Fund has found.The in-depth research will prompt calls for a wholesale clean-up of Capitol Hill by the Obama administration. Lobbying by the finance, insurance and real estate (Fire) sector outstrips any other in the US economy.The study, entitled A Fistful of Dollars: Lobbying and the Financial Crisis, published by the IMF, reveals a stark correlation between lobbying by lenders and high loan-to-income loans.The paper, written by a trio of high-profile IMF economists, established that firms who spend more on buying access to politicians are more likely to engage in risky securitisation of their loan books, have faster-growing mortgage loan portfolios as well as poorer share performance and larger loan defaults.

The Transition To Risk - The hidden transition to ever-higher systemic risk was the major story of 2009: nothing's been fixed, and the risks of systemic failure are rising every day. I want to address what I call the transition to risk. One analogy is the way that the risks of suffering a fatal heart attack rise in a completely hidden way. The body doesn't signal the slow accumulation of fatty deposits in arteries; the process is silent. Nor is there any conscious awareness that arteries are hardening. The accretion of risk is slow, steady, invisible--until it's too late.

On Goldman and Synthetic CDOs - Yves Smith also wrote a long post denouncing Goldman's "deceptive synthetic CDO practices." Yves' argument is that Goldman should have disclosed to investors that it was planning to retain the short position in the synthetic CDO, and not simply act as an intermediary. Arranging banks necessarily take the initial short position in a synthetic CDO, but most would then sell off the short position, pocketing just the arranging fee. Goldman, however, arranged some synthetic CDOs (emphasis on some) where it kept the short position for itself — and when the housing and structured finance markets collapsed, it was Ferraris for everyone! Yves thinks Goldman should have disclosed to investors that it would be in a position to profit if the synthetic CDO declined in value. I disagree. First of all, investors don't have a right to know what Goldman's internal positions are, and they never have. Every single investor understood that Goldman also invested for its own account, and no one would have expected them to disclose their proprietary positions. More importantly, what you have to realize — and where I think Yves goes wrong — is that Goldman wasn't necessarily placing an independent bet against the synthetic CDO market; rather, it was using synthetic CDOs to bet against the housing market. There's a big difference.

How to make the bankers share the losses - FT - There are as many explanations for the causes of the credit crunch as there are economists, but some themes predominate: excessive leverage; inadequate capital; over-complex financial instruments; an asset bubble; and (pretty universally) the asymmetric incentives that arose from bankers’ bonus arrangements. Bankers were paid when the risks they took paid off, but were not penalised when their bets went sour. Since it can take years to be certain that bank risks are profits or losses, it proved too easy for them to take the cash on short-term gains but to have no responsibility for the consequences of their actions years later.  There has been a proliferation of plans to fix this structural weakness of the banking system. But politicians and regulators have overlooked a really simple solution. Why not design a limited-liability model, where bankers become personally liable for the cumulative amount of their bonuses?

WSJ Revisits the Carried-Interest Tax - What ever happened to the carried-interest tax? The Wall Street Journal looks at that today, reporting that hedge funds and private-equity funds may be about to finally get taxed like the rest of us. As it stands, they only get charged capital-gains tax rates on their share of their funds’ profits, even though the money’s being made (mostly) with other people’s money. That’s the “two and twenty” structure that’s common in the industry. A typical fund takes an annual fee of 2 percent of total assets under management plus 20 percent of the profit. The question has been whether this should be treated as income or as capital gains, which are taxed at a much lower rate: 15 percent instead of 35 percent. Well, actually, there hasn’t been much question—you can’t have capital gains on capital that isn’t yours—but the industries have successfully delayed their day of reckoning through fierce lobbying.

FDIC eyes linking levies to bank pay - US banks’ contributions to a multibillion-dollar fund that insures depositors’ savings could be linked to regulators’ assessment of bank pay plans, under preliminary discussions being held by top banking watchdogs. The Federal Deposit Insurance Corporation said on Wednesday that its board, made up of top banking regulators, would meet next Tuesday to consider proposed rules on “employee compensation”. The FDIC did not specify what it would discuss and declined to comment further. However, one of the issues under consideration is whether regulators should seek information about lenders’ compensation policies, how they affect banks’ risk profiles and whether certain pay structures should be taken into account when assessing FDIC insurance fees, according to people briefed on the discussions.Any proposals are likely to be targeted to specific structures that are deemed to increase or reduce risk.

Larry dollar-billz-y'all Summers-blogging... A little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks. A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected -- thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)Last month, it was revealed that Summers, whom President Obama appointed to essentially run the economy from his perch in the National Economic Council, earned nearly $8 million in 2008 from Wall Street banks, some of which, like Goldman Sachs and Citigroup, were now receiving tens of billions of taxpayer funds from the same Larry Summers. It turns out now that those two banks have continued paying into Summers-related businesses.

Banks Race to Raise Fees Ahead of New Credit Card Rules - ABC News - Consumer advocates say the race is on, as banks and credit card companies look for ways to make up the estimated $50 billion they're about to lose when new credit card rules take effect. But now, in many cases, those advocates say, the banks are targeting consumers' credit cards to make up their losses. "The wholesale raising of interest rates, I've seen 12, 15 percent," said Adam Levin of the credit education site "There's no questions they were front-running the laws."  Along with higher rates and new fees, one bank is even charging for a monthly paper statement.

How Visa, Using Fees Behind Its Debit Card, Dominates a Market - NYTimes -When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.  Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud. How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.

Yet More Financial Innovation - Andrew Martin has an article in The New York Times on the dynamics of the debit card industry. I don’t have any expert knowledge to add, but here’s the summary: Visa has been increasing its market share by increasing the prices it charges to merchants; it takes those higher transaction fees and passes some of them on to banks that issue Visa debit cards, giving them an incentive to promote Visa debit cards over other forms of debit cards. Not only that, there are different fees on debit cards depending on whether you use them like a credit card (signing for them) or like an ATM card (entering a PIN). Signing costs the merchant more, so the banks and Visa give you incentives to sign instead of using a PIN. The end result is higher costs for merchants, who pass them on to you. Tell me again, how does this benefit society?

The Cognitively Weak, Financial Services, and Evil Rortybomb’s Survey - In late November I talked about how credit cards specifically, and the consumer financial system more generally, was fee and ‘trick and traps’ based and how that amounted to a transfer from the poorest to the richest in our country. I found this to be a really bad thing, one that gave terrible incentives to financial firms to find innovations that would make prices and information more opaque and less transparent for consumers. Instead of challenging the argument itself, or arguing that this system was a necessary evil to get the poorest in our country access to financial markets, I was amazed at the amount of feedback I got that argued this was a great system, because instead of ripping off the poor to give benefits to the rich, it really transferred “from the ignorant and foolish to the informed and prudent”, or as one emailer put it: “It’s the irresponsible borrowers – who are often poor – that are penalized and the ultra-responsible borrowers that are rewarded. I fail to see the problem there.” The argument is that the system works to punish those who are cognitively weak and financially irresponsible and reward those with good cognition and a sense of responsibility.

Visa and those Fees, I: Market Malfunction - You really need to read this article about Visa and fees. Ever read something and think “I should have tried writing that”? That’s how I feel. Interchange fees are a bit of a topic I love writing about here, and it’s great to see a well-researched and written New York Times article on the topic. Do read it. Kevin Drum, Felix Salmon and Yves Smith have more. I’m going to write some additional points for this article in the next entry, but first I do want to focus on Tyler’s Cowen’s response (my numbered points):

Visa and those Fees, II: For the Activists - Once again, read that article about Visa’s fees. Especially activists who are interested in reforming the financial sector. What happens at the level of the entire sector is similar to what happens at the personal level, and the arguments about price transparency, market failures, political and market clout and consumers getting squeezed in invisible, but real, ways are strikingly similar at the derivatives level as they are at the credit card level. A few additional points, especially as people think about how to frame this issue and create activism around it.

Did Demand for Credit Really Fall? - One standard attack against banks is that they have not expanded lending sufficiently to help the economy recover. The standard defense has been that the supply of credit collapsed only in response to a collapse in the demand for credit. The primary measure of demand for credit that I know of is the one compiled by the Federal Reserve by surveying bank lending officers; it shows falling demand for all types of credit from 2006, with an acceleration in the fall in late 2008. But Google has another way of tracking demand for credit; the Google Credit & Lending Index measures the relative volume of searches* for certain terms like “credit card,” “loan,” and “credit report.” (click to see google graph)

Felix Salmon: The economic statistic of the decade:  Mike Mandel has four nominees for his “Economic Statistic of the Decade” award, including home prices (obvs), Chinese growth, and global trade. But the most startling one, for me, is US household borrowing. I like the time frame that Mike has chosen here, since it shows not only the huge increase in borrowing during the credit boom and the stomach-churning plunge thereafter, but also, for much of the 1990s, what “normal” should look like. Mike notes that the data for this chart includes domestic hedge funds,so it shouldn’t be taken entirely at face value. But it’s the best visual representation I’ve seen of the credit boom and bust.

A sad, below-Zero Day - Everyone tries to make a Living off Consumers; Everyone at least, except for maybe the Consumers themselves. Economists have long known there are Ways to compete by raising Prices–it only requires middleman venders of valued Product. The average Consumer only carries 3 Cards in his or her Wallet, and at least One is specific to a Name brand set of Stores. Some 30% of Card Users utilize their Cards in budgetary manner; either buying from one Card until a financial limit is reached before switching to another card, or restricting the type of expenditures to different Cards. This is where Card companies begin to resemble Mexican Drug gangs, with the old Standby: Make a healthy Profit from the Bribes, or Lose everything!

Consumer Credit Drops Record $17.5 Billion; Steepest Declines Since WWII - While monetarist clowns focus on so-called excess reserves and the huge surge in inflation that is supposed to bring (See Fictional Reserve Lending And The Myth Of Excess Reserves) I am watching the biggest plunge in consumer credit since WWII. Please consider Consumer Credit in U.S. Drops Record $17.5 Billion: Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans. The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October

Consumer Spending & Economic Growth - Thanks to the folks at Chartporn, I ran across a very engaging area graph from VisualEconomics.Com. It shows a breakdown of consumer spending on various categories over the past 100 years. There are a number of items that are of particular interest: the significant decline in spending for food and apparel, the significant increase in spending for transportation, growth in entertainment, the growth of spending for housing, and the relatively small increase in the percentage spent on health care. However, its value to me resides in the fact that it opens the door to discuss not only quantitative change but qualitative change. (I expect the latter, along with an increasing shift from renting to purchasing accounts for much of the growth in spending for housing.

Loan sharking datapoints of the day - Are legal payday lenders a superior alternative to the loan sharks of old? Or are they they loan sharks of old? Just look at what happened in New Mexico, which tried to crack down on payday lenders by limiting the amount of money a company could charge in interest on a short-maturity loan. No problem, said the lenders, and just started selling a new product — an even worse product — which got around the law by having a maturity of over 120 days. They even provided their borrowers with Truth-in-Lending Act disclosures! Like this one: In case you can’t see clearly, this shows a $100 loan which is due to be repaid with 26 bi-weekly installments of $40.16 each, plus a final installment of $55.34. In total, the borrower, Oscar Wellito, has to pay not only his $100 principal back, but also $999.71 in interest, for a total APR of 1,147%. (see more)

GOP, Warning Of A 'New EPA', Oppose Independent CFPA - Senate Republicans are determined to prevent the creation of an independent Consumer Financial Protection Agency because they consider it as threatening as their current arch-nemesis regulator: the Environmental Protection Agency. Consumer advocates, meanwhile, say the CFPA must have strong, independent authority to craft and enforce rules. Anything less, they argue, would be too much of a concession to banks that have gotten enough already. "From the Republican point of view, the idea of a separate agency is still anathema," said Sen. Robert Bennett of Utah, a senior Republican on the banking committee. An independent agency, he said, can go too far in the direction of tight regulation without taking into account the effect of the rules it creates on business and the economy. He said he's seen it happen before.

When the rich get old - Mike Konczal today comes up with something which in and of itself is reason enough to set up a Consumer Financial Protection Agency: ageing boomers. As David Laibson notes, the prevalence of dementia among Americans “explodes” after age 60, doubling every five years to more than 30% of the population over age 85. These individuals are sitting ducks for predatory financial-services professionals, and it’s entirely right and proper for the government to step in and stop such thievish firms from extracting huge chunks of elderly people’s life savings. So let’s get a CFPA up and running soon: the rich are becoming old fast, and that’s a potentially explosive combination

Why Does It Feel Worse than Reported? - And here is a chart showing the five year annualized change in both GDP and Gross Domestic Purchases. So what does this show us? It shows that consumption over the years leading up to the crisis grew much faster than what we actually produced. This, was never sustainable. In addition, the further one moves down this path, the more difficult it becomes to grow off of this higher / boosted base. As a result, in the recent period growth in purchases has not been able to keep up with the growth seen in the headline GDP figure, even though net exports have remained negative (i.e. we still consume more than we produce, just not the larger level needed to maintain growth). Putting numbers to this, GDP has grown at a bit more than 1% annualized over the past five years, whereas growth in Gross Domestic Purchases over that period was only 0.5% annualized (low and lower). So what does this mean? It means that we became accustomed to living beyond our means, irrelevant of the actual production that was created within the confines of any GDP figure. This is one of the reasons that the recent GDP figures have not reflected what has actually been felt by each of us... the recent economic decline has in fact felt much worse.  The below chart makes this more clear. It is a chart similar to the one shown above, but is on a per capita basis.

'Big Is Bad' Catches On In Congress - The populist angst aimed at Wall Street banks is already spilling into Senate deliberations on regulatory reform, and a powerful new sentiment — big is bad — is being echoed by liberals and conservatives alike. The anger at the nation’s financial behemoths is taking shape in a variety of ways, most notably in a bill from Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), who are targeting big financial institutions such as JPMorgan Chase and Citigroup. The bipartisan duo’s bill would reinstate the Depression-era law that built a wall between commercial banking and the riskier activities of investment banking. The separation — originally set up in the Glass-Steagall Act — was repealed in 1999. But reinstating Glass-Steagall has become something of a rallying cry among progressives, as well as some conservatives. They believe that allowing banks to provide all services to all people creates the very sort of “too big to fail” institutions that threatened the stability of the global financial order in 2008.

Goldman Sachs To Launch New HQ! - A Goldman Sachs spokesperson has confirmed that its new headquarters will reach "full operational status" in 2010. Constructed adjacent to the site of the former Twin Towers, the structure is "within range" of all of the firm's nearest competitors.  The most financially-efficient building ever constructed, Goldman expects costs to have zero-impact on its bottom line, with funding provided by the issuance of 0% interest Liberty Bonds, tax grants and windfalls from the TARP (Taxpayers Are Really Paying) Program established by its former CEO turned Treasury Secretary Hank Paulson.  "As with everything we do," continued the spokesperson, " this project is wildly profitable; The $2.3 Billion of actual cost was covered more than ten times over by the $23 Billion in kind contributions from the government. Even if that weren't the case, our ability to take profitable advantage of the misery of others would have paid off the project in three months."

Bankers are as valuable as film stars or athletes, insists Goldman Sachs director - We mere mortals need to shape up our thinking. Goldman Sachs' employees are so special that they ought to be viewed in the same category as professional athletes and movie stars, according to a board member of the Wall Street behemoth. "The shareholder value is made up in people and you need the people there to do the job, says George, at about the 2 mins 40 mark in this clip. "If you don't pay them for their performance, you'll lose them. It's much like professional athletes and movie stars."

Bailed-Out Banks Profit on Rescued Assets - BusinessWeek - The U.S. program to purge bad loans from bank balance sheets has helped transform that frozen debt into a money-maker  Only months after it was started, the U.S. program designed to purge debts of no immediate discernable value from the balance sheets of troubled banks has helped transform the frozen debt into a money-maker as the bonds have rallied. Bank of America Corp. (BAC) and Citigroup Inc. (C), who received 22 percent of the $418.7 billion American taxpayers loaned to troubled financial institutions, boosted holdings on their trading books of home- loan bonds that lack government guarantees while investors were raising cash for the program, according to Federal Reserve data.

U.S. business bankruptcies rise 38 pct in 2009 - Reuters - U.S. business bankruptcies rose 38 percent last year, to a record since bankruptcy laws were changed in 2005, according to a bankruptcy data firm on Tuesday. There were 89,402 bankruptcy filings by businesses last year, compared with 64,584 the previous year, according to data compiled from court filings by Automated Access to Court Electronic Records. That's the highest yearly figure since 2005 when a flood of businesses and consumers filed for bankruptcy before changes to the U.S. Bankruptcy Code that made it harder for consumers to erase their debts and for businesses to restructure without interference from creditors.

Exclusive: U.S. business loan defaults rise again (Reuters) - Severe delinquencies by small and medium-sized U.S. businesses on the loans, leases and lines of credit to finance capital equipment rose again in November as lenders remained reluctant to extend fresh financing, PayNet Inc reported on Monday.Accounts behind 180 days or more, and unlikely ever to be paid, rose to 0.91 percent in November from 0.87 percent in October, according to PayNet, which provides risk-management tools to the commercial lending industry.It was the 22nd consecutive monthly increase in loans so far in arrears they ultimately may have to be written off by lenders.Accounts in moderate delinquency, or those behind by 30 days or more, rose in November to 4.33 percent from 4.19 percent in October, according to PayNet.

Non Performing Loans as a Percentage of Assets (FRED graphic)

Origins of an American Kleptocracy - It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling.  Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year.  We now think that the analysis leading commentators to focus blame on these entities is fatally flawed. We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral.  This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal.  If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary "stimulus."

U.S. Economy: Pending Home Sales Plunge, Factory Orders Climb -(Bloomberg) -- Contracts to buy previously owned U.S. homes plunged more than anticipated in November, while factory demand beat forecasts, showing manufacturing will lead the economy in coming months as the housing recovery cools. The index of signed purchase agreements, or pending home sales, dropped 16 percent as Americans waited for a first-time buyer tax credit to be extended, the National Association of Realtors said today in Washington. Factory orders rose 1.1 percent, more than twice as much as projected, according to figures from the Commerce Department. The manufacturing report showed companies boosted spending on new equipment toward the end of 2009, signaling growing confidence in the economic recovery that may soon lead to more hiring. The drop in November pending home sales followed a 42 percent surge over the previous 10 months as households rushed to take advantage of the government incentive.

The Price for Fannie and Freddie Keeps Going Up - WSJ - On Christmas Eve, when most Americans' minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent. This action confirms that the decade-long congressional failure to more closely regulate these two government-sponsored enterprises (GSEs) will rank for U.S. taxpayers as one of the worst policy disasters in our history. Fannie and Freddie's congressional sponsors—some of whom are now leading the administration's effort to "reform" the financial system—have a lot to answer for. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, sponsored legislation adopted in 2008 that established a new regulatory structure for the GSEs. But by then it was far too late.

Unlimited Credit For Fannie/Freddie Seen As Backdoor Bailout (Reuters) - At a hearing last fall, U.S. Treasury Secretary Timothy Geithner told lawmakers that he and his team were working to put the $700 billion financial bailout fund "out of its misery." But some in Washington now see a second, backdoor bailout in its place. On December 24, the Obama administration announced it was extending an unlimited credit line to mortgage finance agencies Fannie Mae (FNM.N) and (FRE.N) Freddie Mac, which would keep them afloat no matter how high their losses. Representative Dennis Kucinich, an Ohio Democrat who was an early opponent of Obama in the 2008 presidential race, thinks the move is backdoor way to help banks, and a congressional subcommittee he leads is investigating the Treasury's decision to cover unlimited losses at the housing finance companies. "This new authority must be used responsibly and for the benefit of American families," Kucinich said. It "cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U. S. taxpayers and acting as a backdoor TARP."

Fannie, Freddie, and the New Red and Blue - Matt Taibbi - Over the Christmas holiday a nasty thing happened: Tim Geithner’s Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012.The move has already inspired a mini-firestorm, with several outlets delving deeply into the recent history of the GSEs and uncovering some disturbing new facts. Chief among those were an analysis of the GSEs by a former chief credit officer of Fannie named Edward Pinto, who found that Fannie and Freddie routinely mismarked subprime or Alt-A (a sort of purgatory class of nonprime risky mortgage, resting between subprime and prime) mortgages as prime. This is a damning fact and if true certainly supports the Journal claim that the GSE actions were a “principal cause of the financial crisis.”

CMBS Delinquencies May Grow 58% in the Next Six Months, Realpoint Says - The delinquent unpaid balance for commercial mortgage-backed securities (CMBS) rose “substantially” in November – more than 16% – to $37.93bn from the previous month, and the rate of growth looks likely to continue, according to monthly research by credit-rating agency Realpoint. The news comes as investment firm Grubb & Ellis predicts a slow commercial real estate market in 2010. Multifamily loans surpassed retail loans in November as the largest contributor to overall CMBS delinquency, Realpoint said. The sector accounted for 1.23% of the CMBS universe, but 26% of total delinquency.

Commercial Property Is Biggest Risk, U.S. Bank Examiners Find - (Bloomberg) -- Losses on commercial real estate loans pose the biggest risk to U.S. banks this year, troubling smaller lenders while unlikely to threaten the entire financial system, U.S. bank examiners concluded during a review. “Losses from commercial real estate will be quite high by historic standards,” said Eugene Ludwig, former Comptroller of the Currency who is now chairman of Promontory Financial Group, a Washington-based consulting firm to financial institutions. “Hundreds of banks will fail or will be resolved over the course of the cycle.” Federal Reserve Governor Elizabeth Duke said in a Jan. 4 speech that credit conditions in commercial real estate “are particularly strained.” Fed Governor Daniel Tarullo cited commercial real estate as one of the “key trouble spots” in congressional testimony in October after the Fed stepped up a review of banks’ exposure to such loans.

How A Government Bailout Created Today's Commercial Real Estate Catastrophe - By now we all know that “the next shoe to drop” as a result of the bursting of the credit bubble is commercial real estate.In a pattern familiar from the housing crisis, the value of commercial real estate has been plunging while the volume of distressed commercial real-estate loans is rapidly rising. The problems in commercial real estate could slam financial institutions, especially smaller regional and community banks, with billions of dollars in new losses. That, in turn, could snuff out whatever chances we have of a sustained economic recovery.In some ways, this shoe has already dropped.The MIT Real Estate Center said that commercial property prices has dropped almost 42% over the past 2 years.As a result of that drop, about fifty-five percent the $1.4 trillion commercial mortgages that will mature in the next five years are underwater.The delinquency rate for commercial mortgages climbed to 5% in October. A year ago the delinquency rate was just 0.77%.About half of all commercial mortgages sit on the balance sheets of smaller banks. So the massive number of bank failures this year is significantly attributable to losses from commercial real estate.

CMBS delinquencies pass 6 pct for first time (Reuters) The delinquency rate for loans underlying commercial mortgage-backed securities (CMBS) ballooned 500 percent in 2009, surpassing 6 percent in December for the first time, underscoring the rapid collapse of the U.S. commercial property market, according to real estate data provider Trepp. The delinquency rate -- the percentage of loans 30 or more days delinquent -- among CMBS loans rose 0.42 percentage point in December to 6.07 percent. They began 2009 at 1.21 percent and the decade, before the U.S. commercial real estate boom, at 0.50 percent. The casualties reached all types of commercial property. The delinquency rate among hotel mortgages mushroomed over 900 percent in the past 12 months to 13.87 percent.

Commercial, Multifamily Lags With Vacancy, Delinquency, MBA Says - Vacancy and delinquency is rising across commercial property types, although commercial mortgage performance varies depending on the investors, according to a quarterly report (download here) from the Mortgage Bankers Association (MBA) on commercial real estate and multifamily finance. Vacancy among apartments grew from 6.5% to 8.4% in Q309, MBA found (see above chart). That’s even after asking rents fell by 6% during the same time frame. Office properties jumped from 16% to 19.4% vacant while retail vacancies swelled from 12.9% to 18.6%. Asking rents fell 9% for office properties and 8% for retail.

Reis: Strip Mall Vacancy Rate Hits 10.6%, Highest on Record - From Reuters: US shopping center vacancies hit records - report  - Strip malls ... had a vacancy rate of 10.6 percent in the fourth quarter, surpassing the high set in 1991, Reis economist Ryan Severino said in a report released on Wednesday. This is up from 10.3% in Q3 2009 and 8.9% in Q4 2008.  The vacancy rate at large regional malls rose to 8.8 percent from 8.6 percent the third quarter.The 8.8% is the highest since Reis began tracking regional malls in 2000.  "Our outlook for retail properties as a whole is bleak," Severino said in a statement. "... we do not foresee a recovery in the retail sector until late 2012 at the earliest." Click on graph for larger image in new window.

Reis: U.S. Office Vacancy Rate Hits 15 Year High at 17 Percent - This graph shows the office vacancy rate starting 1991. Reis is reporting the vacancy rate rose to 17.0% in Q4, from 16.6% in Q3 and from 14.5% in Q4 2008. The peak following the previous recession was 16.9%. From Reuters: At 17 pct, US office vacancy rate hits 15-year high  During the fourth quarter the national office vacancy rate climbed 0.40 percentage point from the third quarter to 17 percent, the highest level since 1994.

U.S. apartment vacancy rate hits 30-year high - The U.S. apartment vacancy rate rose to an almost 30-year high of 8 percent in the fourth quarter, and rents dropped in the biggest one-year slump in 2009, according to real estate research company Reis Inc. In the fourth quarter, the U.S. apartment vacancy rate rose 0.10 percentage points from the prior quarter, and 1.3 percentage points for the year. At 8 percent, it was the highest national vacancy rate Reis has recorded in its 30 years of tracking the sector. In the fourth quarter, U.S. asking rents fell by an average of 0.7 percent to $1,026, the largest single-quarter decline since 1999. For 2009 asking rents fell 2.3 percent, also the largest decline in 30 years.

Foreclosures of hotels in California quadrupled in 2009 - Hotel foreclosures in California more than quadrupled last year as business travelers and vacationers cut spending and commercial real estate values plunged, forcing owners into default, according to a survey released today. There were 62 foreclosures on hotels in the state last year, compared with 15 in 2008, Atlas Hospitality Group said. Properties in default jumped almost six-fold to 307, said Atlas, which specializes in selling hotels.

Further Slide Seen in N.Y. Commercial Real Estate - There are 920 football fields of available office space in Manhattan. More than 180 major buildings totaling $12.5 billion in value — from Columbus Tower at 1775 Broadway to the office tower 400 Madison Avenue — are in trouble, meaning in many cases they face foreclosure or bankruptcy, or have had problems making mortgage payments. Rents for commercial office space fell faster over the past two years than in any such period in the last half century. “I have been in the business for 12 years. I have never seen it this bad,” More than half a dozen experts on commercial real estate in New York City said that despite some flickering signs of economic recovery here and elsewhere in the country, the universe of big buildings and giant apartment complexes has further to tumble.

Silicon Valley ‘Bloodbath’ Leaves Buildings Empty (Bloomberg) -- Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.  More than 43 million square feet (4 million square meters) -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space.  “There is a bubble bursting in much the same way as the residential market burst,”

Commercial Real Estate Poses a Risk to U.S. Economic Recovery, Ryding Says (Bloomberg) -- The commercial real estate market poses a threat to the U.S. recovery, said John Ryding, chief economist at RDQ Economics in New York.  “We have yet to see the full extent of those problems,” Ryding said today in an interview on Bloomberg Radio. The housing market, which plunged the economy into recession, also remains fragile, Ryding said.  “Maybe housing credit has gotten ahead of itself,” he said. “I don’t think we’re out of the woods yet on the write- off situation.”

Bank Execs Strike Upbeat Tone Despite CRE MessBankers are trying to remain optimistic while addressing one of the industry's top concerns: commercial real estate loans. Executives with regional lenders like Umpqua Holdings Corp., KeyCorp and Fifth Third Bancorp have said in recent weeks that their exposure to the troubled lending segment is manageable, even as industry watchers and investors fret that a drawn-out economic recovery will make it harder for businesses to service and retire their commercial mortgages.

Construction Spending in U.S. Drops to Lowest Level in More Than Six Years - (Bloomberg) -- Construction spending in the U.S. fell for the seventh straight month in November to the lowest level in more than six years, led by declines in homebuilding and fewer commercial projects. The 0.6 percent drop followed a revised 0.5 percent decrease in October, previously reported as unchanged, Commerce Department figures showed today in Washington. Construction spending was down 13 percent in November from the same month a year earlier. Rising office vacancies and plant-use rates close to a record low may discourage new commercial projects, indicating construction will be a drag on the economic recovery. While home sales have stabilized, the threat of more foreclosures will keep residential building muted.

CRE-ative destruction - Krugman - For some reason I haven’t seen this: a comparison of commercial real estate prices from Moody’s/MIT with housing prices from Standard and Poor’s/Case-Shiller. Here it is:  From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.

Commercial Real Estate Collapses Suggests CW about Residential Bubble May Be Wrong - My latest column for the Atlantic looks at the commercial real estate crash and comes to the conclusion that it effectively undermines the major narratives that many people have adopted to explain the residential bubble.   Though the commercial real estate bubble was smaller in scope than the residential one, it was characterized by essentially the same pathologies:  rising prices, stupid banks, and stupid borrowers. Yet we can't blame this on predatory lenders tricking the unsophisticated into unwise loans, because these were basically all professionals.  Nor can we argue that banks were willing to write toxic loans because they were just going to sell the garbage off to investors; a much smaller percentage of commercial mortgages were securitized.  And we certainly cannot blame them because they "should have known better" than their borrwers, who usually had more experience than the banks in pricing commercial real estate.   Somehow, everyone got stupid all at once.

Those who tapped home equity now hammered - Hocking the house for quick cash is a lot harder than it used to be, and it's causing headaches for homeowners, banks and the economy. During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to "live richly" and "seize your someday." Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home-equity loans because they owe more on their mortgage than what the house is worth.

Personal Bankruptcy Filings Rising Fast  - WSJ -The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses. And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filling. A "means" test, for example, was introduced to separate those who could afford to repay their debt from those who couldn't. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured. The worst U.S. recession in a generation is testing the effectiveness of these laws. The economic downturn also has prompted more middle-class Americans to file for bankruptcy protection.Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center

Mortgage Modifications: Help or Hindrance? - Is the mortgage modification program making things worse?  An article in the New York Times gives voice to fears that by encouraging homeowners to stay in homes that they cannot really afford, Obama's Making Home Affordable program is actually increasing the agony of homeowners, who pour money down the rat hole of their mortgage rather than recognizing the loss and starting over.  In the meantime, the modification programs disguise the true condition of bank balance sheets (because modified mortgages are not yet non-performing mortgages), and slow down the process of recovery. How much truth is there to this story?  Some, at least....

Editorial - This Year’s Housing Crisis - NYTimes - Figures released last week show that after four months of gains, home prices flattened in October. At that time, low mortgage rates (courtesy of the Federal Reserve) and a home buyer’s tax credit (courtesy of Congress) were fueling sales. That should have propped up prices. But it was not enough to overcome the drag created by a glut of 3.2 million new and existing unsold single-family homes — about a seven-month supply. The situation, we fear, will only get worse in months to come. Rates already are starting to rise as lenders brace for the Fed to curtail support for mortgage lending as early as the end of March. The home buyer’s tax credit is scheduled to expire at the end of April. And a new flood of foreclosed homes is ready to hit the market.

The Mainstream Media Wakes Up? (HAMP) - Gee, what have I been saying now since this crisis began? Some of them, from the Mortgage Brokers (so they say; all anonymous) are particularly amusing, and demand a response. Let's look at how we got here guys. Home values have appreciated at rates that dramatically exceed individual's growth in salaries. Of course home value expansion significantly beyond the rate of inflation must eventually cause people to be unable to afford houses. The "why" on this isn't particularly difficult to figure out, but for those who were educated in Government Schools, let me lay it out for you.

"HAFA" - Foreclosure Warning Dead Ahead! - Under the Radar - a bit - came this ditty at the end of November.  Coupled with the "unlimited" Fannie and Freddie "credit line", this may presage a veritable collapse in house prices this coming spring and summer - along with a massive "dump" of inventory. Well, here's the stick folks - for those who cannot qualify for a modification, or who "blow it" while on a trial program and simply don't get a permanent change servicers are in fact required to offer short sale or "deed in lieu" alternatives when they make sense.  Got that?  Servicers participating in HAMP must follow the guidelines set forth in this Supplemental Directive. No choices here folks - if you're part of HAMP, you are required to offer expedited and unified procedures for short sales and, optionally, "deed in lieu" programs. Come the spring selling season you're going to see the inventory of homes that were "HAMPd" and failed for whatever reason hit the market. 

Report: HAMP Second Lien Modification Program “On Hold” -Housing economist Tom Lawler emailed the HAMP administrative website to obtain a list of servicers who had signed up for the Second Lien Modification Program. Here is the response he received:  “That program is currently on hold and there is no list of servicers that registered before it was placed on hold.” The Second Lien program was announced on April 28, 2009 by Treasury: Parallel Second Lien Program to Help Homeowners Achieve Greater Affordability. And from the HAMP website: The Second Lien Modification Program is expected to reach approximately 1 - 1.5 million responsible homeowners who are struggling to afford their mortgage payments. I guess that program is falling a little short.

New Research on Mortgage Modifications and Principal Reduction - I've excerpted below from a paper by New York Fed Researchers: Second Chances: Subprime Mortgage Modification and Re-Default  Although the paper uses subprime data, the general results are applicable to all mortgages. The researchers point out that principal reductions lead to much lower redefault rates. They also note that principal reductions help mitigate the mobility problem - as I've noted before, the lack of worker mobility slows the potential growth of the economy, leads to lower home maintenance, and possibly "diminished support for local public goods"1. But the authors don't suggest who should pay for the reductions in principal. If this was a government program, it would be very expensive and unpopular.

Are Principal Writedowns the Answer to Housing Crisis?  But what concerns me most is this new bandwagon driving through the foreclosure crisis. Most agree that the government's mortgage bailout program (Home Affordable Modification Program or HAMP) is at best unsuccessful and at worst detrimental. So now I'm beginning to hear more chatter about principal writedown, and more specifically, government-funded principal writedown. The idea is to give folks equity back in their homes so they don't walk away from their mortgage commitments. I would honestly rather see my home's value go down than see the guy next door who made a poor/negligent financial decision get a mulligan at my expense.

The Difficulty of Modifying Second Mortgages - One of the many obstacles to resolving the housing mess is that so many people during the boom used their houses as piggybanks, taking out second mortgages and helocs that were often originated by different banks from the originator of the first lien mortgage.  In order to do a short sale--or much of anything short of foreclosure--you need to get the second lien holder on board.  This is even harder than getting your first mortgage holder to help you, since there's usually nothing in it for the second guy in line except a sure and certain loss.  The Obama administration has made some efforts to pull the second lien servicers into the process, but the results have been even more pitiful than the single-loan modification process.

Soured Non-Agency Mortgages Rise to Record 1.81 Million Loans (Bloomberg) -- A record 1.81 million U.S. home loans backing the securities that roiled the global financial system were “nonperforming” last month, adding to threats to the housing market, according to Amherst Securities Group LP. Mortgages at least 60 days delinquent in so-called non- agency securities equaled 32 percent of the total as of late December bond disclosures, up from 25 percent a year earlier, according to a report e-mailed yesterday by the Austin, Texas- based securities firm. Soured mortgages ballooned last year even as new defaults eased as the Obama administration pushed loan servicers to assess homeowners for debt modifications and state moves slowed foreclosures, cutting liquidations of properties after borrowers stopped paying, according to Amherst. Higher seized-home sales as the government efforts mature may undermine a stabilization in housing after its worst slump since the 1930s.

Delinquencies jump for home equity loans, lines of credit - latimes - Delinquencies on home equity loans and lines of credit jumped to record levels in the third quarter, a banking trade group said Thursday.Home equity loan delinquencies rose to a record 4.3% of such accounts from 4.01% in the second quarter, the American Bankers Assn. reported.Delinquencies on home equity lines of credit also hit a record, climbing to 2.12% from 1.92%.The troubles with housing debt contrasted with an improvement seen with other consumer loans, the bankers group said. Delinquency rates fell in the third quarter on loans for cars, home improvements and even boats and recreational vehicles, reflecting a stabilizing economy as well as efforts by recession-chastened borrowers to pay down debts and moves by banks to write off dud loans as uncollectable

Housing Animal Spirits to Be Banished by Prime Foreclosures - (Bloomberg) -- Homeowners with the best credit are the next big risk for the U.S. housing market. An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index. “There will be continuing foreclosures, and not just subprime, it will be prime mortgages,”This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.” The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures

Fed may re-enter MBS market later in 2010 - (Reuters) - The Federal Reserve is discussing re-entering the mortgage-backed securities market later this year if its buying power is needed to hold down interest rates, Market News said on Tuesday in a story citing Fed officials.The $5 trillion agency mortgage-backed securities market may weaken when last year's biggest buyer, the Federal Reserve, ends its $1.25 trillion agency MBS purchasing program at the end of the first quarter of 2010. Fed officials, however, "are prepared to contemplate changes if need be, depending on conditions in the economy, housing finance and in financial markets more broadly."

Looking for Stability, Not Increases, in House Prices -- NYTimes - Last week, Standard & Poor’s released October figures for the Case-Shiller housing price index. The quite modest gains seem to have caused some consternation, but housing markets are doing exactly what we should expect them to do. There is no reason to expect a big post-slump jump, and every reason to expect that prices and construction levels will continue to muddle along for quite some time. Don’t expect prices to return to their boom levels for years, if not decades.

Fed Economist: Housing Is a Lousy Investment - Before the housing bust, Americans tended to think their homes were their best and most important investments –- a view promoted by Washington policy makers who made home ownership a top priority. Karen Pence, who runs the Federal Reserve’s household and real estate finance research group, argues at the American Economic Association’s meetings this week that homes are actually a terrible investment. Putting aside the fact that home prices have fallen dramatically, she says several factors make homes a lousy investments

Real Estate Faces Tough Recovery Slog in 2010 - WSJ - Real estate, which sparked the global economic downturn in 2008, struggled to recover in 2009. But the path to a full return to health is littered with land mines that could send the sector spiraling downward again, possibly upending the nascent economic revival.  The past year's progress in the housing market has relied on government programs that are scheduled to be phased out. The commercial real-estate market is faced with huge amounts of unoccupied space and a deluge of defaults and foreclosures that are putting new stresses on banks and other financial institutions that already are on life support.

Housing Contracts Fell 16% in November - NYTimes - The number of houses placed under contract fell sharply in November in the first drop in nearly a year, figures released Tuesday show. It was the clearest sign yet that predictions of another downturn in real estate may become a reality.  The National Association of Realtors said that its index of pending home sales plunged to 96 from a revised level of 114.3 in October. Analysts had predicted a drop, but nothing like that. “We thought it would drop 2 percent,” said Jennifer Lee of BMO Capital Markets. “When you see 16 percent, the first thing you say is, what the heck happened here?”

Pending Home Sales Decrease Sharply - From the NAR: The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised a 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1. On the extended and expanded tax credit:  [Lawrence Yun, NAR chief economist] projects an additional 900,000 first-time buyers will qualify for the extended tax credit in addition to about 2 million who have already purchased; 1.5 million repeat buyers also are expected to benefit from the credit. The extended and expanded tax credit was estimated to cost taxpayers $10.8 billion, but based on Mr. Yun's numbers, the tax credit will cost close to $17 billion...

Contracts down: Is housing headed for double-dip? - The number of people preparing to buy a home fell sharply in November, an unsettling new sign that the housing market may be headed for a "double-dip" downturn over the winter.The figures Tuesday came after a similarly discouraging report on new home sales, illustrating how heavily the housing market depends right now on government help.In October, buyers raced to get contracts signed in time to take advantage of a tax credit for first-time homeowners that was set to expire. It has since been extended into spring — and now prospective buyers are taking their time.The National Association of Realtors said its seasonally adjusted index of sales contracts fell 16 percent from October to November, ending nine months of gains. Economists surveyed by Thomson Reuters had expected only a 2 percent drop."When the tax credit expires this spring and the government phases out programs to keep mortgage rates low, the housing market will have to stand on its own. Many economists doubt it can.

Mortgage walkaways, good or bad? - You see, the mortgage business seems to be counting hard on the idea that maybe you won't walk away from your mortgage even if you're hundreds of thousands underwater and it is in your material self interest to walk away.  Not walking away saves the investment banks tons of money if you valiantly pay you mortgage even though it serves their profits over your economic interest.  These are the same banks (and mortgage-backed securities holders, including the Fed) that took huge risks in lending to you in the first place, and had assumed you would walk away if things got as ugly as they currently are.  Oh, did I mention those guys are still making gazillions? It's kinda funny how the financial business plays the morality card when it suits their pocketbooks, no?

Why you should walk away from your mortgage - Megan McArdle argues that underwater homeowners should continue to pay their mortgages, and not "ruthlessly default" by walking away if they can continue making their mortgage payments. She argues that the social norm to honor debt are important to a well functioning society etc. I disagree. In the context of the credit bubble, banks made loans to customers who could not service that debt out of income. It was a two way bet on rising asset prices. Since that bet did not work out, the borrower should walk away, and the bank should write the asset down. If the loan had been made on the basis of income, then I would agree with Megan.  Waldmann and Salmon want to return to the days where banks made loans that would be paid back. This is not paternalism, this is Sanity

Homeowners With Underwater Mortgages May Be Too Ignorant To Be Ruthless - As home prices have fallen, growing numbers of borrowers wound up owing more on their homes than the homes are worth. For at least two years, we've been hearing that this situation will result in more mortgage defaults as borrowers rationally decide to "just walk away."A few warnings about this:It's still hard to find reliable data about people who could otherwise afford to pay their mortgages choosing instead to default. Many defaults still seem to be driven by much more traditional factors, such as economic distress and unemployment. What evidence there is of strategic defaults, seems to confine the practice to the most sophisticated borrowers.Strategic defaults may seem rational but people don't always act in a cold, calculating manner when it comes to their homes. A rise in strategic defaults would represent a huge change in borrower behavior in the US. That's not to say it cannot happen but it is reason to be at least a bit skeptical.Many of the predictions of a rise in strategic defaults seem to assume that borrowers have accurate and timely information about the value of their homes. In fact, most people have a wide degree of ignorance about home values unless they are planning to sell or refinance soon. They tend to overestimate the value of their home, which should put a damper on stratgic defaults.

The Way We Live Now - Walk Away From Your Mortgage! – NYTimes - Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.”

2010: Walking away will gain cachet - Reuters - Why bother? That’s the question more underwater Americans are asking themselves about their mortgage.Trapped in the abyss of negative equity, more will decide to quit paying. As they should.About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying above-market prices.But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

U.S. Now a Renters' Market - WSJ - Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones. The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.

Rich Toscano: Shadow Inventory Is For Real - It feels like I've been writing about "shadow inventory" -- homes that are in foreclosure but haven't hit the market yet -- forever.  Yet no flood of foreclosures has yet inundated the market, and as a matter of fact, inventory has been quite scarce lately.  Is there anything to this shadow inventory concept? As Kelly Bennett documented in a recent blog entry, the answer is yes.  Kelly noted as of Tuesday, there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale.  That, my friends, is your shadow inventory. For purely illustrative purposes, let's try to understand what the effect would be if all these homes in foreclosure were to suddenly hit the market.  That's certainly not going to happen, and as I'll discuss below, these homes may never come on the market at all.  But this approach helps understand the scale of what lurks in the shadows.

Don't Be Fooled by the Housing Market's False Bottom - Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That's only 10% below the all-time peak in 2005. What's more is that house prices, as measured by the S&P/Case-Shiller 20-city Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat. The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006's peaks some time in 2011 or 2012. Not so fast, guys!The recovery in housing has been boosted by just about every artificial means you can imagine...

In the aftermath of the Great Recession - What scars will the Great Recession leave? We are already seeing some. Americans are moving less than at any time since World War II, reports demographer William Frey of the Brookings Institution. People are tied to existing homes, can't get loans for new ones and won't move without job commitments, Frey says. Only 1.6 percent of Americans are now moving across state lines, half the rate of a decade ago. With a grim job market, the young also seem more cautious. A new survey by Fidelity Investments found that a quarter of workers ages 22 to 33 want to stay with their present employer until retirement; in 2008, that was only 14 percent. John Irons of the liberal Economic Policy Institute worries that many young Americans, lacking tuition funding, will delay or abandon attending college, lowering their long-term earning power.  So the Great Recession's nastiest scar could be an era of economic frustration, characterized by slower growth and contentious competition for scarce resources. Stunned by huge wealth losses in stocks and real estate, Americans save more and spend less. Businesses suffer from weak demand. Hiring remains sluggish. Worse, the slowdown coincides with an aging population, which could compound the effect. In 2020, the projected number of Americans 55 and older will reach almost 100 million, 29 percent of the total population. That's up from 59 million, or 21 percent, in 2000.

Living on Nothing but Food Stamps - NYTimes - About six million Americans receiving food stamps report they have no other income, according to an analysis of state data collected by The New York Times. In declarations that states verify and the federal government audits, they described themselves as unemployed and receiving no cash aid — no welfare, no unemployment insurance, and no pensions, child support or disability pay. Their numbers were rising before the recession as tougher welfare laws made it harder for poor people to get cash aid, but they have soared by about 50 percent over the past two years. About one in 50 Americans now lives in a household with a reported income that consists of nothing but a food-stamp card.

Americans Doing More, Buying Less, a Poll Finds - Quietly but noticeably over the past year, Americans have rejiggered their lives to elevate experiences over things. Because of the Great Recession, a recent New York Times/CBS News poll has found, nearly half of Americans said they were spending less time buying nonessentials, and more than half are spending less money in stores and online. But Americans are not just getting by with less. They are also doing more.  Some are working longer hours, but a larger proportion, the poll shows, are spending additional time with family and friends, gardening, cooking, reading, watching television and engaging in other hobbies.

Top 1 Percent Control 42 Percent of Financial Wealth in the U.S. - How Average Americans are Lured into Debt Servitude by Promises of Mega Wealth. - Wall Street is so disconnected from the average American that they fail to see the 27 million unemployed and underemployed Americans that now have a harder time believing the gospel of financial engineering prosperity.  Americans have a reason to be dubious regarding the recovery because jobs are the main push for most Americans.  A recent study shows that over 70 percent of Americans derive their monthly income from an actual W-2 job.  In other words, working is the prime mover and source of their income.  Yet the financial elite have very little understanding of this concept.  Why?  42 percent of financial wealth is controlled by the top 1 percent.  We would need to go back to the Great Depression to see such lopsided data. Many Americans are still struggling at the depths of this recession.  We have 37 million Americans on food stamps and many wait until midnight of the last day of the month so checks can clear to buy food at Wal-Mart.  Do you think these people are starring at the stock market?  The overall data is much worse...

Wealth-dependent Fines - Mankiw - Tyler Cowen alerts us to an intriguing story:  A Swiss court has slapped a wealthy speeder with a chalet-sized fine — a full $290,000. Judges at the cantonal court in St. Gallen, in eastern Switzerland, based the record-breaking fine on the speeder's estimated wealth of over $20 million. A statement on the court's Web site says the driver — a repeat offender — drove up to 35 miles an hour (57 kilometers an hour) faster than the 50-mile-an-hour (80-kilometer-an-hour) limit.
Is it optimal to base fines on wealth?   My first thought is no.  We fine activities that have negative externalities, such as putting others at risk.  If X is the size of the externality, and p is the probability of being caught, then the optimal fine is X/p.  That will give people the right incentive to produce the optimal quantity of the externality.  Under this policy, the rich may choose to speed more, but that is optimal.

Inequality--does it matter? should taxes address it? - Bruce Bartlett's piece, Inequality: A Problem?, states Bartlett's agreement with Dalton Conley that "the liberals should concentrate more on helping the poor and less on beating up the rich." Now, before we even get into the inequality stuff, you'll notice that the statement above is loaded with presuppositions. It pre-supposes that liberals are extraordinarily focused on "beating up the rich" and that they are not currently very interested in "helping the poor." Further, it presupposes that whatever "beating up on the rich" involves, it cannot "help the poor." Are liberals focused on "beating up on the rich"? I expect Bartlett would point to bloggers (such as myself) as examples. I have rather persistently argued for higher taxation of the rich and super-rich through more progressive rates and elimination of the capital gains preference which results in low effective tax rates on those whose income is predominantly income from financial assets.

Compared to Other Rich Countries, U.S. Had Big Job Losses - Last week I explained how United States employment fell by a greater percentage than did its inflation-adjusted spending and output (gross domestic product, or G.D.P.). The pattern was not the same for other countries. The Organization for Economic Cooperation and Development has constructed indexes of employment and inflation-adjusted G.D.P. that are designed to be comparable across countries. I have calculated percentage changes in each country’s employment index and in its real G.D.P. index from the fourth quarter of 2007 until the third quarter of 2009 (at least, for those countries for which these numbers are available). Each percentage change is displayed in the chart.  Of the nine recession countries with data available, the United States is the only one with inflation-adjusted G.D.P. falling less than employment. Moreover, the United States has the biggest loss of jobs of the nine and the smallest real G.D.P. decline.

Payrolls in U.S. Drop 85,000; Unemployment at 10% (Bloomberg) -- The U.S. unexpectedly lost 85,000 jobs in December, supporting Federal Reserve forecasts that a labor market recovery will take time and making it more likely interest rates will stay near zero for the next six months. Payrolls fell last month after a revision showed a gain of 4,000 in November, the first in almost two years. The median estimate of economists surveyed by Bloomberg News projected no change in December. The jobless rate held at 10 percent.  While job cuts have slowed, companies are holding back on hiring as they gauge the strength of the economic recovery and contend with tight credit.

Mark Thoma: The Economy Continues to Lose Jobs - According to today’s employment report, last month the economy lost 85,000 jobs with the losses concentrated in manufacturing and construction, and the unemployment rate held steady at 10.0%. How can the unemployment rate hold steady even though we are losing jobs? An important part of the employment story is that the labor force has been shrinking as people give up searching for work. As these people leave the labor force, the number of people searching for work falls, and unemployment rate is held down. If the people leaving the labor force had continued to search for work, unemployment would have been higher by several tenths of a point. The erosion of the labor force since May has totaled 1.9 million people, with a fall of 661,000 last month alone. see these charts (1) (2)

Employment-Population Ratio, Part Time Workers, Temporary Workers - Here are a few more graphs based on the (un)employment report ... The Employment-Population ratio continues to plunge, falling to 58.2% in December - the lowest level since 1983. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The general upward trend from the early '60s was mostly due to women entering the workforce. The Labor Force Participation Rate fell to 64.6% (the percentage of the working age population in the labor force). This is the lowest since the early 80s. When the job market starts to recover, many of these people will reenter the workforce and look for employment - and that will keep the unemployment rate elevated for some time. This graph shows temporary help services (seasonally adjusted) and the unemployment rate. Unfortunately the data on temporary help services only goes back to 1990, but it does appear temporary help and the unemployment rate have been inversely correlated.

Employment Report: 85K Jobs Lost, 10% Unemployment Rate -  From the BLS:  Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs. This graph shows the unemployment rate and the year over year change in employment vs. recessions. Nonfarm payrolls decreased by 85,000 in December. The economy has lost almost 4.2 million jobs over the last year, and 7.24 million jobs1 since the beginning of the current employment recession. The second graph shows the job losses from the start of each employment recession, in percentage terms. see also Unemployed over 26 Weeks, Diffusion Index, Seasonal Retail Hiring

Series: UEMP27OV, Civilians Unemployed for 27 Weeks and Over - FRED hockey stick chart

Labor Force Shrinking, Number Of Discouraged Workers Back On The Rise - Besides the big headline loss of 85,000 jobs in December, the canary here may be U-6, the so-called "real unemployment rate," which also tries to capture discouraged or underutitlized workers. After declining from 17.4% to 17.2%, it's back on the rise to 17.3%.Basically, people are quitting the workforce. So for now, the unemployment rate stays right at 10%, but when there are hints of jobs out there, and the discouraged workers start coming back in droves, that number will head straight up.

Broader U-6 Unemployment Rate Increases to 17.3% in December - The U.S. jobless rate was unchanged at 10% in December, following a decline the previous month, but the government’s broader measure of unemployment ticked up 0.1 percentage point to 17.3%. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.1 percentage point below its high of 17.4% in October, its continuing divergence from the official number indicates the job market has a long way to go before growth in the economy translates into relief for workers.

Decline in Jobs Influenced by Bad Weather - Temperatures in the U.S. were running above normal from October through late November, but turned sharply lower last month right around the time that the Labor Department calculates its jobs numbers. The household survey of the jobs report showed that the people “not at work for weather reasons” hit 283,000, the highest reading since 2005. Those people are still counted as employed, but the elevated level suggests the extent of weather-related effects in December. The cold snap may have triggered seasonal layoffs in outdoor areas of employment, especially construction. Indeed, the construction category of the December report noted a drop of 53,000 jobs.

Economists React: Labor Market ‘Not Out of the Woods’ - WSJ - (10) Economists and others weigh in on the drop in nonfarm payrolls amid a steady unemployment rate.

December’s unemployment winners - So who were December’s winners in an arguably downbeat report? Men: The unemployment rate among men, who have borne the brunt of job losses in this recession, edged down 0.2 percentage points to 11 per cent, while the unemployment rate among women edged up 0.2 percentage points to 8.8 per cent.Whites: The unemployment rate among whites edged down 0.3 percentage points to 9.0, but the rate among blacks or African Americans edged up 0.6 percentage points to 16.2 per cent.  African American teens saw a small dip in their unemployment rate of 1.4 percentage points to 48.4 per cent, after a November jump of 7.7 percentage points. Adults with some college or associate degree; 18 to 34 year olds;  Finance and insurance employees: That’s right, finance and insurance payrolls ticked up 9,900. Professional and business services:  Education and health services: Education services saw a gain of 10,800 employees and health care saw a gain of 21,500 employees. Wood products and apparel: Wholesale trade:

Jobs Contract 24th Straight Month; Unemployment Rate Stays At 10.0% -  Mish -So much for ideas that the string of job losses would end this month. And with a massive revision to the Birth/Death model coming up, it might be another 2 months before we see it happen. I would like to point out upfront what a joke the announced unemployment rate is. According to Bernanke himself, it should take 100,000 jobs a month to keep up with the birth rate and immigration. Instead the civilian labor force dropped by 661,000 and those not in the labor force dropped by a whopping 843,00 workers. There are now a whopping 2.5 million people without a job but want one, yet are not counted as unemployed. So yes, the "official unemployment rate" can hold its own or even drop with this kind of nonsense, but the announced unchanged unemployment rate holding steady at 10% is a brutal distortion of reality at best

2010 Census Hiring Employment Scam - Mish - After 24 consecutive months of reported establishment survey job losses, Bloomberg reports that a massive surge in Census Jobs May Jump-Start U.S. Employment Rebound in 2010. The 2010 census couldn’t have come at a better time for the U.S. economy. The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year. Pray tell why does it take 1.4 million Americans to conduct a census, 3 times as many as in 2000? If full employment is the goal and all this hiring is a good thing, let's hire 5 million census workers.

85,000? We’re Missing a Million of Them! - No, Virginia: There isn’t a Santa Clause, and even if there is, he didn’t bring an employment recovery for Christmas. But the household data in many ways are far more concerning than the establishment data, which show an 85,000 drop in December payrolls.A far more disturbing number (in Table A-1 of today’s BLS release) shows that “persons not in the labor force” increased by about 840,000 between November and December, from 83,022m to 83,865m. That’s seasonally-adjusted; unadjusted, the number is closer to a million. Correspondingly, the total size of the civilian labor force fell from 153,720m to 153,059m between November and December.What happened to the million Americans who went missing from the BLS definition of the labor force in the single month of December? They are the “long-term discouraged” or whatever, those whose prospects of finding a job are so poor that they have stopped looking.

Outlook for job market is grim - Barring dramatic changes in economic policy, "We're going to have high unemployment for the next few years," says former Labor secretary Robert Reich, now professor of public policy at the University of California-Berkeley. "Even when the jobs come back, they're not going to be very good jobs."Even as economic growth recovers from the deepest recession since the 1930s, many U.S. jobs will continue to move overseas or be replaced by technology. And consumer spending, which fuels economic and job growth, is likely to remain weak as households continue to sober up from the credit card, home-equity loan binge-spending of the past decade, economists say."It's going to be a long slog," says Steven Cochrane, managing director of Moody's's expects the unemployment rate — 10% in November — to remain high.

Massive Jump In Emergency Unemployment Compensation (EUC) Benefits - Up 43% In One Month! - Mish - I was intrigued by a post by Zero Hedge asking Is The Government Misrepresenting Unemployment By 32%?"...government spent a record $14.7 billion on Unemployment Insurance Benefits as of December 30, a 24% jump sequentially from the $11.8 billion in November. Yet the DOL has disclosed a mere 1.7% increase in those to whom insurance benefits are paid: from 9.4 million to just under 9.6 million. To put the $14.7 billion number in perspective, in December the Federal Government paid a total of $14 billion $$700 million less$ in Federal Salaries!And some more perspective: in calendar 2009 the government has paid $140 billion in Unemployment Insurance Benefits. This is yet another economic stimulus that nobody in the administration discusses, yet which undoubtedly has the biggest impact on the economy, as all those millions unemployed can moderate their pain courtesy of a passable weekly check from the government which should just about cover the rent. I figured the explanation would show up in charts somewhere and I asked Chris Puplava at Financial Sense for a chart of Emergency Unemployment Compensation (EUC) Benefits as well as an update on other charts he has graciously provided on request.

Employment Chart: Goods Producing vs. Government Jobs - Seeking Alpha - I'd planned to put this chart up for some time now, ever since it was noticed that, back in late-2007, the total number of government jobs exceeded the total number of goods producing jobs. After the events of the last two years, the gap is now about four million. The Goods Producing category currently includes less than a million workers in mining and logging, about 6 million in construction, and 11.7 million in manufacturing.The Government category includes 2.8 million federal employees and almost 20 million state and local workers, just over half of whom work in education.

Obama Turning Focus to Jobs, if Outside Events Allow It - NYTPresident Obama keeps trying to turn attention to “jobs, jobs, jobs,” as his chief of staff has put it. But he is finding that it can be hard to focus on any one issue when so many demand attention, often unexpectedly. And as the lackluster employment report on Friday suggested, showing concern is not the same as showing results.  The employment situation is only the most visible of the economic policy challenges that Mr. Obama faces.  His push to overhaul financial regulation is bogged down on Capitol Hill. The housing market is still weak and his programs to help homeowners have had little impact. The Federal Reserve is under pressure from inflation hawks to begin tightening policy, while deficit hawks are demanding that government spending be restrained — even as some economists say more stimulus is needed to avert prolonged economic sluggishness or even another recession. But the measures by which voters are most likely to judge his success are the unemployment rate and the pace of job creation.

In the aftermath of the Great Recession - What scars will the Great Recession leave? We are already seeing some. Americans are moving less than at any time since World War II, reports demographer William Frey of the Brookings Institution. People are tied to existing homes, can't get loans for new ones and won't move without job commitments, Frey says. Only 1.6 percent of Americans are now moving across state lines, half the rate of a decade ago. With a grim job market, the young also seem more cautious. A new survey by Fidelity Investments found that a quarter of workers ages 22 to 33 want to stay with their present employer until retirement; in 2008, that was only 14 percent. John Irons of the liberal Economic Policy Institute worries that many young Americans, lacking tuition funding, will delay or abandon attending college, lowering their long-term earning power.  So the Great Recession's nastiest scar could be an era of economic frustration, characterized by slower growth and contentious competition for scarce resources. Stunned by huge wealth losses in stocks and real estate, Americans save more and spend less. Businesses suffer from weak demand. Hiring remains sluggish. Worse, the slowdown coincides with an aging population, which could compound the effect. In 2020, the projected number of Americans 55 and older will reach almost 100 million, 29 percent of the total population. That's up from 59 million, or 21 percent, in 2000.

What's up with the young folks? - Atlanta Fed blog - During the 1980s participation in the labor market for youth averaged around 68 percent, a rate noticeably higher than for older individuals. The youth participation rate declined sharply to a level at or below the level for older individuals prior to the 1990–91 recession and then remained relatively stable during the 1990s. However, over the past decade youth labor market participation has been on a steep downward trend and currently stands at a little over 55 percent, compared with about 67 percent for older individuals. Moreover, the most recent recession has seen youth participation rates decline at a rate similar to that seen in the early 2000s. In contrast, the labor force participation by individuals over 24 years of age has varied much less, implying that the decline in youth labor force participation has been a major contributor to the reduction in the overall rate of labor force participation (see the above chart). It also appears that the decline in youth participation is most dramatic among teenagers, and for that group it is an equally sized decline for both males and females (see the next two charts).

The Young And The Jobless: Unemployment Woes Continue Among Youths - With the new year upon us, a fresh batch of college students who have just finished their studies will enter the work force. They arrive at a time when they have significantly lower chances of finding employment than their older counterparts had, and when the outlook for the coming months is extremely bleak. In November (the most recent data available from the Labor Department), the total unemployment rate for all 20- to 24-year-olds rose to 16 percent, almost double that of everyone older than them. The jobless rate for those 25 and up inched up to 8.5 percent. The national unemployment rate was last measured at 10 percent. For young people without a college degree, the prospects are especially grim. The November unemployment rate for 20- to 24-year-old high school graduates (without any college schoolwork) was 23.3 percent, and 33.5 percent for those without a high school diploma.

Layoffs moderating, but hiring not yet picking up - Economic Policy Institute - For the labor market to begin recovering from the dramatic losses of the last two years, two things must happen: Layoffs must decline, and hiring must pick up.  The good news is that layoffs have slowed significantly.  The red line in the figure shows layoffs over time.[1]  The bad news is that hiring has not yet resumed.  The blue line tracks the number of monthly hires since 2000.  In December 2007, there were 5.1 million hires.[2]  Since that time, hiring has dropped dramatically. In October 2009, there were 4.0 million hires, a 22% decline. Put together, these two lines tell the following story – fewer and fewer people are losing their jobs each month, but people who are out of work are not yet able to find jobs.  

Service Industry Better, But Lacking Jobs - Econwatch - CBS News - A report on the majority of the nation's economy shows that the worst is over for service sector jobs, but that doesn't mean positions that have been eliminated will come back from the dead just yet. As The Wall Street Journal reported Wednesday, the Institute for Supply Management's nonmanufacturing index — which focuses on 88 percent of the U.S. economy — shows that service sector jobs are expanding slightly. The monthly report was released at 10 a.m. Wednesday. CBS Reports: "Where America Stands" Service sector jobs encompass a wide variety of occupations; the paper includes construction, finance and pet care as examples. In the report, the number 50 represents the divider between expansion and contraction. The report shows the index reads at 50.1, which technically shows the sector in expansion. Analysts polled by Thomson Reuters expected the index would stand at 50.5. The number marks the third of four months that the index sat above 50.

30 Degrees Below Normal - If you read the papers you’re likely to think that the recession is over... we’re in full recovery mode... with rising sales, rising production and rising prices. This year is going to be a good one for stocks... and the US economy is coming back stronger than expected. Is it true? Well, it’s sort of true. The recession is over... the depression continues. As we keep saying, if you’re going to make a royal mess of things, you need taxpayer support. And with the unwitting support of millions of American taxpayers, the federal authorities are busily making a bad situation worse. Don’t believe us? No worries. Since everyone is so sure that the economy is hunky dory the burden of proof is on us to show that it is not....

It Was The Worst Of Times -  This was the decade of deception.No deceit was more malevolently corrosive than the fiction that this was a period of expansive prosperity in which significant numbers of our people were able to share in the American dream of financial security. All the triumphalist rhetoric emanating from Wall Street and the White House notwithstanding, this was -- materially speaking -- a disastrous decade for U.S. families. For the first time since World War II, according to the departments of Commerce and Labor, an average American's net worth actually fell -- by a whopping 13%

What's Ahead for the Economy and Politics in 2010 - Robert Reich - Issue Number One -- the overriding concern that will determine more than anything how many seats the Dems lose next fall -- is jobs. If unemployment is 10 percent or more next November, the Dems are in danger of losing the House and will almost certainly be short of the 60 votes they need in the Senate.  But why would employment be 10 percent or above next November? Surely, you say, there are enough signs of recovery that we can count on a lower rate. Don't be so sure. Here are likely scenarios, with my probabilities:
Double-dip recession (10 percent likelihood). Stalled recovery (20 percent)..Jobless recovery (40 percent).  Solid recovery (20 percent). Strong recovery (10 percent).

U.S. Car Ownership Takes Biggest Dive Since 1960 - Americans' car fleet dropped by a sizeable four million vehicles in 2009, the only large decline since the Department of Transportation began keeping records in 1960, The Globe and Mail reports.Americans bought 10 million cars but sent 14 million to the scrap yard this year, bringing the total down to 246 million nation-wide.Analysts have come up with an eclectic list of factors that could be responsible for the drop, from high gas prices and the expansion of municipal transit systems to the popularity of networking websites that make it easier for teenagers to socialize without leaving home.

A Terrible, Horrible, Worthless Idea - You know your level of confidence in the government has reached the point of lunacy when you can in sincerity propose such an obviously terrible, horrible, worthless idea as this: “That’s why the Obama administration — while it still holds the keys to the big automakers — ought to put some style fascists into the mix: the genius of Marc Newson … Steve Jobs and Jonny Ive from Apple … Frank Gehry, the architect, and Jeff Koons, the artist. Put the great industrial designers in the front seat, right along with sound financial stewardship … the greener, the cleaner, the meaner on fossil fuels, the sexier for me. Check out the Tesla or the Fisker Karma car, designed by the same team that gave the world the Aston Martin.”

Many highly profitable companies cut jobs in 2009 - Economic Policy Institute - Microsoft was one of many profitable companies that cut a large number of jobs in 2009. While companies typically defend such moves as necessary to prepare for more challenging business conditions in the future, the layoffs they carry out often serve to grow profits for shareholders. Today, the economy is showing signs of growing again but layoffs continue to mount, and this extreme attention on the part of companies to saving money is arguably to blame. President Obama noted this disparity between rising gross domestic product and a lack of hiring early this month at the White House Jobs Summit.

Farewell to the natural rate: Why unemployment persists - VoxEU - Most policymakers subscribe to the existence of a natural rate of unemployment. This column provides a visual history of unemployment, vacancies, and inflation in the US and says there is no natural rate. It suggests the economy can rest in any equilibrium on the Beveridge curve, as decided by the confidence of households and firms that pins down asset values.Here I provide a video of data that illustrates how events unfolded in real time. I proceed to connect these data with three strands of research.

Graph of the Week 1/3/10: Distribution of Unemployment Rate Forecasts - The NABE Graph of the Week looks at the distribution of the unemployment rate forecasts by the NABE Outlook panelists. The red bar is the median forecast, while the blue bar shows the five highest, or most pessimistic forecasts, and the green bar the five lowest, or most optimistic forecasts.NABE member can read the full NABE Outlook here. For the public, a summary is online

How the jobs crisis creates an education crisis - Economic Policy Institute - We are in a serious economic crisis, have only barely dodged a full-blown depression, and although the economy is now in recovery, this is still mostly a jobless recovery, with unemployment still at 10% and likely to remain unacceptably high for some time. Stimulating the economy has to be our priority. Providing subsidies for jobs in schools not only employs educators, and cafeteria workers, and janitors, but the paychecks these employed public sector workers spend contributes to expanding employment in the private sector as well. The Census Bureau recently reported that the child poverty rate rose to 19.0% in 2008, from 18% in 2007. The number is undoubtedly now even higher, as unemployment grew substantially during 2009. Poverty directly depresses student achievement, as more children come to school hungry, homeless, and from households under severe stress. A 10% unemployment rate will produce a black child poverty rate of over 50%. This is not only a human disaster, but an educational catastrophe.

U.S. government to release emergency heating subsidies - The Low Income Home Energy Assistance Program, commonly known as LIHEAP, was allocated $5.1 billion for fiscal year 2010, including more than $590 million in emergency funding. The Department of Health and Human Services, which oversees the energy assistance program, plans to release around $1 billion in block grants next week, department spokesman Kenneth Wolfe told Reuters. The department will also likely release some of the emergency funds in the next few weeks, Wolfe said. This contingency funding would supplement the block grants states are already receiving.

25 States Have Run Out Of Unemployment Money And 15 More Are On The Verge Of Running Out - One aspect of the current economic collapse that has not been widely reported is the extreme difficulty that most state unemployment insurance funds are facing. At this point, 25 state unemployment insurance funds have gone broke and the Department of Labor estimates that 15 more state unemployment funds will likely go broke within two years and need massive loans from the federal government just to keep going. State unemployment funds are generally separate from the general budgets of most states.  When these funds do go broke, usually there are two solutions that are considered.  Either unemployment benefits are cut or payroll taxes are increased.

Difficult decisions awaiting fund for jobless - During the past year, the state of Ohio has borrowed $1.7 billion from the federal government to keep its unemployment compensation program afloat. By the end of next year, just 12 months from now, the debt is expected to reach $3 billion. Not only are many Buckeye State men and women unable to pay their bills because they lack jobs, but their state can't pay the bills to provide them with assistance. Ohio simply cannot continue to pile up debt without making some provision to pay it off. Yet Gov. Ted Strickland and leaders in the General Assembly have not been promoting a plan to do that.

State unemployment offices have doubled in size - During a year of layoffs, one of the few places hiring in Washington in 2009 was the state's unemployment offices. The state Employment Security office more than doubled the size of its unemployment-claims staff this past year and still managed to clock 65,000 hours of overtime to handle the increased work load. The extra people were needed to help 410,000 job seekers with employment counseling. In 2009, state unemployment peaked at a seasonally adjusted 9.3 percent. The state paid out about $4 billion in jobless benefits in 2009, more than triple the previous year's total.

Washington among 36 states seeking budgetary life preservers - It’s said that misery loves company. Washington state can take comfort because when it convenes a 60-day legislative session Jan. 11, it will be one of 36 states facing another round of budget cuts. Added together, these states face $28.2 billion in budget gaps, according to the National Conference of State Legislatures. That total is on top of $146 billion in budget cuts made by the states when they first adopted their current budgets. Washington’s share is to blame for $2.6 billion of that $28.2 billion total. California, which is six times more populous, added $6 billion. New York, which has three times the population of Washington, has a $3.2 billion deficit.

State Debt At Staggering Level: Leads Nation - Connecticut enters the New Year as the most heavily indebted state per capita in the nation, and that debt is growing to alarming levels. Our state government already carries the highest tax-supported debt in the nation at $4,490 per person. Massachusetts takes second place at $4,323, according to Moody's Investors Service in July. But that tells only a fraction of the story.Connecticut was ranked as one of the worst-prepared states in saving the necessary funds for employee pensions by The Pew Charitable Trusts in 2007. Altogether, state taxpayers are on the hook for an estimated $58.9 billion in unfunded obligations including outstanding debt, state employee pensions, teacher pensions, and retired state employee health and life insurance benefits, according to the state Office of Fiscal Analysis. For every man, woman and child in Connecticut, that means we each owe about $16,800, with no repayment plan in sight.

U.S. state prison cuts spark controversy (Reuters) - Illinois Governor Pat Quinn is under attack for a plan to save his financially ailing state money by speeding up the release of prisoners who served just a fraction of their sentences. Of the more than 1,700 inmates released for good behavior since mid-September under an accelerated early-release plan, 56 were already back in prison for parole violations or new infractions, according to Quinn. An analysis by the Chicago-Sun Times on Wednesday found 20 prisoners had previously served time for serious crimes such as murder or attempted murder. As the recession depletes their coffers, U.S. states are looking in every corner of government for ways to save money, and some are squeezing their prison budgets

At Capitol, 2010 Looks Bleak - Georgia lawmakers are facing a grim to-do list as they return to the Capitol Monday for the 2010 legislative session. Tax collections are still in freefall, meaning legislators will need to get to work immediately hacking what could be another $1 billion or so from the $18.6 billion state budget. Hill said the steep drop in revenues ``is like falling off a cliff.'' Perdue has already ordered about $900 million in cuts to the budget for the fiscal year that began July 1, telling state agencies to tighten their belts yet again. Unless tax collections pick up which is unlikely anytime soon those cuts will have to go even deeper

Texas sales tax collections are $1 billion behind – Four months into its new two-year budget, Texas already is nearly $1 billion behind its expected pace of sales tax collections, according to new figures released Friday.Comptroller Susan Combs said there's no need for panic, as tax collections should start growing again in the first or second quarter of the year. But the decline is dramatic. A year ago, Combs forecast essentially flat sales taxes receipts in the budget year that started Sept. 1; instead, they've decreased by 12.9 percent in the first four months

Tisei: ‘No End In Sight’ for state fiscal crisis - A fiscal watchdog group has some sobering news for the commonwealth: Not only will Massachusetts have to deal with a shortfall of several hundred million dollars this fiscal year, but it also faces a “gaping $3 billion structural deficit” in the new fiscal year that begins on July 1. According to the Massachusetts Taxpayers Foundation (MTF), the state must still deal with a shortfall of $300-$500 million in the current fiscal 2010 budget, despite the recent round of cuts announced by the Patrick Administration in October. But that shortfall pales in comparison to a projected structural deficit of “at least $3 billion” that awaits in fiscal 2011

Filling a $9.5 billion hole - Unlike the federal government, which routinely spends more money than it takes in, New Jersey's constitution mandates a balanced state budget. "This is not a fun time to be governor, to say the least," said James W. Hughes, a Rutgers University dean and public policy expert. "Just to survive, there are going to have to be significant budget cuts." Projections of multi-billion dollar deficits prior to the introduction of the state budget each year are as common in New Jersey as robins in the spring. Past governors have closed the gaps through tax increases, cuts in programs and so-called one-shot budget tricks that raise hundreds of millions of dollars from unique revenue sources.

Investment losses add to W.Va.’s budget woes - Already grappling with recession-weakened revenues, West Virginia’s state government now must find an additional $145 million to shore up its pension funds, Manchin administration officials said Friday. The Wall Street meltdown inflicted losses totaling around 16 percent on the invested assets of these programs, Budget Director Mike McKown said. The state had been counting on a 7.5 percent return. “You’ve got a 23.5 percent gap in earnings,” McKown told reporters “The major driver of the fiscal year 2011 budget will be shoring up the retirement systems.” The 2011 budget year begins July 1. Gov. Joe Manchin will present his proposed spending plan next week, when the Legislature starts its 60-day regular session. McKown and Legislative Director Jim Pitrolo said it reduces general revenue spending on education by 4 percent, and by 5 percent for most of the rest of state government.

Bakk: State faces deep budget crisis (Minn) Taxes can’t be raised high enough or state spending cut enough to take the state out of its looming deficit, says Sen. Tom Bakk. The state faces a $1.2 billion budget deficit in the current biennium and $5.4 billion in the next two-year budget cycle, a problem that demands immediate attention, says Bakk, DFL-Cook, who is also a Democratic candidate for governor. But the problem isn’t too much spending nor is it totally solved by raising income taxes

New York state "is broke," should cut $30 bln-study (Reuters)- New York state "is broke" and should cut $30 billion of spending over three years in actions ranging from freezing state workers' pay and benefits to axing aid for special education, a new study said Monday.  "Like a runaway train, New York's budget is in danger of running completely off the rails," according to the analysis by the Empire Center, a conservative Albany-based think tank. The wellspring of New York's economy is the financial sector, which nearly ran aground last year, though some banks and brokerages have resumed making money surprisingly swiftly. Most of the state's current $3.2 billion deficit stems from falling tax collections, the report said. But it also cited the state's recent string of billions of dollars of new spending.

Paterson Speech Chastises Lawmakers - In a strikingly blunt State of the State address, Gov. David A. Paterson chastised the lawmakers seated before him on Wednesday, saying they had spent the state into near-ruin and stood by as a plague of political corruption destroyed New Yorkers’ trust in their government. “You have left me and other governors no choice,” Mr. Paterson, the former State Senate minority leader, said. “Whether it be by vetoes or delayed spending, I will not write bad checks, and we will not mortgage our children’s future.” “No longer are we going to run New York like a payday loan operation,” the governor vowed. Lawmakers, Mr. Paterson charged, had too often bowed to the wishes of powerful special interests, feeding an “addiction to spending, power and approval” and plunging the state into economic catastrophe.

The Big Apple's Big Problem - When Michael Bloomberg stood on the steps of City Hall last week to be sworn in for a third term as New York City's mayor, he spoke in upbeat terms about the challenges ahead. The situation, however, is far more difficult than he portrays it. American financial power has shifted from New York to Washington, while global clout moves toward Singapore, Hong Kong, and Shanghai. Even if the local economy rebounds, the traditional media industries that employ many of Bloomberg's influential constituents likely will continue to decline. New Yorkers have long had an outsize view of their city; historically, its mayors have touted mottos that encouraged that view, from Rudy Giuliani's "capital of the world" to Mike Bloomberg's "luxury city." But as Bloomberg begins his new term, New York needs to reexamine its core economic strategy.

Budget deficit to dominate Iowa legislative session - Iowa’s 2010 legislative session will be cut short, from the usual 100 days to 80, to save money for the cash-strapped state. During those days, the governor and legislators will be sculpting a cost-cutting budget. A free fall in state tax collections means a spending gap of $400 million to $1 billion. “It will be a tough, tough budget year. I think this is probably the toughest one that I’ve dealt with,” said Sen. Robert Dvorsky, D-Coralville, chairman of the Senate Appropriations Committee, whos been a legislator since 1987.

Fear of reprisal tempers suits over budget cuts - Hospitals, cities, schools and social agencies all have a stake in the outcome of a legal fight over Minnesota Gov. Tim Pawlenty's power to cut their budgets. But whether they join the battle depends on a variety of considerations, including one intangible: fear of reprisal. Organizations and government agencies that depend on state money are mindful that they could win a court battle over Pawlenty's unconventional budget cuts, but suffer more conventional cuts by the governor later.

Virginia legislators return to Capitol next week, facing $4 billion in cuts -The state faces its worst financial crisis in seven decades, and much of the 60-day session will be spent searching for ways to cut that will hurt Virginians the least. Legislators will debate thousands of bills on such issues as health care, transportation, gun control and the death penalty. They also will debate trimming $357 million from K-12 education in part by capping the number of support staff members that schools can hire and reducing health insurance funding for faculty and staff members. Also being considered is cutting aid to colleges and universities by 26 percent over the next few years, a move that will probably lead to tuition increases.

Tough session awaits Maine legislators as deficit grows - State Rep. Windol Weaver summed up what many local legislators are feeling this week, as they make the trek from southern York County to Augusta for the start of the 2010 session. "I don't think anybody's looking forward to going up there," said the York Republican. "Unfortunately, sometimes you have to say no." Legislators will be saying "no" quite a bit in the session that began Wednesday, as they work to close a budget gap of $438 million to keep the state in the black through June 2011. Maine has a biennium budget, which began July 1, 2009.

December state revenue a ‘mix of declines’ - Arkansas’ December revenue collections revealed a decline in net available general revenue of 5.7 percent from the previous year and 5.3 percent below forecast. Total net revenues topped $376.2 million for the month. All major income categories were down in December. Individual income tax collections were 5.3 percent below expectations, while corporate income taxes settled 7.8 percent below forecast. December gross receipts — which include sales and use taxes — totaled $159.9 million, 8.3 percent below forecast. Arkansas borrowing from feds tops $222 million.

Kan. legislators face decision on raising taxes - There’s going to be plenty of talk about having residents open their wallets a little more to help the state out of its budget mess. Legislators open their annual, 90-day session Monday, and they’re facing a projected budget shortfall approaching $400 million. The biggest issue is whether they’re willing to raise taxes to protect schools, social services and other programs from more cuts –– and, if so, who gets to pick up the tab. Many members of the Republican-controlled Legislature don’t see enough support yet for higher taxes, even if Gov. Mark Parkinson and fellow Democrats are talking up the idea. But pressure is likely to build as legislators weigh potential cuts.

La. colleges submit cost-cutting plans due Friday - Public colleges say they will shrink class offerings, slash library and athletics spending and hand out pink slips to employees as they make required budget cuts, according to plans submitted Friday to the Louisiana governor's office.  Meanwhile, statewide elected officials are trimming museum hours, shutting recreation sites and limiting purchases and travel while largely avoiding layoffs. Gov. Bobby Jindal ordered budget reductions to cope with a $248 million midyear deficit in the $29 billion budget for the fiscal year that ends June 30.

Cretul: State may be faced with $2.6 billion shortfall - Florida House Speaker Larry Cretul said Tuesday that state revenue projections haven't improved as hoped and that the state may be faced with a $2.6 billion funding shortfall for the next fiscal year. Cretul said revenue shortfall estimates range between $900 million and $2.6 billion, but he believes the actual number may end up being higher than the worst-case scenario.

Florida's Troubled Budget: Out of Balance - If you are a Floridian and are expecting the Legislature to tackle any of the most pressing issues facing our state during its upcoming regular session, you probably are going to be disappointed. The Legislature has one overriding objective for the coming year: Balance the state budget in the face of another revenue shortfall. So says Florida House Speaker Larry Cretul, R-Ocala, who describes the state's short-term fiscal outlook as "dismal." It is an accurate assessment, given that the Legislature's own economists project a revenue shortfall of between $1 billion and $2.6 billion - on top of $8 billion in state revenue already lost since 2006. Cretul's cynicism is understandable. Lawmakers have cut every imaginable part of state government - except, inexplicably, prisons - and will have to cut again because, as he pointed out, there are only two solutions to having less money: Either raise taxes or cut spending. And new taxes, he said, are not up for consideration.

Arkansas debt owed to Feds balloons to $222.6 million - The City Wire With the recession pushing people out of jobs and keeping unemployment rates higher than during previous recession, 25 state governments and the territorial government of the U.S. Virgin Islands have been forced to borrow funds from the federal unemployment insurance system.  At the end of 2009, the U.S. Department of Labor reported that the 25 states and one territory had borrowed more than $26.03 billion to fund their respective unemployment benefit programs. California borrowed $5.914 billion in 2009, the most of any other state.Mike Miller, with the U.S. Department of Labor division of fiscal and actuarial services, recently reported that payments from state unemployment trust funds will exceed revenues and interest income by $41 billion in fiscal year 2009 and $55.8 billion in fiscal year 2010.

Hynes: Unpaid bills $5.1 billion - Illinois Comptroller Dan Hynes says the state has $5.1 billion in unpaid bills and that number is growing. Hynes issued a quarterly report Wednesday saying the state is facing "the most dangerous fiscal conditions in modern history." The deficit is expected to top $11 billion this year. Hynes says the backlog of bills is even higher if short-term loans that need to be repaid soon are included along with health care bills not yet sent to his office.

States braced to tighten 2010 belts amid $14.8B in shortfalls (USA Today) States across the nation begin the year facing grim budget shortfalls that could mean a repeat of the service cuts, layoffs or furloughs and higher fees imposed in 2009, a USA TODAY survey shows. States passed fiscal 2010 general-fund budgets totaling $627.9 billion, 5.4% less than a year earlier, says a study released last month by the National Association of State Budget Officers and National Governors Association. Despite cuts, shortfalls for the 2010 fiscal year, which in most states began July 1, are $14.8 billion, the study says. The gap in 2011: $21.9 billion."

State Budget Pictures Bleak as Lawmakers Head Back - ABC News - If you thought state budgets were in bad shape last year, just wait: 2010 promises to be brutal for lawmakers — many facing re-election — as they scramble to find enough money to keep their states running without raising taxes.Tax collections continue to sputter. Federal stimulus dollars are about to dry up. Rainy day funds have been tapped. And demand for services — like Medicaid, food stamps and unemployment benefits — is soaring.As lawmakers head back to state capitols this month, budget woes range "from bad to ridiculously bad," said David Wyss, chief economist at Standard & Poors in New York. "There are some states, those hit particularly hard by the recession, that I don't think can cut spending enough. They're running out of things to cut."Typically, the worst budget years for states are the two years after a recession ends. Across the nation, budgets are already lean after several rounds on the chopping block. And unless lawmakers increase taxes or fees — unpopular moves in an election year — most will need to cut even more as they grapple with the steepest decline of tax receipts on record. Services ranging from higher education to programs for the elderly could be in jeopardy.

Green Shoots: State Tax Revenue in U.S. Drops Most Since 1963 - U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said.Revenue dropped 13.3 percent, or $80 billion, compared with the same nine months of 2008, to $523 billion, the institute said. Collections in the third quarter alone sank 10.9 percent to about $162 billion, according to the report released today by the Albany-based body. It was the fourth straight quarterly decline. The institute is the public policy research arm of the State University of New York.“The first three quarters of 2009 were the worst on record for states in terms of the decline in overall state tax collections, as well as the change in personal income and sales tax collections,”

The States and the Stimulus - WSJ - Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money.

New Year but No Relief for Strapped States - It is one of the bleakest new years that states have seen in over a decade. On Wednesday, governors kick off the season of addresses to state lawmakers as at least 36 states struggle to close budget shortfalls and also begin confronting the next fiscal year’s woes. For many of the states, the new year spells the end to accounting maneuvers, one-off solutions, tax increases and service cuts that were as deep as lawmakers thought they could bear. And governors confront this situation in an election year in which dozens of their jobs are in play, and as many state legislators face their own election challenges.“A budget gap of 5 percent or 10 percent in any given year is a tough problem,”“But we’re talking about gaps in excess of 20 percent over multiple years. The size of these gaps is staggering.”

State budget shortfalls may reach $180 billion this year - If you thought state budgets were in bad shape last year, just wait: 2010 promises to be brutal for lawmakers - many facing reelection - as they scramble to find enough money to keep their states running without raising taxes.Tax collections continue to sputter. Federal stimulus dollars are about to dry up. Rainy day funds have been tapped. And demand for services - like Medicaid, food stamps and unemployment benefits - is soaring. As lawmakers head back to state capitols this month, budget woes range “from bad to ridiculously bad,’’ said David Wyss, chief economist at Standard & Poors in New York. “There are some states, those hit particularly hard by the recession, that I don’t think can cut spending enough. They’re running out of things to cut"

To Avoid Raising Taxes, States Try to Rack Up Fees - Nearly every state in the country struggled to close budget deficits in 2009, and for many the struggle is not over yet. The National Conference of State Legislatures reports that 36 states already have budget deficits for the fiscal year that began in September, and the gaps are only expected to grow as 2010 progresses. There have been a lot of cuts, and more are coming. Governors and legislatures have laid off and furloughed state employees, tapped rainy-day funds and cut spending on education and health care. They have also raised revenue — what most people call taxes. Few ideas are more unpopular during a recession than increasing taxes. So, how can states, counties and municipalities that are struggling financially raise more money? For many, the answer is fees.

Deep cuts to social services expected in Schwarzenegger's budget plan - For the sixth time in seven years, Gov. Arnold Schwarzenegger this morning will unveil a budget plan that promises pain for Californians.Lawmakers and the governor are facing a $20 billion deficit, and officials familiar with the governor's strategy warn that health and social services programs for the state's neediest residents once again may take the brunt of the slashing.After a year that saw legislators close deficits amounting to $60 billion — through accounting tricks and modest tax hikes, but mostly through deep spending cuts — many expect a plan that feels numbingly familiar."There are going to be cuts," said Sen. Abel Maldonado, R-Santa Maria, whom Schwarzenegger has nominated to serve as lieutenant governor. "They're going to come from health and human services."Only funding for schools has officially been declared safe from further cuts in the governor's plan.

California Governor Schwarzenegger Seeks Government Worker Pay Cuts to Replace Furloughs - California Governor Arnold Schwarzenegger (R) is seeking to save $1.6 billion with a 5% across-the-board cut in pay for the state's 200,000 government employees, plus increasing pension contributions by 5% of salary. The changes would take effect July 1 and would replace the current furlough program that has resulted in an effective 14% pay cut. From the Sacramento Bee: Schwarzenegger will ask the Legislature to approve those changes as part of his budget proposal today, which is a "Furlough Friday" for state workers. His plan seeks to close a $19.9 billion deficit over the next 18 months. The Republican governor plans to propose an $82.9 billion general fund spending plan for 2010-11, according to a Department of Finance chart.

State Detonation Countdown: California - Off the wire: California's Governor has declared a fiscal emergency and is imposing $8 billion in emergency cuts, asking for $7 billion in Federal aid. Governor Schwarzenegger has declared that the state is facing a deficit of $41.6 billion - nearly half of projected revenues. The summary budget can be found here.  While there are major cuts in a lot of programs, what's amazing is what's not cut - specifically, K-12 and higher education, both of which are either flat or receive increases. Debt service is also up, and may go up a lot more. This is what I would call "a good start" - but exempting overly-bloated state educational systems is idiotic.

Speed sensors on red-light cameras could raise money fast - Speeding may be dangerous for drivers, but it could soon be a boon for California's fiscal health. Tucked deep into the budget that Gov. Arnold Schwarzenegger unveiled Friday is a plan to give cities and counties the green light to install speed sensors on red-light cameras to catch -- and ticket -- speeding cars. Those whizzing by the radar-equipped detectors at up to 15 mph over the limit would have to pay $225 per violation. Those going faster would be fined $325. Small-government advocates want to put the brakes on the plan. "This is a budget item for the state?" said Lew Uhler, president of the National Tax Limitation Committee. "This is totally reprehensible."

Schwarzenegger Seeks U.S. Funds - California Gov. Arnold Schwarzenegger on Wednesday asked Washington for funds to help close his state's massive budget shortfall -- a move some other states are likely to follow in coming months as they deal with their own fiscal woes. "The federal government is part of our budget problem," the Republican governor said in his annual State of the State address, reiterating a longstanding complaint that California sends far more money to Washington than it receives in return. Mr. Schwarzenegger also said federally mandated spending of state money has further strained California's coffers. "We no longer can ignore what is owed to us," he said, adding that Washington owes the state billions of dollars for various programs. Other cash-strapped states may follow Mr. Schwarzenegger in turning to Washington...

California leaders seek budget help from D.C. - California's political leaders, who are facing the daunting challenge of closing an estimated $20.7 billion budget deficit this year, are looking to Washington for help. Just don't call it a bailout.Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he plans to head to the nation's capital "early and often" seeking federal assistance. Gov. Arnold Schwarzenegger already has put the federal government on notice that he wants billions he says the state is owed. And outgoing Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), said she would head east as soon as this month.It is not just cash that California wants. Schwarzenegger is calling for permanent changes to the formula that determines the amount of money the federal government contributes to Medi-Cal, California's Medicaid program, noting that the state is among the lowest in the country in reimbursement rates. He also wants money for the costs of providing special education in schools and incarcerating illegal immigrants, both unfunded federal mandates.

Will Obama Zero Out the California 2010-2011 State Budget Deficit? - Suppose that you are a Senator from Missouri. Your aide has given you a newspaper clip showing you the front page of the San Francisco Chronicle that declares that California will approach President Obama to figure out a way for the Feds to give California a large chunk of $ to cover the state’s projected 20 billion dollar deficit for the 2010-2011 year. Are you likely to support the increased taxation of your constituents so that Nancy Pelosi’s state can party on?  For better or worse, we both know the answer to this question. President Obama will reject California’s request. Why would liberal Obama reject a request from his prime source of fund raising and many of his closest friends? The answer is his urge to build up Credibility. The Dancing tough guy Rahm Emanuel will whisper to the President that by saying no to California he will score points with Wall Street, the New York Times and Republicans for being serious about federal deficit reduction. Robert Rubin will be quoted as supporting this “tough love”. The President will rationalize his decision saying that his “no” will force California to rethink Prop 13 and its current system that gives the Republicans an implicit veto of any serious reform of the budget process.

California’s pension costs “a locomotive”–California governor Arnold Schwarzenegger equated the state’s rising pension costs to a “locomotive” and pledged to make pension reform a priority in 2010 in his annual State of the State address yesterday. Addressing the California legislature, he said: "We are about to get run over by a locomotive and we can see the lights coming at us. We can see the lights coming. I ask the legislature to join me in finding the equivalent of a water deal on pensions, so that we can meet current promises and yet reduce the burden going forward." The state currently spends US$3bn per year funding pension deficits and that amount is expected to increase to $10bn, he said. The current cost of the state employee system has jumped by 2000% over the past decade, Schwarzenegger continued, while revenues are only up 24%

Pension reform fight has makings of a war. - Like it or not, lawmakers will be asked this year to overhaul the state’s public pension systems that serve 1.7 million Ohioans and cost local governments more than $4 billion a year.  It’ll be an epic struggle among powerful interest groups to determine how the burden of shoring up the pension systems is shared.  Teachers, cops and firefighters may be asked to work longer. Retirees will likely face higher medical costs. And taxpayers may be asked to chip in as much as $5 billion toward the pension systems, if lawmakers accept proposed increases from two of the state’s five public pension funds. The Ohio Police & Fire Pension Fund and State Teachers Retirement System are asking for rate increases that, over the next five years alone, would cost local governments hundreds of millions of dollars.

Debt becomes a political hot potato in Illinois (Financial Times) The pension plan has unfunded liabilities of nearly $80bn, while the state faces a budget gap of almost $12bn, with an estimated $4.3bn shortfall in the current fiscal year. Illinois - which was downgraded last month by Moody's and Standard & Poor's - now has the lowest state bond rating in the US except for California. The Pew Center on the States warned in a recent report that Illinois was in "fiscal peril".

Illinois Seeks Foreign Buyers for Pension Debt as Deficit Looms (Bloomberg) -- Illinois, the second-lowest-rated U.S. state, is seeking to attract overseas investors as it sells $3.47 billion in taxable bonds amid a warning from its comptroller that state finances are in a “downward slide.” The debt offering will go toward an annual payment to the employee pension fund. Governor Pat Quinn is borrowing the money instead of using revenue from the state budget as he attempts to close a gap that the Center on Budget and Policy Priorities estimates at $5 billion at mid-fiscal year. International investors considering buying the securities want to know how Illinois, which was downgraded last month by Standard & Poor’s and Moody’s Investors Service, will balance its budget amid sagging tax collections, said John Sinsheimer, the state’s director of capital markets.

Municipalities Tackling Pension Costs - A pension system that pays retirees a guaranteed monthly amount puts pressure on a town, officials say, especially when a falling economy erodes investments that pay those pensions. According to the Center for Retirement Research at Boston College, in December 2008, the nation's public pensions had total liabilities of $2.9 trillion and assets of $2 trillion, largely a result of stock markets' losses. Plus, local obligations increase over time as workers retire at higher levels of pay.

US public pensions face $2,000bn deficit - The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund.The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times. “If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations. A shortfall of that size could force state governments to take unpalatable decisions such as pouring more public money into their funds or reducing pension benefits. State and local governments have already cut spending to close budget deficits.

The Obama Administration Wants to Annuitize Your 401k's and IRA's - As a rule of thumb, the worst possible time to convert lump sum savings into a fixed income annuity would be when interest rates are historically low. Although products may vary, this is roughly equivalent to buying long term bonds at a time when interest rates are likely to increase, substantially reducing your principal in real terms, and eroding your fixed returns through inflation. For some reason the Obama Administration is promoting the idea now that there should be some encouragement for Americans to start converting their 401K's and IRA's into annuities, to provide themselves with lifetime income. The effort is being spear-headed by Mark Iwry of the Treasury and Phyllis Borzi of the Department of Labor. Here is a paper written on the subject by Mark Iwry when he was at the Brookings Institution. The essence of this paper is that distributions from IRA's and 401K's would automatically be rolled into an annuity providing a monthly income by default. This concept is known on the Street as the handling fees for meager returns pork barrel pigfest. The Fed likes it because they will undoubtedly get a two year rolling chunk of the people's retirement cash to play with.

SS Trust Fund – 2009 Full Year Results – Ugh - The Social Security Trust Fund issued their November and December reports today. They also provided the payment data for January 2010. I think there is some significant information. From my writings on the Trust Fund I have received many comments from those who believe that the SS is a bankrupt Ponzi scheme. That is not correct. The SSTF did an admirable job in a very tough year. They paid a total of $675 billion in benefits and ended the year with an even $100 billion surplus. On December 31st they were sitting on $2.5 Trillion of US Treasury IOU’s. That said there are some very disturbing trends at the Fund.

Social Security's Grim Milestone: Half a Year in the Red - Data recently made public by the Social Security Administration confirm that in October, 2009, the program reached a grim milestone:  six consecutive months of operating cash deficits.  This is the first time Social Security has faced this situation over the entire time period, dating back through 1987, for which SSA posts the monthly data online. From May through October inclusive, Social Security’s outgoing payments have exceeded incoming program revenue, generated mostly by the payroll tax (with a smaller amount coming in via the taxation of benefits).  When a cash-deficit situation develops during a period that the program is still technically solvent, full benefits continue to be paid.  The operational deficit is effectively made up with general revenues, putting additional strain on a sagging federal budget

Looting Social Security - He's baaack--the Wall Street billionaire who wants to loot Social Security. This time, Pete Peterson has invented his own "news network" to promote his right-wing rants about shrinking the only retirement security system available to millions of working people. Peterson styles himself as a patriot saving the nation from fiscal insolvency and has committed $1 billion to that cause (a chunk of the wealth he accumulated at Blackstone Group, the notorious corporate-takeover firm). His efforts might be dismissed as ludicrous--except money does talk in Washington, and Peterson is now buying Washington reporters to spread his dire warnings.

Medicaid Long-Term Care Spending Tops $106 Billion - Long-term care represents 32.1 percent of total Medicaid spending according to a new report. As costs rise, the program is raising serious budget problems for numerous states. Total Medicaid expenditures for long-term care increased 3.8 percent in 2008 reaching a total of $106.4 billion. Medicaid is the nation's poverty program with expenses borne by federal and state taxpayers. Institutional long-term care spending by the Medicaid program increased 2.9 percent in fiscal year 20908 to $61.0 billion according to the report issued by Thomson Reuters. Medicaid nursing home expenditures increased 4.1 percent to $49 billion.

Obesity is now just as much of a drag on health as smoking - Scientific American - In case anyone needs a reminder to stick to that New Year's resolution to slim down or kick the cigarette habit, researchers have confirmed that obesity and smoking are still the country's leading contributors to preventable deaths and illnesses. In fact, the new findings, from a 16-year survey of more than 3.5 million adults, reveal that being overweight has taken the lead as contributing the most to preventable poor health in the U.S.  The results, tabulated from the U.S. Centers for Disease Control's (CDC) Behavioral Risk Factor Surveillance System and published online Tuesday ahead of print in the February issue of American Journal of Preventive Medicine, document what public health officials have long predicted, that with the country's expanding waistlines, widespread health consequences have become increasingly common: "The total health burden of obesity surpassed the total health impact of smoking,"

Setting the record straight on weight loss - It's time to set the record straight. The only reliable way to lose weight is to eat less or exercise more. Preferably both. So why bother to state the obvious? Because a body of scientific literature has arisen over recent years, suggesting that fat oxidation -- burning the fats we eat as opposed to the carbohydrates -- is enough to promote fat loss. It isn't.Sydney scientists have demonstrated that mice genetically altered to burn fats in preference to carbohydrates, will convert the unburned carbohydrates into stored fat anyway, and their ultimate weight and body composition will be the same as normal mice.

17,000 potentially harmful chemicals kept secret under obscure law - Of some 84,000 chemicals being used commercially in the United States, some 20 percent -- or 17,000 -- are kept secret not only from the public, but from medical professionals, state regulators and even emergency responders, according to a report at the Washington Post. And the reason for this potentially harmful lack of openness? Profit. A 1976 law, the Toxic Substances Control Act, mandates that manufacturers report to the Environmental Protection Agency any new chemicals they intend to market, but manufacturers can request that a chemical be kept secret if disclosure "could harm their bottom line," the Washington Post reports.

Prescription: more doctors - That 30 million Americans may soon be able to obtain health care insurance is at the core of the Senate and House health care bills. But let's be clear: "insurance" doesn't guarantee "care." Indeed, a recurrent theme on the Senate floor last week was that the legislation is giving "bus tickets" - that is, health insurance - to uninsured Americans. But there are no buses running on those routes. The analogy is apt. Because without important changes in how many doctors we produce and how we pay to train them, millions of newly insured Americans will simply not have access to a physician.In fact, we don't have enough doctors for the 256 million Americans who are insured right now. No less an authority than the U.S. Department of Health and Human Services notes that the United States has a current shortage, at minimum, of 16,000 physicians

Rainy weather and medical school admission interviews -- Abstract: Mood can influence behaviour and consumer choice in diverse settings. We found that such cognitive influences extend to candidate admission interviews at a Canadian medical school. We suggest that an awareness of this fallibility might lead to more reasonable medical school admission practices. Admission offers to medical school are competitive and sometimes based on an interview. Psychology research suggests, however, that interviews are prone to subconscious biases from extraneous factors unrelated to the candidate. 1 One of the most fundamental observations is that people interviewed on rainy days tend to receive lower ratings than people interviewed on sunny days. 2 We studied whether this bias also extends to admission interviews at a large Canadian medical school.

Dems Intend To Bypass GOP On Health Care Compromise - House and Senate Democrats intend to bypass traditional procedures when they negotiate a final compromise on health care legislation, officials said Monday, a move that will exclude Republican lawmakers and reduce their ability to delay or force politically troubling votes in both houses.The unofficial timetable calls for final passage of the measure to remake the nation's health care system by the time President Barack Obama delivers his State of the Union address, probably in early February.Democratic aides said the final compromise talks would essentially be a three-way negotiation involving top Democrats in the House and Senate and the White House, a structure that gives unusual latitude to Senate Majority Leader Harry Reid of Nevada and Speaker Nancy Pelosi of California.

Lawmakers See Quick Health-Care Agreement Without Public Option - (Bloomberg) - U.S. Democrats will likely drop the idea of setting up a new government-run insurance program as they try to quickly resolve differences between House and Senate health-care bills, party members in both chambers said. Democratic leaders may also bypass a House-Senate conference, the normal route for reconciling legislation, in favor of more informal talks to wrap up in a “few weeks,” said New Jersey Representative Frank Pallone, who heads the House Energy and Commerce panel’s health subcommittee. “I don’t think the public option survives,” Pallone told state lawmakers in Trenton yesterday. “There is nowhere near 60 votes on that.”

Should progressives oppose the health-care reform bill? - Why would a progressive oppose the health-care reform bill that’s now on the table? Three main reasons have been offered. One is that the bill will require (most) people to have health insurance. This means some low-income Americans, those who don’t get health insurance from their employer or from the government (Medicaid or Medicare), will have to buy insurance from a private insurer...I don’t see the logic in this. A second argument against the health-care reform bill is that health insurance companies and pharmaceutical firms will benefit...The third reason for opposing the bill is a belief that it can be replaced by a better one in the not-too-distant future. Unfortunately, as many commentators have pointed out (Hacker, Klein, Krugman, Skocpol, Starr), experience suggests that is very unlikely.

Paul Krugman: One health care reform, indivisible - Start with the proposition that we don’t want our fellow citizens denied coverage because of preexisting conditions — which is a very popular position, so much so that even conservatives generally share it, or at least pretend to. So why not just impose community rating — no discrimination based on medical history? Well, the answer, backed up by lots of real-world experience, is that this leads to an adverse-selection death spiral: healthy people choose to go uninsured until they get sick, leading to a poor risk pool, leading to high premiums, leading even more healthy people dropping out. So you have to back community rating up with an individual mandate: people must be required to purchase insurance even if they don’t currently think they need it. But what if they can’t afford insurance? Well, you have to have subsidies that cover part of premiums for lower-income Americans.

The health insurance excise tax - Krugman - OK, clearly I have to weigh in on this. Should there be a limit to the tax deductibility of employer-provided health insurance, which is what the excise tax in the Senate bill is supposed to fix? My answer is yes, but the final bill should address the criticisms. The argument for limiting the tax exclusion is that the tax break on health insurance encourages over-spending, so limiting it could help in the process of “bending the curve”. More generally, since we think the United States spends too much on health for not-so-good results, it makes sense where possible to pay for expanding coverage from the health sector itself. Both arguments are reasonable.The counter-arguments seem to run along three lines....

What Health Care Reform Means For The States - As the battle enters its final stage in Washington, a rebellion is taking shape in the states, which are alarmed about the new financial burdens they will face in a revamped system. Governors of both parties are complaining that reform will drive their budgets into even deeper holes, with some feeling the effects far more than others. But just how much will be riding on the states? Here's a look at four changes that lie ahead. (also: Watch TIME's video "Uninsured Again.")

Why The Health-Care Bills Are Unconstitutional - WSJ - If the government can mandate the purchase of insurance, it can do anything. President Obama's health-care bill is now moving toward final passage. The policy issues may be coming to an end, but the legal issues are certain to continue because key provisions of this dangerous legislation are unconstitutional. Legally speaking, this legislation creates a target-rich environment. We will focus on three of its more glaring constitutional defects.First, the Constitution does not give Congress the power to require that Americans purchase health insurance. A second constitutional defect of the Reid bill passed in the Senate involves the deals he cut to secure the votes of individual senators which runs afoul of the general welfare clause. A third constitutional defect in this ObamaCare legislation is that the Constitution forbids the federal government from commandeering any branch of state government to administer a federal program

Important but irrelevant alternatives - HEALTH-CARE reform has many lofty goals, including making the cost of medical services cheaper. The health-care industry in America is notoriously inefficient and services are very expensive. That's due to a labyrinth of perverse incentives and opacity. Depending on the provider you chose, you (or your insurer) may face widely different prices for the same treatment. It seems increasing transparency of the costs of services from different providers would be one way to "bend the curve". Alas, Tyler Cowen points out that posting the price of services online in New Hampshire has not been effective at narrowing the price distribution. He cites several sensible reasons this could be. Most people have health insurance, which covers most of the cost of the procedure, so consumers have little incentive to shop around. Also, when it comes to health care, people may be biased to a particular provider. Health-care services can be nuanced, depending on a hospital's culture or the relationship with the provider. It's hard to be sure consumers really receive the same product for a different price. So the state may not be the best case to study the gains from more transparent pricing.

A Misadvertised Decline in the Growth Rate of Health Care Spending - The NYT highlighted the slowdown in the growth rate of national health care spending in 2008 to 4.4 percent, compared with 6.0 percent in 2007 and an average of 7.0 percent in the decade from 1998 to 2008. There really is not very much to tout in this story. The slowdown was roughly proportional to the decline in GDP growth. As a result, health care spending measured as a share of GDP rose by 0.3 percentage points, roughly the same rate of growth that it had averaged over the prior decade.

"Preemies, Health Care Reform and the Cost-Benefit Conundrum" -A concise look at one-half of the medical care issue. Medical care can do amazing, wonderful things. But sometimes only at, currently, great expense. Is trying to save a baby born at 25 weeks worth $300,000? The authors finds this a terribly difficult question to answer. The demand side of medical care poses many such intractable problems. Instead of endlessly debating the economics and philosophy of the demand--including delegating such questions to the tender mercies of "expert" panels--we should instead strive to increase the supply. More supply means lower prices and higher quantities. Allow markets to work; remove barriers to technological advance and greater competition.

Video: David Cutler - The New Yorker - James Surowiecki speaks with David Cutler, a professor of applied economics at Harvard University, about the Senate’s recent health-care reform bill, why productivity growth in medicine has been slower than in other businesses, and how to use information technology to make the system more efficient.

Working people’s blood for sale — prices lower than ever! - The United States is one of a small number of countries that allow the sale of human blood plasma for profits. Across the country, countless workers are selling the yellowy substance found in their blood to the pharmaceutical giants of Wall Street. Just as automobile capitalists seek to drive down the wages of U.S. autoworkers by forcing them to compete with workers in other parts of the world, now the blood profiteers of the pharmaceutical industry have moved their area of exploitation to near the Mexico-U.S. border, where workers are transported from Mexico to sell their plasma.

One In 50 Americans Lives On Nothing But Food Stamps A sobering snapshot from the New York Times - About six million Americans receiving food stamps report they have no other income, according to an analysis of state data collected by The New York Times. In declarations that states verify and the federal government audits, they described themselves as unemployed and receiving no cash aid — no welfare, no unemployment insurance, and no pensions, child support or disability pay.Their numbers were rising before the recession as tougher welfare laws made it harder for poor people to get cash aid, but they have soared by about 50 percent over the past two years. About one in 50 Americans now lives in a household with a reported income that consists of nothing but a food-stamp card.

Britain must produce more food, government to warn - Britain must produce more food to avoid going hungry in the future, the Government will warn this week. A soaring global population, climate change, diminishing energy sources and depleted fish stocks mean that society can no longer be complacent about its ability to feed itself. The current food production system needs reform because it emits too much greenhouse gas, is overly bureaucratic and does not pay enough attention to soil quality and water use, the report, called Food 2030, will state.  It will also warn that the food industry needs to prepare for "sudden shocks" such as natural disasters, disruption to fuel supplies or transport networks, and commodity price spikes.

Failings at the banks to be laid bare - AN official investigation into the problems at Britain’s failed banks has revealed a litany of internal breakdowns and flawed controls that masked the full extent of their failings. The Financial Services Authority (FSA), the City regulator, has been conducting a full-scale supervisory review of Royal Bank of Scotland (RBS), HBOS and Bradford & Bingley (B&B) since last April. A report on the findings is expected to be published within weeks, revealing a catalogue of errors that allowed risks to go unchecked. A breakdown in communication at all three institutions kept board directors in the dark on the risks being run by company executives, according to sources close to the inquiry. The report will also raise questions about public statements made by each bank in the weeks before the government’s series of bailouts.

Private-sector pensions suffer worst year ever - The sharp increase in pension scheme deficits made last year the worst on record for private-sector companies, according to pensions experts, who predict 2010 will see many more final-salary plans close. Despite a jump in the FTSE 100 share index and rises in other markets to boost their returns, companies' liabilities in 2009 rose markedly from the year before, largely due to moves in bond yields and the way they are used to calculate liabilities. That left the total deficit £175bn higher, according to the advisers, Pension Capital Strategies.They believe a particularly tough year could see companies spurred into action in the coming months and 2010 could mark a turning point in the way UK companies manage their huge retirement liabilities.PCS estimates that as at 31 December 2009, the deficit for all UK private-sector, defined-benefit pension schemes was £212bn compared with just £37bn a year earlier.

Pessimistic into 2010 - The FT reports that European company executives they have spoken to are pessimistic about the business outlook for 2010. The head of ABB said the main source of profitability was cost cutting, while an auto executive said 2010 is going to be another tough year for the industry. The head of a Dutch insurance company said he would not exclude the possibility of a double-dip recession, while the head of a management consultancy said the world economy was characterised by zombies in the public and private sectors. The Wall Street Journal reports from the annual conference of the American Economics Association in Atlanta, with some gloomy forecasts from Martin Feldstein and others.

Europe 2010 Debt Sales to Reach $1.3 Trillion, Citigroup Says (Bloomberg) Euro-region governments may offer as much as 912 billion euros ($1.3 trillion) of securities this year to plug budget deficits, with 60 percent of sales in the first half of the year, according to Citigroup Inc. The estimate was revised higher from the 869 billion euros projected in September, and compares with the 830 billion euros issued in 2009, the bank said. Governments in the region are selling an unprecedented amount of bonds to make up for a reduction in tax revenue. The difference between the 10-year German bund yield and the cost of exchanging floating-for-fixed interest payments, known as a swap spread, narrowed to 20 basis points today from 78 basis points a year ago on speculation rising debt supply will push yields higher.

Why the eurozone has a tough decade to come - What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That "something else" is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world's foremost exporter of very high-quality manufactures.The eurozone matters. Its economy is almost as big as that of the US. It is three times bigger than those of Japan or China. So far, it has passed its initial test. Nevertheless, the peak to trough decline of the US economy was only 3.8 per cent, while the eurozone's was 5.1 per cent. More important than the eurozone's overall performance is what is going on inside the zone. The starting point must be with the pattern of current account deficits and surpluses.

European Commision Warns: Eight Countries Charging Off A Sovereign Debt Cliff In 2010 - The European Commission (EC) itself has warned that the finances of half of the Eurozone's sixteen economies are at risk of becoming 'unsustainable', essentially bankrupt. As shown in the Wall Street Journal graphic below, Spain, Ireland, Netherlands, Slovenia, Slovakia, and Greece are all teetering on the brink. While relatively better off European nations would prefer not to bail out their flailing neighbors, the problem with the euro currency union is that their fates are ultimately all tied together via the euro, even if politically they believe themselves to be separate countries. Thus an old criticism of the euro system is appearing more relevant than ever.

The need for special resolution regimes for financial institutions - VoxEU - The global financial crisis forced governments facing failing financial institutions to choose between disorderly bankruptcies and costly injections of public funds. This column argues that special resolution regimes are a better alternative. It analyses their structure and function and argues EU member states ought to introduce and strengthen such regimes.

Clock ticking on debt threat, says Barclays - BARCLAYS Capital sees a renaissance of local corporate debt issuance this year, and an ever-bigger debt binge to follow, as a developing supply and demand imbalance created by government guarantees lights a fire under debt markets.  The British bank's local unit expects about $100 billion to $120bn of guaranteed debt will need to be rolled over around the globe each month from January 2012. "There's a tremendous amount of redemptions coming through the system in 2012 of this government-guaranteed debt, which will have to be refinanced in a traditional senior unsecured type manner," said Barclays head of debt capital markets

Local currency bond markets: Will this time be different? - The official story of local currency bond markets reads roughly as follows. The typical report from a multilateral financial institution (and there have been several) points to the rapid development of local currency bond markets over the past years as a source of strength for financial systems in emerging-market economies. They report that foreign investment is buoyant, with foreign investors channeling increasing volumes of funds into these markets. The authors invariably commend developing countries for borrowing in local currency to reduce foreign currency mismatches end encourage them to adopt better macroeconomic policies, improve debt management strategies, and undertake further financial sector reform. Let me mention some of the problems not cited in the official reports of local currency bond markets.

Ten New Year Questions For Paul Krugman - I have an interview with Paul Krugman in today's edition of La Vanguardia (in Spanish). Below I reproduce the English original. As will be evident, there are many topics about which Paul and I are far from being in complete agreement. But on one topic we are in complete harmony: the diffficult situation which now faces Spain, the need for internal devaluation, and the threat which continuing inaction on the part of Spain's current leaders represents for the future of the entire Eurozone.

Spanish unemployment at new records: 19.3% and 40% for the young - European Union data said Spain’s jobless rate jumped to 19.3% in December and the International Monetary Fund forecasts that it will rise above 20% by the end of 2010. While the Euro-area economy will probably expand in 2010, Spain’s government expects a full-year contraction as the real-estate market works through an excess of at least one million unsold homes and households pay down debt. Government stimulus measures that helped to create more than 400,000 jobs were due to wind down at the end of last year. A project to spend 8 billion Euros on public infrastructure projects will be replaced this year by a fund half that size.

Unemployment in Europe: it's not just Spain - The New York Times published an article about Spain's "soaring" unemployment rate among those aged 15-24. Across Europe and in the US, the unemployment rate for young workers surged in 2009. Labor reform is needed in Spain, which is the overall theme of the NY Times article; but the article confuses slightly the long-run phenomenon that is Spain's growing structural unemployment versus the cyclical surge in unemployment across Europe: But the sharp increase among young people is particularly problematic. It has jumped from 17.5 percent three years ago at the height of the boom to the current 42.9 percent. A three year rise in unemployment is a structural issue in Spain, rather than surging unemployment rates in 2009, which is a cyclical trend. The chart illustrates the unemployment rate for those aged 15-24 across the European Union when available and for the US. Including those countries not listing monthly 15-24 unemployment data, and focusing on the total unemployment rate, Spain's surge is not the strongest nor is its level the highest.

Remittance fact of the day: Mexico edition - World Bank blog - Mexican remittances have reached their lowest level since February 2005, according to the Central Bank of Mexico. The FT's Money Supply blog reports the news, in a post entitled "As the dollar slides": The (remittance) payments were 14.4 per cent below their year ago levels, and more than 43 per cent below the high hit in October 2008. But the speed of the annual decline slowed to its lowest level since March as the US economy sheds fewer jobs. Judging by their choice of title and subsequent content, the Money Supply authors think this fall has something to do with a combination of a weaker dollar and higher unemployment.  Alas, the former assertion makes no sense.

Developing nations emerge from shadows as sun sets on the West - You can only conclude the last decade has been disastrous by viewing the world through a narrow lens. Yes, the so-called "advanced economies" have performed terribly. But, then again, they have been subject to self-imposed policy blunders – in terms of fiscal and monetary profligacy and the removal of key regulatory firewalls – that will make future historians wince.  I honestly believe the likes of Alan Greenspan and Gordon Brown will be savaged when authoritative accounts of the past 10 years are written. As we've repeatedly whacked the self-destruct button over the last 10 years, many other parts of the world have made enormous economic progress. Most mainstream global investors and media outlets are only now starting to realise this – and at a glacial pace. Conventional wisdom in the West remains profoundly behind the curve when it comes to grasping the extent to which the centre of economic gravity is shifting to "the rest of the world".

This decade will tip the economy to the east - The big picture is that the world economy is recovering. That recovery is, however, heavily skewed towards emerging economies such as China, India and Brazil. The International Monetary Fund’s numbers tell the story as well as anybody’s. In 2009 the world economy contracted by 1.1%, the worst performance since the second world war. That was split between a 3.4% drop for advanced economies and a 1.7% rise for the emerging ones. Just as advanced economies were hit harder by the financial crisis, so they will be slower to recover.  That gap will be preserved, more or less, during the upturn, so the IMF expects global growth of 3.1% this year, split between a modest 1.3% expansion in advanced countries and 5.1% growth in the emerging world.

An outside bet for next emerging economy: sub-Saharan Africa -  It would be foolish to suggest that China will not continue to make bigger waves, but a more interesting question is which region might, over the next few years, catch the baton of surprise performer, a laggard that suddenly astonishes everyone and begins to pick up its heels and sprint.  An outside bet is sub-Saharan Africa, a hotch-potch of states ranging from the corrupt and conflict-torn, such as Zimbabwe, to stable improvers, such as Ghana, and fast developers, such as Angola. Standard Chartered, the bank, reckons that the region’s economic growth rate will recover from a weak 1 per cent in 2009 to 4.7 per cent next year and 5.7 per cent in 2011.

Pirate cash suspected cause of Kenya property boom - Property prices in Nairobi are soaring, and Somali pirates are getting the blame.The hike in real estate prices in the Kenyan capital has prompted a public outcry and a government investigation this month into property owned by foreigners. The investigation follows allegations that millions of dollars in ransom money paid to Somali pirates are being invested in Kenya, Somalia's southern neighbor and East Africa's largest economy.Even as housing prices have dropped sharply in the United States, prices in Nairobi have seen two- and three-fold increases the last half decade

Global bear rally of 2009 will end as Japan's hyperinflation rips economy to pieces - Telegraph - The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system. As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

Japan Nov tax revenues down 25 percent yr/yr  (Reuters) - Japan's tax revenues for November fell 25.6 percent from the same month a year earlier, hit by a slump in corporate earnings after the global financial crisis and underscoring the fiscal dilemma the country's new government is facing.Japan's tax revenues are set to come to 37 trillion yen ($399 billion) for the fiscal year ending in March, 9 trillion yen short of initial estimates and driving new debt supply up to a record 53 trillion yen, the government announced in December.

Japan Return to 1991 GDP Gives Credit Markets Mega Risk Crisis - (Bloomberg) -- Japan’s Prime Minister, Yukio Hatoyama, swept to power by a public seeking an end to economic and political stagnation, is failing to arrest the nation’s decline.Japanese gross domestic product shrank to an annualized 471 trillion yen ($5 trillion) in the third quarter, without accounting for changes in prices, the lowest level since 1991. The tumble is unprecedented among the biggest economies since the 1930s, according to Paul Sheard, global chief economist at Nomura Securities International Inc. in New York. As a result of the contraction, the Finance Ministry projects tax revenue this year will drop to a quarter-century low. Hatoyama’s 2010 budget, released Dec. 25, does nothing to rein in record deficits that threaten Japan’s Aa2 rating. It avoided consumption-tax increases or deregulation to boost productivity; without policy changes, deflation and a shrinking population risk eroding the savings pool restraining Japan’s bond yields.“Japan’s fiscal conditions are close to a melting point,” .

New Japanese finance minister calls for weaker yen - Japan's newfinance minister called for a weaker yen on Thursday and said he would work with the Bank of Japan to achieve an appropriate level, prompting a sharp slide in the currency against the dollar. In his first press conference as finance minister, Naoto Kan also signalled he would maintain pressure on the central bank to do more to lift the frail economy, which the government fears could slip back into recession as deflation hurts demand. He also lived up to some expectations that he would not be as fiscally restrained as his predecessor by saying he would be open to spending more in the future if the economy weakens. He had not felt bound by fiscal austerity when the cabinet last month agreed on a budget for 2010/11, he said.

Sovereign Debt, Hither and Yon – You Know, Like Japan - Useful graphic showing government debt as a percentage of GDP over time across various countries around the world. The Japanese continue to really ring the bell in this particular contest, but the U.S. looks set to give Italy a rival for second spot.(see bar graphs)

Car sales plunge to 31-year low - The Japan Times - Domestic sales of new vehicles declined 9.3 percent last year to 4.61 million, slipping below the 5 million mark for the first time in 31 years, industry bodies said Tuesday.It was the fifth straight year of decline, indicating that the vehicle market has been shrinking due to young people shifting away from cars and the overall economic gloom.The 2009 figure represents a plunge of 40.7 percent from a peak of 7.78 million cars sold in 1990."As it is difficult to anticipate a fast recovery in car demand, the situation for the auto industry is likely to remain severe for the immediate future," an official of the Japan Automobile Dealers Association said.

Is the government actually forecasting a narrowing of the U.S. current account deficit? - This is a follow up to an article I wrote earlier this week, Older workers working longer; labor-force participation falling. In response to the article, which highlights the BLS employment and labor-force participation projections for 2008-2018, 2slugbaits (a loyal AB commenter) presented the following point: The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).Put another way, employment growth will be in nontradeable goods sectors, which suggests we might have to sell a lot of assets in order to pay for imports.Is the government actually forecasting that Japan an China will finance the U.S. trade deficit for the next ten years?

Canada, Not China, Is U.S.'s Largest Trade Partner - In a recent post, I linked to a WSJ article that referred to China as the "U.S.'s largest trading partner." A Canadian, Carl Clarke, wrote an email suggesting that the WSJ got it wrong about China, and observes "that same statement is repeated frequently by various American news media." I checked U.S. trade data, and Mr. Clarke is exactly right - Canada has been, and continues to be, the U.S.'s largest trading partner, not China. For the WSJ, America's premier business paper, to get it so wrong is particularly troubling. The Census Bureau regularly (monthly) tracks the U.S.'s top ten trading partners, going back for at least twelve years, and there has never been a single month, nor a total year since 1998, when Canada has not been the largest trading partner of the United States. (see graph)

Taiwan votes to block US beef imports - Parliament’s decision to block a deal to expand US beef imports will damage Taiwan’s standing and ties with one of its biggest allies, Ma Ying-jeou, the president, said on Tuesday.Mr Ma spoke after legislators amended food safety laws that bar the import of offal and ground beef from regions affected by “mad cow disease” in the past 10 years. This in effect reverses an agreement that Taipei and Washington reached last October to lift Taiwan’s US beef ban, and drew a rebuke from the US.The American Institute in Taiwan, the US’s representative office on the island, said that the amendment “undermines Taiwan’s credibility as a responsible trading partner and will make it more difficult for us to conclude future agreements”.

Reply to Commenter on Protection - Commenter Ted takes issue with my pro-protectionist argument. So, let me say that if I were advising a developing country, I would have them be protectionist in a heartbeat. Only, protectionism w/ tariffs is suicide, b/c these countries really, really need market access -- that might be the most important variable in all of economics. A much smarter way is with capital controls, an undervalued peg, and an umbrella of Treasuries one can deploy on a rainy day. Nobody has ever won a WTO case stemming from an undervalued peg. (Who's to say it's undervalued? Who's to say China shouldn't hold $2 trillion in Treasuries?)  Anyway -- here's a trivia question for blog readers/Ted: Name three countries that got rich on free trade.

Yards face closure as orders collapse - The shipbuilding industry looks set for a rash of insolvencies as one of the sharpest-ever collapses in order levels combines with banks' reluctance to finance ship construction to starve many yards of cash. Only 28.8m deadweight tonnes (dwt) of ships were ordered between January and November in 2009, according to London-based Clarkson shipbrokers, against 272m dwt for the whole of 2007, the peak of the shipping boom. The dearth of orders means yards are barely receiving any of the downpayments on new orders that previously smoothed out their cash flow. Half the orders placed this year have been in China, the world's number two shipbuilder, whose state companies are the only shipowners worldwide ordering vessels in any numbers. The past year has already seen three shipyards in Korea, the world leader, several small yards in China, a yard in Japan, three German yards and a Norwegian and US yard file for insolvency. Denmark's only yard is to be closed.

FT - US slaps more duties on Chinese steel products - The US Tuesday slapped additional duties of 43 to 289 percent on imports of more than $300m worth of a steel product from China, the US Commerce Department said. The action against Chinese-made wire decking that the department said is being sold at unfairly low prices inaugurates what is likely to be another year of trade friction between the US and its top import supplier. The preliminary anti-dumping duties imposed on Tuesday are in addition to duties ranging from 2 to 438 per cent announced by the Commerce Department in November to offset government subsidies given to Chinese wire decking producers. Last week, the US International Trade Commission approved duties ranging from 10 to 16 per cent on some $2.74bn worth of Chinese-made oil well tubing and casing in the biggest US trade case against China. The same day, the United Steelworkers union and four U.S. companies filed a new petition asking for duties of at least 109 to 274 per cent on Chinese-made drill pipe.

Nations Don't Trade With Each Other; Individuals Do - from (Reuters) "The United States imported $2.74 billion of "oil country tubular goods" from China in 2008, more than triple the previous year, as a surge in oil prices led to increased demand for the oil well tubing and casing." MP: The statement above perpetuates a common misconception about international trade that clouds clear thinking about the topic. Technically, the United States did NOT import $2.74 billion of steel pipe from China, at least not as a "country." It was dozens, if not hundreds, of American-owned companies that voluntarily placed hundreds, if not thousands, of individual purchase orders in 2008 to purchase Chinese steel from dozens, if not hundreds, of steel-producing companies in China who filled the orders totalling $2.72 billion, and shipped the steel.  It might be a subtle point, but it's important to realize that countries don't trade with each other as countries - rather it's individual consumers and individual companies that are doing the buying and selling.

The End of Influence - By Brad DeLong and Stephen Cohen | Foreign Policy - Who has the money now? What can they do with it? What are they holding? The bigger big batches of dollar-denominated and U.S.-located assets -- and they are very big indeed -- are not cash but are rather investments. A great deal is held by private foreign individuals and organizations: Japanese housewives, German doctors, Scottish pension funds, Dutch companies, Colombian drug lords, Japanese insurance companies, sons of Gulf sheiks, and Russian "businessmen." This money is private money. It belongs to market players -- people, companies, organizations, and institutions looking for the highest returns at the lowest risk. Much of the money is in the hands of the governments and rulers of oil-producing states (or in the hands of whatever or whoever holds their money). Truly great piles of U.S. obligations are in the hands of the governments of Asia. Japan holds about $1 trillion in reserves (which comes to almost $9,000 per U.S. household). Taiwan, Hong Kong, and Singapore together hold something like $500 billion. Korea sits on another $200 billion. But it's China that is the biggest holder of U.S. obligations, with some $2.5 trillion in "reserves," the lion's share of it in U.S. debt obligations. America owes unimaginably large amounts of money to lenders (such as China), about $20,000 per American household, three-fourths of China's GDP, a fact worth repeating, a fact that makes rapid repayment impossible.

Warning issued over arms sales to Taiwan - China yesterday urged the United States to cancel a massive arms deal to Taiwan, warning of severe consequences if it does not heed the call.  The US defense department announced the contract late on Wednesday, allowing US company Lockheed Martin Corp to sell an unspecified number of Patriot air defense missiles to the island. The hardware, some of the best in its class, could shoot down the Chinese mainland's short-range and mid-range missiles, Reuters quoted defense analysts as saying. "This is the last piece that Taiwan has been waiting on," Wendell Minnick, Asia bureau chief of Defense Weekly, said. The sale rounds out a broad $6.5-billion arms package approved under former US president George W. Bush in late 2008, he said Related readings:
Warning issued over arms sales to Taiwan China renews warning on US arms sales plan
Warning issued over arms sales to Taiwan China flays US arms sale plan
Warning issued over arms sales to Taiwan US arms sale to Taiwan fumes Beijing
Warning issued over arms sales to Taiwan US urged to cancel arms sales to Taiwan

Chinese banks find their credit in high demand - China's state-owned banks have become a main engine of the global recovery, financing the construction of copper mines, purchase of airplanes, expansion of retail stores and other projects even as their U.S. and European counterparts scale back lending. The surge in Chinese lending, triple the 2008 rate, has provided a lifeline to international corporations during the worst recession in decades, and it reflects a diversification in China's global economic role beyond its holdings of vast amounts of U.S. government debt. Over the first nine months of 2009, new lending by Chinese banks has injected $1.3 trillion into the world economy, according to statistics from the People's Bank of China, which functions as China's central bank.

China’s netizens pressure Beijing - Al Jazeera video - In a country where media outlets are entirely state-controlled, growing numbers of Chinese people are going online to join a growing army of citizen journalists. But China's so-called "netizens" face a crack down at the hands of the authorities who see their internet activities as dangerous dissent. Al Jazeera's Melissa Chan reports from Beijing on what netizens say is a battle the authorities will eventually lose.

The soap opera of China’s housing boom - The most talked-about television programme in China at the moment is a soap opera called Snail House , which offers the viewer sex, corruption and political intrigue. Really, however, it is all about house prices. One character becomes the mistress of a party official to help her buy a flat, while another young couple struggles unsuccessfully to raise the deposit for an apartment in a city that looks suspiciously like Shanghai. The series struck such a raw nerve that the censors took it off the air at the end of last year, although that has not stopped it becoming a big online hit.The success of Snail House says something important about the popular mood in China today. While much of the rest of the world is in awe of China's rapid recovery, the programme tapped into the mounting wave of unease about the sky-rocketing cost of apartments in many cities. Urban Chinese complain loudly about becoming "mortgage slaves".

Contrarian Investor Predicts Economic Crash in China - Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc. As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year

China's Economy Facing Risks, Warn Officials - BusinessWeek - More signs that China’s red hot economy is facing potential problems: on a central bank-run website called  China Finance,  People’s Bank Governor Zhou Xiaochuan warned yesterday that industrial overcapacity could “pose a risk to the quality of bank loans.” Even so, China will continue its “moderately loose” monetary policy, Zhou wrote. Yes, there is a tension there: even while Chinese officials recognize the risks of their pump-priming policies, they are far from weaning China off of them. Domestic consumption today still only accounts for about one-third of GDP so investment remains a key driver. Chinese officials have expressed concern for some time about the risks of industrial overcapacity in a range of industries including steel, aluminum, glass, and wind turbine equipment. China’s massive lending boom of more than $1.3 trillion in new loans last year has helped keep mainland economic growth strong, but also contributed to excess capacity in at least six industrial sectors

 China's Investment Boom: The Great Leap Into The Unknown - pdf - In this report we describe the background to and the extent of the capital spending bubble in China and identify factors that will precipitate its deflation. We focus on Chinese capital spending firstly because it is the single most important driver of current Chinese and global growth expectations and, secondly and more importantly, investment-driven growth cycles tend to overshoot and end in a destructive way. We conclude that the capital spending boom in China will not be sustained at current rates and that the chances of a hard landing are increasing. Given China’s importance to the thesis that emerging markets will lead the world economy out of its slump, we believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the US subprime and housing boom. The ramifications will be far-reaching...

Where Is My Chinese Consumer Price Inflation? - Every month the People's Bank of China pays 200 billion renminbi to China's exporters to buy up the dollar-denominated assets they have accumulated and so prevent those assets from generating upward pressure on the value of the renminbi. It gets those 200 billion renminbi by borrowing them from the good burghers of Shanghai. By now the central bank owes the good burghers of Shanghai some 16 trillion renminbi. To them, this wealth is nearly as good as cash. It has been piling up for years--and because it is nearly as good as cash, they should be spending it. But the goods that are the counterparts of this financial wealth have been shipped via container to Long Beach. So demand in China should be massively outrunning supply, and China should be seeing strong and rising inflation.

Inflation in China - Why hasn't inflation caught up with a monetary-induced boom in China? One might argue that China's policy of keeping the renminbi cheap amounts to an export subsidy that has been an important factor fueling its growth. But that thesis is puzzling to economists who reason that a cheap-currency policy can only get you so far. Paul Krugman explains...So why hasn't domestic inflation in China undone the stimulus from the exchange rate? I've been forming the opinion that U.S. inflationary dynamics may be more governed by relative price changes than was historically the case, and raise the possibility that China could be ground zero for this phenomenon. Specifically, I'm wondering if the pent-up inflationary pressure takes the form of inducing consumers and businesses in China to try to acquire any hard assets they can, with the result that rather than overall inflation we see remarkable increases in the relative prices of such items.

Chinese Decision on Rates Seen as ‘Turning Point’ - NYTimes - China’s central bank raised a key interest rate slightly Thursday for the first time in nearly five months, in what economists interpreted as the beginning of a broader move to tighten monetary policy and forestall inflation.After breaking stride a year ago during the global economic slowdown, the Chinese economy resumed galloping growth over the summer. Even exports have begun to recover despite continued economic weakness in the European Union and the United States, China’s two biggest overseas markets.Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.

BBC News - China and Asean free trade deal begins - A new free trade area comes into effect on Friday, incorporating China and the six founding members of the Association of South East Asian Nations (Asean).These countries include Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand.  Other members of Asean , including Vietnam and Cambodia are due to follow suite in five years. They plan to eliminate tariffs on 90% of imported goods. This will reduce the cost of trade and is likely to lead to an expansion of cross border commerce between the countries concerned. In terms of population it will be the largest trade area in the world, with nearly 1.9bn people and it includes some of the leading export driven economies.

The world in 2010: China continues its unstoppable economic charge - China and six other South-east Asian countries yesterday toasted the inauguration of the biggest free trade area in the world, when the Association of South East Asian Nations, or Asean-6, was formally launched. Covering nearly 2 billion people in Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, along with China, Asean-6's stated aim is to eliminate tariffs on almost all traded goods between its members. China, by far the biggest member, holds the whip hand in the bloc, with some voicing concerns that the country's manufacturers, who have become the engine behind the world's economy for a number of years, will force overseas competitors out of business. Indeed, four members of Asean have opted not to join the founding six countries in the free trade area. Vietnam and Cambodia, for example, are only due to join in five years' time.

Chinese New Year - Krugman - NYTimes - It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way. Actually, the biggest problems with China involve climate change. But today I want to focus on currency policy.China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. Here’s how it works:

Red hot China - IN CHINA, it's as if the global recession never happened: Chinese manufacturing expanded by the most in five years in December, supporting estimates that growth has accelerated to more than 10 percent in the world’s third- biggest economy...“China’s economy is continuing a V-shaped recovery and economic growth may have quickened to 11 percent in the fourth quarter,” said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. “There are early signs that the economy may be entering an overheating stage,” he added, citing rising raw-material costs and company inventories at high levels.  Chinese leaders are understandably reluctant to pull back on stimulative policies, including the renminbi peg, but inflationary pressures may force their hand. Consumer prices have only just begun expanding once more, but asset prices, including real estate values, have gotten rather frothy. James Hamilton links to other interesting developments in China including rampant hoarding of copper and garlic, among other resources.

Concern as China clamps down on rare earth exports - Britain and other Western countries risk running out of supplies of certain highly sought-after rare metals that are vital to a host of green technologies, amid growing evidence that China, which has a monopoly on global production, is set to choke off exports of valuable compounds.Failure to secure alternative long-term sources of rare earth elements (REEs) would affect the manufacturing and development of low-carbon technology, which relies on the unique properties of the 17 metals to mass-produce eco-friendly innovations such as wind turbines and low-energy lightbulbs. China, whose mines account for 97 per cent of global supplies, is trying to ensure that all raw REE materials are processed within its borders. During the past seven years it has reduced by 40 per cent the amount of rare earths available for export

China to ‘Actively’ Join Global Race for Resources ((Bloomberg) -- China, the world’s second-biggest energy consumer, said it will “actively” participate in the global competition for oil, natural gas and mineral resources as domestic demand rises. The country will intensify the development of overseas resources to ensure “stable” energy supplies for economic growth, Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, said in a speech on foreign investment posted on the commission’s Web site today. Chinese manufacturing expanded by the most in five years in December, supporting estimates that growth has accelerated to more than 10 percent

How Russia Is About to Dramatically Change the World - Over the next few days, Russia will change the world. It has completed a new oil pipeline and port complex that sets Russia up to become a more powerful oil exporter than Saudi Arabia. The ramifications for Europe and Asia are profound: The shape of the global economy—and the global balance of power—will be altered forever.  Prime Minister Vladimir Putin pushed a button that transformed global oil dynamics—especially for Asia and Europe. The button released thousands of barrels of Siberian crude into a waiting Russian supertanker and heralded the opening of Russia’s first modern Pacific-based oil export facilities. The multibillion-dollar, state-of-the-art oil terminal was a “great New Year present for Russia,” Putin said during the inauguration. The strategic terminal, located in the city of Kozmino on the coast of the Sea of Japan, is one of the “biggest projects in contemporary Russia” he said, not only in “modern Russia,” but “the former Soviet Union too.”

It was dead wood, now lumber is the ‘new oil’ -  Locked in a 16-year down-cycle and ending the decade as the most dismal commodity performer, lumber is poised to become the crude oil of the new decade. It all depends, analysts say, on Chinese building codes and the financial mathematics of 150 million new kitchen tables. In one projection, the mass urbanisation of China over the next ten years could see lumber prices soar by more than 300 per cent, driven by a combination of unprecedented demand and the same flood of speculative money that gave the world $150 per barrel oil in 2008. Optimism over the prospects for lumber has been growing steadily for some months — recent clarifications to Chinese building codes have stoked rejoicing.

Fears of oil depletion are 'exaggerated' - The oil market will remain under the influence of several external factors including investment, environment and a possible depletion of crude resources but such fears are exaggerated, according to a British Petroleum official.Peter Davies, Chief Economist at BP, admitted that the world's oil potential is limited but dismissed what he described as theories about peak oil."Can we go on as before… are there external constraints in the oil market that would prevent the trends that we have known from continuing," he told a recent seminar One factor is resources. They are limited, and a barrel can only be produced once. But ideas of peak oil supply are not true. Doomsayers have exaggerated the issue. Those who believe in peak oil tend to believe that technology and economics don't matter, and I think this is false.The application of technology, the innovation of new technology and economic forces especially mean that recoverable oil resources can increase. If there is a peak in oil, it will come from the demand side. There are always fears, but these remain overstated and exaggerated."

Peak Oil Believers Wonder Why Every Government Ignores Them, Conclude It’s Due To A Giant Cover Up - The Oil Drum hosts a research piece that wonders why peak oil isn't even discussed or worried about by energy experts in governments all around the world. We'd add that peak oil isn't really discussed by most energy companies around the world either when they host analyst calls or talk about their strategy. At least nowhere near the degree that peak oil disaster scenario believers do. Yet, interestingly, rather than confront their own assumption that peak oil is the global disaster they make it to be, this article at The Oil Drum ignores this and concludes that non-believers around the world are either A) suffering from psychological 'cognitive biases' or B) in it together in a giant global cover up (combining many enemy governments at odds with each other, plus competing corporations we might add).

The Dean Martins of Peak Oil - New Year’s Eve at the end of the decade. A time to play around a little with alcohol and oil, I would think. In the spirit of Dean Martin then, who famously said: I don’t have a drinking problem. I drink, I get drunk, I fall down. No problem! I bring you some of the choicest No Problem! quotes from our peak oil decade, accompanied by rich visual material to get you past midnight. (quotes with charts)

2010 - Time to Arrest the Oil Extortionists?  - Extortion is a criminal offense which occurs when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercionCoercion is the practice of forcing another party to behave in an involuntary manner (whether through action or inaction) by use of threats, intimidation, trickery, or some other form of pressure or force. Such actions are used as leverage, to force the victim to act in the desired way. Coercion may involve the actual infliction of physical pain/injury or psychological harm in order to enhance the credibility of a threat. The threat of further harm may lead to the cooperation or obedience of the person being coerced. Perhaps there is not much we can do to stop the criminal cartel known as OPEC from withholding the supply of oil (they have cut production by 5M barrels a day globally in the past 18 months) or the US Energy cartel that has taken 32.4% of the US rigs off-line in the past 12 months - EVEN though oil prices are UP 100% over the same time period.  I’m sure, if called to testify before Congress, T Boone and company will do some song and dance to pretend the economics of $80 oil justify 32.4% less drilling than $40 oil did last December rather than the very obvious fact that, by cutting off 32% of our supply, they were able to EXTORT us, to force us to pay through trickery and the pressure of witholding a vital commodity - an extra $40 per barrel.

About 45mbpd extra oil capacity required in 20 years to meet rising global demand - Oil producers need to generate an extra crude output capacity of about 45 million barrels per day in the next 20 years to meet rising demand and offset a steady decline in major fields, the International Energy Agency (IEA) has said.The bulk of the increase is expected to come from Saudi Arabia and other members of the 12-nation Organisation of Petroleum Exporting Countries (Opec) as other supply sources have nearly reached their peak, Fatih Birol, IEA's Chief Economist, told the Paris-based Arab Oil and Gas magazine. Birol said Opec, which controls nearly 70 per cent of the world's oil but pumps just under 40 per cent of the supplies, would have the financial resources to add that capacity given the expected sharp rise in its earnings."In the World Energy Outlook 2008, we carried out a very detailed analysis of the rate of decline of output at 800 oil fields that accounted for two-thirds of world oil production and contained three-quarters of global reserves," he said."That study found there was an average rate of decline of 6.7 per cent a year at most mature fields. We then explained that, even if world oil demand remained flat between now and 2030, one would need to add 45 million bpd to existing production capacity to replace the decline at existing fields, which is equivalent to around four times the production capacity of Saudi Arabia. The outlook for world oil supply thus represents a major challenge at the geological, technological, economic and financial levels," he told the magazine. He estimated that about half the 45 million bpd will have to come from oil fields that have not yet been developed and the other half from fields that have not yet been discovered. "On the basis of this analysis, we estimate that conventional oil supply could reach a peak around 2020 if we do not discover new oil basins between now and then. But when discussing the peak oil issue, it is not at all enough to study only the prospects for supply."

Greener oil sands, greener planet - The Globe and Mail - Now that the noise and fuss of political posturing has faded, one key question emerges from the Copenhagen summit: Who will lead the evolution to a low-carbon future? It must be Canada, the only energy superpower in the democratic world. Canada's oil sands, if they can become greener, are a major part of the answer to stable and long-term hemispheric energy supply. Copenhagen made it all too clear that the planet needs a more sustainable energy platform to address the threat of climate change. We can use the $15-trillion wealth of the oil sands to fund and build a greener future. Indeed, we can use the enormous wealth the oil sands can confer to pay for the transition to alternative energy, built on a platform of much greener hydrocarbon production. This is more than possible. It is necessary. Of the world's four major oil reservoirs – Saudi Arabia, Canada, Iran and Iraq – we are best placed to invest tens of billions of dollars in the new technologies the world needs to meet the aspirations of India, China, Indonesia, Brazil and millions of others in the developing world.

U.S. Natural Gas Energy - Saudi Arabia's Oil - Largely through the use of these hydraulic fracturing techniques,  a process that involves injecting a mixture of water, sand and chemicals under high pressure to break through shale, U.S. natural gas production has increased 40% in recent years, reversing what was once thought to be an irreversible decline in domestic drilling. Altogether there could be as much as 842 trillion cubic feet of natural gas in shales around the country, which is more energy than all of Saudi Arabia's oil.  There's no economic reason to stop making use of valuable shale gas, but that's exactly what congressional critics of hydraulic fracturing are trying to do. Democrats have introduced measures in the House and Senate that would place the drilling method under federal oversight by the Environmental Protection Agency.

Coal? Sold! to the Developing World - The energy source of choice in the developing world remains coal. And, as I have argued, unless the developed world undertakes energy transition now, it too will be forced back into coal as the decade progresses.  Today comes an intriguing story from Bloomberg, that the massive and iconic Richard’s Bay Coal Terminal in South Africa may have, for the first time, shipped more coal to India than Europe: It’s worth taking a look at the countries that are the top consumers of coal, which I call the Coal 7: China, USA, India, Japan, Russia, South Africa, and Germany. I like to use the BP Statistical Review for global energy data which helpfully translates all units of energy measurement –in addition to barrels, tonnes, and bcf–into mtoe or million tonnes oil equivalent...

Renewable energy faces difficulties - "Here's the world's dirty little secret; oil is the perfect fuel in many ways," said Dr. Robert Kaufmann, director of Boston University's Center for Energy and Environmental Science. "Other than environmental externalities, it's a great fuel. Kaufmann makes clear he does not enjoy sounding like an oil advocate. But as a scientist, he admits that no renewable technology can currently compete with fossil fuels."I don't like it, but I understand why it's so difficult to displace," Kaufmann said. "With oil, you have a liquid, so you can pour it to fill a tank. You have high energy density, so you can use it to fly. And you have a high rate of energy return on your investment."This last statistic, abbreviated EROI or EROEI, is the important one.

China’s Copenhagen commitment: Business as usual or climate leadership? - China has promised to lower its carbon intensity by 40%–45% by the year 2020. This column says that standard estimates imply that China could meet that target simply by continuing its long-term historical trend. But China’s recent experience of a lower carbon intensity elasticity of income suggests additional efforts and leadership could be required.

Another Copenhagen Outcome: Serious Questions About the Best Institutional Path Forward - Whether you like it or not, for the time being the most important product of the December meeting in Copenhagen of the Fifteenth Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC) is the “Copenhagen Accord,” which I assessed in my December 20th blog post (“What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord”).  In the long term, however, it is quite possible that another outcome of the December meetings may prove to be equally or more consequential.  I’m referring to the decreased credibility of the UNFCCC as the major institutional venue for international climate policy negotiation and implementation.

Overcoming the Copenhagen Failure - Joseph E. Stiglitz - A month after the Copenhagen climate conference, it is clear that the world’s leaders were unable to translate rhetoric about global warming into action. The failure of Copenhagen was not the absence of a legally binding agreement. The real failure was that there was no agreement about how to achieve the lofty goal of saving the planet, no agreement about reductions in carbon emissions, no agreement on how to share the burden, and no agreement on help for developing countries. Even the commitment ... to provide amounts approaching $30 billion for the period 2010-2012 for adaptation and mitigation appears paltry next to the hundreds of billions of dollars that have been doled out to the banks in the bailouts of 2008-2009. If we can afford that much to save banks, we can afford something to save the planet.

Our planet is now overstocked! - Did you find last month's Copenhagen Climate Change Conference riveting stuff? Didn't think so! And you were correct, because chances are that all that talk was only more hot air emissions and it won't make a blind bit of difference. Non-binding or non-enforceable agreements between the powerful planet polluters will have little effect, as an ever expanding world population jostles for space, advantage - or even its future existence.Nobody mentioned the real problem in Copenhagen - never mind the solution to it. The problem is that there are now too many of us on board.

Greenhouse Gases: Who's Cheating? - BusinessWeek The amounts of carbon in the atmosphere are out of whack with predictions and reported output - As the world gets serious about fighting climate change, a huge question looms: Are countries and companies really reducing their greenhouse gas emissions as much as they claim? The answer is crucial not just for the planet, but for business. The tighter the limits on emissions, the higher the price companies have to pay to pollute—and, conversely, the more profits some companies will reap by releasing less gas and monetizing the reductions under the umbrella of cap and trade. Considering the billions of dollars at stake, "can we really trust what's reported?" asks Pieter P. Tans, senior scientist at the National Oceanic & Atmospheric Administration's Earth System Research Laboratory in Boulder, Colo. Tans and many other researchers worry that the answer is no.

BBC News - Methane release 'looks stronger' - Scientists have uncovered what appears to be a further dramatic increase in the leakage of methane gas that is seeping from the Arctic seabed.Methane is about 20 times more potent than CO2 in trapping solar heat. The findings come from measurements of carbon fluxes around the north of Russia, led by Igor Semiletov from the University of Alaska at Fairbanks. "Methane release from the East Siberian Shelf is underway and it looks stronger than it was supposed [to be]," he said. Professor Semiletov has been studying methane seepage in the region for the last few decades, and leads the International Siberian Shelf Study (ISSS), which has launched multiple expeditions to the Arctic Ocean. The preliminary findings of ISSS 2009 are now being prepared for publication, he told BBC News. Methane seepage recorded last summer was already the highest ever measured in the Arctic Ocean.

Changes in Arctic vegetation amplify high-latitude warming through the greenhouse effect - Abstact: Arctic climate is projected to change dramatically in the next 100 years and increases in temperature will likely lead to changes in the distribution and makeup of the Arctic biosphere. A largely deciduous ecosystem has been suggested as a possible landscape for future Arctic vegetation and is seen in paleo-records of warm times in the past. Here we use a global climate model with an interactive terrestrial biosphere to investigate the effects of adding deciduous trees on bare ground at high northern latitudes. We find that the top-of-atmosphere radiative imbalance from enhanced transpiration (associated with the expanded forest cover) is up to 1.5 times larger than the forcing due to albedo change from the forest. Furthermore, the greenhouse warming by additional water vapor melts sea-ice and triggers a positive feedback through changes in ocean albedo and evaporation. Land surface albedo change is considered to be the dominant mechanism by which trees directly modify climate at high-latitudes, but our findings suggest an additional mechanism through transpiration of water vapor and feedbacks from the ocean and sea-ice.

Climate change far worse than thought before - DELHI: Global alarm over climate change and its effects has risen manifold after the 2007 report of the Intergovernmental Panel on Climate Change (IPCC). Since then, many of the 2,500-odd IPCC scientists have found climate change is progressing faster than the worst-case scenario they had predicted. Their studies will be considered for the next IPCC report, but since that will come out only in 2013, the University of New South Wales in Sydney has just put together the main findings in the last three years. Most are by previous IPCC lead authors "familiar with the rigour and completeness required for a scientific assessment of this nature", a university spokesperson said. The most significant recent findings are: * Global carbon dioxide emissions from fossil fuels in 2008 were 40 percent higher than in 1990. The recent Copenhagen Accord said warming should be contained within two degrees, but every year of delayed action increases the chances of exceeding the two-degree warming mark.

Environmental Refugees Unable to Return Home -  NYTimes - Natural calamities have plagued humanity for generations. But with the prospect of worsening climate conditions over the next few decades, experts on migration say tens of millions more people in the developing world could be on the move because of disasters. Rather than seeking a new life elsewhere in a mass international “climate migration,” as some analysts had once predicted, many of these migrants are now expected to move to nearby megacities in their own countries. “Environmental refugees have lost everything,” said Rabab Fatima, the South Asia representative of the International Organization for Migration. “They don’t have the money to make a big move. They move to the next village, the next town and eventually to a city.” Such rapid and unplanned urbanization is expected to put even further strains on scarce water, energy and food resources.

Bolivia on the global warming frontline - (video) In 1998, scientists predicted that the Chacaltaya glacier above La Paz would have completely disappeared by 2015. Now experts say it will already be gone completely early this year.The 2 million residents of the city of La Paz and its suburb El Alto depend on the surrounding glaciers for some of their water needs. El Alto has expanded from 220,000 residents in 1985 to almost one million today, increasing the demand for water. Half the electricity of the country is also produced from hydro-power, meaning the lack of rain and disappearance of glaciers may create an energy crisis in the future when the glaciers have gone.

Australia suffers hottest decade as globe warms - Australia has sweltered through its hottest decade on record, officials said Tuesday, linking a rise in heatwaves, drought, dust storms and extreme wildfires with global warming. The Bureau of Meteorology also said 2009 was the second warmest year since detailed records began in 1910, with an annual mean temperature almost one degree Celsius (1.8 degrees Fahrenheit) above average. Senior climatologist Dean Collins said the average for the decade -- about 22.3 degrees Celsius (72.1 Fahrenheit) -- was 0.48 degrees Celsius (0.89 F) above Australia's 1961-1990 benchmark average and an indication of man-made global warming."For the past six decades, each decade has been warmer than the preceding one,"

Ummenhofer et al., What causes Southeast Australia’s worst droughts? - Our research investigates iconic droughts of the 20th Century for southeastern Australia, including the Federation Drought (1895-1902) and World War II Drought (1937-1945), as well as the recent “Big Dry.” The research shifts the focus from Pacific Ocean to Indian Ocean variability, in particular the absence of negative Indian Ocean Dipole (IOD) events. Specifically, our results show that extended multi-year droughts in the Victorian region are associated with a lack of negative IOD events (see Figure 1, reproduced from Ummenhofer et al., 2009).
Negative IOD events consistently result in very wet conditions in the south-east. The prolonged absence of a negative IOD deprives the region of its normal rainfall quota. Without the occurrence of these wet negative IOD years, the south-east only experiences dry or average years for a decade or more. This is conducive to drought. When taken in the context of other historic droughts over the past 120 years, the “Big Dry” is still
exceptional in its severity. The last negative IOD event occurred in 1992. This is the longest period on record over the past 120 years without a single negative IOD event.

Walmart, others make money on Oregon's energy tax credits. - When Oregon started handing out jumbo tax subsidies for renewable energy projects two years ago, one of the biggest beneficiaries was also one of the world's richest corporations -- Walmart. No, the retail giant hasn't branched to solar panels or wind turbines.  Instead, Walmart took advantage of a provision in Oregon's Business Energy Tax Credit that allows third parties with no ties to the green power industry to buy the credits at a discount and reduce their state income tax bills. State records show Walmart paid $22.6 million in cash last year for the right to claim $33.6 million in energy tax credits. The cash went to seven projects, including two eastern Oregon wind farms and SolarWorld's manufacturing plant in Hillsboro. In return, Walmart profits $11 million on the deal because that's the difference between what it paid for the tax credit and the amount of its tax reduction

Britain's plan for giant wind farms will need 'super-grid' to take off - Power companies awarded contracts to build 6,400 wind turbines off the British coast have warned that they will need a "super-grid" connected to Europe to guarantee a steady power supply. At peak capacity, the new projects could provide 25pc of Britain's electricity needs. The biggest development, Dogger Bank, will be 18 times the size of the world's current biggest wind farm. Experts say Britain will need to improve its electricity grid, attract huge investment and boost its supply chain to make the projects viable.

Jim Hansen on 4th generation nuclear power - The reason that 4th generation nuclear power is a game-changer is that it can solve two of the biggest problems that have beset nuclear power. 4th generation uses almost all of the energy in the uranium (or thorium), thus decreasing fuel requirements by two orders of magnitude. It practically removes concern about fuel supply or energy used in mining – we already have fuel enough for centuries. Best of all, 4th generation reactors can “burn” nuclear waste, thus turning the biggest headache into an asset. The much smaller volume of waste from 4th generation reactors has lifetime of a few centuries, rather than tens of thousands of years. The fact that 4th generation reactors will be able to use the waste from 3rd generation plants changes the nuclear story fundamentally – making the combination of 3rd and 4th generation plants a much more attractive energy option than 3rd generation by itself would have been.

New coal-fired power plant fuels debate - While burning coal releases CO2, the fuel has advantages over renewable forms of electricity. At least for now, there's a cost advantage compared with wind and solar. And a coal-fueled power plant can produce reliable electricity 24 hours a day, 365 days a year, he said. "With all due respect to the (global warming) debate and potential for green jobs, if you look at the fundamentals, the country needs affordable base load electric power," DeQuattro said. "It's the basis for any type of significant employment base and for us as a country to enjoy the economic standards that we do."

After review of mountaintop mining, scientists urge ending it - The consequences of this mining in eastern Kentucky, West Virginia and southwestern Virginia are ""pervasive and irreversible," the article finds. Companies are required by law to take steps to reduce the damages, but their efforts don't compensate for lost streams nor do they prevent lasting water pollution, it says.  The article is a summary of recent scientific studies of the consequences of blasting the tops off mountains to obtain coal and dumping the excess rock into streams in valleys. The authors also studied new water-quality data from West Virginia streams and found that mining polluted them, reducing their biological health and diversity. Surprisingly little attention has been paid to this growing scientific evidence of the damages, they wrote, adding: "Regulators should no longer ignore rigorous science."

Scientists target East Coast U.S. rocks for carbon dioxide storage - Scientists say buried volcanic rocks along the heavily populated coasts of New York, New Jersey and New England, as well as further south, might be ideal reservoirs to lock away carbon dioxide emitted by power plants and other industrial sources. A study this week in the Proceedings of the National Academy of Sciences outlines formations on land as well as offshore, where scientists from Columbia University's Lamont-Doherty Earth Observatory say the best potential sites may lie. Underground burial, or sequestration, of globe-warming carbon dioxide is the subject of increasing study across the country. But up till now, research in New York has focused on inland sites where plants might send power-plant emissions into shale, a sedimentary rock that underlies much of the state. Similarly, a proposed coal-fired plant in Linden, N.J. would pump liquefied CO2 offshore into sedimentary sandstone. The idea is controversial because of fears that CO2 might leak. By contrast, the new study targets basalt, an igneous rock, which the scientists say has significant advantages.

2.4 Million Pounds of Plastic Pollution Enter the World’s Oceans Every Hour - Finding meaning in global mass phenomena can be difficult because the phenomena themselves are invisible, spread across the earth in millions of separate places. There is no Mount Everest of waste that we can make a pilgrimage to and behold the sobering aggregate of our discarded stuff, seeing and feeling it viscerally with our senses. Instead, we are stuck with trying to comprehend the gravity of these phenomena through the anaesthetizing and emotionally barren language of statistics.

The Future of Phosphorous: Think Tank - Among the scientists I met was James Elser, a biologist who runs the School of Life Sciences. We chatted about space and the origins of life for a while, and then he handed me a two-page white paper that addresses his current obsession: phosphorous. We’re wasting it and need to figure out soon how to recycle it, lest famine or worse ensues, he said. Phosphorous, Elser told me, “is the biggest problem you’ve never heard of.” P, as it is known on the periodic table, is a nutrient essential to plant and animal life. Unlike nitrogen and oxygen, however, it is not copiously available from the atmosphere. It’s in the Earth and it’s finite. How finite, nobody knows—unlike fossil fuels, governments don’t keep careful track of supply and demand, he said. “Plants, and indeed all living things, depend on P for the construction and turnover of DNA, RNA, ATP, and cell membranes. Failing sufficient P, plants, animals and humans die. The key concept: P is unsubstitutable in agriculture and in human life.” As Elser put it as we talked, this issue “only matters if you want your grandchildren to have bones.”

We're Losing The Riches Of The World - Species are now going extinct at between 1,000 and 10,000 times the natural rate: by some estimates, half of the 13 million or so forms of life on the planet will disappear by the end of the century. That would be the greatest extinction since the death of the dinosaurs 65 million years ago, from which life took millions of years to recover.The destruction of the wild places where the species live is even more damaging than the extinctions themselves. And it is increasingly clear that this threatens even more of an economic crisis than an ecological one. For the world's economies are wholly owned subsidiaries of the environment. We depend on soil and the seas for food, on forests for much of our fresh water, on trees to reduce air pollution, on wild species for many of our medicines, and so on. Without such "ecosystem services", societies – rich and poor – would collapse. And we are beginning to cut it rather fine. Forty per cent of the world's forests – which absorb rainwater, releasing it gradually rather than letting it run straight off to cause floods – have been felled in the last three centuries. A third of its coral reefs – the most vital breeding grounds for fish – have been seriously damaged. And every year a staggering 25 billion tons of precious topsoil is eroded away.

Economists Ponder Human Adaptation to Climate Change - As scientists struggle to predict exactly how global climate change will affect our environment, economists are grappling with another question: How well can humans adapt? Judging from the history of wheat production in North America, the answer is very well, says Paul Rhode of the University of Michigan. In a paper done together with Alan Olmstead of the University of California-Davis, which he presented Sunday at the annual meeting of the American Economic Association, Mr. Rhode looks at how wheat production fared between the mid-1800s and the late 1900s, as production moved into parts of North America with harsher climates. The conclusion: Production adapted successfully as farmers introduced new strains that grew well in the new climates.

America is losing the free world - Financial Times - Ever since 1945, the US has regarded itself as the leader of the “free world”. But the Obama administration is facing an unexpected and unwelcome development in global politics. Four of the biggest and most strategically important democracies in the developing world – Brazil, India, South Africa and Turkey – are increasingly at odds with American foreign policy. Rather than siding with the US on the big international issues, they are just as likely to line up with authoritarian powers such as China and Iran. The US has been slow to pick up on this development, perhaps because it seems so surprising and unnatural. Most Americans assume that fellow democracies will share their values and opinions on international affairs.  But the assumption that the world’s democracies will naturally stick together is proving unfounded. The latest example came during the Copenhagen climate summit. On the last day of the talks, the Americans tried to fix up one-to-one meetings between Mr Obama and the leaders of South Africa, Brazil and India – but failed each time. The Indians even said that their prime minister, Manmohan Singh, had already left for the airport. So Mr Obama must have felt something of a chump when he arrived for a last-minute meeting with Wen Jiabao, the Chinese prime minister, only to find him already deep in negotiations with the leaders of none other than Brazil, South Africa and India. Symbolically, the leaders had to squeeze up to make space for the American president around the table.

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