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

Saturday, February 13, 2010

week ending Feb 13

ENTER THE EXIT STRATEGY - To say that there are political and economic risks hovering over the subject is to understate the potential hazards. There are risks to tightening too early, which some worry would repeat the mistakes of 1936-1937, when reserve requirements were tightened and the economy slipped into recession. At the same time, it'd be foolish to discount the potential for higher inflation in the years ahead in the wake of the extraordinary monetary stimulus over the past year or so. Regardless of the economic reality, the political pressure to keep rates low is intense, given the weak labor market.

Bernanke and Fed Face Prospect of Raising Rates - NYTimes - The main question is when and how the Fed should start raising short-term interest rates, which have been at a record low for more than a year. Related is the issue of how to manage, and eventually shrink, the record $2.2 trillion balance sheet that the Fed amassed as it pumped vast sums of money into the economy, starting in 2008.   As a policy tool, Mr. Bernanke is expected to consider a little-known mechanism — referred to as the interest rate on excess reserves — that gives the Fed leverage over $1.1 trillion in bank deposits. To achieve its goal, according to Fed officials and speeches, the central bank will raise the interest rate on excess reserves, now 0.25 percent. It also plans to lift its target for the fed funds rate — what banks charge one another for overnight loans and the centerpiece of its policy statements since 1994. But officials stress that rates will remain quite low for months to come.

Fed to Outline Future Tightening Steps - WSJ - Federal Reserve Chairman Ben Bernanke will begin this week to lay out a blueprint for a credit tightening, to be followed once the Fed decides the economy has recovered sufficiently. The centerpiece will be a new tool Congress gave the central bank in October 2008: an interest rate the Fed pays banks on money they leave on reserve at the central bank. When the Fed is ready to tap the brakes, it plans to raise the rate paid on excess reserves. The higher rate would entice banks to tie up money they otherwise might lend to customers or other banks. The Fed expects such a maneuver to pull up other key short-term rates, including the federal-funds rate—long the main tool for steering the economy.

Bernanke Says Discount Rate May Rise ‘Before Long’ (Bloomberg) -- The Federal Reserve may raise the discount rate “before long” as part of the “normalization” of Fed lending, a move that won’t signal any change in the outlook for monetary policy, Chairman Ben S. Bernanke said.  Bernanke repeated the Federal Open Market Committee statement that low rates are warranted “for an extended period” in testimony prepared for the House Financial Services Committee. The Fed may also temporarily replace the federal funds rate as a policy guide with interest it pays on banks’ deposits should fed funds become a “less reliable indicator than usual,” Bernanke said.  Bernanke, 56, and his fellow policy makers are preparing to remove unprecedented monetary stimulus as the world’s largest economy is forecast to grow at the fastest pace since 2006.

Bernanke Outlines How to Tighten Rate Policy, but Not When - NYTimes - “At some point.” “At the appropriate time.” “When the time comes.” On Wednesday, the Federal Reserve’s chairman, Ben S. Bernanke, outlined a strategy — but not a timetable — for scaling back the extraordinary measures it began taking in 2007 to prop up the economy as financial markets teetered on collapse. The Federal Reserve has eased borrowing by lowering short-term interest rates to nearly zero and built up a $2.2 trillion balance sheet by scooping up assets like mortgage-backed securities and even vast sums of Treasury bonds and notes.  Eventually, to avoid inflation, both actions will have to be reined in. But Mr. Bernanke, in a 10-page statement, provided few hints as to how long that period will be.

Federal Reserve's exit strategy – text of Bernanke testimony - I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted.

The Fed's Exit Strategy, video by Mark Thoma - Something I forgot to mention on the video is that controlling inflation is another reason for the Fed to increase the rate it pays on reserves as part of its exit strategy. When the rate the Fed pays on bank reserves increases, banks have less incentive to make loans (because the spread between what the bank can earn holding onto reserves and what it can earn loaning them out falls). If less bank loans are made, there won’t be as much inflationary pressure. (Inflationary pressure can also be reduced through the sale of financial assets from the Fed’s balance sheet using traditional open market operations.)

Monetary policy: What’s the real worry? - The Economist - A FEW weeks ago, my colleague argued that while the threat of deflation should still be on central bankers' radar, inflation is the more likely to become a problem.  At least one Fed banker agrees. A month ago, I probably would have said that while inflation basically posed no threat in the short- to medium-term, the risk of deflation had been more or less eliminated thanks to Chinese growth and the effect of ample central bank liquidity on asset prices. Now, I'm not so sure. James Hamilton reviews the evidence and concludes: My bottom line: the scales tipped last week in the direction of near-term deflationary pressures, despite the strong 2009:Q4 U.S. GDP report and falling unemployment rate. I'd have to agree. This is a dangerous time for the global economy. Policymakers seem to be overestimating the return to stability. I'd say the argument for forgetting about inflation entirely until we see two quarters of core inflation at or above a 3% annual rate is quite strong.

Fed in Talks With Money Market Funds to Help Drain $1 Trillion (Bloomberg) -- The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions. The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.

The Fed's Exit Strategy - So Ben Bernanke confirmed that the Fed may have to turn to interest paid on excess reserves as its main policy tool rather than targeting the federal funds rate. Bernanke says such a move would only last until normalcy returns to the Fed's balance sheet or, equivalently, excess reserves return to their pre-crisis levels. Mark Thoma provides an informative discussion of this process that shows how the discount rate, federal funds rate, and interest paid on excess reserves interact in a supply and demand graph for bank reserves. Here is what some Wall Street economists had to say about this potential change in Fed policy. And here is what Josh Hendrickson had to say on the matter

Fed Policy - Discussion point: Is it time for the Fed to start contracting its' balance sheet and otherwise withdrawing the special financing it provided while it was faced with the zero interest rate bound and preparing to soon raise fed funds. My fed policy index says the zero bound should no longer apply and that it is time for the fed to start preparing to soon raise fed funds. This is my version of the Taylor Rule. The biggest difference is that my index gives inflation and unemployment equal weight while the standard Taylor Rule gives inflation double the weight of the various measures of excess capacity.

Tightening economic policy: Withdrawing the drugs | The Economist - Although by most measures the world economy is out of intensive care, it is hardly in good health. Big emerging economies are growing briskly, but in many rich ones, notably in Europe, the recovery is fragile.  As big, rich economies’ budget deficits have risen more than fourfold, to an average of 9% of GDP (see chart 2), public debt has started to shoot up. In the euro zone, in particular, investors are getting nervous. All this leaves policymakers with an unenviable task: deciding when and how to withdraw the drugs. An “exit strategy”, in official jargon, requires answers to three questions. First, timing: when should fiscal and monetary tightening begin? Second, tactics: is it more important to start by cutting budget deficits or by raising interest rates? Third, technique: how will central banks, with their balance-sheets bloated by the unusual policies of the past year and a half, go about tightening monetary conditions? There are no easy answers.

Federal Reserve concerned that economic growth could come back : When the banks freaked out last year, the Federal Reserve pumped a lot of money their way. But the banks haven't been lending that money. Instead, they've been sitting on it, using it to cushion themselves against any unexpected problems. That's part of why economic growth has been so sluggish: The banks aren't lending, which means businesses are having trouble expanding. But then you read this: “The Fed’s great worry is that instead of holding onto these reserves, the banks would decide they’d rather take the money they’re tying up and lend it out,”  It's weird to read that the Fed's great worry is that the banks might stop sitting on the money and instead use it to kick-start economic growth, which could in turn lead to a couple of bare flickers in our measures of inflation. So rather than encouraging the banks to lend that money, it looks like the Federal Reserve is going to try to time it so that they get that money back at the exact moment that the banks would otherwise begin pumping it into the rest of the economy.

The Fed's "Exit Plan" Is Just Another Secret Gift To Wall Street - The Fed is planning to detail its "exit plan" this week, the WSJ says.  This exit plan is the means by which the Fed will gradually reverse the tremendous stimulus it is still pumping into the economy and financial system. As we've noted often over the past year, the Fed is in a bind.  During the financial crisis, it bought hundreds of billions of dollars of real-estate loans and securities from banks to reduce mortgage rates and ease the pressure on bank balance sheets.  This, in turn, pumped hundreds of billions of new dollars into the economy, which has helped the banks--and bankers--to make a killing over the past year.  The question--the bind--is how the Fed can reverse this stimulus without killing the economy.  And the initial answer seems to be...By giving the banks yet another gift at taxpayer expense.

FOMC motives and forecasting inflation - The St Louis Fed today published a fascinating paper on how FOMC members motives may play a role in their inflation forecasting. The paper found, strangely, that by removing FOMC members three highest and lowest inflation predictions, the midpoint of the range of price estimates was more accurate than the midpoint of all FOMC members predictions. It’s not obvious why this would be the case. A reasonable assumption could be that the more smart people forecasting inflation, the more likely the midpoint off all the estimates would be. And, indeed, the paper found that that was the case with unemployment and GDP.

IMF: Raise inflation targets - The International Monetary Fund is ahead of the game when it comes to learning lessons from the economic crisis. In a paper, which will be published today and has been seen by the Financial Times, Olivier Blanchard, the IMF’s chief economist, is refreshingly honest about the lessons from the crisis and logical in the ideas for reform floated. This is the IMF working as it should. Even if some of its ideas do not fit the current orthodoxy. The suggestion which leaps out of the page as most controversial is that inflation targets should be raised, implying that in normal times inflation would be closer to 4 per cent and interest rates would be higher than over the past few decades. That would give monetary policy more scope to be loosened in a future crisis, leaving less for fiscal policy to do.

IMF Tells Bankers to Rethink Inflation - The International Monetary Fund's top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession. Mr. Blanchard said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, "most people convinced themselves that the Japanese didn't know what they were doing," Mr. Blanchard said in an interview.  the IMF paper suggests shooting for a higher-level inflation in "normal time in order to increase the room for monetary policy to react to such shocks." Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says. At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.

Q&A: IMF’s Blanchard Thinks the Unthinkable -The International Monetary Fund’s chief economist, Olivier Blanchard, is thinking what for the IMF is the unthinkable. Should inflation be higher? Should regulation be used to fight asset bubbles? Should new social spending programs be put in place to fight downturns? Mr. Blanchard says such a rethinking is necessary because the global financial crisis showed how complacent policy makers had become. The IMF plans to release a paper, “ Rethinking Macroeconomic Policy,” outlining the thoughts of Mr. Blanchard and IMF economists Giovanni Dell’Ariccia and Paolo Maruo on Friday.

IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework - iMFdirect - As the crisis slowly recedes, the IMF has started to reassess the conduct of macroeconomic policy. The Fund has just published a paper, “Rethinking Macroeconomic Policy,” part of a series of policy papers prepared by IMF staff reassessing the macroeconomic and financial policy framework in the wake of the devastating crisis. Several of the papers will be discussed at a conference to be held in Seoul, Korea, later this month. IMF Survey magazine has just interviewed the Fund’s Chief Economist Olivier Blanchard on the reason for the rethink. “It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy.

IMF Explores Contours of Future Macroeconomic Policy - The International Monetary Fund, at the forefront in recommending the policy response to the global economic crisis, has entered the debate about how macroeconomic policy should be adjusted in the future, drawing lessons from the worst global recession in 60 years. The IMF on February 12 published a paper, “Rethinking Macroeconomic Policy,” part of a series of policy papers prepared by staff of the 186 member international institution that reassesses the macroeconomic and financial policy framework in the wake of the devastating crisis. IMF Survey online spoke to Olivier Blanchard, one of the authors of Rethinking Macroeconomic Policy, about the reasons for publishing the paper now and what he hopes to achieve. Blanchard, who joined the Fund in 2008 from the Massachusetts Institute of Technology, is Economic Counsellor of the IMF and head of the Research Department.

Global growth: A flagging wind - THIS week's paper features a Briefing and a Leader on the challenge facing governments around the world—to time their exit strategies correctly. Withdraw support too soon, and the world economy collapses into a double-dip recession. Too late, and budget crises will spread, likewise damaging recovery: The course of action is clear when the recovery is robust, as it is in big emerging markets and rich countries far from the centre of the financial crisis. Their economies have little spare capacity and no reason to keep monetary or fiscal policy at emergency settings. It is no surprise that they have been the first to tighten.

Goldman Sachs Tells Fed To Start With Rate Hikes - Most handicappers believe that when the Federal Reserve starts to tighten policy, it will begin by moving assets off its balance sheet and follow that with interest rate increases.  Goldman Sachs‘ economists aren’t so sure after congressional testimony by Fed Chairman Ben Bernanke this week. The bank now believes the sequence of the central bank’s exit could be the opposite of the consensus view.  The Federal Open Market Committee “would do its successors a great favor by making the first step of monetary tightening an interest-rate increase instead of a reserve drain,” Goldman economist Ed McKelvey told clients.

Fed's Bullard: Fed Could Keep Interest Rates Low Until 2012 - A member of the Federal Reserve’s policy-setting body suggested Monday that the central bank could keep short-term interest rates low until 2012 to encourage economic growth, but that it also could use some of its newer monetary tools to check excessive inflation if it materializes in the current economic recovery.James Bullard, the president of the Federal Reserve Bank of St. Louis, is a new member of the Federal Open Market Committee, which faces tough, unprecedented policy decisions this year as the central bank unwinds first-time programs it launched during the financial crisis to prevent a second Great Depression. The programs include “quantitative easing” measures designed to help keep interest rates low and to pump ready cash – liquidity – into the financial system. The “QE” supplemented the FOMC’s principal policy mechanism: setting the Federal Funds rate, the short-term benchmark interest rate banks charge each other for overnight borrowing.

Fed’s Bullard Advocates Selling Mortgage Securities Gradually in 2010 - The president of the Federal Reserve Bank of St. Louis said Monday the U.S. central bank should begin gradually selling its mortgage securities holdings later this year despite concerns from some investors the move would raise mortgage rates.James Bullard said in an interview the asset sales should happen before the Fed hikes short-term interest rates, a sequencing that is still being debated within the central bank. He also said the market was putting too high the odds that the Fed’s first rate hike will come in November.

Fed Chair as Confidence Man - I’m not the one saying it–that would be Robert Samuelson, columnist for Newsweek and the Washington Post. The sole point of Samuelson’s recent opinion piece is that Ben Bernanke’s job is to increase confidence. Like much but not all error, there is a grain of truth to this point. Too much overconfidence can fuel a bubble and too much pessimism can exacerbate a slowdown. But to leap from there to the conclusion that the job of the chair of the Federal Reserve is to increase confidence–”Ben Bernanke has, or ought to have, a very simple agenda: improve confidence”–is just silly.

Fed’s Bullard Advocates Selling Mortgage Securities Gradually in 2010 - The president of the Federal Reserve Bank of St. Louis said Monday the U.S. central bank should begin gradually selling its mortgage securities holdings later this year despite concerns from some investors the move would raise mortgage rates.James Bullard said in an interview the asset sales should happen before the Fed hikes short-term interest rates, a sequencing that is still being debated within the central bank. He also said the market was putting too high the odds that the Fed’s first rate hike will come in November.

Fed’s Yellen: U.S. Rates Too Hot for China - A top Federal Reserve official said Monday U.S. monetary policy is too hot for China and Hong Kong and explained any trouble those nations ultimately face because of this situation arises from their own foreign exchange policies. “Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory for them,” Federal Reserve Bank of San Francisco President Janet Yellen said. “However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery,” she wrote in a bank Economic Letter published Monday.The central banker said that if China wants to prevent U.S. policies from overheating its economy and driving inflation, it will have to do something about its foreign exchange policy.“Increased exchange rate flexibility could mitigate growing inflationary concerns, and also act toward easing global imbalances and encouraging the development of the household sector, a shift the Chinese government now officially says it wants,” Yellen said.

Janet Yellen: the Fed is a Monetary Superpower - Federal Reserve Bank of San Francisco President Janet Yellen makes the case for the Fed as a monetary superpower, at least in Asia:  For all practical purposes, Hong Kong delegated the determination of its monetary policy to the Federal Reserve through its unilateral decision in 1983 to peg the Hong Kong dollar to the U.S. dollar in an arrangement known as a currency board. One of these must go. In Hong Kong, the choice was to forgo an independent monetary policy. As in Hong Kong, Chinese officials are concerned about unwanted stimulus from excessively expansionary policies of the Fed and in other developed economies. Like Hong Kong, China pegs its currency to the U.S. dollar, but the peg is far less rigid. I am glad to see such a high-ranking Fed official agrees with me that the Fed is a monetary superpower. Now that we have this common understanding let us explore its implications for the saving glut theory.

Stepping on the Monetary Gas Pedal - We had Brad DeLong and Stephen Cohen in the office on Friday to talk about their excellent new book, The End of Influence. I missed the first half of the event so I’m glad we have the video.... DeLong suggested that the Obama administration can begin to fix this dilemma by appointing “competent economists” to the Federal Reserve Board to reduce and eliminate global imbalances that trap the United States and China in financial terror. “Ninety-eight percent of economists think a weaker dollar will help the economy,” but it is a difficult sentiment to express without being seen as treasonous, Cohen explained. The value of the dollar must drop in order for us to save more. Our goods will become cheaper, we will export more, and bring down the trade deficit. And, yes, Europe should be “printing money” too.

Fed’s Dudley: Financial System In ‘Much Better’ Shape - The U.S. financial system is in “much better shape,” although small and medium-sized financial institutions are under pressure, which will put a damper on credit availability in the U.S. economy, a top Federal Reserve official said Monday. “The capital markets are generally open for business–with the important exception of some securitization markets–and the major securities dealers that survived the crisis have seen a sharp recovery in profitability,” Federal Reserve Bank of New York President William Dudley said. But, “many smaller and medium-sized banks remain under significant pressure,” he noted. “Loan losses in commercial real estate and consumer and mortgage loans seem likely to continue to pressure smaller banks for some time to come,” which means “credit availability to households and small businesses will still be curtailed.” Dudley’s comments came from the text of a speech given at an event held by the Reserve Bank of Australia in Sydney. The gathering is closed to the press.

Secret summit of top bankers - THE world's top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.  Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports. Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies. Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.

Treat for elite as Reserve Bank celebrates - CENTRAL bankers are an unobtrusive breed by nature and necessity. So it might have escaped the attention of many that Sydney is playing host to a meeting of some of the world's top money men and women to celebrate the 50th birthday of the Reserve Bank of Australia. The visit by central bankers includes the president of the European Central Bank, Jean-Claude Trichet, the presidents of the Federal Reserve Banks of San Francisco and New York, Janet Yellen and William Dudley, the governor of the People's Bank of China, Zhou Xiaochuan, the governor of the Bank of Israel, Stanley Fischer, and New Zealand's Reserve Bank governor, Alan Bollard.

Head of BIS Calls for Bigger Liquidity Buffers - Regulators have been making a concerted push for banks to hold more equity as a protection against loss and overly-optimistic valuation of trading assets. But the head of the Bank of International Settlements, Jamie Caruna, argued at a secret (not) central bankers’ conference in Sydney that banks also need to carry more in the way of liquid assets (note that this recommendation apparently came in the form of a paper, but we can find no such document at this hour at the BIS website). Caruna recommended that banks hold enough to allow them to survive a month without access to funding. Note that idea only seems radical now, since banks have spent decades perfecting the art of running lean. The rule of thumb in banking is to lend out $9 of every $10 in deposits. In the 1960s, only $5 of loans versus $10 in deposit was considered prudent.

Group of 7 Vows to Keep Cash Flowing - Finance ministers from seven of the world’s biggest economies concluded a meeting in the Canadian Arctic on Saturday with pledges to maintain their fiscal stimulus programs, despite rising worries among investors about the mounting debts of some European governments. “We are all absolutely committed to maintaining the support for our economies until we make sure that we have recovery established,” Alistair Darling, Britain’s chancellor of the Exchequer, said in Iqaluit, Nunavut, where finance ministers and central bankers from the Group of 7 nations were meeting.  The European debt crisis, and its spread from Greece to other countries in the euro zone like Portugal, Spain and Italy, were a focus of the two-day talks. 

I seem, in Greenspan’s words, to have found a flaw in my previous beliefs - I have been of the belief that loose central bank policy has been responsible for stimulating the bubble investor mentality of the last decade. Low interest rates cause people to speculate, therefore, the central bank should avoid doing so in the future. But here is a post from Nick Rowe, in which he describes his thoughts on bubbles, that introduces some doubts on my certainty about central bank complicity: See the implication? When humans want to believe something, they can make it so. If they believe that something will go up in value, then it will go up in value, low rates or not.

Geithner Says U.S. Will 'Never' Lose Its Aaa Debt Rating (Bloomberg) -- Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010. “Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.” Geithner said investors around the world turn to U.S. Treasury securities and dollar-denominated assets whenever they are worried about global stability. That reflects “basic confidence” in the U.S. and its ability to bounce back from the global recession, he said.

PAYGO Statute Reveals 2011 Top Rate Of 20% On Capital Gains and 39.6% On Dividends - Soon, President Obama will sign H.J.Res.45 to increase the debt limit by $1.9 trillion and to restore statutory PAYGO. The exceptions to PAYGO totaling $3.157 tr. (using estimates from the President's FY11 budget) reveal what Congress expects to pass later this year: extending the Bush tax cuts ($1.865 tr. FY11-FY20) , except for those over $250,000 ($969 b.) extending the estate and gift tax as in 2009 ($262 b.) indexing the Alternative Minimum Tax ($659 b.) See the tables on pages 152-3. lifting the 21% Medicare physician pay cut ($371 b. See Table S-7 on page158)The 15% top rate on capital gains and dividends for those under $250,000 would be exempt too, but not for those over $250,000. That means the top rate for those over $250,000 would revert to the 2001 20% for capital gains and 39.6% for dividends.

Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’ – WSJ - University of Maryland Professor Carmen Reinhart co-authored one of the most important economics books of 2009, “This Time Is Different: Eight Centuries of Financial Folly,” a catalogue of financial crises, their causes and consequences. In January, Ms. Reinhart and her co-author, Harvard Professor Kenneth Rogoff, both former International Monetary Fund economists, produced a sobering follow-on to the book, a new paper called, “Growth in a time of Debt,” which reviewed the painful consequences of the rising government debt loads that often follow financial crises. We interviewed Mr. Rogoff and Ms. Reinhart in October. With worries about public debt now mounting in financial markets, we decided to catch up with Ms. Reinhart again in Washington D.C. this week. As she sipped on a hot cup of tea, she offered the following sobering assessment of the many challenges ahead for policy makers in the U.S. and Europe:

Check Out This Very Cool Budget Table From The NY Times…A week ago, Shan Carter and Amanda Cox at the New York Times published this very cool, fun, interesting, and interactive chart that shows the different components of the federal budget in a way that analysts, geeks, observers, and commenters up to now have only dreamed about.  It puts to shame the static pie chart that has been used in the budget itself for decades. What's most impressive and useful is the way the chart displays a great deal of information both visually and with text that provides the actual numbers.  Also, check out the buttons at the top left of the chart.  In particular, click on "Hide Mandatory Spending," and be amazed at how simply and easily it tells you all you really need to know about the federal budget debate. The only thing missing is a similar chart for revenues.

2010 Economic Report of the President - You can download the full report or download by individual chapter in PDF format. HTML versions of the material will be available shortly.Full 2010 Economic Report of the President download as pdf - download eBook for Amazon Kindle - download eBook as ePub for Barnes & Noble Nook, Sony Reader and other devices The Economic Report of the President (President's Message) download as pdf Table of Contents download as pdf

President's Budget Requests $266 Billion to Support Economic Recovery: In light of the still tenuous nature of the economic recovery, President Obama’s budget request of $266 billion for temporary provisions to support and speed economic recovery is necessary, reasonably sized, and well targeted. Some news outlets, focusing on the budget’s $100 billion for a new “jobs initiative,” have reported that the budget proposes only $100 billion for temporary, economy-boosting measures. But, in addition to the funds for the new jobs initiative, the budget includes $166 billion in temporary extensions of some provisions of the American Recovery and Reinvestment Act (ARRA), which are contributing to economic recovery but will soon expire. (See Table 1.) The size of the President’s request — $266 billion — is consistent with recent estimates by a number of economists.... Mark Zandi of Moody’s recently called for additional measures of about $250 billion. The temporary tax cuts and expenditure increases included in the budget appear well designed to help ensure that the economy averts a double-dip recession and attains (and sustains) a reasonable rate of economic and job growth.

Where's The Obama 2011 Budget? - Part of the reason that the Obama budget seems to have disappeared from view is that the White House clearly doesn’t want to talk about it. In fact, the rollout of this year’s budget was comparatively limited. The Obama administration barely did one of the things that many previous administrations have done to dominate the news in the days before the budget was released: leak the details to generate positive stories. Another frequently used tactic — having key economic policy team members interviewed on the Sunday talk shows around the release of the budget so that the debate is on your terms — also didn’t happen this year. Other than the day the budget was released, Office of Management and Budget Director Peter Orszag mostly kept his head down.

Budget Lies Aren’t Helping the Deficit - Last month, President Barack Obama proposed to freeze government spending on everything other than defense, veterans’ benefits, homeland security, Medicare and Social Security. The New York Times reported that administration officials depicted the initiative as proof of the president’s “seriousness about cutting the budget deficit.” The nondefense discretionary spending that Obama aims to reduce now totals $477 billion a year—or just 14 percent of the federal budget. Freezing this outlay would save $25 billion a year, or about 2 percent of the annual $1.4 trillion deficit. Had this plan been part of a governmentwide belt-tightening effort, the White House might have been able to call itself “serious about cutting the budget deficit” anywhere other than in a fantasy land. But the announcement came as the Politico reported the administration was telling defense contractors of its commitment to “steady growth in the Pentagon’s budgets”—budgets so distended by wars and outdated weapons systems that they now top $700 billion a year.

Defense Spending Has Been Growing More Rapidly Than Social Security - The NYT and every one else keeps saying that Social Security is one of the three most rapid growing items in the budget. This is not true. Defense spending grew more rapidly over the last decade. We spend $655.8 billion on defense in 2009 more than double the $306.1 billion spent in 2001. $By comparison, Social Security spending rose by just over 50 percent during these years from $429.4 billion in 2001 to $677.7 billion last year. If we're looking forward, interest spending is projected to grow more rapidly. So it is simply inaccurate to list Social Security among the areas of most rapid spending growth in the budget.

Did Bush Leave Us Bankrupt, Corrupt, Ungovernable? - When you sell the farm, the farm's gone. Is it already too late for America? I'm starting to think that the anti-tax, anti-government conservative movement that started in the mid-70s, elected Reagan and led to the terrible Bush presidency may have effectively destroyed the country, leaving it bankrupt, corrupt, ungovernable, ruled by a wealthy elite -- and we're only now just starting to realize it. To cover tax cuts we stopped maintaining the infrastructure and started borrowing. To satisfy their hatred of government we increasingly stripped away rule of law, regulation, and belief in one-person-one-vote. We are seeing the consequences of all of that coming back to roost now.

Whose Fault? - To believe politicians in Washington and pundits in the media, the national debt has become the most important political issue of the day. (Whether it should be–as opposed to, say, jobs–is another question.) The Republican argument is, basically: “Big deficits! Democratic president! His fault!” The Obama administration argument, by contrast, is “No way! George W. Bush’s fault!” I generally side with Obama on this one, mainly because of the two Bush tax cuts and the unfunded Medicare prescription drug benefit. Keith Hennessey, Bush’s last director of the National Economic Council, has a counterargument. Some of his points are good. OK, well, one point–the fourth one down. The other points are good debating, but I don’t buy them. This could take a while...

The Truth About the Deficit - NYTimes - About half of today’s huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit — all of which Republicans supported, virtually in lockstep. The other half of recent deficits is due to the recession and the financial crisis.  To avoid a meltdown, the government — under President Bush and President Obama — rightly decided it had no choice but to spend hundreds of billions of dollars to bail out banks and car companies and to stimulate the economy. That prevented a very bad situation from becoming much worse, but as the recession dragged on, hundreds of billions in tax revenues have also dried up.

The Emperor Has No Clothes - The NYT had an editorial this past weekend The Truth About the Deficit (Feb 6, 2010) that trotted out some dangerous mistruths about the deficit and framed the issue as a left vs. right political game.I hardly know where to start, but I will note that we've had massive accumulations of new debts under every single administration since the early 1980s, and that it hasn't seemed to matter which party has controlled which branches of government.  One could be forgiven for suspecting that, when it comes to deficit spending, there aren't two parties, but only one.The real truth is that we have a culture of reckless spending in DC that transcends either or both parties, and I always lose a bit of trust in those who attempt to paint it otherwise.  This is simply not a partisan issue. The second objection I have to this editorial rests with its attempt to step past our deficit by painting it as self-evidently necessary

Default, Inflation, Higher Taxes — Choose One - The Federal budget is hopelessly out-of-whack, with 4-5% of GDP deficits out as far as the eye can see.  So, what do we do about it? 1) Raise Taxes.  I don’t like this idea, because the US Government has entered many areas where it should not be.  2) Inflate the currency.  Ugh.  Oppress the elderly, who cannot work to make up the difference?  Create a new inflation mindset that has all of us focusing on the short-term.  Inflationary economies by their nature become more and more short term. 3) Default on obligations.  There are several forms of this:

  • a) Total default: anyone with a Treasury Note is a sucker.  Global depression ensues.
  • b) External default: we do not honor external obligations, but honor internal ones.  Global depression ensues, but the US does relatively well.
  • c) Internal default: what, are you joking?  Why do we pay off the losers who lent to us?

Austerity or Money Printing? - Where the current crisis has been described using millions of words in thousands of articles packed with arcane acronyms (such as TALF, CDO, and CMBS), perplexing regulatory lapses and with a degree of complexity that dwarfs the Apollo moon mission, I can explain why the whole thing happened using just three words.  Too.  Much.  Debt.    Total credit market debt in the US doubled between 2000 and 2008, while incomes stagnated and jobs were not created. When your debts are skyrocketing, but your means of servicing those debts are not, you are on a path to a credit crisis.  And that's exactly what we got. That's all there is to it, and we'd have a better shot of crafting an enduring recovery if we better understood the difference between causes and symptoms.  Too much debt was the cause; virtually everything else was either a symptom or a contributory factor.

The Approaching US Dollar Reserve Currency Crisis -"US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941."No matter how they wrap it, spin it, try to hide it, we have seen an epic expansion in the US monetary base not seen since 1932. This monetary expansion has not yet reached into the broader money supply figures because it is not reaching the public, despite the chant from the "Yes We Can" Kid. Bernanke has most of that liquidity bottled up in a few big banks collecting an easy riskless spread, with some of it chasing beta in the speculative markets. Ben can talk a tough game, and jawbone rates with his plans to someday return to normalcy. But at the end of the day, the US is playing out a well worn script that is highly predictable. There are three choices the Sith Lords at the Fed and their western central bank apprentices have at this point: inflation, inflation, and inflation.

Wars sending U.S. into ruin - More empires have fallen because of reckless finances than invasion. The latest example was the Soviet Union, which spent itself into ruin by buying tanks.  Washington’s deficit (the difference between spending and income from taxes) will reach a vertiginous $1.6 trillion US this year. The huge sum will be borrowed, mostly from China and Japan, to which the U.S. already owes $1.5 trillion. Debt service will cost $250 billion.  To spend $1 trillion, one would have had to start spending $1 million daily soon after Rome was founded and continue for 2,738 years until today.  Obama’s total military budget is nearly $1 trillion. This includes Pentagon spending of $880 billion. Add secret black programs (about $70 billion); military aid to foreign nations like Egypt, Israel and Pakistan; 225,000 military “contractors” (mercenaries and workers); and veterans’ costs. Add $75 billion (nearly four times Canada’s total defence budget) for 16 intelligence agencies with 200,000 employees.

The Coming 'Moment of Truth'-   In a recent Bloomberg Television interview, economic historian and Financial Times contributing editor Niall Ferguson argues that mushrooming sovereign debt concerns in Europe are a sign of things to come -- for the U.S. Here are a few excerpts: I looked at the IMF numbers for gross debt-to-GDP today for developed economies -- the United States is number six. It is not that far behind Greece in terms of the size of its debt and the problem it's going to have getting back into any kind of balance in the foreseeable future...The problem with massive deficits as a response to the recession is that, at some point, you are going to see upward movements in yields.

Morgan Stanley: A Simple Study of History Shows How Today's Markets Are Blind To The Inevitable Debt - U.S debt has exploded in relation the country's GDP -- we probably all know that by now. Yet the last time U.S. debt-to-GDP hit levels comparable to the current status was at the end of World War II when debt-to-GDP hit 108.6%, which is far higher than where we are now. Even then, yes, the U.S. eventually brought its debt-to-GDP ratio down over time, thus history indeed teaches us that the U.S. can eventually get things under control. It's been proven that economic growth over time can bring down this ratio even if debt keeps growing, as long as nominal GDP growth outpaces debt growth.

Credit Suisse Declares the U.S. a Riskier Investment Than Indonesia  - Amid fears that Switzerland might come to an agreement with the United States on banking privacy and tax evasion disclosures, Credit Suisse issued a report identifying those countries it determined to have the highest risks of default on their sovereign debts. Number 16 on the list was the United States, based primarily on its 2009 budget deficits and government debt. Countries ranked less likely to default include corruptocracy Kazakhstan, less-than-reform-minded Indonesia, the debt-ridden Philippines and violence-ridden Colombia. By comparison, U.S. Treasuries prices are up today despite a new issuance this week.

CNBC Anchors Freak Out After Marc Faber Says US Will Default (video) It's hard for Marc Faber to top himself, since he maintains such a cataclysmic outlook. Still, in today's discussion about Greece and general sovereign risks, we were very entertained by the reaction of the Power Lunch crew when Faber delivered the bad news that the US will one day, just like the others, default on its debt. Listen right at the 2:15 mark.

US Debt Is A Safe Haven Just Like Pearl Harbor Was A Safe Haven In 1941 From FT: For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Anti-AARP? - At one point, he suggests that old people will come forward and put entitlement reform on the table, and that will make it politically possible.  I find that notion intriguing, if perhaps implausible. But sometimes the leaders of groups are out of touch with their members--union leaders lean one way, and their members lean another, for example. The AARP policy folks are super-aggressive about protecting every dime of benefits, for everyone from current recipients to today's young people to the unborn (the AARP folks go ballistic if you talk about cutting benefits in 2080) So, would seniors rally to the anti-AARP, a group that wants to give back some of their entitlements? And is there someone willing to lead the anti-AARP?

Is BBCT the New VAT? - Anyone who reads the Wall Street Journal's editorial page knows that it hates the value-added tax. I don't mean hate the way it hates liberals, government regulators and the capital gains tax. No, the Journal hates the VAT more deeply and strenuously than anything else. The reason is that the Journal sees the VAT as the essential fuel of the welfare state. Without it a European-style welfare state cannot exist. Therefore, if you hate the welfare state--as the Journal does--you must oppose the VAT with every fiber of your being. No fooling around; the VAT means Armageddon, the end of America as we know it and victory for welfare state liberalism. If we impose a VAT we will all soon be cheese-eating surrender monkeys just like the French.

Americans Unhappy with Government - In a shocking new development, Americans are unhappy with the Federal government.Two-thirds of Americans are “dissatisfied” or downright “angry” about the way the federal government is working, according to a new Washington Post-ABC News poll. On average, the public estimates that 53 cents of every tax dollar they send to Washington is “wasted.”  Man, if only 47 cents of every dollar sent to Washington were going to good use, I’d be stoked!   But, as to the dissatisfaction . . . meh.  Take a look at the history of the polling on this question, available in the poll results themselves.

Americans Should Be Billed Their Share of the Federal Deficit – Columnist - A Colorado business columnist has proposed a simple, but effective solution to the Federal government’s out-of-control deficits: invoice each and every American monthly for his or her share of the spiraling tab. The U.S. government’s current $12.3 trillion deficit balance amounts to about $40,000 per citizen. Layer in the Obama Administration’s latest proposed budget for the coming year, and that obligation ratchets up to $45,000 per person. For a family of four, the proposed debt burden, before interest, equals $180,000.

Still Budgeting Through Footnotes in FY 2011 | Committee for a Responsible Federal Budget - A few months ago, we pointed out that the Administration was cheating in its Mid-Session Review budget baseline. Essentially it was taking policies which President Obama had signed into law as temporary, under the stimulus bill, and assuming them as permanent. The implication being that, if the policies were a part of the baseline, they wouldn't need to be paid for when enacted. Well, the Administration is at it again in their FY 2011 budget submission, but this time they are doing a better job of hiding it. But let's start from the beginning

U.S. Losing AAA Is Way to Rein in Pelosi, Reid: David Reilly - (Bloomberg) -- When it comes to America’s AAA debt rating, we have to ask whether we would be better off without it. That notion is pure heresy, and Treasury Secretary Timothy Geithner was quick this weekend to try and dispel any thought that the U.S. would ever be in for a downgrade.  “That will never happen to this country,” Geithner said during an interview with ABC News. The remark came after Moody’s Investors Service last week said the pristine U.S. rating will come under pressure unless something is done about mounting deficits.  Geithner shouldn’t have fought Moody’s report. He should have embraced it. What better way to impress upon Congress that the U.S. is very much in crisis and needs to face up to its problems. 

Sometimes Deficits Are Fine, But This Time They'll Kill Us - We are fighting a very rare and wretched economic beast.  As Bernanke’s great reflation experiment has ripped higher I have maintained that the hyperinflationists are wrong.  Though we appear to have slipped through the hands of the balance sheet depression Grim Reaper, the balance sheet recession continues to nip at our heels.   At his side always is his good friend Deflation.A balance sheet recession is so rare that it has only occurred a handful of times in modern economic times.  And thus far, he remains undefeated by all of the powerful economic minds who have stood in his path.  In his path today is the great Sir John Maynard Keynes.   The global economy has stood behind the theories of Lord Keynes as the economy has tumbled and Central Bankers have literally bet their printing presses on his theories.  I fear they are not working and could be setting the table for an even greater catastrophe.

The Budget Deficit Crisis Puzzle - The country faces a serious crisis in the form of a manufactured crisis over the budget deficit. This is a crisis because concerns over the size of the budget deficit are preventing the government from taking the steps needed to reduce the unemployment rate. This creates the absurd situation where we have millions of people who are unemployed, not because of their own lack of skills or unwillingness to work, but because people like Alan Greenspan and Ben Bernanke mismanaged the economy. The answer in this situation should be simple: more stimulus. But the deficit hawks have gone on the warpath insisting that we have to start worrying about bringing the deficit down. They have filled the airwaves, print media and cyberspace with solemn pronouncements about how the deficit threatens to impose an ungodly burden on our children. This is of course complete nonsense.

In praise of mammoth deficits - Haven't we all embraced the idea that the U.S. faces certain ruin from its soaring debt? Baloney, says Marshall Auerback, an investment advisor who also is a member of the brain trust at the Roosevelt Institute. He believes that the deficit hawks are dead wrong, and always have been. The far greater risk to the economy, he and others in his camp assert, is that the Obama administration will cave in to calls for fiscal piety exactly at the moment when the economic recovery needs more oomph. Of course, with the deficit projected at $1.6 trillion this fiscal year and $1.3 trillion the next, it hardly looks like Washington is exercising budgetary restraint.

Ignore anyone who tells you that debt levels don’t matter - Debt levels in an economy matter.  They matter a lot.  An economy that is financed primarily by debt can be like a chain of dominoes.  If one fixed claim fails, and it is large enough, many other fixed claims that rely on the first claim could fail as well, triggering a chain of failures.  This is a reason why a fiat-money credit-based economy must limit leverage particularly in financial institutions. Why financial institutions?  They borrow and lend.  They also lend to other financial institutions.  A  big move in the value of some assets can make many banks insolvent, and perhaps banks that lent to other banks.  The banks should have equity bases more than sufficient to absorb losses at a 99% probability level.  That means that leverage should be a lot lower than it is now.

John Hussman's extreme inflation forecast. Will the CPI double over the next ten years? - John Hussman runs the very successful $6.7 billion Hussman Strategic Growth Fund. I greatly admire Hussman's investment and risk management skills, so I was really surprised when I saw his inflation forecastAt present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the next few years, my impression is that this complacency is probably well-founded, but only because we are likely to observe a second wave of credit losses that will create fresh "safe-haven" demand for default-free government liabilities. From a longer-term perspective, however, I believe that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years. As exchange rates and commodity prices tend to be more forward-looking and less "sticky" than the prices of goods and services, it is likely that these markets will move substantially well before the eventual peak in CPI inflation.

We’re Weimar - This brings me to the second telling event of last week when President Obama said, kind of off-hand, apropos of the US economic situation, "You don't blow a bunch of cash on Vegas when you're trying to save for college. You prioritize. You make tough choices."  Senate Majority Leader Harry Reid (of Nevada) was all over Mr. Obama like a cheap suit for that. I'm sorry that the President didn't slam back the craven Mr. Reid and pull his upper lip over the top of his head. Fuck Las Vegas and fuck Nevada, and fuck all the casino operators in every pulsating gambling venue around this country. The last thing we need is to continue believing that it is possible to get something for nothing, or an industry based on that false principle. I'd go a lot further and shut down legalized gambling all over the USA, send it back to the margins, to the alleys, to the berm between the WalMart and the Target Store, to the basement boiler rooms, to the public bathrooms, to wherever it will be identified as indecent, shameful, and not healthy.

Prospect of a default by the US or Britain is 'absurb' notion, Joe Stiglitz says -  Speaking at an event at the London School of Economics, Mr Stiglitz said that “the likelihood of a default is so small, particularly in the US because all we do is print money to pay it back.”  The debt problems currently engulfing Greece have put the prospect of a sovereign default at the forefront of many investors' minds, but Mr Stiglitz, a former chief economist at the World Bank, said that the idea of a default by the US or Britain is "so absurd, it’s another reflection of the absurdities in the financial markets.”

Tax and Spend, Everyone - Paul Ryan has been taking a lot of bashing from the liberal blogs because his budget plan uses a chainsaw rather than a scalpel, and is unlikely to pass.  Given that the Republicans have suddenly become the latter-day saviors of Medicare, it's even less likely, as Bruce Bartlett points out.  That's why Bruce favors a VAT; I too have been known to tell a Republican or two that they might want to start looking for campaign planks beyond tax cuts. But I'm not sure how much more realistic a VAT is, and not just because the Republicans are against it.  It occurs to me that over the last twenty years, the parties have adopted each others' rhetoric so completely that now almost all viable solutions are off the table. 

Fannie and Freddie: Budget Busters - It's looking increasingly like Fannie Mae and Freddie Mac are going to cost the US government much more than AIG.  In its latest long-term budget outlook released in late January, the CBO projected that the AIG bailout would ultimately cost the Treasury $9 billion dollars.  Indeed, the entire private financial industry bailout is ultimately expected to cost less than $30 billion; of the $99 billion that the CBO expects we will ultimately lose on TARP, half of the loss comes not from helping the "banksters", but from the Obama administration's decision to bail out the automakers.  A further $20 billion will be spent on the Home Affordable Mortgage Program, aka the administration's mortgage modification plan. By contrast, the nationalization of the Government Sponsored Entities is expected to cost the Federal government $64 billion between 2011 and 2020, on top of the $110 billion we've already spent.

Will Ryan's Budget Plan Get Tea Party Endorsement? - My Forbes column today is about Rep. Paul Ryan’s budget plan, which would eliminate the federal debt solely through spending cuts including the effective abolition of Medicare. I suggest that any members of the so-called tea party crowd or its putative leaders, such as Sarah Palin, who are unwilling to endorse it or put forward another budget plan equally as large, specific and comprehensive does not deserve the right to oppose tax increases or be taken seriously. It is, as I say, the budgetary Holy Grail for this crowd and they should know the full consequences of what they say they believe. In that respect, I think Ryan’s plan is very valuable.

Let’s Atomize Wall Street - Paul Volcker’s proposal that proprietary trading should be spun off from deposit-taking banks is a worthwhile step in the direction of stabilizing the financial services business. However, when you consider that business in detail, it becomes clear that further breakups are necessary in order to remove the excessive risks from the U.S. economic system.There are three problems with the current setup on Wall Street: systemic risk, rent seeking and conflicts of interest. The Volcker proposal addresses the systemic risk problem to a great extent, but does not do much about the other two. For a complete solution, we thus need to go further.

Yves Smith: How the Volcker Rule Misses the Shadow Banking System - On the one hand, debating the merits of the Volcker Rule may seem a tad academic, given the rousing opposition it is encountering from Congress. But it is worth pursuing nevertheless for two reasons. First, reform talk is not going to go away because the phony reforms are insufficient to prevent future train wrecks. So this line of thinking may well be revisited. Second, and more important, this discussion will hopefully help clarify the objections I raised recently, and probably did not articulate clearly enough for all readers.

Volcker Rule: They Shoot Horses, Don't They? - What the Volcker Rule would have accomplished is to take the gamblers away from the new “discount window” of Fed and Treasury subsidized programs. It would have also put a serious dent in the ‘Too Big Too Fail’ meme, although it alone was not enough to do that, as it lacked some teeth. But it opened the door to a debate that is not occurring. What exactly is the role of the financial system, and what needs to be done to regulate it, and help it to perform some utility to society's greater functions? Is the relationship between the financial sector and the productive economy out of balance? I want to stress this. Any proposal that has not been hammered upon by multiple minds, and tempered with the objections and observations of many perspectives, is likely to be premature, needing much work. By its method of introduction, I fear that the reconsideration of the relationship between the FIRE sector and the productive economy is now off the table.

Volcker Rule May Not Be the Right Rule - President Obama’s decision to support what is now called the “Volcker rule” has opened up a Pandora’s box of difficult issues—and may yet force policymakers to face some hard truths. It is unlikely the president fully understood that this would happen.  What’s less likely is that some on his economics team didn’t understand.  Increasingly, there is a sense that the combination of the old Clinton guard, most of them deeply linked at one time or other to the banking community and the deregulation movement itself, and a somewhat conservative University of Chicago group of Washington newcomers, led by Austan Goolsbee and Cass Sunstein, are not providing the president a full plate of options or adequate analyses of those he does get.

Transcript: Interview with Paul Volcker - FT - After President Obama’s election, Mr Volcker was made chairman of the President’s Economic Recovery Advisory Board, a position which initially seemed largely ceremonial. But Mr Volcker returned to the centre of financial and economic debate last month when Mr Obama endorsed his proposed separation of commercial banking and proprietary trading, a plan dubbed the “Volcker Rule”. Chrystia Freeland, US managing editor, interviewed Mr Volcker in New York. This is a transcript of that interview.

The Case Against International Financial Coordination - Unsurprisingly, Goldman Sachs and other Wall Street firms are dubious about the “Volcker rules.” So, too, are the Republicans in Congress, along with some Democrats who feel that the scheme has come too late and may interfere with other reform efforts under way, as watered-down as those initiatives may be. Such domestic opposition weakens the prospect that Obama’s proposals will ever become law. But the international reaction was less expected. Obama’s announcement received a decidedly unsympathetic reception from Europeans, who perceived his initiative as a unilateral move that would undermine international coordination of financial regulation. The announcement had come without international consultation. It also seemed to violate earlier agreements to cooperate with other nations through the G-20, the Financial Stability Board, and the Basel Committee on Banking Supervision. Barney Frank was surprised to discover that the greatest opposition to American plans came from international regulators. The Obama administration’s proposed measures would simply create “regulatory confusion,” one of them complained.

Watchdogs need not bark together - Joseph Stiglitz - Given the difficulties in achieving global co-ordination, insisting on such co-ordination may be a recipe for paralysis – just what the bankers who don’t want regulations want. It is perhaps no surprise that they have become among the most vocal advocates of the need for global action.But each country is responsible for ensuring the safety and stability of its financial system and economy, and for protecting its citizens. It is dawning on leaders – in some cases egged on by rightly impatient voters – that we cannot wait for co-ordination. It is far better to have strong action now and then harmonise the regulatory structures later. It may be “second best” – but far better than the third-best alternative of delayed and ineffective regulation. There is even a possibility of a “race to the top”. US voters can see for themselves the much tougher crack-down on bonuses in Europe.

The OTHER Reason that the U.S. is Not Regulating Wall Street - Sure, American politicians have been bought and paid for by the Wall Street giants. See this, this and this.And everyone knows that the White House and Congress – while talking about cracking down on Wall Street with strict regulation – have actually watered down some of the most important protections that were in place. For example, Senator Cantwell says that the new derivatives legislation is weaker than the old regulation. And leading credit default swap expert Satyajit Das says that the new credit default swap regulations not only won’t help stabilize the economy, they might actually help to destabilize it.But the U.S. is not being sold out in a vacuum....

Bank Securitization Woes Only Beginning - Yves Smith - We remarked last week that the FDIC had put forward a proposal for fixing the securitization market. To be a bit more precise, it was the FDIC’s plan, put forward for public comment, of the rules it wanted to have in place for banks to get “safe harbor”, meaning off balance sheet treatment, for their securitizations.  As anyone who had even slight contact with the business press no doubt knows, a whole raft of credit bubble era securitizations, particularly real estate and credit cards, have suffered losses far in excess of what banks and investors anticipated. The result, with real estate securitizations, is that almost all of the market ex government guaranteed paper is in a deep freeze.

Hedging America:  It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought. Cassidy quotes Alan Greenspan: Recent regulatory reform coupled with innovative technologies has spawned rapidly growing markets for, among other products, asset-backed securities, collateral loan obligations, and credit derivative default swaps. These increasingly complex financial instruments have contributed, especially over the recent stressful period, to the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter-century ago. Flexible maybe, resilient apparently not, but how about efficient? How much do all those exotic securities, and the institutions that create them, buy them, and sell them, actually contribute to the “real” economy that provides us with goods and services, now and for the future?

Citi reinvents end-of-the-world insurance - In hindsight, one of the silliest and most dangerous excesses of the Great Moderation was the large number of companies — foremost among them AIG, although there were lots of monoline insurers in the same trade — basically selling insurance on the world coming to an end. It’s a great trade: either the world doesn’t come to an end, and you make lots of money, or the world does come to an end, and it doesn’t matter ‘cos you’re bust anyway. Now, however, after seeing how that trade worked out, we’re wiser, and no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance. Would they?

“Too big to fail” is no redemption song - VoxEU -Policymakers and commentators have recently argued for downsizing banks that are “too big to fail.” This column argues that the logic is based on an illusion. A 2006 list of institutions considered “too big to fail” would not have included Northern Rock, Bear Sterns, or even Lehman Brothers. Instead, regulators should aim to make the financial system less sensitive to error in the markets’ estimate of risk.

So That's What 'Too Big to Fail' Means - The White House released the annual Economic Report of the President today. Most of it is contains data and trends that economists already knew about, but it has some fantastic charts. (And you know how we feel about those around here.) Below, for example, is a graph comparing the country’s total economic output — its gross domestic product — to the size of the American banking sector. Now you will understand why many of the country’s banks were considered “too big too fail”:

Yglesias: Charts and Graphs That Will Finally Make It Clear - Christina Romer and the rest of the staff at the Council on Economic Advisors have prepared an Economic Report of the Presidents which contains many charts and graphs. This one should finally make it clear that however much one may dislike “bailouts” in general or the specific way recent bailouts were structured, they have in fact succeeded in taking a very real credit crisis and ending it. This is not the be-all end-all of recovery. If 20 percent of the people in your town are unemployed, 25 percent have had their hours cut, then all the available credit in the universe isn’t going to get you to take out a loan and expand your store’s operations. But it is necessary for recovery.

Steering Out of a Smash-Up No One Wants In previous financial crises, big shots who contributed to bubbles went to jail; Americans expect heads on pikes after a financial crisis. Jailing even a few crooks is extremely important because it resets the system with a new psychology. For example, after the junk bond bubble burst in the 1980s, junk bond king Michael Milken and top executives at many bankrupt savings and loans went to jail. And after the IT bubble burst in 2000, jail terms were ordered for top guys at Enron, Tyco and even some Wall Street analysts.The bubble that just burst was bigger than any in the past, yet none of the big shots went to jail. Instead, the president has dined with them and begged them to support his financial reforms. Americans see this as a farce. And if the Obama administration is unwilling to change, voters will choose someone else. In addressing the financial crisis, Obama's team continued a Bush administration policy aimed at protecting the status quo. No one could expect the same people who benefited from the system's flaws to support abolishing them.

Tax banks to discourage systemic-risk creation, not to fund bailouts - VoxEU - Obama’s plans for bank taxation took markets, policymakers, and academics by surprise, leaving all parties now debating its merits. This column suggests an alternative. By raising a Pigouvian tax based on banks’ individual contribution to systemic-risk creation, the policy would target the externality caused by funding fragility while raising the cost of opportunistic risk creation in good times.

How to make a bank raise equity - Hart and Zingales - Banks are themselves like large margin investments. They buy most of their assets with borrowed money. The regulator could induce them to raise more equity by making a margin call at the appropriate time. Unfortunately, regulators on both sides of the Atlantic have been late to this game. Precisely because it is costly for a bank to raise equity in bad times, it is also politically difficult for a regulator to make a margin call.  This problem can be overcome, however, with an automatic trigger based on the much maligned credit default swaps. CDS prices provide up-to-date information about the risk that a certain debt will be paid. Hence we can require the regulator to make a margin call any time the CDS price of a bank’s debt exceeds a certain threshold, let us say an average of 1 percentage point over the previous month. A verifiable market-based trigger makes it impossible for a regulator to delay the day of reckoning.  With all its failings, the CDS market has accurately predicted the financial institutions most at risk since the crisis began. Had this rule been in place, banks would have been forced to issue equity in the autumn of 2007 and beginning of 2008, avoiding the negative spiral we experienced in the autumn of 2008.  Not only does this rule eliminate the moral hazard present in banking, it is also fair. Why should regulators treat banks differently from the way banks treat their own customers?

Elizabeth Warren Calls Out Wall Street - Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: “big government” and “bureaucracy.” Elizabeth Warren wrote an op-ed for Tuesday’s Wall Street Journal that lays out the confrontation. The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn’t matter what customers think. How else do you explain, say, Citigroup’s concocting a new credit card “feature” explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?

"Fine Print, Deceptive Pricing, and Buried Tricks" - How bad is the asymmetric information problem in credit card markets? This is from Wall Street's Race to the Bottom, by Elizabeth Warren, arguing for a Consumer Financial Protection Agency. She describes what happened when Citigroup offered its credit card customers a better deal: Citigroup ... in 2007 ... decided to clean up its credit card just a little bit by eliminating universal default—the trick that allowed it to raise rates retroactively, even for consumers that did nothing wrong. Citi's reform resulted in lower revenues and no new customers, triggering an embarrassing public reversal.  Citi explained sheepishly that credit cards were now so complicated that customers couldn't tell when a company offered something a little better. So Citi went back to something a little worse...

Is Larry Summers Getting Tougher? - Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gauntlet of the Senate. To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer. It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.)

Irked, Wall St. Hedges Its Bet on Democrats - If the Democratic Party has a stronghold on Wall Street, it is JPMorgan Chase. Its chief executive, Jamie Dimon, is a friend of President Obama’s from Chicago, a frequent White House guest and a big Democratic donor. Its vice chairman, William M. Daley, a former Clinton administration cabinet official and Obama transition adviser, comes from Chicago’s Democratic dynasty. But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Instead, it gave $30,000 to their Republican counterparts.The shift reflects the hard political edge to the industry’s campaign to thwart Mr. Obama’s proposals for tighter financial regulations.

Republicans Chase Wall Street Donors – WSJ -  In discussions with Wall Street executives, Republicans are striving to make the case that they are banks' best hope of preventing President Barack Obama and congressional Democrats from cracking down on Wall Street. GOP strategists hope to benefit from the reaction to the White House's populist rhetoric and proposals, which range from sharp critiques of bonuses to a tax on big Wall Street banks, caps on executive pay and curbs on business practices deemed too risky. Democrats have dominated Wall Street's fund-raising circles in recent elections. Mr. Obama himself raised millions of dollars from employees of Goldman Sachs Group Inc., Citigroup Inc., J.P. Morgan Chase & Co. and other Wall Street firms.

Record $3.5 billion spent on lobbying in 2009 -  Lobbying appears to be recession-proof, according to a report out by the Center for Responsive Politics today. Companies and interest groups spent a record $3.47 billion on federal lobbying in 2009, a 5% increase over the year before, according to the watchdog group, which tracks money in U.S. politics at its site "Most people would think that when the economy was as utterly rotten as it was in 2009 that companies might be scaling back their efforts in influencing the federal government,"

What to do about those danged bank lobbyists:  Those who would address the financial problems of the past few years with better laws and regulations have a big problem when the rulemakers are captured not just by the industry they regulate but the dodgiest parts of that industry. So what do we do about this? Get out of the regulating business. This is the libertarian solution, and while it reeks a bit of libertopianism, there is a basic truth behind it: The less affected by regulation and/or government spending an industry is, the less it spends on campaign contributions and lobbying, as a general rule. Shine a light on what's going on so the public interest can trump private interests. This does work sometimes. And the increased attention paid to the House Financial Services and Senate Banking committees over the past couple of years has made life more difficult for financial industry lobbyists.

Don't Blame the Rich, or Golfers, or Rich Golfers - What is the populist Wall Street Journal instructing us to do this week? "Don't Blame Golf for the Economy." Okay! Just because the very sight of fashion-challenged rich motherfuckers milling around a golf course can send you into a murderous revolutionary rage, you must not give in to unreasonability. It's not golf that's the problem. It's the assholes that play golf.Wait—no! Must...not...blame...Wall Street. Jesus give us strength. Open our hearts to love. The more we "liberal" poors blame Wall Street, the more Wall Street will be tempted to turn around and give all of its money to Republicans. And lord knows the first priority of the Democratic party must always be to represent those who disagree with it, at all costs! As Glenn Greenwald says in his inimitable style, "First, there simply is no more odious faction inside the U.S. than Wall Street bankers — and that's saying quite a bit." Glenn Greenwald, you are the type of guy we would be proud to share a scavenged cigarette butt with, in debtor's prison.

Wall St.’s Biggest Bonuses Go to Not-So-Big Names - It turns out that some of the highest-paid financial executives in America work far from the canyons of Lower Manhattan, at companies that have largely avoided the outcry over the return of hefty paydays on Wall Street.  Topping the list is John G. Stumpf, head of Wells Fargo, the bank based in San Francisco, according to an analysis of 2009 compensation in the industry. Mr. Stumpf was paid a personal best of $18.7 million in cash and stock for 2009 — up 64 percent from 2007, just before the financial crisis struck. Mr. Stumpf is making twice as much as Lloyd C. Blankfein, his counterpart at Goldman Sachs. Mr. Blankfein — who for many Americans has come to symbolize this new period of Wall Street riches — was paid $9.7 million for 2009, less than some expected.

Why Obama May Back Down On Tax Hikes for the Rich – Kiplinger - What a difference a year makes. Twelve months ago, the conventional wisdom was that President Obama and the Democratic controlled Congress would have their way with tax policy, ramming through tax increases on upper income folks and businesses. Now, with Democrats having lost their supermajority in the Senate, tax hikes seem to be squarely on the back burner. Instead, Job No. 1 is boosting the economy. That means tax cuts, and lots of them. Democratic leaders are so worried about the outcome of the midterm elections that they’re determined to quickly pass a new package of economic stimulus measures, the centerpiece of which is likely to be a credit for hiring the unemployed -- a break that just a few months ago was nixed because of doubts that it would work as intended and fears that it could too easily be abused. And that’s not all: Among other things, small businesses can expect Congress to revive two popular breaks for one more year: 50% bonus first-year depreciation and the higher $250,000 limit on so-called Sec. 179 expensing of assets.

Obama Doesn’t ‘Begrudge’ Bonuses for Blankfein, Dimon (Bloomberg) -- President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay. The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.” “I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Obama says bonuses are part of free market - Barack Obama, US president, on Wednesday said he “did not begrudge” the multi-million dollar bonuses given out to Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase and added that their large pay-outs were a consequence of America’s “free market system”.  Mr Obama’s comments, in an interview with Bloomberg BusinessWeek, are likely to attract further controversy at a time when public anger over the Wall Street bonuses is increasingly being directed at Washington. They were also on Wednesday contrasted with Mr Obama’s recent criticisms of the “obscene” bonuses paid out on Wall Street as evidence that the White House was unable to sustain a clear message on the subject.

Clueless - Krugman - I’m with Simon Johnson here: how is it possible, at this late date, for Obama to be this clueless? The lead story on Bloomberg right now contains excerpts from an interview with Business Week which tells us: President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay. Oh. My. God.  First of all, to my knowledge, irresponsible behavior by baseball players hasn’t brought the world economy to the brink of collapse and cost millions of innocent Americans their jobs and/or houses.

Obama Says He’s ‘Fierce’ Free-Market Advocate, Rejects Critics (Bloomberg) -- President Barack Obama said he and his administration have pursued a “fundamentally business- friendly” agenda and are “fierce advocates” for the free market, rejecting corporate criticism of his policies.  “The irony is, is that on the left we are perceived as being in the pockets of big business; and then on the business side, we are perceived as being anti-business,” Obama said in a Feb. 9 interview in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands tomorrow.  “You would be hard-pressed to identify a piece of legislation that we have proposed out there that, net, is not good for businesses,” he added. He predicted that legislation he will sign this year would cut corporate taxes by about $70 billion.

Revenge of the Wall Street Traders: The Fat Cats Strike Back - Because there is always another nickname, another Delaware corporation, another offshore bank account, another P.O. box registered in the name of another penny stock going to a hundred to dump on another sucker born every minute. These are the types of guys who falsified the documents qualifying $7-an-hour strawberry pickers for McMansion option-ARMs, and their ubiquity in the American economy is the more mundane consequence of its epic failure to seriously police the financial markets. Perhaps what gets lost when we focus our ire on the too-big-to-fail fat-cat class is how many of the meatheads on the front lines of our financial frauds could never hope to set foot in a Goldman Sachs training class.  They have already proven that they will destroy the country if you let them, and the only thing you can trust them for is that they'll happily do it again and host a pep rally afterward to celebrate.

Testy Conflict With Goldman Helped Push A.I.G. to Edge – NYTimes - Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months. A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities. After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.

The NYT’s Latest Goldman/AIG Salvo: Missing the Real Targets? - While, “Testy Conflict With Goldman Helped Push A.I.G. to Edge.” provides some useful new tidbits, it peculiarly focuses on an aspect of Goldman’s dealings with AIG that, particularly with the benefit of hindsight, the bank can defend, and gives short shrift to other issues that implicate not only Goldman, but much bigger fish, namely the Fed and the Treasury.  The story also at quite a few junctures gives an account that appears unduly in line with AIG’s point of view, which also serves to weaken the impact of some of the legitimate issues it raises. Let us start with the central thesis which is: 1. Goldman was overly aggressive in marking down the CDOs it had insured with AIG. Remember, the bigger the losses reported on the CDOs, the more cash AIG would have to pony up to Goldman. 2. Goldman’s actions contributed to AIG’s demise.

The Times Story on Goldman's Role In AIG's Downfall Is More Damning When Placed In Context - Placed in a broader context, the front page story The New York Times, is even more damning of Goldman Sachs than readers might realize. Goldman played an active role in the destruction of AIG. During Hank Paulson's tenure as the firm's CEO, Goldman engaged in a series of sham transactions designed to give the false impression that it was buying credit default swaps as an instrument for risk management. In fact, it acquired those swaps in order to double down on bets against collateralized debt obligations, or CDOs, which it knew to be fatally flawed. In the latter part of 2008, Paulson and his proxies maneuvered AIG into a liquidity crisis in order to protect Goldman at the expense of the U.S. taxpayer.  To appreciate how the Times piece fits into a larger picture, you need to understand why these CDOs were so obviously toxic.

'The Single Most Drastic Error in Policy in Modern History' » PBS Newshour has posted a brief but fascinating interview with David Stockman, Director of the Office of Management & Budget during the Reagan era. Despite -- or, perhaps, because of -- his political and financial industry background, he pulls few punches in his remarks about the financial crisis and its aftermath. Here are a few excerpts:

Congress thinks by analogy....and so we are stuck - I don't remember what link I followed to get to this, but never in my life did I expect to agree 100% on any issue with David Stockman.  Holy wow: Credit default swaps, OK? And we weren't bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.  They didn't. They had garbage on their balance sheet. And the bailout was to make sure that they didn't suffer multi $10 billion write-downs on that AIG-supported loan. It's destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.

Enter Cede & Co II; The Fed Is Now Backstopping $25 Trillion In DTCC Cleared Credit Default Swaps - And you thought the $23 trillion in backstops for the financial system was bad, you ain't seen nothing yet. Earlier today, the Depository Trust & Clearing Corporation, best known for its Cede & Co. partnership nominee which is the holder of virtually every single physical stock certificate in the known universe, and accounts for over $2 quadrillion in stock transactions per year, announced that "the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives." With this approval the DTCC is now the de facto legally accepted global repository for over-the-counter credit derivative transactions. Simply said, the Federal Reserve is now the guarantor behind all CDS transactions that clear via DTCC, which would be pretty much all of them (sorry CME, you lose). The total bottom line in terms of gross notional? 2.3 million contracts with a gross notional value of $25.5 trillion. When the next AIG implodes, and the CDS market is once again facing annihilation in the face, who will be on the hook? You dear taxpayer, that's who.

The Ever Increasing Parallels Between AIG And Greece... And The CDS Puppetmaster Behind It All - David Fiderer's below piece, originally published on the Huffington Post, continues probing the topic of Goldman and AIG. For all intents and purposes the debate has been pretty much exhausted and if there was a functioning legal system, Goldman would have been forced long ago to pay back the cash it received. Oh, and Tim Geithner would be facing civil and criminal charges.Yet as we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece.

The Public Wants Good Outcomes, Elites and Institutions Should Try to Deliver Them - Jacob Weisberg’s article blaming “the childish, ignorant American public—not politicians—for our political and economic crisis” makes fun reading for anyone who follows politics professionally, but it’s fundamentally misguided. The fact that the public, in response to opinion polls, delivers contradictory desires about the details of public policy just shows that most people have a second-order desire to not invest their time learning the answers to these questions. If you tried to decide how to build highway overpasses by polling people, you’d have (a) paralysis, (b) shitty highways, (c) snarky articles about how public ignorance rather than bad engineering was to blame. But the reality is that that would be a dumb way to build overpasses. At the end of the day, I don’t think public opinion about policy is all that hard to figure out. People like conditions in the country to be good, and they get upset when conditions are not good. Effective politicians deliver good outcomes, and effective political institutions create incentives for those with power to do their best to deliver good outcomes.

New Mexico House Votes 65-0 To Move State’s Money To Credit Unions, Community Banks - New Mexico's House of Representatives voted Monday to pass a bill that allows the state to move $2 billion - $5 billion of state funds to credit unions and small banks. The municipal funds bill was approved 65-0 (roll call - PDF), and is subject to a vote by New Mexico's Senate. Governor Bill Richardson told the bill's sponsor that he supports the legislation. Credit Union Times, spoke to one banker who believes that the bill got a boost from Huffington Post's Move Your Money campaign:  Move Your Money is a project started by Arianna and Rob Johnson that aims to spur financial reform at big banks by encouraging account holders to move their money to smaller credit unions and community banks. New Mexico currently keeps $1.4 billion in accounts at Bank of America.

A Secular Shift? - Some analysts believe that what the economy is going through right now is not just a  recession; rather, it is what might be called a "recalibration," or "recalculation," or "reset," involving major changes in the overall structure of the economy.When that happens -- as during the Great Depression, when agriculture's share of the economy experienced a secular decline -- some jobs and industries disappear forever, eventually replaced by others. That said, unless the United States is heading down the banana republic route, I'm not sure the shift detailed in the following USA Today report, "Lobbying Industry Booms in Recession," gives us much insight on what the future holds. Or does it?

Some Random Thoughts on FDIC Insurances in the Debates - Four in fact. So a meme that has always been there, but has been growing in popularity recently is that FDIC insurance on commercial banking deposits is in large part responsible for our current financial crisis. Sandrew flags Charles Calomiris making the argument, I wrote about David Henderson making the argument, interfluidity doesn’t get Rajan’s editorial on the subject and there are many more out there. So is this the problem? Looking back at financial sector map: No. The idea that the problems of the financial crisis has been that depositors have become the driving force of risk since the rather successful 1991 FDIC overhaul is wrong.  The deposits at commercial banks, the thing the FDIC haters are putting the blame on, weren’t the ones funneling the money into SIVs – indeed among certain circles you had the opinion that SIVs and the repo markets would replace commercial banks since they did the same thing but were more efficient. But while they were more efficient, they were also way more fragile. These supercharged credit markets were subject to a supercharged bank run. Deposits weren’t anywhere in sight of this problem. Everyone see that? Now for the FDIC haters, I have a few extra questions:

Give Your Comments Here on FDIC Proposal For Executive Compensation - The FDIC is seeking public comment on a proposal to link bank deposit insurance premiums to the degree of risk-taking encouraged by the bank’s executive compensation program. Note that this measure does not require Congressional approval. However, the FDIC board is split, which makes the public’s input a much more important input than on issues where the board is united.

Why Politics Revolves Around the Median Voter - NYTimes - In fact, there is a dynamic that pushes politicians to embrace the preferences of the typical or “median” voter, who sits squarely in the middle of public opinion. A significant move to either the left or the right would open the door for a rival to take a more moderate stance, win the next election and change the agenda. Politicians will respond to this dynamic, whether they are power-seeking demagogues or more benevolent types who use elected office to help the world.When it comes to the big issues, voters at the midpoint usually get the policies, if not always the exact outcomes, they want. In the federal budget, the largest line items include Social Security, Medicare, Medicaid and military spending — all very popular programs. The interest on the national debt is mounting because we don’t like paying higher taxes now for all those benefits, so our government borrows to postpone the pain.

The perils of economic populism - One view of this new populist uprising is that it’s about Main Street versus Wall Street, and is grounded in voters’ fury at the bailout of irresponsible bankers. But that’s too simple. While the banks are public enemy No. 1, there’s a much wider-ranging anger out there, a sense that everyone except the ordinary middle-class person is getting some sort of handout. Big Business, Big Government, and Big Labor: voters don’t seem to like any of them. The bailout of the auto industry, after all, was as unpopular as the bailout of the banks, even though it was much tougher on the companies (G.M. and Chrysler went bankrupt; shareholders were wiped out, and C.E.O.s pushed out), and even though the biggest beneficiaries of the deal were ordinary autoworkers. You might have expected a deal that helped workers keep their jobs to play well in a country spooked by ballooning unemployment. Yet most voters hated it

Dodd: Senate “a dysfunctional institution”; Senators need to start acting like Senators; “were about to abandon the essence of the Senate”(video) There are still old-time Democrats that treasure the institution of the Senate. Senator Dodd is one of them. I had previously spoken with him about Republican obstruction and, without prompt, the Senator launched a full-throated defense of the filibuster, eventually saying that it was part of what made the Senate the Senate and should not be abandoned. Remembering those words, when I ran into him yesterday, I asked what he thought of reconciliation and recess appointments. He never answered that question, but he had some pretty strong words for the conduct of certain Senators (that remained unnamed), saying they needed to “start acting like Senators”.

Paul Krugman: Yes, We Are Poland - Ezra Klein helpfully explains how a hold works: basically, the normal running of the Senate requires unanimous consent on procedural matters, so any individual senator can stop everything by threatening to withhold that consent. So we really are 17th-century Poland. (As commenters pointed out, the end result of all that was the disappearance of Poland itself, partitioned among its less dysfunctional neighbors.

Should Economists Be Sued for Malpractice - Maxine - How did it come to pass that many people cannot tell the difference between cynical posturing and serious economic argument? I lay much of the blame at the feet of my own discipline, but how did the discipline of economics manage to accomplish this potentially tragic result?  Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote.  If economists were physicians, we would be sued for malpractice.

Krugman: ‘Dark age of macroeconomics’ is upon us - “In the Dark Ages, people forgot what the Greeks and Romans had learned.” It is an analogy Krugman favors these days when he thinks about his own profession. “We’re living in a dark age of macroeconomics,” Krugman said during his lecture, before an audience of several hundred students (and several of his former MIT colleagues) in the Stata Center. “Economists themselves are confused,” he added. “It’s been really amazing within the economics profession to see how much has been lost.” What has been lost above all, Krugman argued, is an appreciation of ideas developed in the 1930s — most notably the economist John Maynard Keynes’s broad view that in certain circumstances government spending is the best tool to instigate an economic recovery. At a time when interest rates are minimal and can hardly be lowered to spur private investment, Krugman argued, Keynesian thought is especially vital, despite some loud arguments to the contrary.

Apocalypse Now? - When MarketWatch highlights the following by a leading columnist, there is evidence that too many people are expecting the worst. Paul Farrell, in How to invest for a global-debt-bomb explosion; Prepare for an apocalyptic anarchy ending Wall Street's toxic capitalism, says: He goes on in this vein for two electronic pages, without modulation. His preferred solution is that the reader become filthy rich and purchase a defensible ranch in Idaho, to guard against marauding revolutionaries and starving peasants. Objectively, apocaplypse will involve nuclear devastation, massive droughts, pestilence, armed invasion by a hostile power, etc. Debt restructurings not...The world will keep spinning, farmers will keep farming, homebuilders will keep building, supply and demand forces will keep working, and most likely Mr. Farrell will regret having taken such an extreme position.

John Quiggin: Zombie Ideas Walk Again - A glutton for punishment, I’ve decided the Zombie Economics book manuscript I submitted a month ago (mostly online here) is in urgent need of more zombies. I’ve been struck, even in that short space of time by the extent to which, with undeniable “green shoots” now appearing, the zombie ideas I’ve written about are clawing their way through the softening soil and walking among us again. The most amazing example is that of the Great Moderation – surely you would think no one could believe in this anymore, but they do. So, I’m planning to add a bit to each chapter, pointing to examples of these ideas being revived. I’d appreciate good examples for the rest: Trickle Down, Micro-based Macro the Efficient Markets Hypothesis and Privatisation.

Financial Crisis Rooted In Corp. Tax Deduction - Washington invariably prefers the quick fix and ignores the underlying causes of whatever problem it faces. What better example than the financial crisis? At its most fundamental level, we underpriced the risk of mortgages and other financial assets. Why? President Obama and Congress have focused on the moral hazard of "too big to fail" financial institutions driven by bonus crazy CEOs making bets backed by government insurance. There's plenty of truth in that, but the deeper cause was easy money. A month ago, I defended Ben Bernanke's refutation of charges that the Fed's 2004 to 2006 easy money policy was to blame. So if, Fed monetary policy wasn't too easy, what was wrong? The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1. That negative tax rate is the root of the fiscal crisis. Taxpayers paid a large subsidy for Wall Street investors to take those risks.

Debt taxation datapoint of the day - I’ve been banging on for a while that one key cause of the crisis was the tax-deductibility of interest payments, and the incentive that allows companies to finance themselves with dangerous debt rather than safer equity. But I didn’t realize it was this bad. Pete Davis finds this table in an October 2005 CBO report, at the height of the debt bubble: It really is as bad as that: companies financing themselves with equity pay an effective tax rate of 36%, while companies choosing debt pay a negative tax rate of 6.4%. How is that even possible? The CBO report explains...The effective tax rate on debt-financed corporate capital income is negative in part because accelerated depreciation and interest payments generate tax deductions in excess of taxable income, which leads to corporate tax refunds. This can’t be healthy.

PPIP Funds Purchase $3.4B in "Toxic" Mortgage Securities: The Treasury released its initial PPIP report Friday, detailing the first concrete progress made under the program since it was announced nearly a year ago as a means of relieving banks of soured real estate assets. So far, the PPIP funds have amassed a total of $24.8 billion to buy up mortgage-backed securities (MBS) – $6.2 billion in private capital, which was matched dollar-for-dollar by the Treasury, as well as another 12.4 billion of debt capital provided by the Treasury. About 14 percent of that-$ 3.4 billion-has been deployed to acquire securities that meet the program guidelines, meaning they were issued prior to 2009 and were originally rated AAA before the real estate crash sent values and loan performance plummeting. As of December 2009, roughly 87 percent of the PPIP portfolio holdings are private residential mortgage-backed securities (RMBS), or $2.97 billion. Thirteen percent of the funds’ bond purchases consist of commercial mortgage-backed securities (CMBS), or $440 million

“The Federal Government Has Become the Mortgage Market” - The role of Federal government in financing housing has grown so dramatically since the outset of the housing crisis that the government now no longer simply supports the mortgage market.  It has taken on so much of the risk involved in financing housing that it has become the market, with the taxpayer shouldering the risk that had once been borne by the private investor. That’s the view Neil Barofsky, the Special Inspector General for TARP, in his most recent quarterly report to Congress. Click on this link for a copy. (pdf)

No Exit in Sight for U.S. As Fannie, Freddie Flail - When Charles E. Haldeman Jr. became Freddie Mac's chief executive officer in August, the ailing housing-finance giant had already consumed $51 billion of government money to stay afloat. It's likely to need even more. Freddie's federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn't likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.Freddie and its larger rival, Fannie Mae, were among the first big financial institutions to receive massive federal bailouts after the financial crisis hit in 2008. Government officials have been racing to fix bailed-out car makers and banks and are pushing to reshape the financial-services industry. But Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.

Fannie and Freddie Stagger On as Troubled Wards of the State - WSJ - Nearly a year and a half after the outbreak of the global economic crisis, many of the problems that contributed to it haven't yet been tamed. The U.S. has no system in place to tackle a failure of its largest financial institutions. Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows. And investors remain heavily reliant on the same credit-ratings firms that gave AAA ratings to lousy mortgage securities. Freddie and its larger rival, Fannie Mae, were among the first big financial institutions to receive massive federal bailouts after the financial crisis hit in 2008. Government officials have been racing to fix bailed-out car makers and banks and are pushing to reshape the financial-services industry. But Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.

 It's Official: Fannie And Freddie Now Exist Merely To Lose Money, Bail Out Homeowners, And Prop Up House Prices  - Now that the Treasury has removed any cap on the amount of money taxpayers will shovel down the Fannie and Freddie rat holes, the companies have stopped making any bones about the business they're in. And what business is that? The "foreclosure-prevention" business. (a.k.a., modify mortgages so homeowners can stay in houses they should never have bought and keep buying mortgages so mortgage rate will stay low and prop up house prices). It's a tough job, but someone has to do it.

Buying out the mortgage market - Mortgage finance twinned with accounting rarely makes compelling reading, but bear with us. Wednesday’s announcement that the two US Government Sponsored Enterprises (GSEs) will start buying out certain loans, has interesting repercussions for the mortgage market as a whole, as well as the Federal Reserve’s exit programme. Freddie plans to buy “substantially all” mortgages delinquent by at least 120 days from its fixed-rate and adjustable rate securities. Fannie, meanwhile, will start repurchasing loans for mortgage-backed securities (MBS) trusts that are delinquent by four or more consecutive months.

Freddie Mac Will Buy Out 120-Day Delinquent Mortgages - Government-sponsored mortgage securitizer Freddie Mac said today it will buy “substantially all” mortgages delinquent by at least 120 days from the company’s related fixed-rate and adjustable-rate mortgage (FRM and ARM) Participation Certificate (PC) securities.“[T]he cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company’s mortgage-related investments portfolio as a result of the required adoption of new accounting standards and changing economics,” Freddie said in the announcement today. New Financial Accounting Standards (FAS) 166 and 167 affected the transfer of financial assets and the consolidation of variable interest entities. Essentially, the standards require financial firms to bring securitized

Freddie Mac To Purchase Substantial Number of Seriously Delinquent Loans From PC Securities Press Release -  Freddie Mac (NYSE: FRE) announced today that it will purchase substantially all 120 days or more delinquent mortgage loans from the company's related fixed-rate and adjustable-rate (ARM) mortgage Participation Certificate (PC) securities.The company's purchases of these loans from related PCs should be reflected in the PC factor report published after the close of business on March 4, 2010, and the corresponding principal payments would be passed through to fixed-rate and ARM PC holders on March 15 and April 15, respectively. The decision to effect these purchases stems from the fact that the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company's mortgage-related investments portfolio as a result of the required adoption of new accounting standards and changing economics. In addition, the delinquent loan purchases will help Freddie Mac preserve capital and reduce the amount of any additional draws from the U.S. Department of the Treasury. The purchases would not affect Freddie Mac's activities under the Making Home Affordable Program

Fannie Mae, Freddie Mac Loan Purchases May Spur ‘Wad of Cash’ (Bloomberg) -- Fannie Mae and Freddie Mac’s plan to step up purchases of delinquent loans may boost prepayments on their securities to rates that in some cases would erase all of the debt within a year. The constant prepayment rate, or CPR, for Freddie Mac’s 30- year fixed-rate securities with 6.5 percent coupons will likely surge by 70 this month under the plan released yesterday by the McLean, Virginia-based company, based on Bloomberg calculations. The measure, which was 17.2 last month, represents the share of the debt that would be retired in a year at the current pace.  Freddie Mac said yesterday that it would buy “substantially all” loans with payments late by 120 days or more from its securities in the next month. Fannie Mae said later that it will “increase significantly” its buyouts, setting a less aggressive timeline.

Barofsky's warning: We're all on welfare now | Washington Examiner - When Inspector General Neil Barofsky, testified before Congress late last month, he received ample coverage for highlighting the incompetence of Treasury Secretary Tim Geithner in his work bailing out AIG. Lost in the AIG headlines was another urgent warning contained in his new report . An entire section details the federal government's extensive efforts to reinflate the sagging housing bubble. Although Barofsky draws no staggering conclusions, the facts he presents are staggering all on their own -- especially if you're a homeowner. The unspoken, bottom line: The federal government has already nationalized the housing industry. We're not just talking about Uncle Sam providing a few subsidies, or even taking over a few of the big players, as they have in the auto industry. This is a complete takeover. Every new mortgage today is a government mortgage.

Fed MBS Purchase Program 95% Complete - The countdown continues ... The following graph is from the Atlanta Fed Financial Highlights, and shows the Fed MBS purchases by week: The Fed purchased an additional $11 billion net in MBS through the week of Feb 10th, bringing the total to $1.188 trillion or just over 95% complete.

We're Paying WHOM to Fix Subprime Mortgages? Why, subprime lenders, of course. (list) -The Treasury Department has allocated $75 billion to entice lenders to let beleaguered borrowers stay in their homes. And the companies getting most of that money—well, they're the same companies that got the borrowers into this mess. At least 21 of the top 25 recipients in the Home Affordable Modification Program were major subprime lenders, according to the Center for Public Integrity. Meanwhile, not even 1 in 5 homeowners eligible for the program has gotten help.

The second lien sticking-point - As a reminder, the Home Affordable Modification Plan aims to help keep people in their houses primarily by lowering interest rate payments. It’s not had a lot of success so far, so people are starting to look at possible ways to rejig the programme. One of those is principal forgiveness, instead of just forbearance, for underwater homeowners. But there’s one big thing standing in the way of principal reduction; second lien mortgages, or second mortgages taken out on a property. Normally second lien mortgages rank subordinate to the first mortgage (first lien). In principle, that means if the property is sold or the borrower defaults, the first lien lender is first in line to get the resulting money, followed by the second lien lender.When mortgage modifications like Hamp come into play, that traditional priority order is reversed. The borrower is paying the Hamp-modified (i.e. lower) first lien amount, and the full second lien amount, so the second lien effectively becomes senior to the first

Strategic Non-Foreclosure Becomes Official Policy - One of my favorite bizarre twists on the credit crisis and housing collapse has been the concept of Strategic Non-Foreclosures. I usually mention this when speaking to groups to see the reactions people have — they tend to be stunned at the banking opposite of Walkaways (Strategic Defaults). But now, under the guise of new bank experiments, the Strategic Non-Foreclosure is becoming official policy. First, we get friendlier terms such as “Soft foreclosure” or “Deed for Lease.” And, it appears to offer numerous benefits for both parties (though more for the banks then the borrower):

Irony, Thy Name Is The MBA - If this doesn’t define irony, nothing does: The Mortgage Bankers Association, taking a big loss on an ill-timed property investment, sold its 10-story Washington headquarters for $41.3 million to CoStar Group Inc., a provider of commercial real-estate data. The price is far below the $79 million the trade group said it paid for the glass-walled building in 2007, while it was still under construction. I mean, do I have to say anything else? I don’t, right? It could only be funnier if it was the National Association of Realtors.

Commercial mortgage failures threaten system: overseer - Over the next few years, a wave of commercial real-estate loan failures could threaten America's financial system, and in the worst case scenario, hundreds of additional community and midsize banks could face insolvency, a congressional watchdog group said Thursday.  According to a report by the Congressional Oversight Panel, a watchdog group for a $700 billion bank-bailout package, about $1.4 trillion in commercial real-estate loans will reach the end of their terms between 2010 and 2014, of which nearly half are now under water (that is, the borrower owes more than the underlying property is currently worth).

Serious Pain in Commercial Real Estate Just Starting - Yves Smith - The February report from the Congressional Oversight Panel makes for sobering reading. It forecasts $200 to $300 billion in losses coming from commercial real estate loans, and notes these were not considered in the famed stress tests, since that process looked only through 2010, when the losses from CRE will peak later...The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Construction loans can and will deliver large losses. Even though construction loans require interest payments during the building and lease-up/sales period, this is all a finesse, since the interest is paid out of the loan balance.

US banks facing $1.4tn crisis over commercial property loans - America's fragile high street banks are bracing themselves for a fresh financial crunch as a wave of commercial property mortgages go sour on offices, shops and factories, causing losses of up to $300bn (£192bn) hitting nearly 3,000 small- and medium-sized financial institutions. A congressional oversight panel charged with scrutinising the Obama administration's bailout efforts has warned that $1.4tn of loans covering commercial premises will reach maturity between 2011 and 2014. After a plunge in property prices, nearly half of these loans are underwater, with borrowers owing more than their underlying property is worth. An analysis by the panel found that 2,988 of America's 8,100 banks have potentially dangerous exposure to commercial property loans. The impact could damage hopes of a US economic recovery and could cause a further squeeze in the availability of credit to consumers and businesses.

Moody's: CMBS Delinquency-Rate Increases Sharply - From Moody's: The delinquency rate on CMBS conduit and fusion loans increased by more than 50 basis points in January, bringing the total rate to 5.42%. The total delinquent balance is now more than $36 billion, a $3 billion increase over the month before. By dollar and basis points, this is the largest increase in the delinquency rate thus far in the downturn, as measured by the Moody’s Delinquency Tracker (DQT). Hotels and multi-family are the worst, but delinquencies are increasing in every category - especially for retail.

Defaults on FHA Loans Surpass 9% - Even with improvements beginning to peek through the debris of the housing crisis, mortgage defaults continue to rise at an incredible rate, and the story is no different for the federal government’s mortgage insurance agency. The latest numbers from the Federal Housing Administration (FHA) show that the percentage of loans it backs that are at least 90 days past due hit 9.12 percent at the end of 2009. That figure is up from 6.82 percent one year earlier – a 34 percent increase.

Fitch: Prime Jumbo RMBS Approach 10% Delinquent - From Fitch: New Year, No Improvement as U.S. Prime Jumbo RMBS Delinquencies Approach 10% U.S. prime jumbo loan performance continued to weaken in January as serious delinquencies rose for the 32nd consecutive month, according to Fitch Ratings in the latest edition of Performance Metrics. "The new year has brought no relief from declining jumbo loan performance," said Managing Director Vincent Barberio. "The trend line for delinquencies indicates the 10% level could be reached as early as next month." Although prime jumbo loan delinquencies began to rise in the second quarter of 2007, they accelerated in 2009 nearly tripling over the course of the year. ...Overall, prime jumbo RMBS 60+ days delinquencies rose to 9.6% for January (up from 9.2% for December 2009).

Paying People Not to Walk Away - NYTimes - On Monday, Loan Value Group L.L.C. of Rumson, N.J., introduced a program that it offers to lenders and mortgage servicers who want to identify borrowers most likely to engage in what’s come to be known as a “strategic default.” Once those lenders find the likely candidates, they can approach them pre-emptively with an offer of money that they would get later if they satisfy the terms of their loans.To identify those borrowers most likely to strategically default, Loan Value Group analyzes loans using about a dozen criteria. These include negative equity level (say a loan-to-home-value ratio of 115 or higher), income level and geographic location. Then, it uses similar criteria and behavioral economic theory to determine the necessary reward amounts for such borrowers. Instead, the program, called Responsible Homeowner Reward, is targeted at those borrowers most likely to make a conscious decision to walk away from their home because it no longer makes financial sense for them to stay. (See how to determine if it makes financial sense for you to walk away here.) The reward amounts don’t make up all of a borrower’s negative equity. Instead, they’re designed to be just enough to encourage a borrower to stay put based on behavioral economic theory.

How long will you be underwater?, I: Some Numbers - Let’s assume that there’s an option value in being above water in your mortgage, if only because you can sell it without having to go into your pocket for additional payments. You’d have to do that for the massive transaction and closing costs in the exercise we are about to do, so we’ll assume that’s even. I’m also fascinated by this post at calculated risk. They reproduce this graph:  Noting: “Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity….The default rate increases sharply for homeowners with more than 20% negative equity.” This got me thinking: what does the payment schedule look like for someone who is 20% negative equity? How long will you be underwater, given reasonable market conditions?

Citi's Deed-in-Lieu Program - Press Release: Citi to Pilot Foreclosure Alternatives Program to Help Distressed Borrowers In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner's association and escrow fees, will be determined on a case-by-case basis

Is The FDIC Killing Short Sales? - As some of you already know, I blogged recently about being interviewed recently by our local NBC news affiliate.  To read the blog, click here.  Basically, IndyMac Bank (now OneWest Bank), is holding one of my clients hostage, demanding a $75k promissory note, or they will proceed to foreclosure.  For the life of me, I couldn't figure out why they were doing this.  The BPO came in at the contract price of $275k, with a net to IndyMac of $241k.  What advantage could there possibly be for them to proceed to foreclosure?Yesterday, I figured it out.  You see, IndyMac was taken over by the FDIC and sold to OneWest Bank in March/2009.  Guess who the investors are behind OneWest?  George Soros, Michael Dell, Steve Mnuchin (former Goldman Sachs executive), and John Paulson (hedge-fund billionaire). Now, listen to the deal they got from the FDIC....

MBA: Mortgage Purchase Applications Decline, Rates Fall below 5.0% - The Market Composite Index, a measure of mortgage loan application volume, decreased 1.2 percent on a seasonally adjusted basis from one week earlier. ... The Refinance Index increased 1.4 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.0 percent from one week earlier. ... The four week moving average is up 0.8 percent for the seasonally adjusted Purchase Index, while this average is up 4.8 percent for the Refinance Index. The refinance share of mortgage activity increased to 69.7 percent of total applications from 69.2 percent the previous week. ...

Foreclosures Drop 10% in January: RealtyTrac - After hitting a record high in 2009, US foreclosure filings in January dropped 10% from the previous month, according to the online market place RealtyTrac.More than 315,000 homes received a foreclosure filing, which include default notices, scheduled foreclosure auctions and bank repossessions. Although the numbers improved from December, levels remain 15% above January 2008. “January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James Saccacio, CEO of RealtyTrac. “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”

US home loan demand drops despite drop in rates  (Reuters) - U.S. mortgage applications dipped last week, reflecting reduced demand for home purchase loans even as rates on 30-year loans fell to their lowest since December, data from an industry group showed on Wednesday. A continuation of lackluster demand for home purchase loans would not bode well for the U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention. The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, fell below 5 percent for the first time since the week ended Dec. 18. Low mortgage rates fueled a slight uptick in demand for home refinancing loans last week, with activity reaching its highest level since the week ended Dec. 11.

'Cash-in' refis growing in popularity - latimes - Thinking of cashing out some equity when you refinance your mortgage? Sure, that used to be what millions of homeowners did when they needed extra money. But now get ready for the post-boom, post-crash trend: "cash-in" refis -- the opposite of cash-outs. "It almost sounds un-American," quipped Frank Nothaft, chief economist for mortgage giant Freddie Mac. After all, Americans have grown accustomed over much of the last two decades to tapping into their equity -- pulling out a chunk of cash and adding to their debt load -- when they refinanced their mortgages. "Almost nobody thought of putting money back in."Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.

U.S. Foreclosure Filings Top 300,000 for 11th Month (Bloomberg) -- U.S. foreclosure filings rose 15 percent in January from a year earlier and exceeded 300,000 for the 11th consecutive month as modification programs failed to keep delinquent borrowers in their homes, RealtyTrac Inc. said. A total of 315,716 properties received a notice of default, auction or bank seizure last month, or one in 409 households.  Filings fell 10 percent from December.Bank seizures, also known as real-estate-owned or REOs, may rise to a record 3 million this year, RealtyTrac said last month. About 66,000 delinquent loans out of a targeted 4 million by 2012 were permanently modified as of Dec. 31 under the Obama administration’s Home Affordable Modification Program, according to the Treasury Department. About 787,000 mortgages are in trial programs that change loan terms.

Homeowners Rent Out Rooms to Stave off Foreclosure - Reeling from the recession's one-two-three-punch of job woes, climbing mortgage payments, and evaporating equity, desperate Silicon Valley homeowners are dipping into a nearby income stream to avoid foreclosure: While renting out a room has been around for years, especially in the South Bay's Latino neighborhoods, sharing a home in order to save it has become an increasingly popular way to hang on to the front-door keys to the American dream.Whether they've rented out rooms in the past to make ends meet, or a job loss has prompted them to tap into their inner landlord for the first time, many people say their rental income is the only thing keeping them from losing their homes. And for many homeowners — even those whose property is worth less than their loan amount — losing their home is not an acceptable option.

Paying your credit card bill before the mortgage -  TransUnion, one of the big credit bureaus, recently released a report showing that an increasing number of consumers are choosing to pay their credit card bills before their monthly mortgages.  The percentage of people delinquent on their mortgages but current on credit cards jumped to 6.6 percent in the third quarter of 2009, up from 4.9 percent in the third quarter of 2008.  The percentage of consumers current on their credit cards but delinquent on their mortgages first surpassed the percentage of consumers up to date on their mortgages but delinquent on their credit cards in the first quarter of 2008, according to TransUnion.

Forget the Mortgage, I'm Paying My Credit Card Bill - Amid high unemployment and sliding home prices, a growing number of struggling consumers are doing what was once considered unthinkable: paying their credit card bills instead of their mortgages. A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008. Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1 percent to 3.6 percent over the same time period.

How Average Americans Are Lured Into Debt Servitude By Promises of Mega Wealth - The bottom 90 percent have been saddled with 73 percent of all debt.  In other words much of their so-called wealth is connected to debt.  Debt is slavery for many especially with egregious credit card companies taking people out with absurd credit card tricks and scams.  Yet the corporate propaganda machine is strong and mighty.  Have you ever received an inheritance?  A large one?  Probably not because only 1.6% of all Americans receive an inheritance larger than $100,000.  If this is the case, why in the world do politicians worry so much about the tax impacts of this?  Because they want to keep the corporatocracy alive and well so their spawn can get a piece of their pie.  They give the illusion to average Americans that if you only work hard enough you too can join this elusive club of cronies.  The data shows otherwise.

Is President Obama Opposed to Workers Saving for Retirement? - That is what USA Today claims. It told readers that the Obama administration believes that current saving rates are impairing economic recovery: "It [job growth] will be even tougher if Americans continue to save at high rates — somewhere in the 4% to 7% range — as the White House report predicts they will until the financial services sector eases lending."  Actually, the current saving rates are close to half of historic saving rates.

What’s wrong with these pictures? – We learned in Econ 101 the basic formula for gross domestic product: GDP = C + I + G + Net Exports.  Perhaps in the same lecture we were told that consumption was the least volatile and largest component of output, accounting for roughly 2/3rds of the sum. It took no forecasting wizard to draw these conclusions: From 1960 to 2000, consumption’s share of output averaged 65.6%, fluctuating with a standard deviation of only 1.8%. As the chart below shows, one consequence of U.S. consumer’s great borrowing and spending spree was a “breakout” of consumption’s already massive share from its long-held “trading range.” Since 2006, consumption has accounted for over 70% of GDP.  In hindsight, it’s not a pretty picture of what it takes to reach this level of consumerism-mainly massive and unsustainable deficit financing across the economy.  So then, with last Friday’s GDP report, we find that the U.S. consumer is still wielding its clout. After hitting an all time peak of 71.3% in Q3-2009, consumption still accounted for 70.7% of Q4-2009 GDP. 

Average Credit Card Debt Drops to $3,752 Per Adult, $7,394 Per Household-- The average American adult is carrying $3,752 in revolving debt, and the average American household is carrying $7,394 in revolving debt, according to new figures released by, a credit card comparison Web site and leading online provider of credit card industry news and research. The debt load dropped significantly since the last report in July 2009, when average revolving debt per adult was estimated at $4,013, and the average household revolving debt was $7,861."Debt levels have gone down for two reasons," said founder Adam Jusko. "Number one, consumers are simply spending less because of the overall economy, so fewer new charges are ending up on credit cards. Number two, credit card issuers have been actively shedding customers, especially those seen as higher risk, because of the higher number of defaults they've had to endure recently. Combine less spending with fewer cards in consumers' hands, and it's no surprise that debt levels are decreasing."

Capital One doubles credit card rates – Telegraph - The rate increases will come into force after customers receive their March statements, with the new interest rates shown on their April ones.The group declined to say how many of its customers were affected by the move.A Capital One spokeswoman said: "The economic environment has changed dramatically and we must adjust rates to account appropriately for the increased risk of lending to consumers in an economic downturn."This significant downturn means that we have had to increase rates for some of our customers by up to 7pc. "This decision reflects similar moves throughout the credit card industry."

Prominent CFPA Supporters Turn Up Volume - Several prominent policy makers rallied Tuesday to support the creation of an independent Consumer Financial Protection Agency, as anticipation mounts over the details of legislation that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) is drafting to overhaul financial regulation. 1) Harvard’s Elizabeth Warren, whom many credit with coming up with the idea of an independent CFPA, penned an editorial in The Wall Street Journal. She blasted the banking industry for lobbying so aggressively to kill the creation of an independent consumer agency:2) Several state attorneys general, Tom Miller of Iowa, Lisa Madigan of Illinois, and Dick Blumenthal of Connecticut, held a conference call and pushed for the creation of an independent CFPA.3) House Financial Services Committee Chairman Barney Frank (D., Mass.) followed up with his own harsh words for those in the banking industry lobbying against the creation of a CFPA.

This Trend is Not Your Friend: Wall Street’s Killer Instinct Spells Death Knell for Jobs - I think it’s time to take Wall Street literally: they’ve made it abundantly clear they have an insatiable appetite for killing things: the housing market, the financial system, the economy, reform legislation, the next generation’s future.  Wall Street is so steeped in destruction that the symbols of death are everywhere.  Wall Street calls the big newspaper ads they take out to herald the launch of their market offerings a “tombstone.”  What does Wall Street call the completion of a buy or sell order: an “execution.”  Wall Street calls an order to complete a trade without any reduction in quantity a “fill or kill.”  This could just as reasonably be called a “fill or cancel” order but it’s so much more fun for the thundering herd to race around a trading floor screaming “kill it, kill it!” What is the benefit to Wall Street in killing things or bringing the share price of companies to near worthless?  Tails they win; heads you lose.  Wall Street can and does make enormous profits on bets that share prices will decline (shorting), that companies will disappear (credit default swaps), that the economy will crater (interest rate swaps).  And there’s a slogan on Wall Street: the trend is your friend.

Competing histories - Atlanta Fed blog - If your economic forecast for the coming year embeds something like robust growth in consumer spending, last Friday's Federal Reserve report on consumer credit should probably give you pause. At least some folks look at that picture and see a slow slog ahead. Calculated Risk sums up the concern:"Consumer credit has declined for a record 11 straight months—and declined for 14 of the last 15 months and is now 4.8% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit—unless the recovery is built on business investment and exports (seems unlikely to be robust)." At Angry Bear, the question is a little more pointed:"Remind me again why all those banks were 'bailed out?' Wasn't it supposed to be to kick-start the economy again?"

Small-Business Owners Remain Pessimistic - Small-business owners in the first month of the new year remained pessimistic about the economy, according to a report released Tuesday. The Small Business Optimism Index has now posted seven quarterly readings below the 90 mark as small business owners entered 2010 the same way they left 2009: still downbeat on the economy. The index, though, in January did post a small gain, of 1.3 points over December, rising to 89.3, reported the National Federation of Independent Business in a press release Tuesday. Seven of the index’s components posted gains and one remained unchanged. Two components — plans to increase employment and invest in inventories — remained negative, but became less negative.

Small business: Wanted: more customers -  What's the biggest problem? "Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers." That will tend to make life hard on a businessman. Of course, that biggest of problems won't be going away until the economy begins adding more jobs than it's destroying, and obviously small businesses aren't there yet. The Obama administration is betting that by creating an incentive to hire, it will change the math—firms will move from cutting jobs on net to adding jobs on net, which will increase the number of customers out there, which will, in turn, feed more hiring. Hopefully, that will be enough, but the proposed $33 billion looks awfully small given the 15 million unemployed.

No Job Growth for Small Business Spurs Recovery Doubt (Bloomberg) -- Small businesses are becoming the Achilles heel of the U.S. recovery by limiting growth and job creation. Improvement in the unemployment rate, which fell to 9.7 in January from 10 percent in December, may stall later this year if these firms aren’t hiring, and growth likely won’t meet the median 2.7 percent annual rate forecast for 2010 by 67 economists in a Jan. 14 Bloomberg News survey.

Will Small Business Stunt An Employment Recovery? - Yesterday, Bloomberg had a rather depressing article about why the employment picture might not get cheerier anytime soon: small businesses continue to cut jobs. Since they account for 70% of new job creation, if small businesses aren't hiring, it will be a very, very slow ride down from 9.7% unemployment.  And it quotes a Goldman economist: "It suggests that a V-shaped economic rebound is even more unlikely than suggested by many standard economic indicators," said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York, which sees gross domestic product growing 2.3 percent this year. Unfortunately, I think this view makes a lot of sense. I've written a few times that this recession's recovery might not resemble the usual quick road back to full employment. Labor immobility is a big problem. Consumer credit tightening should keep spending low and encourage personal debt reduction. While larger businesses are getting more credit, smaller ones aren't having as easy a time, though the government is pushing to change that.

Five myths about how to create jobs - With the unemployment rate in the United States lingering just below 10 percent and the midterm elections just nine months away, job creation has become the top priority in Washington. President Obama has called for transferring $30 billion in repaid bank bailout money to a small-business lending fund, saying, "Jobs will be our number one focus in 2010, and we're going to start where most new jobs do, with small business." The fund is among several measures -- tax incentives, infrastructure projects, efforts to increase exports -- that the White House has proposed to help boost employment. As Americans consider the various approaches, we must have realistic expectations. We need to debunk some myths about what it takes to stimulate job growth.

The problem with more small-business lending as a creator of jobs - A new survey out from the management consultancy George S. May International sheds some light on the issue. In a survey of 713 small business owners, 80% gave their businesses a nine-month lifespan should economic conditions not improve. Four percent figured they'd be out of business within six months, and 16% said they'd be belly up within three months without a broader economic uptick. Who wants to go lend money to small businesses now? As George May managing director Paul Rauseo said in releasing the results: “There continues to be a lot of fingerpointing going around, and small business owners are blaming the banks for not lending credit to them, which may result in their businesses folding. But the banks are not the problem; small business owners needs to get themselves into a position where the banks will be able to lend to them.” An interesting take.

Quelle Surprise! Lack of Small Business Hiring Likely to Put Dent in Recovery - Yves Smith - The article tonight at Bloomberg, “No Job Growth for Small Business Spurs Recovery Doubt,” is a bit surprising, because so many of the people quoted in the article seem….surprised. It appears to have suddenly dawned on some economists and commentators that small concerns aren’t adding jobs, and that might have broader ramifications. What is peculiar instead is the LACK of interest in the small business sector. In the last expansion, the overwhelming majority of hiring took place in small businesses. By contrast, big companies in the US shed jobs.  So why so little focus on small businesses?

Construction Employment Outlook - TIME asks: The Great Recession: Will Construction Workers Survive?  Nationally, unemployment fell to 9.7% in January, but in construction it jumped to 24.7% ...And it won't get better in 2010. The following graph shows construction employment (total) and as a percent of non-farm payroll employment. Although construction employment is off 2.1 million workers since the peak, there will be no increase any time soon....any improvement in residential construction employment will be small, in fact completions in 2010 will be at an all time record low (see: Housing Stock and Flow). And in 2010 the number of 5+ unit completions will collapse:

BLS: Few Job Openings in December - From the BLS: Job Openings and Labor Turnover Summary There were 2.5 million job openings on the last business day of December 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 1.9 percent. The job openings rate has held relatively steady since March 2009. The hires rate (3.1 percent) and the separations rate (3.2 percent) were essentially unchanged in December. The following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Reactions to last week's economic data - Normally the establishment survey is regarded as the more reliable, though Tim Kane has argued that the household survey sometimes does a better job of recognizing turning points. We might look to some other labor market indicators to try to referee the current dispute. Automatic Data Processing constructs its own estimate based on the 22 million Americans whose payrolls it helps prepare, and their guess was that the economy shed 22,000 private sector jobs in January on a seasonally adjusted basis. Since BLS estimates that 8,000 government jobs were lost in January, ADP's estimate is about 10,000 more pessimistic than the BLS payroll figure. The Institute for Supply Management's survey of nonmanufacturing establishments found more managers reporting declines in employment than reported increases in employment in January. By contrast, their survey of manufacturing establishments found more managers reporting increases in employment than declines. Fair to say that the signals are mixed, but things may not be as bad as the BLS nonfarm payroll numbers suggest.

It’s Worse Than It Looks, or: Would You Seasonally Adjust Noah’s Flood? - The drop in the unemployment rate to 9.7% is an artifact of seasonal adjustment: Employment on the Household Survey actually fell from 137.953 million to 136.809 million. Seasonally adjusted, it rose from 137.792 million to 138.333 million. That is, the actual number of people who said they had jobs fell, but by less than would occur in a typical December-to-January period. Temporary hiring during the Christmas season tends to bulk up the employment numbers, which normally fall during January.What if the temporary jobs weren’t there in the first place? In that case, seasonal adjustment wouldn’t apply; the normal December-to-January tick would be swamped by the structural change. It’s sort of like seasonally adjusting rainfall patterns during Noah’s flood.

The Case Against Layoffs: They Often Backfire - Newsweek - There are circumstances in which layoffs are necessary for a firm to survive. If your industry is disappearing or permanently shrinking, layoffs may be necessary to adjust to the new market size, something occurring right now in newspapers. Sometimes changes in technology or competitors' embrace of cheaper overseas labor makes downsizing feel like the only alternative. But the majority of the layoffs that have taken place during this recession—at financial-services firms, retailers, technology companies, and many others—aren't the result of a broken business model. Like the airlines' response to 9/11, these staff reductions were a response to a temporary drop in demand; many of these firms expect to start growing (and hiring) again when the recession ends. They're cutting jobs to minimize hits to profits, not to ensure their survival. As for firms that have no choice but to cut jobs, if your company is the 21st-century equivalent of the proverbial buggy-whip industry, don't fool yourself—downsizing will only postpone, not prevent, your eventual demise.

The massive cost of underemployment - Those of us who have learned to always look at the formerly-obscure U6 underemployment measure on the first Friday of every month have long been shocked at the number of people who want to work full-time but who in fact are working part-time. A new study from Andrew Sum and Ishwar Khatiwada of the Center for Labor Market Studies quantifies the cost of today’s unprecedented levels of underemployment on society as a whole; I can’t find the version that was emailed to me online, but a shorter version is here. In any case, here’s the bottom-line table from the longer version

You're Hired. At Least for Now. - While unemployed folks wait for the jobs of tomorrow, they're taking the temp work of today. Employment for contingent workers has increased 23% since July, according to the American Staffing Association. Close to 166,000 temp jobs have been added to the payrolls since last summer, reports the Bureau of Labor Statistics.  What’s different about this recovery is that companies, many of which cut staffs to the quick, seem committed to staying flexible in the long term by using contingent workers to manage everything from special projects to whole departments. Moreover, instead of the typists and factory workers who have traditionally populated the ranks of temps, these days you’re likely to be working alongside an engineer, accountant, doctor, lawyer or technology guru.

Employers set to keep squeezing pay - Employers who did not offer their staff pay increases during 2009 are likely to continue to freeze salaries for the rest of this year, analysis published today reveals. The Labour Research Department (LRD), an independent consultancy that conducts research on behalf of trades unions, said that many workers would face a pay freeze for the second year running over the next 12 months, despite Britain's economy moving into recovery. and signs that inflation is now beginning to return. Pay freezes were actually now more common than at any time during the recession, the LRD said, with January having seen a marked toughening in the attitude of employers.

Some Survey Results - When asked what the most important problem facing the country is (question 4), here are the winners: Jobs: 27% Economy: 25% Other: 16% Health Care: 13% Budget Deficit: 4% DK/NA: 4%. This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design...

The Senate Finance Committee's jobs bill - The Senate Finance Committee has released a draft (pdf) of its jobs bill, called the HIRE Act. If you've been following along, that might sound strange to you: Wasn't the jobs bill coming from Byron Dorgan and Dick Durbin? Well, yes, but the Finance Committee wants control of the process, so it's trying to muscle its way in front of them. And look how they did it: Fulfilling these agreements has been a condition precedent to the bipartisan discussions that have occurred. First we will work to ensure that the scope of the Finance Committee package retains its bipartisan character. Second we are committed to timely consideration of permanent bipartisan estate and gift tax reform. In other words, in order to get Republic cooperation on an $80 billion jobs bill, Democrats have promised them estate and gift tax reform, which will come to many hundreds of billions of dollars. This is the compromise that appears to have led to this package: not a better or bigger or more tax-focused jobs bill, but massive tax cuts for the rich.

Bipartisan Jobs Bill Receives Bipartisan Boos: Sens. Max Baucus and Charles Grassley released a wide-ranging jobs bill, which everybody agrees has a decent chance to get bipartisan support and a better chance to create a disappointing number of jobs. The bill provides an exemption from Social Security payroll taxes for every worker hired in 2010. The exemption is capped at $106,800. It also provides a $1000 tax credit reward for keeping the employer on payroll for more than a year. The cost: $13 billion over 10 years. The bill also allows companies to write off up to $250,000 of certain capital expenses. The problem, everybody seems to agree, is that the reason most employers aren't hiring is not that they are afraid of incurring more payroll taxes. Instead, it's that there is not enough demand for their products or services to boost profits they would use to hire more workers.

Sen. Reid kills Baucus bill, narrows focus of jobs legislation after complaints - Reid announced Thursday that he would cut drastically back on the jobs bill Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced only hours earlier, essentially overruling the powerful chairman.  The Finance Committee estimated that Reid’s proposal would cost approximately $15 billion. The Baucus bill, which was estimated at $85 billion, included $31 billion in tax extenders that Reid has decided to leave out. A Senate Democratic leadership aide said Reid decided to drop the tax extenders after Senate Minority Leader Mitch McConnell (R-Ky.) declined to endorse the Baucus package. “We’re going to move this afternoon to a smaller package than talked about in the press,” Reid said.

Not all job creation tax credits are created equal - Well-designed employer tax credits can encourage significant job creation, and at an affordable cost per job. But the devil is in the details. The employer tax credit in the Senate’s “jobs bill” is likely to create few jobs, and at an excessively high cost. The Senate’s employer tax credit is based on a design proposed by Senators Chuck Schumer and Orrin Hatch.  The Schumer-Hatch proposal has several questionable design details: (1) credits are awarded for hires, not net job creation by employers; (2) the credits are limited to hires of persons unemployed at least 60 days; (3) the credit rate is only 6.2% for the rest of 2010; and (4) there is a modest retention bonus of $1,000 per new hire retained for a year, but little up-front cash to encourage job creation.

The Jobless Jobs Bill: The political upside for Democrats to crafting a bipartisan jobs bill is obvious: they get a "win" on an issue the public cares about, and they show they can work with the opposition party, which people want them to do. There is, however, a downside. Securing Republican support means whittling the bill down to the verge of meaninglessness. And then you get blamed for the meaninglessness. Here's the A.P.: It's a bipartisan jobs bill that would hand President Barack Obama a badly needed political victory and placate Republicans with tax cuts at the same time. But it has a problem: It won't create many jobs. Even the Obama administration acknowledges the legislation's centerpiece - a tax cut for businesses that hire unemployed workers - would work only on the margins.

Obama Forecast: 95,000 Jobs per Month in 2010, Unemployment rate at 10% - Here is the Economic Forecast from the Economic Report of the President. The last column is average payroll jobs per month per year. Click on table for larger image in new window. The forecast is for an average of 95,000 non-farm payroll jobs to be added per month in 2010, with the unemployment rate averaging 10.0% and real GDP growth of 3.0%. Although there is no way to directly calculate the unemployment rate based on payroll jobs growth - because the data is from different surveys and depends on the number of people in the work force and other factors - there is a fairly strong relationship between payroll jobs and the unemployment rate.

White House Sees Monthly Employment Growth of 95,000 - WSJ. - In the annual Economic Report of the President, the Obama administration noted "clear evidence" that the beleaguered jobs market is stabilizing, but said that with millions of people still out of work more needs to be done to spur hiring. (See the full text of the report.)  "It will take a prolonged and robust GDP expansion to eliminate the large jobs deficit that has opened up over the course of the recession," the report said. "Only when the unemployment rate has returned to normal levels and families are once again secure in their jobs, homes and savings will this terrible recession truly be over."  Average monthly job losses moderated over the course of 2009 from 691,000 in the first quarter, an improvement the White House attributes in part to the $787 billion economic stimulus package.

Some Unemployment Snarkiness - The last time the total change in the number of people being counted as being employed during the current recession was at the current level, just in November 2009, the unemployment rate was 10.0% instead of 9.7%. Now that's an improvement!  But what did it take to get that improvement? Our next chart combines the percentage change in employment levels by age group against the annualized measure of GDP for each quarter since November 2006, when teen employment levels peaked.  As we can see, it took a 5.7% annualized growth rate for GDP in the fourth quarter of 2009 (according to the advance estimate for this data) to stop the descent. It's probably then a good thing that the U.S. didn't have another quarter of 2.2% GDP growth - if things went like they did in the third quarter of 2009, a lot more jobs would have been lost at that growth rate.  It's almost enough to make us long for the days of 1.5% real GDP growth, back in the second quarter of 2008, the last time the employment situation improved for two consecutive months! In a row! Thank goodness for the stimulus package!

McCain Advisor Touts Stimulus:  It's impossible to characterize economist Mark Zandi as some kind of liberal partisan -- he was an adviser to the McCain/Palin campaign in 2008.  Here was Zandi yesterday: I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. This isn't exactly new. Last November, Zandi was saying the same thing, arguing that "the stimulus is doing what it was supposed to do -- it is contributing to ending the recession." He added, "In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent."

Bullet Train/Wine Train - China Stimulus�(217 mph): � U.S. Stimulus�(Napa Valley, Wine Train): (pics)

Stimulus should put cash in poor pockets - The lesson of 2009 is that the best stimulus puts money directly into the pockets of middle- and lower-income Americans. On that basis, extending the earlier unemployment benefits and tax cuts makes good sense. So does the addition of temporary tax credits for employers who add jobs now. But the infrastructure pipeline is already clogged. Adding to it will not provide any near-term boost. Furthermore, additional aid to states will not have a serious economic impact. These flaws, together with the untenable deficit outlook, raise doubts as to whether the full second stimulus can pass. A smaller, faster proposal, which incorporates the lessons of the 2009 bill, would be more appealing. This is the way Congress should go.

American joblessness: The sources of growth:  For most of the last century, educational attainment grew rapidly. Schooling noticeably leveled off in the late 1960s, however, and it actually hit a peakin the late 1990s before pulling back. Now, one obvious thing to note is that 14 years of school generally means an entire primary and secondary education and perhaps one year of post-secondary education. That's quite a bit, and to boost the mean above that level would not necessarily be easy. At the same time, given dynamics in the current economy, a world in which the average student does not get multiple years of post-secondary education—in occupational or technical training or in professional or typical undergraduate studies—is one in which a large share of the population is languishing in fields that pay poorly or that are subject to competition from lower wage labour abroad or automation. And so it's distressing enough that educational attainment has ceased growing. If the declining trend were to continue—as with the share of students dropping out of high school rising, this is not at all impossible—then economic growth is likely to slow and to become more uneven.

Council of Economic Advisers Sees 8.2% Unemployment by 2012 – NYTimes - The Obama administration projected Thursday that the unemployment rate would fall this year by only a little, if at all, and would remain well over 6 percent until 2015. The forecast was the most closely watched element of the annual Economic Report of the President, a 458-page document outlining the White House’s outlook and policies on areas as diverse as savings and investment, health care and climate change. The report projected that an average of 95,000 jobs would be added to the payrolls each month this year — barely enough to keep up with the normal number of jobs the economy would have to create to meet the growth in the labor force and keep the unemployment rate steady.

EconomPic: Employment by Education Attainment - This clearly shows the growing differentiation within the U.S. of the "haves" and "have nots".

Are You Better Off Than Your Parents Were? -  It appears that the United States has less intergenerational social mobility than many other industrialized countries. A new report from the Organization for Economic Cooperation and Development looks at various indicators of intergenerational social mobility, which refers to the “relationship between the socioeconomic status of parents and the status their children will attain as adults.”  If the link between parents’ and children’s social status as adults is tight, the society is less mobile, and vice versa. The report focused on educational and wage mobility. It found that parental socioeconomic background influences descendants’ education and income in “practically all countries for which evidence is available.” On multiple measures, though, the link between parents’ background and children’s outcome appeared especially strong in the United States.

The Reality of Meritocracy -Philosopher Rod Long recently argued that government intervention has practically ended the meritocracy of the market; I responded that the meritocracy of the market is still going strong, though it could be even stronger.  Now at, Shikha Dalmia eloquently defends the extreme position that even the freest markets are not and never were meritocratic - and that defenders of the free market should ditch meritocratic arguments altogether: Markets don't reward merit; they reward value--two very different things.... Most advocates of markets have failed to fully make this distinction, perpetuating a cult of market meritocracy--something that has hindered, not helped, the cause of free markets. Dalmia's right, of course, that value and merit are different, and that when markets have to choose between the two, value prevails.  However, she doesn't seem to consider the obvious retort...

The Worst of the Pain - When it comes to employment, there are roughly three broad categories in the United States. The folks in the upper-income group are not suffering much, if at all, from the profound reversals in employment brought about by the Great Recession. Those in the middle have been hit hard. The job losses there have been severe and long-lasting. But for those in the lower-income groups, the scale of the employment crisis has been mind-boggling. What you’re not hearing from the politicians and the talking heads is that the joblessness and underemployment in America’s low-income households rival their heights in the Great Depression of the 1930s — and in some instances are worse. The same holds true for some categories of blue-collar workers. Anyone who thinks this devastating problem is going away soon, or that the economy can be put back on track without addressing it, is deluded.

Rich people still have jobs, poor people don't - Bob Herbert's column in yesterday's New York Times pointed out that the unemployment crisis is not hitting all parts of the income spectrum equally. I was pretty stunned by the numbers, which go like this: Range of incomes (by decile) Unemployment rate $12,160 or less 30.8% $12,160-$20,725 19.1% $20,725-$29,680 19.7% $29,680-$39,000 12.2% $39,000-$50,000  9.0% $50,000-$63,000 7.8% $63,000-$79,100 6.4% $79,100-$100,500 5.0% $100,150-$138,700 8.0% $138,700+ 3.2%

Biting Recession Leaves Ever more Americans Hungry (Reuters)The number of Americans receiving emergency food from the largest U.S. hunger-relief charity and its partners rose 46 percent from 2005 to 2009, according to a report released on Tuesday."Feeding America" said 37 million people, including 14 million children, needed emergency food aid each year, more than 10 percent of the U.S. population of 300 million. It based the figure on 61,000 interviews and 37,000 surveys of local charitable agencies.That compares to 25.3 million people in 2005, when the group released its last quadrennial study."The findings of this study are nothing short of tragic," said Feeding America chief executive Vicki Escarra. "We have to find a way to feed people in the land of plenty."The United States is the world's top corn and soybeans exporter as well as a major beef exporter.

Misdirecting charity by perpetuating the myth of widespread hunger in America Is the claim that one in eight Americans is seriously at risk of hunger even remotely plausible? No. Food in the U.S. is remarkably inexpensive, which is attested to by the fact that ours is the first society in history whose poor people suffer disproportionately from obesity.Also, because feeding oneself and one’s family is perhaps the most fundamental of all human impulses, if so many Americans were truly “at risk of hunger” on a regular basis, then it is nearly impossible to explain why poor Americans are so richly endowed with goods and services far less necessary to survival than food.

Using Food Stamps to Buy Self-Licking Ice Cream Cone (Oh, SNAP) - Like Ezra Klein, I was surprised to read that “one in eight Americans” are now getting food stamps.  But, reading Jason Deparle and Robert Gebeldoff’s feature, it’s not hard to see why:  We’re actively recruiting people to sign up!A decade ago, New York City officials were so reluctant to give out food stamps, they made people register one day and return the next just to get an application. The welfare commissioner said the program caused dependency and the poor were “better off” without it. Now the city urges the needy to seek aid (in languages from Albanian to Yiddish). Neighborhood groups recruit clients at churches and grocery stores, with materials that all but proclaim a civic duty to apply — to “help New York farmers, grocers, and businesses.” There is even a program on Rikers Island to enroll inmates leaving the jail.

BLS: Few Job Openings in December - From the BLS: Job Openings and Labor Turnover Summary There were 2.5 million job openings on the last business day of December 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 1.9 percent. The job openings rate has held relatively steady since March 2009. The hires rate (3.1 percent) and the separations rate (3.2 percent) were essentially unchanged in December. The following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Falling flat: More evidence that America is experiencing a jobless recovery - Americans were told that their economy had expanded for a second consecutive quarter, and rapidly at that: output grew at an annual rate of 5.7%. This week, they are reminded that a return to growth has yet to benefit the jobless. The economy lost 20,000 jobs in January, a decline driven by the loss of 75,000 jobs in the construction sector. Economists had forecast an increase in employment of around 15,000. The unemployment rate, based on household rather than establishment data, showed a slight improvement, dropping from 10% to 9.7%, but nearly 15m Americans remain unemployed. As Larry Summers put it in Davos last week, the American economy is experiencing “a statistical recovery and a human recession”. Economic Forecasting Survey: Economists Say Many Lost Jobs Won't Return - About a quarter of the 8.4 million jobs eliminated since the recession began won't be coming back and will ultimately need to be replaced by other types of work in growing industries, according to economists in the latest Wall Street Journal forecasting survey. While the job market is constantly shifting as some sectors fade and others expand, this recession threw that process into overdrive. Thousands of workers lost jobs as companies automated more tasks or moved whole assembly lines to places like China. As growth returns, so will job creation—just with a different emphasis in the mix of jobs being created. Economists in the survey are predicting a slow upswing for the economy as a whole. Respondents on average expect economic growth to settle at about 3% in 2010, off sharply from the powerful 5.7% seasonally adjusted annual growth rate in the fourth quarter.

A New Norm for Unemployment? - Economix Blog -  The January jobs report had some mixed messages. One thing seems clear, though: The position of the already unemployed is looking more and more desperate.The average length of time jobless people have been out of work is at a record high of 30.2 weeks: And that doesn’t even include people who want jobs but have given up looking for them. Of all unemployed workers, 41.2 percent have been out of work for at least 27 weeks, another record high. And of the total work force, 4.12 percent of workers have been jobless for at least 27 weeks, yet another record high:

Long-Term Unemployed Still Wait for Recovery to Arrive - Millions of Americans are sharing McKenzie's pain: In January, a record 6.3 million people — 41.2% of the unemployed — had gone without jobs at least 27 weeks. The average unemployed American has been jobless more than 30 weeks, another grim record, the Bureau of Labor Statistics reported on Friday. "It's a deep recession," says Kevin Hassett, director of economic policy studies at the conservative American Enterprise Institute. "Everything's been unusually bad." The Economic Policy Institute figures there are 6.4 jobless people for every job opening. "It's a cruel game of musical chairs," says Lawrence Mishel, president of the liberal think tank.

Frustrated Job Seekers Deciding to Call It Quits - Many jobless people have reached a conclusion that captures the depth of the unemployment crisis: Looking for a job is a waste of time.  The economy is growing. Yet it's creating few jobs. That's why in the past eight months, 1.8 million people without jobs left the labor market. Many had grown so frustrated by their failure to find a job that they threw up their hands and quit looking for one.  The nation's unemployment rate is 9.7 percent. But so many jobless people have quit looking that if they're combined with the number of part-time workers who'd prefer to work full time, the so-called "underemployment" rate is 16.5 percent.

Sick at Work – NYTimes - I am sick at work studying sickness at work. I feel kind of swine-y, but I think I’ve already had H1N1.  At least I’m working at home and am not going to lose any pay. Other sickies are not so lucky.The United States stands out as one of the few rich nations in the world that doesn’t  mandate any form of paid sick leave.  About 40 percent of private-sector workers lack coverage from their employer. This means they will lose pay and even risk losing their jobs if they call in sick.Less than a third of part-time civilian employees and low-wage earners (those in the bottom 25 percent of the wage distribution) enjoy sick-leave benefits. On the other hand, about 90 percent of public-sector workers are covered.

U.S. Wage Growth: The Downward Spiral - What is disturbing is that the outlook for wages and incomes over the short and long term looks bleak even when the recovery is in full swing. The pay rewards for work have been severely lacking for a majority of workers over the past three decades. Whether the measure is wages, earnings, or total compensation, the inflation-adjusted pay narrative remains the same: Workers have seen their inflation-adjusted pay go up only a little during the past four business cycle expansions while most of the gains have been captured by the top 10% to 15% of workers.

New Guest-Worker Rules Seek to Increase Wages - NYTimes - Labor Secretary Hilda Solis announced new rules on Thursday for the temporary immigrant farm workers program, saying they would raise wages and strengthen labor protections for foreign and American workers. Under the new rules, growers will no longer be able to attest that they tried to find American workers to fill jobs given to migrants, but will have to prove they conducted job searches. The Labor Department will establish a national electronic registry of farm jobs to assist the effort. American farm worker organizations hailed the changes, but growers’ groups said they would be costly and could be prohibitively cumbersome for many farmers, particularly smaller producers. Growers “are just beside themselves that these rules keep changing; it just makes it impossible,”

"Hard Times Push More Women to Strip Clubs" - Like it or not, sex sells in Atlanta, where there are still more exotic and nude dance clubs in and around the city than anywhere else in the country, according to the Association of Club Executives, an industry trade group. Club work can be a strong draw in an economy that has shed 8 million jobs nationwide and propelled more women into the role of chief breadwinner. “We’re seeing younger applicants,”“We’re seeing quite a few that have lost their jobs and are now making career changes.” Those who do wind up working in the business soon learn that even nude dancers have to work harder these days, as patrons spend less and don’t return as often. The cyber-savvy dancers have turned to social media to hold customers’ interest. And for good reason. Even in this tough economy, a dancer can clear about $50,000 a year, and that beats working in a dentist’s office or selling homes right now.

Women Taking Over the Workforce - NY Times details that women, for the first time in recorded history, outnumber men in the workforce (on a non-seasonally adjusted basis):  For the first time in recorded history, women outnumber men on the nation’s payrolls. This benchmark is bittersweet, as it comes largely at men’s expense. Because men have been losing their jobs faster than women, the downturn has at times been referred to as a “man-cession.” Women’s new majority in the nation’s workplaces comes decades after women first began trading in their aprons for pantsuits in droves, and it reinforces expectations that women will continue on the path to pay parity.

Men Without Work - The only thing I've discovered that begins to account for that nationwide pattern is that 1978 was the peak year in all of American history for women entering the work force. In the second half of the 1970s, unprecedentedly, more than eight million hitherto non-wage-earning women went out and found jobs. The spike year was 1978.That same year, a multitude of developers independently decided to start putting up big office buildings out beyond the traditional male-dominated downtown....The new advantage was proximity to the emerging work force. These Edge City work centers were convenient for women. It saved them time. This discovery was potent. A decade later, developers viewed it as a truism that office buildings had an indisputable advantage if they were located near the best-educated, most conscientious, most stable workers — underemployed females living in middle class communities on the fringes of the old urban areas.

They Replaced Horses, Didn't They? - When horse-power became cheaper than human-power, horse labor replaced human labor. When steam-power in turn became cheaper than horse-power, horses in turn became replaced. The demand for horse labor rose, then fell. If the population of horses had kept growing at the same rate as the population of humans, most horses now would be redundant, with just a small elite minority of horses employed in very special jobs. Improving technology did in fact drastically reduce the demand for horse labor. If Kurt Vonnegut's novel had been about horses, it would have been a historical novel, not science fiction. It happened to horses; why couldn't it happen to humans?Works councils and US labor relations - The United States has one of the lowest rates of union representation of all developed countries.  And the sole institutional form through which representation occurs in the US context is the union.  So the vast majority of American workers are left with no formal representation within the firm when it comes to wages, benefits, or work practices. This situation contrasts strikingly with the labor-management institutions in place in much of Europe and Japan. In most other countries legislation establishes the opportunity or the mandate for a second form of worker representation within the workplace, the works council. Industry-wide unions establish wage levels; public policy stipulates the level of the "social wage"; and works councils provide an institutionalized context in which management and employees consult with each other, exchange workplace information, and work out firm-specific implementations of industry-wide agreements. 

Working week should be 21 hours, says New Economic Foundation - British workers may be toiling hard to ward off unemployment, but the future could bring an average of only 21 hours a week chained to their desk. A report by the influential thinktank, the New Economic Foundation, says over-consumption, rising unemployment, increasing inequality and deteriorating work-life balance can be tackled by radically altering working life. Reducing the working week could also defuse the pensions time bomb by ensuring employees are healthy enough to work later in life. Citing the example of Utah, the study shows how the US state's decision in 2008 to place all public-sector workers on a four-day week saved energy, reduced absenteeism and increased productivity.

Jobless Suffer as Corporate Cash Hits $1.18 Trillion (Bloomberg) -- A majority of companies in the Standard & Poor’s 500 stock index increased cash to a combined $1.18 trillion while simultaneously reducing spending, keeping a jobs recovery on hold. Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 256 companies that ended last quarter with $518 billion more cash than a year earlier after cutting capital spending by 43 percent. Economists say the dearth of investment is keeping the jobless rate at about 10 percent as the U.S. emerges from its worst recession since the 1930s.

U.S. Postal Service Logs $297 Million Quarterly Loss   (Bloomberg) -- The U.S. Postal Service said its net loss narrowed to $297 million in the fiscal first quarter as it trimmed expenses to account for a drop in mail volume. Revenue declined 3.9 percent to $18.4 billion in the quarter ended Dec. 31, the Washington-based agency said in a financial filing posted on its Web site today. In the year- earlier quarter, the Postal Service said it had a net loss of $384 million and revenue of $19.1 billion. Mail volume, which dropped 8.9 percent in the quarter, is likely to fall by about 10 billion letters and packages for the full fiscal year, or about 5.6 percent. The Postal Service has asked Congress for permission to scale back some service to save money.

Recession Pushes Teens, Young Adults to the Edge - Larkin is among the untold thousands of Detroit's teens and young adults struggling to get by in a disastrous economy that has left their families without jobs or homes. Making matters worse is the organizations that help them are grappling with tough financial issues of their own.  Some are cutting programs, others are scaling back on how many people they serve, but none of them is giving up.  "The neighborhoods we go in are the ones we know are very distressed ... burned buildings, abandoned buildings, areas that are high in crime," Taylor said. "Those kids need to know that we love them and we care about them and we're here to help them. We need to go into areas that others might be afraid to go in." Nationally, it's estimated that up to 1.5 million teens and young adults are homeless. There could be tens of thousands in Detroit because of the city's enormous economic and social problems, according to Wayne State University psychology professor Paul Toro.

Where Are The Next Jobs Coming From? - What all of this makes clear is that policies designed to create new jobs in the economy should be directed at encouraging new firms. What policies are those? Perhaps the most important issue for new and young businesses is financing. Access to credit markets is critical. When credit markets seized up in 2008 it was a dire period for many small and nascent firms. Lending to small business has declined a lot in 2009 but there are conflicting reports about why. Many small businesses claim it is hard to get credit but many lenders claim the demand isn't there.

What next for the jobless? - DEREK THOMPSON calls this "the scariest employment graph I've seen this year":That is a pretty distressing picture. Just over 6 million American workers have been out of a job at least half a year. Mr Thompson then links to this likewise distressing Atlantic piece about how joblessness will shape America's future. There seem to be a number of issues at work shaping the current crisis of unemployment. One is obviously the deep recession, which produced millions of cyclical unemployed. Another is a sectoral crisis; rising debt levels fueled growth in economic sectors which can no longer be sustained. Employment growth in sectors like construction and retail will lag for years to come while households work off thei debt loads. There are other issues, as well. Don Peck writes in the story linked above: But according to the economist Edmund Phelps, the innovative potential of the U.S. economy looks limited today. In a recent Harvard Business Review article, he and his co-author, Leo Tilman, argue that dynamism in the U.S. has actually been in decline for a decade

Snow Likely to Make Mess of Jobs Reports  The storm has hit during the week that the Labor Department’s Bureau of Labor Statistics takes its monthly snapshot of employment among households and employers nationwide. Since the storm has kept a large number of people from work, it could push up the unemployment rate, and lower the count of how many people are working. The Labor Department says it won’t start getting a sense of what the snowstorm will do to the jobs numbers until next week when the data starts coming in. When the jobs report comes out on March 5, a Labor Department spokesman says it will likely include a comment on the snow’s effect.

Gains From Trade, Metropolitan Edition - Here's a serious question:  why don't more cities rent out their snow services?  Upstate New York is apparently blissfully free of snow, and short of money.  Washington DC is one of the flushest metro areas in the country, and in need of snow removal.  Why not get some of the snow removal equipment--and talent--from Rochester and Syracuse and Buffalo on the road?  They could be here in twelve hours at the outside, and have this place cleaned up in a jiffy. It seems like this would be a win-win combination.  But as far as I know, no one's even suggested it.

US snowstorms cause $2 billion insured losses - (Reuters) - Insurers are likely to face more than $2 billion of insured losses resulting from the two major snowstorms that barreled through the eastern United States this month, the risk assessor Eqecat said on Friday. Eqecat said the majority of losses will be realized between northern Virginia and the New York metropolitan area.It said roof damage, pipe damage and "ice dams" -- buildups of ice on roofs along overhangs, which cause water to leak into buildings -- are the most common sources of losses.The storms were strongest on February 6 and February 10, and generated upwards of three feet of snow in some areas. Seasonal snowfall records were set in Washington, D.C., Baltimore and Philadelphia. Eqecat's insured loss forecast is higher than some estimates given for the devastating January 12 earthquake in Haiti, where many structures are not insured. About 212,000 people are believed to have died in that catastrophe.

The Real Economic Cost of Snow -  TIME - How much does a snow storm cost? Every year, on days like the one we are having today on the East Coast and in the Midwest (according to this map 63% of the United States is covered in snow today), economic forecasters try to estimate the impact of all the white stuff falling from the sky. The numbers are always huge. And they are always wrong. Here's why: The biggest reason is that snow storms are often looked at as a snap shot. What is the money spent or lost on that day. That ignores how the economy really works. And it ignores the way snow works. Money spent today doesn't disappear. Snow on the other hand does. Snow expenditures go into the economy and pop out somewhere else. Money not spent today doesn't disappear either. Lets take first the most common cited cost of snow storms: Snow removal.

Lag in Job Numbers Behind GDP Growth is No Worse than in Past Recoveries - At first glance, the job numbers of the last week seem to offer a mixed and confusing picture.   On the one hand, today’s headline from the Bureau of Labor Statistics certainly sounds like good news:  the unemployment rate finally dropped below 10.0% — to 9.7%.   On the other hand, today’s establishment survey of employment, which most of the time is a more reliable measure than the unemployment rate, still shows job change numbers that are negative.   Furthermore, recent numbers on claims for unemployment benefits have been discouraging.   It is inconvenient, but common, that the labor market and the rest of the economy send conflicting signals.

How Reducing Payroll Taxes Can Encourage Employment: - Capping the size of the tax cut for individual firms would decrease the employment effect; Restricting eligibility to small firms would decrease the employment effect; Limiting the eligible wage base would not change the employment effect, but would alter the types of employment fostered by the policy; Basing the tax cuts on the total payroll in 2010 for new hires rather than on the net change in a firm’s payroll from 2009 to 2010 would have a similar effect on employment; Offering larger tax cuts in economically depressed areas would probably not significantly alter the effect on employment; Raising awareness of the tax change would increase the employment effect; and Increasing the complexity of the tax change would reduce the employment effect.

Unemployment taxes slam businesses -- Employers are getting hit with a massive tax hike at a time when they can least afford it. Companies in at least 35 states will have to fork over more in unemployment insurance taxes this year, according to the National Association of State Workforce Agencies. The median increase will be 27.5%. And employers in places such as Hawaii and Florida could see levies skyrocket more than ten-fold. Many of these hikes happened automatically as prolonged joblessness triggered state laws governing their unemployment insurance systems

How a New Jobless Era Will Transform America - There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment—chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society’s most noxious ill.  The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.

Governors’ New Budgets Indicate Loss of Many Jobs if Federal Aid Expires - Facing continued major budget problems and the end of most federal Recovery Act assistance halfway through their coming fiscal year, governors are proposing a new round of deep budget cuts that would increase unemployment and threaten the fragile economic recovery. Without further federal aid, the actions states will have to take to close their budget gaps could cost the economy 900,000 jobs.[1] Congress is considering extending some assistance to states as part of forthcoming jobs legislation.A recent Goldman Sachs report underlines the importance of state fiscal conditions to the health of the economy. Goldman projects economic growth will slow later this year, in part because “state and local budget cutbacks will almost certainly still be weighing on overall demand.” [2] Similarly, Mark Zandi, Chief Economist of Moody’s, recently warned that large state budget cuts next fiscal year “will be a serious drag on the economy at just the wrong time.”[3]

Fire Departments Charge for Service, Asking Accident Victims to Pay Up - Already banned in several states, the practice of charging to respond to house fires and car accidents -- dubbed a "crash tax" or an "accident tax" -- has horrified victims and earned the ire of insurance lobbyists who say their member companies are being targeted to make up for budget shortfalls.  "Part of the sales tactic when municipalities consider this is, 'Hey, don't worry, it's going to go to insurance,'" Jon Zarich, director of government affairs for the Insurance Institute of Indiana, told "But it's the homeowner that's responsible once coverage runs out."

N.J.’s Christie Said to Plan Freezing Some School Aid (Bloomberg) -- New Jersey Governor Chris Christie will announce plans to freeze part of $3.5 billion in unspent aid to public schools to help close a $2 billion hole in the state’s budget, according to two people who have spoken with administration officials about the proposal.  Christie will tell a joint meeting of the Senate and Assembly on Feb. 11 that the cuts are needed to bridge the gap in the $29 billion budget for the year ending June 30, said the people, who declined to be identified before Christie’s announcement. They said $3.5 billion in school funding remains in state coffers with four-and-a-half months left in the fiscal year.

I Take No Joy in Raping and Pillaging - Chris Christie moves New Jersey into the 17th century: Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate....He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become "more efficient and effective."... “I take no joy in having to make these decisions. I know these judgments will affect fellow New Jerseyans and will hurt," Christie said. "This is not a happy moment. However, what choices do we have left?"...

Tuition soars as students face tough financial times - Ironically, as we load ever more debt on our children and grandchildren, the chances of them being able to land good jobs to pay off those debts diminish. That's because the best-paying jobs go to college graduates and the cost of education continues to climb with little restraint. Our colleges are still filled to capacity, but it's getting tougher everywhere -- including Washington -- to meet the costs of putting a freshman through the college front door.  And tuition is going up. Again.

Critics Slam Bank Lobby for Stalling Student Loan Reform - Obama's student loan reform initiative has been held up as an example of logical, bipartisan legislation ever since it passed the House in September. So why is it stalled in the Senate? Commentators are pointing to bank lobbyists, singling out one woman in particular: Jamie Gorelick, deputy attorney general under Clinton and current Sallie Mae lobbyist extraordinaire.

How Schools Spent Their Stimulus Money - Pretty quickly, it seems. According to a new study, schools spent 38% of their stimulus money in the ‘08-’09 school year, 48% this year, and have 14% left over for next year. From a Keynesian perspective, that seems like a pretty decent pace to spend $100 billion. Some states, in fact, managed to spend 100% of their education stimulus money “immediately”. Even better, some of the money that was tied to reforms, like the $4.3 billion Race to the Top program, will probably pay many future dividends as well. The downside of spending the money so quickly is many states and districts are once again facing a budget crunch, this time without stimulus money to bail them out.

With Federal Stimulus Money Gone, Many Schools Face Budget Gaps - Federal stimulus money has helped avoid drastic cuts at public schools in most parts of the nation, at least so far. But with the federal money running out, many of the nation’s schools are approaching what officials are calling a “funding cliff.” Congress included about $100 billion for education in the stimulus law last year to cushion the recession’s impact on schools and to help fuel an economic recovery. New studies show that many states will spend all or nearly all that is left between now and the end of this school term. With state and local tax revenues still in decline, the end of the federal money will leave big holes in education budgets from Massachusetts and Florida to California and Washington, experts said.

Minnesota's deficit is forcing school cuts - East metro school districts from the Mississippi to the St. Croix are scrambling to plug holes in their budgets that many fear could be drained next year. Already school districts in Forest Lake, North St. Paul and South St. Paul are considering layoffs and program cancellations. In addition to staffing changes, the proposed solutions include tapping into the reserve funds they've stored up over the years, called fund balances. The St. Paul Public Schools have been working on ways to bridge a $28 million deficit for months. A similar gap last year led to layoffs of more than 200 people in the state's second-largest school district.

San Bernardino city educators considering deep budget cuts - San Bernardino County Sun - Administrators in the county's largest school district may eliminate more than 110 jobs - including those of teachers - in order to meet budget targets. The San Bernardino City Unified School District needs to slash $30.7 million from its budget for the fiscal year starting Jan. 1.  The school board is poised to issue layoff notices when it meets Tuesday, but it is not a certainty that those who may receive pink slips will actually lose their jobs. The district's recommended budget cuts include eliminating the equivalent of 112.6 full-time positions. Among other proposed cuts, the payroll reductions are projected to result in $26 million worth of savings.

LA Unified may cut school year by 6 days - Los Angeles schools Supt. Ramon C. Cortines proposed Friday cutting six days from the school year to help reduce an estimated $640-million deficit and avoid the need for widespread layoffs in the nation's second-largest school system. The move, announced by news release Friday evening, would save the district $90 million and could spare up to 5,000 jobs, Cortines said. The alternative to this drastic action, he said, would be to let the district go bankrupt.

More Detroit schools to close - Roughly 40 Detroit public schools will close, and the district will impose layoffs, furloughs and other concessions upon its staff this year to help close a $200-million deficit, emergency financial manager Robert Bobb said Wednesday.  Bobb said the closures will include underutilized high schools. Neither Bobb nor district officials would say which schools will close.And the plan isn't a total surprise. School officials talked last year of possibly closing 60 schools over two years.

L.A. Tests Investors’ Deficit Aversion With $1.8 Billion Issue (Bloomberg) -- The Los Angeles Unified School District, the nation’s second-largest after New York, plans to sell as much as $1.75 billion of bonds in mid-February to fund a school construction program called the largest in the U.S. About a third of the offering will be conventional tax- exempt debt and two-thirds taxable Build America Bonds, said Timothy Rosnick, the district’s controller, who called the overall project the biggest of its kind. The federal Build America program gives state and local governments 35 percent interest subsidies to sell taxable debt for public works.

Drastic Steps Needed to Prevent Bankruptcy - As you know, the City of Los Angeles faces a budget shortfall of nearly $208 million, and we expect it to exceed $400 million next year. This is the most serious situation we have faced in 75 years and without drastic steps, the City is threatened with bankruptcy. We cannot allow that to happen. As the City Council and the Mayor consider the Three-Year Financial Sustainability Plan, we will make the most difficult decisions that any of us have faced. Cutting services and laying off employees are the last steps that any of us want to take. But bankrupting the City is not an option. The bankruptcy courts would force the City to implement even more drastic cuts and impose far more layoffs than we now face.

Miami Faces Specter Of "Bankruptcy" Commissioners got a sober assessment of the city's finances Thursday from Management and Budget Director Michael Boudreaux who said Miami is in a "financial crisis." Boudreaux said if Miami continues to dip into its shrinking reserves to make ends meet, it's going to move the city "further toward bankruptcy and, maybe, receivership by the state. City Manager Hernandez took heat from commissioners for failing to administer cuts mandated in the spending plan the commission approved last September, and for miscalculating the projected deficit for the current operating year.

Los Angeles Teeters On Brink Of Bankruptcy- The latest tale of financial crisis in California is playing out in Los Angeles, which faces a budget shortfall approaching $1 billion. Unless the city can find a remedy, it may be insolvent soon. Across the city, people are already feeling the impact of budget cuts...The cuts are likely to get more severe. Los Angeles still needs to make up a deficit of more than $200 million by July 1. The city is also facing a shortfall of close to half a billion dollars in the next fiscal year. The political struggle over how to close those gaps led Mayor Antonio Villaraigosa to make an unprecedented appearance before the City Council this week.

Bankruptcy Bloodbath May Hit Muni Bond Owners Next (Bloomberg) -- Public officials shouldn’t think about filing for Chapter 9 municipal bankruptcy to solve mounting labor costs and pension liabilities.  Even talking about this action will invite an inquiry from Fitch Ratings, the company said in a report published Jan. 27.  “The more bankruptcy is publicly discussed as an option for financial relief, the more its tarnish wears off, increasing the likelihood of its actual use,” Fitch said.  The biggest financial crisis since the Great Depression is squeezing municipalities across the country.

Detroit schools offer class in how to to work at Walmart - Walmart has been widely condemned for offering its employees only low-paying, dead end jobs. Even President Obama criticized Hillary Clinton during the 2008 presidential campaign for having served on Walmart's board and stated that the firm ought to pay "a living wage." In inner-city Detroit, however, where the unemployment rate is estimated at an astonishing 50%, the prospect of a Walmart job may appear far more attractive. Four inner-city Detroit high schools have decided that employment with Walmart is an opportunity worth training their students to pursue. The schools have teamed up with the giant merchandiser to offer a for-credit class in job-readiness training that also includes entry-level after-school jobs.

Chris Christie declares fiscal 'state of emergency,' paving way for N.J. spending cuts - Along with eliminating programs "that sounded good in theory but failed in practice" across state departments, Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate, a longtime Republican target, and folding its functions into other parts of government. He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become "more efficient and effective."

I Take No Joy in Raping and Pillaging - Chris Christie moves New Jersey into the 17th century: Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate....He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become "more efficient and effective."... “I take no joy in having to make these decisions. I know these judgments will affect fellow New Jerseyans and will hurt," Christie said. "This is not a happy moment. However, what choices do we have left?"...

Washington State Considers Having Highest Sales Tax in the U.S. - Washington State legislators have introduced HB 3183, which would raise the state sales tax by 1 percentage point, phasing out as unemployment drops. The tax would drop by a half-point when unemployment falls below 6.5% for four consecutive months and the remaining half-point when unemployment drops below 5%. "We need the money," Appleton said. "I hate to say that, but there are so many people who are going to be hurt and so many cuts we need to make. We’re trying to figure out ways that are the least painful."

Like Feds, States Deep In Red Too - Amid all the voter hang-wringing about rising federal deficits, the overlooked fiscal story is the budgetary problems handcuffing almost every state government. All but two states--Montana and North Dakota--started the year with a budget deficit, and all but nine state are facing projected shortfalls again so far this year, according to a recent report by the Center on Budget and Policy Priorities. California, with its direct democracy-fueled fiscal inanity, is in the worst shape; its current budget gap is more than half its general fund budget, the only such state above the 50 percent threshold. But eight other states join California with a combined carry-over and mid-year budget gap of at least 30 percent of its general fund budget. The report's summary warns that matters will get worse before they get better:

States turn to commercial properties for cash - State and local governments are grappling with budget shortfalls and some are eyeing their office high-rises, prisons and even capitol buildings as assets to be sold or mortgaged for some fiscal relief. In recent weeks, Arizona invited investors to buy bonds secured by several landmark state government buildings. Connecticut, also facing budget woes, has made plans to bring in $60 million over the next two years from real estate sales. But California, with a gaping $20 billion budget gap projected through June next year, has the most ambitious sell-off plan yet. This month, the state will begin marketing nearly 9 million square feet of office space it values at around $2 billion.

Some cash-strapped states raiding workers comp funds - The recession is driving some state governments to raid workers compensation funds to combat budget deficits, but employers, risk-sharing pools and insurers are fighting back. Employers, pools and insurers have gone to court seeking to stop the practice that is tapping money collected through assessments on insured premiums and self-insured entities. They argue that “sweeping,” or transferring employer assessments, is an unconstitutional confiscation of private money amounting to unauthorized taxation.

Insolvent European vs American States - While all the investing world seems to be utterly fixated on the outcome of Greece’s solvency woes, perhaps we need to step back and put this into perspective. Portugal, Ireland, Italy Greece and Spain are in varied degrees of difficulty; but how significant are the PIIGS’ debts to the world’s economy? (If they require a workout, perhaps they can what we do. Give them lower rates and an extended term and/or a cramdown to their lenders). In contrast, consider the distressed United States: How do our own economic “pigs” measure up? In terms of economic importance relative to the world, aren’t the bigger US States that are in deep distress more important (GDP sizewise)? Consider the size of the budget issues and debt load in dollar and percentage terms for just these six states relative to their European cousins: All by itself, the insolvent nation-state of California is the 8th largest economy in the world.

Auditor says governor's budget is $400 million short, violates state spending limits -DES MOINES (AP) - Gov. Chet Culver's proposed budget violates state spending limits and contains a $400 million shortfall, state Auditor David Vaudt said Wednesday. Vaudt, a Republican, criticized the Democratic governor's proposed budget for the fiscal year that begins July 1, claiming it contains projected savings from reorganizing state government that are too large and doesn't pay for spending that's required. He said the proposed budget also violates state spending laws that require the state spend only 99 percent of what it collects.

CalPERS project in Boston on verge of going bust - Another high-profile CalPERS real estate investment is on the verge of going bust.Massachusetts officials this week issued a default notice against a Cal-PERS partnership that's been struggling for years to build an $800 million residential-commercial complex in Boston. A default would likely mean the end of the project as far as CalPERS is concerned.The size of the potential loss isn't known. Clark McKinley, a spokesman for the California Public Employees' Retirement System, said the deal was part of a pool of urban real estate investments, and CalPERS wouldn't specify the amount sunk into the Boston project. The urban real estate pool lost 92 percent of its value – or more than $1 billion – in the 12 months ending Sept. 30, according to a CalPERS staff report.

CalPERS considers leverage to diversify risk  - CalPERS’ investment committee is scheduled to discuss using leveraged bonds as a way to diversify risk in its entire portfolio, similar to a strategy adopted last month by the State of Wisconsin Investment Board, according to agenda documents for its Feb. 16 meeting. The discussion is part of the board’s incorporating risk analysis into its asset allocation study, said Clark McKinley, spokesman for the $202.1 billion system in Sacramento. On Jan. 26, the Madison-based Wisconsin board approved leveraging its $67.8 billion core fund to achieve an asset allocation of 104% through use of synthetic futures and swaps.

Rash of Retirements Pushes Social Security to Brink  — Social Security's annual surplus nearly evaporated in 2009 for the first time in 25 years as the recession led hundreds of thousands of workers to retire or claim disability.The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated."Things are a little bit worse than had been expected," says Stephen Goss, chief actuary for the Social Security Administration. "Clearly, we're going to be negative for a year or two."

Is Social Security too big to NOT fail? - This figure shows graphically the outcomes for the OAS (black line) and DI (gray line) under the three alternative scenarios Low Cost (I), Intermediate Cost (II), and High Cost (III) in the 2008 Report. Almost universally reporting on Social Security revolves around Intermediate Cost and if we examine its lines we see the standard reported outcomes, the DI Trust Fund going to depletion in 2023 and OAS in 2041. But that was then, the 2009 Report shortened up the intervals to 2017 and 2037 for Intermediate Cost, and the 2010 Report is certainly going to see DI in a state of near term collapse. Okay Intermediate Cost shows us a program in need of some fixes, immediately for DI, and in the medium term for OAS. Familiar story. And High Cost tells the same story, only more so.

Social Security Benefits Will Be Paid, It is the Law -  Allan Sloan told listeners to Marketplace radio this morning that future retirees should be worried about their Social Security benefits because the program is now paying out more in benefits than it collects in taxes. In fact, the program has accumulated more than $2.5 trillion on government bonds in its trust fund. The Congressional Budget Office projects that this fund will be sufficient to pay all scheduled benefits through the year 2044.  All of these benefits will be paid under current law. Congress would have to vote to overhaul the program to prevent the payment of benefits.

Pension-plan recovery hit a wall in Jan. - The recovery of U.S. corporate pension plans hit a wall in January when the funding deficit climbed to $263 billion, according to estimates by Mercer, a unit of Marsh & McLennan Companies Inc. Mercer said pension plans at S&P 1500 companies got a big lift throughout 2009 after the stock market roared back from its March nadir. But that changed in January amid stock market declines. Liabilities, meanwhile, were largely unchanged during the month as investment grade corporate bond rates remained relatively stable, Mercer said. Those rates are used to measure pension liabilities. Mercer estimated that these corporate pension plans were 83 percent funded at the end of January, leaving a deficit of $263 billion. That compared with a $247 billion deficit at the end of December.

NJ tries again on pension reforms; bill requires public workers assume portion of costs - Legislation requiring public workers to assume a portion of their health benefits costs and providing relief to the beleaguered state pension system has been introduced. The package of bills introduced Monday follows vows by new Democratic leaders in the state Senate to revisit pension reform recommendations made four years ago but mostly ignored. "Unless we take action now, New Jersey's pension system will implode, leaving thousands of rank and file workers penniless in retirement," One bill requires state, local and school district workers to contribute at least 1.5 percent of their salary toward their health care costs. Another caps at $15,000 the amount of unused sick time that can be cashed in at retirement.

Rendell may suggest revisions to state sales tax -- State officials have been talking for months about a huge, looming financial problem regarding how to pay for increased pensions of retired state employees and public school teachers. The unfunded pension costs will likely be in the range of $3 billion to $5 billion once the crisis hits in 2012, Gov. Ed Rendell has estimated. Now the governor, even though he leaves office in January 2011, is developing a plan to try to resolve the pension funding crisis, a plan that involves major changes in the state's sales tax, the Pittsburgh Post-Gazette has learned.

Fire Departments Charge for Service, Asking Accident Victims to Pay Up - Already banned in several states, the practice of charging to respond to house fires and car accidents -- dubbed a "crash tax" or an "accident tax" -- has horrified victims and earned the ire of insurance lobbyists who say their member companies are being targeted to make up for budget shortfalls.  "Part of the sales tactic when municipalities consider this is, 'Hey, don't worry, it's going to go to insurance,'" Jon Zarich, director of government affairs for the Insurance Institute of Indiana, told "But it's the homeowner that's responsible once coverage runs out."

Governor plans emergency address on Nevada budget - washingtonpost -- Nevada's budget is so far out of balance that by one account the state could lay off every worker paid from the general fund and still be $300 million in the red. The economic downturn has hit so hard that prisons may be closed, entire colleges shuttered and thousands left without jobs.  Against the backdrop of an imploding economy and an $881 million shortage, Gov. Jim Gibbons will try in an emergency "State of the State" address Monday to explain the depth of the state's financial crisis and how fixing the gaping hole in the budget.  It won't be pretty.  Nevada, with a heavy reliance on discretionary spending through gambling and sales taxes, has been especially hard hit by the recession as tourists and gamblers hold on to their money. The state's unemployment rate has hit 13 percent, and a once booming housing market that created thousands of high-paying construction jobs has gone bust, with Nevada topping the nation in foreclosures.

Endgame - Energy Bulletin - Fast forward to the middle of 2009. Around then, facing budget deficits second only to California, the state of Illinois quietly stopped paying its social service providers. In theory, the money is still allocated; in practice, it’s been more than six months since Illinois preschools, senior centers, food banks, and the like have received a check from the state for the services they provide, and many of them are on the verge of going broke. Subsidized rent has apparently taken an equivalent hit. The actual effects have been instructive. Squeezed between sharply contracting benefits and a sharply contracting job market, many of Chicago’s poor are hitting the road, heading in any direction that offers more options. Forget the survivalist fantasy of violent hordes pouring out of the inner cities to ravage everything in their path; today’s slum residents are instead becoming the Okies of the Great Recession. In the process, part of business as usual in the United States is coming to an end.

Retirees’ Medical And Dental Bills Take A $51.8 Billion Bite In California - California is going to have to pay a $51.8 billion bill for health and dental benefits for state retirees, says state Controller John Chiang in a report to the Legislature Tuesday.... The current pay-as-you-go policy results in an actuarial unfunded obligation of $51.8 billion, which represents the total present value of future retiree health benefits earned as of June 30, 2009, by current state retirees and employees. Based on this unfunded obligation, California has an annual OPEB cost of $3.9 billion for 2009-2010 – or the amount the state would need to pay toward funding these benefits. In the 2009-2010 Budget Act, the state only provided $1.3 billion for retirees’ health and dental benefits.

Medicaid fees may be trimmed to help balance Texas budget - Suehs outlined a menu of spending reductions worth $304 million at the request of Gov. Rick Perry Lt. Gov. David Dewhurst and House Speaker Joe Straus. Last month, the three leaders asked state agency heads to submit lists of cuts that would trim spending, with some exceptions, by 5 percent. They are nervous about a looming budget shortfall. Other suggested cuts include closing 50 beds for psychiatric patients at Terrell State Hospital, withholding 10 percent of hospitals’ trauma money from the Driver Responsibility Program, delaying help for families with sick or disabled children and postponing hires of new food safety inspectors. The new inspectors were a response to last year’s outbreak of salmonella traced to a Panhandle peanut plant.

Nev. Medicaid cuts could lead to diaper rationing - Nevada officials on Tuesday outlined drastic cuts to the state's Medicaid program that include plans to ration adult diapers, eliminate denture and hearing-aid programs, and force personal care assistants to buy their own disposable gloves. State lawmakers learned of the cuts at a committee hearing in which health officials said adult day care programs, vision services and outpatient programs for people with brain trauma would also be cut to slash $109 million from Medicaid costs. The grim proposals brought criticism and rebuke from lawmakers of both parties over Gov. Jim Gibbons' comments that Nevada can no longer pay for "bloated government services."

State bets on getting $1 billion more for Medicaid -  It's not clear whether the Senate will pass legislation to provide extra Medicaid payments to state governments, but New York is counting on it.  On Tuesday, Gov. David Paterson made several changes to his proposed fiscal 2011 state budget, including one that adds $1 billion in extra Medicaid money from the federal government. The state anticipates Congress will extend an enhanced Medicaid formula enacted last year as part of the $787 billion economic stimulus package. That formula expires Dec. 31, but the House approved a jobs bill in December that would extend the more generous payments to the states through June 30, 2011.

Long-Term Care Hospitals Face Little Scrutiny - Fewer than 10 hospitals dedicated to long-term care existed in the early 1980s, according to Medicare officials. But many such hospitals have sprouted since then, driven by Medicare rules that offer high payments for hospitals that treat patients for an average of 25 days or more. Long-term care hospitals now treat about 200,000 patients a year, including 130,000 Medicare patients — at a projected cost of $4.8 billion to the government this year, up from $400 million in 1993. Despite the rapid expansion of long-term care hospitals and the serious illnesses they treat, Medicare has never closely examined their care. Unlike traditional hospitals, Medicare does not penalize them financially if they fail to submit quality data.

Which Organs Can I Live Without, and How Much Cash Can I Get for Them? - There are many organs one can theoretically do without, or for which there’s a backup. Most folks can spare a kidney, a portion of their liver, a lung, some intestines, and an eyeball, and still live a long life. That said, donating a lung, a piece of liver or a section of intestines is a very complicated surgery, so it’s not done frequently on the black market. And no one’s going to make much cash on an eyeball. “In the U.S., there’s a fairly steady supply of donated corneas from corpses,” says Sean Fitzpatrick, director of public affairs at the New England Organ Bank. “There’s pretty much no market demand for eyes.” Giving up a kidney, though, is a relatively simple surgery that has netted desperate people a few bucks. Now, black-market organ dealers don’t do a great job of filing taxes, but here are some prices based on rumored deals and reports from the World Heath Organization. In India, a kidney fetches around $20,000. In China, buyers will pay $40,000 or more. A good, healthy kidney from Israel goes for $160,000.

Re-Engineering the Human Immune System - For now, the best way to supplement the body’s own defenses is through vaccines, but vaccines are far from a panacea. Each vaccine must be prepared in advance, few vaccines provide full protection to everybody, and despite popular misconception, even fewer last a lifetime. For example, smallpox vaccinations were lifelong, but tetanus vaccines generally last 5-10 years. There is still no vaccine for HIV infection. And when it comes to bacteria like tuberculosis, current vaccines are almost entirely ineffective. What’s more, the whole process is achingly indirect. Our best hope may be to cut out the middleman. Rather than merely hoping that the vaccine will indirectly lead to the antibody an individual needs, imagine if we could genetically engineer these antibodies and make them available as needed. Call it immunity-on-demand.

Why Republicans Say They Want To Start Over On Health Care - In 1994, when they were killing Bill Clinton's health care plan, Republicans promised over and over they just wanted to do it right. Start fresh and pass a real health care plan without all the bad socialist stuff: "We don't have to do it all this year," [Bob Dole] said in the closing address to committee members. "We don't have to do any of it this year. You know, Congress meets every year. Of course, the Clinton plan died, and Republicans proceeded to do absolutely squat for the next fifteen years. This year, when they're doing everything possible to kill President Obama's health care plan, Republicans again insist they just want to start over fresh, have a chance to enact a real bipartisan plan.

Yglesias: House GOP Medicare Elimination Plan Puts Conservatives in a Pickle -  It’s subscription-only, but Roll Call has a nice little piece by Steven T Dennis about how House GOP budget chief Paul Ryan’s plan to balance the budget by eliminating Social Security and Medicare is putting some of his colleagues on the hot seat: For the past year, Senate Republican leaders have largely avoided putting forward alternative visions to the major bills Democrats have offered, preferring to cherry-pick politically charged amendments instead. House Republicans have taken a somewhat different tack, offering alternative bills. But in some cases, such as in their health care package, offering piecemeal ideas that eschewed politically tough choices. A Republican who asked to have his name withheld said the party’s leadership and rank and file aren’t ready to follow Ryan’s lead. “There’s a lot of worry that we beat the Democrats up on health care for cutting Medicare and now we’re going to turn around and do it,”

Having It Both Ways on Medicare - Krugman - One of the truly amazing things about the health care debate is the way Republicans have managed to pose as defenders of Medicare. The death panel thing has been absolutely central to their argument. For example, when I was debating Roger Ailes on This Week, his response to my Massachusetts comparison — that the Senate bill was basically the same as Romneycare — was to start blustering that Mitt Romney didn’t slash Medicare benefits. Remember what the 1995 government shutdown was about: it was Newt Gingrich trying to force Bill Clinton to accept, yes, deep cuts in Medicare. And it’s not just history: Republican plans to balance the budget rely crucially on … deep cuts in Medicare. Consider the “Roadmap for America’s future” released by Paul Ryan, the ranking Republican on the House budget committee...

Universal Health Care Is Good for Business - A Healthy Blog notes that Massachusetts has reversed the national trend: Since the enactment of Chapter 58, Massachusetts has increased the percentage of employers offering coverage to their employees. With the employer offer rate up 4% over two year, to 76%, we are climbing well above the national average of 60%. This increase occurred in spite of the recession. Most employees (80%) who are eligible for employer-sponsored insurance choose to enroll. There are large (and predictable) differences between small and large employers, with the small employers less likely to offer health insurance. Full report here (PDF).

New WaPo Poll: Two-Thirds of Voters Say Pass Comprehensive Reform - Obama and Congressional leaders will head into the healthcare summit (which Cantor has agreed to) with some good polling backing them up for finishing the job, even without Republicans. Americans spread the blame when it comes to the lack of cooperation in Washington, and, in a new Washington Post-ABC News poll, most want the two sides to keep working to pass comprehensive health-care reform. Nearly six in 10 in the new poll say the Republicans aren't doing enough to forge compromise with President Obama on important issues; more than four in 10 see Obama as doing too little to get GOP support. Among independents, 56 percent see the Republicans in Congress as too unbending and 50 percent say so of the president; 28 percent of independents say both sides are doing too little to find agreement.

Back to the Drawing Board? - A new Washington Post poll apparently shows that people want Congress to keep looking for a way to pass comprehensive health care reform.  The graphic is rather striking: This does not mean that the public wants Congress to pass any of the current bills, though we don't know yet, since the Post seems to be dribbling out the numbers over a few days.  But I'll be surprised if they get more "ayes" than "nays" on passing HCR in its current form, which hasn't happened since Kaiser got a 42% favorable a month ago.  No, I'm betting that what the public, God bless 'em, really wants is for Congress to go back and find a fairy bill that covers a bunch of people, doesn't cost anything, offends no popular special interests, and generates broad bipartisan support.  While they're at it, I want a pony.

Myth Diagnosis – Outside of the few states where it is illegal to deny coverage based on medical history, I am probably uninsurable. So I took a keen interest when, at the fervid climax of the health-care debate in mid-December, a Washington Post blogger, Ezra Klein, declared that Senator Joseph Lieberman, by refusing to vote for a bill with a public option, was apparently “willing to cause the deaths of hundreds of thousands” of uninsured people in order to punish the progressives who had opposed his reelection in 2006. In the ensuing blogstorm, conservatives condemned Klein’s “venomous smear,” while liberals solemnly debated the circumstances under which one may properly accuse one’s opponents of mass murder.  But aside from an exchange between Matthew Yglesias of the Center for American Progress and Michael Cannon of the Cato Institute, few people addressed the question that mattered most to those of us who cannot buy an individual insurance policy at any price—the question that was arguably the health-care debate’s most important: Was Klein right? If we lost our insurance, would this gargantuan new entitlement really be the only thing standing between us and an early grave?

Top five health insurers posted 56 percent profit gains in 2009-  If no health care overhaul passes Congress, health insurers may be in for a windfall -- and one far larger that most Americans probably realize. According to a study by a pro-health reform group published Thursday, the nation's largest five health insurance companies posted a 56 percent gain in 2009 profits over 2008. The insurers including Wellpoint, UnitedHealth, Cigna, Aetna and Humana, which cover the majority of Americans with insurance. The insurers' hefty profit gains came even as 2.7 million more Americans lost their insurance coverage due to the declining economy.

Obama's Hail Mary on Health Care - Asking Republicans to be part of a televised forum on health care reform is a clever move:  put up or shut up.  Nonetheless, I'd guess it probably fails.  Republicans are saying what you'd expect them to:  we won't engage in sham negotiations.  If you want us to come to the table, shelve this monstrous and unpopular plan and let's start over. Democrats should recognize the tactic:  they invented it.  And used it successfully against Social Security reform in 2005.   Astonishingly enough, they did not suffer at the polls, even though the president tried to stir up public discontent with their "obstructionism".  The problem is, the public doesn't get mad at you for obstructing things the public doesn't like.

Obama Willing To Compromise On Health Care Reform - Signaling he'd meet critics part way on health care, President Barack Obama said Tuesday he's willing to sign a bill even if it doesn't deliver everything he pursued through a year of grinding effort at risk of going down as a dismal failure.The Democrats' massive health overhaul legislation is stalled in Congress by disagreements within the party and the loss last month of their 60th Senate vote, and with it, control of the agenda. Republicans suspect that Obama's invitation to a televised health care summit Feb. 25 is a thinly disguised political trap. On Tuesday, the president tried to change the dour dynamic, indicating he could settle for less in order to move ahead."Let's put the best ideas on the table," Obama told reporters after meeting with congressional leaders of both parties. "My hope is that we can find enough overlap that we can say, this is the right way to move forward, even if I don't get every single thing that I want."

Let's scream at each other about health reform - AS MY colleague notes below, the health-care-reform summit has generated a good deal of debate in the blogosphere and beyond. At first glance, the idea of a summit appears slightly insane. But the key to making it work is in the process Mr Obama outlined in his interview with Katie Couric on Sunday. First, he will invite Republicans to come to the White House to lay their ideas on the table. Then, after the recess, a joint meeting will be held to go over the different plans and debate their merits. That could prove to be a useful discussion, as long as the intervening period provides time for the CBO and other neutral appraisers to score the different proposals. Otherwise, the meeting could turn into a ludicrous media circus where nobody knows what they're talking about.

Tech transformation prescribed for geriatric health care - Intel's digital health group was created as a P&L center in a 2005 reorganization, so it's hardly surprising that the company is researching health products and services in Europe, where an aging population is one of the biggest challenges facing society. The question is how to "leverage resources so that more [care] can be delivered by fewer nurses and doctors to more old people," said Niamh Scannell, European research director of Intel's digital health group and director of the Technology Research for Independent Living (TRIL) Center in Dublin, Ireland. TRIL is a multimillion-euro research collaboration between Intel and academic partners at University College Dublin, Trinity College Dublin and the National University of Ireland, Galway.

Charting Europe's Crisis - With Europe finally regaining its rightful place as the epicenter of the peripheral economic crisis, it is time we shift focus, albeit briefly, from America and its increasing cadre of troubles, to those of the Euro area. Below we present some of the key charts and observations that will frame the imminent [bail out|default] of a whole host of minor EMU and EU countries.  The first, and most relevant data series, is unemployment. And while in the US everyone is well aware of the various seasonal adjustment gimmicks, DOL definition loopholes, and ridiculous birth-death model models which make the final number completely irrelevant, it is useful to note that both the EU and the US are sharing roughly the same "broad definition" (U-3) unemployment rate as a percentage of the labor force. Notable is that while the U.S. equivalent of this metric has allegedly started to improve (even as NSA data indicates the reading is at record recent highs), the European unemployment rate has yet to plateau.

Goldman Helped Greece Disguise Deficit - Yves Smith - Readers may know that one point of contention in the worries about Greece’s deficits is that it had hidden the fact that it violated Maastricht rule that fine eurozone countries whose fiscal deficits exceed 3% of GDP. How was this subterfuge achieved? While the Greek government engaged in some bogus accounting on its own, it also got some help from Goldman. Der Spiegel explains how: Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

How Greece hid its borrowing in the swaps market - Beat Balzli has an intriguing story at Spiegel saying that Greece has been hiding the true nature of its deficits and its debt using clever derivatives dreamed up by Goldman Sachs. I believe it, although the details are sparse: Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date. Such transactions are part of normal government refinancing. But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks. This credit disguised as a swap didn’t show up in the Greek debt statistics.

Greece, Goldman Spat Over Deficit Figures - Greek finance ministry officials can be forgiven if they’re a little touchy when it comes to the accuracy of their budget figures. Massive revisions to deficit estimates by Athens last fall helped trigger the ongoing crisis in Greek finances that is expected by many to end with some form of bailout by the European Union in coming weeks.On Wednesday, Goldman Sachs sent out a research note, based on December figures from the Greek finance ministry, suggesting that Athens might have to revise up its 2009 deficit from 12.7% of GDP to as high as 16%. Goldman economists spotted what they saw as a EUR6 billion addition to spending in December, taking the deficit for the year up to EUR37.9 billion from less than EUR30 billion previously. “It is a stunning revision to make,” Goldman economists wrote. The Greek finance ministry pushed back hard Wednesday, saying it “categorically refutes information circulating today of an alleged revision of the 2009 state budget deficit figures.”

Fair Game - A Financial Crisis That Just Keeps Moving - NYTimes  - YOU know we’re in trouble when we’re told that the economic problems in Greece, Portugal and Spain, the most indebted countriesin the euro zone, are likely to remain safely contained in those nations. After all, we heard the same nonsense in 2007 from United States financial leaders talking about the subprime mortgage mess. Both Ben S. Bernanke, the chairman of the Federal Reserve Board, and Henry M. Paulson Jr., then the Treasury secretary, rolled out to reassure concerned investors that troubles in mortgage land wouldn’t permeate the rest of the economy. As we all now know, mortgage woes were contained — to planet Earth. And so it may be with overleveraged nations in Europe.  Simply put, contagion is a fact of life in our interconnected global economy and financial markets. And that means investors must strap in for more gyrations in the stock and bond markets as the great and painful deleveraging that began in 2007

Trichet comes home early A change in travel plans by Jean-Claude Trichet, European Central Bank president, has caused a flurry of excitement in financial markets this morning. He is leaving early a Reserve Bank of Australia conference in Sydney in order to get back for Thursday’s European Union leaders summit in Brussels. The buzz in markets is that this could be a sign that a bail-out is being prepared for Greece. It is a good story to trade on, But my understanding is that the ECB president always intended to be at Thursday’s summit in Brussels, which was meant to be about longer term economic strategy - on which Mr Trichet has strong views.

With Few Policy Tools, Trichet Faces Crisis in Greece - NYTimes - Whether he likes it or not, Jean-Claude Trichet is not just the president of the European Central Bank. Mr. Trichet, 67, is also the de facto president of Europe, at least for the 16 nations that rely on the euro as their common currency. On paper, the European Union has just established a new president in Brussels, and the central bank’s sole responsibility is to keep inflation in check. Moreover, the bank, based here, has almost no formal policy tools to help an ailing member country like Greece. But as investor alarm about Greek, Spanish and Portuguese indebtedness increases, the crisis has highlighted the fundamental weakness of the European monetary union. With no strong political arm to ensure that members observe debt limits set by treaty, the responsibility falls to Mr. Trichet to try to resolve the crisis. In the current situation, said Jörg Krämer, chief economist at Commerzbank in Frankfurt, only the bank’s president “has the authority and the expertise” to manage the situation.

Germany Considers Loan Guarantees for Greece - Germany is considering a plan with its European Union partners to offer Greece and other troubled euro-zone members loan guarantees in a bid to calm fears of a government default and prevent a widening of the credit woes that have shaken global markets in recent days, people familiar with the matter said. The proposed plan would be undertaken within the EU framework but led by Germany, one of the people said. German Finance Minister Wolfgang Schaeuble has discussed the idea in recent days with European Central Bank President Jean-Claude Trichet, according to the person

Don’t leave Greece to face the speculators alone - There are shades of Britain's 1976 tryst with the IMF but the Greek debt crisis offers a chance to fight the speculative attacks faced by the euro - For those with long memories of financial crises, Jean-Claude Trichet's decision to fly home early from Australia to attend a European Union summit had a certain resonance. As the doyen of City economists, Stephen Lewis, noted today, news that the president of the European Central Bank had cut short a visit to the antipodes conjured up images of Denis Healey turning his car round at Heathrow airport to deal with the sterling crisis that eventually required the assistance of the International Monetary Fund. Different decade, different currency, same old story. A country struggling with severe economic problems and high levels of borrowing has been targeted by financial speculators.

Super-wealthy investors move billions out of Greece - A staggering €8bn-€10bn (£7bn-£8.7bn) may have been taken out of Greece by private investors since it became engulfed by economic turmoil in November. Under pressure from the European Union and international markets to rein in the nation's €300bn debt, socialist prime minister, George Papandreou, announced last week that he would have to enforce tough deficit-cutting measures. But the coming austerity package is leading panicked wealthy Greeks to divert their savings out of the country. Traditionally, the country's super-rich, not least ship owners and mercantile elite, have favoured the Swiss bank and off-shore account. But now huge sums are also being spirited away to banks in Cyprus. "Very big transactions are going through Cypriot banks," added Pana­gopoulos. "Greeks feel that Cyprus is not only close, but safe."

BBC News – Greece hit by nationwide strike over austerity measures - Thousands of Greeks have rallied against deficit-cutting measures during a national public sector strike.  Flights have been grounded, many schools are closed and hospitals are operating an emergency-only service.  The prime minister, who wants to freeze pay, gather more taxes and reform pensions, insisted that the proposals would be fully implemented.  EU leaders will discuss Greece's difficulties on Thursday amid concern the crisis could threaten the euro.  European finance ministers are also due to hold a teleconference on Wednesday to talk about the issue.

Greece Deal Opens Door for More Bailouts: Economist European Union leaders set a precedent by bailing out Greece and other euro zone countries such as Portugal would have a strong case for tapping the region for funds if they needed to, Erik Nielsen, chief European economist at Goldman Sachs, told Thursday.Now that EU leaders agreed to effectively backstop Greece's debt, they would struggle to say no to other euro-zone economies in the same difficult situation, he said.

BBC News – Greece plans to ban early retirement  - Greece's government intends to raise the national pension age and ban early retirement as it tries to tackle its huge budget deficit. The socialist government said it wanted to increase the average retirement age from 61 to 63 by 2015.  The steps would be part of a series of austerity measures aimed at curbing the country's deficit and national debt.  But the moves have angered many of the unions, which have scheduled strikes in protest. Farmers have already been protesting for weeks, demanding more government assistance, and the country's biggest union, GSEE, is set to hold a mass walk-out on 24 February.

Greek Strikes Challenge Papandreou’s Bid to Stop Fiscal Crisis Prime Minister George Papandreou’s drive to get Greece’s ballooning budget under control will be challenged in the streets today as striking labor unions shut down schools, hospitals and flights....Protests against Papandreou’s plans to freeze wages and reduce benefits come after European Union leaders, set to meet at a summit in Brussels tomorrow, signaled they may aid the country if progress in cutting the deficit is made. Bonds have slumped in Greece and in the euro area’s southern edge as investors examine budget shortfalls across the 16-nation bloc.

Greece's financial crisis puts the future of the euro in question - Leave Greece to us. It's a family affair. That was the message from Brussels as shares plunged in Athens, customs officials walked off the job in protest at swingeing budget cuts, the financial contagion spread westwards across the Mediterranean and the International Monetary Fund started to cast a long shadow across the soft underbelly of the eurozone. European Central Bank president Jean-Claude Trichet said last week it was vital that Greece met its stated goals for cutting its budget deficit and that the steps announced by the government were encouraging. "The ECB governing council approves the medium-term goal ... we expect and are confident that the government will take all the decisions that will permit it to reach that goal," he added. "The measures taken last Tuesday – tax rises, the freezing of wages in the public sector, and the pension reform – are steps in the right direction." But the reality is more complex.

Rescue Greece and we help ourselves - What has been happening to the euro over the past few days is a stark warning to governments all over the world. No, the Eurozone will not break up in the coming months, though it may well do so at some later date. The problems that the Eurozone's weaker members – especially Greece but also Portugal, Spain, Ireland and Italy – have exposed is that governments of countries with weak finances are being put on notice. They must fix their finances swiftly or face the consequences of a sudden loss of confidence. Greece is the canary down the coal mine.

EU Finance Ministers Urged to Skirt Question of Greek Default (Bloomberg) -- European Union finance ministers were instructed last week to skirt questions on a possible bailout of Greece and emphasize their support for the government’s deficit- cutting measures, according to a draft document. If asked about the risk of a Greek default, ministers were advised to say they were “fully confident” that the country “will rise to this challenge,” according to the confidential EU memo, which was dated Feb. 5. The note’s recommendation on sidestepping such questions was called a “defensive point.”

‘PIGS’ Crisis Is Opportunity for Euro to Stand Up - The euro area and the European Central Bank are now dealing with what markets are calling the “PIGS” crisis: Portugal, Ireland, Greece and Spain. Sometimes Italy is added to the list, but its finances seem to be in slightly better shape.  The bond markets have picked on Greece, punishing the country for running up a budget deficit equal to 12.7 percent of gross domestic product. Now the focus is on other indebted countries in the euro area. Equity and currency markets are jittery as central bankers seek a lasting solution.  It’s a crisis, no doubt. But the ECB should, perhaps, see it as an opportunity.  There has been confusion about fiscal responsibility since the euro was created a decade ago. This is the chance to set the record straight. Get this crisis right, and the euro could establish itself as the dominant world currency. Get it wrong, and by 2030 the only place you’ll be able to get euro notes will be as souvenirs on EBay Inc.

Euro Trashed? - The European experiment with a trans-sovereign currency is facing its first acid test. The flashpoint today is Greece, which looks set to default on its debt barring some outside intervention. While many commentators have been squawking about the immediate crisis as if it were the end of life on Earth, I would like to zoom out and discuss the history and longer-term outlook for the euro and its parent, the European Union.  Since its launch, the euro has outperformed expectations, establishing itself both as the world's secondary reserve currency and the second most traded currency after the U.S. dollar. Because of this stellar introduction, the euro has been proposed as the new primary reserve currency in place of a devaluing U.S. dollar. However, its unusual foundation presents risks to which most investors are unaccustomed.

G7: Europe must rescue Greece - Finance ministers and officials from the G7 countries, meeting in Canada yesterday, insisted there would be a “European” solution to the problems affecting Greece, Portugal and Spain and no need for an IMF rescue.  “We told our partners we had to solve the problem ourselves,” said Jean-Claude Juncker, chairman of the Eurogroup of finance ministers. The difficulties in Greece extended to Portugal and Spain last week, with credit spreads widening sharply, provoking a plunge in local stock markets.  “Greece has to realise that when you break the rules over a long period of time, you have to pay a high price.”

Recovery teeters as debt threat spreads - The Globe and Mail - The world may have averted another Great Depression, but the aftershocks of the 2008 financial meltdown continue to rattle the global economy. The debt threat stalking some of Europe's weaker economies, the tumbling euro, the United States' eye-popping deficit and its still-deteriorating job market are all powerful reminders that the deep-rooted fiscal problems that pushed the global financial system to the brink continue to pose serious risks to stability.The latest flashpoint is Portugal, where the country's parliament defeated an austerity plan Friday. The rejection spooked investors from Toronto to Tokyo, pushing stocks sharply lower again Friday before North American buyers returned in the late afternoon and brought markets back into the black near the close.

Why it's hard for Greece to back out of the Euro- Talk of Euro abandonment would trigger an immediate run on Greek banks, sending the country into an even deeper hole.  Who wants a Euro deposit to be converted into a drachma deposit? You could imagine keeping current Euro-denominated deposits and adding new drachmas to the system, circulating at a flexible exchange rate.  That still might trigger a bank run (who expects the parallel currencies to last forever?).  Furthermore the new drachmas would bring seigniorage only if the law forces their overvaluation in some manner; refer back to the earlier discussion of the bank run. You could imagine a surprise freeze on all bank deposits, thereby preventing an immediate bank run but leading to a later bank run.  Plus in the meantime there is no working banking system.  And if this doesn't come as a true surprise, you end up with the immediate bank run.

Is Greek Crisis a Precursor to a “Global Margin Call”? - Yves Smith - Two readers pointed to a Ambrose Evans-Pritchard story at the Telegraph which argues the the sovereign debt perturbations have the potential to have ramifications as serious as the subprime/Alt-A crisis. Now Evans-Pritchard has a tendency to the apocalyptic, but he also made some astute calls in 2007 and 2008.  And here he connects some important dots. It isn’t just that bond yields on Greece have spiked up; the other countries seen as being big external debt risks are facing bond rollovers soon: The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.

Greek Ouzo Crisis Escalates Into Global Margin Call As Confidence Ebbs - Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece's drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes. Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion.  The scale matches America's sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit.

Moody's Warns Greece: Deviate, and Risk Downgrade - —Greece's debt is likely to face another downgrade by Moody's Investors Service, although the ratings firm is prepared to give the country time to enforce policy changes as it implements a plan to dramatically reduce its debt levels.  In an interview, Pierre Cailleteau, managing director of Moody's Global Sovereign Risk Group, mapped out two scenarios for Greece. The more likely path, he said, would see the government deviate from its plan to stabilize finances, which would prompt Moody's to cut Greece's rating again. It last downgraded Greece to A2 with a negative outlook from A1 in December.

Greek crisis intensifies as Joe Stiglitz calls for Europe to ‘teach the speculators a lesson’ - Economist Joe Stiglitz, who is advising the Greek government, last night denied that the country would require a bail-out, and urged national authorities to intervene in markets to "teach the speculators a lesson". Likening the situation to the Asian financial crisis, in which even healthy economies were targeted as hedge funds and investors withdrew from the region, he told the Sky's Jeff Randall Live show: "The speculators will always look for the weakest link. What they're doing now is a version of the Hong Kong double play in 1997 /1998. "What Hong Kong did in response was to raise interest rates and intervene in the stock market. They burnt the speculators and Europe needs to do the same thing."

A message to all PIIGS shorters out there - I'm wondering what the shorters' game is. As I said before, there is no real possibility of default in an EMU country. In fact, the very notion of an EMU country folding with 120% or even 150% debt to GDP ratio is laughable, not only because it's very, very easy to fix the situation (the PIIGS governments announce a 5% cut in public sector pay, or a rise of 2% in VAT) but also because healthier EMU countries have a lot to lose by letting the PIIGS go down, both politically and economically. Worst case scenario, Germany says 'enough', and the whole thing just blows over.

The 9 Possible Scenarios For A Greek Bailout (slides; interactive)

Anatomy of distress: New insight on the probability of bank turmoil - VoxEU - How safe are the banks? This column provides new evidence on what determines the likelihood of an EU bank experiencing distress, suggesting that bank risks have converged across EU members, and that a more tightly integrated financial regulation should reflect this. The results also call for a greater role for market discipline.

Anatomy of a Euromess - Krugman - Most press coverage of the eurozone troubles has focused on Greece, which is understandable: Greece is up against the wall to a greater extent than anyone else. But the Greek economy is also very small; in economic terms the heart of the crisis is in Spain, which is much bigger. And as I’ve tried to point out in a number of posts, Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. So I thought it might be useful to lay out, in a handful of pictures, how Spain got into its current state. (All of the data come from the IMF World Economic Outlook Database). There’s a kind of classic simplicity about the story — it’s almost like a textbook example. Unfortunately, millions of people are suffering the consequences.

Greek Troubles Are More Than Fiscal - Krugman, graph - Right now all the focus is on the budget, which is the action-forcing event. But Greece, like Spain, experienced a large real appreciation during the years of bubble finance — and now it faces a prolonged era of grinding deflation as it works its way back to competitive costs.

Will Greece set off 'global debt bomb'? - Greece accounts for just 3 per cent of the euro-zone economy. The crisis in the cradle of Western civilization serves merely as proxy for government over-indebtedness everywhere.  Only a few months ago, a Dubai on the edge of default had to be bailed out by oil-rich neighbour Abu Dhabi. A debt-strapped Argentina recently tried and failed to pay debts by raiding its central-bank treasury.  Greece's debt-to-GDP ratio is an eye-popping 95 per cent. But then, the U.S. isn't far behind at 84 per cent. (The Canadian ratio is estimated at 35.5 per cent in the current fiscal year.) Greece's deficit-to-GDP ratio is an alarming 13 per cent. But then, Britain isn't far behind at 12.6 per cent.

Contagion - The key lesson from the ERM crisis of 1992 and the Asian crisis of 1997 is that contagion can emerge quickly and often in unpredictable ways. Unwinding of leveraged positions by distressed market participants, herding behaviour among investors, and loss of liquidity that gives way to general flight to quality can all lead to heightened correlations between markets and, in extremely circumstances, set off a self-filling crisis on a regional/global scale. There have been clear signs over the past week that the distress in the Greek government bond market is increasingly being felt in other euro area countries such as Spain and Portugal. The most likely explanation of this development is the “demonstration effect” – the Greek crisis is likely to have caused investors to re-evaluate the fundamentals of these countries. Spain and Greece may not have strong financial or economic links, but their fundamentals have a lot in common. The possibility of contagion of the Greek crisis may not end with Spain.

Stark warns new euro members, journalists - European countries looking to join the eurozone face tougher scrutiny as a result of the crisis over Greece’s public finances. This is one of the strongest lines from an interview Jürgen Stark, European Central Bank executive board member, has given to Germany’s Spiegel magazine (here’s the English version). “When accepting new members into the euro zone, we have to pay closer attention when it comes to the dates and sustainability of the convergence,” Mr Stark said. Mr Stark also argues “many of the ideas that are being thrown” on possible ways of helping Greece, ”are counterproductive or would be very difficult to reconcile with the fundamentals and principles of the currency union.”

The Rope Limit, Redux - The incentives are perverse in every way in Europe.  If Germany, France, and the Netherlands don’t bail out Greece, then what will become of Portugal and Spain?  And later, Italy and Ireland?  In aggregate, this is big. But, if Germany, France, and the Netherlands do bail out Greece, then will Portugal and Spain be next in line?  And later, Italy and Ireland?  In aggregate, this is big. The Euro is strong –  So strong that marginal nations were able to borrow at rates lower than they ever dreamed imaginable.  The debts built up like mad, ignoring the day when the inevitable weakening in aggregate demand would come, and debts of marginal, overindebted nations would prove weak.  The EU is validating the idea that currency union requires political union.  We learned that in the US 200 years ago, but the youngsters in the EU have to learn that lesson the hard way.

When Germany bails out Greece - Will Greece be giving up fiscal independence in return for bailout funds or German guarantees? I’m sure it’ll agree to stringent conditions, while claiming that it would have kept to such a plan in any case. The question is what happens when — inevitably — it ends up breaking its fiscal promises, or trying to play silly games to get around them. What will Germany be able to do, in that case, to snap Greece back into line? And do the Germans really want to play the role of Europe’s fiscal disciplinarian in any event? It probably doesn’t matter: Greece is the Bear Stearns of Europe, seemingly too big to be allowed to falter or default, and therefore it must be bailed out somehow. Of course this sets an important precedent for when Spain and/or Italy find themselves in a similar situation — and it’s likely to make countries like Latvia feel a bit miffed, seeing how much fiscal pain they’ve inflicted on themselves with no bailout to show for it at all. The hazard here is that countries, seeing the Greek precedent, refuse to take tough fiscal steps unless the path is sweetened by Germany and France. This isn’t the end of the euro crisis: it’s only the beginning.

Sovereign Alchemy Will Fail - When we look at the world economy today, wherever we turn we see a wall of risk. And sadly this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phoney valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.

In bid to stave off debt crisis, E.U. offers to aid Greece - Seeking to calm fears of a brewing debt crisis in Europe, European leaders agreed Thursday to come to the aid of financially troubled Greece, with Germany and France in particular throwing their collective economic clout behind this Mediterranean nation.  The leaders of Germany and France were expected to offer an outline of the agreement later Thursday from Brussels, at the close of a European Union economic summit. The International Monetary Fund is to be asked to offer advice and guidance to Greece as part of the agreement, though it would not be called upon to put up financial assistance -- something Greece's larger partners in the 16-member euro zone view as too embarrassing.

Europe Commits to Action on Greek Debt - European leaders on Thursday promised to safeguard their common currency by backstopping Greece during its debt crisis. But they offered no immediate aid to Athens and remained silent on how they would respond if markets resumed their attacks on the weaker nations that rely on the euro. Germany blocked discussion of bailout mechanisms, forcing the 27-country bloc to turn its attention instead to prodding Greece to get its finances under control, promising stringent monitoring in hopes of reassuring nervous bond market investors that Greece's tough austerity program will work.

Thoughts on soveriegn debt - Today the European Union released a statement about Greece. Absolutely no specifics are given regarding the terms of any Greek bailout, but there was a (slight) surprise: Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.This is a much broader statement than I was expecting; I take it as a blanket guarantee. Euro area members - Germany and France being the largest members as measured by aggregate GDP – will support the stability of the euro-zone, meaning that help will be dished out where needed. I wanted to look at debt levels, not just in Europe but across the world. (charts)

Greek rescue plan: cheap credit - FT - Eurozone members will effectively lend their credit ratings to Greece, to tide the country over with affordable debt while it sorts out its finances. Financial support will probably come from private banks coupled with loan guarantees from member states. This seemingly roundabout process keeps the liabilities off states’ balance sheets but means banks will lend to Greece at rates they would otherwise reserve for Germany, or France, for example. Other options involving actual cash - such as accelerating disbursements of EU regional aid funds to Greece - have been met with extreme reluctance by member states. The set-up will be quite similar to loans provided from the IMF, in the sense that strict conditions will be imposed upon Greece in return for this cheap(er) credit. The EU will seek IMF expertise, but not funds.

Germany rescues Greece but demands its pound of flesh -Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece.  This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan. The central question is how far Germany has been pushed to swallow its words and offer help for Greece, after weeks of denying that it would do anything of the sort.  Only this morning Otmar Issing, the German former chief economist of the European Central Bank, was telling German television viewers that Greeks enjoyed “one of the most luxurious pensions systems in the world” and it was unreasonable to expect German taxpayers to fund it.

How Much Does a Grecian Urn? - Simon Johnson - Plutus, the Greek god of wealth, did not have an easy life. As the myth goes, Plutus wanted to grant riches only to the "the just, the wise, the men of ordered life." Zeus blinded him out of jealousy of mankind (and envy of the good), leaving Plutus to indiscriminately distribute his favors.  Modern-day Greece may be just and wise, but it certainly has not had an ordered life. As a result, the great opportunity and wealth bestowed by European integration has been largely squandered.

European Central Bank Chief Economist on Greece - In a SPIEGEL interview, European Central Bank Chief Economist Jürgen Stark discusses the threat of a Greek bankruptcy, disruption in the euro zone and the growing problem of excessive national debts in countries that have adopted Europe's common currency.

Indebtedness of Various Sovereigns - Dylan Grice put out an informative piece this morning, titled Government hedonism and the next policy mistake.A a few charts — and a quote — is what caught my eye.). As to the charts, these two show the degree of indebtedness of various governments, as well as the gap between what these sovereigns need to stabilize their balance sheets:

Greece Still Slippery From the Financial Times: Greek austerity ‘comes before any bail-out’ [A] senior [German] government official insisted European Union leaders had not given Greece any firm promises of financial assistance, he said they had signalled the possibility of help once the government of George Papandreou had implemented a tough and sustainable austerity programme. Originally investors expected a detailed plan early next week when the eurozone finance ministers meet, but now it appears there will be no plan released

Waiting For The G7 On The Euro - Simon Johnson - Yesterday’s announcement of European “support” for Greece was badly bungled.  The Global Crisis Fighter’s Guide to the Galaxy clearly states that when “markets overreact… policy needs to overreact as well” This definitely does not mean: Vague promises to provide some support in an unspecified fashion in return for some policy actions to be specified later.  Irrespective of your view on how much fiscal adjustment Greece needs vs. how much German taxpayer money it deserves you need a different approach – much more concrete and detailed.  If the euro continues to depreciate as it has so far today, the G7 will need to weigh in.

Euro hit by vagueness of EU plans for Greece - The European Union's indecisive summit response to the Greek debt crisis pressured the euro on Friday as markets were underwhelmed and analysts speculated over a possible "currency crisis".The eurozone unit was also pressured by news of flat economic growth in Germany during the fourth quarter of 2009, dealers said. EU leaders stopped short late Thursday of offering bailout funds to rescue Greece, a eurozone member whose tattered government finances have highlighted the parlous debt of other crisis-hit countries.The union's 27 leaders vowed "determined and coordinated action if needed to safeguard the financial stability in the euro area as a whole".

Will markets call EU bluff on Greek rescue? - Telegraph - The white smoke has at last emerged from the Bibliotheque Solvay in Brussels, but global markets do not like its odour. The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out. The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of "political will".

Greece Derails – Is Europe Far Behind? - Already facing serious difficulties – both internal and with regard to its EU partners (see our longer essay in Saturday’s WSJ) – Greece’s predicament just became substantially worse.Speaking on national television this evening, the Greek Prime Minister – George Papandreou – lashed out at the European Union (presumably meaning mostly Germany) for creating a “psychology of looming collapse which could be self-fulfilling.”  He also implied that Greece was being treated, in some senses, like a “lab animal.” Without doubt, EU engagement with Greece over the past week or three has not be well-managed – and the pseudo-announcement of support after the summit on Thursday was a complete amateur hour. But Greece has real problems that need to be confronted and it will go much easier for everyone if there is external assistance.  You cannot overspend in the Greek fashion without eventually facing a reckoning.

Let Greece Go to the IMF - The members of the eurozone and the EU have apparently decided that they must heroically rescue Greece, that this is better than having the IMF do it.   Senior figures in Brussels feel that the latter alternative is unthinkable.   I am a little confused about why.   Martin Wolf writes in the Financial Times this week that to bring in the Fund  ”would demonstrate that this is not a true union at all.”    But the EU and EMU and not true fiscal unions.  If the citizens of Germany and other more successful countries were willing to bail out the Greeks, then fine;  the EMU would be ready to be a fiscal union.  But they are not; so it is not.   Given that reality, what is wrong with something that “demonstrates” it?

Greece, Goldman Spat Over Deficit Figures – Real Time Economics – WSJ - Greek finance ministry officials can be forgiven if they’re a little touchy when it comes to the accuracy of their budget figures. Massive revisions to deficit estimates by Athens last fall helped trigger the ongoing crisis in Greek finances that is expected by many to end with some form of bailout by the European Union in coming weeks. On Wednesday, Goldman Sachs sent out a research note, based on December figures from the Greek finance ministry, suggesting that Athens might have to revise up its 2009 deficit from 12.7% of GDP to as high as 16%. Goldman economists spotted what they saw as a EUR6 billion addition to spending in December, taking the deficit for the year up to EUR37.9 billion from less than EUR30 billion previously. “It is a stunning revision to make,” Goldman economists wrote. The Greek finance ministry pushed back hard Wednesday, saying it “categorically refutes information circulating today of an alleged revision of the 2009 state budget deficit figures.”

Transferring Volatility to Sovereigns -  Greece never was the issue: I argued on several occasions, most recently on Larry Kudlow’s CNBC show February 5, Europe ultimately will blink: the exchange of threats between the EC in Brussels and the striking firemen in the streets of Athens will be resolved with some combination of austerity in Greece and EC aid if needed. Little as the French and Germans like dipping into their already-threadbare pockets to help the Greeks, the danger of a chain reaction engulfing all of the PIGS is too great for the risk-averse Europeans to accept. Eastern Europe is the subprime of the European banks, and a collapse of the weaker sovereigns would lead to a disaster for the core of the European banking system. Europe is a zombie economy. Its demographics portend bankruptcy for the public sector, but not anytime soon. It simply isn’t that interesting.

Greece, Spain, and the Euro Trojan Horse -  This week saw a rash of sovereign debt credit default swap speculation driving the costs of CDS for Greece, Spain, and Portugal higher as well as other countries, including the United States.  The speculation is another example of the need for derivatives regulation and a transparent trading and recording market.  The fear of sovereign debt default by a European Union Euro currency nation is a wasted exercise, unless you are profiting from the same type of unregulated speculation which helped bring Bear Stearns and Lehman down and drove Merrill Lynch and Morgan Stanley into larger, more systemically dangerous relationships. The problems in Greece and Spain are vastly different, but both are derived from the Euro. 

Paul Krugman: The Spanish Tragedy - As Europe is roiled by sovereign debt fears, it’s important to realize that the crisis in the largest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) has nothing to do with fiscal irresponsibility. On the eve of the crisis, Spain was running a budget surplus; its debts, as you can see in the figure above, were low relative to GDP.So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.

Spain's Fundamentals Were Not Sound - Morning Edition reported on Spain's slump this morning. The slump has pushed the unemployment rate into the high teens.  At one point the piece presents the views of an economist who asserts that Spain's fundamentals were sound prior to the downturn. This is not true. Spain had a huge housing bubble that led to a current account deficit that peaked at 10.0 percent of GDP in 2007. It should have been very clear at the time that its fundamentals were enormously unsound, it is remarkable that NPR found an economist who even now does not recognize that Spain's fundamentals were not sound during its housing bubble.

Spain’s economic stagnation: The zapping of Zapatero - The Economist - IF GREECE is broke, can Spain be far behind? More than four times as big as Greece, Spain has received almost as much unwelcome attention from investors. This month the Madrid stockmarket has tumbled and the risk premium on Spain’s bonds has risen (see article). Aides to José Luis Rodríguez Zapatero, the Socialist prime minister, claim that Spain is the victim not just of a speculative attack but also of a plot led by “the Anglo-Saxon press” to destroy the euro. To this piffle the best retort is: grow up. It is true that Spain is not Greece. Its public debt, relative to the size of the economy, is lower than that of Britain or the United States. It has not had to bail out its banks. And fears of financial contagion have made the markets unnaturally volatile. But there are good reasons for investors to worry about Spain. It has the highest unemployment rate in Europe, at 19.5%;

Worries for eurozone as Greek plight worsens - Weak economic figures from Germany and Italy and evidence of a worsening recession in Greece added to the financial storm facing Europe’s leaders yesterday as they struggled to reach agreement on a common response to the debt crisis in Greece. The Greek economy continues to shrink at an accelerating speed, according to government statistics published yesterday, which showed economic output falling by 0.8 per cent in the final quarter of 2009. Adding to the country’s woes was a downward adjustment by the Government of GDP for the previous three quarters. The rejigging of the figures casts new doubt on the reliability of Greek economic data after last October’s revelation that its deficit was twice as large as previously disclosed.

US Banks Have $176 Billion Exposure To Weak Euro Countries - The largest U.S. banks have a total exposure of $176 billion to four weak European countries whose debt problems have sent shudders through global financial markets in recent days. According to a report by Barclays Capital, 73 large U.S. banks have exposure of $82 billion to Ireland, $68 billion to Spain, $18 billion to Greece and $8 billion to Portugal. The report said the level of exposure was relatively low

Know Your Deficits - Krugman - NYTimes - When I say that the problems of the euro do not, in fact, have much to do with fiscal irresponsibility, here’s the picture I have in mind: Until the crisis hit, Spain to all appearances was highly responsible on the fiscal front — more so than Germany. The surge in deficits since then reflects the bursting real estate bubble and the lack, under the euro, of any way short of prolonged, grinding deflation for Spain to get its costs in line. Greece is a different story. But the Spanish tragedy is not essentially fiscal.

List of National Debt by Country - Some selected levels of Public Sector debt in different countries - US Gross Debt 2008 12,867.5bn 90.8% of GDP (EST) (US Debt) Japan National Debt 192% of GDP 2009 est) 836,521 trillion yen 2007 Italy National Debt 115% of GDP (FT) UK National Debt 68% of GDP (UK) Other selected Levels of Public Debt as a % of GDP from 2009 est (table):

Europe could face years-long debt grind - Is there any way out of Europe's debt morass? Greece's efforts to restore confidence in its finances have only called attention to its woes, and now investors are fretting debt contagion could spread to other countries, starting with similarly troubled Portugal, but with markets wondering who's next.  Some experts believe a bailout may be needed to prevent a continental conflagration—but EU leaders resist the idea, while going cap in hand to the International Monetary Fund would be a humiliating step they're unlikely to take.  A growing chorus of voices is predicting a less dramatic, but potentially more corrosive, outcome: a years-long grind of fiscal pain that neither plunges Greece into default nor restores its finances to health.  As it denies the possibility of a bailout, the EU has been desperately voicing its confidence in Greece's ability to contain spending and pay down debt in the hopes that investors will give the country a break and stop betting on its fiscal demise.

Can Europe print money to get out of its fiscal hole? - Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.

The Option of Last Resort: A Two-Currency EMU - RGE - First, we would like to clarify that we are strong supporters of the European monetary integration project. Our view is that the single currency involves significant potential economic and political benefits for all its participants which far outweigh its potential costs. We thus believe it is right to spare no effort to ensure the euro’s continued stability and success. Having said so, however, we cannot but admit that we are currently faced with hard facts that cannot be ignored by Europe’s policy-makers. The present turmoil in the Greek sovereign bonds market, as well as the increasing pressure on Spanish and Portuguese bonds, is not coincidental but symptomatic of a fundamental truth. This is that the eurozone is not an optimum currency area.

European governments look to tap US investors (FT) European governments are expected to turn increasingly to US investors to help them meet their funding requirements as record levels of bond issuance make it harder to attract buyers.Europe's biggest countries, including Germany, France and Spain, are preparing to launch bond deals denominated in dollars in the US to tap the deep pool of investors there, according to syndicate bankers.

Budget deficit concerns in European economies dominated the G7 meeting - The G7 meeting, which includes finance ministers of the seven largest economies in the world, focused mainly on the widening budget deficit in Greece and debt crisis in other European economies during their two-day meeting held in Canada. The seven countries said they need to promote a common goal which is boosting the fragile recovery in global economies through their commitment to adopting policies that revive growth. By the same token, the British finance minister Alistair Darling said that everyone is intending to support his economy in order to achieve a solid recovery. The U.S. Treasury Secretary Timothy Jetheinr in turn mentioned that it is necessary for the time being to concentrate on making sure that global economic recovery is not endangered to avoid falling again in the crisis that hit world economies in 2008.

What the World’s Leaders Did on their Winter Vacation: Nothing - The big idea behind the World Economic Forum in Davos is that many of the world’s most important problems, such as reforming the financial sector and curtailing greenhouse gases, cannot be resolved without cooperation on a global scale. The forum that just ended was a great opportunity for government officials, central bankers, representatives of the financial industry, and members of the business community to signal that they are strongly committed to working together to prevent another global financial crisis. In my view, they blew it. Faced with the opportunity of a generation to fix global finances, the world’s most powerful people went skiing.

German halt, Italian reverse hit euro zone recovery (Reuters) - Europe's post-recession recovery hit a roadblock on Friday as German economic growth unexpectedly halted and Italy went into reverse in the final quarter of 2009, knocking total euro zone GDP growth almost flat. The weak data comes at a bad time for the single currency bloc as governments struggle to sort out Greece's debt crisis and contain financial market fears that are driving the euro lower and government bond yields higher. Gross domestic product in the 16-country euro currency zone came in just 0.1 percent higher than the previous quarter, below the 0.3 percent forecast and well short of the 0.4 rise that lifted it from recession in the third quarter. Euro zone GDP dropped 4.0 percent in 2009 as a whole.

Europe’s stragglers need German consumers - Conventional wisdom in the eurozone is that the crises are the result of poor policy-making in peripheral countries. In particular, fiscal policy has been too loose and economies too inflexible. The wages of such sins are austerity. Then, after a lengthy penance, the lost sheep returns to the fold of stability.   This conventional wisdom is, alas, nonsense. Until policymakers recognise this, they are dooming the eurozone to huge tensions. There is no way to put this delicately. So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output.

Merkel handed massive bill as court strikes down benefits system - Angela Merkel's government was facing a massive new bill for the country's welfare state yesterday, after Germany's highest court declared the benefits system unconstitutional. The verdict on the programme, Germany's biggest and possibly most unpopular post-war social reform project, was handed down by judges who concluded it was in breach of the constitution because it failed to ensure its 6.7 million recipients received a "dignified minimum income." Chancellor Merkel could be forced to make significant increases in welfare payments that already cost taxpayers billions. The court gave Ms Merkel's government until the end of the year to come up with a new system to replace the five-year-old social benefit payment programme

German Deficit May Swell After Court Welfare Ruling (Bloomberg) -- Chancellor Angela Merkel’s coalition may have to raise spending by billions of euros after Germany’s highest court said social welfare payments to the long-term unemployed and their families are too low. The government must recalculate the base amount it grants adults and their children who are in receipt of so-called Hartz IV welfare, the Federal Constitutional Court said today in the southern city of Karlsruhe. Current welfare rules can remain in place until the end of the year, it said. The provisions in the law that define the base amounts for adults and children “do not fulfill the constitutional right to a decent minimum income,”

Auditor says France must urgently reduce public debt (Reuters) - France must urgently cut its public debt and deficit levels to allow room for manoeuvre in case of a new crisis and to prevent a downgrade of its AAA credit rating, the country's top audit body said on Tuesday. In its 2010 evaluation of government finances, the Cour des Comptes said France had been less successful in reducing its debt levels over the year than other countries and that rising public spending could not be entirely blamed on stimulus measures to counter the global economic crisis.The government is forecasting that public debt will climb to 86.6 percent of gross domestic product in 2013 from 83.2 percent this year. That is based on annual GDP growth rates of 2.5 percent in 2011, 2012 and 2013.

Annualize GDP Growth Rates -  In the U.S. economic growth measures are always presented at annual rates. There is no magic to using annual rates, but it is the convention. This is why it is infuriating to see the NYT use quarterly growth figures in an article reporting on Europe's growth rate for the fourth quarter of 2009.  The use of quarterly growth rates will undoubtedly confuse the vast majority of readers. It is a simple matter to convert France 0.6 percent quarterly growth rate in the 4th quarter to a 2.4 percent annual rate.

Europe Risks Another Global Depression - The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis. At the end of the meeting yesterday, Treasury Secretary Tim Geithner told reporters, “I just want to underscore they made it clear to us, they the European authorities, that they will manage this [the Greek debt crisis] with great care.” But the Europeans are not being careful – and it’s not just about Greece any more.  Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal.  Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.  The Europeans with deep-pockets are doing nothing – except insist that all countries under pressure cut their budgets quickly and in ways that are probably politically infeasible.  This kind of precipitate fiscal austerity contributed directly to the onset of the Great Depression in the 1930s.

Sovereign Default Is Plausible on a Global Scale --In a CNBC interview on Feb. 10, Marc Faber of Gloom, Boom & Doom Report went out on a limb by stating that he is not buying any sovereign debt or bonds, because ALL governments will eventually default, including the United States.  Faber believes some countries like Singapore may fare better due to very little or no debt and large reserves; however, most of the developed world will be severely affected by Greece, bailout or not. In the near term, Faber is relatively optimistic about stocks, but still thinks precious metals will have better returns.  Meanwhile, Jon Levy with Eurasia Group, though sharing an equally gloomy view, does not share the same dire prediction. Levy believes it will be a “long and drawn-out” adjusting process different from country to country.

Debt sustainability: Not so risk-free - The Economist - MARKETS have suddenly woken up to the idea that not all government debt is risk-free. There is a long and not very honourable history of sovereign default, either explicitly or implicitly via inflation and currency depreciation. So which countries are in the biggest trouble? The table shows the main sources of vulnerability for a range of OECD countries. The first column shows each country’s primary deficit or surplus adjusted for the economic cycle. The second column shows the OECD’s forecast for each country’s net debt-to-GDP ratio in 2010. The third column measures the gap between bond yields on debt of average maturity for each country and the OECD’s forecasts for growth in 2010 and 2011. The bigger the negative number, the bigger the problem (although longer-dated debt tends to pay higher yields, so this measure may disadvantage countries which have less refinancing risk). The countries are ranked by adding together their relative league-table positions on these three measures, a rough gauge of the scale of their debt problems.  The fourth column adds another source of risk—the average time to maturity of outstanding government debt.

Greek crisis could force change in EU economy pact - EU officials on Saturday pledged a toughening of monetary policy in the wake of Greece's economic crisis, raising the possibility of modifying the bloc's stability pact. The EU Energy Commissioner Guenther Oettinger said protecting the stability of the euro was crucial, and if member states refused to start cutting their deficits in 2011, European bodies should be given powers to intervene.The lesson to draw from the Greek crisis was that members of the 27-nation bloc should pay more attention to public finances and develop new budget structures, Oettinger told Germany's Welt am Sonntag newspaper."EU states must start reducing their deficit in 2011. If they refuse, the stability pact must be changed to allow European authorities to intervene better in national policy. The stability of the euro must be guaranteed," he said.

Is Tim Geithner Paying Attention To the Global Economy? – In an interview that will air Sunday on ABC, Treasury Secretary Tim Geithner says, “”We have much, much lower risk of [a double-dip recession] today than at any time over the last 12 months or so … We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.  The most rapid rate in six years.  So we are beginning the process of healing.” The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the global economy is bracing for another major shock – this time coming from the European Union. The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury – concerned as it is with China’s exchange rate and the ritual of G7 meetings, But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape.

Europe's Sovereign Disaster Makes U.S. Bonds Look Awesome - As Europe sinks deeper into its sovereign debt morass, America should be partly happy. That's because, on a relative basis, Europe is making the U.S. economy look better in the eyes of bond investors. At a time when many have questioned investors' willingness to continue gobbling up American bonds, it thus should be comforting for the U.S. that a major alternative to U.S. bonds, Euro bonds, isn't looking as attractive as it used to. Japanese bonds aren't looking so hot either given Japan's economic challenges as well. Thus European travails have ensured increased demand for U.S. bonds going forward, and an increased ability for the U.S. to weather through its current period of deficit spending and economic weakness. Sometimes victory is had by the player who simply commits the least errors. It economics this rings especially true given that almost every nation seems to blunder along whatever path political winds blow.

The Eurozne: Deja Vu Argentina 2001 & Other Thoughts - The sovereign debt problems in the Eurozone periphery and the implications of this development for the future of the currency union attracted a lot of attention over the weekend. Here is the New York Times on the problems facing Greece and the Eurozone more generally. Carmen Reinhart, meanwhile, tells us that Greece has been in a state of default about 50% of the time since the 1830s (Why then, was it ever allowed to join the Eurozone?). More importantly, she indicates that if some of the Eurozone's periphery goes under then the problems in Eastern Europe become more severe. Here is CNN quipping that Europe's PIGS (i.e. Portugal, Italy, Greece, and Spain) don't fly. Here is Paul Krugman lamenting the monetary stratightjacket that is the Euro. Finally, here is Simon Johnson pulling a Roubini by forecasting these problems, if not addressed, risk causing another global depression. After reading all these pieces, here are some thoughts:

Welcome to boarded-up Britain: One in eight shops now stand empty as recession hits high streets - The number of empty shops blighting our high streets has trebled since the start of the credit crunch, it was revealed yesterday.  A report shows 12.4 per cent of shops in town centres are empty, compared to 4 per cent in the summer of 2007.  In some towns and cities a quarter of shops lie vacant as the recession has exacerbated the effect of other problems, such as rising rents and the growth of out-of-town shopping centres.  Epitomising the trend is Victoria Street in Wolverhampton, with boarded-up shops apparently outnumbering those still open.

Treasury is failing to force banks to lend, warn MPs - Britain's bailed-out banks are still not lending to cash-strapped businesses and there is little the Treasury can do to improve the situation, a group of MPs will warn this morning. Having stepped in with £850bn of support for the teetering financial system last year, the Government succeeded in maintaining stability and securing retail deposits, a report by the House of Commons Public Accounts Committee (PAC) will say. But the ultimate cost to the taxpayer is still uncertain and attempts to use public ownership of large amounts of a bank's equity to force it to increase lending are not proving successful, according to Edward Leigh, the Tory MP who chairs the all-party committee.

BBC News – UK economy ‘faces crisis’ warns former IMF economist - The UK should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said.  Ex-IMF chief economist Simon Johnson, also described the G7 group of leading economies as "fundamentally useless".  His comments to the BBC came as G7 finance ministers discussed the growing crisis in some Eurozone nations.  One of the major concerns about a country having large budget deficits is that it cannot spend sufficiently to boost its economy.  Although the UK did officially come out of recession in the fourth quarter of 2009 - ending six consecutive quarters of economic decline - the growth was just 0.1%, much less than expected.

Britain's economy now as bad as 1970s, JP Morgan warns - JP Morgan, said that in “many” ways “the UK’s fiscal position is currently worse than observed around the IMF loan in 1976”. The bank warns that Government debts, when compared to the total size of the economy, are higher than during the 1970s crisis.  It adds that there could be a “marked fall” in the value of the pound as international investors re-assess the health of the British economy.  The intervention from JP Morgan is likely to add to the pressure on Gordon Brown and Alistair Darling to set out how they intend to cut Britain’s deficit.

Alberta going for broke with spending hikes and record $4.7B budget deficit - Alberta's Progressive Conservative government plans to run a record deficit and deplete its savings account in a budget that forgoes the kind of deep spending cuts that fiscal hawks have been screeching for. The budget includes about $1.3 billion in cuts to many departments, but those savings are being redirected to key areas such as health and education instead of to the bottom line. There are no tax increases, but up to 250 people could lose their jobs out of the 27,000-member civil service in the first government layoffs in more than a decade. Finance Minister Ted Morton said he is not happy the budget includes a $4.7-billion deficit, but is confident his overall financial plan will help Alberta be back in the black by 2012.

Russia’s 2010 Budget Deficit May Exceed Forecast  (Bloomberg) -- Russia’s budget deficit may be wider than previously estimated as spending is set to increase and a stronger ruble diminishes foreign-currency export revenues.The fiscal shortfall may reach 7.2 percent of gross domestic product this year, compared with an earlier government forecast for a 6.8 percent shortfall, Deputy Finance Minister Tatiana Nesterenko told reporters in Moscow today.

Kuwait projects huge deficit in next fiscal year - OPEC member Kuwait is projecting a 22.4 billion dollars budget deficit for the 2010-2011 fiscal year after raising spending by over 33 percent, according to a draft budget seen on Tuesday. Revenues are expected to reach 33.7 billion dollars compared to 28.1 billion dollars in the current fiscal year that ends March 31, according to the draft which was submitted to parliament and seen by AFP.  Spending is expected to reach 56.1 billion dollars, a rise in projected spending of 33.5 percent above the current year.

Korea Can't Be Complacent About Sovereign Debt - The total amount of Korea's debts by the central and regional governments and state-owned corporations rose W114 trillion or 23 percent year-on to W610 trillion as of the end of September last year (US$1=W1,164). The government says the increase is necessary to stimulate the economy, but what is frightening is the rapid pace of increase. When debts by state-owned financial institutions such as the national housing and deposit insurance funds are included, the total amount rises to W700 trillion. That is close to 70 percent of Korea's GDP.

Global recession set to cause political instability in 2010 - Lloyds -The knock-on effects of the financial crisis and the deepest global recession in decades continue to be felt across the world, causing political risks to increase in 2010. That’s the message from Aon at the launch of this year’s edition of its Political Risk Map, which offers a snapshot of the political risk climate across the globe.There were twice as many countries downgraded in terms of political stability than were upgraded, with 18 countries deemed to show higher levels of political risk than they did in 2009. “ The impact of the economic downturn on the global political climate was also highlighted in last year’s Lloyd’s 360° Risk Insight report “Global Recession: The Magnifying Glass for Political Instability”.

Forget stories about Japan and Europe outpacing America - In the last couple of years, Americans have been down on themselves for having failed at the practices they're supposed to be really good at: creating jobs, innovating, growing, getting things done. In 2008 and 2009, America's competitive advantage seemed to melt away, and our loss was other countries' gain. London was eating New York's lunch in financial services. China was assuming global economic leadership. We came in third—third!—in the 2009 World Baseball Classic. But recent events suggest the cleat is on the other foot. Japan was supposed to have a huge competitive advantage in high-quality manufacturing. Well, not so much. The biggest beneficiary of the Prius debacle is likely to be Ford, the last truly independent U.S. automaker, which has already been taking market share from busted domestic rivals.

In Japan, crisis looms as economy slips - It’s been a humbling few days for Japan.  The triple whammy of manufacturing and fiscal problems is a harbinger of what Japan faces in the coming years as its listless economy slips into an era of reckoning and national loss of face.Standard & Poor’s threatened to downgrade the Japanese government’s credit rating because Prime Minister Yukio Hatoyama is moving too slowly to reduce the debt. And China overtook Japan as the largest maker of cars, according to an announcement from the Japanese Automobile Manufacturers Association.

Is Japan the next Greece? - Is Japan, mired in debt and deflation, the next Greece?, asks the FT in an attention-grabbing line of an editorial comment on Tuesday.After all  even Shizuka Kamei, the country’s financial services minister, thinks Japan Post, the giant bank his ministry oversees, should consider diversifying out of Japanese government bonds and buy corporate bonds and – of all things – US Treasuries.Such “incendiary comments” came as S&P, alarmed at escalating debt levels and sluggish growth, has warned that it might lower Japan’s credit rating. But talk of a massive JGB bubble – let alone default – is “farfetched”, in the FT’s view.

Single East Asian Currency Proposed - The continuing economic woes in Europe and the United States are cultivating a spirit of regionalism in China, Japan and South Korea, so much so that the three East Asian nations can and should upgrade themselves to become the world's economic center, according to some experts. Top economic researchers from the three countries have gathered in Seoul for a two-day seminar at Seoul National University (SNU) that began Tuesday, with their main objective being the possible creation of a pan-East Asian economy.  Kim In-june, president of the Korean Economic Association and a professor at SNU, proposed linking the exchange rates of the Chinese yuan, Japanese yen and Korean won with one another, as a step toward a single regional currency like the euro in Western Europe.

Hong Kong and China and the Global Recession - Janet Yellen - SF Fed - Hong Kong and China are recovering impressively from global recession thanks to effective stimulus programs. But authorities worry that expansionary U.S. monetary policy may fuel asset bubbles in their economies. In the long run, the recession may nudge China toward increased domestic consumption by highlighting the risks of export-driven development. This Letter is adapted from a report by the president and CEO of the Federal Reserve Bank of San Francisco on her visit to Hong Kong and China November 15-21, 2009. Each year, the president of the San Francisco Fed joins the Federal Reserve governor responsible for liaison with Asia on a fact-finding trip to the region, in keeping with the Bank's objective of developing expertise on issues related to the Pacific Basin.

Chinese Depression: Will Its Massive Foreign Reserve Hoard Save the Country's Economy? -- As the United States and Europe deal with economic contraction resulting from excessive credit expansion that many believe has lead to another Great Depression, China’s future remains hazy. Some argue that China has replaced the US as the global engine of growth because of increased internal consumption, export capacity and massive reserves. And for these reasons, China will avoid the same fate as the US and Europe. Not everyone is convinced, however. Trend Forecaster Gerald Celente believes that the depression is global and a contraction across the entire planet cannot be avoided, and that includes China. Economist Harry Dent holds a similar view, recently saying that, “China will see their bubble collapse strongly when the U.S.-led stimulus program fails due to rising defaults and foreclosures later in 2010, at the same time that the world is looking for China to pull it out of this global downturn.” Michael Pettis, of China Financial Markets, says that the conditions in China are eerily similar to conditions in the United States right before the 1930�

Why a China bubble burst would be quieter - The main reason asset bubbles will deflate differently in China is because the Communist Party controls, well, everything. Free-market policies have not stopped the government from manipulating markets in ways that go well beyond what we would ever see in the West. For example, officials can implement strict price controls that can effectively keep the population from feeling the ripple effects of a popped asset class, says Charles Freeman, who focuses on the political economy of China and U.S.-China relations for the Center for Strategic & International Studies. So if real estate values tumbled, the government could artificially prop up the prices of other things to keep the economy from buckling under the weight of deflation. And the government has strict capital controls in place that can keep money from leaving the mainland. Freeman also points out that China controls a large chunk of the banking system, so it can force banks to extend credit whether or not those institutions want to make loans.

A flexible yuan: Yellen makes the case to China | Money Supply | FT - Current US monetary policy is likely to prove excessively inflationary for China and Hong Kong, but both countries are ’stuck’ with the effects of Fed policy as they have pegged their currencies to the dollar. So says Janet Yellen, San Francisco Fed chief: Because both the Chinese and Hong Kong economies are further along in their recovery phases than the US economy, current US monetary policy is likely to be excessively stimulatory for them. However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery.  In China’s case, increased exchange rate flexibility could mitigate growing inflationary concerns, and also act toward easing global imbalances and encouraging the development of the household sector, a shift the Chinese government now officially says it wants.

Raising the Value of the Yuan Would Reduce Inflation in China - The NYT had an article about rising inflation in China. At one point it notes the government's determination to prevent inflation. It then tells readers that higher inflation may reduce pressure from the U.S. to raise the value of the yuan, since higher inflation in China will make Chinese goods relatively less competitive.It would have been worth noting that a higher valued yuan would help to reduce inflation in China. It would reduce the price of imports thereby putting downward pressure on the price of domestically produced goods.

I side with China on this one - Yes, the renminbi (RMB) is closer to fair value. Chinese Foreign Ministry spokesman Ma Zhaoxu states: "Our currency, the RMB, has appreciated more than 20 percent against the U.S. dollar since July 2005, when China moved to a floating exchange rate regime," "The RMB exchange rate has drawn close to a reasonable and balanced level, given the international balance of payments and the market supply and demand for foreign exchange," Ma said. The New York Times asserts that China's currency is undervalued by 25%-40%. The NY Times, like many politicians and media channels, is entirely too obsessed with China's exchange rate; they fail to understand that economic fundamentals are changing. Contrary to popular belief, the level of the renminbi has become rather inconsequential to Chinese trade flows. Why? Because despite the fact that the renminbi has been pegged against the dollar since July of 2008, imports are surging.

All roads lead to the renminbi - I am amazed with the number of “experts” I’ve heard arguing that the West’s fixation with the renminbi is misplaced: China is doing the West a much bigger favor, the argument goes, by embarking on structural measures to rebalance its growth model and, in the process, increase imports. I’m not going to finger point here but the fact that some of them work for brand-name investment banks makes me wonder whether it’s vested interests speaking in lieu of economic acumen… which would be ironic for anyone competing to become the Chinese government’s most trusted advisor. Another way to put this is that a (two-way) flexible renminbi is a critical piece of the “puzzle” called “Addressing China’s structural problems”. The argument works on a number of different levels:

Saving rate statistics are misleading, or why China is not really saving more than the US - There are two men, same age, each with zero money in the bank and no assets to their names. One has a university education, earns £30,000 a year and has experience managing a company. The other has only finished primary school, earns £3,000 a year and has experience assembling parts in a factory. Who has more savings? Now let's say that the latter man starts saving 20% of his salary and lends the money to the first guy. Who has more savings (wealth) now? If the second guy uses the money to get an MBA that will bring him even more money in the future, has his saving rate gone up or down? How meaningful is it to say that the first guy saves 30% of his income and the second guy -3%?  And does this story change if the first guy is Chinese and the second guy American?

China’s Burgeoning Local Debt Means Debt, Banking System Risk Understated -Victor Shih has done some serious analytical work to try to get a handle on the magnitude of China’s local debt. His post, which included extracts from his op-ed in the Asian Wall Street Journal, shows that some of the narratives about China are woefully incomplete. The whole post is very much worth reading, but here are his main conclusions What about claims that the torrent of investment in China has come without too much leveraging? After spending half a year looking into the debt level of local government investment entities– some 8000 of them– my conclusion is no. As in the past, the Chinese government just ordered banks to lend to investment companies set up by both central and local governments..

China’s metropoli bubble fear -- We believe that we now have a bubble in many cities, particularly the big ones. The central government is trying to deflate these bubbles gently, rather than pop them. The fact that prices have been at these levels before suggests this can be accomplished, as it was last time. But this does not mean that the land market will not experience pain during 2010-11.That’s Standard Chartered on the matter of Chinese land prices on Monday.To help put the bubble fears in recent perspective, the bank also provide the below chart reflecting average national land prices on a year-on-year percentage three-month moving average basis:

China Raises Bank Reserve Requirement to Cool Economy (Bloomberg) -- China’s central bank took the second step in a month to restrain inflation and damp asset prices, ordering lenders on the eve of a weeklong holiday to set aside larger reserves. The reserve requirement will rise 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site yesterday. The existing level is 16 percent for the biggest banks and 14 percent for smaller ones. Policy makers are reining in credit growth after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months

BBC News – China banks ordered to increase reserves again - China has ordered banks to increase their reserves for a second time this year, as lending is curbed in a bid to stop the country's economy overheating.  Analysts had expected the central bank to increase reserve levels again, but were surprised it ordered a second increase so soon after January's move.  The bank has told commercial lenders to hike their reserve levels by 0.5%, to 16.5%, by 25 February. China's economy grew 10.7% in the final quarter of 2009 against a year earlier. "The central bank is sending out clear messages to banks that it wants more reasonable bank lending and it is paying close attention to inflation," said Xie Xuecheng at Southwest Securities in Beijing

China’s Central Bank Tries to Slow Economy Again - NYTimes - As most countries agonize over how to keep their barely reviving economies growing, China is already looking to slam on the brakes. China’s central bank moved late Friday to reduce lending to companies and individuals by requiring large commercial banks to increase the amount of cash they park with the central bank. The move, which came earlier than most economists had expected, was meant to slow China’s breakneck economy and inflation.  It was the second time in a month that the central bank had directed the country’s banks to increase reserves. In spite of the earlier edict, which took effect on Jan. 18, banks actually lent more money in January than in the previous three months combined, illustrating just how hard it is for Beijing to modulate its rapidly expanding economy.

New Economics at the NYT - The NYT told readers that China's central bank is raising reserve requirements rather than the central bank lending rate because it is worried that if raised its lending rate, the higher interest rates would pull more foreign money into the economy. This explanation does not make sense because raising reserve requirements would also lead to higher interest rates. The mechanism is very simple. Higher reserve requirements reduce the supply of money. A lower supply leads to higher interest rates. The article also asserted that the Federal Reserve Board signaled that it would raise its interest rates in months, based on strong growth. It certainly is not clear that the Fed has plans to raise interest rates any time soon, although it has not explicitly ruled out this possibility.

China’s Project to Build Fast Trains Is Spurring Growth - NY Times - The Chinese bullet train, which has the world’s fastest average speed, connects Guangzhou, the southern coastal manufacturing center, to Wuhan, deep in the interior. In a little more than three hours, it travels 664 miles, comparable to the distance from Boston to southern Virginia. That is less time than Amtrak’s fastest train, the Acela, takes to go from Boston just to New York.  Even more impressive, the Guangzhou-to-Wuhan train is just one of 42 high-speed lines recently opened or set to open by 2012 in China. By comparison, the United States hopes to build its first high-speed rail line by 2014, an 84-mile route linking Tampa and Orlando, Fla.

'Invincible’ High-Speed Trains Steal China Southern’s Customers (Bloomberg) -- China Southern Airlines Co., the nation’s largest carrier, and Air China Ltd. are slashing prices to compete with the country’s new high-speed trains in a battle that Europe’s airlines have largely already ceded. Competition from trains that can travel at 350 kilometers per hour (217 miles per hour) is forcing the carriers to cut prices as much as 80 percent at a time when they are already in a round of mergers to lower costs. Passengers choosing railways over airlines will also erode a market that Boeing Co. and Airbus SAS are banking on to provide about 13 percent of plane sales over the next 20 years.

China January Power Use Gains 40% as Economy Recovers (Bloomberg) -- China’s January electricity consumption jumped 40.1 percent from a year earlier as an economic recovery in the world’s second-biggest power producer spurred demand from factories.  Power use reached 353.1 billion kilowatt-hours last month, 2.7 percent higher than in December, the Beijing-based National Energy Administration said on its Web site today. Consumption by secondary industries, which includes manufacturing and construction, grew 46 percent to 262.4 billion kilowatt-hours.

Crunch Time for China - Another year, another round of criticism of Chinese currency policy.  Once more Beijing is being faulted for tethering the renminbi to the dollar.  By keeping its exchange rate artificially low, China is enlarging its already enormous current account surplus.  This beggars the rest of the world.  It obstructs the process of global rebalancing.  Here’s an easy prediction: the renminbi will move by more against the dollar in 2010 than in 2009.  After all, it could hardly move less.  But here’s a riskier prediction: it will move by a lot, and it could move either way. It’s crunch time for China.  If the authorities don’t let the renminbi appreciate substantially now, they risk a substantial depreciation later.   Appreciating now will help cool off China’s overheated asset markets. Otherwise China risks a crash and economic slowdown with a weaker currency, since exports will be the only game in town.

China is now Iran's top trading partner - Still think China's going to sign on to a new round of tough sanctions against Iran? Think again. China has most likely already passed the European Union to become Iran's No. 1 trading partner, the Financial Times reportsOfficial figures say the EU remains Tehran’s largest commercial partner, with trade totalling $35bn in 2008, compared with $29bn with China. But this number disguises the fact that much of Iran’s trade with the United Arab Emirates consists of goods channelled to or from China. Majid-Reza Hariri, deputy head of the Iran-China Chamber of Commerce, said that transhipments to China accounted for more than half of Tehran’s $15bn (€10.9bn, £9.6bn) trade with the UAE. When this is taken into account, China’s trade with Iran totals at least $36.5bn, which could be more than with the entire EU bloc. No definite conclusion is possible because it is unclear how much of Iran’s trade with Europe is channelled via the UAE.  Iran imports consumer goods and machinery from China and exports oil, gas, and petrochemicals. Today, China depends on Iran for 11 per cent of its energy needs, according to the chamber.  Look at it this way: Would the United States support hard-hitting sanctions against Saudi Arabia, which in November supplied nearly 8 percent of U.S. oil imports?

Trade and the skilled wage premium: Historical evidence from China - VoxEU - How is the global trade boom affecting wages in developing countries? Evidence from China’s first widespread experience with globalisation suggests that, under certain conditions, the skill premium can decline when developing countries open up to trade.

U.S. Trade deficit falls in 2009, but larger share goes to China - The U.S. Census Bureau reported recently that the U.S. goods and services trade deficit fell from $695.9 billion in 2008 to $380.7 billion in 2009, a decline of $315.3 billion (45.3%). The historic collapse in global trade reflects the effects of the recession and financial crisis on both the demand for goods and services, and the impact of widespread shortages of loans needed to finance trade. Recent increases in monthly trade deficits reflect improving market conditions. The monthly goods and services trade deficit increased from $36.4 billion in November to $40.2 billion in December. Goods trade deficit falls at a slower rate1

Trade Deficit increases to $40.2 Billion in December - The Census Bureau reports:  [T]otal December exports of $142.7 billion and imports of $182.9 billion resulted in a goods and services deficit of $40.2 billion, up from $36.4 billion in November, revised. December exports were $4.6 billion more than November exports of $138.1 billion. December imports were $8.4 billion more than November imports of $174.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through December 2009. Both imports and exports increased in December. On a year-over-year basis, exports are up 7.4% and imports are up 4.6%. This is an easy comparison because of the collapse in trade at the end of 2008. The second graph shows the U.S. trade deficit, with and without petroleum, through December.

Durable Goods and the Collapse of Global Trade - Dallas Fed Economic Letter - Global trade has experienced a stunning collapse in the current recession, with the World Trade Organization estimating a decrease of roughly 9 percent in 2009—the biggest contraction since the Second World War.[1] Both imports and exports plunged in major trading countries (analysis with a dozen charts)

Fixing “global imbalances” in three easy steps - Some problems are hard. Some problems are not, except when we blind ourselves to pretty obvious solutions. Addressing “global financial imbalances”, or, more specifically, the fact that some countries are running persistent current account deficits that they (correctly) perceive not to be in their interest, falls into the second class of problems. It is flawed ideology, nothing more, that makes this problem seem difficult. If you want something to stop, stop it. Let me break it down for you into three easy steps.

  1. Stop blaming China!
  2. Recognize that a nation’s balance of payments is a legitimate object of public policy.
  3. Gradually impose nondiscriminatory capital controls to regulate ones own balance of payments

Brazil to Sanction U.S. on Goods, Intellectual Rights (Bloomberg) -- Brazil may break patents on U.S. goods in accordance with a World Trade Organization ruling allowing it to impose trade sanctions in retaliation for U.S. cotton subsidies, a Brazilian trade official said.  “We intend to retaliate on intellectual property rights and services,” Marcio Cozendey, head of the economic department of Brazil’s foreign ministry, told reporters in Brasilia. “Breaking patents is a possibility,” he added without providing additional details.  The WTO ruled in August that Brazil has the right to impose $294.7 million annually in sanctions against the U.S. because of subsidies paid to American cotton farmers, the second highest amount ever permitted by the Geneva-based trade arbiter.

Pimco’s El-Erian favors Brazil’s bonds, Chinese yuan – The China Post  - Mohamed A. El-Erian, whose company runs the world's biggest mutual fund, favors investments in emerging markets on expectations they'll outpace developed economies in growth and wealth. Brazilian sovereign bonds and Chinese yuan non-deliverable forwards are attractive, El-Erian, co-chief investment officer at Pacific Investment Management Co., said yesterday, in Sydney, during a Bloomberg television interview. Greece needs outside help as it tackles the European Union's (EU's) largest budget shortfall, he said. Pimco portfolio managers are reducing their riskiest positions, El-Erian said. Debt strains in Greece, Portugal and Spain, along with the emphasis on non-developed markets, underscore Pimco's view that 2010 will be a year of slower-than-average growth and a shrinking global role for the United States (U.S.) economy.

Steering Out of a Smash-Up No One Wants - U.S. President Barack Obama dramatically altered policy direction during his first State of the Union address by announcing plans to focus fully on creating jobs while doubling exports in five years. This could put the United States on a collision course with China's export strategy. And a head-on crash, possibly centered on China's foreign exchange rate policy, might occur before America's mid-term elections in November. No one wants confrontation, especially at such a critical time for global trade, the world's recovering economy and China's property market. But a changing political mood is steering Washington into Beijing's lane. China can respond by turning the wheel before it's too late.

China’s PLA Offers Interesting Advice On Reserve Management - Not many people would turn to China’s People’s Liberation Army for advice on foreign exchange reserve management. But that apparently doesn’t mean the PLA isn’t willing to offer some. Indeed, it had some pretty inflammatory ideas on the issue yesterday. According to a Reuters article, senior military officers (including two Generals) want China to sell U.S. bonds to punish Washington for its latest round of arms sales to Taiwan. It’s hard to know what to make of this story. For example, I don’t know what sort of influence these Generals have in Chinese policy making.  Still, I think the story is fascinating, especially coming off the news last week that Russia had approached China over the summer with an idea to cause economic mayhem in the USA by selling US Treasuries en masse.

China orders retreat from risky assets - China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets.  A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing.  BNP Paribas said the move has major implications for global risk assets. "The message from Beijing is that we don't like this environment," said Hans Redeker, the bank's currency chief.

China Dumps US Asset Backeds and Corporates - Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out...

The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested - It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.  From Asia Times: Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events

Asia Times' David Goldman Discusses The Imminent Chinese Asset Dump | zero hedge (video)
The Chinese dumping story is really catching on. After even Alphaville reprinted it, it seems that everyone in the blogospehere is aware of the imminent, and far greater than a Greece contagion, danger of Chinese dispositions. Here is David Goldman who originally broke the story for Asia Times' Inner Workings blog, discussing not only Chinese dumping and the implication for cost of capital (ca. 11 minutes into the clip), but shares color on the topic du jour, Greece, along with Rick Santelli and Larry Kudlow.

China in Africa Myths and Realities - In recent years, journalists and pundits in the West have looked on China’s economic engagement with Africa, including foreign aid, with growing alarm. An NYT op-ed a few years ago called China a “rogue donor,“ giving aid that is “nondemocratic in origin and nontransparent in practice, and its effect is typically to stifle real progress while hurting ordinary citizens.” Other negative stories about China in Africa include China abetting genocide in Darfur by supplying arms in exchange for Sudanese oil; propping up corrupt government in Zimbabwe; swooping in to undo the anti-corruption work of the IMF or the World Bank in Angola or Nigeria with offers of no-strings-attached loans; and generally ignoring environmental, safety and labor standards on projects in Africa. So the idea that China’s aid to Africa could be in any possible way better, more credible, or more effective than Western aid to Africa may be a hard sell. But Deborah Brautigam, author of the new book The Dragon’s Gift: The Real Story of China in Africa, argues that focusing only on the China threat makes us blind to the real opportunities Chinese engagement offers for African development.

Keeping China (Relatively) Green - The blessings of a temperate climate make California the greenest place in America, but California is still a lot browner than China.  When Matthew Kahn and I estimated household carbon emissions across American metropolitan areas, we found that the three areas with the lowest emissions were San Diego, San Francisco and San Jose. Carbon emissions in these places are still more than four times the emissions in the brownest Chinese city (Daqing) and 10 times as high as the household emissions in the average Chinese city. That gulf reminds us why America has so little moral authority on global warming, and why the world’s carbon emissions will probably soar as China and India acquire the living patterns of prosperous nations.

Hottest January in UAH satellite record - Human-caused global warming easily overwhelms much-hyped "cold snap" - Yes, the mid-Atlantic region appears headed toward an epic snow storm as “amazing moisture feeds into what is already a gigantic system,” according to the Capital Weather Gang. But while the anti-science crowd will no doubt tout that as evidence we aren’t warming — just as they did with the “cold snap” in early January — in fact, climate science predicts we will see more extreme precipitation events year-round as warming puts more moisture into the atmosphere [see Was the “Blizzard of 2009″ a “global warming type” of record snowfall — or an opportunity for the media to blow the extreme weather story (again)?].

Butterflies seek higher ground to escape warmer temperatures - The unprecedented, 35-year analysis of butterfly populations in the Sierra Nevada details how several species are fleeing to higher elevations to escape warming temperatures. Those butterflies that already live on mountaintops and can't adjust to the heat have "nowhere else to go but heaven," says Arthur Shapiro, a biologist at University of California-Davis who collected the data. Butterflies have long been regarded as an early warning indicator for climate change. Their short life cycles and high sensitivity to temperature make them especially vulnerable,

Sahara Desert Greening Due to Climate Change? - Desertification, drought, and despair—that's what global warming has in store for much of Africa. Or so we hear.  Emerging evidence is painting a very different scenario, one in which rising temperatures could benefit millions of Africans in the driest parts of the continent.  Scientists are now seeing signals that the Sahara desert and surrounding regions are greening due to increasing rainfall.  If sustained, these rains could revitalize drought-ravaged regions, reclaiming them for farming communities.  This desert-shrinking trend is supported by climate models, which predict a return to conditions that turned the Sahara into a lush savanna some 12,000 years ago.  Images taken between 1982 and 2002 revealed extensive regreening throughout the Sahel, according to a new study in the journal Biogeosciences.  The study suggests huge increases in vegetation in areas including central Chad and western Sudan.

Western Australia drought is possibly the worst for the past 750 years - Scientists have made a surprising link between climate patterns in Australia and Antarctica.  If you thought the drought affecting south-west WA since the 1970s was extreme, you were right. But just how extreme has been a matter of contention. Now, scientists believe it could be the worst of its kind in 750 years, after making an unexpected discovery. Researchers from the Australian Antarctic Division and Antarctic Climate and Ecosystems Co-operative Research Centre have identified a link between the drought, which began in the early 1970s, and snowfall at a site in East Antarctica over the same period.In research published in Nature Geoscience, they say the relationship is inverse:  high snowfalls at the Law Dome site correlate with low rain in the South-West.

Climate change to triple Australia fire danger SYDNEY (AFP) – Climate change could more than triple the risk of catastrophic wildfires in parts of Australia, a top environmental group warned Thursday, almost a year since savage firestorms that killed 173 people. Greenpeace warned that, without a new climate treaty to replace the Kyoto Protocol, the frequency of severe fire danger in drought-parched southeastern Australia would grow three-fold by 2050. "Catastrophic" conditions similar to those ahead of February 2009's so-called "Black Saturday" wildfires which killed 173 people in towns around Melbourne would occur once every three years, instead of once in every 33. "The frequency of catastrophic fire danger could increase more than tenfold in Melbourne, and the number of total fire ban days could triple in Sydney, Adelaide and Canberra by 2050," according to a Greenpeace report entitled "Future Risk."

Wyoming water may become more scarce with climate change - The mountain snows that replenish most surface water in Wyoming, the fifth-driest state, are vulnerable to climate change and likely to be affected by rising temperatures, a new report says.The report released this week by the Ruckelshaus Institute of Environment and Natural Resources at the University of Wyoming also says downstream water demand is expected to increase in the decades ahead because of regional population growth. Most of Wyoming's surface water originates as mountain snowpack. Climate change can cause snowpack to melt earlier during the springtime, making runoff more challenging to manage as a water source, the report says. Reservoir managers have the task of striking a balance between flood control and water storage. The report also points out that Wyoming is located at the headwaters of several river systems, making the state more vulnerable to drought because not much water flows into the state.

Any Hope for Meaningful U.S. Climate Policy? A Somewhat Positive View - Robert Stavins: The current conventional wisdom ­– broadly echoed by the news media and the blogosphere – is that comprehensive, economy-wide CO2 cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years. In addition to ongoing consideration of an economy-wide cap-and-trade system, another possibility now receiving attention is a utility-only cap-and-trade system, which some members of the Congress inexplicably find more attractive than an economy-wide approach. The result of such a system would be much less accomplished..., and at much greater cost

Robert Frank on cap-and-trade "vs" carbon tax - In the case of global warming, markets fail because we don’t take into account the costs that our carbon dioxide emissions impose on others. The least intrusive way to have us weigh those costs is by taxing emissions, or by requiring tradable emissions permits. Either step would move us closer to the conservative/libertarian gold standard — namely, the outcome we’d see if there were perfect information and no obstacles to free exchange.

A refreshing dose of honesty: Maria Cantwell and the politics of global warming - The Economist -The Senate will not pass a comprehensive climate bill any time soon. So Mr Obama is attacking the problem piece by piece, bypassing Congress.Enter Maria Cantwell, the junior senator from Washington state. She is pushing a simpler, more voter-friendly version of cap-and-trade, called “cap-and-dividend”. Under her bill, the government would impose a ceiling on carbon emissions each year. Producers and importers of fossil fuels will have to buy permits. The permits would be auctioned, raising vast sums of money. Most of that money would be divided evenly among all Americans.

The Real Struggle Behind Climate Change - A War on Expertise - The schism over global climate change (GCC) has become an intellectual chasm, across which everyone perceives the other side as Koolaid-drinkers.  Although I have mixed views of my own about the science of GCC, and have closely grilled a number of colleagues who are front-line atmospheric scientists (some at JPL), I'm afraid all the anecdotes and politics-drenched "questions" flying about right now aren't shedding light. They are, in fact, quite beside the point. That is because science itself is the main issue: its relevance and utility as a decision-making tool.   Let there be no mistake, this is all about power, and the struggle goes way back.  In Britain, the "Boffin Principle" long held that technical people have no business making policy suggestions to their betters. In America, waves of anti-intellectual populism - like the 19th Century Know Nothing Party - were  deliberately stoked by aristocracies who saw the new, mental elites as a threat

Climate, Weather, Hot, Cold, Wet and Dry. The present is a tunnel between the past and the future. It might be more or less lit and we think we know our immediate direction and route. Otherwise what is going on outside is beyond our most frantic efforts. Moreover, the carriage is full of people who think they know and are shouting their opinions as loudly as they can. The great majority will turn out to be hopelessly wrong. This is where we are at in the current debate on the future of the climate of our planet. The planet, however, may have its own ideas and will not communicate them but its working will give signals to those capable of interpreting them. There are few able to do so because the planet is a highly complex system many of whose secrets and ways of reacting are still either little understood or even unknown.

Why is Greenland's ice loss accelerating? - Recently, we looked at satellite gravity measurements of the Greenland ice sheet, finding that Greenland is losing ice at an accelerating rate. This has now been confirmed by independent calculations of surface mass balance and ice discharge rates (van den Broeke et al., 2009). More importantly, the extra data offers keen insights into the contributing factors of Greenland's accelerating ice loss. Greenland's ice mass balance is governed by two factors: surface mass balance (SMB) and ice discharge (D). SMB is the result of ice gain from precipitation (rain and snow) minus ice loss from sublimation and runoff. In van den Broeke et al 2009, SMB is calculated by the Regional Atmospheric Climate Model which is then confirmed by on-site observations. Ice discharge is the loss of ice as glaciers calve into the ocean. Satellite measure the velocity of ice as it moves towards the coastline as well as the thickness of the glaciers.

Freak Current Takes Gulf Stream to Greenland - An unprecedented extreme in the northern hemisphere atmospheric circulation has driven a strong direct connecting current between the Gulf Stream and the West Greenland current. The unprecedented negativity of the "Arctic Oscillation" and the strong connection of the Gulf Stream with the Greenland current are exceptional events. More exceptional weather events are predicted with anthropogenic climate change, but this could be a natural variation of weather and currents.

Sea level rise data from TOPEX/Poseidon, Jason-1, and Jason-2 through August 2009 - High-quality measurements of (near)-global sea level have been made since late 1992 by satellite altimeters, in particular, TOPEX/Poseidon (launched August 1992) and Jason-1 (launched December 2001) and Jason-2 (launched June 2008). This data has shown a more-or-less steady increase in Global Mean Sea Level (GMSL) of around 3.3 ± 0.4 mm/year over that period. This is more than 50% larger than the average value over the 20th century. Whether or not this represent a further increase in the rate of sea level rise is not yet certain. The two plots below show the GMSL measured from TOPEX/Poseidon, Jason-1 and Jason-2.

Global Ocean Protection Measures Have Failed - Thousands of tons of trash are thrown into the sea each year, endangering humans and wildlife. A classified German government report obtained by SPIEGEL ONLINE indicates that efforts by the United Nations and the European Union to clean up our oceans have failed entirely. Since the world's oceans are so massive, few people seem to have a problem with dumping waste into them. But plastics degrade at very a slow rate, and huge amounts of them are sloshing around in our oceans. Wildlife consumes small pieces causing many of them to die, since the plastics are full of poisons. And, as experts warn, we've reached a point where it's even getting dangerous for humans to consume seafood.

Who do these independent climate experts think they are? - Skeptics of global warming are using the record-setting snows to mock those who warn of dangerous human-driven climate change — this looks more like global cooling, they taunt. Most climate scientists respond that the ferocious storms are consistent with forecasts that a heating planet will produce more frequent and more intense weather events. But some independent climate experts say the blizzards in the Northeast no more prove that the planet is cooling than the lack of snow in Vancouver or the downpours in Southern California prove that it is warming. (via

Think-tanks take oil money and use it to fund climate deniers - An orchestrated campaign is being waged against climate change science to undermine public acceptance of man-made global warming, environment experts claimed last night.  Free-market, anti-climate change think-tanks such as the Atlas Economic Research Foundation in the US and the International Policy Network in the UK have received grants totalling hundreds of thousands of pounds from the multinational energy company ExxonMobil. Both organisations have funded international seminars pulling together climate change

Mud Volcano Was Man-Made, New Evidence Confirms A new analysis shows that a deadly mud volcano in Indonesia may not have been a natural disaster after all. The research lends weight to the controversial theory that the volcano was caused by humans.  Villagers near Sidoarjo noticed a mud volcano beginning to erupt at 5 a.m. local time May 29, 2006. It was about 500 feet from a local gas-exploration well. Every day since then, the Lusi mud volcano has pumped out 100,000 tons of mud, or enough to fill 60 Olympic-size swimming pools. It has now covered an area of almost 3 square miles to a depth of 65 feet. Thirty thousand people have been displaced, and scientific evidence is mounting that the company drilling the well caused the volcano.

Mining The Grid's Middle Mile - Here's an odd possibility: parts of the so-called "smart grid" could actually make the nation's electricity infrastructure less reliable. As the grid has evolved in recent years, much attention has been focused on its "edges," where power companies generate electricity and where people consume it. The result: Early deployments of advanced power meters and home-operated energy management systems, and an increasing number of wind and solar power sources, which often need to be backed up by coal and natural gas plants.  Ray Gogel, president and chief operating officer of the Current Group, a smart grid firm, worries that the edges of the grid are acquiring too many nodes that haven't been planned for. "All of that interjects more volatility into the grid, which scares utility people like myself," he says.

Cost An Obstacle To Building Nuclear Reactors - Nuclear reactors' hefty price tag is the biggest obstacle to building more, the nation's top nuclear regulator said Monday. Nuclear Regulatory Commission Chairman Gregory Jaczko said that permitting new reactors could take four years or more, and that storing the waste is not a pressing concern, but that paying for the new reactors remains a significant concern for most utilities.The best estimate for a new reactor's price tag is about $10 billion, he said. "Very few utilities have the capability or market capitalization equivalent to that kind of cost," he said.

Palmer Secures Australia's "Biggest" Export Deal With China - MINING magnate Clive Palmer says his company has secured Australia's biggest export deal with a $A69.39 billion agreement to sell coal to China.  The Resourcehouse chairman on Saturday said the company's proposed China First coal mine and infrastructure project in central Queensland had reached a 20-year agreement with one of China's largest power companies, China Power International Development, the flagship company of China Power Investment Corporation (CPI).

China Agrees to Purchase Output and Help Finance $8 Billion Coal Project —Resourcehouse Ltd. said it signed a US$60 billion, 20-year export contract with one of China's largest power companies in a deal that brings a massive coal mine proposed by Australian billionaire Clive Palmer a step closer to reality and underscores the growing commercial relationship between Australia and China.  Mr. Palmer's closely held Resourcehouse, based in Brisbane, Australia, also said Saturday that Export-Import Bank of China agreed to lead debt financing for the project" contributing US$5.6 billion of the estimated US$8 billion development cost. China is the world's largest producer and user of coal, and last year became a net importer of the fuel, which provides two-thirds of its energy needs. Australia already is the largest supplier of coal to China. Of the 125.8 million tons of coal imported by China last year, 43.9 million came from Australia

Junin 6 oilfield to become a RussianVenezuelan joint venture - On Monday, Russia and Venezuela signed a multimillion deal to develop the huge Junin 6 oil field in the South American nation's Orinoco River region – a territory twice as rich as other reserves, such as Saudi Arabia’s.  The two countries agreed to establish a joint venture to develop the oilfield, with Venezuela taking a 60% stake in the deal and Russia the remaining 40%. Read more

PetroChina To Participate In Developing Halfaya Oil Field In Iraq (Xinhua) -- A consortium led by the China National Petroleum Corp.(CNPC), China's largest oil company, won a bid to develop Halfaya oilfield in Iraq, CNPC said on Wednesday. Under the 20-year deal, CNPC, Total, Petroleum Nasional Berhad (Petronas), and Iraq's state-owned South Oil Co. will jointly develop the 4.1 billion barrel Halfaya field. According to an agreement initialed previously, the consortium will receive 1.4 U.S. dollars of service fee from each barrel. The consortium plans to boost output from the current 3,100 barrels a day to 535,000 barrels. CNPC has 37.5 percent of the interests in the project. Total and Petronas will take 18.75 percent each, leaving Iraq's state-owned South Oil Co. with the remaining 25 percent. It is the third important project that CNPC participated in in Iraq after the Ahdab and Rumailia project.

China's New Free-Market Energy Policies - Foreign Policy - Beijing has done something that could alter its relations with Washington in a profoundly positive way. The centralized communist government has started using the free market to source its energy supplies. In December, a consortium led by a state-owned Chinese oil company emerged as the big winner of a major oil auction in Iraq. The tender marked a shift from China's prior policy of securing exclusive state control over its energy supplies, a shift that promises to have far-reaching consequences for what is actually the most serious threat to U.S.-China relations: the shadowy struggle between Washington and Beijing for control of the South China Sea. Until now, China has pursued a costly zero-sum strategy to guarantee energy for its high-growth economy. Rather than buying fuel from foreign gas or petroleum companies, it has entered into long-term agreements with developing countries (often pariah states like Sudan and Iran), exchanging unlimited access to energy for free infrastructure and preferential trade deals. China has also invested in the maritime capacity to ship and the naval power to secure these supplies. It has bought up port facilities along the sea lanes from the Strait of Hormuz to the South China Sea, developed a navy that could soon rival the U.S. Pacific fleet, and even hinted that it might carve a canal through Thailand's Kra isthmus to bypass the narrow Strait of Malacca.

Richard Branson Warns Of Peak Oil In Five Years - While theories differ on when the world will experience the hard hitting times of peak oil, Virgin boss Richard Branson is boldly predicting that will happen in the next five years. In the foreward to a new report being released shortly, Branson urges UK leaders to be proactive rather than reactive to peak oil. “The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well,” Branson will say. “Our message to government and businesses is clear: act,” he says in a foreword to a new report on the crisis. “Don’t let the oil crunch catch us out in the way that the credit crunch did.” According to one consultant, the current worldwide recession has only delayed the inevitable. “The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by Opec,” said Chris Skrebowski. “However, once these are removed, possibly as early as 2012-13 and no later than 2014-15, oil prices are likely to spike, imperiling economic growth and causing economic dislocation.”

Society ignores the oil crunch at its peril - In the years approaching the credit crunch, whistleblowers were limited to a few insightful economists and financial journalists. Now whistles are blowing again about another grave threat to the global economy and the security of nations. They warn of an oil crunch: an unexpected crash in global production such that supply can no longer meet demand, even if China and India throttle back.This time the warning is not limited to a prescient few individuals. Major British companies, led by Virgin, Scottish and Southern and Stagecoach, are flagging the danger, in today's report from the UK industry taskforce on peak oil and energy security . So too are the CEOs of oil companies themselves, in the case of Total and Petrobras, and growing numbers of other senior oil industry figures, usually recently retired. Even the International Energy Agency is sounding the alert, in a coded sort of way.

Dealing With Peak Oil - I like to think about how we will experience peak oil the way James Howard Kunstler and others have referred to the “long emergency.” Energy prices in the future are going to be much higher than they are now. We will experience cycles of rising energy prices, followed by impacts on economies; the resulting economic downturns will reduce energy demand, resulting in a decline in energy prices; this will allow economic recovery and then the cycle will start again. I believe the top three challenges to making progress on solutions are: 1) a lack of public and policy maker knowledge on these issues, and strong resistance to understanding and believing that such a profound threat is close at hand; 2) very strong vested interests that will oppose changes in their industries and how they do business; and 3) our amazing lack of preparation for what we are facing, after investing in a built environment, food production system, transportation system, and overall economy that is so heavily reliant on cheap and plentiful oil.

Energy Flow, Emergent Complexity, and Collapse - Joe's thesis boils down to this: Societies evolve greater organizational and technical complexity to solve social problems that arise due to external forces or population pressures or overuse of natural resources, etc., and at some point, the marginal beneficial returns (problems solved) begin to decline leading to lowered margins of error for dealing with possible catastrophic impacts. Societies collapse when increasing complexity no longer has a payoff and something else bad happens.

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