Federal Reserve Balance Sheet Update: Week Of February 18 - New Records In Total Assets And Excess Reserves - The Federal Reserve's balance just hit another record high, at $2.29 trillion, jumping by a whopping $54 billion sequentially (the biggest weekly increase since mid-November).
- Securities held outright: $1,967 billion (an increase of $60.9 billion MoM, resulting from $56 billion increase in MBS and $5 nillion in Agency Debt), or a huge $53.6 billion increase sequentially. The fed is now 95% complete with its purchases of MBS, and 96% complete with purchases of Agencies. The Fed has completed $167.2 billion of its $175 billion agency debt purchase program through February 17. The Fed's MBS total is now $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion.
- Net borrowings: $127 billion. The monetary base increased by $50 billion in the past fortnight to $2.06 trillion. The ratio of total assets to Monetary Base remained constant at 1.08x, elevated from the historical ratio of 1.00x.
- Float, liquidity swaps, Maiden Lane and other assets: $194 billion. The CPFF program was at $7.7 billion. FX liquidity swaps are now non-existent.
Fed: we need to shrink our balance sheet, but how? - The Federal Open Market Committee released the minutes of the Jan 26-27 session on Wednesday. The meeting minutes revealed disagreement — or at the very least, debate — over the nature and timing of any moves to reduce the size of the Federal Reserve balance sheet. …staff noted that the Committee might want to address both the eventual size of the Federal Reserve’s balance sheet and its composition. Policymakers were unanimous in the view that it will be appropriate to shrink the supply of reserve balances and the size of the Federal Reserve’s balance sheet substantially over time. Moreover, they agreed that it will eventually be appropriate for the System Open Market Account to return to holding only securities issued by the U.S. Treasury, as it did before the financial crisis. Several thought the Federal Reserve should hold, eventually, a portfolio composed largely of shorter-term Treasury securities...
Bernanke on the Fed's balance sheet - (charts) Federal Reserve Chair Ben Bernanke last week released a statement of how the Fed intends to manage its bloated balance sheet over the next few years. Here I offer my interpretation of what his plan involves. Bernanke drew a distinction between three different categories of assets that the Federal Reserve has held on its balance sheet. The first involve extension of short-term emergency credit to financial institutions: This lending came in the form of a wide variety of new facilities, which summed to almost $1.6 trillion by the end of 2008, but are now almost entirely wound down or phased out, as Bernanke observed:
The new normal - Also included in Federal Reserve Chair Ben Bernanke's statement to Congress last week were some guidelines for what we might expect Federal Reserve decisions and communications to look like as we make the gradual adjustment to more normal conditions. In recent years, the Fed had gotten very good at communicating its intentions to the market. FOMC statements came down to a routine in which the Fed announced at each FOMC meeting a target for the fed funds rate that Fed watchers had usually figured out well before the meeting. But the fed funds rate has become an essentially irrelevant number for the last year, and given the Fed's apparent intention to keep a huge volume of reserves outstanding, will likely remain irrelevant for some time to come. Hence one purpose of Bernanke's statement was to communicate what we should be looking for in the way of a new format for policy decisions and announcements from the Fed:
Fed Raises Discount Rate to 0.75% from 0.50% - Note: Just to be clear, this is the discount rate and not the Fed Funds rate. This move was being discussed for some time although the timing is a surprise. From the Fed: The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs. Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC).
The Great Unwind begins - Today the Federal Reserve announced that it would raise the interest rate it charges banks on emergency loans from 0.5% to 0.75%, effective tomorrow. In addition, on March 18, the Fed will shorten the length of time banks can borrow from the discount window back down to overnight, where it has historically been. Finally, the minimum bid rate for the Fed's Term Auction Facility—a program meant to ease short-term lending—will go from 0.25% to 0.50%, and then such auctions will end on March 8. And so the Great Unwind begins. In the wake of the financial-system meltdown, the Federal Reserve, like other central banks around the world, flooded markets with ridiculous amounts of liquidity in a desperate attempt to keep recession from rolling into depression.
Fed Fires Gun On U.S. Exit Strategy As It Raises Discount Rate To 0.75% - The Federal Reserve has officially begun the US "exit strategy" from its emergency economic support measures of the past two years, raising the rate at which American banks can borrow money - The US central bank, chaired by Ben Bernanke, raised the so-called discount rate from 0.5pc to 0.75pc at the request of its 12 regional member banks. The move is highly significant, marking the first time one of the "big three" central banks has tightened policy, rather than merely mooting it, since the crisis begun. Although Mr Bernanke had flagged it as a possibility a week ago, saying that he would consider such a move "before long", the decision caught some investors by surprise...
In Surprise Move, Fed Signals Pivot to Normal Policy - Taking a step to normalize lending after holding interest rates to extraordinary lows for more than a year to prop up the financial system, the Federal Reserve on Thursday raised the interest rate it charges on short-term loans to banks. While the central bank had signaled its intentions to take such a step, the timing was a surprise. The announcement was made after the stock market had closed in a carefully worded statement that emphasized that the Fed was not yet ready to begin a broad tightening of credit that would affect businesses and consumers as they struggle to recover from the economic crisis.
Working Without a Standard Playbook, the Fed Plans Its Moves on Rates - NYTimes - In raising the interest rate it charges banks for short-term loans, the Federal Reserve set the stage on Thursday for the day when the recovering economy will lead it to begin a broader campaign to tighten monetary policy. The question now is how long it will be until that day arrives.The Fed and its chairman, Ben S. Bernanke, face a complex set of forces as they decide how and when to reverse the aggressive steps they took to contain the financial crisis and the ensuing damage to the economy. With the financial system awash in money and economic growth picking up, inflationary forces are possible. But with unemployment hovering near double digits, with Mr. Bernanke under attack for his performance in the runup to the crisis and with Congress moving to pare back the central bank’s powers, economic and political pressures are weighing against rapid interest rate increases.
Fed’s Duke: Discount-Rate Hike Not Signaling Any Monetary Policy Change - A newly announced increase in the rate the Federal Reserve charges on emergency loans to banks does not signal any change in monetary policy but shows the central bank is moving to reverse the exceptional aid it provided amid the global financial crisis, Federal Reserve Board Governor Elizabeth Duke said Thursday. The discount rate is what the Fed charges banks that need emergency cash, and that borrowing inevitably carries a stigma for the banks that need such loans. After U.S. stock markets closed Thursday, the Fed announced it was raising the rate by a quarter-percentage point, to 0.75%. “I’d emphasize that the changes are simply a reversal of the spread reduction we made to combat stigma and like the closure of a number of extraordinary credit programs earlier this month, represent further normalization of the Federal Reserve’s lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses,” Duke said in her prepared remarks.
Dudley Calls Discount-Rate Change ‘Technical’ - Federal Reserve Bank of New York President William Dudley said Friday the increase in the discount rate done by the central bank late Thursday was “technical” in nature.“We made a very small technical change” by raising the discount rate, Dudley said. “The action yesterday was really an action about the improvement in banks,” and reflected the fact these institutions no longer need this emergency source of cheap funding the way they did during the depths of the financial crisis, the official said.The discount rate increase “is not at all a signal of any imminent tightening” in monetary policy, and the Fed’s commitment to keep rates very low for an extended period “is still very much in place,”
Fed's Bullard: Fed Funds Hike As Far Away As Ever After Discount Rate Hike - St. Louis Federal Reserve Bank President James Bullard said Thursday night that a Fed interest rate hike is "as far away as it ever was" in wake of the discount rate increase that the Fed announced earlier Thursday. Bullard, a voting member of the Fed's policymaking Federal Open Market Committee said market expectations of Fed interest rate hikes later this year are "overblown." Calling tools like reverse repurchase agreements and term deposits which would absorb reserves but not reduce the balance sheet "untested," Bullard indicated he would prefer asset sales. But Bullard said he would expect the Fed to begin asset sales slowly and gradually.
"Telegraphed" Discount Rate Hike: Goldman's Take - BOTTOM LINE: The Federal Reserve Board has voted to increase the discount rate by 1/4 percentage point, to 3/4%, effective tomorrow. It has also decided to shorten the typical maximum maturity for primary credit under this facility to overnight, from 28 days, effective March 18, increased the minimum bid rate on the Term Auction Facility to 1/2% from 1/4%, and confirmed plans to phase this facility out. In its announcement, the Board has stressed that all of these are normalizations of its discount liquidity facility and not to be taken as a sign of impending tightening in monetary policy more generally. - Goldman Sachs
Pimco's Gross: Fed move is not start of tightening cycle | Reuters - The Federal Reserve's surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, Bill Gross, the manager of the world's biggest bond fund, told Reuters."I don't think it's the beginning, really, of a tightening from the standpoint of monetary policy," Gross told Reuters Insider television soonafter the Fed's decision. "I don't think it is the beginning of an increase in the fed-funds rate or in terms of interest on reserves that has been discussed as well."
Managing Perceptions: Fed Raises Discount Rate After the Close - In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis. This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks. One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week's $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another 'failed' auction was rising.
The Federal Reserve’s Exit Strategy: Unlegislated Bailout of Fannie and Freddie - "All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term. 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. 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." - Federal Reserve Chairman Ben Bernanke, "Federal Reserve's Exit Strategy" Testimony to House Financial Services Committee, February 10, 2010 Let's put two and two together here…
The punch bowl, the party, the exit - Atlanta Fed blog - Though weather of the sort usually reserved for Minneapolis, Chicago, and Cleveland kept Chairman Bernanke from delivering his message in person, a message was sent on Wednesday of last week nonetheless regarding one of the central monetary policy questions of the moment. That is, in terms of the nuts and bolts, what exactly is the Fed's "exit strategy?" A summary of thoughts on Chairman Bernanke’s comments is provided by the Wall Street Journal’s roundup of economist’s reactions to the testimony. If you have ten minutes to spend, an interest in the federal funds market and how interest on reserve policy works, and the desire to hear a lecture that would usually cost you good money, I further commend to you the Mark Thoma’s video at MoneyWatch.com.
Philadelphia Fed’s Plosser Not A Fan Of ‘Extended Period’ Low-Rate Pledge - Federal Reserve Bank of Philadelphia President Charles Plosser said Wednesday he is uncomfortable with the central bank’s current pledge to keep rates low for an “extended period,” saying what happens with the monetary policy outlook depends on the economy’s path. “I am not a big fan of that language,” Plosser said. The words “confine us in some ways,” he said. That’s not because the Fed won’t act if conditions change, but because language like that conditions financial markets to hold an interest-rate outlook that may not come to pass, the official said. Plosser is not currently a voting member of the interest-rate-setting Federal Open Market Committee. When that body last met in January, it pledged to keep something like its current near-zero interest-rate policy in place for an “extended period.” One Fed official voted against that decision then, believing the language was incompatible with a recovering economy.
Iacono: Is all this “exit strategy” talk warranted? - Boy, for a group of policymakers at the nation’s central bank who, in a best case scenario, are going to just sit on their hands for at least the rest of the year, there sure has been a lot of talk about an “exit strategy”.That is, how the Federal Reserve plans to withdrawal the trillions of dollars in asset purchases, emergency lending facilities, and liquidity measures that have been undertaken over the last year that purportedly saved us from another Great Depression.While it’s probably a good idea to begin thinking about this sort of thing, the way Fed chief Ben Bernanke and others at the central bank have been talking lately, you’d think that the economy is about ready to fire on all cylinders again and that there’s a pressing need to begin dialing back on some of the aid they’ve been providing. What they should probably be worried about instead is the massive wave of foreclosures now washing up onto shore and the waning inventory rebuilding cycle that, when combined, will require more assistance in the form of money printing in the year ahead, not less.
Fed Exit Strategy? Where is the Article on the Fed Strategy for Full Employment? - The NYT has an analysis this morning of the Fed's "exit strategy" from its quantitative easing policy that was designed to support the economy after the collapse of the housing bubble. It seems that the Fed is pursuing an exit strategy, so it is reasonable for the NYT to report on the policy. However, this implies the Fed is also violating the law that governs its operation. The law requires it to pursue the goals of price stability and high employment, which is defined as 4.0 percent unemployment. The Fed's own projections show the unemployment rate remaining above 5.0 percent for the next 5 years. With no serious threat to price stability on the horizon (the core inflation rate has been falling), there is no obvious justification for the Fed's failure to more aggressively pursue expansionary policy. The NYT and the rest of the media should be running stories on the Fed's blatant violation of the law.
Is the Fed Getting Ready to Tighten? - Krugman - Officials say no. But there’s a lot of speculation that the rise in the discount rate presages further action. Let’s hope that this is wrong. It’s worth noting that after the 2001 recession, the Fed waited almost three years before it began to tighten: Assuming that the recession technically ended in June 2009, comparable behavior now would say no rate rise — and no tightening through other measures, such as shrinking the Fed’s balance sheet — for at least another two years. Add in the fact of declining inflation and very high unemployment, and there is really no justification for tightening — not now, and probably not for years to come. If the Fed does tighten anyway, I’ll have to dust off Jamie Galbraith’s analysis (pdf), which suggests that the Fed, um, behaves differently depending on which party holds the White House.
Bernanke Likely to Assure Congress Higher Interest Rates Aren't Imminent (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will probably assure Congress that the central bank is mindful of the lack of job growth in the U.S. and an increase in the benchmark interest rate isn’t imminent after the Fed’s decision to raise the cost of direct loans to banks. The Fed chief will deliver his semi-annual report on the economy and interest rates to House and Senate panels Feb. 24- 25. Fed officials last month forecast growth of 2.8 percent to 3.5 percent this year, and minutes of their January meeting showed they are seeking more evidence the recovery is sustainable. New York Fed President William Dudley indicated yesterday that policy makers need to focus now on maintaining growth rather than fighting inflation, citing a smaller-than-forecast increase in the consumer-price index for January reported by the Labor Department. Another measure of prices, which excludes energy and food, dropped for the first time since 1982.
Monetary policy: What's the right inflation target? - MY EARLIER post on the potential benefit from increasing inflation targets from around 2% to something like 4% touched off some interesting discussion at the Washington office. A few points stood out to me. One is that news sources have seized on Olivier Blanchard's suggestion that the question of a higher target get some consideration as having implications for current policy, but this is probably a little off base. A number of writers, myself included, have made the case for a more aggressive monetary approach to the current crisis, but that's a different question (though the monetary experience through this crisis should inform the discussion over the appropriate target). At any rate, it seems premature to talk about the costs and benefits of 4% inflation in the current environment, given that the core inflation is projected to be safely under 2% through 2012. Ben Bernanke has been very clear about his reluctance to fiddle with long-run inflation expectations. Underlying this reluctance is a concern that Fed credibility is more tenuous than many believe—
Rethinking macro policy - VoxEU - Blanchard etal - The global crisis forced economic policymakers to react in ways not anticipated by the pre-crisis consensus on how macroeconomic policy should be conducted. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework.
Do we need to rethink macroeconomic policy? Atlanta Fed blog - The aftermath of a crisis is always fertile ground for big thoughts. Big thinking is exactly what we get from Olivier Blanchard (the International Monetary Fund's director of research) and his colleagues . Titled, appropriately enough, "Rethinking Macroeconomic Policy," one of the more provocative parts of their analysis was highlighted in the Wall Street Journal: "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." I suppose that the modifier "major" provides something of an escape clause, but as a general proposition there is at least some evidence that 2% is preferable to 4%.
What rate to target? - DAVID ALTIG weighs in on Olivier Blanchard's suggestion that macroeconomists consider whether a 4% or so inflation target might not have advantages over the common 2% target. He turns up a couple of interesting findings from IMF studies, like: Our more detailed results may be summarized briefly. First, there are two important nonlinearities in the inflation-growth relationship. At very low inflation rates (around 2–3 percent a year, or lower), inflation and growth are positively correlated. Otherwise, inflation and growth are negatively correlated…" One might then ask whether there wouldn't be some advantage to a slight increase in the target rate, to perhaps 3%. That's the target a number of prominent economists, including Brad DeLong, have urged Ben Bernanke to adopt as a recession fighting tool. But Mr Altig is sceptical of the need to give the Fed more room to avoid the zero bound
Monetary policy: A healthy dose of inflation - The Economist: In other words, it was fine to have low inflation, because if monetary policy ever got wedged up against the zero bound, then the central bank could simply work to raise long-run inflation expectations. But that's just what Mr Bernanke is now refusing to do. This would seem to make the case for a higher target, in good times and bad, much stronger. If it seems likely that skittish central bankers will be reluctant to do what's necessary to raise inflation expectations when they're caught against the zero bound, then it makes sense to do what you can to keep them out of that situation.
The Case For Higher Inflation - Krugman - Olivier Blanchard, normally at MIT but currently the chief economist at the IMF, has released an interesting and important paper on how the crisis has changed, or should have changed, how we think about macroeconomic policy. The most surprising conclusion, presumably, is the idea that central banks have been setting their inflation targets too low: Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions. To be a bit more precise, I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree.
Higher Inflation Is a Lousy Cure for Meltdowns (Bloomberg) -- Policy makers are looking for measures to avert the next financial crisis. Most of the proposed solutions involve enhanced regulation. Economists at the International Monetary Fund have a better idea: higher inflation. Yes, that’s right. After a multidecade effort to become credible and anchor inflation expectations, central banks are now supposed to throw it all away in order to have more room to maneuver in financial crises. Start with the inflation target, or ceiling, most central banks have adopted of 2 percent, multiply by five, add six, divide by four, and bingo! That’s the new, improved inflation target of 4 percent, according to IMF economists authors of a new paper, “Rethinking Macroeconomic Policy.” Explicit inflation targeting has always been controversial for central banks with a dual mandate. The Federal Reserve, for example, is required to deliver stable prices and maximum sustainable employment. Some Fed officials eschew an explicit inflation target, preferring to retain the flexibility to respond to economic crises with lower interest rates even if inflation is above a target.
When the shoe is on the other foot: Changes in Global Governance [via]: The Chief Economist of the International Monetary Fund (IMF) has co-authored a paper calling for countries to raise their inflation targets from 2 percent to 4 percent and pursue counter cyclical fiscal policies. ... As the Financial Times reports, this ... represents a dramatic shift away from the standard policy advice of the IMF - stretching back decades. During the East Asian Financial Crisis of the late 1990s, for example, the Fund imposed economic austerity on countries that received IMF loans - raised interest rates and contractionary fiscal policy. During the Latin American Debt Crisis of the 1980s, austerity was also the answer. Not surprisingly, these policies resulted in lower economic growth, but the IMF preached financial stability first, economic growth to follow. Of course, during these years, the only borrowers from the IMF were developing countries. ... And as Joseph Stiglitz has observed, the contractionary IMF advice seemed somewhat hypocritical, considering the way advanced industrial countries responded to economic crises - far from following economic austerity, these countries always put together stimulus packages.
Should the Fed stay in regulation? - Atlanta Fed macroblog - One of the central issues in the postcrisis effort to reform our regulatory infrastructure is who should do the regulating. The answer to some in Congress is none of the above: "… proposed eliminating the Office of Thrift Supervision and Office of the Comptroller of the Currency, and moving their powers, along with the bank-supervision powers of the Federal Reserve and the Federal Deposit Insurance Corp., to the new agency. As reported in The New York Times: "The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation's financial system, officials said Wednesday…"Though the idea of a council to provide regulatory and supervisory oversight is still contentious (the Times article offers multiple opinions from Federal Reserve officials) the formation of a council is not necessarily the same thing as removing the central bank from boots-on-the-ground, or operational, supervisory responsibility. In other words, there is still the question of how to monitor systemic risk and which agency is best suited to get the power.
Fallacies of composition/decomposition: money and reserves - Does the supply of reserves matter? It certainly matters in the simple textbook ECON 1000 model of the money multiplier. But is that model fatally flawed, especially in the context of zero required reserves, and where central banks target an interest rate, so the quantity of reserves is demand-determined? Some people do argue that the simple textbook model is fatally flawed, and that the supply of reserves, to a first approximation, doesn't matter. See for example the comments on David Beckworth's post about the Fed's exit strategy. Even if this is a minority view (and I'm not 100% sure it is a minority), it's not an insignificant minority.
US bank lending falls at fastest rate in history - Telegraph - Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus. Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said. Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said. The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken
Fed Officials Set Goal of ‘Eventual’ Exit From Housing Finance - (Bloomberg) -- Federal Reserve officials set a long-term goal to keep only U.S. government securities in their portfolio as they debated how and when to pull back on the most aggressive monetary policy in U.S. history. Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries. Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech. “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.”
Hussman Follow-Up On The Great $1.5 Trillion Unlegislated GSE Bail Out - Another convincing piece by John Hussman, elaborating on his previous perspectives on the "unlegislated" $1.5 trillion bail out of the GSEs. When reading this piece, keep in mind that during the Q&A of Hoenig's speech reference earlier, the Kansas Fed president said "Our primary goal is the exit strategy. We need to remove the assets from our balance sheet. And we need to get out of this as early as we can." Of course, Ben Bernanke will never actually do this, and the "calendar" is so vague it could be referencing 3000AD. As Dow Jones noted earlier, "In outlining the likely path the Fed will take to tighten credit once the economy is strong enough, Chairman Ben Bernanke last week said he expects the central bank's balance sheet to shrink over time. However, Bernanke said he didn't anticipate the Fed would sell any of its holdings of long-term U.S. Treasuries or mortgage-backed securities "in the near term." It is against this backdrop that the sinister ploy described by Hussman is taking place.
Fed carrying Bear Stearns portfolio losses: report - The U.S. Federal Reserve is holding sizable paper losses on real estate assets acquired in the Bear Stearns rescue, the Financial Times reported Tuesday. The assets are held in a vehicle known as Maiden Lane I, which was set up to facilitate JPMorgan Chase's purchase of Bear in March 2008, the newspaper said. The assets were originally valued at $30 billion when a final agreement on the portfolio was reached in June 2008 by the New York Fed and its advisers, the newspaper said. At the end of 2009, the Fed said the assets were worth $27.1 billion. The report said Maiden Lane's losses were concentrated in commercial real estate assets, which had a face value of $8.4 billion and an estimated worth of $7.7 billion when acquired by Fed. They were marked down to $4 billion as of September, according to the report.
The Fed’s Newest Voice on the Economy and Banks - The Federal Reserve’s newest official sounded a bearish note on the economy today and offered a novel case for preserving the Fed’s role as a bank regulator. Narayana Kocherlakota became president of the Federal Reserve Bank of Minneapolis in October. He’s mostly been keeping his head down since then as he settled into his seat at the table with other policy makers. His speech today to the Minneapolis Bankers Association was his first public speech on the economy since taking the new job. It merits extra attention, because he spent much of his career as an economic theorist and when he took the job it was hard to know how the brainy former University of Minnesota professor would apply his ideas in the real world. Here are a few key points:
Central Bankers Support Dollar Reserve - WSJ -The use of the International Monetary Fund's Special Drawing Rights facility as an alternative reserve currency to replace the U.S. dollar is remote in the near term, heads of several central banks said Saturday. "The possibility of SDR as a meaningful reserve currency are remote in any reasonable time horizon partly because of the governing structure of the IMF, partly because it doesn't solve the reserve and adjustment problem in our opinion," Mark Carney, governor of the Bank of Canada, said at a panel discussion organized by India's central bank. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and they can be exchanged for freely usable currencies.
Paper Hangars - At a time when more and more offices are going paperless, governments in most of the developed world are doing the opposite. Finance ministers from Washington to London, Tokyo, Madrid, and, most pointedly, Athens, are attempting to paper over gaping financial chasms in the global economy by issuing ever greater quantities of currency and debt. But paper can only stretch so far. The key problem facing the western world is the 80-year decline in central banking discipline. In truth, these banks have become little more than the private piggy banks of their parent governments. Often furtively, central banks have "bought" ever larger amounts of government debt, which has allowed a consequence-deferred spending spree. The result has been decades of apparent economic growth and prosperity.
Disinflation - What I find myself looking at these days are the Cleveland Fed “trimmed” inflation measures, which exclude outlying large price movements; the ultimate trim is the median, the rise in the price of the median category. And these indicators tell a story of dramatic disinflation in the face of a week economy: I find this a scary picture. For one thing, it suggests that deflation may not be too far in the future. But beyond that, there’s a growing belief among sensible economists that we need higher, not lower inflation. What we’re doing now is moving in the wrong direction, with real interest rates rising even as the nominal rate remains at zero. We may have to start calling the Fed chairman Bernanke-san, after all.
A Deviation from "Paul Krugman is always right" - So, I'm a huge fan of Paul Krugman. I actually work in the same field as that in which he was awarded a Nobel, and his academic work is solid, and I'm generally whole-heartedly in agreement with most of his more recent economic policy analysis. However, I think he should have added a caveat to his latest post in which he argues that because the stimulus essentially ends at the end of this year, it's getting pulled away too fast. Thing is, I think the more important problem is that the Fed is not doing more, and certainly by some point in 2011 is likely to raise interest rates. We really are likely to be in a situation in which, even if Congress does more, the Fed might do less. Although I agree, in principal, that Congress should be doing more, I think the Fed is the more important guilty party at this point. We need a competitive devaluation of the dollar, and the way to do that is for the Fed to print money and buy out debt, with the added benefit that this would reducing our future debt payments. Incidentally, this would also put pressure on the Chinese to revalue -- more pressure than having our politicians jaw them but do nothing.
NYT Does Big-Time Cover Up for the Fed - The NYT told readers about a deal between the Senate and the Obama administration to establish a council of regulators that would have the responsibility of identifying systemic risk. It then adds that the council: "addresses one of the primary lessons of the near debacle: that no one had been assigned to ensure the stability of the system as a whole and detect the kinds of excessive risk-taking and imbalances that could rock an entire economy."This is not true. The Federal Reserve Board had the responsibility to prevent systemic risk and acted upon this authority when it considered it appropriate.
Fed’s Hoenig says fiscal strains pressuring Fed (Reuters) - Growing mountains of U.S. government debt will increase pressure on Federal Reserve to hold interest rates low, making it harder to avoid inflation, a senior Fed official said on Tuesday. "The current outlook for fiscal policy poses a threat to the Federal Reserve's ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well," Kansas City Federal Reserve Bank President Thomas Hoenig told the Peterson-Pew Commission on Budget Reform. Hoenig, a voter this year on the Fed's interest-rate setting committee, also urged the U.S. central bank sell some of the assets it has acquired to help counter the worst economic downturn since the 1930s. Holding them for an extended period will invite pressure from politicians to use Fed powers to aid other ailing sectors of the economy, he said.
FT.com - Bankers fear sovereign risk in 2010 - So, unsurprisingly, those same risk managers are now scouring the horizon for any fresh potential shocks. And as they run scenarios for 2010 – or “try to imagine six impossible horrible things before breakfast”, as one says – an issue that is causing more unease is the matter of sovereign risk, and the related issue of collateral. Until quite recently, this was not something that banks worried much about in the western world, since it was widely assumed that the credit standing of European countries and the US was ultra secure. But now some senior bankers are starting to get uneasy. After all, deals that banks have cut with sovereign entities are believed to account for a significant chunk of the derivatives market. Moreover, such contracts can often be 10, 20 or 30 years, which means that the profits and losses in a derivatives deal can fluctuate hugely – and the potential counterparty risk.
Obama Signs Law Raising Public Debt Limit from $12.4 Trillion to $14.3 Trillion - Behind closed doors and with no cameras present, President Obama signed into law Friday afternoon the bill raising the public debt limit from $12.394 trillion to $14.294 trillion. The current national debt is $12.3 trillion. Check out the National Debt Clock, which tells you your share of that — roughly $40,000 per citizen, $113,000 per taxpayer. The bill also establishes a statutory Pay-As-You-Go procedure requiring that new non-emergency legislation affecting tax revenue or mandatory spending not increase the Federal deficit – in other words, that any new spending or tax cuts be paid for with new taxes or spending cuts.
Hoenig Says Fed’s Objectives Threatened by U.S. Debt (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the U.S. must take “difficult” steps to reduce spending and increase revenue so the central bank isn’t pressured to fund the “unsustainable” federal debt. “It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington. The Obama administration estimates budget deficits will total $4.3 trillion during the next five years and hit a record $1.6 trillion in the year ending Sept. 30. The U.S. must be “willing to disappoint a host of special interests” and tackle the debt, or it risks “its own next crisis,” Hoenig said.
Debt-tastrophe - Hoenig - Growing demands on the federal government have invited a massive buildup of government debt now and over the next several years. US fiscal policy must focus on reducing this debt buildup and its consequences. History holds many examples of severe fiscal strains leading to major inflation. It seems inevitable that a government turns to its central bank to bridge budget shortfalls -- with the result being too-rapid money creation and eventually, not immediately, high inflation. German hyperinflation is one classic and often-cited example, and with good reason. When I was named president of the Federal Reserve Bank of Kansas City in 1991, my 85-year old neighbor gave me a German 500,000 Mark note.
Minneapolis Fed President Kocherlakota Warns Massive Debt Load Can Only Be Paid By Tax Collections Or Debt Monetization - Minneapolis Fed's recently appointed president Narayana Kocherlakota had his first public speech before the Minnesota Bankers Association. His remarks on the economy were significantly much more cautious than some of the other Bernanke sycophants. While the Fed President espouses the need for bank regulation by the Fed (to be expected, the inverse would be equivalent to mutiny), Kocherlakota is much less sanguine than his Fed colleagues about the prospects for the $1+ trillion in excess reserves and how these may lead to (hyper)inflation in the future. His remarks that the only way to fix the debt excesses: increased taxes and debt monetization (even more so than to date), should let many readers reconsider just how appropriate the Fed is to regulate a system which never changes but keeps on keeping on, changing absolutely nothing in its policy approach, and merely hoping that a rising stock market (with or without its invisible hand) is sufficient to fix everything.
The Future of Public Debt - Paper by Cecchetti, Mohanty, and Zampolli - The financial crisis that erupted in mid-2008 led to an explosion of public debt in many advanced economies. Governments were forced to recapitalise banks, take over a large part of the debts of failing financial institutions, and introduce large stimulus programmes to revive demand. According to the OECD, total industrialised country public sector debt is now expected to exceed 100% of GDP in 2010 – something that has never happened before in peacetime. As bad as these fiscal problems may appear, relying solely on these official figures is almost certainly very misleading. Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated
Money Supply Flood To Drown US Economy - Last week, the House approved another increase in the national debt ceiling”, he says, meaning that the idiotic American government can now legally borrow $1.9 trillion more, on top of the $12 trillion already borrowed and owed, “to stay afloat and avoid default”, although he did not mention that this monstrous new load of debt is only expected to last until just after the mid-term elections this year, at which point Congress will take us farther and farther into a deadly financial quicksand with another extension of the debt limit! Hahaha! "Call one drop of water a dollar. Five drops equals one milliliter. Question: What is the volume of water of $14 trillion?” He was pretty quick coming up with the answer: “Twenty times the volume of the Great Lakes. That puts the entire area of the United States 50 meters underwater.”
John Berry: The Debt Limit Debacle: Congress controls this debt ceiling ostensibly to make it harder to run deficits, it has become a political club that the minority party uses to bash the majority, regardless of who or what is at fault... it’s hard to see that the existence of a debt limit does much except give some members of Congress reason to rail about debt and blame someone else for creating it. “Other than drawing attention to the problem, it’s an after-the-fact admission of what has already happened and doesn’t accomplish anything,” said Mickey Levy, chief economist at Bank of America. “Does it lead to better spending and tax policies? The answer is no,” Levy said. “Does it force Congress and the public toward a more meaningful debate on budget policy? Again the answer is no.”
The Impossible Math of Debt Backed Money… and why we WILL take an Evolutionary Step Forward! - The Problem: All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010!
The Federal Budget is Not Like a Household Budget - I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?
How Governments Hide Their Liabilities - In my testimony to the Senate Budget Committee the other day, I recommended that Congress set specific fiscal targets for bringing our out-of-control deficits and debt under control. My particular suggestion? Get the publicly-held debt down to 60% of GDP in 2020. By budgeting standards, that makes for a great bumper sticker: “60 in 20“. But as the New York Times points out in two articles today, a measurable target isn’t enough. You also need to make sure that the government doesn’t game the accounting to hide its liabilities. Exhibit A is Greece. The story was originally broken by Der Spiegel earlier in the week, and is described in the NYT in “Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis“:
US debt will keep growing even with recovery (AP) -- For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario -- a full recovery and a return to prerecession employment levels. The government already has made so many promises to so many expanding "mandatory" programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained.Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.
Two Sides To Every Story - The news-making piece today comes from KC Fed President Thomas Hoenig: "Someone recently wrote that I evoked “hyperinflation” for effect. Many say it could never happen here in the U.S. To them I ask, “Would anyone have believed three years ago that the Federal Reserve would have $1¼ trillion in mortgage back securities on its books today?” Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress." Now, readers of this blog will be able to guess that I find Hoenig's piece to be completely reasonable, and a pretty accurate enunciation of very common fears that most Americans (myself included) have. However, there is a contra-view that says that holders of my view are completely crazy and have no understanding how how our monetary system works. In the interest of avoiding another lengthy comment thread discussion with those who hold the opposite view, I point you toward Billy Blog where you can read for yourself the other side of the story.
Payback Time - Party Gridlock in Washington Feeds Fear of a Debt Crisis -NYTimes - Senator Evan Bayh’s comments this week about a dysfunctional Congress reflected a complaint being directed at Washington with increasing frequency, and there is broad agreement among critics about Exhibit A: The unwillingness of the two parties to compromise to control a national debt that is rising to dangerous heights. After decades of warnings that budgetary profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in lost tax revenues and higher spending for safety-net programs.
Inflation Won't Solve Our Debt Problems - Lately I have seen a few suggestions, here and there, that the United States should consider inflating its way out of its rising debt burden. The country essentially inflated its way out of much of its debt during the Great Depression, and again in the 1970s, according to Harvard’s Kenneth S. Rogoff. But as anyone who remembers the 1970s can attest, inflation can be painful. It’s no fun to get your paycheck and then find out that you cannot buy as many groceries or as much gasoline as you did the week before because prices have gone up so much.The more powerful argument against inflating away debt is that it will not work, says Alan Auerbach, an economics professor at the University of California, Berkeley. Why? Because so much of our long-term spending obligations are indexed to inflation. In other words, the debts will rise along with inflation, so they won’t “feel” any smaller. Here is how Professor Auerbach explained it in an e-mail message:
Getting Today's Politicians to Think About Tomorrow's Problems - My colleague Jackie Calmes has an article today on the political gridlock in Washington over how to address the nation’s long-term fiscal challenges. The response from the White House has been to form a blue ribbon commission that will propose spending and/or taxation changes to address future deficits. Unfortunately, such commissions have a poor track record. They’re not good at building the political will necessary to do something that doesn’t seem to be in politicians’ short-term interests. As I wrote in a Week in Review piece last Sunday, this is fundamentally a problem of misaligned incentives: how do we get politicians elected on a short-term basis to ever care about the long term?
What Matters Is “Marginal” Job Creation and “Marginal” Deficit Reduction - With today being the one-year anniversary of the American Recovery and Reinvestment Act of 2009 (more commonly referred to as “the stimulus”), and President Obama expected tomorrow to announce his Presidential commission for deficit reduction, I’m hearing a lot of claims and rhetoric about what has “worked” versus what has not, and what has to be done going forward versus what should remain “off limits. In all these arguments and politically-colored “evaluations”, I hear misplaced focus on (the stark and easy-to-talk-about) absolutes, averages, and aggregates, when what matters economically are relatives, marginals, and individuals. Let me elaborate a bit with the two issues at hand…
NYT Invents “Broad Agreement” About Budget Problem - The NYT ran a front page article today claiming a "broad agreement broad agreement among critics about Exhibit A: The unwillingness of the two parties to compromise to control a national debt that is rising to dangerous heights." The article presents no evidence to suggest a broad agreement of any sort among critics, nor does it point out that every one of the "experts" cited failed to warn of the housing bubble, the collapse of which is projected to add close to $4 trillion to the national debt. The article then throws in the utterly absurd statement: "After decades of warnings that budgetary profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in lost tax revenues and higher spending for safety-net programs."
Thoughts about the Fiscal Commission - Here is a question I have been pondering. If you were a member of the fiscal commission, what would you try to achieve?The answer for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the "tax and spend" party. President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it. That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.But what if you are conservative? This is harder. You can try to stick to your no-tax-increase position. The problem is that doing so would require spending cuts larger than are politically realistic. If I were king, I bet I could find sufficient spending cuts. But I am not expecting to be anointed any time soon. If the fiscal commission is going to succeed, tax increases will have to be part of the deal.
Deficit Commission Executive Order - For Immediate Release : Executive Order -- National Commission on Fiscal Responsibility and Reform "By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows..." (text)
The Bankruptcy Boys – Krugman - William Galston, writing about Republican refusal to join a deficit-reduction commission, catches something I missed: the WSJ editorial page is now against means-testing on entitlements programs, because it means that middle and upper-middle class (i.e., GOP) voters would get less than they were promised in return for a lifetime of payroll taxes. Wow. First of all, aren’t Republicans supposed to pretend that they’re the party of regular guys, and that the affluent vote Democratic? ... And heres’ the thing: Social Security and Medicare are, you know, very popular. The only way they could be gutted, as opposed to reformed in an incremental way, is in the face of fiscal catastrophe — basically, federal bankruptcy. And that, in effect, is what the WSJ is calling for.
Another Dumb Right-Wing Idea: Default on the Debt - Over the years I have heard a number of conservatives suggest that defaulting on the national debt wouldn’t be such a bad thing. Today Prof. Glenn Reynolds of the University of Tennessee Law School (better known as “Instapundit”) suggests the idea once again. Says Reynolds: “SO HERE’S A QUESTION: Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in? With more collateral damage, of course. . . .” There are an absurd number of false assumptions and premises inherent in this point that I don’t have time to go through, but here are a few.
Oregon Voters' Approval of Tax Increase Noteworthy for Fed Tax Debate - CBPP - On January 26, Oregonians approved two measures to raise income taxes on upper-income households and corporations as part of an effort to close their state’s large budget shortfall. Oregonians’ decisive vote last month to raise taxes on households making over $250,000 calls into question the conventional wisdom that tax-increase proposals are politically untenable regardless of their merit on economic, budgetary, and equity grounds. This has important implications for Congress, which must decide this year whether to let the Bush-era tax cuts expire. If Congress examines the issue on its merits, it will find that the case for letting the tax cuts for the highest-income Americans expire is solid.
Who's Afraid of Taxing Rich People? - President Obama is creating a bipartisan commission to reach a consensus on how to bring down the deficit. Michael Tomasky has a great, thought-provoking blog post at the Guardian about the mechanics of deficit reduction, but I don't agree with his take on the politics of tax increases. Tomasky beings by pointing out that the top marginal tax rate in the 1950s was 91% on income earned above $200,000. Today it's 35% on income earned over $360,000 (see this interesting PDF chart). Tomasky concludes that we should be talking more about raising the top marginal tax rate: When Washington talks about the deficit and entitlements, people always talk about cutting. About living within our means ... And if you broach the subject of what the people at the very top should contribute to the maintenance of this condition, you're considered extreme and unserious.
Tax Rates for Top 400 Earners Fall as Income Soars, IRS Data - The incomes of the top 400 American households soared to a new record high in dollars and as a share of all income in 2007, while the income tax rates they paid fell to a record low, newly disclosed tax data show. In 2007 the top 400 taxpayers had an average income of $344.8 million, up 31 percent from their average $263.3 million income in 2006, according to figures in a report that the IRS posted to its Web site without announcement that were discovered February 16. The figures came at the peak of the last economic cycle and show that widely published reports in major newspapers asserting that the richest Americans are losing relative ground and "becoming poorer" are not supported by the official income data. The long-term data show that under current tax and economic rules, the incomes of the top earners rise when the economy expands and contract during recessions, only to rise again. Their effective income tax rate fell to 16.62 percent, down more than half a percentage point from 17.17 percent in 2006, the new data show. That rate is lower than the typical effective income tax rate paid by Americans with incomes in the low six figures, which is what each taxpayer in the top group earned in the first three hours of 2007.
Is there a case for a VAT? I outlined it yesterday, to a small group. My tale went as follows:
- 1. The United States is on an unsustainable fiscal path.
- 2. For whatever reason, long-term interest rates don't reflect this problem. .
- 3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum. .
- 4. We could, for now, wait and postpone fiscal reform. That means encountering a sudden collapse some number of years from now.
- 5. We'll get a better deal, and make wiser decisions, if we do it today rather than in a panic.
- 6. There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax.
Our Position in the Universe - Bruce Webb does a good job of describing Conservative fears, though he fails to take it to its logical conclusion. Government debt is probably the greatest Socialist element within the spectrum, debt being a universal factor which All feel compelled to honor. Debt must be considered as being paid, or in the process of payment, else everything within the economy is shaken. Under this level of Understanding, Government should be disallowed the power to borrow. Neither Conservative or Liberal would take their ideals this far, as then Government services must be paid as they are developed; no one being willing to pay their taxation at this level of strata. The reality exists that any Investment in Government is a Support of Socialism, and actually, the most vindictive of Supports. One can only hope that All reading this commentary will understand the real underlying trap of Government program.
Economic View - What’s Sustainable About Obama’s Budget? - NYTimes - It may be tempting to assume that a balanced budget is the natural benchmark. Certainly, the Obama budget comes nowhere close to achieving that goal. But there are reasons to think that this standard is far too strict. Sometimes, a budget deficit, even a large one, is called for. War and recession are the two classic cases. Wars lead to temporary surges in government spending, and recessions lead to temporary declines in government revenue. It makes sense for the government to borrow to make it through these tough times. President Obama, like his immediate predecessor, is dealing with both war and recession. A transitory surge in the government’s budget deficit is natural under these circumstances and need not be a cause for alarm. Moreover, even in the long run, a balanced budget is too strict a standard. Because of technological progress, population growth and inflation, the nation’s income and tax base grows over time. If the government’s debts grow at or below that pace, servicing the debt will not become a major problem. That means the government can run budget deficits in perpetuity, as long as they are not too large.
Greg Mankiw on the Deficit - Greg Mankiw, noted economics textbook author and former chair of Bush 43’s Council of Economic Advisers, has an op-ed on the deficit that is relatively sensible by the standards of recent debate. He points out that modest deficits can be sustainable, that taxes will probably need to go up, and that a value-added tax is a plausible option. He also points out that Obama’s projections are based on optimistic economic forecasts that very plausibly may not pan out, and that Obama’s main deficit-reduction strategy is to kick the problem over to a deficit-reduction commission, which are valid criticisms. Unfortunately, his bottom line seems to be throwing more rocks at President Obama, under the general Republican principle that since he’s the president, everything is his fault:
More on Mankiw - I recently criticized Greg Mankiw’s New York Times op-ed. I like the post on his blog better. Basically he says that if conservatives on the deficit commission want to make the commission work (a big if — see my previous post), they “will have to agree to higher taxes as part of the bargain.” In exchange, they should ask for the following: Substantial cuts in spending. Increased use of Pigovian taxes. Use of consumption taxes rather than income taxes. Cuts in the top personal income and corporate tax rates. Permanent elimination of the estate tax.
How to extract Money gracefully - I began reading this article by Greg Mankiw, and started to come up with ideas. It led me to contemplate the entire relationship of Taxes and Recessions. Taxes possess little power to incite Recessions, but they also have little power to inhibit Recessions; even though Conservatives would claim Taxes are a great economic retardant. National debt, though, can have an immense impact on the Inflation rate, and some impact upon Recessions; though I suspect a vastly lesser curative than economists, Conservatives, and Liberals would acclaim. Politicians, on the other hand, are incited by Business to spend other peoples’ money quite liberally, as long as the money which is spent is not their own. It is from this point that We began discussions on national debt.
Getting the Facts Straight on the Deficit - Some of President Obama’s critics and political opponents have launched a line of argument that Obama is mostly to blame for the large federal budget deficits projected for the coming decade and that his Administration’s role in swelling deficits and debt dwarfs that of the previous administration.  The critics cite what they present as proof: the fact that the deficit this year and in the years ahead will be much larger than the average deficits under President George W. Bush and that the increase in the national debt thus will be much larger under Obama than Bush. But asserting that the deficits that lie ahead are primarily the result of policies enacted since President Obama took office is Orwellian. It stands truth on its head.
Jeff Sachs on the Deficit - “Policy paralysis around the US federal budget may be playing the biggest role of all in America’s incipient governance crisis. The US public is rabidly opposed to paying higher taxes, yet the trend level of taxation (at around 18% of national income) is not sufficient to pay for the core functions of government. As a result, the US government now fails to provide adequately for basic public services such as modern infrastructure (fast rail, improved waste treatment, broadband), renewable energy to fight climate change, decent schools, and health-care financing for those who cannot afford it.“Powerful resistance to higher taxes, coupled with a growing list of urgent unmet needs, has led to chronic under-performance by the US government and an increasingly dangerous level of budget deficits and government debt.”
The Government Budget Constraint - Mark Thoma - instructional video
National Debt, Budget Deficit Scary Forecast for Taxpayers: Obama to Sign Fiscal Reform, Economists - American political and economic leaders have sounded the alarm for years about the red ink rising in reports on the federal government's fiscal health But now the problem of mounting national debt is worse than it ever has been before with -- potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform. "It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."
Dean Baker: The Budget Deficit Scare Story and the Great Recession:The Great Recession has left tens of millions of families facing unemployment, underemployment and the threat of losing their home. However, concerns over the deficit threaten to derail efforts to turn around the economy and spur employment. This report attempts to correct many of the misperceptions about the deficit that have brought the issue to the center of national debate. In a time when cogent, effective policies are needed to address the suffering stemming from the economic downturn, the tactics of the deficit hawks distract the public and policy makers from the policies necessary to bring the economy back to full employment.
A Deficit Hawk’s Lament - There are two kinds of deficit hawks these days: people who use the national debt as a crutch to beat the current Democratic administration and Congress over the head, and people who are genuinely concerned about the national debt. I put myself in the latter camp. It’s not an easy place to be; I don’t want to be lumped in with the Sarah Palin fanboys. But I really do worry that our $12 trillion debt, not even counting the unfunded mandates, or the states’ deficits, is something that needs to be addressed immediately. Not because the other party isn’t doing it, but because the long-run consequences are gut-wrenching changes. If the nation doesn’t change its path, it will at some point come to the same fork in the road the Greeks find themselves in: wrenching change, in the form of higher taxes and lower benefits, or default. Since default is unthinkable, wrenching change will likely win the day. It will be worse than it even sounds, and it will be the end of a long, long series of policy errors.
We need jobs, not deficit cuts - But the immediate crisis hasn't passed. It is not over for the jobless. It is not over for those losing their homes. It is not over for Greece, Spain, Portugal, or Iceland, facing ruin in the capital markets. Europe has no plan for jobs. In America, President Obama has recently sent a jobs programme and a call for investments in transportation, clean energy, and education to a Congress in stalemate. No country has a credible plan for effective homeowner debt relief. Central European countries appear to respond with folded arms to the plight of their near neighbours.The right goal is not to shape "post-recession growth". Growth is not assured; it cannot be assumed; and it is not even the highest priority. The right task is to find a fair, effective, and sustainable path out of crisis.People need work. We face the challenge of climate change. The broad outline of a programme is therefore plain. There is no mystery about it. In 1929, Keynes wrote, "there is work to do; there are men to do it. Why not bring them together?" Today as then, it is that simple.
Deficit Hawks Want New (or double dip) Recession - One of the oddest things to come out of the entire credit crisis, recession and muddling recovery has been the sudden re-emergence of deficit hawks.While a few honest deficit hawks are out there — the Peterson Institute is a good example of a group looking at long term structural issues, not immediate fiscal concerns — the vast majority of born again fiscal hawks are political hypocrites. They voted for all manner of budget busting programs — unfunded tax cuts, new entitlement programs (i.e., prescription drugs), an expensive war of choice (Iraq). How is it that they only learned of the evils of deficits after they lose power? How very convenient.
Time to Throw Some Water on The Deficit Hysteria Fire - CAN OR SHOULD THE FEDERAL GOVERNMENT BALANCE ITS BUDGET? - Nowadays the only thing on everybody's mind is the level of government deficit and national debt. Deficit hysteria is being fueled by reports that the US budget deficit will reach "an all time high" this year. President Obama is going to appoint his own commission to study how to reduce the deficit—since Congress failed in its attempt to establish one. He frets that we will leave crippling mountains of debts for our grandkids. The deficit hysteria hydra is too big to cover in one blog—but here we will address the "deficit cycle" and the possibility of ending it.
Peterson-Pew Commission Discussion on Budget Reform - The Peterson-Pew Commission held a forum on Budget Reform and debt. Economists, policy analysts and former public officials gathered to discuss solutions for handling government debt, and how the influence of politics in the federal budget effects the budgeting process. 4 hr. 2 min.
Martin Wolf, Niall Ferguson, James Kwak, and Fat Tail Events Martin Wolf today gave Niall Ferguson a true smackdown on the U.S. budget deficit issue: Niall Ferguson is not given to understatement. So I was not surprised by the claim last week that the US will face a Greek crisis. I promptly dismissed this as hysteria. Like many other high-income countries, the US is indeed walking a fiscal tightrope. But the dangers are excessive looseness in the long run and excessive tightness in the short run. It is a dilemma of which Prof Ferguson seems unaware.Ouch, that has to hurt. Martin Wolf, however, is making a fair point that currently the real U.S. government solvency issue is a long-run one given the projected runaway growth of entitlement programs such as Medicare. As is well known, soaring health care costs are behind these projections and thus, one of the motivations for health care reform is a desire to maintain long-term U.S. government solvency. James Kwak has been making this point recently and like Wolf has been on the warpath to scalp those poor souls who fail to see the long-term issues here. His victims include Robert Samuelson and Greg Mankiw. While I agree with what Martin Wolf, Jame Kwak, and other observers like them are saying on the long-term problems, I believe they underestimate the potential for a fat-tail event in the short-run...
If the Fed Had Done Its Job, the Deficit Would Be Much Lower - The NYT reported concerns expressed by regional Federal Reserve Bank presidents that large deficits could eventually lead to reduced Fed independence and higher inflation rates. It would have been worth pointing out that the deficits are very large at present only due to the fact that the economy is in a severe downturn? This downturn is in turn the direct result of the Fed's failure to rein in the housing bubble before it grew to dangerous levels.
Who is getting robbed? The REAL “intergenerational theft” - We’re always told that our debt levels have risen to “dangerous heights”, but we seem to mix up the causation. Budget deficits go up as growth slows due to the automatic countercyclical stabilizers; they don’t cause the slowdown, but merely represent it. What Senator Bayh and others of his ilk fail to understand is that while you can cut spending, and raise taxes, you cannot eliminate deficits via legislative fiat in the absence of dis-saving from some other non-government sector.My main critique of the deficit hawks is that they (and policy makers and investors who embrace their philosophy) simplistically focus on changing one sector’s financial balance without taking into consideration the implications for other sectors. If sharp reversals of fiscal deficits are attempted, the domestic private sector’s ability to service debt will be impaired unless large current account surpluses can be achieved. That means domestic wage deflation (which will get their private sectors to financial instability straight away) or a magnificent explosion of labor productivity and product innovation, the likes of which we have no reason to expect will spontaneously arise in the near future
Net interest payments on the federal debt: A flawed measure - VoxEU - Net interest payments on the federal debt are widely reported, yet this column argues that this misreports government borrowing costs and leaves open the possibility of manipulation. Computed correctly, the return on Treasury debt is lower on average and considerably more volatile than the official reported interest costs.
Move Over China: Beijing Sells Whopping $34.2 Billion Treasuries In December As Japan Becomes Largest Official Holder Of US Debt - Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion. Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone.
International Demand for U.S. Financial Assets Slowed - Bloomberg-- International demand for long-term U.S. financial assets grew in December at a slower pace than a month earlier, as China sold U.S. government securities, a U.S. Treasury Department report showed. Net buying of long-term equities, notes and bonds totaled $63.3 billion for the month, compared with net purchases of $126.4 billion in November, the Treasury said in Washington. Including short-term securities such as bills and stock swaps, foreigners purchased a net $60.9 billion in December, compared with net buying of $30.7 billion the previous month. China cut its holdings of U.S. government debt in December to the lowest level since February 2009 and Japan was a net buyer for the six month in the past seven. As the financial crisis eased, some central banks that poured money into Treasuries have been investing reserves elsewhere, economists said.
Japan eclipses China as top US Treasury holder - China's holdings of US Treasury bonds tumbled in December, allowing Japan to take over as the top holder of American government debt, according to Treasury data released Tuesday. China's bond holdings dropped substantially to 755.4 billion dollars in the last month of December from 789.6 billion in November, said the Treasury's international capital data report. Japan's holdings increased to 768.8 billion dollars in December from 757.3 billion dollars in November, according to the data. Beijing had expressed fears late last year about the safety of its dollar-linked assets in view of Washington's burgeoning budget deficit and the declining greenback at that time as the American economy struggled to emerge from a brutal recession.
Is China Turning Bearish on the U.S. Treasury? - Is America’s banker turning bearish? This week, Japan eclipsed China as the largest foreign holder of U.S. Treasury securities. This news comes one week after it was reported that China may sell-off some of its U.S. Treasury holdings to punish Washington for selling weapons to Taiwan. These developments offer more evidence that Beijing is growing less willing to continue buying and holding U.S. debt. If China is indeed losing its taste for Treasuries, its timing could not have come at a worse time. The federal government has to finance over $1.3 trillion in deficit spending this fiscal year. And in the past, the U.S. has relied on China to buy not only Treasuries, but corporate and mortgage debt as well. Without China in the picture, it’s unclear where all this money will come from.
The Future of the Dollar - The World is concerned that the dollar cannot play the role of the main reserve currency any longer after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since the 1930s. The Government’s stimulus packages, financial bailouts, the need to support liquidity in Treasuries, keeping interest rates at the lowest level under the circumstances of low economic growth, high unemployment and low tax collection make it print more dollars. This leads to a high risk of substantial inflation, or hyperinflation in a long-run. With a $12.3 trillion national debt and $55 trillion in unfunded obligations for programs such as Social Security, Medicare and Medicaid, with total Federal Reserve and Treasury bailout commitments now at $11.8 trillion, of which $3.6 trillion has already been spent the U.S. need to take steps immediately to protect themselves from the potential loss of the purchasing power of their U.S. Dollars, inflation.us warns.
China Sells Treasuries... or Did They? - Bloomberg (like every major media entity) reports: China’s ownership of U.S. government debt fell in December by the most since 2000, allowing Japan to regain the position as the largest foreign holder of Treasury securities. So Japan has passed China in total Treasury holdgings.... or have they? Looking at the above chart we see that the United Kingdom is listed as the third largest holder of Treasury bonds after the MASSIVE 12 month change seen below. This is where I miss Brad Setser and his blog Follow the Money (. As he detailed back in the summer: China tends to account for a very large share of purchases through the UK. From mid-2006 to mid-2007, about 2/3s of the UK’s purchases of Treasuries were ultimately reassigned to China. I would expect the something similar is happening now — all of China’s bill holdings tend to appear in the US data in real time, but only a fraction of China’s long-term purchases tend to show up directly in the US data.So (most of / some of?) these purchases by the United Kingdom were likely on behalf of China. Below is the last jump / reset cycle, though it is important to note that this cycle has happened on six occasions since 2002.
Foreigners Cut Treasury Stakes; Rates Could Rise (AP) -- A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors. China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009. Private analysts, though, were split over the significance of the decline. Some doubted that the drop in foreign holdings of short-term Treasuries signified growing unease about holding U.S. debt. They noted that net purchases of longer-term Treasury debt rose in December by $70 billion.
Who are the direct bidders at bond auctions? - For years, bond markets have paid close attention to how much of each Treasury auction goes to a group called indirect bidders, because the group includes foreign central banks and is considered a real-time proxy for what sovereign investors – who hold almost half of all outstanding Treasurys – think about buying U.S. debt. But in recent months, more attention has been paid to a group called direct bidders. It didn’t used to matter because that group only bought about 1% of any given bond auction, but now their purchases have gotten big. Direct bidders bought a record 24% of Thursday’s 30-year bond auction. The group bought more than 10% of this week’s 3-year and 10-year note auctions. So who are the direct bidders? Some analysts have used data released by the Treasury a month after the auction to conclude that it’s domestic money managers making most of those bids. Yes, that’s U.S. investors buying more of their own government’s bonds.
What is going on with Canadian holdings of US Treasuries? - Regular commenter Kosta points us to this release of major foreign holders of US Treasuries, noting that Canadian holdings increased by a factor of six between December 2008 and December 2009 (from USD 7.8b to USD 48.3). That may be from a low base, but even if you scale the numbers by GDP - as Kosta very kindly did for us - it's still remarkable: The UK numbers almost certainly include transactions made for third parties. But what is going on with the Canadian numbers? Does anyone know what happened?
Foreign holdings of U.S. Treasuries: was it really that bad? - I can’t believe that the Financial Times can get away with this. From the FT, titled Foreign demand falls for Treasuries: Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday. I don't know what foreign demand is (these are net flows, so it could likewise be a product of domestic supply and/or demand), but foreign holdings of US Treasuries grew! In December, foreign holdings for US Treasury securities – official and private holdings of US Treasury bonds/notes + US Treasury bills – increased by $17 bn over the month (you can see the major holders by country here, or the total on the press release, lines 5+10+23). And lookie here, China dropped its overall holdings , yes, but the article fails to mention the shift in holdings by other key countries that offset completely China's sell-off. In December, the UK and Japan jointly increased their holdings by more than China dropped its holdings, + $US 36.4 bn vs. -$US 34.2 bn.
TIC tock; TIC tock; TIC tock - No, the US Treasury's time is not running out. Where's Brad Setser when you need him - and the media definitely needed him in reference to the December TIC report. Okay, okay, we know: China dropped its share of Treasury holdings in December by $US 34.2 bn. China now holds just 20.9% of the total foreign-owned stock of Treasuries, second only to Japan (21.3%). But China’s share is closer to its average, while Japan’s share is way off – there may be a reversion here, i.e., Japan will grow its stock of Treasuries relative to China (Please see my post yesterday). Except for the period of September 2008 through November 2009, Japan held a much larger share of Treasuries than did China for every month since 2000.Is there a sinister plot developing? Is China selling off S-T T bills to retaliate against the Obama administration’s push on the renminbi? Or is China simply reallocating its portfolio toward risk?
Capital Controls Are In Again - Adair Turner, head of Britain’s Financial Services Authority, has developed a flair for pushing the official conversation on banking forward...Now Mr. Turner is at it again...Mr. Turner’s language was nuanced but the thrust of his argument was clear....Restricting capital flows will imply changes in many other aspects of how we organize our economy, including our fiscal deficit (as a great deal of the short-term capital flows around the world are into and out of United States government securities), and what we rely on to sustain growth (as the United States has been a big net importer of foreign capital in recent decades).And it will have significant implications for our financial system, which, in recent years, has made a great deal of easy money by moving money around the world — and, as Mr. Turner continues to emphasize, has thus created serious global risks.
IMF Staff Says Capital Controls Can Be ‘Legitimate’ Policy Tool - BusinessWeek -- Capital controls are a “legitimate” tool in some cases for governments facing surges in investment that threaten to destabilize their economies, an International Monetary Fund study said.The IMF’s study comes as some Asian countries have said they’re studying capital controls to protect against asset bubbles and currency appreciation. Brazil introduced taxes on overseas investors in its stocks and fixed-income assets in October after the real rallied almost 33 percent.“Even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts,” the IMF research department said in a report released today. “Capital controls on certain types of inflows might usefully complement prudential regulations to limit financial fragility and can be part of the toolkit.”
Systemic risk: how to deal with it? BIS - This paper analyses systemic risk and considers appropriate policies to reduce it. It examines systemic risk as a negative externality in two dimensions: the cross-sectional and the time dimension. Policies to reduce externalities in the cross-sectional dimension seek to limit the damage that can arise from interlinkages and common exposures. Policies to address procyclicality in the time dimension seek to build up capital and liquidity margins of safety during the upswing that can be drawn upon in the downturn. The paper further argues that financial regulatory policies are not enough to address systemic risk. Other policies - especially monetary and fiscal policy - also have a role to play. It also argues that policy coordination is essential, nationally among monetary, fiscal and macro- and microprudential policies, as well as internationally. Already, the Basel Committee on Banking Supervision, working with the Financial Stability Board, has made great progress in addressing the regulatory shortcomings highlighted by the financial crisis.
Wall Street’s Elder Statesmen Favor a Return to Tighter Regulation - NYTimes - Put aside for a moment the populist pressure to regulate banking and trading. Ask the elder statesmen of these industries — giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle — where they stand on regulation, and they will bowl you over with their populism. They certainly don’t think of themselves as angry Main Streeters. They grew quite wealthy in finance, typically making their fortunes in the ’70s and ’80s when banks and securities firms were considerably more regulated. And now, parting company with the current chieftains, they want more rules.
Can we handle the truth? - Neither financial nor political reform can succeed unless we overcome the social and economic contradictions we have relied upon the financial sector to literally paper over. Off-balance-sheet liabilities that hide the impairment of savers’ claims, whether in subprime mortgage-backed securities or sovereign entitlement programs are not aberrations. They are essential tools in the arsenal of social stability, the economic equivalent of military “black-ops”, things that must be done but must always be denied in order to protect the American (and European, and Chinese) way of life. Unless we define overt arrangements that overcome the contradictions between the organization of production and socially desirable patterns of consumption, each scandal and reform will necessarily be followed by some new technique or trick that delivers, however unjustly or corruptly, the wealth transfers upon which our societies depend. Our choices are to overtly align the fruits of production with patterns of consumption, to continue to employ accounting fictions and magic to pretend away the contradictions, or to undergo some form of collapse.
Future Bailouts of America - NYTimes - AS Washington spins its wheels on financial reform, it’s becoming painfully clear that the problem of entities that are too interconnected or “too politically powerful to fail” is also too hard for our policy makers to tackle. This is more than unfortunate, given how large the too-influential-to-fail gang has grown in recent years. Once a small membership organization comprising Fannie Mae and Freddie Mac, the mortgage finance giants, and the occasional troubled auto company, the Future Bailouts of America Club now includes a long list largely populated by financial institutions.
Financial reform in the Senate - I’m more than a little confused about the political jostling surrounding the financial-reform bill in the Senate. In the wake of Chris Dodd giving up talking to Dick Shelby and deciding to work with Bob Corker instead, he’s put out a statement saying that “I am more optimistic than I have been in several weeks” about the prospects for the bill. What I fear is that if Corker and Dodd can come to agreement on what Corker calls the “technical issues” at the heart of what is sure to be an enormous bill, Dodd will be forced to drop the CFPA lest he see the entire bill disintegrate. And I have no idea how you could possibly reconcile a Senate bill sans CFPA with a House bill which has a CFPA front and center.
Senate Bank "Super Regulator" Gains Steam | Mother Jones -The Senate's plan to create a "super regulator" through its financial reform package appears to be gaining momentum in Congress and the White House. The new watchdog, which would actually be a council of regulators, would be led by the Treasury Secretary and would assume responsibility for monitoring systemic risk in the financial markets, i.e., when a particular bank or several them become so interconnected and powerful that failure would pose a threat to the entire economy. A main point of contention with the super-regulator plan is that it would strip the Federal Reserve of much of its regulatory and systemic-risk powers, a move that's not surprisingly drawn the ire of the Fed's leaders and allies. Sen. Judd Gregg (R-NH) disagreed with giving away the Fed's bank oversight powers—which, as it's been widely reported, the Fed made scant use of—saying the Fed deserves to keep its bank-regulating role. Fed chairman Ben Bernanke said in October, however, that he supported a Treasury-led regulatory council, stressing the importance of moving "from an institution-by-institution supervisory approach to one that is attentive to the stability of the financial system as a whole," despite the consequences it would have on the Fed's role in watching over banks' products and practices.
Bill would broaden Treasury secretary's power -The chairman of the Senate banking committee is aiming to release a new wide-ranging bill next week that would overhaul financial regulation, including a provision that could for the first time give the Treasury secretary a direct role in the oversight of individual financial companies, according to aides. Under a proposal from Sen. Christopher J. Dodd (D-Conn.), the Treasury secretary would head a council of regulators charged with monitoring systemic risk across the financial spectrum. It remains unresolved how much power that council would wield. But granting a Cabinet member a measure of regulatory authority would mark a significant departure from the current system, in which independent supervisors are granted autonomy and do not serve at the pleasure of the president.
Why Treasury shouldn’t regulate banks - Wow, Democratic Senator Chris Dodd really doesn’t want the Federal Reserve to be the main systemic-risk regulator — to the degree that his latest proposal gives that job to the Treasury Secretary, of all people. This is not a good idea, as Karen Shaw Petrou says: “I don’t see how you avoid fundamentally changing the role of the Treasury Department as a member of the executive Cabinet,” said Petrou, “One would hope the Treasury would exercise its powers in a virtuous way, but this is not what Treasury is nor what it should be.” If the Treasury secretary had a formal supervisory role, that official could use the position “to meet the political exigencies of the moment or for an upcoming election,” Petrou added. On top of that, remember what we saw at the beginning of 2009: Treasury can be a very chaotic place when the White House changes parties.
Volcker: Let Big Financial Firms Fail - “If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it — not save it. It’s called euthanasia, not a rescue.” -Paul Volcker said on CNN. Paul Volcker said in an interview with Fareed Zakaria that large financial institutions that engage in speculative activities for profit should be allowed to fail. Volcker continues to argue for reinstating Glass Steagall — separating investment firms engaged in market speculation from commercial, deposit-taking banks. Source: Volcker says must let big financial firms fail
Volcker Discusses The Housing Market, GSEs, Raising The Retirement Age, And, Of Course, The Volcker Rule (Bloomberg video) Not too surprisingly, now that the old man is loose, he just refuses to keep his mouth shut about the true state of the economy. Also, unlike his interview with Maria Bartiromo, this time he doesn't just walk off the set. Some of the soundbites: "The mortgage market in the US is in trouble. It's totally dependent, heavily dependent on the government participation. It shouldn't be that way. That's going to have to be reconstructed." Another modest proposal from the former Fed chairman - raising the retirement age: "Social Security program should raise the retirement age by maybe a year or so." On the greatest blunder in the U.S. housing market: "Fannie Mae and Freddie Mac were not a good idea in the first place. This hybrid public/private thing sooner or later was going to get you in trouble and it sure got us in trouble big time! So I hope we don't go back to that model." And, lastly, on the most relevant issue at hand - the Volcker rule and defining commercial bank activities
Pipe Dream Formerly Known As The ‘Volcker Rule’ - The more we read about this so-called “Volcker Rule,” the more pessimistic we become that it will ever become anything more than a pipe dream. The latest to offer his two cents on the matter is Alan Blinder, former Fed vice chairman, who’s pessimistic that some sort of financial reform in its present form will pass into law. “The overriding message is this. Plan A died long ago, and Plan B is gasping for breath. It’s time to prepare Plan C,” Blinder says in a WSJ op-ed today.
It's Time for Financial Reform Plan C - Doing nothing to safeguard the financial system after what we've been through would be a disgrace. So what can be salvaged from the wreckage? Let me start with the two most pressing issues: systemic risk and resolution authority. I don't think any sentient person denies the need for an agency responsible for overseeing system-wide risks... The disagreements come over to whom to give this authority. I have long thought it should be lodged in the Federal Reserve. ... There is good news here. If Congress fails to act, the Fed will, by default, continue to be the tacit systemic risk monitor and regulator. ... Not so with resolution authority. ...
Financial Reforms: no dearth of suggestions, but a lack of action - As economists track the signs of a possibly receding recession, investors test the waters for investing, and Congress is pushed to focus more on deficit reduction than on economic stimulus (probably wrongly), the financial institution imbalance that started it all goes on unabated. We still have huge financial institutions risking not just their money but ours, under the implicit federal guarantee that lets them borrow for less and earn more than similarly situated banks that don't enjoy that federal guarantee. What are the solutions, if any, that will be imposed. Two figures from prior administrations have suggestions about what they should be. Not surprisingly, the focus, and corollary impacts, are profoundly different.
In Defense of Much, But Not All, Financial Innovation - Brookings - Perhaps the most devastating critique of financial innovation comes from one of finance’s greatest living giants (both figuratively and literally): Paul Volcker, the widely and deservedly acclaimed former Federal Reserve Board Chairman, who is now Chairman of President Obama’s Economic Recovery Board. Volcker has provocatively asked: “How many other [recent] innovations can you tell me that have been as important to the individual as the automatic teller machine, which in fact is more of a mechanical than a financial one?” Volcker’s implicit response is that there are none. In this essay, I take up Volcker’s challenge. I do so by highlighting many, perhaps most, of the key truly “financial” (not mechanical) innovations since the 1960s that have changed the way finance carries out its four economic functions: enabling parties to pay each other; mobilizing society’s savings; channeling those savings toward productive investments; and allocating financial risks to those most willing and able to bear them.
Obama to push for stricter capital levels - FT - The Obama administration is preparing to push for higher capital requirements for banks as the main thrust of its regulation reform strategy as it seeks to overcome the legislative gridlock in Congress. Washington’s emphasis on capital requirements for banks has met resistance from some European countries and Japan. After last year’s stress tests and forced capital raisings, some US institutions look healthier than their overseas counterparts. A prolonged debate in the Senate banking committee has raised the question of whether Congress can deliver a bill that Barack Obama, president, would be prepared to sign. Although administration officials remain optimistic that a regulation bill will be passed, there is also an acceptance that the administration may, as a last resort, have to rely on an executive order, bypassing Capitol Hill. If the much-debated “Volcker rule” that would ban deposit-taking banks from proprietary trading is not approved, the Federal Reserve and other bank regulators could be asked to fine-tune capital requirements to make risky activity more expensive
EU Finance Ministers to Resist Obama Plans for Banking Overhaul (Bloomberg) -- European Union finance ministers are uniting to oppose President Barack Obama’s proposal to limit banks’ size and risk-taking, saying his plan may run counter to EU policy, according to a draft document. Their position, which they will ratify at a two-day meeting starting today, comes after Obama last month urged the adoption of the so-called “Volcker rule,” named for former Federal Reserve Chairman Paul Volcker. The plan would bar commercial banks from owning hedge funds and limit how much they can trade for their own account. The finance officials gathering in Brussels will express “their concern that the application of the ‘Volcker’ rule in the EU may not be consistent with the current principles of the internal market and universal banking,”
Banks: A better black-swan repellent - The Economist - How banks can improve their approach to risk management - The answer is not to reject quantitative finance but to be honest about its limits. Models have their place, but they must be coupled with more subjective approaches to risk, such as stress tests and scenario-planning. Three years ago it might have seemed neurotic to fret about systemic liquidity shocks or the failure of a big investment bank. But the few firms that thought through the consequences of such events were better able to react when they occurred. Fixing finance will take more than sharper boards, greater scepticism towards “quants” and more powerful risk managers. But as the world awaits a regulatory panacea, those would be good places to start.
Reform the Banks - Henry Paulson - Congress must pass financial regulatory reform. Delays are creating uncertainty, undermining the ability of financial institutions to increase lending to the businesses of all sizes that want to invest and fuel our recovery. Our overriding goal in restructuring our financial architecture should be that taxpayers never again have to save a failing financial institution. The debate recently has centered on big banks and trading risks. I agree that big banks do pose a dangerously large risk to our financial system, and I am troubled that concentration in the industry has only increased since the crisis. But if we are to protect our system from falling into trouble again, we need broad-based reform that covers all types of financial institutions and all forms of potentially risky activities.
The Naive Conceit of Banking Regulations - In a Wall Street Journal opinion piece on Tuesday, Princeton professor Alan Blinder observed that "Doing nothing to safeguard the financial system after what we've been through would be a disgrace." On the same day former Treasury Secretary Henry Paulson wrote in the New York Times that "it is critical that we learn from the financial crisis and put in place reforms to avert a repeat of 2008 or something even worse." Blinder and Paulson's musings speak to a broad consensus on the left and right that more government is needed to save the banking system. Unfortunately for both sides, the calls for more regulation will not work for ignoring greater realities about talent, incentives, and the certain truth that failure of any kind is an essential economic input, along with a clean form of regulation itself. Implicit in the argument for more or better financial regulation is the naïve assumption that the kind of person willing to work for the government has the skills necessary to regulate a financial sector which, by virtue of the profits historically achieved in the space, attracts some of the greatest minds in the world. More realistically, it should be said that the individuals who populate the Fed, SEC and Treasury in many instances couldn't get jobs in banking, which points to a certain talent deficit when it comes to overseeing the activities of those that could.
Who Pays Wins’ as Merrill, UBS Lure Bankers With Pay Increases - (Bloomberg) -- Bank of America Corp. and UBS AG, which eliminated jobs over the past two years as they received government aid, are luring bankers in London from competitors by as much as doubling base salaries, recruiters said. UBS is offering managing directors in its securities unit base pay of as much as 300,000 pounds ($470,000) compared with at least 150,000 pounds last May, said three people with knowledge of the matter. Bank of America, Merrill Lynch’s owner, raised London managing directors’ base pay to about 230,000 pounds, from 150,000 pounds in 2009, said the people, who declined to be identified because the terms are private. “Some of these firms were hemorrhaging talent, and those gaps are being filled in a hurry,”
Wall Street Still Doesn’t Get It - Forget the bonuses. Sure, it is disgusting that Wall Street is funneling government bail-out funds straight to what my colleague Bill Black calls the "control frauds"—the top managers of financial institutions. And, yes, they are blowing the black hole of financial insolvency bigger day by day even as they thumb their noses at Washington while Timmy Geithner and Ben Bernanke look the other way. But what is even more disturbing is that Wall Street is still maniacally creating risk, inventing new ways to bet on the death of "peasants", economies, and nations. ...And that is what this whole Wall Street house of cards boils down to: risky bets, private profits, socialized losses. Worse, yet, it misaligns interests so that Wall Street profits are higher if there is economic and social instability—and Wall Street is powerful enough to generate exactly those conditions. Until Wall Street is constrained and downsized, it will continue on its path of death and destruction.
Citi: The Biggest Threat To Banks Is The Pitchfork-Wielding Public - Citi's Ryan O'Connell worries that if the U.S. were to abolish the 'Too-Big-To-Fail' doctrine this year, it could slam the credit ratings of Too Big To Fail banks such as Bank of America, Goldman Sachs, and Morgan Stanley. Citi is probably included in the list, but being a Citi analyst, Mr. O'Connell doesn't cover Citi. Ryan O'Connell @ Citi: (The prospects for passage of such a bill by the Senate remain uncertain but such a development should not be ruled out). In the short-term, passage of such legislation could lead to multiple- notch downgrades for several institutions including Bank of America, Goldman Sachs and Morgan Stanley. If the legislation passes and downgrades result, the potential consequences include reduced access to the short-term funding markets and increased collateral requirements related to derivative transactions and repom financing transactions, we believe.
Will we have to blow up a continent (again) before we stop Wall Street? - Surprise, surprise: Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece, Spain, Portugal, and undermined the euro by enabling European governments to hide their mounting debts. This has now become front page news in the Sunday New York Times. According to the Times:“Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards” Sound familiar? This is exactly how AIG built up its credit default swap business, in essence facilitating regulatory arbitrage on behalf of the banks. Basically, banking regulations encouraged companies to buy cheap swaps so that they could treat risk assets as almost risk-free, concealing their toxic nature via the ledger main of financial engineering
The American Nightmare: US Economic Elite Wages War on the American People -As a record number of US citizens are struggling to get by, many of the largest corporations are experiencing record-breaking profits, and CEOs are receiving record-breaking bonuses. How could this be happening; how did we get to this point? The Economic Elite have escalated their attack on US workers over the past few years; however, this attack began to build intensity in the 1970s. In 1970, CEOs made $25 for every $1 the average worker made. Due to technological advancements, production and profit levels exploded from 1970 - 2000. With the lion’s share of increased profits going to the CEOs, this pay ratio dramatically rose to $90 for CEOs to $1 for the average worker. As ridiculous as that seems, an in-depth study in 2004 on the explosion of CEO pay revealed that, including stock options and other benefits, CEO pay is more accurately $500 to $1.
Wall Street’s War Against Main Street America - Former Treasury Secretary Hank Paulson wrote an op-ed in The New York Times, (Feb. 16) outlining how to put the U.S. economy on rations. Not in those words, of course. Just the opposite: If the government hadn’t bailed out Wall Street’s bad loans, he claims, “unemployment could have exceeded the 25 percent level of the Great Depression.” Without wealth at the top, there would be nothing to trickle down. Mr. Paulson spelled out in step-by-step detail the strategy of “doing God’s work,” as his Goldman Sachs colleague Larry Blankfein sanctimoniously explained Adam Smith’s invisible hand. Now that pro-financial free-market doctrine is achieving the status of religion, I wonder whether this proposal violates the separation of church and state. Neoliberal economics may be a travesty of religion, but it is the closest thing to a Church that Americans have these days, replete with its Inquisition operating out of the universities of Chicago, Harvard and Columbia.
A Better Mousetrap for the Age of Rats - American democracy is a better mousetrap. Unfortunately, it was born in the Age of the Rat. It isn’t just any old rat, either. It is a magical rat that somehow convinces its victims that the fatter it gets, the better off they are. I refer, of course to the robber barons of Wall Street, the plump rats and plutocrats of the Industrial Revolution and its technology-empowered successors.It doesn’t take a fine-grained historical account to see that our democratic mousetrap has proved inadequate to the task of catching rats, from yesterday’s railroad magnates to today’s Wall Street thieves. It took a civil war to stop the trafficking in human beings.With some extraordinary exceptions – child labor laws, the New Deal, civil rights – we’ve done little more than occasionally wipe the coal dust from our faces. What is the source of the rat-magic that has made many Americans believe their freedom depends upon the freedom of others to, well, destroy their freedom?
Helping Governments Deceive -- NYTimes - In the aftermath of the Enron crisis, we learned that Wall Street firms had been helping Enron deceive investors by lending money to it through convoluted structures that were intended to let Enron claim they were not really loans, and that the company was therefore less indebted than it was. In return, Enron paid interest rates that were higher than it would have faced on a normal loan. The banks, in effect, were charging Enron for helping it to lie. When Enron collapsed, the same banks were among the losers. They said they had been deceived by Enron about its true fiscal position. They deserved little sympathy. If you pay me to help you lie, it should not surprise me if you turn out to have lied to me as well. Now we see something very similar emerging in Europe.
Financial Lessons in Mass Deception - One of the things you may have noticed as we’ve parlayed our way around the world of finance is how much of what goes on seems to be hidden beneath the surface. It’s almost as though most of the people involved were out to deceive us in an attempt to part us from the limited savings we’ve managed to keep out of the clutches of the taxman. In fact, at one level, that’s probably exactly what’s going on. Market participants are engaging in an escalating war of deception to persuade people to give them their money. Taken to extremes this even goes so far as to encourage the citizen in the street to lie in order to boost the coffers of the securites industry. All of which is what you get when you replace the natural processes of social trust with actuarial projections.
The Flight To Simplicity in Derivatives - Complexity is one of the demons that makes our financial markets crisis prone….Assume we get to the point of standardized swaps and derivatives instruments that are exchange traded and backed by a clearing corporation. These instruments will create a high hurdle for any non-standard OTC product a bank wants to put into the market. The OTC product will have worse counterparty characteristics, will not be as liquid, will have a higher spread (which helps explain why the banks will decry this proposal) and will have inferior price discovery. To overcome these disadvantages, the specialized OTC product will have to demonstrate substantial improvement in meeting the needs of the investor compared to the standardized products.Furthermore, the thought-leaders on the buy side will add their own hurdles to the more complex OTC products. I would not be surprised if many investors require derivatives taken on their behalf be of the standardized, exchange traded form, or that if an alternative is presented, it has to be approved by their firm’s CIO or risk manager. If this comes about, there won’t be too many instances where a complex OTC is pushed forward, because for most legitimate purposes the standardized products, on their own or in combination, will be found to do the trick.
60 Minutes - Yes, It Was All A Scam - Watch CBS News Videos Online Janet Tavakoli appears 9:20 into this clip, which is worth watching in full. Here is part of what she said, along with a bit more... Poking through the wreckage, many experts believe the root cause was a perfect storm: a monsoon of gullibility colliding with a tidal wave of greed."This was a massive Ponzi scheme. And it's the biggest crime against the American economy in our lifetimes, in fact, ever," analyst Janet Tavakoli explained.Tavakoli is an analyst specializing in derivatives, the exotic financial instruments at the heart of the meltdown. She argues that the bad mortgage loans that fueled the crisis were repackaged by investment banks, sliced into increasingly complex derivatives and resold to other investors, even though the underlying mortgages were often virtually worthless.
Janet Tavakoli: Wall Street and Washington Hope You Are Gullible: Disappoint Them - If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and ordered you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest. How is it, then, that you have remained largely silent in the face of the same sort of behavior by Wall Street and Washington?
Defusing "Financial Weapons of Mass Destruction" - In 2002 Warren Buffett wrote that in his view, credit derivatives were financial weapons of mass destruction ("FWMDs"). He made the comment while explaining to shareholders why he was unwinding a Berkshire Hathaway subsidiary dealing in them, and few outside of the value investor community paid much heed.Eight years later we could be singing a different tune in both the media and Congress. After all, we've had a financial crisis, $23.7 trillion of potential government financial backstops and a "Great Recession" that were all exacerbated and partially caused by a FWMD explosion. With some notable exceptions however we haven't changed enough, and these contracts remain poorly understood even as the markets have evolved beyond the levels for which Mr. Buffett first expressed concern.
Liberals Continue to Push for Financial Transaction Tax - WSJ - Backers of financial transaction tax -- including labor unions and liberal groups -- argue that even with the major decline in stock and derivatives transactions stemming from the tax -- some estimate as much as a 50% decline in volume of trades -- such a fee could raise more than $100 billion a year to fight the deficit, create jobs or other purposes.Proponents of the tax also argue it would dampen financial speculation and hyper-trading would diminish, which they say contributed to the bubble that led, in part, to the crisis in 2008. Opponents of the tax contend that it will increase the volatility of stock prices, reduce liquidity and efficiency of the financial markets, and at the same time raise the cost of transactions for long-term "average Joe" investors directly -- or indirectly, through their retirement savings funds.
A special report on financial risk: The gods strike back - The Economist “THE revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.” So wrote Peter Bernstein in his seminal history of risk, “Against the Gods”, published in 1996. And so it seemed, to all but a few Cassandras, for much of the decade that followed. Finance enjoyed a golden period, with low interest rates, low volatility and high returns. Risk seemed to have been reduced to a permanently lower level. This purported new paradigm hinged, in large part, on three closely linked developments: the huge growth of derivatives; the decomposition and distribution of credit risk through securitisation; and the formidable combination of mathematics and computing power in risk management
William Black On Why "Recurrent Crises Will Get Bigger And More Disastrous" And Why All Talk Of Change By The Administration Is Just Posturing - The ever insightful William Black sits down with PBS' Paul Solman to note that most of the too big to fail banks are currently insolvent, that mortgage fraud is pervasive and lender complicit, and that unlike in previous systemic crashes, not only person has been indicted for the trillions in mortgage fraud perpetrated. "At this stage we have zero convictions, we have zero indictments." But the most damning indictment from Black: that Congress managed to extort FASB to change their rules just so that the big banks would continue to appear healthy and solvent, even as unworthy execs made tens of billions in bonuses.
Government Sachs - We can’t help but share the “shocking” news we came across in the Sunday Times that former US Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson does not believe that banning proprietary trading at large banks (i.e. Goldman Sachs) insured by tax payer dollars is a good idea. Since most of those in Washington with the power to formulate financial reform have spent most of their careers on Wall Street, and maintain close ties with their former pals, this “shocking” news should not come as a surprise. But it still makes us sick to our stomach. But perhaps even more appalling is the fact that Hank Paulson led the Wall Street Charge to reduce capital requirements on investment banks in 2004, while he was CEO of Goldman Sachs. This exemption led to a predictable explosion of debt and leverage ratios, resulting in the greatest credit bubble in modern history.
Wall Street's Bailout Hustle : Rolling Stone - Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis. The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative." Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Exposing The Story Behind Goldman's Record Profits - Part 2: The Role Of The Taxpayer - Do Goldman employees deserve any compensation, much less the $16 billion paid out in salaries and bonuses in 2009 when one considers that the firm would not only have no money to pay, but would be defunct had the US taxpayer not stepped in and bailed them out? Should this money have been used to prepay the firm's $20 billion TLGP exposure instead, thus truly making the firm independent of taxpayer support, instead of just claims to Goldman's public funding independence? Will the wave of public anger, now that President Obama has suddenly and inexplicably done a 180 degree turn and sides with the middle-class instead of the financial executives, take Goldman down at the next black swan occurrence? Is Goldman hypocritical in claiming it did not need a bailout after it rushed to become a bank holding company? Is Goldman a doomed business model which relies solely on the existence of the "greater fool" to sell to? Will its monopolist and ever-larger dominant status result in an implosion in the financial industry (especially with the DOJ continuing to deny there is any anti-trust problem)? All these questions and more seek answers in the just released Part Two of the PBS series "Is taxpayer money behind profits at Goldman Sachs." We recommend watching Part One of the PBS series in advance of the clip below.
The Great Goldman Sachs Fire Sale of 2008 - While one could argue that, metaphorically anyway, both Dimon and Blankfein made it to the World Series in 2009 — with Blankfein, whose firm earned $13.4 billion last year, being the M.V.P. — President Obama went one step further in trying to publicly support Wall Street by saying he knew both men to be “savvy businessmen,” and that “I, like most of the American people, don’t begrudge people success or wealth.” If everything was really under control after Lehman collapsed, why were executives dumping their stock by the bushelfull? The whole story is contained in little-noticed public records filed with the Securities and Exchange commission — see here and here — which make enjoyable reading after spending the last year listening to the gang at Goldman and other firms whine about the terms of the Tarp program and repeatedly insist that they weren’t really in all that much trouble. Because if these savvy Goldman guys were freaking out and selling large chunks of stock in the dark days of 2008, that makes it a safe bet things were plenty bad and getting worse.
Wall St. Helped to Mask Debt Fueling Europe’s Crisis - Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Goldman Goes Rogue – Special European Audit to Follow - By Simon Johnson - September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial. Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability. (The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.A single rogue trader can bring down a bank – remember the case of Barings. But a single rogue bank can bring down the world’s financial system.
Open Source Inquiry Opportunity: Some of Goldman’s Greece Swaps Made Public - Yves Smith - In a New York Times op-ed late last year, Bill Black, Frank Partnoy, and Eliot Spitzer called for an open source investigation: we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Now it is worth noting that the emphasis in the Black/Partnoy/Spitzer argument was to get a lot of eyeballs on a large stash of source material that is presumably pretty accessible to the public, namely, e-mails. But there is a second line of potential open-source inquiry that would be at least as valuable: getting people who have expertise in certain types of documentation to look probe transaction documentation for deals that were deceptive...Reader Nick has provided a link to one of the now-infamous Goldman-Greek government swaps, which served to camouflage the magnitude of its fiscal deficits from the EU. His comments:
Goldman Sachs contre, tout contre, la Grèce (translation by bing) I can therefore confirm that, according to concurrent sources, Goldman Sachs and speculative Fund managed by John Paulson would be the two main actors attacks against Greece and the euro. I’ve already detailed you in my post from February 6 speculation mechanism and I will therefore see are not. More shocking, in this case, is without doubt the role played by Goldman Sachs, at a time, advises the Greek Government, and supports secrecy, positions against Greece and the euro. This disorder role is illustrated by the recent case recalled by February 8 Spiegel and the New York Times February 14 (1): in 2002, the Bank of American case helped Greece, against remuneration of 300 million dollars in “creative accounting” operation designed to cover up some of its debt (I will come back in a future column). It is not neutral that at that time Vice President Europe’s Goldman was other than Mario Draghi, become since Governor of the Central Bank of Italy, and just see the position of Vice-President of the European Central Bank him pass under the nose. This special role of Goldman Sachs is illustrated by the fact that the Bank has always been member of syndications in Greece (just as in Portugal): it is a consortium of banks loaded by a Government to put its debt of investor when it is not sure you can directly put on the market by public tender.
The Mouth of Sauron - But mismatched style, surely, cannot account for all of the problem. Nor can it be that Goldman is unique in having committed acts which caused—or can be seen to have caused—much of our present financial woe. Credible evidence exists that all of the major investment and commercial banks extant helped collect and pour the effluent from a thousand sewers upon the unwitting heads of taxpayers, governments, and investors everywhere. But, as Mr. Abelson relates, JP Morgan's Jamie Dimon and Morgan Stanley's John Mack currently have public images only slightly less saintly than that of Florence Nightingale. Nor is Goldman noticeably incompetent, unlike its universal bank peers Bank of America and Citigroup. A pragmatic and striving lot, Americans love competence, but BofA and Citi are only regarded with contemptuous pity, whereas star performer Goldman is about as welcome in the public sphere as a dose of the clap.
Heat On Fed Picks Up As Darrell Issa Demands Full Production Of All AIG-Related Records - Issa says: "it is imperative that the Committee obtain all information in the possession of the Federal Reserve Board of Governors and the Treasury Department related to the AIG bailout, including the decision to pay AIG's counterparties at par and subsequent efforts to prevent disclosure of information related to the payments. Senator Jim Bunning, who is familiar with documents in the possession of the Board of Governors, publicly stated that the Board of Governors is in possession of documents that show troubling details about Chairman Bernanke's role in the AIG bailout. As I wrote to you on January 26, 2010, my office has received information from a whistleblower that confirms Senator Bunning's public statements. We now know from several sources that both the Federal Reserve and the Treasury Department are in possession of documents that are essential to inform the Committee's investigation."
AIG keeps $500 Billion portfolio of derivitives - AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500bn worth of complex positions could help it to survive as an independent entity and repay US taxpayers. The decision underlines the management’s confidence in AIG’s future but could prove controversial in Washington, where officials have baulked at the cost of the US government bail-out of the insurer and scrutinised its use of derivatives
Why is the Administration Tolerating AIG Feather-Bedding and Intransigence? - Yves Smith - Why is AIG being permitted to continue to give the finger to the government, and ultimately, the US public that saved its bacon? The short answer, is that the US government’s need to resort to accounting fictions is being used skillfully against it.The latest AIG stunt is that it is refusing to sell its derivatives business. Remember that AIG owes the taxpayers a mind-numbingly large amount of money, but intransigent CEO Robert Benmosche has refused to execute on the agreed-upon plan, and instead is off on his own mission. And why might that be? AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500bn worth of complex positions could help it to survive as an independent entity and repay US taxpayers….
Citigroup, BofA, JPMorgan’s Idle Cash Drags on Profitabilty - (Bloomberg) -- U.S. lenders, criticized for being too reckless in the past and too stingy in the present, have been sitting on as much as $1.29 trillion in cash, equal to a record 98 cents for every dollar of existing business loans. The ratio of cash to corporate loans has more than quadrupled from 21 cents in June 2008, according to Jan. 13 Federal Reserve data compiled by Bloomberg. Corporate loans shrank 14 percent to $1.32 trillion during that period as bankers tightened standards to curb record defaults and meet demands by regulators for more liquidity. Banks are leaving more cash idle amid slack demand from borrowers throughout the economy and concern that regulators will require more liquidity to forestall another financial crisis. That’s crimping profit, and the result may be a drop in returns on equity by about 33 percent from pre-crisis levels, according to analysts at KBW Inc.
Elizabeth Warren Introduces COP's February Report (video) 3,000 small to medium sized banks could fail because of real estate bubble
Bailing out the banks: Reconciling stability and competition - VoxEU - Billions have been spent saving European banks. Should these bailouts be subject to the usual competition rules or should stability be allowed to trump ‘business as usual’? This column introduces a new CEPR report “Bailing out the Banks: Reconciling Stability and Competition” that argues for a more subtle reaction. Competition policy is critical even in crises but the rules applied must recognise the special features that mark a crisis-struck banking sector.
Success of President Obama's crackdown on lobbying questioned - President Obama is escalating his war on K Street, proposing a series of tough restrictions a year after he first issued policies aimed at tamping down the influence of lobbyists. But changing the way business is done in Washington is slow and difficult, underscored by the fact that spending on lobbying reached record levels last year despite the president's reforms and a down economy. The U.S. Chamber of Commerce spent $144 million on its lobbying efforts -- a 60 percent increase over 2008's expenditure -- leading industry opposition to health-care reform, financial regulations and climate legislation. Another blow to Obama's efforts came last month in a Supreme Court ruling that allows corporations and unions to spend unlimited funds on political campaigns, a decision likely to elevate the role of corporate lobbyists as shadow fundraisers, experts say.
Obama and the 'savvy' bankers - Last week, when President Obama was asked about the $9m dollar bonus for Goldman Sachs CEO Lloyd Blankfein, he described Blankfein as a savvy businessman, adding that Americans don't begrudge people being rewarded for success. While the White House later qualified Obama's comment about Blankfein and his fellow bank executives, it's worth examining more closely some of the ways in which Blankfein and the Goldman gang were "savvy".
Why Bank CEO Pay Needs a Hard Look - 02/18/2010 - Yves Smith - Readers may recall that I solicited their comments on an FDIC Advanced Notice of Proposed Rulemaking on its proposal to link deposit premiums to executive compensation programs (the high concept is to charge higher premiums to banks that reward executives for undue risk-taking. Now admittedly, a program like this would take some thought to make sure it was not easily circumvented (as in measures need to be in place to make sure that banks don’t simply skirt the rule, say by putting risky exposures in off balance sheet entities). I was going to pen a simple cover note expressing general support and attach reader comments, but I wound up writing up something more substantive. The letter raised a couple of issues that have not gotten the attention they warrant, namely, the need for bank executives and key operating staff to bear greater liability, and the way that the bank merger wave seems to have been driven to a considerable way by the fact that it leads to higher CEO pay post-merger.
John Judis: They Ain’t With Main Street - The excerpts that Bloomberg published Wednesday from its interview with Barack Obama provoked some indignation from Simon Johnson, Paul Krugman, and others, but the full interview, published yesterday morning by Bloomberg BusinessWeek, deserves a few additional howls. It shows the degree to which Obama not only doesn’t understand but, on a deeper level, also doesn’t share the outrage many Americans—from left-wing bloggers to right-wing tea-partiers—feel toward the Wall Street CEOs and traders who have made off like bandits during the financial crisis they helped bring about.It’s not the substance of what Obama says—he doesn’t back off on financial regulation or health care reform. It’s his tone, his emphases, and where he allows his sympathies to fall. Let’s start with what Obama says about executive bonuses.
U.S. credit card delinquency rates level off - Reuters - The percentage of Americans falling behind on credit card bills stabilized in January, according to data from five lenders on Tuesday, signaling that U.S. consumer credit woes may be leveling off. Credit card company shares rose on the news, which signals the worst for U.S. consumers may have already past. American Express Co (AXP.N), Bank of America Corp (BAC.N), Capital One Financial Corp (COF.N), Discover Financial Services (DFS.N) and JPMorgan Chase & Co (JPM.N) all posted credit card loan delinquency rates for January little changed from December. Delinquency rates signal how likely credit card issuers are to have to write off bad loans in the future.
The Credit Card Trap: How U.S. Credit Card Companies Are Sucking The Financial Life Out Of The American Consumer - There have been very few things more damaging to American consumers over the past couple of decades than credit card debt. Easy credit has enabled many of us to live absolutely fabulous lifestyles, but outrageously high interest rates, ridiculous penalties and predatory fees have sucked the financial life out of millions of American families. It is very easy to blame the rapidly exploding debt of the U.S. government for the economic collapse that we are now experiencing, but the truth is that tens of millions of Americans have created their own personal economic disasters by overusing credit cards. The temptation of easy credit has been too much for millions of Americans to resist, but now all of that easy credit is proving to be incredibly difficult to pay back, and massive debt problems are literally tearing many American families apart.
Credit Card Fee Blitz Escalates | Mother Jones - On Monday, the second phase of the Credit Card Accountability Responsibility and Disclosure Act of 2009—a major overhaul that boosts safeguards against unfair interest-rate hikes, excessive penalties, and other predatory practices—goes into effect, so of course big banks are doing their best to shift the cost of these new changes onto consumers themselves through higher rates and tricky new fees. Among its many provisions, the Credit CARD Act, as it’s called, will require credit card issuers to offer fair notice of changes in interest rates, ban universal default practices, and let consumers opt in to overdraft protection. The first phase of the CARD Act went into effect last fall; the third and final phase is slated for late August. Not to be outdone, though, banks are ensuring the burden of these new regulations don't fall on them. Citigroup, for instance, recently sent letters to many of its Citi Card customers informing them of a new annual fee of $60. The only way to avoid that fee, the letter says, is to either spend more than $2,400 each year, after which the fee would be credited back to cardholders, or to pay off your debts and close the account.
Time To Leave Citibank Folks - Seeking Alpha (and Business Insider) report: Seen on a recent Citibank (C) statement: "Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change." Folks, the formal name for a checking account is a demand account. It is called a demand account for the very reason that you have a right to all your money, on demand.The fact of the matter is that any bank that reserves the right (whether they claim through some external cause or not) to throw up a gate on a demand account is no longer marketing demand accounts.
Walmart Suffers First Ever Fall In U.S. Quarterly Sales - Walmart has suffered its first fall in quarterly sales at its US discount stores, underlining the challenges facing future growth in its home market as the economy recovers.During the important holiday quarter ending on January 31, net sales at Walmart's 3,400 plus US stores fell 0.5 per cent year-on-year to $71bn, while comparable store sales declined 2 per cent. Customer traffic also fell.
CPI - The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real averge hourly earnings fell, real weekly earnings were unchanged. The core CPI actually fell for the first time since 1982 (chart), bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two. The most severe source of higher prices was medical care where medical commodities increased 0.7% and medical services jumped 0.5%. Meanwhile we have our political system voting to ignore the severe problem of soaring health care cost.
CPI + Velocity = Trouble - Beginning of the year economic blues in the US? I think so. Just looking over Spencer's CPI post; here is an excerpt (the first paragraph): The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real average hourly earnings fell, real weekly earnings were unchanged. My first thought is that I don't think that this is encouraging at all; and I'm not alone. Core prices fell; these prices are typically very, very sticky. For example, shelter prices are biased upwards in their calculations, but have been declining or unchanged for every month since August 2009. I know that the output gap is not directly observed, except by proxy in the capacity utilization numbers or the unemployment rate; but it must be huge to do this to housing costs. Look at it differently: the velocity of money improved in October and November of 2009...but then took a step back in December of 2009. If this trend continues, non-energy prices are sure to back down much further. There's just no support for price action at this time - the Fed can't pull back... it probably should be putting more in.
CPI Number Reported INTENTIONALLY INCORRECT? - Remember the market's "cheering" of the "-0.1%" CPI-U reading (core) yesterday? There's a problem - it was wrong. Look at the highlighted numbers. Let's multiply them up.(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%. But it was reported as -0.5% in the line directly above (inverted tone.) Oops. I didn't re-run the weightings for the entire series but a quick "eyeball" of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.
More on Disinflation - Krugman - First, a tale of dueling headlines: WSJ: Flat prices bode well for economy FT: Prices fall in spite of stimulus measures The FT gets this right: falling inflation is a worrying sign, not good news. As Mark Thoma recently suggested, after making the same observation, it’s odd that most macroeconomic forecasts show inflation remaining stable or even rising despite continuing very high unemployment. Both history and logic suggests that this is wrong. And declining inflation is clear using any core measure. The Fed, I happen to know, tends to focus on the core personal consumption expenditure deflator: we see, once again, serious disinflation as a result of the recession. I still think there’s a real risk we’ll turn Japanese.
Industrial Production - January industrial production rose 0.9%, with the gains with gains across almost all components. Industrial production has now risen for seven months and is 5.5% above its bottom. This implies that so far industrial production has been rising at a 9.4% annual rate. Compared to previous industrial production recoveries this appears to be about a normal recovery. However, given that this was the most severe drop in industrial production in the post WW II era and that recoveries are typically proportional to the decline, this implies that the recovery is moderate.
Corporate America Is More Pessimistic Than You Know - Looking for an explanation for the deep freeze in merger & acquisition activity and the jittery stock market? Just ask the boards overseeing U.S. companies. A whopping 66% of 1,200 corporate board members surveyed recently said U.S. companies wouldn’t return to “business as usual” until at least 2013, and will operate till then in an environment of sluggish sales and growth. Roughly 45% said the economy wouldn’t return to precrisis levels in terms of investment, employment and productivity before 2013, according to the survey, conducted by KPMG LLP, while 22% said it would come beyond 2014. “Not withstanding what economists are saying about the recovery, we are hearing from board members that they just don’t see it,’’
Junk Bond Spreads Widening: A Canary in the Coal Mine? - Yves Smith - As readers no doubt know all too well, the market premium versus safer ones contracts in robust times and widens in downturns. And since credit markets typically signal downturns months before the equity markets, junk bonds are one place to look for advance warnings of changes in economic fortunes (albeit with a risk of false positives). The Financial Times reports that sovereign debt worries are leading investors to exit junk bonds at a particularly rapid clip: Investors are selling out of “junk” bonds at the fastest rate since September 2005, in the latest indication that concerns over sovereign debt are spreading to other credit markets
Greece raises new worries in U.S. corp bond market (Reuters) - Sovereign debt concerns in Europe have eased for a time but they could still weigh on U.S. debt capital markets and put a chill on merger activity if worries persist about global growth. Since concern about sovereign risk in Greece, Spain and Portugal swept through the markets last month, U.S. corporate bond issuance has slowed to a trickle, borrowing costs have risen and at least half a dozen bond sales have been put on hold. "In some sense Greece is...an example of a dynamic that's going on not just in Europe but in the United States and all the developed world," "If Greece were to crash on the rocks...the question becomes, Is this a bellwether for the rest of us?"
ABC News Poll: Consumer Confidence - ABC News Consumer confidence is on a cold streak, locked in place since the beginning of the year at very near its worst-ever rating – and more than three in four think the economy is stalled or will decline in coming months. The ABC News Consumer Comfort Index stands at -49 on its scale of +100 to -100, in a 2-point range and without significant movement for the past six weeks. It is hovering just 5 points from its all-time low, -54 last January, and is far worse than its long-term average, -13 in 24 years of weekly polls. Click here for PDF with charts and data table.
The New Deal in Reverse - Buoyed by great expectations when he assumed office, Barack Obama has so far revealed himself to be an unfolding disappointment. On arrival, expectations were far lower for FDR, who was not considered extraordinary at all—until he actually did something extraordinary. The great expectations of 2009 are, only a year later, beginning to smell like a pile of dead fish with new rhetoric—including populist-style attacks on villainous bankers that sound fake (or cynically pandering) when uttered by Obama’s brainiacs—layered on top of the pile like deodorant.
How the Stimulus Fattened Our Wallets - In a podcast with The Nation's Chris Hayes, Bivens explains how we can measure the effect of the stimulus on disposable income and, indirectly, to consumption, which makes up between 60 and 70 percent of our GDP. If you look at personal income minus government transfers -- this is a good proxy for how the private sector is doing at generating income growth without counting government assistance -- that measure has fallen by 8 percent since the recession began. But disposable personal income -- what people have the ability to actually spend, due to tax breaks and government transfer payments like unemployment insurance -- is actually up one percent. One reason consumption hasn't fallen off the cliff, he suggests, is that Recovery Act has extended billions of dollars of transfer payments and tax credits as the private sector suffered. Here's the graph showing "the difference in year-over-year growth in personal income minus transfers versus disposable personal incomes":
Fed Slightly More Confident of Recovery, Minutes Show - WSJ - Federal Reserve officials, their eyes on a recovery that is gradually becoming more entrenched, are intensifying planning for a reversal of emergency policies put in place during the financial crisis.Minutes of their January policy meeting, released Wednesday after the usual lag, showed officials agreed that the most likely next move will be an increase in an interest rate the Fed charges on emergency loans to banks, the discount rate, now at 0.5%. Officials have emphasized that the point of such a move wouldn't be to tighten credit broadly across the economy but to re-establish a penalty against banks that come to the Fed for emergency loans. Before the financial crisis, the discount rate was a full percentage point higher than the widely followed federal-funds rate, which is the rate banks charge each other for overnight loans. The Fed made the penalty smaller during the crisis to help banks in need, but Fed staff recommended gradually increasing it. The first step would be to put the discount rate at 0.75%.
Fed's Lockhart: The Economic Outlook: A Tale of Two Narratives - I see two competing narratives about how this recovery will play out. Growth in the fourth quarter of 2009 was quite strong and raises hope for a robust recovery. In this, the first narrative—that of a traditional sharp bounce-back following a deep recession—growth exceeds the underlying long-term potential of the economy and unemployment declines at an accelerating pace. The alternative narrative entails some fundamental changes in business practices and consumer habits. Consumers, in this narrative, have assumed a quite different mind-set compared to the precrisis, prerecession "normal."
Kiss That V-Shaped Recovery Good-Bye: The U.S "Worse Than Greece," Says Economist - Pento is negative on America's near term economic prospects for three main reasons: too little bank lending, too few jobs and too much public and private debt. "I've never seen a v-shaped recovery occur when commercial bank lending was down 7% year over year. So, small business are not getting loans to create capital goods and to expand and hire individuals," he observes. Exacerbating the problems at home, is what he describes, as a weak economy abroad. With China looking to clamp down on growth, the EuroZone struggling with its own debt problems, Pento asks, "Where is the growth going to come from in demand from overseas? When he says "demand" he's referring not only to products and services but also to our growing debt burden....
GSE Losses As Shadow Bailout - One doesn’t have to be an advanced game theorist to see the adverse selection in play – the loans sold to the GSEs from the major banks, under much political pressure, in this period were almost certainly of poorer quality and too expensive. Let’s get a little bit of data: As the private sector started to dump housing and housing bonds quickly in 2007 and 2008, government officials made sure that the GSEs would be capable of absorbing these bad loans. See that relationship above? This constitutes one part of many “shadow bailouts” according to Roosevelt Institute senior fellows Rob Johnson and Tom Ferguson; this argument, and the graph above, is from their Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown Part II paper. (In Part I, they argue that the Federal Home Loan Bank System was also used in a similar manner.) Astute readers will notice that the action of government officials using public funding sources to provide makeshift backstops for losses of the banking sector to clear the balance sheets of toxic assets to “unlock the frozen credit market”, without having to go to Congress for funding, was also a central feature of Geithner’s PPIP plan, with FDIC stepping up to the plate once the GSEs went bust.
U.S. looks to reluctant foreign investors to help fund the housing market - U.S. officials are looking to foreign government funds again. The Federal Reserve is scheduled at the end of March to halt its purchases of mortgage-backed securities, a move that could drive up the low interest rates that have helped the housing market show new signs of life. The Fed is gambling that private investors will step in to buy the securities, helping to keep rates from spiking. Senior officials in the Obama administration and at the Fed say they are counting in part on foreigners to keep the housing market funded. But financial analysts and advisers familiar with foreign government funds, known as sovereign wealth funds, predicted that the United States will get limited relief from abroad.
CNBC's Olick: Treasury Concerned about Next Wave of Foreclosures - From Diana Olick at CNBC: What Mortgage Modifications Say About the Housing Market Treasury officials today said they are still concerned about a coming wave of foreclosures, many from pay option ARMs and many from the prime jumbo basket, particularly hard hit by unemployment. Olick also notes that only 2/3 of HAMP borrowers are current on their payments. The main reason 1/3 of HAMP borrowers are delinquent is because some servicers didn't adequately pre-qualify borrowers before putting them in the program. The Treasury recently changed the guidelines for placing borrowers in to a trial program...
Elizabeth Warren on CRE - During the bubble, the small and regional banks were locked out of the residential market (lucky for them!), but many of these banks became overexposed to Construction & Development (C&D) and CRE loans. Now that the CRE bust is here - and is about to get much worse - many small and regional banks will fail over next couple of years. From the WaPo: In D.C., more evidence that commercial real estate headed for foreclosure crisis "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks." ...Nearly 3,000 community banks -- 40 percent of the banking system -- have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week.
Some worry industry is headed for collapse like housing meltdown - As the economy continues to struggle, the pinch is being felt by owners of commercial property and the banks who gave them loans. Some observers are worried that the commercial mortgage industry is headed for a collapse similar to the residential meltdown, which sparked the recent recession. Across the country, though, there is growing concern that some landlords are headed for a wipeout. Earlier this month, the Congressional Oversight Panel issued a report saying it was deeply concerned that commercial loan losses could jeopardize the stability of many banks, “and that as the damage spreads beyond individual banks … it will contribute to prolonged weakness throughout the economy.”
Retail Vacancy Rate: "Improvement by Subtraction" - Here is a solution for some of the vacant retail space ... From the Columbus Dispatch: Razing cuts retail vacancy rate Fewer storefronts were empty last year in Columbus than the year before, but only because two white-elephant malls were torn down ... The demolition of the Columbus City Center mall Downtown and Consumer Square East in the Brice Road area took 1.1 million square feet of empty retail space out of the market. That cut retail vacancies to 15.1 percent in 2009 from 16.9 percent in 2008.
US banks take hit to clear home loan books - Big US banks including Bank of America, Wells Fargo, JPMorgan Chase and Citigroup are moving to clear their books of troubled mortgages by embracing “short sales”, in which homeowners settle debts by selling their properties for less than the mortgage value. Short sales are expected to climb sharply this year as home values continue to fall in some parts of the US, leaving many borrowers owing more on their mortgages than their homes are worth. As moratoriums on mortgage payments and temporary loan modifications expire in coming months, the number of homes entering or in foreclosure is also expected to climb to a record 4.3m, from 3.4m in 2009. The appeal of short sales for banks is smaller losses. Compared with foresclosures, banks say they lose 20 per cent less in short sales.
The Shadow Inventory Of Troubled Mortgages Could Undo U.S. Housing Price Gains - In summer 2009, the seasonally adjusted S&P/Case-Shiller Home Price Index rose for the first time in virtually two years. Since May 2009, the index has risen by over 3%, suggesting that the necessary correction to U.S. residential home prices is nearing an end. However, in Standard & Poor's Ratings Services' view, the mortgage crisis may be far from over. The overhang of homes heading toward liquidation suggests more delinquencies and lower home prices are to come. The current "shadow inventory" (including all delinquent loans, not only those that are real estate owned [REO]) of troubled mortgages will likely take about 33 months?or nearly three years?to clear at the current rate of liquidations. Moreover, we believe this estimate is conservative, as we do not assume any loans that have yet to show any serious signs of distress to date will default in the future and further increase the overhang of homes. Nonetheless, we believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance.
Shadow Inventory of Homes to Take Nearly 3 Years to Clear: S&P - The “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate, according to a report from the credit rating agency Standard & Poor’s (S&P). The analysts add that during this period many servicers will likely shift their emphasis from mortgage modification to loan liquidation.The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation. As for the total amount of homes in the shadow inventory, Amherst Securities places the total at 7m.
Housing Bailout Grows- It should come as no surprise to anyone following the housing crash that the government's $75 billion Making Home Affordable program, a.k.a. mortgage bailout, is not all things to all borrowers. Just this week Treasury officials stressed that it was simply one piece of a multi-faceted solution. Of the 5.6 million borrowers currently delinquent, Treasury estimates only 1.7 million are eligible for the program. Today President Obama stood in Nevada, ground zero for the foreclosure crisis, a state with 13 percent unemployment, and announced another pricey program to keep borrowers in their homes. The money, we assume, goes to help those ineligible for MHA. This one gives $1.5 billion to the hardest hit states (do I even need to list them? — CA, AZ, NV, FL, MI) to "help address the problems facing the hardest hit housing markets."
Moody's Expects HAMP Missteps to Prolong Home Price Declines - Moody’s Investors Service is forecasting another 8 percent decline in home prices over the course of 2010 before a bottom in residential property values is reached, largely because of the “underwhelming” success of the administration’s Home Affordable Modification Program (HAMP). When all is said and done, the ratings agency predicts a peak-to-trough drop of 34 percent in national home prices. That’s actually an improvement over Moody’s estimates last month, when the agency was expecting a total peak-to-trough decline of 37 percent. However, it’s the duration of depreciation that’s the headline grabber. Previously, Moody’s analysts were predicting the price floor to be reached in the third quarter of this year. Now they say it won’t be hit until the end of the fourth quarter
Study: Mods just Delay Foreclosures, 6.1 Million to Lose Homes - John Burns Real Estate Consulting: Loan mods won’t halt foreclosures, study shows - Most shadow inventory will get out onto the market as an REO or short sale. In any event, it results in the homeowner losing their home, and that home being added to the supply of homes available for sale. Of the 7.7 million delinquent homeowners, we actually think that only about 1.6 million will be able avoid losing their homes, and that the remaining 6.1 million will lose their homes. We say that there is 5 million units of shadow inventory because we estimate that about 1.1 million delinquent homeowners already have their homes listed for sale, and we would not classify those homes as “shadow.” We don’t believe that the shadow inventory will be dumped onto the market all at once. Although we don’t believe modification efforts will truly save a lot of homeowners from losing their homes, we do believe that these programs are effective in delaying foreclosures and pushing out the additional supply to later years.
Administration pushed to expand foreclosure-prevention program - The Obama administration is facing increasing pressure from lawmakers and housing advocates to retool its troubled mortgage relief program a year after its debut as the housing crisis continues to deepen and spreads to more creditworthy borrowers. The $75 billion program pays lenders to modify the mortgages of troubled borrowers, typically lowering their payments by about $500 a month. But so far, fewer than 200,000 borrowers have received a permanent change to their loans, according to Treasury Department data released Wednesday, a small fraction of the 3 to 4 million borrowers who government regulators initially said the program could help before it expires in 2012. That may not bode well for efforts to stabilize the housing market. Credit Suisse has estimated that 3.2 million foreclosures would have to be prevented this year for home prices to rise modestly.
Studies: Foreclosures to Keep Pressuring House Prices - WSJ - More waves of foreclosures will keep downward pressure on home prices in parts of the U.S. over the next several years, two new studies project. The studies—by John Burns Real Estate Consulting Inc. and Standard & Poor's Financial Services LLC—both conclude that most efforts to modify loans with easier terms will delay, not prevent, the loss of homes to foreclosure. The Treasury Department is expected to give its latest update this week on government efforts to avert foreclosures.The John Burns study estimates that five million houses and condominiums on which mortgages are now delinquent will go through foreclosure or related procedures that put them on the market over the next few years. That would represent the bulk of the estimated 7.7 million households behind on their mortgage payments. This "shadow inventory" of homes expected to hit the market is enough to last about 10 months, based on the average sales rate over the past decade,
First American CoreLogic: House Prices Decline in December - The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...From LoanPerformance: Home Prices Exhibit “Improving Declines” On a month-over-month basis the national average of home prices declined moderately, falling by 1.0 percent in December 2009 compared to November 2009, indicating seasonal slowing in a fledging housing recovery. This graph shows the national LoanPerformance data since 1976. January 2000 = 100. The index is off 3.7% over the last year, and off 28.2% from the peak. The index has declined for four consecutive months.
Housing Reports: Another Wave of Distressed Sales - WSJ reports on two studies, one from John Burns Real Estate Consulting Inc., and another from Standard & Poor's that both forecast most modification efforts will eventually fail - and that mods have just delayed foreclosures. The Burns forecast is for another 5 million distressed sales over the next few years. See: Foreclosures Seen Still Hitting Prices. Hagerty reports that Burns study suggests prices will be mostly flat unless the economy turns down, and the S&P study forecasts further price declines. S&P says current trends suggest that 70% of [modified loans] eventually will redefault. Loan servicers ... seem to have "nearly exhausted the supply of plausible candidates for loan modifications" and will find that many loans are "unredeemable," the S&P study says. As a result, servicers increasingly are looking to arrange "short sales," in which homes are sold for less than their loan balances. This will be the year of the short sale.
Coming Soon: 5 Million More Foreclosures - Studies keep showing what we have known for a long time: Fighting foreclosures is a futile — and counter-productive — use of resources. New studies by John Burns Real Estate Consulting and Standard & Poor’s Financial Services conclude that loan mod efforts only serve to delay the inevitable, resulting in future foreclosures. The credit bubble allowed home buyers to get in over their heads, to buy more house than they could afford. Once prices came down and the refi pipeline closed down, it was game over for many of these buyers. The latest estimates are for another five million delinquent mortgages to go through foreclosure (or alternatively, short sales) over the next few years. Currently, there is an estimated 7.7 million households in some stage of pre-default delinquency.
Could Your Home Get Sold Without Your Knowledge? | NBC Los Angeles - In this tough economy, millions of Americans are trying to avoid losing their homes. But are big mortgage companies really willing to work with you to avoid foreclosure? NBCLA has learned that if you are behind on mortgage payments, your mortgage company might auction off your home without even telling you. Experts say it's not uncommon these days for mortgage companies to auction off homes of people who are behind on their payments, without telling them or without giving much notice.
Report: Half of Mortgages are at Rates above 6 Percent - From the WaPo: Refinancing unavailable for many borrowers The refinancing wave that swept the nation when mortgage rates hit historic lows last year is petering out, leaving behind millions of homeowners who could not qualify for the best rates. Half of the nation's borrowers have mortgages with rates above 6 percent even though the average rate on 30-year, fixed rate mortgages has been about 5 percent for most of the past year, according to research firm First American CoreLogic. Many of these homeowners have been unable to refinance because they have little or no equity in their homes (many have negative equity), some have lost their jobs and can't qualify, and others have been rejected because lenders have tightened standards.
Mortgage rates poised to jump as Fed cuts funds - The Federal Reserve is poised to turn off a major money spigot that has helped sustain the ailing real estate sector, as an extraordinary program under which the Fed has pumped $1.25 trillion into the mortgage market is slated to end March 31.
Waiting for the Return of Buy-to-Hold Investors? Don’t Hold Your Breath - A significant amount of weight is being placed on the upcoming pullout of the Federal Reserve from the mortgage-backed securities (MBS) market. The success of such a move must be largely underpinned by the necessary emergence of a solid third-party investor base, be it Europe’s institutional investors or Asia-based sovereign wealth funds. When dealing with MBS the best investors are those who buy to hold the bonds to maturity, reducing volatility on both the buy and sell sides. Essentially, the Obama administration appears poised to rely on long-term investors for a long-term recovery, though I doubt we will see either.
Mortgage rates poised to jump as Fed cuts funds - The Federal Reserve is poised to turn off a major money spigot that has helped sustain the ailing real estate sector, as an extraordinary program under which the Fed has pumped $1.25 trillion into the mortgage market is slated to end March 31. "Housing has been on government life support, and without it the crash would have been much more severe," said Mark Zandi, chief economist with Moody's. "This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines."
Predictions on Mortgage Rates after the Fed Stops Buying - Guy Cecala, publisher of Inside Mortgage Finance. "My opinion is that rates will go up a full percentage point initially," meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent.Keith Gumbinger, vice president of HSH Associates, which compiles mortgage loan data, thinks that rates will slowly rise to about 5.75 percent after the Fed withdraws. Julian Hebron, branch manager at RPM Mortgage's San Francisco office, anticipates a bump up to around 5.5 percent by summer ...Christopher Thornberg, principal at Beacon Economics in Los Angeles [said] "Clearly, when they stop printing all that money, it's going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise" to rates of 6 percent or 7 percent ...
FICO Scores and Mortgage Payment Performance - I had an informal discussion with a manager in an MBS IT area last month. Just a general conversation about the field and the data people check. He mentioned FICO scores and I noted that I’m not fond of using them to evaluate a mortgage, especially for first-time homebuyers. Part of this is simple: it’s relatively easier—even in the densely-populated metropolitan areas (e.g., NYC, SF), and certainly in sub- and exurban areas—to maintain a good credit rating if you don’t own a residence. No property taxes, no major repairs, no appliance replacement, no general maintenance, no landscaping, no snow shoveling. And it’s very easy, especially the first time, to underestimate just how much those expenses will be. Looking at just the cost of commuting, renting, storage, parking, etc. makes homeownership appear to be a better economic decision than it is.* Well, the Federal Reserve Bank of New York recently released some data on mortgage payments by type. It’s not directly comparable—the subprime and Alt-A loans have a more granular level of data, most especially with respect to late and current payments—but there are some interesting relationships.
Mortgage Delinquency Rate Falls to 9.47% for U.S. Residential Properties (Bloomberg) -- The delinquency rate for mortgage loans on one-to-four unit residential properties fell to a seasonally adjusted rate of 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009, down 17 basis points from the third quarter, and up 159 basis points from one year ago, according to the Mortgage Bankers Association’s National Delinquency Survey. The information was released in an e-mailed statement.
Mortgage Delinquencies Tick Higher In Fourth Quarter - The percentage of homeowners late with mortgage payments hit another record during the last three months of 2009, and the pace at which they fell behind took a turn for the worse, a new report says. For the fourth quarter, 6.89 percent of mortgage payments were 60 or more days past due, according to credit reporting agency TransUnion. That's up from 4.58 percent in the final three months of 2008. The previous record delinquency rate was 6.25 percent in the third quarter of 2009. The latest report marked the 12th consecutive quarter — equal to three full years — that delinquency rates have risen from the previous year.
Report: Fewer people falling behind on home loans - The end of the foreclosure crisis is finally in sight. For the first time in almost three years, the number of homeowners falling behind on their loans is declining.The drop means the number of people losing their homes will start to fall. But some pain from the crisis is sure to persist. Because millions of people are already in foreclosure, deeply discounted houses will put pressure on home prices for years. "Housing is on a path to recovery," said Mike Larson, a real estate analyst with Weiss Research. "It's going to be a very long, gradual process."In high-foreclosure cities like Las Vegas, Phoenix and Miami, homes have lost roughly half their values from their peaks. But a report Friday from the Mortgage Bankers Association showed Nevada, Arizona and Florida had some of the biggest declines in new delinquencies.
TransUnion: Mortgage Delinquencies at All Time High - From TransUnion: TransUnion Finds National Mortgage Delinquencies Jumped 10.24 Percent at End of 2009 TransUnion's quarterly analysis of trends in the mortgage industry found that mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the 12th straight quarter, hitting an all-time national average high of 6.89 percent for the fourth quarter of 2009. This quarter marks the first time the mortgage delinquency rate increase did not decelerate after doing so for three consecutive periods. This statistic, which is traditionally seen as a precursor to foreclosure, increased 10.24 percent from the previous quarter's 6.25 percent average. Year-over-year, mortgage borrower delinquency is up approximately 50 percent
U.S. Mortgage Foreclosures Rose to Record in Fourth Quarter (Bloomberg) -- A record number of Americans were in danger of losing their homes in the fourth quarter, even as new delinquencies declined, the Mortgage Bankers Association said. Loans in foreclosure rose to 4.58 percent of all mortgages, while those more than 90 days overdue -- the point at which lenders usually begin the process of seizing a property -- climbed to 5.09 percent, the Washington-based trade group said in a report today. “We have a hard-core block of unemployed who have been out of jobs for a long time, and that’s keeping the long-term delinquencies high,”
MBA: 14.05 Percent of Mortgage Loans in Foreclosure or Delinquent in Q4 - The MBA reports 14.05 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q4 2009. This is a slight decrease from 14.11% (edit) in Q3 2009, and an increase from 13.5% in Q2 2009 (note: older data was revised). From the MBA: Delinquencies, Foreclosure Starts Fall in Latest MBA National Delinquency Survey -The delinquency rate for mortgage loans on one-to-four unit residential properties fell to a seasonally adjusted rate of 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009, down 17 basis points from the third quarter of 2009, and up 159 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 50 basis points from 9.94 percent in the third quarter of 2009 to 10.44 percent this quarter.
New wave of foreclosures by end of 2010 is feared - Experts fear that a new wave of foreclosures will hit this year as prolonged unemployment makes it difficult for millions of homeowners to pay their mortgages — and many of them aren’t likely to get much help from a federal program aimed at keeping them in their houses. Banks participating in the Home Affordable Modification Program, announced a year ago this week by President Obama, have been slow to turn temporarily reduced mortgage payments into permanent ones. “The overarching sense is that the mortgage modification process has not worked that well,”
Housing markets: What passes for good news these days | The Economist - HERE'S some great news on the American housing market, as written up by Bloomberg:Housing starts in the U.S. rose in January to a higher level than anticipated, a sign that government support is helping to stabilize the real estate market. Work began on 591,000 houses at an annual rate last month, up 2.8 percent from December, figures from the Commerce Department showed today in Washington. Starts were projected to increase to a 580,000 pace, according to the median estimate of 77 economists surveyed by Bloomberg News. Permits, a sign of future construction, fell less than anticipated after rising in December to the highest level since October 2008. And here's what that great news looks like...
Housing Starts increase Slightly in January - Total housing starts were at 591 thousand (SAAR) in January, up 2.8% from the revised December rate, and up 24% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months. Click on graph for larger image in new window. Single-family starts were at 484 thousand (SAAR) in January, up 1.5% from the revised December rate, and 36% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for eight months.
Q4: Quarterly Housing Starts and New Home Sales - (w/ graphs) This morning the Census Bureau has released the "Quarterly Starts and Completions by Purpose and Design" report for Q4 2009. Monthly housing starts (even single family starts) cannot be compared directly to new home sales, because the monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report shows that there were 71,000 single family starts, built for sale, in Q4 2009, and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA).
What, exactly, are we starting here? - Housing starts in January hit their highest level in half a year, the Commerce Department reported (PDF) this morning—seemingly good news for those banking on a real-estate rebound. More specifically: Privately-owned housing starts in January were at a seasonally adjusted annual rate of 591,000. This is 2.8 percent (±11.5%)* above the revised December estimate of 575,000 and is 21.1 percent (±12.3%) above the January 2009 rate of 488,000. Single-family housing starts in January were at a rate of 484,000; this is 1.5 percent (±11.3%)* above the revised December figure of 477,000. The January rate for units in buildings with five units or more was 100,000.There are a few reasons, though, to be proceed only with cautious optimism. First of all, even though starts were up, building permits were down
NAHB Builder Confidence Increases Slightly, Still Very Depressed - Note: any number under 50 indicates that more builders view sales conditions as poor than good. This graph shows the builder confidence index from the National Association of Home Builders (NAHB). The housing market index (HMI) was at 17 in February. This is an increase from 15 in January. The record low was 8 set in January 2009. This is still very low - and this is what I've expected - a long period of builder depression. The HMI has been in the 15 to 19 range since May.
Kids Moving Back Home and the Construction Industry - We’ve paid a lot of attention to Wall Street over the last two years, but the unemployment rate in the financial services industry is only 6.6 percent (up from 6 percent a year ago). If we want to understand American joblessness, we need to look at other sectors, like the construction industry, which has a 24.7 percent unemployment rate that leads the nation (up from 18.7 percent a year ago). That unemployment rate almost seems low given that Americans built 60 percent fewer homes in 2009 than we did in 2006. The travails of the building industry illustrate why unemployment remains so high, and why there are no easy fixes. From 2002 to 2006, Americans built 9.1 million units. Over approximately the same five-year period (from March 2002 to March 2007), the number of American households grew by only 6.7 million.
MBA: Mortgage Purchase Applications Decline - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, decreased 2.1 percent on a seasonally adjusted basis from one week earlier. ...The Refinance Index decreased 1.2 percent from the previous week and the seasonally adjusted Purchase Index decreased 4.0 percent from one week earlier. ...The average contract interest rate for 30-year fixed-rate mortgages remained unchanged at 4.94 percent, with points increasing to 1.09 from 1.06 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This graph shows the MBA Purchase Index and four week moving average since 1990. The 4 week average of the seasonally adjusted purchase index declined to 221.7, just above the 12 year low set in early January.
Obama to Unveil Additional Homeowner Aid - WSJ - President Barack Obama is expected to announce plans Friday to provide an additional $1.5 billion to a state-assistance program for homeowners worst hit by the downturn in U.S. housing values. The program, which Mr. Obama will announce in Las Vegas, is for states where the average home value for all homeowners in the state has dropped more than 20% from its value at the height of the housing bubble. Under the formula, five states have home-price declines steep enough to qualify them: Nevada; California; Arizona; Michigan; and Florida. Mr. Obama is appearing in Nevada Friday with Senate Majority Leader Harry Reid, who is fighting for re-election in November amid voter anger over the state's high unemployment and widespread housing woes.
Chase Bank's Parallel Foreclosure Policy when home owners ask for a home loan modification, an evil way to do business when better alternatives exist.- Enter Parallel Foreclosures - Apparently the banks won't renegotiate a lower interest rate on a home loan unless the homeowner falls behind in their payments. However, the moment the homeowner falls behind with their payments, banks such as Chase Bank begin a process called Parallel Foreclosures.Even as Chase Bank is allegedly re-negotiating the homeowner's mortgage loan, another Chase Bank division is busy filing foreclosures papers on the homeowners home! So, just as I initially suspected, the banks have decided anybody who is looking for a home loan modification might just be stalling, and to combat that stalling, banks such as Chase Bank begin the process of foreclosing on the homeowner's home as soon as possible.
Parallel Foreclosure - Chase Bank recently disclosed in a news story that they practice Parallel Foreclosure. When a Chase Bank customer asks for a home loan modification, Chase bank begins foreclosure procedures on that person's home even as another Chase Bank division is negotiating the home loan modification!
Most homeowners are unaware of the practice.
Baby Boomers Busted By Housing Market Collapse - I'm a baby boomer who thinks it's probably time to sell the manse and move to someplace smaller. That's what I'm thinking, anyway. Barring some nationwide economic miracle, however, that's not going to happen. Until housing finds its footing again and home prices start to look up, I'm going nowhere, unless I'm keen to lose money. I have plenty of company. My fellow boomers and I, it appears, are suffering from a serious case of real estate irony. Housing, the very thing that fueled our generation's legendary mobility and free spending, is keeping us right where we are.
Foreclosures Triggering A Domino Effect Of Problems - The foreclosure crisis poses the biggest threat to U.S. economic security in the nation’s history, and is now forecast by Housing Predictor to impact more than 20-million mortgage holders. The crisis is a clear danger to the U.S. The epidemic of foreclosures has broadened to include consumers at every level of the economy, triggered a domino effect of problems, including higher crime, a drop in city, county and state revenues, increased homelessness and left more than 2-million residential properties vacant in the U.S. The American Dream of Homeownership has transformed into a nightmare for millions of Americans, who are either at the risk of being foreclosed or have already undergone foreclosure. An estimated 3.5-million mortgage holders are forecast to be foreclosed in 2010 alone.
Suburban Homeless: Rising Tide Of Women, Families - Homelessness in rural and suburban America is straining shelters this winter as the economy founders and joblessness hovers near double digits — a "perfect storm of foreclosures, unemployment and a shortage of affordable housing," in one official's eyes. "We are seeing many families that never before sought government help," "We see a spiral in food stamps, heating assistance applications; Medicaid is skyrocketing," Blass added. "It is truly reaching a stage of being alarming."The federal government is again counting the nation's homeless and, by many accounts, the suburban numbers continue to rise, especially for families, women, children, Latinos and men seeking help for the first time. Some have to be turned away.
Foreclosure Filings Keep on Rising in California: ForeclosureRadar - Foreclosure filings on California properties rose daily in January compared with December, according to ForeclosureRadar, which tracks foreclosure activity in the state. The daily average of Notices of Default filings rose by 9.5%, while Notice of Trustee Sale filings rose by 10.3%.“With delinquent payments rising, foreclosures slowing, and foreclosure alternatives failing, it appears the foreclosure crisis will be with us for many years to come,” said ForeclosureRadar.com founder and CEO Sean O’Toole. The news comes as a report from the credit rating agency Standard & Poor’s estimates that the “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate.
Avg. Michigan Home < $100k, 1st Time Since 1994 - According to housing sale data from the Michigan Association of Realtors, the average price of a home sold in Michigan in 2009 was $99,121, a 16.3% decrease from the $118,388 average price in 2008, and 35% below the peak average price of $152,845 in 2006. The $99,121 average home price in 2009 marks the first year since 1994 (15 years ago) that the average Michigan home sold for below $100,000 (see chart).
In Elkhart, Ind., Fear for the Day When Housing Aid Ends - NYTimes — Over the next six months, the federal government plans to wind down many of its emergency programs for housing. Then it will become clear if the market can function on its own. People here are pretty sure the answer will be no. President Obama has traveled twice to this beleaguered manufacturing city to spotlight the government’s economic stimulus program. The employment picture here has indeed begun to improve over the last nine months.But Elkhart also symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis. Housing in this community has become almost entirely dependent on a string of federal support programs, which are nonetheless failing to prevent a fall in prices and a rise in mortgage delinquencies.
Foreclosures in U.S. Set Record as Unemployment Thwarts Housing Recovery (Bloomberg) -- A record number of Americans were in danger of losing their homes in the fourth quarter, even as new delinquencies declined, the Mortgage Bankers Association said. Loans in foreclosure rose to 4.58 percent of all mortgages, while those more than 90 days overdue -- the point at which lenders usually begin the process of seizing a property -- climbed to 5.09 percent, the Washington-based trade group said in a report today. “We have a hard-core block of unemployed who have been out of jobs for a long time, and that’s keeping the long-term delinquencies high,” Jay Brinkmann, the association’s chief economist, said in an interview. “New entrants to the ranks of the unemployed have been falling, and that’s why we see the early delinquencies dropping.”
Housing Starts, Vacant Units and the Unemployment Rate -The following two graphs are updates from previous posts with the housing start data released this morning. The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing through Q4 2009.Notice that total starts are not rebounding quickly as a number of analysts expected. Instead starts have moved sideways for the last eight months.It is very unlikely that there will be a strong rebound in housing starts with a near record number of vacant housing units. The second graph shows single family housing starts and unemployment (inverted). (The first graph shows total housing starts) You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts.
Five Million Workers to Exhaust Unemployment Benefits by June - Back in December, the qualification dates for existing tiers of unemployment benefits were extended for an additional two months. Time is up at the end of February. Now another extension is needed or millions of workers will lose benefits over the next few months. The National Employment Law Project (NELP) released a new report last week showing that ... 1.2 million jobless workers will become ineligible for federal unemployment benefits in March unless Congress extends the unemployment safety net programs from the American Recovery and Reinvestment Act (ARRA). By June, this number will swell to nearly 5 million unemployed workers nationally who will be left without any jobless benefits.
Unemployment as a Moral Issue I am not a labor economist, and I have never been unemployed. I come to my horror of unemployment genetically. I suspect that I am considerably older than most of the readers of this blog, and unlike you, the readers, I am the child of depression era parents. After the depression, my father was scared the rest of his life; he never afterwards dared even think about a job change, and he never made an on the job decision without the spectre of losing his job bearing down on him. My mother never thought that things would turn out all right, right up to the moment she died. I have worried in a more diluted way my whole life as a consequence of my parents’ terror. But it was with this admittedly unauthentic background that I read David Brooks’ recent column on how high and long term unemployment will affect America and Don Peck’s much longer piece on the same topic in The Atlantic. We are not going to see a rerun of the 1930’s; but we are going to see a long period - of several years - during which unemployment is much higher than we are accustomed to, and long term structural unemployment is a much higher component of overall unemployment. This will, in turn, have enormous effects on the shape and morale of our society.
Americans Like Their Jobs, Worry About Losing Them - More than a quarter of Americans say they are worried about losing their jobs in the next year, a new poll shows.Some 26% of people surveyed in a February Marist Poll said they were somewhat or very concerned about losing their jobs, compared to 74% who said they were only a little or not at all worried about it. Those who do have jobs said they were pleased with them, though. An overwhelming 88% said they were satisfied with their jobs, compared to just 12% who are dissatisfied. On a counterintuitive note, the survey also found that more lower-paid employees were content with their jobs than higher-paid workers. Some 48% of people making less than $50,000 were very satisfied in their jobs compared to the 42% who said the same and were making $50,000 or more.
Unemployment: It All Depends on Whose Ox Is Being Gored -- A study done by Northeastern University's Center for Labor Studies broke the unemployment rate down by income. Unemployment among those making $150,000 a year was only 3% in Q4 2009. What unemployment problem, right? The unemployment rate for those in the middle income range was 9%, about average for the nation. But here’s the kicker. The unemployment rate for those in the bottom 10 percent of income came in at a whopping 31%.With only 3% unemployed at the top end, should we be surprised to see the infrastructure repair program (“Let’s Rebuild America”) of the Obama Administration never got off the ground. Wall Street and Larry Summer didn’t like it. No one polled or asked those in the bottom 10% and they didn’t bother to tell us. Or, what about Obama’s $33 billion bone toss to the unemployed, paying that sum to all employers for hiring and pay raise incentives – mere cosmetic tokenism so the Administration can look like it’s is doing something when it isn’t. As Summers candidly explained, we will just have to wait for the economy to pick up before unemployment drops. What if by some numerical fluke, the situation were reversed so that those making $150k or better a year had the 31% unemployment figure and the bottom 10% came in at 3% unemployed? Would Washington’s attitude and actions be the same? You can safely bet the farm not.
Postal Service foresees insolvency - unless Congress acts - The U.S. Postal Service could become insolvent if Congress doesn't approve five-day mail delivery and change the way the agency funds its retiree health benefits, according to the agency's top financial official. "We will need [some assistance from Congress] or we will have difficulty paying all of our obligations this year," said Joe Corbett, the Postal Service's chief financial officer. "And going into next year, we might not have enough cash to operate. ... We are dangerously close to running out of cash." The Postal Service posted a $297 million loss for the first quarter of fiscal 2010, which ended Dec. 31, 2009. Mail volume for that period fell by 8.9 percent. But that was an improvement over the previous quarter, when volume fell by 12.4 percent; and over the first quarter of 2009, when volume dropped 9.3 percent.
The Long-Term Employment Bust | First Things - High levels of unemployment may last indefinitely. A number of economists (including this writer) have been warning about permanent joblessness, and the idea is now seeping into popular magazines. More than 8 million American jobs were lost since 2007, based on the most recent revision of the overall job count of U.S. establishments. But that is not the worst of it, because the establishment survey fails to capture smaller businesses and the self-employed. By the Bureau of Labor Statistics’ broadest measure of unemployment, including the forced part-time workers and so-called discouraged workers, the unemployment rate rose to 17 percent from 8 percent before the recession. That is 9 percentage points, corresponding to slightly over 12 million adults. A website called Shadow Government Statistics includes “long-term discouraged” workers defined out of the labor force by the BLS, but that alternative measure has tracked the BLS broad measure quite closely in the past few years.
How the government fudges job statistics - In the Marketplace letters segment yesterday, Representative Peter DeFazio (D-Oregon) took issue with me saying that infrastructure investment is an extremely expensive way of creating jobs and “costs a good $200,000 per job”. Just as well I didn’t use the $1 million figure here, which I stand by, and which was fact-checked by the Atlantic! The host, Kai Ryssdal, had no time to read out the letter in full, but has allowed me to reprint it: I have no dog in DeFazio’s fight with the AP. But his attacks on me are just plain wrong. Infrastructure investments are simply not “one of the most efficient creators of jobs”, no matter how much DeFazio might want them to be, and the sources he cites to back up that claim don’t support it. What’s at issue here is a ratio: I’m talking about dollars per job created.
The Next Problem - Preventing the next financial crisis should be high on our society’s priority list. But as the months and years wear on, I suspect we will see more articles like Don Peck’s recent 8,000-word article in The Atlantic, “How a New Jobless Era Will Transform America.” Peck’s article is not about what caused the recent crash and recession, but what its societal consequences will be. And the article is almost unremittingly bleak. The societal implications that Peck sees are worse than the mere numbers would imply. Young people who graduate into recessions never catch up with cohorts around them that graduate into better economic conditions, partly due to risk aversion, partly because they move up more slowly and get tagged as underperformers. Unemployment also changes people:...
The Labor Market: Crawling Out of a Deep Hole - An interesting research note on the labor market from Goldman: (scribd) Goldman Sachs: The Labor Market: Crawling Out of a Deep Hole
February Jobs Report May Be Impacted by Blizzards - That’s because the February blizzard, which laid feet of snow across the country and brought business to a virtual standstill across the Midwest and Northeast, kept many workers from getting to the office and likely pushed new hiring into the following month. The blizzard occurred during the periods when both the Household and Establishment Surveys were conducted, meaning it could affect both the jobs tally and the unemployment rate. Of course, those jobs would resurface in the March jobs report. Using the January 1996 blizzard as a benchmark, Macroeconomic Advisers’ estimates that the March 5th jobs report would have 66,000 fewer jobs than it would otherwise have
Policies for Increasing Economic Growth and Employment in the Short Term - CBO blog - I was scheduled to testify a few days ago before the Joint Economic Committee about policies to increase economic growth and employment in 2010 and 2011. The hearing was canceled because of the snow, but we released my prepared remarks today. The testimony was based on CBO’s January report on Policies for Increasing Economic Growth and Employment in 2010 and 2011 and on CBO’s follow-up letter last week to Senator Casey, which provided additional information about options for reducing employers’ payroll taxes. The testimony emphasizes three points:
Policies for Increasing Economic Growth and Employment in 2010 and 2011 - CBO concludes that further policy action, if properly designed, would promote economic growth and increase employment in 2010 and 2011. Different policies vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects. Moreover, despite the potential economic benefits in the short run, such actions would add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been. In a previous report and testimony, CBO identified three key criteria for judging policy options for spurring economic growth and increasing employment:
Why Reid Is stripping down new jobs bill -In Washington, reaching bipartisan agreement on anything is tough these days. Yet Senate majority leader Harry Reid, D-Nev., has just scrapped a jobs bill that had both Democratic and Republican support. What's he thinking? Reid appears to be making a political calculation that the GOP will have a difficult time voting against his own, stripped-down version of jobs legislation. That's because Reid has left the bill's central job creation provisions intact, while jettisoning tax breaks and other provisions intended to win Republican support.
Job creation in the real world -- TIME - Senate Majority Leader Harry Reid is already catching heat for saying: We feel the American people need a message. The message that they need is that we're doing something about jobs. This comment comes on the heels of news that a bi-partisan jobs bills has fallen through, and Reid is now plowing ahead with a slimmed-down four-point plan. Yes, what Reid said is a bit tone-deaf. The American people don't need a message that Congress is doing something about jobs; they need jobs. At the same time, Reid's framing is one of the most honest I've heard yet in the discussion about job creation. The American people may not need a message, but that's pretty much the most Congress has to offer on the jobs front—at least in the short run.
Congress appears doomed to fail on Jobs Creation Legislation - The House passed a puny measure worth about $154 billion over a decade. The Senate, strangled by the GOP party of no, appears set to pass a bill that does almost nothing and costs only about $15 billion over a decade. See Deal on Jobs Shows Limits of Push for Bipartisanship, NY Times, Feb. 12, 2010 and the NY Times editorial, Ho NOt to Write a Jobs Bill, NY Times Feb. 12, 2010 at A 26. What is Reid proposing? 1) waiver of the ER 6.2% Social Security tax for workers hired who haven't had a job for 60 days, plus a $1000 tax credit for any new employee retained for 52 weeks.this is really puny stuff. First, it's a tax break for an employer who won't be likely to hire a new employee for the break--too little at stake, and new employees aren't hired until there is work for them to do 2) extend the expensing of capital investments yet again. This is not just puny, but also "been there, done that"
Why is Obama So Silent about the Jobs Bill? - Why hasn't Obama been raising hell about the failure of Congress to produce a jobs bill when he appears in public forums? The one bill that looked promising fell apart recently, and the attitude about it seems pretty ho-hum from all sides. Given the number of people who are still struggling to make ends meet in the face of the weakest job market in quite some time, you'd think there would be more urgency about doing something to help. Why isn't Obama making an issue of this?
Success of Stimulus Bill Is Noteworthy as Another Is Weighed - NYTimes - Imagine if, one year ago, Congress had passed a stimulus bill that really worked. Let’s say this bill had started spending money within a matter of weeks and had rapidly helped the economy. Let’s also imagine it was large enough to have had a huge impact on jobs — employing something like two million people who would otherwise be unemployed right now. If that had happened, what would the economy look like today? Well, it would look almost exactly as it does now. Because those nice descriptions of the stimulus that I just gave aren’t hypothetical. They are descriptions of the actual bill. Just look at the outside evaluations of the stimulus. Perhaps the best-known economic research firms are IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com. They all estimate that the bill has added 1.6 million to 1.8 million jobs so far and that its ultimate impact will be roughly 2.5 million jobs. The Congressional Budget Office, an independent agency, considers these estimates to be conservative.
A stark before-and-after picture - Economic Policy Institute - During a podcast interview with The Nation editor Christopher Hayes, EPI economist Josh Bivens said that GDP data, like job loss data, offered compelling evidence of the positive impact of the Recovery Act. Bivens said that GDP patterns presented “a stark before and after picture.” During the last quarter of 2008 and the first quarter of 2009, GDP contracted at a 6% annual rate, the worst six-month decline on record. By contrast, in the second quarter of 2009, which included significant Recovery Act spending, GDP contracted by less than 1%. It has grown each quarter since then. Hayes said Bivens offered “as clear an explanation of the effects of the Recovery Act as I’ve heard.” Asked about the weakness of the Recovery Act, Bivens replied, “It goes away too quickly.” Most Recovery Act spending will be completed by the middle of this year, a time when unemployment is projected to be near 10% and the country will still need 10 million additional jobs to return to pre-recession levels of employment.
Getting the biggest bang for job-creation bucks - Blinder - Official Washington seems interested in only three things: jobs, jobs, jobs. But what are the real policy options? Broadly speaking, job-creating policies come in two varieties: general stimulus to boost growth and programs targeted specifically at job creation. The first category follows the "build it and they will come" strategy: If you raise GDP, you will get more jobs. That's true. And it's the basic idea behind the Recovery and Reinvestment Act and countless other monetary and fiscal stimulus programs pursued by scores of nations since the Keynesian revolution. But there's a catch: That strategy is expensive -- which matters when you have a mammoth budget deficit.
A Strange Preference on Wage Subsidies - Mark Thoma says that he signed a petition, which reads in part, There are many ways to design an effective hiring tax credit, but in general the beneficial effects will be greater the stronger the hiring incentives and the lower the administrative burdens placed on firms. It is critical that such a tax credit be put into place quickly and that it is publicized widely. Firms will begin to accelerate hiring only when know they can count on such tax relief.Cutting the employer portion of the payroll tax would do exactly what this petition wants. You could hardly ask for a lower administrative burden, a faster rollout, or a more direct wage subsidy. Yet my guess is that none of these economists would sign a petition calling for cutting the employer portion of the payroll tax.
Economists for Wage Subsidies - petition to congress, text & signatories
Jobs bills: Where legislation goes to die - The Economist - IN THIS week's print paper, I have a piece on the mess that has become of the Senate's effort to produce a jobs bill. It reads in part: But since the release of the budget things have quickly come apart, wrecked on the treacherous shoals of the Senate. On February 11th Max Baucus and Chuck Grassley unveiled their own $85 billion jobs bill with bipartisan backing, and to much fanfare. Within hours, the White House voiced its support for the senators’ bill. But later that day Harry Reid, the majority leader, scrapped the plan, declaring that the measure would do too little to create jobs. He had a point. Nearly half of the bill’s value came from routine tax-policy extensions. It also contained a grab-bag of tax benefits for corporate interests (chicken producers and catfish farmers among them), designed more to attract Republican votes than to boost employment.
Andrew Samwick: Difficult to Administer and Prone to Abuse - According to The Washington Post, this was the reaction of House leaders to President Obama's proposal to use tax credits to expand employment: The administration also wants to put an additional $100 billion toward an immediate jobs bill. One of the most significant ideas would award tax credits worth as much as $5,000 per new hire to employers that expand their payrolls this year. By the administration's calculations, the tax credit would create 600,000 jobs at a cost to the government of about $33 billion. That is my reaction as well. If the Federal government could administer a problem this intricate, I doubt we would be in the shape we are in.
Businesses Cutting the Growth Cushion - Many mainstream analysts believe it won't be long before things return to "normal." But they are deluding themselves, especially as far as the job market is concerned. For one thing, it now seems pretty clear that the economy that existed before the financial crisis hit had been artificially pumped up by years of cheap money and unsustainable levels of debt. There's another reason why the labor market will remain under pressure. According to two small businesspeople who were kind enough to post their comments at Financial Armageddon, the difficult conditions that owners have experienced over the past few years are leading many of them to eliminate or reduce the cushion of underutilized staff they keep on their books to cope with future growth.
The Independent Contractor Problem Continues and Grows - The IRS and many state governments are stepping up enforcement of the use of “independent contractors” who are actually employees. While there are plenty of legitimate business-to-business independent contractor arrangements, other businesses sidestep the law by misclassifying employees as ICs. (see IRS site) Taxation agencies know there is a lower percentage of income reporting from the ICs, and for those who do report the income there are usually expense deductions not normally useful to a real employee.Taxation agencies receive less revenue, there are no state and federal unemployment taxes paid, and the ICs are not covered by workers compensation insurance.
Labor Underutilization Rate by Household Income - The following chart is based on data from a research paper by Andrew Sum and Ishwar Khatiwada at the Center for Labor Market Studies, Northeastern University "Labor Underutilization Problems of U.S. Workers Across Household Income Groups at the End of the Great Recession: A Truly Great Depression Among the Nation’s Low Income Workers Amidst Full Employment Among the Most Affluent" Bob Herbert at the NY Times wrote about this paper last week: The Worst of the Pain and so did Ryan McCarthy at Huffington Post: 'No Labor Market Recession For America's Affluent,' Low-Wage Workers Hit Hardest: STUDY
Use of temps may no longer signal permanent hiring - It's not the signal it used to be. When employers hire temporary staff after a recession, it's long been seen as a sign they'll soon hire permanent workers. Not these days. Companies have hired more temps for four straight months. Yet they remain reluctant to make permanent hires because of doubts about the recovery's durability. Even companies that are boosting production seem inclined to get by with their existing workers, plus temporary staff if necessary. "I think temporary hiring is less useful a signal than it used to be," . "Companies aren't testing the waters by turning to temporary firms. They just want part-time workers." The reasons vary. But economists and business people say the main obstacle is that employers lack confidence that the economic rebound has staying power. Many fear their sales and the overall economy will remain weak or even falter as consumers spend cautiously.
One million could lose jobless benefits in March -- More than 1 million people could lose their jobless benefits and health insurance subsidy in March if Congress doesn't act fast.When it returns from the President's Day recess on Monday, the Senate will have one week to extend the deadlines to apply for federal unemployment benefits and the COBRA health insurance subsidy. Currently, the jobless have until Feb. 28 to sign up. Without an extension, people receiving state jobless benefits won't be able to apply for additional federally paid unemployment insurance, and anyone already receiving those checks could be cut off.
Benefit Tax Hike Sudden, Startling - The state's climbing unemployment rate has had a sudden and unexpected impact on Kansas businesses - even those that haven't had layoffs - by dramatically hiking unemployment insurance rates. Some businesses claim their rates have gone up so much - more than 500 percent - that they're actually facing potential layoffs to deal with the unforeseen costs. The state's unemployment insurance trust fund, just months ago flush with $566 million and rated among the nation's best, was down to $25 million last week and is expected to be depleted before the end of the month.
Money's Tight? Time to Support Your Unemployed Neighbor -- Seeking Alpha - The U.S. dollar is collapsing. The United States’ creditworthiness is crumbling. Everyone you know is jobless, and you’re worried you might be next. Your credit cards are full, and you may not be able to continue to pay your mortgage when ARMs reset this year. Could it get worse? Actually yes. Even though you are still working, guess what? You’re paying for everyone who isn’t.
Harrisburg excludes debt payments from 2010 budget - Harrisburg, Pennsylvania, moved a step closer to defaulting on a bond payment when its city council passed a 2010 budget that does not include $68 million in debt repayments on an incinerator.Without the debt provision in the $65 million budget, the state capital may miss a March 1 payment of $2.072 million, a rarity for a municipal bond issuer.The council also defeated a plan to sell city assets to help pay down the debt which is guaranteed by the city on behalf of the Harrisburg Authority, a separate municipal entity that owns the incinerator. Council members also rejected Thompson's plan to raise property taxes and water rates.
Muni Threat: Cities Weigh Chapter 9 - The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk
States to Senate: Send more federal aid - States are looking to the federal government for more help balancing their budgets, but the Senate is not heeding their call. Federal aid to the states was among the top priorities in an early Senate job creation bill, as well as in a $154 billion measure passed by the House in December. But it has fallen off the list as Senate Democrats look to craft legislation that will attract bipartisan support. States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's
America's 5 Worst Deadbeat States - Deficits, Political Gridlock, Unemployment: the States Facing the Most Frightening Fiscal Crises - If global markets ever get tired of fretting over the debt situation in Europe there's certainly no shortage of cash-strapped government entities in the United States that give cause for concern. Setting aside the exploding federal deficit situation, ABCNews.com set out to take a close look at the 50 states from a variety of economic and demographic factors, including total population, projected 2010 budget deficits, credit ratings, foreclosure rates, energy costs, total outstanding debt and unemployment. Here are the five states spiraling most dangerously toward insolvency:
NEVADA'S BUDGET WOES: Dentures, diapers for elderly out under proposed reductions, officials say - Poor people eligible for free Medicaid health care no longer would receive eyeglasses, dentures, hearing aids or as many adult diapers under the $109 million in social service spending reductions proposed by Gov. Jim Gibbons. "We are down to the ugly list of options of where we can cut," Department of Health and Human Services Director Mike Willden told members of the Legislature's Interim Finance Committee on Tuesday. The state would save $829,304 by reducing the number of adult diapers that incontinent disabled and elderly people would receive. The reduction was mentioned repeatedly Tuesday as the most horrendous example of a budget cut.
Agency budget cuts small in face of Texas' gaping shortfall - State agencies offered up potential budget cuts of 5 percent Tuesday, fulfilling a request from state leaders as Texas grapples with a shortfall that could reach $15 billion or more. But their trims amount to a relatively small, initial pebble in a large pool. Lawmakers and state leaders face a daunting task to close the budget gap, and few have offered substantive ideas for dealing with the state's structural deficit.
FISCAL YEAR 2009: Nevada's biggest casinos lose $6.8 billion - Nevada's highest-grossing casinos generated a net loss of almost $6.8 billion in fiscal year 2009, victims of declining gaming revenues, reductions in hotel rates and reduced consumer spending. The Gaming Control Board, which released the Gaming Abstract Income statement Friday, said the net loss was by far the largest ever for Nevada
State Parks Dept. recommends closing 41 parks -The Office of Parks, Recreation, and Historic Preservation has recommended the closure of 41 parks and 14 historic sites, and service reductions at 23 parks and 1 historic site to meet budget. The agency says the recommended list of closures and service reductions will address the State's historic fiscal difficulties. In a statement, Gov. David Paterson said, “"New York faces an historic fiscal crisis of unprecedented magnitude. It has demanded many difficult but necessary decisions to help ensure the fiscal integrity of our State. The unfortunate reality of closing an $8.2 billion deficit is that there is less money available for many worthy services and programs. In an environment when we have to cut funding to schools, hospitals, nursing homes, and social services, no area of State spending, including parks and historic sites, could be exempt from reductions.”
Paterson Proposes Delay In Paying Tax Refunds - Some New Yorkers could see a delay in the arrival of their state income tax refund checks if Gov. David Paterson decides it's the best way to make sure the state has enough cash. The state currently limits the amount of tax refunds it pays in the first three months of the year to $1.75 billion. Paterson is considering lowering that threshold to $1.25 billion because the state must roll $1.4 billion into next year's budget to close a current year budget gap.So far the state has paid out $293 million in 281,000 tax refunds this year.The state has until June to pay the refunds before they start accruing interest.The governor is expected to make a decision in the next few weeks.
Wash. gov seeks $605M in higher taxes for deficit - Washington Gov. Chris Gregoire wants a total of $605 million in higher taxes to help fill the state's budget deficit, including larger levies on oil products, bottled water, pop, candy and cigarettes.Gregoire's tax plan, released Wednesday afternoon, is an opening bid in the public debate over hiking taxes amid a fragile economic recovery. The Legislature's majority Democrats are planning to raise taxes and cut spending to solve the $2.8 billion budget gap, but haven't yet revealed detailed plans. Gregoire's plan is centered around some $493 million in tax increases, including a near-tripling of the tax rate on oil products and other pollutants.
Expect Delay For Tax Refund - Many North Carolina taxpayers will soon experience a delay in the return of their income tax refunds, as the state holds on to the money a little longer during the tight budget times. Ken Lay, the revenue secretary, said the move is necessary to make sure the state has enough cash on hand to pay its bills between now and the end of the June 30 fiscal year. "We are managing the cash flow very carefully," Lay said Monday. "We are managing the distribution of refund checks as well."
School Districts Push For Teacher Pay Cuts During Contract Talks - The San Diego and Vista unified school districts are trying to negotiate new labor contracts with their teachers unions while they push for teacher pay cuts. Crowds of teachers have disrupted San Diego and Vista school board meetings recently because of stalled contract negotiations and proposed budget cuts. Teachers in both districts are angry officials want to cut their salary as their unions struggle to hammer out new labor contracts. Vista Unified wants teachers to take a 2 percent pay cut and five furlough days. San Diego Unified is calling for an 8 percent pay cut.
Schools face big budget holes as stimulus runs out - The nation's public schools are falling under severe financial stress as states slash education spending and drain federal stimulus money that staved off deep classroom cuts and widespread job losses. School districts have already suffered big budget cuts since the recession began two years ago, but experts say the cash crunch will get a lot worse as states run out of stimulus dollars. The result in many hard-hit districts: more teacher layoffs, larger class sizes, smaller paychecks, fewer electives and extracurricular activities, and decimated summer school programs.The situation is particularly ugly in California, where school districts are preparing for mass layoffs and swelling class sizes as the state grapples with another massive budget shortfall.
Christie to schools: Prepare for possible 15 percent cut in aid - With school districts still reeling from the midyear budget cuts he ordered last week, Gov. Chris Christie Wednesday said he has asked districts to prepare for a 15 percent reduction in state aid for the budget year that begins in July. If enacted, it would be the largest-ever cut in state aid to schools, officials said. Frank Belluscio, spokesman for the New Jersey School Boards Association, said it would be the first reduction in aid to schools of any kind in at least 30 years. Christie and acting Education Commissioner Bret Schundler said at a meeting with school officials in Union County that their goal is to keep K-12 education aid flat in the upcoming budget, which Christie will propose March 16 and must be signed into law by July 1. But they said with an $11 billion deficit looming, they wanted to give advance warning so school officials would not be caught off guard if steep cuts are necessary.
Parents Told KC Schools Face Bankruptcy - Parents sounded off Tuesday night on a controversial plan to close 30 schools in the Kansas City School District. It's a drastic move to save money and consolidate resources. Families at a public forum at Northeast Elementary were told that the district is teetering on bankruptcy. However, nobody that KMBC's Martin Augustine spoke with was prepared to give up where their children attend school.
Reorganization of Kansas City School District would involve closing half of buildings - Kansas City Superintendent John Covington on Saturday unveiled a sweeping plan to close half the district’s schools, redistribute grade levels and sell the downtown central office. Covington presented his proposal to the school board in advance of a series of public forums this week on what would be the largest swath of closures in district history — as well as a major reorganization.
Utah considers cutting 12th grade -- altogether - Is it a waste of time? Are students ready for the real world at 17? For student body president J.D. Williams, 18, the answer to both questions is a resounding no. "I need this year," he said, adding that most of his classmates felt the same way. The sudden buzz over the relative value of senior year stems from a recent proposal by state Sen. Chris Buttars that Utah make a dent in its budget gap by eliminating the 12th grade. The notion quickly gained some traction among supporters who agreed with the Republican's assessment that many seniors frittered away their final year of high school, but faced vehement opposition from other quarters, including in his hometown
Central Falls to fire every high school teacher –– The teachers didn’t blink. Under threat of losing their jobs if they didn’t go along with extra work for not a lot of extra pay, the Central Falls Teachers’ Union refused Friday morning to accept a reform plan for one of the worst-performing high schools in the state. The superintendent didn’t blink either. After learning of the union’s position, School Supt. Frances Gallo notified the state that she was switching to an alternative she was hoping to avoid: firing the entire staff at Central Falls High School. In total, about 100 teachers, administrators and assistants will lose their jobs.
Missing state payments leave schools districts scrambling - Seven months into their fiscal year, Rock Island County school districts are owed $4.49 million by the state of Illinois, dollars that pay for a range of programs, including those the districts are required by law to provide. Nearly half the money, $2 million, is owed for special education programs and personnel. Transportation programs are being shorted to the tune of $1.2 million. The remaining $1.2 million in unpaid bills are for other programs such as free school breakfasts and lunches and bilingual education. Statewide, schools are awaiting about $650 million in categorical aid funds. The state comptroller does not have the money, said Matt Vanover, spokesman for the Illinois State Board of Education.
Hawaii teacher furloughs remain as school year starts running out - With 11 instructional days already lost to teacher furloughs and just six remaining, time has all but run out on potential furlough solutions this school year, though education officials, the governor's office and the teachers union say they are not giving up. However, the chairman of the BOE says the decision to present the proposal to the HSTA does not amount to an endorsement of the offer. And officials with the teachers union already say the governor's proposal has barely changed since she first proposed it in November — and the union was unwilling to accept it then.
Warning To Schools: Your Conduct Can Constitute A FELONY - Get the allegations in this article: - According to the filings in Blake J Robbins v Lower Merion School District (PA) et al, the laptops issued to high-school students in the well-heeled Philly suburb have webcams that can be covertly activated by the schools' administrators, who have used this facility to spy on students and even their families. The issue came to light when the Robbins's child was disciplined for "improper behavior in his home" and the Vice Principal used a photo taken by the webcam as evidence. The suit is a class action, brought on behalf of all students issued with these machines.
N.C. faces a $500 million gap - Barry Boardman, chief economist on the staff, said the state could face a $500 million gap when the budget year ends June 30. He offered a little more optimism than lawmakers, though: He said if April tax collections are higher than anticipated, the shortfall could be cut in half. Those collections, though, are so difficult to predict that they could just as easily balloon the budget gap.
Fiscal policy: State government drag - The Economist - NOT long ago I noted that early in 2009, Christina Romer estimated, based on data overestimating American employment by 1 million workers, that a federal stimulus of $1.2 trillion was called for. Ultimately, Congress passed a stimulus bill worth about $800 billion. But that is not where the impact of government policy on growth ends; one has to think about state and local governments, too. State budgets have been a persistent drag on output, offsetting much of the discretionary boost from stimulus. As Paul Krugman notes, that federal boost is about to end: State legislatures are looking a combined budget gaps worth more than the size of the House jobs legislation, and senators busy themselves stripping aid to states from their bill.
State Auditors Report Pension Debt - SPRINGFIELD, IL - The state's five pension systems are collectively under funded by more than $62 billion, according to a new financial report released Tuesday by state auditors. That liability was $8 billion more than the previous year, an increase of 14.7 percent. But it could be worse. A recent state law seeks to "smooth" sudden investment gains or losses by spreading them over five years rather than making the pension systems adjust for them annually. Had that law not been in place, auditors pegged the fair market downturn of the pension systems at $23.5 billion, an increase of 43.2 percent.
Emperor has no clothes: Pensions are short cash - Illinois politicians are at it again. They're borrowing from the future to make state pension contributions today. Illinois has one of the most underfunded public pension plans in the nation. When boomers start retiring, there won't be enough money to pay those pension promises. Both political parties are still trying to hide the magnitude of the problem. In early January, while everyone was busy watching the nasty campaign commercials, the State of Illinois pulled an end-run on the budget process. On Jan. 7 the state sold $3.5 billion of "pension obligation notes." In simple English, the state borrowed money to finance the state's contribution to its five retirement systems.
CalPERS retirements up - State and local government employees in California are retiring in record numbers. Experts suggest an aging workforce, cutbacks in positions and pay, and the economic downturn are all factors. [Calpensions] Since last July, retirement applications at CalPERS are up 21 percent. There were 16,558 applications, compared to 13,774 during the same period in 2009. A spokesperson for CalPERS says that the current numbers are on track to “far exceed” 2009 by next July 1. At the same time, more public employees are considering retirement. CalPERS has already received nearly 60,000 requests for retirement estimates since July 1.
Search the CalSTRS $100,000 Pension Club database - 3,090 retired teachers and administrators receive pensionsin excess of $100,000 from CalSTRS. They're all listed here."The information below was obtained under the Freedom of Information Act from the California State Teachers Retirement System (CalSTRS). This list may be be updated periodically with more pensioners as more data is obtained
Study: States must fill $1 trillion pension gap (AP) States may be forced to reduce benefits, raise taxes or slash government services to address a $1 trillion funding shortfall in public sector retirement benefits, according to a new study that warns of even more debilitating costs if immediate action isn't taken. The Pew Center on the States released a survey Thursday of state-administered pension plans, retiree health care and other post-employment benefits in all 50 states that blamed a decade's worth of policy decisions for leaving them shortchanged.The result for some states will be "high annual costs that come with significant unfunded liabilities, lower bond ratings, less money available for services, higher taxes and the specter of worsening problems in the future," the study said.
States Sink in Benefits Hole - WSJ - State governments face a trillion-dollar gap between the pension, health-care and other retirement benefits promised to public employees and the money set aside to pay for them, according to a new report from the Pew Center on the States. States promised current and retired workers a total of $3.35 trillion in benefits through June 30, 2008, said the report from the nonprofit research group, a division of Pew Charitable Trusts. But state governments had contributed only $2.35 trillion to their benefit plans to pay current and future bills, the report said. The Pew report said its estimate of the funding gap would likely prove conservative, because it didn't account for the massive investment losses pension funds suffered
Why Is Wal-Mart Paying Retail Prices? = Ted K. points out (and comments on) Stephanie Fitch’s article in Forbes on Wal-Mart’s 401(k) plan. The crux of the matter is that Wal-Mart seems to have done a lousy job creating a good 401(k) plan for its employees. Until recently, it had ten funds, only two of which were index funds; the other, actively managed funds all had high expense ratios (the ones Fitch quotes are above 1 percent).* More shockingly, the expense ratios paid by plan participants were the same as the expense ratios paid by individual investors in those mutual funds. It didn’t even pool its employees’ money together to get institutional investor rates. The irony, of course, is that Wal-Mart is the world’s best, most powerful negotiator when it comes to getting low prices for the stuff it sells, yet it exercised no negotiating power in getting low prices for its employees — even though it had $10 billion in assets to swing like a club.
Wall Street Oligarchs Eying Social Security - Hank Paulson, the Gold Sachs bankster/U.S. Treasury Secretary, who deregulated the financial system, caused a world crisis that wrecked the prospects of foreign banks and governments, caused millions of Americans to lose retirement savings, homes, and jobs, and left taxpayers burdened with multi-trillions of dollars of new U.S. debt, is still not in jail. He is writing in the New York Times urging that the mess he caused be fixed by taking away from working Americans the Social Security and Medicare for which they have paid in earmarked taxes all their working lives. Wall Street’s approach to the poor has always been to drive them deeper into the ground.
Mr. President, no *Real* Democrat is “agnostic” about Social Security - Last week President Obama said that he will be "agnostic" as to any changes, including benefit cuts, to Social Security that his debt reduction commission will recommend. This is a far cry from his constant campaign rhetoric in which he constantly reiterated that his plan was to raise the payroll cap on contributions, even if he promised to "listen" to all voices. This is a sad but necessary piece in which I lay out the evidence, which I believe is compelling, that Barack Obama's own words and deeds reveal his real agenda all along has been to use a commission or summit to cut Social Security benefits, and that the campaign rhetoric was just a sop to anesthetize opposition. This for a program that, at worst, faces a shortfall 30 years from now, and that Obama himself called the cornerstone of the American social compact.
No Way Out: 60% of Student-Loan Debt in Default or Deferment - Unlike other kinds of debt, student loans can be particularly hard to wriggle out of. Homeowners who can’t make their mortgage payments can hand over the keys to their house to their lender. Credit-card and even gambling debts can be discharged in bankruptcy. But ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens. Yet many former students are trying. There is an estimated $730 billion in outstanding federal and private student-loan debt—and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means that payments and interest are halted, or in “forbearance,” which means payments are halted while interest accrues.
College Students, the New Cash Cows - NYTimes - Cash cow: A product, business unit or consumer that generates unusually high profits, enough to keep less profitable aspects of the business afloat. Colleges and universities have always charged some students more than others — that’s what financial aid is all about. But the growth of for-profit higher education, combined with pressures on state universities to raise more of their own revenue, is intensifying the competition for the students who will pay the most up front. Unfortunately, some efforts to rake in more cash can lower the quality of the basic product — both the likelihood of graduation and the value of a college degree. Less than 60 percent of first-time full-time students seeking a bachelor’s degree at four-year institutions in 2000-1 completed that goal at that institution within six years
Feds grant $675 million in budget relief to California - The high-profile lobbying campaign that Gov. Arnold Schwarzenegger launched with the state's Democratic senators for more cash from the federal government yielded a $675 million dividend Thursday, a welcome bit of relief for the state's deficit-riddled budget. U.S. Health and Human Services Secretary Kathleen Sebelius said the Obama administration will forgive $4.3 billion in health care payments owed by states to the federal government through the end of the year. California's share is $675 million.
In California, Exhibit A in Debate on Insurance - NYTimes - With health care negotiations stalled in Washington, the Obama administration is seizing on the seething fury felt by Mr. Punzet and nearly 700,000 other Anthem customers in California who have received notices of increases that average 25 percent. About a quarter of them are seeing leaps of 35 percent to 39 percent, the company said, at least four times the rate of medical inflation.At a moment when the health care debate seemed drained of urgency, the rate increases have permitted Mr. Obama to remind Americans of what is at stake, not just for the uninsured but for those whose coverage is threatened by unregulated hyperinflation.
Premiums jump 14 percent on Medicare private plans - Millions of seniors who signed up for popular private health plans through Medicare are facing sharp premium increases this year — another sign that spiraling costs are a problem even for those with solid insurance. A study released Friday by a major consulting firm found that premiums for Medicare Advantage plans offering medical and prescription drug coverage jumped 14.2 percent on average in 2010, after an increase of only 5.2 percent the previous year. Some 8.5 million elderly and disabled Americans are in the plans, which provide more comprehensive coverage than traditional Medicare, often at lower cost.The Medicare findings are bad news for President Barack Obama and his health care overhaul that is bogged down in Congress. That's because the higher Medicare Advantage premiums for 2010 followed a cut in government payments to the private plans last year. And the Democratic bills pending in Congress call for even more cuts,
Health Insurance Costs: 'Shocking' Premium Increases Coming, Says Health And Human Services Dept. - Consumers are facing budget-busting increases in medical insurance premiums, Health and Human Services Secretary Kathleen Sebelius said Thursday, releasing a report the Obama administration hopes will tap public outrage and help revive its stalled health care overhaul. People buying their own insurance in at least six states have been facing pressure from insurers to raise rates by as much 56 percent, the report said. Officials said the problem is likely to be more widespread, but data from individual insurers in different states is difficult to obtain.
Once More, Health Care Cost Control: Mr. Franke refers us to Karl Rove’s recent column in The Wall Street Journal.... All of [Rove's] measures would have at best a marginal influence on costs. Business alliances: The idea of allowing small businesses to band together for the purpose of health insurance is not new.... It is hard to see why anyone would seriously deem these alliances superior to the formal insurance exchanges provided in the Senate and House bills, modeled as they are after the already functioning Massachusetts “Connector” and the Federal Employee Health Benefit System through which members of Congress procure their heavily government-subsidized health insurance. Tort reform: There is a good reason to introduce tort reform.... the CBO concluded that “if a package of proposals such as those described above was enacted, it would reduce total national health care spending by about 0.5 percent (about $11 billion in 2009).”
Doing Discounting Wrong - There is a normative argument against valuing lives in cost-benefit analysis; some people think it’s just wrong. I don’t agree with that; I think that in practice, you either value lives implicitly or you do it explicitly, and so you might as well do it explicitly. And for what it’s worth, the practice of valuing lives is firmly entrenched in our legal system; the amount you pay in damages if you kill someone negligently depends primarily on that person’s future earning potential, and also on the monetary value of the benefits that other people gained from his or her life. There is another argument against discounting future lives, however. The basic premise of discounting is that money in the future is worth less than money today. This has two components. One is the time value of money: $100 with certainty one year from now is worth about $99 today, because you can invest $99 in an FDIC-insured account at about 1% and get back $100 in a year. The second is risk: Future events are not certain, and the less certain they are to occurthe less valuable they are to you. Does this apply to lives, however?
Breaking The Healthcare Cost Curve - One answer might be Maryland’s solution, a regulatory commission of seven governor-appointed-commissioners serving 4 year terms and having the responsibility of setting appropriate rates for hospital inpatient, outpatient, and emergency department care to manage its rising healthcare costs by limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set. This regulatory commission is nothing new for Maryland and has been in place for years. At one time, 30 other states regulated hospital rates only to have them fall by the wayside in the late seventies and earlier eighties with the deregulatory movement.
Want lower prices for medical care? - Here's a wild and crazy idea: why not increase the number of U.S. medical schools? If all the [medical] schools being proposed actually opened, they would amount to an 18 percent increase in the 131 medical schools across the country. (By comparison, there are 200 law schools approved by the American Bar Association.)
Health insurance and mortality follow-up = On health insurance and mortality, you'll find Megan's further thoughts (which I agree with) here (and now here). Neither of us is saying the real net effect is zero. Also check out Matt, Ezra, Austin Frakt, all of whom make good points. Overall I'd like to see more numbers in the health care debate. If the Obama plan spends $90 billion extra a year on coverage and saves/extends 10,000 lives a year (a plausible estimate, in my view), that is $9 million a life, a rather underwhelming rate of return. That's a very gross comparison because life extension is not the only benefit and the $90 billion is not the only cost. Still, as a starting point for analysis I don't think it makes the plan look better. Keep also in mind that many of the newly covered people are bumping others back into the queue, since the overall supply of medical care isn't going up and may even be declining.
All you ever wanted to know about the research on health insurance and health -- and more - I think I've said quite enough on the question of whether health-care insurance reduces the risk of death. But one of the first things I did when looking into the subject was call Stan Dorn, the author of the Urban Institute study (pdf) that estimated 18,000 people died in 2006 because they didn't have health-care insurance. At the time, he said he was writing a response of his own, and would be in touch when he finished. Last night, he sent it along. It follows in full, and serves as a good introduction to the literature on this topic.
This Battle Is A Close-Run Thing - The administration is still trying to bring Democrats together for a final push to produce comprehensive health care reform, says Rogers – presumably through the complicated procedure known as reconciliation, which would require a simple majority of 51 votes But if that fails, and the White House is forced to scale back its plan, “Gregg would seem certain to come into play,” writes Rogers, and probably Maine’s two moderate Republicans, Sens. Olympia Snowe and Susan Collins, as well. Judd’s preferred gambit: apply the nearly $500 billion in Medicare savings contemplated by the House and Senate bills to deficit reduction, instead of plowing into expanded coverage. Perhaps he would settle for half as much, suggests Rogers, in which case the Democrats could pick up another $50 billion for coverage by embracing medical malpractice reform. And so on, through a series of possible compromises Judd packaged under the catchy heading of CPR: coverage, prevention and reform.
Obama to Post Health Plan as Sebelius Renews Attack on Insurers - (Bloomberg) -- President Barack Obama is preparing to release a proposal to restart the health-care debate before a White House meeting next week as the administration signaled that insurance company practices will be a focus of the talks. Obama will offer “one proposal” that takes “some of the best ideas” from House and Senate bills “and put them into a framework moving forward,” Health and Human Services Secretary Kathleen Sebelius said yesterday. A senior White House official said the plan will be posted by the morning of Feb. 22. Obama invited Republican leaders to the Feb. 25 meeting and challenged them to present their own health-care plan.
Reid open to public option reconciliation vote | Raw Story - As supporters of the public option mount a comeback, Senate Majority Leader Harry Reid (D-NV) signaled his willingness to pass it through reconciliation Friday. "If a decision is made to use reconciliation to advance health care, Senator Reid will work with the White House, the House, and members of his caucus in an effort to craft a public option that can overcome procedural obstacles and secure enough votes," Reid's spokesman Rodell Mollineau told The Plum Line's Greg Sargent. "Senator Reid has always and continues to support the public option as a way to drive down costs and create competition. That is why he included the measure in his original health care proposal."
Republican Medicare Cuts - Krugman - So, Newt Gingrich and John Goodman say, Don’t cut Medicare. The reform bills passed by the House and Senate cut Medicare by approximately $500 billion. This is wrong. Leave aside the mind-killing irony of Newt Gingrich — New Gingrich! — denouncing Medicare cuts. What are Republicans themselves proposing? Well, Rep. Paul Ryan’s Roadmap for America’s Future calls for the eventual elimination of Medicare as we know it, replacing it with a system of vouchers that would, eventually, account for a steadily declining share of GDP. But what about the next decade? Mr. Ryan’s release says that it Strengthens the current program with changes such as income-relating drug benefit premiums to ensure long-term sustainability. What does that mean? The CBO, helpfully, translates (pdf):
Health Care: Republicans Oppose Their Own Idea - NPR's Julie Rovner gives us the history of the individual mandate: For Republicans, the idea of requiring every American to have health insurance is one of the most abhorrent provisions of the Democrats' health overhaul bills. "Congress has never crossed the line between regulating what people choose to do and ordering them to do it," said Sen. Orrin Hatch (R-UT). "The difference between regulating and requiring is liberty." But Hatch's opposition is ironic, or some would say, politically motivated. The last time Congress debated a health overhaul, when Bill Clinton was president, Hatch and several other senators who now oppose the so-called individual mandate actually supported a bill that would have required it. In fact, says Len Nichols of the New America Foundation, the individual mandate was originally a Republican idea. "It was invented by Mark Pauly to give to George Bush Sr. back in the day, as a competition to the employer mandate focus of the Democrats at the time."
GOP demands White House post health care proposal online, then attacks WH for doing exactly that - On February 8th, Republican House leader John Beohner sent a letter to the White House, demanding that the White House post online any health care proposal it wished to discuss at the health care summit: If the President intends to present any kind of legislative proposal at this discussion, will he make it available to members of Congress and the American people at least 72 hours beforehand? So, four days later, the White House accepted this demand, and announced it would post a legislative proposal online more than 72 hours before the summit: Since this meeting will be most productive if information is widely available before the meeting, we will post online the text of a proposed health insurance reform package. So, naturally, the next day, Boehner attacked the White House for giving into his demand
Global Weirding Is Here, NYTimes: Of the festivals of nonsense that periodically overtake American politics, surely the silliest is the argument that because Washington is having a particularly snowy winter it proves that climate change is a hoax and, therefore, we need not bother with all this girly-man stuff like renewable energy, solar panels and carbon taxes. Just drill, baby, drill.When you see lawmakers like Senator Jim DeMint of South Carolina tweeting that “it is going to keep snowing until Al Gore cries ‘uncle,’ ” or news that the grandchildren of Senator James Inhofe of Oklahoma are building an igloo next to the Capitol with a big sign that says “Al Gore’s New Home,” you really wonder if we can have a serious discussion about the climate-energy issue anymore.
Obama Explains Global Boiling To Conservatives (video) - Hoping to defend their fossil-industry funders from having to limit carbon pollution, conservative politicians and pundits are increasingly embracing conspiracy theories that global warming is an ideological hoax — even as the consequences of climate change grow more dire. “Challenging science,” Media Matters’ Walid Zafar comments, “seems to be the conservative movement’s equivalent to speaking truth to power.” Today in a Nevada town hall meeting, President Obama took on the conservative deniers, explaining in straightforward language how record snowstorms in the nation’s capital are connected to manmade global warming. As Joe Romm notes, the scientific evidence has shown that we get snow storms in warmer-than-normal years
FOXNews - Global Warming Skeptics Lambaste Plan to Increase Funding for Climate Change Research - Global warming skeptics are agog that President Obama is seeking to dramatically increase federal funding for global warming research in the wake of the Climate-gate scandals that have emerged during the last three months. The federal budget for 2011 proposes $2.6 billion for the Global Change Research Program, a 21 percent boost over 2010. Critics are lambasting the Obama administration, saying it remains unfazed by the revelations of Climate-gate: doctored research statistics by British environmental scientists, attempts to discredit skeptics of global warming science, and disclosures that the U.N.'s own Nobel-Prize-winning climate science research was based on faulty research about the Amazon rain forest
Texas State Climatologist Disputes State’s Denier Petition: Greenhouse Gases ‘Clearly Present A Danger To The Public Welfare’ » Texas’s own state climatologist can find no scientific basis in his state’s effort to roll back the Environmental Protection Agency’s finding that greenhouse gases endanger the public. Texas Attorney General Greg Abbott (R-TX) filed paperwork to challenge the EPA endangerment finding yesterday, with the approval of Gov. Rick Perry (R-TX). Dismissing threats like sea level rise, droughts, and floods that global warming poses to Texas, the petition calls for the finding to be reconsidered, based on the argument that the EPA relies primarily on the work of the Intergovernmental Panel on Climate Change (IPCC), an institution guilty of “serious misconduct“
Environmental Regulation can Leave the Economy Better off - The direct benefits of the Clean Air Act from 1970 to 1990 include reduced incidence of a number of adverse human health effects, improvements in visibility, and avoided damage to agricultural crops. Based on the assumptions employed, the estimated economic value of these benefits ranges from $5.6 to $49.4 trillion, in 1990 dollars, with a mean, or central tendency estimate, of $22.2 trillion. These estimates do not include a number of other potentially important benefits which could not be readily quantified, such as ecosystem changes and air toxics-related human health effects. The estimates are based on the assumption that correlations between increased air pollution exposures and adverse health outcomes found by epidemiological studies indicate causal relationships between the pollutant exposures and the adverse health effects.
Big firms drop support for US climate bill - guardian - Barack Obama suffered a setback to his green energy agendatoday when three major corporations – including BP America – dropped out of a coalition of business groups and environmental organisations that had been pressing Congress to pass climate change legislation.The defections by ConocoPhillips, America's third largest oil company, Caterpillar, which makes heavy equipment, and BP rob the US Climate Action Partnership of three powerful voices for lobbying Congress to pass climate change law. They also undercut Obama's efforts to cast his climate and energy agenda as a pro-business, job-creation plan. Only hours earlier, Obama and other cabinet officials had made a high-profile announcement that $8.3bn (£5.3bn) was being awarded in loan guarantees for a company building the first new nuclear reactors in America in nearly 30 years.
World’s top firms cause $2.2tn of environmental damage, report estimates - The cost of pollution and other damage to the natural environment caused by the world's biggest companies would wipe out more than one-third of their profits if they were held financially accountable, a major unpublished study for the United Nations has found. The report comes amid growing concern that no one is made to pay for most of the use, loss and damage of the environment, which is reaching crisis proportions in the form of pollution and the rapid loss of freshwater, fisheries and fertile soils. The study, conducted by London-based consultancy Trucost and due to be published this summer, found the estimated combined damage was worth US$2.2 trillion (£1.4tn) in 2008 - a figure bigger than the national economies of all but seven countries in the world that year.
Obama's Loan Guarantee For Nuclear Plants Signals Shift In Energy Strategy - The Obama administration’s planned loan guarantee to build the first nuclear power plant in the U.S in almost three decades is part of a broad shift in energy strategy to lessen dependence on foreign oil and reduce the use of other fossil fuels blamed for global warming. Obama in the coming week will announce the loan guarantee to build the nuclear power plant, an administration official said Friday. The two new Southern Co. reactors to be built in Burke, Ga., are part of a White House energy plan that administration officials hope will draw Republican support
President Obama To Step Up Support For US Nuclear Industry - President Barack Obama is to signal a major step-change in the global nuclear industry this week when he announces loan guarantees for two nuclear reactors to be built in the US. The move will pave the way for the construction of the first nuclear power plants in America for more than three decades. Financial assistance will be given to build two 1,150-megawatt reactors to Southern Company's two-unit site south of Augusta in Georgia in the first of billion of dollars of loans guarantees allocated to the nuclear power industry. Mr Obama has said he wants to use nuclear power and other alternative sources of energy in his effort to create a more self-sufficient energy policy for America.
Southern Co.'s lobbying draws complaints - President Barack Obama's award of billions of dollars in federal nuclear loan guarantees to Southern Co. has angered environmentalists who say the president is embracing the energy powerhouse that worked aggressively to defeat a key climate change bill championed by his administration. The Atlanta-based company had nearly twice as many climate lobbyists as any other company or organization during last year's debate over cap and trade legislation, according to the Center for Public Integrity. The company hired 16 outside firms to supplement their stable of in-house lobbyists and spent $16.5 million on Capitol Hill lobbying in 2009. The company maintains the report overstates their lobbying role.
Obama's Nuclear Boondoggle | Mother Jones - The Department of Energy (DOE) will underwrite a loan of $8.3 billion to Southern Company's two planned reactors at Plant Vogtle in Burke County, Georgia—"just the first of what we hope will be many new nuclear projects," Carol Browner, the White House adviser on climate and energy, told reporters on Tuesday. Browner said the loan guarantee demonstrates the administration's commitment to working with Republicans on energy; handing major concessions to nuclear interests has been a key part of the Obama administration's strategy to pass a climate bill this year. Yet last October, federal regulators discovered significant safety concerns in the design proposal for the Westinghouse AP1000 reactors that are slated to be used for the Georgia project and six others around the country. The Nuclear Regulatory Commission (NRC) rejected the proposal after determining that the shield design would not protect the reactor from earthquakes, tornadoes, hurricanes, and airplane crashes. Michael Johnson, director of the NRC's Office of New Reactors, noted that the agency had "consistently laid out our questions" to Westinghouse about the design, which did not yet meet "fundamental engineering standards."
Energy Department pulls water applications for Yucca rail line - In what is the strongest sign to date that it will abandon the Yucca Mountain Project, the Department of Energy on Tuesday withdrew 116 water applications it had filed with the State Engineer for building a rail line to haul nuclear waste to the mountain from Caliente. "This is the first card in hopefully a domino of cards that is ready to fall," said Nevada's Senior Deputy Attorney General Marta Adams. She leads the state's legal effort to block DOE from obtaining water for the project, both for the proposed rail line and for constructing and operating a repository to bury 77,000 tons of highly radioactive waste in the mountain, 100 miles northwest of Las Vegas.
Michael Northrop: The Clean Energy Gold Rush - Of the 10 largest wind power companies in the world, the United States has one -- General Electric. Of the world's 10 largest solar companies, we have two -- First Solar and SunPower - but almost all their manufacturing is in Asia. Hydropower and geothermal companies are also located in the Far East. The U.S., with no national goal or policy framework for clean energy, simply hasn't found a way to create a stable marketplace where large, renewable energy companies can thrive. For a nation that consumes 25 percent of the world's energy, our failure to compete is ominous, and all the more troubling because a veritable "clean energy gold rush" has begun.
Report Says Cape Wind Would Save Billions - Green Inc. - An offshore wind farm in the Nantucket Sound could save the New England region billions of dollars over 25 years, according to a new report. The long-debated Cape Wind project, which would install 130 offshore wind turbines roughly five miles from the nearest shore, would be the first of its kind in the United States. It would cover 24 square miles in the sound. The turbines would supply about 10 percent of the 2013 power demand in Southeastern Massachusetts and about 1 percent of the total 2013 New England demand. The project would save the New England region about $185 million a year, according to the report, which was prepared this month by Charles River Associates and commissioned by backers of the project. Over 25 years, this would amount to $4.6 billion.
Climate pact appears increasingly fragile; U.N. official quits - Just two months after patching together a climate deal in Copenhagen, the world's biggest emitters of greenhouse gases are trying to figure out how to keep the fragile accord together, while the United Nations, which has played a central part in 15 rounds of climate talks, seems destined for a smaller role in the future. Nearly 100 nations, including the United States, South Africa and Brazil, have endorsed the Copenhagen Accord. But China and India have yet to formally sign off on it, and sources close to Chinese officials say they are balking at sensitive points dealing with transparency and monitoring, even as they vow to press ahead with limits on the growth of their emissions in the next decade. Meanwhile, a domestic political stalemate in the United States could make it challenging for the Obama administration to deliver on pledges to cut emissions 17 percent below 2005 levels by 2020. Pessimism about global climate talks deepened Thursday as Yvo de Boer, the United Nations' top climate official, resigned after struggling for 3 1/2 years to produce a binding legal treaty requiring the world's major emitters of greenhouse gases to slash their carbon output in the coming decades.
Liability Issues Related to New Anti-Climate Change Initiatives - Yesterday, I listened to an interesting lecture on the economics of carbon capture and sequestration at my UCLA Institute of the Environment. As world electricity demand continues to rise, developing nations will use coal fired power plants to supply a big share of this demand. Under "business as usual", this will increase greenhouse gas emissions to levels that Jim Hansen would say are quite scary. If Carbon Capture and sequestration (CCS) could safely work, then this would be a way for the developing countries to achieve a "win-win" of access to electricity without the resulting greenhouse gases. Listening to the talk, CCS raises a host of legal liability issues and spatial economics issues. A whole infrastructure of collecting the coal gas and injecting it into pipes will be needed and these pipes will then have to go somewhere for injection under the ground. Will for profit insurance companies be willing to write insurance contracts for these unknown hard to quantify risks? If not, then government will need to step in and thus the taxpayers will bear the risk of this as yet unproven technology.
Fog decline threatens US redwoods - BBC - Scientists in California say a drop in coastal fog could threaten the state's famed giant redwood trees. Their study, published in the Proceedings of the National Academy of Sciences, says such fog has decreased markedly over the past 100 years. The weather records analysed come from the US National Climate Data Centre. "Fog prevents water loss from redwoods in summer and is really important for the tree and the forest," The team at the University of California, Berkeley was interested in how fog was involved in climate changes on the coast and noticed a drop that they believe could have an effect on the trees. The scientists say redwoods are concentrated along the coastal areas primarily because they are not as well adapted as other tree species to deal with California's hot summers.
An Ominous Warning on the Effects of Ocean Acidification - They had drilled down into sediment that had formed on the sea floor over the course of millions of years. The oldest sediment in the drill was white. It had been formed by the calcium carbonate shells of single-celled organisms — the same kind of material that makes up the White Cliffs of Dover. But when the scientists examined the sediment that had formed 55 million years ago, the color changed in a geological blink of an eye. “In the middle of this white sediment, there’s this big plug of red clay,” says Andy Ridgwell, an earth scientist at the University of Bristol. In other words, the vast clouds of shelled creatures in the deep oceans had virtually disappeared. Many scientists now agree that this change was caused by a drastic drop of the ocean’s pH level. The seawater became so corrosive that it ate away at the shells, along with other species with calcium carbonate in their bodies. It took hundreds of thousands of years for the oceans to recover from this crisis, and for the sea floor to turn from red back to white.
How Worrisome Is Ocean Acidification? - But experiments alone can't show how acidification will affect the broader ocean. So another option is to study the past. And that's what two researchers at the University of Bristol, Andy Ridgwell and Daniel Schmidt, have done in a new study published in Nature Geoscience. About 55 million years ago, for instance, there was a huge spike in carbon-dioxide released into the air over the course of about 10,000 years. This was known as the Paleocene-Eocene Thermal Maxium (PETM). No one's quite sure what the cause of the CO2 spike was: At the time, the Earth had been warming for a variety of natural reasons, and that may have kicked off feedback effects like the release of methane trapped in ice. But the upswell in CO2 had a devastating effect—temperatures rose between 5°C and 9°C, and a large number of deep-water species went extinct. So Ridgwell and Schmidt tried to see if that's a good analogy to what's going on today by modeling the changes in ocean chemistry then and now and comparing results.
Rate of ocean acidification on track for extinction of most marine species, much like 65 million years ago The rate at which the oceans are becoming more acidic is greater today than at any time in tens of millions of years, according to a new study.Rapidly rising concentrations of carbon dioxide in the atmosphere mean that the rate of ocean acidification is the fastest since the age of the dinosaurs, which became extinct 65 million years ago, scientists believe. The oceans are likely to become so acidic in coming centuries that they will become uninhabitable for vast swathes of life, especially the little-studied organisms on the deep-sea floor which are a vital link in the marine food chain. Scientists have concluded, in a study published today in the journal Nature Geoscience, that the current rate of ocean acidification is up to 10 times faster than 55 million years ago – the last time the deep oceans became so acidic. This is because of the speed at which carbon-dioxide concentrations are rising in the atmosphere. This carbon dioxide dissolves in seawater at the sea surface to form carbonic acid. The increased acidity of the water affects the amount of dissolved carbonate minerals that are available for marine organisms to use in forming their shells and hard skeletons.
Kieran Mulvaney: A Farewell to Ice - Sea ice cover in the Arctic Ocean grew by an average of 13,000 square miles a day last month. Great news, right? Well, not so much. For one thing, it was January. Mid-winter. Sea ice cover is supposed to grow. For another, it ain't growing like it used to. In the 1980s, the average rate of ice growth was 35,000 square miles a day. According to the National Snow and Ice Data Center, average sea ice extent in the Arctic last month was 5.32 million square miles, which was 69,000 square miles above the record January low, set in 2006, but 417,000 square miles below the 1979-2000 average. Now, nobody is predicting the disappearance of winter sea ice in the Arctic. However, as NSIDC director Mark Serreze explained to Reuters, a reduction in winter sea ice extent -- and the fact that the ice that remains is younger and thinner -- sets up the Arctic for a summer "double whammy."
Greenland's glaciers disappearing from the bottom up: As much as 75% of the ice lost by glaciers is melted by ocean warmth - Water warmed by climate change is taking giant bites out of the underbellies of Greenland's glaciers. As much as 75% of the ice lost by the glaciers is melted by ocean warmth."There's an entrenched view in the public community that glaciers only lose ice when icebergs calve off," says Eric Rignot at the University of California, Irvine. "Our study shows that what's happening beneath the water is just as important." The underwater faces of the different glaciers retreated by between 0.7 and 3.9 metres each day, representing 20 times more ice than melts off the top of the glacier. This creates ice overhangs that crumble into the sea, says Paul Holland at the British Antarctic Society.
Projection shows water woes likely based on warmer temperatures - Several Midwestern states could be facing increased winter and spring flooding, as well as difficult growing conditions on farms, if average temperatures rise, according to a Purdue University researcher. Keith Cherkauer, an assistant professor of agricultural and biological engineering, ran simulation models that show Indiana, Illinois, Wisconsin and Michigan could see as much as 28 percent more precipitation by the year 2070, with much of that coming in the winter and spring. His projections also show drier summer and fall seasons."This was already a difficult spring to plant because of how wet it was. If you were to add another inch or so of rain to that, it would be a problem," said Cherkauer, whose findings were published in the early online version of the Journal of Great Lakes Research. "It could make it difficult to get into fields. There's also a potential for more flooding."
Snowfall increase in coastal East Antarctica linked with southwest Western Australian drought - The southwest corner of Western Australia has been subject to a serious drought in recent decades. A range of factors, such as natural variability and changes in land use, ocean temperatures and atmospheric circulation, have been implicated in this drought, but the ultimate cause and the relative importance of the various factors remain unclear. Here we report a significant inverse correlation between the records of precipitation at Law Dome, East Antarctica and southwest Western Australia over the instrumental period, including the most recent decades. This relationship accounts for up to 40% of the variability on interannual to decadal timescales, and seems to be driven by the meridional circulation south of Australia that simultaneously produces a northward flow of relatively cool, dry air to southwest Western Australia and a southward flow of warm, moist air to East Antarctica. This pattern of meridional flow is consistent with some projections of circulation changes arising from anthropogenic climate change. The precipitation anomaly of the past few decades in Law Dome is the largest in 750 years, and lies outside the range of variability for the record as a whole, suggesting that the drought in Western Australia may be similarly unusual
Smoke bomb: The other climate culprits - IN JUNE 1783, lava and gases began pouring from the Laki fissure in Iceland in one of the biggest and most devastating eruptions in history. Poisonous gases and starvation killed a quarter of Iceland's population. The effects of the eight-month-long eruption were felt further afield, too. In the rest of Europe, a scorching summer of strange fogs was followed by a series of devastating winters. In North America, the winter of 1784 was so cold the Mississippi froze at New Orleans.At the time, French naturalist Mourgue de Montredon suggested the eruption might be to blame, but two centuries passed before scientists started to work out how gas and dust from volcanoes affect climate. The main culprit is sulphur dioxide, which has a cooling effect. Laki pumped an estimated 120 million tonnes of the stuff into the atmosphere, cooling the northern hemisphere by as much as 0.3 °C over the next few years. Nowadays, we are pumping out amounts of sulphur dioxide each year comparable to Laki's emissions. Human emissions rose rapidly over the 20th century, peaking at an estimated 70 million tonnes a year in the 1990s as developed countries cleaned up their act. Even such huge amounts, however, have not been enough to stop global warming: the cooling effect has been more than offset by the warming effect of carbon dioxide and other pollutants.
The Peak Oil Crisis: Government in Transition - Sitting at home waiting for the plows should remind the more perceptive among us that we are no longer in the 18th century where nearly every family, equipped with an ax and a rifle, could provide for its own food, safety, shelter, and general well-being without the need for outside help. Today, when the lights go out, we rely on government to rush us to shelter where we are kept warm, fed, and even entertained until the lights come on again. It is amazing how many among us still don't grasp that we are an interdependent whole, needing many specialized skills and institutions to sustain life. In today's America, only a miniscule percentage has the skills, knowledge, land, and lifestyle to survive without outside help. For most of us, it is the collective, in the form of government, that holds our civilization together - water, sewers, public health, roads, buses, and yes, even snow plows.
Peak Oil, Matt Savinar, Life After the Oil Crash - Oil will not just "run out" because all oil production follows a bell curve. This is true whether we're talking about an individual field, a country, or on the planet as a whole. Oil is increasingly plentiful on the upslope of the bell curve, increasingly scarce and expensive on the down slope. The peak of the curve coincides with the point at which the endowment of oil has been 50 percent depleted. Once the peak is passed, oil production begins to go down while cost begins to go up. In practical and considerably oversimplified terms, this means that if 2005 was the year of global Peak Oil, worldwide oi
Singapore accused of launching 'Sand Wars' - Singapore has been accused of launching a clandestine "Sand War" against its neighbours by paying smugglers to steal entire beaches under the cover of night. The island city-state's size has increased by over 20 per cent since the 1960s and demand for sand for lucrative land reclamation and development projects is higher than ever. However, recent bans on exporting sand introduced in Indonesia, Cambodia and Vietnam have cut off supplies and opened up a thriving smuggling trade. Thieves have begun making night-time raids on the picturesque sandy beaches of Indonesia and Malaysia, carving out millions of tons of coastline and leading to fears of an imminent environmental catastrophe on a swath of tropical islands.
DOT: Vehicle Miles Driven unchanged in December In early 2008 there was sharp drop in U.S. vehicle miles driven. That was one of the key signs of demand destruction for oil that led me to predict oil prices would decline sharply in the 2nd half of 2008. With oil prices at $77 per barrel, I've started looking for possible signs of demand destruction again (see: Oil Prices Push Above $81 per Barrel). The Department of Transportation (DOT) reports that vehicle miles driven in December were unchanged from December 2008: Travel on all roads and streets changed by 0.0% (-0.1 billion vehicle miles) for December 2009 as compared with December 2008. ... Cumulative Travel for 2009 changed by +0.2% (6.6 billion vehicle miles). This graph shows the comparison of month to the same month in the previous year as reported by the DOT.
The Peak Oil Crisis: The Crunch - Another study warning governments of the imminence and danger of peak oil was released last week. This one was an updated version of a similar report produced by a group of British industrialists 14 months ago. The new report, produced by the UK's Industry Taskforce for Peak Oil and Energy Security, is of interest because it updates the estimates of when the oil "crunch" (when demand exceeds production) will occur to account for the global economic slowdown. In addition, the amount of unbiased attention that has been given to the report including that of the British government shows that a wider understanding of the problem is starting to take hold.
U.K. Should Expand Tax Incentives in North Sea, Shell Says - (Bloomberg) -- The U.K. should expand tax incentives to producing oil and natural-gas fields in the North Sea to increase output, said James Smith, chairman of Royal Dutch Shell Plc’s U.K. office. The U.K. plans to make more deposits eligible for tax incentives, Chancellor of the Exchequer Alistair Darling said Dec. 9. The changes could support an additional 300 million barrels oil equivalent of crude and gas production. “It’s a good start, but I don’t think it will be enough,” Smith said yesterday in an interview. “Using the same tool more extensively is going to be very important for getting an extra amount from the North Sea, particularly from brownfield areas.�
Free trade, loss of support systems hurt African food production - Market reforms that began in the mid-1980s and were supposed to aid economic growth have actually backfired in some of the poorest nations in the world, and just in recent years led to multiple food riots, scientists report today in Proceedings of the National Academy of Sciences, a professional journal."Many of these reforms were designed to make countries more efficient, and seen as a solution to failing schools, hospitals and other infrastructure," "But they sometimes eliminated critical support systems for poor farmers who had no car, no land security, made $1 a day and had their life savings of $600 hidden under a mattress. "These people were then asked to compete with some of the most efficient agricultural systems in the world, and they simply couldn't do it," Becker said. "With tariff barriers removed, less expensive imported food flooded into countries, some of which at one point were nearly self-sufficient in agriculture. Many people quit farming and abandoned systems that had worked in their cultures for centuries."
MIT - Trends in Rainfall and Economic Growth in Africa: A Neglected Cause of the African Growth Tragedy - Abstract - We examine the role of rainfall trends in poor growth performance of sub-Saharan African nations relative to other developing countries, using a new cross-country panel climatic data set in an empirical economic growth framework. Our results show that rainfall has been a significant determinant of poor economic growth for African nations but not for other countries. Depending on the benchmark measure of potential rainfall, we estimate that the direct impact under the scenario of no decline in rainfall would have resulted in a reduction of between around 15% and 40% of today's gap in African GDP per capita relative to the rest of the developing world.
EU biofuels significantly harming food production in developing countries - EU companies have taken millions of acres of land out of food production in Africa, central America and Asia to grow biofuels for transport, according to development campaigners. The consequences of European biofuel targets, said the report by ActionAid, could be up to 100 million more hungry people, increased food prices and landlessness.The report says the 2008 decision by EU countries to obtain 10% of all transport fuels from biofuels by 2020 is proving disastrous for poor countries. Developing countries are expected to grow nearly two-thirds of the jatropha, sugar cane and palm oil crops that are mostly used for biofuels."To meet the EU 10% target, the total land area directly required to grow industrial biofuels in developing countries could reach 17.5m hectares, over half the size of Italy. Additional land will also be required in developed nations, displacing food and animal feed crops onto land in new areas, often in developing countries," says the report. Biofuels are estimated by the IMF to have been responsible for 20-30% of the global food price spike in 2008 when 125m tonnes of cereals were diverted into biofuel production. The amount of biofuels in Europe's car fuels is expected to quadruple in the next decade.
European finance ministers meet to discuss bailing out the Greek economy - EUROPE'S finance ministers meet for two days, beginning on Monday February 15th, to discuss the details of a plan to support Greece as it struggles with its public finances. A political deal pledging support for Greece, agreed at a summit of European leaders in Brussels, was intended to reassure financial markets fearful of a default and the doubt it cast over the long-term prospects for the euro area. But after a vague promise of aid for Greece did little to lessen uncertainty, finance ministers will be expected to produce more concrete measures.
An underwhelming EU summit on Greece - “PRETTY catastrophic”. That was the verdict of a depressed-looking diplomat, at the end of a Brussels summit on Thursday February 11th that saw European Union leaders issue a ringing, but alarmingly vague, pledge of “determined and co-ordinated action” to preserve the euro zone from the risk of a Greek sovereign default. The vagueness of the bail-out promise was no mystery. After years of footing the bills for successive Euro-crises, Germany is in a truculent mood. Of the 16 countries that share the single currency, most came to Brussels ready to spell out, in some detail, how they might come to the aid of Greece, without breaching “no bail-out” rules that prevent the EU from assuming the debts of countries in the euro zone.
Can Anyone Fix The Euro Puzzle? - The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours. It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.
Guardian: Euro continues to fall as EU fails to agree Greece rescue plan- The euro continued to fall today amid disappointment that the European Union has not come up with a solid rescue plan for Greece. Figures showing that Germany's economic recovery unexpectedly stalled in the final quarter of last year added to the euro's woes. The currency came under heavy pressure yesterday as German chancellor Angela Merkel dashed hopes of a swift bailout of debt-laden Greece. EU leaders made a vague pledge to take "determined and co-ordinated action if needed" to help Greece and prop up the euro. This morning, Olli Rehn, Brussels's monetary affairs commissioner, said the EU needs to be bolder in its surveillance of economic policies to avert a repeat of Greece's budgetary crisis.
Greece debt bailout: EU leaders split over euro crisis - The European single currency is facing an 'inevitable break-up' a leading French bank claimed yesterday. Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide 'sticking plasters' to cover the deep- seated flaws in the eurozone bloc. The stark warning came as the euro slipped further on the currency markets and dire growth figures raised the prospect of a 'double-dip' recession in the embattled zone. Claims that the euro could be headed for total collapse are particularly striking when they come from one of the oldest and largest banks in France - a core founder-member.
Few Surprises As Greece’s Economic Contraction Accelerates -Well, I may say there were no surprises, but in fact the Greek economy contracted more than many observers expected in the fourth quarter, while downward revisions to the rest of 2009 converted the present recession into the country’s worst since 1987. Evidently the latest numbers offer the first warning that all may not be as simple as it looks on paper for the Greek government’s plan to set their finances straight. According to the Greek National Statistics Office gross domestic product contracted by 0.8 percent in the fourth quarter, significantly more than the 0.5 percent drop forecast in a Reuters survey of economists. The data clearly reveal that Greece’s downturn actually picked up speed from a revised 0.5 percent in the third quarter, casting doubt over government estimates of a return to growth in the second part of this year, and raising yet more issues about the evolution of the debt to GDP ratio.
Economist: Feeble growth in the euro zone -BARELY had the ink dried on a statement by European leaders supporting Greece in its struggle to finance its debts when more bad news emerged from the euro zone. Figures released on Friday February 12th showed that GDP in the 16-country currency zone rose by just 0.1% in the three months to the end of December compared with the previous quarter. That there was any improvement at all was largely down to France, where a burst of consumer spending lifted the economy by 0.6%. In the region’s other big countries, GDP was either flat—as in Germany—or falling, as in Italy and Spain (see chart below). The main problem is a familiar one: consumers within the euro zone are not spending enough and the strong currency is making it hard to tap demand in the rest of the world.
Between Dire and Disastrous - Let’s look at how Greece came to its current rather dismal predicament. And we will look at why it may be even worse than many pundit First, we need to go back to the creation of the euro. Most of the Mediterranean countries that are now in trouble were allowed into the union with an exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany. That meant that Greek consumers could buy products and services that previously may have been out of their reach. Plus, with government debt at low rates, the Greek government could borrow more to finance deficit spending, without the threat of higher interest rates. And Greece began to increase its debt with abandon.
Europe’s Trojan Horse - Europe is now moving ineluctably toward a bailout for Greece. There will be emergency financing. There will be conditions. There will be the obligatory promises by the government in Athens. This will make it possible for the Greek government to service its debt. ... The longer-term consequences will not be savory, but they will be problems for another day. ...All of this raises the obvious question: Was the real mistake creating the euro in the first place? Since I was one of the few Americans to advocate a single European currency, you would be justified in asking: Am I having second thoughts?My answer is no....
Greece Rescue Collides With the Policy Trilemma - Yves Smith - A fair number of policy commentators are hewing to the view that somehow the EU will cobble together some sort of solution to the Greek fiscal mess because the alternatives look vasty worse. As Paul Krugman noted: A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” Yet we have the spectacle of Greece signaling that it isn’t exactly up for what its creditors want from it, as the Financial Times reports: Greece is expected on Monday to resist pressure for an immediate tightening of its current austerity package as it fights to win back the confidence of international financial markets and its eurozone neighbours. Ambrose Evans-Pritchard points to another wee problem: the EU made a commitment in advance of member states going along. And right now, they, like Greece, are not making the right noises either...
Not federal union, yet: Rescuing Greece. Economic union. Two different things | The Economist
THERE has been a lot of commentary, in the past couple of days, to the effect that Europe is on the brink of a great leap forward in political and economic integration. The theory goes: a bail-out of Greece, accompanied by intrusive monitoring by Eurocrats, would constitute an unprecedented level of EU interference in the fiscal affairs of a member country. Wise birds have murmured that Europe makes its biggest advances in the depth of crises. In France, there has been much fluttering in the dovecotes after Angela Merkel, the German chancellor, said at the February 11th summit that the EU needed an "economic government": an old French idea whose very name was previously verboten in Berlin.
Europe Economy Chief Calls for More Steps by Greece (Bloomberg) -- The European Union’s top economic official said Greece should take more measures to cut the region’s largest budget deficit as the EU sought details on the country’s use of derivatives to manage its debt. “We expect that in due course the Greek government will take the necessary additional measures,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today before a meeting of EU finance chiefs. Greek Finance Minister George Papaconstantinou said his task was like changing “the course of the Titanic.”
Greece: Our Debt, Your Problem – Good insider-y and cynical reading on Greece's debt non-problem problem that has been making the rounds, allegedly written by an anonymous in-country banker: GGBs: Our debt, your problem. If Greece defaults, it will be the biggest sovereign default in history. If Greece is bailed out, it will be the biggest sovereign bailout in history. That's what you get when there's EUR 250 billion at stake. The Russian and Argentinean defaults, both south of EUR 60 billion, were not even a quarter as big. Thing is, as a Greek I'm as worried about the whole thing as a resident of the fictitious "South Sea" would have been when the South Sea bubble went bust. Here's why: Debt is not dealt with very well by economic theory. Debts net out. For every lender there is necessarily a borrower.
Greece refuses EU austerity measures demand - The Greek Government looked set on a collision course with the European Commission today as its finance minister denied demands that it needed to take further austerity measures to cut its debt. Hours ahead of a two-day meeting of eurozone finance ministers in Brussels, being held to scrutinise Greece's existing plan to cut is deficit, Olli Rehn, the new EU Commissioner for Economic and Monetary Affairs said: "Our view is that risks... are materialising, and therefore there is a clear case for additional measures.” But George Papaconstantinou, the country’s Finance Minister, said the EU needed to show more support to Greece instead of expecting more detailed austerity measures. He said: “If we announce today new measures, will that stop markets attacking Greece?
Germany growls as Greece balks at immolation – Telegraph - The EU has issued a political pledge to rescue Greece – and by precedent, all Club Med – without first securing a mandate from the parliaments of creditor nations. Holland's Tweede Kamer has passed a motion backed by all parties prohibiting the use of Dutch taxpayer money to bail out Greece, either through bilateral aid or EU bodies. "Not one cent for Greece," was the headline in Trouw. The right-wing PVV proposed "chucking Greece out of EU altogether". Germany's Bundestag has drafted an opinion deeming aid to Greece illegal. State bodies may not purchase the debt of another state, in whatever guise. The EU is entering turbulent waters by defying these irascible and sovereign bodies. It had no choice, of course. Europe's banking system was – and is – at imminent risk as Greek contagion spreads across Club Med.
Teaching PIIGS to Fly - Greece’s fiscal problems are, as I have argued many times, but the tip of a global iceberg. For the next installment of the recent global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses in order to revive economic growth. Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build-up of public debt. Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed after a few years by sovereign defaults and/or high inflation to wipe out the real value of public debts. Greece is also the canary in the coal mine for the euro zone, where all the PIIGS economies (Portugal, Italy, Ireland, Greece, and Spain) suffer from the twin problems of public-debt sustainability and external-debt sustainability. Euro accession and bull-market “convergence trades” pushed bond yields in these countries toward the level of German bunds, with the ensuing credit boom supporting excessive consumption growth.
What should Greece do? - There’s been a lot of discussion of the problems of Greek sovereign debt, its implications for the euro and so on. But I haven’t seen much discussion of what the Greek government should do in dealing with the simultaneous problems of an economic downturn and unsustainable debt. The course of action being demanded by the bondholders and their advocates, as well as by the EU governments that are likely to bear the costs of a bailout is that of drastic retrenchment on the lines the IMF would normally advocate in cases of this kind. But that is obviously not a desirable policy response when considered in macroeconomic terms. I’m not well informed on the details of Greece’s budget problems, so I’m mostly going to make generic suggestions that are applicable to a case like this.
Unwinding Global Imbalances - Yves Smith - I found Pettis’ discussion of Eurowoes to be useful, and start with his punch line first: You can’t run large trade surpluses if your trade partners are no longer able or willing to run the corresponding trade deficits. This is a non-trivial observation. It is common to blame the debtor (after all, they are the ones that welches on its obligations), but like many things in life, parsing out responsibility is often more complex than it appears on the surface. So if you think of the surplus country as having put itself in the position of being a vendor (not exactly correct, but a useful way to reframe the problem), it is not in a vendor’s interest to keep selling to a deadbeat, or someone who for other reasons is no longer a suitable outlet for your product. So Pettis’ point is that Germany really does need to do something, which is consume more.
The euro group gets concrete – on what Greece has to do, but not on the bailout - At the eurogroup meeting yesterday, it was agreed that Greece has to do more, surprise, surprise. Eurogroup finance ministers gave Greece until March 16 to present a more credible adjustment plan. Olli Rehn says the budgetary assumptions are too optimistic, which is correct – though the French budgetary assumption lack have that particular problem as well. The euro area finance ministers have discussed concrete measures of additional expenditure cuts, including further wage cuts, cuts in capital expenditure, and revenue measures, such as a VAT increase, a tax on luxury goods, energy taxes, according to Kathimerini. But Jean Claude Juncker refused to say what the euro group itself will do. He says it would not be helpful to provide a public account of any emergency measures.
Greece to resist push for greater austerity - Greece is expected today to resist pressure for an immediate tightening of its current austerity package as it fights to win back the confidence of international financial markets and its eurozone neighbours. Germany and the European Central Bank have been pushing Athens to strengthen its existing fiscal stability plan by adding measures such as a 1-2 per cent increase in value added tax and further public-sector wage cuts in return for financial assistance. , Jean-Claude Trichet, ECB president, called on Greece "to take the extra measures that will be necessary to make credible their turnaround plan".Athens is fighting to postpone any decision on further measures until mid-March, when officials from the European Union, ECB and the International Monetary Fund are due to carry out a forensic inspection of Greece's deficit-cutting programme.
Germans say euro zone may have to expel Greece: poll (Reuters) - A majority of Germans want debt-ridden Greece to be thrown out of the euro zone if necessary and more than two-thirds oppose handing Athens billions of euros in credit, a poll published on Sunday showed. Vocal opposition to aid for Greece from members of Chancellor Angela Merkel's coalition also grew at the weekend with several senior politicians expressing skepticism, especially as Germany's own recovery is fragile. The Emnid poll for Bild am Sonntag newspaper showed 53 percent of Germans asked said the European Union should, if necessary, expel Greece from the euro zone.
EU Showdown With Greece Looming -- Yves Smith - The latest move in the “so what are we gonna do about Greece?” EU vs. Greece drama was that Greece was playing non-negotiable, saying it had agreed to reduce its fiscal deficit by 4% of GDP (from over 12.7% to 8.7%) and it was premature to talk about doing more at this juncture. That posture is not going over well in Brussels. This is the key section of a recap from Bloomberg:The ministers from the 16 nations that use the euro told Greek authorities to ready more deficit measures by March 16, in case the government fails to show sufficient progress on its budget goals in a report to the European Commission…. “We’re waiting for Greece to prove that it’s taking very seriously the commitments it has made,” Juncker said late yesterday after leading a meeting of euro-area finance ministers in Brussels. Should the government’s efforts not satisfy the commission, the EU “will impose on Greece the acceptance of additional measures,”
Juncker: Greece has March 16 Deadline to Show Progress - Based on reports from Dow Jones: Juncker: Euro Zone Ready To Support Greece If Needed and the BBC: Greece 'may cut spending further', here are some comments from Jean-Claude Juncker, Luxembourg's prime minister and chairman of the 16 euro-zone finance ministers: Greece has until March 16th to show progress on their budget. If Greece is not on track, the EU will demand extra cost cutting measures. Dow Jones quotes Juncker: "If it appears in mid-March that they are not on track we will ask for additional measures." Mr Juncker said there would be no details released of any possible bail-out. According to the BBC, Juncker said it would be "unwise" to discuss the details now.
Greek Finance Ministry Walks Off The Job To Protest Debt Crisis Austerity - Greek customs officials and finance ministry employees walked off the job Tuesday to protest government austerity measures designed to pull the country out of a debt crisis that has shaken the entire eurozone. The three-day customs strike will affect imports and exports, with a skeleton staff processing only certain items such as perishable goods and pharmaceuticals, and could affect the supply of fuel.Finance Ministry employees — including those at Greece's much-maligned statistics service, which was accused by the EU of helping cause the crisis by faking the country's economic statistics — walked off the job for four days. The strikes came as European finance ministers in Brussels warned Athens that it would have to prepare even tougher budget cuts if its current austerity program can't reduce its massive deficit from 12.7 percent of economic output to 8.7 percent this year. Athens has until March 16 to report back to the EU on
Greek unions launch 1st assault on austerity plan - A civil servants' strike grounded flights and shut down public services across Greece on Wednesday, as labor unions mounted their first major challenge to austerity measures in the debt-plagued country. Air traffic controllers, customs and tax officials, hospital doctors and schoolteachers walked off the job for 24 hours to protest sweeping government spending cuts that will freeze salaries and new hiring, cut bonuses and stipends and increase the average retirement age by two years. "It's a war against workers and we will answer with war, with constant struggles until this policy is overturned,"
Germany rejects European fund for Greece BERLIN (AP) - Germany has rejected the idea of setting up a special fund to bail out eurozone countries, like Greece, that run into budget trouble. Finance Ministry spokesman Michael Offer said Monday that a European Monetary Fund would not help a case such as Greece's. He said there was "no way around" painful austerity measures being pushed through by the Greek government. Offer said Greece must reduce its budget deficit by four percentage points this year and bring it down to 3 percent of gross domestic product by 2012. That is in line with requirements for participation in the common currency. Greece's debt trouble has shaken confidence in the 16-country currency union and pushed the euro to a nine-month low against the dollar.
Greek MPs lash out at Germany over debt crisis (Reuters) - Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticising the country over its yawning fiscal deficits. "How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?" Chancellor Angela Merkel's government has so far deflected appeals to promise aid to heavily indebted Greece, despite fears that failure to help Athens could threaten the euro.\
Greece loses EU voting power in blow to sovereignty – Telegraph - The European Union has shown its righteous wrath by stripping Greece of its vote at a crucial meeting next month, the worst humiliation ever suffered by an EU member state. The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty. While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.
Greece Outlaws Cash Transactions Above 1500 Euros, Unveils New Taxes - In an attempt to rein in the shadow economy and collect more tax revenue, Greece outlaws cash transactions greater than 1500 Euros. Please consider Greek Finance Minister unveils tax reform, wage policy. Everyone in Greece will quickly figure out that the time to make major purchases is now. So expect to see sales plunge starting January 1, 2011 as demand for everything priced above 1500 euros shifts forward.
Greek Polls Show Massive Resistance To Any Form Of Financial Discipline- Greeks have little confidence that their government can push through necessary spending cuts without facing massive public opposition: Business Week:Eighty percent of people questioned said they see more protests in the next two to three months, Kathimerini newspaper reported. The survey, published yesterday, was conducted Feb. 4- 9, after Prime Minister George Papandreou announced an increase in fuel taxes and a higher retirement age to tackle the deficit. In the poll of 1,042 people by Public Issue pollsters, 52 percent of respondents said they believe Greece is moving in the right direction, compared with 57 percent in January. The poll has a margin of error of 3.2 percentage points.
Up to 25 billion euros in aid mulled for Greece: report (Reuters) - Germany's finance ministry has sketched out a plan in which countries using the euro currency will provide aid worth between 20 billion and 25 billion euros ($27-$33.7 billion) for Greece, a magazine reported on Saturday. Citing "initial considerations" by the ministry, German weekly Der Spiegel said the share of financial aid for Greece would be calculated according to the proportion of capital each country holds in the European Central Bank. The report said all euro countries would shoulder the burden and that Germany's share in the package would amount to 4-5 billion euros, and be handled by state-owned bank KfW
Let Greece take a eurozone ‘holiday’, by Martin Feldstein, Commentary, Financial Times: Loan guarantees or temporary credits from Germany and France may allow Greece to avoid a refunding crisis later this spring. But temporary financial patches will not deal with the real problem: Greece’s budget deficit of 13 per cent of gross domestic product. .......Greece needs to cut future annual spending and increase its future taxes in a combination equivalent to at least 10 per cent of GDP. Unfortunately, such a fiscal contraction would sharply increase unemployment, already at a painful 10 per cent... If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports... But since Greece no longer has its own currency, it is not free to follow this strategy. So what can Greece do? ...The rest of the eurozone could allow Greece to take a temporary leave of absence... More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma.
Feldstein’s Euro Holiday - Paul Krugman - Today, Martin Feldstein suggests that Greece make a temporary return to the drachma, so as to regain cost competitiveness. In terms of the macroeconomics, this actually does make sense. But it’s also impossible; Feldstein needs to read Barry Eichengreen. Here’s Eichengreen on euro exit: Reintroducing the national currency would require essentially all contracts – including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else – to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. . Computers will have to be reprogrammed. Vending machines will have to be modified. Payment machines will have to be serviced to prevent motorists from being trapped in subterranean parking garages. Notes and coins will have to be positioned around the country. One need only recall the extensive planning that preceded the introduction of the physical euro.
Greece May Have to Pay More Than 7% on Bonds, UniCredit Says - (Bloomberg) -- Greece may have to pay as much as 7.3 percent to attract buyers for an issue of 10-year bonds as the government struggles to persuade investors it can reduce its budget deficit, according to UniCredit SpA. The nation is likely to sell as much as 5 billion euros ($6.75 billion) of 10-year notes by March, Spyros Papanicolaou, the former head of the country’s debt agency, said Feb. 2. Greece needs to raise 53 billion euros this year and faces about 16 billion euros of bond redemptions by May as it struggles to narrow a deficit more than four times the European Union limit.
Ponzi Scheme - Let’s face it, the government-bond market in the West is a gigantic Ponzi scheme. Most governments in the ‘developed’ world are drowning in debt, they are running mind-boggling budget deficits and printing money like there is no tomorrow. Furthermore, under the guise of quantitative easing, their central banks are buying their own newly issued debt! It is our contention that similar to Mr. Madoff’s hedge fund, the sovereign debt markets in the West have now become gigantic scams. Only this time around, the players have changed and the sums involved are significantly larger.
Greece Imploding As Customs Workers' Strike Reduces Exports By 18%, Fuel Stocks Dwindle - Just because one waves a magic wand and austerity measures appear automatically, with unicorns singing, leprechauns dancing and pissing gold coins, and rainbows shooting out of Joaquin Almunia's... assets. Or not. The much delayed budget cuts which are finally being instituted are causing transportation gridlock with taxicab drivers on strike, multi-hour long lines at gas stations, and as of recently, following the customs union workers' strike, an export plunge of 18%, putting the already frayed economy even more on edge.
Greece and the euro: Leant on | The Economist - Fortified by a couple of European Union summits, plus a more ambitious Greek pledge to cut the deficit and a euro-zone counterpledge to stand behind the country, the market for Greek government debt looks stable. But for how long? The bond market’s assault has indeed abated, but only the most carried-away kite-flying oyster-eater could believe that this crisis is over for good. At some point in the next few months, during which Greece has to raise at least €20 billion ($27 billion) in the bond markets, its finances are likely to be tested again. Greece’s plans to restructure its economy lack credibility, the euro zone’s promised rescue is vague and the whole confection threatens to be needlessly expensive. European leaders bought time this week. They should use it to devise something better.
Can Eurobanks Take a Greek Default? - The markets did not react well to the Friday combo plate of weaker than expected European growth, Chinese tightening ahead of the anticipated schedule, and less than convincing remarks regarding what if anything the EU intends to do about its little looming sovereign debt crisis. And top it off by having Greece PM Papandreou launch a blistering attack on his would-be rescuers, accusing them of stoking the crisis psychology that was working to his country’s disadvantage. Now some grandstanding at home is probably necessary, given that Greece is almost certain to be subjected to daunting austerity measures and some lack of sovereignity. But snapping at the hand that has yet to feed you is not very smart. But as much as there are ample reasons to suspect a bailout will not come together in time, there is one big reason to think that the powers that be will perceive it to be necessary: a Greek default would push the European banks over the edge. The large institutions were thinly capitalized in the good times, and have recognized even less of the losses sitting on their books than their US peers
JPM Sees IMF Greece's Knight In Shining Armor When The Greek Liquidity Crisis Hits In Two Months - If Greece fails to comply with all of the demands from the rest of the EU, and then experiences a genuine liquidity crisis in April and May, the most obvious next step for the region is to push Greece into the arms of the IMF. The IMF would then provide a program of financial support, with appropriate amounts of conditionality, to give Greece a couple of years to implement the appropriate fiscal adjustment. - JP Morgan
Will Greece Go To the IMF? - Simon Johnson - Traditionally, “you should go to the IMF” was not something you would say to friendly neighbors and close allies. Over the past few decades, the International Monetary Fund became associated with excessive fiscal austerity, extreme political insensitivity, and – since the Asian financial crisis of 1997-1998 – with an out-and-out stigma. Countries borrowed from the IMF only under duress, when all else failed – and when there was simply no other way to pay for essential imports. But the IMF has changed a great deal in recent years, largely under the auspices of Dominique Strauss-Kahn, its current managing director. This is a situation tailor-made for Strauss-Kahn and the “new IMF” to ride to the rescue.
Greek saga won't kill the euro but the end may begin here - Telegraph - Greece accounts for only 3pc of the 16 member states' combined GDP, they say, and has lower debts than some of the banks bailed-out during sub-prime. A loan of €20bn $£17.5bn$ would do the trick, we're told. That's less than the British government injected into either Lloyds or the Royal Bank of Scotland. Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That's because, at the heart of the eurozone project there was always a fundamental contradiction – one that the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.
How Greece can devalue without devaluing - But let’s take it on faith that Greece is overvalued, by say 30 per cent, thanks to its participation in the euro and that exiting the euro is not desirable (which, indeed, is my view because printing money is an invitation to surreptitiously tax the public). Is there some way that Greece can devalue without devaluing?There is, indeed. The government can implement wage and price controls for, say, the next three months, with these controls covering not just the growth in wages and prices over the next three months, but also their initial levels. Specifically, the Greek government would decree that all firms must lower their nominal wages and prices by 30 per cent, effective immediately, and not change them for three months. After three months, everyone would be free to put prices and wages back up.
Wall Street Helped to Mask Debts Shaking Europe - Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards. It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’ - (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit. No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days. Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
It’s Greek to Goldman Sachs - “What is this Goldman Sachs and why has it caused us so much grief?” is a question they must be asking in even the most remote of Greek villages, as they are throughout much of this economically troubled world. The Greek financial scandal in which Goldman Sachs stands accused of selling dubious derivatives that concealed enormous government debt has sent the Greek economy and European markets into a tailspin. But that’s just part of a made-in-the-USA banking hustle that has haunted folks at home and abroad. At the heart of the worldwide banking meltdown are those mysterious unregulated derivatives that Goldman and JPMorgan led the way in selling. But Greece’s case did not involve the usual questionable mortgages packaged into derivatives with credit default swaps backing them up, but rather expected revenue on airport fees and other potential sources of the cashed-strapped government’s future income.
The ignominious role of Goldman Sachs - Merkel has sharply criticised “banks” that helped Greece circumvent EU budget rules; Jean Quatremer reports that Goldman Sachs was among the institutions that placed heavy bets in European bond markets during the height of the crisis; Simon Johnson is calling on the EU Commission to launch a full investigation of the role of Goldman Sachs during the crisis, and of Mario Draghi, who was then a vice-chairman of the bank; Satyajit Das offers an in-depth explanation of how the currency swap scam worked; Yves Smith takes a look at the legal issues involved; pressure is growing inside Merkel’s coalition against a Greek bailout; the Greek government may be preparing a bond issue, or syndicated loan, next week, which might force the issue of a bailout; Dominique Strauss-Kahn, meanwhile, makes the case against unilateral national financial regulation.
Tower of Debt, or Greeced Pole? - The AIG angle looks especially enticing when you look at the inevitable entanglements of Goldman Sachs. Goldman encouraging Greece to spend like a drunken sailor, Goldman helping it hide the debts from the EU and its accounting rules, Goldman meanwhile taking on lots of CDS protection vs. the inevitable default, and Goldman then seeking to trigger that default, to force a bailout of Goldman’s positions. Yes, in that sense it’s like rewriting a play. Greece ~ AIG, Germany/the EU ~ Treasury/the Fed, Goldman = Goldman. On the other hand, if you leave out the actual mechanism of crime and take the eagle’s-eye view, this sure looks like Lehman – it’s collapsing, everyone wants to pretend they can let it collapse without crashing the system – but this time everyone knows you can’t let Greece default and still keep on with business as usual. Nope, Portuguese and Spanish default would probably follow hard on a Grecian jubilee, and from there the dominoes quickly get much bigger. There are dark allusions to the big European banks’ exposure to Greek debt, and the UK itself is being held together by duct tape.
Blogger Yves Smith on FoxBusiness - Greece, Goldman and Fraud - Description: Naked Capitalism author Yves Smith on the relationship between the big bank and the foreign nation.
Head Of Greek Debt Office Replaced By Former Goldman Investment Banker | zero hedge
And so the tragicomic becomes surreal. Yesterday's news about the departure of the head of the debt management agency, Spyros Papanicolaou, was somewhat of a yawner, until we realized that his replacement would be none other than Petros Christodoulou, who until today was head of Private Banking and Group Treasury at the National Bank of Greece (reporting directly to the CEO of the NBG Tamvakakis), as can be seen on the org chart below. Yet was is oddest, is that Mr. Christodoulou worked not only as head of derivatives at JP Morgan but also held comparable posts at Credit Suisse, and... wait for it, Goldman Sachs... Uh, say what?
The Greek derivatives aren’t Goldman’s fault - The first thing you have to know about the Greece-Goldman story is that the definitive account was published by Nick Dunbar of Risk magazine in July 2003. He kicked off by saying that the deals he was writing about “are likely to prove controversial” Here’s Dunbar, explaining what went on: The cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large ‘balloon’ cash payment from Greece… It seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.
Don't Blame Goldman for Greece's Budget Games - The Atlantic Business Channel -Goldman Sachs may have helped Greece use a loophole to hide some of its debt from the European Union. But who is really at fault for the country's financial crisis? According to Der Spiegel and the The New York Times, Goldman acted as the middle man in a currency swap -- where debt in one currency is exchanged for an equal amount in another. This swap was different, though. Goldman used a fabricated exchange rate so Greece would get extra money upfront, but pay the difference later, basically making the swap a loan. Felix Salmon, referring to a 2003 article in the trade publication Risk by Nick Dunbar, sums it up well: Goldman is sending Greece a steady stream of payments over the course of the deal, and then being repaid with a big balloon payment at the end. Essentially, Goldman is continually lending Greece money, and getting no interest payments in return, until maturity a long way out.
EU Seeks Greek Swaps Disclosure After Ministry Probe (Bloomberg) -- European Union regulators ordered Greece to disclose details of currency swaps after an inquiry by the country’s Finance Ministry uncovered a series of agreements with banks that it may have used to conceal mounting debts. The swaps were employed to defer interest payments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens. The document didn’t identify the securities firms that arranged the contracts. The government turned to Goldman Sachs Group Inc. in 2002 to get $1 billion through a swap. “While swaps should be strictly limited to those that lead to a permanent reduction in interest spending, some of these agreements have been made to move interest from the present year to the future, with long-term damage to the Greek state
Greek Spies Hot On The Trail Of CDS "Speculators" Who Singlehandedly Destroyed Greece - This story gets more surreal by the day. First it was the Spanish CIA, and now Greek daily To Vima reports that the Greek National Intelligence Service, instead of focusing on such potentially more pressing issues as who may be bombing various offshore financial offices, or possible Cypriot unrest, is hot on the heels of those who were solely responsible for the Greek bond market collapse: four hedge funds who have had the temerity to buy and sell Credit Default Swaps (or, heaven forbid, GGBs). And they are not doing it alone: French and British intelligence agencies have also joined in the fray, actual people blowing themselves up all over the place be damned.
FT.com Insight - Stripping away the disguise of derivatives - Use of derivatives to disguise debt and arbitrage regulations and accounting rules is not new. In the 1990s Japanese companies and investors pioneered the use of derivatives to hide losses – a practice called “tobashi” – “to make fly away”. Derivatives, such as interest rate and currency swaps, are used to alter the interest rates and currency of the cash flows on existing assets or liabilities. Transactions entail exchanges of one stream of payments for another. At the commencement of the transaction, if the contract is priced at current market rates, then the current (present) value of the two sets of cash flows should be equal (ignoring any profit). The contract has “zero” value – in effect, no payment is required between the parties.Using artificial “off-market” interest or currency rates, it is possible to create differences in value between payments and receipts. If the value of future payments is higher than future receipts, then one party receives an upfront payment reflecting the now positive value of the contract. In effect, the participant receives a payment today that is repaid by the higher-than-market payments in the future. Any number of strategies involving combinations of different derivatives can achieve this effect. Greece may be merely following the precedent of another Club Med member. In 2001 academic Gustavo Piga identified Italy’s use of derivatives to provide window dressing to meet its obligations under the European Union’s Maastricht treaty.
Are US Taxpayers Bailing Out Greece? - Last week we were reminded that ours is not the only country suffering from severe economic turmoil. The Greek government is the latest to come close to default on their massive public debt. Greece has insufficient funds in their treasury to make even the minimum payments that are now coming due. Their debt level is about 120 percent of their gross domestic product and their public sector absorbs what amounts to 40 percent of GDP. Any talk of cutting costs and spending is met with violent protests from the many Greeks heavily dependent on government payments. Mounting fears of default have sent shockwaves through their creditors and all of the eurozone countries.But there have been statements made by the European Central Bank to calm fears and give assurances that Greece will get the aid it needs. Details of agreements are not forthcoming.Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.
Just What Is The Real Level Of Government Debt In Europe? -“If you don’t fully understand an instrument, don’t buy it.”To the above advice from Emilio Botín, Executive Chairman of Spain’s Grupo Santander, I would simply add one small rider: Don’t sell it either, especially if you are a national government trying to structure your country’s debt.In a fascinating article in today’s New York Times, journalists Louise Story, Landon Thomas and Nelson Schwartz begin to recount the mirky story of just how the major US investment banks have been able to earn considerable sums of money effectively helping European governments to disguise their growing mountain of public debt. What is new in today’s report from the NYT team is the extent to which they identify the problem as a much more general one, involving more banks and more countries, since “Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere”. I very strongly suggest that our NYT stalwarts take a long hard look at what has been going on in Spain, and especially at the Autonomous Community level.
FT.com - Bankers fear sovereign risk in 2010 - So, unsurprisingly, those same risk managers are now scouring the horizon for any fresh potential shocks. And as they run scenarios for 2010 – or “try to imagine six impossible horrible things before breakfast”, as one says – an issue that is causing more unease is the matter of sovereign risk, and the related issue of collateral. Until quite recently, this was not something that banks worried much about in the western world, since it was widely assumed that the credit standing of European countries and the US was ultra secure. But now some senior bankers are starting to get uneasy. After all, deals that banks have cut with sovereign entities are believed to account for a significant chunk of the derivatives market. Moreover, such contracts can often be 10, 20 or 30 years, which means that the profits and losses in a derivatives deal can fluctuate hugely – and the potential counterparty risk.
Ireland poses real threat to future of the euro, says top think-tank – IRELAND has been identified as one of a small number of countries that poses "a real risk" to the future of the euro, according to reports in a Sunday newspaper. The report cites research from influential German think-tank CESifo, which warned of "very serious" slowdown in the Irish economy three years ago. The new research reportedly lists Ireland and Greece as two countries where international money markets see a significant risk of a sovereign default or an exit from the single currency. This perceived risk is reflecting in the markets for Irish and Greek debt, CESifo says, even though leaving the eurozone is not on the political agenda. Ireland, along with Finland, also comes in for a mention in CESifo's list of countries for which eurozone membership is "not optimal", due to our heavy reliance on trading with non-eurozone countries.
Spanish Government Struggles With Crisis Message (AP) -- Could Spain be the next Greece? The government bristles at the very thought, and points out its debt burden isn't nearly as heavy. It's a stinging comparison nonetheless for a country that only a few years ago had burgeoning growth but is now lumped with other deficit-laden countries on a watch list for a Greek-style crisis. The collapse of a real estate- and consumer-fueled boom has left Spain with a eurozone high jobless rate of nearly 20 percent, and the government ran up a deficit that in 2009 equaled 11.4 percent of GDP. That is way over the eurozone limit of 3 percent and earned Spain a place as the letter "S" in the inelegant PIGS acronym coined by analysts (the others are Portugal, Ireland, and Greece).
EU states face US$2.85 tril. debt maturities: data - Europe's more indebted countries have US$2.85 trillion of maturing bonds and syndicated loans to refinance in the next three years, according to Thomson Reuters data. Worries about high levels of sovereign debt in Portugal, Italy, Ireland, Greece and Spain have hit the bond and loan markets, potentially raising the rates that governments and companies will have to pay to refinance their debt. The five countries have US$1.665 trillion of sovereign bonds maturing in the next three years along with US$988 billion of corporate bonds and US$200 billion of syndicated loans.
Euroland, the Horror Movie - - Those who run Europe have three choices: to bail out Greece, to let Greece sink (into a desperate economic depression), or to pretend to bail out Greece. The sad truth of the situation is that there is not enough productive activity in Europe to really support all the members of the European Union in the style they're accustomed to. (Which also happens to be true of the USA and its constituent states, but you probably know that already.) Europe is a sad case, really poignant, because it became such a darn nice corner of the world after the convulsions of the mid 20th century. Europe rebuilt itself so beautifully after the war while America became a utopia of overfed clowns riding in clown cars around the plasticized cartoon outskirts of our ruined cities. Europe had wonderful public transit while America let its railroads rot away. European men went about their business in grown-up clothing while Americans men dressed like five-year-olds and got flames tattooed on their necks as though contemplating a barbarian invasion of Akron, Ohio. My guess is that the current situation in Euroland is unfixable. The "contagion" of Greece has already spread and it's only a matter of months before the Iberian peninsula goes under too. Did I leave out the UK's financial troubles (acknowledging that they are not within the Euro currency system)? Not to put too fine a point on it, Old Blighty is pretty well nigh fucked. It's on the express line back to the fifteenth century, and doesn't know it yet. Break out the leathern helmets and the wooden ploughshares. The UK is out of oil, out of banking cred (which is all it had the last forty years), and out of time. The one thing they have a lot of is bad paper hiding in their bank vaults -- enough to blow that black hole of capital even wider. A larger question is what happens to the vaunted peacefulness of contemporary Europe now that the narcotic of universal prosperity is wearing off. Maybe it will be too shellshocked for a while to do anything. More likely, though, old and new animosities will burble out of those lovely old streets. Nations that seemed to be populated by effete cafe layabouts will be transformed back into warrior societies. Never under-estimate the sheer power of testosterone in idle, unemployed young men.
Phasing out monetary policy in the euro area - VoxEU - What effects have the recent exceptional monetary policy interventions had on loans and unemployment, and what are the possible effects of phasing them out? This column argues that the policies’ main influence was through the effects on interest rates and on money market spreads, rather than solely through "quantity effects" on the money supply.
Shock as British deficit equals that of Greece - Britain's public finances are in a worse position than those of Greece, according to the latest figures on government borrowing. The Office for National Statistics said yesterday that January alone saw a net shortfall of £4.3bn, far worse than City forecasts and in a month which has always previously shown a healthy surplus. It puts the UK on track for a deficit of £180bn this year, or 12.8 per cent of GDP, economists said, shading the Greek figure, hitherto the worst in the European Union, of 12.7 per cent. In the pre-Budget report the Chancellor forecast a deficit of £178bn for the current year. Warnings that the UK could face a Greek-style crisis of confidence have been building for some weeks, and yesterday saw a sell-off of sterling and British government securities, or gilts, on the disappointing news.
Britain and the PIGS - As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds. Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray. While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP. I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.
Economists urge swift action to reduce budget deficit - The government must act more quickly to cut Britain's huge budget deficit, a group of economists has said. In a letter to the Sunday Times, the 20 experts say the lack of a credible plan threatens to push up interest rates and undermine the recovery. Shadow chancellor George Osborne said Prime Minister Gordon Brown's "argument on the deficit had collapsed". The letter was signed by an array of eminent academics and policy-makers including former members of the monetary policy committee and Sir Howard Davies, a former deputy governor of the Bank of England.
Riposte by 60 economists to calls for cuts: - More than 60 leading economists... creating a dividing line within the profession on the crucial general election issue of how to tackle the UK’s huge public debt. Two letters in Friday’s Financial Times warn of the risks of damaging Britain’s fragile recovery by “reckless” early cuts. They are a riposte to the 20 economists who wrote to The Sunday Times last weekend supporting the Conservative party’s argument that fiscal tightening should start this year. The sharp differences between economists emerged as official data showed the budget deficit surged in January as income tax receipts fell by a fifth, alarming the markets and pushing up yields on government debt. The letters, while not overtly political, reject the Tories’ claim that cuts are needed now to reassure the markets and head off the risk of Britain losing its triple A credit rating.
British finances to be 'worse than Greek deficit' - Times Online - The Government is on course to run up a higher budget deficit this year than Greece after dire figures on the public finances today showed that it borrowed £4.3 billion more than it received in taxes in January, the first time this has happened. January is usually a bumper month for tax receipts as people submit their tax returns and corporation tax payments fall due. However, a steep decline in income tax and capital gains tax payments, coupled with a sharp rise in interest payments to cover the Government's debts, forced the Treasury to borrow money to balance its books. The dire data confounded economists' expectations of a surplus of £2.8 billion, and falls far short of the £5.3 billion surplus recorded in January last year.
Paul Krugman: Britain’s Deficit - There’s an economists’ duel underway in Britain. Everyone agrees that Britain needs to address its underlying budget deficit; but how fast? One group of prominent economists has published a letter saying that cuts should start more or less immediately. But an equally or maybe even more prominent group disagrees, pointing out that slashing spending now would depress a still very weak economy. Their letter isn’t public yet; I’ll post a link when it is. As you might guess, I’m very much in agreement with the second group. It’s important to be clear that the call for immediate austerity isn’t grounded in unarguable economics; in fact, the arithmetic tells you that what Britain does in the next year or two is virtually irrelevant to its long-run solvency.
Cameron Should Mull U.K. Plea to IMF, Stelzer Says - Conservative leader David Cameron should consider a “profoundly unpopular” move such as calling for aid from the International Monetary Fund if his party wins this year’s U.K. election, economist Irwin Stelzer said. “What would I do if I were David Cameron? I would look at the books” and “I would say: ‘Shock, horror, I’ve found it’s much worse than I thought and so Gordon Brown has forced me to call in the IMF,’” Stelzer said, speaking at an event in London late yesterday. Such a move would be reminiscent of 1976 when then- Chancellor of the Exchequer Denis Healey sought an emergency loan from the IMF
U.K. Mortgage Issuers in $500 Billion Funding Gap, Moody’s Says (Bloomberg) -- British banks will struggle to refinance 319 billion pounds ($500 billion) of bonds backed by home loans as the government prepares to withdraw two aid programs, Moody’s Investors Service said. "It is highly uncertain that the mortgage-backed securities market will have the capacity to absorb the level of refinancing needed in the required timeframe,” according to the report.The government programs allow banks to take mortgage-backed securities off their balance sheets by swapping the debt for Treasury notes from the government.
The importance of G7 consumption growth - VoxEU - Just how important is consumption for growth? This column suggests that consumption trends in the G7 economies have significant short-term and long-term implications for global growth and global imbalances. For sustained rebalancing of the global economy, however, investment behaviour may be more important.
Japan’s Yields May Rise on ‘Next Greece’ Concern, Mizuho Says (Bloomberg) -- Sovereign-debt risks in Greece and other European nations may push up Japanese bond yields and increase the cost of insuring the debt against default, according to Mizuho Securities Co. Concern that China’s central bank will take further steps to slow its economy may combine with speculation about the widening budget deficits of Greece, Portugal and Spain to refocus investors on Japan’s fiscal woes, said Makoto Noji, a senior market analyst at the unit of Japan’s second-largest banking group in Tokyo. “If investors shift their attention to Japan’s worsening finances, that may lead to higher yields,” Noji said in an interview yesterday. As long as the market stays focused on sovereign-debt risks, Japan’s bonds may face speculation that the nation will be “next Greece,” he said.
Bank of Japan Pressed To Fix ‘Sick Dog’ - Bank of Japan officials have a metaphor to explain why they do not want to buy more government bonds in spite of deepening deflation: Japan’s economy is like a chronically sick dog.The bank’s regular policy board meeting begins on Wednesday and many in Japan’s government and the markets would like it at the meeting’s end on Thursday to announce aggressive quantitative easing in the form of the purchase of long-term debt as the US Federal Reserve and the Bank of England have done. But the BoJ is reluctant, fearing tthat bond buying will not cure the dog but kill it.The bank’s view is that deflation is entrenched and structural. “Core-core” consumer prices in Japan, a measure of underlying inflationary pressure that excludes fresh food and energy, are falling at their fastest since records began in 1971. The medicine of flooding commercial banks with cash through quantitative easing would not cure the disease, officials feel, because there is little demand for loans in the economy no matter how low the interest rate.
Japan as #2: It Isn't - USA Today told readers that Japan is hanging on for now as the world's second largest economy, ahead of China. This is just silly. While Japan does still rank second when its GDP is measured using a currency conversion standard (converting its currency into dollars at the current exchange rate), its economy is only half the size of China's using a purchasing power parity standard. This measure applies the same set of prices to all goods and services. In a wide range of categories China's output already exceeds that of the United States. It has more Internet users, twice as many cell phone users, produces almost ten times as much steel, and generates more college graduates with science and engineering degrees. It also has by far the largest accumulation of foreign reserves in the world. Anyone who thinks that China's economy is still smaller than Japan's badly underestimates its importance in the world.
Blackhorse's Richard Duncan: The US Must Keep Spending, Otherwise We'll Be Japan! - Richard Duncan has called on the U.S. to completely revamp its economy in a wide ranging interview with the FT. The author and partner at Blackhorse Asset Management says that the U.S. must not make the same mistakes as Japan in terms of spending stimulus funds. He says that while there is no choice between keeping up spending and not, the spending must be done in a way to revamp the U.S. economy around bio-tech, energy, and and other high tech industries. FT Alphaville cites how Duncan predicted the current crisis back in 2003 with his book The Dollar Crisis, and therefore shouldn't be discounted on his views of renewed, efficient government spending.
Coming to America, Greece-style - From Greece, to Portugal, to Spain, to the UK, to… Some commentators are speculating whether sovereign debt pressure might migrate all the way to the United States — a country also plagued by budget deficits, ratings rumblings and a plethora of short-term debt issuance coming due: While Greece matters, attempts to extrapolate its debt crisis into a sovereign crisis for the US seem far fetched to us, to say the least. Credit Default Swap Spreads for the US have widened as in most countries, but remain far removed from crisis levels. If we were to reach a point where the US was having trouble financing its debt, the world would be in a dire spot indeed.
Greece is more like U.S. than people think - Greece may be geographically far away from the US, with a population of about 11 million and relatively insignificant, when compared to the US, GDP of 357 billion, but here is why Greece is more like the US than some people seem to think. Simply put, the citizens and the governments of both countries spend well beyond their means. It looks like Greece may get a bailout of some form this time but the US is another matter; who will bail it out when the time comes? .The US simply can no longer hope to grow its way out of its ever-expanding consumer and government debt. True, there is some deleveraging taking place in consumer debt, but government tax breaks and stimulus packages are only really another form of credit extension to the American consumer – and government debt ultimately becomes the citizens’ debt. Besides that, consumer deleveraging is unlikely to be able to keep up with the declining earning power and property values in the US – this relationship being much more important than the amount of debt in itself. In the same way GDP growth in the US no longer has any hope of catching up to the ballooning government debt. I will demonstrate why this is so in both cases.
Take a good look at the Greek financial crisis. America could soon face something very similar - I have seen America's future, and it is Greece. By this I do not mean that the Midwest will soon be covered with ancient ruins or that Texans will swap hamburgers for feta cheese. I mean that the ongoing Greek financial crisis is the same kind of crisis the United States might face a few years from now if we continue to make the same kinds of mistakes the Greeks have made over the last decade. For those who haven't followed this saga, let me reassure you that the story is quite straightforward: Greece is bankrupt. And although Greece's bankruptcy is headline news this week—Greece's weak finances threaten the stability of the euro, the common European currency—the truth is that Greece has been bankrupt for years. Its budget deficit in 2009 was 12.7 percent of GDP. Overall debt was 113.4 percent of GDP. Those are not figures that can be achieved overnight.
Becoming a Third World Country - What distinguishes the Third World from the privileged industrial minority of the world’s nations? Third World nations import most of their manufactured goods from abroad, while exporting mostly raw materials; that’s been true of the United States for decades now. Third World economies have inadequate domestic capital, and are dependent on loans from abroad; that’s been true of the United States for just about as long. Third World societies are economically burdened by severe problems with public health; the United States ranks dead last for life expectancy among industrial nations, and its rates of infant mortality are on a par with those in Indonesia, so that’s covered. Third World nation are very often governed by kleptocracies – well, let’s not even go there, shall we? There are, in fact, precisely two things left that differentiate the United States from any other large, overpopulated, impoverished Third World nation. The first is that the average standard of living here, measured either in money or in terms of energy and resource consumption, stands well above Third World levels – in fact, it’s well above the levels of most industrial nations. The second is that the United States has the world’s most expensive and technologically complex military. Those two factors are closely related, and understanding their relationship is crucial in making sense of the end of the “American century” and the decline of the United States to Third World status.
Former Mexican foreign minister calls for ‘North American union’, unified currency - Prolific Mexican politician and intellectual Jorge Castañeda believes that a greater North American community -- a "North American Union" -- with economies tied together under a European Union-style system, compete with open borders and a unified currency, is the wave of the future. In a new interview with Web site BigThink.com, Castañeda, Mexico's foreign minister from 2000-2003 and a global distinguished professor of politics at New York University, said that with nearly 11 percent of Mexicans living in the United States, he has stopped seeing his nation as a Latin American country. "Well, my sense is that we’re moving closer and closer to forms of economic integration with the United States and Canada and conceivably Central America and Caribbean could become part of that in the coming years," he said. "I don’t see Mexico as a Latin American country. Too much of trade, investment, tourism, immigration, remittances, absolutely everything is concentrated exclusively with the United States.
Islamic derivatives standard to launch soon (Reuters) - The launch of the first template for an over-the-counter Islamic derivative contract is "imminent" and will encourage more companies to hedge their risks, an executive at a bank involved in its creation said on Tuesday.The contract, which is expected to pave the way for quicker and cheaper Islamic risk management and more frequent cross-currency transactions, was initially due to be launched a year ago."It will be launched imminently," Simon Eedle, Managing Director of Islamic Banking at Credit Agricole CIB told the Reuters Islamic Banking and Finance Summit on Tuesday. The contract -- to be known as Ta'Hawwut or hedging -- would create a standard legal framework for OTC derivatives in the Islamic market, whereas currently contracts are arranged on an ad hoc basis.
Off the cliff and back? Credit conditions and international trade during the global financial crisis VoxEU - Was the great trade collapse due to the evaporation of credit? This column examines how the interbank lending rate across countries affected US trade during the crisis months to confirm the role of credit conditions in influencing trade patterns. It suggests the decline in trade volumes would have been about twice as large had interbank rates remained at the high levels of September 2008.
Latest insights on antidumping, safeguards, and protectionism during the crisis - VoxEU - Protectionism has been a growing concern during the global crisis. This column examines the fourth-quarter data from the Global Antidumping Database. For the first time since the onset of the crisis, the world witnessed a substantial decrease in industry demands for temporary new import barriers through trade remedies. But this period also saw a substantial increase in new trade barriers imposed, as the trade-remedy investigations initiated earlier in the crisis concluded with new protection.
State Debt Expected to Snowball in Coming Years The country's state debt is expected to grow by 184 trillion won over the next five years, according to a state-run economic think tank. Two thirds of the state debt will have to be shouldered by taxpayers. According to the Korea Institute of Public Finance, state debt will reach 493.4 trillion won in 2013, up 184.4 trillion won from 2008. The estimation is based on the Ministry of Strategy and Finance's state debt management plan.
The December Trade Release: Implications for GDP Growth, Rebalancing, Doubling Exports and the US-China Deficit - The December trade release surprised some observers in terms of the rise in imports.  I think there are some other interesting implications. First, the implied downward revision in GDP is minimal. Second, the drop was less pronounced in the ex-oil trade balance. Third, although real trade flows are rising from there troughs, they have not re-attained pre-Lehman levels. Fourth, the US-China goods trade balance continues to improve. The implied reduction in GDP growth is on the order of 0.25 percentage points. The ex-oil trade balance continues to decline, but at a much slower pace than the total trade balance.
Rogue Aluminium Shipments Suggest Chinese Metal Stockpiles are Being Re-Exported - This might be the year's most important news. Which got almost no press globally. Something strange happened in Japan in December. Shipments of aluminum from Mozambique and Brazil showed up in the northwestern ports of Fushiki and Fukui. Shipping aluminum to Japan isn't weird. The nation is an important consumer. But shipping South American and African aluminum to northwest Japan is strange. These are minor ports. Usually such imports would be unloaded on the Pacific side, at Yokohama, Osaka or Nagoya. Where did this "rogue aluminum" come from? It's reported that large aluminum stockpiles have been held at Shanghai ports over the past year. Traders think it might be from China.
The China syndrome on exchange rates - VoxEU - China’s exchange rate policy has implications for global trade and particularly other East Asian nations. This column argues that, given China’s fixation on the dollar peg, countries such as Thailand and Malaysia may have no choice but to peg their currencies to China’s yuan.
A call to expand offshore market of renminbi - VoxEU - Many economists have pointed to China’s exchange rate policy as a cause for global economic instability. This column argues that an offshore market for the renminbi will provide a dynamic and objective benchmark from which to assess the value of China’s currency and to exert pressure to float its exchange rate.
Renminbi ad absurdum - The U.S. government argues that China unjustly benefits itself by keeping the yuan undervalued. - If this argument is correct, why doesn’t Beijing arrange for the yuan’s value to be even lower – say, $0? If the Chinese were simply to give yuan to Americans, Americans’ demands for Chinese exports would soar even higher. China’s export industries would boom even more magnificently. And presumably (according the logic of Uncle Sam’s argument) the Chinese would prosper even more splendidly, if more unfairly, at the expense of Americans. Because the Chinese don’t give the yuan away for free on foreign-exchange markets, do they reveal themselves to be really not so clever and financially savvy after all?!
The currency quarrel with China is a dangerous distraction In an article in the Washington Post last November entitled ‘The currency quarrel’  there were a number of assertions made about the economic relationship between the US and China that are questionable, to say the least. The opening sentence begins by pointing out that “it is a cliche that the United States has no more important bilateral relationship than that with China.” Is that true? ... It's Canada – NOT China - that is the U.S.'s largest trading partner. It has been for some considerable time.  ... Nowadays the world economy is quite literally dominated by giant transnational global corporations, most of which are owned and controlled by American citizens.... China’s domestic firms, on the other hand, simply can’t compete with these global giants.
Goldman on the Yuan – What Do They Know? On Monday morning Bloomberg has a story out quoting Goldman’s Chief European Economist as saying: Goldman Sachs Group Inc. Chief Economist Jim O’Neilll said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.I doubt that Mr. O’Neill is making a guess here. I think he may have some real insight on this. When he says this, I listen: “I have a strong opinion that they’re close to moving the exchange rate,” Say this story is true and in the not too distant future China will adjust its currency against the dollar by a reasonably significant amount. Assume that they move by 5%. What might this mean in the scheme of things? What are the market implications, if any? Just some thoughts
Trade group official: China to allow stronger yuan (Reuters) - Growing international pressure makes it likely that Beijing will allow its currency to begin rising in value again this year, two U.S. private sector China specialists said on Wednesday. "I think China has been waiting for its exports to resume growth, which they started to do in December. That, I think, gives them the domestic cover they need to resume (a) gradual appreciation," John Frisbie, president of the U.S.-China Business Council, said during a panel discussion.
An Alternative Route to Appreciation for Chinas Yuan - With China’s economy surging and flirting with a property bubble, most analysts are prescribing the same remedy: a stronger Chinese currency that would help contain inflation. A few economists are now turning that argument on its head, and proposing that China allow inflation to do the work of currency appreciation. Rather than adjusting the currency upward to make Chinese goods more expensive abroad, authorities should just allow rising wages and other costs to make Chinese goods more expensive, they say. To put it in the language of economists, they think China can get the needed adjustment in the real exchange rate without actually moving the nominal exchange rate.
Thinking the Unthinkable: What if China Devalues the Renminbi? - Conventional wisdom holds that the Chinese are due (as in overdue) for a revaluation of their currency, the renminbi. For instance, a recent report from Goldman argues that China will raise the value of the RMB against the dollar by 5% this year. The argument is that the move is needed to slow down an overheating economy. But to a large degree, whether you agree with that as a remedy depends on what one’s reading is not just of China’s notoriously misleading statistics, but of the underlying growth dynamics, which are well out of bounds of any previous pattern, and not in a good way, either. We question whether a revaluation is the right answer for them, and more important, whether the Chinese themselves see a revaluation as a plus. The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.
China, China, China! - Why does the world care about Chinese monetary policy? In short, the ten countries below enjoy 60% of China's import demand ($1.3 trillion annualized in December 2009), where the % are listed in the legend. The globe is watching Chinese policy. The People's Republic of China raised bank reserve requirements another 50 bps yesterday - its second such measure since January. From the NY Times... Less credit = smaller growth rates. And it's not just "markets" that are worried about the slowdown of the Chinese economy. On Feb. 2, the Reserve Bank of Australia referred to China directly in its policy statement: ...
Australia welcomes China's investment, if not its influence - Here in this land of searing heat, scrub and eucalyptus, a land so vast that road signs warn the next gas station is 600 miles away, Mount Whaleback was once 1,500 feet high. Today it's a hole, the biggest open-pit iron ore mine in the world -- an entire mountain crushed, sold and shipped to China.Ton by ton, including more than 300 million tons of ore per year and vast quantities of liquid natural gas, China is buying Australia. One of the world's most staggeringly huge transfers of natural resources has both enriched and alarmed Australia, prompted a determined response from Washington and illustrated both China's savvy and ungainliness as it aggressively expands its influence around the world.
China's "Ant Tribe" Poses Policy Challenge For Beijing - They sleep in boxy rooms crammed into dingy low-rises and spend hours commuting to work on crowded buses as part of a trend of poorer white-collar workers being forced to the fringes of China's wealthiest cities. Some say these struggling college graduates who swarm out of their cramped accommodations and head to work in the urban sprawl each morning are reminiscent of worker insects in a colony. Not surprisingly, they are often referred to as China's ant tribe. The growing ranks of 'worker ants' poses a policy challenge for Beijing's Communist Party leaders as high property prices and dim career prospects thwart the ambitions of many graduates for a comfortable middle-class lifestyle.
China’s Growth May Top 11% Even as Officials Rein in Lending - (Bloomberg) -- China’s economy, the world’s third biggest, may expand at a faster pace in 2010 even as officials cool lending to restrain inflation and avert asset bubbles. Goldman Sachs Group Inc. maintained its forecast for 11.4 percent growth after the central bank raised reserve requirements for lenders on Feb. 12. That compares with an 8.7 percent expansion last year. Rebounding exports, up for a second month in January, may boost a Chinese economy that last year depended on its own stimulus-fueled investment and consumption for growth.
WSJ Poll Shows China Growth Slowed Ahead of Government Tightening - Most private analysts who study China think its economic recovery lost some momentum in the fourth quarter of 2009, a new poll by The Wall Street Journal shows. The finding runs counter to official statistics that indicate a recent acceleration in growth, and highlights the conflicting signals China’s economy is sending at a time when the leadership is trying to contain potential bubbles without derailing the expansion. Read full post at China Real Time Report
Rising wages in China are a good thing - Many analysts expressed some worry that rising wages can set off an inflationary spiral in China. Although I think there is certainly a risk of rising inflation (the relative low CPI number for January, 1.5%, down from December’s 1.9%, was offset by the 4.3% PPI) I am not sure an increase in wages will have such a big impact on inflation because Chinese manufacturing tends to be heavily capital intensive and worker productivity has anyway risen faster than wages in the past ten years (in fact this “suppression” of wage growth relative to worker-productivity growth is part of the mechanism that forces high savings rates and low consumption in China). In spite of nagging worries about inflation, most observers, as far as I can see, welcomed the possibility of higher wages. I think they are right.
China Isn't Supplanting The US, It's Supplanting The World Bank, And It's Making The Yuan The World Gabor Steingart, writing in Der Spiegel, points out the absurdity of US Presidents (Obama and Bush before him) slamming China over its currency policies, when in fact the country has done a way better job than the US at managing its finances. The People's Republic has quietly been taking stakes in virtually all the world's regional development banks. Like a mini-World Bank, China has been helping to shore up financially troubled countries in Latin America, Africa and Asia. It has also increased its stake in the International Monetary Fund, by $50 billion. Chinese monetary experts, not Chinese soldiers, have been driving the nation's expansion -- silently and efficiently.
Watching China Run - Two weeks ago, as I was getting ready to take off for Palo Alto, Calif., to cover a conference on the importance of energy and infrastructure for the next American economy, The Times’s Keith Bradsher was writing from Tianjin, China, about how the Chinese were sprinting past everybody else in the world, including the United States, in the race to develop clean energy. That we are allowing this to happen is beyond stupid. China is a poor country with nothing comparable to the tremendous research, industrial and economic resources that the U.S. has been blessed with. Yet they’re blowing us away — at least for the moment — in the race to the future. Our esteemed leaders in Washington can’t figure out how to do anything more difficult than line up for a group photo. Put Americans back to work? You must be kidding. Health care? We’ve been working on it for three-quarters of a century. Infrastructure? Don’t ask.
Thomas Friedman Believes that China is "Smarter" than the United States: Is He Right? - Do China's best and the brightest work for their powerful state or in the private sector? The NY Times' Tom Friedman hints that the Chinese government is filled with 200 IQ people. He argues that China is pursuing a wiser long term energy policy than the United States. Why? Unlike our government, China's government anticipates the coming scarcity of resources and thus are making investments now so that they will be ready to corner even more export markets when "natural resource collapse" is just about to take place.
China or the U.S.: Which Will Be the Last Nation Standing? - Silly me. Here I had thought that world leaders would want to keep their nations from collapsing. They must be working hard to prevent currency collapse, financial system collapse, food system collapse, social collapse, environmental collapse, and the onset of general, overwhelming misery—right? But no, that's not what the evidence suggests. Increasingly I am forced to conclude that the object of the game that world leaders are actually playing is not to avoid collapse; it's simply to postpone it a while so as to be the last nation to go down, so yours can have the chance to pick the others' carcasses before it meets the same fate.