Federal Reserve Balance Sheet Update: Week Of February 25 - Just $45 Billion Left In Quantitative Easing - The Federal Reserve's assets were at $2.27 trillion as of February 25, jumping by $6 billion sequentially. Securities held outright: $1,975 billion (an increase of $62.6 billion MoM, resulting from $59 billion increase in MBS and $3 billion in Agency Debt), or $8 billion increase sequentially. The fed has completed $169.1 billion of $175 billion in the agency MBS program, or a 97% completion, and 96% complete with purchases of Agencies. The Fed has completed $1.21 billion of its $1.25 billion MBS debt purchase program, or 97%, through February 25. There is just $45 billion left in QE. Net borrowings: $103 billion. The monetary base increased by $81 billion in the past fortnight to $2.14 trillion. The ratio of total assets to Monetary Base declined slightly to 1.06x. Float, liquidity swaps, Maiden Lane and other assets: $191 billion. The CPFF program was at $7.7 billion. FX liquidity swaps are now at zero: we are carefully keeping an eye on this metric as any increase presently would indicate banks are again experiencing a dollar funding shortage. Maiden Lane I and Maiden Lane II increased and were $27.2 and $15.5 billion, while Maiden Lane III as always continues pretending it has value and came flat at $22.4 billion.
Is The Fed Tightening Or Not? - The announcement that the Fed is raising the discount rate from 1/2% to 3/4% triggered a reaction in the financial markets with bond traders apparently expecting further tightening in the form of rising interest rates. Various people ranging from Mark Thoma to Jim Hamilton declaring that this is not a tightening but an adjustment to other changes such as their raising the amount they plan to pay on reserves banks park at the Fed, which is arguably a sort of tightening. I agree that the discount rate is not a tightening and is not in itself a sign of likely more tightening per se. However, it is a fact that the Fed is in a gradually tightening scenario that it has announced for some time. This involves removing itself from the many special credit facilities that it put into place in the immediate wake of the crisis, several of which shut down as of Feb. 1, including the very crucial swap arrangements with the ECB and some other foreign central banks. Probably the most important one is the gradual unwinding of Fed support for the housing mortgage market through purchasing MBSs, which is supposed to end on (or about) March 25.
The Fed's discount rate hike - The Federal Reserve Board announced last Thursday that it is raising the interest rate at which banks borrow from the Fed's discount window to 0.75%, a 25-basis-point increase, and intends to return discount lending primarily to the traditional overnight loans. "The rate hike cycle begins," declared 24/7 Wall St, and Business Week reported:Treasuries fell, pushing yields to the highest levels in at least five weeks, amid concern the Federal Reserve's increase in the discount rate signaled policy makers are moving closer to lifting benchmark borrowing costs. But I don't believe that's what the discount rate hike means at all. The same message was emphatically repeated in statements by Fed Governor Elizabeth Duke and Federal Reserve Bank of New York President William Dudley. Maybe you have a theory that the way the Fed communicates that it intends to raise rates is by denying that it intends to raise rates. If so, I can't help you. The Fed described its true intentions in the minutes of the Jan 26-27 FOMC meeting
Fed’s Yellen: U.S. economy still needs ultra-low rates (Reuters) - The U.S. economy still needs extraordinarily low interest rates, as inflation is "undesirably low" and growth will likely be sluggish for several years, a top Federal Reserve official said Monday. San Francisco Federal Reserve Bank President Janet Yellen told the University of San Diego's business school that the U.S. economy will likely grow at a pace of about 3.5 percent this year and 4.5 percent next year."Even though the recession appears to be over, it does not mean that we are where we want to be. Even with my moderate growth forecast, the economy will be operating well below its potential for several years," Yellen said, according to prepared remarks.
Yellen Doesn’t Expect Fed to Sell Assets in Forseeable Future - The Federal Reserve will rely most heavily on its power to pay interest on reserves, rather than assets sales, when the time arrives to tighten monetary policy, although those actions are unlikely for quite a while, a top Federal Reserve official said Monday. With a still weak economy and scant inflationary pressures, “this is not the time to be removing monetary stimulus,” Federal Reserve Bank of San Francisco President Janet Yellen said. “When the day comes to start raising rates again, we have tools at the ready. But, for the time being, the economy still needs the support of extraordinarily low rates,” she said.When it becomes time for the Fed to change gears, Yellen said the Fed’s ability to pay interest on reserves banks hold at the Fed will “play a lead” role in the policy response.
Fed's Yellen: Economic Outlook and Monetary Policy –Excerpts - From San Francisco Fed President Janet Yellen: The Outlook for the Economy and Monetary Policy.
The Helicopter Departs -The Fed move to raise the discount rate on Feb. 18 has initiated a discussion of the timing of the removal of accommodation. Unfortunately, framing the subject as being relevant to accommodation is a mistake. The implementation of a near zero interest rate policy is just another component of emergency measures used to cure a systemic bank run. The emergency measures need to be viewed completely separate from the setting of a policy rate for economic management purposes. The potential raising of the Fed target rate from near zero to near 1% should not be called a tightening of monetary policy. There exist many harmful side effects of an emergency rate policy.
Treasury Announces Expansion Of Borrowing Program - Now that the government's debt ceiling has been increased, the Treasury Department said Tuesday it will once again expand an emergency program created at the height of the financial crisis to help the Federal Reserve manage its books. The Treasury said it will expand borrowing in the Supplementary Financing Program from $5 billion to $200 billion. During the financial crisis, the borrowing program hit a peak of $560 billion in 2008 but it was trimmed last fall to keep the government from breaching the debt limit. The increase planned over the next two months will be accomplished by selling $25 billion in 56-day bills at weekly auctions which will be held every Wednesday. Treasury officials said that they are resuming the debt sales to make sure that the Federal Reserve has the flexibility it needs to manage its balance sheet.
Another Fed Maneuver to Digest - The Treasury announced this afternoon that it is going to revive a program in which it borrows $200 billion by issuing short-term bills and leaves the cash on deposit with the Federal Reserve. Why? And why now? The Treasury initiated this program — called the Supplemental Finance Program — at the peak of the financial crisis. It was a way to get the Fed cash it needed to fund a myriad of new programs to get credit into the financial system. The Treasury reduced the program last year as its borrowing authority approached legal limits. But since Congress earlier this month approved an increase in the debt limit, it is able to revive it.
Treasury Supplementary Financing Program (SFP) - Whenever the Federal Reserve buys an asset or makes a loan, it simply credits new reserve deposits to the account that the receiving bank maintains with the Fed. The bank would then be entitled to convert those deposits into physical dollar bills that it could ask the Fed to deliver in armored trucks. Banks currently hold $1.2 trillion in such reserves, or more than a hundred times the average level of these balances in 2006, and more than the total cash the Fed has delivered since its inception a century ago. The traditional way the Fed would bring those reserves back in (and thus prevent them from ending up as circulating cash) would be to sell off some of its assets.The Treasury's Supplementary Financing Program was introduced in the fall of 2008 to assist the Fed in its massive operations to prop up the financial system at the time. The SFP represents an alternative device by which the Fed could reabsorb the reserves it created. Essentially the Treasury borrows on behalf of the Federal Reserve, and simply holds the funds in the Treasury's account with the Fed. When a bank delivers funds to the Treasury for purchase of a T-bill sold through the SFP, those reserve deposits move from the bank's account with the Fed to the Treasury's account with the Fed, where they now simply sit idle, and aren't going to be withdrawn as cash.
The Fed and the Supplementary Financing Program - As I discussed briefly yesterday, Treasury has announced plans to revitalize its Supplementary Financing Program (SFP), which will effectively mop up $200 billion in excess reserves over the next two months. Even though this is a Treasury action, it strikes me as an important step (with many yet to come) in the Fed’s exit strategy.The boost in the SFP has created some confusion among observers, however, because of the limited information that Treasury and the Fed have provided about the rationale for the move. Indeed, as one reader pointed out to me, Ben Bernanke makes no mention of the SFP in his prepared testimony today. Over at Econbrowser, Jim Hamilton provides an excellent summary of the SFP and the possible implications of its rebirth.
Step Three of the Fed’s Exit Strategy - A journey of a thousand miles begins with a single step. The Fed faces just such a journey today: returning monetary policy to normal as the economy heals. And in case you didn’t notice, the Fed has already taken three steps down the road. Step 1 was the termination of various special credit facilities (e.g., the Term Auction Facility) that were created to provide liquidity during the crisis. Step 2 was last week’s sort-of-surprise announcement that the Fed was increasing the discount rate from 0.5% to 0.75%. Step 3 is today’s announcement that Treasury is reviving the Supplementary Financing Program (SFP). Over the next two months, Treasury will issue $200 billion in bills for the SFP and then place the proceeds in its account at the Fed. The SFP will thus mop up $200 billion of liquidity that Fed asset purchases have injected into the monetary system
Treasury Moves Sparks Worries About Fed Tightening - Financial markets have been left wondering again whether the Federal Reserve is actively moving to a tighter monetary policy stance. The latest round of anxiety centered on an announcement by the Treasury Department on Tuesday that it is increasing the size of a temporary program called the supplementary financing program (SFP) back to $200 billion, from the current $5 billion. Under the program, Treasury sells short-term bills and moves the proceeds into the Fed's accounts.
New Study Shows Money Has Tightened Despite Fed’s Efforts - The Federal Reserve has pushed short-term interest rates to near zero, flooded the financial system with loans and committed to purchase more than $1.7 trillion of mortgage and Treasury securities to restart a financial system devastated by the debt crisis. After all that, however, financial conditions tightened a bit at the end of 2009, according to a new study produced by a collection of Wall Street and academic researchers. The reason is that even with exceptionally low interest rates, capital markets aren’t humming and bank lending is weak. In an unusual collaboration, the chief economists from Goldman Sachs and Deutsche Bank teamed up with economists at Princeton University, Columbia University and New York University to produce an index measuring financial conditions. It is an important exercise because financial conditions help to drive economic growth, inflation and asset prices. When money is loose and easy, the economy tends to grow faster in the short-run, though inflation and asset price booms can build. Tight money, on the other hand, is like a lack of oxygen which can strangle growth.
Bernanke reasserts need to keep rates low - Federal Reserve chair Ben Bernanke said record low interest rates are still needed to foster U.S. economic growth as the country recovers from its worst battering since the Great Depression of the 1930s. In making his semi-annual monetary policy report to the U.S. Congress, Bernanke said short-term rates will remain low for some time yet. The Fed "continues to anticipate that economic conditions … are likely to warrant exceptionally low levels of the federal funds rate for an extended period," he said. "Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures."
Bernanke Reaffirms ‘Extended Period’ of Low Rates - NYTimes - In presenting the Fed’s semiannual monetary report to Congress, he did not waver from his recent statements on monetary policy. It was Mr. Bernanke’s first testimony since a grueling confirmation process ended last month, when the Senate gave him a second term as chairman by the narrowest margin in the Fed’s history. In what appeared to be a deliberate response to the criticisms leveled at the Fed, Mr. Bernanke announced support for two measures to improve oversight of the extraordinary lending programs the Fed started in 2008. In one of the moves toward openness, Mr. Bernanke said the Fed would back legislation requiring the eventual release of the names of borrowers that used the programs.
Bernanke defends Fed’s actions: - Mr Bernanke’s insistence that rate hikes were still far away will dampen fears that last week’s increase in the discount rate - at which commercial banks can borrow emergency cash from the central bank - from 0.5 per cent to 0.75 per cent - is a precursor to a swifter tightening of monetary policy. “These adjustments [to liquidity policies put in place during the crisis] are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signalling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC,” Mr Bernanke said. Mr Bernanke said that “at some point” the Fed would have to tighten monetary policy in order to avert a spike in inflation..
Bernanke Backs Audit of Fed Loan Programs, Naming of Borrowers After Delay (Bloomberg) -- The Federal Reserve will back legislation to let congressional auditors probe its emergency- lending programs and identify, “after an appropriate delay,” firms that borrowed, Chairman Ben S. Bernanke said. “We understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation,” Bernanke said today in semiannual monetary-policy testimony to Congress. The lag must be “sufficiently long” so investors won’t view a firm’s participation as an indication of current problems, he said. Bernanke is aiming to increase Fed openness without bowing to some lawmakers’ demands to identify banks that borrow from the discount window or allow audits of interest-rate decisions. In Feb. 3 comments after being sworn in for a second four-year term, Bernanke pledged to “ensure maximum transparency” without compromising the Fed’s “ability to conduct policy in the public interest.”
Bernanke: Unsustainable Debt Could Hurt Dollar, Interest Rates --Federal Reserve Chairman Ben Bernanke warned Wednesday of negative consequences to the dollar and interest rates if investors lose confidence in the U.S. government's ability to bring the deficit back under control. There are a number of different channels through which large deficits, or unsustainable deficits, could affect the current economy," Bernanke told the House Financial Services Committee
Bernanke: Despite Doubts, Low Rates Really Are Helping the Economy - “I’m beginning to wonder whether low interest rates really have any possibility of spurring this economy,” Sen. Johanns said. “Unless there’s demand, unless we can get consumers back into it, it just seems very unlikely to me you’re going to see much growth. I’m not sure offering somebody an interest rate at 2% rather than 4% is going to get us to the other side.” Bernanke maintained that “low interest rates do tend to help,” citing improvement in equipment and software investment by big firms that have access to credit at “reasonable rates” in the bond market. He also noted that the Fed’s actions have helped bring down mortgage rates and stabilize demand for housing and house prices.
Bernanke Discusses Fed Support for Housing Market - U.S. Federal Reserve Chairman Ben Bernanke said that by simply holding mortgage-backed securities on its books, the Fed will continue to support the housing sector and the wider economy. He added, however, there were lots of different views on how ending the purchases could impact long-term rates. “There may not be a significant reaction,” Bernanke told lawmakers. In a key testimony at the House Financial Services Committee, Bernanke said the Fed would stick to plans to end buying $1.25 trillion in mortgage-backed securities by the end of March. Some economists worry that the end of the purchases could lead to higher mortgage rates.
Chairman Ben S. Bernanke testimony - Semiannual Monetary Policy Report to the Congress - Before the Committee on Financial Services, U.S. House & the accompanying Monetary Policy Report.
Economists React: Bernanke Has ‘No Interest in Surprising Markets’ - WSJ - (9) Economists and others weigh in on Fed Chairman Ben Bernanke’s congressional testimony.
Bernanke Transparency Offer May Not Defuse Calls for Audits (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke sought to defuse congressional efforts to audit monetary policy by backing the release of more information on emergency aid to investment banks and corporations. The Fed will support legislation to let government auditors probe six temporary programs created to combat the financial crisis such as the Primary Dealer Credit Facility, Bernanke said yesterday in House testimony. While he would support the delayed release of names of firms getting aid from those programs, he said banks borrowing through the longstanding discount window must be allowed to remain anonymous. Bernanke’s move toward greater openness may not dissuade lawmakers who want the Fed to disclose more information about the Fed’s lending and policy decisions. Lawmakers are responding to public anger over the Fed’s role in the $182.3 billion bailout of American International Group Inc.
Exit strategy, tactics, and decision makers - Atlanta Fed blog - Vincent Reinhart, resident scholar at the American Enterprise Institute and former senior official of the Federal Reserve Board of Governors, heard the Chairman speak and seems to have come away not wholly satisfied. "… Bernanke will talk about reverse repurchase agreements and interest on excess reserves as congressional committee members nod in agreement. Mastery over tactics, the bet runs, will restore faith in an otherwise undefined future. It is a difficult trick, this confidence game. Interestingly, Reinhart himself has his own answer to that question: That judgment is certainly not a matter of inside information or any special insight, as there are plenty of statements like this one from Dennis Lockhart, our boss here at the Atlanta Fed.
Fed's Bullard: Will "try out" discount rate level (Reuters) - The U.S. Federal Reserve may not have to raise its emergency lending discount rate to a full percentage point above the interbank fed funds rate to normalize lending, a senior Federal Reserve official said on Tuesday. "We'll try out this 50 basis points (differential between the discount rate and the fed funds rate), we'll see how it goes," St. Louis Federal Reserve Bank President James Bullard told reporters after speaking to a business group. "It's not clear that you need the full 100 basis points to make it enough of a penalty rate so that banks don't use the discount window for ordinary lending," he said
Dallas Fed’s Fisher: Fed Has Done All It Can to Support Economy - The Federal Reserve has provided all the support it can to the economy, and now is the time to allow those supportive policies to bear fruit, Bank of Dallas President Richard Fisher said in a Dow Jones Newswires interview Thursday. “I would expect rates to stay low for an extended period…given the current forces acting on the economy,” he said. But Fisher added that putting a time frame on the continued maintenance of a near 0% fed-funds rate can’t be done. “People want specificity. You can’t provide specificity here,” he said. Fisher stressed that when the Fed’s mortgage-buying program ends in March — it will have purchased $1.25 trillion in securities — it will be definitively over
Fed's Pianalto: "May take years to get back to 2007 level of output"- From Cleveland Fed President Sandra Pianalto: When the Small Stuff Is Anything But Small. A few excerpts: You know we have been through one of the most severe and longest recessions in our nation’s history. The recovery from the recession may also end up being one of the longest in our history. In fact, it may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began. Some of you may think I am being too pessimistic. After all, we saw a strong GDP growth estimate for the fourth quarter of last year--nearly 6 percent at an annual rate. But I think that figure overstates the underlying strength of our economy right now.Over the course of this year, I expect overall growth in employment and output to be on the weak side for the early stages of an economic recovery.
Global Crisis Leads I.M.F. Experts to Rethink Long-Held Ideas - The International Monetary Fund has long preached the virtues of keeping inflation low and allowing money to flow freely across international boundaries. But two recent research papers by economists at the fund have questioned the soundness of that advice, arguing that slightly higher inflation and restrictions on capital flows can sometimes help buffer countries from financial turmoil. One paper has received particular attention for suggesting that central banks should set their target inflation rate much higher — at 4 percent, rather than the 2 percent that is the most widely held standard. As aggregate demand fell across the world in 2008, central banks, including the Federal Reserve, lowered short-term interest rates to nearly zero, where they have largely remained. While the two papers do not represent a formal shift in the fund’s positions, they suggest that the I.M.F. is re-examining some of its long-established orthodoxies as part of its response to the global economic crisis that began in 2007.
An Alternative to the 2% Inflation Goal - Many central banks now target a rate of inflation. The Federal Reserve, for instance, has an informal goal of 1.5% to 2% inflation over the long run. Targeting became popular in the 1990s and 2000s because central bankers felt it helped build their inflation fighting credibility, which anchored expectations for future inflation, kept interest rates low and helped to keep the economy robust and stable.But there are problems with this approach. One is that it forces central bankers to lose their memory. Say inflation falls short of a 2% target one year — as it did in many places last year. A strict adherent to an inflation rate target would let bygones be bygones and continue to target 2% inflation in year two, even though the economy is coming out of recession with slack and excess capacity. There could be a better alternative to inflation targeting, which became all the vogue among central bankers in the last two decades but now has doubters. Rather than target a rate of inflation, as is now custom, target a level of prices. Price level targeting, its proponents say, would give central banks more flexibility to respond aggressively to downturns and crises without sacrificing their inflation fighting credibility.
Morgan Stanley – We Can’t Inflate Our Way Out - Inflation is not the solution. It's tempting to think that the US can inflate its way out of its fiscal problems. A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would - other things equal - reduce the real resources needed to service and pay back the promises we are making today. And there is no mistaking the staggering value of those promises. On our projections, federal marketable debt held by the public, which we estimate will be 60.7% of GDP at the end of F2010, will jump to 87% of GDP in the next decade - a level not seen since the post-WW II period (1947). In absolute terms, such debt will more than double over that period from its January level of US$7.2 trillion. Adding fuel to the fire, a growing chorus of household-name economists from both sides of the political aisle appears to be advocating higher inflation as the remedy for our fiscal maladies. Indeed, many believe that higher inflation will cure multiple ills, and that central banks should raise their inflation targets to as high as 4% from the current ones (some implicit) that cluster near 2%. From a policy perspective, we couldn't disagree more
Our Inflation Target is what? - OK, so the Fed has an unofficial inflation target of 2%, right?Except, the Fed's projection of inflation for this year is 1.4-1.7%. And the Fed is also taking steps to slow the economy. But if I'm a rational agent, I'm not sure why I wouldn't expect prices to rise at the lower end or below of the Fed's range. So, the Fed essentially has an inflation target of 1.4%, whether it knows this or not. Complete madness.
Core Logic - Krugman - I thought I might take a few minutes to address an issue that seems to confuse many people: the idea of core inflation. Why do we need such a concept, and how should it be measured? So: core inflation is usually measured by taking food and energy out of the price index; but there are alternative measures, like trimmed-mean and median inflation, which are getting increasing attention. And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia. Think about it this way...
A Question for Ben Bernanke "We are not in a Great Depression by any means, but our economy has operated below potential for nearly three years. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, monetary policy seems paralyzed, with a paralysis that is largely self-induced. ... Perhaps it’s time for some Rooseveltian resolve." If these words sound familiar, Chairman Bernanke, that is because you wrote them. You wrote them about Japan in 1999, when Japan's CPI was flat, and Japan's unemployment was at a mere 4.7%. You wrote that this called for "an aggressive depreciation of the yen", for a “helicopter drop of newly printed money" and for an "inflation target of 3-4%".
“Should Monetary Policy and Banking Regulation be Conducted Separately?” - I have argued many times that the Fed should have two roles. It should conduct monetary policy, and it should be the primary regulator of the financial system. However, not everyone agrees. When I was at the What's Wrong with Modern Macro Conference in Munich recently, I met Hans Gersbach -- we were on a panel together -- and he passes along his argument that monetary policy and banking regulation should be conducted by separate bodies: Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity, by Hans Gersbach, at Vox EU:
Bernanke offers concessions to quell Congress' criticism of Fed - Federal Reserve Chairman Ben S. Bernanke launched a wide-ranging effort Wednesday to fend off congressional efforts to take powers away from the central bank, laying out a series of compromises and olive branches meant to defuse lawmakers' criticism. Testifying before the House Financial Services Committee, Bernanke said he will support legislation to disclose the names of companies that take advantage of special Fed lending programs, so long as enough time has passed since the loan request to avoid stigmatizing the borrowing firm. He also said he will support legislation to expand congressional oversight of many Fed functions, if its power to manage monetary policy is exempted. In what appeared to be an effort to combat efforts to strip the Fed of bank oversight, Bernanke said that the Fed is overhauling its policies to try to reflect the lessons of the financial crisis.
Bernanke Says Fed Actively Ramping Up Bank Supervision - There’s been a lot of talk on Capitol Hill about who should be given the power to oversee the country’s largest financial companies. Based on Federal Reserve Chairman Ben Bernanke’s testimony to the House Financial Services Committee on Wednesday, it sounds like Fed officials aren’t waiting around for Congress to act. Here are some quick takeaways from Mr. Bernanke’s testimony, directly related to bank supervision. 1) The Fed is conducting “an intensive self-examination of our regulatory and supervisory responsibilities” and is “actively implementing improvements.” 2) The Fed is “overhauling supervisory framework and procedures to improve coordination within our own supervisory staff” and with other agencies. 3) The Fed is developing an “enhanced quantitative surveillance program for large bank holding companies.” 4) Mr. Bernanke argues in favor of retaining key supervisory powers at the Fed.
Kansas City Fed’s Hoening: Deficit Pressures to Keep Rates Low - Federal Reserve Bank of Kansas City President Thomas Hoenig reiterated his call for interest rates to go back to normal levels sooner rather than later, but warned that the U.S. government’s budget deficit puts pressure on the Fed to keep rates low. In an interview with C-Span’s “Washington Journal,” Hoenig said one of the issues that he has dealt with is how to bring interest rates back to a more long-term sustainable level from the current “extremely low” and “obviously unsustainable” levels. “There are some disagreements. That’s one thing about a committee like the [Federal] Open Market Committee where you can have different views, and I do share a different view,” Hoenig, who’s a voting member of the FOMC, said. “We should be going back to more normal levels sooner rather than later.”
Auerback: Bernanke Fesses Up: America Has No ‘Insolvency’ Issue - Usually, we dread the regular Congressional testimonies of the Fed Chairman. They generally constitute a mix of obfuscation on the part of Mr. Bernanke mixed with political grandstanding on the part of Congress. But occasionally, a glimmer of truth comes through, as occurred today in this exchange between the chairman of the Federal Reserve and Congressman Barney Frank: Frank: Do you think there is any realistic prospect of America’s defaulting on its debt in the near future? Bernanke: Not unless Congress decides not to pay…. So there you have it. If Congress doesn’t pass the debt ceiling, the Treasury can default. But this constraint is not operationally inherent in the monetary system.
National Debt in the Bail-out Era - I'm reviewing a lot of stuff that is coming back fast and furious from the illustrator for my (our, actually, as I have a co-author) book which comes out later this year. Meanwhile, last minute we ended up needing an "Obama chapter." Here's a graph that was produced on the fly for that chapter (before the illustrator does his magic and makes it really look snazzy): Data sources...Debt comes from the the Treasury. CPI and Population come from Fred.
It's Alive! The dollar, that is. -The U.S. dollar was supposed to be at the end of its rope. Kicking the bucket. A dying symbol of a dying empire. Well, maybe not. The dollar continues to defy gloom-and-doom predictions. After a swoon last year, the dollar is again enjoying a major rally. The U.S. dollar index, which measures the greenback's value against other major currencies, is just off an eight-month high. Like the slasher in a cheesy horror flick, the dollar keeps coming back for another go, just when you least expect it. The main reason behind the dollar's recovery is actually no real surprise at all. There is no alternative able to replace the dollar as the world's No.1 currency.
The Incredible, Vanishing Greenback - The ruling elite in Washington is going to try to inflate its way out of its debt conundrum, attempting to pay off the government's foreign creditors with greenbacks that lose value right before your eyes, like an ice cream cone melting on a hot summer day. The process is already well under way. If you could once buy a silver dollar for one greenback, but it now costs 15 greenbacks, then the dollar is now worth seven 1960 cents. If gold once cost $35 an ounce and it now costs $1,100 an ounce, than the greenback is now worth about three 1940 pennies.
How long can the U.S. dollar defy gravity? -The Greek debt crisis, which has sent investors stampeding back into the U.S. currency, has provided a reprieve. The dollar has gained some 10 percent against the euro since December. And following the Fed's decision last week to hike the discount rate it charges banks for emergency loans, the dollar rose even higher as some investors bet it would benefit from the eventual end to the Fed's post-crisis regime of easy money. But a number of economists, investors and officials here and abroad interviewed for this story say the longer-term prognosis is far from rosy.As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion -- but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, "there'd be hell to pay for the dollar," Pardee said. "Sooner or later, the U.S. is going to have to pay attention to the dollar."
“The US is not a viable concern anymore” – Duncan - FT Alphaville spoke with Richard Duncan, partner at Blackhorse Asset Management and author of The Dollar Crisis on Tuesday, regarding his new book The Corruption of Capitalism. And while he is pretty pessimistic on the US, Duncan says there is a way out if policymakers make bold decisions. Simply put, according to Duncan, the breakdown of the gold standard allowed too much paper-money to be created in the US. This de facto funded the US deficit, which respectively fuelled a savings glut in Asia. That inevitably drove dollar inflows back into the US — which themselves, over the course of a four-decade period, fueled a global credit bubble of simply gargantuan proportion. In Duncan’s words, the collapse of Bretton Woods represented the moment “capitalism became corrupted by government debt”. From that point on “US policymakers abandoned the core principles of economic orthodoxy: balanced government budgets and sound money”.
Head of IMF Proposes New Reserve Currency - Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. dollar. "That day has not yet come, but I think it is intellectually healthy to explore these kinds of ideas now," he said in a speech on the future mandate of the 186-nation Washington-based lending organization. America Tied Up by Record Debt - Bloomberg interactive graphic
Republicans Pushing To Count GSE Debt Toward Statutory Debt Limit May Be Surprised To Find Real Debt-To-GDP Ratio Is 130%, And That Greece Is Amateur Hour - A new proposal by House Republicans, lead by Rep. Scott Garrett (R., N.J.), is seeking to address changes to Fannie and Freddie accounting, along the lines of what has been previously proposed by Zero Hedge, and to not only include the GSE's losses as part of the Federal budget, but to also count the debt from the two mortgage zombies toward the nation's total statutory debt limit. As we stated previously, it is only semantics at this point which distinguish the GSE obligations from other Treasury obligations. Yet it is not just us, but the administration's very own Peter Orzsag who was pushing for consolidated GSE accounting two years ago. Yet with GSE debt most recently at $6.3 trillion, or about half of the existing Treasury debt, this would mean total US debt would not only explode by 50% overnight, but the recently increased debt ceiling would be immediately breached and America would find itself in technical default
Rogoff: America Has Defaulted Before And It Will Run Into Trouble Again (CNBC video) Kenneth Rogoff spoke with CNBC today about the threat of sovereign debt crises today. The Key Points: When countries hit gross government debt as 90-100% of GDP, problems are bound to arise. If countries go too long with stimulus it can leave them in a debt trap and with prolonged slow growth. The U.S. has been in 'default' before -- when it went off the gold standard -- and there is no reason why it won't have problems again.
Just How Large Is America's Public Debt? - Drama sells. And when it comes to the merchants of doom who make a living off of selling alarmist tales about the American apocalypse, the bigger the number cited for the US public debt, the better. How else can you sell the idea of a “debt bomb” to scare people into participating in schemes to “invest” in gold. gold stocks, or some other commodities or to participate in some machination to short the US Dollar? I recently wrote a fairly detailed article on the US’s overall debt dynamics entitled How Big a Deal Is America’s Debt Problem? I've decided to follow the article up with one that focuses entirely on the issue of US public debt given that this is an area in which there's a great deal of misinformation circulating. It's common these days for analysts to cite figures for US public debt at around 80% to 95% of GDP. Some analysts cite even larger figures. I've even seen some writers cite US public debt figures at 60 trillion to 80 trillion dollars. All of this is misinformation. I'd like to cite a few facts, just for the record.
Kroszner Says U.S. Must Appease ‘Wary’ Markets by May on Budget (Bloomberg) -- The U.S. will see borrowing costs on its debt rise ‘a lot’ if President Barack Obama fails to set out by May measures to bring the record budget deficit under control, former Federal Reserve Governor Randall Kroszner said. “There’s been a lot of discussion about fiscal responsibility, but we haven’t had a clear plan yet and that’s going to be crucial,” Kroszner said today in a telephone interview during a visit to London. “If we do not get a clear plan in the next two months the markets are going to start to be much more wary and I think borrowing costs will go up a lot.”The budget deficit will probably swell to a record $1.6 trillion during the fiscal year ending Sept. 30, the Obama administration predicted Feb. 1. China sold a record amount of U.S. debt in December, raising speculation that it is turning bearish as Obama raises borrowing to sustain economic growth.
The Lost Budget Decade - Budget aficionados have long warned that the U.S. budget is on an unsustainable path. That’s old news (but important).The new news, which I hope you’ve noticed, is that those warnings have become more urgent over the past year or so. Why? Because our future problems have moved much closer. Over at the Committee for Economic Development, Joe Minarik has a nice chart that illustrates how rapidly the budget outlook deteriorated:
Greg Mankiw's Prediction for America - Harvard economist Greg Mankiw has an interesting interview on the economic outlook for the U.S. He covers a variety of topics and the whole piece is worth a read. One interesting part of the discussion was about the long-term fiscal outlook in America. He lays out the possible solutions to the huge problem of the impending explosion in federal entitlement obligations brought on by retiring baby-boomers (Social Security, Medicare, etc.). Here is his prediction of which option will prevail: Mankiw: Our children will pay vastly higher tax rates than we currently face. The alternative is to reduce spending, but the spending cuts that are necessary to maintain our current levels of taxation are politically untenable. If I had my druthers, I would raise the eligibility age for Social Security and Medicare, but that is a political non-starter.
Time for independent fiscal policy committees - The financial crisis has brought large fiscal deficits and soaring public debt. A switch to tight fiscal policy risks throttling the recovery, but continuing deficits are spooking markets. This column argues the obvious solution is to promise future fiscal rectitude and stick with the current expansionary policies in the near term. This requires independent fiscal policy committees to institutionalise fiscal transparency and restore credibility to governments’ long-term public finances.
A New Social Contract, but Which One? - Paul Krugman writes today about “starving the beast” — the idea, popularized under President Reagan, that depriving the government of tax revenue would force it to shrink. As Professor Krugman suggests, the history of this strategy has been weak. The types of spending cuts necessary to substantially shrink the country’s long-term deficits are profoundly unpopular, especially given that Medicare, Medicaid and Social Security are among the federal government’s biggest spending commitments.A decline in tax revenue — whether due to a legislated tax cut, or to a severe recession like the one we’ve just been through — simply does not seem to be an effective weapon in building the political will necessary to decrease spending today, tomorrow or 10 years from now.In fact, in a paper last year, Christina D. Romer found that legislated tax cuts not only did not shrink the size of government, but might even expand it: That is, if anything, tax cuts somehow seem to lead to spending increases.The reason for this trend is unclear; the Romers propose that it may have something to do with a disconnect in the voters’ minds between spending and taxes, or perhaps that tax cuts promote sense of “shared irresponsibility” and encourage different political interests to clamor for their own piece of the pie.
On Starving the Beast - The idea of using budget deficits as cover to cut spending that couldn’t otherwise be cut—a concept known as starving the beast—seems to be resurfacing (see here and here). This is a view I once held back in the 1970s. Just cut taxes, I thought, and pressure to balance the budget will manifest itself in the form of spending cuts that will reduce the size of government and increase growth, which would further reduce the size of government as a share of GDP.The problem is that this idea presupposed that there was significant support in Congress to reduce the deficit. Unfortunately, there has been no serious concern about the deficit in either party since the end of the Clinton administration. While both parties share some blame in this regard, there’s no question that more of it belongs to Republicans. They cut taxes willy nilly during the George W. Bush years, massively expanded entitlement spending by enacting the Medicare drug benefit without paying for a penny of it, started two wars without paying for them either, and approved all pork barrel projects proposed by any Republican no matter how worthless.
Will China Dump U.S. Debt? - One of the big worries Americans have about China's rising economic power concerns its immense holdings of U.S. government debt. The fear is that Chinese actions regarding these holdings could end up destabilizing the U.S. economy, or that they could be used as a political tool to influence American policy. If China, let's say, got angry at Washington over its support for Taiwan or the Dalai Lama, Beijing could retaliate by dumping U.S. Treasury bills. Or perhaps China would sell Treasuries as part of a no-confidence vote on the future of the U.S. economy. By selling American debt, China would weaken the value of the dollar, damage investor sentiment towards the U.S. economy and make it harder for Washington to finance its giant budget deficits.
How Safe Are Your Dollars? - Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe. Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback. And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.Will the value of the dollar continue its long-term downward trend relative to other currencies? Will the enormous rise of United States government debt that is projected for the coming decade and beyond lead to inflation or even to default? Will the explosive growth of commercial banks’ excess reserves cause rapid inflation as the economy recovers? But, while there is much to worry about, the bottom line is that these fears are exaggerated.
China defends move cutting U.S. Treasury securities holdings (Xinhua) -- China defended its move to reduce its holdings of U.S. Treasury securities, saying the United States should take steps to promote confidence in U.S. dollar .Foreign Ministry spokesman Qin Gang made the comment Thursday when responding to questions on China's sale of U.S. Treasury securities last December. Qin said the issue should be viewed from two perspectives.He said on the one hand, China always followed the principle of "ensuring safety, liquidity and good value" in managing its foreign exchange reserve. And when it came to how much and when China buys the bonds, the decision should be made taking into account the market and China's need, so as to realize rational deployment of China's foreign exchange property, he said. And on the other hand, the United States should take concrete steps to beef up the international market's confidence in the U.S. dollar, Qin said.
What the PBoC cannot do with its reserves - MIchael Pettis - So was China a net seller of dollar assets in December? Almost certainly not. Just look at the PBoC balance sheet. PBoC reserves rose in December by $61.3 billion, of which $39.0 billion was the trade surplus. Remember that China has a large current account surplus which necessarily must be recycled abroad, and the US has a large current account deficit which necessarily must be funded abroad. It would be astonishing if, under these circumstances, total Chinese holdings of USD assets declined, and of course it is impossible that they declined faster than the willingness of other foreigners to replace them.
In Search of...Crowding Out - Econbrowser There are various definitions of crowding out. There's crowding out in the financial markets, and crowding out of actual economic activity. In order for crowding out in the financial markets to translate into a reduction of the interest sensitive components of aggregate demand, one needs to see an impact on interest rates. So, what is happening to real (inflation adjusted) interest rates? First, let's take a look at the nominal interest rates, both the risk free and risky.
Yield Curve Steepest In History: Is The Meaning Different This Time? -Curve Watchers Anonymous is once again taking a look at the yield curve looking for economic clues. Here are a few charts to consider. Under normal circumstances with a steep yield curve, banks would be willing to borrow from the Fed at close to zero and lend at prime or higher. Yet we know that banks are reluctant to lend (more accurately businesses are reluctant to borrow) as mentioned many times, most recently in As Credit Contracts, Keynesian and Monetarist Clowns Snipe at Bernanke. Is It Different This Time? In the US, with unemployment close to 10% and no driver for jobs (neither housing nor commercial real estate is going to make a strong comeback here), extreme caution is warranted.
More Money, More Problems – Headline CPI came out this morning and surprised to the downside, 2.6% year-over-year versus 2.8% expected. Core CPI was also cooler than expected at 1.6% versus the 1.8% predicted by economists. Watchers of the monetary aggregates aren’t as surprised, but who watches M2 anymore? Every economic theory enjoys its time in the sun, but ideas fall in and out of popularity. Monetarism is no different. Money supply data used to be pored over upon its release by the Fed. We believe that the tracking and analysis of money supply will enjoy its day in the sun again, and in the meantime we plan to keep watch. We’ve taken to following a measure of money supply that adds together M2 and the only surviving component of M3: institutional money funds. As you can see below, it has been falling since June of 2009 and is now down year-over-year.
Graph of Core CPI, and Cleveland Fed Measures of Inflation - A combination of significant resource slack, and a policy of pushing down rents (an unintended consequence of the first time homebuyer tax credit), pushed core inflation (CPI minus food and energy) negative in January for the first time since 1982. This was no surprise. Professor Krugman has more and suggests focusing on the Cleveland Fed measures of inflation: Core CPI has been behaving erratically lately, making me doubt whether it’s still a good guide to underlying inflation (by which I mean the trend in prices that, unlike commodity prices, have a lot of inertia).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. That inspired me to put all three measures on one graph:
Looking behind the core inflation numbers - Atlanta Fed's macroblog - Last Friday's consumer price index (CPI) report showed headline inflation in January remaining stable from the previous month at a 2 percent annual rate, a bit above most private forecasts, boosted by higher fuel costs. But the show was stolen by the core measure. Excluding food and energy, consumer inflation saw the largest monthly drop in more than 27 years and its third largest decline in 47 years. Several factors were behind the decline in the core index (such as falling airline fares, a dip in new car prices, and ongoing declines in prices for household furnishings and operations), but a sizeable drop in shelter prices, which account for more than 40 percent of the core CPI index, was a significant factor in January's dip. A concern that decelerating shelter prices could skew the core inflation measure was noted in the minutes of January's FOMC meeting
Inflation Perceptions - I’ve recently put up several posts on disinflation, and was struck by how many of the comments were along the lines of “Get real — the cost of everything like food and gas has gone way up over the past two years.” So I thought I’d look at the BLS average price data. What’s happening, I suspect, is that sharp price rises in some things catch peoples’ attention, while declines don’t. Also, these are tough times, and while the cost of living may not be rising much, it’s certainly getting harder to afford stuff. Oh, and the big food and gas price increases of 2007-2008, even though they have receded, may have left a mark on memories.
Bernanke’s BS Bounce Part II - Yay, more free money! Oh not for you (unless you are a banker) but for all of Ben’s best buddies as the Fed Chairman promised yesterday to maintain “exceptionally low levels of the federal funds rate for an extended period.” He can do this because, according to Bernanke: Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. See! I bet you didn’t realize how well things were going, did you? Oil going from $70 to $80 in 15 days isn’t inflation – it’s SUBDUED! Up from $37 last February and March – SUBDUED – As in, DUDE, where’s my money???
A Hawk For All Seasons – Krugman - You might think it would be hard to be an inflation hawk, demanding monetary tightening now now now, in the current environment. For one thing, there’s no inflation. And there’s also mass unemployment. Based on historic Fed behavior, the combination of these two factors should mean a Fed funds rate of around -6 percent; since the Fed can’t do that, it ought at least to keep rates near zero for a long time, probably at least the next two years. But these guys are made of sterner stuff than that. Irwin Kellner explains that the overall level of prices is rising, as long as you don’t count the goods whose prices are falling.
Some People Actually Like The Volcker Rule - The Volcker Rule -aka the euthanasia principle- got some fresh backers over the weekend, with five former Treasury secretaries sending a letter to the WSJ to voice their support. While this must be good news (late wedding gift?) for Paul, the former secretaries don’t add much to the initial argument. They’re just reiterating what Paul’s been saying from the start: This is just one component of a much broader picture, banks should not engage in speculative activity unrelated to essential bank services, prop trading is a bad, bad, thing. Right. Doesn’t do much to convince the haters.
Geithner May Give Regulators Leeway in Applying Volcker Rule - (Bloomberg) -- The U.S. Treasury Department wants to give regulators discretion to define proprietary trading as the White House tries to revive its plan to bar banks from making hazardous bets that could cause another financial crisis. One month after President Barack Obama said firms “will no longer be allowed” to trade for their own accounts, officials say they need flexibility to avoid impairing the $7.2 trillion Treasury securities market. Dealers who trade in government bonds on behalf of clients need to be able to maintain inventories in their firms’ own accounts to insure market liquidity, said Lee Sachs, a counselor to Treasury Secretary Timothy F. Geithner. “This measure is not aimed at anything having to do with customer business, market- making or hedging,”
Prospects For Financial Reform - The best opportunity for immediate reform of our financial sector was missed at the start of the Obama administration. As Larry Summers and Tim Geithner know very well – e.g., from their extensive experience around the world during the 1990s (see Summers’s 2000 Ely lecture) – when a financial system is in deep crisis, you have an opportunity to fix the most egregious problems. Major financial sector players are always good at blocking reform – except when they are on the ropes. Naturally, the Obama administration’s generally weak and unfocused financial reform proposals have morphed into generally weak and unfocused congressional bills. The overall narrative has been lost – despite moments of clarity from the president (e.g., when he spoke first about the Volcker Rules, but this was spun away within 12 hours by Secretary Geithner and others on the team).
Volcker Rule Being Deep Sixed - Yves Smith - As readers may recall, we had argued over a series of posts that the proposed Volcker rule, to bar proprietary trading at commercial banks, did not go far enough in reducing systemic risk. While the concept was so sketchy that it was difficult to be certain what it meant, it appeared to have two serious flaws. First, it defined proprietary trading as only positions booked that did not involve customer transactions, such as private equity funds. This is a spurious distinction. The second flaw is that Volcker appeares to have an outdated view of the financial system. All these debates appear to be moot. The Volcker rule is following the tried and true path of all Obama “reforms”, meaning an idea announced with great fanfare is being whittled back to meaninglessness.
Satyajit Das: Paul Volcker’s Trojan Horse - Some financial regulation proposals are not quite what they seem. Named after Paul Volcker, the six-foot-seven-inch former Chairman of the Federal Reserve, the eponymous rule restricts banks from proprietary trading and investing in hedge or private equity funds. The primary aim is to prevent depositor funds from being risked in speculative investments and activities. Popular narrative on the proposal has focused on the practical problems of the proposal. Distinguishing between proprietary trading and agency business (matching clients) is not easy. A trader may buy a security with the intention of selling it to another client. The trader risks his or her own capital in holding the position until an offsetting counterparty is available. It is not clear whether this constitutes “proprietary trading”. Policing trading activities may literally require a regulator on the shoulder of every trader.
Head Of IMF Calls On Member States To Give Him Global Oversight Of Global Financial System - Director of the IMF Dominique Strauss-Kahn will call on member nations of the organization to give him unprecedented regulatory oversight over the global financial services industry, according to Le Monde. His position was revealed in an advance copy of his speech to the Bretton Woods council in Washington acquired by Le Monde. If our understanding is correct, Strauss-Kahn wants the IMF to be a systemic regulator, working to find the issues which could bring down the system, before they do so.
The Economist Debate on Finance for Good or Evil - The debate now going on at the Economist is providing one of the most exciting and insightful looks at What We Learned about Finance from the Crash. The debate is very relevant for the role of finance in development (which Levine has devoted his career to studying). Debate is now on round 2 and you can vote for your favorite. Stiglitz has a small lead at this point; my vote still goes to Levine. (excerpts from both here)
Advocate: Rein in CEOs! | Mother Jones - The pro-financial reform organization Americans for Financial Reform (AFR) today sent a letter [PDF] to the Senate banking committee, who's leading financial-reform talks right now and is expected to release a bill next week, to make sure it includes new oversights and protections of corporate boards—the very leaders, AFR says, who blindly let financial markets implode under their watch: In a November financial-reform discussion draft in the Senate [PDF], a number of investor protections and executive-compensation crackdowns were included, like giving shareholders a "say on pay" and requiring a majority vote for uncontested director elections, among others. Right now, though, it's unclear whether those reforms from last fall will make it into the draft
Eliot Spitzer's Tough Words For Obama: Reform Doesn't Come From Bipartisanship (VIDEO) - Spitzer had tough words for Barack Obama on and his constant search for bipartisanship. "Fundamental reform doesn't come from bipartisanship. And it seems to me bipartisanship has become appeasement. Barack Obama won an election based on a set of principles. Fight for them."(watch the clip).
Rubin to be Grilled by Financial Crisis Inquiry Commission - Yves Smith - Bloomberg reports that former Treasury Secretary and Citigroup board member Robert Rubin will be summoned before the Financial Crisis Inquiry Commission in April, with Alan Greenspan and Chuck Prince likely to be tapped as well. On the one hand, it’s a welcome sign that the FCIC will be interviewing many of the major figures responsible for the crisis. On the other, the Q&A format is almost certain to prove mighty unsatisfying. Greenspan, while a key actor, is unlikely to provide new information.But Rubin was either the architect or the moving force behind so many of the flawed policies and practices that fed the crisis that it is difficult to come up with a complete list. For starters, he was an advocate of a finance-centric view of the economy and ultimately of US interests (notice how often trade negotiations have made opening financial markets a priority item. ...
Geithner Calls Meeting on Banking Rules as Action Heats Up - Treasury Secretary Timothy Geithner on Thursday has called a meeting with some of the country’s top business and financial trade groups – including the U.S. Chamber of Commerce, the American Bankers Association, the Independent Community Bankers of America, the Financial Services Roundtable, and the Securities Industry and Financial Markets Association. The meeting is supposed to focus a lot on the financial overhaul plan. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) told reporters Monday he hopes to bring a bill to his committee in a matter of “days.”
Risk taking, regulatory capture and bailouts: The doomsday cycle - Over the last 30 years, the US financial system has grown to proportions threatening the global economic order. This column suggests a ‘doomsday cycle’ has infiltrated the economic system and could lead to disaster after the next financial crisis. It says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.
The world economy has no easy way out of the mire - Anybody who looks carefully at the world economy will recognise that a degree of monetary and fiscal stimulus unprecedented in peacetime is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely. So let us consider the endgame, instead.
Martin Wolf is Very Gloomy, and With Good Reason - Yves Smith - Martin Wolf, the Financial Times’ highly respected chief economics editor, weighs in with a pretty pessimistic piece tonight. This makes for a companion to Peter Boone and Simon Johnson’s Doomsday cycle post from yesterday. Let us cut to the chase of Wolf’s argument: Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure. By “success”, I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale.
Martin Wolf Makes Me Look Like Pollyanna - Krugman - Quite a depressing column: So what happens next? We can identify two alternatives: success and failure …Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. I wish I disagreed.
Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity –(Bloomberg) -- Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks. Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.” The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.
Buffett's Partner: 'It's Over' for U.S. Economy - Charlie Munger, Warren Buffett’s longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning. In an article penned for Slate.com, Munger uses the form of a parable to explain how Wall Street’s love affair with gambling has destroyed America’s Main Street. The article leads with this headline: “Basically, It’s Over.” The Berkshire Hathaway vice chairman describes the economic history of Basicland, which happens to match U.S. history.
Greenspan: U.S. recovery extremely unbalanced (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was "extremely unbalanced," driven largely by high earners benefiting from recovering stock markets and large corporations. Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" -- including the 1930s Great Depression, said Greenspan in an address to a Credit Union National Association conference. "It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year,"
Greenspan Says Worst Financial Crisis EVER, INCLUDING the Great Depression - Greenspan just said that the current credit crunch is “by far the greatest financial crisis, globally, ever” — including the 1930s Great Depression. Bloomberg notes: Greenspan said that while the economy was in worse shape in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s because “never had short-term credit literally withdrawn.”Greenspan also said “fiscal affairs are threatening this outlook” for recovery.Unfortunately, virtually everything the American government has done since the crisis started has been counterproductive. See this, this, this, this, this, this, this, this, this, this and this.
The governments of every major nation are going to default on their debts. There are two relevant questions: (1) How? (2) When? - PWA - Establishments around the world all deny this. They have gained power and wealth by means of the expansion of government. They have justified their success by insisting that the government-business alliance is the only way to establish economic growth and economic security for the masses. This claim rests on a more fundamental claim, namely, that an unhampered free market is destructive of economic stability and will inevitably lead to economic depression. The Establishments are universally Keynesian. John Maynard Keynes‘ book, The General Theory of Employment, Interest, and Money, was published in 1936. It defended in theory what all Western governments had been doing in practice for at least five years, namely, running huge deficits. Keynes became as close to an academic high priest as any modern scholar ever has. He was the apostle of national government debt. His ideas today are more influential than they were at his death in 1946. We live in the age of Keynes.
West Not Recovering, Bond Crisis on the Way: Strategist (CNBC...video) The economies in the West are not actually recovering, Martin Hennecke, associate director at investment and financial advice firm Tyche, said Tuesday. He foresees high or even hyper inflation going forward in the West and a potential crisis in the bonds market. "We are not seeing any growth in the United States, let alone any sustainable growth," Hennecke told CNBC. "The U.S. economy has never really recovered. They have just been throwing money at the problems, been bailing out the banks
21st Century Breakdown - Political leaders and the mainstream media have been blindsided by the sudden mood shift of the country in the last few years. The reason they have been blindsided is they believe world history is linear. Liberals have now begun referring to themselves as progressives. These people think the world only progresses. The facts indicate otherwise. History is cyclical. History is replete with grand empires like Rome, Spain and Britain. It is also replete with Dark Ages, depressions and wars. Strauss & Howe have established that history can be broken down into 80 to 100 year Saeculums that consist of four turnings: The High, The Awakening, The Unraveling, and the Crisis.
Dave’s Top 10 Reasons to Fade the Recovery (It’s Not a Business Cycle!) - This is NOT a business cycle: this is a one-time reversal of twenty years of inflation of the household balance sheet. An aging population needs a 10% savings rate (at least) to meet minimum funding requirements for the biggest retirement wave in US history (comparable to Japan’s retirement wave during the “lost decade” of the 1990s). With 17% effective unemployment, many Americans are dis-saving, after a $6 trillion shock to home equity.
Recent Stats Indicate U.S. Economic Recovery Was an Illusion - A number of economic reports in the last few days indicate that the U.S. economy has not only not failed to recover from the recession, but continues to fall deeper into a hole. Banking, consumer confidence, employment numbers, durable goods and the housing industry - each representing a different aspect of the economy - are all sending out troubling signs. Despite the onslaught of negative data, mainstream economists continue to echo the official U.S. government view that "the recovery is still on track."
Revenge of the Balance Sheets - The U.S. economic crisis has been called by some observers as a balance sheet recession given the deterioration of the balance sheets in the banking system and the household sector. The U.S. banking system's balance sheets certainly took a beating during the crisis, but some progress has been made in repairing them. The IMF, for example, shows in its latest Global Financial Stability Report that 60% of needed writedowns of U.S. bank assets had already occurred by late 2009. The November 2009 OECD Economic Outlook notes similar improvements, including sizable capital injections. Of course, there are still more writedowns to do, bank lending is still anemic, and much of the banking system's balance sheet problems have only been transferred to the Fed's balance sheet. Still, there has been some meaningful repair to banking system's balance sheet and that is more than can be said for the household balance sheet. This can be seen by examining the flow of funds data for the households, specially household net worth (i.e. household assets minus household liabilities). The figure below graphs this series as a percent of disposable income
Lowering The Boom On Financial Leverage - The struggle for financial regulatory reform in Washington will fail if the debate continues to focus mainly on the bookends of the crisis – the original subprime shock and the eventual federal bailout. Although both were very serious problems, even more serious was the near collapse of the American financial system that came in between. A healthy financial system would have been able to absorb the subprime shock, like a well-conditioned fighter who’s able to take a punch and remain standing. But our financial system, wildly overleveraged, crumpled after just one blow. If we don’t fix the leverage problem, everything else will be for naught.
IV: The Financial Coup d’Etat - Ever since the days of Henry Ford, the Economic Elite have needed a thriving US middle class to increase growth and profits, but now, in the global economy, they view the US middle class as obsolete. They increasingly look globally for profits and they would rather pay cheap labor in countries like China and India. On top of the millions of jobs they have already shipped overseas to increase profits at our expense, they are planning to ship an additional 25% of current US jobs overseas as well. They now see us as the biggest obstacle to their continued consolidation of wealth and resources. This is why they have stepped up their attack on us. If you want further proof of this, all one needs to do is study the Wall Street bailout. The entire bailout is strategically designed to eliminate the US middle class. Every time you hear the word “bailout,” you should think “coup d’état.” Here is the definition of coup d’état:
Are Derivatives the Real Problem? - Regulators, Congress, and the media generally focus on the crisis at hand. The Enron scandal gave us Sarbox. The market crash has created a PR flurry against “sponsored access” and proprietary trading. AIG generated a firestorm surrounding the use of credit derivatives. The common thread is that policy-makers are reactive and missing the big picture, leading to short-termism and a host of poorly constructed rules and policies. And invariably the word “derivatives” is used as a lightening rod for why new regulations should be promulgated. The problem, however, isn’t exclusive to derivatives; it’s the underlying “business purpose” of transactions. Hedging has a legitimate business purpose. Making markets, speculation, and financing projects have solid business foundations as well. But entering into transactions that serve to hide or obfuscate economic reality work against this principle. And this lack of business purpose is not confined to the derivatives markets, but frequently takes place in the cash markets as well.
Financial Innovation II: Much, But Not All - Robert Litan at Brookings has a paper out, In Defense of Much, But Not All, Financial Innovation. You should check it out, it is pretty good. I tend to agree that interest rate and credit default swaps have been a net improvement for the market. I think we need to put CDS into an exchange-with-clearing structure, as the current system, dependent on ratings systems in large part, is broken. I think both these types of swaps are important because, as Fischer Black once pointed out, they are kinds of fundamental risks, which, along with cost of capital and liquidity, are the components of bonds themselves.I’m dubious about the results of enhanced liquidity that comes from the extra trading that comes from hedge funds, particularly in terms of high-frequency trading, because that liquidity isn’t there in a crisis. Litan says a lot about how the payment structure is much more convenient as a result of credit and debit cards. I agree it’s convenient, but it doesn’t come free.
After the financial crisis, in praise of Wall Street's wizards - The Obama administration wants to regulate their trading. Business reporters put out damning books about them, including Scott Patterson's "The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It." And former Fed chairman Paul Volcker says that their new products didn't really make the economy more productive and that the best financial innovation of the past few decades has been the ATM. Into this fray steps Robert E. Litan, an economist at the Brookings Institution, with a spirited report titled "In Defense of Much, but Not All, Financial Innovation." In the 47-page study, released last week, Litan runs through the recent history of innovation in banking and finance, from ATMs to credit default swaps, with many stops in between. He breaks down financial products according to their key roles -- allowing parties to pay one another, enabling savings, channeling savings to productive investment and allocating risk to those most willing and able to bear it -- and assesses whether they expanded access to finance, offered convenience and boosted economic growth. Litan concludes that most financial innovations accomplished all three goals, while acknowledging that some were poorly designed (such as collateralized debt obligations, which he decries as "financial alchemy") or misused (such as home-equity lines of credit).
Dodd punts on fiduciary requirement for brokers - The provision was circulated two weeks ago by Sen. Tim Johnson, D-S.D., a Banking Committee member. Rather than classifying certain brokers as registered investment advisers, Mr. Johnson's proposal would require the Securities and Exchange Commission to conduct a study of regulatory standards for brokers and advisers, then propose rules on the issue. Scrapping the fiduciary requirement will only hurt investors, said Knut A. Rostad, chairman of The Committee for the Fiduciary Standard, a group formed last year to promote higher standards for financial advisers. “Studying this issue is a straw man,” Mr. Rostad said. “There has been so much study that has been done over the past 15 years that the SEC has become a think tank on the issue of fiduciary issues. But the industry needs to explain why these investor protections should not be afforded to their customers.”
S.E.C. Moves on Short-Selling and an Accounting Shift - NYTimes - A sharply divided Securities and Exchange Commission voted on Wednesday to restrict selling stocks short when they are falling rapidly, with the majority voicing hopes the action would improve investor confidence and the dissenters saying there was no evidence that any action was needed.The commission also said it hoped to approve the switch of American companies to international accounting standards by the end of 2011, but it set a series of conditions that made eventual adoption of the standards appear less than certain.
Rules vs discretion in macroprudential policies - VoxEU - How much “freedom” should policymakers have? This column discusses to what extent the experience gained from monetary policy can help to define how macroprudential policy should be implemented.
Das: Mark to Make Believe – Still Toxic After All These Years! - In volatile times, liquidity becomes concentrated in government bonds, large well known stocks and listed derivatives. For anything that is not liquid, MtM means mark-to-model. This assumes universally accepted pricing methodologies with verifiable inputs. Valuation for all but the simplest instruments today requires a higher degree in a quantitative discipline, a super computer and a vivid imagination. For complex structured securities and exotic derivatives, the only available price is from the bank that originally sold the security to the investor. Prices available from the purveyor of the instrument (a concept known as mark-to-myself) strain reasonable concepts of independence and objectivity. A current market price of 85% for a AAA security does not actually mean that you will lose 15% of the face value. It is only an estimate of likely losses. It may reflect the opportunity loss of being able to invest in the same or similar security at the time of valuation. In volatile markets, excessive uncertainty or risk aversion means that values deviate significantly from actually cash values. MtM prices may be prone to manipulation. An often neglected element of the Enron scandal was the company’s ability to convince its auditors and the U.S. Securities and Exchange Commission (“SEC’) to allow MtM accounting to be used in the natural gas industry allowing the company to record current earnings based on the future value of long term contracts.
Treasury to Resume the Monetization of the Fed’s Programs to Support the Wall Street Banks - This Treasury Supplemental Financing Program is designed to provide public funds for the Fed's efforts to purchase and then liquidate toxic assets and derivatives from the financial sector, effectively absorbing their losses and monetizing them. The Treasury creates new notes and sells them on the open market. The money obtained in these sales is deposited at an account at the Federal Reserve. The Federal Reserve uses this money to purchase toxic assets from the banks at its own discretion and pricing, subject to little oversight and market discipline. Senator Chris Dodd said "the Fed could become an 'effective Resolution Trust Corporation,' purchasing and ultimately disposing of depreciated assets. It looks very much like a stealth bailout. It is even more of a scandal because of the Fed's resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.
Credit where credit is due - Federal Reserve governor Elizabeth Duke is due to give a really nice piece of testimony tomorrow unpacking what's going on with small-businesses lending. Judging by the advance text up on the Fed's web site, it will be a joyously nuanced picture. Banks are hesitant to lend, yes, and are sometimes hamstrung by their own imprudent lending of the past. But businesses are also often not in the mood to borrow, considering the uncertain economic recovery. This does not make for a snazzy populist sound bite, but, alas, it is an honest portrayal. Duke makes one other major point: bank examiners, like those employed by the Fed, shoulder some of the responsibility.
Banking Industry: Sicker, More Concentrated - A few other summary points from the report:
- Profits are small — actually, nonexistent except at larger banks: “The average return on assets (ROA) for all four of the asset size groups featured in the Quarterly Banking Profile was better than a year ago, although only the largest size group—institutions with more than $10 billion in assets—had a positive average ROA for the quarter.”
- Bank balance sheets continue to get worse, with net charge-offs increasing for the twelfth consecutive quarter.
- Lending continues to fall: “Total loan and lease balances declined for the sixth consecutive quarter in a row.” Total bank balance sheets fell by 5.3 percent — “the largest percentage decline in a year since the inception of the FDIC.”
- Concentration is increasing, with 319 banks vanishing due to mergers or failure in 2009.
On those ‘epic’ declines in bank lending - Great headline from the Wall Street Journal on Wednesday: ‘Lending falls at epic pace‘. Of course, with a headline like that, one would expect a less-than-uplifting tale: U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers. That decline in lending – particularly at banks with sizeable portfolios of rapidly-deteriorating commercial real estate (CRE) loans – is not at all surprising. US policymakers, legislators and regulators of all stripes have been warning of just such a drop-off.
Unofficial Problem Bank List increases Significantly - The Unofficial Problem Bank List underwent major changes during the week as aggregate assets for all institutions were updated to 2009q4 from 2009q3 and the FDIC finally released its enforcement actions issued during January 2010. The list now includes 644 institutions, up from 617 last week, as 33 institutions with assets of $12 billion were added while 6 with assets of $1.3 billion were deleted. Despite the additions, aggregate assets fell from $329 billion to $326 billion. For the 616 institutions that stayed on the list from last week, their aggregate assets dropped $13.8 billion during the fourth quarter.
Growth of Problem Banks (Unofficial) - By request here is a graph of the number of banks on the unofficial problem bank list. We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public. CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. Some of this data is released with a lag, for example the FDIC announced the January enforcement actions yesterday
U.S. ‘Problem’ Banks Soar 27%, Fund Deficit Widens, FDIC Says (Bloomberg) -- U.S. “problem” lenders climbed to the most in 17 years in the fourth quarter, and the Federal Deposit Insurance Corp. fund protecting customers against failures posted a wider deficit, the agency said. The FDIC included 702 banks with $402.8 billion in assets on the confidential list as of Dec. 31, a 27 percent increase from 552 banks with $345.9 billion in assets at the end of the third quarter, the regulator said today in a quarterly report. “Problem” banks account for 8.7 percent of all U.S. lenders. “The growth in the number and assets of institutions on the problem list points to a likely rise in the number of failures,” FDIC Chairman Sheila Bair said today at a Washington news conference. “Both the problem list and bank failures tend to lag behind economic recovery.”
FDIC Q4 Banking Profile: 702 Problem Banks - The FDIC released the Q4 Quarterly Banking Profile today. The FDIC listed 702 banks with $403 billion in assets as “problem” banks in Q4, up from 552 banks with $346 billion in assets in Q3, and 252 and $159.4 billion in assets in Q4 2008. Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing. The Unofficial Problem Bank List shows 617 problem banks - and will continue to increase as more formal actions (or hints of pending actions) are released.
FDIC Hits Record "Default" Level As Deposit Insurance Fund Plunges By $12.7 Billion To NEGATIVE 20.9 Billion - The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund's reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund...Net charge-offs of troubled loans occurred across all major loan categories, led by a $3.3 billion increase in residential mortgage loans. The FDIC said U.S. banks' coverage ratio--reserves divided by the amount of noncurrent loans--fell to 58.1% in the fourth quarter from 60.1% in the third quarter.
Reports on Possible Imminent Bank Failures - A couple of the largest banks on the Unofficial Problem Bank List - in terms of assets - are in Puerto Rico. We haven't seen any bank failures in Puerto Rico yet this cycle, but according to the following report that is about to change ... From José Carmona and John Marino at caribbeanbusinesspr.com: Feds expected to take action against island banks next month Federal regulators are likely to begin taking action against troubled island banks sometime next month, government and industry sources told CARIBBEAN BUSINESS.
Banker sees U.S. failed bank tally hitting 1,000 - About 1,000 U.S. banks could fail as a result of the recent banking crisis that saddled financial institutions with large portfolios of bad loans, a leading investment banking executive said on Thursday. James Dunne, senior managing principal of Sandler O'Neill, said 300 to 400 banks could be seized this year, especially as institutions start to deal with deteriorating commercial real estate loans." Regulators have seized 185 banks since January 2008. The Federal Deposit Insurance Corp has said the pace of failures is expected to peak this year. The agency said earlier this week that its "problem" bank list jumped 27 percent during the fourth quarter to 702.
Bank Profit Mirage Redux – On December 1 we posted a piece here looking at the 3rd quarter FDIC Quarterly Banking Profile, which contained one of our favorite charts. The FDIC released the 4th quarter report on the banking sector today, so we update the chart and present it below. It shows the relationship between noncurrent loans and leases and the level of loan loss reserves available to protect bank capital from losses. The coverage ratio is simply the loss reserve as a percentage of noncurrent loans and leases. Let’s keep this short and sweet. The coverage ratio fell to 58.1% from 60.1% in the previous quarter and 75.3% a year ago.
Night of the living dead banks - Killing zombies isn’t just a job for horror-movie heroines. It’s also one of Sheila Bair’s primary tasks. And the Federal Deposit Insurance Corp chief’s challenge has increased as the number of scary banks on the regulator’s watch list has spiked. Thankfully, there’s no financial excuse to keep FDIC from quickly exterminating the industry’s living dead.On Tuesday, the agency reported 702 institutions on its “problem” list at the end of the fourth quarter — up from 552 in the third quarter. Moreover, total assets for banks on the list increased to $403 billion, or 3 percent of GDP. While these are terrifying figures, the FDIC also managed to collect $46 billion of fresh cash from banks, bringing its total cash and liquid securities to $66 billion.
A Desperate FDIC Begs Americans To Open Savings Accounts During "America Saves" Week - Just in case Americans weren't schizophrenic enough, listening to Obama and CNBC telling them to spend, spend, spend, even if that means maxing out all credit cards, here comes the FDIC, with the other side of the coin, imploring "consumers across the nation to consider establishing a basic savings account or boosting existing savings." And with that the insanity that is now the United States of America is laid ba(ir)re for all to see. The question of just how underfunded US banks are if the FDIC has to resort to such fund raising gimmicks is obviously irrelevant. Well, not quite - luckily, the FDIC will come out this week with its quarterly banking update so we can all see how many tens of billions the DIF burned through in the past 3 months.
Bank Loan Program Is Another Subsidy to Banks - The Obama administration has proposed a new program that would give $30 billion to banks at below market interest rates. The Post briefly discusses the merits of this program, noting that many businesses are not borrowing because they don't have demand for their product, however the article does not include the views of anyone who makes the obvious point: this is another subsidy to the banking industry.
Pondering "Bail-Ins" Instead Of "Bail-Outs" - The Economist had an interesting article recently co-written by Credit Suisse's investment banking head Paul Calello and former chief risk officer Wilson Ervin. They suggest that, rather than bail out banks in the future, they could be "bailed-in." What does that mean? Essentially that regulators could take hold of troubled banks and require them to rework their capital structure to avoid failure. It would sort of work like a pre-packaged bankruptcy. The idea makes sense, but I wonder: isn't this exactly what a new resolution authority would do?
Credit Rating Firms: Worthless in a Bull market, Damaging in a Bear Markets. -The big 3 credit ratings firms seem to have missed nearly every major crisis, collapse, bankruptcy and default of the past few decades. The fear is that they will – belatedly, and without providing any meaningful insight (beyond CYA) further pummel Greek government bonds by lowering their ratings for Greece. The fear that Standard & Poor’s and/or Moody’s will soon lower the boom (Fitch already has) has Gold rallying, and the US dollar up 0.135 (0.17%).
Of Credit Ratings, Sovereign Risk and Semi-Sovereign Risk - When I was a bond manager, we had a rule for our analysts — ignore the rating, but read the write-up. The analysts at the rating agencies would give their true opinion in the write-up. The buy side analysts usually found themselves in agreement with what was written, and would tell us what they thought the rating really should be. As managers, we knew we could always find seemingly cheap bonds for a given rating, but they were “cheap for a reason.” We would avoid them. Who would buy them? Collateralized Debt Obligations [CDOs]. In CDOs were run by mechanical rules that relied on the ratings of the debts, among other things. As such, they tended to fail. After seeing the debacle 1999-2002 in CDOs, most insurers swore off CDOs — aside from AIG. They were structurally weak securities with lousy collateral.
Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs - (Bloomberg) -- When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention. Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a coverup. Geithner countered that he had acted properly to avert the collapse of the financial system. A potentially more important development slipped by with less notice. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG. These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.
Worst Revelation Yet in the On-going Goldman-AIG-NYFed Scandal - Richard Teitelbaum reported today that Timothy Geitner’s New York Fed hid the smoking gun that proves Goldman played the key role in bringing down AIG. The only plausible explanation for hiding the document is that Geithner et.al. were protecting Goldman. Is this the worst scandal in US history? To ask the question is to answer it. In brief, here is the story.
Quelle Surprise! AIG Hires Additional Lobbyists After It Goes on Taxpayer-Funded Life Support - A very good article in The Nation by Sebastian Jones, “The Media-Lobbying Complex,” (hat tip Tom F) has gone peculiarly unnoticed in the blogosphere, which is a real shame. It does some good, old-fashioned reporting to identify 75 individuals who were regularly presented on TV as experts, and by implication independent, when in fact they were “registered lobbyists, public relations representatives and corporate officials–people paid by companies and trade groups to manage their public image and promote their financial and political interests.”The article is very much worth reading in its entirety, but a particularly interesting revelation is the degree to which AIG was selling its message during the crisis, and the fact that it ratcheted up its lobbying post crisis, which would strike most taxpayers as an abuse. The relevant section here…
Is AIG the main CDS insurer for Greek government debt? - Credit Writedowns - Previously, I had mentioned the CDS exposure of the hapless German Landesbanks (banks owned by the individual German states or Länder – hence the term Landesbank). These same companies lost enormous amounts of money in the subprime meltdown – and apparently they have all sorts of other toxic exposure like Greek CDS still on the books. So I find it interesting that the German daily Frankfurter Allgemeine is focussing instead on the AIG CDS connection to Greece. Here’s part of what they had to say (my translation from German original): London investment bankers named the American insurer AIG as an additional seller of CDS....Before the financial crisis, AIG is said to have insured a large amount of sovereign credit risk. If there is still a major insurance positions on Greece, then the American government would have a strong interest in preventing a default of the country....the examples illustrate the weakness of the CDS market. The protection is sold by banks or insurers, which themselves have only limited capital resources. As a general rule, they also have a much lower credit rating than the countries whose default they are insuring. The insurance provided by CDS may turn out to have been a bubble. We await further details. But, what should be clear here is that those banks and financial institutions that were caught out during the initial crisis period are probably the same ones now at risk yet again – except this time they start from a weaker capital position
German Paper Says AIG May Have Sold CDS on Greece - Yves Smith - Note the text below, translated by EuroSavant, replaces an earlier GoogleTranslate version. You can read an English version of the entire article here. In the larger scheme of things, this example shows how AIG could have, and probably did, serve to channel funds from the public at large to speculators. London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.
Banks Bet Greece Defaults on Debt They Helped Hide - Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit. “It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
CDS demonization watch, Greece edition - My CDS Demonization Watch has been on the back burner for a while: I thought that the caravan had moved on. But right now, the most-read story in the NYT business section, getting a lot of attention in the Twittersphere, is this one, headlined “Banks Bet Greece Defaults on Debt They Helped Hide”. It’s gaining a lot of traction: Ben Bernanke said today that he’s looking into the issue of whether the CDS market is enabling some kind of run on the Greek government. I sincerely hope he was just being polite to his Congressional overlords, rather than buying in to this theory. It’s worth looking at the NYT story in some detail, to see just how little sense it makes.
The Mask of Solvency - On reading the news of Goldman Sach's involvement in the Greek Government's heretofore successful plot to negatively obscure their fiscal position from the rest of the world (with the notable exception of Goldman Sachs, it seems worth noting) a vision sprang to mind. In it, a group of Greek Finance Officials are seated on one side of one of those over-long conference room tables found in the upper floors of modern office buildings facing two people from Goldman Sachs- Europe's Chief Institutional Derivatives Salesman and his mid 20s blond bombshell assistant. After the obligatory pleasantries are completed the assistant distributes folders to the Greek Officials, bending over slightly in front of each man in the process. "As I was saying on the phone, Gentlemen," the GS salesman interjects, interrupting the not well concealed ogling, "we at Goldman Sachs can structure a portfolio of derivatives to hide your true fiscal position from both potential investors and the prying eyes of the European Central Government. We call it, 'The Mask of Solvency' portfolio." Fade out...
Revealed: Goldman Sachs’ mega-deal for Greece - Risk.net (2003) With the help of Goldman Sachs, Greece has been using giant swaps deals to ensure its national debt ratios meet EU targets. But these deals are likely to prove controversial.
Goldman Sachs | On the Issues - Goldman Sachs Transactions with Greece - Interest Rate Hedges - The December and June 2001 cross currency swaps generated a reduction in the value of the swap portfolio for Goldman Sachs. To offset this, Greece and Goldman Sachs entered into a long-dated interest rate swap. The new interest rate swap was on the back of a newly issued Greek bond, where Goldman Sachs paid the bond coupon for the life of the trade and received the cash flows based on variable interest rates. Effect of Currency and Interest Rate Hedges The transactions reduced the country’s debt by a total of €2.367bn, although they had a minimal effect on the country’s overall fiscal situation. In 2001, Greece's GDP was ~$131bn, and its debt was 103.7% of GDP. By 2008, Greece's GDP was ~$357bn and its debt was more than 99% of that. Greece’s deficit in 2001 was -4.5%; without the swaps, it would have been -4.64%.
FT Alphaville –The defensive Goldman Sachs - On Monday, Goldman finally acknowledged those Greek currency swaps with a statement of the bleeding obvious. The swaps were legal the bank says, and consistent with the rules at the time etc. All of which is true, but why has Goldman suddenly felt the need to explain all of this, as well as the fact that the swaps had a minimal effect of Greece’s fiscal situation? It’s hardly proactive PR. In fact it’s downright defensive. Here’s the full statement, which hit the wires
Everyone Was Doing It - Gerald Corrigan, a Goldman Sachs executive and a former president of the New York Fed, had a curious defense of the Greece-Goldman interest rate swaps. Here are some direct quotations from the Bloomberg story: “[The swaps] did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” The swaps were “in conformity with existing rules and procedures.” . . . “There was nothing inappropriate,” “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.” . . .Goldman Sachs was “by no means the only bank involved” in arranging the contracts, Corrigan said. . . . “Governments on a fairly generalized basis do go to some lengths to try to ‘manage’ their budgetary deficit positions and manage their public debt positions,” Corrigan said. “There is nothing terribly new about this, unfortunately. Certainly, those practices have been around for decades, if not centuries. We have to keep that perspective.”
Goldman belittles Greece’s billions - Memo to the Goldman Sachs communications machine: you are broadly considered to be out of touch, living large on Planet Billions while the rest of us struggle in one of the harshest economic environments of the post-war era. You might want do something about that. Characterizing €2.367 billion as being “a rather small” amount of money is not going to help. The fact is that €2.367 billion is a rather large amount of money — both in absolute terms and in terms of a percentage of GDP. Your adjectives just make you look out-of-touch, both in your official press release, where you describe the sum as “just 1.6%” of Greece’s GDP, and in your statement to the UK parliament that it was “a rather small but nevertheless not insignificant reduction” in official debt figures. Translating into American, remember, 1.6% of GDP is about $227 billion.
You Can’t Cheat an Honest Man - An honest man knows that you can’t get something for nothing. Discounts? Sure, when warranted, but nothing is ever truly free. That is one reason why I have been skeptical about Greece and Goldman Sachs. It would be really hard to trick an honest government into using derivatives in order to get into the EU. Honesty requires full disclosure when the parties on the other side have asked for it, even if they are not checking too closely for their own reasons. Which brings up another angle of the story. If EU governments cared that much about the sanctity of the Euro, why did they not inquire more closely about derivatives? Why is it a surprise now? At the time when Greece entered the EU, the use of derivatives was well-known, why did the governments of the EU not challenge Greece, given its checkered history with respect to default. Even if Goldman was marketing swaps to marginal European governments wanting to get into the EU, with many other investments banks imitating them, the governments weren’t dumb.
Goldman Is Unpopular Because ‘It Brings Envy,’ (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, is unpopular because some people envy its performance, said Jon Corzine, the company’s former chairman and chief executive officer. “When you’re successful it brings envy,” Corzine, 63, said today in a Bloomberg Television interview. “People are broadly frustrated with the financial institutions, and since it is the leader of the industry and has shown great success over a long period of time, I think it’s more vulnerable.” The company, led by CEO Lloyd Blankfein, has been criticized by lawmakers and pundits for issues from its pay practices to its role in helping Greece raise off-balance-sheet funding and report smaller debt. Responding in part to that public pressure, Goldman Sachs subtracted $519 million in the fourth quarter from the compensation fund set aside during the year and instead made donations to a company philanthropy.
Ben Bernanke Responds To Why Goldman Sachs Needs Fed VaR Exemption, And Other Questions ... Many moons ago, July 15, 2009 to be specific, Zero Hedge asked a rather simple question: why does Goldman need a Fed exemption for VaR calculations even though it is a Bank Holding Company. That question, and some others, prompted several members of congress, among whom Alan Grayson and Ron Paul, to shortly thereafter pass our query on to Ben Bernanke.Today Ben Bernanke has responded. We present his response. We will share our commentary and views on this response shortly.
Goldman vs. Grassley on Build America Bonds - The latest dust-up involving Goldman Sachs involves Build America Bonds. The New York Times reports:Senator Charles E. Grassley of Iowa has asked Goldman Sachs to clarify how much it has collected in underwriting fees as states and cities issue so-called Build America Bonds to raise money for infrastructure projects and create jobs.The senator, the senior Republican on the Finance Committee, said Wednesday in a letter addressed to Chief Executive Lloyd C. Blankfein that he was “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks, including Goldman Sachs, as a result of the Build America Bonds program.”The bond program, part of stimulus legislation passed last year, is intended to help local governments raise money by issuing taxable bonds; the federal government subsidizes 35 percent of the interest payments. On Wednesday, the Senate passed a bill that would expand the program and its subsidies.
Greece Gets Snowed Under by New York - Greece is being buried by traders. They have been betting big money that the Aegean nation, familiar to many people as a warm vacation spot, can't make good on its massive debt load. The short money has been so big that Greece was forced to postpone a bond offering scheduled for this week. Since Greece is part of the EU, the traders have also attacked the euro, sending it from a high of $1.51 (when I was traveling in Europe, natch) to a more recent $1.35. There's even talk of parity with the dollar. If you are planning a vacation to Corfu, this is good news. But if you do business planning in an industry that buys and sells in Europe this is a nightmare, particularly for manufacturers, who have benefitted from a stronger euro.
In Greece’s Crisis, Fed Studies Wall St.’s Trading - NYTimes - Greece’s problems deepened on both sides of the Atlantic as the Federal Reserve disclosed it was investigating Goldman Sachs and other banks that helped the country mask its debts, and investors grew increasingly leery of lending any more money to a nation flirting with default. Wall Street’s role in the run-up to the debt crisis has generated criticism and calls for an inquiry from European leaders. The Fed examination is the first time American regulators will examine the highly profitable if little-known business of supplying custom-made financial instruments to strapped countries on the Continent.
Putting The Question Of Evil Sovereign CDS Speculators To Rest - Dear Mr. Bernanke, dear idiots at the SEC (to paraphrase an extremely observant Harry Markopolos), and dear everyone else who is just an empty chatterbox and a mouthpiece for other conflicted interests, who claim baselessly that it is all the CDS traders' fault that Greece is about to be flushed down the toilet. We present to you the ratio of cash to synthetic (CDS) exposure. As Bloomberg points out, the "maximum amount on the line if 10 government defaulted, $108 billion, is 0.98% of their combined $11 trillion in sovereign debt." So these less than 1% marginal players are now blamed for the end of civilization? How about blaming sellers of cash bonds? Or, here's an idea, how about actually looking at the root cause, like for example governments, who with the assistance of Goldman Sachs, have lied for a decade about the true state of their finances, and have misrepresented on sovereign prospectuses all their economic exposure for years, which was subsequently signed off by countless auditors and lawyers. The corruption goes to the very top, and the SEC idiots are now investigating CDS traders?
Is Goldman Finally About to be Leashed and Collared? - Yves Smith - Goldman may have made a fatal mistake. Fatal not to the existence of the firm, but to its standing, reputation, legitimacy, and ultimately, to the thing it covets most, its profits.Power is most effective when it is used as sparingly as possible. The Rothschilds, which among other things financed governments at war, went to some lengths to underplay their influence so as not to threaten their state patrons/clients. The problem is that the behaviors that contributed to Goldman’s commercial success have over time become unbalanced, and are putting it at odds with governments. It is one thing to abuse the likes of a Jefferson County, as JP Morgan has. As deplorable as that behavior is, they cannot retaliate. It is quite another to mess with bodies that really are, ultimately, bigger than you are.
Fed probes Wall Street's role in Greek debt crisis: Bernanke - The Federal Reserve and securities investigators are looking at how Goldman Sachs may have helped Greece disguise the size of its budget deficit through the use of derivatives, Fed Chairman Ben Bernanke said Thursday.The surprise announcement came as Bernanke prepared to start the second day of his semi-annual testimony on the economy before the Senate Banking Committee and was in response to concern raised by committee chairman Chris Dodd."We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Mr. Bernanke responded
Goldman Sachs Under Investigation by the Fed? Yeah Right - Business Week: Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs Group Inc. and investment banks with Greece....Editor's note: In remarks on the state of monetary policy, Fed Chairman Ben Bernanke expressed concern earlier this week over the Greece debacle, most notably pointing a finger at the role Goldman Sachs may have played in unloading dangerous debt on the EU's least favorite nation (for the moment, just wait until the other dominoes start to fall). JDA votes the Fed is helpless. They were not regulating GS at the time and even now appear entirely unable to do anything but sit there and watch Goldman work its corrosive magic on the world financial system. Sigh. - JDA
The PR War - Every major bank other than Goldman Sachs must be ecstatically happy that Goldman exists, soaking up all the attention with its escapades in Greece and Italy. The other banks, by contrast, are trying to make themselves out to be white knights. See, for example, JPMorgan’s ad today in multiple major print newspapers describing its commitment to small business lending: Like that picture of small-town America? The main claim is in the second paragraph: a commitment to lend $10 billion to small businesses in 2010. These kinds of marketing claims are difficult to verify. But I gave it a shot...
Jamie Dimon, Free at Last - You might have read the news yesterday that Atlanta issued an arrest warrant for Jamie Dimon, the CEO of superbank JP Morgan Chase. The city wanted someone to clean up the thousands of tires that were piling up on a vacant property. Well, Obama's favorite banker is free again to fly into Hartfield-Jackson and not be worried about getting cuffed. The Atlanta Solicitor General's office revoked the an arrest warrant for the executive, after some lawyering from the bank. But the incident probably foreshadows what we are going to be seeing more of in the near future: More anger and legal issues directed toward the bank over foreclosures and foreclosed properties
Wall Street Targets the Elderly: Looting Social Security - Hank Paulson, the Gold Sacks bankster/US 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 US 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. As there is no money to be made from the poor, Wall Street fleeces them by yanking away their entitlements. Wall Street’s approach to the poor has always been to drive them deeper into the ground.
Wall Street Bonuses Rise 17%, N.Y. Comptroller DiNapoli Says - (Bloomberg) -- Wall Street bonuses rose 17 percent in 2009 from a year earlier as the securities industry rebounded from the financial crisis, New York State Comptroller Thomas DiNapoli said. The average bonus for the industry was $123,000 last year, DiNapoli said today in an interview on Bloomberg Television. Wall Street has added 3,900 jobs through December and DiNapoli said he expects that trend to continue. He said the increase in tax revenue from higher bonuses won’t solve New York’s budget problems. Cash and stock bonuses totaled about $20 billion, down about a third from 2007, he said. New York State’s budget deficit is estimated to be $8.2 billion, 10 percent more than estimated in January, because Wall Street’s cash bonuses are less than forecast, Governor David Paterson said Feb. 3. Personal income tax collections in January were $1 billion below the $7.08 billion the state projected.
Capitalism Is Dead, Long Live the Billionaire Bailout Society - The statistics are harsh: Since the mid-1970s the average real wage of non-supervisory production worker has actually declined by 18 percent, while the top earners saw enormous gains. The net result is this: the compensation of the top 100 CEOs compared to the average workers was 45 to 1 in 1970. By 2008 it was 1,081 to one. In 1960, the financial sector accounted for 15 percent of all corporate profits. By 2008 it was 35 percent. Along the way Wall Street found new ways to mint money without fulfilling its primary mission: providing capital and credit for investment in the real economy. They could do far better creating, selling and trading new financial instruments that supposedly removed risk from risky loans. In the new America, the smart money built hybrid financial instruments, not hybrid cars.
Fed Pay Rules: Clawbacks for Big Banks, Go Light on the Little Ones - The Federal Reserve’s new pay rules for banks are coming into better focus. Its general counsel, Scott Alvarez, was on Capitol Hill explaining how the rules, announced last October, are developing. He sought to draw distinctions between how the rules would affect small banks, big regional banks and the biggest firms. Here’s how he broke it down: Big Firms, focus on deferred compensation and clawbacks: “It is clear that substantial changes at many firms likely will be necessary to fully conform their practices with principles of safety and soundness. For example, at many firms, the measures and systems needed to make the incentive compensation of non-executive employees appropriately risk sensitive are not well advanced...Smaller banks and regional banks, going light on the little guys:… After comparing and analyzing the information collected, supervisory efforts and expectations will be scaled appropriately to the size and complexity of the organization and its incentive compensation arrangements
Junk Debt ‘Wall’ to Trigger U.S. Defaults, Bank of America Says (Bloomberg) -- A “wall” of junk debt maturing in the next four years will increase the risk of corporate defaults in the U.S., according to Bank of America Merrill Lynch. More than $600 billion of high-yield bonds and loans are due to be repaid between 2012 and 2014, New York-based analysts Oleg Melentyev and Mike Cho wrote in a note to clients. Almost 90 percent of loans outstanding mature in the next five years, compared with an average of 36 percent between 2005 and 2009, according to the report.
Citi Warns of Withdrawal Gate - "When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future."
Citigroup can limit demand deposit withdrawals and money funds can too - Citibank has come up with an innovative solution – turn demand deposits into 7-day deposits. This may be good for Citi but I wonder how it is legal. After all, the point of a demand deposit is to provide safekeeping for one’s money. Otherwise, with interest rates at zero percent, why not just keep your money under a mattress? An interested commenter on the cited article above pointed to this particular passage in a recent SEC proclamation which effectively does the same thing for money fund deposits – turning them from demand deposits into time deposits. Suspension of Redemptions: The new rules permit a money market fund’s board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.
Rewards Cardholders Face a Higher Price for Perks - NYTimes - After years of profiting from debt-ridden credit cardholders, lenders are turning their attention to a potentially lucrative new source of fee income, the moneyed users of rewards programs who spend big and pay their bills on time. Banks are scrambling to find revenue as new credit card protections that take effect on Monday make it harder to raise rates and reap billions in penalty fees from consumers, especially people at the margin. Lenders are betting they can cover some of the difference by luring rewards programs users to pay more for perks once subsidized by weaker borrowers. “There is a much greater focus on the heavy spender,”
New rules, new traps for credit cards - If you haven't heard, big changes are here for the credit card industry. On Monday the CARD act goes into effect and consumers finally get some relief from such practices as "double-cycle billing" and arbitrary rate increases. The new act, which was signed into law last May, promises consumers more transparency about their credit card bill. But cardholders still need to watch out for a whole new series of traps and tricks. Higher fees: For starters, consumers could suddenly find themselves socked with a variety of new fees and charges. Tougher to get a card: As Congress moved closer to passing the law last spring, banking industry advocates cautioned that shaking up the status quo would mean that credit would be more difficult to come by for consumers.
Banks Apply Pressure to Keep Fees Rolling In - NYTimes - As the government cracks down on the way banks charge fees for overspending on debit cards, the industry is mounting an aggressive campaign aimed at keeping billions of dollars in penalty income flowing into its coffers. Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on. Chase has been fanning special letters out to consumers with an offer that it urges them not to refuse. “Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you,” the message, emblazoned in large red type, warns. “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency,” with “even in an emergency” underlined for emphasis.
“Please Keep This Valuable Service” -Here’s a letter submitted by a reader, originally from Chase, encouraging her to keep overdraft protection on her checking account. There’s nothing particularly evil about this — banks will no longer be allowed to charge overdraft fees without your consent, and even I will concede that there are some people who might want this service, so now they have to ask for permission. Of course, it’s a pretty hard and misleading sell: they focus primarily on the issue of funds availability (deposits may not be available immediately), and they try to frighten you with “an unexpected emergency like a highway tow.” If you do get a letter like this and are not sure what it means, remember that the bank will not tell you when you are about to overdraw your account, and it will charge you $34 each time, even multiple times per day, no matter how small the overdraft. I was also interested to note that the bank doesn’t even promise that it will cover your overdraft — it says only that it may cover your overdraft, at its discretion.
NYT Shows Banks Playing Dirty on Overdrafts : Ryan Chittum – CJR - The New York Times is excellent to spotlight how banks are using aggressive marketing tactics to try to trick customers into opting in to overdraft “protection” now that federal law forces banks to make consumers choose to let banks dock them $35 a pop for the privilege of overdrawing. Banks will, of course, do what it takes to keep as much of that highly profitable tens-of-billions-a-year revenue stream flowing as they can. We warned about this back in October when the surprising news broke that the Federal Reserve had ordered the shift: Calling all personal-finance columnists—stat! They and the rest of the press need to really focus on this issue and explain why almost everyone should ignore these intentionally misleading pleas. Would a Consumer Financial Protection Agency fight these tactics where the Federal Reserve will not?
Editorial - Loan-Sharking Inc. - NYTimes - The Credit Card Accountability, Responsibility and Disclosure Act, signed into law last spring, was supposed to put an end to many of the deceptive practices that allowed credit card issuers to bleed customers dry. The most important provisions went into effect earlier this week, but credit card companies have already found ways to evade the law. Congress and federal regulators need to do a lot more. For starters, that means creating a strong and flexible Consumer Financial Protection Agency that could react quickly to all-too-common scams and evasions. The bill that would create this agency has passed the House, but it is being stonewalled by Senate Republicans under heavy lobbying from the financial industry.
Obama may compromise on consumer agency to pass financial regulation - The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system. In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources. President Obama's economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department. The administration may also have to compromise on Obama's recent proposal for a rule to limit risky activities at banks by prohibiting them from engaging in many kinds of speculative investments.
Consumer Confidence Falls to Lowest Since April. - The Conference Board’s confidence index slumped to 46, below the lowest forecast in a Bloomberg News survey of economists, from 56.5 in January, a report from the New York- based private research group showed today. A separate report showed home prices rose for a seventh month. Economists forecast the confidence index would decrease to 55 from a previously reported 55.9 January reading, according to the median of 68 projections in the Bloomberg survey. Estimates ranged from 50.9 to 59. The Conference Board’s measure of present conditions decreased to 19.4, the lowest since February 1983, from 25.2. The share of consumers who said jobs are plentiful fell to 3.6 percent from 4.4 percent, according to the Conference Board. The proportion of people who said jobs are hard to get increased to 47.7 percent from 46.5 percent.
Financial Armageddon: Tales of the Unexpected? ...workers filing applications for unemployment benefits in the U.S. unexpectedly surged last week after having fallen sharply in the previous week... Orders for durable goods excluding transportation unexpectedly fell 0.6 percent,... Sales of new homes unexpectedly fell to a record low in January ...Confidence among U.S. consumers fell more than anticipated in February...economic indicators rose in January, but the gain was smaller than expected....Confidence among U.S. consumers unexpectedly fell in February .... Businesses slashed wholesale inventories sharply in December, a much weaker showing than had been expected....The U.S. services sector grew less than expected in January
Why Do These Clowns Still Have Jobs? - Earlier today, the Conference Board published its consumer confidence index for February, and the "experts" were -- shall I say -- "shocked" to learn that consumers are not as upbeat as they are about the state of the economy. As before, the Present Situation index -- which represents an average of responses to questions about current business and employment conditions -- remained in the doldrums, hitting its lowest level since February, 1983. In fact, the percentage of respondents who claimed that business conditions, in particular, are "good" fell to 6.2 percent, an all-time low. No doubt that very small group of optimists includes stock traders, "strategists," economists, policymakers, and Washington lobbyists.
What Happens When Consumer Confidence Falls 10-Points? - Consumer Confidence fell 10 points last month. That is a relatively rare event, occurring only 21 times in the 400 months or so the survey began its monthly format in 1977. James Bianco notes that “Almost every such 10-point drop can be attributed to an unusual market-moving event.” Stock market performance following these drops are usually poor: Bianco adds: “This is not meant to imply a cause and effect relationship, but is certainly something worth watching over the following months…”
ABC Consumer Comfort Index Drops To -50, New 2010 Low And Just Four Point Above All Time Record Low - Not a good day for consumer confidence. First, the vastly irrelevant Conference Board crashed and burned earlier, dropping nearly 10 points below consensus expectations after its only driver, the market, turned down in January, showing just how unreliable this index is, and now the ABC Consumer Comfort came in at the "dreaded" -50 level (and don't get us started on UMich, whose entire rolodex consists of the home phone numbers of Blankfein, Dimon and Pandit). The is the lowest reading for the index since -51 recorded in October 2009, and just 4 points above its 24 year record low. Of the three main readings in the index, the Personal Finance component declined even as Buying Conditions and the National Economy both stayed at depressed levels. Notably, the racial gap among the respondents who view the economy as being in total shambles has all but disappeared, even as increasingly more Democrats perceive the economy as worse off than Republicans.
Learn How Canceling Credit Cards Affects Your Credit Score – - Adam Baker, blogger at Man vs. Debt, canceled all his credit cards 15 months ago. His credit score dropped just 10 points, but he learned a lot about that score, and what financial reviewers are looking for, by taking the plunge. Baker guest-blogs at the Get Rich Slowly blog about what living almost credit-free has done to his credit score. There have been great benefits, besides the obvious financial clarity, like a spotless payment history and no new-credit-lookup black marks. But he's honest about what living off the debt grid will likely do to his score, over time:
FICO Spots Disturbing Trends in Consumer Credit Behavior.- According to the analysis in FICO Score Trends, recent repayment behavior across the financial services industry has shifted significantly from historical trends. In 2008-2009, bankcard accounts were just 1.6 times more likely to become 90 days delinquent than were mortgage loans. By comparison, in 2005 bankcard accounts were more than three times more likely to become 90 days delinquent. And for borrowers scoring high on the FICO(R) score's 300-850 score range, the level of repayment risk actually has become greater for real estate loans than for bankcards. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on bankcards.
Reinflating the Bubble – CJR - A relative of mine just got this in the mail from Bank of America Home Loans (ie: Countrywide) offering to refinance his home loan with a ten-year interest-only option ARM (well, it’s unclear if it’s actually an ARM or if it’s a fixed-rate mortgage, but I’d bet on the former). Also on offer: a second mortgage and a regular ARM. Mind you this isn’t one of my Oklahoma relatives getting this offer in their non-bubble market. This one’s here in Seattle, a market that’s been hammered pretty bad in the crash (down nearly a quarter) and where house prices are still falling at an 8 percent clip year-over-year. And my relative’s existing mortgage isn’t with BofA, so it’s not like they’re pulling a Wells Fargo here and trying to paper over losses and hoping the market rebounds in a decade.
Housing: The Best Leading Indicator for the Economy - Historically the best leading indicator for the economy (and employment) has been housing. I've been writing about this for years. For a great summary paper, see Professor Leamer's presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle For housing as a leading indicator, I use Residential Investment (quarterly from the BEA's GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB. So here is a review of the three monthly leading indicators:
Jobless Recovery Gang Ignores Sobering Reality - There is a reason that 702 American banks, nearly one in ten, were on the FDIC “problem list” as of the end of 2009. A large number of small and mid-sized banks are burdened with home and commercial mortgages that are in default and may even go into foreclosure. New data from First American CoreLogic shows why the solution to the problem banks face is so difficult to find. Eleven million, three hundreds thousand homes had underwater mortgages as of the fourth quarter of last year. That number represent 24% of all residential homes loans in America.The pressure that the home value trouble puts on banks is clear. The aggregate dollar value of negative equity was $801 billion at the end of last year, up $55 billion from $746 billion in Q3 2009. People who believe there is no hope of their homes ever having any economic value are more likely to default on mortgages, especially in an environment where unemployed and under-employed people make up 17% of the total available workforce nationwide. Many homeowners are as concerned about their employment future as they are about the value of their houses.
FHA Changes Rules For Loans (I-Newswire) With the changing economy there will be new guidelines regarding FHA loans. The FHA’s tightened lending requirements will no doubt have an effect on the housing market considering that an estimated 40% of all loans are FHA. One of the biggest changes is the increase in the upfront mortgage insurance premium from 1.75% to 2.25%. This will increase closing costs by ½ a percent. Another significant change will be the minimum down payment. The traditional down payment of 3% has been raised to 3.5% and for those whose credit FICO scores are below 580, the amount will jump to 10% down.
David Rosenberg: Get Ready For The FHA To Go Completely Bust And The Housing Market To Take The Hit - We've mentioned before that the FHA seems to have no idea how bad things are going to get for its portfolio of mortgage insurance and is adopting completely inadequate reforms to protect against looming disaster. Of course, the FHA can never really go broke. Ultimately, the FHA is backed up by the full faith and credit of the United States government. Which means that we're all on the hook for the FHA's mistakes.Today, David Rosenberg's note touched on this and the potential implications: We have a contact in the mortgage business who took a good hard look at the delinquency data from the FHA, along with loss severities. There is a very good chance that in the near future we will see the FHA insurance fund go negative. The implication is that the FHA will inevitably have to go to Congress for funding. When that happens Congress will have to tighten lending standards and increase requirements. Bear in mind that the FHA now represents about 40% of the mortgage market — with prospective of stricter FHA, home prices are going back down and fast.
Fannie Mae Reports $15.2 Billion Loss- Press Release: Fannie Mae Reports Fourth-Quarter and Full-Year 2009 Results. Fannie Mae reported a net loss of $15.2 billion in the fourth quarter of 2009 ... For the full year of 2009, Fannie Mae reported a net loss of $72.0 billion... The fourth-quarter loss resulted in a net worth deficit of $15.3 billion as of December 31, 2009, taking into account unrealized gains on available-for-sale securities during the fourth quarter. As a result, on February 25, 2010, the Acting Director of the Federal Housing Finance Agency submitted a request for $15.3 billion from Treasury on the company’s behalf. FHFA has requested that Treasury provide the funds on or prior to March 31, 2010.
Fannie to US: We need another $15.3 billion - Battered by the housing crisis, mortgage finance company Fannie Mae said Friday that it needs another $15.3 billion in bailout money from the federal government. Fannie Mae, which is controlled by the government, reported a fourth-quarter loss of $16.3 billion, including $1.2 billion in dividend payments to the Treasury Department. This is down from $25.2 billion a year earlier and $19.8 billion in the third quarter. For 2009, however, Fannie's losses ballooned to $74.4 billion, compared with $59.8 billion in 2008.
Fannie Mae's Loss is the Bankers' Gain - Fannie Mae and its sister institution Freddie Mac buy mortgages from banks. That is what they do. This means that when Fannie and Freddie lose money, they paid banks too much money for the mortgages. This point should be so simple that even an economist could understand it. This is why it is disturbing when news articles on Fannie's newly announced loss of $15 billion in the last quarter don't point out that this is money given to banks. The key issue is whether Fannie and Freddie's losses are due to mortgages and mortgage-backed securities purchased prior to their takeover in September of 2008 or whether they are the result of mortgages purchases subsequent to that date. if the latter is the case then the Treasury Department is effectively using Fannie and Freddie to run a TARP program, purchasing mortgages from banks at above market prices. This amounts to a huge taxpayer subsidy to Jamie Dimon, Lloyd Blankfein and our other favorite bankers
Mortgage Zombie Freddie Mac Reports Q4 Loss; Another $5 Billion In Taxpayer Money Out The Window To Support Fake Home Prices - Freddie Mac had positive net worth of $4.4 billion at December 31, 2009, compared to positive net worth of $9.4 billion at September 30, 2009. As a result of the positive net worth, no additional funding was required from Treasury under the terms of the Purchase Agreement for the fourth quarter. The decline in positive net worth for the fourth quarter of 2009 resulted from the fourth quarter 2009 net loss of $6.5 billion and the dividend payment of $1.3 billion to Treasury on the senior preferred stock, partially offset by a $2.7 billion decrease in unrealized losses recorded in accumulated other comprehensive income (loss) (AOCI) primarily driven by improved values on the company's available-for-sale (AFS) securities. Freddie Mac had a net worth deficit of $30.6 billion at December 31, 2008.
NAR to Congress: Turn Fannie and Freddie into Non-Profits - A trade organization for real estate agents, the National Association of Realtors (NAR) is recommending to Congress that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac be converted into non-profit secondary market authorities.NAR proposed that the current private profit and public loss structure be removed while regulators and Congress consider restructuring plans for the GSEs. NAR added that Fannie and Freddie are “best positioned” to become government authorities, and they should provide a flow of capital into the secondary market regardless of the volatility of the mortgage markets. But they would not be federal agencies, according to the proposal. Instead, the authorities would function as “self-sustaining” organizations removed of Congressional funds and profit motives.
Bernanke Suggests Privatization for ‘Platypus’ Fannie, Freddie - Federal Reserve Chairman Ben Bernanke referred to mortgage-finance giants Fannie Mae and Freddie Mac as a “platypus,” saying they were “neither fish nor fowl.” He suggested strongly that the companies should be privatized during his appearance before the Senate Banking Committee.Mr. Bernanke didn’t specifically direct Congress to privatize the government-sponsored firms, but did go as far as saying it was an “interesting direction to go,” which in Fedspeak often means something.
Commercial Mortgage Default Rate in U.S. More Than Doubles (Bloomberg) -- The default rate for commercial property mortgages held by U.S. banks more than doubled in the fourth quarter and may reach a peak of 5.4 percent at the end of next year, according to Real Capital Analytics Inc. The default rate for loans on office, retail, hotel and industrial properties surged to 3.8 percent from 1.6 percent a year earlier, the New York-based real estate research firm said yesterday in a report. The default rate for loans on apartment buildings climbed to 4.4 percent from 1.8 percent.
Moody's: CRE Prices increase 4.1% in December 2009 - Via the MSN Money, from Moody's: US commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices (CPPI) increased for the second month in a row in December, rising 4.1%."Although we are unable to conclude that the bottom to the commercial real estate market is here, we do believe that the period of large price declines is over," says Moody's Managing Director Nick Levidy. "We will need to see data from the first few months of 2010 to develop a better picture of where things stand."Here is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.
AIA: Architecture Billings Index Shows Contraction in January - Note: This index is a leading indicator for Commercial Real Estate (CRE) investment. Reuters reports that the American Institute of Architects’ Architecture Billings Index decreased to 42.5 in January from 43.4 in December. Any reading below 50 indicates contraction. The index has remained below 50, indicating contraction in demand for design services, since January 2008. Its lowest recent reading was in January 2009, when it reached a revised 33.9 level. The ABI press release is not online yet.
NAR Forecasts No Recovery for Commercial Real Estate This Year - The National Association of Realtors® (NAR) released its latest projections for commercial real estate (CRE). The outlook remains grim as the NAR forecasts no recovery in CRE this year. Rents are expected to decline across all segments (although slightly lower than last year’s rent declines) as vacancy rates remain extremely high. CRE is not expected to recover until after employment materially improves. Since the NAR does not anticipate this improvement until later this year, it is projecting a CRE recovery no earlier than 2011. The NAR also notes a related index finally stopped declining in the last quarter
Realtors see no commercial real estate recovery before 2011 - The latest survey of the commercial real estate market from the National Association of Realtors predicts that the current commercial real estate doldrums will continue at least through 2011, despite signs that economic recovery may be taking hold. The Realtor group's Commercial Real Estate Outlook notes that commercial vacancy rates are high and will likely remain so for the rest of 2010. The NAR forecasts office vacancy rates to rise from 16.3 percent in the fourth quarter of 2009 to 17.6 percent by the end of 2010
Dodd Urges Action on Commercial Real Estate - U.S. regulators need to “redouble” their efforts to deal with the still shaky commercial real estate market, a top U.S. Senate Democrat said Monday. Sen. Christopher Dodd (D., Conn.), who chairs the Senate Banking Committee, said in a letter released by his office that he was concerned about the potential effects of commercial real estate woes on the broader economy.“I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy,” Dodd said in the letter to Federal Reserve Chairman Ben Bernanke. Similar letters were sent to the Federal Deposit Insurance Corp. and Office of Thrift Supervision, among others. U.S. regulators have been warning about problems in the commercial real estate market for months
What’s Up With HUD’s REO Sales? - David Rosenberg at Gluskin Scheff commented today about possible problems at FHA: We have a contact in the mortgage business ...You don’t have to have ‘a friend in town’ to get this insight. You just have to go to the HUD website for their REO sales. The number of HUD homes for sale is staggering. There are 50 pages of listings in just Ohio alone. By my count the FHA is listing 500 homes for sale in Ohio. You have to wonder what Mr. Donovan is selling here. This American recovery he is talking about is being tripped up by the FHA’s REO sales. It is both interesting and easy to look at the HUD properties for sale. I would encourage readers to take a gander. HUD is in every state. The HUD website takes you to this page where you can select the state you live in.
Fed MBS Purchases and the Impact on Mortgage Rates - First, the following graph is from the Atlanta Fed Financial Highlights, and shows the weekly Fed MBS purchases since January 2009: From the Atlanta Fed: The Fed purchased a net total of $11 billion of agency-backed MBS through the week of February 17. This purchase brings its total purchases up to $1.199 trillion, and by the end of the first quarter of 2010 the Fed will have purchased $1.25 trillion (thus, it is 96% complete). Freddie Mac report that mortgage rates increased last week. From Freddie Mac: Long-Term Rates Rise to Over 5 Percent for the First Time in Three Weeks ... And that brings us to this graph from Political Calculations based on some of my posts: Predicting Mortgage Rates and Treasury Yields
More on Mortgage Rates and Fed MBS Purchases - Earlier I discussed the possible impact of the end of the Fed's MBS (Mortgage Backed Securities) purchases on mortgage rates: Fed MBS Purchases and the Impact on Mortgage Rates. My estimate is that the spread between the Freddie Mac 30 year fixed mortgage rate and the Ten Year Treasury yield will increase by about 35 to 50 bps after March. Analysts at Amherst Securities wrote today that they "don’t think there will be much of a widening", perhaps less than 25 bps, because some usual investors are under weighted in MBS. Just two points to remember: there are private bidders (it is just a matter of price), and the increase to the normal spread might take a few months.
What happens to house prices when the Fed stops buying MBS? - Paul Smalera asks what’s going to happen to mortgage rates after March 31, when the Fed has said that it will stop buying mortgage-backed securities. The answer, predictably, is that they’re going up: Lawrence Yun, chief economist for the National Association of Realtors (NAR), says 30-year fixed rates are “rock bottom” and simply cannot stay at 5 percent. That much, economists, analysts, and the Fed all agree on. But just how high they’ll get is another question. What does this mean for house prices? Let’s say I have an $80,000 income and a $20,000 downpayment. According to this calculator, at 5% mortgage rates I can afford $279,075 of house. At 6%, that figure drops to $257,780 — a 7.6% fall. And at 6.5%, it’s $248,034 — a drop of more than 11%.
Mortgage Rates - Only One Way to Go - There's been plenty of speculation about what will happen to mortgage rates if and when the Federal Reserve wraps up the last of its planned purchases under the $1.25 trillion Mortgage-Backed Security (MBS) purchase program, first announced in November 2008. While there have been some suggestions that the Fed may extend and expand the program beyond the end of next month, nothing has been said officially. Assuming it ends on March 31st as planned, the laws of supply-and-demand would seem to indicate that the MBS market is headed for a heap of trouble. Why? The Fed has been the biggest buyer of residential mortgage-backed securities by far over the past year or so.
Duck! Watch out for falling home prices (CNN Money)-- Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.The average home price in the United States will fall by about 6% by September 2011, according to Fiserv, a division of Moody's Economy.com. And that's after plunging more than 27% in the past three years. Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.
97,000 Homeowners in "Loan Mod Limbo" - ProPublica reports: Chase and Other Servicers Leave Many in Loan Mod Limbo; Treasury Threatens Penalties - About 97,000 homeowners in the government’s mortgage modification program have been stuck in a trial period for over six months. Most of them, about 60,000, have their mortgages with a single mortgage servicer, JPMorgan Chase. Trial periods are designed to last only three months, after which mortgage servicers are supposed to either give homeowners a permanent modification or drop them from the program. According to a ProPublica analysis, about 475,000 homeowners have been in a trial modification for longer than three months. When the HAMP program began, the requirements for putting a borrower in a trial program varied by servicer. Some servicers put anyone who answered the phone in a trial program.
Obama's New Housing Band-Aid - Earlier today, Obama announced in Las Vegas the program to tackling the housing crisis in states like Michigan, Nevada, Florida, and a few others by asking state and local Housing Finance Agencies, or HFAs, to create innovative new ways to address mounting foreclosures tailored to their areas. HFAs, in Obama's new plan, will submit program designs to the Treasury Department specifically geared to help homeowners who're unemployed, underwater (they owe more than their home is worth), or grappling with second mortgages on their homes. Lending experts, however, voiced doubts over whether the program will really do all that much. "This latest effort is just a Band-Aid," said Kathleen Day with the Center for Responsible Lending. Day said what's needed is a housing relief program in which loan modifications are mandatory, which isn't the case with the multi-billion dollar Home Affordable Modification Program, Obama's flagship relief program.
U.S. Weighs Changes to Mortgage-Relief Program - WSJ - The U.S. Treasury is considering new guidelines to mortgage lenders that would give distressed borrowers more time to try to qualify for a federal program aimed at averting foreclosures. Under the proposals, loan-servicing companies, which collect payments and handle foreclosures, would have to give borrowers 30 days to respond after being denied a modification of their loan terms under the Home Affordable Modification Program, known as HAMP. During that period, which would allow borrowers to appeal against the decision, the servicer couldn't put the home up for sale at a foreclosure auction. A Treasury spokeswoman said the proposals are among "many ideas under consideration in the administration's ongoing housing stabilization efforts." She added: "This proposal has not been approved and there are no immediate planned announcements on the issue."
Treasury Looks to Mandate Foreclosure Abatements, Mortgage Mods - One of the most disappointing policy initiatives of the Administration to date has been the expensive and ineffective attempts to fight foreclosures at all costs. The net impact of this is to artificially prop up home prices and reduce the number of real estate transactions. As wrenching and unpleasant a process as foreclosures may be, the net impact of artificially high real estate prices is even more problematic. It punishes savers and first time home buyers (think Newlyweds).This is what makes the latest proposal out of Treasury — found here:
Supplemental Directive: Foreclosure & Bankruptcy Changes — so disappointing. It seeks to mandate Foreclosure Abatements and Mortgage mods. These (and other related) policies that have shown themselves to be ineffective, and ultimately, counter-productive.
FDIC to test principal reduction for underwater borrowers - WaPo: The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure. ...Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. ... "We're thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater," said FDIC Chairman Sheila C. Bair.
Brad Miller’s Challenge The failure of the Obama administration so far to come up with a working solution to the problem of mass defaults and foreclosures may be due to practical barriers, such as lack of capacity among mortgage servicers or legal uncertainties regarding securitization trusts. Alternatively, however, it may simply be that the administration doesn’t care that much. Perhaps the primary goal of homeowner assistance all along was to detoxify the toxic assets on large banks’ balance sheets; now that those banks are off of life support, maybe the mortgages themselves don’t matter that much.Congressman Brad Miller’s proposal in The New Republic should put that question to the test.* Miller says we should stop expecting the mortgage lenders, securitizers, and servicers who created this mess to be the ones to clean it up. Instead, the government should create a new Home Owners’ Loan Corporation, modeled on the one created by FDR in June 1933 (three months after taking office), to buy up mortgages and modify them. The HOLC could pick and choose the mortgages it buys and modifies, so it could focus on mortgages that could be successfully modified to keep the homeowner paying something and give the HOLC a small profit.
Freddie Mac: Delinquencies Increase Sharply in January - Here is the monthly Freddie Mac hockey stick graph ... Freddie Mac reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.03% in January 2010, up from 3.87% in December - and up from 1.98% in January 2009. "Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..."
Freddie Mac: "Potential Large Wave of Foreclosures"- "We start 2010 with some early signs of stabilization in the housing market, with house prices and home sales likely nearing the bottom sometime in 2010. We expect that low mortgage rates, relatively high affordability and the homebuyer tax credit will help continue to fuel the recovery. Still, the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures." The quote is from the Freddie Mac Q4 earnings release: Freddie Mac Releases Fourth Quarter and Full-Year 2009 Financial Results Fourth quarter 2009 net loss was $6.5 billion. After the dividend payment of $1.3 billion to the U.S. Department of the Treasury (Treasury) on the senior preferred stock, net loss attributable to common stockholders was $7.8 billion...
Home prices unexpectedly dip (Reuters) - Home prices unexpectedly slipped in December but the annual rate of decline slowed, reinforcing the housing market's rocky road to recovery, Standard & Poor's/Case-Shiller indexes showed on Tuesday. The S&P composite index of home prices in 20 metropolitan areas declined 0.2 percent in December, matching the dip in November, for a 3.1 percent annual drop. A Reuters survey had forecast that prices would be unchanged for the month and down 3.2 percent annually, following a 5.3 percent annual drop in November. "It's really ambiguous right now as to where this market is heading," Yale University economics professor Robert Shiller, a creator of the S&P Case-Shiller indexes, said on a conference call.
Case-Shiller: Home prices rise 0.3% in December -(AP) — Home prices rose for a seventh straight month in December as the U.S. housing market continues its bumpy road to recovery. The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday rose 0.3% from November to December to a seasonally adjusted reading of 145.87. The index was still off 3.1% from December last year, nearly matching analysts' estimates that it would fall by 3.2%.Only five of 20 cities in the index showed declines from November to December. The index is now up more than 3% from its bottom in May, but still 30% below its May 2006 peak.
Case Shiller House Price Graphs for December - The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 30.3% from the peak, and up about 0.3% in December.The second graph shows the Year over year change in both indices. The Composite 10 is off 2.4% from December 2008. The Composite 20 is off 3.1% from December 2008. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
S&P/Case-Shiller HPI about in line but true test comes this summer - The Dec 20 city S&P/Case-Shiller home price index fell 3.08% y/o/y, about in line with expectations and fell .24% m/o/m NSA. Seasonally adjusting the m/o/m figure results in a rise of .32%. Of the 20 cities, 7 saw gains on a y/o/y basis, led by San Francisco, Dallas and San Diego. The y/o/y decline was led by Las Vegas which is down 20.6%, followed by Tampa, Detroit, Miami and Phoenix. Overall, the index fell to the lowest since July ‘09. It is 4.8% above the low back in April ‘09 but is down 29.4% from its record back in July ‘06. The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test.
A Look at Case-Shiller, by Metro Area (February Update) The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, was mostly flat in December from a month earlier.The index declined 3.1% from a year earlier. On a month-to-month basis prices fell 0.2% in December from November, but adjusted for seasonal factors the 20-city index was 0.3% higher. On a seasonally adjusted basis, just five cities posted month-to-month declines. Unadjusted, 15 regions experienced home-price drops. The housing market is particularly sensitive to seasonal factors, especially in December as the holidays depress activity. Los Angeles posted the largest jump in prices, while Chicago posted the biggest drop.
Housing: Price-to-Rent Ratio - In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph through December 2009 using the two Case-Shiller Home Price Composite Indices: This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.
Shadow Rental Market Pushing down Rents - "Rents are down and vacancies are up. Demand is off, and we attribute really to to the fact that here has been a pretty significant erosion of jobs in the Orange County markets. And it is having a trickle down effect. In addition to that, our members are saying that they are competing quite a bit with what historically has not been a competitor for us - that's the gray market or the shadow market - which are condominium rentals and single family home rentals and things of that nature. There is just a lot of product on the market."
U.S. January New-Home Sales Probably Rose on Credit Extension - (Bloomberg) -- Sales of new homes in the U.S. probably rose in January as an extension of a first-time homebuyers’ tax credit spurred demand from a nine-month low, economists said before a report today. Purchases increased 3.5 percent to an annual pace of 353,000 new homes, according to the median estimate of 71 economists surveyed by Bloomberg News. Demand slumped 7.6 percent in December, the month after the incentive was originally scheduled to expire. Expansion and extension of the credit covering contracts signed by the end of April may give housing a further lift in coming months. Sustained growth in home sales will require payroll gains after the loss of 8.4 million jobs the last two years.
New Home Sales fall to Record Low in January - The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the revised rate of 348 thousand in December. The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red column for 2010. In January 2010, 21 thousand new homes were sold (NSA). This is below the previous record low of 24 thousand in January 2009. The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now 6% below the previous record low in January 2009. And another long term graph - this one for New Home Months of Supply. The final graph shows new home inventory. Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels. Obviously this is another extremely weak report.
Weak New Home Sales Report Least of Housing’s Problems, Barry Ritholtz Says - Ritholtz believes about the best you can say about housing is "the pace of deterioration has stabilized," as S&P's David Blitzer put it regarding this week's Case-Shiller report. In addition to "obvious" issues such as high unemployment, still historically high prices and tougher lending standards, he cites the following: -- The "shadow inventory" of homes for sale, which Ritholtz believes could be as much as 5 million units, as detailed here. -- The government's push to modify mortgages via the HAMP program; as detailed on Ritholtz's blog, this includes a preliminary proposal to "mandate foreclosure abatements and mortgage mods." Regarding this latter point, Ritholtz notes the majority of modified mortgages eventually end up in foreclosure anyway. The government and mortgage lenders have incentives to delay the inevitable,
Existing home sales tank in January - New Year's revelers weren't the only ones with hangovers in January. Both the existing and new home sales markets clearly suffered from one related to the home buyer tax credit. The credit juiced sales in mid-2009 for new homes and late-2009 for existing homes. Yet in its wake, demand is clearly tapering off. The extension and expansion of the credit should help later in the spring selling season as the new deadline looms. But so far, it just isn't happening, with sales plunging almost 23% in the past two months
Existing Home Sales Decline Sharply in January - The NAR reports: Existing-Home Sales Down in January Existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 7.2 percent to a seasonally adjusted annual rate1 of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5 percent above the 4.53 million-unit level in January 2009. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. This is a sharp drop from November when many of the transactions were due to first-time homebuyers rushing to beat the initial expiration of the tax credit. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.27 million in January from 3.29 million in December. The all time record high was 4.57 million homes for sale in July 2008. The third graph shows the 'months of supply' metric. Months of supply increased to 7.8 months in January.
More on Existing Home Sales - Earlier the NAR released the existing home sales data for January; here are a few more graphs ... This graph shows NSA monthly existing home sales for 2005 through 2010 (see Red column for Jan 2010). Sales (NSA) in January 2010 were 7% higher than in January 2009, and slightly lower than in January 2008. The second graph shows existing home sales (left axis) and new home sales (right axis) through January. I jokingly refer to this as the "distressing gap". The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties. The following graph shows the same information as a ratio - existing home sales divided by new home sales - through January 2010. This ratio is just off from the all time high in November.
Now This Is An Ugly Chart For The Homebuilders - Courtesy of this morning's latest missive from David Rosenberg, this chart shows how long it takes for homebuilders to find a buyer for their units. There's scarcely a green shoot in sight. Suddenly the collapse in lumber prices is making more and more sense.
Washington Post Finds More "Surprised" Economists - The headline of a Washington Post article told readers: "Economists surprised as new-home sales fall to lowest level in nearly 50 years." The first sentence explained: "sales of newly built homes unexpectedly plummeted in January to their lowest level in nearly five decades, providing more evidence of the housing market's fragility." Actually, economists who understand the housing market were not at all surprised by the data. The Post should try to rely on sources who know about the topics on which they are supposed to be experts.
Survey: Short Sales Increase in January - From Campbell Surveys: Short Sales See Big Jump in Activity During January - According to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, short sales accounted for a substantial 15.9% of home purchase transactions in January. This was well above the share of other distressed property activity – damaged real estate owned or REO (13.4%) and move-in ready REO (13.8%) – and represented a big jump for short sales.
Coldwell Banker Survey Identifies Multi-Generational Homes as a Trend in Real Estate -Family reunions are taking on a new meaning in the real estate market. According to a recent survey by Coldwell Banker Real Estate LLC among its network of real estate professionals, in the last 12 months, 37 percent of sales professionals surveyed noted an increase in homebuyers looking to purchase homes to accommodate more than one generation of their family. In addition, almost 70 percent of Coldwell Banker sales agents believe that economic conditions may cause greater demand for multi-generational homes in their market during the next year.Furthermore, the Coldwell Banker® January 2010 survey respondents cited financial drivers as the No. 1 reason why home buyers or sellers are moving into a house with other generations of their family (39 percent). Twenty-nine (29) percent said that health care issues are the primary reason, and six percent cited a strong family bond as the main factor.
More Generations Living Under the Same Roof (Reuters) More generations are living under the same roof and the trend will deepen as families grappling with near double-digit unemployment share expenses, a study showed on Monday.Demand is escalating for multi-generational housing as buyers scale down during the deepest housing crisis since the Great Depression, according to a survey by Coldwell Banker Real Estate in Parsippany, New Jersey.Thirty-seven percent of the company's real estate agents polled in January said that in the past year, buyers were increasingly shopping for homes that fit more than one generation. Almost 70 percent of the agents said they expect economic conditions will drive still greater demand for this type of housing over the next year."More buyers are pooling investments, considering bringing mom and dad into it,"
One Quarter of Mortgage Holders Sink Underwater - More than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide, according to the latest report from First American CoreLogic. Negative equity, or “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.
Q4 Report: 11.3 Million U.S. Properties with Negative Equity - First American CoreLogic released the Q4 negative equity report today. First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near‐negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
More Than Half of 2005-2007 US Subprime and Alt-A Mortgages Underwater - Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
Housing Recovery Is Looking A Lot Shakier Than Expected (CNBC) The recent slump in housing is making some analysts uneasy about a recovery that many thought sustainable just a couple months ago and comes at a time when the Federal Reserve is nearing the end of a critical, year-long program to support the mortgage market. A spate of recent reports from home sales to mortgage activity has been starkly negative. And, even if some of it can be written off to seasonal patterns, namely weather, the weakness is not what what people expected with the extension and expansion of the government’s homebuyer tax credit that jacked sales for several months last summer and fall. New homes sales fell to a record low in January, extending a two-month slide; pending and existing home sales were down in December; homebuilder sentiment in January fell back to where it was last June, and mortgage applications have fallen three of the past four weeks
Housing: Still very shaky - I’ve been following the CoreLogic data on the number of underwater mortgages for over three years now, and it’s undoubtedly the most reliable time series we have on that front. Which is why this is so scary: First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners — or 24% of all homes with mortgages — were underwater as of the end of 2009. That’s up from 23% and 10.7 million borrowers three month earlier. How could the number of underwater homeowners could have risen by 600,000 in just one quarter — especially when the latest Case-Shiller data shows national house prices more or less stable over those three months? I think the answer might lie in the seasonal adjustments...
Living Rent Free: Homeowners become Squatters - Alana Semuels at the LA Times discusses her article today: (video) Here is the story: Many borrowers in default stay put as lenders delay evictions - Throughout the country, people continue to default on their home loans -- but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free. Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes. And with a glut of inventory in places like Southern California's Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market. Finally, allowing borrowers to stay in their homes helps protect the bank's investment as it negotiates with the homeowners, said Gary Kirshner, a spokesman for Chase bank, a major lender. "If the person's in the property, there's less chance for vandalism, and they're probably maintaining the house," he said.
Landlords not so quick to evict in slow economy - Landlords know they'll have trouble finding new tenants if they lose the ones they have, industry observers say, so some of them are more willing to give struggling tenants a break. "It's changed the way a lot of people live, who is looking to rent, how many units are rented, and it's certainly true — some companies are giving a little more latitude to renters who find themselves in trouble." The cost of removing someone from a unit, cleaning, painting and maybe even laying new carpet has a lot to do with landlords' reluctance to evict, Cathers said. But that's not the only reason that fewer eviction proceedings are being filed."The pool of potential renters is just smaller," Cathers said. "Young people are moving back in with parents, and older people are moving in with children. And roommates … they are going two to three to a unit today instead of renting the two or three separate apartments they might have occupied before the recession began."
It Is Not a Jobless Recovery, It is a Growthless Recovery - The NYT has a good article on how millions of workers are likely to face prolonged joblessness as a result of the current recession. The article implies that there has been a change in the relationship between economic growth and employment in recent decades as it has taken longer for the economy to recovery the jobs lost in the last two recessions than in prior recessions.While it has taken longer to recover the jobs lost in the downturn, this has nothing to do with a changed relationship between growth and jobs. The problem is simply that growth has been very weak. Here is the cumulative growth in the 8 quarters following the end of the last 5 recessions: 1970(IV)-1972(IV) -- 8.9% -- 1975(I)-1977(I) - 9.8% -- 1982(IV)-1984(IV) - 13.5% -- 1991(I)-1993(I) -- 6.0% -- 2001(IV)-2003(IV) -- 5.9%
Who Pays the Costs of the Recession? –Thoma - But what hasn't received enough attention is the distribution of the costs of the financial meltdown and the subsequent recession. For example, the costs of unemployment are never distributed equally when downturns occur, the young and minorities in particular experience much larger employment shocks than, say, white middle-aged males. As noted below, blacks in many areas are experiencing unemployment levels that equal or exceed 20%, and the damage from the unemployment will be permanent, it won't go away if and when jobs return. The recession is taking away opportunity for the young to gain employment experience, and many who are employed are working below their abilities in jobs they are likely to get stuck in for many years, if not forever. The recession is wiping out the accumulated assets of the unemployed as they try to bridge the gap until jobs return, and since many of these are older workers, this will have a large detrimental effect that lasts throughout their retirement years. Recessions cause skills to depreciate, there are psychological costs, there are costs to family members, the loss of a job generally means loss of health care, the costs to working class households go on and on.
Recession hits older blacks in what should be their prime - McClatchy - In telephone surveys, more than twice as many African Americans ages 45 and older reported having trouble paying their mortgage or rent, having to cut back on medications and having borrowed money to pay living expenses in comparison to the general population.Twice as many blacks also reported losing a job and having a spouse who either lost a job or had to take a second job. Nearly twice as many blacks had difficulty paying for essential items such as food and utilities. These older, established black workers also lost their job-based health coverage at higher rates, were more likely to raid their retirement savings prematurely and provide financial help to their parents and children more often than their age-equivalent peers, the survey found.
The New Poor: Despite Signs of Recovery, Long-Term Unemployment Rises - NYTimes -Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed. Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come. Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department.
Mass Layoffs Increase in January - WSJ - The number of people let go in mass layoffs rose in January after four straight months of declines. Employers laid-off 182,261 workers, seasonally adjusted, in 1,761 mass layoff events last month, the Labor Department said Tuesday. A mass layoff is when a single employer terminates at least 50 people. Manufacturing employers laid off 104,846 workers in mass layoffs in January, not adjusted for seasonal variations, and construction companies terminated 24,148 workers. The upside is that the mass layoffs picture still looks better than it did a year ago. The number of mass layoff events was nearly 23% lower than the same month a year ago. And the number of people fired as part of those layoffs was down nearly 28%.
Blame It On The Snow | zero hedge - Today's ugly initial claims number has already found its scapegoat: excess February snowfall. As the NCDC charts below demonstrate, February 7-13 drought/snow debt levels were certainly material. This has caused reputable firms such as Stone & McCarthy to speculate that weather sensitive jobs, such as construction, have "probably suffered." Yet with ongoing inclement weather, with today's Nor'Easter being no exception, this "non-recurring" component will be a prevalent one for at least 2 more weeks, allowing pundits to provide whatever explanation they wish to recent not so good Insurance Claims patterns.
Horrid Job Number Coming It snowed this month in much of the United States. ... Both the household survey (which produces the unemployment rate) and the employer survey (which produces the job count) ask about workers in the week during which the 12th of the month fell [the week of the blizzards].... That means that a lot of people who had jobs may report they did not work during the week, and companies may say they had fewer people on the payroll than they would have cited a week earlier or later. If so, we may get a truly horrid job number.
Weather and the February Employment Report - On Monday I linked to an article by Floyd Norris at the NY Times: Horrid Job Number Coming. Since then I've spoken to a BLS representative, and although they will not comment on upcoming releases, he told me the BLS would prominently disclose any possible impact of the recent snow storms on the employment report - similar to the disclosure after Hurricane Katrina. It is possible that the response rates will be lower than usual in certain areas (like Washington D.C.) - this will be disclosed and adjustments will be made.
Can I Get A Ditch To Dig? - But Jack is a good example of what you can do with yourself when you’re collecting unemployment checks; that is, invest in a skill with which you can make a living. It’s the best thing for society and yourself. Obviously, not everyone (almost nobody, in fact) should spend their unemployment time learning finger pick guitar. But there are the free online courses offered by MIT and hundreds of other places to educate yourself online. It is a great age to be an autodidact. There are also plenty of grants and free programs for continuing education that will pay for classes at community college. What you shouldn’t do is sit around lamenting that the government won’t give you something to do. If collecting unemployment makes you feel like you need to contribute something society the best contribution you can make is to do whatever you can to make it less likely that you will need to rely on unemployment in the future.
When stints on payroll hurt the jobless – Workers who seek to renew their benefits for a second year - not uncommon during this recession - are finding that their new benefits are based on their most recent wages, even if it was low pay for temporary or part-time work. LaPlante’s benefits, for example, were slashed to $178 a week from more than $600. He was forced to move in with a friend, who supported him for several months before he found a full-time job a few weeks ago. “I don’t think people should be penalized for working.’’ Workers who do not work during their first year of unemployment do not risk changes in their benefits when they refile for a second year.
Bad Credit Sidelines Some Jobless Workers - Employers’ growing reliance on credit checks when screening new hires is turning out to be bad news for millions of jobless Americans. Losing a job can often mean trouble paying bills for many unemployed people. And the damage done to their credit history increasingly can become a barrier to finding another job, touching off a vicious downward spiral.There are no hard numbers on how often poor credit reports thwart someone's effort to find a new job. Many applicants will never know; employers aren’t required to explain why a candidate was turned down for a job. But a recent survey by the Society of Human Resource Management found that many employers use credit checks to screen job candidates. Of the roughly 350 employers who responded, 60 percent said they checked credit histories for some or all job applicants. That’s up from 43 percent in 2004 and just 25 percent in 1998.
Underemployed Report Spending 36% Less Than Employed Gallup's daily measure of U.S. employment reveals that 19.9% of the U.S. workforce was underemployed during the month of January, translating to close to 30 million Americans who are working less than their desired capacity. Those who were underemployed reported spending 36% less than those who were employed, $48 per day versus $75 per day.These results are based on January interviews with more than 20,000 adults in the U.S. workforce, aged 18 and older. Gallup classifies respondents as "employed" if they are employed full time or are employed part time but do not want to work full time. Gallup classifies respondents as "underemployed" if they are employed part time but want to work full time or are unemployed.
Dude, I'm Not Slack. It's the Paradox of Toil. - Turns out slackers are the best model for macroeconomic policy advice: Don't work too hard, or you'll screw up the economy: This paper proposes a new paradox: the paradox of toil. Suppose everyone wakes up one day and decides they want to work more. What happens to aggregate employment? This paper shows that, under certain conditions, aggregate employment falls; that is, there is less work in the aggregate because everyone wants to work more. The conditions for the paradox to apply are that the short-term nominal interest rate is zero and there are deflationary pressures and output contraction, much as during the Great Depression in the United States and, perhaps, the 2008 financial crisis in large parts of the world. The paradox of toil is tightly connected to the Keynesian idea of the paradox of thrift. Both are examples of a fallacy of composition. More here.
Poll: Most of Unemployed Don’t Expect to Find Work - Three out of five Americans who are unemployed or underemployed don’t expect to find work in the next month, according to a new Gallup poll. Gallup surveyed more than 4,000 adults throughout January. Some of the other findings: Among the underemployed — people working part-time but want full-time work — who say their companies are hiring, only 42% are hopeful about getting full-time hours. Almost two-thirds of people with a college degree or postgraduate education aren’t hopeful about finding work. Almost three out of four underemployed Americans ages 50 to 65 aren’t hopeful about finding a job within a month, making them the demographic group with the lowest likelihood of being hopeful. One area where hope made little difference: having enough money. Among both groups (hopeful and not hopeful), more than one in three said they did not have enough money to pay for food in the past year.
Six in 10 Underemployed Not Hopeful About Finding Work – Gallup - Gallup Daily tracking during January reveals that 61% of the underemployed are not hopeful they will find a job within the next four weeks, while 39% are hopeful. These results are based on interviews with more than 4,000 underemployed U.S. adults, aged 18 and older, during January 2010. Gallup classifies respondents as underemployed if they are either unemployed or work part time but want to work full time. Gallup asks those who are unemployed if they think they will have a job in the next four weeks, and asks those who are employed part time but want to work full time if they think they will have a job in the next four weeks that requires them to work 30 hours or more per week. Respondents who believe they will find work are "hopeful" while those who do not believe they will find work are "not hopeful."
Getting Back Lost Jobs Could Take 5-Plus Years - ABC News - So many jobs have been lost that the U.S. must run hard just to keep from losing more ground. Despite the election-year emphasis on job creation by both parties, the short-term outlook is bleak. While many economists believe the recession is technically over, nearly 15 million Americans remain unemployed. Six million of them have been out of work for more than half a year. President Barack Obama is asking for almost $300 billion more for recession relief and job formation. The House last December passed a $154 billion spending bill focused on jobs. The Senate is due to debate a far more modest version on Monday, but appears bogged down in partisan bickering. With or without new legislation, reducing a jobless rate that's now just under 10 percent to prerecessionary rates of about half that won't happen soon, especially as government efforts to prop up the economy begin to wind down.
Leaving in droves - Since the recession started in December 2007, the labor force -- people who are either working or seeking work -- has declined by 700,000 workers, even though the working-age population has increased by 3.7 million. The shrinking labor force is largely a reflection of discouragement with the labor market; as jobs have become scarce, many job seekers have given up looking for work. That said, the decline in the labor force has not been spread equally across the population. The figure shows the percentage point change in the labor force participation rate by age.The labor force participation rate for workers age 16-24 has decreased from 59.1% to 54.7% in the 25 months since the recession started, representing a loss of 1.3 million young workers, while the labor force participation rate of workers age 55 and older increased from 38.9% to 39.9%, representing an increase of 2.3 million workers.
Some Good News on Jobs: Tax Withholding Improving - Here is some good news on the jobs picture, courtesy of economists at Deutsche Bank. After collapsing last year, individual income-tax withholding seems to be turning a corner. Tax withholding is a good jobs indicator, because you have to have a job to get your taxes withheld. Withholding sank with the recession’s onset and collapsed after the collapse of Lehman Brothers in 2008. But it seems to be turning a corner.
Arnold Schwarzenegger Calls Out GOP On Stimulus Hypocrisy: SCHWARZENEGGER: I find it interesting that you have a lot of the Republicans running around pushing back on the stimulus money and saying this doesn’t create any new jobs. Then they go out and they do the photo ops and they’re posing with the big check and they say, “Isn’t this great?”... Anyone that says it hasn’t created a job, they should talk to the 150,000 people that have been getting jobs in California.... In the private sector and from the public sector. … So I’m happy that we got this money. I’m happy that we have put 150,000 people to work and there will be more people that are put to work because of it.
Is Fiscal Stimulus Pointless? - DeLong - The Harvard economist Robert Barro, writing in The Wall Street Journal, recently made an intelligent argument against America’s fiscal stimulus. After wading through the drivel of ethics-free Republican hacks and knowledge-free academic hacks who claim, one way or another, that the basic principles of economics make it impossible for government spending decisions to alter the flow of economic activity, reading Barro comes as a great relief. But I think that Barro misreads how his own evidence applies to our current situation. ... So I really cannot understand Barro’s last paragraph: “The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake...”It is as if he has not done his own arithmetic.
The stimulus and jobs bills: Tax cuts can in fact create jobs - The Economist - SEE what you think of this argument: it's impossible for tax cuts to create jobs. When the government cuts taxes, it simply has to borrow more money to cover its spending. This sucks money out of capital markets, which means financial institutions have less money to lend to businesses. That means businesses can't start up or expand. Whatever jobs are created by tax cuts, an equal number will be destroyed by increased borrowing; all the government is doing when it cuts taxes is taking money from one place and giving it to another.Most people would agree that this is a silly argument. But it is nearly the same argument that the Heritage Foundation's Brian Riedl and University of Chicago economist John Cochrane are currently making against the effectiveness of last year's American Recovery and Reinvestment Act (the stimulus).
US stimulus added up to 2.1 mln jobs in Q4 2009: (Reuters) - The massive stimulus package passed last year to blunt the impact of the worst U.S. recession in 70 years created up to 2.1 million jobs in the last three months of 2009, the non-partisan Congressional Budget Office said on Tuesday. The package boosted the economy by up to 3.5 percent and lowered the unemployment rate by up to 2.1 percent during that period, CBO said. The report comes as President Barack Obama and his fellow Democrats are pushing further measures to bring down the 9.7 percent unemployment rate before the November congressional elections....
If You Buy The V-Shape Thing, Don’t Read This - It’ll get buried beneath stories about home sales and Bernanke’s testimony, but this notion about capex took a hit today, too. The Equipment Leasing and Finance Association reported that its monthly activity index fell 24% in January from a year ago: The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity for the $518 billion equipment finance sector, showed overall new business volume for January declined by 24 percent when compared to the same period in 2009. We will point out, once again, that this time last year was just about the nadir for everything, so the fact that equipment financing is down this sharply from a year ago should be an eye-opener. And the source of that weakness is the one source that no amount of government largesse can engineer: demand.
Jobs Bill Just Got Bipartisan Senate Support - It's too early to get our hopes up for sustained Senate bipartisanship, but just before 6 p.m. tonight, five Republicans joined 57 Democrats to invoke cloture on Senator Harry Reid's (D-NV) amendment to the House jobs bill, H.R.2847. Newly elected Scott Brown (R-MA), Kit Bond (R-MO), Sue Collins (R-ME), Olympia Snow (R-ME), and George Voinovitch (R-OH) voted with the Democrats. Ben Nelson (D-NE) was the only Democrat to vote with the Republicans. So far, Reid's amendment would be limited to $12 b. FY10-FY12, and it's "paid for" over 10 years, but amendments could add to that, and it will grow larger in any compromise with the House's $65 b. FY10-FY19 bill. Reid's amendment is outlined here, and its CBO cost estimate is here. The House bill is described here, and its cost estimate is here.
In Passage of Jobs Measure, a Glimpse of Bipartisanship - NYTimes - Five Republican senators broke ranks with their party on Monday to advance a $15 billion job-creation measure put forward by Democrats, a rare bipartisan breakthrough after months in which Republicans had held together to a remarkable degree in an effort to thwart President Obama’s agenda. The 62-to-30 vote — two more yeses than the minimum required to get past a procedural roadblock — cleared the way for the Senate to vote Wednesday to approve the measure, which Democrats said would create tens of thousands of new jobs at a time when the unemployment rate is hovering near double digits and is expected to remain high for years to come. But it is not clear whether the House, which has backed a broader approach, will go along without making substantial changes.
Senate bill no match for scale of jobs crisis -Economic Policy Institute - It is a good thing that the Senate is now focusing on passing a jobs initiative, since the jobs crisis urgently demands action. Unemployment will be as high as it is now – or higher – one year from now; two years from now, it will still be as high as 8%. That would mean that at the end of 2011, four years after the recession began, we will still have an unemployment rate higher than the highest unemployment at any point in either of the last two recessions. The Recovery Act in early 2009 did a lot to dig us out of the deep hole we were in, but further aggressive policy action is still needed to get us the rest of the way out of that hole. Unfortunately, what the Senate is considering hardly qualifies as a good first step.
Will This Jobs Bill Do Any Good? - The Senate passed a jobs bill on Wednesday that, among other things, would give employers a temporary exemption from payroll taxes for hiring people who had previously been out of work for at least 60 days. The idea of a subsidy for new hires has received support from many economists who study labor issues, and the Congressional Budget Office has said that a payroll tax credit targeting new hires could be a relatively cheap, effective way to stimulate the job market. But the policy proposal that the budget office scored looks pretty different from the one that the Senate just passed. In fact, there are myriad different ways to construct such a credit, and they are not all equally effective at creating jobs, and creating them cheaply.
The limits of the job-creation bill: I am thrilled, as are many others, that Congress has found a way to actually move forward on an issue. I refer to the apparent progress of the $15-billion job-creation bill. Unfortunately, as I've explained before, I'm pretty sure the legislation won't have as much of an impact as we're hoping for.... Seems what businesses really want is more demand for their products and services. Duh, right? Government spending would drum up demand in plenty of industries, but I guess more government spending creates a political problem.... Here's another idea. What about funneling more money to state and local governments? A whole lot of police officers and teachers didn't lose their jobs this past year because of the stimulus bill of early 2009. Maybe those would be some good jobs to save...
Senate Passes Jobs Bill; Tax Credit Will Pay Companies for the Wrong Thing in Many Cases - The U.S. Senate has passed a bill to pay companies that hire, calling it a jobs bill. The San Francisco Chronicle has a good Q&A on the provisions. During the run-up to the vote, most analysts liberal and conservative denounced the bill, saying it wouldn't create new jobs for all the usual reasons: Firms that claim the credit would have hired the person anyway, in which case the credit is just corporate welfare. Firms may game the system by abolishing and re-creating jobs. Temporary tax breaks can't inspire an expensive long-term commitment like a new hire. Only a permanent rate cut can credibly claim to be such a powerful economic incentive, and even then, counting "jobs created" is hooey. From our perspective, the bill's only virtue is its small size...
Inventing Job Creation Numbers - The WSJ told readers that Democratic senators claimed that the employment tax credit in a job bill passed by the Senate would create 1.3 million jobs. It then added: "but some independent economists said they expected it would have less impact than that." It would be surprising if any independent economists believed the tax credit would create even one-tenth this many jobs. Every month, roughly four million workers leave or lose their job. Employers hire roughly 4 million workers to replace these workers. The vast majority of the 4 million workers who are already being hired every month would qualify for the Senate's tax credit. This means that the overwhelming majority of the money would be paid out to firms that are hiring anyhow. Since the incentive provided by the credit is small, there is little reason to believe that it will have any noticeable effect on employment.
American small businesses needn't go extinct - Where the independent pharmacist counted pills, we see a CVS employee. Where family livestock farms dotted the landscape, we see immense operations run by Smithfield and Tyson. Where the buttonmakers of New York and Los Angeles sold their wares, we see the imported products of Li & Fung. Where our community bank stood, we see Bank of America. Where the local grocer marketed local fruit, we see Wal-Mart. Where the local general-merchandise store stacked jeans, we see, well, Wal-Mart again. One recent study, based on data compiled by the Organization for Economic Cooperation and Development, placed the United States second to last out of 22 rich nations in the percentage of workers who run their own businesses. Only Luxembourg ranked lower.
Obama Aims to Use Federal Contracts as a Way to Lift Wages - NYTimes - By altering how it awards $500 billion in contracts each year, the government would disqualify more companies with labor, environmental or other violations and give an edge to companies that offer better levels of pay, health coverage, pensions and other benefits, the officials said. Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class. It would affect contracts like those awarded to make Army uniforms, clean federal buildings and mow lawns at military bases.
“The High Road Procurement Policy” - Thoma - We hear about Wall Street and Main Street, but not as much about the streets where people live, at least not much beyond all the foreclosed houses. And with unemployment as high as it is, and Congress doing little more than than tossing a few bones at the problem now and again, it's no wonder those streets are feeling overlooked and neglected. Maybe that's part of the problem Tim Geithner describes:The president says somehow we've managed to create a situation where there's a large portion of Americans that think we are running a pro-business, pro-Wall Street policy. But the business community and Wall Street think we are like a bunch of socialists. Well, we have been socializing Wall Street's losses, but I don't think that's what they're complaining about. In any case, Wall street and the business community aren't going to like this:Plan to Seek Use of U.S. Contracts as a Wage Lever: The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers
Insiders, Outsiders and Unemployment - From today's NYTimes: The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan.... Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is. Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult. Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders...
CBO Director Doug Elmendorf Offered A Sobering Jobs And Budget Outlook Today - Congressional Budget Office Director Doug Elmendorf addressed the National Economists Club luncheon today in D.C. He started with the good news: "In the near term (FY10-FY12), we expect the economy to recover." However, his job outlook was grim: "More pain of unemployment lies ahead of us than behind us." That's because this recession has had much more permanent job loss than past recessions and because our recovery is likely to be weak, with subpar job growth. We've lost 8.5 million jobs so far, and it would take 11 million new jobs to reach the level we would have had if the recession hadn't occurred. He expects the unemployment rate to drop to 5% by FY13, but, "That's a long ways away." The deficit outlook is grim also. We closed FY09 last September 30 with a 9.9% of GDP deficit, and CBO estimates this year, FY10, will end at about 9%. FY12 drops to 4% under present law, but that assumes the Bush Tax cuts, equal to 2% of GDP, will expire -- a very unlikely event,
A Bad Idea From Dennis Kucinich -Yesterday, Rep. Dennis Kucinich appeared on Fox News plugging his plan to encourage early retirement. I critiqued it in my Forbes column on Friday. Here is the relevant discussion: Rep. Dennis Kucinich, D-Ohio, has proposed lowering the age to qualify for early Social Security benefits to 60 from age 62 for the first 1 million people who apply. He assumes that all the people who would take advantage of this opportunity are currently employed. Thus, according to him, the proposal would automatically lead to the opening up of 1 million job vacancies.This is not a new idea. As historian William Graebner has documented, the Social Security program itself was partly conceived in order to encourage older workers to leave the labor force so as to create employment opportunities for younger workers.
Minnesota Governor Tim Pawlenty Doesn't Know Any Economics - It is appropriate for reporters to call attention to statements by politicians are that strange or wrong. NYT should have pointed out that Minnesota governor Tim Pawlenty was not making sense when he complained about the stimulus package: “We’re going to take a dollar from you in the private sector, bring it into government, spin it around, take 5 to 20 percent for overhead, and redeploy it into the private economy and call that growth.”Of course the government is not taking money from the private sector. The stimulus cut taxes. The borrowing also did not pull money away from the private sector, banks have more than $800 billion in excess reserves and interest rates are at historically low levels. In other words, Pawlenty's comments indicated that he either didn't know what he was talking about or didn't care.
Robert Samuelson: Financial Meltdown Exposes Flaw in Welfare State - One might think that the mass unemployment caused by the collapse of the housing bubble might lead people to be concerned about restructuring the financial sector: not at the Washington Post. Robert Samuelson tells us that the meltdown shows that the welfare state is no longer viable. Actually, he has a pretty good case. With Goldman Sachs and the rest of the financial sector siphoning off an ever larger share of the country's output, we may not be able to afford much of anything in the future.
Health Care is Important, But Don't Forget the Unemployed, by Mark Thoma - I’d be less worried if it looked like a meaningful job creation package was about to emerge from Congress, but the proposals under discussion don’t do nearly enough, and what little that has been proposed isn’t happening as fast as needed. The legislation should be in place place already, not still under discussion. And while it’s good that health care reform is coming back onto the front burner, that means that a job creation bill is unlikely to be the main priority for Congress in the near future. Unless Congress can learn to walk and chew gum at the same time, which it’s unlikely to do, a side effect of the renewed attention to health care reform may be less job creation and higher unemployment.
Mark Thoma Lets Loose - But his blog is justly popular because it presents a wide range of views through extensive quotations and relatively little editorial commentary. So I think it’s revealing that he provides the following postscript to an article by Jamie Galbraith: “Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can’t wait another day. It should have been done months and months ago.“Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn’t be tolerated. But Congress doesn’t seem to be in much of a hurry to do anything about it, or give any sign that it much cares.”
We need jobs, not deficit cuts, by James Galbraith, CIF -"Now that the immediate crisis has passed," Policy Network asks for "long-term strategies to shape our post-recession economies" and "to promote economic growth". 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. People need work. We face the challenge of climate change. The broad outline of a program 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.
Some movement at the station - Today I reflect on my weekend of media reading. Within the never ending media assault on budget deficits which is now being regularly elevated to “the fiscal crisis of the state” I read a few stories which actually took a different tack. One said that several national leaders were going to prioritise jobs over the wishes of the financial markets while the other said that the so-called “debt moralists” (aka deficit terrorists) are not on sound economic grounds. Amidst the continual conservative onslaught at present, both articles reflect some movement at the station
Mass Transit is As American as Apple Pie - The conservative discourse about mass transit simply illustrates the fact that it’s an ideology driven by inchoate resentments rather than any ideas about policy or the role of government. This error-ridden paragraph from Rich Lowry and Ramesh Ponnuru, two of the movement’s shining starts, underscores the point:...you can hear it in all the admonitions from left-wing commentators that every other advanced society has government child care, or gun control, or mass transit, or whatever socialistic program or other infringement on our liberty we have had the wisdom to reject for decades. Matthew Schmitz ably handles the allegation that mass transit is a “socialistic program” or “infringement on our liberty” by asking compared to what? Presumably they think this because mass transit is built and administered by the government and supported, quite often, by taxes. But the exact same thing is true of highways. Would Lowry and Ponnuru denounce the Interestate system as socialistic on the same grounds?
Why Won't Government Hire People Who Want to Work? - "Put me to work digging ditches or helping build roads. Anything is preferable to sitting on my butt. This would give those of us on unemployment back our pride and actually accomplish something with the money being spent. There is a work force of a million people just sitting idle waiting for something to do. That is a massive amount of lost labor that could be fixing America's infrastructure. Instead of unemployment, hire me to do that." That potential work force is actually way greater than a million people; there are over 11 million American workers currently getting unemployment benefits and another 3.5 million or so who want jobs but can't find them.
Address jobs now and deficits later : President Barack Obama is in a difficult position when it comes to deficits. Today's high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What's a president to do? The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead. The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t. But this is rarely accurate....
Jobs - On the Topic of Employer of Last Resort - Without writing everything I have been thinking about on this topic, I have decided to provide you with a few links for discussion, accompanied of course by some commentary. first: Marshall Aurback via Barry Ritholtz: "We therefore suggest a new approach: Government as Employer of Last Resort (ELR). The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. A sizable benefits package should be provided, including vacation and sick leave, contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom-up reform of the current patchwork health care system."
Unemployment and the Oligarchs - WorldBank PSD Blog - Roughly one in ten Americans is officially unemployed, with the effects of unemployment becoming more dire, yet America's GDP managed to grow at 5.7 percent last quarter. What explains this juxtaposition? Thoma blames taxpayer-funded financial bailouts, calling for more support at the bottom of the income pyramid: The fact that many of the costs were concentrated among those least able to pay them stands in contrast to the fact that the bailout benefits were concentrated among those at the opposite end of the income distribution. Government transfers to compensate low income groups for the costs they were forced to pay but had no hand in causing, transfers that are financed by those who received the benefits during the bubble years and the bailout money when the bubble popped, seem more than justified. Might America's GDP growth be over-representing the gains of its wealthiest citizens?
How much do the wealthiest Americans make, and how much do they pay in taxes? -Bloomberg has a brief story out on recent IRS statistics of income. See Top Earners Averaged $345 million in 2007, IRS says Here are the figures cited in Donmoyer's report (based on Tax Analysts' data analysis presented by David Cay Johnston on Tax.com): Average income of top 400 US households in 2007: $345 million (that's income per year, folks) Average income of top 400 US households in 2001: $131.1 million (that's about half) Average effective tax rate in 2007 for this same group: 16.6% (per Johnston article) Average effective tax rate in 1993 for this same group: 29.4% Percent of the top 400 earners in items taxed at preferential (low) tax rates: about 75% So the richest of the rich managed to do quite well in the artificial boom of the Bush years when most Americans were barely holding even (or actually declining) in wages. They doubled their annual income from 2001 to 2007 in the years after the Bush tax cuts that disproportionately benefited the wealthy.
Debunking the claim that higher income-tax rates reduce GDP. - By Eliot Spitzer - - Supreme Court Justice Oliver Wendell Holmes Jr. observed that "taxes are what we pay for civilized society." In 1942, President Franklin Roosevelt said, "In this time of grave national danger, when all excess income should go to win the war; no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000." That $25,000 is the equivalent of $323,208 in today's dollars. Can you conceive of a modern president suggesting that no American should earn more than $323,000 after taxes? (President George W. Bush went to war twice without once calling for such a common sacrifice to pay for it.) And President Harry Truman in 1948 vetoed a broad-based tax cut, even in the face of an expected and eventual congressional override, and then asked for a tax increase following his upset victory. But President Ronald Reagan transformed our conversation about government and turned taxes into the enemy of progress. It is commonly thought that President George H.W. Bush's violation of his "read my lips" pledge cost him re-election and President Bill Clinton's 1993 tax increases cost him control of Congress.
Why So Few People Pay Income Tax - Last week Fox Business News asked me whether it was a problem that nearly half of all Americans paid no federal income tax last year. I’ve gotten that question repeatedly since I reported the Tax Policy Center estimate that 47 percent of all taxpayers and 55 percent of the elderly and families with children paid no federal individual income tax in 2009. (Remember, however, that most people who pay no federal income tax do pay Social Security, Medicare and other federal taxes as well as state taxes.) Still, reporters and others want to know if it is fair that so many people pay “no” tax? The explanation is simple: the income tax serves two masters. On one hand, it raises nearly half of all federal revenues. On the other, it delivers a broad array of social benefits in the form of exemptions, deductions, and credits that reward people for government-favored behavior. If we look only at raising revenue, about three-fourths of people pay taxes. It’s that social welfare function that knocks so many people off the tax rolls.
How To Clean Up the Tax Code - On Feb. 23 Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) introduced S. 3018, a bill to reform the federal income tax. Unlike utopian reform ideas such as the flat tax, which would tear the existing tax system out by its roots and replace it with something completely different, the Wyden-Gregg plan has a more modest goal of just trying to make the tax system work a little better. The problem historically with utopian plans is that they need to be implemented in totality for them to work. This means taking on every vested interest in any section of the tax code simultaneously. It was a simple matter for those opposed to touching the mortgage interest deduction to join forces with churches concerned about the deduction for charitable contributions and big corporations anxious to keep the research and development credit and all the other special deals that businesses have inserted into the code over the years.
A snapshot of income disparity - latimes -On the eve of our worst financial crisis since the Depression, the United States was -- from an economic standpoint, at least -- a less equal nation than at any time since the Gilded Age. The sputtering recovery now underway is producing few, if any, jobs to replace those that have been lost. Meanwhile, a variety of factors continues to push wages and most salaries lower. Thus, we're likely to emerge from this downturn with even greater disparities in income, wealth and effective tax rates, We have a pre-recession portrait of American inequality because, in 1992, the Clinton administration asked the Internal Revenue Service to begin tracking the incomes and tax payments of the country's 400 richest households. During the George W. Bush years, the IRS continued to collect the data, but -- you'll be shocked to know -- didn't release it to the public.
Wealth Disparities in U.S. Approaching 1920’s Levels - What a time to be an oligarch! This graph was an eye opener for me (not that I should be surprised):All I wanted to do was vomit when I saw this. Folks, there is no way we can have economic prosperity in this country when the top 1% has all of the money. The middle class is basically being destroyed right in front of our very eyes. Consumption economies die when the consumers have no money to consume! I see growing signs of desperation and anger as the wealth of this nation continues to get transferred to the elite of this nation. People are starting to "lose" it as a result. Things are only going to get worse in the violence department as the taxpayers continue to get violated and more desperate as a result of this economic cataststrophe.
The Government Pays More Money to Peter Peterson and Other Rich Investment Bankers than to Poor Chidren - The NYT had another blogpost complaining that the government pays more money to rich investment bankers like Peter Peterson than it does to poor children. Actually, the column didn't mention how much money rich investment bankers get from the government in the form of interest payments on the government bonds that most of them hold, instead it complained about the money that retirees collect in the form of Social Security and Medicare payments.Of course, it would be foolish to compare the money that rich investment bankers get in interest payments on money they have lent to the government with the pure transfer payments that the government makes to ensure that poor children have a decent chance in life. But, it is also foolish to compare the retirement benefits that seniors have largely paid for during their working life, through Social Security and Medicare taxes, with the pure transfer payments that the government makes to ensure that poor children have a decent chance in life. But, rich investment bankers like Peter Peterson have the money to ensure that the first sort of stupid comparison (money going to rich people as interest and money going to poor children) doesn't appear in serious news outlets and that the second sort of stupid comparison does.
U.S. Economic Terrorism the New 'Winning Trade' - When Wall Street planned and executed the U.S. housing-bubble (and all its related scams), it destroyed the lives of tens of millions of Americans. Then, when it subsequently 'crashed' global markets, it inflicted hardship on most of the world. But the Oligarchs were just getting started. As governments responded in a totally predictable manner, Wall Street began to collect on its interest-rate swap scam (see “WHO were the WINNERS in Interest Rate Swaps?”). With this scam the Oligarchs progressed from merely destroying companies and individuals to destroying schools, hospitals, towns and even states. However, as we are now finding out, those were merely Wall Street's “appetizers”. For their “main course”, the Oligarchs have moved up to destroying nations. Here, I must confess to once again underestimating the Oligarchs. I had thought that the latest propaganda campaign was merely a tactic to pull the worthless, U.S. dollar out of yet another nose-dive. How wrong I was!
Unemployment benefit extension stalled in Senate - While the jobless anxiously await the outcome, the Senate on Thursday remained tied in knots over legislation to extend unemployment benefits and health-care subsidies. Benefits for tens of thousands of Floridians and millions more around the country hang uncertainly in the balance. The law providing extended benefits and subsidies ends on Sunday, Feb. 28th. Senate Majority Leader Harry Reid tried Wednesday night to push back the law by 30 days as a stopgap measure To move this measure swiftly, Reid asked the Senate for unanimous consent to pass the law without lengthy debate or a roll call vote. A single objection is enough to block a unanimous-consent request. Senator Jim Bunning, a budget-conscious Republican from Kentucky, objected. He said the 30-day stopgap would cost $10 billion and insisted on drawing stimulus money to pay for it.
More than 1 million long-term unemployed could lose benefits without extension - Economic Policy Institute - . More than 6 million Americans have been jobless and looking for work, week-in and week-out, for six months or more. The extensions of unemployment compensation that allow workers to keep benefits for up to 99 weeks, instead of the normal 26 weeks, are therefore vitally important. But they expire in less than a week, on February 28. Given this grim reality, Senator Reid’s announcement that the Senate will debate a 15-day extension of unemployment benefits was disheartening. The extended benefits program will be needed for another year at least, so a 15-day extension makes no sense. Waiting until the last minute to vote on an extension has already cost the states millions of dollars and forced them to send cut-off notices to workers receiving unemployment checks. Extending the program for only 15 days will force the states to twist themselves into knots to re-start the program while simultaneously preparing to shut it down again. This is waste and abuse.
Senator Jim Bunning Just Kicked 1.2 Million Unemployed Americans To The Curb The week-long squabble over a proposed extension of unemployment benefits for 1.2 million Americans came down to the repeated objections of one man: Kentucky Sen. Jim Bunning. With many Senators home for the weekend, Illinois Sen. Dick Durbin tried to pass the measure with a voice vote. In such a vote, it takes a single objection to block passage. Thus Bunning, a former baseball player who once pitched a perfect game, was able to stop the extension all by himself. The Senate has now recessed for the weekend, according to HuffPo, which means tough luck for the unemployed.
Jobless benefits start ending on Sunday - Depending on extended unemployment benefits to see you through the Great Recession? You'd better not: The Senate failed to push back the Feb. 28 deadline to apply for this safety net. Starting Monday, the jobless will no longer be able to apply for federal unemployment benefits or the COBRA health insurance subsidy. Federal unemployment benefits kick in after the basic state-funded 26 weeks of coverage expire. During the downturn, Congress has approved up to an additional 73 weeks, which it funds. These federal benefit weeks are divided into tiers, and the jobless must apply each time they move into a new tier. Because the Senate did not act, the jobless will now stop getting checks once they run out of their state benefits or current tier of federal benefits. That could be devastating to the unemployed who were counting on that income. In total, more than one million people could stop getting checks next month, with nearly 5 million running out of benefits by June, according to the National Unemployment Law Project.
Senate will seek yearlong extension of unemployment benefits on Monday - Senate Democrats will seek a yearlong extension of unemployment insurance benefits on Monday. Federal unemployment benefits expire on Sunday, since Republican Senator Jim Bunning blocked the passage of a 30-day extension of benefits on Thursday in the Senate. A Democratic leadership aide said Senate Majority Leader Harry Reid (D-Nev.) is hammering out a proposal that would extend unemployment benefits and several expiring tax provisions. The aide said the unemployment benefits would be combined with a tax extenders bill that passed the House Thursday. An extension of COBRA subsidies would likely also be included.
Time To Privatize Unemployment Insurance - Besides foreclosures, one of the lasting problems of the financial crisis is the fiscal trouble many states are in; over the weekend, a study from the National Governors Association found that state economies were likely to continue to worsen. Just one sign of how bad the finances of the states are: More than half of all state unemployment funds are now in the red. The latest entrant into the financial foul up is Massachusetts, which may have to borrow up to $1 billion from the federal government to keep paying benefits. ProPublica is pointing out that the states will eventually have to pay the money back, most likely with interest (the loans are interest free for a time), and that's going to be a continuing drain on state finances. But there is a larger lesson to be learned here: The government is very bad at pricing insurance. It's not just unemployment insurance. The bank insurance fund at the FDIC is out of money as well.
Ohio has no idea how to pay US back for jobless benefits - It has been more than a year since Ohio depleted its unemployment-compensation fund, and with the fund's debt surpassing $2billion and growing, a fix is nowhere in sight.No one has even proposed what should be done to shore up the fund - not the governor, not the General Assembly, not an advisory panel made up of business, labor and legislative leaders.In fact, state leaders can't even agree on who is responsible for solving the problem.The Unemployment Compensation Advisory Council threw its hands up 15 months ago after it was unable to reach consensus; it said the legislature would have to figure out a solution.
States Facing $150 Billion in Red Ink - The total budget hole for state and local governments in fiscal 2011 is “approaching $150 billion,” Mark Zandi, chief economist and co-founder of Moody’s Economy.com, said in an interview Thursday. But Senate Democrats on the same day said that legislation to provide more federal aid to states will be delayed until after the Senate approves a jobs bill without those provisions. “If they don’t get more aid, there will be more serious job cuts and program cuts,” Zandi said. Some states are already preparing for such cuts, he added, saying that he “would guess that a number of states are counting on that extra money” from federal legislation.Zandi and other economists warned three months ago that state budget cuts would cause the gross domestic product to drop nearly one percentage point in fiscal 2011 unless the federal government swoops in with aid to states extending beyond what is currently provided by the American Recovery and Reinvestment Act, the vast majority of which expires this year."
News Release - States Reported Fifth Consecutive Drop in Tax Collections in the Fourth Quarter of 2009 - State tax revenues declined by 4.1 percent nationwide during the final quarter of calendar 2009, the fifth consecutive quarter of reduced collections, according to a report issued today by the Rockefeller Institute of Government.The five straight quarters of year-over-year decline in overall tax collections represent a record length of such decreases, the Institute said. Collections from each of the two major revenue sources, income and sales taxes, also fell for a fifth straight quarter.“States will likely face further revenue weakness in the first quarter of 2010,” Overall, the tax revenues collected by the 46 states fell from $140.2 billion during the fourth quarter of 2008 to $134.5 billion during the same period of 2009. Data were not available for Louisiana, Nevada, New Mexico or North Dakota.
Report: State Tax Revenues decline in Q4 - From the Rockefeller Institute: States Reported Fifth Consecutive Drop in Tax Collections in the Fourth Quarter of 2009 State tax revenues declined by 4.1 percent nationwide during the final quarter of calendar 2009, the fifth consecutive quarter of reduced collections, according to a report issued today by the Rockefeller Institute of Government. The five straight quarters of year-over-year decline in overall tax collections represent a record length of such decreases, the Institute said. “Calendar 2009 will be remembered as bringing historically sharp declines in tax revenue to states,” the report says. “Revenue gains toward the end of calendar 2009 were often driven by legislated tax increases rather than growth in the economy and tax base.” Here is the report: Final Quarter of 2009 Brought Still More Declines in State Tax Revenue
State Budgets Still Falling Like It’s 2008 - State budgets continue to decline as falling sales and income taxes leave them in a deepening pool of red ink, according to a report from the left-leaning Center on Budget and Policy Priorities. State budget shortfalls are nothing new, of course, but they continue to get worse even as the economy gets better. Partly that’s because it takes time for tax collections to catch up with all the havoc in the economy. But taxes also tend to be more closely tied to the job market and retail sales - two areas that have continued to be battered by the recession. According to the CBPP report: (table)
Governors Brace For More Economic Turmoil (AP) -- On the recession's front lines, governors are struggling to chart the road ahead for states staggered by unrelenting joblessness and cut-to-the-bone budgets even as Washington reports signs of economic growth. "The worst probably is yet to come," warned Gov. Jim Douglas , R-Vt., chairman of the National Governors Association, at the group's meeting Saturday. He called the situation "fairly poor" in most states, adding that it "doesn't look too good." Such uncertainty weighed heavily over the governors' weekend meeting even though health care -- and how states can address skyrocketing costs -- was the intended focus. That's recognized as one of the biggest issues affecting states' long-term solvency.
REPORT: How Conservative And Progressive State Governments Are Dealing With Their Budget Crises - One of the major problems facing the nation’s economy is the budget crises being experienced by states all over the country. Ethan Pollack, an analyst at the Economic Policy Institute, estimates that “the combined shortfalls for state and local governments [is] $469 billion over the next three fiscal years.” Additionally, a new report from the Pew Charitable Trusts finds that states are looking at a budget gap of nearly a trillion dollars for state worker pensions and other benefits.State legislatures faced with these crises have a choice. They can choose the path of the “deficit peacocks,” who demand cutting social spending while ruling out tax increases on those who have benefited immensely from years of conservative policies. However, at a time when the tax burden between the wealthy and the middle class is “narrower than at any time in modern history” they can instead look for ways to responsibly raise revenues while protecting their states’ spending on vital programs. Conservative and progressive state-led governments are approaching their problems with different policy solutions
Lawmakers say budget crisis is worse than Paterson letting on (video) A budget battle appears to be brewing at the Capitol. As the Assembly, Senate and Governor now all have different forecast for the state's 2010-2011 fiscal year. While the Governor's budget estimates the deficit at $8.2 billion, both chambers think that number is far too optimistic. The Senate thinks the Governor is off by $403 million in his revenue projections. The Assembly isn't as optimistic. They predict the Governor was $1.2 billion off in his forecast. The differing numbers suggest there is a lot of work to do before the budget deadline on April 1st. But on Tuesday, lawmakers were focused on a different money issue. Paterson's push to delay tax returns for New Yorkers.
New York State Budget Gap May Grow 43% to $2 Billion - (Bloomberg) -- New York’s budget deficit for this year may be $2 billion, or 43 percent wider than projected earlier this month by the Division of Budget, comptroller Thomas DiNapoli said. Tax collections by the March 31 end of the state’s fiscal year might be less than anticipated, according to DiNapoli. Governor David Paterson plans to roll the deficit into the year beginning April 1, when he forecasts an $8.2 billion budget gap, according to amendments announced Feb. 9. The state is required to pass a budget with revenue at least equal to spending, though not to keep it in balance during the year.
N.Y. public hospitals could lose $1 billion through 2011 - New York City Health and Hospitals Corp. has projected an operating loss of at least $1 billion through June 30, 2011, despite an expected infusion of “hundreds of millions of dollars” of retroactive Medicaid payments. The one-time Medicaid payout, plus ongoing efforts to cut costs and improve efficiency, will help the 12-hospital system close its books this June with an operating gain, said system President Alan Aviles, but operations will “burn through that at a pretty torrid rate.” Aviles said growing demand for subsidized and free care during the recession and cuts to Medicaid, which covers roughly two-thirds of the system's patients, has left it struggling to balance its budget
Decaying Apartments Symptom of Housing Crisis - This Bronx apartment building, where city housing violations have increased from 82 to nearly 600 in 16 months, is among thousands of rental properties from Los Angeles to Harlem showing a creeping decay as housing values collapse and funds for repairs dry up. As landlords find themselves owing more than their properties are worth, some have simply walked away, leaving garbage to pile up. Others have disappeared into bankruptcy, with unpaid utility bills. Some have tried to reduce their losses by neglecting basic maintenance. 'There are 100,000 apartments teetering on the edge'' in New York City alone, Across the country, multifamily mortgages covering 340,000 apartment units and worth an estimated $28.8 billion were delinquent or in foreclosure at the end of 2009 -- more than 18 times the sum from two years earlier -- according to Real Capital Analytics.
Businesses may have to shoulder future state deficits - WI — A former state budget director believes businesses should monitor future budget talks, because they could get stuck helping lawmakers close a budget deficit in the form of higher taxes.""In passing the 2010-2011 budget, the state faced a deficit of $5.4 billion. Chandler said $2.2 billion in funds from the $787 billion federal stimulus package helped close that deficit gap, but it's unlikely federal aid can be counted on again.
Georgia May Cut 5000 Jobs - Georgia's budget is more than one billion dollars short and some state lawmakers are now saying furloughs simply will "not be enough." The state's top three elected leaders met on the state's budget problems without reporters. Afterward Lt. Governor Casey Cagle conceded to Channel 2 Action News that the budget deficit is large. "It could be bigger than a billion," Cagle said. "Tough times ahead, but we'll get through." GOP Senator Seth Harp compares the state's fiscal troubles with the Great Depression and believes job cuts are next.
State economist: Douglas' AHS budget cuts would cause 1000 to 1400 layoffs - Proposed budget cuts to the Agency of Human Services could result in the permanent loss of 1,000 to 1,400 Vermont jobs, according to a memorandum from Tom Kavet, an economist for the Vermont Legislature. The one-page memo, which sums up the impact the budget reductions would have on the state’s economy, is posted on the Joint Fiscal Office Web site. (Memo – Proposed AHS Budget Reductions) Kavet writes that the total impacts on the state’s economy could “approach losses of $50 million per year” in gross state product and “exceed $40 million per year in personal income.”“There’s all this talk about creating jobs,” Kavet said in an interview. “What’s happening in state government will offset all of that.”
How will SC pay off its $800 million debt? - South Carolina and other cash-strapped states borrowed a total of about $31 billion from the federal government over the last two years to provide their unemployed workers with benefit checks, and now as the country climbs out of recession the states must find a way to pay it back. John Rainey, South Carolina's chief economic adviser, said the state needs to take calculated steps to repay its $800 million debt, while some others hold out hope that the federal government will forgive the loans.
3000 SC prisoners may be set loose - South Carolina will consider opening its prison doors and freeing up to 3,000 inmates before their sentences are finished as a way to save cash during a crippling economic time. States from Connecticut to California have adopted or are mulling similar measures to keep budgets afloat, but critics warn that these initiatives could be destined to fail if not accompanied by adequate support and supervision.
Michigan lawmakers hear debate on inmate release plan -State lawmakers at odds over whether to offer early release to thousands of prison inmates in Michigan heard testimony Wednesday from families of offenders who hoped to get loved ones home early and crime victims who feared that stripping the state's truth in sentencing standards would remove integrity from the justice system and jeopardize public safety. The cash-strapped state faces a $1.7 billion overall deficit for the fiscal year starting in October. Democratic Gov. Jennifer Granholm wants to cut more than $130 million from state prison spending, mostly by allowing some types of inmates to shave time off their sentences for good behavior and letting more offenders be released with electronic monitoring outside of prison. The proposals combined could cover roughly 7,500 prisoners
Detroit to Demolish Upward of 3,000 Houses in 2010 (AP) - About a third of Detroit's estimated 10,000 vacant homes that need to be demolished are slated to be torn down this year as the city attacks blight in its neighborhoods.The only thing preventing more demolitions is lack of funding.Of Detroit's $47-million share of federal Neighborhood Stabilization Program funds, about $14 million has been earmarked for such demolitions, building officials told a City Council committee Monday.Detroit is facing a budget deficit estimated at more than $300 million and no general fund dollars are planned for demolitions.Between 2,500 and 3,000 houses are on the list to be razed. It costs upward of $10,000 to tear down each single-family home, and all the federal stimulus funding for demolitions is expected to be exhausted this year.
State Budget Facing a 1.8 Billion Dollar Shortfall - House Fiscal Director Mitch Bean doesn’t do politics, he does numbers, and he says right now the numbers don’t add up. He says the state is looking at a 1.8-billion dollar budget deficit next year, which could grow.Kalamazoo School Superintendent Michael Rice says the $165per pupil cut they took this year was the biggest in state history, and next year’s may be even bigger and that will mean serious cuts.
Washington State Senate Democrats Want Sales Tax Hike - Democrats want to temporarily raise the sales tax by three-tenths of a penny, hike the cigarette tax by $1 per pack and close a long list of tax exemptions to help balance the state budget. The Senate's budget proposal, revealed Tuesday morning, calls for about $920 million in additional tax revenue to help solve the state's $2.8 billion budget deficit. The tax plan is larger than one proposed last week by Democratic Gov. Chris Gregoire but smaller than what many education and social service advocates have been pleading for since the legislative session began.
Revenue shortfall grows to $2.8 billion - The state’s estimated revenue shortfall for the biennium ending in 2011 grew from $2.6 billion to $2.8 billion after the latest revenue forecast was released recently. The Washington Retail Association (WRA) favors spending cuts to address the shortfall and opposes a host of tax increases under consideration by Governor Gregoire and the Legislature. WRA projects further layoffs and a lengthier economic recovery if new taxes and fees are approved this session, which ends on March 11.
California is a greater risk than Greece, warns JP Morgan chief - Jamie Dimon, chairman of JP Morgan Chase, has warned American investors should be more worried about the risk of default of the state of California than of Greece's current debt woes. Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged. California however poses more of a risk, given the state's $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce
California May Raise $2 Billion in Real Estate Sale (Bloomberg) -- California, facing a deficit that could force it to issue IOUs, may raise more than $2 billion from the sale of 11 office properties that would be the biggest commercial real estate deal in the state government’s history.Almost 7.3 million square feet of office space in Los Angeles, San Francisco, Oakland, Sacramento and Santa Rosa may draw bids from investors worldwide, the state Department of General Services said today in a statement. Proceeds will be used to retire more than $1 billion in bond debt and add at least $660 million to the state’s general fund, according to the agency. The state would lease back space from the new owners. “This sale will allow California to pay off debt, tap equity and lock in some of the lowest rental rates seen in years,” Ron Diedrich, the agency’s acting director, said in the statement. “The short- and long-term financial gains will be real to help shore up the state budget in the years to come.
State building sale looking worse and worse - The closer it gets, the worse California's pending sale of state buildings looks, at least for the long-term interests of taxpayers. Here are the basics of the sale, which aims to produce a modicum of cash to help resolve a budget crisis that seems to grow worse every year: State officials planned to go into the real estate marketplace in late February with as many as 17 state buildings that are expected to fetch about $2 billion even in today's depressed climate for sales of commercial buildings. Bids will probably begin arriving in early April. One reason these buildings will likely draw strong interest is that the state will guarantee continued occupancy for at least 20 years and in some cases as much as 30 years. Not many commercial buildings come with that kind of guaranteed rental income.
California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale - Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors."And seriously, did California think it would succeed where so many other high yield issuers have recently failed? So as Lockyer contemplates how to best approach DC about a bailout, here are recent California CDS levels.
'Doomsday is here for the state of Illinois' - SPRINGFIELD -- To become solvent, the state must enact the largest tax-increase package in Illinois history, whack another $2 billion from already starved government programs and wrest major financial concessions from the state's unionized work force, a nonpartisan government watchdog contends. In a new analysis of Illinois' "horrific" finances, the Civic Federation lays out the painful choices awaiting Gov. Quinn and the Legislature as they stare down an epic $12.8 billion budget deficit that has choked the flow of state cash to public universities and schools, transit systems and social-service agencies to the point of economic collapse. "Doomsday is here for the State of Illinois," said Laurence Msall, the organization's president
Budget "Catastrophe" Predicted for Schools - Illinois State Superintendent of Schools Christopher Koch is predicting a “catastrophe” for Illinois schools in the next fiscal year-- a one billion dollar shortfall. The prediction is forcing districts across the region—and the state-- to examine ways to cut back.The biggest funding uncertainty for school districts is state money. They're not getting payments now, and funding for the next school year is still in question—a preliminary budget plan laid out by Governor Pat Quinn Wednesday showed schools losing several billion dollars in fiscal year 2011. The Illinois Association of School Boards (IASB) believes the federal government is the best bet for minimizing damage. Officials are encouraging districts to appeal to lawmakers in Washington.
School districts ax teachers, blame state for financial meltdown - Chicago-area school districts already struggling with multimillion-dollar budget deficits are warning of mass teacher layoffs and deep program cuts for the coming school year — an impending crisis they blame on the recession and the state's chronic financial woes. The state hasn't paid the current school year's education bills in months, despite $3 billion in federal stimulus funding provided over the last two years. In addition to teaching positions, school districts already have chopped or postponed pool hours, athletic teams and textbook purchases. Others plan to cut band programs, increase class sizes, reduce field trips and use fewer substitute teachers.
Frustrated schools advertising how much they're owed - The cash-starved State of Illinois is months late and more than $700 million behind in paying its education bills, and at some school districts, taxpayers don't have to go far to find out exactly how much their schools are owed. Districts stretching across Naperville, Carpentersville and Rockford have posted signs outside their schools announcing how much the state owes them. Elgin, home to the state's second-largest school district, was dotted last week with school signs declaring: "The state owes U-46 $12.4 million.''
Layoffs loom for teachers: education secretary (Reuters) - Many teachers and educators across the United States are at risk of losing their jobs in the next few months, the nation's education secretary told a meeting of the National Governors Association on Sunday."I am very, very concerned about layoffs going into the next school year starting in September. Good superintendents are going to start sending out pink slips in March and April, like a month from now, as they start to plan for their budgets," said Arne Duncan, referring to the slips of paper included in some paychecks to notify a person of being fired
Public college tuitions spike 15%, even 30% - Tuition at many public colleges and universities is skyrocketing, thanks to state budget deficits that have choked off funding for higher education. The University of California, for instance, estimates a 30% increase in the 2010-2011 year. "California's $20 billion deficit will make it hard for the [state's] legislature to provide funding to the schools," said Patrick Lenz, UC Berkeley's budget administrator. Next year's tuition numbers aren't final, since many states are still hashing out their budgets. But one thing is certain: Rates are going up, and the schools that will be hit the hardest are in the states that have seen the worst of the economic downturn.
Spanier to lawmakers: Lack of funds for higher ed is hurting the state - Penn State President Graham Spanier joined the leaders of Pennsylvania's three other state-related universities in Harrisburg Tuesday (Feb. 23) to answer questions from legislators and ask the lawmakers to invest more fully in higher education. The four institutions – Penn State, the University of Pittsburgh, Temple University and Lincoln University — combined bring more than $1.5 billion a year in research dollars into the state, educate more than 150,000 students and contribute substantially to Pennsylvania's economy, according to the schools' leaders. Penn State alone generates more than $17 billion annually in overall economic impact and supports more than 67,000 jobs, according to a recent independent study.
The Economics of Higher Education - Americans today are generally aware of the high and ever accelerating cost of a college degree relative to current income. What Americans may not be aware of just how high the cost is. Lets look at the economics of college. Undergraduate student costs for the academic year 2009–2010 at MIT will be about $52,000. So the total cost of a 4 year undergraduate degree is approximately $208,000. The total cost of an advanced degree would be $260,000. Now lets assume you borrow the money paying 7% interest. Let’s also assume a 45 year working career upon graduation. The future value of $260,000 invested (or borrowed) at 7% interest 45 years hence is $5,460,637. Broken down into equal amounts over 45 years, that is $121,347 per year. So, using these assumptions (feel free to use your own), the college graduate has to make $121,347 per year, every year of his career after college, to just to pay for the education.
Get-Tough Education Approach Passes A Test - WSJ -The Knowledge is Power Program, or KIPP, is a get-tough approach to education that’s been adopted by charter schools across the country. KIPP schools, which feature long days, limited vacation time and heavy homework loads, are touted as giving disadvantaged children a leg up on education. But figuring out what sort of results KIPP schools get has been less than clear cut, because while KIPP students often perform better than students at nearby schools, they may have an edge to start with. Now a group of researchers has uncovered evidence that suggests KIPP really works.
CARPE DIEM: DC Public Schools: $1.29 Billion, $28,170 per Pupil - The Cato Institutes's Andrew Coulson had crunched the numbers and finds that the District of Columbia public school system spent almost $1.3 billion educating 45,858 students for the 2008-2009 school year (data here). That works out to spending of $28,169 per student (and that's for last year, spending is probably higher this year), which is almost as much as Harvard tuition of $32,550 for the 2009 academic year (data here), see chart above.
McCann: 1,500 layoffs If Christie Cuts School Aid -The Jersey City Board of Education at their Feb. 18 meeting saw school board member and former Jersey City Mayor Gerald McCann announce a doomsday scenario for the Jersey City school district: 1,500 school employees would have to be laid off before the next school year. He was referring to Gov. Chris Christie’s recent announcement that school districts across New Jersey should brace themselves for cuts, as much as 15 percent, in school aid for the 2010-2011 school year to tackle a $11 billion budget deficit in the next fiscal year.
Nevada schools chief expects 1000 teacher layoffs -“I’m guessing roughly it will be 600 to 1,000 teachers,” Rheault said during the start of the special session in Carson City. “I think there will be (layoffs) just because we will have $178 million in cuts,” Rheault said, referring to the amount of the governor’s proposed 10 percent cut of funding for education. “If it is 1,000 (statewide) it could be 150 in Washoe at the far end.”
Jordan District Teachers plan to protest layoffs at Tuesday night rally - About 500 people showed up to Jordan School Board meeting Tuesday night to let their opinions be heard regarding the district's budget cut plans, which includes laying off 500 employees. Members and supporters of the teacher's union, Jordan Education Association, rallied outside the packed auditorium. Students and educators held up signs that read "Speak for Tomorrow Today" and hoisted a 30-foot-long banner featuring pictures of teachers.
Number of homeless students skyrockets in local school districts - Homelessness is on the rise and local children and teenagers are among the victims. The number of homeless students in Montcalm County's seven school districts plus Belding more than doubled from 182 in 2007-2008 to 428 in 2009-2010, according to Brenda Greenhoe, homeless services grant director for Gratiot, Ionia, Isabella and Montcalm counties. The Montcalm County school districts include Carson City-Crystal, Central Montcalm, Greenville, Lakeview, Montabella, Tri County and Vestaburg. While Greenhoe is not able to track all families, she said more than 160 families are currently affected. She declined to give specific homeless student numbers per school district.
Applications for Help on Heat Bills Rise by 15% - The number of households applying for home heating assistance has climbed to record levels for the third straight year, rising by 15 percent to a projected 8.8 million this winter, state energy officials said Monday. This compares with almost 7.7 million recipients last year and 5.7 million in 2008. Average heating costs have declined slightly since 2009, and the increase in applications reflects, in part, the mounting troubles of those suffering prolonged unemployment, including many people who had not sought the aid in the past.
Muni Bond Flashpoint (Forbes) The U.S. is at the flashpoint with our weakest states, cities, school districts and communities. The largest vapor bubbles ready to explode are California, New York, New Jersey, Illinois, the New York MTA, the City of Los Angeles--the list continues. Twice now the governor of California, Arnold Schwarzenegger, has asked the Obama Administration for aid to a state that is federally mandated to educate, incarcerate and provide free health care to the illegals flooding in from Mexico across its open borders without federal monies. Our state and local legislators do not have the courage to put on the spending brakes. So the Great Depression 2 continues to deepen in the public finance sector. Yet the disconnect between wobbly municipal finances vs. low municipal bond yields grows wider. This "flight to munis" has everything to do with the fright of higher taxes to bridge our huge deficits and low-yielding (actually, no-yielding) money markets and CDs.
Los Angeles' credit rating downgraded due to excessive spending (Xinhua) -- A Wall Street rating agency on Tuesday downgraded Los Angeles' credit rating, a move that will cost the city millions of extra dollars down the road. Standard & Poor's Corp. notified city officials by telephone that it was lowering the city's general fund credit rating from AA to AA-, and reducing the rating on its Municipal Improvement Corporation from AA to A+, the local Daily News said on its Web.The agency cited disappointment in the city's inability to stop spending money it doesn't have, which has created a huge structural budget deficit. The agency said it wanted to see real action from the city council, such as employee layoffs, significant concessions from unions, steep cuts to city services or any combination to fill in a budget gap now at 212 million dollars and projected to grow to 484 million next year, according to the paper.
New Jersey's Clean-Energy Advocates Fear Job Losses - Last week, when Gov. Chris Christie froze unspent funds in many agency budgets to cover the state’s $2.2 billion shortfall, he appropriated $158 million from New Jersey’s Clean Energy Fund, the engine behind one of the few bright spots in New Jersey’s economy, the renewable energy industry.Advocates of the Clean Energy Program, which is administered by the Board of Public Utilities, say losing the $158 million could result in lower grant and rebate amounts this year, endangering thousands of jobs and setting back the state’s solar industry, the largest in the country after California.
N.J. Senate is expected to pass public pension cutbacks - A package of public pension and health benefits change bills introduced just two weeks ago is being fast-tracked through the New Jersey Senate. The measures cap the unused sick days retiring employees can cash at $15,000; require public workers to contribute at least 1.5 percent of their salaries toward their health insurance costs; and bar part-time workers from enrolling in the pension system.The pension system is underfunded by about $34 billion and at risk of becoming insolvent
N.J.'s pension plans underfunded by almost $17000 for each resident of the state - Gov. Chris Christie recently said what every governor across the country is secretly thinking: Without reform, public sector pension costs will crush state budgets. In fact, the true value of public pension shortfalls is far higher than even the $32 billion reported by New Jersey's plans. If valued by the standards applied to private pensions, New Jersey's unfunded liability reaches $145 billion, equal to almost $17,000 for each resident. Unless pension accounting rules are updated, taxpayers in New Jersey and around the country are in for a shock when the pension bill comes due.
CalPERS loses $475 million on investment that paid controversial placement agent millions - CalPERS says it has lost $475 million on an investment that yielded controversial placement agent and former CalPERS board member Alfred Villalobos his biggest single payday. The loss is based on June 30 figures and appears to have shrunk somewhat in the months since. Because the loss is still on paper, it could rebound some more before CalPERS chooses to sell it. Nevertheless, the deal remains deeply in the red, according to figures released Tuesday by the California Public Employees' Retirement System.The pension fund said its equity investment in New York financial giant Apollo Global Management had fallen to an estimated $124.6 million as of last June, the latest figures available
Report: Public Employee Pensions Face a $1 Trillion Funding Gap - From Stateline.org: The Pew Center on the States released a report Thursday (Feb. 18) saying that there is a $1 trillion gap between what states have promised to pay retirees and the money they have set aside to cover those costs. New Jersey, the report said, was one of the worst states in keeping up with its required annual pension payments, amassing a $34 billion shortfall in 2008 after finishing with a surplus in its retirement fund in 2000.[...]The spurt of pension activity in 2010 follows three busy years in states. Last year, 15 states approved legislation to change their state-run retirement systems, compared to 12 in 2008 and 11 in 2007. Most of the reforms centered on reducing benefits, increasing the retirement age, hiking employee contributions and keeping up with funding requirements. The Pew report discusses many of these reforms in greater detail.
Social Security 'Crisis': Lensing the Framing: Part 1 - The immediate economic/political news this week will revolve around Health Care and then transition to Jobs. Which is a good thing because I could really use a job with health care benefits. But Social Security blogging is what I do so here is a piece on the various ways in which Social Security 'crisis' is viewed which in turn controls the structuring of the proposed solutions. A lot of meta with not much in the way of numbers so I'll tuck it unobtrusively under the fold.
Wall Street Targets the Elderly: Looting Social Security - Hank Paulson, the Gold Sacks bankster/US 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 US 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. As there is no money to be made from the poor, Wall Street fleeces them by yanking away their entitlements. Wall Street’s approach to the poor has always been to drive them deeper into the ground.
Campaigning for State-Owned Banks - In the quest to find ways to divorce the well-being of their states from the financial sector, a growing number of candidates are picking up on the public bank alternative. Florida, Illinois, Oregon, Massachusetts, Idaho and California all have candidates whose platforms contain this proposed solution to the credit crisis. A publicly-owned bank has also been proposed on the federal level. Nationalizing the Federal Reserve (which is not actually federal but is owned by a consortium of private banks) was advocated by 2008 Presidential candidates Dennis Kucinich, a Democrat, and Cynthia McKinney, the Green Party candidate. In 2009, Nobel laureate Joseph Stiglitz said the government would have been better off funding a federally-owned bank than doling out trillions of dollars to private investment banks and CEOs who speculated their way into bankruptcy. “If we had used the $700 billion to create a new financial institution, allowed it to lever 10 to 1, which is very modest compared to the 30 to 1 that we were doing, 10 to 1 would have generated $7 trillion of new lending capacity, far in excess of what our country needs. So the issue here is not about lending. It’s really about saving the bankers. And what we confused was saving the banks versus saving the bankers and their shareholders.”
Struggling Towns Printing Their Own Cash - Residents can also exchange it at a few area bars for greenbacks, but the cheer is vastly more colorful. It features a chiseled, naked Greco-Roman superhero (the Spirit of Detroit) towering Godzilla-like over the city skyline, cupping a tiny family in one hand and a sunburst representing God in the other. He's a lot more fun than George Washington And Detroit isn't the only city sporting its own currency. Since the market tanked nearly 18 months ago, there's been an interest in local scrips not seen since the Great Depression. Residents in tiny North Fork, Calif., just launched the North Fork share, and folks in Piedmont, N.C., spend the newly issued the plenty, a currency depicting local flora and fauna like the ever-popular turkey vulture. Brooklyn, N.Y., is preparing to launch the torch, while South Bend, Ind., is set to print what it calls MACs.
'Either they can't read, they can't add or they can't comprehend' -Mayor Dave Bing today criticized leaders of the city's largest union for foot-dragging on contract negotiations, saying it's costing the financially strapped city $500,000 a month and could result in more layoffs. "Either they can't read, they can't add or they can't comprehend," Bing said at a press conference this morning in his office at City Hall. "It has to be one of the three. "Everyone is running with a deficit in their budgets. It's leadership or a lack of leadership that has got us to where we are." Bing said he's ready to impose a contract on the American Federation of State, County and Municipal Employees Council 25 but said the city must follow the law.
Mayor Bing's Plan To Shrink Detroit - Mayor Dave Bing said Wednesday he "absolutely" intends to relocate residents from desolate neighborhoods and is bracing for inevitable legal challenges when he unveils his downsizing plan. In his strongest statements about shrinking the city since taking office, Bing told WJR-760 AM the city is using internal and external data to decide "winners and losers." The city plans to save some neighborhoods and encourage residents to move from others, he said. "If we don't do it, you know this whole city is going to go down. I'm hopeful people will understand that," Bing said. "If we can incentivize some of those folks that are in those desolate areas, they can get a better situation."
Recession Swells Medicaid Rolls, Shrinks State Treasuries - Nearly every state is considering or already making cuts to its Medicaid program as the recession swells rolls for the state-run health insurance program for the poor, The New York Times reports. Because of requirements for getting stimulus money to support programs, the states are not allowed to curb enrollment, and are instead cutting optional benefits and reimbursement rates. Lower rates could drive more physicians and other providers away from the program, which already pays very low fees. In a few states, political leaders are pushing higher tobacco taxes or taxes on health providers as an alternative to cuts, but those are not popular either. Meanwhile, congressional Democrats have proposed adding 15 million people to the Medicaid programs as part of their health overhaul (Sack and Pear, 2/18). A new Kaiser Family Foundation report has found that between June 2008 and July 2009, Medicaid rolls grew by 3.3 million people, a 7.5 percent increase, USA Today reports. A graphic developed by that newspaper shows that enrollment increased in all 50 states, which has not happened in more than a decade. To deal with the growth, beginning in 2011, California, Arizona and Virginia reduce eligibility. Massachusetts and some other states would cut benefits like "restorative dental" care. Still other states would simply cut reimbursement rates for doctors, hospitals and nursing homes
Kaiser Permanente: Medicaid enrollment rising while states face fiscal challenges - As economic conditions deteriorated and unemployment rose from 5.5 percent in June 2008 to 9.5 percent in June 2009, national Medicaid enrollment grew at a rate not seen since the early days of program implementation in the late 1960s, according to a June 2009 data snapshot on Medicaid enrollment recently released from Oakland, Calif.-based Kaiser Permanente.According to Kaiser Permanente, monthly Medicaid enrollment in June 2009 rose by 3.29 million, a 7.5 percent increase over June 2008. The program expanded to cover 46.8 million Americans in June 2009, many of whom turned to Medicaid as their only source of health coverage as they lost jobs and income during the economic downturn, Kaiser Permanente stated."
Here Come the State Bailouts - $4.3 Billion here, $675 Million there… . Note how this bailout is being handed out, through Health and Human Services. So, is it a state bail out, or a Medicade bailout? If they were to give cash directly to the states it would add to our current account deficit - this likely is an attempt to side-step that. Watch the accounting and the money trail! Will this “debt forgiveness” simply be written off and not accounted for properly? By taking from money owed Medicare (an accounts receivable), this when properly accounted would put Medicare in an even deeper hole. Perhaps that hole is so deep that they don’t think anyone will notice? Where exactly in the rule of law does it allow for Medicare debt forgiveness? Is this not monetizing? This is not a little question or a minor detail, the rule of law and accounting standards need to be followed or confidence in the system will continue to deteriorate.
When States Become Dependent on Federal Aid - Last week, the Department of Health and Human Services gave another $4.3 billion to state governments “by reducing the amount they will have to pay the federal government to offset the cost of Medicare coverage for prescription drugs.”This style of transfer, where the federal government allocates unrestricted money to needy states by changing the health care reimbursement rules, has become a regular feature of this recession. Budget crises have made states dependent on federal largess, and the flow of money from Washington has given the feds more control over local spending. I’m not sure this shift of responsibility from state capitals to Washington is a good thing.
Is the U.S. Overweight on Health R&D? « Mandel on Innovation and Growth - When it comes to government spending on health R&D, the U.S. just blows away the rest of the world (those are the blue bars. The data is from 2008 for all the countries, except for 2006 for Korea and 2005 for the UK). But surprisingly, when it comes to government spending on nonhealth civilian R&D, the U.S. is actually lagging other major countries. It appears that to some degree, we have gambled our economy on the success of life sciences innovation. Note: This data comes from the OECD, so it’s slightly different than the U.S. budget data
Are We Overpaying Grandpa? - The elderly receive a large amount of government assistance – an amount that is not commensurate with their numbers. The total annual income in the United States (national income, as economists call it) is about $12.5 trillion, or about $40,000 per person per year. The egalitarian view of government is that it taxes persons with annual incomes more than $40,000, and pays benefits to persons with less than $40,000, so that those with less than average incomes could enjoy living standards closer to the average. For reasons that I began to explain last week, our government actually does the opposite. Combined, the public pension and public health programs are spending an average of $40,000 per elderly American per year.
Weekly Address: President Obama Says it is Time to Move Forward on Health Care Reform The other week, men and women across California opened up their mailboxes to find a letter from Anthem Blue Cross. The news inside was jaw-dropping. Anthem was alerting almost a million of its customers that it would be raising premiums by an average of 25 percent, with about a quarter of folks likely to see their rates go up by anywhere from 35 to 39 percent. Now, after their announcement stirred public outcry, Anthem agreed to delay their rate hike until May 1st while the situation is reviewed by the state of California. But it’s not just Californians who are being hit by rate hikes. In Kansas, one insurance company raised premiums by 10 to 20 percent only after asking to raise them by 20 to 30 percent. Last year, Michigan Blue Cross Blue Shield raised rates by 22 percent after asking to raise them by up to 56 percent. And in Maine, Anthem is asking to raise rates for some folks by about 23 percent.
Obama to Urge Oversight of Insurers’ Rate Increases - NYTimes - The president’s legislation aims to bridge differences between the bills adopted by the House and Senate late last year, and to frame his debate with Republicans over health policy at a televised meeting on Thursday. By focusing on the effort to tighten regulation of insurance costs, a new element not included in either the House or Senate bills, Mr. Obama is seizing on outrage over recent premium increases of up to 39 percent announced by Anthem Blue Cross of California and moving to portray the Democrats’ health overhaul as a way to protect Americans from profiteering insurers.
White House Unveils $950 Billion Health Bill To Bridge Differences Between House And Senate Legilsation - The Obama plan maintains key elements of the Senate proposal but also incorporates stronger anti-fraud provisions and allows the federal government to review insurance rate hikes. On a call with reporters Pfeiffer insisted that the administration has not determined “on which path to move forward with”, but the bill’s substance suggests that Obama is hoping to bypass a prolonged-Senate debate and use the reconciliation process to fix the Senate bill and convince reluctant House progressives to pass the Senate legislation. “The American people deserve up or down vote on health reform,”Pfeiffer said. “We can get an up or down vote if opposition decides to take extraordinary steps of filibustering health reforms.” But it’s unclear if progressive House members will embrace the new compromise. While the bill addresses House members’ affordability concerns, increases the excise tax thresholds and completely closes the donut hole in Medicare Part D, the legislation does not include a public option, retains the Senate bill’s state-based exchanges and keeps the start date for most reforms at 2014.
Putting Americans In Control of Their Health Care | The White House
Obama Health Care Plan is on the Web - It's alive update: Igor Volsky provides a good summary of the proposal As far as I can see the Snowe plan worst tax ever free rider provision to prevent employment of people who need jobs provision is included. I believe I am the first person to publicly object to this proposal when the gang of six said that they were considering it. Any company with 50 or more employees that does not offer coverage and whose employees access taxpayer supported health programs will be required to help offset the costs to the American taxpayer. There is a tax increase on the rich so that's something...
Obama Health Plan May Provide Roadmap for Passage by Democrats - (Bloomberg) -- White House officials signaled a willingness to push through President Barack Obama’s $950 billion health-care plan with only Democratic support, even with a bipartisan summit set to take place this week. Obama’s proposals to expand coverage to millions of uninsured Americans may qualify for a parliamentary maneuver that would allow Senate Democrats to circumvent Republican opposition and pass the measure with a simple majority, said lawmakers. Administration officials didn’t reject the idea. “The American people deserve an up-or-down vote on health reform, and this package is designed to provide us the flexibility to achieve that” should Republicans try to block the bill,
The Single-Payer Health Debate We Should Have Had - There’s been a bit of a debate going on in the blogosphere lately about whether the Democrats should have proposed a more limited health reform plan in the first place. Such a plan might have gotten some Republican support or at least led to less intense Republican opposition and both improved the health system and given the Democrats a badly needed victory. The plan they proposed instead was too big to pass, so the thinking goes. As a purely political matter, I think this analysis is wrong. The real problem, in my view, is not that the Democrats’ ambitions were too large, but rather that they were too small. In particular, I think they erred by not making the case for a single-payer system in the first place. Had they done so, the plan they eventually developed would have appeared to have been a modest alternative. I say this not because I favor a single-payer health system. Rather, it’s because I understand political dynamics—you often have to ask for twice what you want in politics in order to end up with half of what you need at the end of the day.
The Democratic plan: Finish this bill - There's not a lot of policy news in the president's new health-care plan. The changes are pretty much what we expected: more money going to subsidies (which are now being referred to as "the largest middle class tax cut for health care in history"), an excise tax that kicks in later and affects fewer plans, a new Health Insurance Rate Authority to oversee premium increases and reject them if they're unfair, the elimination of the Nebraska deal, and so on. There's no public option, nor any significant retrenchment. In fact, the cost of the bill has increased by $75 billion, the result of more generous subsidies. But if the changes to the underlying policies are modest, the impact on the politics will be tremendous.
Yglesias: You Can’t Create Jobs by “Focusing” on the Economy - Are there any centrist Democrats or moderate Republicans who are going to claim that had Obama backed off on health care they would have voted for substantial additional short-term stimulus measures? Do any sources at the Federal Reserve think that had Obama not attempted health reform that Ben Bernanke would have implemented a more expansionary agenda? As far as I know, the answer to both of those questions is “no” so nothing was actually traded off when Obama decided to focus on health care. But even though everyone in the media is very interested in second-guessing Obama these days, nobody seems interested in looking in to these issues.
Price controls for insurance companies - I'm confused by the recent discussions emanating from the Obama administration. If something like the current proposals pass, and those proposals "work," low-risk individuals end up subsidizing the health care of high-risk individuals. Prices for insurance won't need to go up at outrageous rates, or so we are told. If current proposals fail to pass, insurance companies can still just dump people. Forcing them to lower their prices will induce them to dump even more people and to have a tighter definition of preexisting conditions.It seems to me this announcement is either just headline-seeking or an admission that, after the plan is passed, premia will continue to rise at high rates. The latter case runs contrary to the narrative of how the plan will contain "the health insurance death spiral of the status quo."
How Not to Stop Healthcare Inflation - The NY Times reports: President Obama will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system, White House officials said Sunday. Very, very strange. You would think that all those future Nobel-prize-winning economists working for the President would explain to him the history and economics of government price controls. Imposing price controls certainly wasn't President Nixon's finest hour. Maybe President Obama should instead follow in President Ford's footsteps and start wearing a WHINE button on his lapel, for Whip Healthcare Inflation Now, Egads! Feckless would be one step better than counterproductive.
Health Care Price Controls - Greg Mankiw mocks Team Obama’s endorsement of price controls on health care. Its not immediately clear to me that this isn’t a viable strategy, however. If you believe that a large portion of the health care industry is rent dissipating then putting clamps on it might not be such a bad idea. That is, we spend lots of money on health care because we want to buy “the best care available” regardless of what that care is. However, this just encourages the creation of new therapies that we now have to buy in order to have “the best care available.” Here is a though experiment that helps illustrate:
Reform And Premiums, Explained - So the big factual debate in the health summit was over whether insurance premiums would rise or fall under the Democratic plan. The answer is that they would fall — but Republicans successfully threw up dust by pointing to the CBO conclusion that average payments to insurance companies would rise. Actually, this excellent post by Catherine Rampell offers some helpful ways to think about it. The first question is, who are the uninsured? As Rampell points out, they’re generally young people, who are healthier than average. What health reform would do is bring these people into the risk pool, so that the average insured American would be healthier and hence have lower costs than the average now. This is what would bring premiums down.
Financing Healthcare Reform - Today's Washington Post reports:Obama's proposal takes the more modest Senate bill as his basic framework. But, in what is perhaps his proposal's most notable feature, he scales back the Senate bill's main revenue source, a tax on high-cost insurance that he has strongly supported. Instead, he would impose a new tax on the unearned income of the wealthy. In my view, this is a step in the wrong direction. The tax on so-called Cadillac health plans made sense as a way to reduce the existing tax incentive toward excessively generous health insurance, which in turn encouraged excessive use of healthcare. That reform is, apparently, now gone. Instead, the current administration proposal is to increase the tax on capital income, reducing the incentive for saving and investment.
REPORT: WellPoint Raising Premium Rates By Double Digits In At Least 11 States - If Democrats move to pass health care reform after tomorrow’s summit, their newfound momentum can be at least partly attributed to WellPoint’s decision to drastically increase premiums in California’s individual health insurance market. The rate increases highlighted the broken health care system and pressured lawmakers to drastically reform the individual health insurance market. The administration’s strong response also enunciated the differences in lawmakers’ approach to reform and may have pushed the President to add stronger cost control provisions into his health care blue-print. WellPoint’s hikes created a political opportunity for reform, but California policy holders aren’t the only ones experiencing drastic rate increases. A new survey from the Center for American Progress Action Fund has found that “double-digit hikes have been implemented or are pending in at least 11 other states among the 14 where WellPoint’s Blue Cross Blue Shield companies are active
Blue Cross parent hiked rates after paying out $39 million in bonuses - California's Anthem Blue Cross justified its whopping 39 percent insurance premium hike by citing rising medical costs. But, it turns out, its parent company Wellpoint, Inc. has been spending tens of millions on large executive bonuses and fancy retreats.According to congressional investigators, Wellpoint dished out over $1 million in bonuses to each of 39 executives, and spent at least $27 million on 103 lavish company trips, McClatchy reports.The revelation throws something of a wrench into the claim by WellPoint's president and chief executive officer Angela Braly that the rake hikes were an effort to remain financially solvent, which she said before the House committee.
Bust the Health Care Trusts - NYTimes - Rates are soaring all over the country. Insurers have been seeking to raise premiums 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon and a wallet-popping 56 percent in Michigan. How can insurers raise prices as much as they want without fear of losing customers? Astonishingly, the health insurance industry is exempt from federal antitrust laws, which is why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go. But that protection could soon end: President Obama on Tuesday announced his support of a House bill that would repeal health insurers’ antitrust exemption, and Speaker Nancy Pelosi signaled that she would put it toward an immediate vote.
The Elephant at the Health Care Summit - This week will determine the shape of American politics for the next three years.No, that’s not one of those journalistic exaggerations intended to catch your attention, although I hope it did. It’s an accurate description of the stakes at the health care summit President Barack Obama has called for Thursday.The issue is whether the summit proves to be the turning point in a political year that, at the moment, is moving decisively in the Republicans’ direction. If the summit fails to shake things up and does not lead to the passage of a comprehensive health care bill, Democrats and Obama are in for a miserable time for the rest of his term. Republicans know this and are doing all they can to undermine, discount, discredit and back away from the encounter.
Health Care Reform: The Obama Compromise Proposal and the Likely Republican Response – Thoma - A key question, one that is receiving considerable attention, is what will be in the health care bill once it emerges from Congress. Health care reform bills have already passed the House and the Senate, but there are differences between the bills that must be resolved before the process can move forward. Finding a compromise bill that is acceptable in both the House and the Senate has proved to be a daunting task. A very nice visual side by side presentation of the House bill, the Senate bill, and the Obama proposal to bring the two sides together can be found here (the main summary table is repeated at the end of this post). The main features of the Obama proposal are a requirement that individuals purchase insurance or pay a fee, a requirement that large employers offer insurance or pay a fee, a combination of excise and payroll taxes to finance the reform effort, and measures to improve affordability for low income households.The Obama proposal is closer to the Senate bill than the House version, but as noted in the discussion accompanying the side-by-side comparison, it’s unclear whether House members will be willing to accept the compromise position the administration has proposed
Just trust them, right? - This is an amazing back-and-forth from yesterday's White House press briefing. They are doing this on the fly, folks. They are governing based on public opinion polls and the 24 hour news cycle. (Yeah, I know... this administration is not the first, but they are getting better with experience.) Anyway, just read this. Notice that Secretary Gibbs has no clue how to explain this. Obviously he was badly prepped. After reading this, and even after reading the NY Times article, I am left wondering what this would really do. Is this just a device to strong-arm the states or would it have real power? Have they even worked that out yet? It's not clear to me. What is clear to me is that it could put a lot of power to influence price and quality into a politically appointed panel being run out of a cabinet office. What could go wrong?
Read His Lips: Obama Calls for Increasing Payroll Taxes on ‘Households’ Earning Less Than $250,000 Per Year - President Obama presented a new health care plan on Monday that calls for raising the Medicare payroll tax on some households earning less than $250,000, an apparent breach of his campaign pledge not to raise taxes on families earning less than that amount. The president’s plan also calls for increasing taxes on interest, dividends, annuities, royalties and rents... the new health care plan released in summary form yesterday by the White House specifically calls for increasing the Medicare payroll tax on “households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly.”
Democrats looking beyond health-care summit to final talks within party - Although Obama is billing the White House gathering as an opportunity for Republicans to air their ideas for reform, Democrats do not expect it to reveal much common ground and are showing little willingness to abandon the basic outline of legislation that the House and Senate have approved. Democrats hope that after Thursday's meeting, Obama will bring a more forceful approach to his role as lead negotiator on health-care reform. To the frustration of many on Capitol Hill, the president has dipped in and out of the debate throughout the past year, offering broad objectives and cutting deals here and there with individual lawmakers but seldom putting the weight of his office behind demands for specific provisions in legislation.
Health Care Summit Pre-Mortem - Mark Thoma writes, As the graph shows, the aging of baby boomers is not the main factor in the growth in health care costs, the effect of the demographic change due to aging baby boomers is minor relative to overall cost growth. That is because the graph goes to 2080. Certainly in the second half of the 21st century, the increasing share of health spending relative to GDP is a much bigger problem for Medicare than is the aging population (at least under standard projections). But that talking point is misleading. My counter-talking-point is that the second half of the 21st century is not relevant. We cannot make it to 2030, much less 2080, if we stay on our current course for Medicare and Social Security. That is because between now and 2030, the number of people aged 65 and over will double. Even if health care spending per capita stayed even with GDP, we would have to cut benefits nearly in half just to keep the Medicare budget under control.
Health Care Summit "Mid-Mortem" I've been watching the health care summit on C-SPAN and I followed the live blogging on Cato's site done by Arnold Kling and others. Obama confused the idea of insurance pooling. He said that the purpose of insurance pooling is to put low-risk and high-risk people together. It's not. The purpose is to pool like risks. The Republicans have not handled THE tough problem. By agreeing that insurance companies should not be able to price based on pre-existing conditions, they have backed themselves into a regulatory corner. Although Obama tends to be dismissive of Joe Biden, and he did it again at about the 12:50 point, Biden nailed it. If we agree, he said, that insurance companies shouldn't be allowed to "discriminate" based on pre-existing conditions, that's not a small agreement, that's a big one.
Health Care Summit Post-Mortem - I thought that President Obama did well to convey a willingness to negotiate. If I were the Republicans, I would move off the "scrap the bill" talking point and instead go with something like this. We have some areas where we agree, some areas where we might negotiate, and some areas where we can never agree. That suggests a three track approach. Fast track. For issues such as ending waste, fraud, and abuse in Medicare, we should aim to pass a bill within thirty days that contains all of the ideas on which we agree. . Negotiation track. These would be issues where compromise is possible. Gridlock track. Issues like public funding of abortion or malpractice reform probably go here.
Health Care Summit Squabbles | FactCheck.org - This marathon discussion had no shortage of factual malpractice - We tuned in to watch the president’s health care summit at Blair House today — all six-plus hours of it. And we weren’t surprised to hear some factual missteps in the discussion:
Doctors' Group: Obama Plan Leaves Millions Uninsured, Boosts Private Insurers - President Obama's health care proposal, preserving as it does a central role for the for-profit, private health insurance industry, is incapable of achieving the kind of universal, comprehensive and affordable reform the country needs, a spokesman for a national doctors' group said Wednesday. "Regrettably, the president's proposal is built on some of the worst aspects of the Senate bill," said Dr. Quentin Young, national coordinator of Physicians for a National Health Program, an organization of 17,000 doctors who support single-payer, Medicare-for-All approach to reform. Young's statement comes on the eve of the president's bipartisan summit in Washington. "For example, the president's proposal would ship hundreds of billions of taxpayer dollars to the private health insurance industry in the form of subsidies," Young said. "And to help finance this, it would impose a new tax on health benefits of workers, especially those in high-cost states.
There's no plan B for health-care reform: The Wall Street Journal has a splashy piece this evening on the White House's plan B for health-care reform: a fallback approach that would cover 15 million people, do less to reform the system and cut costs, and carry a lower price tag. Call it health-care lite. I could quote some White House sources swearing up and down that that's being blown out of proportion by a conservative paper interested in an agenda-setting story. They're furious over this story.... There's no Plan B at this point in the game, and most everyone knows it. Think about what's entailed in restarting the process. The Senate Finance Committee and the Health, Education, Labor, and Pensions Committee would have to build new bills. The House Energy and Commerce Committee, Education and Labor Committee, and Ways and Means Committee would need to write new legislation. All of those proposals would need to be merged. There would need to be discussions in committees, and then weeks and weeks on the floor. Then there would need to be conference. Then they'd have to come back to the floor
Robert Reich: It's Time To Enact Health Care With 51 Senate Votes - Why haven’t the President and Senate Dems pulled the reconciliation trigger before now? Here are the theories. None of them justifies waiting any longer. Reconciliation is too extreme a measure to use on a piece of legislation so important. I hear this a lot but it’s bunk. Use of reconciliation would infuriate Senate Republicans. It may. So what? They haven’t given Obama a single vote. Reid fears he can’t even get 51 votes in the Senate now, after Scott Brown’s win. Reid counts noses better than I do, but if Senate Dems can’t come up with even 51 votes for the healthcare reforms they enacted weeks ago they give new definition to the term “spineless.” House and Senate Dems are telling Obama they don’t want to take another vote on health care or even enact it before November’s midterms because they’re afraid it will jeopardize their chances of being reelected and may threaten their control over the House and Senate.
Health Care Summit Will Probably Avoid Tax Talk - Three health care experts summarize the opposition to President Obama's plan and the best alternative in today's Wall Street Journal. They conclude: Despite the claims of some partisans to the contrary, the president's plan is failing because it does not speak to the concerns of the majority of Americans. Instead of addressing the high and rising costs of care, it proposes mandates, invasive regulation, and unaffordable new entitlements. This will not bring health-care costs down-it will only make this problem worse. Even these conservative experts spend little time on taxes, and neither do opposing liberal commentators (who sound a little panicky about the rumored White House Plan B, an appealingly incremental bill that would replace the massive overhaul if it fails again). President Obama and even Republican leaders will probably spend little of their TV summit time talking about the complex new taxes that the Obama plan includes. Howard Gleckman has a good post in the Christian Science Monitor.
"A Better Way to Reform Healthcare": Heed Milton Friedman - One of Cogan, Hubbard, and Kessler's primary suggestions to control costs is to get rid of the tax-preferred status of paying people in health insurance dollars. We work and get paid partially in health care premiums because typical money wages are taxed and health care premiums are not. When someone decides whether to go to the doctor, he compares the value the office visit gives him to his co-payment. It doesn't matter whether the overall cost of the doctor's visit is $100, $1000, or $10,000. As long as the person's value of the visit to the doctor is more than the co-pay, he goes. "Other people" pay the balance. Taken society-wide, we probably tend to go more often than we otherwise would, putting more pressure on health care resources and pushing up costs more than is optimal. The tax-preferred status of health care premiums have the effect of raising the demand for health care (assuming health care is a normal good). Eliminating the tax-preferred status of health insurance premiums would be a useful way to bring these costs under control.
Zombie economics gets a mulligan: or, how Obamacare caused the Global Financial Crisis - I’m adding a little section to each of the chapters in my Zombie Economics book called “Reanimation”, about the attempts that are already under way to revive economic ideas killed by the global crisis. I wasn’t surprised to find plenty of examples for the efficient markets hypothesis or for policy ideas that yield big benefits to the rich and powerful, such as privatisation and trickle-down economics. But I was surprised a little while ago to see the crisis described as a transitory blip in the continuing Great Moderation. Still that pales into insignificance compared to this piece by Casey Mulligan of Chicago, in which (I swear this is true!) the crisis is the result of financial markets correctly anticipating the adverse labour market impacts of possible legislation under Obama, such as a health plan that might include means tests.
Did Woodstock hippies lead to US financial collapse? - A new film is gaining traction among tea-party followers for suggesting that the collapse of the US financial system has roots dating back 40 years to the Summer of Love. “Generation Zero,” a film set to premiere in March, examines what producer David Bossie says is a “historic perspective on a generational change” that led to the September 2008 bank collapse. Mr. Bossie says generational narcissism, as represented by the 1969 Woodstock Festival, is responsible for the excessive spending, mortgage crisis, and recklessness on Wall Street. Citizens United, Bossie’s company, is no stranger to controversial topics that take aim at liberals or their causes. The company was at the center of a recent US Supreme Court case involving “Hillary: The Movie”... The film, which features commentary from conservative pundits such as Charles Krauthammer, Newt Gingrich, and Dick Morris, offers no concluding message other than a plea to control government spending.
Ezra Klein: Selling insurance across state lines: A terrible, no good, very bad health-care idea - Insurance is currently regulated by states. California, for instance, says all insurers have to cover treatments for lead poisoning, while other states let insurers decide whether to cover lead poisoning, and leaves lead poisoning coverage -- or its absence -- as a surprise for customers who find that they have lead poisoning. Here's a list (pdf) of which states mandate which treatments.The result of this is that an Alabama plan can't be sold in, say, Oregon, because the Alabama plan doesn't conform to Oregon's regulations. A lot of liberals want that to change: It makes more sense, they say, for insurance to be regulated by the federal government. That way the product is standard across all the states. Conservatives want the opposite: They want insurers to be able to cluster in one state, follow that state's regulations and sell the product to everyone in the country. In practice, that means we will have a single national insurance standard. But that standard will be decided by South Dakota. Or, if South Dakota doesn't give the insurers the freedom they want, it'll be decided by Wyoming. Or whoever.
Andrew Leonard: South Dakota's healthcare lesson: Allowing insurance providers to sell across state lines guarantees a bad result, for the consumer - According to the recollection of South Dakota's governor, Bill Janklow, after the bank convinced him a change in the laws would bring jobs to the state, Citibank drafted a law revoking usury limits and the legislature passed it in within 24 hours. Citibank promptly relocated its credit card business. The move set off a chain reaction, as other states strove to duplicate South Dakota's success by promptly getting rid of their own usury laws. The same kind of chain reaction, argues Klein, would take place if Congress allowed health insurers to sell across state lines. Insurers would cluster in states with minimal regulation and with predictable results, according to an analysis conducted by the Congressional Budget Office in 2005.
Maggie Maher: In Massachusetts Elite Providers Drive Health Care Spending; What Does This Say about the Dartmouth Research? Massachusetts Attorney General Martha Coakely has just released a report which reveals that the state’s health care costs are spiraling in large part because he state’s primo hospitals and physician groups --those with brand name recognition-- -are demanding exorbitant reimbursements from insurers. Providers who control the market in geographically isolated areas also are insisting on reimbursements that far exceed what other providers receive for the same services.. http://www.mass.gov/Cago/docs/healthcare/Investigation_HCCT&CD.pdf These providers have market leverage. Patients want both marquee names and providers close to home in their insurers’ network. If these providers are not included, customers will switch to a different insurance plan. Thus, insurance companies have no choice but to pay what the providers demand.
Rising Threat of Infections Unfazed by Antibiotics - Not until the day Mr. Armbruster died did a laboratory culture identify the organism that had infected him: Acinetobacter baumannii. The germ is one of a category of bacteria that by some estimates are already killing tens of thousands of hospital patients each year. While the organisms do not receive as much attention as the one known as MRSA — for methicillin-resistant Staphylococcus aureus — some infectious-disease specialists say they could emerge as a bigger threat. That is because there are several drugs, including some approved in the last few years, that can treat MRSA. But for a combination of business reasons and scientific challenges, the pharmaceuticals industry is pursuing very few drugs for Acinetobacter and other organisms of its type, known as Gram-negative bacteria. Meanwhile, the germs are evolving and becoming ever more immune to existing antibiotics.
Deadly Germs Largely Ignored By Drug Firms - Gram-negative bacteria are practically built to withstand drugs, which is one reason few drug makers have rushed to pursue treatments. The bacteria have a double cell membrane to shield them, compared with Gram-positive organisms, which have a single membrane. They can make various enzymes that break down antibiotics. And some, particularly Pseudomonas aeruginosa, have powerful pumps that can expel the drugs. The bacteria also readily exchange genes, even across different species, that confer drug resistance. It is likely to be several years before new drugs to treat Gram-negative infections are available. A report last September by European health authorities found only six novel drugs in clinical trials that might work against at least one Gram-negative organism, compared with 13 for Gram-positive bacteria.
US scientists warn of fraud of stem cell ‘banks’ - Clinics in many countries allow parents to deposit stem cells from their neonate's umbilical cord with a view to using the cells to cure major illnesses that could occur later in life. In Thailand, for example, parents pay in the region of 3,600 dollars to make a deposit in a stem cell bank, thinking they are taking out a sort of health insurance for their child. But Irving Weissman, director of the Institute of Stem Cell Biology and Regenerative Medicine at Stanford University in California, said the well-meaning parents were being fleeced by the stem cell bankers."Umbilical cords contain blood-forming stem cells at a level that would maintain the blood-forming capacity of a very young child," Weissman told reporters at the annual meeting of the American Association for the Advancement of Science (AAAS). "They could also have derived mesenchymal cells -- fiberglass-like cells that have a very limited capacity to make scar, bone, fat -- but they don't make brain, they don't make blood, they don't make heart, they don't make skeletal muscle, despite what various people claim," he said.
Do Toxins Cause Autism? - NYTimes - An article in a forthcoming issue of a peer-reviewed medical journal, Current Opinion in Pediatrics, just posted online, cites “historically important, proof-of-concept studies that specifically link autism to environmental exposures experienced prenatally.” It adds that the “likelihood is high” that many chemicals “have potential to cause injury to the developing brain and to produce neurodevelopmental disorders.” The author is not a granola-munching crank but Dr. Philip J. Landrigan, professor of pediatrics at the Mount Sinai School of Medicine in New York and chairman of the school’s department of preventive medicine. While his article is full of cautionary language, Dr. Landrigan told me that he is increasingly confident that autism and other ailments are, in part, the result of the impact of environmental chemicals on the brain as it is being formed.
Monsanto 'faked' data for approvals claims its ex-chief: India Today - Jagadisan, who worked with Monsanto for nearly two decades, including eight years as the managing director of India operations, spoke against the new variety during the public consultation held in Bangalore on Saturday. On Monday, he elaborated by saying the company "used to fake scientific data" submitted to government regulatory agencies to get commercial approvals for its products in India. The former Monsanto boss said government regulatory agencies with which the company used to deal with in the 1980s simply depended on data supplied by the company while giving approvals to herbicides. "The Central Insecticide Board was supposed to give these approvals based on the location and crop-specific data from India. But it simply accepted foreign data supplied by Monsanto. They did not even have a test tube to validate the data and, at times, the data itself was faked," Jagadisan said.
'The Soil is Bleeding': New research from Univ. Illinois: synthetic nitrogen destroys soil carbon, undermines soil health - The case for synthetic N as a climate stabilizer goes like this. Dousing farm fields with synthetic nitrogen makes plants grow bigger and faster. As plants grow, they pull carbon dioxide from the air. Some of the plant is harvested as crop, but the rest—the residue—stays in the field and ultimately becomes soil. In this way, some of the carbon gobbled up by those N-enhanced plants stays in the ground and out of the atmosphere. Well, that logic has come under fierce challenge from a team of University of Illinois researchers...In two recent papers (see here and here) the trio argues that the net effect of synthetic nitrogen use is to reduce soil’s organic matter content. Why? Because, they posit, nitrogen fertilizer stimulates soil microbes, which feast on organic matter. Over time, the impact of this enhanced microbial appetite outweighs the benefits of more crop residues.
Debunking Lomborg, the Climate-Change Skeptic - Newsweek - The Danish political scientist won fame and fans by arguing that many of the alarms sounded by environmental activists and scientists—that species are going extinct at a dangerous rate, that forests are disappearing, that climate change could be catastrophic—are bogus. A big reason Lomborg was taken seriously is that both of his books, The Skeptical Environmentalist (in 2001) and Cool It (in 2007), have extensive references, giving a seemingly authoritative source for every one of his controversial assertions. So in a display of altruistic masochism that we should all be grateful for (just as we're grateful that some people are willing to be dairy farmers), author Howard Friel has checked every single citation in Cool It. The result is The Lomborg Deception, which is being published by Yale University Press next month. It reveals that Lomborg's work is "a mirage," writes biologist Thomas Lovejoy</A%
A new approach to tackling climate change - FT - First, while the Kyoto protocol had obfuscated the distinction, it is now customary for negotiators to distinguish between commitments arising from the “stock” and “flow” aspects of climate change. The former relates to commitments arising from historical carbon emissions; the latter to current emissions. But, though the language of “legally binding” commitments is routinely used, there is no process by which anyone’s feet can be held to the fire if the delivery falls short. With the new protocol we need to draw on the example of the WTO. There, failure to deliver on accepted trade-openness obligations can be challenged and a dispute settlement process exists where an adverse finding leads to penalties. A climate change protocol where the commitments on stock or flow aspects are mere declarations with no consequences would lead to a charade and breed cynicism, not produce action.
China says no emissions cap for now - China's top climate change negotiator has said the world's biggest carbon polluter has no intention of capping greenhouse gas emissions for the time being, state media reported Thursday. Su Wei, who led China's negotiating team at the UN climate change talks in Copenhagen in December, said the country's carbon emissions had to increase because the economy was still developing, the China Daily said.China "could not and should not" set an upper limit on greenhouse gas emissions at the current stage, Su told a meeting on climate change policy in Beijing on Wednesday. However, he said China was committed to making its economy more energy-efficient.
Stewart Brand’s ‘Ecopragmatism’ - In the 1960s, Stewart Brand became one of the country’s first and most famous champions of a new ecological awareness. His Whole Earth Catalog spoke to a generation of hippies and back-to-nature commune dwellers.Now, at 70, Stewart Brand is calling on environmentalists to reframe their understanding of the problem — and solutions. It’s too late for back-to-nature, he says. Global warming is beyond that. To survive now, Brand says, we need nuclear power, genetic engineering, giant cities. We must manage nature or lose civilization. This hour, On Point: In the face of global warming, Stewart Brand redefines green..
George Will: Time For Some Significant Fact-Checking - A year ago this month, George Will wrote a howler of a column in the Washington Post about global warming, loaded with scientific errors and profoundly illogical arguments. It would not have survived even the most perfunctory fact-checking–despite claims from the Washington Post that his columns go through a “multi-layered fact checking process.” In subsequent months, Will has continued to offer new climate howlers, and this Sunday he provided us all with a dubious one-year birthday gift. In Will’s latest piece, he yet again declares global warming a construction of hysterical climate scientists who, in his words, “compound their delusions of intellectual adequacy with messiah complexes.” This time, he claims that climate scientists themselves are finally confessing that it’s all been a whole lot of hooey.
Washington Post Spreads Misinformation About Climate Change Regulations - It is not the job of reporters to just report what partisans to debates say about events. When one party says something that is not true, the news is that this person is lying, not their lie. Therefore when the Post told readers that Michael Morris, the chief executive of American Electric Power said of cap and dividend rules "would take money from 'mom in the Midwest and dividend it to Paris Hilton'" it was not engaged in serious reporting. The bills being considered would tax carbon emissions and dividend them to low and moderate income families so that they are largely protected from price increases. Unless Paris Hilton loses her inherited wealth, she would not be a recipient of this money.
Michael Mann responds to the “false and misleading claims” in the error-riddled, defamatory WSJ piece by Jeffrey Ball and Keith Johnson - I’d like your help debunking this atrocious piece of media misreporting, “Push to Oversimplify at Climate Panel.” Yes, the WSJ piece wins the prize for the most unintentionally ironic headline since it is the media’s self-destructive push to oversimplify that has led to repeated libeling of Michael Mann and other climate scientists (see “Newsweek staff who play fast and loose with the facts are imperiling not just their profession but the planet” and “Abandoning all journalistic standards, CBS libels Michael Mann based on a YouTube video — while reporting his exoneration!” I am running a full response by Dr. Mann below. It seems the least I can do in response to the umpteenth false attack on his reputation. It simply boggles the mind — and raises serious questions of journalistic bias for the paper — that the WSJ can run this error-riddled attack on Mann.
Belief In Climate Change Hinges On Worldview - NPR - Over the past few months, polls show that fewer Americans say they believe humans are making the planet dangerously warmer, despite a raft of scientific reports that say otherwise. To social scientist and lawyer Don Braman, it's not surprising that two people can disagree so strongly over science. Braman is on the faculty at George Washington University and part of The Cultural Cognition Project, a group of scholars who study how cultural values shape public perceptions and policy beliefs. "People tend to conform their factual beliefs to ones that are consistent with their cultural outlook, their world view," Braman says. The Cultural Cognition Project has conducted several experiments to back that up...
Mountain Pine Beetle, British Columbia: A Climate Catastrophe... Unfortunately, this video speaks very well for itself. I have to wonder what is going on in Nebraska, North Dakota, Idaho, Washington. I saw very unhealthy stands in the Wisconsin Dells last August. I was pretty shocked.
Climate-Change Group IPCC Moves to Fix Crisis Damage - WSJ - In the next few days, the world's leading authority on global warming plans to roll out a strategy to tackle a tough problem: restoring its own bruised reputation. A months-long crisis at the Intergovernmental Panel on Climate Change has upended the world's perception of global warming, after hacked emails and other disclosures revealed deep divisions among scientists working with the United Nation-sponsored group. That has raised questions about the panel's objectivity in assessing one of today's most hotly debated scientific fields. The problem stems from the IPCC's thorny mission: Take sophisticated and sometimes inconclusive science, and boil it down to usable advice for lawmakers. To meet that goal, scientists working with the IPCC say they sometimes faced institutional bias toward oversimplification, a Wall Street Journal examination shows.
Can we trust the IPCC on the big stuff? - EVER since the Intergovernmental Panel on Climate Change's 2007 report on the impacts of climate change was discovered to contain a major error - that the Himalayan glaciers will be largely gone by 2035 - there has been a media feeding frenzy to find other mistakes. But it misses the point to focus on individual errors sprinkled through the report's 1000 or so pages (see "Digging devils from the details"). How solid are its headline findings? In this special investigation, New Scientist takes a closer look at these headline forecasts. Our aim is not to uncover a new scandal buried deep in the report. Rather, we explore how conclusions that the IPCC itself regards as key findings reached the top of the heap, and whether the science behind them stands up to scrutiny.
Emissions vows not enough to avoid 2 deg C rise: UN - (Reuters) – Emission cuts pledges made by 60 countries will not be enough to keep the average global temperature rise at 2 degrees Celsius or less, modeling released on Tuesday by the United Nations says. Scientists say temperatures should be limited to a rise of no more than 2 degrees Celsius (3.6 F) above pre-industrial times if devastating climate change is to be avoided. Yearly greenhouse gas emissions should not be more than 40 and 48.3 gigatonnes of CO2-equivalent in 2020 and should peak between 2015 and 2021, according to new modeling released on Tuesday by the United Nations Environment Programme (UNEP). Keeping within that range and cutting global emissions by between 48 percent and 72 percent between 2020 and 2050 will give the planet a "medium" or 50-50 chance of staying within the 2 degree limit, said the report, which was based on modeling by nine research centres.
Misinterpreting a retraction of rising sea level predictions - A new skeptic argument has emerged that upon close inspection, is a polar opposite to the scientific reality. This week, scientists who published a 2009 paper on sea level rise retracted their prediction due to errors in their methodology. This has led some to claim sea levels are no longer predicted to rise. This interpretation was helped no doubt by the unfortunate Guardian headline "Climate scientists withdraw journal claims of rising sea levels". However, when you read the article and peruse the peer-reviewed science on future sea level, you learn that the opposite is the case.The IPCC 4th Assessment Report predicted sea level will rise between 18 to 59 cm by the year 2100. Many consider this a conservative estimate as observed sea level rise is tracking at the top range of IPCC estimates (Rahmstorf 2007, Allison 2009). However, a study led by Mark Siddall examined how sea levels have changed over the past 22,000 years in response to temperature change (Siddall 2009). This enabled them to predict how sea level would respond to future warming, estimating sea level rise between 7 to 82 cm by the year 2100. Siddall's paper concluded that this increased confidence in the IPCC projections.
Team finds subtropical waters flushing through Greenland fjord -- Waters from warmer latitudes -- or subtropical waters -- are reaching Greenland's glaciers, driving melting and likely triggering an acceleration of ice loss, reports a team of researchers led by Fiamma Straneo, a physical oceanographer from the Woods Hole Oceanographic Institution (WHOI)."This is the first time we've seen waters this warm in any of the fjords in Greenland," says Straneo. "The subtropical waters are flowing through the fjord very quickly, so they can transport heat and drive melting at the end of the glacier." Greenland's ice sheet, which is two-miles thick and covers an area about the size of Mexico, has lost mass at an accelerated rate over the last decade. The ice sheet's contribution to sea level rise during that time frame doubled due to increased melting and, to a greater extent, the widespread acceleration of outlet glaciers around Greenland.
Giant iceberg breaks off from Antarctic glacier (Reuters) - An iceberg the size of Luxembourg has broken off from a glacier in Antarctica after being rammed by another giant iceberg, scientists said on Friday, in an event that could affect ocean circulation patterns. The 2,500 sq km (965 sq mile) iceberg broke off earlier this month from the Mertz Glacier's 160 km (100 miles) floating tongue of ice that sticks out into the Southern Ocean. The collision has since halved the size of the tongue that drains ice from the vast East Antarctic ice sheet
Two huge icebergs let loose off Antarctica’s coast - An iceberg about the size of Luxembourg that struck a glacier off Antarctica and dislodged another massive block of ice could lower the levels of oxygen in the world's oceans, Australian and French scientists said Friday. The two icebergs are now drifting together about 62 to 93 miles (100 to 150 kilometers) off Antarctica following the collision on Feb. 12 or 13, said Australian Antarctic Division glaciologist Neal Young. "It gave it a pretty big nudge," Young said of the 60-mile (97-kilometer) -long iceberg that collided with the giant floating Mertz Glacier and shaved off a new iceberg. "They are now floating right next to each other." The new iceberg is 48 miles (78 kilometers) long and about 24 miles (39 kilometers) wide and holds roughly the equivalent of a fifth of the world's annual total water usage, Young told The Associated Press. Experts are concerned about the effect of the massive displacement of ice on the ice-free water next to the glacier, which is important for ocean currents.
Mammoth iceberg could alter ocean circulation: study - An iceberg the size of Luxembourg knocked loose from the Antarctic continent earlier this month could disrupt the ocean currents driving weather patterns around the globe, researchers said Thursday. While the impact would not be felt for decades or longer, a slowdown in the production of colder, dense water could result in less temperate winters in the north Atlantic, they said. The 2550 square-kilometre (985 square-mile) block broke off on February 12 or 13 from the Mertz Glacier Tongue, a 160-kilometer spit of floating ice protruding into the Southern Ocean from East Antarctica due south of Melbourne, researchers said. Some 400 metres (1300 feet) thick, the iceberg could fill Sydney Harbour more than 100 times over.
E.P.A. Plans to Phase in Regulation of Emissions - NYTimes. - The E.P.A.’s administrator, Lisa P. Jackson, wrote in a letter to eight coal-state Democrats who have sought a moratorium on regulation that only the biggest sources of greenhouse gases would be subjected to limits before 2013. Smaller ones would not be regulated before 2016, she said.“I share your goals of ensuring economic recovery at this critical time and of addressing greenhouse gas emissions in sensible ways that are consistent with the call for comprehensive energy and climate legislation,” Ms. Jackson wrote.The eight Democratic senators, led by John D. Rockefeller IV of West Virginia, said hugely significant decisions about energy, the economy and the environment should be made by elected representatives, not by federal bureaucrats.
Is the Environmental Protection Agency under-pricing carbon? - Buried in the 336-page EPA proposal is a short section on the “social cost of carbon” – the dollar value of all damages caused by emitting one ton of CO2. There is, of course, no such number. Many damages to human life and nature are priceless, as I’ve argued elsewhere. In a cost-benefit analysis, however, the price tag attached to damages is all that matters. The higher the price, the more it’s worth doing to avoid them. That’s why the strength of US climate policy may depend on EPA’s social cost of carbon. Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you’d start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.
Will The EPA Drop The Ball On Regulating Carbon Emissions? - Mark Thoma at economists view links to a set of comments by Frank Ackerman on proposed regulations by the EPA to limit carbon emissions. Central to those regs are estimates of the social costs of carbon emissions, and Ackerman accurately points out that EPA economists seem to be leaning to pricing those costs at around $5-6 a ton, which would translate into about a nickel for a gallon of gas, pretty inconsequential. It would appear that these low numbers are due to their only looking at peer-reviewed articles for sources and thus not the Stern Report, using Nordhaus's old DICE model, using ridiculously high discount rates of around 3-5%, and all but ignoring the problem of catastrophic risk of runaway warming as argued by Martin Weitzman. This becomes unpleasantly important as it seems increasingly unlikely that the Senate will pass any sort of cap and trade bill on carbon emissions (or anything else related to climate change), leaving this action by the EPA that was mandated by court rulings as about all that may be done any time soon by the US government about this issue. What an embarrassing scandal.
A Small Price for a Large Benefit - The numbers — and there are many to choose from — paint a grim picture. According to recent estimates from the Integrated Global Systems Model at the Massachusetts Institute of Technology, the median forecast is for a climb of 9 degrees Fahrenheit by century’s end, in the absence of effective countermeasures. That forecast, however, may underestimate the increase. According to the same M.I.T. model, there is a 10 percent chance that the average global temperature will rise more than 12.4 degrees by 2100, and a 3 percent chance it will climb more than 14.4 degrees. Warming on that scale would be truly catastrophic. Scientists say that even the 3.6-degree increase would spell widespread loss of life, so it’s hardly alarmist to view the risk of inaction as frightening. In contrast, the risk of taking action should frighten no one. Essentially, the risk is that if current estimates turn out to be wildly pessimistic, the money spent to curb greenhouse gases wouldn’t have been needed to save the planet. And yet that money would still have prevented substantial damage. (The M.I.T. model estimates a zero probability of the temperature rising by less than 3.6 degrees by 2100.)
Texas sues EPA over anti-pollution plan... The State of Texas ratcheted up its attack on the Obama administration's environmental policies on Tuesday, filing suit against the EPA over a declaration that could broaden government enforcement of carbon dioxide emissions. Gov. Rick Perry, Attorney General Greg Abbott and Agriculture Commissioner Todd Staples announced the lawsuit at a joint news conference to declare that the two-month-old declaration is based on bogus conclusions and could cause billions of dollars of economic damage in Texas. "The EPA's misguided plan paints a big target on the backs of Texas agriculture and energy producers and the hundreds of thousands of Texans they employ," Perry asserted. But environmental groups quickly countered that Perry and the other leaders are ignoring scientific evidence about the dangers of global warming.
When do smart prices get dumb? - The Globe and Mail - My local utility just mailed me a notice informing me that they’ve installed a new smart meter at my home that will start monitoring and charging me for my electricity depending upon time of use. The first thing I noticed about smart (i.e. off-peak) prices was how expensive dumb (i.e. peak) prices were. At 9.3 cents per kilowatt hour, power ain’t cheap anymore on the grid Sir Adam Beck built from Niagara Falls. Sure, if I wanted to do my laundry, run the dishwasher and charge my electric car (if I had one) at night, I could get all the juice I wanted at the very reasonable price of 4.4 cents per kilowatt hour. But I might just want to sleep and leave the laundry and dishes for another day and take the bus to work in the morning.
Bloom Energy unveils 'power plant in a box' - The Bloom Energy Server, a smooth metal box the size of a pickup truck, can generate electricity from multiple fuels while producing relatively few greenhouse gas emissions. With government subsidies factored in, power from the server costs less than power from the grid. Unlike other fuel cells, Bloom's is made mostly of sand, with no platinum or other precious metals thrown in as catalysts. And unlike solar panels and wind turbines, each server can produce the same amount of energy day and night for years on end, according to the company. The process is twice as efficient as burning natural gas.
California solar project gets $1.4bn U.S. guarantee (Reuters) - The United States on Monday gave its biggest backing yet to a renewable energy project, guaranteeing $1.37 billion in loans for a California development by BrightSource Energy Inc that uses the sun's heat to power a steam turbine. BrightSource's proposed solar thermal plants are expected to generate about 400 megawatts of electricity and power about 140,000 California homes, giving it the heft to compete with plants fueled by coal and natural gas.
A quiet sun won't save us from global warming - EVEN if the sun were to quieten down appreciably for the rest of this century, it would still be business as usual for global warming. The sun goes through an 11-year solar cycle during which its luminosity varies according to the number of sunspots appearing on its face. The normal cycle has a small effect on Earth's weather. But sometimes lulls in sunspot activity can last several decades, driving down the sun's luminosity to a "grand minimum". The Maunder minimum lasted from 1645 to 1715 and may have contributed to the little ice age. Stefan Rahmstorf and Georg Feulner of the Potsdam Institute for Climate Impact Research in Germany modelled what would happen to temperatures on Earth if a grand minimum started now and lasted until 2100. They found that while temperatures would go down by as much as 0.3 °C, global warming would push up temperatures by 3.7 to 4.5 °C - more than negating any effect of a global minimum (Geophysical Research Letters, DOI: 10.1029/2010gl042710, in press).
Can Dr. Evil Save The World? - Wood's proposal was not technologically complex. It's based on the idea, well-proven by atmospheric scientists, that volcano eruptions alter the climate for months by loading the skies with tiny particles that act as mini-reflectors, shading out sunlight and cooling the Earth. Why not apply the same principles to saving the Arctic? Getting the particles into the stratosphere wouldn't be a problem — you could generate them easily enough by burning sulfur, then dumping the particles out of high-flying 747s, spraying them into the sky with long hoses or even shooting them up there with naval artillery. They'd be invisible to the naked eye, Wood argued, and harmless to the environment. Depending on the number of particles you injected, you could not only stabilize Greenland's polar ice — you could actually grow it. Results would be quick: If you started spraying particles into the stratosphere tomorrow, you'd see changes in the ice within a few months. And if it worked over the Arctic, it would be simple enough to expand the program to encompass the rest of the planet. In effect, you could create a global thermostat, one that people could dial up or down to suit their needs (or the needs of polar bears).
Ohio coal group challenges EPA on greenhouse gases - The Ohio Coal Association has joined a fast-growing list of business and industry groups and states that are challenging the federal government's finding that pollution from cars, power plants and factories is dangerous to humans. The U.S. Environmental Protection Agency determined in December that carbon dioxide and other greenhouse gases endanger people's health. The decision set in motion a process to write new rules restricting climate-changing emissions. At least three states -- Texas, Virginia and Alabama -- have challenged the EPA finding. All have Republican governors. Ohio Gov. Ted Strickland, a Democrat, has made no move thus far to sue
Killing the Golden Goose? Taxation Chills Investment in Low Carbon Renewables - Consider the case of Wyoming . Like all states, it is seeking out new sources of revenue. Returning to basic ideas from the economics of taxes, a State can tax (and raise revenue) from activities that cannot respond and "walk away". You can tax land because it can't migrate to Nevada. If Wyoming tries to tax high income earners, it will quickly lose these high flyers as they migrate elsewhere. If you tax the "golden goose" you risk losing your goose!Today's NY Times says that Wyoming is considering a $1 per MwH tax on wind output. This lowers the marginal revenue that wind turbine companies will earn. In truth, this is not a large tax but if it hints that the tax will go up even higher in the future --- then forward looking entrepreneurs in the green renewables game should think twice about going to Wyoming.
The Puzzle of Coal: American Ingenuity in the Cleaner Energy Mix - Last week, President Obama announced the creation of a Carbon Capture and Storage (CCS) Task Force. For those of us in the energy industry, this watershed event demonstrates the Administration's recognition of the need for coal in our nation's cleaner energy strategy. Coal is our most abundant and cost effective source of power and generates half of US electricity today -- abandoning it is simply not an option. We need to move coal power to the next plateau of environmental performance and acceptability. I think the President's CCS Task Force puts us on the path to accomplish this.
It’s Official: Google Can Sell Power Like A Utility -The Federal Energy Regulatory Commission has granted Google Energy, a wholly owned subsidiary of the search giant, the right to behave like a utility.The order grants Google Energy the power to sell energy, capacity and services at market rates.Why does Google want to do this? Right now, the company rakes in billions of dollars from ads and it doesn’t have to have extensive support desks and remote repair teams — the kind of people-power providers must have on staff — in order to do it. Selling power is a much more hands-on business.Google has said it wants to go carbon neutral. With the FERC order, it can now effectively erect as many solar panels and install as many fuel cells as it likes without worrying about having purchased too much capacity; the company can now sell off the extra power it generates.But more importantly, Google can now exploit its massive data centers to provide services for controlling power consumption in commercial buildings, industrial sites, and homes. It is largely a task that should be handed off to large computer rooms.
Where Will the U.S. Get Its Electricity in 2034? - Cleaner coal, nuclear, solar, wind: these are some of the options for power generation to feed the U.S.’s electric power requirements. That need is expected to grow by 30 percent during the next 25 years, according to the Energy Information Administration, even with a slew of energy-efficiency measures and improvements to the grid infrastructure that delivers the electricity. But the primary source of electricity in 2034, according to a new projection from consulting firm Black & Veatch, will be natural gas. It is the fossil fuel with the least greenhouse gas impact on the atmosphere—burning it releases 43 percent less CO2 than burning coal—and looks set to increase its share of the electricity market, even with looming regulations to restrain climate-changing emissions. And there’s this boost, too: new, vast reserves of natural gas found in places like the Marcellus Shale Formation, which stretches from West Virginia to New York State.
Water Waste A Kink In New York Shale Gas Future - Technological advances that have unlocked natural gas from shale rock deep beneath the surface have outpaced advances in water waste disposal, meaning that gas drilling could begin in New York state before a waste disposal program is in place."There is a shortage of treatment facilities that can handle this very salty water, so that's going to become a bit of a bottleneck for the industry when they do start issuing drilling permits," said hydrogeologist John Conrad, head of the environmental consulting firm Conrad Geoscience Corp. The booming shale gas business accounts for 15 to 20 percent of U.S. natural gas production and is seen increasing fourfold over the next 15 years, providing a relatively clean energy source for a country sensitive to its dependence on foreign oil and looking for ways to reduce carbon emissions.But millions of gallons of water are needed for each shale gas well, leaving drillers to deal with the tainted waste water
Halliburton, Schlumberger, B. J. Services using carcinogens for fracking, contaminating ground and drinking water What the frack is it? The process, which forces highly pressurized water, sand and chemicals into rock to release the gas and oil locked inside, gives drillers unprecedented access to deeply buried gas deposits and vastly increases the country’s known energy reserves. [See an illustration.] What’s the fracking problem?As ProPublica has detailed in more than 60 articles, the process comes with risks. The fluids used in hydraulic fracturing are laced with chemicals—some of which are known carcinogens. And because the process is exempt from most federal oversight, it is overseen by state agencies that are spread thin and have widely varying regulations.The diesel connection… In 2004, the U.S. Environmental Protection Agency examined hydraulic fracturing and determined it can be safe [oh sure, George Bush's EPA] as long as diesel fuel isn’t added to the drilling fluids. The agency based its decision in part on a non-binding agreement it struck with the three largest drilling service companies—Halliburton, Schlumberger and B.J. Services—to stop using diesel.Newly released documents reveal… B.J. Services violated that agreement and that Halliburton continued to use diesel in other geologic formations not governed by the agreement. All three companies acknowledged using other potentially harmful chemicals, such as benzene, toluene, ethylbenzene and xylene.
Plan to truck hydrofracking wastewater to Finger Lakes shelved, for now - Oil and gas companies drilling for natural gas in Pennsylvania are running out of ways to dispose of the millions of gallons of wastewater produced by “hydrofracking” the Marcellus Shale. One gas company proposed a solution: Bring the dirty water to New York’s Finger Lakes. Chesapeake Energy Corp., an Oklahoma City company that holds dozens of drilling leases in Central New York, wanted to store up to 663 million gallons of wastewater from Pennsylvania in a converted natural gas well 87 miles west of Syracuse, in the Steuben County town of Pulteney. The town sits less than a mile from Keuka Lake. When residents found out, hundreds flocked to meetings at the local firehouse. Elected officials fired out letters of opposition. U.S. Rep. Eric Massa threatened to lie down in front of Chesapeake trucks, if necessary
Oil Shortage Spills Into Water - Looming oil and water shortages are interconnected and the world is only just waking up to the fact, says a leading proponent of the “peak oil” hypothesis. Matthew Simmons, the chairman emeritus of the US consulting firm Simmons and Company International, says oil production consumes large amounts of water, while boosting clean water supplies is energy-intensive. “The inter-twining of oil and water is something we all missed,” he told the Marsh National Oil Companies Conference yesterday in Dubai. Mr Simmons, author of Twilight in the Desert, the controversial book examining the implications of Saudi oilfield depletion for global crude supplies, said the world was not running out of oil or water. But he believed that oil production had peaked worldwide in 2005, due largely to declining flows of easily extractable, high-quality light oil. Fresh water was also in short supply. “Quality crude is rapidly being replaced by junk crude,” Mr Simmons said, referring to the stickier crude grades that are harder to refine into transport fuels. “Most of the world’s remaining usable water is brackish or saline,” he added.
Gasland (Documentary) When filmmaker Josh Fox discovers that Natural Gas drilling is coming to his area—the Catskillls/Poconos region of Upstate New York and Pennsylvania, he sets off on a 24 state journey to uncover the deep consequences of the United States’ natural gas drilling boom. What he uncovers is truly shocking—water that can be lit on fire right out of the sink, chronically ill residents of drilling areas from disparate locations in the US all with the same mysterious symptoms, huge pools of toxic waste that kill cattle and vegetation well blowouts and huge gas explosions consistently covered up by state and federal regulatory agencies. These are just a few of the many absurd and astonishing revelations of a new country called Gasland.
Refinery crisis afflicts global oil sector - The world's major oil companies are grappling with a crisis in the refining sector which is forcing them to cut back heavily to staunch losses, as shown by a dispute at Total in France. The possibility that Total could shut down a refinery in France has sparked angry protests and the government now wants the privately-owned group to commit to not closing any French refineries for five years. But the fact is that refining is not a good business for oil companies in advanced industrialized countries, analysts said. And financial results published by the big producers show that Total's situation is hardly unique. The global refining situation today is not good," said Colette Lewiner, an energy expert at the French global consultancy Cap Gemini. "At all the oil majors, refining activities are losing money.
Oil to Hit $100 in US Driving Season: Analyst - A recovering economy and tightening supply from oil refiners will push the price of crude up to $100 a barrel as the US driving season gets into full swing, John Kilduff, co-CIO of Round Earth Capital, told CNBC Tuesday. "The move back above $80 will be before us in the next several days and we're going to continue higher… I think we're going to see $100 a barrel for crude oil here at some point during even the first half of the year," Kilduff said. "It will be a drag and it will likely be temporary. It will probably coincide with the peak summer of gasoline demand here in the United States," he added. - Watch the full interview
The Oil Bubble Controversy, Revisited – Krugman - One of the curious things about economic debate in the later Bush years was the conviction among many on the right that there wasn’t a bubble in housing, but that there was one in oil.We now know the truth about housing. But what about oil? Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals. And it also suggests that resource constraints will be an issue if and when we do get a full recovery.
Another Take On Peak Oil: Exports, Not Production, Indicate Crisis - Most of the peak oil debate centers on supply, analyzing the productivity of oil fields both known and yet-to-be discovered. There is no consensus on the amount of oil left in the world. Experts diverge considerably in their estimates due to the lack of truly reliable data and the powerful political motivations involved. Brown takes a different angle by using a different model, one developed with colleague Dr. Samuel Foucher and originally inspired by Matthew Simmons. Dubbed the Export Land Model, it analyzes a nation’s net oil exports—the difference between a nation’s production and consumption of its total liquid oil products. According to Brown, it’s the future net exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first, and hardest. Brown’s analytical model is unique in that it emphasizes the tendency of oil exporting nations to experience economic growth even as their oil supplies diminish
Peak demand: The cornucopians reach for a fig leaf - Energy Bulletin -The world's oil supply optimists must feel as if they are in that dream that so many of us have had about arriving at work in our underwear. Oops! What do I do now to save face? Over the past decade oil optimists repeatedly forecast a glut in oil supplies that kept failing to materialize. Now, they are reaching for a fig leaf hoping no one will remember their consistently errant predictions. That fig leaf is the idea that we have reached peak demand, and that that's the reason we have not seen oil production rise in the past several years. Strangely, they made no mention of this theory in 2005, 2006, 2007 or 2008 as prices skyrocketed.
Nigeria oil reform would worsen bad situation -Shell |(Reuters) - Nigeria's proposed oil industry reforms could drive away $50 billion in investment if passed in their current form and make a bad situation for the sector even worse, Royal Dutch Shell (RDSa.L) said on Tuesday.Oil majors say the terms proposed in the Petroleum Industry Bill (PIB) will make it hard for them to develop new resources in deep offshore waters as well as to run current operations. "The PIB threatens to make a bad situation worse ... If passed in its current form it will take years to correct its mistakes," Shell's Executive Vice President for sub-Saharan Africa, Ann Pickard, told an industry conference in Abuja.
Why is reservoir simulation important for Saudi Aramco? - GLG News - I have before me a chart which is five feet long. It shows the average total daily average black oil rate for the several Saudi Arabian oil fields from 1971 through November 2009. I have the data going all the way back to 1938 in a different file. Every five years, I have to extend the chart with a new Dietzgen No. 340-T33 section which is marked off in years by months. The chart up to end 1995 is yellowed with age. 1996 through 2005 is yellowing. Much of the scotch tape has lost its strength and has curled up and peeled off. The last five year section is still black and white. At the end of 2010, if I am still among the living, I will have to add another section. The vertical well era in Saudi Arabia ended in 1991. By my count, which is reasonably accurate, by the end of 1990, 1,235 vertical well were producing, on average, 5,060 bbl/day. By comparison, in the 1940-1960 era, many, many vertical oil wells could produce in excess of 10,000 bbl/day. In addition to plotting production rate each month as new data appears, I have annotated the chart over the years showing new fields coming on line, new wells drilled, volumes of water injected and more recently a great succession of redevelopment projects that have allowed Saudi Aramco to maintain relatively high offtake rates. From a study of the chart, one can see that the era of sustainable capacity from vertical wells ended about 1990. The era of sustainable production from horizontal wells ended in 1997. This was followed by an era of erratic production and capacity decline until 2003. Saudi Aramco announced a strategy change in 2002. Horizontal wells were out and Maximum-Reservoir-Contact wells were in. Redevelopment became a big business sometimes after the year 2000 and it was in the huge Ghawar field that much of this activity started.
Saudi Aramco CEO Says China Overtakes U.S. as Largest Customer - BusinessWeek -- Saudi Arabian Oil Co., the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said.“We are already exporting more to China than to the U.S.,” he said today in an interview in Davos, Switzerland. “We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities.”The U.S. imported 1.014 million barrels of oil a day from Saudi Arabia in the nine months through September, according to the Energy Information Administration. China and Saudi Arabia aim to boost trade 50 percent to $60 billion by 2015, the state- owned Saudi Press Agency reported this month, citing Chinese Trade Minister Chen Deming.
China passes US as top Saudi oil importer: energy secretary – China has surpassed the United States, long the top importer of Saudi oil, in short-term average daily imports from the petroleum-rich Gulf kingdom, US Secretary of Energy Steven Chu said Wednesday in Abu Dhabi."It's correct, as far as I know," said Chu, when asked if China has recently moved ahead of the US in terms of average barrels-per-day oil imports from Saudi Arabia.He did not provide specific figures.As Chinese demand will likely continue rising and the US is trying to cut back its consumption of oil, especially from foreign sources, China might continue to be the main importer of Saudi crude."In the long run, one fully expects China's demand for oil to be increasing,
China' electricity consumption surges 40% in Jan - China's power use reached 353.1 billion kWh in January, up 40.14% year on year or 2.7% month on month, according to the latest statistics released by the National Energy Administration. Last month, primary industry consumed 7 billion kWh of power, 23.5% more than in the same period of last year. The power use of secondary industry during the same period jumped 45.99% year on year to 262.4 billion kWh, while that of tertiary industry rose 25.61% from a year earlier to 39.8 billion kWh. Residents in the urban and rural areas consumed 44 billion kWh of electricity, 25.9% more than in the same period of last year.
Mexico oil production falls as government struggles to implement hard-fought reforms – CNBC -Mexico's oil production continues to fall in annual terms as the government struggles to implement hard-fought energy reforms needed to ramp up exploration. State-run oil company Petroleos Mexicanos says January crude production was 2.615 million barrels a day, a 2.6 percent decline from 2.685 million in the same month of 2009.The bright side is that January output was the highest volume in nine months, though still a significant drop-off from the record annual average of 3.383 million barrels a day in 2004.Congress passed a bill in 2008 to give Pemex more flexibility in deals with foreign companies.More than a year later, no new exploration deals with foreign companies have been signed amid red tape and political resistance.
Mexico Economy Shrank 6.5% in 2009 Amid Global Crisis – (Bloomberg) -- Mexico’s economy contracted 6.5 percent last year, the country’s worst annual slump since 1932, as the global financial crisis sapped demand for its exports. Gross domestic product, the broadest measure of a country’s output of goods and services, fell 2.3 percent in the fourth quarter from a year earlier, the national statistics agency said today. Analysts had forecast a 2.6 percent decline, according to the median estimate of 19 economists surveyed by Bloomberg. The recession in the U.S., which buys about 80 percent of Mexico’s exports, crippled Latin America’s second-largest economy as a fall in exports led to job losses, falling production and declining domestic demand. Industrial production fell for 19 straight months beginning in May 2008 before rising in December, and retail sales have dropped for 15 months.
Americas bloc excluding US and Canada is proposed - Latin American and Caribbean nations have agreed to set up a new regional body without the US and Canada. The new bloc would be an alternative to the Organisation of American States (OAS), the main forum for regional affairs in the past 50 years. Mexico has been hosting a regional summit in the beach resort of Cancun. The OAS has been dogged by rifts between some members and the US over economic policy and trade, and criticised for promoting US interests. The proposed new grouping was one of the main issues on the agenda of the two-day summit, which ended on Tuesday.
Global Trade Imbalances as a Statistical Artifact: Today, the latest spin that purports to describe the still unfolding global economic crisis is that of 'global trade imbalance', with particular attention being focused on the US and China. The US, we are told, has a huge trade deficit and China is conveniently blamed for this. "They say China's currency manipulation hurts the U.S. economy" [1] making China's goods much too cheap relative to those produced in America. This tale does not reflect the contemporary reality and it is all the stranger because, on the other hand, it's never been a secret about the manner in which the large global corporation has evolved its operations over the last 4 decades. These huge networked businesses now have production systems that most often span a large number of countries at the one time. That means, in effect, that world trade is now mostly defined by the nature and extent of the global corporation and its networks. The nation is no longer the core economic entity.
Greece Said to Have Arranged Swaps With 15 Banks - (Bloomberg) -- Greece arranged swap agreements with about 15 securities firms, including some payments from banks that may have helped hide the country’s true deficit, according to a person with direct knowledge of the contracts. The swaps that allowed Greece to receive payments upfront date from before 2008, when European Union regulators changed rules to limit the use of the contracts, said the person, who spoke on condition of anonymity. Goldman Sachs Group Inc., which provided Greece with about $1 billion in funding in a 2002 swap, may have arranged the biggest of the contracts, the person said. The EU accounting watchdog ordered Greece last week to provide information on its swaps as it probes whether the country used derivatives to hide the extent of its budget deficit, and if other countries used them. Swaps are typically designed to help countries to manage their debt rather than generate cash
Drawing the right lessons from an obscure tale of obscure interest rate swaps - The Eurozone's current problems are not mainly a result a of prolifigate and reckless spending of government resources in the Eurozone periphery [1]. Even nobel laureate Paul Krugman has begun to forcefully push this argument arguing that the real source of the malaise is the steady build up internal Eurozone imbalances. I only conditionally agree. As I have argued on several occasions, the key to understand the current situation in the Eurozone is to see the connection between the obvious inflection point reached in the context of the public debt/deficit and the need to correct through an internal devaluation (relative price deflation). The main point is then to recognize that the while the former is definitely a prerequisite for the latter, the process itself (deflation) will only serve to intensify the short term and long term pressure on public finances. Moreover, the recent flurry in the context of interest rate swaps used by the Eurozone (and other) governments to generate current assets for future liabilites in an effort to massage public deficits only serves to add a further layer of confusion and uncertainty to the fiscal aspect of the situation.
Debt Deals Haunt Europe; Investors Re-Examine Complex Financial Maneuvers Used to Hide Borrowings - Concerns that Greece and other struggling European nations may not be able to repay their debts are focusing investor attention on another big worry: Economies across the Continent have used complex financial transactions—sometimes in secret—to hide the true size of their debts and deficits. Investors long turned a blind eye to European governments' aggressive bookkeeping, aimed at meeting the euro zone's fiscal ceilings. Countries using the euro currency have a rich history of exotic maneuvers aimed at meeting rules requiring members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%. Despite criticism, European leaders deemed many of these moves acceptable as they sought the long-planned currency union.
EuroSavant - CDS: Just Another Evanescent Bubble? - Speculation in the CDS market began after 4 October 2009, as the Greek Socialists celebrated their election victory. Two weeks later the newly-elected government informed its Euro-partners that the deficit for 2009 was going to lie at 12.7 percent of economic performance (GDP). That was a shock, since the previous conservative government had prognosticated precisely half of that. The new estimate for the budget deficit called onto the stage the first hedge funds, reports a London CDS-dealer working for a large American bank. In view of Greece’s previous history of cheating its way into the monetary union with false budget statistics, at that point a wager on Greece having payment problems was promising. This bet in the meantime has become obvious. The rise of the Greek risk-premium at first still continued timidly, but steadily. It could be that that hedge funds had been the first to recognize Athens’ exhausted budget situation but had bet in the CDS market on a fall in the value of Greek debt with little commitment of capital. But the new Greek government’s commitment to transparency unleashed this speculation.
EUobserver / Greek drama heightens debate on economic co-ordination - The Greek drama currently being played out in financial markets across the globe has brought the eurozone's weaknesses into sharp relief, with greater economic co-ordination increasingly touted as a possible solution. The recent financial crisis has also served to highlight the multitude of structural flaws embedded in the wider EU economy, with the bloc's permanent president, Herman Van Rompuy, amongst those advocating a European 'economic government'. Greater convergence of economic policies, it is argued, will boost EU growth and job numbers in years to come, and prevent weaker eurozone members from being forced out of the single currency. The EU's new economic 10-year plan, currently being thrashed out by national capitals and EU institutions, appears the obvious method to achieve this greater convergence, although tough implementation mechanisms are seen as key to the plan's success
Nationwide Strike Paralyzes Greece - WSJ - Greek police clashed with youths in central Athens Wednesday as tens of thousands of people took to the streets in protest at the Socialist government's austerity measures. The strike has affected transport and public services, with government offices, schools and universities all shut and travel around the capital, Athens, disrupted. Athens International Airport was also closed as air traffic controllers joined the action, with no flights in and out of the country's airports. Train, bus and ferry services were canceled nationwide. Banks are also expected to be affected while state hospitals will operate on skeleton staffing. No newspapers will be published because the journalists' union is taking part too.
Bond Vigilantes Set Sights on Sovereign Debt - With Greece's top income earners - shipping and tourism - slumping badly, gunslingers in the world’s money markets have focused their sights on the sovereign bond market of Greece, which trades a paltry $1 billion per day. Speculators have bid-up the cost of insuring Greek debt in the CDS market for one-year, to a record high of 565-basis points this month, up sharply from 100-basis points at the beginning of December. A frenzy of fear has been whipped up over Greece’s budgetary woes, and speculators have profited by short selling the euro, against all other major currencies. Yields on Greece’s 5 year note have been jacked up 280-basis points higher to 6.35%, over the past few months, and are now sufficiently high enough to choke its economy. Although Greece’s economy only generates 3% of the eurozone’s output, if it can’t service the €50 billion of debt coming due this year, it could rupture a hole big enough to sink the eurozone stock markets
Euro in Big Hedge Funds’ Crosshairs - Yves Smith - The Wall Street Journal is not the first to comment on the magnitude of the wagers against the euro (the Financial Times took note nearly two weeks ago: “Speculators raise record bets against euro“). But the Journal offers a spectacle sure to inflame sentiment in Europe: that of major hedge funds feasting first on lemon-roasted chicken and filet mignon and later the euro. The article contains some comment that I consider to be misleading: There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion. Regulators haven’t suggested that any trading has been improper. The first paragraph gives the mistaken impression that foreign exchange markets are regulated. They aren’t.
Greece Holds Back Bond Sale in Game of ‘Chicken,’ Ignis Says - (Bloomberg) -- Greece may be playing “a game of chicken” over a planned 10-year bond sale as it negotiates with European Union officials on budget targets, according to Ignis Asset Management. The longer Greece delays the note issue, the more likely it can win concessions on the severity of spending cuts demanded by its neighbors to reduce the region’s largest deficit, said Stuart Thomson, who helps oversee more than $100 billion at Ignis in Glasgow. The Greek debt agency said Feb. 2 the country will probably sell bonds by March. “There’s a game of chicken going on,” . “If Greece turns up at the next European finance ministers’ meeting and says it’s about to run out of money, it can avoid demands for further budget cuts.”
Moody’s Says Greece May Be Cut If Fiscal Plan Missed (Bloomberg) -- Greece’s sovereign debt rating may be cut within months unless the country meets the objectives of its fiscal deficit reduction plan, Moody’s Investors Service said. “If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Pierre Cailleteau, managing director of sovereign risk , said. Such a departure may merit a cut of “a couple of notches,” he said. Cailleteau spoke a day after Standard & Poor’s said it may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. At the same time, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures, Cailleteau said. Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to A2, he said.
S&P May Downgrade Greece Within Month on Budget Risks –(Bloomberg) -- Standard & Poor’s may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. “We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement late yesterday. The euro fell to a one-year low against the yen as the threat of a downgrade raised concern that Greece will need the EU’s assistance to avoid defaulting on its debt. The premium investors demand to hold the nation’s 10-year securities instead of Germany’s rose yesterday to the most in more than two weeks as unions staged a strike to resist budget cuts.
A run on Greece - After a warning by S&P and Moody’s of further credit downgrade for Greek sovereign debt, the bond markets sold of (whatever remains of) Greek secondary market debt, with the yield on the two-year bond now once again above 6%. And the euro slid further. The FT has a story quoting traders as saying that a Greek bond issue is very unlikely to come before the country announces the next round of austerity measures, expected next week. If the downgrade becomes reality, Greek debt will no longer be eligible as ECB collateral once the ECB returns to its previous collateral rules, expected next year. FT Deutschland leads the paper with the story that leading German banks announced that they would not be buying Greek bonds at a forthcoming auction (very unhelpful such an announcement, but this is what happens once a panic starts).
Moody's: Greece must act on fiscal plans (Reuters) - Moody's Investors Service said on Thursday any changes in its ratings on Greece would depend on whether Athens was smoothly enacting its fiscal reform plans as promised. Pierre Cailleteau, the head of Moody's global sovereign ratings, told Reuters in an interview that Moody's would follow the situation in Greece and see what was happening on the ground."We have to look at the facts and whether the government of Greece is going to do what it has promised to do," he said. Rival ratings agency Standard and Poor's said on Wednesday it may downgrade Greece's BBB+ rating by one or two notches within a month, citing downside risks to growth that could hinder the country's deficit-cutting plan.
Can Greece Avoid the Lion? - Project Syndicate - Even as the European Union and the International Monetary Fund lay the groundwork for a giant first-round bailout, debate is swirling about whether Greece can avoid sovereign default. Avoiding default may be possible, but it will not be easy. One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP). But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence.
Greece should try a fiscal devaluation, not holiday from the Eurozone - VoxEU - Martin Feldstein argued last week that Greece should take “a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.” In this column, Argentina’s highly regarded former Minister of the Economy and a co-author argue that the idea won’t work. A better solution would be to adjust the Greek tax system.
Sovereigns: Debt levels raise fears of further downgrades (FT) Never before has so much government debt been raised against such an uncertain economic backdrop. This year the Organisation for Economic Co-operation and Development forecasts $16,000bn will be raised in government bonds among its 30, mostly industrialised, member countries. This is a sharp increase of $4,000bn in the space of just two years as governments around the world have turned to the capital markets to pay for fiscal stimulus packages and bank bail-out initiatives. The consequences of this record amount of issuance are still playing out in the markets as countries with weak public finances are forced to pay big yield premiums to attract investors, who can afford to be more selective with the vast amount of bonds on offer.
Why the IMF should deal with Greece - VoxEU - The situation in Greece has called into question the EU’s ability to deal with fiscal crises. This column argues that the EU’s political vulnerability is likely to prevent it enforcing existing rules for fiscal discipline. The IMF should therefore be called in. This would take the blame off the Eurozone, re-establish lost credibility, and avoid moral hazard.
The IMF Cannot Help Greece - The IMF can be very effective in tackling the problems of solvency and liquidity arising from the fiscal emergency – and it has probably more expertise than the European Union (EU) or the European Central Bank (ECB) in this regard. But the Fund is much less able to address the problem of restoring equilibrium in current account balances within the Eurozone. Unfortunately these two problems must be solved together. The Greek fiscal deficit and the loss of competitiveness are connected, because a current account deficit (i.e., imports above exports, implying a deficit in net total domestic savings, otherwise known as importing capital) will make it much more difficult for the Greek government to raise taxes to cover its public deficit. The financial equilibrium of the country is exposed to a sudden increase in risk aversion by foreign investors – this is when they would run for the doors, e.g., if taxes increase.
EMF roundtable: EMF Roundtable: Wrapping up - The Economist - OVER the past few days, several economists, both in America and Europe, have weighed in on Daniel Gros and Thomas Mayer's proposal for a European Monetary Fund (EMF). They have raised questions both about the need for an EMF in principle, and about its feasibility and usefulness in the present context, i.e. Greece's troubles. I think it's fair to say that Messrs Gros and Mayer's ideas came in for a good deal of criticism from our invited experts on all these counts. The guest piece argued that: The difficulties facing Greece and other European borrowers expose two big failures of discipline at the heart of the euro zone. The first is a failure to encourage member governments to maintain control of their finances. The second, and more overlooked, is a failure to allow for an orderly sovereign default. Our commenters were by and large unconvinced....
Europe's monetary union has become an instrument of deflation torture - Telegraph - If the purpose of the euro was to bind Europe's tribes together and serve as catalyst for political union, EU elites must have been chastened by the outpouring of anti-German feeling in the Greek parliament last week. The Left called for war damages for Axis occupation and accused German banks of playing a "wretched game of profiteering at the expense of the Greek people". Mainstream New Democracy was no nicer. "How does Germany have the cheek to attack us over our finances when it has still not paid compensation for Greece's war victims? There are still Greeks weeping for lost brothers," This is deeply hurtful to Germany, a vibrant democracy that has played its difficult part in Europe for 60 years with dignity. No country could have done more to overcome its demons. It has paid the EU bill, and paid again, rarely grumbling.
The Euro Will Face Bigger Tests Than Greece - Otmar Issing, one of the fathers of the euro, correctly states the principle on which the single currency was founded. As he wrote in the FT last week, the euro was meant to be a monetary union but not a political one. Participating states established a common central bank but refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in the Maastricht treaty and has since been rigorously interpreted by the German constitutional court. The euro was a unique and unusual construction whose viability is now being tested. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro. Mr Issing admits that he was among those who believed that “starting monetary union without having established a political union was putting the cart before the horse”.
Greece Has Now Made A Bailout Impossible - Yesterday we twice made the point that Greece was shooting itself in the foot, making it impossible to receive a bailout. Let's revisit the points. First, there was the violence in the streets as a result of threats of government austerity. The riots were (and are) a clear message to Greece's more stable EU peers that there's really no point in bailing the country out with the expectation of strong deficit reduction, because it just couldn't happen there politically. We're talking about a country where 30% of the workers work for the government. That means there's just no realistic way to take a big hatchet to public spending without causing lots of pain to the people. Then Greek leaders continued to damage themselves by flinging NAZI gold theft accusations at Germany, as if that were the root of the country's problems. There's basically no chance this will make German leaders more willing to bail the country out.
Greece Retaliation Against Germany Escalates: Airbrushed Venus Statue Flipping Off Greeks By Banana-Eating Germans Prompts Greek Boycott - Have we just crossed the historic Rubicon when a photoshopped classical statue is about to lead to a collapse in a monetary and customs union, and possibly something a tad more serious? Also, is the KFW bailout rumor too little too late? It appears the Greeks are two minutes away from saying "take you bailout and shove it." The reason: The Focus cover which shows a status of Venus de Milo flipping off the Greeks, who were characterized as the "cheats of the eurozone." After recent Greek media outbursts have recalled the Nazi wartime occupation of the country, as well as demands for WWII reparations, today's action by the Federation of Greek Consumers, calling for a boycott of products, made by "banana-eating" Germans, is a direct response to the airbrushed statue of Venus expressing the communal German sentiment.
Greek Treasuries Pancake As Bond Vigilantes Chant Death Chorus - Ah, curve pancaking - better known in bond parlance as the death rattle. The Greek 4 Year GGB just traded wider of the 15 Year at a spread of -4bps (yup, negative). This, to continue the parlance lesson, means the bond vigilantes are now pretty sure how the Greek situation will play out. Oh, and Greece, all the best with that €5 billion10 year bond issuance. The 1 Year spot his exploded from just over 200 bps on January 1, to just under 5%, a rout for all short-term GGB holders. We are anxiously awaiting RBS' rebuttal.
How have previous currency unions dissolved? - Marc Flandreau writes: This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians.
Greece threatens more than the euro - FT - Now the crisis has happened – and it clearly invites the big political steps that the founding fathers anticipated. A logical political response to Greek insolvency – and the threat of similar crises in Spain, Portugal and eventually Italy – might be to create common European taxes and a mechanism for big fiscal transfers between EU states. So what happens now? It is possible that Greece may yet muddle through this crisis. But, in a world of rapidly rising sovereign debt, the next euro-crisis might only be months away. At that point, the members of the European single currency will once again be asked how much they are willing to do (and to pay) to help each other out. If the answer is still, “not very much”, the euro-area might begin to shed some of its weaker members. But the consequences could go well beyond the single currency. The EU would have a crisis of confidence and the likely result would be that other powers it has acquired, on everything from immigration to social policy, would come into question. There is more than money at stake in the Greek crisis.
European banks need to issue $327 billion annually: Citi (Reuters) - Twenty-four European banks may need to issue about 240 billion euros ($327 billion) annually for the next three years to fund existing and new businesses, as well as to meet the new Basel stable funding requirements, Citigroup said. According to analysts, including Stefan Nedialkov, the 24 European banks, who account for 65 to 70 percent of the sector's assets, issued 56 billion euros of long/medium-term funding in January but investors' macro-economic concerns are restricting their appetite for new issuance in February.
Protests Grow in Greece, Portugal and Spain -The financial press has for the most part looked at the possibility of sovereign debt crises in Greece, Spain, and Portugal through a deal-making window: will Germany and other EU surplus countries back a rescue package, and if so, with what strings attached? There has certainly been ample speculation, particularly since a bailout of Greece would be wildly unpopular in Germany, but some have though various finesseses, such as having various EU members guarantee Greek debt, along with imposing austerity measures (in particularl, raising the retirement age in short order from age 61 to 67) might be workable. But even if a deal could be brokered, will the citizens accept it? Citizens in Greece could be every bit as big a stumbling block as those in Germany. From the Globe and Mail...
Portugal Strike Poses Threat to Deficit Effort - WSJ - Unions representing Portugal's public-sector workers are preparing a national strike to challenge a wage freeze that is key to government efforts to cut a towering budget deficit. But will the unions prevail?The March 4 strike highlights political challenges faced by the government of Socialist Prime Minister Jose Socrates. In seeking to close a budget gap worth 9.3% of gross domestic product in 2009 - more than three times the European Union's 3% limit – the government is running headlong into union culture
Greece leads Europe’s winter of discontent – Europe, World – The Independent - A wave of industrial and social unrest is building across Europe as workers resist attempts by governments and private companies to impose austerity policies, drive down wages and rescue some nations from near bankruptcy. Huge protest rallies took place in cities across Spain last night; today a general strike could paralyse Greece while industrial action at French airports and oil plants as well as the narrowly averted stoppage at Germany's Lufthansa promise to be just the start of the greatest demonstration of public unrest seen on the continent since the revolutionary fervour of 1968. Europe's industrial economy is not clear of recession yet either and with unemployment rising and demands for austerity growing, Europe's workers are becoming increasingly restive.
Spain battles to shore up plan’s credibility - Spain – wary of joining Greece as the next target for investors and speculators concerned about rising levels of sovereign debt – has launched a radical cost-cutting plan to reduce its budget deficit from 11.4 per cent of gross domestic product last year to 3 per cent of GDP by 2013. It has sent the plan to Brussels for approval. Economists and central bankers have cast doubt on the plan’s chances of success, saying its economic growth forecasts are too optimistic and insisting on the need for ambitious reforms to the rigid labour market to make the economy more competitive. The market consensus is that Greece isn’t the real issue. It’s Spain,” Alastair Newton, senior political analyst at Nomura International, said yesterday
German Banks Turn Their Backs on Greek Bonds - Greece needs to refinance 20 billion euros' worth of debt by May, but has found it difficult to raise money on the bond markets. On Thursday, the country delayed an issue out of fear of a ratings downgrade. And on Friday, German banks said they aren't interested in taking on more Greek debt. The deadline facing Athens is an ominous one. By April and May, Greece must refinance €20 billion in sovereign debt, the first chunk of the €53 billion the country will need to refinance by the end of the year. But as winter turns to spring, it's growing apparent that Greek efforts to raise money face big challenges."
Germany Faces Ratings Dilemma in Greek Bailout, Schroders Says -(Bloomberg) -- Germany risks either harming its credit rating or damaging exports depending on whether it agrees to help bail out Greece, according to Schroders Plc. Any transfer of funds to the European Union’s most indebted nation from its biggest economy may hurt Germany’s AAA rating, said Jamie Stuttard, who oversees $25 billion as head of European fixed income at the London-based company. A refusal to do so would harm the economies of countries such as Greece, Ireland, Italy, Portugal and Spain and damage Germany’s ability to sell goods into those markets, he said
German Recovery ‘Prone to Setbacks,’ Finance Ministry Says (Bloomberg) -- Germany’s stagnating economy in the final quarter of last year shows that the recovery from the deepest recession since World War II is “prone to setbacks,” the Finance Ministry said in its monthly report. As worldwide stimulus measures subside, domestic German sources of growth are gaining in importance, though are “apparently unfolding only slowly,” the Berlin-based ministry said today. The German economy’s expansion stalled in the fourth quarter after recording 0.7 percent growth in the previous three months, That weakening “industrial dynamism” toward the end of 2009 shows that the economic upswing of last summer “rested mainly on short-term demand impetus in the wake of global economic stimulus measures,” the report said.
If This Be Victory ... Krugman - Via Edward Hugh, The Economist is portraying Latvia as a success story. Hey, the peg against the euro is still holding, and further debt downgrades are on hold. And the other little things — the 17.5 percent fall in real GDP, the 23 percent unemployment rate? Minor details. Actually, as Hugh points out, Latvia is still a long way from having brought prices and wages down to a competitive level. So it’s still faced with the prospect of years of grinding deflation and sky-high unemployment. But it’s a success!
Double-dip recession may not be far off | Business | guardian.co.uk - This nascent recovery is fragile, said Mervyn King, governor of the Bank of England. You bet it is. Look at what we have learned in the past few weeks. Retail sales fell 1.8% in January. Unemployment rose. Mortgage approvals were down. Bank lending to businesses was down. VAT went up. Most of the country suffered at least a week of slower output because of bad weather. Consumers continued to repay their credit card debts, suggesting general caution.Overseas, the recovery in the eurozone, the place that buys half of our exported goods and services, appears to have stalled. In the US, the UK's other big export market, the consumer confidence index dropped to its lowest level for 10 months.
UK may intervene on bank debt, says Paul Tucker - Paul Tucker, head of the Bank's financial stability arm, admitted that the end of the central bank's support schemes for bank funding could bring with it a "collective action" problem as banks rush to raise money, potentially unsettling markets. He said that although the Bank was confirming the end of the Special Liquidity Scheme, which has helped support banks in the absence of the securitisation market, it was braced for possible strain as those banks have to raise that cash in the wholesale debt markets instead.
Debt problems: US to face own version of Greek crisis – -If there were a gold medal awarded to a sovereign entity with the largest financial problems , Greece might be in the unhappy position of claiming the title. But outsized media attention notwithstanding, bigger catastrophes than Greece lie ahead. Greece is merely one of many sovereign entities that have lived beyond their means for a long time. At some point, we in America will suffer the consequences of having the world focus on our imbalances. Besides size, the major difference (for the time being) is that Greece no longer has its own printing press -- nor do any other countries that use the euro. That is the real problem, at least so far as the euro goes.
World trade suffers biggest drop since 1945 - World trade fell by 12 per cent last year — the biggest drop since the Second World War — according to the World Trade Organisation (WTO). The level of trade between nations had been expected to decline by 10 per cent in 2009. Pascal Lamy, the director-general of the WTO, said the sharp fall made it “economically imperative" to conclude the Doha Round international trade talks this year. The negotiations, which began in 2001 and are currently at a standstill, are aimed at removing barriers to trade for poor nations by striking a deal that would cut agriculture subsidies and tariffs on industrial goods.
Global imbalances: Are emerging markets the new guest at the party? - VoxEU - What will happen to the global imbalances that many argue caused the global financial crisis? This column suggests that, while both surplus and deficits countries may make adjustments, emerging markets that have so far been on the sidelines of the action and outside the core discussion of global imbalances could start to absorb the excess liquidity.
Exports: Productivity, Factor Proportions, and Policy Implications - The President's goal of doubling exports elicited a lot of discussion, and skepticism. In a previous blog post, I examined the prospects of accomplishing this goal from a macroeconomic perspective. However, a few discussions I've had with journalists have reminded me that the frontier of international trade theory has moved considerably over the past few years, even as the much of the economic commentary remains mired in the older models. In this respect, the most recent edition of the Economic Report of the President was extremely welcome, as it brought to bear recent innovations in the trade literature. One observation, not yet firmly in the literature when I first started teaching international trade (link to my old course), was the role of heterogeneity across firms of productivity.
Emerging Europe: Managing Large Capital Flows - The IMF Blog - Conventional wisdom has been that capital flows are a blessing to emerging economies, bringing needed funds to countries where investments are most productive. But if history is any guide, capital flows have proven to be highly volatile—surging in good times and collapsing in gloomy ones.The global financial crisis has renewed the debate over the desirability of capital flows to emerging economies. Adding fuel to this debate is the fact that two of the world’s largest emerging economies—China and India—have experienced strong growth and relatively limited fallout from the crisis, all the while maintaining hefty restrictions on the flow of foreign capital.What can be done to ensure that emerging economies still benefit from productive foreign capital, while reducing the risks associated with highly volatile flows? Can we throw out the bathwater, but keep the baby?
Crisis Lessons to Remember for Europe’s Policymakers - The IMF Blog - For my final blog in this series on iMFdirect, I have decided to add a personal touch and draw on my experience as a former policymaker. So while this article builds on the previous five posts, it goes beyond them and includes some highly subjective comments on what lessons I believe the reformers in eastern Europe should take away from the crisis. And, although my primary focus is on countries outside the eurozone, it is clear that the eurozone will need to address long-term challenges, as I pointed out in my post After the Crisis, Much Still at Stake for Eurozone
What to Make of Chinese Official Zhu Min’s Role at IMF? - The announcement today by the International Monetary Fund that Zhu Min, deputy governor of China’s central bank, would become a “special advisor” to IMF chief Dominique Strauss-Kahn in May had IMF-ologists puzzling about the significance. The IMF’s press release said Mr. Zhu would play a role in “strengthening the Fund’s understanding of Asia” — which is the polite way the IMF talks about its inability to get hardly any Asian countries to turn to the IMF for help during the current economic turmoil. (Pakistan and Afghanistan are exceptions.) The IMF’s heavy-handed actions during the Asia financial of 1997 and 1998s still haunt the IMF there, though Latin America, another region where IMF animosity has run deep, is becoming IMF-friendly.
IMF urges emerging-market capital controls – WSJ - International Monetary Fund economists, reversing the fund's past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capital so they don't produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn. The recommendation is the IMF's firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting.
Rogoff Foresees A Wave of Sovereign Debt Defaults - Kenneth Rogoff, former IMF chief economist warned that a series of sovereign debt defaults is likely to be in the offing. From Bloomberg:Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years. I predict we will again,” Rogoff,…said at a forum in Tokyo today.He said financial markets will eventually drive interest rates higher, and European countries such as Greece and Portugal will “have a lot of troubles….“It’s very, very hard to call the timing, but it will happen,” Rogoff, 56, said in the speech. “In rich countries – - Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates. They will deal with it.”…Rogoff said Japanese fiscal policy is “out of control.” Japan has the world’s largest public debt, with gross liabilities that are approaching twice the size of the economy. Rogoff is far from alone in seeing sovereign defaults as likely...
Next Greece’ Search Is on as Hedge Funds Circle: William Pesek - (Bloomberg) -- The search for the next Greece is finding its way to an unlikely place:Japan. Few here gave much weight to warnings by analysts like Makoto Noji of Mizuho Securities Co. about the second-biggest economy facing “next-Greece” speculation. That was until Japan’s central bank chief hinted at a similar risk. Governor Masaaki Shirakawa last week called on Prime Minister Yukio Hatoyama to contain the world’s largest debt with a warning that investor trust won’t be assured in the aftermath of Greece’s budget woes. It was an extraordinary comment. Politicians routinely slap the Bank of Japan around; it’s jaw- dropping to see the BOJ return the favor. The BOJ head is right to put a spotlight on the fiscal train wreck that could be Japan’s $4.9 trillion economy. That’s especially so now that the Federal Reserve is on the move. Its discount-rate increase last week telegraphed what Japan has been dreading: rising global bond yields that exponentially boost debt-servicing costs.
Lessons from Japan on sovereign default and balance sheet recessions - Edward wrote a piece about Japan’s government net asset value falling below zero. He thought it would make sense if I gave you an alternative view using Richard Koo’s latest thinking about the Japanese experience, especially given the parallels to the U.S. regarding balance sheet recessions. I should add that, for all of the talk about Japan’s "national insolvency", I still don’t see their social security cheques – or the Japanese equivalent – being bounced. The fact that debt issuance exceeds tax revenues only tells me that the economy remains in dire straits, not that the country is bankrupt. The latter implies a shortage of yen, which can never been the case in a country which has retained its sovereign ability to create currency. I know Edward understands this despite his Austrian-oriented sensibilities. but it needs to be reiterated. See Edward’s piece “Russia, sovereign debt defaults, and fiat currency.”
Japan - GDP – exports - manufacturing – autos – Toyota - Forget the Eurozone for just a minute. Japan's problems are big: Toyota is a major exporter/employer. Last year 48% of all new standard passenger vehicles sold in Japan were Toyota (or its Lexus brand). The WSJ article describes Toyota's status in Japan as the following:In short, Toyota is to Japan what General Motors Corp., in its heyday, was to America. And for a beleaguered country that has suffered a series of institutional blows in recent months—the collapse of the long-ruling political party, the bankruptcy of its champion national airline, a renewed bout of deflation— the global humiliation of Toyota may be the most psychologically damaging blow of all. Psychological blow, what about an explicit economic blow! Toyota is certain to drag the only Asian G7 economy down due since auto exports are big in aggregate export income.This is big. I wouldn’t be surprised if the IMF downgraded their forecast of Japan based solely on Toyota’s misstep.
Asia Leads the Way Out of Recession - WSJ - The global recession was made in America. The recovery is being made in Asia. This week's headlines well illustrate the striking contrasts: Thailand said its economy expanded at a 15.3% annual rate in the fourth quarter, and Taiwan said its grew at an 18% pace. But Germany said its economy didn't grow at all in the quarter, and the only reason it didn't contract was that German industry managed to boost exports to healthier economies. "The slump was very synchronized. The recovery? Increasingly less so," says Olivier Blanchard, chief International Monetary Fund economist. Take a quick tour of the world economic recovery room. First stop is the rich, mature economies—the U.S., Europe and Japan. None are healthy yet...
Is China trying to “lock up” the world’s natural resources? - VoxEU - The rapid emergence of China as a major industrial power poses a complex challenge for the world’s natural resources. This column argues that the Chinese government-backed investments in natural resource supplies are predominately in areas that will help expand, diversify, and improve competition in the global supplier system. But potential geopolitical consequences remain a reason for concern.
Where did all the Chinese workers go? - Chinese exporters can't find workers, according to the Wall Street Journal and Financial Times. Or, to be more precise, they can't find the kind of workers who used to be willing to plunk themselves down in front of mind-numbing assembly lines for wages of around $250 a month. The millions of migrant workers from the inland who once poured into China's coastal regions willing do any kind of work at all appear to be getting more choosy, even when offered a dazzling array of perks. The Journal's Shen Hong speculates that government efforts to spur development in China's inland regions have ameliorated the economic pressure that previously motivated workers to head East. The FT backs up that theory by noting what a difference it makes to upgrade transportation links connecting previously remote cities to wealthier markets.
NYT Should Rely on Experts Who Are Not Employed by J.P. Morgan - The NYT reports that strong demand is causing wages to rise rapidly in China. While the article describes this as a "labor shortage," this is actually a normal process in a growing economy. Workers move from less productive sectors to more productive sectors. At the end of the article, the NYT notes that China may revalue the yuan as one mechanism for offsetting the inflation caused by the rise in wages. It then cites Jing Ulrich, the chairwoman of China equities and commodities at J. P. Morgan: "Letting wages rise benefits workers, ... letting the currency rise benefits currency speculators." Actually, workers would benefit from a rise in the yuan also, since they would be able to buy imported goods at lower prices. However, letting the currency rise would make J.P. Morgan a relatively weaker actor in China since most of its assets are in dollars. These dollars would be worth less in China if the yuan rose in value.
China insider sees revolution brewing - China's top expert on social unrest has warned that hardline security policies are taking the country to the brink of ''revolutionary turmoil''. In contrast with the powerful, assertive and united China that is being projected to the outside world, Yu Jianrong said his prediction of looming internal disaster reflected on-the-ground surveys and also the views of Chinese government ministers.Deepening social fractures were caused by the Communist Party's obsession with preserving its monopoly on power through ''state violence'' and ''ideology'', rather than justice, Professor Yu said. Disaster could be averted only if ''interest groups'' - which he did not identify - were capable of making a rational compromise to subordinate themselves to the constitution, he said.
Stopping the leakages in China - Anyway, the lack of significance in the Fed’s move is too obvious to be worth discussing. What I want to dwell on here is another hike—that by China—where the implications (or lack thereof) are a touch less obvious. So, you may recall that, at the end of last week, and right before the Chinese New Year holiday, China hiked banks’ reserve requirement ratio (RRR) for the second time this year. Both times, we got the all-predictable market reaction above—the rationale being that China is stepping on the brakes, prompting a slowdown in domestic investment (especially in infrastructure and real estate), commodity imports and global growth. But as it happens, China’s RRR hikes have virtually zero impact on the country’s financial conditions. Indeed, as I’ll argue below, China has yet to show any signs that it is serious about avoiding overheating and asset bubbles in its economy in an effective and sustainable way.
Bernanke: Imbalance With China Can Be Risk to Financial System - Federal Reserve Chairman Ben Bernanke said imbalances created from China’s large holdings of U.S. assets could pose a risk to the financial system. “It would be a healthier situation if China saved less and we saved more, and as a result they were not accumulating dollar assets so quickly and we had a more balanced financial picture,” Bernanke told the Senate Banking Committee.“I do think those large capital flows and the potential instability of those flows can be a risk to our financial system,” he said. Bernanke, who earlier called for China to allow more flexibility in its exchange rate, said keeping the currency pegged to the dollar requires China to buy up a lot of U.S. Treasurys.
Time to Press China on Its Exchange Rate - This morning the bipartisan United States-China Economic and Security Review Commission holds a hearing on “U.S. Debt to China: Implications and Repercussions.” I’m on the first panel, which will discuss in part the perception that China’s large dollar holdings confer upon that country some economic or political power vis-Ã -vis the United States. In particular, I’ll talk about whether Chinese reserves prevent us from putting pressure on that country’s authorities to revalue (i.e., appreciate) the renminbi. I will argue that this view is incorrect and completely misunderstands the situation. Here’s the outline of my reasoning.
US-Sino tensions "dangerous game," U.S. panel told (Reuters) * China might aggressively sell US assets if provoked - China's belief it now has the upper hand in the global economy creates a risky dynamic that makes it urgent the United States cut its mammoth debt, a former International Monetary Fund official said on Thursday. At issue is China's vast holdings of U.S. Treasuries and growing concerns that China could wield its position as one of the country's biggest creditors as a club against U.S. policy. The United States' huge budget deficit, which has ballooned due to government bailouts of financial firms and economic stimulus, makes the country dependent on maintaining the appetite of big investors like China for Treasuries."In fact, the bargaining strengths of the two countries are finely balanced. But the changing perceptions set up a dangerous game of chicken that could spin out of control," Eswar Prasad, former head of the IMF's China Division.
Time to Worry about China? - TIME - I have absolutely no doubt China will be the next great superpower. But I do have an issue with what I consider blind optimism on the part of many observers about the China growth story. Too many economists out here seem to wish away some of the serious structural problems in China's economy. The prevailing attitude is that China is somehow more capable of dealing with such problems than other countries. I'm not convinced. I'm starting to wonder if China is heading into one of those rough patches right now. Sure, China's GDP growth in 2009 (at 8.7%) was an amazing achievement. But now Beijing has to contend with the fallout from the measures it took to create that growth during the Great Recession. For example, there is a fascinating story in The Wall Street Journal about the percolating problem of debt at China's local governments. This problem gets at a much bigger issue: What damage has China's stimulus plan done to its financial system? China's GDP surge was created by a credit boom of biblical proportions. Banks granted almost twice the number of loans in 2009 as they did the year before, an amount equivalent to nearly 30% of GDP. This increase in credit runs counter to usual economic logic
China's building bubble about to burst - Frenzied developers with access to cheap money are creating a glut of premium office space and luxury apartments, priced at about 80 times the average income of the city's residents. Prospective middle-class homeowners, in panic-buying mode, are snapping up two properties at once, hoping to flip the second one to finance the first. Civic officials are encouraging the building boom. The sale of vacant lots bolster their municipal coffers. Banks eager to reap upfront fees are granting mortgages to all comers. Even factory owners are in on the speculation, generating more profit from flipping property than from traditional manufacturing, which increasingly is moving offshore to Vietnam, Malaysia and other nations with lower labour costs. This is Beijing today, where until recently one of the most popular programs on local television was a reality show called The Romance of Housing that spotlighted the struggles of families pursuing elusive affordable shelter.
Could China's Voracious Demand for Natural Resources "Green" the World's Economy? This piece about China's demand for natural resources got me thinking again about the broad topic of "limits to growth". As world population and per-capita incomes rise, and given our global desire to achieve the "American Dream", could we exhaust our finite stocks of non-renewable resources? In Collapse, Jared Diamond argues that there are many historical case studies that suggest that the answer is "yes". China and India's ongoing growth is a credible signal that resource demand will rise --- if this is predicted to lead to rising resources prices over time then this creates sharp innovation incentives to devise substitutes for the increasingly scarce natural resources.
"India vs. China: Whose Economy Is Better?" - India may finally have one up on its high-octane rival. Though India still can't compete on top-line economic growth — the World Bank projects India's gross domestic product (GDP) will increase 6.4% in 2009, far short of the 8.7% that China announced in mid-January – India's economy looks to be rebounding from the downturn in better shape than China's. India doesn't appear to be facing the same degree of potential dangers and downside risks as China, which means policymakers in New Delhi might have a much easier task in maintaining the economy's momentum than their Chinese counterparts. "The way I see it is that the growth in India is much more sustainable" than the growth in China, says Jim Walker, an economist at Hong Kong–based research firm Asianomics. India's edge is due to the different stimulus programs adopted by the two countries to support growth during the downturn.
"A Road Map for India".- India has a critical decade ahead. Managed well, it will catapult India into a developed country with superpower status. Managed poorly, the opportunity will be squandered. I would like to believe that this time, India will manage its destiny well. And in my new book, Vision India 2020, I have outlined what I wish to see.So far India has positioned itself as a software superpower on the shoulders of outsourcing. But is that all that we will ever achieve? With the right guidance, I resolutely believe that the Indian youth have the potential to build their nation's next phase of development--systematic development rather than the haphazard, helter-skelter development we have thus far seen.Development for India, of course, will not be limited to the technology sector. Driving from Calcutta to Kharagpur last year, I experienced intimately the toll of one of India's many unforgiving bottlenecked roadways: a highway reduced to one lane because of a bridge that has stood derelict for three years.
India budget raises borrowing to new record, bonds hit -Finance Minister Pranab Mukherjee told parliament the government plans to increase market borrowing by 1.3 percent in his $239 billion budget, pushing bond prices lower as investors feared a flood of fresh debt supply. Analysts said the borrowing plan cements the likelihood that the central bank will raise interest rates at its next meeting on April 20 as policymakers scramble to keep surging food inflation from spreading to the wider economy and fueling social unrest. Mukherjee announced plans to hike spending on social and agricultural programmes popular among voters, but moved only tentatively to cut a fiscal deficit that is worrying investors
India May Struggle to Cut Budget Gap on Spending, Rogers Says - Should India’s government continue to spend at the present rate, the nation’s debt to gross national product may reach 100 percent in three to four years from more than 80 percent currently, Rogers said. This may mean that India will face the problems besetting Greece, whose struggle to slash its fiscal shortfall has sparked a sell-off in global stocks, he said. “Many studies have shown that when your debt gets up to 90 percent of GNP, your growth slows immensely and you usually wind up having serious problems,” Rogers said. “India is becoming a very indebted nation and that’s not good for India or for the world.”
Services-led growth: A new hope for development late-comers? - VoxEU - Which is the best route to development: Manufacturing or services? This column argues that India’s example of a “services revolution” – rapid growth and poverty reduction led by services – provides inspiration for late-comers to development and challenges the conventional wisdom that industrialisation is the only rapid route to economic development.
Bond markets require larger budget deficits - Today I have been reading all the documentation surrounding the proposals issued by the Bank of International Settlements to reform the regulatory system for international banking. These considerations then took me to an interesting paper from Deutsche Bank where they refute (albeit unintentially) much of the media hysteria about exploding government bond yields and bond markets “closing governments down” because their deficits are “ballooning out of control”. In fact, the DB Report shows categorically that within the new regulatory framework that the BIS (and hence the Australian Prudential Regulation Authority will introduce, there is scope for larger budget deficits. In terms of the state of the Australian labour market and the very slow growth that the world economy will experience in the coming years, a further stimulus package is necessary. The DB Report implies that the bond markets would welcome it. Curious?
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