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

Saturday, February 6, 2010

week ending Feb 6

Fed’s Emergency Efforts Winding Down Amid Market Approval - WSJ -  In with a bang, out with a whimper. And so it goes for a series of emergency lending programs hatched by the Federal Reserve over the course of the worst financial crisis since the Great Depression. Monday saw the end of initiatives aimed at supporting various parts of the commercial-paper market, where companies get short-term financing, along with programs to ensure key investment banks could get liquidity. Also shuttered: currency swap arrangement the Fed had with other major central banks. Over the next several months other emergency lending programs will also make their last stands. The end of these facilities represents a move by policy makers to normalize their relationship with healing financial markets. Emergency aid withdrawn, an eventual tightening in monetary policy will follow.

Fed Watch: Devil's Advocate - Commentators, including myself, have been critical of a Federal Reserve policy stance that appears to place uncertain inflation concerns ahead of a very real unemployment problem. Playing devil's advocate, one can argue that Federal Reserve members are showing remarkable patience in keeping interest rates at rock bottom levels. Even more remarkable is that there is not a greater push to aggressively contract the balance sheet to a more traditional state. Central bankers are simply a very conservative lot, and the Fed is operating at the boundary of what many policymakers can stomach. Indeed, recent data must be somewhat disconcerting, with the US economy under the influence of an inventory correction that is having a very real positive impact on the manufacturing sector. And if the January employment report yields a substantial increase in nonfarm payrolls - something not out of the question in the wake of 5.7% growth in the fourth quarter of last year - policymakers may start to think that the balance of risks are turning rapidly toward inflation. Remember, the chief obstacle to tighter policy is the forecast of persistently high unemployment. Data flow that runs contrary to that expectation will raise fears among some policymakers that they are already dangerously behind the curve.

The Myth of the Fed’s Exit Strategy - The “Exit Strategy” the Fed’s Bernanke is contemplating is nothing less than a total, unadulterated myth. This is the fairy tale you read to your young children at night where the government cuts back its spending and the Fed shrinks its lending. The private economy then picks up the slack, and the rest of us live happily ever after. Unfortunately, this time there will be no Prince Charming riding in on a white horse. In 2009, the US ran an unprecedented $1.5 trillion budget deficit, financing the shortfall by issuing Treasury bonds. The Fed happily obliged by soaking up this tsunami of paper, either directly, or indirectly through mortgage purchases. This boosted its own balance sheet from $800 million to a mind boggling $2 trillion in the process, or about 14% of GDP. Were there any other takers of new government debt? China bought $100 billion, and another $200 billion went to a hodgepodge of assorted foreign central banks and sovereign funds, barely 20% of the total. Back out the Fed as the buyer of last resort, and where are we?

The Fed’s Exit Strategy - Allan Meltzer had an op-ed in the Wall Street Journal the other day in which he argued that the Fed’s exit strategy will fail. Meltzer and I likely disagree on when the exit strategy needs to begin, however, we are in agreement that the strategy will not work. The banking system is currently flooded with excess reserves — over $1 trillion. Historically, that figure has been around $1 billion or less. Thus far this has not led to inflation because of the declines in velocity and the money multiplier (for more on this see here and here). It is only a matter of time before confidence re-emerges and banks start lending these excess reserves. When this happens, monetary policy will have to respond by draining these reserves from system. It is possible to do so in one of two ways. The first way is to sell bonds through open market operations. The second way is the raise the interest rate that the Fed currently pays on reserves. While I have no doubt that the latter is possible, it is a much trickier assignment and only tackles the problem indirectly. If the problem is with reserves, the Fed should tackle the problem directly.

Kansas City Fed’s Hoenig Explains His Dissenting Vote - Federal Reserve Bank of Kansas City President Thomas Hoenig became a voter on the Federal Open Market Committee last week, and right off the bat he became the first central banker in a year to dissent on policy. He wanted the Fed to remove language from its statement saying that rates would stay low for “an extended period.”  “I think policy makers need to have the broadest options possible and the language that we use that is ‘very low for an extended period’ was appropriate during the height of the crisis to assure that we were not going to make any changes,” . “But now the economy is beginning to recover. It has been in recovery now for two quarters. We have to be thinking a little bit longer ahead and that’s really what my admonition was … that we need to broaden options at this point. Mr. Hoenig, one of the most hawkish regional bank presidents, didn’t say that the Fed’s interest-rate target should be increased now. But he said the central bank should have more flexibility to raise rates as economic data improve. The Fed’s target eventually should be “at least higher than 3%,” Mr. Hoenig said. “That’s quarters or maybe even years ahead depending on how the economy recovery goes. But that’s not something … that I think that should be the rate tomorrow.”

Drinking poison to quench thirst - Andy Xie -The zero-interest rate environment and rapid monetary growth are scaring conservative savers into becoming budding speculators. By threatening to destroy the value of cash and by subsidizing speculation with low interest rates and bailouts, good guys really finish last. It may be better surfing the speculative waves than staying put. One may die in a speculative crash, but holding onto cash when governments are hell-bent on printing money to solve every problem seems like certain death. Central banks have thrown trillions of dollars towards preventing necessary economic adjustments, believing that stimulus will bring back growth. The money is buying some time, but the costs are (1) that the governments won't have enough money to cushion the pain during the coming economic restructuring and (2) that inflation will increase misery in an economic downturn. The whole world is drinking poison to quench its thirst. It may feel like relief now, but the sickness will strike in 2012.

Chris Sims: Monetary Policy at the Zero Lower Bound: (13pp pdf) - via DeLong - In models, it is easy to specify an announced future policy stance and assume the public believes the announcement. In practice, there is inevitably uncertainty about ex- actly how firm are commitments to future policy, even if the future policy is announced in detail.... Central banks in most developed countries have succeeded in convincing the public that they are committed to maintaining low and stable inflation. But this credibility has built up over decades as the central banks have acted to deliver on their commitment. In the presence of a binding ZLB, the result from the models is that the central bank ought to commit to expansionary future policy. A bank that has built up inflation-fighting credibility may find this is a liability if it tries to convince the public that it is temporarily committed to increasing the inflation rate. Announcements about future policy at a time when the short rates that ordinarily are seen as set by the central bank are stuck at zero are partic- ularly subject to doubt, just because they are accompanied by no current action...

Bernanke Vows to Defend Fed Autonomy at Swearing-In Ceremony - Ben S. Bernanke vowed to defend the independence of the Federal Reserve, work harder to explain its decisions to the public and step up supervision of the nation’s banks during his second term. “In the interest of maintaining public confidence and promoting economic and financial stability, we must continue to protect our independence,” the 56-year-old former Princeton University professor told Fed employees assembled in the atrium of the central bank’s Washington headquarters after he was sworn in for another four-year term yesterday.

Bernanke calls for further Fed transparency - So, are we looking at a new Fed chair, one humbled by his actions in the lead up to the financial crisis? It’s hard to say. But he is willing to make at least one concession. Mr Bernanke called for the Fed to become more transparent. The Federal Reserve is already one of the most transparent and accountable central banks in the world, providing voluminous information and explanation concerning all of its activities. However, I believe that we should be prepared to do even more, to become even more transparent. It is essential that the public have the information it needs to understand and be assured of the integrity of all our operations, including all aspects of our balance sheet and our financial controls. Of course, he doesn’t want to go overboard....

A Funny Thing Happened on the Way (Back) to the Fed - Although Bernanke remains as chair, the political impact of the confirmation tussle looms large. First, brewing dissatisfaction with the Fed’s performance extends far beyond the confirmation vote. The House has voted to allow audits of monetary policy, while proposals in the Senate would strip the Fed of its supervisory powers, rein in its emergency lending powers, and confine it to the task of setting (interest) rates. Bernanke’s wafer thin confirmation margin reveals legislators’ wariness—if not downright distrust—of the Federal Reserve.  Second, the road to confirmation has imposed a steep tax on the Fed’s independence. Bernanke’s explicit lobbying for senators’ support, as well as claims from the Democratic leader that his support was “conditional,” belies the myth of Fed independence. That of course raises the possibility that political pressure could interfere with the Fed’s conduct of monetary policy— thus stoking the risk of inflation.

Official says Fed might buy more mortgage-backed securities - The Federal Reserve would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness, Federal Reserve Bank of New York President William C. Dudley said in two new interviews.  The Fed is buying $1.25 trillion in mortgage-backed securities in its effort to prop up the economy but has said it will end those purchases March 31.   Dudley said the time is right to end the program because the economy is growing and because expanding the purchases would make it harder for the Fed to unwind its support down the road.  But he said the Fed might reconsider if rates rose sharply. "Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages," 

Monetary Policy and the Housing Bubble - A popular explanation of the financial crisis lays the blame at the feet of the Federal Reserve for lax monetary policy.  In this story, the Fed dropped interest rates starting in 2001 and kept rates too low for too long.  Low rates induced an orgy of mortgage borrowing for leveraged home speculation.  It's a nice story.  Only problem is it doesn't really hold up under inspection.  Low rates in 2001-2003 did fuel an amazing mortgage refinancing boom, but not a purchase boom, and the boom was mainly in conventional fixed-rate mortgages, not the exotic products later years.  Moreover, despite the refinancing boom, no housing bubble was emerging in this period.  The Fed started to raise rates in mid 2004 and continued to do so until mid-2006.  It was during this period that the bubble emerged, when rates were going up. 

Fed’s Warsh: Regulatory Reform Needs International CooperationFederal Reserve governor Kevin Warsh said Wednesday that reforming the financial regulatory system will require international cooperation, if those efforts are to be successful. Warsh’s comments came in response to audience questions after a speech given before the New York Association for Business Economics. Warsh’s formal remarks centered on the matter of regulatory reform. Congress is currently mulling proposals that could see the Fed stripped of its bank oversight powers, a possibility that worries many central bankers. In an opinion piece in the Financial Times published Wednesday, Warsh argued in favor of the Fed maintaining its current portfolio, and offered his thoughts on the best way forward for reform.

Kevin Warsh: Focus on ways for banks to fail safely - FT - This is not only a time of great consequence for financial regulation and the US economy. It is also a time for choosing. Washington is seeking to repair the regulatory system. This is a wholly worthwhile task. Improvements in regulatory policy – if part of a broader review of the financial architecture – could herald greater prosperity for future generations. But efficacy, not convenience, should be the goal of policymakers. We will have done ourselves no favours if what is billed as “comprehensive regulatory reform” over-promises and under-delivers.  The prevailing theory has it that financial institutions engaged in practices that begat the financial crisis. To redress these wrongs, sweeping new regulatory powers will treat the infirmities that ail us. This theory has understandable appeal, but is deficient in important respects.

Kevin Warsh: “No Firm Should Be Too Big To Fail” - Simon Johnson - The debate over Ben Bernanke’s reappointment, and his approach to the financial system, may after all have had some impact.  In a speech yesterday, Kevin Warsh – the Federal Reserve Board Governor who liaises between Ben Bernanke and financial markets – signaled a major change in Fed thinking regarding “too big to fail”. Warsh was much blunter than we have heard from the Fed in a long while: “Moral hazard in the financial system is higher than any of us should countenance”; “eradicating the too-big-to-fail problem should be the predominant policy goal”; and “in the new regime, no firm should be too big to fail.”At some level, Warsh and his colleagues are finally learning the main lesson of 2008-09. But there is still a major problem in the Fed’s thinking.

Fed Disqualifies Itself as Systemic Risk Regulator - If anyone had any doubts as to whether the Federal Reserve should assume the role of systemic risk regulator, a comment in the Financial Times by Board of Governors member Kevin Warsh, based on a speech he is to give later today, puts the matter firmly to rest. No matter how logically positioned a central bank may be to assume this job, Warsh’s remarks illustrate that the Fed has learned nothing from the crisis, and is still in the thrall of neoclassical economics ideology, which is blinding it to facts on the ground. Warsh argues, incredibly, that industry structure is not a problem. Huh? We have an oligopoly of twenty firms or less that control the international debt markets that are critical to modern commerce. That is a major and thorny problem.

“Why Bernanke Should Resign” - Richard Alford - former economist at the New York Fed - There was a long period of time during which I believed that Mr. Bernanke should have resigned the Chairmanship of the Board of Governors of the Federal Reserve System. Subsequently, I came to believe that he would not be nominated for a second term as Chairman  Now, Bernanke has been confirmed by the Senate-albeit with a record number of Senators voting nay. And I am back to my original position- I believe that Bernanke should resign. In fact, the arguments for a resignation are more compelling than ever. The reasons that I believe Bernanke should resign and the reasons behind my “I was for a Bernanke departure, before I was against it and now I am for it again” position are straightforward.

A framework for central banks and bank supervision – VoxEU - Should monetary policy and banking regulation be conducted by separate bodies? This column proposes a new policy framework whereby the central bank chooses short-term interest rates and the aggregate equity ratio while banking regulation and supervision, including the determination of bank-specific capital requirements, would be left to separate bank-regulatory authorities.

Deflation - Core inflation rates are still headed downward:  [source] A recent Economic Letter at the San Francisco Fed examined the Phillips curve relationship between inflation and unemployment, and used that model to forecast inflation through the end of 2010:For the period from the fourth quarter of 2009 to the fourth quarter of 2010, the Phillips curve model suggests that inflation should continue to go down and remain low, as the unemployment rate is likely to remain high. This leads to a puzzle: Why don't the consensus macro forecasts show much of a fall in inflation? If current unemployment forecasts are right, inflation should continue to fall. And the graph above gives no reason to doubt that forecast. Do forecasts of inflation invoke some magical "anchoring" effect to say that somehow this won't happen?

US deflation no longer seen as a risk - FT - Mr Bullard, president of the Federal Reserve Bank of St Louis, told the Financial Times in an interview that his preoccupation throughout 2009 had been deflation, but the risk had "passed". Last week's Fed meeting produced a dissenting vote for the first time in a year when Thomas Hoenig, president of the Kansas City Fed and a rate hawk, argued that financial conditions no longer warranted a policy of holding rates at "exceptionally low levels . . . for an extended period". Mr Bullard, who is considered a centrist member of the FOMC, said he was happy to continue with the current guidance, but he did have some sympathy for Mr Hoenig's argument that "if you come off zero and you move up a little bit, it's still a very easy policy. You've still got a very large balance sheet and you're still at very low interest rates." He added that, although it was not time to tighten policy, members of the committee would weigh in their decisions factors other than inflation and unemployment. Factors to consider would include asset bubbles.

Despite Carping, Dollar Is Still King - The Chinese and the Russians love to dump on the dollar. The International Monetary Fund dreams that some day its unofficial currency, the SDR, may become the world’s reserve currency. But for now, at least, the dollar is still king.  According to a study by Linda Goldberg, an international economist at the New York Fed, the dollar remains the world’s top currency by a long shot when measured in a number of different ways. Those include: foreign currency reserve holdings, foreign exchange transactions, international trade financing and international bond sales. The dollar had about an 86% share of foreign exchange transactions in 2007, for instance, slightly higher than in 1995.

Is the International Role of the Dollar Changing? - NYFed - Recently the U.S. dollar’s preeminence as an international currency has been questioned. The emergence of the euro, changes in the dollar’s value, and the financial market crisis have, in the view of many commentators, posed a significant challenge to the currency’s long-standing position in world markets. However, a study of the dollar across critical areas of international trade and finance suggests that the dollar has retained its standing in key roles. While changes in the global status of the dollar are possible, factors such as inertia in currency use, the large size and relative stability of the U.S. economy, and the dollar pricing of oil and other commodities will help perpetuate the dollar’s role as the dominant medium for international transactions.PDF full articlespacer 7 pages / 434 kb

Memory and the dollar: New evidence on international demand - VoxEU - Will the dollar lose its dominant role in international transactions? This column argues that this will happen quite slowly, if at all. It presents new evidence that in developing economies, demand for dollars hinges much more on historical than on recent experience. The highest inflation rate recorded within a country over the past 30 years explains flows of cash dollars more compellingly than recent inflation rates.

US debt to hit proposed ceiling by end-February: Treasury - The US debt is on track to hit a congressionally proposed debt ceiling of 14.3 trillion dollars by the end of February, the Treasury said Wednesday, a day ahead of a key vote to raise it to that level."Based on current projections, Treasury expects to reach the debt ceiling as early as the end of February. However, the government's cash flows are volatile, making it difficult to forecast a precise date," the Treasury said in a statement. The current limit on the public debt of the United States is 12.374 trillion dollars.The US debt exceeded 12.349 trillion dollars on Monday, according to Treasury data. The US House of Representatives will vote Thursday on whether to raise the US debt limit to a historic 14.3 trillion dollars, allowing the United States to borrow another 1.9 trillion dollars.

It's Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against Raise - Congress Democrats have just signed off on the US hitting 100% debt/GDP. About 140% if one adds GSE liabilities which also should be on the budget.

State of the Union 2010 - Brookings Institution (video & transript) On January 28, Brookings hosted a discussion of President Obama's first State of the Union and its impact on the policy agenda. Participants included Kemal Derviş, Brookings vice president and director of the Global Economy and Development program; Karen Dynan, Brookings vice president and co-director of the Economic Studies program; Martin Indyk, vice president and director of the Foreign Policy program; and Rob Puentes, senior fellow in the Metropolitan Policy program. Senior Fellow Thomas Mann led the discussion.

State of the Union, Part 1—Obama sees extraordinary economic problems but proposes only ordinary solutions - In his State of the Union address the captain of our ship of state has gotten on the horn and told us we've struck an iceberg and are in danger of sinking, but his call to action is all about deck chairs. And it's really worse than that. Some proposals are inconsistent with each other, e.g., he wants to spend federal money to promote basic research, infrastructure construction, education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. And some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its exchange rate.

State of the Union, Part 2—The Great Recession is far worse than any other post-war recession, and there are big underlying long-term problems. - In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. Here I quote from his State of the Union address and then post some charts and graphs to show that he does not overstate our problems. In Part 3, I'll post a list of Obama's proposals.The US has escaped the danger of a Japanese-style deflationary trap, according to James Bullard, a voting member of the Federal Reserve's key policy-setting committee.

Financial Confusion Reigns On Record $1.6 Trillion Deficit Forecast – The White House is about to present its budget to Congress for the 2010 fiscal that will cause a $1.6 trillion deficit and $3.8 trillion in spending. That would be an all-time record and $200 billion higher than the 2009 number.  The Administration’s budget would add $8.5 trillion to the federal debt through 2020 growing the debt as a percentage of GDP to 77%, The White House forecasts that the deficit would drop to $727 billion, or 4.2% of the gross domestic product, by 2013.Obama’s proposal will include a freeze on spending increases in some discretionary government programs, but the $250 billion savings that represents over ten years will have the most minor affect on the red ink.The President and some members of Congress would like to put together a bipartisan panel to analyze the nation’s finances and suggest budget cuts, but members of the legislative branch may find the cuts unpalatable as they seek re-election.

Obama to propose $3.8 trillion 2011 budget – report (Reuters) - President Barack Obama will unveil a $3.8 trillion (2.4 trillion pound) budget proposal on Monday for fiscal 2011, the New York Times reported on Saturday. The White House declined to comment on the report. The newspaper said the budget would include $25 billion for struggling states and provide funding increases for programs at the Energy Department, National Institutes of Health, National Science Foundation and the Census Bureau. An administration official confirmed to Reuters that the budget would include a 6 percent increase in civilian research programs. The budget would also provide more funds for military programs, including the Pentagon's Special Operations forces, the U.S. Army's Black Hawk and Chinook helicopters, and the $300 billion F-35 Joint Strike Fighter.

Obama’s Spending Priorities - More details are emerging: The budget for the 2011 fiscal year, which begins in October, identifies the winners and losers behind Mr. Obama’s proposal for a three-year freeze of a portion of the budget. Many programs at the National Institutes of Health, the National Science Foundation and the Energy Department are in line for increases, along with the Census Bureau. Among the losers would be some public works projects of the Army Corps of Engineers, two historic preservation programs and NASA’s mission to return to the Moon, which would be ended as the administration seeks to reorient the space program to use private companies for launchings. Mr. Obama is recycling some proposals from last year, including one to end redundant payments for land restoration at abandoned coal mines.

Obama's 2010 budget deficit soars to record $1.56 trln  (Reuters) - President Barack Obama on Monday projected the U.S. budget deficit would peak at a fresh record in 2010 before easing as he pushes for fiscal responsibility while battling double-digit unemployment. Dubbed an old-style liberal tax-and-spender by his Republican opponents, Obama is under pressure to convince investors and big creditors like China that he has a credible plan to control the country's deficit and debt over time.

In $3.8 Trillion Budget, Obama Pivots to Trim Future Deficits - NYTimes - President Obama sent Congress on Monday a proposed budget of $3.8 trillion for the fiscal year 2011, saying that his plan would produce a decade-long reduction in the deficit from $1.6 trillion this year, a shortfall swollen by $100 billion in additional tax cuts and public works spending that he is seeking right away. But at the end of the decade, the yearly deficits would begin moving up again, as the projected costs of health and retirement programs for an aging population start to escalate, according to forecasts in the administration’s new blueprint.

Obama pairs a push for jobs with proposed spending cuts - President Obama today proposed a $3.8-trillion federal budget that includes a $100-billion jobs package, more education spending and higher taxes on families earning more than $250,000 a year. The budgetary blueprint for fiscal 2011, which starts Oct. 1, is 3% more than the government is spending this year, according to the Office of Management and Budget. The White House envisions a $1.267-trillion deficit in fiscal year 2011, smaller than this year's projected $1.56 trillion. That would be 8.3% of the gross domestic product, down from 10.6% this year. The White House Budget Office forecasts that it could be trimmed to less than 4% of the GDP by 2015.

Budget reflects weakened economy, EPI analysis shows - Economic Policy Institute - The Obama administration today released its fiscal year 2011 budget, and its budget projections continue to reflect the poor state of the economy. The recession—with greater unemployment and lower incomes—automatically leads to lower revenues and higher spending levels:  2011 revenues are projected to be significantly below trend at 16.8% of gross domestic product, and outlays are projected to be higher than trend at 25.1% of GDP.  However, the resulting deficit in 2011, at 8.3% of GDP, would be down from the projection for 2010 of 10.6%. The overall forward-looking trend in the deficit is positive, with the deficit as a share of the economy peaking in 2010, and then falling to around 4% of GDP for 2013 through 2020.

U.S. Can't Make Quick, Deep, Budget Cuts: Geithner - Treasury Secretary Timothy Geithner said Tuesday that the U.S. can't make deep and immediate budget cuts because it would damage the recovery and only exacerbate fiscal challenges. But he said the White House will seek to take the first critical steps to control the deficit. Geithner's comments, in prepared testimony to the Senate Finance Committee, illustrate the tightrope that the Obama administration is walking on fiscal policy. On the one hand, the White House is advocating new spending to boost jobs but is also pledging to be fiscally conservative.

Tom Hoenig For Treasury - Simon Johnson - The White House is floating, ever so gently, the notion that they are open to nominations for the position of “Tim Geithner’s Successor.”It’s not clear if they mean this job is likely to be advertised formally sometime in 2012 or 20 minutes after the November midterms.  Nor is it obvious if this is a real request for proposals – it could be just an effort to make critics “put up or shut up.”Fortunately, there is an entirely plausible successor already in waiting, ready now or whenever the president finally realizes the need to fundamentally change banking policy. Tom Hoenig, president of the Kansas City Fed, is best known for three things.

Treasury to Get Nearly $80 Billion From Federal Reserve in 2011—The Treasury will get $156.3 billion from the Federal Reserve over the next two years after the central bank's huge asset purchases to counter the financial crisis, the White House said Monday. In its proposed budget, the White House estimated the Treasury should receive $77 billion from the Fed this year and $79.3 billion in 2011, compared to 2009 deposits of $34.3 billion. "Federal Reserve deposits of earnings with the Treasury will peak in 2011 and start to fall in the out-years as the Federal Reserve plans to wind down its portfolio," the budget said

Treasury Dept. Projects $392B in 1Q Borrowing - The Treasury Department says it expects to borrow $392 billion in the current quarter to help finance the largest annual budget deficit in history.The projection is $86 billion lower than an estimate the department issued in November, when it expected to borrow $478 billion. The improvement is largely due to higher-than-expected repayments of about $90 billion in bailout funds by large banks. The department also says it borrowed $260 billion in last year's fourth quarter, below an earlier estimate of $276 billion. Treasury expects to borrow $268 billion in the second quarter of this year.The projections come the same day that President Barack Obama proposed a $3.83 trillion budget that forecast a record $1.56 trillion deficit for this year, an increase from the $1.41 trillion deficit in the 2009 budget year.

The Budget and Economic Outlook: Fiscal Years 2010 to 2020 (CBO) 179 pp pdf

Peter R. Orszag: Facing the Fiscal Facts: (CBO blog) A Wall Street Journal op-ed today by the prior Administration’s CEA Chair, Edward Lazear, observes that the ratio of federal spending-to-GDP has risen by 14 percent since 2008—and that the transition from 2008 to 2009 saw the greatest annual increase in spending in the last 30 years. Ed is right about the numbers—but let’s look at the facts. On January 7, 2009, the Congressional Budget Office issued its Economic and Budget Outlook for Fiscal Years 2009-2019.  In that document, CBO projected that government spending would rise from 20.9 percent of GDP in fiscal year 2008 to 24.9 percent of GDP in fiscal year 2009.  (Just for the record, that CBO projection was issued 2 weeks before the current Administration took office.) This week, CBO issued its updated Economic and Budget Outlook for Fiscal Years 2010-2020.  That document shows that government spending in fiscal year 2009 turned out to be 24.7 percent.... It is thus correct that federal spending rose by roughly 4 percentage points of GDP between 2008 and 2009 -- and it is also the case that the increase in spending has helped to stabilize the economy -- but it is wrong to attribute that increase primarily to Administration actions since it took office.  The increase was already on the books when we arrived.

CBO Estimates a Federal Budget Deficit of $434 Billion in the First Four Months of Fiscal Year 2010 - Director's Blog - The federal government incurred a budget deficit of $434 billion in the first four months of fiscal year 2010, CBO estimates in its latest Monthly Budget Review, almost $40 billion more than the shortfall recorded in the same period last year. Although spending is lower than it was at this time last year, the deficit is still higher because revenues have fallen by 11 percent. Assuming that no other legislation affecting spending or revenues is enacted, CBO expects that the federal government will end fiscal year 2010 with a deficit of about $1.35 trillion, slightly below the $1.4 trillion deficit recorded in 2009. (See The Budget and Economic Outlook: Fiscal Years 2010 to 2020 for more details on CBO’s estimate for 2010 and its most recent 10-year projections.)

Record White House Budget Deficit Omits Trillions in Fannie and Freddie Liabilities - The record budget deficits announced by the White House on Monday fail to include the federal government’s share of Fannie Mae and Freddie Mac’s $6.3 trillion in liabilities — though the Director of the Office of Management and Budget once thought it should. Following a 2008 bailout that made the government a majority stakeholder in the mortgage companies, then-Congressional Budget Office Director Peter Orszag said, “Now that the authority is indeed being exercised, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”

Obama's FY 2011 Budget - The Obama Administration released its FY2011 Budget proposals today which assumes a substantial amount of tax cuts (making the 2001-2003 Bush cuts permanent for most Americans costs about $3.75 trillion over ten years) and some tax increases to cover important programs (about $1.9 trillion), resulting in a substantial net tax cut of almost $2 trillion over ten years. See press release and Green book. The press release claims that the Administration's plan covers "short-term tax incentives to create jobs and encourage business investment, ...proposals to deliver tax relief to middle class families and small businesses, and its blueprint for restoring fiscal discipline and responsibility to our tax code."  Personally, I think most of the tax cuts are stupid and will do very little to create jobs.  And many of the famlies offered "tax relief" are not really middle class--they are the upper middle/lower upper class.

The President’s bigger budget - Most people in Washington will focus on (1) the effects of the proposed budget on the deficit and (2) what the budget proposes for specific policies they happen to care about. I will focus on the size of the proposed budget relative to the rest of the economy.  The deficit is an important but incomplete measure of this.  It’s important to remember that every dollar not spent by the government is a dollar that can be spent by individuals, families, and firms.  We should care not just about the difference between spending and taxes, but also on how big government is relative to the private sector. Throughout this post I will describe things as a share of the economy (% of GDP).  This is a useful way to compare budgets across time but it is biased in favor of bigger government.  There is nothing that says that because the economy gets bigger that the government must grow along with it

Budget Forecasts vs. Reality Something to keep in mind when reading about the president’s budget projections: They are almost always wrong. And not surprisingly, the estimates usually err on the side of optimism.  When my colleague Amanda Cox crunched (and then graphed) the numbers on previous budget forecasts, she found that in the last 30 years, about 80 percent of four-year budget forecasts have been too optimistic. The one exception was the early Clinton administration forecasts, which had failed to predict the surpluses that materialized, in part, because of the stock bubble late in the decade.

Obama’s Mind-numbing Budget - Very little in President Obama’s 2011 budget, released this morning, is new. But the numbers…. Even in Washington, where we throw around trillions of dollars as if they were Hershey’s Kisses at Halloween, these numbers take your breath away. This year, the federal government will spend $3.7 trillion, but will collect only $2.2 trillion. That gap of $1.5 trillion would be equal to more than ten percent of the national’s total economic output. Next year, according to Obama’s fiscal plan, spending would increase to more than $3.8 trillion. Revenues would rise by two full percentage points of GDP to almost $2.6 trillion. Thus the deficit as a share of GDP would shrink to 8.3 percent. After that, matters would improve somewhat more (thanks in part to a growing economy) but the deficit would never fall below 3.6 percent of GDP. And still, the total debt held by the public would grow from an already-troubling 63 percent this year to 77 percent by 2020.

Obama’s blowout budget - Reuters - Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama’s proposed budget sets a new deficit record — $1.6 trillion this year compared to $1.4 trillion last year. The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We’ve accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run. In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a “new era of responsibility.” Of course that’s not at all what we’re getting. Orszag even trots out the line that we can grow our way out of debt:

Budget Sense and Nonsense - With the submission of the Obama administration’s budget today, fiscal silly season is opening. President Obama already launched an opening salvo last week with his proposed freeze on non-security-related military spending,which amounts to a rounding error on the ten-year budget projections, which are themselves a rounding error on the long-term budget projections– at a time when unemployment is running at 10.0%. Fortunately, there is a partial saving grace, which is that the freeze does not set until until fiscal year 2011 (which begins in October 2010), and in the meantime Obama has proposed $100 billion in tax cuts and government spending to create jobs. (Whether his proposals are the right way to spend $100 billion is a debate for another time.)

Analysts' View: 2010 Budget Deficit To Hit Record (Reuters) Following are analysts' comments after U.S. President Barack Obama on Monday projected in his budget for the fiscal year to September 30, 2011 the U.S. budget deficit would soar to a fresh record of $1.56 trillion in 2010.

The Endless Debt Spiral: Barack Obama Proposes A 3.83 Trillion Dollar Budget For 2011 - What would happen to your household if it spent $9,000 every single month but only brought in $6,000 every single month?  Well, you would quickly accumulate a massive amount of debt that you would very soon not even be able to pay the interest on.  You would probably have to end up declaring bankruptcy.  So if it is not okay for your household to spend like this, then why is it okay for the U.S. government to do it?  On Monday, Barack Obama unveiled his proposed budget for 2011.  It calls for 3.83 trillion dollars in spending, and it projects a deficit of 1.3 trillion dollars.  In other words, one out of every three dollars that the U.S. government would spend under Obama's proposed budget would be borrowed.

The Scary Budget Numbers - The recession and attendant financial shock appear to be easing as I write this. But in Washington, financial imprudence is part of the fabric of government. You can see that in a single document that gets updated every year: the US budget. In putting together the budget, the president and Congress set our national priorities and allocate resources among them. The results have been pretty consistent. Over the forty years ending in 2008, revenues have averaged about 18.3 percent of our economy and spending has averaged over 20.6 percent, resulting in an average deficit of about 2.4 percent. But that gap began to widen...

Wealthy Face Tax Increase - President Barack Obama's $3.8 trillion budget for the coming fiscal year raises taxes on businesses and upper-income households by $2 trillion over 10 years and cuts spending on programs with considerable political support, but will still leave the nation with $8.5 trillion in added debt over the next decade.  The budget plan for fiscal 2011 calls for nearly $1 trillion in tax increases on families with income above $250,000 over the next decade—largely by allowing tax cuts from the administration of George W. Bush to expire. But extensions of Bush tax cuts for the middle class, plus new tax cuts in Mr. Obama's jobs program, would cost the government $284 billion over the coming decade. Banks and multinational corporations would face new fees and levies. And oil companies would lose $36.5 billion in tax breaks over the next decade.

Obama Expands the Baseline—Again - President Obama broke new ground last year by presenting a budget that assumed changes in the tax law as part of his baseline. Because no one wants to see the Bush tax cuts disappear as scheduled next year or the estate tax go after mere millionaires or the AMT hit a third of all taxpayers, his 2010 budget simply assumed that 2009 tax rules would become permanent and ignored the cost of forgone revenue. That made some sense, given that Congress would never allow all of the tax cuts to disappear or the AMT to affect so many of their constituents. Building those provisions permanently into the baseline only recognized reality, making budget projections both more reasonable—and more drenched in red ink. This year the president has taken his baseline approach a step further in a way that makes much less sense. His 2011 budget baseline assumes that two provisions of last year’s stimulus bill—expansions of the child tax credit and the earned income credit—become permanent...

Obama's Budget Attacked - A blogger writes, we will still face unsustainable medium- and long-term deficits. Let us explain this word "unsustainable." For me personally, an unsustainable budget would be if I promised to buy my kids mansions in Paris, Tokyo, and London. I cannot keep those promises, hence they are not "sustainable." They are lies. When this blogger uses the word "unsustainable," that is his way of calling Baloney Sandwich on the President's Budget.  This alternative, like it or not, is sustainable. In a better world, the discussion would be limited to sustainable budgets. Discussing anything else is like my family discussing buying mansions for the kids. It's delusional.

Obligatory budget post - I keep on hearing about a "pivot," but where is it?  Via Greg Mankiw and Arnold Kling, here is Keith Hennessey: We can draw five important conclusions from this graph:

  1. At 8.3% of GDP, the proposed budget deficit for 2011 is still extremely high.
  2. President Obama is proposing larger budget deficits than he did last year.
  3. For 2011, the most relevant year of this proposal, the President is proposing a budget deficit that is 2.3 percentage points higher than he did last year (8.3% vs. 6.0%).
  4. Using his own numbers, the President’s proposed budget deficits will cause debt as a share of the economy to increase.
  5. Under the President’s proposal, budget deficits begin to increase as a share of the economy beginning in 2018.

Fannie, Freddie Kept Off Budget, Dividends Counted (Bloomberg) -- President Barack Obama’s budget blueprint for the next fiscal year excludes the $6.3 trillion in liabilities of government-controlled Fannie Mae and Freddie Mac and delays for a second time a decision on restructuring the mortgage-finance companies that were seized 17 months ago. The companies may need $54.4 billion more in U.S. Treasury Department preferred stock purchases to stay afloat in the current year that ends Sept. 30, and $23 billion more for the next fiscal year, according to calculations made from the Obama administration’s 2011 budget proposal to Congress today.

$2 trillion gone and nothing to show for it - NOTHING better explains the fiscal setback Barack Obama’s domestic agenda has suffered in the last year than this sentence from the budget: Since the [previous budget] was released in February of 2009, unfavorable economic conditions and technical re-estimates have worsened the deficit outlook by $2 trillion through 2019—the equivalent of 1 percent of GDP per year—with a deterioration of about $200 billion in 2015 alone. Got that? $2 trillion gone, with nothing to show for it: no new tax cuts, no new domestic programmes, not even new bail-outs: just gone because the economy is delivering up less tax revenue than Mr Obama anticipated a month after taking office.

Obama: Time for ‘painful choices’ in deficit battle - US President Barack Obama promised to rein the burgeoning US budget deficit, saying it was now time for Americans of different political persuasions "to come together" to solve this problem."Because we've heard plenty of talk and a lot of yelling on TV about deficits, and it's now time to come together and make the painful choices we need to eliminate those deficits," Obama said in his weekly radio address.The White House is forecasting a deficit for the full fiscal year of 2010 of some 1.5 trillion dollars, which would eclipse the record of 1.416 trillion in the fiscal year ended September 30.

Damn Those Tricksy Republicans With Their Hate and Their Crop Subsidies! - One of Andrew's readers writes: There is a portion of the Republican base in the Plains states that believe not all Americans are entitled to health care, but all farmers are entitled to payments from the federal government for crops to be grown that nobody actually needs.  If a spending freeze means more cuts like the ones proposed here, I'm all for it. One would think that there were no Democrats on the Senate Agricultural committee--or, for that matter, no Democrats from Nebraska, North Dakota, Iowa, Minnesota, and so on. Would that it were so . . . we might have a shot at killing off farm subsidies.  Sadly, not the case.  Obama's freeze will founder on the same two problems:  farm states wield disproportionate, bipartisan power in the Senate, and Americans think that farmers are really, really cute.

Obama Increasing Funding for Nuclear Weapons - President Barack Obama is seeking increased funding for nuclear weapons research and security programs next year, even as his administration promotes nonproliferation and has pledged to reduce the world's stockpile of nuclear arms. The administration on Monday asked Congress for more than $7 billion for activities related to nuclear weapons in the budget of the National Nuclear Security Administration, an increase of $624 million from the 2010 fiscal year. NNSA Administrator Thomas D'Agostino defended putting more money into the programs, saying the U.S. needs the best nuclear weapons facilities, scientists, technicians and engineers as it moves toward eventual disarmament.

Defense Analysts Blast Military Exemption to Spending Freeze - Steve Kosiak has spent much of his career as a defense analyst frustrated by military bloat. In early 2003, he found it was “impossible to say precisely” how much of the Bush administration’s military buildup was actually attributable to the post-9/11 emergency and how much was pre-existing defense pork. A 2005 paper he authored for the Center for Strategic and Budgetary Assessments, a leading Washington defense think tank, warned that rising defense costs could add “some $900 billion to projected deficits.” And in December 2008, he devoted almost 100 pages to carefully itemizing the costs of the Iraq and Afghanistan wars — $970 billion as of then, he found — and placing them in a broader social, economic and budgetary context. The Obama administration is deeply familiar with Kosiak’s work. A year ago, the White House tapped him to oversee defense spending for the Office of Management and Budget. And that makes President Obama’s decision to exempt the hundreds of billions spent annually on defense and homeland security from a proposed overall freeze in discretionary spending — a policy he formally unveiled in his State of the Union address Wednesday night — particularly difficult for defense analysts to understand.

PUTTING THE PENTAGON BUDGET ON THE TABLE?.... When the White House started talking up the notion of a spending freeze (which isn't really a spending freeze) last week, officials outlined a proposal with modest reductions in discretionary spending not related to national security. There are a few unfortunate angles to this, but one of the key problems is taking defense spending out of the equation. Fred Kaplan noted the other day that if we're looking to cut the budget, the Pentagon shouldn't be excluded.I was surprised to see House Minority Leader John Boehner (R-Ohio) explain yesterday that he agrees."I don't think any agency of the federal government should be exempt from rooting out wasteful spending or unnecessary spending. And I, frankly, I would agree with it at the Pentagon. There's got to be wasteful spending there, unnecessary spending there. It all ought to be eliminated...."

America cannot afford its military - Frank's next target is the Pentagon -- that costly sacred cow among Republicans. "Iraq has cost US$1 trillion," he said in an interview with me at the World Economic Forum in Davos. "It was a Vietnam-scale mistake, not in terms of lives lost, but as a geopolitical disaster which destabilized the region, encouraged the worst kind of radicalism and made us hated around the world. It is one of the single worst decisions in the history of the US." If the US had not waged two wars -- Afghanistan and Iraq -- and continued to keep unnecessary military commitments, the deficit and debt situation would not be an issue, he said. "There would have been enough to improve the quality of life of Americans and bail out the financial sector." According to the Stockholm Peace Research Institute, the U.S. accounted for nearly half of the US$1.46 trillion spent in 2008 by the top ten defense spenders. The next highest was China at US$84.9 billion.

Editorial - The Defense Budget - NYTimes - The cold war has been nearly banished from the Pentagon’s latest review of military challenges. The Quadrennial Defense Review, released this week, finally catches up with the current world, one where the United States confronts a host of different adversaries on a variety of different battlefields.  The review and the accompanying 2011 defense budget request still fall short, particularly in their failure to address the security-related consequences of a world of deficits as far as the eye can see. The review talks about the need for future “trade-offs” but suggests that that is only a possibility when it must be a given.

Fiscalizing Failure - Krugman - If you read much of what’s being said these days by respectable people, you’d believe that deficits are always and everywhere the main source of economic problems. But, you know, that’s not really true. David Sanger asserts that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.  Is that really true? I thought Japan’s influence has waned because of its economic stagnation, its failure to maintain its status as an economic superpower; I have never heard anyone cite the debt as a central cause. Bear in mind that so far, at least, Japan has had no problems financing its deficits.Btw, it’s also not true, as the article asserts, that “Chinese leadership” is lending much of the money to finance the U.S. government’s spending...

A Couple of Additional Budget Thoughts - Krugman - The administration projects debt of 77.2 percent of GDP in 2020. Without the non-security discretionary spending freeze, this number would, by my reckoning, be 78.7 percent. But hey, the freeze is crucial to demonstrating fiscal responsibility …There is a lot of near-term fiscal tightening built into the budget, mainly because of the fading out of the stimulus, but reinforced by the freeze and the expected wind-down of Iraq/Afghanistan and the planned expiration of Bush high-end tax cuts. All of this will take place in the face of high unemployment, with the Fed unable or unwilling to take offsetting action. 1937!

A Decade of Enormous Deficits May Alter American Politics and Power - NYTimes - In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated. But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product.

How Trillion-Dollar Deficits Were Created - To understand the looming deficits, The New York Times analyzed Congressional Budget Office projections of the budget surplus or deficit for the years 2009-12, President Obama’s current term. The budget office has been making estimates for these years for nearly a decade now. The numbers that appear below are the average annual deficit or surplus for this four-year period. Related Article: How a Sea of Red Ink Spread From a Puddle

Congressional Democrats are nay-saying Obama’s budget - As Congress begins picking through President Obama's vast election-year budget, many Democratic incumbents and candidates seem to be finding something they love -- to campaign against. A Democratic Senate candidate in Missouri denounced the budget's sky-high deficit. A Florida Democrat whose congressional district includes the Kennedy Space Center hit the roof over NASA budget cuts. And a headline on the 2010 campaign website of Sen. Blanche Lincoln (D-Ark.) blares her opposition to Obama's farm budget: "Blanche stands up for Arkansas farm families." Obama's budget gives his fellow Democrats an unlikely campaign tool -- a catalog of ways to establish their distance from controversial aspects of his administration. The time-tested campaign tactic of politicians declaring their independence of their party leaders is particularly important for Democrats this year because being an insider is a political liability in an anti-incumbent year.

Kill Your Favorite Subsidy to Win the Deficit War (Bloomberg) -- The Deficit. The Debt. Americans are strangling themselves economically. So: 1) Restore all income taxes to the pre-President George W. Bush level, not just those for people earning $250,000 or more.  2) Tax the banks $90 billion as proposed by President Barack Obama to pay for their bailout. Then break them up -- making them small enough to fail and eliminating the need for more trillion-dollar rescues. 3) Eliminate income-tax deductions for property taxes and mortgage interest. 4) Break Fannie Mae and Freddie Mac into four mortgage- buying companies and get them off the federal dole.  Because we need curbs now on out-of-control entitlements: 5) Raise the retirement age for collecting full Social Security benefits to 72. Cut cost-of-living increases for beneficiaries to half the inflation rate for 10 years. Work Longer 6) Raise the age for Medicare eligibility to 68.    7) End the wars in Iraq and Afghanistan 8) Kill farm subsidies. There are other possibilities. We could start a national sales tax -- with rebates for those with low incomes. We can tax excessive health-insurance benefits. Personally, I would like a special income tax on college presidents who make more than half a million and college teachers who don’t teach.

Balance the U.S Budget by Auctioning off 10 Million U.S Passports - Where is the Pigou Club when we need it? We all want budget discipline and some of us want to avoid climate change. Suppose the Congress did enact carbon cap & trade and that the market price of a ton of carbon dioxide is $35; if there are 300 million Americans and each of us contributes 20 tons of carbon a year on average, then if none of the revenue was handed back to the public; this policy would yield $210 billion a year in revenue.  If you reject this revenue generating program, what is your counter-proposal? Should we auction off the Grand Canyon? We could auction off 10 million U.S passports. Suppose we could sell each for $200,000 --- that would yield a one time payment of 2 trillion dollars. Now that I think of it, that's a pretty good idea!

41% Fine With Budget Deficit If Taxes Are Cut - President Obama has now turned his attention to the ballooning federal budget deficit, but a new Rasmussen Reports national telephone survey finds that a modest plurality of voters (41%) prefer a budget deficit with tax cuts over a balanced budget that requires higher taxes.  Thirty-six percent (36%) would rather see a balanced budget with higher taxes. Twenty-three percent (23%) are not sure which is better.  Thirty-seven percent (37%) of voters believe it is possible to balance the federal budget without raising taxes. Forty-two percent (42%) disagree and say a balanced budget is not possible without tax hikes. One-in-five voters (20%) aren’t sure.

Slow Growth and Rising Debt - From Carmen Reinhart and Kenneth Rogoff: As government debt levels explode in the aftermath of the financial crisis, there is growing uncertainty about how quickly to exit from today’s extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different – which so far has not been the case – yesterday’s financial crisis could easily morph into tomorrow’s government debt crisis.In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.

Budget Sense and Nonsense:  The fiscal situation is actually very simple. The budget was in surplus when President Clinton left office, although there was already the prospect of budget-busting Medicare deficits in the long-term future. The 2001 and 2003 Bush tax cuts and the unfunded Medicare prescription drug benefit created the large deficits of the Bush era. (The Iraq and Afghanistan wars didn’t help) Then the financial crisis and the resulting recession blew a huge hole in government tax revenues, creating the current spike in deficits; that spike was exacerbated by the stimulus package, which most but not all economists would consider a sensible response to a major recession. Yet somehow the Republicans have tried–successfully!–to spin our current and projected deficits as the result of “more government spending,” putting the Democrats on the defensive. And unfortunately, the result is the Obama administration buying into the Republican attack line–that government spending must be reduced. How else to explain the three-year spending freeze, which is mainly symbolic and a little bit destructive?

Argentine advice: Duhalde cautions U.S. about debts - When an Argentine political figure cautions you about your government deficits and mounting debt, you better listen. In this case, it is former president — and perhaps future president — Eduardo Duhalde. He came to power eight years ago as the fifth president in the South American country in a 10-day period. The political uproar that drove out the first four, including elected president Fernando de la Rua and four successive interim presidents, was sparked by a financial meltdown in December 2001. Duhalde points out the economic implosion actually began years ago as a recession, before turning into a depression that rivaled the collapse Argentina suffered in the 1930s. Does any of this sound familiar? It should since the Obama administration has sought to spend the nation's way out of the Great Recession.

U.K., U.S. Top Aaa Ratings Tested by Debt Burdens, Moodys Says – (Bloomberg) -- Moody’s Investors Service said the top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because public finances are worsening in the wake of the global financial crisis.  “The deterioration has been pretty severe,” said Pierre Cailleteau, managing director of sovereign risk at Moody’s, in a Bloomberg Television interview in London. “We expect a pretty strong policy response in the next couple of years in order to keep the debt in the Aaa range. We expect them to bend but not to break.”  The U.S. and U.K. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings of Canada, Germany and France, Moody’s analysts led by Cailleteau said in a report today. None of the top-rated countries is “vulnerable,” or have public finances that are “stretched beyond the point of ‘no return’ to the Aaa category,” New York-based Moody’s said.

The U.S. is broke. Here's why. - The disease? Fiscal sclerosis — setting future national priorities in stone long before the future has arrived. Our fiscal arteries are so clogged and hardened that to do anything new, meet any emergency, or engage any new opportunity, the president must renege on past legislators' promises regarding Medicare, Medicaid, Social Security and other such entitlement programs. If he doesn't address unsustainable promises head-on, Obama will have no wiggle room in the budget for the rest of his presidency, and government will be tied up with yesterday's problems and the demands of yesterday's voters.Thanks to decades of promises for ever-higher benefits and low taxes for the indefinite future, there's now less give in future budgets than at any point in American history. At least profligate Congresses in the past confined their excesses and temporarily large deficits to the current year. Until recently, they didn't box in the future. For the first time in U.S. history, in 2009 every single dollar of revenue was committed before Congress voted on any spending program. Meanwhile, most of government's basic functions — from justice to education to turning on the lights in the Capitol — are paid for out of swelling, unsustainable deficits.

Tax Cut Era Is Over Dave Stockman Just Said - I could hardly believe my ears just now, watching former Reagan OMB Director Dave Stockman pronounce the end of the tax cut era on the PBS Newshour.  The interview hasn't been posted by PBS yet, but it's a shocker.Stockman started by lambasting Wall Street gunslingers, of which he was one, for wrecking the financial system.  Then he cited the AIG bailout as the worst policy mistake of our era.  Then he said the deficits will have to be addressed, that the Reagan tax cuts failed to restrain government spending, and that we'll be forced to raise taxes from now on.  That's an amazing turnaround from one of the original supply side torch bearers. I formulated the Roth-Kemp tax cuts in early 1977 and couldn't conceive of their enactment.  Four years later, I stood on the Senate floor in disbelief as they passed, wondering how long the red ink would last.  The answer was 17 years.

Deficit Hawks: Don't Tax, and Spend - Don't tax you, don't tax me, tax that fellow behind the tree" - So now the fiscal hawks have been asked to put their money where their mouth is and actually cut some spending, it turns out, they have some reservations.  I mean, of course, they want to cut spending.  They want it with a rare passion.  They just don't want to cut any spending that might, y'know, be done in their districts. It is this sort of thing that makes me wonder if I ought to be despairing at our fiscal future.  I'm not, yet.  Most countries as developed as ours do get their deficits under control, when they have to.  We just don't quite have to at this point.  In our own past, when push came to shove, we shoved taxes up and put the brakes on spending.

GOP Doesn't Do Fiscal Responsibility - The following all happened just this week:Item 1.  The Conrad-Gregg commission, which needed 60 votes in the Senate, was defeated 53-46.  The amendment creating the commission would have been adopted 60-39 if all of the GOP senators who co-sponsored the amendment voted for it.  Item 2. All Senate Republicans voted against re-establishing the pay-as-you go rules, which would have required that, with certain exceptions, any new mandatory spending or revenue legislation not increase the deficit.  Item 3.  With the Conrad-Gregg commission killed, congressional Republicans have been heavily critical of the commission the Obama administration may create by presidential order to consider ways to reduce the deficit.  Item 4.  Republican Chairman Michael Steele is saying so often that Republicans are against cuts in Medicare that it's starting to sound like a mantra.  Add to that their stated opposition to revenue increases (see #1 above), military spending reductions, homeland security reductions, and the extremely low possibility that, if Medicare is too hot to handle, they'll go anywhere near Social Security, and the deficit reduction math becomes totally impossible.

Fiscal Scare Tactics, by Paul Krugman, NY Times: These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions,... they’re reported as if they were facts, plain and simple.  Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.  So why the sudden ubiquity of deficit scare stories? It isn’t being driven by any actual news. ...

Random Fiscal Factoid: Alt Universe U.S.? - Out of curiosity, what do you think the U.S. deficit would look like today if annual federal fiscal expenditures had grown at 4% since 2000, rather than at almost 8% compounded? Answer follows: (see table) In short, if U.S. expenditures had grown at the rate of inflation the country would have run a surplus as recently as 2008. Yes, yes, I know, who knows what revenues would look this in this scenario, and all else being equal, etc., but it's still an interesting thought experiment.

Assume a Can Opener - Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true. Even Washington Post blogger Ezra Klein reports Ryan’s plan “erases the massive long-term deficit.” That’s not true either. All this confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan. In that 50-page document, CBO suggests the plan could eliminate the deficit in 50 years and, even more impressively, eliminate the debt by 2080. But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP.

Greece ‘Dress Rehearsal’ for U.S., U.K. Debt, Deutsche Bank Says  (Bloomberg) -- The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said. The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,” Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today. These countries have similar issues to those facing peripheral Europe but have the luxury of a flexible currency up their sleeves as a first defense if the market wants to attack them,” Reid said. “Such a defense means that the market, for now, thinks there are easier targets.

Moody’s Warns U.S. of Credit Rating Fears  - Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the country’s budget deficit. In a move that follows intensifying concern among investors over the US deficit, Moody’s said the country faced a trajectory of debt growth that was “clearly continuously upward”. Steven Hess, senior credit officer at Moody’s, said the deficits projected in the budget outlook presented by the Obama administration outlook this week did not stabilise debt levels in relation to gross domestic product.

It Is Now Mathematically Impossible To Pay Off The U.S. National Debt - A lot of people are very upset about the rapidly increasing U.S. national debt these days and they are  demanding a solution. What they don't realize is that there simply is not a solution under the current U.S. financial system. It is now mathematically impossible for the U.S. government to pay off the U.S. national debt. You see, the truth is that the U.S. government now owes more dollars than actually exist. If the U.S. government went out today and took every single penny from every single American bank, business and taxpayer, they still would not be able to pay off the national debt. And if they did that, obviously American society would stop functioning because nobody would have any money to buy or sell anything. And the U.S. government would still be massively in debt. So why doesn't the U.S. government just fire up the printing presses and print a bunch of money to pay off the debt? Well, for one very simple reason. That is not the way our system works. You see, for more dollars to enter the system, the U.S. government has to go into more debt. The U.S. government does not issue U.S. currency - the Federal Reserve does.

So, How Do You Think This Movie Will End?  These two charts tell you pretty much all you need to know about the state of the US economy.  They also, unfortunately, provide some clues as to how this movie will end. First, from John Mauldin, the state of the U.S. government's finances.  The red line is spending.  The blue line is tax revenue. Can you imagine if that was your household? Second, from Ned Davis, the state of our country's debts, as measured by debt as a percentage of GDP.  The little peak to the left was the debt mountain we accumulated during the Great Depression, which took a decade to work off.  The, um, bigger peak to the right, is the one we've accumulated now.

Federal Debt: The Time Series - Here is a graph of Federal debt held by the public, as a share of GDP, 1990-09.

Our debt time bomb is ready to go ka-boom – MarketWatch - Retire? You can fuggetaboutit if the new Global Debt Time Bomb is detonated by any one of 20 made-in-America trigger mechanisms.  Yes, 20. And yes, any one can destroy your retirement because all 20 are inexorably linked, a house-of-cards, a circular firing squad destined to self-destruct, triggering the third great Wall Street meltdown of the 21st century, igniting the Great Depression II that George W. Bush, Ben Bernanke, Henry Paulson and now President Obama have simply delayed with their endless knee-jerk, debt-laden wars, stimulus bonanzas and bailouts.

Mauldin: This Time Is Different - (11pp pdf) When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention.

Taleb vs Treasuries In The Black Swan, Nassim Taleb explains his barbell investment strategy: Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe investments, like Treasury bills — as safe a class of investments as you can manage to find on this planet. Today, he’s saying something rather different: It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.” Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.

20 Reasons Why The U.S. Economy Is Dying And Is Simply Not Going To Recover (slide show)

Samuelson: Economy Doesn't Go Bust Often Enough - Newsweek - Already, a crude consensus has formed over what caused the financial crisis. We were victimized by dishonest mortgage brokers, greedy bankers, and inept regulators. Easy credit from the Federal Reserve probably made matters worse. True, debate continues over details. Fed chairman Ben Bernanke recently gave a speech denying that it had loosened credit too much, though he admitted to lax bank regulation. Just recently a congressionally created commission opened hearings on the causes of the crisis. Still, the basic consensus seems well established and highly reassuring. It suggests that if we toughen regulation, suppress outrageous avarice, and improve the Fed's policies, we can prevent anything like this from ever occurring again. There's only one problem: the consensus is wrong—

Double Dip Risk Rises After Inventory Blowout (Bloomberg) -- When is quarterly gross domestic product growth of almost 6 percent bad news? When it looks like what was reported last week. U.S. GDP increased 5.7 percent at the end of last year, with more than half of that growth -- 3.4 percent -- attributable to changes in inventories. This astonishing impact of inventory has ample historical precedent, and the bottom line has terrible implications for 2010. Around turning points, expectations can go horribly wrong, and inventories are often the first sign that firms are being surprised by their customers. A car manufacturer might expect that it will sell 100 cars next month and set its production accordingly. If sales fall short, the unsold cars sitting on the lot represent inventory piling up.

Historically, Huge Inventory Boosts Like In Q4 Have Ended Very Badly - Many of us know by now that Q4's 5.7% GDP blow-out was boosted 3.5% by an inventory adjustment, whereby the rate of businesses' inventory-cutting slowed.  Optimists are reading this as the beginning of a new inventory cycle, whereby slowing inventory reductions will eventually reverse into inventory growth, thus fueling future GDP growth. Kevin Hassett of the American Enterpise Institute doesnt fall into this camp. According to Mr. Hassett, historically there have been nine quarters since 1970 when GDP growth of over 3% benefited from an inventory change of the magnitude we just witnessed for Q4.Unfortunately, the economy usually hit a sudden speed bump right after such an event. Thus he believes that GDP growth could easily hit zero percent (no growth) in the current quarter.

Roubini Sees `Very Dismal' U.S. Growth as Summers Rues `Human Recession' - (Bloomberg) -- Nouriel Roubini, the New York University professor who anticipated the financial crisis, said the U.S. growth outlook remains “very dismal” and White House economic adviser Lawrence Summers said the economy is still mired in a “human recession.” Speaking at the World Economic Forum’s annual meeting in Davos, Switzerland, after the U.S. reported the fastest growth in six years, their comments underscored concern that emergency measures to rescue banks and fight the recession may be withdrawn too soon. “The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini said in a Jan. 30 Bloomberg Television interview following a U.S. Commerce Department report that showed economic expansion of 5.7 percent in the fourth quarter. “I think we are in trouble.”

Roubini Is Still A Bear, His 10 Reasons For A U-Shaped Recovery - Still bearish, Nouriel Roubini predicts a slow recovery. In an email to Roubini Global Economic's clients, he predicts that the economy will recover in a U-Shape. His forecast is in line with Goldman Sachs, who also recently predicted that "gradually is the watch word and a V-shaped recovery remains unlikely."A V-shape recovery might be visible in Q3 private consumption rates, which grew a healthy 3.4%, in line with consumption rates before the crisis. But this was just a head-fake, according to Roubini, thanks to cash-for-clunker type programs and home buyer tax credits. He thinks consumption will now slow, growing at just 1.8% in 2010.

Watch Felix Salmon interview Nouriel Roubin - Reuters - Yesterday evening Reuters.com streamed an interview with renowned economist Nouriel Roubini live from our studio at the World Economic Forum in Davos. Reuters columinst Felix Salmon presented the interview and all the questions he put to Roubini were sent in by visitors to our Davos 2010 live blog. Greece’s economic woes, U.S. GDP and the trustworthiness of statistics coming out of China were just some of the issues being discussed. If you missed it, or if you want to see it again, watch the interview in the player below.

Muddling Out of Freefall, by Joseph E. Stiglitz - The US economy is in a mess... More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months. As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out. The 2.5-3.5 million foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies. Even the Congressional Budget Office is predicting that it will be the middle of the decade before unemployment returns to more normal levels...President Obama took a big gamble at the start of his administration. Instead of the marked change that his campaign had promised, he kept many of the same officials and maintained the same “trickle down” strategy to confront the financial crisis. Providing enough money to the banks was, his team seemed to say, the best way to help ordinary homeowners and workers. ... Had Obama’s attempt at muddling through worked, it would have avoided some big philosophical battles. But it didn’t work...

Questions For Joseph Stiglitz - Interview - NYTimes

Why an American Recovery Matters - The restoration of growth and balance in the US economy is crucially important, not only for its effect on global growth, but also as a foundation for tackling a broad array of international problems and challenges. Right now, it looks as though creating that foundation is on hold.  Outside the advanced countries, there is a view that the world will return to pre-crisis conditions, with a stable US that functions as borrower, lender, and consumer of last resort. What this perspective ignores is that pre-crisis growth in the US and the global economy was based in part on an unsustainable configuration.  Returning to that model is neither likely nor wise.  What is needed is coordinated restructuring and policy setting. That is hard to do when the US, the largest fiscally unified economy, is focused elsewhere.

Ron Paul Warns Of Coming Social And Political Chaos (Video)

There is No Return to Self-Sustaining Growth: An Interview with James K. Galbraith - Roosevelt Institute Braintruster James K. Galbraith belongs to the most distinguished economists in the United States today. In the following exclusive interview that was conducted for New Deal 2.0 in the USA and MMNews in Germany, he talks about the financial / economic crisis and the phenomenon of Peak Oil, points at future tasks and explains why he supports the Audit the Fed bill.

The Basel II concept leads to a false sense of security - The Basel II accord has done more harm than good for stability. In a previous post last month on the failure of financial regulation, I pointed out that Basel II has glaring deficiencies that virtually provide a navigational map to creating off-balance sheet instruments. The regulatory incentives regarding capital requirements in Basel II contributed to the subprime crisis. All of the off-balance sheet activities that led to the financial crisis were backed by stand-by loan commitments with (rolling) maturities under one year that are given a zero risk weight under Basel II. It gave banks incentives to:

  • “originate and distribute” as opposed to originate and hold
  • securitise every asset and buy it back without changing the credit risk profile
  • use credit default swaps to reduce capital requirements even further
  • stuff toxic securities into structured investment vehicles       

TARP Inspector General: Government Programs "risk re-inflating bubble" =To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market. From Office of the Special Inspector General for the Troubled Asset Relief Program: Quarterly Report to Congress, January 30, 2010

Obama Added a New Twist to Financial Reform Talk - NYTimes - President Obama’s proposals to tax and curb the activities of Wall Street have thrown an unpredictable element into the debate over financial regulatory reform. They also have touched off an intensive new round of lobbying and raised questions in Congress over whether his plan will add urgency or merely bog things down. For two months, four pairs of Senate Banking Committee members — each with one Democrat and one Republican — have been meeting behind closed doors to reach a bipartisan compromise on regulatory reform. The new White House approach has already prompted the Senate panel, led by Senator Christopher J. Dodd, Democrat of Connecticut, to interrupt those negotiations. On Tuesday, in the first of several hearings on Mr. Obama’s proposals, the committee will hear from Paul A. Volcker, a former Federal Reserve chairman, and the deputy Treasury secretary, Neal S. Wolin.

How to Reform Our Financial System, by Paul Volcker - In approaching that challenge, we need to recognize that the basic operations of commercial banks are integral to a well-functioning private financial system. It is those institutions, after all, that manage and protect the basic payments systems upon which we all depend. More broadly, they provide the essential intermediating function of matching the need for safe and readily available depositories for liquid funds with the need for reliable sources of credit for businesses, individuals and governments. Combining those essential functions unavoidably entails risk, sometimes substantial risk.

Volcker Rules - Finally President Barack Obama has come to his senses on financial regulation. His endorsement of what he calls the “Volcker Rule” for once puts him squarely on the side of ordinary Americans as opposed to the banking bandits who have so thoroughly fleeced the public. The proposal from former Federal Reserve Chairman Paul Volcker basically involves restoring the spirit, if not the letter, of the 1930s Glass-Steagall banking regulations to prevent another Great Depression. It means separating the activities of commercial banks, entrusted with the deposits of ordinary folks, from the antics of the financial high rollers who are presumably dealing with wealthier and more knowledgeable investors. Commercial banks were intended to be heavily regulated and insured by the government to protect the savings of unwary citizens. Less risk-averse investors and the firms that handled their funds could fend for themselves, and if there was a collapse there would be no innocent victims requiring a government bailout.

Volcker’s Rules - Not so fast, bankers. Former Federal Reserve Chairman Paul Volcker will try to dispel some of the recent complaints made by Wall Street executives in his testimony to the Senate Banking Committee Tuesday. Ever since President Barack Obama proposed last month limiting the ability of commercial banks to engage in “proprietary trading,” bankers have complained that the definition of “proprietary trading” is too open to interpretation and vague. Mr. Volcker doesn’t buy it.“Every banker I speak with knows very well what ‘proprietary trading’ means and implies,” he will tell the Senate Banking Committee in the afternoon, according to prepared remarks. (Essentially, a bank engages in proprietary trading when it makes bets using its own capital, not a client’s). He says “only a handful of large commercial banks — maybe four or five in the United States and perhaps a couple of dozen world-wide — are now engaged in this activity in volume.”

Volcker Rule: Dead on Arrival? And is Obama a Lame Duck? -- Yves Smith - We’ve argued that the “Volcker Rule,” which would limit “proprietary trading” by banks, is in theory a very good idea, but the proposal put forward by Volcker/Team Obama goes wide of the mark by defining any customer trade as not being part of proprietary trading. That’s a spurious distinction; large-scale position-taking well beyond what was needed for market-making dates back to the 1980s, long before firms had separate proprietary trading desks or in-house hedge funds. As a result, they looked likely to have little impact. As we noted:You can drive a supertanker though the loopholes in this proposal, which are:1. If a firm does not own a bank, it can do proprietary trading 2. Trades with customers are not proprietary trades. These are so silly that I’m astonished anyone is treating this proposal seriously...Let’s dispatch them in order.

The Volcker rule’s loopholes - Paul Volcker’s long NYT op-ed last weekend, and his testimony to the Senate banking committee this week, did very little to clear up a lot of the uncertainty over what exactly the Volcker rule comprises. That was probably deliberate, given the degree to which Chris Dodd is skeptical that any such rule can be implemented at all. But the contours of a Volcker rule are slowly emerging all the same, and that they carve out two enormous loopholes. Firstly, the Volcker rule seems to apply only to depositary institutions: if you don’t take deposits, then you’re exempt. The result is that it’ll be easy for Goldman Sachs and Morgan Stanley to get around the rule just by returning their current (tiny) deposit base and voluntarily withdrawing from access to the Fed’s discount window.Secondly, it seems that banks might be allowed to continue to own hedge funds, private-equity funds, money-market funds, and the like, just so long as they’re run for clients, with client money, rather than being vehicles for the investment of the bank’s own capital.

Volcker vs. Volcker? - Paul Volcker lays out his argument in the New York Times today for "Volcker rule'' -- President Obama's new proposal to rein in "too big to fail'' institutions by limiting the size of banks and keeping them out of riskier businesses like proprietary trading, hedge funds and private equity.   But those who suspect that the proposal is window-dressing for the more tepid approach favored by Treasury Secretary Tim Geithner won't get much comfort. Volcker starts off well, identifying the core problem of protecting institutions considered too big to fail.  But then there is this jolt:   That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.

Calling Out Obama: Bankster "Reforms" - Now comes the banksters with their lobbyists and bribes, er, "campaign contributions" to say that: A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter.Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. ...A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

Paul Volcker's Op-Ed - I think it’s safe to say that Yves Smith and I don’t see eye-to-eye on much. But on Paul Volcker’s latest op-ed, we largely agree: Volcker simlpy doesn’t get it. I have the utmost respect for Volcker, but he seems to be fighting old battles. He emphasizes the importance of — and the need to extend the safety net to — depository institutions like commercial banks. He contrasts commercial banks with "capital market institutions," which he does not believe should have access to the safety net. Capital market institutions, Volcker believes, should "be free … to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail." I’m sorry, but were we watching the same financial crisis?

Summers’s role questioned as US economic policy shifts - - As President Obama and his team have rolled out a fresh set of strategies to fix the economy, one item on the list - curbing the ability of big banks to gamble in the stock market - has been viewed by some as a repudiation of Lawrence H. Summers, the former Harvard president who is the White House’s chief economic adviser. Summers, who favored bank deregulation when he was secretary of the treasury for President Clinton, had counseled Obama for much of last year to take a less sweeping approach to overhauling bank rules. But that point of view publicly fell out of favor last month as the White House adopted a more populist tone

Volcker, SIGTARP, Wells Fargo and $100MM Bonuses - Paul Volcker wrote a lengthy Op-Ed in the NY Times this weekend without really saying anything.  He didn't lay out rules for how he wants to reform the banks, rather, he reiterated obvious statements that we in the blogosphere have been railing about for 18 months, like "Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts."   I mean, I agree with that concept, but it's a "no shit sherlock" kind of reform.   The quarterly SIGTARP (Special Inspector General to the TARP) report is out.    Calculated Risk points out how SIGTARP noted that "the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market."  The charts showing the extent to which the government has taken over the housing market are STAGGERING - check them at Calculated Risk or in the SIGTARP report.

More on the Volcker Rule - I'm not against the Volcker Rule - I don't think it will increase risk or make things worse, but I think it's woefully insufficient at best if the goal is to curb systematic risk.  I think the goal of the proposed Volcker Rule is to allow the Administration to say to the people "Look - we hear your anger - we understand that nobody wants banking institutions involved in proprietary trading activities with government backstops."  There's nothing wrong with that - except that it will do little to nothing to prevent future crisis.  As I commented on Barry Ritholtz's thread on the subject: "isn’t there a very very easy way to explain why the Volcker rule is, at the very least, woefully inadequate to limit systematic risk: Lehman… Merrill… Bear Stearns… AIG… LTCM… not one of those were banks – and not one of them would have been effected/reigned in by the Volcker rule."Barry responded that the Volcker Rule would not have prevented the current crisis, but it would be "prophylactic against the next crisis."   On the contrary - the Volcker Rule will be prophylactic against the next crisis from originating AT A BANK.   The Volcker Rule, however, does nothing to address leverage at non-bank institutions. 

Volcker rule unlikely to move forward in Senate, lawmakers say - A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate. Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue. Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.

Dodd Calls Obama’s Bank Reform Plan Too Ambitious - NYTimes - The chairman of the Senate Banking Committee warned on Tuesday that the Obama administration’s new proposals to rein in Wall Street firms ran the risk of derailing months of delicate negotiations over overhauling financial regulations. “It’s not a movable feast,” the chairman, Christopher J. Dodd, told Paul A. Volcker, the former Federal Reserve chairman, who has become an influential outside adviser to President Obama. “It’s adding to the problems of trying to get a bill done,” he said at the end of a hearing on the proposals, after all the other committee members had already left. Mr. Dodd, Democrat of Connecticut, added that the administration was “getting precariously close” to excessive ambition for the legislation. “I don’t want to be in a position where we end up doing nothing because we tried to do too much,” he said.

Dodd Says Financial Reform Talks Are at an Impasse - NYTimes - Two months of Senate negotiations over legislation to rewrite financial regulations — a top priority of the Obama administration — fell apart on Friday amid wrangling over a proposal to create a consumer financial protection agency that would oversee credit cards, mortgages and other products. The chairman of the Senate Banking Committee, Christopher J. Dodd of Connecticut, said that Democrats would forge ahead with their own proposal, in the absence of Republican support. That could result in a bitter partisan fight resembling the struggle over health care

Seeking a Safer Way to Securitization - NYTimes - Securitization grew as a way for banks to get around capital rules, not because of any profound desire by investors for such assets or any real unwillingness by banks to make the loans. But since it was more expensive to hold capital against the risk if the loans were not securitized, they were securitized. That also opened the market to new players, who neither wanted to, nor could amass, the capital to hold onto loans. Together, those developments undoubtedly made mortgage loans less expensive for borrowers. That was welcome to politicians and to regulators, who wrongly thought that securitization had moved a lot of risk outside the banking system.  Then the whole structure collapsed. But there is no doubt that the banks have not fallen all over themselves to lend as it is, even with many billions of dollars in government-supplied capital.

Banks May Get Help to Escape Proposed Limits on Risk – NYTimes - Only a year after the government stepped in to aid Goldman Sachs and Morgan Stanley by granting them access to the federal safety net, policy makers are developing an exit path that would allow them and others to escape limits on banks being proposed by the Obama administration.President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds. The plan, policy makers said on Friday, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations. But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses.

Did Obama’s economists do their homework on the Volcker rule? – What is disturbing is how poorly the Volcker rule has been thought through. When first announced, it sounded like a worthy and needed step in the right direction, and a suggestion the Obama team was waking up to reality. But I also expected more sophisticated details to come.So far, there are none. The main proposal is to separate “proprietary” trading from lower-risk normal bank activities. I naturally assumed the Obama team was going to expand the definition of proprietary trading beyond its narrow meaning on Wall Street. So far it looks like they didn’t give it much thought before announcing the plan. This is a critical error in judgment. Volcker apparently thinks that proprietary trading encompasses most of the risk-taking speculation done by the banks. It is hard to imagine he is that out of touch. Disturbingly, Volcker has said publicly that most bankers know the difference between trading for speculation and trading for their customers (making markets). Well, if they do, how do we truly separate the two tasks? It is a lot harder than it looks.

Even Better Volcker Rules - Simon Johnson -Addressing bank size is not a panacea. In addition, capital requirements need to be strengthened dramatically, back to the 20 to 25 percent level that was common before 1913 (i.e., before the creation of the Federal Reserve, when the government effectively had no ability to bail out major banks). Capital needs to be risk-weighted, but in a broad manner that is not amenable to gaming Such strengthening and simplifying of capital requirements would go substantially beyond what the Obama administration has proposed and what regulators around the world currently have in mind.The capital requirements for derivative positions also need to be simplified and strengthened substantially. For this purpose derivative holdings need to be converted according to the “maximum loss” principle, i.e., banks should calculate their total exposure as they would for a plain-vanilla non-derivative position; they should then hold the same amount of capital as they would for this non-derivative equivalent.

Q&A with Simon Johnson - MIT News - Over the last two years, Simon Johnson has become America’s most outspoken critic of the banking industry. Johnson has consistently argued that the United States has the same problem today that he encountered in smaller countries as former chief economist at the International Monetary Fund: The political “capture” of government by the financial lobby. In Johnson’s view, this means the U.S. government has, among other things, spent large sums of bailout money on financial institutions they deemed “too big to fail,” but without getting banks to lend the capital that could help kick-start the economy.  

Financial Regulatory Reform and US Investment Treaties - The US Department of State is about to conclude its revision of US model investment rules.  The model forms the initial bargaining position for the US in negotiations over Bilateral Investment Treaties (BITS) and Free Trade Agreements (FTAs).   When completed, the Obama Administration hopes to proceed with official negotiations with China, India, Vietnam, and possibly Brazil. The current “Model BIT” could make it difficult for the US and its trading partners to deploy effective policies to prevent and mitigate financial crises.   The US should ensure that no measures designed to maintain financial stability are actionable under US treaties.

U.S. Bank Bailout Encourages Risky Behavior (Reuters) - The U.S. taxpayer-funded rescue program set up to save banks from collapse during the financial crisis makes future reckless behavior more likely, the government's bailout watchdog said in a quarterly report. A quarterly report to Congress on the $700 billion Troubled Asset Relief Program, or TARP, made available in draft form late on Saturday, said financial firms seen as too big to fail before 2008 have only grown larger as they feasted on subsidies from the bailout program."To the extent that institutions were previously incentivized to take reckless risks through a 'heads I win, tails the government will bail me out' mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions," the report from the Office of the Special Inspector General for the Troubled Asset Relief Program, said.

Proprietary Trading Did Bring Down Wall Street - The proprietary activities most often highlighted by those in the banking community are investment and trading activity within private equity, hedge fund and prop trading desks. The banks are screaming that these activities should not and need not be separated from their overall operations because these activities did not cause our economic crisis. They would be correct on one hand, but how convenient that their definition of proprietary is not truly comprehensive. How so?  I raised the question as to what constitutes proprietary trading when I wrote, “Mr. President, Are SIVs Considered Prop Trading?” What is a SIV? A structured investment vehicle. How did they work?

Goldman Sachs And The Republicans - Simon Johnson - I testified yesterday to the Senate Banking Committee hearing on the “Volcker Rules” (full pdf version; summary).  My view is that while the principles behind these proposed rules are exactly on target – limiting the size of our largest banks and preventing any financial institution backed by the government, implicitly or explicitly, from taking big risks – the specific rule changes would need to be much tougher if they are to have any effect.Wall Street is strongly opposed to the Volcker Rules (link to the written testimony; webcast) and the discussion elicited some classic Goldman Sachs moments....

Can Goldman dodge the Volcker rule? - The Volcker rule is an attempt to ensure that banks which are too big or interconnected to fail — institutions which will certainly get bailed out if they blow up — don’t take inordinate risks on their own account. So this worries me: Some institutions will be able to avoid facing the Volcker rule by shedding their insured deposits, according to U.S. Deputy Treasury Secretary Neal Wolin on Monday. Goldman Sachs Group, which funds fewer than 5 percent of its assets with deposits, could easily change its funding profile to get out from under the rule.Why should an enormous bank like Goldman get out from under the Volcker rule just by dint of not taking deposits? If it’s a leveraged institution with a risk of systemically-damaging failure, then it’s exactly the kind of bank which should be subject to the rule. Or is Treasury, here, trying to weaken Volcker’s intent?

Front-Running the Markets And the Sickness Unto Death "And that is the nature of Goldman. Gather up as many customers as possible, aggregate the available information to achieve a superior market view and then relentlessly extract rents from the marketplace. Better yet, tell yourself you’re smarter than everyone else and you’ve earned the rents from the symbiosis." -James Rickards, former General Counsel of Long Term Capital Management This is a nice, concise, albeit somewhat simplified description, from a more mainstream and highly credible source, of how the markets are operating today to the extreme disadvantage of the public and the real economy. Between front-running and naked short selling the banks have things pretty well under their control.The market makers are the Wall Street banks are the prop trading desks, trading at high frequency slightly ahead of the markets while peeking into your accounts, gaining just enough unfair advantage to defy the odds of winning and losing in a fairly regulated market.

Lloyd Blankfein: $100 Million Man? - 02/01/2010 - Yves Smith - The folks at Goldman, and Blankfein in particular, really do not get it. From Times Online: Goldman Sachs, the world’s richest investment bank, could be about to pay its chief executive a bumper bonus of up to $100 million in defiance of moves by President Obama to take action against such payouts. Bankers in Davos for the World Economic Forum (WEF) told The Times yesterday they understood that Lloyd Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts. “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals.

Senators Propose 50% Bonus Tax on Big TARP Recipients - Hhhm. Even though the UK 50% bonus “supertax” was deemed to be a bit of a failure (the banks just grossed up bonuses to compensate for the levy), Senators Barbara Boxer and James Webb have proposed a similar measure, and one wonders how it might fend off the sort of gaming that plagued the UK effort.  The one-time tax would be limited to bonuses of more than $400,000 at firm that received more than $5 billion in TARP funds. Bloomberg notes:The bill would affect 13 firms and could raise $10 billion to help cut the federal deficit, Boxer said.

Goldman Received Bailout Money at Far Below Market Interest Rates - The NYT discussed the prospects for the 2009 bonus for Goldman Sachs CEO Loyd Blankfein, which it reports could be as high as $100 million. The article notes anger over the huge bonuses at bailed out institutions, but then tells readers that Goldman paid back the money "with interest." It would have also been worth informing readers that the interest paid by Goldman was far below the market interest rate at the time of the crisis. We know this because Warren Buffet contracted to lend money to Goldman at the the same time as it received TARP money and charged more than twice the interest rate as the government. In addition, Goldman was allowed to borrow more than $20 billion with a guarantee from the FDIC. This guarantee saved Goldman several billion dollars in interest costs. Goldman likely also borrowed billions of dollars at below market interest rates from the Federal Reserve Board's special lending facilities, although we don't know this for certain because Federal Reserve Board Chairman Ben Bernanke refuses to tell the public to whom he lent our money and under what terms.

Heavy Flow - Was 2009 a great year to be a bank? The headlines all say so. (The 140 U.S. banks that were closed by the FDIC last year may disagree some.) But, as Isabelle Kaminska of Alphaville notes, very little of the gains posted for last year came from anything related to talent: When I first started working in the investment side of the banking industry, 20-some years ago, the traders and marketers were especially careful to distinguish themselves from the "retail" side of banking. Indeed, the retail bankers were described as "9-6-3" people: lend at 9%, take deposits at 6%, and be on the golf course by 3:00.

Chicago Fed Weighs Making High-Speed Trading Safer -This so-called high-frequency trading engages in extremely fast buying and selling of stocks to generate profits. The few who do it account for significant amounts of volume for the word’s major stock exchanges, and as a result, are a potential source of system wide trouble. A new paper published Wednesday by the Federal Reserve Bank of Chicago takes a look at the issue. While much of the piece, written by staffer Carol Clark, simply explains what high-frequency trading is, it also offers a few suggestions that could mitigate the risks of the strategy. The threat is potentially real–some 70% of U.S. stock market’s total volume was driven by high-frequency trading, despite only 2% of trading firms engaging in the pursuit, according to research cited by the paper.

Bankers use derivatives trades to cash in bonus stock - Financial News: Investment bankers in the US have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter. „Rather than wait three or five years fort he restrictions to pass, bankers would rather take a discount of up to 50% now just to get out and do something else“. [Source]

Debunking Some AIG/Fed/CDO Theories -- Yves Smith - One of the impediments to getting to the bottom of the financial crisis is some of the most destructive behavior involved complex instruments like collateralized debt obligations and credit default swaps. It isn’t simply that these “innovations” had terms and features that differ from familiar investments like stocks and bonds, but the way those instruments were used, both the trading/investment strategies and transaction mechanics, also differ from those of more traditional instruments.This matters because it is very easy to go off half cocked, and that in the end serves the financial services industry, not the cause of reform...we need to remember what we are up against. The lobbyists paid by the financial services industry to kill reform are professionals...if the pro-reform camp is not careful and pursues flights of fancy that are unsupported by hard evidence, or simplyoverstates what it has proven, then it plays into the hands of banking industry lobbyists.

Has the New York Fed been serving the public trust? Has Geithner?  - In Geithner’s AIG testimony before the House Oversight Committee, the Secretary again tried to sell the notion that ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’. Even if this were true, why did they have to pay these counterparties one hundred cents on the dollar? The answer may be because, as President of the New York Fed, the counterparties you paid out on AIG owned your company. Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Credit Default Swaps’ Status in Bankruptcy Challenged by Court - The 2005 bankruptcy law changes, among other things, provided that that derivative transactions were exempt from bankruptcy provisions, meaning that creditors have to put in their claims against the failed business and have the court sort out who gets what. The Financial Times explained how this provision had the perverse effect of accelerating the collapse of Bear, Lehman, and AIG:...Lawyers said under the old rules, creditors of companies facing financial difficulties were wary of settling trades or seeking extra collateral because they knew such demands could precipitate a bankruptcy filing and potentially freeze their claims.However, when the financial health of Bear, Lehman and AIG took a sharp turn for the worse this year, their trading counterparties – mainly hedge funds and other banks – were not deterred from seeking to settle their trades or forcing the three companies to put up more collateral.

Cuomo Sues Bank of America as It Settles With S.E.C. - NYTimes -The legal drama surrounding the controversial takeover of Merrill Lynch by Bank of America, one of the pivotal moments of the financial crisis, took a fresh turn on Thursday as the attorney general of New York leveled civil fraud charges against Kenneth D. Lewis, the former Bank of America chief who masterminded the deal. But no sooner did that news break than the Securities and Exchange Commission announced that it had struck a new, $150 million deal with Bank of America to settle its own cases involving the merger. Moments later, North Carolina’s attorney general announced that his office also had reached a settlement.

Andrew Cuomo and the Real Power of the Martin Act  – WSJ. - Cuomo is charging Bofa and its former executives under the Martin Act, a broad New York state law against financial fraud that was enacted during the Great Depression. The Martin Act enables the state’s prosecutors to go after just about any attempt to hide financial information from investors. In some cases, the AG’s office, which is smaller than the Securities & Exchange Commission or the US Attorney’s office, doesn’t have the man power to litigate the cases it files and is aiming instead for a high profile settlement.  Elliot Spitzer dusted off the 70-year statute when he took over as attorney general in 1999 and used it aggressively against Wall Street, over issues ranging from compensation practices at the New York Stock Exchange to stock analysts who were publishing positive research about companies while disparaging them privately.

Eliot Spitzer on the Colbert Report - Spitzer says Americans should be furious that the financial system is being rebuilt exactly as it was before the economic collapse.

Rule by the Rich -The Democrats were destroyed as an independent party by jobs offshoring and so-called free trade agreements such as NAFTA. The effect of "globalism" has been to destroy the industrial and manufacturing unions, thus leaving the Democrats without a power base and source of funding. Obama and the Democrats cannot be an opposition party, because Democrats are as dependent as Republicans on corporate interest groups for campaign funding. The Democrats have to support war and the police state if they want funding from the military/security complex. They have to make the health care bill into a subsidy for private insurance if they want funding from the insurance companies. They have to abandon the American people for the rich banksters if they want funding from the financial lobby.

Where Did They Get The Money? (BlackRock) - We counted over 1,800 13Gs that Blackrock dumped on Friday. For those less familiar with the 13G, since we don’t often write about these filings, it’s a requirement when ownership exceeds 5% of the outstanding shares. With few rare exceptions, these filings represented new positions for Blackrock since we only counted 11 amended 13Gs, Where did Blackrock get the money?  Blackrock has just $3.96 billion in cash on hand according to the most currently numbers on Yahoo Finance.  The S&P 500 alone has a market cap of some $13 trillion dollars. Something "funny" is going on here folks, and it demands an inquiry - and answer.The underlying question remains - if and when something goes wrong, what does Blackrock have available to them to deal with it when they're managing an asset base larger than that of The Federal Reserve?

No January Thaw - EP is more discomfited by the intransigence in Washington than by the weather. Threats pile up. In On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, his just-published memoir, former Treasury Secretary Henry Paulson reports that high-ranking Russian officials approached their Chinese counterparts in August 2008 to propose dumping Fannie Mae and Freddie Mac bonds in order to precipitate a crisis in financial markets and force a US government bailout.Also last week, John Markoff, David Sanger and Thom Shanker of The New York Times, reported on a series of probes, cyberattacks and surveillance efforts in the last few years thought to be associated Chinese nationals, and discussed the evolving US strategy in response – essentially a policy of retaliation.But Congress is deadlocked on just about everything else – not just national health care policy, but banking regulation, deficit reduction, climate management, campaign finance, confirmation protocol, to name only the most obvious..

Senate Cites Lax Rules for Illicit Money Transfers - NYTimes -The 325-page report by the Permanent Subcommittee on Investigations, which will conduct a hearing on Thursday, sheds new light on how banks like Citigroup, Wachovia and Bank of America unwittingly shifted hundreds of millions of dollars on behalf of African politicians, their relatives and associates.  The banks ended up closing or restricting the accounts and cooperated with the subcommittee, offering comments on individual transactions. In all cases, the Senate report says, the banks ignored controls intended to prevent money laundering and related screens on PEP, meaning politically exposed persons — high-risk clients from corrupt countries.

My Congressman on the Big Think - Barney Frank starts off by trying to blame the Bush administrations for the financial crisis: And the Clinton Administration was better than the Bush Administration.  When the Bush Administration came in, they appointed people who didn’t believe in regulation. So it was not that the banks captured them, it’s that they volunteered to become parts of that operation. I agree, but it is not at all black and white, as this New York Times story from 2003 shows: WASHINGTON, Sept. 10— The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

This Week in Banking: Root Canals, Rhetoric or Real Reform? - Bankster - The debate over banks and banking came front and center this week. In his toughest language yet, President Barack Obama vowed to veto financial reform legislation that is not tough enough on Wall Street. "The lobbyists are already trying to kill it," Obama told Congress in his State of the Union address. "Well, we cannot let them win this fight. And if the bill that ends up on my desk does not meet the test of real reform, I will send it back." But the rest of the President's speech and the other dramatic developments in the banking world this week indicate that Democratic actions are falling far short of their rhetoric, a pattern that voters are sure to notice.

Move Your Politician’s Money - I talked Sunday about Move Your Money with Guy Raz of NPR’s Weekend All Things Considered (summary; audio from about 3:45).  We covered a lot of ground, from what’s in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely).Unfortunately, there wasn’t enough time to discuss what comes next – i.e., what happens when the location of political candidates’ own money starts to matter.  As early as this fall’s primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?

Mr. Obama’s Junk Economics: Democrats Relinquish the Populist Option to the Republicans - The Republicans are winning the populist war. On the weekend before his State of the Union address on Wednesday, Mr. Obama strong-armed Democratic senators to re-appoint Ben Bernanke as Federal Reserve Chairman. His Wednesday speech did not mention this act (happily applauded by Wall Street). The President sought to defuse voter opposition by acknowledging that nobody likes the banks. But he claimed that unemployment would be much higher if they hadn’t been bailed out. So the giveaway of public funds was all for the workers. The $13 trillion that has created a new power elite was just an incidental byproduct. Unpleasant, perhaps, as American democracy slips into oligarchy. But all for the people. The least bad option. It had to be done. People might not like it, but Main Street simply cannot prosper without creating hundreds of Wall Street billionaires – without enabling them to increase their bonuses and capital gains as bank stock prices quadruple. It’s all to get credit flowing again (at 30% for credit card users, to be sure).So the rest of us must wait for wealth to trickle down.

Fed: Banks Cease Tightening Standards, Loan Demand Weakens Further - From the Fed: The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period. In general banks have stopped tightening lending standards, however demand continues to weaken. For real estate - especially commercial real estate - the banks are still tightening standards

Bank Failures Seen Rising In 2010, Despite Recovering Economy - The continuing fallout from bad loans made in good years mean even more U.S. banks will fail in 2010 than 2009, despite a recovering economy.  Thats the prediction of bank analysts who see as many as 200 institutions closing this year, at a potential cost of more than $50 billion to taxpayers, as risky loans approved in 2006 and 2007 take their toll.  And that represents a projected 43% increase in closures from 2009, which saw 140 failures, the most since 1992 when the U.S. was recovering from the savings and loan crisis

FDIC Proposes Tough-Minded Securitization Reforms; Industry Howls -- Yves Smith - In addition, this FDIC proposal supports two of my other pet theories. One is that it is possible for regulators to come up with effective reforms if they have the will. This is a cogent and well designed plan. Second is the FDIC is the only Federal banking overseer that takes regulation seriously (the SEC might have once upon a time; it might be possible for it to rebuild that skill. The Fed is beyond redemption here; it is dominated by monetary economists who not only don’t know what they don’t know, but also are unduly respectful of the wonders of financial markets. The FDIC, by contrast, is not overawed by banksters).

 Budget Suggests FDIC Reserve Ratio May Need to Increase —U.S. policy makers should consider raising the amount of money the Federal Deposit Insurance Corp. has on hand to deal with bank failures, the Obama administration said in its fiscal 2011 budget on Monday. The proposal suggests that the current reserve ratio used by the FDIC—which represents how much the agency has on hand in its deposit insurance fund compared to federally insured deposits—may not be high enough. The current reserve ratio range of 1.15% to 1.5% is "inadequate to handle the unexpected risks and losses that come with a downturn in the economy."

Obama to Outline $30 Billion in Small Bank Assistance (Bloomberg) -- President Barack Obama will propose providing community banks with $30 billion to spur lending to small businesses, administration officials said. Under the lending plan being announced today, which would be separate from Troubled Asset Relief Program and require congressional approval, banks with assets from $1 billion to $10 billion could borrow as much as 3 percent of their risk-weighted assets, while banks with less than $1 billion in assets would get up to 5 percent of their holdings. Obama will lay out his proposal to use money repaid to the TARP to expand lending by as many as 8,000 banks to businesses ready to hire new workers, according to the officials, who briefed reporters last night on the condition of anonymity.

Spurned by Big Banks, Small Firms Find Cash Where They Can - NYTimes - Recently, the Treasury Department began tracking lending by the 22 largest bank recipients of federal bailout money, and it found a sizable decrease in small-business lending. Banks, of course, are now more reluctant to hand over money to small and midsize companies partly because the practice is riskier than it was just a few years ago, when consumers were spending freely. Banks are writing off record numbers of bad loans and have tightened their underwriting standards to limit their losses. “After Chase said no, I went to Citibank. I went to Capitol One. I wasn’t going to sit around waiting,” says Mr. Levy, explaining that he needed to borrow $1 million last year for $1.5 million in purchase orders for new products, including frames with Wi-Fi access. “All of them said the same thing: ‘the underwriters, the underwriters.’ They just tightened and, boom, they just shut it off.”  WHEN small businesses face funding squeezes, Mr. Eitelberg and others like him offer an enticing, if expensive, pitch for desperate entrepreneurs.

Moody's sees junk risk in $1.4 trln refinance wave - U.S. junk-rated borrowers, holding the bulk of $1.355 trillion in corporate debt maturing in the next five years, may face refinancing challenges if the U.S. economy stumbles, Moody's Investors Service said in a report on Monday. Most of the debt stems from unprecedented leveraged buyout activity leading up to 2007, before the global credit crisis took hold, the rating company said, noting mega deals from TXU, HCA, First Data, Univision and Freescale. While debt coming due in the next two years won't pose a great risk, the biggest chunk of speculative-rated debt, some $700 billion worth, comes due between 2012 and 2014.

A Good Guy in D.C.? - Edward DeMarco, the acting head of FHFA, wrote a letter to some heavy hitters in Washington. Sen. Dodd-Banking, Sen. Shelby-Banking, Congressman Frank-Financial Services and Bachus-Financial Services. The letter was a cry for help. I sincerely hope that these important legislators do not ignore this SOS. If they do, some irreversible damage will have been done. Hundreds of billions of dollars are at stake. . What Mr. DeMarco said between these lines was “If you guys don’t get off your ass and pass some new legislation I am going to be forced to take us down a road that we should not go down. I don’t have a choice in this. I think this is a big mistake. Please do something to stop this. I don’t want to be the guy that puts the mortgage giants on a path that will end very badly. We have made this mistake before with the GSEs. I don’t want to make it again. Please help, before it is too late”

Of vacuums and central bank policies FT Alphaville noted earlier today the extent to which the US government is propping up the housing market. Programmes such as the Hamp are explicitly aimed at supporting house prices; while the Federal Reserve is due to buy $1.25 trillion worth mortgage-backed securities (MBS). Moral (housing) hazard aside, the government’s support poses a major problem for the US economy. It means when the US government finally does withdraw its extraordinary policies there will be no one that can easily step in to take its place. Traditionally banks and thrifts have accounted for about 20 per cent of total debt outstanding in the US credit mark, according to Deutsche Bank estimates. Much of that was focused on the housing finance market, where they held 42 per cent of mortgages. The problem is that lending hasn’t picked up yet. Here’s a nice chart from Deutsche Bank to illustrate the problem:

Loans by the Top Four US Banks: bar graph (last 5 quarters)

Treasury Removes Embarrassing Line From Mortgage Modification Report -I was working on a post about the Treasury's new mortgage modification rules (to soon follow) when I noticed something kind of amusing. Last month, I noted that its mortgage modification program was doing incredibly badly in terms of providing permanent modifications to struggling homeowners who requested assistance. In fact, it had a mere 1% success rate through November. Looking at this month's report, I suddenly realized that I couldn't make that calculation any more: the Treasury removed the denominator of the ratio from the report. Here's what the chart looked like in November's report (.pdf): …

SIGTARP Warns of Second Housing Bubble - The Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which oversees the federal government’s economic recovery program, called for reform to prevent government bailouts in the future and warned of a government-induced second housing bubble. “Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” SIGTARP wrote in its latest quarterly report (download here). “To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the government will bail me out’ mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions.” The report warns the government’s efforts to stabilize the housing market may create a second bubble.

U.S. Housing Bubble v2.0 - Here’s one thing that the Sigtarp’s quarterly report to Congress, released on Saturday, made very clear: propping up house prices is now an explicit goal of the US government. So explicit in fact, that the Special Inspector General for the Troubled Asset Relief Program has knocked up this little chart to show how various policy programmes (Hamp, MHA, etc.) lead to higher houseprices:  As the report states: Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”

The Lay of The Land – The U.S. economy will continue to be weighed down in 2010 by the after-effects of the bubble collapse in residential and non-residential real estate. This collapse, not the financial crisis that was sparked by the collapse, is the cause of the recession and the main factor suppressing growth. The fallout from the collapse of these bubbles virtually guarantees that 2010 will be a year of slow, and possibly negative, growth with 2011 offering little better prospects. The impact of the housing bubble is fairly straightforward....

The Next Leg Of The Housing Crisis In Five Simple Charts - Everything that the government has done so far, with a few minor detours, has been almost exclusively focused on maintaining home prices high, by tweaking either the supply or the demand side of the housing equation. As the bulk of consumer net wealth is concentrated in the housing sector, and a wealthy and confident consumer, much more so than the banking system, is critical to the recovery of America's economy, the Administration will do everything in its power to achieve its goal of artificially manipulating the housing market, thereby not causing an incremental loss of wealth to those still stuck with overpriced houses, while the real intersection of actual supply and demand curves would indicate a materially lower equilibrium price. This is ironic, as proper price discovery is critical for a true recovery, since Americans realize all too well that buying a house at prevailing levels in advance of the second down-leg in housing is senseless, the continued pursuit of such flawed policies by the Fed and President Obama merely pulls the market ever further away from its equilibrium, thereby making the anticipated second dip so much more likely and not that far off in the distant future.

Rising FHA default rate foreshadows a crush of foreclosures - The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.  About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.  Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.  If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

Mounting Foreclosures Impede Housing Recovery - It is painfully clear that the number one obstacle preventing a complete housing recovery is the foreclosure crisis. According to a recent report released by Realty Trac, almost 3 million homeowners experienced a foreclosure filing in 2009, an all-time record. To put the magnitude of the foreclosure problem in context, last year’s foreclosure total was 21 percent greater than all of the foreclosure filings in 2008 and more than double the total foreclosure filings in 2007.  These numbers represent a harsh reality for many households in America. Almost 3 million households lost their home last year. One in forty-five households was in default last year.

Lost your house? You still have to pay - As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right? Wrong.  Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.It can even happen to people who got their bank to approve them selling their home for less than it is worth.

No Aid or Rebound in Sight, More Homeowners Just Walk Away - New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying. In a situation without precedent in the modern era, millions of Americans are in this bleak position. The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

Negative Equity Report for Q3 - Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Tell the NYT, Walking Away from Underwater Mortgages Is Good for the Economy - It is not clear on what evidence the NYT is basing the assertion that more people defaulting on their mortgages would damage the economy because none is presented. In fact, this is likely to benefit the economy since if people stop paying mortgages on homes that have fallen in value since the collapse of the bubble, and decide to rent instead, it is likely to free up thousands of dollars a year for each family. If millions of homeowners made this decision it could lead to tens of billions of dollars in additional consumption, providing a substantial boost to the economy. The decision of homeowners to walk away might be bad news for banks, but it is good news for the economy.

Walking away from negative equity -The logic is straightforward. As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers' tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes. Not only will people end up losing money when they sell their home, but many underwater homeowners are likely to pay far more on their mortgage and other ownership costs than they would to rent the same unit. We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage.

Is the US Reaching a Strategic Default Tipping Point? - The New York Times writes tonight about strategic defaults on mortgages, and argues that enough mortgages are deeply enough under water to induce solvent borrowers to think about walking away: New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying….Although the Times doesn’t say where this “research” comes from, it is presumably survey research of some sort. The problem is that any survey or focus group research around money decisions is notoriously unreliable. Clearly, elective defaults are rising, even if no one can say with confidence by how much. The longer the real estate bust continues, the more deeply underwater borrowers will think hard about the costs of upholding their side of a deal…with a merciless servicer and anonymous investors.

More Borrowers Pay Credit Cards Before Mortgages - It's exactly the opposite of the norm. Usually cash-strapped Americans during tough economic times will miss credit card payments before they'll miss mortgage payments. Welcome to the new world order. The percentage of borrowers who are delinquent on their mortgages but paying their credit card bills on time is growing, to 6.6 percent in the third quarter of 2009 from 4.9 percent in the same quarter of 2008, according to a new study by Chicago-based TransUnion. In an interview with Reuters, the author of the study, Sean Reardon, confirmed, "This goes against conventional wisdom and that has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages."

Mortgage Delinquencies Pass 10%: LPS - Home-loan delinquency rates in the US reached 10% in December, up from the record-high 9.97% in November, according to Lender Processing Services, which provides data on mortgage performance. Accounting for foreclosures in the pipeline, the total non-current rate stands at 13.3%, according to the data in the LPS database. When extrapolated for the entire mortgage industry, 7.2m mortgage loans are behind on their payments. Earlier in January, Fitch Ratings reported the delinquency rate among prime jumbo residential mortgage-backed securities (RMBS) almost tripled to 9.2% in December 2009. For the amount of loans current at the end of 2008, 4.64% fell into serious delinquency. That means that of the loans current as of Dec. 31, 2008, 2.3m fell into serious delinquency by December 2009.

Q4: Homeownership Rate Declines to Early 2000 Level -The Census Bureau reported the homeownership and vacancy rates for Q4 2009 this morning. Click on graph for larger image in new window. The homeownership rate declined to 67.2% and is now at the levels of early 2000. .The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%

U.S. Vacancy Rate Increases as Banks Seize More Homes (Bloomberg) -- The share of homes vacant and for sale rose in the fourth quarter after banks seized property from borrowers who defaulted on mortgages. The homeowner vacancy rate increased to 2.7 percent from 2.6 percent in the third quarter, the U.S. Census Bureau said in a report today. There were 2.09 million empty properties on the market, up from 1.99 million, according to the report. The rate gained even as the number of properties listed with brokers declined because the survey includes bank-owned homes for sale without a realtor. Foreclosures probably will reach 3 million this year, surpassing the record of 2.82 million in 2009, according to Irvine, California-based RealtyTrac Inc.

Homeownership Rate Falls Back to Pre-Boom Level - The American homeownership rate in the last quarter of 2009 fell back to its level from a decade ago, according to the Census Bureau. The rate refers to the proportion of households that are owner-occupied, and it is calculated by dividing the number of households whose owners live in them by the total number of occupied households. On a seasonally-adjusted basis, the homeownership rate declined to 67.3 percent in the fourth quarter last year. That is about the level it was in early 2000.

Are Appraisals the New Organized Crime? - Greedy appraisers, who put lofty valuations on properties to please lenders and line their pockets, played a large role in the housing bubble. And the fallout continues: On Jan. 29, a former Beverly Hills real estate appraiser was sentenced to three years in federal prison for her role in a multimillion-dollar scheme to profit from inflated property values.  The conflicts have led to the increasing use of appraisal management companies -- middlemen that are supposed to act as a firewall between lenders and appraisers.  But appraisal management companies probably aren't the solution to appraisal fraud. In fact, a closer look at the industry and its scandals reveals a "Godfather"-like underbelly, complete with death threats on public officials, stings and yes, actual murder.

More Examples: Massive BS Accounting I keep harping on this, but it's important. I keep getting copies of various evidence that the banks are not properly handling defaulted mortgages. The instance I present here is a mortgage - a "conventional" loan - that has been reported as "120 days past due" to the credit bureaus for THIRTEEN CONSECUTIVE MONTHS. (picture) What the hell sort of game is this?  Note that it was also reported 60 late twice too, but that's reasonably possible - it went late, went 60 late, the debtor made one attempt to pay it down but still was 60 late, then gave up. This person has been living in their house without making a mortgage payment for nearly a year and a half, and the bank - it's one of the "Big Three" - HAS NOT FORECLOSED.

Resolving fake homeownership  Mike Konkzal has a new post on the homeowner crisis. In it, he describes the current phenomenon of homeowners being offered mortgages, which they can’t afford once rates are reset after a teaser period, then being left with an uncertain future as banks defer on foreclosure after they‘ve gone delinquent. He gives this a term, “Fake homeownership”, which is probably a very apt term for what the arrangement essentially amounts to. He has given vivid illustrations of what is actually going on in the ground, and like many, is reasonably perplexed at how banks could have let people come this far into trouble. Not being in the US, many of the things he says are new to me, but having once been in a bank, I will put my comments and clarifications on key passages of his post, to try to put more light on some of the reasons why they are what they are, so that Mike (who’s doing an admirable work of trying to get to a deeper understanding) can give us more nuanced recommendations.

Florida bankers move to dramatically speed up the foreclosure process - St. Petersburg Times
If bankers get their way, Floridians facing foreclosure could be kicked out of their homes in as little as three months. The Florida Bankers Association, the 400-member-strong lenders' lobby, has presented state legislators with a bill to upend decades of Florida law and establish "non-judicial" foreclosures in Florida by July 1. What's a non-judicial foreclosure? Banks would accelerate foreclosures against defaulting homeowners by bypassing the courts. Judges would no longer rule on foreclosure cases. Some states — 37 in fact — already grant that fast-track foreclosure authority, including California, Georgia, Alabama and Texas. But Florida, with its plethora of vacation and retiree homes, has always been big on homeowner rights.

Construction Spending Declines in December - Residential construction spending was off slightly in December, and is now about 10% above the bottom in June 2009. I expect some growth in residential spending in 2010, but the increases will probably be sluggish until the large overhang of existing inventory is reduced. The first graph shows private residential and nonresidential construction spending since 1993.  The second graph shows the year-over-year change for private residential and nonresidential construction spending. Nonresidential spending is off 17.7% on a year-over-year (YoY) basis.

Residential Investment Components in Q4 - More from the Q4 GDP underlying detail tables ...Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q4 2009. This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Property Values Projected To Fall 12 Percent In 2010 - NewObservations.net projects residential real estate prices will fall 12 percent nationwide in 2010. Our average of four major indexes predicts a total fall in prices of 34% from peak to stable trend. The total fall of 34% is based upon a current loss across four number sets of 19%. The timing and the total fall vary widely among the data. The most conservative picture of our total fall is a 20% loss. The most radical prediction is that values will fall 51% from peak to stable trend (Please see the summary of results immediately below.).

Mortgage Bankers Association Half Off Sale - From the WaPo: Mortgage bankers group sells D.C. offices to Bethesda company The Mortgage Bankers Association ... fell victim to the collapse of the market and sold its $90 million headquarters in downtown Washington on Friday for $41 million. ...The Mortgage Bankers Association moved into the building in 2008 just as the real estate market was crashing ... Sounds like they were drinking their own Kool-Aid!

The Perfect Storm: Deteriorating Rents and Occupancies, Deflating Sales Prices and Tight Credit - While much has been made of the aid the U.S. government has put into helping the economy, commercial property owners nationwide are beset with distressed properties. Help is available to commercial property owners, but it is not widely known about and commercial properties continue to get foreclosed unnecessarily. "Not since the early 1990s have we observed this perfect storm of deteriorating rents and occupancies, deflating sales prices, and tight credit that's leading to a lot of defaults,"  "With close to $3.5 trillion of loans outstanding and at least 12 to 24 more months of rent declines, I expect to see more commercial properties defaulting on loans." Commercial real estate is expected to remain a drag on the U.S. economy through 2010 and beyond. However, some savvy commercial real estate investors that are unwilling to lose their holdings are taking a proactive approach to avoid foreclosure and protect their assets against further financial decline.

Q4: Office, Mall and Lodging Investment - Here are graphs of office, mall and lodging investment through Q4 2009 based on the underlying detail data released by the BEA ...Reis reported that the office vacancy rate rose to a 15 year high in Q4 to 17.0%, from 16.5% in Q3 and from 15.9% in Q2. The peak vacancy rate following the 2001 recession was 16.9%. With the office vacancy rate rising, office investment will probably decline through 2010. Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 50% (note that investment includes remodels, so this will not fall to zero). Reis reported that the mall vacancy rate in Q4 was the highest on record at 8.8% for regional malls, and 10.6% for strip malls. The third graph is for lodging (hotels).Lodging investment peaked at 0.32% of GDP in Q2 2008 and has declined rapidly to 0.16% in Q4 2009. As projects are completed there will be little new investment in these categories probably at least through 2010

U.S. commercial property prices hit new cycle low (Reuters) - U.S. commercial real estate prices fell 4.9 percent in the fourth quarter, setting a new low for the current downturn, according to a leading property index released on Friday. The slide to 139.25 points wiped out a 4 percent rise recorded in the third quarter and takes the index -- by the MIT Center for Real Estate (MIT/CRE) -- below 140.06, the cycle's previous low reached in the second quarter. For the year, the index, which includes prices for commercial property sold by major institutional investors, is down 22.5 percent since the end of 2008. At the end of the 2009, the index was 39.5 percent below the second quarter 2007 peak of 230.26.

Industry Outlook: The Worst May Still Be Yet To Come For U.S. Commercial Real Estate Loans (13pp pdf) - S&P report

Commercial property loans to hit small banks-Moody's  (Reuters) - Smaller-sized U.S. banks will be hardest hit by their exposure to commercial real estate loans, and many of those banks will collapse, Moody's Investors Service said in a report released on Thursday. A large number of smaller-sized banks, which are not rated by Moody's, make up only 15 percent of U.S. bank system assets but carry 50 percent of commercial real estate loans outstanding, and will struggle under the weight of that exposure, Moody's said.

Hotels' Distress Lead CMBS Delinquencies To Record Level - Hotels, which for more than a year have been struggling with a drastic drop in bookings, now lead all other classes of commercial real estate in delinquencies, data provider Trepp said Tuesday. Payments on loans to hotel properties that were 30 days late or more hit a high of 15.32% in January. That matches Fitch Ratings' estimates that nearly 15% of the $51 billion in hotel loans that are securitized into commercial mortgage bonds will turn delinquent over the course of this year.

Housing Crisis Getting Uglier in 2010 - Nearly 6 Million Foreclosures in Past 3 years - 3 Million More Expected in 2010  - CBS News - The American Dream is now a nightmare for many of the 75 million Americans who own a home. The housing report card is ugly. In the past two years, the housing market has lost an estimated $4.9 trillion dollars, as 59 million homes have declined in value. Nearly 1 in 4 homeowners -- 10.7 million households nationwide -- are underwater on their mortgages. They owe more than their home is now worth.  "Today, the number one cause of foreclosure is unemployment,"

TARP Focus Shifting to Foreclosure Prevention - The Obama Administration’s proposed fiscal year 2011 budget includes shifting the Treasury Department’s focus of the Troubled Asset Relief Program (TARP) away from large financial institutions to a renewed focus on foreclosure prevention efforts and small businesses and unemployment. The Treasury said along with a new “focus on the challenges of helping families avoid foreclosure,” TARP will aim to bring down unemployment from record highs. Other initiatives in the budget include $30bn in TARP funds to help community and smaller banks extend credit to small businesses and $500m in efficiency savings in the Treasury Department, including using paperless processing for electronic benefit payments and tax collections.

Obama Housing Rescue Threatened by Foreclosures, Unemployment - (Bloomberg) -- President Barack Obama’s efforts to bolster the U.S. housing market, the trigger of the worst recession since the 1930s, may be undone by record unemployment and repossessions by lenders.  Foreclosures probably will reach 3 million this year, surpassing the record of 2.82 million in 2009, according to Irvine, California-based RealtyTrac Inc. That would more than offset an estimated 448,000-unit rise in home sales, based on the average forecast of the National Association of Realtors, the Mortgage Bankers Association and Fannie Mae.  The housing industry remains a challenge for Obama as he enters his second year of office and government assistance programs near expiration. Data this week showed home sales tumbled after the expected end of an $8,000 tax credit for first-time buyers boosted transactions the prior month.

Krugman: Romer and Bernstein on stimulus - Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of what the American Recovery and Reinvestment Plan would accomplish.... This looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.... [T]he estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am. Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.

2011 Budget Sees Slow Growth, Accelerating to 4.3% by 2012 - After its severe recession, the U.S. economy is expected to expand by 2.7% in 2010, but that won’t be enough to prevent unemployment from staying high for several more years, the White House said Monday in its fiscal 2011 budget request. U.S. gross domestic product is seen growing by 3.8% in 2011 and by 4.3% in 2012. The forecasts are broadly in line with those made by private sector economists

2011 Budget Proposals to Spur Jobs Creation - The Obama administration’s fiscal 2011 budget request includes a range of measures aimed at spurring job growth, from extending jobless benefits to the unemployed, investing in infrastructure and increasing loans to small business owners. As expected, the budget focuses heavily on the need to repair the moribund jobs market, as the White House seeks to improve the nation’s employment picture heading into the November midterm elections.They include around $25 billion in increased aid to states to help them avert layoffs, providing loans to community and regional banks to boost capital available to small businesses, and eliminating capital gains tax on investments by small businesses

Foreclosures linked with unemployment are leading to homelessness - The homeless shelters are filled in capacity with foreclosures being linked with unemployment causing homelessness. In the suburbs the number of homeless people is spreading across the nation. According to HUD the number of homeless living in shelters in the suburbs and rural regions increased from 23% to 32%. In the big cities however it dropped from 77% to 68%.  In the suburbs it is becoming a problem because of the poor facing uncertain conditions and a huge numbers thrown out of homes by foreclosures are migrating to the outskirts of the cities. Many small businesses have downed shutters as unemployment figures are increasing in general. The city facilities for the homeless are full up and many are moving out hoping for better amenities in the suburbs.

January U.S. Private-Sector Jobs Fell by 22,000, ADP Says - WSJ - The labor market showed positive signs of recovering in January. Private-sector jobs in the U.S. fell by 22,000 in January, the smallest drop since February 2008, and service jobs continued to rise, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. A separate report indicated that the U.S. service sector resumed expansion in January. The ADP loss is slightly below the 30,000 drop projected by economists in a Dow Jones Newswires survey. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000.

824,000 Will Disappear On February 5; BLS Admits Flawed Model But Plans No Changes - On Friday, expect to see the BLS revise job creation estimates down by a whopping 824,000 jobs. The culprit, as I have been harping on for a couple years is a birth-death model far out of sync with reality. Bloomberg has some nice interactive charts in an article Birth Death Model Insights. Originally the BLS said 4.8 million jobs were lost between April 2008 and March 2009. This is what it looks like now.

January unemployment rate drops to 9.7 percent – Forbes - The unemployment rate dropped unexpectedly in January to 9.7 percent from 10 percent while employers shed 20,000 jobs, the government said Friday. The rate dropped because a survey of households found the number of employed Americans rose by 541,000, the Labor Department said. The job losses are calculated from a separate survey of employers. The report also included an annual revision to the estimates of total payrolls, which showed there were 930,000 fewer jobs last March than previously estimated. The department also revised down its estimates for April through October of last year, adding another 433,000 job losses.

Unemployment drops to 9.7% despite more job losses -  This morning’s release by the Bureau of Labor Statistics of the January 2010 employment report showed 20,000 jobs lost in January. Furthermore, revisions released today showed that the country had 930,000 fewer jobs last March and 1.4 million fewer jobs last December than previously estimated. The total number of payroll jobs lost since the start of the recession in December 2007 now stands at 8.4 million. In a testament to both the enormity of the current crisis plus the very weak jobs growth of the 2000-07 business cycle, the U.S. labor market started 2010 with fewer jobs than it had a decade ago, in January 2000, though the labor force has grown by almost 11 million workers since then. Given the slight decline in payroll jobs in January, there was an inexplicable decline in unemployment in January from 10% to 9.7%.

Back to Zero - The unexpected drop in the unemployment rate for January made me more than usually curious about the household survey results, and things there actually look OK for a change. The flat unemployment rate between November and December '09 was the less-than-virtuous result of declining labor force participation pacing the decline in employment. This month's decline in the unemployment rate reflects increasing labor-force participation and employment-to-population ratios; unemployment levels and underemployment rates [1] are also down. The unemployment decline appears to be statistically significant based on the BLS's (inexact) guidance on sampling variability in household survey estimates. The headline employment figure, in contrast, is not a statistically (or qualitatively) significant result, hence the summary's "essentially unchanged" language.

Employment-Population Ratio, Part Time Workers, Temporary Workers - A common question is: how could there be fewer payroll jobs, but the unemployment rate declined? This is because the data comes from two separate surveys. The unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 400,000 business establishments nationwide. The establishment survey showed a loss of 20,000 payroll jobs in January, but the household survey showed an increase in the employment level of 541,000. The number to use for jobs is the establishment survey, but the unemployment number is based on the household survey and the surveys can diverge over the short period, but over time this will work out (for more on the differences, see: Jobs and the Unemployment Rate). Here are a few more graphs based on the employment report ...

Economists React: Jobs Report Has More Good Than Bad - WSJ - Economists and others weigh in on the decline in the unemployment rate amid continued job cuts.

Don’t Expect the Unemployment-Rate Decline to Last - WSJ -Among the surprises in Friday’s government jobs report: Unemployment fell sharply in January to 9.7% from 10%. The jobless rate rose as high as 10.1% in October. But it’s most likely to move higher, not lower, in the coming months.The Labor Department estimates the unemployment rate from a survey of households, separate from the survey of employers used to track changes in payrolls. (That figure showed employers cutting 20,000 jobs in January.) The household survey asks people whether they have a job or whether they want a job and searched for one, among other questions. It showed a substantial gain in employment — 541,000 jobs last month.The Labor Department surveys tend to be volatile, producing figures that jump around between months due to sampling. Last July, joblessness declined to 9.4% from 9.5% — and then rose for three straight months after that. The drop was due in part to a substantial decline in the labor force. Last month, the labor force actually rose by about 111,000.

Labor Dept pains in the birth-death jobs model  (Reuters) - The Labor Department on Friday blamed faulty estimates of how many companies were created or destroyed for its unusually large revision to payrolls that showed job losses were considerably steeper than first thought.Once a year, the Labor Department compares its payroll data with unemployment insurance tax reports and releases a "benchmark revision" that adjusts for discrepancies. Normally the difference is relatively modest. This time, the Labor Department revised the level of employment for December 2009 down by 1.39 million, bringing the total number of jobs lost since the start of the recession to 8.4 million.The primary culprit behind that huge revision was the so-called "birth-death" model, a method the Labor Department uses to try to estimate how many jobs were gained or lost because of companies opening or closing in a given month. While economists have long questioned the accuracy of the model, it had performed well up until the latest recession. This time, it overstated job creation by 779,000 in the year that ended in March 2009.

Unemployment report - Below is the full Employment report from the BLS: Please go to page 5 and 6 of the above report and you will find discussion and tables of the annual revisions. While they present the table, they don’t bother to add up the revisions, but I did… and the number is 617,000 more jobs were lost than they originally reported! This is largely due to their use of a totally false “Birth/ Death model” for businesses. Below is a picture of their revision table, note only one month was positive, and in the average month, jobs were overestimated by 51,400 people!

Jobs and the Unemployment Rate - This is probably worth reviewing again, and I've added several graphs to show the relationship between net payroll jobs (establishment survey) and the unemployment rate (household survey) over different periods. As I noted yesterday, a common question is: How could there be fewer payroll jobs, but the unemployment rate declined? This is because the data comes from two separate surveys. The establishment survey showed a loss of 20,000 payroll jobs in January, but the household survey showed an increase in the employment level of 541,000.  The number to use for jobs is the establishment survey, but the unemployment number is based on the household survey. The two surveys can diverge over the short period, but over time it will all work out.

OOPS! – U.S. Government Unemployment Numbers Have To Be Revised Because They Were Off By Almost One MILLION! - What a mess! We all knew that U.S. government unemployment numbers were off, but this is ridiculous. It is now being reported that the U.S. may lose 824,000 jobs when the government releases its annual revision to employment data on February 5th.  How in the world could the original figures be so far off?  The truth is that U.S. government figures have been getting more and more out of touch with reality each year.  Government bureaucrats have been monkeying with the "definitions" of unemployment and inflation for decades, and at this point the figures they give us mean little to nothing.  For example, the U.S. government has been telling us that the unemployment rate in the U.S. is somewhere around 10 percent, while everyone knows that the "real" number is somewhere in the neighborhood of 20-22 percent.

Could have, should have – Economist - I HAVE a News analysis column up on the main page discussing this morning's unemployment figures out of America. The drop in the unemployment rate, from 10% to 9.7%, is grabbing a lot of attention, but I'd suggest that's not providing the most accurate picture of the labour market. Looking instead at the establishment data, we see that the employment picture was more or less flat in January (payrolls officially fell by 20,000), but that labour markets are struggling to climb out of a much deeper hole than was initially realised: The Labour Department published the results of its annual benchmark revision of previous employment data. Through the 12 months to March 2009, the American economy lost 930,000 more jobs than had been previously estimated.

The January Employment Situation: Four Pictures - Downward revision in the level of nonfarm payroll (NFP) employment; stabilization in employment measures (establishment, household, research series); aggregate weekly hours trend up.

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

Unemployment number decline is all about seasonal adjustments -  A lot of people are questioning the unemployment rate of 9.7% in the face of a –20,000 non-farm payroll. How could we be losing jobs and have the unemployment rate drop? It would seem people are dropping out of the labor force.  However, I have now parsed the household survey data and most of the data seems reasonable. The labor force participation rate actually ticked up slightly (both seasonally adjusted and unadjusted) – as did the number of people not in the labor force who wanted a job (unadjusted only). This is what we would expect. What sticks out is the seasonal adjustment for the number of persons employed and unemployed. In December 2009, there were 15.267 million people unemployed on a seasonally-adjusted basis.  This ticked down to 14.837 in January 2010, a fairly large drop of 430,000. Meanwhile the unadjusted numbers go the other direction – massively.  In December 2009, the number of unemployed persons was 14.740 million. This rose 1.4 million to 16.147 million.

Non Farm Payrolls Benchmark Revision and the Unemployment Rate as Cruel Farce - As you may have heard, the Bureau of Labor Statistics did a benchmark revision. This is Washington speak for 'revised the numbers as far back as anyone might care to remember to give ourselves more wiggle room.'  The benchmark is a product of the Bernays Factor, that measure of public gullibility which permits obviously contrived government statistics to be taken seriously. Did you react to the positive jobs trend initially announced in September - October 2009? Oops, it was really a greater loss than expected, and not a gain at all. One can only suspect that in a few years this whole recovery could be revised away without so much as a bureaucratic blush. Here is a picture comparing the old and new headline numbers.. The change is pervasive. One item of note is the taking of more job losses in the earlier years, setting up a stable base for potential job gains in the present, without embarrassing oneself by getting out of synchronization with the actual growth of the civilian population. There will be more 'truing up' of the numbers in the future.

TrimTabs: Here's Why The Real Jobs Loss Number Was 5x Worse Than What The BLS Reported
TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 104,000 jobs in January.  Meanwhile, the Bureau of Labor Statistics (BLS) reported the U.S. economy lost 20,000 jobs.  We believe the BLS has underestimated January’s results due to problems inherent in their survey techniques. In addition to their regular report, the BLS published benchmark revisions to their employment estimates derived from an actual payroll count for March 2009.  As a result, job losses from April 2008 through March 2009 were revised up a whopping 930,000, or 23% from their earlier revisions.  In addition, the BLS revised their job loss estimates for 2009 up 617,000, or 14.8%. While the BLS originally reported job losses of 4.2 million in 2009, TrimTabs reported 5.3 million, a difference of more than a million lost jobs.  We consistently reported that based on real-time tax data, job losses were much higher than the BLS was reporting.  This past January, the BLS revised their job loss estimate to 4.8 million, an increase of almost 600,000 lost jobs.  The new total brought the BLS’ revised estimates much closer to TrimTabs’ original estimate based on real-time tax data.

Even at 10%, The Unemployment Rate Is Highly Misleading -- Seeking Alpha - It's the duration, stupid. Even if it weren’t a lie, just look at that vertical line…Have a closer look at the chart above. click to enlarge 1. The “unemployment rate” is a lie. It’s much higher than the government wants you to believe. 2. Even if it weren’t a lie, a 10% unemployment rate does not mean that the job market is 90% hot. Employment is absolutely frozen. 3. Unemployment has a much more dangerous dimension: duration.

From Part-Time Back to Full-Time? - One bright spot in the January jobs report is that more employers appear to be converting their part-time employees back to full-time workers. In addition to the headline unemployment number released each month, many economists look to a broader measure of unemployment, known as the “U-6.” This includes people who want jobs but have given up looking, and people who want to be working full time but can only find part-time work. The U-6 fell last month, to 16.5 percent, from 17.3 percent in December. Much of that drop comes from the sharp decline in workers who were working part time for economic reasons, from 9,165,000 people in December to 8,316,000 in January.  Accordingly, there does seem to be a slight pickup in the number of hours that the average private-sector worker is clocking each week:

In a First, Women Surpass Men on U.S. Payrolls - For the first time, women have outnumbered men on the nation’s payrolls. The Labor Department revised on Friday its previous estimates of nonfarm payroll employees, the monthly aggregate employment series that gets the most media attention. The most recent jobs estimates by gender are for January. Before adjusting for seasonal changes, 64.2 million payroll employees last month were women, and only 63.4 million were men.The chart below, taking revisions reported on Friday into account, shows payroll employees by gender for each month of 2009. In four of the 12 months — February, March, November and December — there were more female payroll employees than male employees. Employment follows a seasonal pattern and a somewhat different seasonal pattern for men than for women.

Green Jobs for Jailbirds "If you can create jobs or activities for offenders that are educational in nature, what you're doing is employing people and getting them out of their cells," says the state's deputy director of prisons, Dan Pacholke. "Any prison system will tell you that idleness is a bad thing. If we don't have stuff for them to do, then we're just going to hire more security staff." Pacholke, 49, is a career DOC employee whose expertise is high-security response and emergency operations: escapes, disturbances, hostages, executions. His demeanor is easygoing, but he's not the kind of man who spends taxpayers' money on bleeding-heart projects. "It's environmental economics," he says. "We're expensive places to operate. I could sell the [project] on cost containment alone: solid waste, energy, food costs."

A Depressing Budget  - Krugman - I haven’t gone through the budget proposal in detail yet. But there’s no escaping the sense that this is a tremendous comedown from the hopes of a year ago. As many have pointed out, the administration projects high unemployment for years to come: So what’s the response to this dismal, family-destroying prospect? A brief, small additional stimulus, followed by a spending freeze. In essence, the administration is accepting mass unemployment as just one of those things we have to live with.

A jobs lesson from the New Dealers - In the winter of 1933-34, with unemployment close to 25 percent, FDR aide Harry Hopkins put an astonishing 3 million people on the federal payroll in just 90 days, repairing airports, military bases and schools. This in a nation of just 130 million people -- the equivalent today would be around 7.5 million. Hopkins and Roosevelt faced the same criticisms -- over the size of the deficit and the growth of the federal government -- that Obama and the Democrats face. But the New Dealers persisted throughout the 1930s, reducing unemployment; building roads, airports and bases; and securing the allegiance of voters for decades to come. Today's Democrats seem to lack the urgency, compassion and spine of their '30s forebears. Obama's proposals fail to challenge the conservative narrative that government can't engender worthwhile economic activity, so all we can do is cut taxes on business and hope for the best.

Obama’s Newest Tax Credit: First Houses and Cars, Now Jobs - To the surprise of nobody, President Obama has proposed new tax subsidies for businesses that hire additional workers by the end of the year. Structured as a payroll tax holiday, the plan would give companies a $5,000 credit against their share of Social Security payroll taxes for each net new hire, plus a “bonus” 6.2 percent credit for real increases in overall wages. Because the subsidy would be capped at $500,000, small business would be the big winner. Think of this as a jobs version of cash for clunkers or the homebuyers’ credit. The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway.

How to Destroy American Jobs - Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."The fundamental assumption behind these proposals is that U.S. multinationals expand abroad only to "export" jobs out of the country. Thus, taxing their foreign operations more would boost tax revenues here and create desperately needed U.S. jobs.  This is simply wrong. These tax increases would not create American jobs, they would destroy them

The Stealth Tax Credit - With great fanfare, the President in his 2010 State of the Union address announced a new small business tax credit that will go to “over one million small businesses who hire new workers or raise wages.” A White House fact sheet described the credit as a “powerful short term incentive to not only create good jobs but to increase wages and hours for Americans with jobs.” Providing a credit to businesses that raise jobs or payrolls has been discussed over the past year as a possible anti-recession measure. My colleague Howard Gleckman has written several posts expressing skepticism of its effectiveness, while some academic economists have defended the idea. As with any other policy proposal, the devil is often in the details, so I eagerly awaited the release of the President’s budget and the Treasury Department’s Green Book for a more complete description of the proposal and revenue estimates. To my surprise, however, I could not find the proposal either in the Green Book or the chapter in the Analytical Perspectives volume of the budget that lists revenue proposals. Thanks to my more persistent and diligent colleagues, I can report that the category labeled “Allowances” in the list of revenue proposals on page 188 of “Analytical Perspectives” does contain a budget line item for “jobs initiatives.”

Why Obama's Job Creation Plan Might Not Work - President Obama's $3.8 trillion budget for fiscal 2011 includes a jobs bill that could cost around $100 billion. In addition to small business credits and continued state aid, the White House has proposed a $30 billion job creation plan that would give employers $5000 dollars for each new hire. Last week I wrote that while the job creation tax credit has broad support among policy groups, including the CBO and the left-of-center EPI, it's also easy to game the system. Richard Posner finds a deeper flaw: It does nothing to juice demand.  Here's Posner:The Keynesian theory of stimulus (the only theory that makes economic sense) is that if private demand for goods and services falls substantially below the economy's productive capacity (as it has done), government can replace the shortfall in demand by increasing its own demand. The job-stimulus plan is not aimed at increasing demand, and therefore is unlikely to increase employment. For think: if a company is producing 1,000 widgets a year with a work force of 30, and it adds a 31st employee and thereby earns a $5,000 tax credit, the company's total costs will have risen by the wages and benefits that he pays the new employee minus the $5,000. But his sales will not have risen. Participating in the job-subsidy program will actually reduce his profits (revenue minus cost).

The Growing Underclass: Jobs Gone Forever - NYTimes - President Obama talked about the need to put people back to work, calling job growth the “No. 1 focus in 2010. ”But one major obstacle to that goal — and one that has so far gone mostly unacknowledged — is that many of the jobs slashed during this recession are not coming back. Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions.As a recent Congressional Budget Office report put it, “Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, especially those in declining industries and sectors.” Think glassmaking. Or clerical work. Or, for that matter, newspapers. Over all, the share of unemployed workers whose previous job has been permanently lost tends to rise during recessions, and the share of the unemployed who are just

Who Belongs to Unions? - We recently noted that, last year, public sector union members had outnumbered private sector union members for the first time in history. Courtesy of the Bureau of Labor Statistics, here’s a more detailed break-down of where the country’s union workers were employed in 2009:  The bluish sections refer to government workers, and the reddish sections to private-sector workers. As you can see, local government employees represented a plurality of the country’s union members in 2009. While local government workers make up a relatively small share of the nation’s total employment, they have the highest unionization rate of all industries. In this group, which includes public school teachers, police officers and firefighters, 43.3 percent of all workers are unionized.

Jobs for America - Milken Institute - Jobs for America: Investments and policies for economic growth and competitiveness finds that changes to U.S. economic and tax policies can add 2.9 million jobs by 2019 and more than 3.5 million jobs can be created in each of the next three years by supporting investment in 10 key infrastructure project categories. Go to research report homepage....Dowload Slides...View PDF...The study analyzes two different approaches to how the United States can retain and create new jobs – one on the policy side and the other on the investment side. The first outlines the potential growth in jobs and GDP that would result from changes to economic and tax policies and the second calculates the impact that $425.6 billion in government-supported infrastructure investments would have on job creation and the economy.  View Policy Simulation -- Use Infrastructure Investment Calculator

Formula shows why it's so hard to cut jobless rate - The economy's 5.7 percent growth last quarter — the fastest pace since 2003 — was a step toward shrinking the nation's 10 percent unemployment rate. There's just one problem: Growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point. And economists don't think that's possible. Most analysts say economic activity will slow to 2.5 percent or 3 percent growth for the current quarter as the benefits fade from government stimulus efforts and from companies drawing down less of their stockpiles.That's why the Federal Reserve and outside economists think it will take until around the middle of the decade to lower the double-digit jobless rate to a more normal 5 or 6 percent. Another way of looking at it: A net total of about 3 million jobs would have to be created this year to lower the average unemployment rate by 1 percentage point for 2010, economists estimate. Yet even optimists think the creation of 1 million net jobs is probably out of reach this year.

Wage and Benefits Grow Slower Than Inflation - Wage and benefit costs, both before and after adjusting for inflation, grew more slowly 2009 than any year since the U.S. government began tracking data in 1982 as double-digit unemployment weakened workers’ ability to command higher pay.Over the past 12 months, the cost of wages and benefits for workers other than those employed by the federal government rose 1.5%, according to the Labor Department’s employment cost index. Over the same period, consumer prices rose 2.7%.Adjusted for inflation, wages and benefits fell by 1.3% after rising by 2.8% in 2008, the first year of the recession. The inflation-adjusted cost of wages and benefits at the end of 2009 stood just 1.1% higher than at the end of the previous recession in 2001, the Labor Department said.

Immigration helps boost relative wages of U.S.-born workers at all levels of education - Economic Policy Institute - There is broad agreement among economists that immigration has a small but positive impact on the average wages of workers born in the United States: while new immigrant workers add to the labor supply, they also consume goods and services, which creates more jobs. However, economists remain divided over the impact of immigration on specific groups of U.S. workers, particularly those with low levels of education. In the new paper Immigration and Wages, Economist Heidi Shierholz finds that recent immigration has boosted relative weekly wages for native-born workers at all levels of education, including those with less than a high-school education.

What Does It Mean to Be an 'Independent' Contractor? -Hardly a week goes by that I don’t receive e-mail messages from readers worrying about workers misclassified as “independent contractors.”These messages usually referr to laid-off employees who have been rehired to perform largely the same tasks as staff members under largely the same conditions, but who receive less pay and fewer benefits. For example, independent contractors do not receive overtime and are not eligible for unemployment benefits. They also are responsible for both halves of their payroll taxes. (A full employee has one-half of his payroll taxes withheld from his paycheck, and his employer pays the other half.)The misclassification of workers as “independent contractors” when they should really be treated as employees is a persistent problem, going back decades. But concerns about misclassification of workers seem likely to rise in the wake of a recession...

Build America Bond Extension Set to Gain Obama Backing With Lower Subsidy (Bloomberg) -- Build America Bonds, the fastest- growing part of the $2.8 trillion U.S. municipal debt market, would become permanent under a budget proposal released today by President Barack Obama.  Issuers from Oshkosh, Wisconsin, to the state of California to the New York’s transit agency have sold more than $70 billion of the taxable securities, which were created as part of the economic stimulus package Obama signed into law in February 2009. The program helped revive borrowing for municipal capital projects after the global credit crisis led investors to seek the safest assets and dump tax-exempt bonds, driving their yield premium over Treasuries to a record.

A Majority Of States Are Now Insolvent: Quantifying The Disastrous Unemployment Situation - Zero Hedge recently highlighted the ever increasing Federal outlays on unemployment insurance, leading to questions on whether the true unemployment rate, as indicated by actual cash outlays, may be materially higher than indicated in increasingly dubious governmental reports. One proposed alternative has been that the Federal government is directly subsidizing standalone states' depleted unemployment insurance trust funds. Using data provided by ProPublica we have been able to confirm that indeed standalone states are for the most part now bankrupt and have no reserves left in their coffers when it comes to funding ever increasing insurance benefits. As ProPublica indicates, there are now 26 states which have depleted their trust funds, among these are the usual suspects including California, Michigan, New York, Pennsylvania and Ohio, which now rely exclusively on borrowings from the Federal government to prevent the cessation of insurance payments to recently unemployed workers.

Officials wary as more state jobless funds go broke - Policymakers are growing wary as Utah finds itself in an ever-shrinking group of states whose unemployment insurance trust funds haven't gone broke yet. Last week, Colorado and New Hampshire became the latest of 26 states to declare their trust funds wiped out by the recession's surge in jobless claims. Industry watchers predict as many as 40 states will run out of money for unemployment benefits before the economy rebounds. Insolvent states are being forced to borrow from the federal government, raise taxes or cut benefits to keep unemployment aid flowing. Borrowing states now owe the feds almost $30 billion and face cutting benefits further and increasing premiums on employers when the loans come due.

More than 100,000 WI state residents face losing unemployment benefits - More than 100,000 state residents could lose their unemployment benefits by the end of April unless emergency measures are taken soon, state lawmakers warned Thursday. The state Department of Workforce Development already sent about 8,000 letters on Tuesday notifying people their unemployment benefits will end within several weeks, spokesman John Dipko said. Once the remaining amount is gone, additional benefits will not be availableThe department started sending the letters this week and plans to continue mailing them at a rate of about 1,500 each week, continuing indefinitely, to notify those "who are nearing the point of exhausting" their benefits.

State budget deficit balloons to $8.2 billion - ALBANY — Gov. David Paterson announced Wednesday that the state’s budget deficit for the coming fiscal year was $750 million higher than projections just two weeks ago, largely because of lower than expected income-tax revenue from Wall Street and higher Medicaid costs. The estimates bring the state’s deficit for the 2010-11 fiscal year, which starts April 1, to $8.2 billion, up from $7.4 billion when Paterson introduced his budget proposal Jan. 19. Paterson said the new numbers further indicate the need for fiscal restraint. He has proposed cutting aid to schools and health care as ways to help close the gap, along with about $1 billion in new taxes.Comptroller Thomas Di-Napoli painted an even gloomier picture.

New York State Budget: Comptroller DiNapoli Concerned About Revenue Assumptions - - One day after New York State Governor David Paterson announced the state budget deficit has grown to $8.2 billion, comptroller Thomas DiNapoli is saying the situation is even worse.The comptroller is also concerned the state is not prepared for the decrease in revenue.  "There are many revenue assumptions in that (Governor Paterson's proposed) budget that are not realistic," said DiNapoli."Personal tax collections for January are off by $1 billion," DiNapoli said in a statement posted on YouTube.   WEB EXTRA: Comptroller DiNapoli's YouTube Statement

New Jersey’s state budget deficit could reach $11 billion - Gov. Chris Christie's office late Thursday announced the governor will address a special joint session of the Legislature next Thursday, Feb. 11, regarding the state's 2009-10 budget's $2 billion deficit. Earlier Thursday, Christie spoke with both Senate President Stephen M. Sweeney (D-Gloucester) and Assembly Speaker Sheila Y. Oliver (D-Essex) to request the joint session. The budget crisis New Jersey is facing appears to only be getting worse. David J. Rosen, the Grim Reaper of the New Jersey state government's fiscal nightmare, appeared before the Senate Budget and Appropriations Committee Thursday and told them the deficit legislators and the governor must overcome when crafting the 2010-11 budget by June 30 could climb as high as $11 billion.

Pimco: Forget Greece, California Bond Spreads Have Soared Back To Crisis LevelsMore bad news for California bondholders. Pimco expects yields on California debt to return to their highs from the state's fiscal crisis last summer, which would slam bond prices.Credit default swaps have painted an ugly picture of credit deterioration as well: Bloomberg: California’s credit default swaps, insurance contracts that are generally used to protect against default, have risen 97 percent since late October to $314,000 to protect an investment in $10 million of bonds. The state has $73 billion of general obligation debt outstanding, according to Treasurer Bill Lockyer, who has repeatedly dismissed any suggestion the state may not make required payments.A taxable California bond that matures in 2039 traded today for an average yield of 7.79 percent in blocks of more than $1 million, the highest since Dec. 28, according to Municipal Securities Rulemaking Board data. That opened a gap of 3.15 percentage points between California’s bond and 30-year Treasuries, according to Bloomberg data.

NV gov. recommendations fall short of deficit - Budget reductions recommended by Gov. Jim Gibbons' office late Wednesday include laying off 234 workers, roughly 10 percent spending cuts to education and most other agencies, and closing the aging Nevada State Prison in Carson City. But even if all the governor's recommendations were enacted, they'd cover less than half the anticipated $880 million funding gap facing the state for the rest of the biennium that ends June 30, 2011 _ meaning more cuts or added revenues must be found.

Connecticut Would Borrow $1.3 Billion for Budget Fix (Bloomberg) -- Connecticut, the state with the highest tax-supported debt, may sell bonds backed by revenue from electric-bill surcharges to raise $1.3 billion to help close a budget gap under a plan from Governor Jodi Rell. Connecticut should issue the securities this year because the state’s “cash position” was depleted after lawmakers drew down the $1.4 billion rainy day fund as tax revenue plummeted, according to a report the governor released today. The state faces a deficit of $535 million this year and $725 million in the year starting July 1 even with the one-time budget fixes, the Legislature’s fiscal analysis office said today.

Sharp Drop Is Seen in Gifts to Colleges and Universities - NYTimes - Gifts to colleges and universities declined almost 12 percent in the 2009 fiscal year, to $27.85 billion, according to the Council for Aid to Education’s annual survey of voluntary support of education. It was the steepest decline in the survey’s 53-year history.  In the last fiscal year, alumni participation declined to 10 percent from 11 percent, the lowest ever recorded in the survey, and the amount alumni contributed dropped 18 percent. Corporate support, in contrast, declined by less than 6 percent.

What’s a Degree Really Worth? - WSJ -A college education may not be worth as much as you think. For years, higher education was touted as a safe path to professional and financial success. Easy money, in the form of student loans, flowed to help parents and students finance degrees, with the implication that in the long run, a bachelor's degree was a good bet. Graduates, it has long been argued, would be able to build solid careers that would earn them far more than their high-school educated counterparts. But now, as tuition continues to skyrocket and many seeking to change careers are heading back to school, some researchers are questioning the methodology behind the high projections.

A long and persistent middle-class squeeze - Economic Policy Institute -Working Americans have long complained about a middle-class squeeze, but families focused on their day-to-day financial struggles may not always see how much ground has actually been lost. EPI data tracking income and wage patterns show that the majority of income growth has for decades gone to a startlingly small number of top earners, while other workers have suffered a persistent stagnation or even decline in real earnings.  While many middle-income families have lost jobs, homes, and retirement savings during the latest recession, their economic woes date back much further. This pattern is best illustrated in the following chart, which shows that 34.6% of all income growth over the past three decades has gone to the top one-tenth of 1% of all earners—an exclusive group representing just 13,000 families. By contrast, the bottom 90% of all earners has collectively seen only 15.9% of all income growth over the same period

Credit Card Cleverness - The person who got the letter above used to have an 8.1% APR. This letter raises the APR to 29.99%. But, if he pays his balance on time, he will get a “credit” amounting to (at least) 70% of the interest amount, bringing the APR down to 8.99%. If he misses a minimum payment, he may not be eligible to continue in the program. In other words, he has an 8.99% APR that jumps to 29.99% immediately (retroactively, actually, since it can apply to the previous month’s balance) if he misses a payment. Furthermore, the 8.99% rate does not have to be restored after six months of making payments, because the official rate was always 29.99%, and the 70% credit is just a “program.”

Five myths about America's credit card debt - They're yuppie food stamps. They give new meaning to the question "paper or plastic?" And they're in everyone's wallet. Americans have nearly 700 million all-purpose bank credit cards, plus nearly 500 million retail store cards -- and they have transformed how we live and consume. Today, Americans are more dependent on credit than savings, a radical departure from the last major economic crisis, in the 1930s. Congress's effort to change that, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act signed by President Obama last spring, will go into effect in a few weeks. But it won't fix everything. Or maybe not much of anything. Here are the myths that muddle our understanding of how we've racked up so much credit card debt.

December PCE and Saving Rate - From the BEA: Personal Income and Outlays, November 2009 - Personal Personal income increased $44.5 billion, or 0.4 percent, and disposable personal income (DPI) increased $45.9 billion, or 0.4 percent, in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2 percent.  Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in December, compared with an increase of 0.4 percent in November. Personal saving -- DPI less personal outlays -- was $534.2 billion in December, compared with $506.3 billion in November. Personal saving as a percentage of disposable personal income was 4.8 percent in December, compared with 4.5 percent in November. This graph shows the saving rate starting in 1959 through the December Personal Income report. The saving rate was 4.8% in December.

Consumer Credit Drops For 11th Straight Month, Down -1.8 Billion, November Revised $4.3 Billion Lower January Consumer Credit dropped for the 11th straight month, declining by $1.8 billion in January to $2,456.8 billion from a $4 billion downward revised $2,458.6 billion in November. Revolving credit dropped by $8.5 billion, or an 11.5% annuallized rate, while non-revolving credit (think auto loans) surged by almost $7 billion, a 5.2% annualized increase.The primary source of capital was "pools of securitized assets" whose total increased from $601 billion to $610 billion as most other funding classes declined.

Consumer Bankruptcies Remain Elevated - Consumer bankruptcies jumped 15% from a year earlier as consumers continue to struggle with high debt loads and elevated unemployment, the American Bankruptcy Institute said.On a positive note, the 102,254 consumer bankruptcies filed in January represented a 10% decline from December, but filings at the end of last year were abnormally elevated from usual seasonal levels.“Consumer filings this year will likely surpass the 1.4 million consumer filings recorded in 2009,” said ABI Executive Director Samuel J. Gerdano. The number of bankruptcies in 2009 was at the highest level since the government revamped rules in 2005, making it more difficult to file for bankruptcy.

ABI: Personal Bankruptcy Filings Up 15% from January 2009 - A couple of key points: The ABI is forecasting more personal bankruptcy filings in 2010 than in 2009 (just over 1.4 million) Filings were down 10% from December, but up 15% from January 2009.  From the American Bankruptcy Institute: January Consumer Bankruptcy Filings Decrease 10 Percent from December The 102,254 consumer bankruptcies filed in January represented a 10 percent decrease nationwide from the 113,274 consumer filings recorded in December, according to the American Bankruptcy Institute (ABI) relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the January 2010 consumer filings represented a 15 percent increase over the 88,773 consumer filings recorded in January 2009.

In tough economic times, shoppers take haggling to new heights -A recent Consumer Reports study found that 66 percent of American consumers had haggled at least once in the preceding six months, with an 88 percent ka-ching rate on gadgets, clothes, furniture and steak. "People like this," Koehn said. "They are not going to go back to giving their money away. Why would they?" The recession merely popped the lid off a retailing shift that has been brewing for a decade. EBay gave millions of consumers dealmaking training wheels (. The Internet offers instant pricing data. And don't forget Priceline, which lets consumers name their price for flights, hotels and rental cars. ShopSavvy is a shortcut: It converts the phone's camera into a price scanner, delivering a live listing of competing prices as you stand in front of a coveted item. The app is downloaded once every second. And retailers are playing ball, paying the company to advertise better prices if a shopper is about to make a purchase from a competitor.

Rosenberg: Without The Consumer And Households, The Recovery Is Toast - Hey — these two sectors combined account for only 75% of the economy.  Who needs ‘em?  Below is the three-month moving average of the Chicago Fed’s National Activity Index (CFNAI) — the personal consumption and housing subindex to be exact.  Look at Chart 1 and please tell us if it depicts an economy in recovery mode.  This subindex is still mired deep in recession terrain, with all deference to the latest set of GDP data.  The other three components — sales, production, and employment to a lesser extent — have done virtually ALL of the heavy lifting to get us to where we are overall on the CFNAI, which is an economy barely going at all.  Absent a turn in this subcomponent, the other three cannot carry us much further.   The bottom line is that if the personal consumption & housing sub-component doesn’t start showing some signs of life, it’s game over as far as the recovery story goes.  Exiting recessions, this subcomponent sits, on average, at -0.09.  It printed at -0.48 last Thursday, and has not printed better than -0.43 since December 2008.  In other words, it is going nowhere fast, and the other components can’t carry the ball forever. 

Inequality in times of crisis: Lessons from the past and a first look at the current recession - VoxEU - The unemployment rate has dominated economic headlines, but recessions raise numerous problems. This column warns that recessions raise earnings inequality and income inequality, absent mitigating government programmes. The current recession has indeed raised such inequality, but consumption inequality has surprisingly declined.

Inequality and "Guard Labor" - This is from a profile of Samuel Bowles: Born Poor?, by: Corey Pein: ...Bowles’ most recent paper ... examines how wealth is transferred from parents to children in hunter-gatherer societies versus agricultural societies. That might seem distant... But everyone can relate to his chosen subject: inequality. ...“Prior to about 20 years ago, most economists thought that inequality just greased the wheels of progress. Overwhelmingly now, people who study it empirically think that it’s sand in the wheels.” ... Bowles offers a key reason why this is so. “Inequality breeds conflict, and conflict breeds wasted resources,” he says. Inequality leads to an excess of what Bowles calls “guard labor.” In a 2007 paper on the subject, he and co-author Arjun Jayadev, an assistant professor at the University of Massachusetts, make an astonishing claim: Roughly 1 in 4 Americans is employed to keep fellow citizens in line and protect private wealth from would-be Robin Hoods.

Unemployment Rises in 82% of Metro Areas As Jobs Remain Scarce During Recovery - Unemployment rose in most cities and counties in December, signaling that companies remain reluctant to hire even as the economy recovers. The unemployment rate rose in 306 of 372 metro areas, the Labor Department said Tuesday. The rate fell in 41 and was unchanged in 25. That's worse than November, when the rate fell in 170 areas, rose in only 154 and was unchanged in 48. The metro employment numbers aren't seasonally adjusted and can be volatile. Many of the increases were due to seasonal factors.

Muni Debt Is Bubble Near Bursting, Marketfield’s Aronstein Says - (Bloomberg) -- The $2.8 trillion municipal bond market is a bubble about to burst, as housing and technology did in the past 10 year, said Michael Aronstein, the money manager whose Marketfield Fund returned 31 percent in 2009 Lulled by ready access to low-cost credit, politicians have piled up unsustainable debt service that the public will soon demand they stop paying, he said. Bankers are selling municipal bonds based on unrealistic assumptions of population and revenue, and will be held accountable when they can’t be repaid, he said in an interview. Aronstein also saw weakness in emerging markets such as China and India, which have been saturated by years of investment and will be harmed as investors return funds to the U.S. to capitalize on a strengthening dollar.

Study: 1 in 8 get help at food banks - One in eight Americans — 37 million — received emergency food help last year, up 46% from 2005, the nation's largest hunger-relief group reports today.Children are hit particularly hard, according to the report by Feeding America, a network of 203 food banks nationwide. One in five children, 14 million, received food from soup kitchens, food pantries and other agencies, up from 9 million in 2005, the year of the group's last major survey. "This is a crisis," says Vicki Escarra, president of Feeding America. "People need to understand that this is America, and we're seeing this kind of need." She says the report is her group's most comprehensive study on emergency food distribution.

Food banks nationwide report more first timers - A surge in first time visitors has contributed to the greatest demand in years at food banks nationwide, according to Feeding America, a Chicago-based national food bank association. Many of the first timers were middle class but lost jobs or had their wages cut. "They were doing pretty well," said Ross Fraser of Feeding America. "They've completely had the rug pulled out from under them." Federal agencies and national organizations have just started tracking first timers. But anecdotal evidence and statistics from individual pantries is clear: More and more new faces are appearing among the approximately 25 million Americans who rely on food pantries each year.

More People Struggling To Stay Warm, Taxing Agencies - State and local agencies estimate an unprecedented 150,000 metro Detroiters are at risk of having their heat shut off if they don't receive help paying their bills. The number of people seeking state assistance so far this winter jumped 30% over last year at this time, according to the state Department of Human Services. Officials blame the rise on metro Detroit's miserable economy that continues to cost people their jobs. Since last winter, unemployment rose 33% -- to 288,000 people -- for the tri-county area, according to state employment data.

New York City's finances: Bloomberg's budget(s) blues | The Economist - THE jobless rate in New York City increased from 7% in December 2008 to 10.6% a year later. Some 425,000 New Yorkers are looking for work, more than at any time since the 1970s, and the number is expected to grow. The city budget is a tough one to balance even at the best of times. In the worst of times, it is near impossible without support from New York state and the co-operation of the unions. So when Michael Bloomberg, who has just begun his third term as mayor, presented his preliminary budget for 2011 on January 28th it wasn’t pretty. The city faces a staggering $4.9 billion deficit for 2011. This year’s $2.9 billion surplus has gone; it was spent on reducing next year’s deficit and paying bills and bond repayments. To close the gap, Mr Bloomberg is ordering every city agency to make cuts—the seventh round he has ordered since early 2007.

New York's Hungry Children - One in eight Americans needed emergency food help in 2009-----one of five children in New York City are relying on emergency food. These sad statistics come from Feeding America and the Food Bank for New York City."Food insecure" is the bureaucratic term for hungry people -- and New York is, unfortunately, a textbook case in food insecurity. Our food pantries and soup kitchens are overloaded. Yet, without a healthy infusion of federal stimulus money, it could be a lot worse. So says Joel Berg, executive director of the NYC Coalition Against Hunger.Berg says 37% of South Bronx residents had trouble affording food in the last year. "The federal stimulus money is helping us avert disaster," Berg continued. "We are fortunate to have that money at this time."

Annual Cost Per Sugar Farm Job Saved = $826,000 - A few days ago, I posted about tariffs doubling U.S. sugar prices (see chart above) and how those artificially high prices impose huge economic costs on the U.S. economy ($2.5 billion last year). Thanks to a comment from Ron H., I found a research paper "Employment Changes in U.S. Food Manufacturing: The Impact of Sugar Prices," that was published by the U.S. International Trade Commission in 2006. Here is a summary of the findings...

White House Whitewash: Can the Agribusiness Lobby Kill Small, Organic Dairy Farmers? - In the early 2000s, virtually all of the nation’s organic dairy farmers—not to mention the millions of consumers willing to pay a premium for organic products—agreed that milk certified as organic by the United States Department of Agriculture had to come from cows that had access to pasture.  But beginning in the mid-2000s, at about the time when it became evident that the green “USDA Organic” label translated into bigger profits, huge Confined Animal Feeding Operations (CAFOs) with herds of up to 10,000 cows located in western states got into the organic milk business. There was one obvious problem. How do you provide pasture for thousands of hungry cows in a semi-arid landscape that would, at best, produce enough feed for a few dozen animals?  In some cases, a narrow, grassless strip outside the vast barns in which the animals were kept was considered “pasture” because some hay had been spread there.

Thousands of Utahns Must Choose Between Food Or Paying Rent - More than half of the quarter-million Utahns who got help from local food pantries last year had to choose between buying food and paying their rent or mortgage. And 42 percent of those receiving emergency food supplies are children, according to the most detailed survey ever completed on Utah Food Bank clients. The numbers were released Tuesday as part of the nationwide Hunger in America 2010 report. It includes a detailed survey of 408 Utahns who received assistance from the Utah Food Bank last year, pinpointing demographics that put a human face on hunger in the Beehive State.

CalSTRS expects rate-hike tussle in Legislature amid CalPERS' woes - CalSTRS officials say controversies at the state's other big pension fund, CalPERS, will complicate the already difficult task of persuading the Legislature to raise pension contributions for teacher retirements. Staggered by a 25 percent loss in the last fiscal year, the board of the California State Teachers' Retirement System began crafting a strategy Friday to petition lawmakers for higher rates. The investment loss left CalSTRS some $42 billion underfunded as of last June – an estimate of how much additional cash the fund needs to pay its bills over the next 30 years. The amount of underfunding doubled in about 12 months. Unlike CalPERS, which has the authority to impose rate hikes, the teachers' retirement system must get permission from the Legislature for an increase from any of its three funding sources.

Pension liabilities weigh on Big 3 -  The pension plans of Detroit's Big Three automakers, covering nearly 1.3 million people, still face growing shortfalls even though Ford Motor Co. is making money again and its domestic rivals slashed costs dramatically in bankruptcy. The huge pension liabilities weighing down the companies' balance sheets are left over from the "legacy" costs that for so long made Detroit automakers uncompetitive against their lower-cost foreign rivals. The obligations are growing as the pension funds earn lower rates of return, driving up future funding needs. General Motors Co.'s pension fund deficit stands at $18 billion, The Detroit News has learned from documents not yet made public, and Ford said last week that its shortfall worldwide grew to $12 billion as of Dec. 31, up $500 million from a year ago.

The Government Wants to Hijack Your 401(k) - It's bad enough that we've been forced to bail out Wall Street. But now the Obama administration is hatching plans to raid our retirement savings, too.  To say that I'm "outraged" doesn't come close to describing the emotions I experience every time I think about the government's latest hare-brained scheme. According to widespread media reports, both the U.S. Treasury Department and the Department of Labor plan are planning to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other "steady" payment streams backed by U.S. government bonds.  Folks, there's only one reason these agencies would do such a thing - the nation's creditors think that U.S. government bonds are a bad bet and don't want to buy them anymore. So like a grifter who's down to his last dollar, the administration is hoping to get its hands on our hard-earned savings before the American people realize they've had the wool pulled over their eyes ... once again.

Pravda on 401(K)s - The largest source of liquid private wealth remaining in the [US] are the $15 trillion in private retirement funds and the ultimate ownership, control and future of these funds have already been compromised and exchanged for the favorable tax treatment of private retirement plans. ... The retirement trap I'm writing about is only a proposal at the present time and since it may well begin in the latter years of the Obama Administration assuming the Democrats can somehow maintain their majorities in Congress, I'm calling it the "Obama Retirement Trap'. But make no mistake, the government need for current revenue and their frenzied search for a short-term fix to fund the backstop of liquidity to buy future government debt obligations when no credible investors will buy them is an unspoken quest of both political parties. ... The protoype for their plan was devised in 1991  in a paper entitled 'Current Taxation of Qualified Pension Plans: Has the Time Come?' ... After years of deficits, the greatest hazard to our economy is a run on the dollar and on Treasury securities by foreign investors", Ron Holland at Pravda, 15 January 2010, link: http://english.pravda.ru/opinion/columnists/111678-retirement-0.

The Treasury Is Soliciting Your Feedback Regarding The Proposed Annuitization Of 401(k) - Yes, slowly but surely it is happening. In a federal notice filed earlier, the DOL and Treasury are soliciting a response on what has been on many investors' mind, namely the process of converting 401(k)s into annuity-like products. To wit: The Department of Labor and the Department of the Treasury (the "Agencies") are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement. The purpose of this request for information is to solicit views, suggestions and comments from plan participants, employers and other plan sponsors, plan service providers, and members of the financial community, as well as the general public, on this important issue.Full notice

Next In Line For A Bailout: Social Security (Fortune) -- Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system. A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.  Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout. No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

Medicaid Could Get Billions - The White House will include an additional $25 billion in Medicaid funding for states in the federal budget to be released Monday, spending that Democrats originally hoped to include in their health overhaul. The budget proposal underscores how the government is already adapting to the stalling of the health legislation in Congress. Some states were so confident Congress would pass a health bill that they included the extra Medicaid funds in their state budgets.  After the Republican victory in a Senate race in Massachusetts put the health plan in jeopardy, governors have been scrambling to plug the hole.

US Public Health Care Spending Hits Record High -  For the first time, government programs next year will account for more than half of all U.S. health care spending, federal actuaries predict, as the weak economy sends more people into Medicaid and slows growth of private insurance, The Wall Street Journal reported Thursday. The figures show how federal and state spending is taking a bigger role while Congress hesitates over a health care overhaul. Government health programs are a growing burden on the federal budget, which is running annual deficits of more than $1 trillion, and rising health costs continue to batter private industry. By 2020, according to the new projections, about one in five dollars spent in the U.S. will go to health care, a proportion far beyond any other industrialized nation.

Report: Feds to pay more than half of health costs - Federal and state programs will pay slightly more than half the tab for health care purchased in the United States by 2012, says a report by Medicare number crunchers released Thursday. That's even if President Barack Obama's health care overhaul wastes away in congressional limbo. Long in coming, the shift to a health care sector dominated by government is being speeded up by the deep economic recession and the aging of the Baby Boomers, millions of whom will soon start signing up for Medicare.  The report serves as a reality check in the debate over Obama's health care plan, which has been dominated by disagreements over how large a role government should play.

The demand for quacks - The 10:23 campaign against homeopathy raises a question: given that homeopathy doesn’t work, why is there such strong demand for it? A new paper by Werner Troesken (ungated draft pdf) sheds some interesting light on this. He studies not homeopathy but US patent medicines in the 19th century. Despite being practically useless, these enjoyed spectacular long-run growth - Professor Troesken estimates that spending on them grew 22 times faster than US GDP between 1810 and 1939. Why?The answer, he says, is that demand for them was inelastic with respect to failure - people kept buying them even though they didn’t work. This was because the medicines offered enormous consumer surplus; the products were cheap, but the benefits they offered were huge; there’s an analogy here with Pascal’s wager. As a result, when a product failed to work, consumers downgraded the probability that patent medicines generally would work, but still saw a positive expected gain from buying them; the small chance of a big improvement in one’s health is worth paying for.

120 House Democrats demand public option - Over a hundred House Democrats are urging the Senate to use reconciliation to pass heatlhcare reform that includes a public option.Progressives launched a campaign to revive the public option after Democrats lost their supermajority last month. Now that Democrats lack 60 votes to break a filibuster, it's likely they will have to use reconciliation anyway in order to change parts of their bill that House Democrats object to. In a letter to Majority Leader Harry Reid (D-Nev.) today, 120 House Democrats say the Senate should seize that opportunity and include a public option. "This letter states loud and clear that the public option is gaining momentum and is alive and well in the eyes of the American public,”

Pelosi: No Hope For Public Option At This Time -  The public option already died once. Today it died again. House progressives have been trying to use the health care stalemate to revive the public option. Almost 100 have signed a letter urging Congressional leaders to include a public option in a separate bill, which could in theory pass the Senate with a simple majority of votes. If that happened--a big if--it could then be included as part of comprehensive legislation, securing progressives a major victory. But on a conference call today, House Speaker Nancy Pelosi put a second set of nails in the public option's coffin, saying it would not be part of any grand bargain to push ahead with health reform. But in so doing, she took a veiled swipe at the White House for not standing enthusiastically behind the proposal.

#HealthCareFAIL: How The Dems Botched Their Signature Legislation - Talk about fits and starts. A year ago Democrats committed to passing comprehensive health care legislation; six months ago, it became clear that their project wouldn't go smoothly; one month ago it was full speed ahead; and a week and a half ago it all fell apart.Health care reform is now on life support. To mix metaphors, it's on life support and the back burner at the same time. How the Democrats' signature agenda item went from a foregone conclusion to a prospect in peril is a tale of missteps and bad luck. No single player or event brought us to where we are today. But if any of the below episodes had gone...more smoothly, this might've been a done deal.

Cossack Rahm Works For The Czar - Ezra Klein finds Rahm Emanuel’s apparent willingness to let health reform slide into the indefinite future very depressing. So do I. And it’s not just health reform that will die under this approach — it’s the road to a caretaker presidency. It’s all very well to say “we’re going to focus on job creation”. But what does that mean? At this point, no major economic programs have any chance of getting passed. Think of it this way: a year ago the question was whether the stimulus would be $700 billion or $1.2 trillion, now we’re talking about $30 billion jobs tax credits. Maybe financial reform will happen, or at least set up a “teachable moment” battle with the GOP. But by letting health reform slide, the administration is abandoning one really big policy initiative that is just inches from happening. Let this go, and there’s likely to be no achievements worth remembering.

Hello, White House. Is Anyone Home? - Krugman - What Jonathan Cohn said. Health care reform is achingly close, but it needs a push from Obama. Remember, both houses of Congress have passed broadly similar bills. In a normally functioning Congress, the differences would be negotiated, and a deal would be struck. But thanks to the filibuster, that can’t happen: a 59-41 majority isn’t enough. There is, however, a fairly straightforward way to get back to more or less majority rule. The Senate has to pass a reconciliation bill — a money-related bill, that doesn’t require 60 votes — that modifies its original bill, making it more acceptable to the House. This can be done with as few as 50 Senators plus Joe Biden. Then the House passes both bills, and sends the combo to the president’s desk.

Rep. Paul Ryan: 'Rationing happens today! The question is who will do it?' - Rep. Paul Ryan is the ranking Republican on the House Budget Committee. His budget proposal, 'A Roadmap for America's Future,' was scored (pdf) by the Congressional Budget Office as erasing the long-term deficit entirely. I commented on it here. I spoke to the congressman this afternoon about his bill, the conservative vision for health-care reform, and the problems of Congress. The transcript has been lightly edited for length and clarity.

The Republican Plan, III: Comic Relief -(This is a multi-post series on the Republicans’ Roadmap for America’s Future. Part I was on how it slashes Medicare spending. Part II was on how it shifts risk from the government to individuals.) The Roadmap brings up the issue that there is little price transparency in the health care market. This is the solution: Enron? WorldCom? Self-regulation? FASB, the SEC, and the securities industry are their example?

Health Care: Git 'Er Done! -  Last week, Jonathan Chait responded to me, arguing that Democrats have already taken all the political hit they're going to from passing health care, since each house voted for a bill. Of course, if Chait is right, then Democrats should probably do it--at least, if you think that democracy should put zero weight on the actual opinions of those slack-jawed rubes in the electorate.  But this logic seems highly questionable to me. Who are you more likely to leave:  the spouse who makes a pass at another woman, and then thinks the better of it, or the spouse who goes through with it?  Maybe you'll leave them either way.  But it does not follow that they are better off going through with it...

Why do people often vote against their own interests? - Last year, in a series of "town-hall meetings" across the country, Americans got the chance to debate President Obama's proposed healthcare reforms. What happened was an explosion of rage and barely suppressed violence.  Polling evidence suggests that the numbers who think the reforms go too far are nearly matched by those who think they do not go far enough.  But it is striking that the people who most dislike the whole idea of healthcare reform - the ones who think it is socialist, godless, a step on the road to a police state - are often the ones it seems designed to help.

Obama Pushing Clean Coal, Green Jobs — Looking for a political and policy victory, President Barack Obama on Wednesday pushed energy proposals designed to attract allies and opponents alike, calling for increased ethanol production and new technology to limit pollution from the use of coal. Facing a Senate with a newly energized Republican minority, Obama has begun tailoring his energy policy to GOP-supported ideas, starting in his State of the Union address last week with calls for offshore oil drilling opposed by environmentalists and a bigger role for nuclear power."Now, there's no reason that we shouldn't be able to work together in a bipartisan way to get this done," Obama said during a bipartisan meeting He spoke as the White House released presidential task force recommendations calling on both Washington and the private sector to spend more money on biofuels like ethanol.

Sen. Rockefeller Criticizes Obama Over Coal Policy - NYTimes - Speaking at a Senate Finance Committee hearing on Obama's fiscal 2011 budget request, Rockefeller took umbrage first with the administration's decision to eliminate four tax breaks for the industry. "It's going to be partly psychological," Rockefeller told White House budget chief Peter Orszag. "People are going to reduce their production because they feel, 'Uh oh, here comes the Obama administration,' and they are going to cut out coal."But Rockefeller said his concerns snowballed when he considered recent U.S. EPA decisions on mountaintop-removal coal mining and work on regulations to control greenhouse gas emissions across the economy. Given that, he said, he isn't sure he trusts the president's commitments to coal, even as Obama promotes the fossil fuel through a series of other administration actions.

"The President’s Tax Hike on Drilling" - Roy Cordato argues that the administration's touted cut of "subsidies" for fossil fuels--eliminating the expensing of "intangible drilling costs"--is a tax increase, an increase that will discourage investment. (I'd bet that when the price of gas goes up, the administration will blame greedy oil companies.)

He said what? - President Barack Obama said for the first time Tuesday that legislation that would require industries to pay for emissions of greenhouse gases may need to be separated from a more popular "green jobs" bill in the Senate, a maneuver that could kill what once had been one of the administration's top policy priorities. Answering a participant in a town-hall meeting in Nashua who asked about green jobs—those connected to renewable energy—and so-called cap-and-trade legislation, Mr. Obama said, "The only thing I would say about it is this: We may be able to separate these things out. And it's possible that that's where the Senate ends up."via online.wsj.com

The President Caves on Climate Policy - At a time of unsustainable deficits, deficit neutrality is a remarkably lame vision for climate policy. Last year, President Obama proposed to raise $500 billion over ten years through a cap-and-trade system that would limit carbon emissions. This year his climate policy raises nothing.  am sympathetic to the idea that the value of some emission allowances should be used to compensate some families, communities, and businesses as the system ramps up. But studies have repeatedly found that such compensation would require only a fraction of the overall value of the allowances. There should still be plenty of room for allowances that are ear-marked for deficit reduction.

Modeling the Impact of Warming in Climate Change Economics - Any economic analysis of climate change policy requires some model that describes the impact of warming on future GDP and consumption. Most integrated assessment models (IAMs) relate temperature to the level of real GDP and consumption, but there are theoretical and empirical reasons to expect temperature to affect the growth rate rather than level of GDP. Does this distinction matter in terms of implications for policy? And how does the answer depend on the nature and extent of uncertainty over future temperature change and its impact? I address these questions by estimating the fraction of consumption society would be willing to sacrifice to limit future increases in temperature, using probability distributions for temperature and impact inferred from studies assembled by the IPCC, and comparing estimates based on a direct versus growth rate impact of temperature on GDP.  You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

'Beyond Copenhagen' conference draws in experts  - David Roland-Holst uses bubbles, big and small, on a chart to demonstrate a fundamental truth behind the near-crash-and-burn of global climate talks in Copenhagen in December.  The chart maps energy use against per capita income; the bubbles represent countries by population. Floating high on both axes are the medium-to-small bubbles of the United States and the rest of the industrialized world, rich countries that use a lot of energy. Hanging near the bottom are two giant bubbles, China and India, where both energy use and income are low — and rising. The relationship between income and energy use is no coincidence, and recognizing that simple fact is an essential part of getting past the current stalemate and finding answers to climate change

Copenhagen climate deal gets low-key endorsement - Nations accounting for most of the world's greenhouse gas emissions have restated their promises to fight climate change, meeting a Sunday deadline in a low-key endorsement of December's "Copenhagen Accord." Experts say their promised curbs on greenhouse gas emissions by 2020 are too small so far to meet the accord's key goal of limiting global warming to less than 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial times.

"The Rising Sea" - Orrin Pilkey and Rob Young, eminent coastal scientists, wrote their book The Rising Sea to provide substance for that alarm and to offer suggestions as to how we can plan ahead to reduce the severity of the impact of the rising sea. The authors begin by reminding us that it’s not a distant prospect. They describe what is happening to Alaskan shoreline villages such as Kivalina and Shishmaref, atoll nations such as Kiribati, the Maldives, the Marshall Islands, Tokelau and Tuvalu, and the city of Venice, places already grappling with rising sea level.    Rising tide gauge data and an increase in coastal erosion along many of the planet’s shorelines provide clear evidence of the rising sea and of the warming of the planet. Not that the authors are simplistic about this. They recognise and discuss the function of tectonic changes and additions to or subtractions from the weight of the crust.  But there is plenty of evidence of an increase in the volume of water in the oceans, accelerating in response to global warming. Easier evidence to assemble, they note, than the measurement of global temperature trends...

Are More Extreme Waves from Global Warming? - Scientific American - Whereas global sea-level rise creeps along at a fraction of an inch per year—providing relatively ample time for coastal managers to respond—annual maximum wave heights in the Pacific Northwest are rising at a rate of about 10 centimeters, and sending wave run-up increasingly higher onto beaches. As a result, according to a separate paper by Ruggiero that is currently under review, the contribution of waves to the total water level, or run-up plus tide, is rising an estimated three to 10 times faster than the sea level. In an upcoming paper to be published in the Journal of Coastal Research, Richard Seymour of Scripps Institution of Oceanography at the University of California, San Diego, shows wave heights are increasing down the coast through southern California. Peter Adams of the University of Florida reports a similar trend from North Carolina's Cape Hatteras to Florida's West Palm Beach, although his results also await publication. And some of the first evidence that breakers might be on the rise actually came from across the Atlantic: records of an annual increase of about 2.2 centimeters in average wave heights between 1962 and 1986 off England's southwestern tip.

Tibet temperatures warmest on recordThe roof of the world is heating up, according to a report today that said temperatures in Tibet soared last year to the highest level since records began. Adding to the fierce international debate about the impact of climate change on the Himalayas, the state-run China Daily noted that the average temperature in Tibet in 2009 was 5.9C, 1.5 degrees higher than "normal". It did not define "normal", but Chinese climatologists have previously drawn comparisons with an average over several decades."Average temperatures recorded at 29 observatories reached record highs," Zhang Hezhen, a Lhasa resident and specialist at the regional weather bureau told the newspaper. The average rose in both summer and winter, which is unusual as most of mountain warming has previously been observed in the winter. A monitoring station at the foot of Mt Everest also recorded a new record high temperature of 25.8 degrees, which was 0.7C warmer than the previous peak.

Global Deal on Climate Change in 2010 'All But Impossible' - Global deal at next summit in Mexico impossible, says Prescott • 'Disarray' cited over UN organisation assessing pledges A global deal to tackle climate change is all but impossible in 2010, leaving the scale and pace of action to slow global warming in coming decades uncertain, according to senior figures across the world involved in the negotiations."The forces trying to tackle climate change are in disarray, wandering in small groups around the battlefield like a beaten army," said a senior British diplomat. An important factor cited is an impasse within the UN organization charged with delivering a global deal, which today will start assessing the pledges made by individual countries by a deadline that passed last night.

Bill Gates digs deep for geoengineering - THE world's richest man has been funding geoengineering research, it emerged last week. According to a report posted online by Science, Bill Gates has committed $4.5 million of his own money to funding a number of climate scientists interested in geoengineering. It is not clear whether all of that has gone to geoengineering studies. Atmospheric scientist Ken Caldeira of the Carnegie Institution for Science in Stanford, California, says he received $1.1 million over three years for "blue skies" research. He estimates about one-third of that was spent on investigating geoengineering.

India Pledges to Cut Emissions - WSJ - India committed Sunday to reduce the intensity of its carbon emissions by 20% to 25% by 2020 from 2005 levels, meeting a deadline for developing countries to set voluntary carbon-curbing actions. In its statement announcing the target, the Environment and Forests Ministry didn't spell out what measures India, the world's fifth largest polluter, would take to meet the goal. The statement also said the targeted cuts won't be legally binding.India's pledge, which it publicized earlier, means that it will adopt cleaner technologies to slow the rate at which emissions are growing--reducing the intensity of emissions per unit of gross domestic product. However, it doesn't cover the agriculture sector, a move aimed at ensuring food security for the country's growing population of 1.2 billion.

Kyoto and the carbon content of trade - VoxEU - Production-based CO2 emission targets can give rise to carbon leakage, as firms relocate to countries without carbon policies. This column shows that Kyoto countries’ embodied CO2 imports have been increasing by about 50% since the Protocol was signed. Climate policies may have lead to additional carbon imports without sizeable domestic reductions. Consumption-based targets should therefore play a more prominent role in climate policies.

Oil demand has peaked in developed world: IEA (Reuters) - Oil use in rich industrialized countries will never return to 2006 and 2007 levels because of more fuel efficiency and the use of alternatives, the chief economist of the International Energy Agency said on Thursday. The bold prediction, while made previously by some analysts, is significant because the IEA advises 28 countries on energy policy and its oil demand forecasts are closely watched by traders and policymakers."When we look at the OECD countries -- the U.S., Europe and Japan -- I think the level of demand that we have seen in 2006 and 2007, we will never see again," Fatih Birol told Reuters in a telephone interview.

South Korea Crude Oil Imports Decline for Third Month (Bloomberg) -- South Korea, Asia’s fourth-largest buyer of crude oil, imported less of the fuel by volume for a third month as refiners maintained low crude run rates.  Imports dropped 20 percent to 74.5 million barrels in January from 93.3 million barrels a year earlier, the Ministry of Knowledge Economy said in an e-mailed statement today. Imports gained 5.5 percent from December.  SK Energy Co., South Korea’s biggest refiner, processed fuel at a rate of about 71 percent of capacity in January, down from 82.1 percent a year earlier, on weak overseas demand. Refiners rushed to import the fuel in January last year before the government doubled taxes to 2 percent the following month. The crude import bill jumped 44 percent in January from a year earlier as Asian benchmark Dubai prices rose 74 percent to $76.80 a barrel, the government said.

Crack Spreads Widen as Refineries Close in the U.S. (Bloomberg) -- As refineries from New Jersey to New Mexico close at the fastest pace in three decades, traders in Singapore are profiting from a new plant on India’s west coast and a ship heading for Florida filled with jet fuel from Taiwan.  The so-called refinery crack spread in Singapore, representing the value of fuels minus the cost of crude oil, may climb 50 percent to as much as $4.50 a barrel this year, according to a Bloomberg News survey of five analysts. U.S. refinery margins will drop 30 percent by December, futures contracts on the New York Mercantile Exchange show. That means higher profits for oil companies and traders in Asia, where consumption is growing 13 times faster than in Europe and the U.S. That’s also why Morgan Stanley can buy jet fuel in Taiwan and ship it 11,500 miles to Port Everglades, Florida, and still make money.

UPDATE 2-Cosmo to cut refining capacity as demand wilts | Reuters - Cosmo Oil Co Ltd (5007.T) will cut refining capacity by 80,000 barrels per day (bpd) from Tuesday and consider further reductions at mid-year, becoming the latest Japanese refiner taking action on declining domestic demand. Japan's oil firm said its total refining capacity would be 555,000 bpd after the output cut.Oil demand in the world's third-largest consumer nation has been falling steadily for years as the population ages and greener and more energy-efficient technology use rises. But the trend accelerated last year during Japan's worst recession in decades."Refiners have cut runs to the point that they can't cut much further, so reducing refining capacity is really the only avenue left for them to tighten the market," said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo.

China Guarantees Future Stronghold In Iraq After Forgiving Saddam's Debt - Interesting move on the part of China, presumably intended to guarantee close cooperation between it and Iraq going forward. With Iraq potentially set to be the new Saudi Arabia -- and China having an amazing thirst for oil -- this move makes sense. AP: Iraq says China has agreed to write off 80 percent of its Saddam Hussein-era debt. A statement posted on the Iraqi Finance Ministry Web site on Tuesday put Iraq's debt to China at $8.5 billion.

Saudi Oil Flows East: China's Ever Increasing Appetite for Oil - One more measure of China’s growing global clout – so much Saudi oil is flowing China’s way that it may soon replace the U.S. as the leading market for the world’s largest oil exporter. A  report from oil-industry consultant PIRA says Saudi Arabia accounted for 11 percent of total U.S. oil imports last year, down from 18 percent in 2003. Over the same period, China’s shipments of Saudi crude increased from 16 percent of total imports to 20 percent. In just the past two years, Saudi oil imports to China have increased 60 percent, reflecting the rocketing demand for energy to fuel economic growth. Xinhua, China’s official news agency, says crude oil imports could surge more than 40 percent in the next three months after hitting an all-time high of 5 million barrels per day in December.

Some are more energy hungry than others - CHECK out this nice World Bank chart, from Paul Kedrosky: Qatar is a bit of an outlier, though there is a clump of energy producing states, including Iceland, UAE, and Kuwait, that stand head and shoulders above the rest of the world. The next tier includes large former British colonies (Australia uses energy much like Canada and America), as well as Northern European countries like Norway, which both produce energy and use a lot of it in the winter. Next you have the rest of the developed world. Then emerging markets pulling away from the destitute bottom. But what should stand out is that most of the world's population is squished into that broad bottom tier, which includes emerging markets and undeveloped countries. Really, something like 85% of the people living on this planet consume below the world's average energy use. Either those people need to quit aspiring to developed nation lifestyles, or the world needs to make output far less energy-intensive, or we should all prepare ourselves for a nasty time of things, in geopolitical and environmental terms, as emerging markets continue to develop economically

World Oil Capacity to Peak in 2010 Says Petrobras CEO - Mr. Gabrielli, the CEO of Petrobras, gave a presentation in December 2009 in which he shows world oil capacity, including biofuels, peaking in 2010 due to oil capacity additions from new projects being unable to offset world oil decline rates. Gabrielli states in his presentation that the world needs oil volumes the equivalent of one Saudi Arabia every two years to offset future world oil decline rates.

Beyond the black stuff: Big Oil is being forced rethink its future (Economist) In the long term, however, the firms’ success depends on sustaining reserves. The big western oil companies are trying to expand through acquisitions and investment, but the opportunities do so are becoming scarcer. The firms are spending where they can. Exxon Mobil, the biggest listed oil company, says that exploration and capital spending hit $27.1 billion in 2009, 4% higher than in 2008. The company expects to spend $25 billion to $30 billion annually to the same end over the next five years. BP intends to spend some $20 billion this year on investment in new projects and drilling, roughly the same level as last year. But there are limits to what money can buy...

Exxon Dives Deep into High-Risk Exploration - Hardly known as a wildcatter, Exxon Mobil Corp. is searching for oil in most of the world's regions where high-risk exploration is under way, even as other big oil companies are being more selective and cutting capital spending.  So far, though, Exxon has little to show from its exploration campaign and needs to make large discoveries soon to justify the increased spending.  Exxon has "tried to put a tiger in the exploration hat," said Neil Mc Mahon, a Sanford C. Bernstein & Co. analyst. But it has "only pulled out a fluffy bunny so far."

Peak oil looms - As 2009 ended, a report issued by the International Energy Agency (IEA) received scant media attention, but it has huge implications for future U.S. economic growth and national security. Faith Birol, chief economist for the IEA, announced that unless there are major new oil discoveries, something his agency does not expect, the output of conventional oil production will peak in 2020. The agency's official conclusion is that production will reach a plateau sometime before 2030. The news was startling from an agency that had previously refused to predict when oil supplies might stop growing. In fact, the IEA, closely watched by the world energy markets as an objective analytical source, had previously downplayed the prospects that oil production was reaching a peak.

Obama's Nuclear Giveaway -- In September 2007, the city of San Antonio and NRG Energy announced a partnership to build two new nuclear reactors—the first new nuclear project to be initiated in the United States in decades. The project represented, one of the partners promised, "a milestone for our long-term energy future." The project, initially estimated to cost $5.8 billion, quickly became a leading candidate for a Department of Energy (DOE) program in which the government would guarantee loans to finance new nuclear plants. In less than a year, however, the plant's projected cost had more than doubled to $13 billion. By April 2009, an independent report had calculated that the real cost of the plant could be as high as $22 billion. In December, San Antonio's municipal utility, CPS, announced it was bailing out of the venture entirely and suing NRG, arguing that NRG and Toshiba—which was contracted to construct the reactors—had lied about the price tag of the venture.

Growth Isn't Possible (report excerpt) -Energy Bulletin - Whether or not the stumbling international negotiations on climate change improve, our findings make clear that much more will be needed than simply more ambitious reductions in greenhouse gas emissions. This report concludes that a new macro economic model is needed, one that allows the human population as a whole to thrive without having to relying on ultimately impossible, endless increases in consumption.

Why Transition? - We are living in an age of unprecedented change, with a number of crises converging. Climate change, global economic instability, overpopulation, erosion of community, declining biodiversity, and resource wars, have all stemmed from the availability of cheap, non-renewable fossil fuels. Global oil, gas and coal production is predicted to irreversibly decline in the next 10 to 20 years, and severe climate changes are already taking effect around the world. The coming shocks are likely to be catastrophic if we do not prepare.  The Transition movement represents one of the most promising ways of engaging people and communities to take the far-reaching actions that are required to mitigate the effects of peak oil, climate change and the economic crisis.

Energy Quiz: What renewable fuel delivers the most net energy? | Energy Bulletin - Surprise! Humble firewood yields the highest energy return on energy invested - Firewood as a residential heating fuel is rarely mentioned in energy policy discussions. When discussed at all, the conversation usually centers around how to restrict wood burning because of the pollution created by users of bad equipment and bad fuel. But considering its many advantages, a better strategy would be to promote the ways its smoke emissions can be reduced. Most economists, as well as financial pundits in the mainstream media, focus on the money cost of energy. But the energy costs of energy can provide useful insights into environmental impacts and the underlying reasons for the money cost. For this reason, the energy return on energy invested (EROEI) should be included in any review of the quality, impacts and appropriateness of various energy sources. EROEI is also sometimes referred to as net energy, a simpler term that can also be used.

Culture Change - Depletion of Key Resources: Facts at Your Fingertips - Modern industrial society is based on a triad of hydrocarbons, metals, and electricity. The three are intricately connected; each is accessible only if the other two are present. Electricity, for example, can be generated on a global scale only with hydrocarbons. The same dependence on hydrocarbons is true of metals; in fact the better types of ore are now becoming depleted, while those that remain can be processed only with modern machinery and require more hydrocarbons for smelting. In turn, without metals and electricity there would be no means of extracting and processing hydrocarbons. Of the three members of the triad, electricity is the most fragile, and its failure serves as an early warning of trouble with the other two…

Rare Earth Demand Rises, No Supply Increase Seen Outside China - Demand for rare-earth metals was increasing "exponentially", primarily driven by demand for new technology, independent consultant and commentator Jack Lifton said on Monday. He told delegates attending the 2010 Mining Indaba in Cape Town that 2010 was already shaping up as the year of rare metals. Rare-earth metals are critical technology metals used in the manufacturing of hybrid cars, super alloys used in the defence industry, cellphones, large wind turbines, missiles and computer monitors.

China doing laps around US on energy - China is so far ahead in the race to create technology related to renewable energy, that "the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China," notes the New York Times. The United States, along with other countries, is trying to catch up, but it's an uphill battle. While renewable energy continues to be more expensive, China charges a fee to all users to help spread out the cost, an example of how the government takes a deep interest in energy policy. And it's not just about government regulations. In fact, part of the reason why China has been able to become a world leader in building this new technology is that its domestic market is growing. Demand for electricity in China is skyrocketing, so power companies have to constantly buy new equipment, making it easier to develop large-scale production lines

China Is Leading the Race to Make Renewable Energy - NYTimes - China vaulted past competitors in Denmark, Germany, Spain and the United States last year to become the world’s largest maker of wind turbines, and is poised to expand even further this year. China has also leapfrogged the West in the last two years to emerge as the world’s largest manufacturer of solar panels. And the country is pushing equally hard to build nuclear reactors and the most efficient types of coal power plants.These efforts to dominate renewable energy technologies raise the prospect that the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China.

New York Times tells us that cheaper renewable energy is a bad thing - Because it's coming from China.  To be fair, they are careful not to explicitly pass judgment on the situation.  But still. Here's the story and the money quote: These [China's] efforts to dominate renewable energy technologies raise the prospect that the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China. Anyone over at Green Inc. see the difference between buying oil and buying capital equipment used to make energy from the wind and sun?  Actually, forget that difference.   Anyone over at Green Inc. think that we would be better off without Mideastern oil?  It would be nice if the folks over at Green Inc. would provide at least a hint that they understand the basic gains from trade and then explain that to their readers.

India steps up scramble with China for African energy - India has stepped up its efforts to gain an economic foothold in Africa in a new scramble with China for the continent's resources, signing energy deals with top oil producers Angola and Nigeria. India has lagged behind China's aggressive courting of African nations to secure rights to energy as well as raw materials.Beijing is using its deep pockets to build roads, railways, even a new parliament building in Malawi, to win favour across Africa, deploying at least half a million Chinese workers to labour on projects around the continent.India's democratic system and often lumbering bureaucracy have left it slower to make inroads and less likely to fund big projects, since government must account for all spending to parliament. But this month India deployed two high-level missions to the continent, with Oil Minister

Charter cities are way to Third World prosperity - In the West we know it costs very little to light a home: 1p an hour for a 100W bulb. Most poor people in Africa are not starving. They could afford some light. Africans do not lack electricity because they are poor — indeed power is so important for employment and education that it is more accurate to say they are poor because they don’t have electricity. What is going on?The problem is that the rules that govern many developing countries don’t work. In Britain good laws, and the institutions that uphold them, have developed over hundreds of years. These ensure that power companies charge reasonable prices and provide reliable service.

China in Africa: A China-bashing backlash - In 2008, China replaced the US as Africa’s largest trading partner, with the volume of trade reaching $107bn, representing a tenfold increase since 2000. Meanwhile, Deborah Brautigam tones down the China-Africa hyperbole in Foreign Affairs: Over the past few decades, China has managed to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment — the kind of experimentation that the Chinese leader Deng Xiaoping once described as “crossing the river by feeling the stones.” Today, China is feeling the stones again but this time in its economic engagement across Africa. Its current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China’s own successful development and of decades of its failed aid projects in Africa.

The Roots of China’s Rapid Recovery - China’s crisis management is only part of the story. It does not explain why other countries that took even stronger measures failed to generate a similarly rapid recovery, or why China’s government seems to have more room than others for policy maneuver.  China ’s budget was actually in surplus and its government debt-to-GDP ratio was only 21% before the crisis (now it is about 24%), much lower than any other major economy. That gave Chinese policymakers freedom to spend money to confront the crisis. Moreover, the level of non-performing loans in Chinese banks was quite low when Lehman Brothers collapsed, which allowed Chinese policymakers to let it increase in order to battle the crisis. Moreover, the Chinese economy was in good shape when the global crisis hit. Cautious macroeconomic management during China’s boom, including early self-adjustment, put China in a favorable position. China’s economy had been booming since 2004, but officials did not step aside and “let the market decide.” Instead, they adopted counter-cyclical measures aimed at preventing the economy from overheating.

Uppity China - (bullies everywhere) A month ago I reported: I hear a lot of China bashing these days.  To check, I surveyed the last ten China news articles in the Post and NYT. … Yup, top US newspapers are in full fledged China bashing mode. Today’s top article at WashingtonPost.com is “China’s strident tone raises concerns”: China’s indignant reaction to the announcement of U.S. plans to sell weapons to Taiwan appears to be in keeping with a new triumphalist attitude from Beijing that is worrying governments and analysts across the globe.  From the Copenhagen climate change conference to Internet freedom to China’s border with India, China observers have noticed a tough tone emanating from its government. …So Western analysts are befuddled that China is surprising uppity – analyst explanations and remedies center on Chinese psychology and actions; surely nothing the West has done could be part of the explanation.  “We were just standing here minding our own business when they just went all crazy …”

The Roots of China’s Rapid Recovery - China’s crisis management is only part of the story. It does not explain why other countries that took even stronger measures failed to generate a similarly rapid recovery, or why China’s government seems to have more room than others for policy maneuver.  China ’s budget was actually in surplus and its government debt-to-GDP ratio was only 21% before the crisis (now it is about 24%), much lower than any other major economy. That gave Chinese policymakers freedom to spend money to confront the crisis. Moreover, the level of non-performing loans in Chinese banks was quite low when Lehman Brothers collapsed, which allowed Chinese policymakers to let it increase in order to battle the crisis. Moreover, the Chinese economy was in good shape when the global crisis hit. Cautious macroeconomic management during China’s boom, including early self-adjustment, put China in a favorable position. China’s economy had been booming since 2004, but officials did not step aside and “let the market decide.” Instead, they adopted counter-cyclical measures aimed at preventing the economy from overheating.

Andy Xie: Pumped With Cash And Ready to Crash? – China's foreign exchange reserves soared by US$ 453 billion in 2009, or 10 percent of 2008 GDP. Bank lending increased 32 percent to 9.6 trillion yuan. And yet nominal GDP rose only about 5 percent. Clearly, the financial side drove China's GDP growth last year, reflecting a new reality of the post-financial crisis world. But all that money produced relatively little GDP growth because it worked its way into a single sector: property.  Two market beliefs animate this continuing movement. First is the belief that China's currency will only appreciate. The other is that China's land prices will drive money flows.

China: hard to extinguish speculators’ animal spirits - FT- Recent moves in Beijing to tighten lending conditions have spooked Chinese investors. Given that easy money fuels asset price bubbles, it is tempting to believe that the withdrawal of liquidity signals an imminent end to the good times. However, history suggests that once a boom has got going, it takes several sharp blows with the monetary cudgel to extinguish the speculators’ animal spirits. The last time the Chinese authorities attempted to deflate an asset price bubble was in January 2007. At that time interest rates were raised, bank reserve requirements increased, and important officials spoke openly about the need to quell speculation. Several commentators anticipated an imminent collapse of the Chinese stock market, which had doubled over the previous year. The outcome was rather different. Over the following months the Shanghai Composite entered a period of exponential growth...

The mystery of Chinese savings - VoxEU - What is the connection between China’s one-child policy and its savings glut? This column provides a pioneering explanation. China’s surplus of men has produced a highly competitive marriage market, driving up China’s savings rate and, therefore, global imbalances.

China Defaulting Loans Soar, Insolvency Lawyer Says (Bloomberg) -- Non-performing loans in China have risen into the “trillions of renminbi” because of poor lending practices, an insolvency lawyer said. “We work really closely with SASAC, the state-owned enterprise regulator in China, and there are literally trillions and trillions of renminbi of, frankly, defaulting loans already in China that no one is doing anything about,”“At some point there’s going to be a reckoning for that.” China’s government is tightening controls, including banks’ reserve ratios, to prevent record lending from fueling inflation. The Shanghai office of the China Banking Regulatory Commission warned yesterday that a 10 percent fall in property values would treble the number of delinquent loans in the city.

Obama Vows to Address Yuan Exchange Rate Issue - Reuters is quoting President Obama: "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage."  Pimco's Paul McCulley listed this as one of the key issues for 2010: The first issue is the peg between the Chinese yuan and the U.S. dollar, which essentially gives us a one-size-fits-all monetary policy in a very differentiated world. ... And Professor Krugman wrote about this in Chinese New Year  And Larry Summers mentioned this at Davos, see: How the bottom fell out of 'old' Davos

Obama: US Must Address Dollar-Yuan Exchange Rates – CNBC - President Barack Obama vowed to "get much tougher" with China on trade and currency rules to ensure U.S. goods do not face a competitive disadvantage, adding to a range of issues weighing on relations. With U.S.-Chinese ties strained over U.S. arms sales to Taiwan and Obama's planned meeting with Tibet's spiritual leader, the Dalai Lama, the U.S. president said his administration was pushing China and other countries to enforce trade rules and further open their markets. However, analysts cautioned against reading too much into Obama's comments, saying his words were as much aimed at appealing to a domestic audience rather than to seriously put pressure on Beijing.

China's central bank: no quick change to currency policy (Extra) - The deputy governor of China's central bank, Zhu Min, told a panel Saturday at the World Economic Forum that his country would not quickly change it currency policy. 'A stable exchange rate is good for China and good for the world,' Zhu said in Davos.Part of China's need for stability on the currency market was to ensure balanced growth, Zhu said, noting that, despite the country's place as an emergent economic powerhouse, most of the country's inhabitants were still poor. Monetary and fiscal policy, including a stimulus package in place since last year and set to last for another one, would continue as well. Zhu said China would unwind the package when the rest of the global economic leaders did so with their programmes.

Currency Dispute Likely to Further Fray U.S.-China Ties - NYTimes -To the growing list of grievances between the United States andChina, add one more: the Obama administration is reviving American pressure on China to stop artificially depressing its currency, a policy that fuels its persistent trade gap with the United States. The administration has told Chinese officials that currency policy will be high on its agenda this year for economic talks with China, a senior official said on Wednesday. The White House is also weighing whether to designate China as a country that manipulates its currency, when the Treasury Department issues its semiannual report on foreign currencies in April. President Obama signaled the tougher line on Wednesday, telling Democratic senators that the United States needed “to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage.”

China to Impose Dumping Penalties on U.S. Chicken (Bloomberg) -- China, the largest market for U.S. chicken, will impose preliminary anti-dumping duties of up to 105.4 percent on imports of American poultry products, threatening to deepen a trade rift. Importers of U.S. broiler chicken products will be required to pay after an investigation showed they had caused “material damage” to local producers by selling at below-market prices, the Ministry of Commerce said in a statement on its Web site, citing a preliminary ruling. The duties are effective Feb. 13. The ruling may further strain trade relations between the U.S. and China, which began its investigation in September, two weeks after the U.S. imposed tariffs on Chinese tire shipments. Ties have also soured over proposed arms sales to Taiwan and President Barack Obama’s plans to meet the Dalai Lama later this month.

Money for Nothing and Yuan Appreciation for Free - I’m perennially baffled by the occasional phenomenon of American officials publicly complaining about China’s currency policy. After all, what kind of a world are we living in when a great nation can’t think of a way to devalue its own money? Larry Summers is a brilliant economist, but he can’t think up a better way of making this happen then asking the Chinese nicely (or not-so-nicely) then maybe he ought to step aside and let someone stupid take the helm. Maybe it’s just that I have no idea what I’m talking about, but I actually feel confident that if Barack Obama put someone who doesn’t know what he’s talking about (me, say) in charge and give me a mandate to devalue the dollar I could get the job done.

It is the poor who pay for the weak renminbi - FT - Dani Rodrik of Harvard University estimates that China’s undervaluation has boosted its long-run growth rate by more than 2 per cent by allowing greater output of tradable goods, a sector that was the engine of growth and an escape route from underdevelopment for postwar successes such as Japan, South Korea and Taiwan. Higher tradable goods production in China results in lower traded goods production elsewhere in the developing world, entailing a growth cost for these countries. Of course, some of these costs may have been alleviated by China’s rapid growth and the attendant demand for other countries’ goods. But China’s large current account surpluses suggest that the alleviation is only partial. These emerging market victims of China’s exchange rate policy have remained silent because China is simply too big and powerful for them to take on. And this despite the fact that disaffected constituencies now encompass not just companies but also central bankers, who have found macro-economic management constrained by renminbi policy. Hence the third consequence. By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status.

More renminbi rhetoric - THIS week's Economist has a Leader on growing geopolitical tensions between China and America, which concludes: Already the Obama administration has shown itself too ready to resort to trade sanctions against China. If China now does the same using a political pretext, while the cheapness of its currency keeps its trade surplus large, it is easy to imagine a clamour in Congress for retaliation met by a further Chinese nationalist backlash. That is why the administration and China’s government need to work together to pre-empt trouble. Some see confrontation as inevitable when a rising power elbows its way to the top table. But America and China are not just rivals for global influence, they are also mutually dependent economies with everything to gain from co-operation. Nobody will prosper if disagreements become conflicts. The piece points out the difficulty American leaders face; it's important not to be a pushover and to hold China to appropriate standards, but one has to recognise that America (and the world) can't afford a falling out with China.

Exchange rate policy and monetary policy - Michael Pettis has the best blog on the Chinese economy that I have been able to find.  If you are interested, you should check out his recent post on how the policy debate looks from within China (and yes there is vigorous debate inside China.) But today I want to respond to one comment I don’t entirely agree with, which he made in a post in early January: For those who remember the 1980s, when many policymakers in Japan insisted that Japan’s trade surplus had nothing to do with the value of the currency, and everything to do with domestic competitive advantages in manufacturing, it is a little weird seeing them now worry so much about the impact of a rising yen on their manufacturing sector and on the process of economic recovery.  Currencies do matter, I guess. I’m paranoid.  Since I was one who didn’t think the value of the yen explained the 1980s surpluses, and who also strongly believes the strong yen has recently devastated their manufacturing sector, I naturally assumed he was talking about me. The thing is, I don’t see any conflict at all.

S&P: Many Asian countries facing fiscal challenges - Ratings agency Standard & Poor's said on Wednesday a number of Asian countries face fiscal challenges this year and their ratings may come under pressure unless measures were taken to rectify them.The credit rating agency identified Japan, India, Sri Lanka, Taiwan and to some extent, Vietnam and Malaysia among the leading candidates with fiscal problems as they had relatively higher government debt to GDP ratios."Their ratings may come under pressure unless policymakers overcome structural fiscal issues and take tough measures in consolidating finances in the medium term while not stifling economic growth," S&P said in a note

Emerging-Market Sovereign Debt Hits Record High - International investors bought a record amount of sovereign debt from emerging markets in January, despite the destabilizing impact of the debt crisis in Greece on sovereign-bond markets. The value of sovereign debt emerging markets sold to international investors hit $15.9 billion between the start of the year and January 29, according to Dealogic. That's more than double the $7.2 billion issued a year earlier and up 29% from the previous record high of 2004.

Argentine Central Bank President Quits Over Reserves – Bloomberg -- Argentina’s central bank President Martin Redrado resigned last night after a standoff with the government over its plan to use $6.6 billion in reserves to pay debt due this year. “I have followed the Constitution, the law and the central bank rules,” Redrado said during a press conference in Buenos Aires. “My cycle has ended at the bank.” President Cristina Fernandez de Kirchner tried to fire Redrado, 48, by decree on Jan. 7 for not backing her plan to tap reserves. A judge halted the measure the following day, saying Fernandez hadn’t notified Congress as required in the central bank charter. A bicameral commission, whose decision isn’t binding, began discussing the decree on Jan. 26. Economy Minister Amado Boudou has said the government intends to name former central bank President Mario Blejer, who also worked at the International Monetary Fund and the Bank of England, to replace Redrado. Central Bank Vice President Miguel Pesce has been running the institution since police barred Redrado from entering its headquarters on Jan. 24.  “The government tried to destroy the central bank,” Redrado said last night.

McKinsey Says Deleveraging Will Exert Drag on GDP Growth - International consulter Mc Kinsey is another mainstream thinking business that takes a seat in the orchestra of doom, fearing years of gloom: The specter of deleveraging has been haunting the global economy since the credit crunch reached crisis proportions in 2008. The fear: an unwinding of unsustainable debt burdens will drag down growth rates for years to come. So far, reality has been more benign, with economic growth recovering sooner than expected in some countries, even though the financial sector is still cleaning up its balance sheets and consumer demand remains weak.New research from the McKinsey Global Institute (MGI), though, suggests that the deleveraging process may just be getting under way and is likely to exert a significant drag on GDP growth.1 Our study of debt and leverage2 in ten mature and four emerging economies3 indicates that some sectors of the economies of five countries—Canada, South Korea, Spain, the United Kingdom, and the United States—will very probably experience deleveraging.

The debt crisis - how countries rank: The debt trap: ranking the suspects | The Economist (table) CAN one devise a way of spotting those countries which are most at risk from a debt crisis? One method is to use the concept of a debt trap, where the bond yield is higher than the economy's nominal growth rate. Countries cannot live in this trap for long without taking radical economy measures; otherwise interest costs eat up more and more of GDP. Without a sudden burst of growth, governments need to run a primary surplus to get out of the trap - that is, their revenues need to exceed their spending, before interest payments.  To assess which countries are in the trap, I took figures from the OECD economic outlook for growth rates and compared them with bond yields. This is a rough-and-ready measure but I think it gives a good idea of market concern. And market concern can be self-fulfilling - the costlier it is to service one's debt, the more markets worry it will not be serviced, and the higher the yield they demand.

What the world must do to sustain its convalescence - The world’s leaders showed an impressive ability to deal with the crisis. The will to co-operate last year, seen not least in the rise of the G20, was remarkable. But such co-operation becomes far more difficult as we return to politics as usual, particularly given high unemployment and deep political divisions inside the US, still the world’s hegemonic power. The European Union remains ineffective. Indeed, the inability of the eurozone to address the fact that the periphery cannot escape from its fiscal trap without strong expansion in demand at the core is proof of that. China, too, is inward-looking. Mr Zhu promised rebalancing. But is that going to happen after today’s stimulus measures are withdrawn?

After the stimulus, the big retrenchment - VoxEU - The staggering growth in public debt as a result of the financial crisis has led many to call for significant fiscal retrenchment. This column argues that such looming expenditure cuts will actually enhance the effectiveness of today’s fiscal stimulus. But if monetary policy is constrained by the zero lower bound on policy rates, the spending cuts should not come too early.

IMF’s Blanchard: Interest Rates Should Stay Low - Central banks should keep interest rates very low, the International Monetary Fund’s chief economist Olivier Blanchard says “It is essential, and for as long as necessary. So long as there is no recovery in private demand, it is absolutely vital–maybe even beyond 2010,” “If that creates bubbles between now and then, different means must be found [to address them], but it is essential for economic activity to start up again,” he says, noting this doesn’t stop central banks withdrawing other monetary policies that don’t involve rate changes.Blanchard also warns that European countries like Portugal, Spain and Greece are facing serious budgetary difficulties, which means they will have to make big sacrifices, like salary cuts. But he says the euro zone doesn’t risk falling apart.Blanchard also says China needs to let the yuan appreciate to slow down external demand. Blanchard says a rise in the yuan could help address imbalances in world trade, but it wouldn’t be enough to maintain strong growth in rich countries.

A framework for central banks and bank supervision - VoxEU - Should monetary policy and banking regulation be conducted by separate bodies? This column proposes a new policy framework whereby the central bank chooses short-term interest rates and the aggregate equity ratio while banking regulation and supervision, including the determination of bank-specific capital requirements, would be left to separate bank-regulatory authorities.

Japan to increase holding of US assets - Here's one that was tucked away in the Financial Times, Japan Post Bank urged to diversify holdings. With all of the talk about China, its currency, and the question of the Chinese "financing the U.S. deficit", the media always forgets about Japan! From the FT:  One of the largest buyers of Japanese government bonds is under pressure to diversify its holdings in a move that will reverberate throughout the huge JGB market.A big shift by the postal bank away from JGBs could have unsettling implications for the market. Japan Post helped digest 45 per cent of the increase in outstanding JGBs between 2001 and 2007 and already holds about 24 per cent of outstanding JGBs,  Japan Post Bank - one of four government companies that was scheduled for an IPO offer, but to my knowledge that has been stalled - holds ¥176,990.8bn in deposits, or $US1.96tn, and the equivalent of $US2.2tn in total assets. That rivals Bank of America, the US' largest bank holding company by assets.

Japan’s Recovery Failing to Spread, BOJ’s Chief Economist Says - (Bloomberg) -- Japan’s economy is far from achieving self-sustained growth as the export-led recovery fails to spur spending at home, according to Kazuo Momma, the Bank of Japan’s top economist. “The risk that the Japanese economy will fall off from a cliff is small, but there is still a long way to go,” before the expansion becomes sustainable, Momma said in Tokyo today. “Even if the global economy continues to recover, the spread of that to capital spending and the labor market will be limited.”  More than $2 trillion in global stimulus spurred demand for Japanese exports last year, helping pull the nation out of its worst postwar recession. Momma said there’s no “magic” solution to stamp out deflation and that overcoming

Japan Can Expect to Become Less Crowded and Less Polluted and the Post Screams "Crisis" - Japan is one of the most crowded countries in the world. It hires people to push commuters into over-packed Tokyo subway cars during rush hours. Given its overcrowding, it is difficult to see why the Japanese people should view the prospect of the declining population as a crisis, as the Washington Post argues in a "news" story.  In fact, Japan's economy continues to produce far more than it consumes, which is why it has a trade surplus, something that appears in the Post article as a serious negative. In fact, economists would argue that this is exactly what a country with an aging population should be doing: running trade surpluses so that it can draw on foreign assets in future decades.

Baltic Dry Index Continues to Drop - The Baltic Dry Index, which measures changes in the cost to ship goods by sea, is about as volatile as an option contract.  As shown in the chart below, the index has had a number of major swings over the past few years and months.  We can't imagine what it must be like in the shipping industry to have to deal with these kinds of price changes all the time.  Since December 2008, the index has risen by 547%, fallen by 50%, risen by 115%, and is currently down 42% since November 19th.  Going back farther, from 2005 to mid-2008, the Baltic Dry rose 575%, and then it fell 94% from its peak to its trough on December 5th, 2008.

Is Russia’s Economic Crisis Over? - Has Russia’s economic crisis ended? That depends on who you ask. Ask Prime Minister Vladimir Putin, or any official of his United Russia party, and you will be told, “Of course it is over.” They will even produce proof in the form of an unemployment rate that does not rise, unprecedented increases in pensions, and strong growth in construction and metal-working. Of course, all these comparisons are made with how things stood last month rather than with the country’s pre-crisis economic performance. Then there is another “miracle” that the government is starting to trumpet, one discovered in August 2009: an increase in Russia’s population. Unfortunately, in no month before or since have births outpaced deaths.  Ask a member of the opposition whether the crisis has ended, and you will be told that it is only just beginning. Gazprom’s production is falling at a dizzying pace; the country’s single-industry “mono-towns” are dying.

Euro Proving No Reserve Asset as Central Banks Shift – (Bloomberg) -- Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world’s reserve currency.  Last year, policy makers loaded up on euros, while analysts at Barclays Plc in London and Aletti Gestielle SGR SpA in Milan predicted central bankers would make good on threats to reduce the greenback’s dominance. Now the euro is down 8.1 percent since Nov. 25 in its fastest slide in 10 months amid concern that cash-strapped countries like Greece won’t pay their debts. Billionaire investor George Soros said Jan. 28 that there’s “no attractive alternative” to the dollar.

Are sovereign wealth fund investments politically biased? - VoxEU  - Are sovereign wealth funds substantially different in their investment choices from other types of institutional investor? This column compares the holdings of two groups of sovereign and mutual funds – and finds a few differences. But, contrary to popular belief, evidence suggests that sovereign and mutual funds’ investments do not differ when looking at the political profile of targeted countries.

Sovereign debt: Where's the deficit news? | The Economist - I think that the immediate priority should be economic weakness rather than deficits (although these needn't be mutually exclusive—you can always pass budget fixes now that take effect several years down the road). But it's just not true to say there is no news driving the interest. There is actually quite a bit of news on the risk of sovereign debt crises, driven by developing conditions in Europe. Here is just one of the stories describing the deficit worries sweeping Europe. Mr Krugman has been arguing that Europe's debt troubles don't have anything to do with fiscal irresponsibility, but that's also wrong. As you can clearly see at right, Europe's deficit troubles began well before the global economic collapse. Now, there was an interesting discussion in the Washington office this week over whether it was possible for there to be a simultaneous crisis for all sovereign debt. While perhaps technically possible, it does seem unlikely, and so one might argue that countries with a relatively sound fiscal position, like America, have a lot of room to borrow for now, because debt worries elsewhere are causing investors to look for relatively safe havens. Perhaps so. But it's just not right to say that there is no news driving these headlines, and no reason, other than politics, for people to be discussing these issues.

Spain Is On The Brink Of Financial Collapse Because Nobody Pays Taxes - Spain threatens the strength of the euro currency union far more than Greece, given the much larger economy.  And it turns out that, just like Greece, Spain has a horrendous tax-dodging problem. Which means lost tax revenue the Government has to borrow money for. For Spain, such tax shenanigans center around the property market where reportedly half of landlords evade taxes. Bloomberg:Owners are asking for payment in cash from tenants to avoid tax on 2.5 billion euros ($3.5 billion) of earnings annually, the Gestha union of tax inspectors estimates. An increase in rental properties nationwide hasn’t generated any more tax revenue.The Spanish government, seeking to pull the country out of its deepest recession in 60 years, needs all the money it can get right now. The slump was triggered by a crash in the housing market and has left Spain with the highest budget deficit since at least 1980. Taxes go unpaid on income equal to about a quarter of gross domestic product, Gestha estimates.

Spain Goes On Offensive, Cuts Everything To Combat Debt Crisis - Spain has gone on the offensive targeting massive budget cuts as a means of bringing itself back in line with euro zone debt requirements. This includes cuts to social security, foreign aid, and a hiring freeze on the civil service. It is the latest attempt by the troubled state to dodge a crisis like Greece is in.The Spanish government has decided the best way to fight the crisis is with a combination of massive spending cuts and tax increases in what some are calling an "austerity budget."They are even going so far as to raise the retirement age from 65 to 67. The government is doing everything it can to meet its budget requirement for 2013, which includes knocking back its deficit from 11.4% of GDP in 2009 to 3% of GDP by 2013.

Spain’s GDP Contracts for Seventh Quarter, Bank of Spain Says – (Bloomberg) -- The Spanish economy contracted for a seventh quarter in the final three months of last year, widening the gap with the euro region and putting further pressure on Spain’s budget deficit.  Gross domestic product fell 0.1 percent in the last quarter of 2009, declining 3.1 percent from a year earlier, the Madrid- based Bank of Spain estimated today in its monthly bulletin.  Facing the highest unemployment rate in the euro region and another year of annual economic contraction, Spain has seen its borrowing costs soar compared with those of Germany amid concern it will struggle to reduce its debt. The International Monetary Fund expects the economy to contract 0.6 percent this year, twice as much as the government forecasts, while the euro region may grow 1 percent

The Collapse of Spain - Great Paul Krugman post illustrates the point that the budget crisis in Spain has basically nothing to do with irresponsible budgeting. Pre-crisis Spain had a budget surplus and a low debt load. The problem is that the structure of the EU has made it impossible for Spain to adapt to a large negative shock: So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment. If Spain had its own currency, this would be a good time to devalue; but it doesn’t.

Euro Bludgeoned As Portuguese Government Debt Disaster Sparks Credit Default Swap Panic
The Eurozone has become a cluster of sovereign financial explosions lately. The latest burst comes from Portugal.Portuguese credit default swap spreads hit their widest level ever today in Europe, at 2.26%. This was a huge jump from just 1.96% a day earlier. Markets appear to have been shaken after the Portugese government sold only 200 million euros of 500 million offered.

Portuguese govt defeated on austerity measures - Portuguese opposition parties defeated a government austerity plan on Friday and passed their own bill that lets the country's autonomous regions rack up even more debt. The move raised new questions about European countries' ability to control their swollen budget deficits. The vote was also likely to rattle the world's financial markets, which are already concerned that the financial troubles gripping Greece may spread to other vulnerable eurozone countries such as Portugal and Spain. Portugal's minority Socialist government had fiercely opposed the opposition bill, since it contradicted earlier promises to crack down on ballooning debt. Yet the bill passed 127 to 87, appearing to show that Portugal, western Europe's poorest country, has little appetite for painful austerity measures"

Greece Gets The Green Light, But Will It All Work? - Well, as reported over the weekend on this blog, the EU Commission did in fact demand "more sacrifices" from the Greek people, and in the end Prime Minister Papandreou had to make a last minute TV appearance to explain to his incredulous listeners that the time had come "to take brave decisions here in Greece just as other countries in Europe have also taken....We all have a debt and duty towards our homeland to work together at this difficult time to protect our economy." I thought that that time had come last November, but evidently I was precipitate in my judgement, but now it has finally arrived, although I ould note that hope does spring eternal, and that even now not everyone is 100% convinced.As the Financial Times put it, the EU puts Athens under close scrutiny.

Greece's Monetary Trap - The Greek government has just unveiled a new fiscal austerity plan. With a combination of tax increases and spending cuts, it aims to get budget deficits down to about 3% of GDP--10 percentage points lower than where it is now.Everyone is expressing optimism.  But while this sort of belt-tightening is necessary for Greece to stay in the EU, it's going to come at a huge cost.  Greece is already in recession--that's why its budget problems loom so large--and the fiscal contraction will only make them deeper.  Meanwhile, the EU will be setting its interest rates to meet the needs of larger, healthier members (and inflation-hawk bondholders).  Tight fiscal and monetary policy means a long, painful period ahead for the Greeks.

Are Greek Bonds the New Subprime? - WSJ - Greek officials have blamed “market speculation” for the plummeting price of Greek bonds in recent days. That — along with mounting investor concern — may well be true. But it’s not the whole story. Many investors, especially banks, which are big buyers of government debt, are not betting on Greece’s financial prospects so much as trimming their bond holdings and defending the value of what’s left, observers say. These banks have realized that their Greek and other European government bond holdings are much riskier than they previously assumed.To cover themselves, they’re either selling bonds outright or scrambling to buy credit-default swaps, a kind of insurance, driving the price of such insurance higher.Last Thursday, prices of credit-default swap contracts tied to Greece hit a record high of 4.225 percentage points, according to data provider CMA DataVision. That means the cost of insuring $10 million of Greek sovereign debt hit about $422,500 per year

Greece’s new promises provokes anger at home - Prime Minister George Papandreou promised to increase fuel taxes and raise the retirement age, while retreating on a promise to raise wages faster than inflation, a pledge that helped him win elections in October.  The European Commission approved the plan but also announced that it will put Greece under closer surveillance writes the FT. The Commission also decided to launch legal proceedings against Greece for the lack of reliable financial statistics.  While markets and EU policy makers welcomed the new plan, there is growing anger at home. Greece’s biggest union is set to approve the second mass strike this month in protest against spending cuts, showing that Papandreou’s parliamentary majority may not be enough to guarantee implementation of his plan ( Bloomsberg Europe).

Greece’s Biggest Union Sets Strike, Threatens Cuts (Bloomberg) -- Greece’s biggest union approved the second mass strike this month and tax collectors began a 48-hour walkout, showing that Prime Minister George Papandreou’s parliamentary majority may not be enough to implement his plan to cut the European Union’s largest deficit.  GSEE, which represents about 2 million workers in the private sector, voted at a meeting in Athens today to walk out Feb. 24. The main public-employee union plans a Feb. 10 strike to protest spending cuts as Papandreou steps up budget cuts to persuade investors Greece won’t need a bailout.

BBC News – Greece ’should not get bail-out’ - Reports have suggested that the EU might bail Greece out, which would calm the financial markets. However, Otmar Issing, who was one of the founding members of the Executive Board of the European Central Bank, told BBC World Service that this would undermine the Greek government's planned drastic budget cuts. "These reforms which are needed will be blood and tears, to use this phrase, but without that, Greece will never overcome the difficulties. "It is after years of violating rules, cheating on figures, financing consumption, public and private by huge debts - this is a way which has to be stopped.  "Greece has to turn in the other direction, there is no alternative to that," said Dr Issing.

Could Greece Be Expelled From The Eurozone?The European Commission has approved Greek government plans for getting on top of its budget deficit. A huge relief in Athens, no doubt. But the worries won't be dispelled just yet. The pressing concern is will Greece default on its debts? And if that seems likely will the rest of Europe, or the IMF come to the rescue?  But beyond that there are some even bigger questions about the Euro.  In particular, will Greece quit the euro or even be expelled from the eurozone? It is certainly not an imminent prospect.  But the question is being asked and was recently put to the European Central Bank President Jean-Claude Trichet. His reply? "I don't comment on absurd speculation," he said.  But it seems one of Mr Trichet's in-house lawyers has been engaging in speculation along precisely those lines, whether it's absurd or not.

Goldman: If Greece Is Handled Wrong, All Of Southern Europe Will Fall Like Dominos And 30% Of Euro GDP Will be at Risk - Of Europe's basket case financial economies (though we'll point out that the U.S. could soon fall into the basket case category as well), Greece still sticks out like a sore thumb.  Just look at this comparison of each PIIGS nations' twin deficits: (chart) Or CDS spreads: (chart) While it is pretty well known by now that Greece is in definite trouble, Europe's other teetering economies could easily fall like dominoes if a Greek crisis is mishandled according to Goldman.

FT / Opinion - The best course for Greece is to call in the Fund - The past few days have been dramatic for the Greek economy. Fuelled by doubts about the government’s capacity to put its fiscal house in order and by uncertainty about whether and how eurozone countries and European Union authorities would assist the country, Greek bond yields rose by more than a percentage point last week to a staggering 7.25 per cent.  If Greece was not in the eurozone it would have turned already to the International Monetary Fund and negotiated a stand-by agreement, getting financial assistance in exchange for credible fiscal adjustment measures, as Hungary, Latvia and Romania have done. Along with IMF aid, Greece would have been eligible for EU balance-of-payments assistance.  But being part of the eurozone has had two effects: first, Greece (and financial markets) had a false sense of immunity against debt problems. Second, it became ineligible for EU balance-of-payments assistance. For a long time, the first effect dominated: in spite of the “no bail-out” provision introduced in the Maastricht treaty, the risk of Greek default was barely priced by bond markets. Recently, rising concerns were masked as banks could pledge unlimited amounts of Greek bonds as collateral for loans at the European Central Bank.

Swiss Take Emergency Action To Devalue Franc To Keep Pace With Plunging Euro - Overnight the Swiss National Bank moved to maintain its currency's unofficial peg to the Euro by actively devaluing it on the open market. The impact of the devaluation was felt throughout the Asian markets overnight. FT Alphaville reports that the Swiss moves were "very aggressive" according to one trader who also described them as "unusual." This active devaluation comes on the heels of a steep decline in the Euro during yesterday's trading, as it is faced with a bevy of soverign debt threats, most notably Greece, Portugal, and Spain.

European markets plummet as the echoes of the ERM crisis intensify - Telegraph - The falls have been sparked as investors take fright at the budget difficulties faced by a variety of leading European nations. They fear in particular that Greece, Spain and Portugal will struggle to reduce their budget deficits as fast as they promise, putting them at risk of becoming trapped in a debt spiral. With rumours still circling of a possible bail-out for Greece, whose national debt is already over the critical 100pc of gross domestic product level, the European Central Bank's president Jean-Claude Trichet was forced to deny that he was planning an emergency meeting on the fringes of the G7 finance ministers' meeting in Canada this weekend.

IMF Stands Ready to Help Greece - The International Monetary Fund stands ready to help Greece, which is struggling to stabilize its public finances, but understands that other members of the euro-zone currency bloc want to resolve the matter among themselves, the fund’s managing director said. Greece recorded a budget deficit of nearly 13% of gross domestic product in 2009, far above the European Union’s 3%-of-GDP limit.“If I’m asked to step in, we’ll do it, but I completely understand the Europeans who want to try to resolve the problem among themselves,” Dominique Strauss-Kahn said in an interview with RTL radio, without elaborating.

Should Germany Bail Out Club Med Or Leave The Euro Altogether? - Germany faces a terrible dilemma. Either Europe's paymaster agrees to underwrite a Greek bail-out and drops its vehement opposition to a de facto EU economic government, treasury, and debt union, or the euro will start to unravel, and with it Germany's strategic investment in the post-war order. We can argue over whether Greece, Portugal, or Spain are at risk of being forced out of the euro. But there is another nagging question: whether events will cause Germany and its satellites to withdraw, bequeathing the legal carcass of EMU to the Club Med bloc. The spike in yields on 10-year Greek bonds to 400 basis points above German Bunds has been shockingly swift – a warning to Britain, too, that markets can suddenly strike any country that takes creditors for granted.

Eurozone Update - From the Financial Times: Spain and Portugal fight to calm investors Spanish and Portuguese debt and equity markets were hard hit by Greece-related doubts among investors, partly because Madrid and Lisbon ran up budget deficits to dampen the effects of the economic crisis and partly because of fears for eurozone cohesion. Reuters is quoting European Central Bank Governing Council member Ewald Nowotny as saying talk of a Eurozone breakup is "absurd". And Bloomberg is quoting Nowotny on the exchange rate: “There’s no worrying development. Foreign exchange rates naturally fluctuate.”And more from the NY Times: Debt Problems Chip Away at Fortress Europe And from the WaPo: Debt crisis unsettles European economy  Senior officials at the major rating agencies on Friday played down the risk of an immediate debt crisis, hitting banks and other institutions with broad exposure to the sovereign debt of the "PIGS" of Europe -- Portugal, Ireland, Greece and Spain.  And more from Paul Krugman on the problems of a single currency: The Spanish Tragedy...

UPDATE: Greece, Worse Than We Think? (CNBC Video) With finance ministers from around the world meeting this weekend to discuss the troubles plaguing Europe, what must you know? Saturday's activities will start with "a candid discussion on financial sector and the need for coordinated efforts by G7 nations to address the underlying causes of the crisis, " according to Canada’s finance minister. And the conversation couldn’t happen soon enough. Credit-default swaps on the debt of Greece as well as Spain and Portugal rose to record highs on Friday amid concerns that European governments will struggle to fund their deficits.

Bremmer and Roubini: Sovereign Risk Meets Sovereign Reality – WSJ - After months of shrugging off debt problems in Dubai, Greece and other smaller economies, markets yesterday seemed suddenly aware of the risks of sovereign default. The current crisis in Greece is only the worst example inside the EU. The PIGS—Portugal, Italy, Greece and Spain—all boast public debt above or headed for 100% of GDP. Though the PIGS acronym was apparently coined by British bankers, Britain, Ireland and Iceland also smell distinctly of bacon.  The problem isn't confined to Europe. Japan and the United States, by most reckonings the world's largest economies, also face pressing questions about their sovereign debt levels. To be sure, the U.S. and Japan can sustain such deficits more comfortably than small countries like Greece or Portugal where the government's ability to curb public-sector spending is rightly suspect. Yet even in economic giants, bad policy could cause investors to move out of debt they have long considered a safe haven. The moment is approaching when the artificial line separating the wealthy from emerging markets will lose much of its relevance.

France and Germany to unveil 10-year plan  Angela Merkel and Nicolas Sarkozy on Thursday (4 February) are set to unveil their own economic and political strategy document, the "Franco-German Agenda 2020," in an attempt to put some substance in the widely advertised but not always smoothly working partnership between the EU's two major economies.The plan, including 80 separate measures, ranges from economic and fiscal initiatives to common school books and simpler rules for Franco-German marriages. It is set to be published at the end of a joint ministerial council meeting of the two countries, chaired by both Mr Sarkozy and Ms Merkel in the Elysee palace.

Bank faces quantitative easing dilemma - By the time the Bank of England’s monetary policy committee meets on Thursday, it will have spent £200bn buying mostly government gilts in an effort to boost nominal demand.That effort, coupled with interest rates at a record low of 0.5 per cent, finally yielded results in the fourth quarter of 2009. The economy stopped contracting and expanded for the first time in 18 months, growing 0.1 per cent. That news sits awkwardly with inflation data for December showing prices rising year-on-year at 2.9 per cent, far higher than anyone had forecast, presenting the MPC with strong contradictory signals.The MPC has flagged meetings in the months in which it unveils its quarterly inflation reports as those in which key decisions on policy will be made, and February is one of these. There had been widespread expectations that, although rates will be held at record lows, the gilts purchase programme, known as quantitative easing, is likely to end with this week’s MPC meeting. But the weak gross domestic product data are giving economists pause.  “The February MPC meeting is likely to be a rules-changer,”  “The reason is that the importance of the output gap on disinflation is diminished.”

Bank of England’s time-out for quantitative easing plan - The Bank of England has decided against further quantitative easing (QE), the policy designed to stimulate growth in the UK economy. Under QE, the Bank has pumped new money into the economy by buying assets such as government bonds, as a way to boost lending by commercial banks. Last week, it revealed it had spent all of the £200bn it created for QE.  The Bank also kept interest rates on hold at a record low 0.5% for the 11th consecutive month.

Banks told to comply on bonuses or lose UK banking licences in shock FSA ultimatum - In an extraordinary ultimatum that has shocked some of the City's biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict. Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA's toughest yet response. One pay executive in a major bank told The Daily Telegraph: "The message came back that while the FSA agreed that it does not have jurisdiction over contractual law, it does have jurisdiction over issuing bank licences in London, and that we should go away and unwind the contracts."

Banks’ bad debts to rise for another year, says Moody’s – Bad debts at Britain's banks will not peak for another 12 months, according to credit-rating agency Moody's, in a warning that the UK's emergence from recession is a "false dawn for credit". Moody's senior vice-president said "banks remain fragile" and there are "reasons to remain concerned about bank asset quality and earnings in 2010 and 2011".  He added that lenders are likely to push "more companies into a wind-up" as they grow "less willing to continue forbearance measures such as extending repayment periods or relaxing covenant rules".

UK consumer debt reaches £56,000 per household - Figures from the National Audit Office revealed that personal debt in the UK has reached a massive £1.5 trillion as the downturn continues to impact upon consumer finances. This figure of £1.5 trillion includes credit cards, mortgages and personal loans and equates to a debt for each UK household of £56,000, 60% higher than the average household income and the highest figure ever

Why the Risk of Sovereign Debt Crisis? -  I have just read a column by Jeremy Warner in the Telegraph, in which he describes how he sees the progression of the economic crisis. It is an analysis with which most analysts, politicians and commentators would broadly agree. The problem is that it is wrong. The interesting thing about the analysis is that it is made in the context of the sovereign debt worries about the PIIGS (Portugal, Ireland, Italy, Greece Spain), and the broader worries about the AAA rated larger economies such as the US and UK. His view is that this is a new potentially damaging phase in the crisis. The reason that he is wrong is that his first phase is not actually the first phase at all. Something else entirely caused the current economic mess, and the risk of sovereign default naturally flows from the real first phase (it is a long post, but if you stick with it, it will be clear why the sovereign debt crises are inevitable).

European Exceptionalism: Almost every state of any significance in history has aspired to dominate its known world. In the last century, Britain, Germany, Russia and even France aspired to this role, and right now Russia and China are keen to try. Religiosity, militarism, inequality, and governments that do little for their subjects are the norm rather than the exception. Long hours of hard work have been the lot of humankind at least since the arrival of agriculture. The real exception to all of this is Europe. The largest economic aggregate in world history, it has enough military power to repel any invader, but is deeply uninterested in using this power to any more glorious end. It grows by a process of reluctant accretion, controlled by ever more onerous admission requirements. In all of history, it would be hard to find anything comparable in terms of pacifism, godlessness, equality, leisure for the masses or public provision of services

Success of the left in Europe, the right in US - Before welfare reform, US states with more African-Americans were significantly less generous to their welfare recipients. My colleague Erzo Luttmer found that people in the United States who live around poor people of a different race are more likely to oppose welfare spending. There is a long historical literature, written by scholars like C. Vann Woodward, documenting the role that racial divisions have played in blunting the appeal of populist redistributors in the United States and elsewhere. The other half of the difference between the United States and Europe can be explained by differences in political institutions. Richer countries - including the United States - that have have first-past-the-post electoral systems tend to have less redistribution. The welfare state is generally bigger in countries that make it easier for minority groups to elect leaders through proportional representation, as is the case in much of western Europe.

U.S., Britain to be sued by Iraq over depleted uranium bomb use - The Iraqi Ministry for Human Rights is filing a lawsuit against the United States and the United Kingdom over its use of depleted uranium bombs in the country. Wijdan Mikhail Salim, Iraq’s Human Rights Minister, announced that a lawsuit will be launched based on reports by the ministries of science and environment that accused the US and Britain of repeatedly using depleted uranium bombs during the first year of the war in Iraq, according to Press TV.  Iraqi military experts have concurred that the US and British military used nearly 2,000 tons of depleted uranium bombs to blast the country in the early days of the war. Thus, the amount of atomic radiation has caused the increase of a number of children being born with defects in the southern provinces of Iraq.  Doctors in the country say they are also having a hard time coping and dealing with the rise in the number of cancer cases. The ministry will seek remuneration and compensation from both states for the victims of these bombs.  It is expected that these numbers are going to increase as the radiation continues to persist in soil and water in the central and northern provinces in Iraq.

Britain Facing Food Crisis As World's Soil 'Vanishes In 60 Years' -  Fertile soil is being lost faster than it can be replenished and will eventually lead to the “topsoil bank” becoming empty, an Australian conference heard. Chronic soil mismanagement and over farming causing erosion, climate change and increasing populations were to blame for the dramatic global decline in suitable farming soil, scientists said.  An estimated 75 billion tonnes of soil is lost annually with more than 80 per cent of the world's farming land "moderately or severely eroded", the Carbon Farming conference heard.  A University of Sydney study, presented to the conference, found soil is being lost in China 57 times faster than it can be replaced through natural processes.  In Europe that figure is 17 times, in America 10 times while five times as much soil is being lost in Australia.

Is There Enough Food Out There For Nine Billion People? - Sometime around 2050, there are going to be nine billion people roaming this planet—two billion more than there are today. It's a safe bet that all those folks will want to eat. And that's... an incredibly daunting prospect. Right now, an estimated one billion people go hungry each day. So add two billion more people, a limited supply of arable land, plus the fact that rising incomes will boost demand for meat and dairy products, plus the fact that many key natural resources (fisheries, say) are already being overexploited… and it's hard to see the situation getting better. And that's before we get into the fact that the planet's heating up, which is expected to wreak havoc on agricultural yields. Still, not everyone's convinced that feeding nine billion people—and doing it in a sustainable fashion—is a totally impossible task. A new paper published this week in Science, written by Britain's chief scientific adviser John Beddington along with nine other experts, outlines a way this could actually be done. The catch? Doing so would require "radical" changes to the current global food system. The paper's a great synthesis of a wide range of different food issues, and I'll just pull out the main ideas…

Why Big Ag Won't Feed the World - A year ago I sat in a room at the Earth Institute at Columbia surrounded by executives from big food companies. One of them, I believe from Unilever, clicked to a slide that read "The solution to global hunger is to turn malnutrition into a market opportunity." The audience—global development practitioners and academics and other executives—nodded and dutifully wrote it down in their notebooks.  It was not your average sustainable food panel discussion. Reflecting back on it, three things jump out at me. The first was a false premise that is taken for fact. The false premise: Both Deutsche Bank and Monsanto made it clear that they are basing their business strategy on answering a simple question: How will we feed the world in 2050, when the population reaches over 9 billion and global warming puts massive strains on our resources? The answer for Deutsche Bank: increase yields by investing in industrial agriculture in the developing world, with an emphasis on technology; put lots of capital into rural land to shift subsistence and local market agricultures to commodity export agriculture. The answer for Monsanto: increase yields by decreasing resource dependence using genetically modified crops.

Davos 2010: Leaders Admit Drop in Trust - There was general relief that the financial system had been pulled back from the abyss glimpsed by many speakers at Davos a year ago. As the chairman of the British bank HSBC, Stephen K. Green, put it, “We’re in a better place than we were then” although “there has been a huge breakdown in trust.”Members of the financial services industry seemed ruefully aware of how far they had sunk in public regard. Commenting on whether private equity companies would support an Obama administration proposal on bank regulation, David M. Rubenstein, managing director of the buyout firm Carlyle Group, quipped, “Our position is unsure because we’re afraid if we come out in favor, it won’t pass.”

From Davos, predicting the next economic crisis - A panel of experts gathered in Davos, Switzerland, to debate where the next global crisis will come from. Their grim forecast: Some of the very measures that governments have taken -- or might take -- to fend off financial turmoil are only setting the stage for more trouble. Harvard economist Kenneth Rogoff kicked off the Wednesday discussion with a simple, depressing argument: The banking collapse is morphing into a long-term crisis of government debt. Instead of financial panic, we now face an "illusion of normalcy," with governments stepping in to guarantee everything. They've succeeded in fending off another Great Depression but at the cost of skyrocketing debt. And if history is any guide, he said, financial crises are often followed precisely by a wave of sovereign debt crises a few years later.

The Deadly Dozen - I have been thinking about the the forces distorting the global economy.  In the long run, the distortions don’t matter, because economies are bigger than governments, and eventually economies prevail over governments.  Here are my dozen problems in the global economy.

Financial turmoil strikes as G-7 officials gather - A bout of turmoil in global markets has provided sobering reminder to global financial leaders that the aftershocks from the worst recession in seven decades are far from over. Finance ministers and central bank presidents from the world's seven major industrial countries—the United States, Japan, Germany, France, Britain, Italy and Canada—were scheduled to arrive Friday for discussions in this small snow-swept Canadian town about 200 miles south of the Arctic Circle. The talks are expected to be dominated by the question of how much longer extraordinary government stimulus should be provided to lift economic growth.

G-7 Splits Hurt Investors as Ministers Seek Exit Plan (Bloomberg) -- Group of Seven finance ministers and central bankers meet on the edge of the map today, with their policies all over it. As they gather in Iqaluit, Canada, officials are seeking more unity on bank regulation after unilateral steps by the U.K. and U.S. The end of collaboration, forged during the financial crisis, may soon spread to monetary and fiscal policies as economies exit their recessions at different speeds. The unpredictability of policy and politics has JPMorgan Chase & Co. and Standard Chartered Bank warning investor confidence may suffer, potentially curtailing demand for riskier assets such as stocks.

Finance ministers promised a meal of seal at G7 summit in Iqaluit - Seal meat, an Inuit delicacy still legally hunted, and a traditional meat pie made with caribou are both on the menu for the Canadian gathering of the world's leading economic ministers.  In a decision described by one European official as "crazy", the Canadian government has chosen the city of Iqaluit, home to 7,000 in an icy landscape 200 miles south of the arctic circle, as the venue for a gathering of G7 finance ministers. With patchy phone coverage and February temperatures dipping to -20C, Iqaluit has only 300 hotel rooms, obliging some visiting officials to sleep in dormitories.

G-7 Report Pushes for More Exchange-Rate Flexibility Among Major Economies - Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings, according to a report prepared for a meeting of finance chiefs from the Group of Seven. “Countries with inflexible nominal exchange rates must permit greater flexibility in real exchange rates either through higher inflation or a nominal appreciation of their currency,” the document, drawn up by Canada’s Finance Ministry and obtained by Bloomberg News, said.  G-7 finance ministers and central bankers are meeting in Iqaluit, Canada, today as policy makers seek to avoid a widening of distortions such as the U.S. trade deficit and the Chinese current-account surplus, which economists blame for helping deepen the worst postwar worldwide recession.

G-7 Pledges to Keep Stimulus Even Amid Budget Stress  (Bloomberg) -- Group of Seven finance ministers pledged to maintain the flow of stimulus into their economies even as investors focus on mounting budget deficits. “The position for most countries is to support the economies now and get the budget deficit down as the economy recovers,” U.K. Chancellor of the Exchequer Alistair Darling, 56, said in an interview in Iqaluit, Canada last night as finance ministers and central bankers began meeting. “You will see a determination from the G-7 countries to do just that.” Governments are trying to spur expansion by spending at a time when investors are increasingly shunning countries with rising debt burdens.

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