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

Saturday, March 27, 2010

week ending Mar 27

Fed's Balance Sheet Rises to Record in Latest Week -- The U.S. Federal Reserve's balance sheet rose to a record high in the latest week, surpassing the previous week's record level, Fed data released on Thursday showed.  The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.296 trillion in the week ended March 24 from $2.290 trillion in the previous week. The Fed's holdings of mortgage-backed securities backed by U.S. housing finance agencies Fannie Mae and Freddie Mac rose to $1.074 trillion from $1.066 trillion a week earlier.  The central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was unchanged from a week ago at $167.49 billion.

A Look Inside the Fed’s Balance Sheet — 03/25/2010 Update - WSJ - Assets on the Fed’s balance sheet expanded again in the latest week, rising to $2.295 trillion from $2.290 trillion. With direct bank lending continuing to decline, the bulk of the increase came from the Fed’s purchases of long-term securities. More than $7 billion in new purchases of mortgage-backed securities were added to the balance sheet. The central bank is expected to end its acquisitions by the end of next week. The Fed has a little over $6 billion left to purchase this week to fulfill its $1.25 trillion allocation for MBS. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed.

Bernanke Hints at Timing and Pace of Exit Strategy -- The Federal Reserve chairman, Ben S. Bernanke, hinted on Thursday that the central bank might be open to selling part of its huge portfolio of mortgage-backed securities when the time comes to start tightening credit,  Sewell Chan of The New York Times reports from Washington. In testimony on Thursday before the House Financial Services Committee, Mr. Bernanke did not depart from the Fed’s stance that it intends to keep short-term interest rates near zero for “an extended period,” given that unemployment remains high and inflation expectations have been stable. But he did offered a glimmer into his thinking about the timing and pace of the Fed’s eventual withdrawal from its monetary policies of the last two years.

Federal Reserve's exit strategy - Ben Bernanke: text of testimony Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.

Larry Meyer’s House Testimony: Unwinding Emergency Programs & Accommodative Policy - text of testimony Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.

FACTBOX-Fed's exit strategy toolkit (Reuters) - Financial markets are betting the Federal Reserve may soon boost the discount rate it charges banks for emergency loans, after raising it by a quarter percentage point to 0.75 percent last month. The move would mark the latest in a series of small steps by the Fed to begin weaning the banking system off a heavy dose of emergency funding measures put in place to battle the worst financial crisis since the Great Depression. Below are tools the Fed could use when it decides the time has come to tighten policy.

 Donald Kohn, Fed Vice Chair: Homework Assignments for Monetary Policymakers (speech March 24, 2010) The events of the past few years have raised many questions for central bankers. Although prompt and innovative actions by the Federal Reserve and other central banks helped prevent a severe economic downturn from turning into something even worse, our experience also highlighted a number of areas we need to study further to see whether we can improve the conduct of monetary policy. I've titled my presentation "Homework Assignments" because I don't think the answers are clear, though I will venture some tentative thoughts. I have four assignments on my list; I could easily have more.

Monetary Policy Can Do More, by Joseph Gagnon, Peterson Institute for International Economics - A new study in which I participated has been posted on the website of the Federal Reserve Bank of New York. It documents how the Federal Reserve lowered long-term interest rates about 50 to 60 basis points last year through its purchases of $1.7 trillion of longer-term bonds. The study reinforces an argument I have previously made: that the Federal Reserve and other central banks can apply further monetary stimulus by lowering long-term borrowing costs even when short-term interest rates are stuck at zero. (For the wonkish, the effect appears to work though the term premium rather than through expectations of future short-term interest rates.)

Monetary policy: Learning from the downturn - The Economist AMONG some economics writers (including, at times, me) there is a real disappointment that the Ben Bernanke who stood in front of Milton Friedman and said of the central bank's response to the Great Depression: You're right, we did it. We're very sorry. But thanks to you, we won't do it again. Does not seem to be the same Ben Bernanke who ran America's monetary policy during this recession. Scott Sumner has argued that monetary policy was far too tight in 2008, and Mr Bernanke feels confident ending his unconventional interventions while unemployment is still near 10%, citing the threat of inflation. For some reason or another, the chairman hasn't been ready to act as he almost certainly would have recommended the Fed act while he was merely a highly regarded academic. Joe Gagnon explains what more might be done:

Target the Cause Not the Symptom - Olivier Blanchard of the IMF recently made the case for monetary policy targeting a 4% inflation target instead of the standard 2% target. His main argument for doing so is that it would make the zero bound on the policy interest rate less of an issue. There was a lot of push back on this argument in the blogosphere from folks like Ryan Avent, Mark Thoma, and David Altig who countered that (1) the zero bound isn't really a constraint for monetary policy, (2) higher inflation will lead to increased relative price distortions, and (3) there is mixed evidence and thus less certainty on the benefits of higher inflation. While all of these points are valid, I think there is a more fundamental problem with Blanchard's view: inflation targeting at any rate is merely responding to the symptom not the underlying causes--

The Fed’s exit and the discount rate - References to the discount rate were notably absent from the FOMC statement last week - but that doesn’t mean the committee did not discuss it. Last month, the Fed raised the discount rate from 0.5 per cent to 0.75 per cent, increasing the spread over its main interest rate, the Fed funds rate, to 50 basis points. Before the crisis, that spread stood at 100 basis points, and some are expecting the Fed will soon make a further move in that direction. Mr Bernanke could presumably use tomorrow’s appearance to prepare the ground for further increases in the discount rate - if not to explain a new hike itself.

Helping the Fed Solve the Problem of Excess Reserves... - Ben Bernanke and the brain trust at the Federal Reserve have been working overtime trying to solve the problem of excess reserves in the US banking system. "How," they wonder, "can we drain these reserves from the system without destabilizing the markets?" Their fears of destabilizing markets are, I believe, justified, which seems odd given that the Fed, in the past, has been able to drain reserves, although the quantity drained was admittedly much smaller. To the extent there is no way to drain these reserves without upsetting the markets the solution to the problem might not be one of action, but of thought. As Norman Vincent Peale said, "Change your thoughts and you change your world." Instead of trying to drain the excess reserves let's admit that they are not, in fact, "excess", but rather, "prudent", or even, as I suspect, "insufficient."The Fed could, of course, prove me wrong by draining the reserves deemed to be in excess without precipitating a crisis. I won't, however, be holding my breath.

Desperation Stage for the Bailout - Yesterday before Congress Ben Bernanke agreed that the Fed’s balance sheet is now over $2.3 trillion. He lamely said he dreams of its someday returning to its pre-Bailout level below $1 trillion.We see the contradiction. Today the Bailout looting is primarily laundered through Fannie and Freddie MBS buys, and the Fed has been the main repository of this toxic junk. Taxpayer money is thus directly stolen by the government and handed over to the banks, while the worthless paper received in return is meant to prop up the worthless paper already on the banks’ balance sheets. There’s no other “market” participant here, because there is no market. The market wants to deflate. Only the zombie banks and their government stooges are artificially resisting reality.

Just how long is ‘extended’? - Dennis Lockhart, president of the Atlanta Fed, threw a wrench into the conventional interpretation of the Fed speak phrase “extended period.”The common interpretation of “extended period” (as in, the Fed is expected to maintain exceptionally low rates for an “extended period”) is six months.But in a question and answer period today, Mr Lockhart rejected that interpretation, according to Reuters, instead saying that “extended period” means only “not imminent,” seeming to give the phrase a less meaning (and the Fed more flexibility) than its generally interpreted to have. Of course, this all depends on what the meaning of “imminent” is.

The "Central Banks' Central Bank" says Bailouts Putting Nations at Risk, as Confirmed By Higher Credit Default Swap Spreads - The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks. BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps.  Remember, in the U.S., the Fed is taking toxic assets as collateral for loans, and even a freedom of information lawsuit from Bloomberg has not forced Bernanke and the boys to reveal what kind of derivatives and other junk the Fed is mopping up.

Bullard Says Fed Must Start Planning Now for Future Asset Sales - (Bloomberg) -- The Federal Reserve must start making plans now for asset sales to meet its goal of returning a record $2.32 trillion balance sheet to its pre-crisis size and makeup, St. Louis Fed President James Bullard said.  “We want to someday get back to a pre-crisis balance sheet -- both the size of it and the fact that it would be an all- Treasuries balance sheet,” Bullard said today in a telephone interview. “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future.”  The Fed responded to the financial crisis both through temporary liquidity backstops, most of which have closed or run off, and direct purchases of up to $1.43 trillion in housing- related debt. While the central bank could neutralize the monetary effects of those purchases, without asset sales the balance sheet would remain large for years and keep the Fed as a stakeholder in U.S. housing markets.

Q&A: Philly Fed’s Plosser Open to Sales of Fed’s MBS - The Federal Reserve should be open to selling some of its portfolio of mortgage backed securities even before it starts raising interest rates, says Charles Plosser, president of the Federal Reserve Bank of Philadelphia. In an interview with the Wall Street Journal in Frankfurt at the tail end of a trip to Europe, Mr. Plosser said he’s comfortable with inflation in the near term, but thinks the Fed should reduce its balance sheet to prevent future price pressures. Mr. Plosser thinks the U.S. will soon be generating jobs, which may help spur an end to the Fed’s use of the “extended period” language in its policy statements.

Yellen Plays Down Inflation Risks From Deficit, Fed Purchases - “I don’t believe this is yet the time to be tightening monetary policy,” Federal Reserve Bank of San Francisco President Janet Yellen said Tuesday. The current policy of essentially zero-percent interest rates is “accommodative” and “is currently appropriate… because the economy is operating well below its potential and inflation is subdued.”Yellen’s comments came from the text of a speech prepared for delivery before an event by Town Hall Los Angeles.

The U.S. Economy and Emerging Risks - FRB Altanta - Lockhart - This afternoon, I will give you an update on the U.S. economy and comment on conditions in the global economy that affect this country. I'll also offer views on the interplay between fiscal uncertainty here and abroad and appropriate monetary policy to achieve both growth and control of inflation. The views that follow are mine alone and don't necessary reflect the views of my colleagues on the Federal Open Market Committee (FOMC).

Fed Ends Bank Exemption Aimed at Boosting Mortgage Liquidity…(Bloomberg) -- The Federal Reserve Board removed an exemption it had given to six banks at the start of the crisis in 2007 aimed at boosting liquidity in financing markets for securities backed by mortgage- and asset-backed securities.  The so-called 23-A exemptions, named after a section of the Federal Reserve Act that limits such trades to protect bank depositors, were granted days after the Fed cut the discount rate by half a percentage point on Aug. 17, 2007. Their removal, announced yesterday in Washington, is part of a broad wind-down of emergency liquidity backstops by the Fed as markets normalize.  The decision in 2007 underscores how Fed officials defined the mortgage-market disruptions that year as partly driven by liquidity constraints. In hindsight, some analysts say that diagnosis turned out to be wrong.

 The Equation of Exchange Still Makes Sense -- Over at Alphaville, Isabella Kaminska is fretting over what seems to be a breakdown in the equation of exchange:  So what’s wrong with Irving Fisher’s famous MV = PT equation? Why has throwing money at the problem not affected the relationship between money and income in the equation the way it supposedly should?Drawing on a research note by Standard Chartered, Isabella concludes the answer must be with velocity. Let me reassure Isabella that the equation of exchange still holds and that there is more to story than just velocity. As I showed in an earlier post, the way to see this is to first note that M, the money supply, is the product of the monetary base, B, times the money multiplier, m: M = Bm. Now substitute this into the equation of exchange to get the following (I use PY instead of PT ): BmV = PY

Understanding fractional reserve banking - I have never understood the concept of fractional reserve banking. Or, at least, while I could follow the argument easily enough, when I tried to write the corresponding accounting entries, I couldn’t. This was filed under `things I will figure out at some point’ until recently, when I read a post at the Big Picture pointing out that the M1 money multiplier is now less than one. Clearly there is something fishy about the whole ‘new reserves create even more new money’ story. What’s going on? The first point to notice that the money does not have ‘central bank money’ and ‘bank money’ printed on it (or attached to balances for that matter). So any story that relies on distinguishing between them must not be the whole truth.

Larry Meyer Discusses Monetary Policy on Bloomberg - (video)

Toward a More Competitive, Efficient, and Innovative Financial System” -  In a speech today, Ben Bernanke says the financial system is far from the "competitive ideal," and that the too-big-to-fail problem is the primary cause of the "insidious barriers to competition" and "competitive inequities" that currently exist in these markets. One thing I'd add is that there is reason to be concerned about the size of these firms over and above the too-big-to-fail problem, i.e. for traditional reasons involving the exercise of market power. Bernanke says that: our technologically sophisticated and globalized economy will still need large, complex, and internationally active financial firms to meet the needs of multinational firms, to facilitate international flows of goods and capital, and to take advantage of economies of scale and scope But I'd like to have more precise information about how large these firms need to be...

Bernanke: Keep Fed as Watchdog of Small US Banks - (AP) - Federal Reserve Chairman Ben Bernanke made a fresh pitch Saturday to retain oversight of small banks, contending that what the Fed learns from that role helps it assess the overall health of the entire U.S. financial system.  Bernanke, in a speech to the Independent Community Bankers of America's meeting in Orlando, Fla., argued against a Senate proposal that would scale back the Fed's banking duties.  Close connections with community banks give the Fed a better understanding of the nation's financial risks, including problems in commercial real-estate and small-business lending, according to Bernanke's prepared remarks.

Federal Reserve Shouldn't Have Power Stripped: Frank - Rep. Barney Frank told CNBC Friday that he does not support removing the Federal Reserve's authority, in part because it wasn't the only government agency to make the mistakes that led to the financial crisis."If the argument is nobody who didn't do a good job over the decade that we just passed can do any regulation, then we've got nobody left," Frank said in a live interview.  Frank added that the central bank's issues weren't as much of an institutional failure as they was the mistakes of former Federal Reserve Chairman Alan Greenspan, who refused to regulate subprime mortgages.

Our loquacious Fed leaders - Fed leaders - past and present - have chosen today to be awfully talkative. And they haven’t at all times been in agreement with each other, either. So here are the highlights of today’s Fed speak. Alan Greenspan, Former Fed chief, on the Bubble… James Bullard, St. Louis Fed President, on economists’ ability to forecast… Charles Plosser, Philadelphia Fed President, on “extended period” language and MBS sales… Daniel K. Tarullo, Fed governor, on testing to the tail… I leave you with: Kevin Warsh, Fed governor, with an ode to central bank independence

Yin/Yang at the Federal Reserve - Several months ago I supported Ben Bernanke when his re-nomination as Chairman of the Fed came under fire. While others such as Simon Johnson called for his removal, I wrote that I instead wanted to see more focus on systemic incentives. Put a bit differently, I believed we were being more reactive in our approach to the financial crisis than pragmatic about how thousands of mostly well-meaning citizens -- both public and private -- could have made such collective decisions as led to collapse.This remains a key issue in need of attention, and it requires deep thinking about whether assumptions used to pass legislation over the past 40 years still hold. Interestingly, a few days ago I was surprised to come across a letter by Senator Sherrod Brown indirectly addressing part of this through a question I share about the Fed's dual mandate (hat tip Yves Smith)

Economics Focus: It Wasn't Us -  the Economist - Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis. The crisis, Greenspan argues, stemmed from a “classic euphoric bubble” whose roots lay in the sharp global decline in nominal and real long-term interest rates in the early part of the 2000s, which fuelled an unsustainable boom in house prices. Thanks to this euphoria, banks misread the risks embedded in complex new financial instruments. Mr Greenspan reckons the best remedy is to improve the system’s capacity to absorb losses by raising banks’ capital and liquidity ratios and increasing collateral requirements for traded financial products.

Explaining the Impact of Ultra-Low Rates to Greenspan - As noted last night, Alan Greenspan has blamed the crisis on a lack of regulation rather than ultra-low rates. (You can find his Brookings institute paper The Crisis here). While the lack of regulatory enforcement — ironically, mostly notably by the Greenspan Fed — was no doubt a large part of the problem, his exoneration of ultra low rates is belied by history. I detail all of this elsewhere; but perhaps the impact of low rates would be more easily understandable to the Maestro if we put it into numerical bullet point form

New Monetarist Economics: Models - - pdf -The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.

If The Money Supply Is Exploding Why Are We Not Seeing Rampant Inflation? The U.S. money supply has been expanding at an absolutely unprecedented rate.  So why are we not experiencing rampant inflation?  Why is the U.S. dollar not falling through the floor?  Well, the truth is that all of this new money has gotten into the U.S. financial system but it is not getting into the hands of U.S. businesses and consumers.  In fact, even though the money supply is exploding, U.S. banks have dramatically decreased lending.  This has brought us to a very bizarre financial situation as a nation. What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009.  In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942.

Do we need a bubble? - There is something economists have known since 1958 that we don't talk about much, except in private, like in economics journals that nobody else reads. It's a bit too weird. There are two sorts of world. In a normal world, the equilibrium rate of interest is above the growth rate of the economy. In a weird world, the equilibrium rate of interest is below the growth rate of the economy. What's weird about a weird world is that it needs a bubble, a Ponzi scheme, a chain-letter swindle, for the economy to work well. Maybe the world we live in is a weird world. And it needs a bubble to work well. And the economy keeps trying to create a bubble. And when it succeeds the economy does work well. But bubbles are unstable and eventually burst. Then it works badly again. Until the next bubble.

The Tipping Point at Zero - The US Economy is bifurcated, with price inflation advancing on the cost side while price deflation harms on the asset side, to produce a nasty storm that is unlikely to abate. When high pressure zones clash with low pressure zones, hurricanes and tornadoes occur. Calling the resulting near 0% or low 2% price inflation on a net basis a good sign completely ignores the forces pulling the national economy apart. Economists prefer to view the landscape in aggregate, but they miss the picture composed of two important parts enduring very different forces. The financial sector has grotesquely grown, to an extreme. Global financial assets have more than tripled since 1980, relative to GDP. In just this past decade, the volume of Credit Swap Contracts (asset backed bond insurance) increased five-fold in a span of four years. The base value of equity derivatives (stock index contracts) increased almost five-fold in the same four years. Leverage has also grown. Tremendous flaws exist in the prevailing economic counsel that misguides the nation, into one phase of disaster after another. Crisis is indeed the norm.

Views I toy with but do not (yet?) hold - Financial panics and economic crises are nearly inevitable, for at least two reasons.  The first is that policymakers are ill-informed and have poor incentives.  The second is that bank managers, periodically, like to take risk and we are unwilling to shoot or otherwise severely punish the failed ones.  Instituitions which transform liquidity can, sooner or later, find a way to take such precarious risks, no matter what the regulators do (it still may be worth trying regulatory restraint, however).  There's simply not enough downside risk in a wealthy, humane society.

Why Should the S&P 500 Care if India Tightens? Hint: “Tighten” Is the Magic Word - As I showed earlier this week, foreign banks and hedge funds are financing the US deficit at an $800 billion rate, on top of $300 billion in financing from US banks and a dollop from the Fed. The whole massive $1.6 trillion US deficit depends on the carry trade. It’s surreal, scary, and freaky, but them’s the numbers. In effect the world has turned into the Japan of the 1990s, when the central bank pumped out liquidity at 0% which the banks reinvested in government securities at 50 to 100 bps. There is no reason that this sort of thing cannot go on for quite a while. Japan’s been doing it for almost 20 years. And for 20 years the sure-thing trade has been to short Japanese government debt, and for 20 years that trade has gone wrong. Of course, this sort of arrangement ensures that the zombie financial system eats the rest of the economy, so that the Wall Street zombies turn Main Street into zombies.

The Most Important Chart of this Century - The latest U.S. Treasury Z1 Flow of Funds report was released on March 11, 2010, bringing the data current through the end of 2009. What follows is the most important chart of your lifetime. It relegates almost all modern economists and economic theory to the dustbin of history. Any economic theory, formula, or relationship that does not consider this non-linear relationship of DEBT and phase transition is destined to fail. It explains the "jobless" recoveries of the past and how each recent economic cycle produces higher money figures, yet lower employment. It explains why we are seeing debt driven events that circle the globe. It explains the psychological uneasiness that underpins this point in history, the elephant in the room that nobody sees or can describe. This is a very simple chart. It takes the change in GDP and divides it by the change in Debt.  What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

Visualizing The National Debt – Infographic

Martin Armstrong Writes From Solitary Confinement: "We Are Entering Phase II Of The Debt Crisis" - Philosopher Martin Armstrong, already in jail, has apparently been thrown in solitary confinement for distributing manifestos.   Below, via Zero Hedge, is what purports to be Martin's latest handwritten solution to our economic crisis, apparently smuggled out of prison. Basically, the solution is: 1)Convert world debts to equity 2) Eliminate all taxes except local sales tax If this document is genuine, though, the more noteworthy fact is that it was somehow scribbled in longhand and smuggled out of solitary confinement: Martin Armstrong From the Hole 3910

I.M.F. Warns Wealthiest Nations About Their Debt - The global economic crisis has left “deep scars” in the fiscal balances of the world’s advanced economies, which should begin to rein in spending next year as the recovery continues, the No.2 official at the International Monetary Fund said Sunday in Beijing.  For the United States, “a higher public savings rate will be required to ensure long-term fiscal sustainability,” Mr. Lipsky said.  The United States and other industrialized countries, as well as some developing countries, have been putting pressure on the I.M.F. to criticize China for its large-scale intervention in currency markets to hold down the value of the renminbi against the dollar. But Mr. Lipsky refrained from chastising China in his speech.

 Obama Pays More Than Buffett as U.S. Risks AAA Rating (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.  Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.  The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

What explains a Moody’s change? - The media have been bombarding the public with scare stories about the country's "record" budget deficits. Most of these deficit stories feature a potpourri of wrong or misleading information. One item that is especially effective at raising fear levels in the public is the warnings from Moody's, the huge bond-rating agency, that it may downgrade its rating of US government debt. US government debt has always held Moody's highest AAA rating. If Moody's were to lower the rating on government debt it would be a huge embarrassment to the country; essentially an indictment of the government's poor financial practices. It would also have the practical effect of raising the government's interest burden as a downgrade could lead to higher interest rates on US government debt. Before we rush to cut our parents' social security and Medicare it would be worth asking a couple of questions. First, people should know a bit more about Moody's and the other major bond-rating agencies.

Greenspan Calls Treasury Yields ‘Canary in the Mine’ (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television. “I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006.

Treasury Will Soon Have to Pay More to Finance Growing Debt - The US government could soon have to reward investors more handsomely for helping to finance its debt. Treasury auctions this week served notice that the market is beginning to reach a saturation point as hundreds of billions flow in every couple of weeks. An auction of five-year notes—a traditionally attractive denomination and not much of a test for investor resolve—flopped and sent yields sharply higher. "People yesterday were talking about the bond vigilantes," Matt Zeman of LaSalle Futures Group said in an interview with CNBC. "If you're going to continue to auction off record amounts of debt—you're going to spend, spend, spend—hey, we're going to make you pay for it."

Treasury Yields Rise; What's Cooking? - Rates may be rising because:

  • Of added supply concerns from Obamacare;
  • Sovereign credit quality;
  • Heightened fears over a looming trade spat with China (if the Treasury accuses China of being a ‘currency manipulator’ next month);
  • Hedging related to the most recent huge wave of corporate bond issuance;
  • Swap rates have also become unhinged (they traded at an unprecedented 8bp discount to 10-year Treasuries yesterday) ….

… but yields are NOT rising from inflation (in fact deflation signs are re-appearing again). Hence, real yields are on the rise ... not typically what an equity bull would like to see with real growth now softening. Rising real rates as real growth slows means it is time to get more defensive, not more cyclical (especially with small-cap stocks up nearly 10% year-to-date, doubling the performance of the large-caps. This will not be sustained as the global and domestic economies cool off through the balance of the year.)

More About Bond Vigilantes - Krugman - Yesterday I criticized the WSJ for writing as if a fairly small rise in long-term interest rates spelled doom, doom I tell you, for deficit spending. The rate rise that the WSJ is making so much of is an increase in 10-year rates from 3.67 percent on 3/22 (and 3.61 percent at the beginning of the month) to 3.91 percent on 3/25.  Now compare July 2003: the 10-year rate rose from 3.56 percent at the beginning of the month to 4.49 percent at the end. Correct me if I’m wrong, but I don’t remember a lot of stories calling that spike in rates a sign of imminent US bankruptcy. Mostly it was taken as a sign of increased optimism about the economy.

Yes, People See Through US Treasury AAA Farce - Burger King is not the only American concern that likes to sell Whoppers. Recently, we've asked "Where's the Beef?" with regard to the American Dream and the melting pot and have found both notions quite wanting to say the least. Returning to the realm of sovereign borrowing, let's turn our attention to that chestnut: triple-A "risk free" Treasuries. It seems the infinite appetite America #1-style cheerleaders ascribe to them as evidence of the Enduring Greatness of America is losing its lustre. To start with, the most recent TIC data release indicates that Chinese holdings of this stuff has fallen for a third straight month, unbeknownst to many of us as the FT summarizes; full summary here of the $33.4 billion decline in TIC flows for January:

Neoliberal Deficit Hysteria Strikes Again - In recent days, articles in Der Speigel, the NYTimes, and the AP have all highlighted Neoliberal commentary warning of the dangers of growing budget deficits in the wealthiest nations—specifically in the US and the UK. ADVICE TO PRESIDENT OBAMA AND PRIME MINISTER BROWN: Tell the IMF, the European Commission, and the Ratings Agencies to Take a Hike

The US default-risk meme --There’s a constant drumbeat of stories about how the price of credit protection on the USA says little if anything about America’s creditworthiness: Dan Gross had one just last week. I’ve written much the same story myself, but at least I tried to explain what was actually going on in that market; what I’m still waiting for is a journalist who can find someone who’s actually buying or selling these things, so that we can find out from the horse’s mouth why they’re doing so. What’s new is stories looking at yields on Treasury notes and extrapolating default probabilities from those.

In Defense of Deficits - The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. (Back in his salad days, former Senator Alan Simpson was a regular schemer to cut Social Security.) The Obama spending freeze is another symbolic sacrifice to the deficit gods. Most observers believe neither will amount to much, and one can hope that they are right. But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

Some facts about the federal deficit - The federal deficit -- as a portion of the overall economy -- was much larger in the early 1940s than it is today. Back then, a period of high, post-war deficits was followed by decades of unprecedented economic growth. And critics of today's deficit often fail to mention that Bush-era tax cuts to the wealthy are a major contributing factor. In the video Deficits and the Recovery, policy analyst Ethan Pollack offers some historic context on the federal deficit and explains why "if we really do want to reduce the deficit, we first need to create jobs." Watch Deficits and the Recovery

Will the Presidents Commission use CBO or SSA Numbers? - Well some things are coming clear about the Presidents Deficit Commission. One its Chairmen have made it clear that its business starts and stops with Entitlements, the concerns some Republicans had that this would be Obama's way of boosting taxes on the General Fund side or slashing military spending have been shown to be misplaced. Moreover it is clear from the NYT article cited by Jack yesterday plus many other indications that Social Security is front and center, after all the GOP has used the prospect of cuts to Medicare as a centerpiece to their opposition to HCR. So the ground in being prepared for a grand debate on Social Security. But the question I want to throw out today is this: Who will be the scorekeeper? And the answer to that has huge implications.

Mankiw: A Fiscal Train Wreck - A couple days ago, Bloomberg reported: The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.In my view, a default on U.S. government debt is less likely than another scenario, suggested by Paul Krugman: How will the train wreck play itself out? prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won't happen right away....But unless we slide into Japanese-style deflation, there are much higher interest rates in our future. Paul wrote that in 2003, and we know now that his prediction of higher inflation did not come to pass. But budget deficits are much larger today, so maybe his logic will apply this time around.  My own guess is that the United States will likely raise taxes substantially, and taxes as a percent of GDP will reach levels never seen in U.S. history.  If the political process is stymied as our leaders debate the relative merits of tax hikes versus spending cuts, bond investors may get nervous, and we could witness either the Krugman inflation scenario or the much less likely default scenario.

States Are the Canary In the Fiscal Coal Mine… - Last week, Moody's released guidance stating that the US and UK Aaa bond ratings are at risk. Debt levels are rising rapidly to levels where those ratings cannot be maintained, and avoiding that outcome will require "fiscal adjustments" -- read, spending cuts and/or tax increases -- that are likely to "test social cohesion."  For a clue about how federal officials might make these fiscal adjustments, we can look to state governments. While Congress and the President have the luxury of postponing fiscal realignment for years or decades, states have limited leeway to run budget deficits. When a gap opens between revenues and planned expenditures -- as has happened in 48 of 50 states over the last two years -- officials must take action to raise taxes and/or cut spending.

Tax Increases are Inevitable: What Types of Taxes will Change the Most? - Federal, state, and local budgets will all come under considerable pressure in coming years. . It won’t be possible to solve the budget problems through cuts in spending alone; at some point government at all levels will need to find additional sources of revenue. Thus, taxes will increase. It won’t happen right away, since increasing taxes now could hurt the recovery from the recession and the economy will need to be on firmer footing before taxes can be increased. But there will come a time in the not too distant future when both the rates people pay and the tax base to which those rates apply will be increased. The only question is how the additional revenue will be generated. Here are some thoughts:

why taxes are important - When I started this blog several years ago, I wrote in my inaugural post that I thought it was important for people to be informed about taxes--how they work, who pays them, and why we need a tax system to support our governmental programs.  I thought it might be worth repeating parts of that, given all the misinformation abounding now about taxes.  For just a tip-of-the-iceberg indicator of the misinformation and lack of understanding that many Americans have about taxes, see Mark Thoma's Economist's View posting on Bruce Bartlett's analysis of the tea partiers' views about taxation: The Misinformed Tea Party Movement. The following is from my inaugural post:

Of the Fair Tax and the Underground Economy -  I truly lament that I am getting to the point where I have real trouble understanding folk-economics. Unlike many economists I explain economics to a non-captive, non-economist audience regularly. Yet, still the ability to understand some of their thinking is slipping. Here is an example. Ken Hoagland writes to the National Review to complain about an article that criticized the Flat Tax. Now, it just seems inescapable to me that if the Flat Tax sweeps these folks into the tax base by taxing their consumption, it must likewise sweep part of our consumption out of the tax base when we buy their services. That is, the drug dealer now pays tax at the grocery store but I now avoid taxes when I buy drugs.1 I am not sure how you think about this issue without that occurring to you, but apparently Mr. Hoagland has.

The Case for a Consumption Tax on Big Spenders - NYTimes - LAST year’s stimulus spending is running out, yet unemployment stays stubbornly near 10 percent. And as state and local governments keep cutting their budgets, the economy desperately needs an additional spending boost. Concerned about growing federal deficits, however, many in Congress appear reluctant to act. But an effective remedy is at hand. A simple revision to current tax policy could spur an immediate burst of nongovernment spending that would help restore full employment without adding to the deficit. And this same revision would simultaneously create a relatively painless new revenue stream that would help balance future budgets.  What I have in mind is a surtax on extremely high levels of consumption. It would be enacted right away, but not take effect until unemployment again fell below 6 percent.

Is Inflation Coming Back? - Most students of the economy are focusing on the Fed's planned wind down of monetary support,  and that awful swamp known as the housing market. But increasingly I'm seeing smart souls question something that's been off the table for a few years: inflation. Talking about inflation now is a bit like discussing fur fashions in August, but as the economy gets further from the recession it's a natural thing to begin watching. Also, the new focus on inflation is not so much a concern about the runaway price increases, the kind that would occur if the Fed chose to monetize the debt, but more of an expectation for low-grade inflation, the kind that props up corporate profits, adds a bit of oomph to retiree income from CDs and money funds, and generally puts an end to all that banter about disinflation.

Inflation-linked issuance to hit record $200bn  -A record $200bn issuance of new inflation-linked bonds from the US, Europe and the UK is forecast this year as governments seek to finance ballooning budget deficits. Investors have become increasingly worried about the dangers of rising prices in the longer term, boosting demand for inflation-linked bonds. This follows the actions of central banks, which have pumped vast amounts of money into the financial system in the past year. Investor appetite has also been boosted because so-called linkers are seen as a safe and stable asset class, attractive to investors who remain worried about the economic outlook.The market has performed well in the past year. US Treasury inflation protected securities (Tips), the best-performing index-linked bonds last year, gave a total return of more than 10 per cent, according to Bank of America Merrill Lynch indices.

Why the U.S. can't inflate its way out of debt - It's dawning on people that getting a handle on burgeoning U.S. debt will be a long and hard process.So if lawmakers can't agree on a credible plan, some have suggested that the country could just "inflate its way" out of its fiscal ditch. The idea: Pursue policies that boost prices and wages and erode the value of the currency.The United States would owe the same amount of actual dollars to its creditors -- but the debt becomes easier to pay off because the dollar becomes less valuable.That's hardly a good plan, say a bevy of debt experts and economists."Many countries have tried this and they've all failed," said Mark Zandi, chief economist at Moody's

Inflating Away the Debt, Take II - Michael Kinsley and Paul Krugman, two of the leading public policy minds of our generation, have been debating whether politicians might be tempted to inflate away the country’s yawning debt. Other pundits have weighed in, too. There’s just one major caveat with the premise of this debate: Inflating away America’s debt probably isn’t an option. Not because it’s too painful for politicians to implement, but because it wouldn’t work. Too much of the country’s debt is indexed to inflation, either directly or indirectly (as with future Medicare liabilities). Even if government printing presses went gangbusters, Berkeley’s Alan Auerbach calculates, 90 percent of the country’s debt problem would survive. Find more on this here.

An Inflation Debate - An interesting debate between Michael Kinsley and Paul Krugman.  Read in this order:

  1. Kinsley's orginal article
  2. Krugman's critique
  3. Kinsley's response
  4. Krugman again
  5. Kinsley again

The Kins(l)ey Report (on Inflation) Kinsley's initial article contains statements like: "am I crazy?", "Every economist I admire, from Paul Krugman and Larry Summers on down, is convinced that inflation will remain low for as long as we can predict",  and "My fear is not the result of economic analysis. It’s more from the realm of psychology."  These are the words of a humble student searching for wisdom to quell his fears.  The wise Professor Krugman begins his rebuttal with: "Mike Kinsley has an odd piece in the Atlantic in which he confesses himself terrified about future inflation, even though there’s no hint of that problem in the real world."  You can almost see the sneering Professor holding up the student's paper in front of the class as you read the words (at least I could). Using the tried and true nasty Professor trick of tossing about a bit of relevant jargon and a counter-example, Krugman expects Kinsley to slink back into his seat.  To his credit, Kinsley doesn't flinch....

Building a Wall Around Inflation - Megan McArdle - There's a current spat between various left-members of the blog world, like Paul Krugman and Ryan Avent, and the Atlantic's own Mike Kinsley.  Kinsley is worried that the government will start inflating away its debt, to which Krugman and Avent say, essentially, "Pshaw, it won't be so bad!"  I don't believe that the US government will try to inflate the value of our debt away.  Having the world's reserve currency is a valuable asset for a nation's government, and besides, the government has a lot of financing needs.  Inflating away the value of your prior debt only works if you don't need to keep borrowing more money--if you do, the higher interest rates quickly wipe out the value of the inflation. But I am not convinced that higher inflation is a good idea, even though it has lately become fashionable....

A Closer Look At Inflation - Inflation is a very important issue because high inflation would force the Fed's hand with monetary policy (forcing them to raise rates) whereas low inflation allows the Fed to keep interest rates low for an extended period of time. First, let's start with a definition of inflation. This is from my econ text in college -- the 12th edition of Paul Samuelson's Economics Text on page 226: Inflation occurs when the general level of prices and costs is rising....By deflation we mean that prices and costs are generally falling. A little inflation is healthy because it indicates there is sufficient demand or cost push to increase prices....

Bernanke Wants to End Bank Reserve Requirements Completely: Does it Matter? What Chaos will Result? – Mish - Many people have written over the past few days asking me to comment on the very last sentence in Chairman Ben Bernanke's speech on the Federal Reserve's Exit Strategy before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system." Does This Matter? This is going to shock every hyperinflationist in town (and perhaps every inflationist and deflationist too) but amazingly, elimination of bank reserve requirement is essentially meaningless.

Rent capture through financial innovation - VoxEU - How does economic theory need to adjust in light of the global financial crisis? This column presents a new insight on how innovation leads to rent capture, which in turn is a sign of a potential crisis. This stems from asymmetric information in the financial sector. To avoid a repeat of the crisis, policymakers need to increase transparency.

And Now, On to Financial Reform . . . - As I noted 6 months ago, the White House emphasis on Health Care over Finance was a significant tactical error. I would imagine with their weekend health care victory, the White House might push for finance reform. I expect they will see some significant traction.I do not know what the political fall out from being for or against health care will be. But I can tell you that it will be much harder to oppose re-regulating banking. While the banks have succeeded in buying Congress, I think their attempts to stop a major overhaul of financial regulation will be far more difficult. Political opponents will paint anti-reformers as pro-banks and anti-family. Ideally, what should that overhaul look like? I can identify at least six areas that need total overhaul:

Volcker And Bernanke: So Close And Yet So Far - In case you were wondering, Paul Volcker is still pressing hard for the Senate (and Congress, at the end of the day) to adopt some version of both “Volcker Rules”.  It’s an uphill struggle – the proposed ban on proprietary trading (i.e., excessive risk-taking by government-backed banks) is holding on by its fingernails in the Dodd bill and the prospective cap on bank size is completely missing.  But Mr. Volcker does not give up so easily – expect a firm yet polite diplomatic offensive from his side (although the extent of White House support remains unclear), including some hallmark tough public statements.  It’s all or nothing now for both Volcker and the rest of us.

Kansas City Fed's Hoenig Endorses Volcker, Suggests Large Banks $210 Billion Undercapitalized; Blasts "Too Big To Fail" - Mish - Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City has some interesting things to say today about Paul Volcker, risk taking, and especially about bank capitalization. Please consider The Financial Foundation for Main Street. (pdf-excerpts follow here)

Fed’s Hoenig Backs More Diverse Financial System - Read a new table of Fedspeak Highlights here. The U.S. economy would be better off with a system in which there are fewer big financial firms that were at the root of the recent crisis, a top Federal Reserve official signaled on Wednesday.  In a speech at the U.S. Chamber of Commerce, Federal Reserve Bank of Kansas City President Thomas Hoenig endorsed a proposal that could force large banks to get rid of divisions that make risky bets with their capital. The growth of big financial companies to a level were they pose a threat to the overall economy has distorted the financial system, the Fed veteran added. Hoenig, who votes on the Fed’s policy-setting committee, said financial holding companies should be banned from proprietary trading and from investing or sponsoring hedge funds. Trading and private equity investment should be housed in “separately capitalized subsidiaries subject to strict leverage and concentration limitations,” he said.

Top Fed Official Says Megabanks Need To Shrink Or Crises Will Keep Occurring - The U.S. financial system is tilted in favor of the biggest banks, compromising the "very foundation of the economic system" and putting the nation at risk of continued crises, a top Federal Reserve official said Wednesday. Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City and the current longest-serving regional Fed chief, has been an outspoken advocate on behalf of community and regional banks. Megabanks, he's long argued, benefit from the kinds of implicit and explicit government guarantees that hurt their smaller competitors, distorting the market and crippling Main Street. "If we stray from our core principles of fairness or ignore the rule of law, we distort the playing field and inevitably cultivate a crisis," . "When the markets are no longer competitive, firms become a monopoly or an oligopoly and it matters more who you know than what you know. Then, the economy loses its ability to innovate and succeed. When the market perceives an unfair advantage of some over others, the very foundation of the economic system is compromised.

The Administration Starts to Fight On Banking, But For What? - Simon Johnson - Speaking to the American Enterprise Institute, Treasury Secretary Tim Geithner had some good lines yesterday, “The magnitude of the financial shock [in fall 2008] was in some ways greater than that which caused the Great Depression.  The damage has been catastrophic, causing more damage to the livelihoods and economic security of Americans and, in particular, the middle class, than any financial crisis in three generations.” Like Ben Bernanke, Mr. Geithner also finally grasps at least the broad contours of the doom loop,  "Each major financial shock forced policy actions mostly by the Fed to lower interest rates and to provide liquidity to contain the resulting damage." The apparent success of those actions in limiting the depth and duration of recessions led to greater confidence and greater risk taking.  But then he falters....

The Brown Amendment: Do the Volcker Rules Live? - The administration may be distancing itself from the Volcker Rules, but the same is not true of all Senators.  (Why did President Obama go to the trouble of endorsing Mr. Volcker’s approach to limiting risk and size in the banking system, if his key implementers – led by Treasury Secretary Tim Geithner – were going to back down so quickly?)Among a number of sensible amendments under development in the Senate, Senator Sherrod Brown (D., OH) proposes the following language: (update: text now attached) “LIMIT ON LIABILITIES FOR BANK HOLDING COMPANIES AND FINANCIAL COMPANIES.—No bank holding company may possess non-deposit liabilities exceeding 3 percent of the annual gross domestic product of the United States.”And a few paragraphs later, an essential point is made clear: this includes derivatives,

Rob Johnson: Dodd bill “doesn’t do the job” -This week, the Obama administration turns its attention (finally!) to financial reform. Is the current proposal the Biggest Overhaul of Wall Street since the Great Depression? Or just a Big Nothing? Our very own Rob Johnson, Director of the Roosevelt Institute’s Global Finance Project and Senior Fellow, agrees with Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, that the Dodd bill “doesn’t do the job.” Johnson is critical of the decision to house the consumer protection agency within the Fed, calling the missions of regulating banks and protecting consumers “incompatible.” The combination of Too Big to Fail institutions and unregulated derivatives are still the “San Andreas Fault Line” of our economy, he warns. Johnson points out that the derivatives market is 300 trillion dollars - or roughly 20 x the size of the American economy. And it puts the entire system at risk. (see story in Harper’s here). Watch the video at Democracy Now.

Putting Stronger Limits into the Dodd Bill - Picture if you had a woodshop filled with oily rags, no ventilation, no exits, a woodshop that was always catching on fire. One thing to do is to get a fire extinguisher. That is the resolution authority of the financial reform debate. Another thing to do is to establish new codes and rules to make it less likely that there will be a fire. Current regulators and industry leaders will tell us that the financial capital markets are up to The Swanson Code, the “I’ll know trouble when I see it” system; however we want there to be clear rules regulators won’t mess up to reduce the likelihood that there will be fires. Ryan Avent and Kevin Drum both look at the Dodd Bill and are left a little worried about financial reform. A few points.

"Deposit Insurance" for the Shadow Banking System - - Here are some more thoughts inspired by Gary Gorton's work and discussions at the Economics Blogger Forum. During the Great Depression of the 1930s there were runs on the banking system.  During the Great Recession of the late 2000s something similar happened. There was a run on the shadow banking system in the repurchase agreement (repo) market by institutional investors and nonfinancial firms. Repos represent a liability for the shadow banking system just as deposits do for the traditional banking system. According to Gorton, the repo market is around $12 trillion in size (compared to about $10 trillion in assets for the traditional U.S. banking system) so this was a major bank run. The emergence of the shadow banking system, therefore, not only has implications for the correct measure of the money supply, but also for what will be the new moral hazard and government regulation of the financial system.

Boehner Tells Bankers to Stand Up to Those Senate Punks - The Dodd bill has its good points, but contains some bizarre twists. The ruling that the Fed would only supervise banks of over 50 billion seems particularly bizarre. Mr. Hoenig of the Kansas City Fed objected to this today. As well he might, since his district contains NO banks worth more than $50 billions, and he would be presumably out of a job. This is classic Democrat blundering. Spend many months negotiating and seeking partnership with people who would just as soon place their hands in a meat grinder as make any reasonable compromise, and then toss off some bizarre legislation seemingly out of nowhere, after having made a big deal out of wishing to be 'bipartisan.' The Democratic party seems leaderless.

Bair Says Dodd Bill May Allow ‘Backdoor Bailouts’ – (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said Senator Christopher Dodd’s plan to overhaul Wall Street rules could allow “backdoor bailouts” through proposed Federal Reserve lending authority. The FDIC has “serious concerns” about sections of the Senate Banking Committee chairman’s draft bill that would let the Fed provide liquidity to the market in times of extreme economic stress, Bair said today at a community bankers’ conference in Orlando, Florida.  “There are provisions that would suggest that the Federal Reserve Board could support an open institution if it’s involved in payment processing or clearing facilities,” Bair said today in remarks to the Independent Community Bankers’ national convention. “The definition is quite broad.”

How Does Dodd's Bank Resolution Mechanism Work? -  So Mike Konczal has been writing some important posts on resolution authority, and some e-mail conversation led me to realize that we're still confused about the details of the resolution mechanism. I reached out to some Senate aides who are familiar with the legislation and asked them run me through the details. Wonky! To start: the legislation tries to make it difficult for regulators to prop up banks; for instance, the Federal Reserve can't lend to individual institutions. So if a bank runs into trouble and regulators decide that normal bankruptcy is too risky for the system as a whole, they give three bankruptcy judges 24 hours to determine if the bank is insolvent. If it is insolvent, the treasury secretary appoints the FDIC to be receiver.

Why financial regulation must also rebuild trust -VoxEU - Public distrust of bankers and financial markets has risen dramatically with the financial crisis. This column argues that this loss of trust in the financial system played a critical role in the collapse of economic activity that followed. To undo the damage, financial regulation needs to focus on restoring that trust.

Will Proposed Financial Regulatory Overhaul Actually Reform Wall Street? (video) With the main healthcare reform bill signed into law, Democrats say congressional efforts to reform Wall Street and the nation’s financial regulatory system will soon top the Obama administration’s agenda. A measure put forward by Sen. Christopher Dodd is being described as the biggest overhaul of financial rules since the 1930s, but critics have faulted the proposal for giving additional power to the Federal Reserve while gutting the proposed Consumer Financial Protection Agency and housing it inside the Fed

FinReg Reading - Krugman - On the whole, I don’t like the term FinReg for financial reform — it sounds too DC-ish, not catching the huge importance of the issue. But it is what all the insiders are calling it. So, what you should read as it becomes the Next Big Thing: David Leonhardt has a very good overview of the issues; Mike Konczal has a very useful tip sheet for understanding the legislation actually on the table. As I read Konczal’s brief, his problem with the Dodd bill is similar to my concern that it’s too Hellenistic and not sufficiently Roman: it sets up a system that will work fine if we have first-rate regulators, but doesn’t seem robust to the mediocrity that is all too likely to prevail, sooner or later. More hard rules, please. That said, no system will work once President Palin gets to appoint the Secretary of the Treasury and the chairman of the Fed.

Current State of Financial Reform, March 26 - Mike Konczal - Given that the major health care debate, which has been taking up a lot of oxygen in the room, is over, everyone is now turning their attention to financial reform. So I’ve decided to write a little 10-page brief that does its best to catch everyone up to what has been going on with the financial reform debate. In particular, it tries to argue how we can judge a successful reform effort from a weak one along the ideas of consumer financial protection, derivatives reform, resolution authority, and a 21st Century Glass-Steagall. Some people have asked for something like “Rortybomb 101: Financial Reform”, and this is what you get. Here’s the web page and the pdf. There’s also 4 graphics at the end for those of you who prefer to not read it, but want to be quickly updated.

Wall St. War to Senate Floor - In a brisk, no-frills 20-minute session, Sen. Chris Dodd's version of a sprawling financial reform bill was passed by the Senate banking committee—13 Democrats to 10 Republicans—and moves on to what will surely be a legislative war on the Senate floor. Today's mark-up session by the banking committee was meant to be a debate among committee members over nearly 400 amendments to Dodd's original bill (PDF), released last week. But lawmakers instead approved a manager's amendment to the bill, which makes a number of technical and rhetorical tweaks to Dodd's bill, then voted on the bill entirely, knowing that a Democratic majority would pass it and set up the real debate in the Senate.

White House Looking Towards End Game on Financial Rules? - Just two days after Senate Banking Committee Chairman Christopher Dodd (D., Conn.) advanced a financial regulation overhaul bill through his panel along party lines, Mr. Dodd will huddle with President Obama and House Financial Services Committee Chairman Barney Frank (D., Mass.) in the White House’s Oval Office.Mr. Obama has regularly met with lawmakers on the financial rules, but this meeting comes as the White House is pushing much more aggressively to get the rules moved through Congress. A Senate vote could come before the Memorial Day recess.

Heading Off the Next Financial Crisis - NYTimes (5 pp feature) To reduce the odds of a future crisis, the Obama plan would take three basic steps. First, regulators would receive more authority to monitor everything from mortgages to complex securities. This is meant to keep future financial time bombs, like the no-documentation loans and collateralized debt obligations of the past decade, from becoming rife. Second — and most important — financial firms would be forced to reduce the debt they take on and to hold more capital in reserve. This is the equivalent of requiring home buyers to make larger down payments: more capital will give firms a bigger cushion when investments start to go bad. Finally, if that cushion proves insufficient, the government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank.

An Interview About Interchange Fees with The Credit Card Con - It’s been a while since I’ve written about interchange fees. The Credit Card Con, a project centered around credit card swipe fees, has a new report out (pdf). I hear a lot about how the interchange fee is determined by market forces. When it comes to the market for pizza, I have a fairly good understanding of what should happen if a pizzeria raises its price. But what happens if interchange fees go up? Does this two-sided market look like the market for pizza? I decided to interview Bob Johnson, the President of Consumers for Competitive Choice who is overseeing the credit card con project, and ask him about this, as well as ask him directly the best arguments I’ve heard in favor of the interchange rate.

Derailing Help for Consumers - NYTimes - Why should there be any significant opposition to the creation of an independent agency with strong powers of enforcement to protect consumers from exploitation by banks, mortgage companies, auto dealers and other purveyors of credit? The dragons lurking in the fine print of some credit agreements are enough to give you heart failure. Payday loans, for example, typically carry annual interest rates in the vicinity of 400 percent. Or look at the lineup of fees, penalties and interest rates on your credit cards and overdraft privileges. Don’t even start on mortgage abuses. That would take too long, and it’s too depressing. We’re talking here about exploitation run wild. The Mob, which used to have a stranglehold on loan-sharking, can only look on with envy.

Military and the CFPA - Tim Fernholz writes about the Department of Defense working towards building a Consumer Financial Protection Agency with Treasury (my bold): Will Republicans oppose protections that will help keep military families from being the victims of predatory lending now that a vote against consumer protection is a vote against mission readiness? It’s even more amusing than that. Last fall, I wrote about the Pentagon’s efforts to study and legislate the issues of consumer financial protection over at the Atlantic Business Channel. It was an interesting topic to research, since predatory lending is such a major problem for the military. There’s a problem where a lot of the study of consumer financial interactions and financial literacy initiatives are funded by credit card companies, and so it’s particularly useful to read the Pentagon’s no-nonsense study and recommendations.

Behind Consumer Agency Idea, a Fiery Advocate - Ask Elizabeth Warren, scourge of Wall Street bankers, how they treat consumers, and her no-nonsense bob will shake with indignation. She will talk about morality, about fairness, about what she calls their “let them eat cake” attitude towards taxpayers. If she is riled enough, she might even spit out the Warren version of an expletive.  “Dang gummit, somebody has got to stand up on behalf of middle-class families!” she exclaimed in a recent interview in her office here. Among all the dramatis personae of post-financial crisis Washington, there is no one remotely like Ms. Warren, 60, who has divided the town between those who admire her and those who roll their eyes at her.

Hard Pressed, Senator Dodd Gives Ground - Senator Chris Dodd has good political antennae.  He knows that his financial reform bill will come under severe pressure because it has a weak heart – the provisions that deal with “too big to fail” are simply “too weak to make any sense.” Stung by the hard-hitting critique of Senator Ted Kaufman earlier on Friday and unsure exactly where an increasingly combative White House is heading on the broader strategy vis-à-vis banks, Mr. Dodd took to the Senate floor yesterday afternoon – actually immediately after Senator Kaufman – in an attempt to sustain the momentum behind his approach to “reform”.  Note the prominent and rather defensive mention of Delaware, Senator Kaufman’s state, in what Senator Dodd said.

Chris Dodd's wife and derivatives trading - In the middle of a blog item about credit default swaps, Felix Salmon of Reuters drops the following nugget  about Sen. Chris Dodd and the CME Group, which owns the Chicago Mercantile Exchange and the New York Mercantile Exchange. "Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website  or in its SEC filings, despite the fact that he’s surely a big part of the reason why she has the position.)" Why is this notable?  Because Dodd, as the chairman of the Senate Banking Committee, is leading a charge to pass legislation from which the CME Group would likely benefit greatly.

A Simple Explanation of How The Use of Derivatives Created The Great Recession - In comments to a post by fellow Angry Bear Robert Waldman, reader Cantab writes: Nobody here has come up with a believable story on how derivatives hurt the economy or were the cause of the recession. All we really get is a claim that they happened together and the further assertion that derivates [sic] caused the recession rather than the more likely story that derivatives were the victim of the recession. I'm pretty sure Cantab is wrong but I don't have the time to find the various posts that described the issue. But I can summarize:

Big Finance's Derivatives Battle - Gary Gensler, a top government regulator of tricky financial products like swaps and futures, singled out today big Wall Street firms and their lobbyists in Washington as a leading force specifically trying to kill new reforms of derivatives, the opaque deals that helped crash the global economy. Gensler told reporters at the US Chamber of Commerce today that Big Finance was "undercutting" efforts to regulate and shed light on derivatives, which help utilities and other companies hedge risk but are also used as gambling chips. " Gensler, the chairman of the Commodity Futures Trading Commission, appeared at the Chamber to deliver a speech advocating for far more rigorous and reaching oversight of the $600 trillion, "over-the-counter" derivatives market.  Unlike the speaker who preceded Gensler, Sen. Blanche Lincoln (D-Ark.), who vaguely hinted at the need to exempt certain users from derivatives regulation, Gensler took a strong stance by calling for complete regulation of the shadowy derivatives market.

On Clearinghouses - Now that the financial reform debate is heating up again, I want to caution people against viewing a wider clearing requirement for OTC derivatives as necessarily better. Clearinghouses are not a panacea by any means, and pushing instruments that aren't mature enough or sufficiently liquid for clearing onto clearinghouses would be a very bad idea. In order to properly manage counterparty risk, a clearinghouse needs to be able to accurately price the instruments it clears. Clearinghouses manage counterparty exposure by requiring counterparties to post initial margin at the beginning of the trade, and — crucially — daily variation margin. As explained by Robert Bliss and Robert Steigerwald in a Chicago Fed paper:

Ambac regulator threads CDS needle - To protect municipal bond insurance policies the Wisconsin insurance watchdog is forcing haircuts on holders of credit default swap contracts written by Ambac Financial, the troubled U.S. bond insurer. It’s an echo of what might have been done with American International Group in different circumstances. Ambac got into trouble selling CDS protection on what proved to be toxic mortgage-backed bonds. As those bonds have gone bad, the protection buyers have been demanding payments — and receiving them in full, to the tune of $120 million a month. The problem for the regulator was that this cash outflow was on track to drain Ambac dry, leaving other policy-holders with no protection. Since Ambac also insures lots of municipal bonds, the fallout could have been felt across the United States.

Wisconsin Regulator Moves on Ambac Subprime Contracts - Ambac Assurance Corp. (AAC) is handing over its subprime mortgage-related contracts to its state a regulator.The contracts could total about $35 billion and have triggered market speculation that the payment could potentially lead to the collapse of the second-largest bond insurer, which would trigger losses for municipal noteholders. The Wisconsin Office of the Commissioner of Insurance ordered the handover to “protect policyholders, including investors in thousands of state and local municipal bond issues,” according to a separate statement.   It will suspend payments totaling about $120 million for March to holders of these contracts. These policy holders include banks, pension funds, hedge funds and other insurance companies. As long as the regulator is overseeing these contracts, the monthly payments beyond March are also suspended.

Ambac May Seek Bankruptcy After Regulators Step In - The Ambac Financial Group warned again on Thursday that it might seek bankruptcy protection after state regulators took control of some of the bond insurer’s most troubled assets, The Associated Press reports. The Wisconsin insurance commissioner, Sean Dilweg,  on Wednesday ordered the company’s main operating subsidiary, Ambac Assurance, which is based in that state, to set up a segregated account for policies related to risky structured finance transactions. Those include the credit-default swaps and residential mortgage-backed securities held by major Wall Street banks that helped to accelerate the national financial crisis.

Commentary: Enabling Wall Street's secret gambling problem - Last year alone, Wall Street spent more than $200 million to block efforts to rein in their recklessness.  And the investment is paying off. The financial reform bills moving through Congress are full of holes for greedy bankers to exploit. Just look at the Senate Democrats' new bill. One place you can see the Wall Street lobbyists' handiwork is in all the exemptions for derivatives, the complicated financial instruments blamed for accelerating the crisis. Analysts say the bill would exempt up to 40 percent of derivatives from being traded on open exchanges. This means that high flyers could still do their riskiest gambling in secret - far from the eyes of any regulator cops.

New York Fed Warehousing Junk Loans On Its Books:  Examiner’s Report - As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas. The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.  Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Repo 105’s antecedents: Ken Lewis - I agree with Felix Salmon that the former Lehman staffers who defend Repo 105 are psychopaths – certifiably insane.  They state (as if this justifies it) that … The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, are “yappers who don’t know anything.” For those that don’t know Repo 105 was a sale and repurchase agreement by which Lehman parked about 50 billion in assets (presumably assets they did not want to discuss) overnight via a repo transaction so they would not appear on the balance sheet.  But unfortunately the Lehman executives do have one point.  Repo 105 type balance sheet faking was “an old trick” and well known to anyone who cared to read balance sheets (very) carefully.*

The Lehman Whistleblower’s Letter – Deal Journal – WSJ - In May 2008, former Lehman Senior Vice President Matthew Lee wrote a letter to senior management warning that the New York securities firm may have been masking the true risks on its balance sheet. A month later, he had been ousted. His warning was revealed for the first time in a report by a U.S. bankruptcy-court examiner and showed that Lehman’s auditors knew of potential accounting irregularities and allegedly failed to raise the issue with Lehman’s board. Here is the letter that placed the little-known Lehman executive at the center of allegations that Lehman manipulated its numbers and misled investors.

Hoisted from Comments: The Lehman Whistleblower Letter - Yves Smith - I had not pointed to the letter written by Matthew Lee, the so-called Lehman whistle blower, because it seemed to add little to the main story: insider alerts senior management to a Big Problem (or in Lehman’s case, that its chicanery/incompetence was so pervasive as to be impossible for anyone within hailing distance of it to miss). The fact that there was someone who knew things did not smell right, alerted the top brass, and was ignored with prejudice (as in fired, demoted, or marginalized) is typical and disheartening. But reader Michael C, who was involved in Sarbanes-Oxley compliance for a major bank, argues that the letter is significant, despite its failure to mention Repo 105 by name.  This was the meat of Michael Lee’s May 2008 letter

Paid to Fail -- In a report just filed with the United States court that is overseeing the bankruptcy of Lehman Brothers, a court-appointed examiner described how Lehman’s executives made deliberate decisions to pursue an aggressive investment strategy, take on greater risks, and substantially increase leverage. Were these decisions the result of hubris and errors in judgment or the product of flawed incentives?  In our study, “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman Brothers 2000-2008,” we examine the standard narrative and find it to be incorrect. We piece together the cash flows derived by the firms’ top five executives using data from Securities and Exchange Commission filings. We find that, notwithstanding the 2008 collapse of the firms, the bottom lines of those executives for the period 2000-2008 were positive and substantial.

Lehman’s Auditor Goes Blind From the Cooking - Ernst & Young LLP, the Big Four auditor that failed to keep Lehman Brothers from misleading investors about its financial condition, still can’t get its facts straight.  Last week, after Lehman’s bankruptcy examiner accused E&Y of malpractice in a report on the investment bank’s collapse, the accounting firm issued a brief statement standing by its audit work and offering up its best defense. “After an exhaustive investigation, the examiner made no findings in his report that Lehman’s assets or liabilities were improperly valued or accounted for incorrectly in Lehman’s November 30, 2007, financial statements,” E&Y said, referring to the last fiscal year for which it performed a full-fledged audit of Lehman’s books.  Part of that statement is a half-truth. The other part stretches the truth past the breaking point.

An Ernst & Young Response: Dear Audit Committee Member…Ernst & Young is circulating a point-by-point response to the Lehman Bankruptcy Examiner’s Report to Audit Committee Members. In the letter, EY attempts to defend their position in more detail. I guess they know where their bread is buttered: With the guys who hire and fire them in the Fortune 500. I will be commenting on this in more detail in a future post. I obtained this note via an accounting professors listserv.  Dennis Beresford sent it along to the list along with his comments, reprinted with his permission:

Bank of America Says Its Lehman-Style Bogus Balance Sheet Manipulation Is A-Okay - As John Hempton pointed out last week, Lehman wasn't the only bank that engaged in bogus end-of-quarter balance sheet manipulation to trick investors into thinking it was less leveraged than it was. Turns out, Bank of America (BAC) did it, too. Hempton compared Bank of America's "average quarterly assets" and "end of quarter assets" and found that, in each quarter, billions of dollars of assets conveniently disappeared briefly at the end of the quarter, only to return again at the start of the next one. Thus, Bank of America interrupted its wild gambling for a few days at the end of the quarter, presented a sober snapshot to its investors, and then went right back to gambling again.

Bank of America: Our Balance Sheet Management Is ‘Routine and Appropriate' -  I’d put in several calls and e-mails with Bank of America both Monday and today asking for a response to the allegations. The bank’s rep said he wanted to be thoughtful about the response, and this afternoon, sent me this carefully crafted statement:“Efforts to manage the size of our balance sheet are routine and appropriate, and we believe our actions are consistent with all applicable accounting and legal requirements.” My only thought is that this is very similar to what Lehman’s auditors, Ernst & Young, said in response to criticism about their review of Lehman’s accounting, right after Repo 105 hit the news earlier this month. Here’s what the auditor’s spokesman, Charles Perkins, said at the time [2]:“Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles, and we remain of that view.”

Lehman Chief Warns Of More Big Bank Failures - Lehman Head Bryan Marsal has warned that Wall Street had not learned its lesson in the credit crisis and that another megabank bankruptcy is likely. Marsal made the remarks while in Berlin for a bankruptcy conference in an interview with German business daily Handelsblatt, which I have translated below. A link to the full German text is provided at the bottom of this post. His comments serve as a reminder that the megabanks are still too large and complex, and, therefore pose a risk to the entire global banking system.

Why is Goldman willing to lose so much on deposits? - Writing my Hotel California column earlier this week, I came across the following interesting tidbit in Goldman’s 10-K (page 206): The amount deposited by the firm’s depository institution subsidiaries held at the Federal Reserve Bank was approximately $27.43 billion and $94 million as of December 2009 and November 2008, respectively, which exceeded required reserve amounts by $25.86 billion and $6 million as of December 2009 and November 2008, respectively. This seems a good indicator of the lack of lending opportunities in the economy. But I’m curious: Goldman is probably losing a lot of money parking customer deposits on reserve at the Fed. Why do it?

SEC workers investigated for porn-surfing - In the case of the regional supervisor, the inspector general found that during a 17-day period, he received about 1,880 "access denials," wherein the computer system blocked his attempts to view Web sites that were deemed pornographic.  The supervisor later told an IG investigator that despite the blocked attempts, he still had been looking at pornography at work up to twice a day and it had "probably occurred for a long time."  SEC records also provide insight into how some employees were able to bypass the Internet filters inside the SEC that were supposed to keep pornography off government computers.  One worker said the computer system blocked him from visiting some Web sites but that he was able to look up blogs containing pornographic images.  "I would click on it and it went to a blog and it wasn't blocked," he told investigators. "And that's how it started."

JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid Rigging…(Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.  A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24. The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”

Investment banks, munis and derivatives, redux - Wall Street must be wondering whether the returns on selling derivatives to municipalities (and say, Greece) are really worth the headache. In the latest development in the saga of investment banks v munis in re derivatives, a judge ruled on Thursday that a dozen financial institutions will have to defend themselves against allegations of bid rigging and price fixing in the market for municipal derivatives.(The original action, brought in August 2009, included more than 40 corporate defendants, court filings show. Goldman Sachs, for those wondering, was not named in the case.) The defendants read like a who’s who of the Street: Wells Fargo, JP Morgan Chase and Morgan Stanley are among those that will face a pre-trial conference on April 30. Even Bear Stearns — RIP — made an appearance. Representing Europe: UBS, NatWest, SocGen and Natixis.

The Bust-Out: What the Mafia can teach us about corporate fraud. The bust-out is what happens when the mob moves in to take control of a business that's heavily indebted to a loan shark. As Black tells it, why the heck a mobster would ever want to take over a bar or liquor store in this way is incomprehensible to a classical economist. Why take over the business when you're already getting every cent of profit and more in your weekly vig? Except that in the real world, things don't work that way, explains Black, a professor at the University of Missouri-Kansas City. The reason to take over the business is to loot it 1,000 ways to Sunday, from buying vast amounts of liquor on credit to, ultimately, torching the place for the insurance money. Prosecutors and mobsters know this. Economists who think the mob operates like a bank that happens to charge high interest rates miss it.

Debunking Michael Lewis’ Subprime Short Hagiography - Yves Smith - Lewis’ tale is neat, plausible to a mass market audience fed a steady diet of subprime markets stupidity and greed, and incomplete in critical ways that render his account fundamentally misleading. It’s almost too bad the book’s so readable, because a lot of people will mistake readability for accuracy, and it’s a pity that Lewis, being a brand name author, has been given a free pass by big-name media like 60 Minutes (old people) and The Daily Show (young people) to sell to an audience of tens of millions a version of the financial crisis that just won’t stand up – not if we’re really trying to get to the heart of the matter, rather than simply wishing to be entertained by breezy well-told stories that provide a bit of easy-to-digest instruction without challenging conventional wisdom.

Cultural change is key to bank reform -- Maybe it is the denizens of Wall Street and the City – or their attitudes – that need to change. In the 1980s, investment banks, encouraged by regulators, began a transformation from stodgy, tradition-bound institutions to restless, relentless seekers of profit. Some of that change was good but, ultimately, it gave us a few powerful, global companies bound by no clear standards of behaviour, where appalling conflicts of interest were accepted and pay practices encouraged the most greedy, short-sighted thinking imaginable. The culture was toxic.

German Central Bank Admits That Credit Is Created Out Of Thin Air - Preface: Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves.  But very few people – with the exception of those in the banking industry and financial experts – know where credit really comes from. Many ZH readers are in the banking industry or financial experts, so this may seem obvious. Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air.

Those Wall Street Gamblers Might Not Be Bad After All - NYTimes - In ancient Rome, speculators were sentries who looked out for signs of trouble. By the 17th century, “speculate” meant “to consider, examine, or reflect upon with close attention,” seemingly an activity to be encouraged.  Speculators aren’t getting much encouragement these days. They’ve drawn the enmity of the left and the right, and been blamed for everything from high gas prices and the collapse of Lehman Brothers to the debt crisis that’s hit Greece.  Perhaps its time for a reconsideration: This month marks 10 years since the technology bubble peaked, and among the few who warned of the coming implosion were speculators who had targeted tech stocks.  “If there are heroes in the financial system, these are the heroes,” said Frank Partnoy, a professor of law and finance at the University of San Diego. “They’re the people who bet against Enron, who bet against Lehman and warned it was insolvent.”

Wall Street Despised in Poll Showing Majority Want Regulation (Bloomberg) -- Americans are leery about creating a new federal agency to make consumer-protection rules for mortgages and credit cards and would prefer to enhance the existing powers of banking regulators. Most people interviewed in the Bloomberg National Poll say they don’t like Wall Street, banks or insurance companies and favor letting the government punish bankers who helped cause the worst financial crisis since the Great Depression. Almost seven out of 10 people surveyed support using current bank regulators for consumer protection, backing positions held by the financial industry and Republicans over President Barack Obama’s proposal to establish an independent agency.

Who Needs Wall Street? - NYTimes - Because some people have savings and others need capital, some unifying force must bring the two together. Royalty once taxed its citizens and chartered corporations. Wall Street privatized this function, aggregating the savings of disparate individuals through the sale of stocks and bonds. Industry thus gained access to capital; what’s more, public markets performed a miracle of equivalence.  Since the street stood at the intersection of capital and savings — or, if you will, of insiders and Main Street — the potential for conflict was rife.

How to reward taxpayers who bailed out Wall Street -- The time has come to include taxpayers in the rewards of a recovery that would never have happened without their money.  Billions of dollars in bonuses paid recently to financial-sector executives are a direct result of the TARP bailout and generous Federal Reserve policies constructed during the crisis. These firms have had toxic assets removed from their balance sheets and have benefited from interest rates near zero as the Federal Reserve opened its "discount window." A July 2009 report to Congress indicated that the guarantee of support from the Fed was in the neighborhood of $6.8 trillion. In short, the top-tier managers in these companies had enormous backup from taxpayers.

JP Morgan Chase to get yet another taxpayer bailout for their thievery - Most people are under the false assumption that the taxpayer bailout of Wall Street banks began and ended with TARP. They couldn't be more wrong.   The Wall Street bank bailout began with Federal Reserve subsidies in December 2007, and has continued in one form or another right up to now.   J.P. Morgan Chase & Co. is nearing a deal that would allow it to benefit from a tax refund of as much as $1.4 billion, becoming the latest company to tap a little-noticed plank in an economic stimulus bill.   That law let companies apply losses from 2008 or 2009 against taxes paid in the previous five years, instead of the previous two years. 

Fed Issues Gift-Card Rules - The U.S. Federal Reserve announced final rules Tuesday pertaining to how and when fees can be assessed to inactive gift cards. The rules also require that gift-card issuers provide consumers with the exact terms and conditions, particularly regarding card-expiration dates.“Concerns have been raised regarding the amount of fees associated with gift cards, the expiration dates of gift cards, and the adequacy of disclosures,” the Fed said. “Consumers who do not use the value of the card within a short period of time may be surprised to find that the card has expired or that dormancy or service fees have reduced the value of the card.” Under the final rules, three conditions must be met if gift-card issuers want to charge inactivity or service fees. Fees can be applied only if the consumer hasn’t used the card within a one-year period, if there’s no more than one fee charged a month, and if consumers are made aware of such fees.

Canadian Banking Is Not the Answer - Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation.  The chief executives of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto.  This makes it easy to monitor banks.  They also have smart-sounding requirements:  If you take out a loan worth over 80 percent of a home’s value, then you must take out mortgage insurance.  The banks were required to keep at least 7 percent Tier One capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited. But is it really true that such constraints necessarily make banks safer, even in Canada? Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged — and therefore more risky — than well-run American commercial banks.

U.S. Proposal for Bailout Tax on Banks Gains Support in Europe - NYTimes - President Obama’s proposal for a direct tax on banks to cover the cost of the financial bailout is gaining support in Europe. Germany is set to move ahead with its own levy, and Britain is expected to endorse a similar measure ahead of the Group of 20 meeting next month.  The developments leave France as one of the few major Western economies yet to endorse the idea of such a tax. But while Mr. Obama and the German government press ahead, analysts and officials cautioned that a globally coordinated approach would be preferable to deter banks from shifting operations to countries without the tax, potentially offsetting its effectiveness.

EU bank tax - Ths EU is likely to join Sweden in imposing a tax on banks to fund any future bailouts that may be needed.  The EU is also slated to push the idea at the June G-20 summit in Canada. Will the US get on board or do the bank lobbyists still control what Congress does?  A tax on banks calculated in terms of their liabilities is a sensible response to the crisis, in which excess leverage was a major factor.  Such a tax should be viewed as a reasonable charge to banks for the implicit guarantee--at least until we take action to ensure that the "guarantee" of taxpayer bailouts is not necessary and will not be invoked to save the big banks.  Banks that enjoy the implicit guarantee also enjoy lower costs of funds--i.e., they can borrow more cheaply than other banks.  There's a clear moral hazard here--enjoying the guarantee from being too big to fail means that it is more likely that the big bank will put itself in the position of overleverage and perhaps needing another bailout.  So the tax charge makes sense, as do other mechanisms to limit leverage.

Foreign banks ready for US invasion -  The long-anticipated wave of mergers in the banking sector could soon be upon us. The buyers, however, may not be from the United States. Canada's Toronto Dominion Bank (TD) and Royal Bank of Canada (RY) have both in recent months publicly expressed their interest in expanding their U.S. footprint sometime soon. And investors were abuzz earlier this month following a Wall Street Journal report that British banking giant Barclays (BCS), which acquired the North American assets of Lehman Brothers, may soon try to complement its already big presence on Wall Street with the acquisition of a retail bank.

Metrics - A Banking Battleground - Graphic - NYTimes

The weak-small-bank meme - I’m not convinced about a the “too puny to succeed” meme, as evinced today by Binya Appelbaum and David Cho...For one thing, no one is expressing that $205 million as a delinquency rate. Any set of loans will have some kind of delinquency rate; if the rate is lower than the rate of interest on the loans, the lender is in OK shape. The fact is that Treasury is going to make a profit on its TARP payments to banks, and that the biggest risks to the TARP fund come not from small banks but from large ones — not only South Financial and Citizens Republic, but also even bigger banks like GMAC. And the biggest bailout of all was that of mortgage giants Fannie Mae and Freddie Mac; so far there’s no sure indication that they will be able to repay the government’s funds.

Feinberg Reduces Cash Pay by One-Third at Five U.S. Companies (Bloomberg) -- American International Group Inc. and four other companies overseen by Obama administration paymaster Kenneth Feinberg were told to cut cash compensation to top executives by 33 percent from last year.  Total pay in 2010, including cash, will fall by about 15 percent for 119 executives at AIG, General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial Corp., Feinberg said at a press briefing in Washington yesterday. Still, his rulings showed 69 of them will get $1 million or more, including long-term restricted stock payable only in future years.

Pay czar widens review of executive pay at banks - The government's point man on executive compensation is broadening his review of how Goldman Sachs, Morgan Stanley and hundreds of other banks compensated top executives during the height of the financial crisis in 2008, and he may seek to have bonuses and other compensation repaid, according to government officials familiar with the review.  Kenneth R. Feinberg, the special master for compensation, is slated to send a letter on Tuesday, asking for details about compensation to top executives, to 419 banks that received assistance as part of the Treasury Department's financial rescue program.

Pressure Grows To Overhaul Fannie Mae, Freddie Mac - It is the forgotten bailout: $125.9 billion spent by taxpayers so far to rescue housing giants Fannie Mae and Freddie Mac -- nearly twice what's been pumped into American International Group Inc. -- and with no end in sight.But in a hearing Tuesday, lawmakers will start pressing the Obama administration for an exit strategy as the government faces an unlimited commitment for the next three years to the housing finance agencies, which are almost single-handedly keeping the fragile real estate market afloat."It's clear that Fannie and Freddie, as they currently exist, should be put out of existence, which means the important question is what combination of entities public and private will replace them," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Fannie, Freddie messy government tie tough to cut -  (Reuters) – With the housing sector still on the ropes, the Obama administration on Tuesday will begin to sketch out plans for the market's two biggest financing pillars, Fannie Mae and Freddie Mac.After hitting its worse slump since the Great Depression, the housing market is being very slowly resuscitated by the government with massive dollops of cash and the help of Fannie Mae and Freddie Mac.The government has relied on the companies, which combined guarantee nearly half of all outstanding mortgages, to mop up bad loans in a bid to help struggling homeowners. Along the way, the government was forced to take control of the two firms, at a cost to taxpayers that has reached $125 billion so far.

Treasury’s Geithner Urges End to Fannie, Freddie ‘Ambiguity’ (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner called for an end to the “ambiguity” over the government’s involvement in Fannie Mae and Freddie Mac and endorsed a need to redesign federal guarantees in housing finance. “I have not seen an ideal model yet to replace this current system,” Geithner said in testimony to the House Financial Services Committee today. “But we’re going to have to take a careful look at how to design a better form of guarantee and support that doesn’t have the same risks.”  Geithner said the Treasury Department and the Department of Housing and Urban Development will issue a request for comment by April 15 on how to overhaul the U.S. housing-finance system and its regulatory structure. The government needs to make sure there is “no ambiguity over the status or allowable activities of any private entity which enjoys any benefits or protections from the government,” he said.

Treasury Takes First Steps to Reshape Fannie and Freddie - NYTimes - On April 15, the Treasury Department and the Department of Housing and Urban Development will publish a list of questions seeking comment on the appropriate role of the government in housing finance, as well as the design of mortgage products and protections for consumers who use them.  The government has so far spent $126 billion bailing out Fannie and Freddie. Republican criticism over the absence of a plan for the institutions escalated when the White House released a budget in January that said only that the administration “continues to monitor the situation.”  Appearing before the House Financial Services Committee on Tuesday, the Treasury secretary, Timothy F. Geithner, said the administration would “take a fresh, cold, hard look at the core problems” in housing finance and deliver a “comprehensive set of reforms” to Congress, but declined to specify a timetable.

Plan to Reshape Mortgage Market - WSJ - Fannie Mae and Freddie Mac won't be allowed to return to a precrisis structure that rewarded shareholders with big profits for years but ultimately saddled taxpayers with massive losses, Treasury Secretary Timothy Geithner told a congressional panel on Tuesday. The administration will outline broad principles for the future of the mortgage market at the hearing, including stronger consumer protections and explicit guarantees for any government backstop of mortgages.  The administration won't issue a detailed overhaul proposal until later this year.

 Geithner says Fannie, Freddie overhaul must wait - US Treasury Secretary Timothy Geithner on Tuesday swatted aside pressure for a swift reform of troubled government-backed mortgage giants, as data pointed to a still struggling US real estate market. Geithner told Congress any restructuring of the mega-lenders Fannie Mae and Freddie Mac that found themselves at the epicenter of the global financial meltdown, "must be done as part of a reform of the wider housing finance system."

Tim on the Hill – Ho Hum or Ahem? - I watched the Tim G. show today. I was not impressed. One and a half years after conservatorship the Treasury Secretary admitted he was on square one when it comes to a fix on the Agencies. He admitted he had been diverted, saving everything else required more immediate attention. On future timing Tim was very vague. He said there would be meetings and progress made gathering a consensus of what could and should be done over “The next three months”. Read this to mean that the talk goes to the summer recess and the issue does not come up again until after the mid term elections. So the answer that Tim would not give on the timing for delivering a defined strategy for the Federal role in the mortgage market is sometime at least a year from now.

Reforming A Broken Mortgage System - George Soros - The business model of Fannie Mae and Freddie Mac is fundamentally unsound. These public-private partnerships were supposed to serve the public interest and the interest of shareholders. But this was never properly defined and reconciled.  Management’s interests were more closely allied with those of shareholders. They had an incentive to lobby Congress — both to expand homeownership and to protect and use their government-sponsored duopoly status.  The GSEs extended their activities from insuring and securitizing mortgages to building highly leveraged portfolios of securities by taking advantage of their implicit government backstop. They profited from the growth without bearing the risk of collapse: Heads they win, tails you lose.

U.S. banks pay lip service to second mortgages - JPMorgan this week became the latest in a trickle of big banks willing to modify second mortgages for some struggling U.S. borrowers. While it’s a baby step in the right direction, it won’t do much to fix America’s foreclosure woes. Second-lien loans, essentially top-up mortgages, look like a good place to start addressing the problem of borrowers who can’t keep up with payments. After all, second liens are subordinate to first mortgages. So when it comes to cutting interest or principal payments, they should logically come first. But the U.S. government has primarily tackled first mortgages — and hasn’t got that far even there. The Home Affordable Modification Program (HAMP), which is designed to facilitate mortgage payment reductions, is aimed at several million struggling borrowers. Of 1.4 million trial modifications offered so far, only 170,000 have resulted in adjustments that the program sees as “permanent”.

HAMP applicants tanned and juiced - One aspect of the Making Home Affordable loan modification program known as ‘HAMP’ is almost always taken for granted in its wide reporting – that the borrowers in fact need ‘help’. Moreover, it is generally taken for granted that those seeking modification under HAMP simply cannot afford their monthly mortgage payment. It is assumed that they have made great sacrifices, assumed they have already cut back drastically on discretionary expenses, assumed that they have already gone over their monthly budgets with a fine-toothed comb to eliminate all but the most necessary expenditures in an effort to keep their home. So prepare to be shocked – shocked! – as I share with you that I have seen first-hand that this assumption is oftentimes greatly, seriously flawed.

The FHA Is Being Run Like A Ponzi Scheme That Will Surely Implode - It has issued hundreds of billions of dollars of mortgages in the last two years, expected to redouble once again, growing to $1.5 trillion over the next five years. Along the way to becoming a behemoth, the FHA has radically transformed its business. Very few people seem to understand how thorough going this transformation has been. In many ways, the FHA is being run like a Ponzi scheme. And like all such schemes, it is likely to eventually fail. A recent paper titled “Reassessing FHA Risk” may have escaped your notice. It is written in a such a sober and academic tone that it hasn’t attracted the attention it deserves. What it describes is truly horrifying: The FHA is unable to assess the risks it is taken and the losses it will face will be massive. Because it does not appreciate its own risk, it is not adequately taking steps to limit the losses.

Federal Home Loan Bank sues Wall Street Banks for Billions- This was lawsuit was filed on March 15th. Here are some details from the bank and see: Pools That Need Some Sun in the NY Times for more ... From the Federal Home Loan Bank of San Francisco: Statement Regarding PLRMBS Litigation Today the Federal Home Loan Bank of San Francisco (Bank) filed complaints in the Superior Court of California, County of San Francisco, against nine securities dealers in relation to certain of the Bank’s investments in private-label residential mortgage-backed securities (PLRMBS). The Bank is seeking to rescind its purchases of 134 securities in 113 securitization trusts, for which the Bank originally paid more than $19.1 billion. The Bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities.

Serious mortgage delinquencies jump in Q4 - Delinquencies on mortgages rose to nearly 14 percent in late 2009, led by a sharp increase in seriously overdue home loans held by the most credit-worthy borrowers, U.S. banking regulators said on Thursday.The percentage of current and performing mortgages fell to 86.4 percent at the end of the fourth quarter of 2009, down 0.9 percent from the previous three months, marking a decline for the seventh consecutive quarter, the report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision said.

Those Pesky Second Liens, and an update on HAMP -  It’s been a while since we’ve talked about about those second liens and mortgage writedowns (I, II). Since then John Cassidy did some investigating and James Kwak responded to his arguments in language I still find convincing.To recap: Writing down the second and other junior liens of mortgages, which would allow principal writedowns of underwater mortgages, would expose the stress tests of last year as a joke. There’s probably a hole in the balance sheet of the 4 big banks because they only recorded losses on second/junior liens at 15%. The second/juniors will continue to ‘perform’ because much of it is HELOC debt, which like a credit card you’ll never pay off, can have interest added to principal, without ever a real exit strategy to the debt.So you have a decade of people underwater in their homes, unable to move to pursue new jobs, with the 1st mortgage owner willing to negotiate new terms but being blocked by the second mortgage owner, in order to pretend that the stress tests weren’t completely invalid. Instead we get the predatory lending shop called HAMP opening up, a failure for consumers and a nice little subsidy to the major banks. Everyone wonders why it isn’t working, and Treasury prays that the forbearance works and housing prices appreciate fast over the next few years and it all goes away.So two new developments..

Has The Post Heard About the Housing Bubble? - When discussing the cause of foreclosures the Post told readers that the Obama administration's new housing plan takes aim at: "the major cause of the current wave of foreclosures: "the spike in unemployment.." Actually, the major cause of both waves of foreclosure was the collapse of the housing bubble. The plunge in prices pushed many homeowners underwater in their mortgages. As much research has shown, being underwater is a key factor in foreclosure. Homeowners are unlikely to default on homes in which they have equity.

Big Expansion in Effort to Aid Homeowners Is Proposed - Another element of the new program is meant to temporarily reduce the payments of borrowers who are unemployed and seeking a job. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs. The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

Should taxpayers subsidize underwater homeowners? - The Obama administration will announce a major new stock market initiative on Friday that will directly tackle the problem of the millions of Americans who lost money betting on stocks.  The government will buy loans from stock brokerage houses at the current value of the stocks in an investor’s portfolio, in an effort to stabilize the stock market, people briefed on the plan said. The government will also increase incentive payments to stock brokers who loaned on margin to their investing clients and now assume some of the losses of those clients. And it will require those stock brokers to cover some of the losses of unemployed investors for a minimum of three months.

HAMP Principal Write-downs - There are a number of changes to HAMP announced today. This includes help for unemployed homeowners and more outreach. Here is a fact sheet from Treasury on these changes. The key changes are principal reductions and larger payments to 2nd liens (including for HAFA short sales). For short sales, the 2nd lien payment has been doubled from 3% of the outstanding balance to 6% - although this is probably still below the typical recovery rate for 2nd liens. The Treasury has some examples here for the various changes.

U.S. Plans Big Expansion in Effort to Aid Homeowners. - The Obama administration on Friday announced broad new initiatives to help troubled homeowners, potentially refinancing millions of them into fresh government-backed mortgages with lower payments.  Another element of the program is meant to temporarily reduce the payments of borrowers who are unemployed. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs to make their mortgages more affordable.

Second mortgages complicate efforts to help homeowners - The Obama administration is about to ramp up its efforts to tackle second mortgages as part of an aggressive program announced by the White House on Friday to address foreclosures. ... Government officials have estimated that about 50 percent of troubled borrowers have a second mortgage. But a year after federal officials launched an initial program to lower payments on these second loans, not a single homeowner has been helped. ...Just a few banks hold most of the second liens; Bank of America has about $147 billion of them, while Wells Fargo and J.P. Morgan Chase have $124 billion and $118 billion of the market, respectively. Citigroup has about $53 billion of these loans on its books.  They have all signed up for the administration program announced last year, but none has taken action yet.

A Bold U.S. Plan to Help Struggling Homeowners - The new measures ... are aimed not only at the seven million households that are behind on their mortgages but, in a significant expansion of aid that proved immediately controversial, the 11 million that simply owe more on their homes than they are worth. ..The latest programs, together with foreclosure assistance efforts already in place, are aimed at helping as many as four million embattled owners keep their houses. But the measures, which will take as long as six months to put into practice, might easily fall victim to some of the conflicting interests that have bedeviled efforts to date. None of these programs have the force of law, and lenders have often seen no good reason to participate.

Obama administration to order lenders to cut mortgage payments for jobless – Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether.  The new push, which the White House is scheduled to announce Friday, takes direct aim at the major cause of the current wave of foreclosures: the spike in unemployment. While the initial mortgage crisis that erupted three years ago resulted from millions of risky home loans that went bad, more-recent defaults reflect the country's economic downturn and the inability of jobless borrowers to keep paying.  The administration's new push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, offering financial incentives for the first time to lenders to cut the loan balances of such distressed homeowners. Those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration.

CEPR Statement on Obama Administration's Housing Initiative…The latest Obama Administration initiative aimed at easing the nation's foreclosure crisis may be well-intentioned, but fails to give proper consideration to the state of the housing market. The biggest winners are likely once again to be the banks. In particular, holders of second mortgages are likely to see this program as a huge bonanza.  The program provides a substantial incentive for holders of first mortgages to reduce principal by having the Federal Housing Authority (FHA) guarantee a new loan at 97.75 percent of the current market value....By substantially reducing the required payment on the first mortgage, the program will be creating a situation in which the second mortgage - which would be worth little or nothing in foreclosure - will suddenly again hold considerable value. This will be a huge windfall for second mortgage holders. It is worth noting that the major banks have vast portfolios of second mortgages.

Housing: Obama Still Has Not Grown Up  - The Obama administration plans to announce programs to help homeowners avoid foreclosure, including subsidies for borrowers who owe more than their home is worth.  This sounds like homeowners will get some "free money" gifted to the banks so as to make them "not underwater" and thus avoid foreclosure.  Well, it is - to a point.  (If you were one of the people who put down 20% during the boom and was prudent in your use of debt, are you angry yet?  You should be!) The new plan would increase payments to lenders that modify second mortgages, an official said. Banks’ unwillingness to write down second liens has helped block efforts to prevent foreclosures, Banks aren't unwilling, they're unable.  Look, this has been true since this crisis began - the banks - especially the big banks with lots of these loans - are insolvent if they recognize the "value" of this paper.

Half of U.S. Home Loan Modifications Default Again (Bloomberg) -- More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.  The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months. U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.

More Foreclosures, Please . . .- I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks. It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded.  We need more, not less foreclosures.

The Case for Ending the Mortgage Deduction - NYTimes - Mortgages should be made less attractive. That’s one lesson of the recent housing bubble and bust. As long as borrowing seems like the easy road to riches, people will do too much of it. But right now in the United States, the tax code encourages many people to take out big mortgages. That’s why it’s a good idea to put the elimination of the tax deductibility of mortgage interest on the political agenda. American homeowners can for tax purposes deduct interest on mortgages of up to $1 million. It’s a politically popular arrangement, and the lure of paying a bit less to the government has been an incentive to stretch housing budgets up to, or past, the limit. Even extra cash borrowed under home equity loans can share in the tax largess, whether or not the funds go to home improvement.

Housing limps along - TWO pieces of housing data are out this morning, and neither is very comforting. First, we have existing home sales, which fell in February for a third consecutive month. Home sales hit their lowest level in eight months. Weak sales have had the expected effect on inventory and months of housing supply: Bloated inventories place downward pressure on prices. Right on schedule, we have the latest data release from the Federal Housing Finance Agency, which reported a second consecutive montly price decline, of 0.6%, in January. December's decline was larger than originally reported at 2.0%.

Existing U.S. Home Sales Fall for Third Month - (Bloomberg) -- Sales of existing U.S. homes fell in February for a third month, and the number of properties on the market climbed by the most in almost two years, casting a pall over the prospects for a recovery.  Purchases dropped 0.6 percent to a 5.02 million annual rate, the lowest level in eight months, figures from the National Association of Realtors showed today in Washington. There were 3.59 million houses for sale, a 312,000 increase from January that marked the biggest gain since April 2008.

Existing Home Sales Decline in February - The NAR reports: February Existing-Home Sales Ease with Mixed Conditions Around the Country Existing-home, which are finalized transactions that include single-family, townhomes, condominiums and co-ops, slipped 0.6 percent nationally to a seasonally adjusted annual rate of 5.02 million units in February from 5.05 million in January, but are 7.0 percent higher than the 4.69 million-unit pace in February 2009.Total housing inventory at the end of February rose 9.5 percent to 3.59 million existing homes available for sale, which represents an 8.6-month supply at the current sales pace, up from a 7.8-month supply in January. Raw unsold inventory is 5.5 percent below a year ago. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

More on Existing Home Sales and Inventory - Earlier the NAR released the existing home sales data for February; here are a couple more graphs ... This graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010).  Sales (NSA) in February 2010 were 7.9% higher than in February 2009, and 3.2% lower than in February 2008. We will probably see an increase in sales in May and June because of the tax credit, however I expect to see existing home sales below last year later this year. The second graph shows the Year-over-year change in reported existing home inventory.

U.S. new home sales unexpectedly fall in Feb  (Reuters) - Sales of newly built U.S. single-family homes fell for a fourth straight month to a record low in February, a government report showed on Wednesday, heightening fears of renewed weakness in the housing market. The Commerce Department said sales fell 2.2 percent to a 308,000 unit annual rate from an upwardly revised 315,000 units in January.Analysts polled by Reuters had expected new home sales to edge up to a 320,000 unit annual pace from January's previously reported 309,000 units. The data came on the heels of report on Tuesday showing existing home sales fell for a third straight month in February and a jump in the supply of houses on the market.

New Home Sales at Record Low in February - The Census Bureau reports New Home Sales in February were at a seasonally adjusted annual rate (SAAR) of 308 thousand. This is a new record low and a decrease from the revised rate of 315 thousand in January (revised from 309 thousand). The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2010. In February 2010, 24 thousand new homes were sold (NSA). This is below the previous record low of 29 thousand hit three times; in February 2009, 1982 and 1970. The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now 6% below the previous record low in January 2009.

Sales of New U.S. Homes Drop to Lowest on Record on Job Concerns, Weather (Bloomberg) -- Sales of new homes in the U.S. unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market. Purchases decreased 2.2 percent to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years. New-home sales are vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6 percent this year, close to a 26-year high.

Bad Weather Did Not Reduce Home Sales in February - Contrary to what you read in the paper, bad weather did not explain the weak homes sales reported for February. While there was unusually bad weather across much of the country in February, it typically takes 4-8 weeks between when a contract is signed and when a sale is closed. This means that February sales reflect contracts signed in December and January. It is also worth noting that sales actually rose in February in the Northeast and the Midwest. They fell in the South and West where weather was less likely to be a factor.

Housing Sales: Forget It - As I pointed out on March 17th, the housing "tax credit" has run out of gas - and today's existing home sales numbers prove it: Sales of existing homes have thus fallen three consecutive months, a reversal after having risen steadily through the fall in response to a federal subsidy for first-time home buyers. The tax credit has been restored and expanded to repeat buyers, but there has been no increase in sales yet.  Notice the "yet" - despite the fact that you must have a signed contract by April 30th to get the credit. Let's cut the crap - the debt channel is stuffed for consumers.  Without the ability to take on more debt the American Consumer cannot continue to buy houses, cars, or anything else that they cannot pay for with current income.

Funhousing - Housing sales are again slumping after last year’s uptick, even as more units are being put on the market, according to the NYT. ”Again” is a tendentious term, since only last year’s homebuyer tax credit artificially propped up sales in what’s otherwise now a three year decline. That’s the reality-based process which is being hindered by the temporary tax credit extension, now set to expire on April 30.  If they want to keep this zombie propped up, they’ll have to extend this again and pretend again. As with everything else, this tax credit may help a few random buyers (but is probably setting up most of them for underwater status), but is really yet another looting of taxpayer money for the benefit of Wall Street, to help prop up the toxic crap on the banks’ balance sheets. It’s another part of the Bailout.

MBA: Mortgage Applications Decrease, Rates Rise - The MBA reports: Mortgage Refinance Applications Decrease in Latest MBA Weekly Survey - The Market Composite Index, a measure of mortgage loan application volume, decreased 4.2 percent on a seasonally adjusted basis from one week earlier. ... The Refinance Index decreased 7.1 percent from the previous week and the seasonally adjusted Purchase Index increased 2.7 percent from one week earlier. ... The refinance share of mortgage activity decreased to 65.0 percent of total applications from 67.3 percent the previous week. This is the lowest refinance share observed in the survey since the week ending October 30

Home Prices May Be Undervalued - Demand for housing still looks weak, even with low mortgage rates and the federal tax credit. Sales of existing and new homes both declined in February. But there are signs that housing is turning. The February blizzards may have delayed some closings. If so, sales should bounce back in milder March. And sales in the second quarter will benefit from buyers rushing to close before the expiration of the tax credit. Even KB Home said it expects a nationwide housing recovery to return the company to profitability in the latter part of the year. Another — mostly overlooked — sign of stability: home prices have finally stopped falling. And in many cases homes may be undervalued.

New Home Prices: More Room to Fall - Over the past 48 hours, the Census Bureau and the National Association of Realtors have announced new and existing home sales, respectively, for February. As expected (at Financial Armageddon, at least) neither set of data points offered any real encouragement for those who keep harping on about a recovery in the sector. In fact, a comparison of annualized sales and median price trends for both data series reveals an interesting divergence -- one that suggests new home prices will need to fall by 15 percent from where they are now to entice buyers if the historical relationship between the two markets is anything to go by.

Investors with cash are buying houses - USATODAY- More home buyers are snapping up properties with cash, a trend driven in large part by investors returning to the market after four years of falling prices around the country. The share of home sales involving all-cash transactions was 26% in January, up from 18% a year earlier, according to the National Association of Realtors. The figures come from a survey of members about their most recent transactions. Many home buyers also are paying cash, but investors are largely using cash so they can avoid paying interest charges on loans and get a larger return on their investment. Other NAR data also show a pickup in investment activity.

Distressed Property Sales Soar - Last month distressed properties - those involving homes acquired as part of a foreclosure or pre-foreclosure sale - accounted for 48.1 percent of the home purchase transactions tracked in the closely-watched monthly survey. This was way up from the 37.3 percent level recorded as recently as November. It was also the highest distressed property market share seen since last July. Stepped up government efforts, including temporary foreclosure moratoriums and a push to qualify more financially troubled homeowners for mortgage modifications, temporarily reduced the number of distressed properties coming on the housing market in the fall and much of this past winter. But now a growing number of distressed properties appear to be hitting the housing market.

Nearly Half of Home Purchases Are Distressed Properties - Last month distressed properties – those involving homes acquired as part of a foreclosure or pre-foreclosure sale – accounted for 48.1 percent of the home purchase transactions tracked by the survey. The February numbers were up significantly from the 37.3 percent level recorded as recently as November. It was also the highest distressed property market share seen since last July. Stepped up government efforts, including temporary foreclosure moratoriums and a push to qualify more financially troubled homeowners for mortgage modifications, temporarily reduced the number of distressed properties coming on the housing market in the fall and much of this past winter. But now a growing number of distressed properties appear to be hitting the housing market

Why mortgage principal reduction isn’t happening - BofA’s “earned principal forgiveness” program looks very similar to the Responsible Homeowner Reward plan of Loan Value Group that I wrote about yesterday. In both cases, homeowners staying current on their mortgage payments get a reward after a certain number of years — a principal write-down on their mortgage in the first case, and an old-fashioned cash payment in the second. I think I prefer the cash payment to the principal write-down, assuming that the write-down would cost the bank just as much money as a cash payment would. While the effect on the homeowner’s balance sheet is the same, most people would prefer a pile of cash to a principal reduction — especially if the principal reduction is taxable, which it might well be, in five years’ time.

Finding in Foreclosure a Beginning, Not an End - A nonprofit lender made the deal possible by buying the house from her original mortgage company and selling it to her for 25 percent more than its purchase price — a gain to hedge against future defaults.  “ This counterintuitive solution — intervening after foreclosure rather than before — is the brainchild of Boston Community Capital, a nonprofit community development financial institution, and a housing advocacy group called City Life/Vida Urbana, working with law students and professors at Harvard Law School.  Though the program, which started last fall, is small so far, there is no reason it cannot be replicated around the country, especially in areas that have had huge spikes in housing prices, said Patricia Hanratty of Boston Community Capital. “If what you’ve got is a real estate market that went nuts and a mortgage market that went nuts, what you’ve got is an opportunity.”

Countdown: Fed MBS Purchase Program only $2 Billion more - One week and $2 billion to go ... (UPDATE: Mortgage News Daily says $6.1 billion left). So the program is essentially over. We should be watching to see if 10 Year Treasury yields rise - and if mortgages take "a beating".From the Atlanta Fed weekly Financial Highlights released today (as of last week):This graph shows the cumulative MBS purchases by week. From the Atlanta Fed: The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 17. This purchase brings its total purchases up to $1.24 trillion, and by the end of the first quarter of 2010 the Fed will have purchased $1.25 trillion (thus, it is 99% complete). The NY Fed purchased an additional net $8 billion in MBS for the week ending March 24th. This puts the total purchases at $1.248 trillion or 99.84% complete. Just $2 billion and one more week to go ...

Bernanke: Fed Likely to Sell Some of Its Mortgages Eventually - Federal Reserve Chairman Ben Bernanke carves out new ground in his testimony to Congress today, saying the Fed is likely to start at some point gradually to sell some of its large holdings of mortgage backed securities. His goal, he says, is to get his $2 trillion balance sheet down to below $1 trillion. One way to do that is to sell mortgage-backed securities. This matters a lot for millions of Americans because if the Fed sells pieces of its trillion-dollar mortgage portfolio, it could put upward pressure on mortgage rates.

IS THE HOUSING MARKET RECOVERING? - The Fed is talking about an exit strategy these days, including selling its existing stockpile of mortgage securities, which it purchased in large quantities over the past 18 months to boost the sagging fortunes of the housing industry. It may be coincidence, but the Obama administration is reportedly rolling out a new program to address the still-high rate of foreclosure in the residential housing market. "We would like to get back to an all-Treasury portfolio within a reasonable amount of time," Fed chairman Bernanke said yesterday in testimony in a session of the House Financial Services Committee. But not any time soon. We're unlikely to see an imminent unwinding of the central bank's massive portfolio of mortgage-backed and debt securities issued by Fannie Mae and Freddie Mac. The reason is hardly a secret. The real estate market is still weak, as suggested by the latest updates on new home sales and existing home sales.

LA Times Sees an Oncoming Option ARM Wave : CJR  - The Los Angeles Times looks at the possible impending Option-ARM crisis, something we’ve asked for more coverage of for a good while now: In a wave cresting through the coming two years, most of the estimated 900,000 borrowers who have option ARMs will lose their ability to make these teaser payments, according to First American CoreLogic, “Unless option ARMs are restructured proactively, large proportions of them could end in foreclosure, leading to a potential double dip in housing prices in many California markets,”  In other words, it’s not just a matter of rates resetting. If it were, the coming wave of resets might not be a big deal since interest rates are low.

Option ARMs pose threat to housing market - latimes - Home values are slowly rising, and interest rates are still at low tide. But some analysts see a hidden reef that could sink the housing market: option-ARM loans. Option ARMs are adjustable-rate mortgages that give borrowers the option to make minimum payments that don't even cover the interest owed, much less the principal. That unpaid interest gets tacked onto the principal, increasing the size of the loan. But there's a catch: The optional minimum-payment period usually lasts five or 10 years. Because most of the option-ARM loans were funded from 2005 to 2007, the easy-term periods have started to expire.

In Housing, a Supply Problem of Epic Proportion - Last week, I wrote about REO volumes and showed how bank-owned real estate was back on the upswing after two quarters of limited inventory—and by the end of last week, so too had most of the financial press. Which is flattering. This week, I’m going to build from last week’s column to take a more in-depth look at delinquency trending to help you get a feel for where the real estate market is headed next. (I can only hope the message is as widely followed by my journalistic colleagues this week, as well.)

The Housing Crisis and the Resentment Zone - By 2009, about one in four home mortgages was “underwater” — meaning that the market value of the house had fallen below the amount owed on the mortgage (a.k.a., home equity is negative). Because of the low resale values, foreclosing on any of the homes will not yield lenders their entire principal; lenders in those cases must rely on the good behavior of the borrowers. Meanwhile, homeowners are considering whether it is worth moving, and a reduced credit rating, in order to erase their negative home equity by walking away from their home and its mortgage.  As it has with health care, student loans, nutrition and other areas, the federal government has responded to the mortgage crisis with another layer of means-tested benefits. And these may be the largest means tests yet.

americas-most-underwater-housing-markets - Negative equity--what you have when you owe more on your home loan than the property is worth--is one of the defining features of the still-unfolding mortgage crisis. It's a particularly nasty problem because it can lead to all sorts of unpleasant outcomes for the real estate market and the economy as a whole. To get a better sense of the cities with the greatest concentrations of negative equity, Zillow provided U.S. News with data that detail the percentage of mortgage borrowers who are underwater in 142 distinct markets throughout the country. Based on this research, we compiled the following list of America's most underwater housing markets. (Please note: We chose no more than one city per state.)

BofA to start reducing mortgage principal-sources  Bank of America will announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home's value or are battling ever-expanding "negative amortization" loans. According to a summary of the program obtained by Reuters, Bank of America pledged to offer an "earned principal forgiveness" of up to 30 percent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.-

Will Treasury Adopt a Mortgage Plan Like Bank of America's?… It seems somehow poetic to me that on the very day the TARP watchdogs releases a report that just rips the Treasury's $75 billion Home Affordable Modification Program, Bank of America announces it will begin writing down principal on thousands of loansOn top of that, in an interview on CNBC this afternoon, Bank of America's chief of foreclosure mitigation told me: "We have been talking to Treasury, other large services have been talking to Treasury about programs similar to this for quite some time. I think the Treasury is close to deciding whether or not they want to go forward with a program like this...definitely they have it on their radar screeen.  They know they need to do things to approve acceptance rate also, and this is a way that most people believe might do the most to improve the acceptance rate."

Some homeowners facing the prospect of repeated foreclosures - Though signs of recovery in the housing market are emerging, thousands of people throughout the Southland are still in a precarious position on the brink of foreclosure, struggling with monthly bills and mortgage payments.Duchemin and Ashraf are an extreme example because they've gone through foreclosures on two homes and are in danger of losing a third. They aren't alone: Flimsy lending practices mean that thousands of other borrowers face the prospect of repeated foreclosures, mortgage and foreclosure experts said. The problem is especially visible in areas that attracted speculative buyers during the boom. In Maricopa County in Arizona, which includes Phoenix, at least 283 individuals have received a foreclosure notice on two or more properties since 2006, according to data provided by RealtyTrac Inc.

Homeowners Facing Foreclosure Take Own Lives - Eyewitness News has learned that in the past month, two homeowners took their own lives before sheriff's deputies arrived to tell them that they were being evicted. On March 5, deputies arriving to post an eviction notice on Lynda Clark's South Philadelphia home found she had hanged herself. "It's devastating for everyone. We're not even family members and it's just devastating to us," Captain Albert Innaurato of the Philadelphia Sheriff's Office said. Less than three weeks later, owner Gregory Bellows shot and killed himself shortly before deputies arrived to evict him from his Roxborough home.

EconomPic: Commercial Real Estate Bottoming? - Commercial real estate prices rose for the third straight month, bouncing from an epic collapse, on lower volume (less transactions), but higher dollar volume. Before we jump into the details, as Calculated Risk notes:  Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices. The below two charts (index level and year over year change), both show what appears to be a bottoming in the commercial real estate market.

The Pressure on Malls: More Store Closings - Pat Connolly, executive vice president [Williams-Sonoma Inc., which also owns Pottery Barn]: "We are committed to restoring our retail channel profitability to historical levels ... We are working diligently to restructure our portfolio of stores and optimize our sales and costs per square foot. This will be accomplished by selective store closings and lease negotiations ... Over the next three fiscal years, 25 percent of our store leases will reach maturity ... E-commerce is 30 percent of our corporate revenue and it’s very profitable ... even in this environment. The Internet and e-commerce have become the focus on our capital investment."

AIA: Architecture Billings Index Shows Contraction in February - This index is a leading indicator for Commercial Real Estate (CRE) investment. The WSJ reports that the American Institute of Architects’ Architecture Billings Index increased to 44.8 in February from 42.5 in January. Any reading below 50 indicates contraction. The ABI press release is not online yet.This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008. The second graph compares the Architecture Billings Index with the year-over-year change in non-residential structure investment.

Not a textbook rebound (see series of charts) Is this as good as it gets? For the time being at least, it seems to be. The Chicago Fed national Activity Index fell from -0.04 in January to -0.64 in February, leaving it well above the recession trough, but still below the normal or trend value of zero. A negative value for this index is not that uncommon during an expansion, but not what we'd like to be seeing at this point, either. The Aruoba-Diebold-Scotti Business Conditions Index is also up significantly from its recent trough, but has been trending back down into negative territory with the last few weeks' data on new claims for unemployment insurance

Is credit Card debt a hindrance? - (see graphic) With the recession forcing more and more Americans to burden their credit cards with debt, it's time to ask whether the increasing accrued costs are manageable, or are detrimentally impacting lives.

Is "Debt Gene" Behind US Spending Pathologies?- Some people have a genetic bias toward running up credit card debt, a new academic study has discovered. The researchers found that those of us with an inefficient version of a gene previously linked to impulsive and addictive behaviour are significantly more likely to have overspent on credit cards...[they] argue that since about half of the population carry the inefficient gene there may be a need to protect them by law from genetic discrimination.

American companies—and consumers—are borrowing much, much less. That's good news. - Cheap and plentiful credit has powered the U.S. economy for decades. But since the financial crisis of 2008, America has gone on a drastic debt diet. Just as families are paying down credit-card debt and building up cash reserves, businesses large and small are learning to operate in an environment where cash once again is king.  During the credit bubble, both companies and individuals spent and invested based on expectations of what they could borrow. Now they're hoarding cash. The savings rate, near zero in 2007, rose to 3.3 percent in January. At the end of last September, the 376 members of the S&P 500 that aren't utilities or financial firms had a record $820 billion in cash in their coffers, up more than 20 percent from the year before, according to Standard & Poor's.

Seven Stressors Sapping the Middle Class - Working harder for less is the new normal--for those lucky enough to have a job. Millions of families are giving up comforts they long took for granted, such as restaurant meals, new clothes, vacations, spacious cars, home improvements, and cable television. College funds and retirement savings have taken a hit, and some families have been forced to downsize their homes or, worse, submit to foreclosure. Little wonder that record numbers of Americans tell pollsters it's getting harder to get ahead and that they worry their kids' standard of living may fall rather than rise.

DOT: Vehicle Miles Driven decline in January - Yesterday we discussed the impact of high oil prices on vehicle miles driven.  And today the Department of Transportation (DOT) reported that vehicle miles driven in January were down from January 2009: Travel on all roads and streets changed by -1.6% (-3.7 billion vehicle miles) for January 2010 as compared with January 2009. Travel for the month is estimated to be 222.8 billion vehicle miles. This graph shows the percent change from the same month of the previous year as reported by the DOT.

House OKs small business, construction aid (Reuters) - A $19.3 billion package of small-business incentives and construction subsidies passed the House of Representatives on Wednesday as Democrats returned to job-creation efforts after their bruising healthcare battle. The House approved 246-178 a bill designed to boost investment in small businesses, which have been reluctant to take on new workers as the economy recovers from the worst recession in 70 years. Only four Republicans voted for the bill.It would lift all capital gains tax on small-business stock bought before 2012 and expand a tax deduction for business start-up costs. The measure also would expand subsidies for state and local construction bonds in an effort to bring down the 9.7 percent unemployment rate ahead of the November congressional elections.

Less Bang for America’s Stimulus Buck - The aftermath involves resetting asset values, deleveraging, and rehabilitating balance sheets – resulting in today’s higher saving rate, significant shortfall in domestic demand, and sharp uptick in unemployment. So the most important question the US now faces is whether continued fiscal and monetary stimulus can, as some believe, help to right the economy. To be sure, at the height of the crisis, the combined effect of fiscal stimulus and massive monetary easing had a big impact in preventing a credit freeze and limiting the downward spiral in asset prices and real economic activity. But that period is over.

"Effects of Fiscal Stimulus in Structural Models" - Phillip Lane of the Irish Economy blog notes a new IMF working paper on The Effects of Fiscal Stimulus in Structural Models. He says: This new IMF working paper provides interesting analytical insights into the determinants of fiscal multipliers.  Also striking is the set of co-authors: it represents a joint collaborative effort across the IMF, ECB, European Commission, Federal Reserve, OECD and Bank of Canada. Here are a few graphs from the report (I went overboard and there are 14 graphs below, most are on the continuation page to save space and reduce load time).  Interestingly, from the point of view of stimulating GDP, there is little difference between government investment and government consumption, and both work better than changes in taxes and transfers (one exception appears to be "targeted transfers")

 Recovery depends on Main Street - Can the American economy recover if only its big global companies, Wall Street and high-income Americans are doing better but its small businesses and middle and lower-income Americans are not? The short answer is no. The earnings of companies in the Standard & Poor’s 500 stock index tripled in the fourth quarter, but this does not mean the rest of the US economy is doing well. Much of their sales were into fast-growing markets in places like India, China and Brazil. Meanwhile, they continued to slash jobs and cut costs at home.

Economic Desperation, Reshaping Morality - My colleague Jesse McKinley has a fascinating article today about how legal-marijuana advocates are touting the fiscal virtues of their cause. Not coincidentally, another banned substance was legalized in the wake of major economic upheaval: alcohol, during the Great Depression. The “Noble Experiment” known as Prohibition ended in 1933, when a legalized alcohol market promised more job opportunities and additional sales tax revenues for governments under stress. I’m curious how much today’s economic pressures will eventually reshape Americans’ thinking on other “social issues.” After all, many states desperate for revenue have already started expanding state-sanctioned gambling, whose perceived sinfulness no longer appears to outweigh its fiscal usefulness.

Overview 2009: Income, Population, Jobs and Home Prices by State - Things were bad all over the U.S. in 2009, but some areas got hit harder than others. Overall U.S. per capita income dropped 2.6% to about $31,000. Connecticut, home to many of the titans of finance, continued to be the state with the highest per capita income in the nation at $54,000, but it was in the top 10 in terms of declines from 2008 with a 3.3% drop. Wyoming had the largest personal income drop in the country at 5.9%. Only four states posted gains in per capita personal income with West Virginia coming out on top with a 1.8% increase, though it has seventh lowest level in the nation. Every state experienced a decline in employment last year.

More on small businesses and jobs - macroblog - Anxiety about the state of small businesses has become a common theme. This report, from the Wall Street Journal, is typical: I, myself, have expressed similar concerns. It bears noting, however, that the story about jobs and small business is still somewhat murky. It is true, as we have noted, that at least the first year of the recession was characterized by disproportionate net job losses in the small business sector relative to the 2001 recession. In light of this, we have previously looked into the credit access issue among small businesses in the six states represented by the Atlanta Fed and to our surprise found little evidence of yet that financing problems represent a major constraining factor among most of these enterprises. but"… the survey respondents represent established, relatively successful firms. We could not, with this effort, capture the experience of firms that have recently failed (perhaps for lack of credit). Nor can we ascertain the businesses that were never formed because they could not obtain start-up funding."

Are Jobless Recoveries the New Norm - Cleveland Fed - Recent recessions have been followed by exceptionally slow recoveries in the labor market, and the current recession is shaping up to follow the same pattern. We take a close look at some labor market measures and uncover a difference between these recent recessions and those that preceded them—workers are staying unemployed longer. This difference is a clue we can use to predict how the current labor market recovery might proceed in the near future.

American joblessness: Springing forward | The Economist - THE American recovery is now three quarters old, and yet in only one month since the onset of recession in 2007 has payroll employment increased. That was last November, when non-farm employment ticked up by 64,000. The Obama administration has estimated that the economy will add an average of 95,000 jobs per month in 2010—barely enough to prevent additional increases in the unemployment rate—but the first two months of the year turned in employment declines. But perhaps March will be different.  Simon Constable explains the possibility: In the first place, the government has started hiring large numbers of temporary workers for the census. That number should peak at around 635,000 in May, according to the Commerce Department.

Why the President's Next Big Thing Should Be Jobs - Financial reform surely needs bucking up. The bill passed by the House last year was riddled with loopholes, delays, and cop-outs for the Street. The one that’s emerging from the Senate Banking Committee is only slightly better. It still allows a world of unregulated derivative trading and hands the ball over to the same regulators that punted last time. It doesn’t even include Paul Volcker’s watered-down remake of the Glass-Steagall Act. And the Senate bill is likely to get even worse as Harry Reid and Chris Dodd troll for Republican support. In an election year when Wall Street money is flowing freely to both parties, watch your wallets. Notwithstanding all this, the biggest Next Big Thing ought to be jobs.

 Will Retiring Boomers Lead to Too Many Open Jobs by 2018? - Right now, there are about five times as many people looking for work as there are jobs to be filled. But by 2018, a new study argues America could be facing the opposite problem — more jobs than there are people to fill them.It comes down to demographics, argue Barry Bluestone and Mark Melnik of Northeastern University in a study sponsored by the MetLife Foundation and think tank Civic Ventures, with retiring Baby Boomers will leave a huge number job vacancies in their wake.The two project that by 2018 there will be 14.6 million new nonfarm payroll jobs, plus some additional jobs in farming, family businesses and so on. Meantime, with no change in immigration policy or labor force participation rates, there will only be about 9.6 million workers available to fill those positions, leaving a gap of more than 5 million jobs that are vacant.

Underemployment At Record 20% According To Gallup - Just in case anyone needed confirmation that the DOL data is just a little, how should we say it, cooked, here comes Gallup with their March 15 undermployment number, which just hit a 2010, and series, high of 20%. This is obviously worse compared to both the beginning of the year (19.5%) and February (19.8%). Unlike the Dept of Labor's arcane voodoo which lately is based more on executive confidential memos and snowfall observations, Gallup's underemployment measure is based on more than 20,000 phone interviews collected over a 30-day period and reported daily. Furthermore "Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks."

Postal officials expected to back five-day mail week - The end of Saturday mail delivery gets closer to reality in the next 10 days, as Postmaster General John E. Potter plans to formally present his proposals to his board of directors and postal regulators.  Letter carriers would stop delivering mail to American homes and businesses and would not pick up mail from blue collection boxes on Saturdays, according to Potter. But post offices would stay open on Saturdays, and mail would be delivered to post office boxes. Express mail services also would continue seven days a week. The delivery cuts would save the Postal Service $3.1 billion in the first year and as much as $5.1 billion by 2020, postal officials said.

The Resentment Zone: Losing Means-Tested Benefits- Losing access to government benefits has the same effect on household budgets as paying more taxes. Benefit reduction means that the bite taken out of an additional dollar of income, or the effective marginal tax rate, goes up as income goes up. Many state and federal benefits start phasing out somewhere between the poverty line and twice that line (from $22,000 to $44,000 for a family of four in 2009).  Taking both income taxes and the loss of benefits into account, marginal tax rates in that range of the income distribution are often higher than the rate of 35 percent applied to the taxable income over $372,950 of married couples filing jointly for 2009.

 The Unemployment Situation in Perspective (graphic) By any measure, the unemployment rate is on the rise. But exactly how bad is the problem and what are the implications for the broader economy? To put things in perspective, we need to consider how the unemployment rate is calculated, who is considered employed and who isn’t. Many claim the official rate is flawed and presents an optimistic picture that doesn’t truly reflect reality. Other quoted statistics measuring job loss can be deceptive if selective time periods are used. In our latest infographic we have taken a broad view of the American workforce over the last five years showing the various employment conditions and how each is categorized.

Underemployment Hits 20% in Mid-March - Gallup's underemployment measure hit 20.0% on March 15 -- up from 19.7% two weeks earlier and 19.5% at the start of the year. Gallup Daily tracking makes it possible to monitor the underemployment rate throughout the month, rather than just once per month, making it the best and most timely way to measure the U.S. jobs situation. The findings underscore why Americans say the most important problem facing the nation today is jobs and unemployment. Gallup's underemployment measure is based on more than 20,000 phone interviews collected over a 30-day period and reported daily. Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks.

Why aggregate demand stimulation becomes less effective as a recession continues - There is an asymmetry between layoffs and rehires.  If an economy starts heading into recession, robust aggregate demand may limit the number of layoffs.  But once those workers are laid off, robust aggregate demand won't necessarily lead to their rehiring.  The employer already has figured out how to do without those workers and the production process has "moved on," so to speak.  Few employers are looking to recreate the status quo ex ante. Even a shock which was originally one hundred percent "nominal" becomes increasingly "real" as time proceeds.  The laid-off workers have to find new and different jobs, which often means cross-sectoral adjustments.  Laid-off workers become frustrated, lazier, less healthy, and so on -- hysteresis -- which also makes for required real adjustments, since now they are less productive.

Paving the Way Through Paid Internships - As Spring 2010 college graduates prepare to search for jobs, many from low-income families will start at a competitive disadvantage because they have had to work rather than take crucial, but often unpaid, professional internships that provide key skills for entering the workforce.  A new legislative proposal from the EPI and Demos seeks to remedy this inequity by providing funding for low-income students to take high-quality public service internships. Read full text in print-friendly PDF format - Read press release

Durable Goods For February Show A Weak Pulse - Like the products they represent, statistics on durable goods have a lot of moving parts, and because they are often revised, can seem like disembodied numbers. For the three months ended February, says the Commerce Department, shipments of durables have been falling. Orders and backlogs for new products have been rising, however, which points to an improving future for manufacturing, but the gains are all pretty small.Shipments were down for the second month — off 0.6 percent after a 0.1 percent drop in January. December brought a 2.4 percent increase in durables shipments of all sorts, with strength in raw metals, machinery and transportation equipment (motor vehicles and nondefense aircraft). By February, transportation goods were down three percent, and metals and machinery had faded to gains of 2.4 percent and 2.7 percent respectively.

 US Industry, A Dim Bulb - While US electricity consumption has been growing it is being used to power a different mix of activities.  Until the mid 80s US Industry was the biggest consumer of energy, as the graphs below depict. Since the era of financial deregulation and industrial off-shoring (among other changes) Residential (all those new electronics exports from Asia) and Commercial (all those new office towers filled with people and computers in cubicles) use have continued to grow while Industrial use has lagged. US Industry uses roughly the same amount of power today as it used in the early 90s. Meanwhile China's electricity consumption has been growing by leaps and bounds. The CIA's World Factbook lists China's electricity consumption as a close second to the US.  However, Chinese Industry currently uses, according to their Statistical Yearbook, almost 2.5 times as much electricity as US Industry.

Manufacturing Areas in U.S. Post Biggest Declines in Population - Cities in Michigan, Ohio and Pennsylvania accounted for eight of the 10 metro regions with the largest estimated decreases in the number of residents, the U.S. Census Bureau said today in a report. New Orleans lost about 127,000 residents, the most of any area from April 2000 through July 2009 and likely a result of Hurricane Katrina in 2005.  The report shows the effects on cities as the U.S. economy becomes more service-oriented. Some 5.7 million manufacturing jobs have been lost since 2000, while service-producing employment has grown by about 5.8 million, according to Labor Department figures. In a separate report today, the Census Bureau said state government tax collections decreased 8.6 percent, or $66.9 billion, to $715 billion in fiscal 2009. Income tax collection declined 12 percent to $245.9 billion, and government revenue from corporate taxes dropped 21 percent to $40.3 billion, the report showed.

Senate Republican holds up jobless benefits - As Congress raced to leave Washington for its Easter recess, a Republican senator blocked a stopgap bill to extend jobless benefits, saying its $9 billion cost should not be added to the national debt. As a result, some people who have been out of work for more than six months will at least temporarily lose benefits. Newly jobless people won't be eligible to sign up for generous health insurance subsidies. At the center of the battle is Sen. Tom Coburn, R-Okla., who's insisting that the measure be "paid for" so as not to add to the nation's $12.7 trillion debt. "What we are doing is stealing future opportunity from our children," Coburn said Thursday.

Does Unemployment Insurance Necessarily Raise the Unemployment Rate and Decrease Employment? - Some analysts (e.g., most recently Professor Mulligan) have stressed the disincentive effects of unemployment insurance on the unemployment rate and the level of employment. I think it useful to consider the offsetting effects arising from various effects, and hence distinguishing between the two variables. In my view, the impact of UI is more complicated than it would seem at first glance, with UI potentially increasing employment while concurrently increasing the unemployment rate. In addition, according to newer research, even if UI extends unemployment duration, it still might be welfare-enhancing. In other words, some researchers appear to have had their worldview frozen in 1990.  Let's first consider the definition of the unemployment rate (and the corresponding log approximation):

Unemployment soars in U.S. metropolitan areas (Reuters) - Unemployment rates in 363 U.S. metropolitan areas rose in January, and 346 areas reported year-on-year declines in their number of jobs, the Labor Department said on Friday. Nearly 200 metropolitan areas reported jobless rates of at least 10 percent in January, showing that unemployment problems persist at the local level. California has been especially hard hit during the recession that began in late 2007, and the Labor Department data showed the state's jobs situation continues to deteriorate, with an overall unemployment rate of 12.5 percent in January. The three areas with the highest jobless rates in the country, all above 20 percent, were all located in California, the most populous U.S. state.

Tallying Job Losses, by Metro Area - WSJ table - How many years worth of jobs has your city lost in the Great Recession? The Brookings Institution has done a tally in this report. According to the report, the only metro area that has actually gained jobs since the outset of the recession is McAllen, Texas, a border town that has been a huge beneficiary of the North American Free Trade Agreement. McAllen has added 0.7% jobs through the fourth quarter of 2009 from its prerecession peak. In fact Texas — where rising oil prices and a smaller decline in real-estate prices has left the economy on stronger ground than most of the rest of the country — has six of the top 15 cities for job growth through the Great Recession.

The United States of Unemployment (interactive graphic) Fifteen states and the District of Columbia had double-digit unemployment rates in February, according to a new government report. Once again, Michigan had the dubious honor of holding the highest unemployment rate in the country.  Michigan’s unemployment rate was 14.1 percent in February, and in the Detroit-Warren-Livonia area the rate was 14.8 percent. After Michigan, the states with the next highest rates were Nevada (13.2 percent) and Rhode Island (12.7 percent).Florida, Nevada, Georgia and North Carolina were each at their highest jobless rates on record.

Jobless fund could be $3B in hole by 2011 - Ohio’s unemployment compensation fund is even more broke than the 422,000 Ohioans who rely on the unemployment checks to make ends meet until they land new jobs.The fund went broke Jan. 12, 2009, forcing the state to borrow money from the federal government to continue issuing unemployment checks. So far Ohio has borrowed $2.1 billion, and by the end of the year, the loan amount is expected to balloon more than $3 billion. Ohio will be forced to start paying interest on that money in January 2011 at an annual rate of 4.66 percent.

6,800 San Jose city workers asked to take pay cut  It is tough all over and it just got a lot tougher for workers in San Jose. On Tuesday night, they were told to expect pay cuts. All city workers in San Jose would lose 10 percent of their paychecks under the mayor's proposal. The city council voted 8-3 to move forward with the mayor's suggestion to ask all 11 of the city's unions, to take a 10 percent cut in salaries and benefits. It is a move that is aimed at saving 450 jobs and keeping public services running. If the city cannot close the $116 million budget gap, the mayor says park, community center, and library hours could be cut -- dramatically.

States shed government jobs as revenue plummets — Pennsylvania, Michigan and Washington shed government jobs last month, a result of shrinking state tax revenue that economists fear could weaken the recovery. State and local government jobs have traditionally provided a haven during economic downturns. But as states have struggled to close growing budget gaps, job cuts have spread. That trend emerges from data on a dozen states that have released their employment figures in advance of a federal report Friday on state joblessness for February.

California, in Financial Crisis, Opens Prison Doors - The California budget crisis has forced the state to address a problem that expert panels and judges have wrangled over for decades: how to reduce prison overcrowding. The state has begun in recent weeks the most significant changes since the 1970s to reduce overcrowding — and chip away at an astonishing 70 percent recidivism rate, the highest in the country — as the prison population becomes a major drag on the state’s crippled finances.  Many in the state still advocate a tough approach, with long sentences served in full, and some early problems with released inmates have given critics reason to complain. But fiscal reality, coupled with a court-ordered reduction in the prison population, is pouring cold water on old solutions like building more prisons.

US Incarceration Nation Faces Budgetary Pressure - Another thing America #1-style cheerleaders need to explain to me and others who believe that it is a shoddy example of how to run a country is its need to throw so many of its own people in jail. For, another thing America is infamous for is having the world's highest incarceration rate. Like the hopeless fraud that is the American dream, it needs some explaining why this "melting pot" is compelled to throw many of its minorities should be behind bars. It's inequality writ large all over again as the "land of opportunity" is more like one big gated community, with jails being the doghouse. Or maybe not anymore. It seems that fiscal woes are bumping up against the world's most populous prison population as throwing people behind bars--no matter how badly mistreated they are --still costs money.

Police, firefighters and taxpayers hit with bill for millions - Firefighters, police and taxpayers in Tampa are going to have to pay millions more than they expected because of increased costs to the pension plan. Firefighters and police will see almost a double digit cut in their take home pay. The Public Safety employees were upset they didn't get step increases this year because of budget problems, and now Tampa police and firefighters are learning they have to make a bigger contribution to the pension. It will take an 8 percent cut in net take-home pay.

DWP plans 37% rate hike over four years to cover cost increases -The Los Angeles Department of Water and Power is planning to boost the electricity bills of its customers by 37% over the next four years as part of its effort to cover steadily rising costs.Officials with the city utility divulged their plans Thursday as the City Council's Energy and Environment Committee debated Mayor Antonio Villaraigosa's plan for boosting rates to help pay for renewable energy. Villaraigosa is seeking a 21% increase over the next year.

Preparing for Loss of State Aid, Bloomberg Orders More Budget  - Bracing for a steep loss in funds from Albany, Mayor Michael Bloomberg is once again asking city agencies to find more savings, this time to the tune of $1.3 billion. That's the amount Gov. David Paterson is proposing cutting from aid to the city and its schools. The Senate has passed its own budget, with deep cuts to education; the Assembly is coming up with its own spending plan, and money could be restored, but Deputy Mayor Ed Skyler says, no matter what, the city's fiscal back is against the wall."It does not appear that the city will weather the Albany budget without having a significant impact on our own operations and our own fiscal situations," Skyler says.The possible $1.3 billion cut in state aid to New York City could mean layoffs of 19,000 city employees, including 8,500 teachers. Bloomberg says the aid reduction would be "catastrophic" for the city. Agencies are being asked to submit their revised budgets by April 7. While the state's budget deadline is April 1, the city's is July 1.

More Homeless on New York City Streets Than Last Year - In the past year, New York City saw a significant increase in the homeless people sleeping on the streets, subways, and in parks. Data released by the city's Department of Homeless Services (DHS) on Friday found that, compared with last year, there has been a 34 percent increase in the number of homeless people living on the streets of New York. In January, the City did its annual homeless sweep, where 2,500 volunteers combed through five boroughs in search of the homeless sleeping on the streets, in subways, and in other public spaces. The sweep found 3,111 homeless persons—an increase of 783 over the previous year's findings.

Fatal fire raises concerns about brownouts in Calif. -  A senior citizen was found dead in his Golden Hill apartment today after flames tore through the residence.  Recent cutbacks in San Diego's emergency services delayed water to the scene of the apartment building fire. Under the cost-cutting measure, engine companies at 13 of the city's 47 fire stations are deactivated for a month at a time on a rotating basis, leaving up to eight of them out of service each day. The firefighters that typically staff those vehicles fill in for other crew members who are absent from duty.

Rich Stunned by Recession Sell Munis for First Time (Bloomberg) -- For the first time in decades, the rich showed no confidence in state and local governments during a recession.  The wave of selling began in the summer of 2007, when hedge funds and some mutual funds were forced to raise cash to meet redemptions. Municipal bonds retained the most value, and the rich didn’t hesitate to sell.  Such selling accelerated in 2008. The rich did the unthinkable. Fear of a second Great Depression and the crackup of capitalism trumped the allure of tax-exempt income and a historical default rate of less than 1 percent. U.S. Treasury notes and insured certificates of deposit became the new investments of choice for those with the most to lose.

Municipal Bond Yields Reach Four-Month High Amid Wave of Supply -- Yields on top-rated tax-exempt municipal debt climbed to their highest level in four months as investors flocked to taxable Build America Bonds amid the biggest weekly issuance of state and local debt since Dec. 11.  States, local governments and other municipal issuers sold about $13.3 billion in fixed-rate bonds this week, the most since December, according to data compiled by Bloomberg. Of that $3.6 billion were federally subsidized Build Americas. The surge in issuance comes as some investors are selling to realize gains or free up cash in anticipation of the U.S. tax season, said Matt Fabian, a managing director at the Concord, Massachusetts- based research firm.

Interest-Rate Deals Sting Cities, States - Buyer's remorse has hit some cities and states that did deals with Wall Street in different times. Hundreds of U.S. municipalities are losing money on interest-rate bets they made during the bull market in hopes of protecting themselves from higher rates. The deals backfired when rates fell, shriveling the sums paid to municipalities. Now some are criticizing Wall Street and trying to exit the contracts. "State lawmakers have proposed restrictions on municipalities' ability to use swaps. "It's gambling with the public's money," Mr. Wagner said. "Elected officials are simply no match for the investment banker that's selling the deal."The Service Employees International Union said Chicago, Denver, Kansas City, Mo., Philadelphia, Massachusetts, New Jersey, New York and Oregon all are in the hole on swaps agreements they made with financial firms. The required payments range from a few million dollars to more than $100 million a year, the union said.

State tax swap isn't even, with $5 billion shortfall – Lawmakers passed a tax swap four years ago that has turned out to be a tax swamp. The Legislature's top budget-writing staff member told a panel Wednesday that the built-in fiscal gap the state faces is nearly $5 billion a year. While they knew that a reworked business tax meant to make up for a large chunk of property tax cuts has sputtered, legislators hadn't been told in such precise – and stark – terms how big the problem was. "We expected that of the $7.1 billion a year in property tax relief that the state paid for, that the revenue increases would cover about 60 percent of that," John O'Brien, director of the Legislative Budget Board, told a newly created House panel. "As it turned out ... the new revenue covers about 36 percent of the change in state spending."

US states may be the next dominoes to topple over - Rather than a make-believe beast, the Governator is in the sights of the very real and very powerful bond market vigilantes.  These are the funds who stalk the $80-trillion global fixed income market, forcing unpleasant decisions on governments who don't have the stomach for real budget cuts. They had their way with Canada in the early 1990s and now are toying with Greece. But they are already eyeing new targets. They are watching California, as they are Michigan, New Jersey, New York and other states that have been piling up debt. Positions in credit default swaps on state bonds are building as bondholders and speculators place their bets.  In some respects, it's easy pickings.

NC short $65 billion for roads - A national transportation research group said yesterday that North Carolina faces a $65 billion shortfall in the money it needs over the next 20 years to maintain and build roads. A lot of that money will be needed for projects in Winston-Salem and other parts of the Triad, said Carolyn Bonifas of TRIP, an organization that is financed by businesses and groups with an interest in transportation.TRIP officials say that the current federal transportation program will expire at the end of the year, but that federal money provides 22 percent of the money the state spends each year for road and bridge construction

CMS board votes to start layoffs of 600 teachers - The Charlotte-Mecklenburg school board Tuesday voted 6-3 to launch layoffs of approximately 600 teachers and cut pay for all 224 assistant principals in 2010-11, as the district braces for a second bleak budget year. The board voted 6-3 against a motion to cut everyone's pay up to 10 percent to avert layoffs. But members said they'll keep looking for alternatives to layoffs, possibly including pay cuts.

Exotic Investments Trip Up Wisconsin Schools - A European bank Wednesday seized $5.5 million left in trusts related to a disastrous $200 million investment in subprime-related securities made by five Wisconsin school districts. The school districts have lost most of the $35 million of taxpayer money they had invested, and they could be on the hook for an additional $150 million as a result of the continuing fallout. The districts’ predicament is the latest example of how cities, states and other municipalities across the U.S. are still reeling from exotic investments they bought before the financial crisis.

14800 teachers face loss of jobs  - Nearly 15,000 teachers across the state could be laid off next school year if Gov. David A. Paterson’s proposed $1.3 billion cut in school aid is enacted, according to survey results released Monday by statewide education groups.  The majority of school districts responding to the survey also anticipate increasing class sizes, trimming or eliminating summer school programs and reducing elective courses, extracurricular activities, sports programs and field trips, the New York State School Boards Association and the New York State Council of School Superintendents reported.  “If school districts are going to minimize property tax increases while dealing with rising expenses and decreased state aid, it will be impossible to avoid employee layoffs,” said Timothy G. Kremer, president of the School Boards Association.

12 Local Schools Could Face Bankruptcy  - California State Superintendent Jack O'Connell today announced a 17 percent increase in the number of school districts that may be unable to meet future financial obligations because of the continuing state budget crisis and cuts to public education. Massive state budget cuts are crippling our public school system's ability to operate," O'Connell said. In the first interim status report of the 2009-10 fiscal year, 126 local educational agencies are now on the Fiscal Warning List list, which is up 17 percent from the 108 school districts on the watch list last June

State to Santa Rita School District: Make drastic cuts or face bankruptcy - The situation for the Santa Rita school district is dire, said Superintendent Mike Brusa."The real problem is the state's reduction," Brusa said. "They are pulling so much of our revenue." By the 2011-2012 school year, the district's deficit will have grown to $3.5 million. The district's operating budget for the current school year is $23.7 million. The deficit takes into account the requirement for the district to maintain 3 percent reserves.

19 Sacramento-area school districts make state's fiscal early warning list - Every one of Sacramento County's major school districts and many in Placer and El Dorado counties are on shaky ground financially, say state officials. Nineteen local school districts have made the state's fiscal early warning list – up from nine last year. In the 2006-07 school year, only 22 school districts throughout the state made the list. This year, state education officials said the list has grown to 126 districts

Cobb schools may have to cut budget deeper than expected - Cobb schools chief Fred Sanderson told the seven-member board that the system’s budget shortfall will likely be $137.7 million next year because of declining revenues. A week ago the working shortfall figure for the budget year that begins July 1 was about $100 million. Cobb, Clayton, DeKalb, Gwinnett, Fulton, Atlanta and other school systems have all been hammered by state cutbacks in funding and declining property tax revenues as a result of a real estate bust that has reverberated through all sectors of the economy.

Albuquerque schools: 700 layoffs may be needed - Albuquerque schools superintendent Winston Brooks says a $43 million budget shortfall is leading to severe cuts for next school year, including the possibility that 700 employees might be laid off. In addition, the district wouldn't fill about 500 empty positions, resulting in a cut of 1,200 employees — about 10 percent of the work force.Employee salaries and benefits make up about 85 percent of the $655 million operational budget for Albuquerque Public Schools.

N.J. School Staff Cuts Planned in 90% of Districts (Bloomberg) -- More than nine in 10 New Jersey public school systems that responded to a poll by a state education group said they plan to trim staff for their 2010-11 year to cope with Governor Chris Christie’s funding cuts.  Ninety-three percent, or 138, of 149 districts that submitted answers to a survey by the New Jersey School Boards Association said their budget proposals call for firing workers or cutting staff through attrition. The number of school systems planning reductions should grow as more respond to the request for information, said Marie Bilik, the group’s executive director.

Illinois' public schools hit by 'double whammy' of economic pain - The Illinois comptroller’s office has a $4.3 billion backlog of bills that haven’t been paid, and some of those date back as far as Sept. 1, spokesman Alan Henry said. “We’re paying the things that have to be paid every month,” Henry said, and education funding has to compete with other state priorities, including debt payments, Medicaid reimbursements and a working state government. The state makes its general state aid payments to school districts twice a month — money that districts can use for anything they need, Regional Superintendent Richard Fairgrieves said. Most of that money goes to a district’s education fund, which covers day-to-day operations such as employee salaries and benefits. But the state isn’t paying the required quarterly payments for mandated programs, such as special education, transportation and free breakfast and lunch.

20000 teachers to be laid off in state, group says A coalition of Illinois education groups says more than 20,000 teachers could be laid off from state schools in the next school year. The coalition is surveying 944 school districts and other educational institutions in the state and said this week it has heard from three-quarters of them so far on the layoffs they're planning. Already 17,228 layoffs have been reported."We expect job cuts could top 20,000 when all the final data is in," said Brent Clark, executive director of the Illinois Association of School Administrators, one of the six groups in the coalition.

State Lawmakers Consider Four-Day School Week - Illinois lawmakers are considering a four day week for some struggling schools. Supporters say it would help districts save money on utilities and busing. But State Representative Monique Davis, a Chicago Democrat, said "I don't believe that children should be told, "You can stay home alone for a full day and take care of yourselves, take care of your little brothers, take care of your little sisters, because the state can no longer afford to educate you." it would just pass fiscal problems onto students and their families. Districts would have to hold public hearings before cutting any school days. The plan would have to be reviewed by the Illinois State Board of Education.

Sallie Mae facing thousands of layoffs While Congress could not come to an agreement on single-payer health insurance, it did reach a consensus - or should we say reconciliation - in the correction passed on Thursday for a single-payer student loan program."You basically will be borrowing from the government as if it were a bank," said Sallie Mae Senior VP Jon Kroehler. So the private partnership version of student lending, which is the heart and soul of Sallie Mae's business, gives way to direct government lending. Sallie Mae employs 8,500 people nationwide, with 1,700 of those working in Fishers and 700 more in Muncie.

Sallie Mae Complains That Direct Government Loans Will Increase Efficiency - That is the implication of its complaint that getting private financial companies out of the government insured student loan business will cause it to shed 2,500 jobs. Since the government is not hiring new employees to deal with the extra business, the implication is that these people were unnecessary paper pushers. This move by the government is freeing up resources to be used more efficiently elsewhere.

Top Students Earn Big Money for Egg Donations -Many egg donation agencies and private couples routinely exceed compensation recommendation limits for potential donors, a new study finds.From a sample of over 300 college newspapers, findings revealed that almost one-quarter of advertisements offered payment in excess of $10,000, a violation of guidelines issued by the American Society for Reproductive Medicine (ASRM).  Compensation strongly correlated with average SAT score of the university’s students, according to the study published in The Hastings Center Report of the Georgia Institute of Technology.  In addition, approximately one-quarter of the advertisements listed specific requirements for potential donors, such as appearance or ethnicity. This also goes against ASRM guidelines, which prohibit linking compensation to donor personal characteristics.

Is education on the wrong track? - It is fair to say that I’ve asserted that “school reform efforts are distracting from more important social welfare goals,” but a little misleading when phrased in this way. A better summary of my concern is that “school reform efforts are distracting from more important environmental causes of low student achievement.” It is conventional in education policy these days to say that the most important influence on student achievement is the quality of a teacher. This is only true if it is qualified as the most important school influence on achievement. Fifty years of social science research has confirmed, over and over again, that the best predictor of student achievement is not teacher quality or any other school influence, but the social and economic circumstances of the children.

Ill. universities struggle without state payments - — The University of Illinois postponed the search for a new dean of its College of Media. Southern Illinois University in Carbondale isn’t paying its bills on time. And Northern Illinois University has frozen most hiring. As Illinois’ public universities await hundreds of millions of dollars in overdue state money, most have managed to cut back in ways students and tuition-paying parents aren’t likely to notice. But that could change — with tuition increases, larger classes and fewer course choices — if the money doesn’t come through soon, officials said. “You will probably see some creeping up of class sizes” over the next few semesters,

Pension Problem: Teacher's Pensions Grossly Underfunded - Pension promises are now causing problems in Pennsylvania. Some school district's are looking at a 500% increase in payments to the state teacher's pension fund something they say they just can't cover. The budget process for next year has already started and in this economy people say they can't afford property tax increases. That leaves school districts stuck with trying to find a creative ways to generate revenue, like pay to play. But they say nothing they can do will account for the pension problem. "It will bankrupt every school district in the state.""

'A pension tsunami': Officials say school funding crisis is on the horizon - A financial storm is hitting Pennsylvania’s school districts because the pension system is severely underfunded. “The current funding issue confronting PSERS (Public School Employees’ Retirement System) represents the greatest challenge the agency has faced in its history,” Jeffrey Clay, PSERS executive director, said in a written statement. “It has been described as a pension tsunami and a retirement disaster,” he said. “Unfortunately, this is not media headline hyperbole. We have a real school finance crisis looming.”"

Pension Woes May Deepen Financial Crisis For States -There's a looming U.S. financial problem that's big, is getting larger and could threaten the solvency of some states. From Connecticut to California, pension funds for teachers, firefighters and other public employees are severely underfunded."Generally, they're in an abominable state," says Joshua Rauh, an associate professor of finance at the Kellogg School of Management at Northwestern University. A recent report from the Pew Center on the States put the tab for unfunded pension liabilities at $452 billion. But Rauh and others say pension funds are using unrealistic assumptions about investment returns, meaning the pension funding hole is likely much deeper. "Our calculation is that it's more like $3 trillion underfunded," Rauh says. And the kicker is that taxpayers are on the hook.

Student loan reforms ends use of private lenders - Riding the coattails of a historic health care vote, the House Sunday also passed a broad reorganization of college aid that affects millions of students and moves President Barack Obama closer to winning yet another of his top domestic policies. The bill rewrites a four-decades-old student loan program, eliminating its reliance on private lenders and uses the savings to direct $36 billion in new spending to Pell Grants for students in financial need. In the biggest piece of education legislation since No Child Left Behind nine years ago, the bill would also provide more than $4 billion to historically black colleges and community colleges.

Senate committee begins shifting teacher pension costs to counties - The Maryland Senate budget committee has taken the first step toward passing half of the state’s massive burden for teacher pensions onto local governments, as part of the budget it voted to send to the Senate floor on Monday.The Budget and Taxation Committee approved language Friday that would begin moving the pension obligations to local governments next year. Nothing would change in the fiscal 2011 budget now being reviewed, but the move could shift nearly $338 million to counties within five years. The state now pays for all teacher pensions. All told, the committee reduced nearly $120 million from Gov. Martin O’Malley’s proposed budget. Over the next five years, however, the changes are expected to cut about $1 billion in state spending obligations. That could likely cut in half long-term budget deficits of over $2 billion that the budget staff is projecting

Shortfall Threatens Illinois Pension System - If states could go bankrupt, Illinois might be the first. State finances are in such a mess that many experts say the "Land of Lincoln" is on borrowed time and money. Today, the unfunded pension liability in Illinois is much greater than the pension funds' assets, and has ballooned to a staggering $77.8 billion."That means every man, woman and child in the state of Illinois is on the hook for $6,031 in pension promises that we don't have the assets for," says Lawrence Msall, president of The Civic Federation, a Chicago-based group that keeps tabs on state and local government finances.

Illinois General Assembly approves pension reforms -- Future government employees throughout Illinois would have to work longer to get full retirement benefits, and the size of those pensions would be limited under a measure that zoomed through the General Assembly on Wednesday after years of calls for reform. The idea is to save billions of dollars in the coming decades for taxpayers who will have to dig deep to cover retirement costs for teachers, lawmakers and many public servants throughout state government, universities, cities, counties and park districts. But the pension cutbacks won't apply to anyone currently in the retirement systems, only to new government hires and state officials elected after the measure takes effect.

Funding gap widens -While many public pension funds are self-sustaining, meaning they have sufficient assets to cover all liabilities, an increasing number of funds are finding themselves coming up short.  California's fund, for example, had assets equal to 118 percent of its liabilities in 1999. In 2008, however, its assets equaled only 89 percent of its liabilities, according to a February study by the Pew Center on the States.  To keep that number from rising, the state must contribute approximately $12.4 billion a year to its retirement fund.  Nationwide, the unfunded liability for states is somewhere in the neighborhood of $1 trillion.

Trillion-Dollar Pension Crisis Looms Large Over America -The country’s pension system faces trillions of dollars in unfunded liabilities. Assuming they can laugh about such things, pension fund accountants might consider telling a joke that goes like this:  What’s the difference between General Motors and California?  California hasn’t gone bankrupt. At least, not yet.  General Motors Corp. did go bankrupt, of course, in a historic Chapter 11 filing orchestrated by the federal government last June. A similar fate for California isn’t out of the question, though it is unlikely. No U.S. state has ever gone bankrupt, although California’s Orange County back in 1994 and, more recently, the City of Vallejo did take the plunge.  California’s $20 billion financial crisis — just the latest in a series, like a Hollywood horror movie with endless sequels — makes it Exhibit A of the pension funding predicaments looming over many state and local governments in the U.S.

New York's Cuomo Probes Pension 'Spiking' - WSJ. - New York became the latest state to shine a light on the practice of pension "spiking"—big increases in a government worker's salary just before retirement to boost the lifelong pension payout. New York Attorney General Andrew Cuomo said Thursday his office was investigating what he called "manipulation" of government workers' salaries and overtime pay to increase their pensions, which are mostly calculated based on the final years of income. Mr. Cuomo called the moves a burden to taxpayers.  Spiking, which is legal in most places, has come under increased scrutiny in the past couple of years. As private-sector workers have fallen upon tougher times and have seen their retirement savings shrink, anger has grown over what are perceived to be overly generous retirement benefits for public employees. In particular, six-figure pensions that can result from spiking have drawn headlines.

New Jersey Cuts State Workers' Benefits - WSJ - New Jersey adopted a slew of measures to scale back government workers' benefits, as politicians from both parties allied to tackle the state's ballooning public-pension costs. Late Monday evening, Republican Gov. Christopher Christie signed three bills that require all government employees to contribute, or contribute more, to the cost of their health-care insurance. For new government hires, the measures limit payouts for unused sick leave, bar part-time workers from being eligible for pensions and eliminate pension benefit raises approved in 2001.

Delusions of Retirement Adequacy -  I almost called this “EBRI Says Workers Are “Clueless” About Retirement Needs” but then that would have given the whole thing away too soon.  The issue we are discussing today comes to us from MacroMaven’s Stephanie Pomboy, via Alan Abelson in Barron’s. The subject: Our vastly underfunded public and private retirement system(s). It seems there is a surprising disconnect between reality and what the respondents in the Employee Benefit Research Institute (EBRI) latest retirement survey seem to believe. Workers have a rather unwarranted expectation of actually being able to afford retirement — despite seeing their retirement savings rate shrink.

Social Security Payout to Exceed Revenue This Year – This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.  Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual. The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Social Security Goes into Deficit - Every since the early eighties, when the Greenspan commission kicked the can down the road with a combination of tax increases and later retirement ages, analysts have been awaiting the day when the system would finally go into deficit.  That date has been sliding around between 2016 and 2020 for some years now, but the suspense is finally over: the system is going into deficit this year. " . . . payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program's revenue has fallen sharply, because there are fewer paychecks to tax." According to the CBO report from which that article is drawn, the deficit will persist until around 2014, at which point it will go temporarily back into surplus before returning permanently to the red in 2018.

Oh Yeah, That Social Security Problem…We’ve been so busy with health care reform and trying to figure out how to “bend the health cost curve” that we’ve almost forgotten about the other federal entitlement program that is on an unsustainable (albeit less severe) fiscal path.  An article in today’s New York Times reminds us of that other program, Social Security, with the newsworthy event being a Congressional Budget Office table that reveals the program is expected be in a cash deficit this year–with Social Security benefits paid out expected to exceed Social Security payroll taxes collected.  True, the Social Security program only faces one of the two pressures adversely affecting Medicare spending: just the demographic challenge of a rising elderly population relative to the working-age population.  And as a result the problem is not as large. 

Social Security: We Can Solve This - So how do we fix the social safety net? How do we promise within our means? The New York Times called a few bright folks to opine on this yesterday, and the sum of their ideas probably encompass what any big commission would recommend. To wit, we need to raise the socal security age, yet again. The age is already being bumped up and will reach 67 by 2027. But there needs to be another bump to reflect that reality of rising longevity.  The other contributors advocate removing the income ceiling and taxing all wages, and another says social security payments should not be adjusted up for inflation. In the end it comes down to trimming benefits and raising taxes. (Of course, there are those who want to junk the whole system, but that's for another blog post.)

Social Security will never go bankrupt - The NYTimes leadsThis year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office. There is nothing important about this threshold. The Government prints money whenever it spends, and is thus never operationally constrained in its spending. Spending too much will, of course, cause inflation, but whether the system pays out more than it takes in, or whether it accumulates a "trust fund" (which is a meaningless concept) or exhausts this "trust fund" has no bearing on anything.

That's the headline and lede...where are the interesting parts? - From the NY Times yesterday: "Social Security to See Payout Exceed Pay-In This Year" That's the headline.  The interesting parts are buried deep.  "For accounting purposes, the system’s accumulated revenue is placed in Treasury securities. In a year like this, the paper gains from the nterest earned on the securities will more than cover the difference between what it takes in and pays out. Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly."

Why reform health care?- I find it helpful in thinking through these issues to consider two polar extremes of what the objective of health insurance is taken to be. In the first case, consider a group of people, all of whom are healthy at the moment, all of whom have the same risk of needing significant assistance with medical expenditures at some point in the future, and none of whom know whether they are the one who is going to need assistance. If the individuals each pool their resources, with the funds subsequently used to assist those for whom the needs arise, each of them would perceive themselves to be better off as a result of being included in the pool. Now consider the opposite extreme, namely a group of people each of whom already knows with perfect certainty who is going to need medical expenditures and who is not. In this case, if the funds of the group are pooled, with payments going from the healthy to the sick, it is not Pareto improving-- those receiving the funds are better off and those supplying the funds are worse off.

What Do We Owe the Deserving Sick? - The main recurring question in the comments on the Separation of Health and State Debate: What do we owe the deserving sick?  Josh K asks: It seemed to me like the crux of the debate was whether or not we, as wealthy able bodied people, have any moral obligation to those who are less fortunate than ourselves. Do you think we have a duty to the deserving poor? Why or why not? Like David Balan (much to my surprise), I think that the distinction between the deserving and undeserving poor is important.  Forcing people to help the undeserving poor seems clearly wrong to me.  Forcing people to help the deserving poor is a harder case.

The Final Health Care Vote and What it Really Means - Robert Reich - So don’t believe anyone who says Obama’s health care legislation marks a swing of the pendulum back toward the Great Society and the New Deal. Obama’s health bill is a very conservative piece of legislation, building on a Republican rather than a New Deal foundation. The New Deal foundation would have offered Medicare to all Americans or, at the very least, featured a public insurance option.The significance of Obama’s health legislation is more political than substantive. For the first time since Ronald Reagan told America government is the problem, Obama’s health bill reasserts that government can provide a major solution. In political terms, that’s a very big deal

 Health-Care Overhaul Adds Millions of U.S. Customers (Bloomberg) -- Drugmakers and health insurers will gain millions of customers under legislation overhauling the U.S. medical system. The industry also will pay new fees to the government, and face stricter rules that may narrow profit margins and fuel mergers. The bill that the House passed in a pair of votes yesterday expands coverage to 32 million uninsured Americans, according to Congressional number crunchers. That means more sales for Pfizer Inc., the world’s largest drugmaker; UnitedHealth Group Inc., the largest health insurer; and a cluster of companies led by Amerigroup Corp. that specialize in managing services through Medicaid, a program that will grow in the remake.

News Analysis - Obama’s Health Care Victory Carries a Cost…Whether it was a historic achievement or political suicide for his party — perhaps both — he succeeded where President Bill Clinton failed in trying to remake American health care. President George W. Bush also failed to enact a landmark change in a domestic program, his second-term effort to create private accounts in the Social Security system. At the core of Mr. Obama’s strategy stands a bet that the Republicans, in trying to portray the bill as veering toward socialism, overplayed their hand. Fueled by the antigovernment anger of the Tea Party movement, Republicans have staked much on the idea that they can protect the country by acting as what the Democrats gleefully call the “Party of No.”

We On The Right Should Remember 2003 When We Lament 2010 - I was distressed to read this post by Megan McArdle about "The Future after Health Care," There seem to be three complaints here. The third complaint is the most legitimate of the three, that we have created a new entitlement with dubious financing and greater government involvement in the provision of health care.  This is more true than I would like it to be, but given what Republicans passed with Medicare Part D, they have surrendered the fiscally responsible high ground.  And, more importantly, they surrendered the political high ground when they failed to propose a coherent alternative that addressed the critical problems of pre-existing conditions in health insurance markets.  It was a mystery to me that no Republican stepped up with a sensible alternative that addressed the structural problems without committing to such a large federal government role in the conduct and financing of health care markets. 

The Liberal U: Health Care Reform Edition - Though not nearly as strong as it sometimes appears the liberal U seems to be present in this Gallup poll on the Health Care Reform. The poor support it overwhelmingly. The affluent support it mildly and the middle class is against it.  What’s ironic is that according to the Washington Post calculator you stop getting benefits from HCR right around 90K.  Just another nail in the coffin of the “people vote their wallet” hypothesis.

Ezra Klein: We have something to fear from fear-mongering itself - I don't want to exaggerate the importance of the death threats being made against congressmen who voted for health-care reform. Nuts are nuts. But there is a danger to the sort of rhetoric the GOP has used over the past few months. When Rep. Devin Nunes begs his colleagues to say "no to socialism, no to totalitarianism and no to this bill"; when Glenn Beck says the bill "is the end of America as you know it"; when Sarah Palin says the bill has "death panels" -- that stuff matters.

Republicans Block Senate Committee Hearings, Including On National Security Matters, For Second Day In A Row - ThinkProgress yesterday reported that all of Tuesday’s Senate committee and subcommittee hearings had to stop after 2:00 p.m. because of Republican objections. There is a little-noticed Senate rule that says committees need permission to meet anytime after two hours after the Senate convenes. Without permission, even a committee already in session has to stop meeting. No committee meetings are allowed to occur after 2:00 p.m. The Senate generally waives this rule by unanimous consent at the start of business each day. But to protest health care legislation, Republicans have refused to give their consent this week, bringing committee work in the Senate to a virtual standstill.

Measuring the Impact of Health Insurance on Inequality - A substantial part of the inequality literature in the United States has focused on yearly levels and trends in income and its distribution over time. Recent findings in that literature show that median income appears to be stagnating with income growth primarily coming at higher income levels. But the value of health insurance is an important and growing source of economic well being for American households that is missed by focusing solely on income. In this paper we take estimates of the value of different types of health insurance received by households and add them to usual pre tax post transfer measures of income from the Current Population Survey's March Annual Demographic Supplement for income years 1995-2008 to investigate their impact on levels and trends in measured inequality. We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend. As an application of our fuller measure of income, we consider how two provisions of current health reform proposals to expand health insurance affect the level and distribution of economic well being.  You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

The Health Care and Education Reconciliation Act

H.R.3590: Title: Patient Protection and Affordable Care Act.

House Approves Landmark Bill to Extend Health Care to Millions - NYT -With the 219-to-212 vote, the House gave final approval to legislation passed by the Senate on Christmas Eve. Thirty-four Democrats joined Republicans in voting against the bill. The vote sent the measure to President Obama, whose yearlong push for the legislation has been the centerpiece of his agenda and a test of his political power. After approving the bill, the House adopted a package of changes to it by a vote of 220 to 211. That package — agreed to in negotiations among House and Senate Democrats and the White House — now goes to the Senate for action as soon as this week. It would be the final step in a bitter legislative fight that has highlighted the nation’s deep partisan and ideological divisions.

A Historic Moment for Health Care? - Room for Debate Forum  - NYTimes  For many, the health care overhaul, which was approved by the House, 219 to 212, and will be signed into law by President Obama, is far from perfect. For some, it’s a disgrace. But for others, it’s a bold effort that expands health care to more Americans than ever in the nation’s history. Whatever the assessments, today’s vote in the House represented change. Is this legislation as significant as the creation of Medicare? Will it fundamentally alter the social safety net?We invited several public figures and historians to give us their thoughts on this moment.

$85 Billion is 2 Percent for the Pharmaceutical Industry - The NYT article on the passage of the health care reform package noted that the pharmaceutical industry had agreed to reduce their charges by $85 billion over the next decade. It would have been helpful to tell readers that this is a bit more than 2 percent of projected revenues over this period for the industry. The patent monopolies granted by the government on prescription drugs give them about three times as much money every year.

Background Noise - Bloggers are wild with discussion of the new health care bill passage. We are still hearing the wild claims from all sides, and expectations are way too high. Administration of any program formed by the legislation will be bureaucratic in the extreme, wrap immense resources into Accounting Costs, and probably do nothing to reduce medical costs within the Country. I am not cognizant of the basic stipulations of the bill, and may have to eventually concede that it’s passage was a Step forward; though I very much doubt I will have to do so. The Cost of health administration has obviously been vastly increased, with the sincere judgement that it will take the average physician at least 3 years to simply read the entirety of medical restrictions implanted by the legislation. Medical administrators will assert restrictions in a much shorter period, possibly within 3 months. There will be a paralysis period in the interim, with no one to say Yes or No to any medical treatment, with No the preferred statement with any reference to potential financial loss. We might not have eased the treatment of health problems, but introduced an epileptic disturbance to the practice of medicine. We can only hope for the Best, and expect the Worst

How the Health Care Overhaul Could Affect You - Graphic - Major ways the overhaul will affect those who currently have health insurance and those who do not. (multiple choice interactive)

Concord on the Risks in the Health Reform Reconciliation Bill - The Concord Coalition has released a series of videos, blog posts, and statements explaining the fiscal risks and challenges in the health reform reconciliation bill. One of the videos is shown above, but you can get to the others through this page. We basically elaborate on the quick points I made in my blog post from last week. We think the bill does a lot of good things and has tremendous potential to be fiscally responsible–if the political will is there, not just now, but more crucially (and unfortunately much more dubiously) ten years from now. What if the fiscally-courageous “follow through” doesn’t materialize and Congress and whichever Administration is in place ten years from now says “never mind”? 

Healthcare, Tradeoffs, and the Road Ahead - Well, it appears certain that the healthcare reform bill will become law. One thing I have been struck by in watching this debate is how strident it has been, among both proponents and opponents of the legislation. As a weak-willed eclectic, I can see arguments on both sides. Life is full of tradeoffs, and so most issues strike me as involving shades of grey rather than being black and white. As a result, I find it hard to envision the people I disagree with as demons. Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

How big is the bill, really? - We should start by putting the health-care bill into proper perspective. Opponents and supports of the bill have both profited immensely from exploiting the average person's inability to put billions and trillions into context. So let's begin by breaking down the numbers. The $900 billion price tag is repeated with the regularity of a rooster's crow. That's a shame, as the number is, somewhat impressively, misleading in both directions. On the one hand, that $900 billion -- or, more precisely, $940 billion in the final legislation -- is stretched over 10 years. But people don't think in 10-year increments. They don't pay taxes once a decade. Put more simply, the bill will cost an average of $94 billion a year over the first 10 years.But that's not quite right either: The bill wouldn't really kick in until 2014.

Health Care Bill Myths (table with actual facts)

Factbox: Details of final healthcare bill   (Reuters) - The package of changes now go to the Senate for approval. The Senate is expected to take it up this week. If it passes unchanged it will then go to Obama for his signature. If any changes are made by the Senate, the package of changes will have to go back to the House for further action. The legislation aims to extend coverage to 32 million uninsured people. Here are key provisions of the Senate-passed legislation and the proposed changes.

What Happens If You Don't Buy Health Insurance under Health Care Reform Bill? - The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

In Health Bill, Obama Attacks Wealth Inequality - NYTimes - For all the political and economic uncertainties about health reform, at least one thing seems clear: The bill that President Obama signed on Tuesday is the federal government’s biggest attack on economic inequality since inequality began rising more than three decades ago. Over most of that period, government policy and market forces have been moving in the same direction, both increasing inequality. The pretax incomes of the wealthy have soared since the late 1970s, while their tax rates have fallen more than rates for the middle class and poor. Nearly every major aspect of the health bill pushes in the other direction. This fact helps explain why Mr. Obama was willing to spend so much political capital on the issue, even though it did not appear to be his top priority as a presidential candidate. Beyond the health reform’s effect on the medical system, it is the centerpiece of his deliberate effort to end what historians have called the age of Reagan.

The Medicare Millionaires' Tax - A reader points out that one statistic in my column on Wednesday about the health care bill may have misled some people. I wrote: A big chunk of the money to pay for the bill comes from lifting payroll taxes on households making more than $250,000. On average, the annual tax bill for households making more than $1 million a year will rise by $46,000 in 2013, according to the Tax Policy Center, a Washington research group. So I asked Joseph Rosenberg of the Tax Policy Center what the average tax hit would be for a household making precisely $1 million. This includes new Medicare taxes on earned and unearned income above $250,000. Mr. Rosenberg’s answer: $9,959

The essence of the health care legislation - David Leonhardt argues that the health care changes will work to reverse the inequality of the age of Reagan. There are two problems with these claims. The first is a conjecture of mine that the rise in inequality is mainly a statistical mirage created by focusing on household income. When the divorce rate rises as it did in the 1970s, any measure of income inequality by households gets distorted. That is why you can observe in the data that changes in inequality or the median household inome are very poor predictors of what has happened to the person who was at the median at the beginning of the sample. The few data sets we have that follow the same people over time show that their incomes are doing very well even though it appears in other data that the “rich” get all the gains and everyone else’s income is stagnant.

A Rounding Error In The Right Direction - I will dispense with the health care issue today. This is the last of my 3 posts on the subject—I promise. There are so many other disasters to cover, so I need to get this one out of the way. Let's start with Ezra Klein's How big is the bill, really? Klein's point is that compared to the projected amount the U.S. will spend on health care in future years, costs measured in billions are insignificant. He's right. The graph indicates that national health spending is projected to be $4,530,000,000,000 (trillions) in 2018, an increase of about $2,000,000,000,000 over the 2010 levels. That's with health care reform, which the CBO estimates will save $138,000,000,000 (billions) over the next 10 years. Thus on the cost containment issue, we have accomplished a rounding error in the right direction.

Health Reform Will Reduce the Deficit - Despite an official estimate by the Congressional Budget Office (CBO) to the contrary, some critics of the new health reform legislation — such as Rep. Paul Ryan and former CBO director and McCain campaign adviser Douglas Holtz-Eakin — charge that it will not reduce federal budget deficits because it relies on budgetary gimmicks or games.[1] Careful analysis of these charges shows them to be misleading or inaccurate. They do not withstand scrutiny. CBO estimates the legislation will reduce the deficit by $143 billion over the ten years from 2010 through 2019. [2] In the following decade, 2020 through 2029, it estimates that the legislation will reduce the deficit by an estimated one-half of 1 percent of gross domestic product (GDP), or about $1.3 trillion. CBO also anticipates that health reform “would probably continue to reduce budget deficits relative to those under current law in subsequent decades, assuming that all of its provisions continue to be fully implemented.” We now examine the specific claims about budgetary gimmicks and games one by one.

Wrapping Your Head Around the Health Bill - To appreciate what the legislators crafting the bill tried to accomplish, anyone truly interested in this reform bill might start at the beginning, with Senator Max Baucus’s “Call to Action: Health Reform 2009” [pdf]. As to the Senate bill itself, I would recommend to readers a summary of that bill, prepared by the Congressional Research Service. The Congressional Research Service is a bipartisan research arm of Congress. This 24-page summary of H.R. 3590 is written in plain English. It can give any reader who actually cares to know what is in the bill a good grasp of its contents. A similarly readable summary of H.R. 4872, the reconciliation bill passed by the House and now being debated in the Senate, can be found here [pdf]. That summary also is written in plain English, rather than the legalese of formal bills, although it should be kept in mind that the bill is merely a set of proposed amendments to H.R. 3590, the Senate bill.

Consequences Of Health Care: Valuations - Obama has said that there would be no "material" impact to finances until 2014.  Liar. Truth: Caterpillar and John Deere already announced non-cash charges of $100 and $150 million, respectively, for this year based upon the impact of this bill on forward retiree health care costs.  The law says you must account for such changes when you become aware of them, and that would be now. But today a 100-kiloton device landed on AT&T's balance sheet - they announced a one billion dollar non-cash charge:On March 23, 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590). Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy.  AT&T Inc. ("AT&T") intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change.  As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company. Oh, there won't be any material impacts until 2014 eh?

The Legal Challenge to Health Care Legislation - Politico's The Arena asks: State AG's lawsuit against health care: Do they have a case? Dean Baker responds: What happened to the Republicans' opposition to frivolous lawsuits? From what I've read, there are two points to make. First, it would be crazy to rule that the individual mandate (or any other component of the legislation) is unconstitutional. Second, we have four crazy justices on the Supreme Court.

David Frum, AEI, Heritage And Health Care -Krugman - In discussing the Frum firing, Bruce Bartlett asserts that AEI has muzzled its health-care experts, because the truth is that they agree with a lot of what Obama is proposing. I find this quite believable; back in 2003 Stuart Butler of the Heritage Foundation, which is supposedly harder-right than AEI, proposed a health care reform consisting of … drumroll … an individual mandate coupled with subsidies to make insurance affordable. In short, Obamacare.  I was struck, by the way, by Butler’s recommendation that we  Provide support to people to obtain health care based on their need, not where they happen to work, or their eligibility for welfare, or their military record, or their age. From each according to his ability, to each according to his need?

Delays and Delays (Not Tom) -Krugman - There’s a new meme running around which claims that the deficit-reduction estimates for health reform are bogus because Democrats gamed the CBO. What feeds into this perception is the delay in implementing reform, with most of the program not kicking in until 2014. How serious a concern is this?...But it turns out that the arithmetic on health reform isn’t at all the same. The costs are delayed — but so is the extra revenue and savings. Ezra Klein has a nice chart:

It Ain’t Over Until the Speaker Lady Sings by economistmom …and gets the President to (sign and) sing along. There are lots of good stories speaking of Speaker Pelosi’s own determination and the pressure she put on the President to follow through with the necessary leadership on health reform that only the President (if anyone) could provide...  The health reform effort seemed about to crash and burn just two months ago.  ... Well, her solution seemed to be to keep up the kind of determination, forcefulness, and yet grace and diplomacy that perhaps only the first female speaker (and a mom and grandmother) could provide...

Health care reform and the Amish…- Yoder and the rest of the Amish community have good reason to be interested and concerned. If H.R. 3200 passes into law in its present form, it would require all Americans to buy health insurance. The Amish, though, discourage owning any insurance in favor of taking care of themselves and each other. A clause in the bill likely would allow most Amish families an exemption from the insurance requirement, but the bill could still create sticky issues for the young people who have not formally joined the church.Of even more concern for many is the affect the bill could have on Amish-owned businesses. While the religious conscience exemption clause in H.R. 3200 may protect most Amish individually, it probably won’t apply to Amish-owned businesses.

Employers brace for health reform changes - Companies and their lobbyists said a host of new rules and regulations are likely to increase taxes and health insurance premiums while hampering job growth for manufacturers, retailers and other large businesses."This legislation will make it more difficult to offer benefits not just for retirees but also current workers as companies have to weigh these costs," said Dena Battle, the National Association of Manufacturers' tax policy director.Lawmakers' changes are critical in a country where more than 150 million working-age adults get health benefits from their employers. Government programs insure another 45 million elderly and disabled and more than 43 million poor.

NOW Unhappy With Abortion Compromise: 'Obama Breaks Faith With Women’ - While House Democrats are hailing President Obama's executive order on abortion as a breakthrough that will help the final passage of health care reform legislation, at least one group is not happy. The National Organization for Women (NOW) issued a statement this evening declaring that the group is "incensed" by the move. NOW President Terry O'Neill said in a statement emailed to reporters that Obama's executive order was "designed to appease a handful of anti-choice Democrats who have held up health care reform in an effort to restrict women's access to abortion." O'Neill accused Obama of trying to "lend the weight of his office and the entire executive branch to the anti-abortion measures included in the Senate bill,

States Say Overhaul Will Bust Already Strained Medicaid Budget - Florida, Texas and Pennsylvania are among 12 states preparing lawsuits challenging the constitutionality of the burden imposed by the legislation, according to statements by state attorneys general. The health-care overhaul will make as many as 15 million more Americans eligible for Medicaid nationwide starting in 2014 and will cost the states billions to administer. States faced with unprecedented declines in tax collections are cutting benefits and payments to hospitals and doctors in Medicaid, the health program for the poor paid jointly by state and U.S. governments. The costs to hire staff and plan for the average 25 percent increase in Medicaid rolls may swamp budgets, said Toby Douglas, who manages the Medicaid program for California, which hasn’t joined the lawsuits.

Ten States Plan Lawsuit Over Obama Health-Care Bill  (Bloomberg) -- Twelve states plan to challenge the constitutionality of the health-care overhaul passed yesterday by the U.S. House, according to statements made today. Florida Attorney General Bill McCollum said Florida, Texas and Pennsylvania are among 11 states that will sue “as soon as the president signs the bill,” claiming it places a burden on already cash-strapped states to pay for an expanded Medicaid program and build an exchange so individuals can find affordable insurance. Virginia Attorney General Ken Cuccinelli also said in a statement his state would sue on the similar grounds. States nationwide are facing unprecedented declines in tax collections, according to the Nelson A. Rockefeller Institute of Government in Albany, New York, and are cutting spending on these health programs for low-income residents. Florida will have to spend an additional $1.6 billion for Medicaid alone and hire 1,000 new workers to accommodate the overhaul, McCollum said.

Could SCOTUS Be The Death Panel For Health-Care Reform? - Now that President Obama has signed health-care reform into law, opponents of the bill are pinning their hopes of stopping it on a last-ditch legal strategy. A group of 13 state attorneys general has filed suit (pdf), arguing that the law is unconstitutional.  The bid seems far-fetched at first. But the Roberts Court has recently shown a willingness to strike down landmark legislation -- charges of judicial activism be damned. So, given the stakes, it's worth asking: Could health-care reform have made it through the congressional gauntlet, only to end up dying in the courts?

Health-Care Suits ‘Unlikely to Succeed,’ Scholars Say (Bloomberg) -- Lawsuits by 14 states seeking to scuttle health-care legislation signed by President Barack Obama have little chance of success in the face of the broad powers granted to Congress by the U.S. Constitution, scholars said.  Thirteen states led by Florida said the law signed yesterday illegally places a fiscal burden on their cash- strapped budgets with an expansion of state-run Medicaid. Virginia filed a separate suit contending the “individual mandate” requiring people to buy health insurance exceeds Congress’s powers.

US Law to Make Calorie Counts Hard to Ignore - NYTimes -- A requirement tucked into the massive U.S health care bill will make calorie counts impossible for thousands of restaurants to hide and difficult for consumers to ignore. More than 200,000 fast food and other chain restaurants will have to include calorie counts on menus, menu boards and even drive-throughs.  The new law, which applies to any restaurant with 20 or more locations, directs the Food and Drug Administration to create a new national standard for menu labeling, superseding a growing number of state and city laws. President Barack Obama signed the health care legislation Tuesday.

Last supper ‘has been super-sized’, say obesity experts - BBC - The food portions depicted in paintings of the Last Supper have grown larger - in line with our own super-sizing of meals, say obesity experts. The Cornell University team studied 52 of the most famous paintings of the Biblical scene over the millennium and scrutinised the size of the feast.  They found the main courses, bread and plates put before Jesus and his disciples have progressively grown by up to two-thirds.  This, they say, is art imitating life.

House approves huge changes to student loan program -- The student aid initiative, which House Democrats attached to their final amendments to the health-care bill, would overhaul the student loan industry, eliminating a $60 billion program that supports private student loans with federal subsidies and replacing it with government lending to students. The House amendments will now go to the Senate.  By ending the subsidies and effectively eliminating the middleman, the student loan bill would generate $61 billion in savings over 10 years, according to the nonpartisan Congressional Budget Office.  Most of those savings, $36 billion, would go to Pell grants, funding an era of steady and predictable increases in the massive but underfunded federal aid program for needy students. Smaller portions would go toward reducing the deficit and to various Democratic priorities, including community colleges, historically black colleges and universities, and caps on loan payments.

About that Government Takeover of the Student Loan Business - Under current law, federally supported loans are made both direct from the government and through private lenders. The government loans are direct loans (i.e., the government lends directly to students). The private loans are guaranteed by the government (i.e., private organizations lend to students and the government guarantees the lenders against the risk of default). The health/revenue/education legislation will eliminate the private lending channel. (The market for non-government private loans will continue to exist.)Opponents have denounced this change as a government takeover of the student loan market. That makes for a great soundbite, but overlooks one key fact: the federal government took over this part of the student loan business a long time ago.

What Healthcare Success?  -You have seen this before so please excuse the personal rant. Follows is a copy of a notice from my heavyweight health care provider, UnitedHealthcare/Oxford. Note that at the renewal rate insurance for a family of four now costs $58,600 a year. In the Heathcare debate the CBO but out some numbers on insurance costs for a family. Their high-end number was 17% of household income. By that calculation a family would have to have an income of $345,000 to afford this plan. This is no Cadillac. I pay minimums and co-pays. I had a surgeon I know and trust cut something recently. He was out of network so that cost $1,300. I have the Freedom Plan. But actually I am in jail. These folks have me over a barrel.

Post Mortem - Well, I’ve written plenty on this vile reactionary health racket bailout. I don’t have much desire to say much more now. So just a few words. Everyone agreed in principle that the system was broken, yet instead of chucking the whole thing they all agreed to further entrench the existing broken system. Instead of real reform they entrenched the existing abuses. They doubled down on organized crime.Don’t let any of this scum get away with comparing this to how Social Security was imperfect to start with but was then built upon. Social Security was structurally headed in the right direction from the inception, and only needed scaling. This reactionary entrenchment of the private parasite heads in exactly the WRONG direction. It builds the parasitic tollbooths into fortresses. It further scales up the inefficiencies, insanities, rent extractions, and crimes.

Obama’s Global Health Care Impact - - Finally Obama might have some global consequences...The the crisis offered hope about the global reform. Although we are still struggling with understanding how the global economy works, the eventual development of some kind of global economic policy umbrella has become increasingly inevitable. As this blog pointed out before, Barack Obama had a unique opportunity to design and push through such a global institutional architecture, and it has been disappointing that he decided not to do so. Yet, the health care reform that he finally pushed through the US Congress yesterday could have global impact.

Funding a Global Health Fund - World leaders will come together at the United Nations in September in order to accelerate progress towards the Millennium Development Goals (MDGs). Three of the eight MDGs involve bringing primary health services to the entire world’s population. A small amount of global funding, if well directed, could save millions of lives each year. The key step is to expand the Global Fund to Fight AIDS, Tuberculosis, and Malaria into a Global Health Fund. The Global Fund was created in 2002 to help the world battle those three killer diseases, and its accomplishments have been spectacular, making it arguably the most successful innovation in foreign assistance of the past decade.

World's slums grow despite rapid economy growth: U.N. - The number of people living in shantytowns increased by 55 million to 827.6 million as population growth and migration from the countryside outstripped the effect of upward mobility in cities, the U.N.'s biennial report on cities found. "The situation has improved over 10 years, but alas over the same period, the net increase of the urban poor is 55 million," Anna Tibaijuka, the executive director of the U.N. Habitat program, said in Rio de Janeiro. Some 227 million people escaped slum conditions from 2000 to 2010, meaning that countries easily surpassed their collective target under the U.N. Millennium Development target, the report said.

Chicago’s Evans Defends Fed Policy’s Effect on Developing Nations - Chicago Federal Reserve President Charles Evans on Wednesday countered criticism that the Fed’s aggressive loosening of monetary policy has led to a deluge of funds in developing nations such as China, saying the U.S. response to the financial crisis averted greater damage to the global economy and the fund injections have mostly remained in the U.S. China’s banking regulator said in November low U.S. interest rates had inflated speculative bubbles around the world. Beijing is trying to restrain surging housing prices and credit growth, efforts that would be complicated by funds entering from the U.S.

Charter Cities and the Benefits of Global Migration - - In too many places, weak or misguided rules hold people back. If people could migrate to better rules, they could improve their lives and, by their own actions, do much to reduce global poverty. Gallup reports that 700 million people would like to move permanently to another country if they had the chance. They don’t because voters in the destination countries often oppose immigration in large numbers. Understanding and addressing this opposition is an important challenge, but people needn’t remain stuck with ineffective rules in the interim. Charter cities can quickly create an opportunity for millions of people to move to places with better rules—the types of rules that will help to ensure that they can send their kids to school, keep their families safe, and find employment at a wage that more accurately reflects the value of their work.

Deepening Deficits, Around the Developed World - The Organization for Economic Cooperation and Development has put together a handy set of numbers showing deficits around the developed world. And according to the agency, every developed country except Norway ran a deficit last year: The graph shows the total deficit (or surplus) for each country’s governments — federal, state and local — as a percentage of each country’s gross domestic product. The average deficit in O.E.C.D. countries is about 8.2 percent of G.D.P. Greece is at the higher end, with its general government deficit — the deficit for all levels of government — taking up around 12.5 percent of its total output. The United States is not too far behind, though, with its general government deficit amounting to 11.2 percent of total output.

Trade collapse or trade crisis? - VoxEU - World trade fell dramatically during 2009, as widely documented on this site and elsewhere. But there has been little econometric analysis of the different explanations put forward. This column uses data from Belgium to argue that a fall in demand was the main culprit. It is not a trade crisis – it is a trade collapse.

Some Say Trade Numbers Don’t Deliver the Goods - The WTO says world trade fell 12.2% in 2009. On Friday, the organization predicted that trade would bounce back sharply this year, rising 9.5%.  But these figures don't tell the whole truth about trade. According to some economists, trade in finished products—the things consumers actually buy, such as cars, computers and iPods—declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported. By ignoring the multinational composition of goods, conventional trade data also make trade imbalances between some trading partners seem larger than they really are.

Econbrowser: A Misalignment Primer - As the release of the next Treasury Report to Congress on International Economic and Exchange Rate Policies looms, it might be useful to recount the various ways in which different observers define currency "misalignment". I have discussed several of these approaches in the past [0] [1], but a review of the approaches bear repeating, if only because there so much confusion regarding what constitutes currency misalignment.

Who Should Lead the IMF? - Now, however, the rumor mill is heating up with gossip that the Fund’s managing director, Dominique Strauss-Kahn, will leave in order to oppose Nikolas Sarkozy in the 2012 French presidential elections. ...A lame-duck managing director would hamstring the Fund. ...On top of this now comes the interesting news that the IMF has appointed Zhu Min, previously a deputy governor of the People’s Bank of China, as special adviser to Strauss-Kahn. Zhu will thus be part of the core management team. This, in turn, has fueled speculation that Zhu will be a candidate to become the next managing director. It is the turn of someone from outside Europe to head the IMF – Europe having had a monopoly on the position since the Fund was created following World War II.

WTO says China is world's biggest exporterThe World Trade Organization Friday confirmed China's pre-eminence in global markets, saying it had overtaken Germany as the world's top exporter.China's exports in 2009 came to $1.2 trillion last year, while Germany exported $1.12 trillion in goods and services. The United States, with exports of $1.06 trillion, was third on the list, The London Times Online reported Friday.With increasing frequency, China has been criticized for pegging its currency to the U.S. dollar, which has kept it undervalued by as much as 20 percent, giving its exporters that much more of an edge when selling products abroad.

W.T.O. Talks Are Stifling the Economy, One Argument at a Time  - FRUSTRATED with years of delay and stonewalling, 130 members of Congress last week urged the Obama administration to punish China for manipulating the value of its currency to the detriment of American exports. But this issue does not stand alone; it is part of the larger, murkier world of international trade policy, centered on the Doha round of World Trade Organization negotiations. These talks, which began in 2001, long ago became a quagmire. It’s time to admit the global economy has passed them by and pull the plug on them.

International reserves and involuntary borrowing - Borrowing is nearly always voluntary. Somebody might want to lend to me, but they can't force me to borrow from them if I don't want to. But there's an exception. A country that issues the reserve currency can be forced to borrow from other countries, if those other countries want to lend to it. This point helps us understand the relation between China and the US. To understand this point, lets go back to the gold standard first. Suppose gold is the only form of international reserves. Suppose one country, let's call it "China", decides it wants to hold a bigger stock of gold reserves. If the world stock of gold reserves is fixed, the only way that China can hold more gold reserves is if other countries hold less gold reserves.

Five Steps of the Global Geopolitical Dislocation Phase - At the end of this first quarter of 2010, with increasing signs of confrontation at international level on monetary, financial, commercial and strategic fronts, and as the severity of the social impact of the crisis is evident at the heart of major countries and regions, LEAP/E2020 is able to provide a first anticipation of the ensuing roll-out of this phase of global geopolitical dislocation.  A reminder that this phase can only be a precursor to a sustained reorganisation of the international system if, between now and the middle of this decade, the consequences of the collapse of the world order inherited from the second world war and the fall of the Iron Curtain fully come home to roost. In particular, this development requires a complete recasting of the international monetary system based on an international currency, replacing the current system founded on the US Dollar, the value of which would be based on a basket of the major world currencies weighted according to the respective size of their economies.

China holds key to dollar’s fate - In July of 1997, when the Bank of Thailand was forced to devalue the baht, few analysts anticipated that the move would lead to contagion affecting other countries in south-east Asia and that it would eventually spread to Korea and Taiwan. Within six weeks of the baht’s devaluation, the Indonesian rupiah was in freefall, going from 2,300 to the dollar to well over 10,000. The computer systems of some Japanese banks crashed as they were not programmed to handle a move from four digits to five. Fast forward a few years to the current economic situation, and the question is whether the US dollar will suffer a similar fate to the rupiah.

A stable yuan/dollar rate forever? - Speculation is rife about when, not just if, China should exit from its policy of stabilising the renminbi/dollar rate. The Financial Times editorial policy more generally, and Martin Wolf in particular have joined the usual ranks of American protectionists in bashing China for failing to appreciate. Unsurprisingly, investment banks and hedge funds are placing their usual one-way bets. Chinese officials are being closely quizzed for possible hints as to when the great event is going to happen. Governor Zhou XiaoChuan of the People’s Bank of China is playing the role of Hamlet. This month he told a press conference that the currency peg was a “special measure” to help China weather the financial crisis. “These policies sooner or later will be withdrawn.” In seeming contrast, Premier Wen Jiabao declaimed on March 5: “We will continue to improve the mechanism for setting the renminbi and keep it basically stable at an appropriate and balanced level”. But must China ever appreciate?

Some Thoughts on the Undervalued Yuan - I don't think claims that the yuan is not undervalued hold much water -- China maintains a fixed exchange rate to the dollar, accumulates dollar-denominated assets, and runs a large trade surplus with the US.  How exactly does that suggest that the yuan is anything but undervalued relative to what it would be if it floated? What to do about is more subtle. Paul Krugman is correct when he calls this a drastic form of mercantilism, and he has a point when he argues for a tough stance against the low value of the yuan. Obviously, China's leaders have something in mind besides improving the near-term consumption levels of Chinese citizens. China needs to continue to transition workers out of legacy state-owned enterprises and into a stable private sector.  I don't think it is anything insidious toward the US -- it is just the same sort of export-led growth that we have seen from many Asian countries, but now on a much larger scale. So we need to unwind a bit from our previous positions.  As Michael Pettis discusses very clearly, though, we don't have to unravel:

Ludicrous claims about the renminbi - With the Treasury’s verdict on global currency manipulators coming up on April 15th, the debate on the Chinese renminbi has not just been increasingly heated; it’s also turned ludicrous. The ludicrous took center stage last week after a key figure in the Chinese leadership suggested that the renminbi is not undervalued. Shortly after, two of the most loyal Ambassadors of Ludicrous—top economists at a couple of brand-name investment banks—argued that “the renminbi is not particularly undervalued…. China is importing a lot”; or that the US should mind its own business and save more.

The Threat the U.S. Must Muddle Through -- I have pretty well laid out over the past decade that I think the US will muddle through what promises to be a period of below-trend growth and a long-term secular bear market. It will not be pleasant or fun - there will be a lot of pain - but we will get through the coming crisis (note: I think the Big One is still in our future). That is what we do in a more or less free-market world. But, as I wrote 7 years ago and have written since, there is one caveat that turns me from a muddle through-er into a real doom and gloom type, and that is the threat of protectionism and trade wars. As in Smoot-Hawley, which made the Depression into something much worse than it should have been. Yet that is the prescription that Paul Krugman is advocating. In a commentary in last Sunday's New York Times ("Taking on China"), he called for an across the board 25% tariff on Chinese goods

China Says It Will Not Adjust Policy on the Exchange Rate - NY Times: Despite mounting pressure in Congress for the Obama administration to declare China a currency manipulator, the Chinese government is giving no indication that it will change its exchange rate policy.  After meeting with officials at the Treasury and Commerce Departments on Wednesday, China’s deputy commerce minister, Zhong Shan, told reporters, “The Chinese government will not succumb to foreign pressures to adjust our exchange rate.”  Mr. Zhong reiterated a statement this month by the Chinese premier, Wen Jiabao, who said he did not believe the currency, the renminbi, was undervalued.

China warns US against sanctions over currency BEIJING (AP) -- China's commerce minister warned the United States on Sunday against imposing trade sanctions over Beijing's currency controls, and said his country was likely to report a trade deficit in March." Asked what measures China would adopt if the Treasury Department declared it a currency manipulator, Chinese Commerce Minister Chen Deming said China would not sit idly by and reiterated Premier Wen Jiabao's statement a week ago denying that the yuan was undervalued. "If (the Treasury Department's) reply is accompanied by trade sanctions and trade measures, we will not ignore it," Chen said. "If it is followed by any international legal lawsuit against China, we will take them on."

China CEOs Join Obama in Supporting Yuan Appreciation (Bloomberg) -- Chinese executives are joining U.S. President Barack Obama in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.  Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.

China May Resume Yuan Float, Avoid Sharp Revaluation  (Bloomberg) -- China may allow the yuan to trade more freely against the dollar, while avoiding an abrupt revaluation that would wreck its exports, according to Fan Gang, an adviser to the country’s central bank.  “China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes,” Fan wrote in an opinion piece published today in China Daily, a government-backed English language newspaper. “If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness.”

America's Weak Dollar Policy Amounts to the Biggest Currency Manipulation in Human History-  The US Dollar depreciated by 37% between 2002 and 2008 (data here), see graph above. The president is playing with fire. For one thing, his country is being kept afloat by China's willingness to keep buying U.S. government debt. Obama really should tread carefully. At the same time, the US is now at risk of sparking what could be an all-out trade war. The reality is that America's "weak dollar" policy – its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts – amounts to the biggest currency manipulation in human history. At the same time, the U.S. has, for years, shamefully stalled on various rulings passed by the World Trade Organisation that show America to be breaching global trade rules.

US Lawmakers Consider Import Duties on Chinese Goods - China’s Vice Commerce Minister Zhong Shan told business leaders in Washington on Wednesday that China would reform its currency policy gradually and keep the exchange rate stable. But a growing number of U.S. economists estimate China's currency is undervalued by up to 40 percent.  They say that gives China an unfair price advantage in international trade, takes jobs away from other countries and adds to global financial distortions.   U.S. lawmakers are crafting legislation that would slap import duties on Chinese goods. This would help offset the price advantage China enjoys from suppressing the value of its currency.   Sponsors of a bipartisan bill want U.S. President Barack Obama's administration to formally label China a currency manipulator in a semi-annual Treasury Department report due on April 15th. 

China, U.S. Are on ‘Collision Course,’ Roubini Says (Bloomberg) -- The U.S. and China are on a “collision course” over the value of the Chinese currency and investors are underestimating the disruptions for global financial markets, according to Nouriel Roubini.  “The risk of a collision course on China’s currency peg and a wider trade rift between the world’s largest debtor and creditor nations has risen significantly in recent months,” Roubini, a professor at New York University, wrote in a note to clients. “Markets do not seem to be pricing in the potential consequences of the U.S. labeling China a currency manipulator, which could be significant even if both sides avoid taking immediate bilateral actions.” There is a 50 percent chance that the U.S. government will label China a currency manipulator, said Roubini, who issued his comments after attending a private meeting for Western delegates with Premier Wen Jiabao at the annual China Development Forum.

World Trade Protectionism "Getting Ugly", OECD Head Gurria Says  (Bloomberg) -- Initiatives to curb imports are rising around the world, threatening “disastrous consequences,” the head of the Organization for Economic Cooperation and Development said today.  “It is getting ugly out there,” OECD Secretary-General Angel Gurria said in a speech at a Beijing forum today. “There are too many fingers ready to pull the trigger. We must avoid it at all cost. Any miscalculation can have disastrous consequences.” Historically high unemployment, “low” economic growth and record budget deficits in a number of countries are the “perfect breeding ground” for protectionism, said Gurria, a former Mexican finance minister who has led the Paris-based OECD since 2006.

China’s got options - This morning there was an abundance of links evidencing the building anxiety over U.S.-China relations. Edward Harrison at Credit Writedowns links to a Reuters article, China vows to hit back if targeted by U.S. on yuan. Calculated Risk refers to commentary at the Financial Times and the Washington Post referencing China Losing Support of American Business CommunityDeutsche Welle also reports the benefits that Europe would incur from a stronger yuan compared to the U.S. dollar, which gives me pause: why exactly would Europe profit from an appreciation of the Chinese yuan against the U.S. dollar? The U.S. export industry, yes, but Europe? This is an entirely one-sided argument: if the Chinese yuan appreciates, then export income would be diverted away from Chinese exports and toward Chinese imports, paving the way for Europe to reap the benefits. Same story as in the U.S. auto maker case, but with a twist: China has options.

US Economist Says China Could Act on Yuan if US Quiet - China will have more scope to allow its currency to appreciate if the U.S. government adopts a low-key stance on the issue, a Harvard University economist who also advises the U.S. government on economic policy said. "If the U.S. Congress and the Treasury don't talk about the Chinese manipulating their currency, if the U.S. can be quiet for two months, then I think the Chinese will be able to say that because of the great strength of the Chinese economy ... they are unilaterally raising the value of the RMB," said Martin Feldstein, a member of U.S. President Barack Obama's economic recovery board.

Choosing their moment - Those advocating strongly for a Chinese revaluation seem to approach the peg as if it is an immutable part of Chinese economic policy. It isn't. China was steadily appreciating its currency during the three years preceding the crisis. Its decision to halt this process was a countercyclical one. Chinese officials have repeatedly made this point, and have repeatedly said that a return to appreciation is just a matter of time. As Mr Huang notes, a week before Mr Krugman's latest firebreathing column on the issue People’s Bank of China Governor Zhou Xiaochuan said that the peg was among the interventions that would end as recovery solidified. And today, we read this: China may allow the yuan to trade more freely against the dollar, while avoiding an abrupt revaluation that would wreck its exports, according to Fan Gang, an adviser to the country’s central bank.  “China may resume a managed float of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes,”

Renminbi and Reality - The renminbi's exchange rate has once again become a target of the US Congress, but revaluation by China would only push up US inflation, as Vietnamese, Indian, and other low-cost producers fill the export gap. Only serious efforts by both sides to fix their domestic fundamentals, including over-consumption in the US, will imbalances be reduced in a sustained way.

China Leaders Vie for Control of Exchange Rate - NYTimes - The conflict, which has broken into rare public view, seems to be mainly between China’s central bank and its Commerce Ministry. But how it is eventually resolved could decide the course of trade tensions between China and the United States.  The current drama began on March 6 when the governor of China’s central bank stunned analysts by saying that the bank’s policy of keeping the renminbi at a constant exchange rate against the dollar was a “special” response to the global financial crisis.  The new description suggested to many economists that the current value of the renminbi was temporary and that the central banker, Zhou Xiaochuan, was preparing the Chinese public for a stronger renminbi. But other Chinese officials, particularly at the Commerce Ministry, have fought back in the last two weeks, stoking nationalism and anti-American sentiment by loudly declaring that China would not be told what to do by the United States.

Krugman’s Chinese renminbi fallacy - VoxEU -  Should the US follow Paul Krugman’s advice and use protectionist policies against China’s exports to encourage a revaluation of its currency? This column argues against this idea. Far from saving jobs, a revaluation of the Chinese currency might even cut global economic growth by 1.5%.

Report: China Losing Support of American Business Community -From the Financial Times: China to lose ally against US trade hawks  Myron Brilliant, senior vice-president for international affairs, who has previously helped to protect Beijing from hawkish trade policies, told the Financial Times: “I don’t think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill].”...Mr Brilliant said corporate America’s attitude had changed in response to a range of “industrial policies” pursued by Beijing, including the undervaluation of the renminbi, which made it harder for US companies to do business and compete with China.

My Boss On Why West Shouldn't Fear China - It may be a peculiarity of those of us from Eastern cultures that we like the idea of having a boss. Whereas Westerners often disdain being told "do this, do that," we actually like the idea of being answerable to someone who can make things happen for you--if you play your part in the grand scheme of things. What follows below are Arne Westad's thoughts on why a more preponderant China will not look much different from today's world. Being a historian by training, he is particularly keen on how China's political and security considerations colour economic ones. Interesting stuff

China could report trade deficit in March (Reuters) - China's trade balance could turn to a deficit in March, commerce minister Chen Deming said on Sunday, adding that adjustments to the yuan's value would not by itself resolve global trade imbalances. Chen, speaking at the China High Level Development Forum, said that in the three years from 2005 to 2008, the yuan had appreciated by more than 20 percent while the trade surplus increased. In 2009, he added, the yuan was steady but the trade surplus fell by 34 percent. "A country's currency appreciation is very limited in helping to rebalance global trade," he said. "I personally expect that China could possibly have a trade deficit in March."

China, importer - TWO weeks ago, China released trade data for the month of February. Where monthly trade surpluses during the pre-crisis boom years had been in the $20 billion to $30 billion range, China recorded a $14 billion surplus in January, and just an $8 billion surplus in the month of February—results, China's government used to argue that currency adjustment isn't necessary. Now, we learn this: The country will probably see a "record trade deficit" in March thanks to surging imports, Minister of Commerce Chen Deming said on Sunday, while warning that Beijing will "fight back" if Washington labels China a currency manipulator. That would certainly complicate the arguments of those demanding a revaluation. Amid heated rhetoric on the issue, the stakes have been steadily climbing...

China Expects to Announce Trade Deficit for March - Yves Smith - A story in China Daily indicates that the Chinese offiicaldom foresees a record trade deficit for March: Yves here. Note that a trade deficit would seem to undercut the US’s argument that the renminbi is undervalued (or to put a finer point on it, it may have been undervalued, but is no longer). If true, this may bear out the contention made here by Marshall Auerback in earlier posts, namely, that domestic inflation is running at a high level. Cynics may argue that China’s suddenly showing a trade deficit, on the eve of when the Obama administration is under pressure to brand China a currency manipulator, is just too convenient an outcome to be believed. No matter how you look at this, the pre-announcement is significant. If China appears to be fudging its data, it sets the stage for a full blown trade war. Regardless, this salvo makes the idea Auerback discussed more than a month ago, which was hooted down at the time, that China might devalue the renminbi, suddenly look like a real possibility.

PRC Crackdown on Hot Money: RMB Reval Imminent? - Basically, you'd expect more inflows of "hot money" into China when speculators believe the revaluation of the Chinese renminbi will occur soon. Do the yuan traffickers know something we don't--perhaps some insider information about the timing of a revaluation to, say, appease America prior to the 15 April Treasury decision? Also factor in those wanting to take advantage of asset price rises in China as well as somewhat higher interest rates in the developing world. Once more, the currency watchdog, the rather amusingly titled State Administration of Foreign Exchange (SAFE), is conducting sweeps for illegally entering hot money. From our favourite official publication bar none, China Daily:

What Is China's Capital Seeking in a Global Environment? -  SF Fed Letter - China is becoming increasingly active in international markets for mergers and acquisitions. Chinese acquirers are buying stakes in foreign companies to get access to resources, markets, and technology, among other reasons. With China's expanding wealth and vast foreign exchange resources, further growth in the volume and variety of foreign direct investment is likely.

Google and China's Future -Google's dispute with the Chinese government has taught us a lot about modern China. The disagreement was sparked by the company's January decision to stop filtering Internet searches by its Chinese users and could lead to the closure of Google's Chinese search engine, or perhaps an even more drastic withdrawal from China. (An announcement from Google could come this week.) The case has exposed the myth that China is a great place to do business for foreign companies. Google's step also moves China closer to having a “different” Internet than the rest of the world, one dominated by Chinese companies and policed by the Chinese government. China's leadership doesn't appear to care much about the impact of Google's possible departure. But should they? The Google case begs a fundamental question about China's future: Is there a connection between human rights and economic progress?

Google to Redirect China Users to Uncensored Site - NYTimes - Just over two months after threatening to leave China because of censorship and intrusions from hackers, Google on Monday closed its Internet search service there and began directing users in that country to its uncensored search engine in Hong Kong. While the decision to route mainland Chinese users to Hong Kong is an attempt by Google to skirt censorship requirements without running afoul of Chinese laws, it appears to have angered officials in China, setting the stage for a possible escalation of the conflict, which may include blocking the Hong Kong search service in mainland China.  The state-controlled Xinhua news agency quoted an unnamed official with the State Council Information Office describing Google’s move as “totally wrong.” “Google has violated its written promise it made when entering the Chinese market by stopping filtering its searching service and blaming China in insinuation for alleged hacker attacks,” the official said.

Google to stop censoring search results in China - Google announced Monday that it would stop censoring search results on its site in China, forcing authorities in Beijing to decide whether they are willing to forsake one of the most important tools of modern technology so that they can maintain their iron grip over the flow of information. In negotiations with Chinese authorities over the past two months, Google had tried to determine whether it could operate an unfiltered search engine in China under the country's laws. But Chinese officials, the company said Monday, made it "crystal clear . . . that self-censorship is a non-negotiable legal requirement."  As a result, Google has made what analysts described as a shrewd but risky business decision -- to redirect users in mainland China to its search engine based in Hong Kong

Conroy's filter plan unworkable, says Google Australia - FRESH from halting censorship of search results in China, internet giant Google says Australia's mandatory ISP filter is both unworkable and unwanted by parents. The federal government plan will force ISPs to filter web pages that contain refused classification-rated content based on a government blacklist. Labor senator Kate Lundy, Greens communications spokesman Scott Ludlam and a host of privacy advocates and child groups say they prefer an opt-in version of the filter.

Chinese Academics’ Paper on Cyberwar Sets Off Alarms in US…- Larry M. Wortzel, a military strategist and China specialist, told the House Foreign Affairs Committee on March 10 that it should be concerned because “Chinese researchers at the Institute of Systems Engineering of Dalian University of Technology published a paper on how to attack a small U.S. power grid sub-network in a way that would cause a cascading failure of the entire U.S.”  When reached by telephone, Mr. Wang said he and his professor had indeed published “Cascade-Based Attack Vulnerability on the U.S. Power Grid” in an international journal called Safety Science last spring. But Mr. Wang said he had simply been trying to find ways to enhance the stability of power grids by exploring potential vulnerabilities.

The Return of China - In the coming decades China will likely surpass United States as the world’s biggest economy. That may seem strange and uncomfortable to many Americans, but it wouldn’t be the first time China dominated the global economy. The Organization for Economic Cooperation and Development’s Factblog has posted a fascinating set of statistics showing the evolution of the Chinese economy, compiled by economic historian Angus Maddison. The chart above shows the percentage of the world’s economy contributed by China during the last two centuries. As you can see, China held a far bigger share of the world’s economy in 1820 than it does today. From the early 19th century until the mid-20th century, China’s share of global output fell steadily, troughing at about 4 percent of world G.D.P. in the 1960s.

FT Graphic on China’s Overseas Investments - A super interactive graphic from the Financial Times. China has developed a rapacious appetite for natural resources as its economy has developed over the last decade.

China Tops U.S. In Spending On Clean Energy - China is emerging as the world's clean-energy powerhouse, according to a new study by The Pew Charitable Trusts.Last year, China spent more than any other major country on clean energy, including wind and solar, toppling the U.S. from the top spot for the first time in five years, the Pew report says. The U.S. is also on the verge of losing the top spot in terms of installed renewable energy to China.Unless U.S. policies change to encourage more investment, the U.S. could miss its chance to lead the expanding clean-energy industry, says Phyllis Cuttino, project director at Pew. The USA's entrepreneurial tradition and strengths in innovation give it the potential to recoup leadership, the Pew report says.

Labor shortage exceeds 2 mln in Pearl River delta  - Just after the Lunar New Year holiday, processing and manufacturing sector as well as the services industries in Guangzhou are facing labor shortage estimated to hit 150,000, while almost 30 percent of the labor demand of Dongguan cannot be satisfied. Shenzhen had a shortage of 819,000 laborers in Q4 of 2009. Zhongshan has a labor shortage of 130,000 or so at present. Total labor shortage in the Pearl River delta exceeds 2 million. Guangzhou's processing, manufacturing, as well as the services sectors, face most serious labor shortage, said Zhang Baoying, director of Guangzhou human resource market service center.Current labor shortage is different to that in previous years, Zhang said, adding that labor shortage in the city would hit 150,000. Dongguan, know as a "world factory," has been experiencing labor shortage since last August, reported the local media. With unexpected robust economic recovery, the situation has been worsening.

Chinese consumed millions of gallons of toxic sewage oil: study - Chinese cooking oil siphoned from restaurants' waste tanks and stripped out of raw sewage is being resold on the cheap and has for years tainted approximately one out of every ten meals cooked in the eastern nation, according to a recent study.The revelation, first noted by state media, sent Chinese health inspectors into a snit as they scrambled to reassure the public that the claims were being investigated. "He Dongping, a professor at the Wuhan Polytechnic University, has been studying the problem for seven years," newspaper Epoch Times noted. "According to China Youth Daily, he found that China recycles an estimated two million to three million tons of waste oil per year.

Frayed String for China’s Property Balloon - Andy Xie - Don't expect China's property bubble to shrink as long as Beijing tinkers with rules but neglects credible reform (Caixin Online) Beijing has unleashed another round of property market tightening measures, and this time it's tightening mortgage loan terms considerably: The mortgage interest discount has been reduced for first-time homebuyers; the discount has been abolished and down payment requirement raised to 40 percent for second-time homebuyers; and rates are at banker discretion while the required down payment has been raised to 60 percent for third-time buyers.

China seeks Russia alliance to counter US dominance Looking to form a counterbalance to the power of the US, Beijing called on Moscow, as one of the emerging market economies, to enter into an alliance with China seeking to increase their leverage in global affairs.  Speaking after talks with Russian Prime Minister Vladimir Putin, Chinese Vice President Xi Jinping hailed the strength of bilateral ties with Russia as a success and went on to express the Beijing government's support for Russia's growing power on the global stage.  "We are in favor of Russia playing an important role in international and regional affairs," Xi said, "In our opinion, China and Russia should in the future facilitate the establishment of a multi-polar world and democratization of international relations," the Chinese official added.

Japan, Struggling With Debt, Approves a $1 Trillion Budget - The Japanese government on Wednesday pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. It means another round of spending and adding to Tokyo’s already substantial public debt.  Recent data shows the Japanese economy, the world’s largest after the United States, is slowly emerging from its worst recession since World War II, as a global recovery sets off a rebound in exports, production and employment. But some economists worry about runaway government spending in Japan, which is already saddled with a public debt twice the size of its economy — the worst ratio among industrialized countries.

Japan approves record $1 trillion budget amid debt concerns (Reuters) - Japan's parliament approved on Wednesday a record $1 trillion budget for the fiscal year from April, with an all-time high of 44.3 trillion yen ($490 billion) in new bond issuance underlining the country's tattered finances. Prime Minister Yukio Hatoyama has said he sees no need for economic stimulus now as the risk of a double-dip recession is receding. But he added that the government should be ready to act if necessary given lingering downside risks such as unemployment.

Japan's Central Bank Holds Much of Japan's Debt - An AP story in the Washington Post on the IMF's warnings about debt levels told readers that: "Japan's debt is proportionately even bigger -- about twice its GDP -- but the impact is cushioned because most is held by Japanese households." Actually the fact that the debt is mostly held by Japanese households by itself is of little consequence. If Japan had been running large trade deficits and foreigners had bought private assets but not government bonds, then Japanese households and its economy would be in the same situation as if foreigners had bought its debt. It is important that a very high portion of Japan's debt is held by its central bank. This means that the interest on the debt is paid to the bank. It is then refunded to taxpayers so this debt does not impose any burden whatsoever.

Japan govt to face big fund shortage in 2011/12 - An increase in bond issuance would raise the spectre of a cut in Japan's sovereign ratings as the national debt is nearing 200 percent of its gross domestic product, analysts say.  Fitch, Moody's and Standard and Poor's have all warned Japan it faces a ratings downgrade, which could raise the borrowing costs for the most indebted of the industrialised nations and rattle investors who are already nervous about Greece's debt and the sovereign risk facing other European nations. "The government has said it will launch a fiscal framework this year, and that could be the trigger for a downgrade if it doesn't go well," said Nobuto Yamazaki, executive fund manager at DIAM Asset Management in Tokyo.

Life After Japanese - Not breaking news, but I wanted to mention that Japan’s population is shrinking. This is hardly unique in the world, since a number of other countries are also suffering from population decline, mainly in Eastern Europe. What makes Japan different and has demographers all over the world (all 25 of them) drooling in anticipation, is that they were expecting this, and there is really isn’t much Japan can do to avoid a dramatic depopulation in this century on a scale not seen since the bubonic plague ravaged Europe in the 1300s.  Here are the projections. It’s a really great graph, so click on it, put it in a big window and take some time to look it over.The estimate is that by the year 2105, the population in Japan will have plunged from its current 127 million to around 45 million. A 65% drop for those keeping score.

More Asian Geese Ready to Fly - iMFdirect - Like geese flying in formation, the successive waves of Asian countries achieving economic takeoff and emerging or developed market status, has been likened to those migratory birds in flight.  If this model is accurate, more Asian geese are set to join the flock of economically successful nations. The “Flying Geese Paradigm” or ganko keitai was first conceived of  by Japanese economist, Kaname Akamatsu in the 1930s as a way of explaining East Asian industrial development.  According to Akamatsu, the lead goose in the formation, was Japan.  The second tier consisted of newly industrialized economies—South Korea, Taiwan Province of China, Singapore, and Hong Kong SAR.  Following hot on their tails were the ASEAN countries, such as Indonesia, Malaysia, the Philippines and Thailand.  More recent additions to the flock are China and India.

Junk Defaults May Swell in 2011 as Debt Matures, Moody's Says  Defaults in Asia may rise next year as speculative-grade companies struggle to refinance maturing U.S. dollar debt, according to Moody’s Investors Service.The dollar bond refunding requirement in 2012 for high- yield companies in Asia is “concentrated among single-B issuers typically characterized as having limited financial flexibility,” Elizabeth Allen, a Moody’s vice president, wrote in a note to clients today. Debt maturing in 2011 and 2012 will be “higher than the historical average, indicating this will be a challenging issue after 2010.”Companies are selling junk bonds at the fastest pace since credit markets seized up in 2007 amid signs the economic recovery is gaining momentum. Borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data compiled by Bloomberg. Sales are up from $16.2 billion in all of February.Credit-default swaps on the Markit iTraxx Asia Series 13 index of 20 non-investment-grade borrowers outside Japan are pricing in a 24 percent chance of default, according to data compiled by Bloomberg. That compares with an 8.7 chance of default for investment-grade borrowers, the data show.

Massive deficits have investors on edge - The growing struggle of governments to cope with their deficits is enveloping Portugal and threatening to sap confidence in Spain and Britain. Portugal's debt downgrade by ratings agency Fitch sent tremors through markets, reminding investors that concern about sovereign debt is not limited to Greece, which still is struggling to convince the rest of the European Union to fund a bailout. Fitch took action after Portugal revealed its 2009 deficit was much bigger than expected. North America is not immune to bad budget news. U.S. states are fighting losing battles to keep their budget gaps to a minimum. California is loosening its parole supervision to reduce the number of people returning to prison, in hopes of cutting a penal system budget that eats up more of the state's resources than education. In Canada, Ontario confirmed that its budget deficit in the current fiscal year topped $21-billion.

Commodity terms of trade: New data on the history of booms and busts - VoxEU - How do commodity-price booms affect the economic performance of commodity exporters? This column presents comprehensive new data on country-specific commodity terms of trade. It finds that, on average, countries grow nearly 2 percentage points faster during booms than during busts. But policy plays an important role – sharp currency appreciations and large government deficits are associated with lower growth.

Is the Euro Overvalued? - - An American traveler in Paris or Berlin is continually struck by how high prices are relative to those in the United States. A hotel room, a simple lunch, or a man’s shirt all cost more at today’s exchange rate than they would in New York or Chicago. To bring the cost of those goods and services down to the level in the US would require the euro to fall relative to the dollar by about 15%, to around $1.10. It is easy to jump from this arithmetic to the conclusion that the euro is overvalued, and that it is likely to continue the decline that began last December. But that conclusion would be wrong. Looking ahead, the euro is more likely to climb back to the $1.60 level that it reached in 2008.

Now, China is bashing the euro - Remember, the good old days of China’s dollar bashing? Well, no more. There is a new victim in town, and it’s called the euro. In today’s sovereign crisis-filled world, it seems bashing the euro is fair game — even if it’s counter intuitive. After all, if you don’t like the dollar and you don’t like the euro — and let’s face it, you can’t possibly like sterling — what’s left? The franc, the yen? But that, at least, appears to be the case on Thursday. According to Reuters, Zhu Min, deputy governor of the People’s Bank of China, made the following whopper of a statement during Asian trade: Zhu min said the Greek debt crisis was just the beginning, prompting short-term players to sell the euro and triggering stop-loss orders at $1.33000...

China comments add to sovereign debt fears (Financial Times) Growing concerns about sovereign debt found a significant mouthpiece on Thursday, when a senior Chinese central banker warned that the Greek crisis was just the beginning. “We don’t see decisive actions telling the market we can solve this,” Zhu Min, a deputy governor of the People’s Bank of China, was reported as saying But there is a potentially more important issue emerging. The poor reception given to the auction of $42bn of US five-year notes on Wednesday points to fatigue among buyers of US government debt. If this continues, yields will rise, but not for the good reason – faster growth – but for the bad reason – too much supply. This could knock the nascent economic recovery and hit asset markets, particularly cycle-peak equities, hard. And who buys most of the US debt? Why, Mr Zhu and his colleagues of course.

Greece Will Default `at Some Point,' UBS Economist Donovan Says -- Greece will default on its bonds “at some point” as the euro region fails to deal with its first major economic crisis, said Paul Donovan, deputy head of global economics at UBS Investment Bank. “I think it’s in an impossible situation,” said Donovan, who is based in London, in an interview with Bloomberg Radio today. “Europe has failed to clear its first serious hurdle. If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work. It’s a bad idea.” European governments have yet to agree on how to fund any rescue for Greece, which says it will struggle to pay its debts at current market interest rates. While Prime Minister George Papandreou announced a 4.8 billion euro ($6.4 billion) austerity package on March 3, the extra yield that investors demand to hold Greek debt over German counterparts has since risen.

European Disunion - A few weeks ago, a solution to Greece’s debt problems seemed close. The Greeks did their part by adopting a tough new austerity program earlier this month. But Europe has not followed through with the needed guarantee that the money Greece must borrow to pay its bills will be safe from default. That is a big problem for Greece, and for the European Union, whose reputation for effective coordination is suffering. It also is bad for the United States. The nervous decline of the euro pushes up the dollar, making exports more expensive and slowing America’s recovery.

Greek Impasse Deepens as Trichet Rejects Loan Subsidy (Bloomberg) -- Europe’s stalemate over possible aid for debt-encumbered Greece deepened as European Central Bank President Jean-Claude Trichet spoke out against offering low- interest loans for which the Greek government has pressed. Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened the chance that Greece will leave a March 25-26 summit empty-handed. That could force Prime Minister George Papandreou to decide whether he’s ready to

The Biggest Greek CDS Speculator Has Been Uncovered - Culprit Is... Greek State-Controlled Hellenic Post Bank! - We have officially moved from a Greek tragedy to a Greek surreal comedy. After nearly a month-long scapegoating campaign in which Greek PM G-Pap said he would spit in the faces and skullf#@* all those who dared to buy Greek CDS (because as we have all been lied to by everyone who doesn't know the first thing about CDS, it is CDS buying not bond selling that drives spreads), with the stupidity reaching as far and wide as the Spanish and German secret services, which said they would spy on CDS traders in London and New York,

Greek daily Kathimerini has just uncovered that the biggest speculator, holding 15%, or $1.2 billion of the total $8 billion in Greek notional CDS, has been a firm that operates about 2 blocks away from the parliament building in Athens - the state-owned Hellenic Post Bank (TT)! Luckily poetic justice is about to be served, as every single media outlet tomorrow will apply the same circus monkey treatment to G-Pap and his clownshoes henchmen, not to mention the chorus of obese idiots over at the European Commission who fell for the ruse

Greek Crisis May Provoke Fed-ECB Split as Euro Slides (Bloomberg) -- European Central Bank President Jean-Claude Trichet’s campaign for governments to learn the lessons of the Greek fiscal crisis may provoke a transatlantic policy split that forces the euro back toward its lows of 2006. As investors push Greece, Spain, Portugal and Ireland to deliver on plans to cut budget deficits, the withdrawal of stimulus raises the risk of double-dip recession and even deflation in all or parts of the 16-nation euro area. The possibility of slower expansion is prompting economists from Deutsche Bank AG to HSBC Holdings Plc to predict Trichet’s ECB will be slower than they previously anticipated in raising its key interest rate from a record low of 1 percent.  Trichet’s restraint would contrast with Federal Reserve Chairman Ben S. Bernanke if the U.S. central banker takes the lead in tightening economic policy while lawmakers show few signs of attacking a budget gap of more than 10 percent of gross domestic product.

Germans think they would be better off outside the euro area - A FT/Harris poll says majority of Germans wants Greece out of the euro, oppose help to Greece, and long to get out themselves; results show sharp contrast with public opinion elsewhere in the euro area; Merkel goes on radio to warn against expecting a deal on Greek aid; Barroso, meanwhile, calls on European Council decide aid package this week; Wolfgang Munchau says present German policies are inconsistent with a survival of the euro area; Martin Taylor says the best solution for the euro area would be a split into a northern and a southern part; Harold James says the real problem in the global monetary system is the lack of policy co-ordination, and Europe’s tragedy consists of the attempt to try to solve this problem at regional level

Merkel’s 5-point plan to save her faltering coalition: Refusing to help Greece is point Nr. 3 – This is a story for those who still underestimate the political climate in Germany against using German taxpayers’ money to support Greece. Spiegel online reports that Angela Merkel started her campaign for state elections, profiling herself as the tough Lady, who will resist any compromise for a Greek support.  Countries, who cheat on their public finances should help themselves, she promised to defend this position confidently among EU collegues. Her coalition government is forecasted to face electoral defeat in North Rhine Westphalia, which would mean that Merkel loses her majority in the second chamber, the Bundesrat.

Merkel Says Summit Won’t Yield Greek Aid (Bloomberg) -- German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan and helping send Greek bonds to their lowest in more than three weeks. EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk radio yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its aid measures at the March 25-26 summit in Brussels.

Germany wants to have Greece aid off the summit agenda - This is hard to believe - and a sign of the confusion now deliberately spread by German officials. According to FT Deutschland Germany wants to achieve that the subject of aid to Greece is not at all addressed during the summit. The Greeks have not asked for help so there is no need for a decision now, is the official reasoning. The German government also says no invitations have been issued for a special eurozone summit. The line in all the German media is that Merkel's position has been hardening, and that she has recent some support from other leaders over IMF involvement. The European Commission also seem to have given up its resistance to such a plan. Le Monde quotes Commissioner Olli Rehn trying to save a compromise by saying that the IMF could be a partner of an EU led initiative.

Game, Set and Match for Merkel – Greece will have to go to the IMF - The German press reports there will be a deal: Greece to get money from the IMF; Germany will not commit to a bailout; rules of engagement for IMF are still open to debate; Sarkozy and Zapatero called for a eurozone summit ahead of the meeting to fix the problem; Der Spiegel says Angela Merkel will be the big winner on Thursday, as her EU bashing earns her brownie points with the electorates; FT Deutschland says she is playing a dangerous game with the financial markets; Wolfgang Munchau goes through the scenarios, and concludes that any agreement other than a European solution will trigger further financial speculation; euro falls to a 10-month low against the dollar; Frankfurter Allgemeine writes that this episode underlines a sea-shift in Germany’s position within the EU

Has Europe put the loaded gun on the table? Greek Prime Minister Papandreou asked the European leaders to "put the loaded gun on the table" at this summit i.e. do something concrete to ward off speculators. So they have. The deal which European leaders have now struck is the best we could have hoped for given the political constraints for everyone involved. The 16 countries in the eurozone have agreed to a contingent aid package of loans and IMF assistance and supervision. The Greek Prime Minister expressed satisfaction with the result, largely hammered out by the French and the Germans before the EU summit.

Broken? - There are two alternative views of what it means to be in the Eurozone, and they can’t be reconciled.  At most, one of those views will survive.  I think the German version is more likely. My view is by no means the consensus, but without Germany on board, there is no Greek bailout.  The IMF is too small to truly help Greece.  If Greece were to default, it would harm banks in Europe, but it is a lot cheaper to help local banks than to help Greece.  That makes me a little bullish on the Euro, because if Greece defaults and leave the Eurozone, it sends a warning to other profligate nations, and leaves the core of the Eurozone stronger.  Beyond that, vacations in Greece would become the rage, as they would be very cheap, even including the frictions of exchanging Euros into “New Drachmas.”

The euro and sovereign debt: Deal or no deal? | The Economist… - PART of the reason why the euro's rally has been rather subdued in response to the overnight deal on aid for Greece is that there is, in fact, no automatic bailout for the beleaguered Hellenes. (See the post from my Charlemagne colleague, who was there.) As you can see from the EU's website, aid is dependent on the Greeks being unable to get funding from the markets. So if the Greeks can get funding but at a potentiallly ruinous 6-7%, the rest of the EU will not automatically step in. As I write, Greek 10 year bonds are still yielding 6.2%. Then any deal is dependent on the unanimous support of all euro-zone member countries, including those who do not take part in the bailout*. So the Germans can still veto if they think the Greeks are being given an easy ride. There is also talk of a "strengthening of the stability pact" which could lead to another round of uncertainty as the French and Germans battle over the terms. And of course the Greek population may be even less enthusiastic if it comes with terms imposed by "Washington", as they perceive the IMF to be a US vehicle. With or without aid, the Greeks face some nasty maths, as a piece in this week's issue explains.

Not history, but not a disaster: Not a great leap forwards, but not a bust up either - The Economist - Greece has now proved that you can be inside the euro, and get yourself into a lot of bother. The new agreement from this week's summit is being sold as a grand bargain of sorts: an offer of loans on suitably harsh terms to assure markets that a euro member cannot go bust, matched with toughened surveillance of national economic and budgetary policies and a degree of macro-economic co-ordination. A working group is to examine new ways to reinforce policy co-ordination, including new sanctions (President Nicolas Sarkozy of France talked of the possibility of suspending the voting rights of governments that misbehave). Does that amount to a great leap forwards? To me, this agreement amounts to something else: trying the same policy instruments before, but with more conviction this time.

IMF Drafted by EU for Greece in Bid to Support Euro (Bloomberg) -- European chiefs put the International Monetary Fund on standby to aid debt-stricken Greece, seeking to snuff out a threat to the stability of the euro.  Leaders of the 16-nation euro region endorsed a Franco- German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece won’t need outside help to cut Europe’s biggest budget deficit.  “We had to answer the question: How can people place long- term trust in the euro as a stable currency and how can a currency union combine solidarity and stability?” German Chancellor Angela Merkel said after a European Union summit in Brussels today. “In this context, we really broke new ground.”

Lipsky Says Debt Challenges Face Advanced Economies (Bloomberg) -- Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.  All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech today at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging market nations had also reached a “worrisome level.”  “This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,”

Why Greece Breathes a Little Easier  - One of the irritants the Eurozone has been encountering with the Greek tragicomedy was self-inflicted. For, a measure that has helped Greek banks stay afloat during the credit crisis is an ECB lending window allowing the aforementioned banks to use Greek sovereign debt as collateral in availing of precious euros. Earlier on, ECB President Jean-Claude Trichet announced that this lending windows would become narrower at year-end by only accepting assets rated A-or higher instead of the existing standard of BBB- or higher. The worry was that it was quite possible that Greek sovereign debt would not meet this higher threshold come the holiday season. Ho, ho, ho. Only yesterday, however, the esteemed Mr Trichet did a surprising U-turn and said the European Central Bank would not be doing so, thus helping Greece breathe easier along with just-announced intentions to draw up a formal contingency plan for Greece:

Has Germany Just Killed The Dream Of A European Superstate? - German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.  Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections.  The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a  'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

Draft Greek Bailout Agreement: Welcome IMF - As part of a package involving substantial International Monetary Fund financing and a majority of European financing, euro area member states are ready to contribute to coordinated bilateral loans. This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank. We expect euro member states to participate on the basis of their respective ECB capital key.

Greece's bail-out maths: Safety not | The Economist - A standby fund for Greece of €25 billion is rumoured, and euro-zone ministers now seem less frosty at the thought of help from the IMF. That may be enough to calm markets and enable Greece to roll over its debts. But it will be only a temporary fix. It will take years to repair Greece’s public finances, which means a much larger rescue fund will be needed if it is to avoid default.  Greece cannot devalue, so it needs more time to adjust than the three years it has agreed with its EU partners—and a bigger safety net while it does.  Just how big? Analysis by The Economist suggests a figure of €75 billion rather than €25 billion. Greece is likely to need five years to get its deficit down below 3% of GDP (see table). On our projections interest payments will rise from 5% of GDP to 8.4% in that time, to reflect the higher cost of issuing new debts and of refinancing old ones.

Berlusconi: Euro ’screwed everyone’ - The Italian Prime Minister has frequently blamed the euro for pushing up prices and choking off exports. Yesterday the billionaire claimed that his main political foe, the former prime minister Romano Prodi, had brought Italy to the brink of disaster by negotiating bad terms for its entry into the single currency. He told a conference of his Forza Italia party: "Italy is not at a disastrous point, but I can say that Prodi's euro screwed us all," trying to score points against his opponent in the run up to the campaign for next year's general election. Mr Prodi, now the leader of the centre-left opposition which is leading in the opinion polls, was president of the European Commission until November.

PIIGS Debt Coming Due - This graphic is from Der Spiegel: Moment of Truth for Europe's Common Currency Greece's financial difficulties have exposed numerous weaknesses which threaten Europe's common currency. Now, policy makers and economic experts are trying to find ways to stabilize the euro. SPIEGEL ONLINE takes a look at the proposals.Seith looks at several proposals from the formation a common EU economic government, to having better and automatic economic stablizers, to a Eurpoean Monetary Fund (EMF). None seem likely in the near term..

Portugal’s Debt Rating Lowered by Fitch on Finances (Bloomberg) -- Portugal’s credit grade was cut by Fitch Ratings for the first time, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.  The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today, adding that further economic or fiscal underperformance this year or in 2011 may lead to another downgrade.   “A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,”

Spain’s economic woes: The mañana syndrome | The Economist - The list of things that need repair is extensive. Spain’s structural faults were long hidden by a housing bubble and have been glaringly exposed now that it has burst. From unemployment and low productivity growth, and from troubled savings banks to creaky public finances, the problems are piling up. With the government unwilling to apply radical surgery, there are fears that Spain will fall further behind its neighbours. “The risk is that we will have a lost decade, like Portugal or Japan,” Unemployment tops most people’s worries. Faster growth is needed to bring it down. Yet Spain has been in recession for seven quarters; the government expects GDP to shrink again this year; and the IMF forecasts growth of less than 1% in 2011.

Anticipating Eurozone collapse - The Germans are pressing a hard line on all fronts of the sovereign debt crisis in Europe – not only with austerity measures for Greece but for a planned European Monetary Fund (EMF) as well. The most critical part of the German negotiating stance, however, is now Eurozone exclusion, something that started when Finance Minister Wolfgang Schäuble publicized plans for the EMF.  But now German Chancellor Angela Merkel is also pushing this line. I saw her as rather dovish earlier in the crisis. But, the domestic politics have changed this I was wrong (see this Spiegel article for why). She calls for more severe sanctions including Euro exclusion for persistent free riders. In fact, Merkel wants to change eurozone rules in order to kick out any repeat offender of the stability and growth pact. The rhetoric is the toughest stance yet by German officials and makes the chances of a systemic crisis that much greater. An article just released in today’s German weekly WirtschaftsWoche (Business Week) puts together the salient points quite well. My translation is below

How to Save the Euro - The European Union is facing a constitutional moment. The founders of Economic and Monetary Union (EMU) warned even before the euro’s birth that fiscal profligacy would constitute a danger to the common currency’s stability. The solution to this conundrum was supposed to have been the Stability and Growth Pact, working in tandem with the so-called “no bailout” clause in the Maastricht Treaty. The latter was intended to impose market discipline, and the former, to preserve the stability of public finances by fixing a strict limit on the size of national budget deficits. Both proved futile. The Stability and Growth Pact clearly did not prevent “excessive” deficits, and the no-bailout clause failed its first test when European leaders, facing the Greek crisis, solemnly declared that euro-zone members would “take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole.”

The Euro Zone’s Default Position - - Kazakhstan may be far removed from the euro zone, but its recent economic experiences are highly relevant to the euro’s current travails. As the euro zone struggles with debt crises and austerity in its weaker members, Kazakhstan is emerging from a massive banking-system collapse with a strong economic recovery.  Greece is now at a crossroads similar to that of Kazakhstan and Ireland: the government borrowed heavily for the last decade and squandered the money on a bloated (and unionized) public sector (rather than modern – and vacant – real estate), with government debt approaching 150% of GDP.

Are the Brits headed for the PIGS sty? - U.K. officials this week released a budget that was short on cost-cutting details. Silence on that unpopular subject was hardly surprising, given the U.K. economy's slow recovery and the political jockeying ahead of a national election that is expected to take place in early May. The move wasn't the biggest stunner in a week that saw a downgrade in Portugal, squabbles over a Greek bailout and a selloff in long-dated U.S. government bonds.Even so, observers warn of a squandered opportunity to quell fears over the cost of financing a recovery in the hard-hit U.K. economy. Government spending is on track to account for more than half of U.K. gross domestic product in 2010, while government debt is heading toward 64% of GDP next year, up from 44% in fiscal 2009.

Budget 2010: Bankers react with fury to ‘bonkers’ plan for levy - Senior London bankers said they were "deeply worried" by the proposals that emerged over the weekend for a new tax, adding that if any measure were enacted unilaterally it could have disastrous consequences for the City of London and the financial services industry in the UK. Sources at the UK's major lenders said they were "concerned" and "uncomfortable" with the idea of Britain introducing a levy on the industry. They said that the tax could force banks to move operations overseas.

Public pension cost soars to £1200billion  The cost of gold-plated pension promises made to public sector workers has soared to nearly £1,200billion, a shocking report warned yesterday.  This is the equivalent of sending a bill for £47,000 to every household in Britain, equal to nearly two years' salary for the average worker.  In a bitter blow, the majority of private sector workers do not even have a pension - even though they are having to fund those of state employees. In fact, the children and grandchildren of today's workforce will have to pay their share of this huge commitment.

UK Strikefest 2010: Let's Just Shut Britain Down - Well, the parallels to the seminal events of 1979 when the "Winter of Discontent" just keep mounting here in Blighty--as if we didn't have enough problems in these lands. Sometime ago, I discussed how rolling postal strikes were causing havoc on the many businesses that relied on timely delivery of parcels. On my usual route to work, I pass the Trade Union Congress (TUC) building. Even if I hadn't read the newspapers prior to embarking on my journey, I can rest assured that some sort of industrial action is imminent when reporters and cameramen are busy mulling outside the TUC. It appears I'm going to see a heckuva lot more of these characters as nearly every logistics, transportation, and utility concern Britain relies on is going on strike. Workers of the British isles unite!

Energy Minister Will Hold Summit To Calm Rising Fears Over Peak Oil - In a significant policy shift, the government has agreed to undertake more work on whether the UK needs to take action to avoid the massive dislocation that could be caused by the early onset of "peak oil" – the point that marks the start of terminal decline in global oil production. Lord Hunt, the energy minister, is to meet industrialists in London tomorrow in a bid to calm mounting fears about the disruption that could follow a sudden shortage of oil supplies.

Non-OPEC Oil Production Hits the Wall - In the last year I’ve read several articles expounding on the many non-OPEC* oil discoveries that have been made in recent years and how large the oil resource is within the non-OPEC sphere of the world. The objective of these articles is to reassure the reader that all is well for non-OPEC oil production, now and in the foreseeable future. If all is so well outside OPEC, one must ask why the non-OPEC oil production rate has not exceeded the level achieved in 2004 in spite of the elevated price of oil since then. For the 1999-2004 period, much of the non-OPEC production rate increase was due to Russia (+2.726 mb/d)

RIGZONE - U.S. Govt Agency Exposes Faults in Key Oil Report…The U.S. government faces "critical" shortcomings in producing its oil-inventory data, according to internal Department of Energy documents, casting doubt on figures that affect the production and prices of the world's most important industrial commodity. The documents, obtained through a Freedom of Information Act request, expose several errors in the Energy Information Agency's weekly oil report, including one in September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors. A weak security system also leaves the data open to being hacked or leaked, the documents show. Moreover, problems with EIA data underscore the hazards of depending on companies or other firms to self-report data

Is there Panic at the EIA? - Since the early 1980s, the EIA has been reporting on U.S. oil inventories. Lately, the EIA has come under fire over its weekly oil reports. Within the last three years, several discrepancies were found in the amount of oil reported in storage. Let's take a closer look at one of those instances... On September 16, 2009, the EIA reported a loss of four million barrels of oil from the Cushing storage hub in Oklahoma. That day, oil futures climbed 2.2%. Some of the errors were reported to the EIA by the companies that made them. According to the EIA, these errors are rare and mistakes are typically adjusted later on.  The EIA isn't without excuses. For starters, their system hasn't been updated for nearly three decades. Furthermore, much of the data must be put in manually.

The Peak Oil Crisis: A Breakthrough? - Given the political environment, which admittedly is worse in the U.S. than in Europe, it came as a surprise that last weekend Britain's Energy Minister summoned a meeting of business leaders to discuss the government's response to a decline in global oil production should it actually be imminent.  The new initiative came as a result of a report that was published last month by the UK Taskforce on Peak Oil and Energy Security entitled "The Oil Crunch: a Wake-up Call for the UK Economy." The report was well publicized in the British media, but received little coverage on this side of the Atlantic. Britain of course will have parliamentary elections in May and the report's authors took care to note that the next government, which could serve a five year term, is likely to be dealing with declining oil production which is likely to start by 2014.

Startling New Research Says Peak Oil May Happen by 2014 - In a surprising announcement in March 2010, Dr. Ibrahim Nashawi of Kuwait University and colleagues released a study that suggests that world conventional crude oil will peak as early as 2014 — a decade or three earlier than other parties have estimated. The findings were published in the American Chemical Society’s magazine Energy & Fuels. The term “Peak Oil” refers to the point in time when global production has reached its maximum and will start to decline (represented by a bell curve) — thus having bearing on the point at which the oil supply being pulled from earth will not meet oil demand and consumption. Peak Oil is about production of a finite, nonrenewable energy source which is subject to depletion. In fact, oil production has grown almost every year of the last century.

World oil reserves at tipping point - The Smith School of Enterprise and the Environment has today  (23rd March 2010) published a paper stating that capacity to meet projected future oil demand is at a tipping point and that we need to accelerate the development of alternative energy fuel resources in order to ensure energy security and reduce emissions. The Status of Conventional Oil Reserves – Hype or Cause for Concern? published in the journal Energy Policy concludes that the age of cheap oil has now ended as demand starts to outstrip supply as we head towards the middle of the decade. The report also suggests that the current oil reserve estimates should be downgraded from between 1150-1350 billion barrels to between 850-900 billion barrels, based on recent research. “The common belief that alternative fuels such as biofuels could mitigate oil supply shortages and eventually replace fossil fuels is pie in the sky. There is not sufficient land to cater for both food and fuel demand. Instead of relying on those silver bullet solutions, we have to make better use of the remaining resources by improving energy efficiency. Alternative such as a hydrogen economy and electric transportation are not mature and will only play a major role in the medium to long term.”

Oil reserves 'exaggerated by one third' - The world's oil reserves have been exaggerated by up to a third, according to Sir David King, the Government's former chief scientist, who has warned of shortages and price spikes within years. The scientist and researchers from Oxford University argue that official figures are inflated because member countries of the oil cartel, OPEC, over-reported reserves in the 1980s when competing for global market share. Their new research argues that estimates of conventional reserves should be downgraded from 1,150bn to 1,350bn barrels to between 850bn and 900bn barrels and claims that demand may outstrip supply as early as 2014. The researchers claim it is an open secret that OPEC is likely to have inflated its reserves, but that the International Energy Agency (IEA), BP, the Energy Information Administration and World Oil do not take this into account in their statistics.

Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production - Recently, a 55 page paper called Tipping Point: Near-Term Implications of a Peak in Global Oil Production (PDF warning) was published as the joint effort of two organizations: This paper talks about the likely systemic impacts of peak oil, including the possibility of collapse. With a long publication such as this, it is difficult to know how to present a reasonable subset of the material. In this post, we are publishing the Summary as Part 1. Our tentative plan is to publish three additional excerpts from the paper later. Those who wish to read the paper now can download it from the link above.

Platts: China's Oil Demand Tops Record High in February - China's apparent* oil demand in February jumped 16.6% from a year ago to a historic high of around 8.5 million barrels per day (b/d) or about 33.28 million tonnes, according to a Platts analysis of official data just released. February marked the sixth straight month the world's second largest oil consumer posted double-digit annual growth in oil demand. Meanwhile, China's apparent oil demand in January was lower at an average 7.75 million b/d, but still 17.6% higher than a year ago. Average demand for the first two months of the year at 8.1 million b/d was 17.8% above the corresponding period of 2009.

What will a post-peak world be like? We might be about to find out - We have walked out of our burning house and we are now headed off the edge of a cliff. Beyond that cliff is an abyss of economic and political disorder on a scale that no one has ever seen before. This is one extreme of opinion on what society may look like if global oil production peaks. It is by no means the only one. Commentators have envisaged post-peak futures from slight economic adjustment to complete societal breakdown. But what are the most likely effects of a supply-limited peak in oil production? The first impact expected is a sharp increase in price. Many expect that the 'scarcity value' associated could double the price of oil over a relatively short period of time. Historical analogy, such as the whale oil market of the 19th century, has been used to suggest that the oil price may double, but accurate forecasts of price after peak are very difficult. In short, oil may be very expensive in a post-peak world.

China Coking Coal Imports May Near Record This Year, Teck Says - (Bloomberg) -- Teck Resources Ltd., the second- largest seaborne exporter of steelmaking coal, said global supplies will be crimped this year as Chinese imports may be near a 2009 record and exceed 30 million metric tons.  “The seaborne market looks very tight for 2010 and probably beyond because it will take some time for the major producers, including ourselves, to increase production,” Teck Chief Executive Officer Don Lindsay said today at a Singapore conference. Chinese imports of coking coal touched a record 34 million tons last year, he said. “China is hungry for commodities on an unprecedented scale,” Lindsay said. “Domestic supply of high-quality coking coal required will not be able to keep pace with steel production growth.”

Is China The Next Global Resource Glutton? Friday, mining giant Rio Tinto (RTP) announced a deal with China’s Chinalco “to develop an iron ore reserve in the West African country of Guinea.” This makes sense since Chinese consumers have awoken to the dream of having all the things Westerners possess.China’s National Energy Administration (NEA) recently reported that China’s electricity consumption in January 2010 grew 40.14 percent year-over-year to 353.1 billion kilowatt-hours (kWhs). That’s the sound of a lot more factories running or residential air conditioners humming. Moreover, the US Department of Energy offers a glimpse of China’s voracious appetite for oil:

Mexico Oil Output Slips In February, Still Above Target (Reuters) - Mexican oil production fell in February but at a far slower rate than in early 2009, suggesting state oil monopoly Pemex is successfully controlling the decline. Crude output was 5,000 barrels per day lower than in January at 2.61 million bpd and 2 percent below the year-ago level in February. Sliding oil production has put pressure on Mexico's public finances, which depend heavily on export revenues to fund its federal budget. Pemex has struggled since 2004 to contain the rate of decline at its giant Cantarell field, which once pumped nearly two-thirds of Mexican oil output.

Energy in Saudi Arabia: A Kingdom Running on Empty? - Saudi Arabia has the world’s largest crude reserves, and the kingdom's natural gas reserves are the fourth largest in the world at 267 trillion cubic feet. This should provide the country with a plentiful supply of fuel for its power stations, water desalination plants and petrochemicals facilities. So why, Saudi citizens might well wonder, are power generation plants frequently forced to shut down? Last summer, in fact, the state-owned power utility, Saudi Electricity Company (SEC), was forced to withhold electricity supplies for three-hour periods to industrial users south of Jeddah and elsewhere. The reality, experts say, is that Saudi authorities are struggling to keep up with increasing demand and strained capacity.

Saudis to Turn Increasingly to Oil to Meet Power Needs - Saudi Arabia’s booming economy and soaring demand for electricity is increasing the kingdom’s reliance on oil to produce power. By 2012, it may be using 1.2 million barrels a day – more than twice current levels -- to meet its electricity needs. This increasing use of oil is occurring because the Saudis’ natural gas production cannot keep up with power demand.  In 2009, the Saudis were using less than 450,000 bbls/d of crude oil for electricity generation. By 2012, according to a recent report by JP Morgan, an additional 750,000 b/d could be burned during the peak summer season. How this increased consumption of oil within Saudi Arabia will affect the global oil market remains to be seen and will depend, in part, on the strength of the global economy.  Regardless, Saudi Arabia’s rising electricity demand will undoubtedly alter the spare capacity picture once world economies recover. “The seasonal peak in refinery demand for crude could face competition from price insensitive consumers in the Middle East,” the JP Morgan report says.

More Saudi Oil Goes to China Than to U.S. - NYTimes - Last summer, Saudi Arabia put the final bolt in its largest oil expansion project ever, opening a new field capable of pumping 1.2 million barrels a day — more than the entire production of Texas. The field, called Khurais, was part of an ambitious $60 billion program to increase the kingdom’s production to meet growing energy needs.  It turns out the timing could not have been worse for Saudi Arabia. As demand slumped because of the global recession, Saudi Arabia was forced to shut about a quarter of its production. After raising its capacity to 12.5 million barrels a day, Saudi Arabia is now pumping about 8.5 million barrels a day, its lowest level since the early 1990s. The recession also precipitated a milestone for Saudi Arabia and the global energy market. While China’s successful economic policies paved the way for a quick rebound there, the recession caused a deeper slowdown in the United States, slashing oil consumption by 10 percent from its 2005-7 peak. As a result, Saudi Arabia exported more oil to China than to the United States last year.

India's natural gas demand to double by 2015  - India's natural gas demand is expected to nearly double to 320 million standard cubic meters per day by 2015, global consultancy firm McKinsey said in a study on Monday.  In a report released at the VI Asia Gas Partnership Summit, Mckinsey said the current demand of 166 mmscmd—made up of nearly 132 mmscmd supplies from domestic fields and the rest from imported LNG-- is likely to rise to at least a minimum of 230 mmscmd and a maximum of 320 mmscmd by 2015. There was an upside of 280 mmscmd if gas was made available at a delivered price of $10 to 11 per million British thermal unit.

The Oil Drum | Our Energy Supply: Some Basics - If a person were to listen to Energy Secretary Steven Chu or National Geographic's Aftermath: World Without Oil, one might think that our energy problems are fairly minor and distant. We can easily add sufficiently renewable energy to substitute for fossil fuels in a fairly short time frame. All we need to do is put our minds (and pocketbooks) to it.But if one looks at the situation more closely, one discovers that the situation is quite different. Our energy problems are close at hand, and solutions using what are optimistically called "renewables" are distant and may very well sink the country further into recession.

Institutional Investors Start To Worry About Challenges Facing Oil Companies - WITH the current state of the oil and equity markets, it may seem premature to think that the petroleum industry is about to hit the wall, whatever your opinion of peak oil and climate change. But institutional investors from the US, Europe and Australia worth a combined $US12.5 trillion ($13.6 trillion) are sufficiently concerned about the significant challenges and potential threats to oil industry valuations that they are demanding greater disclosure on how these companies propose to manage the inevitable transformation to a low-carbon economy and the likely shift away from their end products.

Petrodollars Threatening Amazon - The dozens of hastily granted oil and gas concessions Peru´s government has given to countries from Vietnam to Brazil already cover 41 percent of the Amazon region, and exploration and drilling there threatens indigenous populations and local flora and fauna, according to a new study by the University of Barcelona. The study, conducted by the Spanish university´s Environmental Science and Technology Institute with the US organization Save America´s Forests, found that many of the concessions — 52 that are active — coincide with protected areas and indigenous lands. The lots cover 70 percent of the region.

Can Brazil Say "Central Bank Independence"?  While it is common for finance ministers to try and become presidents and prime ministers, it is rarer for central bankers to aspire for these posts. So, we have the interesting case of Brazilian central bank honcho Henrique Meirelles dithering on whether to try and succeed Lula (Meirelles is a former congressman). Instead of splurging on public programmes to win favour, what's a central banker to do? Bloomberg suggests keeping interest rates low may be the thing. Indeed, many pundits were instead looking to Brazil's central bank to raise interest rates to cool rising inflation:

Trickle-Down and Globalization, Levels of the Lie - We should proceed immediately to liquidate all concentrated wealth. The only reason it was allowed to accumulate in the first place, the alleged value it created, was that so much of it would “trickle down” that everyone would end up better off.  But we now know what a Lie this was. We know the wealth never trickles down and was never meant to. There was never any social value in its accumulation. On the contrary, the extraction system has been purely destructive for all except the rentier parasites. It was stolen property right from the start, and it remains stolen property. Yet the lie continues, for the obvious reason that it’s the only way for the parasite class to hold on to this power and wealth, and because the brainwashing runs deep. Even after everything that’s happened, most people still believe their own well-being somehow depends upon a kind of handout from the rich. (And that they themselves are magically going to become rich someday.)

False economic paradigm, false employment, artifical employment - In this ongoing series with economist Mike Folkerth, , and author of The Biggest Lie Ever Believed, he writes about “When reality comes knocking; be long gone” as it applies to present day America. Americans continue operating in a 20th century economic paradigm that cannot continue in the 21st century. We think we can grow, consume, grow and consume more. Some think we can grow more, but consume less, but keep growing. The economist Kenneth Boulding said, “Only economists and fools think we can continue unlimited growth.” Richard Heinberg, author of Peak Everything: Facing a Century of Declines, presents a much more sobering understanding facing humanity in the 21st century.

Worse Than Peak Oil? We're Quickly Running Out of a Chemical Essential to Growing Food - "P" is for phosphorus, the stuff of life, and "p" is for "peak phosphorus" by 2030, ecologists say, unless - presto! - pee can be turned into gold through modern-day alchemy. Unremarked and unregulated by the United Nations and other high-level assemblies, the world's supply of phosphate rock, the dominant source of phosphorus for fertilizer, is being rapidly - and wastefully - drawn down. By most estimates, the best deposits will be gone in 50 to 100 years. Worse, phosphorus production could peak in just two decades, according to new research from Australia and Sweden. That's when demand could outstrip supply, playing out a familiar scenario of scarcity, price shocks, riots, starvation and war.

Observations: Is Earth past the tipping point? - Scientific American - Biodiversity loss. Land use. Freshwater use. Nitrogen and phosphorus cycles. Stratospheric ozone. Ocean acidification. Climate change. Chemical Pollution. Aerosol loading in the atmosphere. A team of 30 scientists across the globe have determined that the nine environmental processes named above must remain within specific limits, otherwise the "safe operating space" within which humankind can exist on Earth will be threatened. Amid some controversy, the group has set numeric limits for seven of the nine so far (chemical pollution and aerosol loading are still being pinned down). And the researchers have determined that the world has already crossed the boundary in three cases: biodiversity loss, the nitrogen cycle and climate change.

Asia’s air pollution ‘circles the world for years’: report - Pollution from Asia's booming economies rises into the stratosphere during the monsoon season then circles the world for years. According to a report by the Boulder, Colorado-based National Center for Atmospheric Research (NCAR) said the strong air circulation patterns linked to Asia's monsoon rainy season serves as a pathway for black carbon, sulfur dioxide, nitrogen oxides and other pollutants to rise into the stratosphere. The stratosphere is the layer of the atmosphere located some 32 to 40 kilometers (20 to 25 miles) above the Earth's surface. "The monsoon is one of the most powerful atmospheric circulation systems on the planet, and it happens to form right over a heavily polluted region,""As a result, the monsoon provides a pathway for transporting pollutants up to the stratosphere." Using satellite data and computer models, the scientists found that once the pollutants are in the stratosphere they circulate around the globe for several years.

Internet is biggest threat to species - The internet has emerged as one of the greatest threats to rare species, fuelling the illegal wildlife trade and making it easier to buy everything from live lion cubs to wine made from tiger bones, conservationists said today. The internet's impact was made clear at the meeting of the 175-nation Convention on International Trade in Endangered Species (Cites). Delegates voted overwhelmingly today to ban the trade of the Kaiser's spotted newt, which the World Wildlife Fund says has been devastated by internet trade.A proposal from the US and Sweden to regulate the trade in red coral – which is crafted into expensive jewellery and sold extensively on the web – was defeated. Delegates voted the idea down mostly over concerns that increased regulations might damage poor fishing communities.

EPA Questions Method Of Mining Uranium - The U.S. Environmental Protection Agency has told the Nuclear Regulatory Commission to go back to the drawing board with its site-specific environmental reviews of three proposed in situ uranium mines in Wyoming.The in situ method of mining uranium involves a series of wells used to flush a sodium bicarbonate solution through a formation dissolving the uranium, which is then pumped to the surface. Of particular concern to the EPA is the potential contamination of aquifers that provide drinking water.

In Utah, a move to seize federal land - Long frustrated by Washington's control over much of their state, Utah legislators are proposing a novel way to deal with federal land -- seize it and develop it. The Utah House of Representatives last week passed a bill allowing the state to use eminent domain to take land the federal government owns and has long protected from development.The state wants to develop three hotly contested areas -- national forest land in the Wasatch Mountains north of Salt Lake City, land in a proposed wilderness area in the red rock southwestern corner of the state, and a stretch of desert outside of Arches National Park that the Obama administration has declared off-limits to oil and gas development.

Job Losses Expected In Plan To Reduce Pollution At Coal-Fired Plants- A bill aimed at curbing air pollution turned into a battle over jobs at a state Senate hearing Thursday. Already passed by the House of Representatives, the bill directs Xcel Energy to come up with a comprehensive plan to reduce nitrogen-oxides pollution by up to 80 percent at its older Front Range coal-burning plants. The legislation also calls for giving "primary consideration to converting from coal to (natural) gas." That language mobilized the mining industry, railroads and unions Thursday to urge the Senate Agriculture, Livestock and Natural Resources Committee to reject the legislation.

As Temperature Rises, Earth Breathes Faster — and Maybe Harder - As planetary temperatures rise, Earth’s soils release steadily larger amounts of carbon dioxide, according to massive data crunching from hundreds of soil respiration studies published since 1989.The critical question is whether soils release more CO2 because faster-growing plants pump more in, or if soils release CO2 that would have stayed in the ground at lower temperatures. If the latter, the fresh influx of CO2 could produce a self-reinforcing cycle, producing higher temperatures that cause even more CO2 to be released. “That’s the $50,000 question: Is there a feedback effect?”

As global mean temperature increases, soils are releasing more CO2 - Twenty years of field studies reveal that as the Earth has gotten warmer, plants and microbes in the soil have given off more carbon dioxide. So-called soil respiration has increased about one-tenth of 1% per year since 1989, according to an analysis of past studies in the journal Nature. The scientists also calculated the total amount of carbon dioxide flowing from soils, which is about 10-15% higher than previous measurements. That number -- about 98 petagrams of carbon a year (or 98 billion metric tons) -- will help scientists build a better overall model of how carbon in its many forms cycles throughout the Earth. Understanding soil respiration is central to understanding how the global carbon cycle affects climate.

Urban CO2 Domes Increase Deaths - Everyone knows that carbon dioxide, the main greenhouse gas driving climate change, is a global problem. Now a Stanford study has shown it is also a local problem, hurting city dwellers' health much more than rural residents', because of the carbon dioxide "domes" that develop over urban areas. That finding, said researcher Mark Z. Jacobson, exposes a serious oversight in current cap-and-trade proposals for reducing emissions of heat-trapping gases, which make no distinction based on a pollutant's point of origin. The finding also provides the first scientific basis for controlling local carbon dioxide emissions based on their local health impacts.

Methane-making Microbes Thrive Under The Ice - Microbes living under ice sheets in Antarctica and Greenland could be churning out large quantities of the greenhouse gas methane, a new study suggests. In recent years scientists have learned that liquid water lurks under much of Antarctica’s massive ice sheet, and so, they say, the potential microbial habitat in this watery world is huge. If the methane produced by the bacteria gets trapped beneath the ice and builds up over long periods of time — a possibility that is far from certain — it could mean that as ice sheets melt under warmer temperatures, they would release large amounts of heat-trapping methane gas. Jemma Wadham, a geochemist at the University of Bristol in England, described the little-known role of methane-making microbes, called methanogens, below ice sheets on March 15 at an American Geophysical Union conference on Antarctic lakes.

Greenland Ice Sheet Losing Mass on Northwest Coast — Ice loss from the Greenland ice sheet, which has been increasing during the past decade over its southern region, is now moving up its northwest coast, according to a new international study.Led by the Denmark Technical Institute's National Space Institute in Copenhagen and involving the University of Colorado at Boulder, the study indicated the ice-loss acceleration began moving up the northwest coast of Greenland starting in late 2005. The team drew their conclusions by comparing data from NASA's Gravity and Recovery Climate Experiment satellite system, or GRACE, with continuous GPS measurements made from long-term sites on bedrock on the edges of the ice sheet.The data from the GPS and GRACE provided the researchers with monthly averages of crustal uplift caused by ice-mass loss. The team combined the uplift measured by GRACE over United Kingdom-sized chunks of Greenland while the GPS receivers monitor crustal uplift on scales of just tens of miles. "Our results show that the ice loss, which has been well documented over southern portions of Greenland, is now spreading up along the northwest coast,"

Animation depicting the spread of ice loss into northwest Greenland observed by GRACE from 2003 through 2009, by John Wahr - The animation below, produced by CU-Boulder's Wahr, depicts the spread of ice loss into northwest Greenland observed by GRACE from 2003 through 2009. The shift in the color spectrum beginning with turquoise and ending in black over the seven-year time span shows the decreasing mass of ice relative to 2003. Courtesy John Wahr, University of Colorado.

Thinning Arctic sea ice alarms experts The latest alarm about the fate of the Arctic sea ice, due to an unusually high proportion of thinner "first-year" ice, raises the prospect of an acceleration in the loss of ice during the warmer summer months, considered a key indicator of climate change. Adding to the concern, Nasa and the National Snow and Ice Data Centre (NSIDC)in the US today warned that even in the colder winter months sea ice is failing to recover substantially. The most recent winter maximum, reached on 28 February this year, was the fifth lowest since satellite records began in 1979, and meant the last six years were the sixth lowest on record, the organisations said. However, based on the latest data about the much greater area of thin first-year ice and losses of multi-year ice, especially that of five years or more, they believe that in volume terms last summer was the lowest since records began in the 1930s – and probably for at least 700 years and possibly up to 8,000 years

NASA study finds Atlantic 'Conveyor Belt' not slowing overturning circulation of the global ocean - New NASA measurements of the Atlantic Meridional Overturning Circulation, part of the global ocean conveyor belt that helps regulate climate around the North Atlantic, show no significant slowing over the past 15 years. The data suggest the circulation may have even sped up slightly in the recent past.  The Atlantic overturning circulation is a system of currents, including the Gulf Stream, that bring warm surface waters from the tropics northward into the North Atlantic. There, in the seas surrounding Greenland, the water cools, sinks to great depths and changes direction. What was once warm surface water heading north turns into cold deep water going south. This overturning is one part of the vast conveyor belt of ocean currents that move heat around the globe.

Death of coral reefs could devastate nations - Coral reefs are part of the foundation of the ocean food chain. Nearly half the fish the world eats make their homes around them. Hundreds of millions of people worldwide — by some estimates, 1 billion across Asia alone — depend on them for their food and their livelihoods. If the reefs vanished, experts say, hunger, poverty and political instability could ensue.

Disputed Bay of Bengal island ‘vanishes’ say scientists - BBC - A tiny island claimed for years by India and Bangladesh in the Bay of Bengal has disappeared beneath the rising seas, scientists in India say.  The uninhabited territory south of the Hariabhanga river was known as New Moore Island to the Indians and South Talpatti Island to the Bangladeshis.  Recent satellites images show the whole island under water, says the School of Oceanographic Studies in Calcutta.  Its scientists say other nearby islands could also vanish as sea levels rise. "What these two countries could not achieve from years of talking, has been resolved by global warming,"

NASA: “It is nearly certain that a new record 12-month global temperature will be set in 2010″ - NASA’s Goddard Institute for Space Studies (GISS) has released a draft paper “Current GISS Global Surface Temperature Analysis.”  It is a must read for warming junkies, but, as James Hansen notes in an e-mail, “it is too long for popular use.”  So Hansen offers “some of the main conclusions,” as well as a description of a rather shocking hack of the GISS website (all of which is reprinted below). The paper predicts a new record 12-month global temperature record, and says the calendar year (2010) is likely to set the global surface temperature unless “El Nino conditions deteriorate rapidly by mid 2010 into La Nina conditions”  This new record temperature will be particularly meaningful because it occurs when the recent minimum of solar irradiance ( pmod.php?topic=tsi/ composite/ SolarConstant) is having its maximum cooling effect.

Canada reports mildest winter on record - Canada jumps into spring after having recorded the mildest and driest winter on record, Environment Canada reported Friday.  The agency, which has compiled data from 1948, determined the average temperature throughout the country was four degrees Celsius (seven degrees Fahrenheit) above normal, said meteorologist Andre Cantin. Cantin said the country also saw 20 percent less precipitation than normal, also a record. El Nino, the climate pattern in the Pacific Ocean that influences global weather, was likely responsible for the freakish weather, according to Cantin, who noted that changes in climate may also have played a role.

Pine beetles threaten N. American forestry - (UPI) -- The pine beetle infestation of western Canadian forests is expected to close at least 16 major sawmills and cut exports by half, a report said Thursday. The International Wood Markets Group forecast released in Vancouver, British Columbia, said losses due to the insects would also cause lumberprices to rise, the Vancouver Sun reported. "Sawlog shortages caused by the mountain pine beetle could trigger the permanent closure of about 16 large primary sawmills and/or plywood production facilities within the British Columbia interior by 2018," the report said. The pine beetle is expected to kill 11 billion square feet of timber in British Columbia and western Alberta, the report said.

Rapid Increases in Tree Growth Found in US - The first-ever research program of its kind has so far:

  • Found rapid increases in tree growth in the forest around the Smithsonian's Environmental Research Center (SERC) in Maryland, USA, a finding attributed to increased atmospheric carbon dioxide and longer growing seasons, published in PNAS.
  • Proposed a novel biodiversity theory relating stress and seed-size published in PNAS.
  • Examined the effects a changing climate in forests is having on white-tailed deer, mice and even mosquitoes.
  • Addressed the lack of a reliable method for estimating the carbon storage capability of secondary forests on a landscape scale by assessing how measurements from airborne LiDAR and other remote sensing technologies relate to ground-based measurements.
  • Reviewed how human disturbance changes the way forests take up carbon in diverse environments.

Bees in trouble after bad winter - The mysterious 4-year-old crisis of disappearing honeybees is deepening. A quick federal survey indicates a heavy bee die-off this winter, while a new study shows honeybees' pollen and hives laden with pesticides.Two federal agencies along with regulators in California and Canada are scrambling to figure out what is behind this relatively recent threat, ordering new research on pesticides used in fields and orchards.  Federal courts are even weighing in this month, ruling that the U.S. Environmental Protection Agency overlooked a requirement when allowing a pesticide on the market. Scientists are concerned because of the vital role bees play in our food supply. About one-third of the human diet is from plants that require pollination from honeybees, which means everything from apples to zucchini.

Senators at odds over climate bill - Democratic Senator Maria Cantwell and Republican Senator Susan Collins late last year offered a streamlined "cap and dividend" bill to reduce U.S. greenhouse gas emissions blamed for global warming. It is competing against a more complex "cap and trade" bill passed by the House of Representatives last June and a more limited cap and trade compromise being worked on by a bipartisan group of senators. "We probably still have a difference of opinion on creation of trading platforms," Cantwell told reporters. "There are some who believe that you actually have to have trading to have liquidity," she added. "I think a clear price market signal without volatility will unleash the investment." But Senator Lindsey Graham, a South Carolina Republican working on the cap and trade bill, expressed strong opposition to the Cantwell-Collins approach for pricing carbon.

U.S. Bolsters Chemical Restrictions for Water - The Environmental Protection Agency announced on Monday that it would overhaul drinking water regulations so that officials could police dozens of contaminants simultaneously and tighten rules on the chemicals used by industries. The new policies, which are still being drawn up, will probably force some local water systems to use more effective cleaning technologies, but may raise water rates. “There are a range of chemicals that have become more prevalent in our products, our water and our bodies in the last 50 years,” the E.P.A. administrator, Lisa P. Jackson, said in a speech on Monday. Regulations have not kept pace with scientific discoveries, and so the agency is issuing “a new vision for providing clean, safe drinking water.”

Big Oil seeks shale gas deal in climate bill - Three oil majors want U.S. senators crafting the climate bill to keep the federal government from regulating shale gas drilling methods that have made vast domestic reserves accessible but have been criticized for polluting water supplies. "Some of the Senate staffers had asked the majors their views about what would be sensible in the climate bill," an industry source said. In response, the companies submitted a document to the senators indicating they want states, not the federal government, to regulate hydraulic fracturing, or "fracking" for natural gas, according to the source. The companies were ConocoPhillips, BP, and Shell Oil Co, the source said.

U.S. Congress Worries About Materials Shortages - From wind turbines to cell phones, rare earth minerals play a big role in advanced technology, and they could be key for future clean energy. But congress is worried about the fact that almost all of these materials come from China, and could be subject to tight export controls by that country's government. The subject was discussed yesterday at a hearing, where experts called on the U.S. government to take steps not only to promote domestic production of these materials, but to fund research to find ways to recycle them, to use less of them, and to do without them altogether.

US states sue EPA to stop greenhouse gas rules (Reuters) - At least 15 U.S. states have sued the Environmental Protection Agency seeking to stop it from issuing rules controlling greenhouse gas emissions until it reexamines whether the pollution harms human health. Florida, Indiana, South Carolina and at least nine other states filed the petitions in the U.S. Circuit Court of Appeals in Washington, D.C. on Thursday, states said.They joined petitions filed last month by Virginia, Texas and Alabama.The EPA is set to issue regulations later this month that would require autos and light trucks to increase energy efficiency. That would trigger rules on large emitters like power plants requiring them to get permits showing they are using the best technology available to reduce emissions

Federal Climate Change Programs - CBO Director's Blog - As awareness of global climate change has expanded over past decades, Congresses and Administrations have committed several billion dollars annually to studying climate change and reducing emissions of greenhouse gases, most notably carbon dioxide. Most of that spending is done by the Department of Energy (DOE) and by the National Aeronautics and Space Administration, although a dozen other federal agencies also participate. The effort has included funding science and technology, creating tax preferences, and assisting other countries in their attempts to curtail greenhouse-gas emissions. In a study released this afternoon, CBO examines the government’s commitment of resources to those purposes. The study presents information on current spending and analyzes recent patterns and trends in spending.

Green vs. Green: Renewable Energy or Bats? - EverPower Wind Holdings wants to build 70 wind turbines in an 80,000-acre area in Champaign County just east of Urbana and about 40 miles west of Columbus. Each turbine would be about 490 feet tall. In all, the turbines are expected to provide enough electricity to power about 42,000 homes. EverPower hopes to start construction late this year. Before that can happen, however, the company has to account for the bats. Surveys by EverPower and others over the past several years found female Indiana bats, Seymour said. That means that a colony of the 3-inch flying mammals nests there. It's likely, she said, that 50 to 100 female bats return to the area each spring. Because the Indiana bat is a federally listed endangered species, any project that could harm it must go through two closely linked processes.

My latest (and last) exclusive post at the Energy Collective - Titled, Preliminary results from an offshore wind farm / recreation survey in North Carolina, begins like this:  In an ongoing study, Craig Landry (East Carolina University), Tom Allen (ECU), Todd Cherry (Appalachian State University) and myself (ASU) are trying to estimate the impacts of coastal wind farms on recreation and tourism.  And ends like this:  The take home message seems to be that coastal recreation and tourism won’t be creamed with wind farms. More results are sure to follow, so stay tuned.

We Cannot 'Techno-Fix' Our Way to a Sustainable Future - Given the failure of Copenhagen, the sellout of US Congress to special interests and the stalemated international negotiations, the "last resort" of geoengineering is gaining support. This is especially true as many are either in a state of panic or paralysis following recent announcements of methane seeping from the East Siberian Arctic Shelf, on top of the ongoing reports of emissions rising, ice melting, and temperatures reaching all time highs. There are good reasons to be quite worried. But there may be good reasons to be even MORE worried by the climate geoengineering proponents and what is going on at Asilomar this week.

Pickens Makes Moves on Water - T Boone Pickens has been wrong before. But that does not mean he has changed his mind about wind. In fact he has done three wind farm deals in recent months. Just none of them are the big farms with which he had captured the public’s attention. It does not matter. Pickens believes wind will contine to take on a growing role in the US energy supply, and the big wind farm will one day be built: “It will be done. But it may be 10 years from now,” he says.  That is because Pickens believes the future will belong to a portfolio of energy sources. But he also has his eye on something else - water. Pickens realises that water is becoming an increasingly precious commodity and has been snapping up water rights for the day that the resource is in such demand that it has real value.

Billionaire Bill Gates' nuclear investment comes to light - Many of the tech cognoscenti are already familiar with TerraPower and its plans. Last month, Gates talked about TerraPower at the TED conference in Long Beach, Calif. TerraPower is one of the companies in a Seattle-based think tank called Intellectual Ventures, founded by former Microsoft  chief technology officer Nathan Myhrvold.  As he talked about his investment in TerrPower, Gates said the world needs to get to zero carbon emissions by 2050. TerraPower is looking to develop an alternative type of nuclear reactor that runs on natural or depleted uranium, which would also be safer and less expensive than enriched uranium.

Can Climate Skeptics Be Convinced? - Thomas Friedman, in Hot, Flat and Crowded, proposes that we refer to our time as the "Energy-Climate Era."  Friedman's thesis -- that the converging trends of rapid population growth, man-made climate change, and peak oil will define our time -- is well-argued.  But events since the date of publication invite a refinement upon Friedman's label for our time.... Because the third development since Friedman's book of 2008 has been an avalanche of data suggesting that climate change is moving faster than previously thought.  NASA's data indicate that polar ice is now melting at a net pace of 500 gigatons/year. Neither of the two most plausible explanations for this are comforting.

Revkin: “The idea that we’re going to fix the climate change problem or solve global warming has always been a fantasy, totally wishful, from my standpoint.”  - Policymakers should abandon the notion that a binding international agreement will be the primary tool for curbing greenhouse gas emissions, a former New York Times climate reporter told an environmental law conference here yesterday.Andrew Revkin, who left the Times last year and is now a fellow at Pace University’s Academy for Applied Environmental Studies, said regulations probably aren’t the best way to address global warming. But he cautioned that he was not advocating tearing up the U.N. Framework Convention on Climate Change. That treaty, he said, has spurred spending and “soft commitments” for “moving people away from business as usual,” Revkin told the American Bar Association’s Conference on Environmental Law. “But,” he added, “there’s a difference between wishful and aspirational.”

How Much for a Drink of Water? - Conserving fresh water is becoming increasingly important around the globe, a new report from the World Bank’s internal evaluation group says, so the World Bank should encourage countries to charge for water.  “Growing water scarcity is a reality, which the Bank and its partners need to confront by putting more emphasis on the challenging areas of groundwater conservation, pollution reduction, and effective demand management,” writes the evaluation group’s chief, Vinod Thomas. The inability to get people to pay higher rates “has raised concerns about sustainability” in water projects, the report further argues.

Drought continues in China, 51 million people affected (Xinhua) -- Severe drought has affected 51 million Chinese and left more than 16 million people and 11 million livestock with drinking water shortages, China's State Commission of Disaster Relief said Friday. About 4.348 million hectares of farmland were affected and 940,200hectares would yield no harvest, the commission said in a statement. Since autumn last year, southwest China has received only half its annual average rainfall and water stores are depleted.The commission said the ministries of finance, agriculture, civil affairs and water resources had appropriated more than 370 million yuan (54.4 million U.S. dollars) to the provinces, autonomous region and municipality to combat the drought. The funds are generally to be used to purchase drinking water, equipments and supplies for urgent water construction projects.

China Has 'Test' Meeting Grains Goal, Premier Says - China, the biggest grain user, faces a test meeting a crop-output target because of drought in the southwest and a cold winter in the north, Premier Wen Jiabao said, underscoring the challenges brought on by bad weather. Meeting this year’s goal of growing 500 million metric tons of grains will be a “test for sure,” the Xinhua News Agency reported, citing Wen. Wheat output in China may fall because of the cold weather, Wen was cited by the state agency as saying during a trip to drought-hit Yunnan from March 19-21. China’s leaders have prioritized food security to ensure that the world’s most populous nation has adequate supplies, maintaining stockpiles of about 40 percent of annual consumption. Rivers in the southwest have plunged to record low levels, according to the Ministry of Water Resources. About 18 million people are short of drinking water, Xinhua reported.

With cheap food imports, Haiti can't feed itself Decades of inexpensive imports — especially rice from the U.S. — punctuated with abundant aid in various crises have destroyed local agriculture and left impoverished countries such as Haiti unable to feed themselves. Bill Clinton — now U.N. special envoy to Haiti — publicly apologized this month for championing policies that destroyed Haiti's rice production. Clinton in the mid-1990s encouraged the impoverished country to dramatically cut tariffs on imported U.S. rice."It may have been good for some of my farmers in Arkansas, but it has not worked. It was a mistake," Clinton told the Senate Foreign Relations Committee on March 10.