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

Saturday, March 13, 2010

week ending Mar 13

New Flow Of Funds Report Demonstrates Massive Selling In Agency & MBS Holdings Away From The Fed - Today the Fed released its Q4 Flow of Funds, aka Z.1, report. Using the data in this report, some have focused on such temperamental measures as household net worth, which in Q4 came out at $54.2 trillion, a $700 billion increase from Q3. What they will not disclose is that all of this increase came courtesy of the stock market, as the "Equity Shares at Market Value" line increased from $15.546 trillion to $16.234 trillion: this represented the entire increase in household net worth. Should the market dive, as many are concerned it is will once the Fed stops manipulating the mortgage (and potentially equity) market, watch all this intangible net worth disappear, as unbooked profits are just that - unbooked. Others will tell you that consumer deleveraging continues unabated, which is true: the decline in total non-financial debt in Q4 for Households and Businesses was -1.2% and -3.2%, respectively. Who made up the difference: the US government of course, whose domestic nonfinancial debt holdings increased by 12.6%.

Is The Federal Reserve Insolvent? -The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed's endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling...

Preparing for a Smooth (Eventual) Exit - - NYFed - Remarks at the National Association for Business Economics Policy Conference, Arlington, Virginia

A 4% inflation target? - VoxEU - Olivier Blanchard, the IMF’s Chief Economist, recently broached the idea that central banks should target an inflation rate of 4% during the good times to leave more room for nominal rate cutting during bad times. This column supports this view, presenting new research showing that a higher inflation target could have halved the output loss of Japan during its “Lost Decade.”

The inflation solution | The Economist - At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.  The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”.

Reputational Risk: Living in a Derivative World - Two weeks ago, we wrote about how the zero interest rate policy (ZIRP) that is being maintained by the Federal Open Market Committee is driving global deflation ('Is the Fed's Zero Interest Rate Policy Driving Global Deflation?',). ZIRP is slowly re-pricing the yields on all manner of financial assets. Falling cash flow is eating away at the subsidy provided to banks by the Fed.  According to the most recent Quarterly Banking Profile published by the FDIC, net-interest margin (NIM) for the banking industry "in 2009 was 3.47 percent, the highest annual average since 2005," but we already see evidence that NIM is starting to fall at some banks. More important, the corrosive effect of ZIRP on money market funds and other interest rate sensitive investors is becoming critical.

Fed's Evans throws cold water on hike concerns - Evans said he is "wary" that the unemployment rate may tick higher or at least remain stuck at its current 9.7% level. Evans said that the labor market may be much weaker than the headline numbers suggest because workers in this recession have been out of work for much longer than is typical in downturns. The weak condition of the labor market suggests that near-zero interest rates will be needed for "some time," Evans said. Pressed by reporters, Evans said he was "quite comfortable" with the current Fed policy language that rates can stay low for an "extended period." He said this translates into steady policy for 3 or 4 meetings or roughly six months.

As Fed Eases Loan Aid, Policy Challenges Arise - NYTimes - The Federal Reserve has terminated nearly all of the extraordinary lending programs it created in 2007 and 2008 to combat the credit crisis. But it now faces critical decisions in coming months about when and how to tighten monetary policy, according to two Fed officials.  The officials — Brian P. Sack, the executive vice president who oversees the trading desk at Federal Reserve Bank of New York, and Charles L. Evans, president of the Chicago Fed — spoke this week at an economic policy conference here sponsored by the National Association for Business Economics. Neither challenged the position that the Fed’s chairman, Ben S. Bernanke, and other members of the Fed’s policy-setting panel have stated for months: that the central bank would keep short-term interest rates “exceptionally low” for “an extended period.”

Fed Announces Expansion Of Reverse Repo Program, Adds Money Market Funds To List Of Eligible Counterparties - Over the weekend we posted a very critical paper by the Minneapolis Fed discussing the potential weakness with the various liquidity extraction mechanisms (in the absence of a Fed Funds rate hike). Today, the Fed goes one step further, after noting increasing pressure by its own members to commence a tightening policy, and has announced the expansion of its reverse repo program with Primary Dealers, by adding additional counterparties.And guess who the first expansion wave focuses on - why Money Market mutual funds of course. Let's just do all we can to drain the money market system asap, shall we.

Fed's Brian Sack: "The Fed Will Be Embarking On A Tightening Cycle Like No Other In Its History" -When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets. - Brian Sack, Executive Vice President and Undisputed Head of the Fed's Markets Group, Rumored Head of Mythical Plunge Protection Team.

Fed Lieutenant’s Speech Suggests Rate Increase by Year End - For some time now, Federal Reserve officials have been hesitant to put a precise time frame on when they will begin to tighten policy, except to note the action lies well into the future.But on Monday, one of their chief lieutenants, the man charged with implementing Fed policy, offered a pretty clear take on the likely timing of a move up in interest rates. The official, New York Fed Markets Group chief Brian Sack, has no formal role in setting monetary policy. But his position elevates his importance, and he suggested in a speech some sort of rate tightening will occur by late year.“The current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year,” Sack told a group of economists in Virginia. “The markets seem prepared for the risks toward tighter policy,” he said, adding a “decent-sized term premium” on longer-dated yields suggests low chances of a “sizable upward shift in yields’ when that tightening comes.

Volcker Says Too Soon to Cut U.S. Monetary, Fiscal Stimulus (Bloomberg) -- White House adviser Paul Volcker said it’s too soon for U.S. policy makers to withdraw the stimulus measures and interest-rate cuts used to fight the worst slump since the Great Depression.  “This is not the time to take aggressive tightening action, either fiscally or monetary-wise,” said Volcker in an interview in Berlin yesterday, pointing to “high” unemployment. “So I think we have to, as best as we can, maintain the expectation that it will be taken care of in a timely way.”  The Federal Reserve and the Treasury are trying to withdraw the emergency measures introduced during the financial crisis without causing a relapse in the economy.

The Countdown: Federal Reserve MBS Purchases 98.4% Complete - The Fed MBS purchases are scheduled to end on March 31st. It will take a couple of months for some of these purchases to settle on the Fed's balance sheet. The coming increase in the Fed's balance sheet (and the expansion of the Supplementary Financing Program (SFP) over the same period) are related to the MBS settling on the Fed's balance sheet. Now that the short term liquidity facilities are finished - the balance sheet will increase by about $200 billion over the next couple of months as the remaining MBS settle. This expansion would result in an increase in excess reserves, and the almost $200 billion ramp-up in the SFP will counterbalance this increase. The Treasury apparently waited to announce this until the statutory debt ceiling was increased.

US could face debt crisis over Fed decision to halt agency MBS purchases - The US's fledging recovery from recession could be jeopardised by the Federal Reserve's plans to cease purchasing government-sponsored enterprise (GSE) securities from the end of March, warned a speaker at the Chicago Board Options Exchange risk management conference in Naples, Florida on Monday. Benn Steil, director of international economics at the Council on Foreign Relations, said his analysis suggests entities that purchased US government debt in 2009 might cease to do so once the US central bank halts purchases of Freddie Mac and Fannie Mae mortgage-backed securities (MBS) – which could precipitate a debt crisis in the world's largest economy.

Vola-geddon - - With monetary authorities around the world preparing for their exit, there are fears in some circles that a new Armageddon is in sight. Volatility could shoot up, it is argued, as investors try to figure out the impact of a synchronous global tightening on their respective asset classes—let alone the difference between, say, the effective fed funds rate and the interest on excess reserves! The fears are not unjustified, so I thought of going back to see whether history, can inform us about the chances of an impending “Vola-geddon"

Productivity Surge May Hurt Job Growth, Fed Paper Says - “The surge in labor productivity allowed employers to keep output steady while shedding workers and reducing hours of work in the economy,” the paper said. “As such, it allowed unemployment to rise much more than expected given the change in GDP, breaking the normal pattern between the two measures observed over the past 60 years.” The paper does not offer a prediction of what will happen with unemployment, except to say what many economists think will happen may be too optimistic.

Monetary Policy and Unemployment: Should the Fed have Done More? - Should the Fed have done more to combat the unemployment problem? In examining the costs and benefits of further easing, I have made almost all of the arguments against further easing by the Fed made below, i.e. that further easing by the Fed may not have much additional effect on long-term real interest rates, that even if rates could be brought down, consumers and businesses would be unlikely to respond by increasing investment and the consumption of durables -- firms already have considerable idle capacity, so why build more, and consumers are pessimistic about their futures, so why buy on credit -- and that there is an inflation risk from further easing.  One additional argument against more aggressive action by the Fed is that there is considerable uncertainty about the effects of further easing because they do not yet have "a robust suite of formal models to reliably calibrate interventions of this sort." But as with climate change, uncertainty does not necessarily translate into inaction.

Labor Markets and Monetary Policy, by Charles Evans, President, Chicago Fed: The other side of an economy experiencing growing output but low labor utilization is high productivity growth. Indeed, productivity has been quite strong of late, particularly over the past three quarters. This is often the case in the early stages of a recovery, as firms first meet higher demand for their products and services without expanding their work force. A key question today is the degree to which the recent productivity surge reflects a temporary cyclical development or a more enduring increase in the level or trend rate of productivity. If the gains are predominantly driven by intense cost cutting, then they may be unsustainable once demand revives more persistently. In this case, we would expect hiring to pick up quickly as the economic expansion takes hold. However, if the level or trend in productivity has risen due to technological or other improvements, then higher average productivity gains will continue.  In this case, the implications for hiring are not clear. Higher levels of productivity will show through in both higher potential and actual output for the economy, and so need not necessarily come at the cost of lower labor input.

Why Do Federal Reserve Board Seats Remain Unfilled? - Right now there are two unfilled positions on the seven member Federal Reserve Board. If nothing is done to fill those positions, the number will increase to three in June of this year when Governor and Vice-Chairman Don Kohn retires. One open Board position should not go unfilled for this long, two is worse — two positions have been open since president Obama took office — and three open slots should not be allowed to happen. It’s not exactly clear what has taken the administration so long to propose people to fill the open Board seats except fear of obstructionism from the other side. But there is a very legitimate argument that filling the open positions is important if we want to maximize our chances of recovering from the economic downturn, so obstructionism could backfire in this instance. The administration should have tried to fill the positions in any case, obstructionism or not, given the importance of doing all we can to recover from the recession and the importance of trying to prevent this from happening again

Christina Romer to Remain at White House, Not Joining Fed - Christina Romer, one of U.S. President Barack Obama’s top economic advisers, Friday said she won’t be taking up a job at the Federal Reserve and will be staying on at the White House. Among the possibilities for the vice chairman slot are Janet Yellen, who has been president of the Federal Reserve Bank of San Francisco since 2004, and Laurence Meyer, a former board member and now a private Fed watcher. Alan Krueger, a Princeton University labor economist who is now assistant Treasury secretary for economic policy, and Jeremy Stein, a Harvard University finance professor who did a brief turn in the Obama administration last year, are other names that have surfaced this week.

Juggling Act for Obama in Filling Fed Board Openings - NYT - It could use the expertise of an outsider with Main Street credentials, but savvy in bank regulation; a veteran of complex financial deals, but not associated with the bailed-out banks of Wall Street; and an esteemed economist, but one whose vision extends beyond fighting inflation. Among the potential unconventional nominees whose names have been floated in recent days are Martin D. Eakes, a North Carolina lawyer who helped found Self-Help, a community development fund for low-income borrowers; Peter A. Diamond, an M.I.T. economist and an authority on Social Security and pensions; Alan B. Krueger, a Treasury economist on leave from Princeton, who has studied labor, inequality and terrorism; and Jared Bernstein, an adviser to Vice President Joseph R. Biden Jr. and a longtime advocate of liberal economic views.

Report: Obama to Nominate Janet Yellen as Fed Vice Chairman - From Bloomberg: Yellen Said to Be Obama’s Pick for Fed Vice Chairman I suggested Dr. Yellen as a possible candidate for Fed Chairman last year, so obviously I think this is a good choice. She was way ahead of most other Fed members in recognizing the housing bubble, and she is apparently well respected by other Fed members. She is also very focused on unemployment (something we need right now). Yellen served on the Federal Open Market Committee (FOMC) last year - and this would put her back on the Committee (the Fed Presidents rotate each year).

Yellen, Raskin, Diamond May Help Bernanke Exit Stimulus as Obama Fed Picks (Bloomberg) -- President Barack Obama’s likely nomination of three Federal Reserve governors will help Chairman Ben S. Bernanke plan an exit from record monetary stimulus and strengthen banking supervision and consumer protection.  Janet Yellen, an economist who heads the Fed Bank of San Francisco, is Obama’s choice for central bank vice chairman in Washington. The administration has also approached Sarah Bloom Raskin, Maryland’s commissioner of financial regulation, and Peter Diamond, an economics professor at the Massachusetts Institute of Technology, to fill two vacancies on the Board of Governors.  The appointments would complete the Federal Reserve’s seven-member board for the first time since April 2006.

Top Choices Are Floated to Fill Seats on Fed Board - NYT…Moving quickly to put its mark on the Federal Reserve, the White House on Friday identified two economists and a lawyer as its candidates to fill three seats on the central bank’s board of governors. The economists are Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, who is the top choice for vice chairwoman, and Peter A. Diamond, a Massachusetts Institute of Technology professor and an authority on Social Security, pensions and taxation. The lawyer, Sarah Bloom Raskin, is the Maryland commissioner of financial regulation.

Senator Brown Warns Summers And Geithner Not To Fill Fed Vacancies With Yet More Administration Puppets And/Or Idiots - In a letter to Larry Summers and Tim Geithner, Senator Sherrod Brown warns the administration to not simply place more Wall Street cronies in filling the three vacancies at the Federal Reserve, which will open up once Fed vice chairman Donald Kohn leaves this coming June. Instead of mere" maximum liquidity" automatons, Brown wants the new Fed members to be "committed to transparency, consumer protection and lowering the unemployment rate." Furthermore, Brown demands that "we need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged." Alas, as transparency and rationa thought, coupled with proactive defensive actions means game over for the Fed, these conditions are an immediate deal killer, with the result being that the only affirmative criteria for new Fed membership is the endorsement of Lloyd Blankfein and current Fed Director Jamie Dimon.

More Calls for Fed Governors Who Actually Saw Crisis Coming, Care About Consumers, and Tolerate, Um, Welcome Transparency - Yves Smith - One of the bizarre things that occurs whenever particular high profile slots are up for grabs is that the discussion rapidly devolves into which candidate A Lot of People Have Heard Of should get it, rather than focusing on selection criteria. In addition, some of the evident selection criteria for heavyweight roles look pretty dubious. A former Fed economist and hedge fund manager who can claim to have invented swaps, but for some odd reason doesn’t commented dryly when Bernanke was appointed Fed chairman: “The record of academic economists in that job is pretty poor” and then proceeded to dissect Arthur Burns’ record. By contrast, Kevin Warsh’s presence in the Board of Governors seems quite unfathomable. The letter below, from Senator Sherrod Brown, chairman of the panel that oversees Fed monetary policy, thus puts the focus on the right foot.

FOMC Governor Litmus Test - As noted earlier this month (Geithner, Summers Lead FOMC Vacancy), there are 3 vacancies on the Federal Reserve — two Governors and a Vice-Chairman. Fed Governors are appointed by the President, and require Senate confirmation. They serve 14-year terms. I placed a significant amount of blame on the Federal Reserve for the financial crisis. The ultra low rates pushed by Greenspan in response to the dotcom collapse is well understood. What people seem to understand less is how else the Fed failed. The Federal Reserve states its responsibilities. Thus, I suggest a litmus test for any nominee to the FOMC board.

Webb, Sanders Pressure Obama On Fed - Two senators on opposite ends of the Democratic caucus spectrum are circulating a letter pressuring President Obama to appoint governors to the Federal Reserve who reflect the interests of the middle class and small businesses rather than Wall Street. Sen. Bernie Sanders (I-Vt.), a self-described democratic socialist, has been intensely critical of the Fed's failure to reduce unemployment and its failure to regulate the financial services industry leading up to the crisis. He's joined by Sen. Jim Webb (D-Va.), a conservative Democrat who voted to back Chairman Ben Bernanke's most recent confirmation to a second term.The letter is being circulated through the Senate in search of additional signatures and was provided to HuffPost by an aide in a third office. Obama has an opportunity to fill a vice-chair position and two governor spots on the Federal Open Market Committee. All three positions are powerful ones and could help shape the Fed in a new mold.

Obama to tap Yellen for Fed vice chair: source - (Reuters) - President Barack Obama plans to nominate San Francisco Federal Reserve Bank President Janet Yellen, a respected policy dove, to be vice chairman of the central bank, a source familiar with the process said on Thursday. Yellen would replace Donald Kohn, a 40-year veteran of the Fed who announced earlier this month that he would retire on June 23. The nomination for the four-year term as the Fed's No. 2 would be subject to Senate approval. She is considered one of the most "dovish" members of the central bank's policymakers, meaning she is seen to lean toward policies that will boost growth and promote employment rather than those aimed at keeping inflation at bay.

Who is Janet Yellen? - WSJ - Janet Yellen, president of the Federal Reserve Bank of San Francisco, is expected to be nominated by President Barack Obama as vice chair of the Federal Reserve Board. Ms. Yellen, 63 years old, has served as a Fed policy maker for almost a decade between her stints in Washington and San Francisco. Ms. Yellen has been a reliable supporter of Fed Chairman Ben Bernanke’s policies. She is frequently cited by economists as one of the central bank’s most dovish policymakers, generally backing policies that would boost growth and reduce high unemployment. She has long been a counterweight to the Fed’s more hawkish regional bank presidents who tend to be more concerned about rising inflation.

Stiglitz, Nobel Prize-Winning Economist, Says Federal Reserve System ‘Corrupt’ - Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve's -- in which regional Feds are partly governed by the very banks they're supposed to police -- it would have raised alarms."If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."

Report: Fed to Keep Supervision Authority of Large Banks - The Financial Times reports: Big bank oversight to stay with Fed - Chris Dodd ... is set to propose this week that the 23 largest institutions stay under the Fed’s oversight ... At issue ... was the regulation of several hundred state chartered institutions that also want to remain under the Fed’s supervision. “The Fed feels it is gaining some momentum,” said [an unidentified Senate aide]. The Fed has been lobbying hard, and according to the Financial Times, has the backing of Secretary Geithner and many of the bank lobbying associations. The regional Fed presidents have been arguing for the Fed to retain supervision authority too. Dr. Altig at Macroblog quotes from Atlanta Fed President Dennis Lockhart's speech last week:  "... the Fed must play a central role in a defense structure designed to prevent or manage future crises. My key argument is the indivisibility of monetary authority, the lender-of-last-resort role, and a substantial direct role in bank supervision."

Fed Audit Bitterly Opposed By Treasury - The Treasury Department is vigorously opposed to a House-passed measure that would open the Federal Reserve to an audit by the Government Accountability Office (GAO), a senior Treasury official said Monday. Instead, the official said, the Treasury prefers a substitute offered by Rep. Mel Watt (D-N.C.), and would like to see it enacted as part of the Senate bill.  The Watt measure, however, while claiming to increase transparency, actually puts new restrictions on the GAO's ability to perform an audit. Secretary Tim Geithner, Assistant Treasury Secretary Alan Krueger and Gene Sperling, a counselor to the secretary, held a briefing Monday with new media reporters and financial bloggers during which they discussed the Fed audit and other topics.

What if price-level targeting were already in place? - A popular research topic at the Bank of Canada over the past few years has been price-level targeting: committing to a path for the level of core CPI, not just to its rate of inflation. The idea here is that standard inflation targeting forgets and forgives past deviations from target. But under price level targeting, higher-than-target inflation will be compensated by lower-than-target inflation in subsequent periods.  There are several good things about this idea

Dollar Dominance Gets a Warning - The dollar's dominant role as global reserve currency hasn't been challenged by the global credit crunch, Standard & Poor's said in a report published Thursday. But the ratings firm warned that the U.S. can't take the dollar's role for granted. Unless it addresses its fiscal deficit and debt, foreign investors could start to reduce dollar holdings, sending rates sharply higher and undermining the economy, which in turn could threaten the U.S.'s triple-A rating. "The will isn't there yet, but we think it will come," said John Chambers, the chairman of S&P's sovereign-ratings committee, referring to the U.S. government's commitment to rein in its deficit. Mr. Chambers said the 2010 budget, presented last month, was disappointing, but he expects a "more-robust fiscal consolidation plan" to emerge after this year's midterm congressional elections."

Is There Too Much Worry About the Debt? - TIME - Judging from the noises emanating from some corners of Washington these days, the federal debt has assumed pride of place as the source of national anxiety. President Obama has called for independent commissions to seek ways to reduce spending. The media are filled with talk of America's path of financial suicide; economists warn that the debt crisis in Greece is a dry run for the cataclysm that awaits America and the world as U.S. deficits and debt balloon.The numbers are undoubtedly big, running into many trillions of dollars. The percentages are also daunting, with projections of total gross debt reaching 100% of U.S. GDP this year or next and surging every year thereafter. There is bipartisan agreement that the deficits and overall debt are unsustainable. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, has urged policymakers not just to educate the public about the dangers ahead but also "to scare them to death" about the dire prospects if the debt is allowed to continue to grow.

America's Debt - No Big Deal? -- I just read a Time Magazine article Sunday about the U.S. debt and how it is no big deal that the U.S. has so much debt. In fact, Zachary Karabell actually believes that our debt is a good thing. I actually met Mr. Karabell last year at a conference we both spoke at, although he was paid and I was merely on a panel, but it is unlikely he would remember me. Regardless, I have to humbly disagree with the conclusions he came up with in his article. Debt can be a good thing, but only in small amounts and for productive reasons. For example, a business that takes out a loan to hire a new employee to expand their business would be productive debt as it contributes to society, hopefully. However, taking out a loan to buy a 50” high definition TV is, in my opinion, a terrible reason to add debt to one's balance sheet. The U.S. government has recently borrowed money to hire people and encourage spending, but the government is not creating productive jobs because it creates nothing and it must tax the people in order to pay off the debt for the job it created. The government actually destroys wealth through taxation and wasteful spending. Basically, the government is borrowing money to buy big screen TVs. Bad debt.

What is the National Debt? - My Forbes column this week tries to answer the question. BB It's a rare public opinion poll these days that doesn't show the national debt near the top of Americans' concerns. Huge budget deficits as far as the eye can see are a source of great worry, encouraging many people to join the so-called tea party movement to demand fiscal responsibility. President Obama has responded by asking for a freeze on nondefense discretionary spending, and appointing a commission to study the deficit and make recommendations for reducing it. Before we can take meaningful steps to control the debt--or even understand its true cost and effect on the economy--we first have to understand what it is.

It Takes Two to Tango: A Look at the Numerator AND Denominator - A new book by Kenneth Rogoff and Carmen Reinhart, "This Time It's Different: Eight Centuries of Financial Follies", has occasioned much comment in the press and blogosphere (see here and here) The book purports to show that once the gross debt to GDP ratio crosses the threshold of 90%, economic growth slows dramatically. But that's too simplistic: a ratio is just a number. Debt to GDP is a ratio and the ratio value is a function of both the numerator and denominator. The ratio can rise as a function of either an increase in debt or a decrease in GDP. So to blindly take a number, say, 90% debt to GDP as Rogoff and Reinhart have done in their recent work, is unduly simplistic.

The long wave of government debt - VoxEU - The high levels of government debt have raised concern among policymakers and commentators. But this column argues that markets have financed much larger levels of debt than are currently predicted for the UK and US. Given the enormous financial shock these economies have experienced, they might actually be better off with high debt for a long period of time.

This time probably isn't different – Economist - CARMEN REINHART and Kenneth Rogoff have been doing their best to place the global economy's latest financial and economic crisis in historical perspective, most notably in their recent book "This Time is Different: Eight Centuries of Financial Folly". Concerning the long view, the authors explain in a new NBER paper: . It is particularly distressing that so many cross-country analyses of financial crisis are based on debt and default data going back only to 1980, when the underlying cycles can be half centuries and more, not just thirty years.  Here's one picture of what that looks like: It's a fascinating image. The authors are right: debt cycles do appear to be somewhat rare and about a half-century in duration. And the struggle to work out recurring debt tends to play out in consistent ways, with increases in default and the occasional bout of rapid inflation.

Debt And Transfiguration – Krugman - Carmen Reinhart has a new working paper out (subs. req.) that’s an extremely valuable resource: more than 100 pages of charts showing the history of debt and banking crises in many countries; sample above. I’ll be keeping this one ready to hand for years to come.I’ve been going through this chartbook somewhat in tandem with rereading the recent Reinhart-Rogoff paper on debt and growth (subs. req.) — the one that’s being widely cited as evidence that bad things happen when debt goes above 90 percent of GDP. I sort of wondered about that result, given the ability — documented in the new Reinhart paper — of some advanced countries to manage debt burdens as high as 250 percent of GDP.What I think I’m seeing, although I haven’t tested this carefully, is that the causal relationship largely runs from growth to debt rather than the other way around.

America's Foreign-Owned National Debt - In my Forbes column this week I discuss the dangers. BB Virtually every budget expert knows that the U.S. federal debt is on an unsustainable course. This means that something beyond our control is eventually going to force us to live within our means. Historically, it has been foreign bond holders who ultimately imposed fiscal austerity on profligate nations. That is why America's growing foreign debt should be a matter of concern to policymakers. As is well known, the Founding Fathers were quite hostile to the idea of a national debt and deficit spending. The Constitution itself came into being because the federal government was institutionally incapable of balancing its budget, leading to a financial crisis and a constitutional convention to fix it. Yet, the framers of the Constitution neglected to include a provision requiring a balanced budget.

NYT Joins Efforts to Scare Public About the Size of Government Debt - Peter Peterson, the billionaire Wall Street investment banker, is devoting more than $1 billion to a campaign to whip up fears about budget deficits in order to force cuts in Social Security and Medicare. It almost looks as though the NYT has joined the effort. It printed an article today that uses a measure of government debt that is explicitly designed to be misleading. The article reports on the debt of Greece, but then adds in a discussion of the debts of other countries, including the United States.  The calculations are misleading because they compare future obligations over many decades to the current year's GDP.

The Dollar, the Deficit, and Accounting Identities - It would be great if people who reported on the budget deficit for major news outlets could be required to know the basic accounting identities that get taught in every introductory economics class. The key one that almost none of them seem to know is that the trade deficit (X-M) is equal to the sum of public and private savings (T-G)+(S-I). This identity means that if the United States is running a trade deficit, then the sum of public and private savings must also be negative. That has to be true -- it is an identity. It's just like 2 + 2 = 4. It is always true. This matters for all the nutty deficit hysteria because no one every asks the deficit hawks how they would like to see the identity met. The U.S. has a large trade deficit because of the value of the dollar. At a given level of GDP, the main determinant of the trade deficit is the value of the dollar. Politicians and even many economists like to hyperventilate about "competitiveness" and talk about how we're going to improve our trade situation by getting a better trained and educated work force, rebuilding the infrastructure, or fixing the tax code. But even if you gave any of these characters everything they wanted in whichever direction, there is no plausible story where their policy of choice would have even half the impact on competitiveness and trade as a 10 percent reduction in the value of the dollar -- and even then we would only see the impact after many years.

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 It's true that inflation could reduce a small portion of U.S. debt. The International Monetary Fund (IMF) estimates that in advanced economies less than a quarter of the anticipated growth in the debt-to-GDP ratio would be reduced by inflation.But the mother lode of the country's looming debt burden would remain and the negative effects of inflation could create a whole new set of problems....

Fed’s Dudley: Governments Need Fiscal Stimulus Exit Plan - Calling government budget deficits unsustainable, a top Federal Reserve official on Thursday called on national leaders to start laying out plans that would allow a move back to more manageable spending levels. “Just as there needs to be a credible exit strategy for monetary policy to anchor inflation expectations, there also needs to be a credible exit strategy from fiscal policy stimulus to anchor expectations about the risks of sovereign debt default,” Federal Reserve Bank of New York President William Dudley said Thursday...

CBO’s Elmendorf: U.S. Fiscal Policy on Unsustainable Path - The U.S. federal budget deficit is on a trajectory that poses “significant economic risks” and will become unsustainable, Douglas Elmendorf, director of the Congressional Budget Office, said on Monday. Mr. Elmendorf noted that the choices needed to address the medium and long-term budget deficit will be “larger and more fundamental” than in the past. “U.S. fiscal policy is on an unsustainable path that can’t be resolved through minor tinkering,” he said. “The problem posed by the federal budget deficit not at its current level but on this trajectory… poses a growing risk to the recovery.”

Definition of Unsustainable in One Handy Chart -'s entry for Unsustainable is thus: "Not able to be maintained or supported in the future, especially without causing damage or depletion of a resource." Exhibit A, above, depicts in visual form the definition of unsustainable, courtesy of the Treasury's annual release The Federal Government's Financial Health: A Citizen's Guide to the Financial Report of the United States Government, FY 2009 Summary Edition. At only 55 percent of GDP as of February 25, 2010, the bunnies and rainbows crowd no doubt will exclaim, "What, Me Worry? What's the big deal about $7.929 trillion? We need MORE deficit spending to cure what ails us, not less, and we can economically grow our way out of this temporary situation, as we did after World War II." Not...This time, growing our way out is not a plausible scenario, except via Fed-Treasury-induced hyperinflation.

It's not our debt that's unsustainable, it's our politics - As a debt worrywart who devoured one of Pete Peterson's doomsday books on my (first) honeymoon, and who came to Washington to help balance the budget in the 1990s, I take a back seat to no one when it comes to deficit hawkery. But the current panic over the national debt is a little mad. Yes, it's a fine thing that President Obama is naming Alan Simpson and Erskine Bowles to head up the fiscal commission he'll unveil Thursday. And Republican glee and Democratic fear over the political fallout from trillion-dollar deficits are understandable. But, at least for now, the policy consequences are modest and manageable. How can I say that? Because even the most debilitating debt is racked up only one year at a time. And that means the staggering $9 trillion in fresh debt that President Obama has projected over the next decade is only a number on paper for the moment. If they came to pass, these levels of debt would be country-wrecking, next-generation-crushing and downright wrong. Is the president's forecast of such debt proof of the White House's unwillingness to lead on hard choices? You betcha. Does it mean we'll actually incur this debt? In a word, no....

What It Would Mean to Default on the Debt -The other day I commented on a blogger's suggestion that it might be better to default on the debt than raise taxes. In the course of doing some research on debt default I came across the following article in which a friend of mine, Chris Whalen, actually made a serious argument for defaulting on the debt. It's too good not to share.

What Assets Could the United States Sell? - Several German lawmakers hit a nerve last week with their suggestion that Greece sell some of its assets in order to cut its debts. The German newspaper Bild summarized this line of reasoning quite memorably: “We give you cash, you give us Corfu.” That zinger has prompted a cottage industry of possibly humorous efforts to tote up what Greece should consider selling. For example, the Christian Science Monitor has a slide show of the top ten items it thinks that Greece could sell, including the Parthenon and the Acropolis. While no one (?) takes these suggestions seriously, they do raise an important point. Spending reductions and revenue increases are important when governments face budget pressures, but they are not the only option. Governments can also sell off assets. Which raises a natural question. If push comes to shove, what could the United States sell in order to cut its debts?

Obama Spending Plan Underestimates Deficits, Budget Office Says - (Bloomberg) -- President Barack Obama’s budget proposal would create bigger deficits than advertised every year of the next decade, with the shortfalls totaling $1.2 trillion more than the administration projected, according to the Congressional Budget Office. The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.  Deficits between 2011 and 2020 would total $9.76 trillion, the CBO said. Economists generally consider deficits topping 3 percent of GDP to be unsustainable because that means government debt is growing faster than the ability to pay back the money.

US monthly deficit at record 220.9 billion in February news  - The US government's monthly budget deficit rose to a record $220.9 billion in February 2010, the treasury department said today.  This brings the total US government deficit for the first five months of the current fiscal (October-February 2009-10) to $651 billion, compared with a $589 billion deficit in the similar period of the previous fiscal.The February budget deficit is up 14 per cent year-on-year and is the biggest monthly shortfall in US history.

Bowles Says Deficits Will Make U.S. ‘Second-Rate’ (Bloomberg) -- Erskine Bowles, co-chairman of the commission on U.S. deficit reduction, said entitlement programs such as Social Security will turn the nation into a “second- rate power” if their costs aren’t reduced.  “We’re going to mess with Medicare, Medicaid and Social Security because if you take those off the table, you can’t get there,” Bowles said today in a speech to North Carolina bankers in Greensboro. “If we don’t make those choices, America is going to be a second-rate power and I don’t mean in 50 years. I mean in my lifetime.”

Does the President’s budget increase the deficit or reduce it? -Team Obama says the President’s budget would reduce the deficit.  CBO says the President’s budget would increase the deficit.  What the heck is going on?  Who is right? Let’s use Budget Bubble Graphs to see if we can understand what’s going on. We begin by reminding ourselves that federal spending, taxes, and budget deficits have remained surprisingly stable over time.  Over the past fifty years the federal government has, on average: taken 18.0% of GDP in taxes; spent 20.3% of GDP; and run a deficit of 2.3% of GDP. While there are annual fluctuations and short-term trends, these long-term averages are incredibly stable.  I believe they represent a sort of implicit political consensus about the appropriate role of government in American society, or at least a roughly stable political balancing point.

New CBO analysis says the Senate bill reduces the deficit - - This won't be shocking to many of you, but the Congressional Budget Office just released an updated analysis for the Senate health-care bill, and it finds that it reduces the deficit, much as its predecessors did. The first 10 years see savings of $118 billion, and the second 10 years see savings in excess of $600 billion. Most striking is that "CBO expects that the legislation would generate a reduction in the federal budgetary commitment to health care during the decade following 2019," which is to say that this bill will cover 30 million people but the cost controls will, within a decade or so, leave us spending less on health care than if we'd done nothing. That's a pretty good deal.

Budgetary Effects of the Senate-Passed Health Bill - CBO Blog - CBO has just released an estimate of the budgetary effects of the health bill, H.R. 3590, that passed the Senate on December 24. Today’s estimate differs from the estimate for a slightly earlier version of the legislation that we released on December 19 in that it encompasses all of the amendments that were adopted by the Senate, reflects a revised assumption about its enactment date, and incorporates some technical revisions. Like the December 19 estimate, this estimate is based on CBO’s baseline projections from March 2009. We and the staff of the Joint Committee on Taxation (JCT) prepared this updated estimate in preparation for further consideration of health care legislation. However, the changes we have made do not result in an estimate that differs substantially from the earlier one. CBO and JCT now estimate that, on balance, the direct (mandatory) spending and revenue effects of enacting H.R. 3590 as passed by the Senate would yield a net reduction in federal deficits of $118 billion over the 2010–2019 period.

Debt Is A Political Issue – Krugman - And if you do the arithmetic of debt service, that really does seem to suggest that debt isn’t a problem. To stabilize the real value of debt, all the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable? And even that, you could argue, is too pessimistic. To stabilize the debt/GDP ratio, all you need is to pay r-g, where r is the real interest rate and g the economy’s real growth rate; and right now r-g looks, ahem, negative.And this benign view of debt isn’t just hypothetical: countries have, in reality, run up immense debt/GDP ratios without going insolvent: see the history of Britain, above. So what’s the problem? Confidence.

Good Debt, Bad Debt - There is a pathetic quality to our discussion of deficits and fiscal responsibility because we never face up to how much we need government to do. Our debates are also characterized by a politically convenient amnesia. Just a decade ago, we were running surpluses so big that Alan Greenspan, then chairman of the Federal Reserve, worried about what would happen once our national debt was liquidated. We had this problem well in hand until we started waging wars and cutting taxes at the same time.What would a rational approach to the budget look like? It would begin by accepting that running deficits at a time of high unemployment is a good thing. We would celebrate the fact that the world’s governments were far wiser in this downturn than their counterparts were during the Great Depression.

Presentation on “Fiscal Policy Choices” to the National Association for Business Economics - CBO directors blog - The theme of the conference was “The New Normal? Policy Choices After the Great Recession,” and naturally I discussed fiscal policy choices. My slides and remarks were based on CBO’s January report on the budget and economic outlook and preliminary analysis of the President’s budget released last Friday.

The Deficit Problem Is a Political Problem - By which I do not mean to say it is not a problem. As Paul Krugman reminds us,“If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral. “So what determines confidence? The actual level of debt has some influence — but it’s not as if there’s a red line, where you cross 90 or 100 percent of GDP and kablooie . . . Instead, it has a lot to do with the perceived responsibility of the political elite.The implication is that our deficits really are a serious problem. But what’s making them a serious problem is not just that they are big and getting bigger; it is that our political system seems incapable of dealing with them. So, ironically, deficit peacocks are right that the deficit is a problem, but only because they refuse to do anything about rising health care costs — since the long-term deficit problem is a health care cost problem.

How to get the money - AS DEBT issues feature more prominently in public debates, policymakers and economists are spending more time thinking about how to close looming fiscal gaps and, specifically, where to find new revenue. Potential policies have been bandied about—the health insurance excise tax, a carbon tax, a financial transactions tax, and a VAT. Some public figures have proposed a major rethink of the tax system. Wisconsin Congressman Paul Ryan falls into this category, having put out an ambitious reform proposal to balance future budgets and reduce debt.

Rep. Ryan’s Tax Roadmap Falls Short of His Revenue Goals - TaxVox - In his provocative Roadmap for America’s Future, Representative Paul Ryan (R-WI) figures that his broad tax code overhaul would eventually generate about 19 percent of Gross Domestic Product in revenues. But the Ryan plan would produce hundreds of billions of dollars-a-year less than that—about 16.8 percent of GDP—a decade from now, according to new Tax Policy Center estimates. Moreover, the plan would give a huge tax cut to the wealthy, while cutting taxes by little or nothing (and in some cases even raising taxes) for low- and middle-income people.As a result, Ryan would likely fall far short of meeting his goal of balancing the budget and paying off the national debt by 2080, even if government spending were slashed to 1951 levels as he proposes.

Who Do You Love, Part II - Paul Ryan’s Roadmap for America’s Future has drawn a lot of admiring commentary from self-described reasonable conservatives — which just goes to show that no matter how many times Lucy pulls away the football, Charlie Brown will keep on trying to kick it. In fact, the plan is a huge gift to the very, very well off, while actually raising taxes for 60 percent of tax units. Oh, and the claims that it’s fiscally responsible are phony; basically, Ryan pulled a fast one by having the CBO evaluate his spending proposals but not his revenue-bleeding tax proposals.

The Ryan Tax Plan: Higher Taxes for 90% of Americans, Less Revenue for the Government - Paul Ryan’s “budget roadmap” has terrified the GOP leadership, but thrilled conservative intellectuals with its calls for sharp cuts in Social Security, Medicare, Medicaid, defense, and all other government programs combined with privatization of Medicare so that a larger share of your diminished benefit goes to for-profit insurance companies. Less widely discussed is the tax aspects of Ryan’s plan: when the Center for Tax Justice (PDF) ran the numbers, they discovered that this isn’t the kind of tax cut that makes your taxes lower. On the contrary. Most Americans will pay higher taxes under Ryan’s plan than under Obama’s. Only the very richest will pay less. This table sums up the essence of the Ryan Ripoff:

The Silly Debate Over Big Government – Kiplinger - It’s become fashionable these days -- especially with the rise of the Tea Party movement and the success of attacks on President Obama’s health care plan -- to assume that Americans, almost by nature, are against “big government.” I’m sure a poll testing that term would draw impressive numbers, with a very large majority insisting they prefer “smaller government.” But what do those terms really mean? I couldn’t help shaking my head at the congressional hearings and the press coverage of Toyota’s safety problems, as lawmakers and commentators blasted the National Highway Traffic Safety Administration for failing to catch Toyota’s problem and do something about it sooner. But that requires a staff and -- yes -- regulations with enforcement behind them. How do you square hat with a call for smaller government?

The Problem with Deficit Neutrality -  Imagine you have a friend who has a budget problem.  Every month he spends more than he earns.  His credit card bills are piling up.  He is clearly on an unsustainable path.  Then one day he comes to you with an idea. Friend: I am going to take off a few days from work and fly down to Bermuda for a quick vacation. You: But isn't that expensive?  Won't that just add to your growing debts? Friend: Yes, it is expensive.  But my plan is deficit-neutral.  I have decided to give up that half-caf, extra shot caramel macchiato I order at Starbucks twice every day. And if I give it up for the next three years, it will pay for my Bermuda trip.

The Dangers of Deficit Reduction  - A wave of fiscal austerity is rushing over Europe and America. The magnitude of budget deficits – like the magnitude of the downturn – has taken many by surprise. But despite protests by the yesterday’s proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression. Most economists also agree that it is a mistake to look at only one side of a balance sheet. One has to look not only at what a country or firm owes, but also at its assets.  After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits

Slashing the Deficit without Massive Tax Hikes - BusinessWeek - For all the political theater surrounding the newly appointed deficit commission, there are some straightforward steps it could take to change the alarming U.S. debt dynamics. The panel is supposed to recommend ways to narrow the gap to 3% of gross domestic product by 2015, down from this year's 10.6%, and improve the fiscal outlook by tackling entitlement programs. Here's how it could be done:  Start with Social Security. Now on track to become insolvent by 2037, the program with modest changes could contribute $60 billion in annual savings by 2014. A quarter of the $5.3 trillion Social Security shortfall over the next 75 years could be made up simply by pegging annual cost-of-living adjustments made to retirees' pensions to an index many economists believe measures inflation more accurately than the one Washington uses. Adopting the so-called chained consumer price index—which takes into account people's tendency to substitute similar but cheaper products when prices rise—would save taxpayers billions.  People live longer now. Recognizing that, raising the retirement age would make up another quarter of the gap. The full Social Security retirement age is already rising to 67 for those born after 1959. Save big by including those born after 1958 and pushing the eligibility back by a month every other year. The retirement age still wouldn't reach 69 until long after today's workers retire.

What's Our Credit Limit Again? - 50% of the federal budget right now goes to entitlements. This last month we posted a record $220.9 billion budget deficit.  We took in $107 billion but spent $328 billion. Isn't that special.  We only funded 32% of expenditures? Remember - entitlements were half of that $328 billion. So let's see if we can do the math here. Entitlements were about $164 billion last month in spending.  The rest was, of course, the rest. But we only took in $107 billion. So even if we eliminated all entitlement spending we still did not have enough money to cover the rest. Yeah.

Black Swan’ Author Concerned About Hyperinflation (Bloomberg) -- Nassim Nicholas Taleb, author of “The Black Swan” about how unforeseen events can roil markets, said he is concerned about hyperinflation as governments around the world take on more debt and print money. “We are facing an environment with a huge amount of debt,” he said in a speech in New Delhi today. “The next mistake is going to be overprint, which is going to be the way out for them, which is why I fear hyperinflation.” Taleb joins Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co., in warning governments about rising public debt. Failing to carry out fiscal measures in time would raise the possibility of governments seeking to eliminate excessive debt through inflation or default, El-Erian said yesterday. “Why is the state converting private debt into public debt?” said Taleb, “public debt is permanent.”

Welcome to America, Sucker - Every great American boom and bust makes and breaks its share of crooks. The past decade -- call it the Ponzi Era -- has been no different, except for the gargantuan scale of white-collar crime. A vast wave of financial fraud swelled in the first years of the new century.  Then, in 2008, with the subprime mortgage collapse, it crashed on the shore as a full-scale global economic meltdown.  As that wave receded, it left hundreds of Ponzi and pyramid schemes, as well as other get-rich-quick rackets that helped fuel our recent economic frenzy, flopping on the beach.

It Will Be Far Worse Than The Great Depression - If the economy was a person, then the producing sector (agriculture, manufacturing, mining, etc) would be its “income”. If the service sector is much smaller than the producing sector (like China today or the US one hundred years ago), then a country is living below its means (net saver). If the service sector is much larger than the producing sector (like the US today), then a country is living above its means (depleting savings and going into debt).

Re-thinking Macroeconomic Theory and Policy - If you think the US financial system is broken, then you don’t know how much more broken the macroeconomic theory is. The traditional Keynesian model of ‘depression economics’ where increasing government spending could stimulate the economy was misused by governments, particularly in developing countries, for decades during the 1950s to the 1980s. The result was the ‘commanding heights’ which expanded the role of the public sector in production, distribution, marketing, job creation, in almost all economic activities. Low economic growth and high rent-seeking by bureaucrats in developing countries was recorded during 1960-85.

Financial Crisis Panel to Grill Greenspan - WSJ - Greenspan is scheduled to testify before the Financial Crisis Inquiry Commission in early April. This might be the one real opportunity to understand why regulators missed the lending problems. Hopefully the Commission will ask about regulatory oversight (and lack thereof). We already know from various Inspector General reports that Fed and FDIC field examiners were expressing significant concerns in 2003 and 2004. What action did Greenspan take at that time with those reports? Put them in a drawer? Why wasn't action taken earlier to tighten lending standards? Was Greenspan concerned about the "widespread" innovation in the mortgage industry (automated underwriting, reliance on FICO scores instead of the 3 Cs - creditworthiness, capacity, and collateral, agency issues with the widespread use of independent mortgage brokers, expanded securitization, non-traditional mortgage products, etc.)? When lending booms, methods change, and standards weaken - isn't that when the regulators need to be the most vigilant?

A Note to the Financial Crisis Inquiry Commission - President Obama's Financial Crisis Inquiry Commission (FCIC) is under way and taking testimony from economists and other experts on what they believe were important contributors to the crisis. I was interested to see what was being said about the role U.S. monetary policy may have played in creating the crisis. Surprisingly, the only public testimony that looks closely at monetary policy's role is that of Pierre-Olivier Gourinchas.*His testimony amounts to two main points: (1) the conduct of the Fed in the early-to-mid 2000s was largely warranted given the threat of deflation and the weak employment growth then and (2) it was not so much a saving glut as it was an excess demand for safe debt instruments only available in the United States that caused excessive amounts of credit to be channeled to the U.S. economy. On both points there are alternative perspectives that paint a far less favorable view of U.S. monetary policy at the time.

Modeling problems in credit markets -  On Friday I joined fellow blogger Mark Thoma (and a good many other economists) at a very interesting conference on financial markets held at the Federal Reserve Bank of San Francisco. Here I share some ideas I expressed at the conference about the directions I feel this research ought to go. The theme of the conference, and indeed the topic of a great number of academic papers now being written, is to try to describe what happens when capital markets have trouble efficiently bringing borrowers and lenders together. The motivation for this interest is the correct observation that interbank and other key lending froze up in the fall of 2008, with devastating consequences for the world economy. The objection that I have to many of these papers is that they focus too much on the effects of these disruptions and not enough on the causes.

A few comments on this blog’s harsher tone about the credit crisis - I have taken a less optimistic view of the credit crisis’ workout phase as evidenced by recent posts like Wood: “The endgame will be a systemic government debt crisis in the western world” and The mindset will not change; a depressionary relapse may be coming. So I want to give you a bit more colour into what I am seeing and why my tone has shifted. I have been quite sceptical about the economic policy response to the credit crisis offered up in the U.S. and elsewhere. Now that the crisis has abated, it seems to be business as usual. Mind you, there are some changes coming. Nevertheless, the feeling in policy circles is that the system is sound

Inside Alan Greenspan's nightmare - Alan Greenspan had a dream, or rather a nightmare. Greenspan seems to have woken up in a cold sweat one morning in fear that the period of "disinflationary pressures" that had kept inflation low since the 1990s was about to end. This was 2007, when he published his autobiographical economic treatise, The Age of Turbulence. Despite his well-known love for economic data, and poring over the latest reports from every statistical agency, he did not realise that he was sitting on a housing bubble of epic proportions. Not seeing the bubble (he also missed the prior stock market bubble that accumulated and burst on his watch, causing the 2001 downturn), he could not know that it would soon collapse and cause a very ugly recession, in which inflation would be irrelevant.

Blame it on the bubble - Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.

It’s Déjà Voodoo Economics... All Over Again - The financial industry often prides itself on the hindsight principle. We may not predict the future  with great accuracy, but when things fall apart we’re very quick to explain why and how it happened  with authoritative aplomb. "Hindsight is 20/20", as they say. But is it really? Despite our seemingly  thorough analysis of past failures, the financial industry seems to have an uncanny ability to make  the same mistakes over and over again. Perhaps this is due to the fact that we don’t properly review  events passed. Our obsession with predicting future results impels them away into oblivion. ... Looking back on the last decade from 2000 to 2009, are there any  lessons that can provide some guidance for the next decade? And are there any lessons that can  be gleaned from September 18th and October 7th, 2008, when we almost lost the entire financial  system? We certainly hope there are....

An Unholy Trinity: Congress, The Federal Reserve, And Wall Street Are you angry that Congress overspends and the Federal Reserve continues to print money out of thin air? Then why aren't you angry that Wall Street robs small investors through dishonest manipulation of prices? Dr. B. compares Wall Street's manipulation of their money supply to that of Congress and the Fed in this insightful article.

Rooseveltian reflections - Wednesday morning, I attended a Roosevelt Institute conference, on the theme “Make Markets Be Markets“. It was an enjoyable affair, with a bunch of smart, well-known speakers saying things I broadly agree with, mostly on financial reform. A wrinkle I had not really expected was how frequently, and rather charmingly, the name of the gentleman after whom the Institute is named would be invoked. FDR, and the 1930s generally, were very much with us that morning. I have much to spout on the subject of financial reform; I am several posts in arrears on that. But by the end of the conference, I was fascinating myself with a little thought experiment:  Suppose the good guys win. Better yet, suppose they had never lost.

Video From the Make Markets Be Markets Conference Online - Video of the Make Markets Be Markets conference is finally online. Here’s the pdf of the final report. Here it is broken up by presenter at vimeo, and at youtube, with the vimeo video being higher quality. An 8-minute boiled-down Simon Johnson presentation is pretty concentrated & devastating And here is Elizabeth Warren’s defense of a Consumer Financial Protection Agency. Like Simon’s presentation, I had been following the argument for a long time, but seeing it all in one short presentation was really effective.

The End of an Era in Finance - In the world of economics and finance, revolutions occur rarely and are often detected only in hindsight. But what happened on February 19 can safely be called the end of an era in global finance. On that day, the International Monetary Fund published a policy note that reversed its long-held position on capital controls. Taxes and other restrictions on capital inflows, the IMF’s economists wrote, can be helpful, and they constitute a “legitimate part” of policymakers’ toolkit. Rediscovering the common sense that had strangely eluded the Fund for two decades, the report noted: “logic suggests that appropriately designed controls on capital inflows could usefully complement” other policies.

Wall Street Reform That Will Prevent The Next Financial Crisis - Financial regulatory reform is perhaps the most important legislation that the Congress will address for many years to come. Because if we don't get it right, the consequences of another financial meltdown could truly be devastating. In the Senate, as we continue to move closer to consideration of a landmark bill, however, we are still far short of addressing some of the fundamental problems – particularly that of “too big to fail” – that caused the last crisis and already have planted the seeds for the next one.  And this is happening after months of careful deliberation and negotiations, and just a year and a half after the virtual meltdown of our entire financial system.

U.S., Europe at odds over global financial reform - A feud between the United States and Europe has cast doubt on the likelihood of a comprehensive global response to the financial crisis that nearly sparked a worldwide depression, according to regulators and analysts. U.S. Treasury Secretary Timothy F. Geithner warned on Friday of the diverging approaches developing in the world's major financial centers, arguing that if the United States fails to take a convincing lead on financial reform it could lead to an ineffective patchwork of global regulation. "The American financial system is strong in part because our firms operate globally," Geithner said in remarks at the Export-Import Bank in Washington. "If America cannot demonstrate its ability to act and reform our markets here, then other countries are going to decide they will go their own way on reform, and the American financial system will have to live with the risk . . . of inconsistent, different, competitively weaker standards for financial oversight around the world."

What The Lehman Report Proves: Financial Insolvency -The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government's active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture. The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.

NY Fed Under Geithner Implicated in Lehman Accounting Fraud Allegation -- Yves Smith - Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.  Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear.

Findings on Lehman Take Even Experts by Surprise - NYTimes - For the year that it took the court-appointed examiner to complete his report on the demise of Lehman Brothers, officials from Wall Street to Washington were anticipating it as the definitive account of the largest bankruptcy in American history.  And the report did just that when it was unveiled on Thursday, riveting readers with the exhaustive detail contained in its nine volumes and 2,200 pages. Yet almost immediately, it raised a host of new questions.

Fed Helped Bank Raise Cash Quickly - NYTimes -The newly released report on the collapse of Lehman Brothers — which lays out what it characterizes as “materially misleading” accounting at the bank — also sheds surprising new light on Lehman’s dealings with the New York Lehman executives tried to keep the floundering bank afloat in 2008, they used these troubled investments to raise quick cash that helped mask the extent of the firm’s troubles. And they did it with the help of the Federal Reserve Bank of New York. Lehman engaged in a series of transactions with the New York Fed that were similar to the ones that drew criticism from the bankruptcy court examiner who investigated its collapse. The examiner, Anton R. Valukas, drew no conclusions about the transactions with the Fed, and focused instead on deals that were known inside Lehman as “Repo 105.”

Accounting Fraud, Short Sellers & the SEC -The bankruptcy report on Lehman is both revealing and damning. Once again, the investing public learns — after the fact — the basic truisms of modern markets:-Major accounting firms are worthless to investors.  -Corporate management engages in fraud all too regularly: Dick Fuld’s defense will be “I didn’t know that Lehman was a giant Ponzi scheme, and I was unaware we were hiding billions in bad debt and leverage off balance sheet?”-The Shortsellers turn out to be the good guys. Consider the absurdity fraud of “protecting” the bankster frauds —-The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and  ignore the whistleblowers who uncover it;-The ban on short selling is an indictment of the inability of the SEC to understand WTF is going on,-The Media did a terrible job uncovering the fraud as well. -The Analyst community, for the most part, failed as well. PatheticAll in all, the entire system failed.

Did JPM and Citi Cause Lehman’s Collapse? - As is so often the case, determining the precise cause of death is an exercise in subtlety, something we Americans tend to do poorly  — and the media does even worse. Consider, for example, immune deficiency diseases. What typically causes the actual death is a pneumonia or some other opportunistic infection. But there was first an underlying disease that created the condition.So what actually kills the patient — the disease that ravages the body, destroys its naturally ability to fight off invaders, and leaves it totally vulnerable? Or whichever random infection finally does them in?In the case of Lehman Brothers, the disease that left them vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management.

CSI Lehman-Barclays: Who Really Killed the September 2008 Deal? - WSJ - The U.S. bankruptcy-court examiner’s report into the collapse of Lehman Brothers Holdings may have kicked off a Transatlantic kerfuffle over whether an attempt to buy Lehman Brothers by Britain’s Barclays was torpedoed by U.K. regulators.  Buried within the report is a submission from the Financial Services Authority that contradicts the account of the September weekend when Lehman went down given in former Treasury Secretary Hank Paulson’s new book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.”

And The Lehman Disclosure Hits Just Keep On Coming… Reading through the thousands and thousands of pages of Valukas' report has proven, as we suspected early today, quite entertaining. After having first uncovered the Repo 105 accounting gimmick, and E&Y (and, in a normal society, Tim Geithner) coffin nail, we are convinced that this is just the tip of the iceberg, and sure enough, as we read along, more stunners come to light. We will update this post with new discoveries, but for now, we present the episode of the Fenway Tri-Party Repo Market Clusterfuck ("FTPRMC"), The Part Where Lehman Lied To Its Shareholders, And The SEC Gets The Middle Finger (Again), and the parable of Ben Bernanke's And His Scale Of 0 To 100 Of Systemic Fuckedupedness.

The Chicago School--why does anybody still listen to it?- I have frequently written here about the problems of "freshwater" economics--the school personified by Milt Friedman and the extremist "free market" ideology that views government as the enemy, the "markets" as always right, and any public role in economic development as "socialism".  As I've noted, this ideology misses many points about the role of government in creating a space where markets can function as they should and  where individuals can have maximal personal liberty while pursuing better lives and respecting a societal decision that valuing each individual means allocating society's resources in ways that support, rather than brutalize, those at the bottom.The Nieman Foundation, connected with Harvard's journalism school, has an interesting watchdog website that includes a number of controversial articles raising questions about the way today's media tend to accept without questioning that "received wisdom" of the past...

Republicans are locked in a passionate embrace with a corpse and won't let go - In his meeting with the Republican caucus in Baltimore President Obama repeatedly invoked the opinions of economists, and at one point, specifically referred to “credible economists,” and later referred to a "consensus among people who know the economy best.” Shouldn’t we be asking who he is talking about? This is obviously a very important question. But if it is an important question for the President, it is an equally important question for the media and the public. A very strong case can be made that the Great Recession resulted from a blind faith in an economic theory that was simply wrong. It is no longer possible to treat economic theory as an arcane academic matter of no interest to practical people. If it was a bad theory that got us into trouble, maybe we need another theory. Of course the Republican opposition is clinging to their old faith like grim death.

Elizabeth Warren Discusses The Global "Enron": From Wall Street To Greece And Back - The appearance of the Chair of the Congressional Oversight Panel, Elizabeth Warren, on Charlie Rose is a must watch. In addition to an in depth discussion of the the consumer protection agency, which despite all valiant attempts to the contrary, will likely end up under the Fed's jurisdiction, thereby making the world's most powerful cabal even more powerful, Warren touches on a variety of other issues, including the sovereign debt situation, commercial real estate, and the one concept at the heart of it all: the lack of impairments by stockholders (and certainly by debtholders) in what was a bankrupt financial industry.

The Volcker Principles Move Closer To Practice - Simon Johnson - Senators Merkley and Levin, with support from colleagues, are proposing legislation that would apply Paul Volcker’s financial reform principles – actually, much more effectively than would the Treasury’s specific proposals.  (Link to the bill’s text.) Volcker’s original idea, as you may recall, is that financial institutions with government guarantees (implicit or explicit) should not be allowed to engage in reckless risk-taking.  At least in part, that risk-taking takes the form of big banks committing their own capital in various kinds of gambles – whether or not they call this proprietary trading. At the Senate Banking Committee hearing on this issue in early February, John Reed – former head of Citi – was adamant that a restriction on proprietary trading not only made sense, but was also long overdue.  Gerald Corrigan of Goldman Sachs and Barry Zubrow of JP Morgan Chase expressed strong opposition, which suggests that Paul Volcker is onto something.

Debt, markets and regulation: Those wicked speculators again - The Economist - THERE is a long and ignoble tradition in sport of blaming the referee for defeat*. Politicians have a similar habit of blaming speculators the moment that financial markets move against them. Greek prime minister George Papandreou is currently driving that bandwagon in his visit to America. Angela Merkel, the German chancellor, is calling for regulation of sovereign credit default swaps, presumably to stop investors shorting government bonds. Yes, there has been lots of speculation. But we are in this mess not because of wicked hedge funds going short. We are in it because lots of investors (and many ordinary people) speculated on the long side, taking out too much debt in an attempt to make a quick killing in the housing market. Imprudent banks encouraged the process. Politicians were generally absent in calling for restrictions on speculation at that point, and central banks did little to restrain credit growth.

De-Detour: CDS Nudity on the Exotic Fringe - A recent FT Editorial implicates a topic I -- basis risk in emerging markets (EM) credit derivatives.  The problem is this:  If you want to buy protection against default by a big U.S. firm--say, GM--you buy a CDS contract on a GM bond.  But even in the leading emerging markets, it is often difficult to buy protection on major corporate credits, especially if you want to hedge against default on local-currency or other non-dollar/euro/yen obligations.  This is because local financial markets are relatively thin.  Your choice then is to buy a liquid standardized instrument, such as a CDS on foreign-currency sovereign debt, or to negotiate an expensive bespoke contract with a party willing to take the precise local risk off your hands.  If you opt for the liquid standardized sovereign CDS, you get partial protection.  This means that if your borrower defaults but the government is still servicing its dollar-denominated foreign bond, you cannot collect.  Herein the basis risk.  Note that even if you were able to arrange bespoke protection, you could be taking on more counterparty risk, since the only people willing to insure illiquid local instruments might be local institutions more exposed to measures such as capital controls ... or risk-hungry fringe elements that might flake out on you.

Bill to Include Agency That Tracks Financial Risk - NYTimes -Senate Banking Committee members from both parties said on Wednesday that they had agreed to include in their regulatory overhaul bill a new Office of Research and Analysis that would provide early warnings of possible systemic collapses.   The proposed agency, which has sometimes been referred to as the National Institute of Finance, is intended to give federal regulators daily updates on the stability of individual firms as well as that of their trading partners, including hedge funds. By standardizing financial instruments and reporting mechanisms, the agency would give regulators a broader view of the health of participants in the financial markets and the potential for problems to spread. The idea’s supporters say that kind of information was lacking in recent years as the housing bubble burst and troubles spread from firm to firm.

The NYT jumps the CDS shark - If Paul Krugman and others want the New York Times to be the paper of record, especially when it comes to matters economic, they’re going to have to do better than this: Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street. That’s Gretchen Morgenson, who ought to know better. The derivatives that hid Greece’s obligations were currency swaps, not credit default swaps. But it gets worse. if you follow Morgenson’s hyperlink, you get to the Times Topics page on credit default swaps: the part of which is trying to compete with Wikipedia in terms of giving a clear overview of topics in the news...

Lies and truth on sovereign CDS - It’s not just the NYT: now the BBC is printing “explanatory” articles about credit default swaps which are simply wrong. Check out the factbox: Is there anything here which is actually true? No, bonds don’t “come with” a CDS attached. No, there is no evidence of hedge funds (or anybody else) “buying up vast quantities of CDSs linked to Greek bonds”. No, a downgrade of Greece would not result in the seller of the swap having to pay out on it. And no, a swap payout is not “a penalty fee”. The important thing here is not the inaccurate reporting so much as it’s the way in which heated political rhetoric has been unquestioningly accepted by journalists who simply don’t have a grounding in this stuff. If a lie can get halfway around the world before the truth has got its boots on...

Revisiting That Hyped WSJ Hedge-Fund Story : CJR - Last week, The Wall Street Journal ran an odd story on its front page headlined “Hedge Funds Pound Euro”—something Felix Salmon saw as the latest evidence of “the sensationalist WSJ.” I did, too. That was because the headline implied that the euro’s fall was being caused by hedge funds who, it’s hinted in the second paragraph, are colluding at exclusive dinners at private homes. But the piece was a mess, as I noted: The thing with this story and its headline is that the piece details how the euro started falling in December, continued to fall in January—all well before the hedge-fund dinner, which happened less than three weeks ago.  ...It turns out the story is messier than that, with a couple of errors that made the dinner in question seem more sinister than it apparently was.

Can You Trigger a “Run” on A Country - Megan McArdle and Felix Salmon run roughshod over the NYT: Felix: I’m not even going to try to enumerate all the inaccuracies here... Megan:You see this sort of folk mythology among market watchers very frequently... I don’t know enough about Greece’s situation to say whether or not CDS played a pivotal role but it is certainly theoretically possible. That is, one need not be quite as dull as Felix and Megan suggest, in order to believe that financial instruments could break a country.I suspect and Felix seems to confirm that the market for CDS on Greek debt was orders of magnitude smaller than the market for the debt itself. Its therefore far more vulnerable to manipulation whether purposeful or accidental....

Transparency Liquidity -  Felix Salmon is a very smart person who writes very well. Also he once invited me to an instant messenger debate that he posted on his high traffic blog. So I’d like to make only polite criticisms. However, I can’t write well so I will please translate the following to polite in your heads. Salmon wrote “The CDS market is actually more transparent, with smaller bid-offer spreads”. That is, Salmon equates “the CDS market is actually more transparent”, and “CDSs are more liquid.” Liquid and transparent are not synonyms. Take the metaphors literally, and look at an old analog thermometer. You will find that mercury is liquid but not transparent and glass is transparent but not liquid. Serious discussion after the jump.

Janet Is On It Again (Sovereign CDS) - From Huffington Post: Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these "financial weapons of mass destruction" levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull's-eye. She then continues with information I was unaware of:U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold.

Defenders and Demonizers of Credit Default Swaps - A cogent case for prohibiting the use of credit default swaps to make directional bets has been made recently by Wolfgang Münchau in the Financial Times: Felix Salmon objects to this reasoning, arguing that trade in naked credit default swaps adds liquidity to the market, which in turn makes borrowing easier in times of stress: Sam Jones also rises in defense of naked CDS contracts, though for somewhat different reasons...  So the argument here is that while hedge funds may have raised the cost of borrowing for Greece in 2008-09, their current actions are making borrowing easier and less costly.   Leaving aside the question of whether naked CDS trading has been good or bad for Greece, it is worth asking whether there exist mechanisms through which such contracts can ever have destabilizing effects. I believe that they can, for reasons that Salmon and Jones would do well to consider.

On Asymmetry, Reflexivity and Sovereign Default - One of the most rewarding aspects of blogging is that it gives me the opportunity learn from those who read and comment on the ideas expressed here. I have had the good fortune of being visited by a number of informed and thoughtful readers, whose remarks have often been of greater quality than the posts to which they were responding. Among those for whom I have developed the greatest respect is the anonymous author of Macroeconomic Resilience, who left a couple of very helpful comments in response to my post on credit default swaps a couple of days ago.

How to regulate CDS - Go read CFTC head Gary Gensler’s speech on regulating credit default swaps: it’s by far the best thing written on the subject to date. He’s absolutely right about pretty much everything, and it would be amazing if the Europeans, who seem much keener to start regulating these animals than we are in the US, were to use it as a blueprint for their own CDS reform. A comprehensive regulatory framework governing over-the-counter derivatives should apply to all dealers and all derivatives, no matter where traded or marketed. It should include interest rate swaps, currency swaps, foreign exchange swaps, commodity swaps, equity swaps, credit default swaps and any new product that might be developed in the future.

The Problem With Credit Default Swaps - Here's the problem: if you own a corporate bond of some kind, but don't want to run even the small risk of default that it carries, you can buy a CDS on that bond. This is basically fine. As Gensler points out, it does have the downside of making bond buyers less careful about due diligence, but that's probably manageable. (And Gensler has some ideas about how to manage it.) But what happens when lots of other people also buy a CDS on that bond? Obviously, you have the problem Gensler mentions, namely that under some circumstances these CDS owners might have a vested interest in helping the bond issuer fail — the same way you might want your house to catch on fire if it's insured for more than it's worth. But you also have another problem: if the bond issuer does default, and there are a hundred speculators who own CDS protection on one of its bond, you've gone from, say, a $10 million event to a $1 billion event. Basically, when things go bad — and eventually they always do — widespread CDS protection can cause things to spiral far more out of control than they would otherwise.

What’s the instability risk of CDS markets? - Kevin Drum has a couple of good questions about credit default swaps, and the final link in his post literally made me laugh out loud, so I’ll do my best to answer him. The first thing to do here is to dispute the premise. Yes, things will always go bad. But when things go bad, is it true that “widespread CDS protection can cause things to spiral far more out of control than they would otherwise”? Kevin is honest enough to note that when things went bad in 2008, that didn’t happen. And conceptually, it’s not the existence of credit protection which is a problem. People who have bought protection make money, they’re happy. The problem is the people on the other side of the trade — the people who wrote the CDS, not the people who bought them.

EU Considers Ban on Some Credit Default Swap Trades - WSJ  - The European Commission on Tuesday swung behind an initiative by Germany and France to more tightly regulate credit-default swaps, a nearly $40 trillion global market for insuring corporate and government debt. EU President Jose Manuel Barroso said in the European Parliament Tuesday that he would support the initiative, even going so far as to ban speculative derivative trades. "These markets are as mobile as they are opaque. The Commission will raise this question with our international partners, notably at the level of the [Group of 20 industrialized and developing nations]," he said.

It looks like they might really ban naked CDS - Germany and France, working with Luxembourg and Greece, are planning a joint anti-speculation initiative to galvanise action by the European Commission to tighten regulation of derivatives trading, and in particular of CDS in the sovereign debt markets, the FT reports.  Angela Merkel called on Tuesday for the “fastest possible” adoption of new rules to clamp down on the most speculative elements of derivatives trading, including so-called naked CDS.  The four-nation initiative was aimed to speed up the regulatory process for CDS in particular.   On his visit to Washington, George Papandreou, told the press that the G20 group will consider a European initiative. US regulators meanwhile stepped up calls for greater disclosure of prices of credit default swaps. There are still differences between France and Germany that appear unresolved. “While Germany favours a ban, France is more inclined to give regulators the power to suspend such trading.

Credit Swap Ban to Spur Sovereign Debt ‘Bubble’, UniCredit Says - Policy makers are proposing curbs to derivatives amid claims hedge funds and banks profited from Greek swaps, driving up the nation’s financing costs. Prime Minister George Papandreou will today press President Barack Obama to help combat “unprincipled speculators.” Blaming derivatives for Greece’s debt crisis “confuses cause and effect,” and a ban could lead to “mispricing of financial risks,” said Tim Brunne, a credit strategist at UniCredit. The cost of swaps on Greek bonds surged to a record on concern the government will struggle to repay more than 20 billion euros ($27 billion) of debt coming due by May.

Is That Fear I Sense? (CDS Regulation) - The assertion is made: “You need to get the U.S. on board, otherwise the effect will be minimal because trading will simply move elsewhere,” said Jan Hagen, head of the financial services group at the European School of Management and Technology in Berlin. “A ban would allow European politicians to tell voters at least they’re doing something.” On the contrary. EU nations can pass laws and regulations that make the collection of bets placed in this fashion unenforceable.  That is, you're free to write all the swaps you want over in London, but you can't force anyone in the EU to pay when the bet goes against them. This, incidentally, is exactly what the Dutch did when Tulip Mania blew up.  They declared all the contracts that had been written against Tulip Bulbs (which were an awful lot like a CDS!) to be unenforceable gambling contracts and thus void.

Europe bars Wall Street banks from government bond sales - European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch."Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."

Geithner Warns Europe on Fund Legislation - WSJ - U.S. Treasury Secretary Timothy Geithner has warned the European Commission that its proposals for more restrictive regulation of alternative fund managers could affect cross-border investment, demonstrating how the controversial European Union directive could have transatlantic ramifications. According to Paul Myners, the U.K. financial services minister, Mr. Geithner had raised the issue of the Alternative Investment Fund Managers directive in a letter to Michel Barnier, who was confirmed as European commissioner for the internal market last month.

Dodd, Fed Scourge, Makes U-Turn - Despite rampant criticism and open attacks on its leader, the Federal Reserve could emerge a winner in the Senate's long slog toward financial-reform legislation. The latest news from the Senate banking committee's ongoing negotiations, led by chairman Sen. Chris Dodd (D-Conn.), is that the Fed will retain oversight power for the nation's biggest banks—the 23 institutions with more than $100 billion in assets—according to a Sunday night report from the Financial Times (sub req'd). Banks with less than $100 billion in assets will potentially fall under the oversight of a new, centralized super-regulator, which would mean a victory for Dodd who included a super-regulator in his November reform draft. Among the losers would be the Fed's branch banks spread throughout the nation, whose authority right now includes mid-sized banks.

Dodd Aiming for Balance Between Consumer Protection, Safety and Soundness - Senate Banking Committee Chairman Christopher Dodd (D., Conn.) went to the Senate floor Friday to try and give a status report on the bill he’s working on to overhaul financial market rules. He painted a mixed picture of the status, saying he was “optimistic” but also using the word “fragile.” He described in slightly more detail than usual one of the central issues they are struggling with — how do you protect consumers in a way that doesn’t threaten the safety and soundness of banks?

Whither financial reform? - The Reuters headline says that talks have failed, and that Dodd is going solo, but in fact it’s not quite as bleak as that.The important context to bear in mind here is that Dodd, in Griffin’s words, “is staring down the barrel of a April recess and knows he needs to get something moving”. Or, as Simon Johnson puts it, “a week or two lost now can derail completely opportunity for reform along any dimension”. It’s all well and good for Dodd to negotiate with Corker in good faith, but if the talks are dragging out far too long, it makes sense for Dodd to put some deadlines on negotiations with the Republicans. And the way that he’s doing that is by taking a bill to the full committee, and allowing just one week for it to sit there in markup

Compromise would shield payday lenders, pawnbrokers and car dealers from oversight – Payday lenders, pawnbrokers, car dealers and other companies that make loans but do not hold bank charters would be shielded from the scrutiny of a proposed federal consumer protection regulator under the terms of a tentative compromise between senators who are attempting to craft a bipartisan bill. Under the proposal, the regulator would hold broad authority to write rules protecting borrowers, but officials would make regular compliance checks only at banks and, for the first time, at mortgage lenders, a step that still would exclude some of the nation's largest and most controversial lending industries. The Obama administration has pushed to place nearly all lenders under federal oversight for the first time, but Sen. Bob Corker (R-Tenn.) insisted on limiting the scope of the proposed consumer regulator as a condition of his negotiations over a broader package of regulatory reforms with Sen. Christopher J. Dodd (D-Conn.), the chairman of the banking committee, according to several people familiar with the negotiations.

Downgrade of consumer financial protection agency threatens Obama’s overhaul plan - Reporting from Washington - The move this past week to downgrade a proposed Consumer Financial Protection Agency to lure bipartisan support instead appears to be undermining the Obama administration's effort to overhaul the nation's regulation of the entire industry.The overhaul, aimed at preventing a repeat of the economic meltdown that helped send the nation and world markets into a deep recession, now might be moving closer to the junk heap of congressional bills than to a significant new law. Creating a powerful and independent consumer agency, which is strongly opposed by the financial industry and Republicans, has been the major roadblock in drafting a bill that could pass in the Senate. Desperate to surmount that hurdle as this year's legislative clock winds down, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) floated the idea this week of putting the new agency in the Federal Reserve.

Dodd to Press Ahead on Financial Regulation Bill - NYTimes - Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, said he would put forward his own bill on Monday, despite the lack of a single Republican endorsement. Democrats concluded that bipartisan talks were not making enough progress and that going their own way was the only realistic hope of getting the legislation adopted in an election year, he said.  Mr. Dodd said the bill would rewrite the rules of Wall Street, end the “too big to fail” phenomenon and protect consumers from risky or abusive financial products. The Congressional calendar meant that further delay could imperil the legislation’s chances, he said.

Two cheers for Dodd - It's not clear to whether Senate Banking chairman Chris Dodd simply lost his patience or was told by his Democratic brethren to end the fruitless attempt  to negotiate with Republicans over financial regulatory reform.  It doesn't matter.  The important thing is that Dodd finally called it quits and announced on Thursday that he will unveil his own bill on Monday without any Republican support.  If that means there is no financial reform this year, because Republicans block it by filibuster, it will be a setback for much-needed fixes to catastrophically broken system of regulation.   But the way things were going, this bill would have been worse than no bill.

Dodd Statement on Financial Reform - “On Monday, I will present to my colleagues a substitute to the original financial reform package, unveiled last November.” “Over the last few months, Banking Committee members have worked together to try and produce a consensus package. Together we have made significant progress and resolved a many of the items, but a few outstanding issues remain.” “It has always been my goal to produce a consensus package. And we have reached a point where bringing the bill to the full committee is the best course of action to achieve that end. “I have been fortunate to have a strong partner in Senator Corker, and my new proposal will reflect his input and the good work done by many of our colleagues as well.”

Delaying Tactics On Display - “Republicans remain open to finding common ground with Chairman Dodd.  If my Democrat colleagues are interested in enacting reforms that protect American taxpayers, promote economic growth, and preserve the competitiveness of our financial markets, there is no reason that we cannot reach an agreement.  As long as we remain focused on policy and not politics, an agreement is still very possible.  The Republican members of the Committee stand united and ready to work with Chairman Dodd toward that goal.” - Senator Richard Shelby, ranking Republican on the Senate Banking Committee

Frank Suggests He ‘Might’ Kill Financial Overhaul if Its Too Watered Down - Mr. Frank passed a bill through the House of Representatives in December that would create a new Consumer Financial Protection Agency to write and enforce new financial product rules. Senate lawmakers are looking to create a new consumer protection “watchdog,” likely within an existing agency. Mr. Frank has said he wouldn’t support the creation of such a watchdog within the Federal Reserve, which is what some Senators are leaning towards doing.

Barney Eats Seconds – Or Blows Smoke – Or Both - Yesterday Barney Frank came out with a letter addressed to some of the big banks putting some muscle on them. He wants them to write off their second lien mortgages. He thinks the seconds are junk. His words: "Large numbers of these second liens have no real economic value." In this case I just want to shoot the messenger. Not the message. Subordinated debt is not money good when there is a problem. Period. There is a problem and the Second’s deserve the losses. In that sense I would support the pressure on the banks to move more aggressively to write this unpayable crap off. It is part of the cleansing process. Mr. Frank has lost his right to contribute to this debate any longer. He speaks with a forked tongue. As Chairman of the House Financial Services Committee Congressman Barney Frank is well aware of the financial activities of the D.C. mortgage Agencies. I don’t believe he calls the shots or even has a veto on significant policy decisions. But I also doubt that anything big happens without his knowledge. If he strongly objects to something it either won’t happen or it will get restructured to where he will bless it.

Barney Frank: The Liar Is (Again) In The House - Will this man ever take responsibility for what he does? Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans." How did that happen Mr. Frank? Oh yeah, I remember!  Your committee pressured FASB to drop "mark to market" accounting requirements last year! That is, YOU were personally responsible for this crap. Remember the subcommittee hearing chaired by your fool-in-chief Mr. Kanjorski?  I remember that circus show of horrors well.  In case you've forgotten, let me help jog your memory:

Why Is The Pentagon Worried About Consumer Protection? - Those fighting for the consumer financial protection agency just got a new ally with unparalleled battle strategy know-how, literally. The Defense Department has come out in support, according to Politico. It's reportedly worried about U.S. armed forces getting ripped off by banks and finance companies. I'm a little confused as to why. The Pentagon's concerns were raised in a Feb. 26 letter from Clifford Stanley, undersecretary of defense for personnel and readiness. He said that "unscrupulous" lending by auto dealers has hurt troops -- and has even prevented them from being deployed, as some groups have documented. That may blunt the sympathy the National Automobile Dealers Association members received during the House debate.

Consumer Groups Urge Regulation of Nonbank Financial Institutions – NYTimes— While much of the Congressional debate over consumer financial protection has focused on banks, lawmakers have been grappling behind the scenes over whether and how to regulate payday lenders, debt collectors, check-cashing outlets, title and installment lenders and even pawnbrokers. Many of these companies primarily take aim at lower-income customers, and consumer advocates say the companies are far less regulated than banks.  The Federal Trade Commission has brought fewer than 25 lawsuits in the last five years against mortgage originators, payday lenders and debt collectors, officials said. It has only 70 staff members to cover about 10,000 such companies nationwide, and does not have the authority to conduct compliance exams, as bank regulators do.

Draft on Payday Rules Loses a Provision - NYTimes - The Senate Banking Committee’s chairman, Christopher J. Dodd, Democrat of Connecticut, proposed legislation in November that would give a new consumer protection agency the power to write and enforce rules governing payday lenders, debt collectors and other financial companies that are not part of banks. Late last month, Mr. Corker pressed Mr. Dodd to scale back substantially the power that the consumer protection agency would have over such companies, according to three people involved in the talks.  Mr. Dodd went along, these people said, in an effort to reach a bipartisan deal with Mr. Corker after talks had broken down between Democrats and the committee’s top Republican, Senator Richard C. Shelby of Alabama. The individuals, both Democrats and Republicans, spoke on condition of anonymity because they were not authorized to discuss the negotiations.

Who Do You Love, Part I - Just when you think you’ve seen it all: Bob Corker goes to bat to prevent a 36 percent interest rate cap on payday loans: W. Allan Jones, who started Check Into Cash, in Cleveland, Tenn., in 1993, has been a longtime friend and supporter of Mr. Corker’s. The company says it is now the country’s third-largest payday-lending chain, with 1,100 stores in 30 states. Payday loans are short-term, high-interest loans — typically 400 percent on an annualized basis — to help borrowers cover expenses until their next paycheck. Many take out more loans, digging themselves deeper into debt. Mr. Jones, his relatives and his employees have given money to Mr. Dodd, Mr. Shelby and other members of the Banking Committee, but have been particularly active donors to Mr. Corker, records show. They have contributed at least $31,000 to his campaigns since 2001...

How To Deregulate Our Way To Better Payday Lending… Seriously -The proposed Consumer Financial Protection Agency was supposed to regulate payday loans -those extremely high interest rate short term loans- but it now appears that it may not. This could turn out to be a good thing for consumers, since the best way to help payday borrowers might be to deregulate the industry…. Bare with me, I know that sounds ridiculous.A recent paper from Robert DeYoung and Ronnie Phillips at the Kansas City Fed provides some cautionary results about potential negative side effects of increasing regulation, and suggests possible positive impacts of deregulation. What they find is that more competition among payday lenders can decrease the exorbitant interest rates on payday loans.

 The payday lender CFPA carve-out - Binya Appelbaum has the latest news on the shape of the consumer financial protection legislation which is likely to come out of the Senate: Payday lenders, pawnbrokers, car dealers and other companies that make loans but do not hold bank charters would be shielded from the scrutiny of a proposed federal consumer protection regulator under the terms of a tentative compromise between senators who are attempting to craft a bipartisan bill.  The first response to this is, of course, outrage that Corker, who has received substantial campaign donations from payday lenders, could singlehandedly manage to remove them from CFPA oversight. But on the other hand, it does seem to mean that some kind of CFPA might make it into the Senate and then to reconciliation

Roger Lowenstein vs the CFPA - Roger Lowenstein has a column up on Bloomberg with the headline “Smart Banks With Dumb Customers Don’t Exist” — which just goes to prove that smart writers with dumb ideas do exist. Ryan Chittum has already done a good job dismantling the piece, but I feel the add to add my own two cents with respect to his characterization of the Consumer Financial Protection Agency:

Who is Really to Blame for Bewildering Tax Rules? -  A bill is slowing making its way through Congress that would try to make government documents released to the public easier to understand. Specifically, H.R. 946 requires the use of "language that the intended audience can readily understand and use because that language is clear, concise, well-organized, and follows other best practices of plain language writing."Whatever that means.One huge target of this legislation is of course the IRS, a government agency notorious for its use of dense impenetrable language. But who is really to blame for that? Is it those hardhearted IRS technical writers? No. It is Congress.

Consumer credit, credit availability and The Credit CARD Act - macroblog - Total consumer credit outstanding expanded by $5 billion in January after contracting 15 of the previous 17 months. Consumer credit outstanding includes revolving and nonrevolving credit. Revolving credit is mostly credit card debt, and nonrevolving credit includes loans for items such as vacations, autos, and boats. Even with the slight increase in January, total consumer credit (after adjusting for inflation) has contracted nearly 6 percent since the recession began in December 2007. This number might seem like a huge contraction but compared with three of the past four recessions, it actually looks rather typical. Consumer credit contracted 9 percent in the 1973–75 recession, 11 percent in the 1980 and 1981–82 recessions (treated as one recession here), and 8 percent in the 1990–91 recession. (enlarge) (enlarge) (enlarge)

Bank Of America To Stop Charging 31,200% Interest - No, that's not a misprint. Let's say you went to Starbucks and bought a $5 Latte.  You swiped your debit card and didn't have the $5 in your account. Bank of America would charge you a roughly $30 overdraft fee, amounting to 600% of your purchase for a loan of that $5 for as little as one day.  That's bad enough. Let's assume you paid that overdraft fee (and the $5) in one week.  There are 52 weeks in a year and the bad news is that when computing the annual percentage rate you must divide the interest charged by the percentage of a year you held the money to get the APR.  Thus, 31,200% interest on an "annualized" basis, assuming you pay it in one week (it's 218,400% if you pay it off the next morning!) The bank will soon stop doing this, and in fact is mandated to do so without getting permission first for each transaction, as of June 1st.

The perfect overdraft - What to make of BofA’s decision to abolish overdraft fees on debit-card purchases? Josh Duboff says it’s “kind of undeniably great”, James Kwak says it’s a good thing, and the Center for Responsible Lending says that it’s a GOOD thing. Only Kevin Drum spies a fly in the ointment: It just doesn’t make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn’t smell right here. Kevin’s hit on something important here: while this is undoubtedly an improvement on the status quo ante, it’s far from optimal.

BofA under regulatory pressure to shrink: report| Reuters  (Reuters) - Regulators have told Bank of America Corp Chief Executive Brian Moynihan and other executives that the largest U.S. bank by assets must become "much smaller," Fox Business Network's Charlie Gasparino reported on Wednesday. Industry overseers are increasingly concerned about U.S. banks being "too big to fail," according to the report on Fox Business Network's website. The regulatory focus on Bank of America comes as Citigroup Inc, now the third largest U.S. bank, has announced a plan to shrink the company, and has shed hundreds of billions of dollars of assets since 2007, Gasparino reported.

More Bank Marketing - Citigroup, like other banks not named Goldman Sachs, is attempting to cloak itself in a mantle of goodness. Pandit’s testimony included several bullet points discussing all the wonderful things that Citigroup is doing for ordinary Americans. For example: “In 2009, we provided $439.8 billion of new credit in the U.S., including approximately $80.5 billion in new mortgages and $80.1 billion in new credit card lending.” There are two problems with these kinds of numbers. One is that I have no idea what to compare them to. I looked through Citigroup’s most recent financial supplement and was unable to find any numbers for “new credit,” let alone those numbers in particular. For a credit card, what does “new credit” mean? If I have no balance, and then I lose my job so I run up $20,000 on my Citi credit card, is that $20,000 in new credit?

The Rules, Part I - This is the first in a series of what will likely be long set of irregular posts about what I call “The Rules.”  Please understand that I don’t want to make grandiose claims here.  “The rules work 70% of the time, the rules don’t work 25% of the time, and the opposite of the rules works 5% of the time.” Here is today’s rule: There is no net hedging in the market.  At the end of the day, the world is 100% net long with itself.  Every asset is owned by someone, regardless of the synthetic exposures that are overlaid on the system.

The Rules, Part II - One note: I disagree with Volcker and Sarkozy regarding supporting Greece, versus the Euro.  If Greece defaulted, Greece would lose the low cost funding of the Euro.  The Eurozone would lose a country, but the Euro would retain its strength, and marginal nations prone to cheating would come into line.  Tough love is the best policy; don’t bail others out if you care about the union as a whole.On to tonight’s rule: Unless there is a natural purchaser of an exposure that one is trying to hedge, someone must speculate to a degree to allow you to hedge.  If the speculator is undercapitalized, risks to the financial system rise.

The Rules, Part III - Okay, here is tonight’s rule: The assumption of normality for asset price changes is wrong in virtually every financial market setting.  The proper distributions are fatter tailed and more negatively skewed. Normality allows researchers to publish, regardless of the truth. Normality allows risk managers and regulators to pretend that adequate reserves are held against disaster.  It also allows businessmen to achieve acceptable ROEs, while accepting a probability of ruin far in excess of what is prudent.

The Rules, Part IV - Okay, here is tonight’s rule: Governments that scam the asset markets (and their citizens) take all manner of half measures to defend failed policies before undertaking structural reform.  (This includes defending the currency, some asset sales, anything that avoids true shrinkage of the role of government.)  The five stages of grieving apply here.I know I wrote it 8+ years ago, but it feels very live now.  At present it is most obvious to apply the logic to the PIIGS, and American municipalities that have overextended themselves.

Burning Down the House - In addition to his patent irritation that no-one has bothered to put any flesh on the bones of this proverbial unicorn, Mr. Teitelman takes exception to the idea of resolution authority for other reasons.  But where The Deal's Editor sees flaws and shortcomings, Dear Reader, Your Disputatious Correspondent sees features and benefits. I like the fact that the proposed resolution authority is currently vague and undefined. I think it should be written into law in as vague and undefined a manner as possible. That would make it much more effective in combatting the next (inevitable) financial crisis. You look puzzled. Allow me to explain.

More on the Resolution Authority Headfake - Yves Smith - Remarkably, the often-sound Epicurean Dealmaker defends the fantasy resolution authority. And his choice of metaphor undermines his argument. He uses both a “break glass” emergency image and the same expression in the article. Surely he must recall the Neal Kashkari “break the glass” memo mentioned in Sorkin’s Too Big Too Fail. It was well received by the higher-ups and was totally useless in practice. TED offers two defenses, that the vagueness give regulators flexibility and discretion. Ahem, regulators always have those available to them. And the powers that be had that in spades during the crisis. They went around and did rescues that were widely criticized for their inconsistency and ad-hoc-ness. Why were Bear’s shareholders given anything at all? Why were WaMu’s sub bond holders crammed down (and worse, as John Hempton bitterly argues, a bank that he believes was not insolvent taken out and shot?). In fact, that very “flexibilty” meant that the authorities seemed to be constantly overcorrecting in response to whatever criticism they had gotten on their most recent salvage operation.

The Downside of Anger - TED -I think Yves Smith needs a vacation. In one of her normal link aggregation posts this morning, the impressively prolific blogger and newly published author remarked that: I need to get on a different schedule, something that is less out of whack with normalcy, and this is going to necessitate a cutback in posts over the next few days.Based on the disappointing riposte she made to the arguments I made in these pages this weekend, I must say I agree with her. Perhaps then she would think twice before putting out such desperately sorry pap...Let me address Ms. Smith's arguments, such as they are, point by point.

Guest Post: TED gets furious, tells Yves to go away and, errm, not be so furious -  It’s clear that regulators need the legislative authority to wind down a financial firm – that’s been unfinished business since Glass-Steagall was abolished, which left FDIC flapping in the breeze, and bit the hapless Fed and Treasury very heavily in the backside once they finally noticed there was something of a financial crisis on; 12 September 2008, according to Hank Paulson’s memoirs. Better late than never, I suppose. It’s clear that regulators need to monitor the exposures of large complex financial institutions. It’s clear that no-one has a clue how to wind down a large complex financial institution that has chunky derivatives exposures and large overseas deposits, otherwise there wouldn’t be this continuing low-key faff about Citigroup. It’s also clear that this administration doesn’t exactly have a glittering track record of grabbing the financial reform agenda by the throat,So you might think a Naked Capitalism post politely (well, relatively politely, this is Yves, but anyhow, not at all angrily, see for yourself ) questioning The Epicurean Dealmaker’s attempted defence of the resolution authority idea would be a useful addition to this great debate we’re all having. TED doesn’t think so.

Banksters Win Again, Edition 1,477,536 - Yves Smith - The Financial Times give us yet another sorry update in the bankster vs. the general public saga, and the banksters continue to gain ground. Their latest about-to-be-cinched victory is beating back a pro-reform idea sponsored by Senator Dodd (yes, even he can have the occasional “Nixon Goes to China” moment). Dodd had wanted bank regulation to be stripped from the Fed and housed in a new agency.  While that model can be argued to have led to some fumbled passes in the UK during the early stages of the crisis (most notably, the Northern Rock run), many observers contend that the flaw was the failure to hash out certain operational details, rather than the structure being inherently unworkable (in general, any organization structure is going to have particular shortcomings; you therefore need to have other mechanisms in place to compensate for them).

Build America Helps Generate Wall Street Fees – - Wall Street firms have received fees exceeding $1 billion in less than a year selling "Build America Bonds" meant to spur jobs in struggling cities, often charging municipalities higher costs than for traditional bond deals. These new bonds were rolled out in April 2009 under President Obama's economic stimulus plan to create jobs building roads, schools and hospitals. Unlike conventional municipal debt, the new bonds are taxable and generally carry higher interest rates. The U.S. pays 35% of the interest, so the bonds have enabled local governments to borrow during a credit crunch and save money at the same time, making the higher costs a wash for them. The Wall Street fees are "surprisingly high," says Edward Prescott, a Nobel-winning economist at the Federal Reserve Bank of Minneapolis and a professor at Arizona State University.

Fannie and Freddie's Losses Are Profits at Goldman Sachs - In a discussion of the future of Fannie Mae and Freddie Mac the Washington Post noted that the government had committed $125 billion to cover their losses. While the article reports that these losses have been a major political issue, it would have been useful to point out that the losses were, in effect, subsidies to banks. Fannie Mae and Freddie Mac buy mortgages in the secondary market. If they lose money it means that they paid banks more for these mortgages than they were worth. This overpayment is effectively a subsidy to banks who otherwise would have been left holding the mortgages on their books and likely would have incurred losses when they went bad.

For CEO Pay, a Single Number Never Tells the Whole Story – WSJ - Executive pay is a hot topic, but the players can't agree how to keep score. Pay controversies are sure to flare again in coming weeks, as hundreds of companies file their annual proxy statements. The math will look different, after the Securities and Exchange Commission changed its rules for calculating compensation for the second time in four years. Most experts say the changes are an improvement, but they might sow confusion. To keep track of the numbers, "You need to be part accountant, part attorney and part archeologist,"

Justice and Stabilization - How is it that we live in a country where illness often leads to bankruptcy, but gross mismanagement of a major bank leads to a generous retirement package? A country where people take home seven-figure bonuses for finding regulatory loopholes but where we “can’t afford” decent schools or mass-transit systems in our cities? Most people have stronger views about morality than they do about macroeconomic stabilization policies, and they look at policies that are unfair and outcomes that are wrong and find it hard to believe that it’s also the case that these policies worked. Conversely, to technocrats things that worked are things that worked, and policies that emphasize just deserts are naive.

TARP Oversight Panel Finds Fault With GMAC Bailouts - NYTimes - The panel, the Congressional Oversight Panel for the Troubled Asset Relief Program, raised questions about the Bush administration’s initial decision to rescue GMAC in December 2008. The government “might have been able” to arrange a strategic bankruptcy for GMAC, as it did for General Motors and Chrysler, preserving its automotive lending arm while dealing with the mortgage lending operations that brought it down, the panel found. In one passage, the report concluded that GMAC became “one of the five largest wards” of the government even though it was “a company that apparently posed no systemic risk to the financial system, that did not seem to be too big to fail, too interconnected to fail, or indeed, of any systemic significance.”

Bailed-out Banks on K St. Spree - Bailed-out automakers like General Motors and Chrysler and their banking brethren who the government rescued in 2008 and 2009 are on a K Street shopping spree. As The Hill reports today, those companies that pleaded for billions in government funding to stay afloat are now hiring the top lobbying firepower that Washington has to offer, making sure their voices are heard as Congress tackles a spate of new bills like comprehensive financial-reform and health-care legislation.

Can We Admit There is a TBTF Policy - - The occasion for Felix’s rant was an appearance on Thursday by Assistant Treasury Secretary Herbert Allison before the Congressional Oversight Panel for TARP. Throughout Allison’s testimony, the panel members pushed him to admit that there are certain financial institutions, like Citibank, that are legally considered “systemically significant,” and that the government has guaranteed them against failure. In other words, the panel members wanted Allison to admit that there is a formal “too big to fail” policy. (You can see one example of this around the eighty-fifth minute of yesterday’s hearing.) Allison, though, consistently demurred, offering answers like, “We cannot comment on a judgment about whether [Citibank is] systemically significant.”

They Saved the Big Banks But Kind Of Lost The Economy Doing It - By Simon Johnson - It would be easy to take relatively cheap shots at the portrayal of Tim Geithner — “we saved the economy but kind of lost the public doing it” — in the New Yorker, out today. But the Geithner issues reflected here run much deeper.  The New Yorker’s John Cassidy alludes to these but he may be too subtle.  Here’s the less subtle version.

Way Too Big To Save - By Simon Johnson - Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that “too big to fail” adequately describes our most serious future systemic banking problems.  It does not.  In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure – and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role.  ... But the experience in Europe is definitely not encouraging.  The Irish state is in serious trouble because major banks failed and were “saved”; let’s not even talk about Iceland (where banks assets peaked around 11-13 bigger than GDP, i.e., the size of the entire economy).

Moody's Says Many US Banks Will Remain Unprofitable in 2010 - Moody's Investors Service reaffirmed its opinion that serious quality issues remain for U.S. banks in its latest report on the banking system for the fourth quarter of 2009. Despite improvements in the final three months of 2009, the negative outlook by Moody's is being driven by the low quality of assets and the effects on capital for U.S. banks. According to the report, nonperformers and charge-offs remain at nearly historic levels."We believe rated U.S. banks have recognized approximately 45% of the loan charge-offs that will be realized from 2008 to 2011,"  "Although loan loss allowances stand at unprecedented levels, the remaining provisioning required to finish cleaning up balance sheets will make many U.S. banks unprofitable in 2010."

JPMorgan, Top US Banks May Charge Off $196 Billion: Moody's (Bloomberg) -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. may record more losses on bad loans in the next two years than they have in the past two, Moody’s Investors Service said. The four largest U.S. banks could post charge-offs of $196 billion in 2010 and 2011 on residential mortgages and other consumer loans, the credit rating company said in a report today. That’s more than the $166 billion of loan losses in 2008 and 2009, the report said.Financial institutions worldwide have written down $1.7 trillion since the financial crisis began with mortgage losses in 2008, including provisioning for loans going bad, according to data compiled by Bloomberg. Even as the value of some of those securities has recovered, mortgage and other consumer-loan defaults have increased. The world’s 25 largest banks will have to raise $600 billion of capital in the next five years, McKinsey & Co. estimated in a report published this week. “Our view on the fundamentals of banks around profitability and asset quality is still extremely negative,”

The fake stress tests -  About a month ago I wrote a post called “The coming wave of second mortgage writedowns” the gist of which was that the big four banks (Citi, JP, BofA, and Wells) had a shed load of exposure to now worthless second mortgages. With many first mortgages now hopelessly underwater, it stands to reason that second mortgages on those same properties have zero value. The big four are certainly well aware of this problem and are looking for ways to extend the wherewithal of underwater borrowers and pretend they don’t need to take losses on these loans. On paper, these companies are very well capitalized. However, in the real world, the likely losses they must eventually take on loans already on their books would probably render them insolvent. This is what I hinted yesterday in my post on the stress tests.

The Next Stress Test Scenarios - It is probably time for the U.S. to consider the next set of stress tests for the banks. That is what the Financial Services Authority (FSA) is doing in the U.K. From the FSA: We have now embedded our new approach to stress testing into our normal supervisory process. This includes supplementing firms’ own stress testing with supervisory stress testing of major firms. This involves regularly updating the stress test scenarios. So stress tests are now part of the normal oversight process. I think the Treasury should do the same thing, and release two scenarios again: 1) a baseline case matching the consensus view (or the Fed's current forecast), and 2) a more severe case with a double dip recession and further house price declines.

The Startling Link Between Globalisation and Bank Fraud  - If you think that the world of crime has to be shady and underhand, you are wrong. With the beginning of the fourth world war, organised crime has globalised its activities. In this new war, politics, as the organiser of the nation state, no longer exists. Now politics serves solely in order to manage the economy, and politicians are now merely company managers. An oft misunderstand leader, Subcomandante Marcos, now Delegado Zero, tried to warn us more than 12 years ago that "it takes no more than a few minutes for companies and states to be sunk", and that they would be sunk, not by military theater operations, but by hurricanes of finance. More than a decade later, with many of his predictions now coming true, perhaps it's finally time we started listening to him.

The Top Ten Ways to Crack Down on Corporate Financial Crime - Ninety-five percent of criminologists study blue collar crime.Five percent study white collar crime.Of the tiny minority who study white collar crime, ninety five percent focus on the individuals who rip off the corporation.We are left with a small handful of criminologists – think Edwin Sutherland, John Braithwaite, Gil Geis – who have studied or are studying – corporate crime.That would be crime by the corporation. Bill Black is one of the most prominent of those living corporate criminologists. His specialty – control fraud.Control fraud is when the CEO of a company uses the corporation as a weapon to commit fraud. Black says there are steps we can take as a society to control corporate crime – in particular financial crime. In an interview with Corporate Crime Reporter last week, Black laid out his top ten.

Gary Gorton On The Shadow Banking System Run, And The Interplay Of Shadow And Traditional Banking - There are few people as qualified to discuss the stresses of (and on) the financial system over the past several years as Yale and Wharton Professor Gary Gorton, who just incidentally has held positions at the Bank Of England, the Federal Reserve and the FDIC. In a submission to Zero Hedge, Professor Gorton provides some unique perspectives into what we have long claimed was the immediate catalyst for the near collapse of the banking system: the bank run, not so much on depository institutions, but on the much more critical shadow banking system.

FDIC’s Bair Outlines Priorities For Financial Overhaul - Federal Deposit Insurance Corp. Chairman Sheila Bair outlined on Monday three points she said must be part of any financial regulatory overhaul, but said market incentives must also be realigned to make credit markets function properly over the long term. “Fixing regulation can only accomplish so much,” she said in a speech to the National Association for Business Economics. “Rules and regulations can help constrain our ‘animal spirits,’ but unless economic incentives are also appropriately aligned, regulation alone will fail.”

Bloomberg: Banks Face Writedowns after FDIC Auctions -From Bloomberg: A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month ... may trigger writedowns that weaken lenders nationwide. The auctions may have wider repercussions. Of the $50.4 billion in loans seized from failed banks currently held by the FDIC, 63 percent involve participations by other lenders, according to data provided by agency spokesman Greg Hernandez.  “These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,”  "This problem" is many small and regional banks are carrying loans above market value. The FDIC auction will establish market value, and that will probably lead to significant losses for many banks - and more bank failures.

‘On the Edge’ Banks Facing Writedowns After FDIC Loan Auctions – Bloomberg -  A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.  Almost half of the loans were originated by Silverton Bank N.A. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.  The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.  “These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,”

FDIC Sells Failed Banks' Toxic Crap Back To Soon-To-Be-Failed Banks At 50% Haircut With Explicit Taxpayer Guarantee - The FDIC has just announced that it has closed the sale of $1.8 billion of Notes backed by RMBS "from seven failed bank receiverships." The value of the actual aggregate balance: $3.6 billion. And somehow banks still keep their RMBS books marked at par. Furthermore, "the timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the United States. Sure enough, smelling this insane deal, the vultures came out to snack on the taxpayer's corpse: "The transaction was met with robust investor demand, with over 70 investors participating across fixed and floating rate series. The investors included banks, investment funds, insurance funds and pension funds. All investors were qualified institutional buyers." Just how many of these "banks, investment funds, insurance funds and pension funds" are viable to begin with, courtesy of the FDIC's permission for every failed bank to continue existing is an amusing question, and Zero Hedge will attempt to get an itemized list of the participating buyers.

FDIC Said to Encourage Pension Funds to Invest in Failed Banks (Bloomberg) -- U.S. regulators are encouraging public pension funds that control more than $2 trillion to inject capital directly into the banking system by buying failed lenders, said people briefed on the matter. The Federal Deposit Insurance Corp. is trying to attract pension funds that want to buy stakes or assets of distressed bank-holding companies, according to two of the people. Direct investments may allow public retirement funds to reduce fees for private-equity managers, and the agency to get better prices for distressed assets, the people said. They declined to be identified because talks with regulators are confidential.

FDIC wants pension funds to prop up failed banks - Over 140 U.S. lenders folded in 2009 alone. To remedy the financial void left in their wake, the Federal Deposit Insurance Corporation wants public pension funds, which safeguard the retirement funds of millions, to buy in part or in whole the banks that couldn't manage to keep their depositors' funds. "Direct investments may allow funds such as those in Oregon, New Jersey and California to cut fees for private-equity managers, and the agency to get better prices for distressed assets," anonymous sources reportedly told Bloomberg News. In a speech to the National Association for Business Economics Washington Policy Conference, FDIC Chairwoman Sheila Bair outlined what she called "a pre-funded resolution mechanism," but did not specify what exactly that is. She instead said it would be "similar to the FDIC's receivership authority for failed banks,"

Companies’ Net Worth Falls Again - The Federal Reserve’s latest flow of funds report offers a clue for those trying to understand why banks often don’t want to lend to businesses: By some measures, businesses’ finances are still deteriorating. In the fourth quarter of 2009, nonfinancial corporate businesses’ net worth — what they have minus what they owe — declined 1.9%, notching its ninth straight quarter of contraction. The main driver of the drop is companies’ real-estate holdings, which tend to include things like land, warehouses and offices that have kept falling in value even as residential real estate has rebounded a bit. One problem with the fall in net worth is that it can drive a wedge between the interests of a company’s owners and its creditors. With less to lose, the owners might be willing to take on more risk in the hopes of making big gains. The creditors, by contrast, are more likely to take a bigger loss if the owners’ bets go wrong.

Treasured Moments - Megan McArdle - So I went to the Treasury Department with a bunch of other bloggers yesterday, and spoke with "senior administration officials" about all manner of exciting topics.  Though not all of the topics were exciting for me.  Because I missed the last blogger sit-down, I was rolled in with the progressive bloggers, who were often more concerned about messaging and political strategy than in figuring out what Treasury really thinks about various issues.   Practically, they may well have had the more relevant questions--who cares what Treasury thinks if they can't pass their legislation?  But with the exception of Gene Sperling, Treasury is not filled with people who are experts in political messaging.  So the responses we got were about what you'd expect...

Why Treasury doesn’t like principal write-downs - Well done to Shahien Nasiripour, who did the best job of anybody, at the Treasury blogger meeting yesterday, at getting Treasury’s officials to commit news. Specifically, he asked about Sheila Bair’s sensible idea that mortgage principal write-downs can help keep homeowners in their homes while also maximizing the value of the mortgage to the issuing bank. And he was told, quite clearly, that Treasury has been talking to Bair about this idea, and that if it makes sense at the bank level, it probably makes sense at the federal level, too, as part of the HAMP program to make mortgages affordable. Except that once the meeting was over, its main architect, Treasury flack Andrew Williams, emailed Nasiripour to walk that particular idea back, saying that Treasury was NOT (his all caps) going to do anything “major” in terms of principal write-downs...

Home-Saving Moves Afoot - WSJ - Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages. Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages." The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing these obstacles.

Obama Plan To Modify Second Mortgages Has Yet To Help One Homeowner - Nearly a year after the Obama administration announced a plan to help up to 1.5 million struggling homeowners modify their second mortgages, not a single homeowner has gotten any assistance. The program, a part of the administration's $75 billion anti-foreclosure initiative, was supposed to induce mortgage servicers to coordinate payment reductions on additional mortgages when the first mortgage is modified under the administration's Home Affordable Modification Program. But it's never gotten off the ground.  The plan was first announced last April. In August the Treasury Department released guidelines on how the program would work. Months passed before any servicers signed up. More than five weeks ago, Bank of America, the nation's largest servicer with about three million second liens, signed an agreement to join, but a bank spokeswoman said the firm is still awaiting final guidelines from Treasury before proceeding.

Obama Foreclosure-Prevention Plan Lagging, New Data Shows - Only about a third of the homeowners who have successfully completed the trial period of the Obama administration's mortgage modification program have been offered permanent relief, according to new federal data obtained by the Huffington Post. The conversion rate -- about 33 percent -- is woefully short of what the Treasury Department had forecast. Treasury thought the rate would be "ranging up to 75 percent," Herbert M. Allison Jr., assistant secretary for financial stability, told the Congressional Oversight Panel in October.The other two-thirds of homeowners who have gone through the trial program and made the necessary payments remain in limbo. Some of those homeowners -- more than 350,000 of them -- will ultimately lose out on the kind of relief the administration has repeatedly promised: averting foreclosure through lower monthly payments.

Program Will Pay Homeowners to Sell at a Loss - In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.  This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.  More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

Housing markets: Short stack - The Economist - SO FAR, the Obama adminstration's foreclosure prevention policies have been extremely disappointing. The Making Home Affordable programme (abbreviated HAMP, presumably because MHAP is hard to pronounce), which offered financial institutions cash incentives to modify delinquent loans and additional money each year borrowers kept up on modified loan, has failed to have anything like the expected effect. The administration had hoped to keep some 4 million troubled borrowers in their homes via HAMP. As of February, just over 100,000 borrowers had received permanent loan modifications.There are a couple of significant problems with the policy....

Principal Writedowns and the Fake Stress Test - Mike Konczal - Three things happened in a row yesterday: (1) Two positive profiles of Timothy Geithner (New Yorker, and The Atlantic) came out, both working under the assumption that the stress tests of last year worked. (2) Shahien Nasiripour had a comment about principal write-downs walked back on him by Treasury: “Treasury is NOT poised to roll out a major principal write-down program. As the [official] said, we are looking at a number of tweaks to existing programs to help reach more borrowers.” (3) And Barney Frank released a letter to the four largest banks...I want to connect these three things around a simple premise: writing down those second liens, which would allow principal writedowns of underwater mortgages, would expose the stress tests of last year as a lie.

Mortgage modifications: Stress tests underwater | The Economist - MIKE KONCZAL is a finance blogging machine, so I hesitate to disagree with him, but I think he may be off base in an argument he makes today, declaring the government's bank stress tests to be essentially bunk. He quotes from a letter from Congressman Barney Frank (emphasis Mr Konczal's): Large numbers of these second liens have no real economic value – the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep borrowers in their homes.

Second Lien Writedowns, II - R.A. (Ryan Avent!) writes in response to my previous entry: [Mike's thesis] places the government in a bind. If it forces banks to write down worthless second mortgages to clear the way for new modifications, then the banks suddenly look shaky again. If it doesn’t, then lots of homeowners are stuck in loans they can’t modify and may not be able to afford.I think that he may be overstating the potential pain to banks, however. It is the case that troubled borrowers are very likely to have second liens. But is it the case that second liens are likely to belong to troubled borrowers? Let’s get a little bit of data in here I should have opened with. I’m going to go to a paper by Laurie Goodman from Amherst Securities Group, “2nd Liens—How Important? “, covered here by Alphaville, and reproduce some text and a chart:

Global House Prices May Have Further to Fall, but U.S. Looking Better - House prices across the globe still have room to fall, but the U.S. may be in better shape than other developed nations, according to an International Monetary Fund research article.In the article, Prakash Loungani notes that house prices in major economies declined an average of about 5% in inflation-adjusted terms from 2007 through 2009. But he looks at some key metrics to determine if the global correction has ended. One measure is how much house prices have risen compared to rents, and another shows how much they jumped compared to incomes. In many countries those ratios are still far above long-term averages. Based on this and other data, Loungani concludes: “house prices in many countries still have room to fall.”

The Problem That Hasn't Gone Away -Yale Professor Robert Shiller, author of the called-the-top classic, Irrational Exhuberance, is one of the very small group of economists who "gets it." Although I don't necessarily agree with everything he has to say, he is that rare academic who is guided by facts and an appreciation for how the world really works, unlike the so-called experts who believe in theories that have little or no basis in reality. For that reason alone, I usually pay attention to his insights on the world. Here's what he had to say about the housing market in a recent interview I am worried that [the financial crisis] not over...I think there's a definite risk of a turn-down again in home prices, and if home prices decline 10 or 20 percent more, we are in big trouble. It's going to really throw off balance sheets. It's going to bring the economy down. 

Mom, Apple Pie and Mortgages - Shiller, NY Times - FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.  But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

Foreclosures Slow Considerably In February The foreclosure crisis isn't over, but the pace of growth may finally be slowing down. RealtyTrac Inc. said Thursday that the number of U.S. households facing foreclosure in February grew 6 percent from the year-ago level, the smallest annual increase in four years. More than 308,000 households, or one in every 418 homes, received a foreclosure-related notice, the Irvine, Calif.-based foreclosure listings company reported. That was down more than 2 percent from January Still, fears remain about the hundreds of thousands of homeowners who are still being evaluated for help under loan modification programs. Many analysts say most of those borrowers will eventually lose their homes, sparking a new round of foreclosures later this year.

Credit Suisse: $1 trillion worth of ARMs still face resets - While several industry observers worry about negative equity and unemployment driving foreclosures, a couple of experts point out that interest rates on mortgages remain a cause for concern. Credit Suisse made waves in 2007 among housing bears with a chart that estimates the volume of adjustable-rate mortgages to face a reset each month. An updated version of the chart, which was provided to SNL, shows resets remain a worrying force over the next few years. Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.

New round of foreclosures threatens housing market - - About 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale. Some economists project it could take nearly three years before all these homes have been put on the market and purchased by new owners. And the number of pending foreclosures could grow much bigger over the coming year as more distressed borrowers become delinquent and then, if they can't obtain mortgage relief, wade through the foreclosure process, which often takes more than a year to complete. As these foreclosed properties add to the supply of homes for sale, they could undercut housing prices, which have increased modestly through December, according to the most recent figures in the S&P/Case-Shiller home prices index. That rise partly reflected a slowdown in the flow of foreclosed homes onto the market.

We Bought A Toxic Asset; You Can Watch It Die. Finally, we find a beautiful, totally toxic asset at what [Wit Solberg, a former Wall Street trader] thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing. We buy a piece from Solberg for $1,000. It's going to be our encyclopedia of the financial crisis.  What Our Toxic Asset Looks Like. Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure. At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely. Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. If it goes to Thanksgiving, we could double our money.

The Washington Post Is STILL Missing the Housing Bubble - The Post had a front page article with a headline warning readers that a "new round of foreclosures threatens housing market." Yes, well actually a huge oversupply of housing created by the bubble-driven construction boom is virtually certain to push prices back down to their trend level.  Nationwide, inflation-adjusted house prices rose by more than 70 percent during the bubble. Over the hundred years from 1896 to 1996 they had just kept pace with the rate of inflation. Prices must fall by another 15 percent or so to get back to their long-term trend. Given this departure from long-term trends, and the continued massive oversupply of housing as measured by record vacancy rates, it would be very surprising if house prices stabilized at their current level. Another wave of foreclosures will be a factor depressing prices -- and could cause prices to overshoot on the downside -- but prices would be virtually certain to fall further in any case.

Record Drops In Home Value, Peak Foreclosures - We have just in the last year had the largest annual fall in real estate prices, hit the highest number of delinquent mortgages measured, witnessed a record 918,000 homes taken in foreclosure, and 11.3 million home owners now own negative-equity. Case Shiller prices fell a record 19.1 percent versus the previous year in Q1 2009. Mortgage delinquencies are at a record high 15.02 percent (Q4 2009) according to the Mortgage Bankers Association — meaning an estimated 8.4 million families do not pay their most important bill. RealtyTrac reported a record of over 900,000 foreclosure repossessions in 2009, and estimates a record 3 million homes will experience a foreclosure event this year. First American counts 11.3 million homes with negative equity, and sees an additional 2.3 million homeowners on the edge of going overboard and under water. Every element — falling prices, mortgage delinquencies, repossessed homes, negative equity — they all hit records in 2009. Now look at the other side of the story and the radical opposite reaction in our real estate war-of-the-worlds.

Home Equity Lending That Fueled Spending to Recover (Bloomberg) -- John Hale’s four-bedroom house near Seattle is worth about $2 million and is 90 percent paid for. It still took him nine months to find a bank that would give him a $250,000 home equity line of credit.  Rising home prices and an improving economy will spark a modest rebound this year in U.S. home equity lending, the driver of about 2 percent of consumer spending in the first half of the decade. This time around, lenders and homeowners will be more cautious about converting their equity to cash, muting any boost to the economy after the worst slump since the Great Depression.

US home value decline steepens in January - Zillow (Reuters) - Home prices continued to weaken in many U.S. markets during January as the impact of government tax credits on housing demand lost momentum, real estate Website said on Tuesday. Nationally, while the annualized appreciation rate continued to rise, increasing from negative 5.5 percent in December to negative 4.8 percent in January, home values fell 0.33 percent from the prior month, a slightly larger monthly depreciation than the 0.27 percent recorded in December, according to Stan Humphries, chief economist at Zillow

Alpert: Two years until we see market-clearing prices in housing market - Ann Lee and Dan Alpert joined Bloomberg’s Pimm Fox today to talk about the housing market recovery. Lee, a professor of finance at New York University, was sceptical that population growth predicts any substantial increase in housing transactions and prices simply due to the continued pressure on wages and disposable income. and Dan Alpert, managing director at Westwood Capital LLC, said we are not looking at market-clearing prices in the near-term because home ownership percentages need to drop. This process will take two to two and a half years in his view. Short clip below.

MBA: Mortgage Applications Increase Slightly - The MBA reports: Purchase Applications Increase in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, increased 0.5 percent on a seasonally adjusted basis from one week earlier. ...The Refinance Index decreased 1.5 percent the previous week and the seasonally adjusted Purchase Index increased 5.7 percent from one week earlier. ... The refinance share of mortgage activity decreased to 67.2 percent of total applications from 69.1 percent the previous week. The refinance share is at its lowest level since it was 66.1 percent in October 2009. ...

Flow of Funds Report: Mortgage Debt Declines by $72 Billion in Q4 -The Federal Reserve released the Q4 2009 Flow of Funds report today: Flow of Funds. According to the Fed, household net worth is now off $11.8 Trillion from the peak in 2007, but up $5.0 trillion from the trough last year. A majority of the decline in net worth is from real estate assets with a loss of about $7.0 trillion in value from the peak. Stock market losses are still substantial too.This is the Households and Nonprofit net worth as a percent of GDP. This graph shows homeowner percent equity since 1952. The third graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP increased in Q3 because of an increase in real estate values.

Q4 2009: Mortgage Equity Withdrawal Strongly Negative -The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is very little MEW right now!), normal principal payments and debt cancellation. For Q4 2009, the Net Equity Extraction was minus $75 billion, or negative 2.7% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

More: Short Sales and 2nd liens -This is a follow up on the previous post on short sales and 2nd liens. (the previous post had excerpts from the NY Times, Short-Sale Program to Pay Homeowners to Sell at a Loss and WSJ Home-Saving Loans Afoot) Just to be clear on what subordinate lien holders will receive under a HAFA short sales - excerpts from Treasury's HAFA program Short Sale Agreement:

Short-Sale Program Will Pay Homeowners to Sell at a Loss - NYT  In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.  This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.  For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Will Short Sales Help the Housing Market - I was taken aback this morning when  I read in the New York Times that there is a new federal program that will look to put many thousands of mortgages-gone-bad back to the banks through a short-sale process. It's not actually new, the Treasury assures me, but rather was put forward as part of the Home Affordable Modification Program announced back in November.  That's a relief because I was beginning to think that new housing programs were firing off as if from a multiple rocket launcher.

Housing: A Tale of Boom and Bust and a Puzzle - I've heard a number of stories of homeowners staying in their homes and not paying their mortgage, and the banks not foreclosing - and, at the same time, there is intense competition for any home that comes on the market. This is a real mystery right now. With 14 percent of mortgages delinquent or in foreclosure according to the MBA - why aren't the lenders foreclosing? Is this because of modifications? Are lenders waiting for the HAFA short sale program? And why do Fannie, Freddie and the FHA have a record number of REOs waiting to sell if the market is so "intense"?

Strategic defaults on homes on the rise  -"People are acting against their own economic self-interest by continuing to pay off houses where they may not have any equity for decades," he said. "They're throwing away good money after bad." Shame, guilt and fear stop many homeowners from reneging on their mortgages, he said. The government and big banks actively cultivate those emotional constraints because the economic consequences of a large-scale walkaway phenomenon could be dire, he said.Strategic defaults have widespread repercussions. Ongoing foreclosures destabilize the housing market because the homes are sold at bargain prices. They also undermine the entire economy because banks must eat huge losses and homeowners rein in spending as their own homes lose value. Empty homes hurt neighborhoods and attract blight. And walkaways may inspire copycats - people who've seen their neighbors deliberately default feel more emboldened to do so themselves.California is a nonrecourse state, where lenders cannot pursue homeowners for the unpaid balance on their first mortgage.

The Coming Second Wave…It's an uprising of distressed homeowners who feel betrayed by their government and frustrated by the financial system. People are walking away from their mortgages by the thousands, making a financial decision that it's better to take the hit on their credit score than try to recover $300,000 of negative equity on a $600,000 home purchased at the peak of the housing bubble. They're called "strategic defaults."  Some of them are so far "under water," owing more than their home is worth, they can't see the light of day.

'Cash for Keys' Deals Helping Homeowners Escape Debt - Jon Daurio, chief executive officer of mortgage investor Kondaur Capital, recently offered a $4,000 check to Barry Culver for the deed to his Bryan, Ohio house. With the exchange, and a pay-off to a second-lien holder, Culver was freed of $120,000 in crushing mortgage debt on the house, said Daurio, who had bought the right to cut the deal when he purchased the mortgage months earlier. The house, after repairs, is now on the market for $47,500. Such 'cash-for-keys' offers are common for Orange, California-based Kondaur, one of the largest players in the business of buying and resolving distressed loans for profit. The business is growing more popular, with volumes of loans for sale at their highest since the founding of Kondaur in July 2007.

Fitch Announces Another Record In CMBS Delinquencies The announcement by Fitch that CMBS delinquencies rose by another 29 bps to a new high of 6.29% is no surprise to anyone who has been following RealPoint's remittance/CMBS reports. Yet it is good to get independent confirmation that there is no respite in CMBS land. And with TALF for existing and new loans expiring on March 31 and June 31 respectively, without ever really taking of, this sector of the market is sure to face increasing pressure, especially when coupled with the certain increase in MBS rates once the last $30 billion or so in QE is purchased. The most recent culprit for deterioration: maturities of 5 year loans from the 2005 vintage as the refi market is still practically dead: "Approximately 30% of the newly delinquent loans were from 2005 transactions. In fact, the four largest newly delinquent loans (ranging in size from $65 million to $112 million) are from this vintage. Three of these four loans are past their 2010 maturity dates and are, therefore, categorized as non-performing matured loans."

Office Vacancies Still Rising, Should Peak in 2011 - National office vacancy rates will probably top 18% in 2010, reaching their highest levels ever and forcing landlords to negotiate more concessions with tenants than in the past. Robert Bach, chief economist of commercial real estate firm Grubb & Ellis, says high unemployment and employers' reluctance to hire workers will keep leasing markets deteriorating before they start a slow, multi-year recovery in 2011. Bach estimates that in 2009, office leasing rates were between 10% and 15% lower than 2008 levels, and he expects rates to continue to decline moderately until sometime next year. Once markets begin to recover in 2011, he believes it will take two to three years for stronger markets like New York, San Francisco and Washington, D.C., to fully recover and four to five years for weaker markets to bounce back.

Vacant High Rise Condo Units - A couple of articles about vacant or near vacant high rise condo towers in Florida ... From the News-Press: Sole occupant of 32-story Fort Myers condo wants out Victor Vangelakos is the only buyer to take possession of his unit in the 32-story Tower 1 of the Oasis high-rise project in downtown Fort Myers. Apparently the original plan was to build 5 towers with a total of 1,079 units. That is about 216 units per tower, and all but one unit are vacant in Tower 1. Tower 2 appears to have few lights on too. And from the WSJ on the 850-unit Everglades project in Miami: BofA Lawyers Rebuked in Cabi Case Only 109 or about 13% of the Everglades' 850 units have sold

Green Building: The difference between cost and value - From Lots of people, especially those trying to battle high utility bills, believe in energy-efficient homebuilding. But there's something holding green technology back: It simply costs more to include it than it adds to resale value.Appraisals for newly built green homes do not fully reflect the cost of green technology, and the lower appraisal values mean buyers often cannot get the full financing they need from banks. That discourages developers from using green technology, in turn diminishing the market for more green products. "We can't get lenders to appreciate the value, and if we can't get the values recognized, manufacturers can't justify moving these products forward," said Bill Nolan, a Florida home building consultant. Simple economics: Costs don't represent value.  Costs represent, well, costs...

McKinsey: Don’t Look to Clean Tech for Jobs - Pouring government stimulus funds into clean technology may be a great way to boost the economy’s potential. But it isn’t the best way to create jobs, according to the consultants at McKinsey & Co. The McKinsey Global Institute, the firm’s research arm, has produced a new tome of advice for governments as they become more deeply involved in markets and the economy. One message: Policy makers can have a bigger immediate impact on jobs by focusing their efforts on service businesses — such as retail and telecoms — than by trying to boost manufacturing or innovative technologies.

Green Jobs Debate - The Economist is hosting a green jobs debate between former Green Jobs Czar Van Jones and Andrew Morriss, one of the authors of “The Green Jobs Myth”. The pre-debate vote of reader support for the statement “This house believes that creating green jobs is a sensible aspiration for governments” was close to 50-50, so this one could go either way. When green jobs are created by the public sector they are at best a coincidental byproduct of other worthy goals. Making green jobs an explicit policy goal means having two contradictory objectives: maximizing efficiency, that is output per dollar, and maximizing jobs, that is maximizing workers per output. If you consider that jobs cost dollars, these goals are almost exactly opposite. The only way they don’t work against each other is the extent to which you can costlessly exchange capital for labor, a rare if non-existent condition. Remember, maximizing workers per output is the same as minimizing output per worker.

U.S. millionaire ranks up 16 percent last year | Reuters - The number of U.S. households with a net worth of at least $1 million jumped 16 percent last year after dipping sharply during the financial crisis, an industry consulting group said on Tuesday. Households with a net worth of $1 million or more, excluding their primary residence, totaled 7.8 million in 2009, up from 6.7 million in 2008, according to Spectrem Group. The number of millionaire households shrank by 27 percent in 2008, it said. The current total is still well below the record 9.2 million millionaire households reported in 2007

Median Net Worth of Single Black Women in Prime Working Years: $5 - Yves Smith - In case you somehow harbored the notion that the other half doesn’t live differently than the rest of us, an eye-opening report released by the Insight Center for Community Economic Development, “Lifting as We Climb,” analyzes a topic that too often gets short shrift, the net worth, or “wealth” of the lower economic strata. The media (to the extent it has taken up the issue of income inequality) has focused on the rising concentration of income and assets at the very top, and less attention has gone to the obverse side of this coin: the relative decline of the standing of lower ranks. This study drew on the 2007 Survey of Consumer Finances, which is conducted one in every three years and is considered one of the most relaible sources of information on wealth disparities. The analysis uses the same definition of net worth as the Federal Reserve does.

Study finds median wealth for single black women at $5 - Women of all races bring home less income and own fewer assets, on average, than men of the same race, but for single black women the disparities are so overwhelmingly great that even in their prime working years their median wealth amounts to only $5. In a groundbreaking report released Monday by a leading economic research group, social scientists turned a spotlight on the grave financial challenges facing an often overlooked group of women, many of whom could not take an unpaid sick day or repair a major appliance without going into debt. (pdf) Among the most startling revelations in the wealth data is that while single white women in the prime of their working years (ages 36 to 49) have a median wealth of $42,600 (still only 61 percent of their single white male counterparts), the median wealth for single black women is only $5.

That stubbornly high credit card debt - Total credit-card debt outstanding dropped by $93 billion, or almost 10%, over the course of 2009. Is that cause for celebration, and evidence that U.S. households are finally getting their act together when it comes to deleveraging their personal finances? No. A fascinating spreadsheet from CardHub breaks that number down by looking at two variables: time, on the one hand, and charge-offs, on the other.It turns out that while total debt outstanding dropped by $93 billion, charge-offs added up to $83 billion — which means that only 10% of the decrease in credit card debt — less than $10 billion — was due to people actually paying down their balances. What’s more, in the first quarter of 2009 alone, total credit card debt decreased by $64.5 billion, of which only $17.5 billion was charge-offs.

Consumers Unprepared for Rainy Day Expenses - Consumers would struggle to meet an unexpected expense according to a TNS Survey. Around half of American, British and German respondents reported that they would not be able to come up with $2,000 in 30 days from savings, borrowing, friends or family. Here are the numbers for all eleven countries surveyed: (table)

EconomPic: Is the Consumer Relevering? - Sure looks like a possibility based on Friday's consumer credit release. Marketwatch details:In an encouraging sign for the economy, U.S. consumers increased their debt in January for the first time in a year, just the latest hint that household demand may be on an upswing.  Although the economy has picked up steam lately, many economists don't believe it will be on a sustainable path unless consumers restart their spending.This wasn't too big a surprise following last week's downturn in savings (paying down debt counts as savings), but maybe we should not be counting out the consumer in the short run. We shall soon see...

Lower credit card debt traced mainly to charge-offs - Americans cut more than $93 billion in credit card debt from 2008 to 2009. Good news, right? It's not what it seems, according to an analysis of federal data by, a credit card comparison website.Rather than turning wholly frugal, consumers instead fell further behind on bills in 2009, causing a surge in debt charge-offs, says Odysseas Papadimitriou, CEO of Consumer debt related to credit cards fell from $969.3 billion in the fourth quarter of 2008 to $876.1 billion in the fourth quarter of last year. "When consumers are paying back more, that's a sign of great financial health," says Papadimitriou. But his analysis shows that in the third quarter of last year, bank charge-offs reached their highest rate since 1985. Charge-offs occur when consumers declare bankruptcy or when their credit card debt is 180 days past due.

Unemployment rises in 30 states in January -Unemployment rose in 30 states in January, the Labor Department said Wednesday, evidence that jobs remain scarce in most regions of the country.The data is somewhat better than December, when 43 states reported higher unemployment rates, but worse than November, when rates fell in most states. Still, five states reported record-high joblessness in January: California, at 12.5 percent; South Carolina, 12.6 percent; Florida, 11.9 percent; North Carolina, 11.1 percent; and Georgia, 10.4 percent.Michigan's unemployment rate is still the nation's highest, at 14.3 percent

Unemployment Rate Increases in 30 States in January - From the BLS: Regional and State Employment and Unemployment Summary Thirty states and the District of Columbia recorded over-the-month unemployment rate increases, 9 states registered rate decreases, and 11 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50states and the District of Columbia. ...Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high

Unemployment Figures: Slow Going - IN FEBRUARY, for the twenty-fifth time in 26 months, the American economy shed jobs. The toll—a decline of 36,000—was smaller than feared for a month of severe winter weather. But it was distressing nonetheless; another bit of evidence pointing towards a jobless recovery. Most economists estimate that the recession in America ended around the close of the second quarter of 2009, the last quarter in which GDP shrank. But during the second half of last year the economy still managed to lose more than a million jobs. One explanation for the divergence of output and employment, which started to emerge while the economy was still shrinking, is that firms are now able to wring more productivity out of their workers. An alternative explanation for the divergence is that the American economy simply hasn’t been doing as well as the output figures have suggested.

Unemployment in U.S. Peaked in October, Economist Achuthan Says - (Bloomberg) -- History indicates U.S. joblessness in coming months won’t exceed the quarter-century high reached in October, said Lakshman Achuthan, managing director at Economic Cycle Research Institute in New York. Unemployment unexpectedly held at 9.7 percent in February, figures from the Labor Department showed last week. The rate climbed to 10.1 percent in October, the highest level since 1983.“You have never had a four-tenths-of-a-point decline in the rate and then see it go up to a new peak” since the end of World War II,  “The unemployment rate already peaked.”The reason the improvement does not “ring true” is that long-term unemployment remains high, “The long-term unemployed, people who have been unemployed for more than six months, that’s 40 percent of the people out of work,”

Gallup: Can’t Get No Satisfaction - August 2009 was the high point of American’s satisfaction with the economy during Barack Obama’s tenure. Interestingly, this meshes with the data on the ground. In a recent interview, Simoleon Sense quoted James Montier as saying that his favourite real-time economic indicator is the ADS Business Conditions Index charted below (hat tip Philly Fed via the Pragmatic Capitalist).  What is this telling us?  I’m not sure yet. The pink shading in the Philly Fed chart indicates recession. So, implicitly the Philly Fed is saying recession ended in August 2009, right about the ABS Business Conditions Index was peaking for the first time (a subsequent peak came in December 2010).  This view that the recession ended in August is one I share (see my comments in Readers of this blog expect the recession to last redux and Is the recession dating committee preparing for a double dip?). Perhaps, this indicates an economy softening toward a potential double dip. I don’t know. All I know is that the ABS data are worrying.

Economy Still Breeding Doom And Gloom - The latest readings from consumers and small business owners indicate economic sentiment isn’t improving, despite signs of a factory rebound and less gloom on the labor front.On Tuesday, the National Federation of Independent Business said its optimism index for small business owners fell back in February to its December reading of 88.0, and the IBD/TIPP Economic Optimism Index dropped 3% to 45.4 in March, well below its average of the past year.What’s behind the setback? For tiny firms, it is the lack of customers. “Poor sales” was cited as the top problem among small-business owners. For consumers, job jitters and the lack of vigor in the economy are contributing to the gloom. Households also think their personal finances are worsening.

Small Businesses Turn More Pessimistic - Small-business owners in the U.S. turned slightly more pessimistic in February, although employment readings grew a shade more positive. The Small Business Optimism Index lost 1.3 points to 88.0 last month, reported the National Federation of Independent Business in a press release Tuesday. The NFIB noted that only two of 10 components posted gains last month. The subindex covering expected business conditions dropped 10 points to a -9 reading, and sales expectations dropped three points to zero.The report said the drop in sales expectations may explain why fewer owners planned to increase inventories. The inventory index dropped three points to -7 in February. Small-business owners saw some improvement in earnings, although the trend remained negative. The index for better earnings rose three points to -39.

Q&A: Atlanta Fed’s Altig on Small Business’s Potential to Derail Recovery - WSJ - In recent weeks, policy makers from President Barack Obama to Federal Reserve Chairman Ben Bernanke have been taking extraordinary measures to remove what they see as a serious impediment to the recovery: A dearth of credit for the small businesses that many economists say must play a leading role in creating new jobs. David Altig, head of research at the Atlanta Fed, has been in the front lines on the issue, polling small businesses in his region and parsing economic data to figure out what’s really happening. He spoke with Real Time Economics about the extent to which small businesses are in trouble, what banks have to do with it and why we should care.

Warning signs - SMALL businesses punch above their weight in creating new jobs—firms employing 500 workers or fewer were responsible for two-thirds of the jobs created over the past 15 years. This is why President Obama's budget made support for hiring and investment at small businesses a priority (unfortunately, Congress has yet to act on these proposals), and it's why economists tend to pay close attention to sentiment among smaller firms.The latest report (PDF) from the National Federation of Independent Business, detailing the economic outlook among small business owners in the month of February, has just come out. The news is a little worrying. The overall optimism index declined slightly

A look at the income-side estimates of growth - Atlanta Fed macroblog - Last week, a post in the New York Times' Freakonomics blog on Okun's law made note of the statistical discrepancy between the two methods for calculating national output: "…there are two measures of output growth—the usual measure, which adds up total spending in the economy, and the alternative, which adds up total income. In theory, the two should be exactly the same. In practice, they have been very different during this recession… These GDI [gross domestic income] numbers suggest that output growth actually declined much more sharply than had been widely understood." Indeed, the recession looks deeper and the recovery seems much less pronounced, looking at the income-side data in this chart.

The Sham Recovery - Robert Reich: - Are we finally in a recovery? Who’s “we,” kemosabe? Big global companies, Wall Street, and high-income Americans who hold their savings in financial instruments are clearly doing better. As to the rest of us – small businesses along Main Streets, and middle and lower-income Americans – forget it. ...Look more closely and the only ones doing better are the people and private-sector institutions at the top. Many of America’s biggest companies are sitting on huge amounts of cash right now, but that says nothing about the health of the U.S. economy. ... America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures.

Not Durable? - Following the severe downturn we've had, many economists would probably agree that one key ingredient for a sustained economic recovery is a healthy (i.e., low level) of inventories relative to sales. Relatively speaking, if businesses are carrying too much inventory on their books, that can act as a drag on growth because they will be hesitant to crank up production -- and hiring -- until stocks are whittled down to more comfortable levels. So, what does the latest data reveal on that score?

So how bad is the economy? Google Public Data Explorer tells all -- in vibrant color - As if the constant headlines about high unemployment rates and phone calls from siblings about jobless nephews weren't enough, Google has stepped in to provide some neat graphs and tables showing the wretchedness of our economy. Google's new tool is called Public Data Explorer. Google is targeting students, journalists and politicians with the project, the company writes on the product page. But really, anyone can peek in and see some steep line graphs titled U.S. Unemployment Rate. The graph embedded at the top of this post, which can also be seen in full-page form on Google's site, lets you click the play button and watch as unemployment expands and constricts over time (and eventually explodes, within the last two years).

CHART OF THE DAY: The Scariest Job Chart Ever - We can debate whether today's jobs number was good or not, but this much is clear, compared to other recessions, the job losses, and lack of job gains, are truly unprecedented

Job Market for Youth Still Looks Bleak - The labor market for young college graduates improved last month, but for youths in general the job market still looks bleak. The unemployment rate for college graduates between 20 and 24-years-old fell to 8.5% in February from 9.3% a month earlier as those with more education continue to fare better in a tough labor market than those with less. People in the same age group with only a high school diploma also experienced a drop in their unemployment rate to 21.8% from 22.7%. Their jobless rate is still more than twice as high as the rate for the entire labor force.

Young Adults Fret Over Jobs, Haven’t Lost Hope - Young people are worried about losing their jobs and paying their bills, but they’re still holding out hope that conditions will improve. Some 60% of 18- to 29-year-olds said they were worried about paying their bills and meeting other obligations in this economy as fear of job loss still looms large, a new poll by Harvard’s Institute of Politics shows. Nearly half, 46%, said they’re concerned about losing their jobs.  An even larger share – 67% — said they feared that family members or friends might lose their jobs. And 58% said they were personally concerned about being able to afford housing.

Unemployment Rate and Level of Education - This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).
According to the Census Bureau, in 2008 of the 25 years and over workers:
13.4% had less than a high school diploma.
31.2% were high school graduates, no college.
26.0% had some college or associate degree.
29.4% had a college degree or higher.

BLS: Low Labor Turnover, More Job Openings in January - From the BLS: Job Openings and Labor Turnover Summary -There were 2.7 million job openings on the last business day of January 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate rose over the month to 2.1 percent, the highest the rate has been since February 2009. The hires rate (3.1 percent) and the separations rate (3.2 percent) were unchanged in January.Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people.  The following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

SnowJob: Revising the Non-Farm Payrolls Report - It appears as though the concerns expressed by the Administration about the snow storms and their impact on lost employment was overdone, if not misplaced. The market is pleasantly surprised with this -36,000 jobs number, since the expectations had been calibrated lower so effectively. In fairness to the Obama Administration, they are only doing what Bush II, Clinton, and Bush I* had been doing right along with almost every statistic that they have issued. It's called 'perception management.' Greece used one method of accounting management in shaping the numbers, and the US uses its own approach to what is essentially a similar problem.

Where the Jobs Are (w/ graphs) Job openings rose in January, according to a new Labor Department report. As a result, the number of unemployed workers per available job dipped slightly to 5.4, from about 6 workers per job opening in December:The job openings rate — which refers to the number of job openings, as a percentage of total existing and open jobs — rose. In January the job openings rate was at 2.1 percent, up from 1.9 percent in December, and at its highest level in nearly a year. Job openings rates varied across industries. It was highest in education and health services, and lowest in arts, entertainment and recreation: Despite criticisms about the growth of government, the job openings rate was higher in the private sector (a rate of 2.1 percent) than it was in government work (1.7 percent). The government may not have many available positions, but it isn’t laying off many people, either.

A Job For Life - Sales for the world's largest manufacturer of arc welding machinery dropped 38 per cent. But unlike millions of other U.S. workers, those at Lincoln Electric felt reassured listening to John Stropki, their boss. Two indisputable facts provided comfort. First, for more than 60 years, no permanent employee had ever been laid off for economic reasons. Second, for 75 uninterrupted years, the bonus had been paid through good times and bad, sometimes exceeding 100 per cent of a worker's base earnings.

Trading Away Productivity - FOR a quarter-century, American economic policy has assumed that the keys to durable national prosperity are deregulation, free trade and a swift transition to a post-industrial, services-dominated future.  Such policies, advocates say, drive innovation, which leads to enormous labor productivity and wage gains — more than enough, supposedly, to make up for the labor disruptions that accompany free trade and de-industrialization.  In reality, though, wage gains for the average worker have lagged behind productivity since the early 1980s, a situation that free-traders usually attribute to workers failing to retrain themselves after seeing their jobs outsourced. But what if wages lag because productivity itself is being grossly overstated, especially in the nation’s manufacturing sector?

Michigan Lost 80,000 Manufacturing Jobs Over Past Year - Industrial employment in Michigan fell 10.9% over the past twelve months according to the 2010 Michigan Manufacturers Directory, an industrial directory published annually by Manufacturers' News, Inc. (MNI) Evanston, IL. MNI reports Michigan lost 80,101 industrial jobs and 913 manufacturers between January 2009 and January 2010, the sharpest decline MNI has ever reported for the state. Coupled with the 42,874 jobs lost between 2008 and 2009, industrial employment in Michigan has declined by 122,975 jobs or nearly 16% since the start of the recession, according to MNI. Manufacturers' News reports Michigan is now home to 14,619 manufacturers employing 657,787 workers.


  • * small businesses are closing at an alarming rate
    * cities thought recession-proof (e.g. Columbus Ohio) are suffering badly
    * the hotel/motel business is in a depression
    * the housing markets are very weak, with occasional signs of life
    * commercial real estate, office and retail, is very weak
    * the auto parts supplier network is very fragile, any cascade of closings could shut down the auto industry (domestic and foreign) for a period of time
    * the cities of Detroit and Toledo, after 40 years of of mismanagement, corruption, globalization and auto industry deterioration, are near collapse, as are the school districts
    * infrastructure is crumbling, but only a few stimulus projects are visible
    * we could put thousands of people to work cleaning up environmental problem sites and demolishing (sadly) former manufacturing plants
    * state and local governments need tax increases, but tax increases drive businesses south and west

Detroit: the last days | Film | The Guardian - When the film- maker Roger Graef approached me last year to make a film about the rise and fall of Detroit I had very few preconceptions about the place. Like everyone else, I knew it as the Motor City, one of the great epicentres of 20th-century music, and home of the American automobile. Only when I arrived in the city itself did the full-frontal cultural car crash that is 21st-century Detroit became blindingly apparent. Leaving behind the gift shops of the "Big Three" car manufacturers, the Motown merchandise and the bizarre ejaculating fountains of the now-notorious international airport, things become stranger and stranger. The drive along eerily empty ghost freeways into the ruins of inner-city Detroit is an Alice-like journey into a severely dystopian future. Passing the giant rubber tyre that dwarfs the nonexistent traffic in ironic testament to the busted hubris of Motown's auto-makers, the city's ripped backside begins to glide past outside the windows...

Beyond 'ruin porn' —It's a challenge to tell stories about people in this city who see its problems and are working hard to be part of its rebirth. It's a challenge because press accounts of Detroit are training us to view the city in three morbid ways."Ruin porn" is the favorite negation. Photo after photo of broken windows, vandalized schools, abandoned and decaying buildings. Murder capital, riots, corruption, crummy cars, poverty, racial bigotry. Detroit has something for nearly everyone to hate or ridicule, and ruin porn—porn in the sense of provoking civic, not sexual, degradation—has become a shorthand way to convey scorn. The second genre is shoot 'em up. Last month's Metro Times: "A car turned from Jefferson onto Chalmers. It drew closer, then slowed when it reached Jackson's house. The headlights panned the front of the home until they revealed the ex-cop sitting there on the otherwise dark porch, staring back. He had a shotgun in his lap. Conventional coverage's third variety focuses on Detroit as the site of weird art.

Caterpillar Joins ‘Onshoring’ Trend  - Caterpillar Inc. is considering relocating some heavy-equipment overseas production to a new U.S. plant, part of a growing movement among manufacturers to bring more operations back home—a shift that will likely spark fierce competition among states for new manufacturing jobs.  The trend, known as onshoring or reshoring, is gaining momentum as a weak U.S. dollar makes it costlier to import products from overseas. Manufacturers are also counting on White House jobs incentives, as well as their ability to negotiate lower prices from U.S. suppliers who were hurt by the downturn and willing to bargain.

Don't pull back on stimulus - Christina Romer takes a shot at those arguing signs of recovery are a signal to cut back on stimulus spending."Immediate fiscal contraction would inevitably nip the nascent economic recovery in the bud -- just as fiscal and monetary contraction in 1936 and 1937 led to a second severe recession before the recovery from the Great Depression was complete," said Christina Romer, who heads the Council of Economic Advisers.  One analogy I've found helpful on this stuff is antibiotics. People frequently get a packet of antibiotics and stop taking them halfway through because they're feeling better. But they're feeling better because the antibiotics are working. If they pull back before the antibiotics have finished killing the bacteria, then the underlying problem is still there, and they get really sick. The fact that the economy is getting a bit better isn't evidence that the crisis is over. It's evidence that the interventions are working, or at least appear to be working

Fiscal policy: The "treading water" stimulus - HERE is some food for thought, via Tyler Cowen:This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean.There are a lot of interesting issues to explore here. Was monetary policy running even tighter than expected, as the Fed partially offset a fiscal stimulus that wasn't, in fact, there? What does this say about the state of fiscal federalism in America? And why isn't federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?

Government Can and Should Create Jobs - In a town in a country suffering through a recession, a wealthy person just happens to live next door to an unemployed worker. The worker has experience in a variety of trades, and is quite competent, but despite his skill and reputation, there are no jobs to be found. And it isn't for lack of trying. Seeing this, and having a kind heart, the wealthier of the two -- much, much wealthier -- decides his neighbor needs a job, so he sets about creating one. The first option he considers is just to find something for him to do, it doesn't much matter what, digging holes and then filling them up, whatever.

What if everything happened according to plan? - I had occasion to revisit this graph: And then, it suddenly struck me: what if everything had gone as planned? From the perspective of Obama's reelection chances, the light blue graph ("without recovery plan") is much better than the dark blue ("with recovery plan"). By Election Day, 2012, the two curves are nearly at the same point. But in the year from 2011 to 2012, the economy is improving much faster with the top curve than the bottom curve. And, as Doug Hibbs, Bob Erikson, Steven Rosenstone, and others have taught us, year-to-year change in the economy is what it's all about. I'm not exactly saying that Obama and his team actually want unemployment in 2011 to be any higher than necessary; it's just funny how, from a crude curve-extrapolation perspective, the above graph is looking like it could be good news for them in two and a half years.

Bill to Extend Jobless Benefits Clears Senate Procedural Hurdle (Bloomberg) -- A $138 billion plan to extend unemployment benefits through the rest of this year cleared a procedural hurdle in the U.S. Senate as lawmakers moved closer to putting the measure to a final vote. Eight Republicans joined all but one Democrat in a 66-34 vote to advance the measure. A final Senate vote is likely tomorrow; the bill also needs House approval. The bill would provide $25 billion to help states balance their budgets, prevent a 21 percent cut in Medicare reimbursements and temporarily ease corporate pension-funding requirements. The legislation, partly financed by offsetting savings, would add $97 billion to the deficit, according to the nonpartisan Congressional Budget Office.

Senate passes $149 billion for jobless aid, tax breaks - Reuters - The Senate on Wednesday passed a $149 billion package of jobless aid and tax breaks, as Democrats continued efforts to lower the 9.7 percent unemployment rate before congressional elections in November. The measure, approved by a vote of 62 to 36, now heads to the House of Representatives, where many Democrats have pushed for more aggressive job-creation measures in the face of the worst U.S. economic downturn since the 1930s.

Is This the Best Congress Can Do for the Unemployed? - Why are they calling this a jobs bill? There are hardly any job creation measures in it: Jobless claims bill OK'd by Senate, The Senate on Wednesday approved ... by a 62-36 vote ... the latest job creation effort to go before lawmakers, though it contains virtually no new initiatives to boost employment. Its price tag has wavered between $140 billion and $150 billion, which is partially offset.  The bill passed Wednesday would push back the deadline to file for extended jobless benefits and the federal subsidy for COBRA health insurance until Dec. 31. ...The measure would also extend dozens of tax provisions -- It would also temporarily halt a 21% reduction in Medicare physician reimbursement rates. And it would send another $25 billion to the states to help them fund their Medicaid programs for another six months. The bill also extends two Recovery Act provisions for small busines

Perhaps They Should Call Health Care Reform Another “Jobs Bill” - So the extension of the expiring tax provisions is something that would occur, repeatedly, even without the vehicle of a “jobs bill.”  There really is hardly ever a tax cut that is truly “temporary” in practice, no matter how it is written into law. What the label of “jobs bill” allows is the exemption of these (effectively permanent–in good times and in bad) tax cuts from PAYGO rules, which would otherwise require that the cost of the tax cuts be offset.  The CBO estimate shows (on page 2) that out of the package’s around $100 billion in cost over ten years, $95 billion is considered PAYGO-exempt because of the “emergency” designation. It makes me wonder why politicians don’t try to label any policy they’re trying to pass lately, especially any policy they don’t want to have to pay for, as a “jobs bill.”

Are unemployment benefits no longer temporary? - Millions of Americans have been forced to rely on unemployment payments for extended periods as the nation struggles through its longest period of high joblessness in a generation, and critics are taking aim, saying that the Depression-era program created as a temporary bridge for laid-off workers is turning into an expensive entitlement. The unemployed say extensions help to tide them over in unusually difficult times when jobs are hard to come by. Although unemployment held steady at 9.7 percent in February, millions of jobs have been lost in the downturn, particularly in the hardest-hit sectors including real estate, construction, manufacturing and financial services. Those jobs are unlikely to return even when the economy recovers, many experts say.

THE GOP STILL JUST DOESN'T LIKE THE UNEMPLOYED.... It's astounding, but in the midst of an unemployment crisis, prominent Republicans continue to castigate those struggling to find jobs.Yesterday, for example, disgraced former Majority Leader Tom DeLay (R-Texas) argued that unemployment benefits are a bad idea, because, as he sees it, they discourage people from entering the work force."You know," DeLay said, "there is an argument to be made that these extensions of these unemployment benefits keeps people from going and finding jobs." When CNN's Candy Crowley described his argument as "a hard sell" to the public, DeLay replied, "It's the truth."Crowley followed up, asking, "People are unemployed because they want to be?" DeLay again said, "Well, it is the truth."

It's always (and by always I mean never) fun when economists are caught contradicting themselves - Former Enron adviser Paul Krugman takes note in his New York Times column of what he calls "the incredible gap that has opened up between the parties": "What Democrats believe," he says "is what textbook economics says": But that's not how Republicans see it. Here's Senator Jon Kyl of Arizona, : unemployment relief "doesn't create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work." Krugman scoffs: "To me, that's a bizarre point of view-"- What does textbook economics have to say about this question? Here is a passage from a textbook called "Macroeconomics": Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker's incentive to quickly find a new job." So it turns out that what Krugman calls Sen. Kyl's "bizarre point of view" is, in fact, textbook economics. The authors of that textbook are Paul Krugman and Robin Wells. Miss Wells is also known as Mrs. Paul Krugman.

Supply, Demand, and Unemployment - Krugman - I hear through the grapevine that the usual suspects at the WSJ have put out something along the lines of “Krugman says that unemployment benefits won’t raise unemployment, but in his textbook he says they will, neener neener.” Are they really that stupid? Probably not — but they you think that you, the reader, are that stupid. But anyway, maybe this is a good time to explain the difference between determinants of the NAIRU — the minimum rate of unemployment consistent with a stable inflation rate — and the determinants of the unemployment rate at a point in time. So: there are limits to how hot you can run the economy without inflationary problems. This is usually expressed in terms of a non-accelerating-inflation unemployment rate; yes, there are some questions about whether the concept is quite right, especially at very low inflation, but that’s another issue.

The Effect of Unemployment Insurance on Unemployment - Last week, I addressed the issue of how much of the current unemployment is due to the many extensions of unemployment benefits. In some states you can now receive benefits for as much as 99 weeks, just shy of two years. To put that in perspective, we have never been there before. In the early 1980s, the longest anyone could receive such benefits was, I believe, 55 weeks. So this almost an additional year of benefits and it puts us in the same league as much of Western Europe. There is much agreement among economists about the microeconomics of unemployment benefits, and it's worth reviewing why. I could lay it out fresh but Larry Summers said it quite clearly in his article on unemployment in my Encyclopedia. Here's Larry:

An Epidemic of Laziness? - Paul Krugman, last Friday: But that’s not how Republicans see it [unemployment benefits]. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”Dancing DeLay agreed: Crowley pointed out that saying “people are unemployed because they want to be” is a “hard sell.”DeLay responded: “Well, it is the truth.” Without trotting out all manner of charts and graphs [BR: Ok, one chart] to demonstrate how absurd this position is, I’ll make one comment and ask a few questions:

Graph of the week - Brendan Nyhan links to this hilariously bad graph from the Wall Street Journal:  It's cute how they scale the black line to go right between the red and blue lines, huh? I'm not quite sure how $7.25 can be 39% of something, while $5.15 is 10%, but I'm sure there's a perfectly good explanation . . . Follow the above link for more details. As Brendan notes, the graph says essentially nothing about the relation between minimum wage laws and unemployment ("Any variable that trended in one direction during the current economic downturn will be correlated with the unemployment rate among teens or any other group.") and he also helpfully graphs the unemployment trends among the general population, which has a similar upward trend.

WaPo on Unemployment Benefits - A few factoids from the WaPo: Are unemployment benefits no longer temporary?  About 11.4 million out-of-work people now collect unemployment compensation, at a cost of $10 billion a month. Half of them have been receiving payments for more than six months ... States determine the amount of the benefits, but they average 36 percent of the average weekly wage, according to the National Employment Law Center.  Nearly two-thirds of the jobless collect unemployment benefits, which go only to those who have earned a certain amount of money in the previous year, and who lost their jobs through no fault of their own.

Graphs: Duration of Unemployment - Here are two graphs that show the weeks unemployed over the last 40 years.The first graph shows the number of unemployed in four categories as provided by the BLS: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The second graph shows the same information as a percent of the civilian labor force. It appears there was more turnover in the '70s and '80s, since the 'less than 5 weeks' category was much higher as a percent of the civilian labor force than in recent years. This changed in the early '90s - perhaps as a result of more careful hiring practices or changes in demographics or maybe other reasons - but if the level of normal turnover was the same as in the '80s, the current unemployment rate would probably be the highest since WWII.

The Emotional Cost of Underemployment – Gallup -- Underemployed Americans are significantly more likely to be "struggling" (54%) than employed Americans (38%), according to the Gallup-Healthways Well-Being Index. Those who are underemployed are also less likely to be "thriving," than those who are employed -- 42% versus 61%. These results are based on January and February interviews with approximately 40,000 adults in the U.S. workforce, age 18 and older. Gallup classifies respondents as "employed" if they are employed full time or are employed part time but do not want to work full time. Respondents are considered "underemployed" if they are employed part time but want to work full time or are unemployed. Gallup categorizes Americans as thriving, struggling, or suffering according to how they rate their present and future lives on a ladder scale, with steps numbered from 0 to 10, based on the Cantril Self-Anchoring Striving Scale.

What Is "Heavy Investment" in Education, Clean Energy and Scientific Research? - In an article about the increasing number of people receiving long-term unemployment benefits the Post told readers that to have a labor force suited for the jobs of the future: "the Obama administration has tried to address that by investing heavily in education, clean energy and scientific research." Actually, the Obama administrations investments in education almost certainly don't even offset the state and local cuts in spending forced by the recession. Its heavy investment in clean energy and scientific research is dwarfed by its spending on the war in Afghanistan.

Unemployment hitting state, businesses right in the wallet -  As the jobless rate hovers at its highest level in decades, employers statewide are seeing unemployment insurance taxes rise.  Record claims have exhausted unemployment funds in many states, forcing them to seek loans from the federal government. The situation has triggered automatic increases in unemployment insurance rates in states like New York that can't generate enough money to cover jobless benefits. In 2009, the state paid $5.1 billion in claims - much of which came from loans. As of March 1, New York owed $2.62 billion to the Federal Unemployment Account - the third-highest balance in the nation. California leads with an outstanding balance of $7.54 billion, followed by Michigan with $3.55 billion. More than 30 states have had to draw $33.66 billion from the fund - a figure that is expected to rise to $40 billion by the end of the year.

Fund that pays unemployed benefits will run dry this week  - PHOENIX - Hundreds of thousands of Arizonans depend on jobless benefits to get by but the state fund that pays out those benefits is expected to run dry this week. In December of 2007 there was about $1 billion in our state's unemployment trust fund. That fund is where the state gets its money to pay those who are looking for work and receiving unemployment benefits. In the last two years a massive amount of people have applied for those benefits due to the economy. Those of you who receive benefits will continue to get them because the Arizona Department of Economic Security will borrow $250 million from the United States Treasury to continue paying unemployment benefits.

Unemployment Tops 20% In Eight California Counties - For many California areas, unemployment rates moved persistently higher in January, indicating that the national economic recovery hasn't yet translated into jobs for the Golden State. New county-by-county figures released by the state Wednesday showed that in eight counties, more than 1 in 5 people were out of work. Moreover, revised numbers for last year show that fewer people were employed than was previously believed. The state was one of five, along with Florida, Georgia, North Carolina and South Carolina, that reached their highest unemployment rates since the government began keeping track in 1976, according to the Bureau of Labor Statistics. California's was 12.5% in January, up from 12.3% in December.

States’ Payrolls Lag as U.S. Austerity Sets In: Chart of Day –(Bloomberg) -- U.S. state and local governments are likely to keep cutting jobs even as the broader labor market shows signs of emerging from the worst slump since World War II, economists said.  The CHART OF THE DAY shows combined employment by state and local governments fell for eight straight months through February. The streak of losses was the longest since two years of declines ending in 1983. State and local governments, which account for about 13 percent of gross domestic product, have so far cut a total of 192,000 jobs since August 2008, when employment peaked at 19.8 million.  “There’s a lot of state and local government cutbacks still coming ahead,”State and local governments are scaling back as a decline in property values erodes their tax base. Forty-nine of the fifty states are legally bound to balance their budgets.

States, Cities Likely to Slash Jobs As Stimulus Dwindles - The worst looks to be over for private-sector unemployment, but it may be just beginning for state and local government workers.State and local government payrolls typically don’t decline much until a year after the beginning of a recession because budgets are already in place and fairly inflexible. As a result, payrolls were stable in 2008 and a good part of 2009. But not anymore. Revenue-starved states are taking more drastic steps to balance budgets."This is a completely unprecedented crisis," says Ethan Pollack of the Economic Policy Institute. "The budget cuts are going to get more and more severe."

States may hold onto tax refunds for months - Residents eager to get their state tax refunds may have a long wait this year: The recession has tied up cash and caused officials in half a dozen states to consider freezing refunds, in one case for as long as five months. States from New York to Hawaii that have been hard-hit by the economic downturn say they have either delayed refunds or are considering doing so because of budget shortfalls. "It's an indicator of how bad it is," says Scott Pattison, executive director of the National Association of State Budget Officers. "You know things are bad when you have to do that."

Fifty-One Herbert Hoovers - Krugman - More than a year ago I coined a phrase that seems to have made its way into the econolexicon; writing about how cutbacks at the state and local level would tend to undermine fiscal stimulus at the federal level, I said that we had fifty Herbert Hoovers. But I was wrong. Via Mark Thoma, we have at least fifty-one — because we have to add David Broder to the list. Before I get there, let’s note that fears about fiscal drag at the state and local level have, in fact, proved justified. Aizenman and Pasricha have a fairly definitive analysis; you can get the quick and dirty version just by looking at government purchases of goods and services:

John Berry: States Borrow Heavily for Unemployment - (table) - Faced with the toughest and most prolonged recession since the Depression, state governments have had to borrow $35 billion during the last two years to keep their unemployment insurance programs afloat. Job losses exact a dramatic toll on workers as well as state coffers. But the fallout doesn’t end there.  Experts say that most states will have no choice but to increase taxes on employers in order to repay their federal loans, as they have in the past. As the cost of doing business increases, hiring new workers decreases. And hard-hit industries such as construction and manufacturing typically pay even higher unemployment insurance taxes because they lay off workers more frequently.  Every state has had to borrow from the federal unemployment trust fund to keep their programs going, in amounts ranging from California's $7.9 billion and Michigan's $3.6 billion to Vermont's $9 million and New Hampshire’s $7 million, according to Department of Labor data.  Moreover, they are steadily going deeper into the hole.

Unemployment benefit cuts, higher taxes for Wis. business projected to deal with shortfall - In 2007, before the recession started, less than $1 billion was paid to the unemployed in Wisconsin who were eligible for up to 26 weeks of benefits. In 2009, benefits could be tapped for up to 93 weeks and the state paid out $3.1 billion, more than triple what it did two years prior. Wisconsin's debt to the federal government is expected to double from the roughly $1.2 billion that is owed now to nearly $2.4 billion by 2014, said Hal Bergan, administrator of Wisconsin's unemployment insurance program

Thousands of state and local government employees face layoffs - Thousands of state and local government employees face layoffs because of the severe budget cuts. Just how many jobs will be lost should become clearer by Saturday when the General Assembly is scheduled to adopt a budget for the 2010-2012 biennium. The direst layoff forecast comes from the Virginia Education Association, which represents teachers and other education employees. Robley Jones, lobbyist for the association, said 15,000 would lose their jobs under the Senate version of the budget, and 22,000 in the House version, which would cut public education more severely

Report: Feds could take over S.C. jobless fund - South Carolina must quickly take steps to stop the billion-dollar bleeding within its bankrupt Unemployment Insurance fund, lawmakers were told Wednesday, or the consequences could be great.For one thing, the state risks losing control of the unemployment insurance system to the federal government, due to its unpaid debt to Washington, which now stands at more than $773 million, and counting. Each week, the state's debt to the federal government grows by $16 million due to the state's inability to afford unemployment benefits

Deficit borrowing to rise for states, cities (Reuters) - U.S. states and cities may increasingly turn to deficit borrowing to deal with still sagging tax revenue and the pending loss of federal stimulus money. "With the fiscal pressures mounting, states are turning to any financing mechanism at their disposal to manage those pressures," said Ted Hampton, an analyst at Moody's Investors Service. Despite glimmers of an economic recovery, state and local government funds are expected to remain sparse for some time. Meanwhile, the $863 billion American Recovery and Reinvestment Act will largely shut off the federal funding spigot to states at year end

15,000 San Francisco Workers Given Layoff Notices (And Re-Hired At Lower Wages) - Emotions ranged from disbelief to despair to downright anger Friday as 15,000 San Francisco city workers received pink slips. But Mayor Gavin Newsom reiterated that his controversial plan to rehire them under shortened workweeks would wind up saving thousands of jobs. Newsom ordered the layoff notices be sent to most of the city's 26,000 workers and said the overwhelming majority of them will be hired back within two weeks to work 37.5 hours a week instead of their current 40 - meaning they'll see a 6.25 percent cut to their paychecks.

Las Vegas Mayor Says City Should Fire All Workers - If Las Vegas can't get the desired wage concessions out of its employee unions, the city should simply fire everyone and offer to rehire them to work a shorter work week, Mayor Oscar Goodman said Wednesday. "I'm trying to save jobs. I really am," Goodman said. "If it's a strong-arm tactic, so be it. "If it's legal, I'm going to propose it to the council. I think it's the only way we're going to save jobs."Goodman ordered the city attorney to study the possibility. The idea didn't go well with the unions. Several union presidents went so far as to call the mayor a bully.

New York state debt in red zone, should cut $20 billion: study - The $120 billion that New York state owes in debt, health and pension benefits for public workers puts it in the danger zone, and getting down to the safety zone requires a $20 billion cut, a study said Tuesday. By this measure, California has more outstanding long-term obligations -- over $159 billion -- but can better afford them than New York, according to the analysis by the Citizens Budget Commission. New York's ability to pay its bills was estimated at a ratio of 1.099, meaning that for every dollar of resources it has, there are $1.099 worth of obligations. Although California has some of the nation's worst budget problems, its ratio works out to a more affordable 0.599, according to the study by the nonpartisan research group. Only three other states have higher debt burdens than New York: New Jersey, whose ratio is the highest at 1.473; Hawaii, at 1.472; and West Virginia, at 1.127.

New Jersey plans to privatize state jobs - Gov. Chris Christie today will create a commission to privatize as many as 2,000 state jobs beginning next January, officials said Wednesday night. As he grapples with an $11 billion deficit in the budget he will present on Tuesday, Christie is also considering invoking the Disaster Control Act to suspend Civil Service rules to make it easier for him to lay off higher-paid workers, according to two administration officials. The Republican governor today plans to sign an executive order creating the task force to cut the size and cost of the state payroll. Three officials familiar with his plans last night said the commission will identify which jobs or agencies would be operated by the private sector and how that would be accomplished. The officials declined to be named ahead of the announcement.

Virginia State Police Help With Budget Crunch. - A federally funded ticketing blitz in the state of Virginia landed a total of 6996 traffic tickets this weekend. The blitz, dubbed “Operation Air, Land & Speed” coincided with frantic efforts by state officials to close a$2.2 billion budget deficit. Supervisors ordered state troopers to saturate Interstates 81 and 95 to issue as many tickets as humanly possible over the space of two days. Activists with the National Motorists Association pointed out that enforcement efforts may have concentrated on areas where speed limits are expected to rise to 70 MPH following Governor Bob McDonnell’s signature on legislation raising the state’s maximum speed limit (view law). This would mean a significant number of tickets were issued for conduct that will be perfectly legal in a matter of months. The group also indicated that state police tactics may run afoul of state law.

NY gov says may seek extra power to cut spending - New York's financial situation will worsen over the next five years because spending is expected to rise 7.5 percent but revenues will only climb 3 percent, Paterson told reporters. "That would put us at $65 billion in the hole," he said.Lieutenant Governor Richard Ravitch has been charged with finding a long-term solution to the state's fiscal crisis, and Paterson said one possibility was creating an independent board to review whether a "past budget is in compliance with the state's fiscal situation."New York's deficit in the new budget that starts on April 1 tops $9 billion, but Paterson would need the legislature to approve the extra budget powers he is considering.

New York state could run out of money in May or June (Reuters) - New York state could run out of money in May or June, Governor David Paterson said on Monday, underscoring the state's perilous finances, which could force it to delay income tax refunds by a few weeks.  The Democratic governor, speaking at a broadcast town hall meeting, said: "We are crossing the Rubicon between recession and something else far worse if my colleagues and I in the legislature can't close a deficit that is something like $9 billion." New York's budget deadline is April 1 and this was Paterson's most extensive public appearance after he repeatedly denied he was resigning last week amid federal and state probes into allegations against him.

DiNAPOLI: NYC Faces Budget Risks of $2 Billion - New York City’s fiscal year 2011 budget could be greatly impacted by the outcome of the State budget, according to a report <pdf> New York State Comptroller Thomas P. DiNapoli released today. While the City’s current plans greatly reduce the $4.9 billion budget gap that the City had projected for fiscal year 2011, proposed reductions of $1.2 billion in State assistance could increase the City’s budget risks to about $2 billion, according to the report.  “The City has been far more fiscally responsible than the State,” DiNapoli said. “But, unfortunately, fiscal problems trickle down, and the State’s actions could have a harsh impact on the City’s finances.” The DiNapoli report found that while the impact on the City of the global economic downturn has not been as painful as initially forecast, New York City has lost nearly 162,000 jobs and the unemployment rate has hit 10.5 percent, the highest in 17 years. The effects of the recession contributed to a decline in City tax revenue, which fell by $2.8 billion in fiscal year 2009, or 7.1 percent – the steepest decline in at least 30 years.

Defaults Signal Bursting Muni Junk Bubble After Surge (Bloomberg) -- Investors in search of better returns poured $7.8 billion into high-yield municipal bond funds last year, pushing assets to a two-year high. They may start experiencing losses as early as this year as default risks grow.  “People are starving for yield because rates are at zero,”. “They’re taking more risk than they think.” Below-investment grade munis are typically issued by companies raising debt through a municipality for a project with a public interest such as hospitals, nursing homes, housing developments and sports stadiums, said Eric Jacobson, director of fixed-income research for Morningstar Inc.

Fair Game - The Swap Contracts That Swallowed Your Town - NYTimes - Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street. The rocket scientists crafting the products got backup from swap advisers, a group of conflicted promoters who consulted municipalities and other issuers. Both of these camps peddled swaps as a way for tax-exempt debt issuers to reduce their financing costs.  Now, however, the promised benefits of these swaps have mutated into enormous, and sometimes smothering, expenses. Making matters worse, issuers who want out of the arrangements — swap contracts typically run for 30 years — must pay up in order to escape.

The problem with municipalities buying swaps - I’d highly recommend checking out Bond Girl, who has a second installment today attacking the hypocrisy of municipalities who are happy to lock in fixed interest rates through interest-rate swaps, only to complain loudly when rates fall and they realize they would have been better off doing nothing. But the fact is that municipalities around the world have been ripped off by fast-talking derivatives salesmen for years, and the whole business really is very sleazy. In their excellent FT article, Rachel Sanderson, Guy Dinmore and Gillian Tett show how Italian municipalities are losing money even on fixed-to-floating interest-rate swaps, which you’d think would be pretty hard in today’s low-interest-rate environment.

Los Angeles Fires First Shot In California’s War On Banks, As Cities Seek To Wrangle Out Of Swaps - This Los Angeles City Council has passed a resolution to get out of various interest-rate swaps it entered into banks pre-crisis.  According to the SEIU, getting out of the swaps, will save LA $19 million per year. So why does the city think it should be able to get out of legally entered-into swaps without having to pay a cancellation fee? Because, according to the SEIU's Marcus Mrowka, all those swaps were entered into pre-crisis, before the banks changed all the rules. Up next: the union will push for various Northern California municipalities to do the same, potentially costing banks $150 million/year. Now, why would banks relent to the demands of the cities? Think about it: the cities do business with these banks, and do have leverage of them. Cancelling a few swaps might be well worth it.

Cash-Strapped Los Angeles Wary of Scaring Off Business Los Angeles is struggling to raise money and cut costs to fill a $200 million budget gap that could force thousands of layoffs and drive the city into bankruptcy. But last week, the city decided to forgo $3.4 million in revenue as it slashed taxes for Internet companies. Officials say the tax break for the fast-growing industry is vital to Los Angeles's future, even though it puts the city in a deeper hole. They worried that without the cut, more businesses and jobs would flee the city, which has a 12.5% unemployment rate. The decision highlights the quandary of local governments across the country as they confront dueling crises of deficits and jobs

Nevada lawmakers' reliance on temporary fixes creates $3 billion hole -In the nearly three years since Nevada's economy crashed, lawmakers have scrapped together a patchwork of temporary fixes to the state budget, hoping an eventual recovery would rescue them from being forced to make permanent choices on how they tax and what they spend.  But the economy didn't get better. It got worse. The result: Lawmakers will now face a nearly a $3 billion hole in a roughly $6 billion budget when they return to Carson City next year. And the temporary fixes have all been used up.

$11 billion budget shortfall projected for Texas - The Texas Legislature will face a budget shortfall of at least $11 billion when it meets to write the next state budget in 2011, a key state official said Monday. The shortfall is the projected difference between available revenue and the cost of maintaining services at their current levels in the next two-year budget. The shortfall is mainly a result of lower-than-expected sales tax receipts. John O'Brien, director of the Legislative Budget Board, told a committee of House budget writers that the estimate is conservative and could grow to as much as $15 billion. The available revenue also will have to be used to cover any holes in the current budget, including a Health and Human Services Commission shortfall of more than $1.3 billion caused by a recession-induced surge in Medicare enrollment.

Social services short $1.6 billion, chief says - The Texas budget shortfall for next session -- whether it's $11 billion or $15 billion -- just got bigger. Health and Human Services Executive Commissioner Tom Suehs just told House budget writers that the recession has overwhelmed predictions for how many Texans would sign up for Medicaid, the nation's main health care program for the poor. It's well known that last year, lawmakers low-balled caseload growth and health care inflation in Medicaid. Suehs said he got money to cover a 3.4 percent growth in the rolls in the current fiscal year, which ends Aug. 31. Instead, enrollment will increase by 11 percent, he said. Many more poor Texans who didn't turn to Medicaid in the past, even though they were eligible, are now enrolling, he said

N.J. municipalities raise taxes despite state cap - When New Jersey announced that property taxes went up by an average of 3.3. percent last year — the smallest increase in a decade of rapid growth — some hailed it as evidence that a 3-year-old law capping annual increases at 4 percent had finally taken hold. But a closer look shows the law is hardly a fire wall. Nearly a third of the state’s 566 municipalities raised property taxes above the cap with the state’s permission last year, many because they were able to show they were facing virtual civic dysfunction, a Star-Ledger review shows. Through hundreds of pages of applications asking to exceed the cap, school and town officials spared no adjectives when describing what would happen without relief: The police force would be cut. Special education aides would be fired. Fire hydrants would not be installed.

Christie May Propose Cutting N.J. Budget to $25 Bln  (Bloomberg) -- New Jersey Governor Chris Christie may propose reducing state spending by a record 14 percent, including cuts to property-tax rebates and school aid, according to two people with knowledge of budget talks. “The things I’m going to propose next week are going to anger people,” Christie said yesterday at a town hall meeting in Haddon Heights. “But I will tell you that it’s going to be fair. We will cut everyone. I’m just trying to fix the problems we have. I would love to play Santa Claus, but I can’t.” Christie’s plan for next fiscal year may eliminate or scale back the state’s $1.1 billion property-tax rebate program, which gave more than 1 million New Jersey homeowners checks averaging $1,000 last year. The state’s highest-in-the-nation real estate levies averaged $7,281 last year, up from $7,045 in 2008, according to data released Feb. 26

Gov. Pat Quinn budget proposal: Borrow $4.7 billion  - Ill Gov. Pat Quinn on Tuesday unveiled a caustic budget plan that would borrow billions of dollars to stay afloat and push even more debt down the road, hoping to persuade leery lawmakers to instead raise taxes in an election year. Quinn aides warned the plan would cost some 13,000 teachers and staff their jobs, cut off poor seniors from help in paying for costly prescriptions and shut down some health care programs for the indigent. But even after about $2 billion in cuts, the state would still be $11 billion in the hole.

Ill. budget to hit schools, police, child care-- Gov. Pat Quinn's plan to fill the biggest deficit in Illinois history includes cuts so severe that 17,000 teachers could lose their jobs, thousands of poor families would get less help with child care and fewer state troopers would patrol the roads, a top Quinn aide said Saturday.Such cuts will be necessary even if lawmakers agree to the governor's call for an income tax increase, said Quinn budget director David Vaught.  "This is the reality budget. This is what's really happening," Vaught said in an interview with The Associated Press.  Illinois faces a roughly $13 billion deficit in the upcoming budget year, he said. That's because the state's current budget is woefully out of balance, revenues are expected to drop and expenses keep climbing. Pension costs, for instance, will jump by about $1.7 billion, Vaught said.

Gov seeks 33% tax hike for education, billions in spending cuts - Uncorking a risky election-year gambit, Gov. Quinn on Wednesday proposed a 33 percent increase in the state income tax to avoid "sacrificing the future of a generation of children." Quinn's push to hike the tax on Illinois workers' paychecks from 3 percent to 4 percent came with a promise to devote all of the $2.8 billion in new annual revenues to education, staving off the $1.3 billion in cuts the governor aimed at the state's schoolchildren and university students if the tax hike doesn't materialize. "I believe this 1 percent for education makes sense, and I think the people of Illinois will understand," the governor said during a 20-minute budget address to both chambers of the General Assembly.

IF You Are Going To "Demonstrate"....Then aim your "demonstrating" at the people who are bankrupting your state - and you personally. I speak specifically of people such as those that The Daily Illini pointed out - all employees for the University of Illinois.Let's see what we have here.... The head of the football team - the coach - makes $1 million.  For coaching a college football team. The "intercollegiate (sports) director makes $600,000. The President of the University is just $50 large shy of a half-million. A large number of Deans and Professors make $250,000 - or more. Indeed, I have to get eight pages into this list before I drop below $200,000.

It's not just the Capitol: Billions in red ink drowning California's cities, schools and counties, too  — With even well-managed counties, cities and schools finding themselves in the same budget hole that has swallowed state government, California now confronts a financial crisis that may be unrivaled — though it is also maddeningly difficult to quantify. In fact, the problem is so expansive that several experts contacted by the Mercury News wouldn't even hazard a guess. So just how broke is California? A quick, unscientific look around the Golden State suggests that California's collective deficit may be double the state government's $20 billion budget gap. San Francisco must trim $522 million from its budget. San Jose's upcoming balance sheet is $116.2 million in the red. The Los Angeles Unified School District is staring at a $640 million shortfall. Even tiny Dorris, a few miles from the Oregon border is contemplating cuts.

Cities Cut Education Jobs Amid Budget Pressures -The education sector has been a rare bright spot in the labor market, but as cities face mounting budget pressures the pain spread to their school systems last month, the government’s payroll tally showed Friday.  The education sector as a whole added a net 11,000 jobs in February, but local governments shed 24,100 positions from public education. The only industry that cut more jobs was construction, which has been hard-hit throughout the recession and may have been influenced by severe winter weather that idled workers. In contrast, public education payrolls aren’t as likely to be influenced by winter weather since teachers and principals are paid whether or not school is in session for the day. It’s the third monthly drop in local government education payrolls and further cuts are most likely ahead. Cities are expected to see budget deficits between $12 billion and $19 billion next year.

More School Districts Trying to Save Money by Shutting Down 1 Extra Week Day - More and more school districts are saving money by shutting down for one extra day each week. It's a controversial move. "What will be the impact on children? There is no research that tells us that," noted the National School Boards Associations' Anne Bryant.  A shorter week means longer school days, and many teachers fear students can't concentrate. "Kids are kids. There's only a certain amount of attention they're gonna have," said Randi Weingarten of the American Federation of Teachers . "When you actually try to double or triple up English or math, we know that they disconnect from that." .

Kansas City wants to close half its public schools — Kansas City was held up as a national example of bold thinking when it tried to integrate its schools by making them better than the suburban districts where many kids were moving. The result was one school with an Olympic-sized swimming pool and another with recording studios. Now it's on the brink of bankruptcy and considering another bold move: closing nearly half its schools to stay afloat. Schools officials say the cuts are necessary to keep the district from plowing through what little is left of the $2 billion it received as part of a groundbreaking desegregation case. Superintendent John Covington has said diplomas given to many graduates "aren't worth the paper they're printed on."

Massive school closures in KC to be done by fall … - Kansas City's school superintendent said Thursday the plan to shutter nearly half the district's schools, while "painful," will move forward quickly so that all the closures will be complete by fall.The school board narrowly approved the plan Wednesday night to close 29 of the district's 61 schools to try to stave off bankruptcy. The closures have angered many parents, students and teachers, but administrators say they had no choice because without them, the district would have been in the red by 2011."It has been a difficult and painful and emotional process that affects our entire community," superintendent John Covington said at a news conference. "No one likes closing schools."

Cleveland school board approves reform plan - After months of meetings, a lot of behind-the-scenes cobbling, bursts of community anguish and a couple of major revisions, the Cleveland school board has approved what the district is calling its transformation plan.  Now can district leaders tie up scores of loose ends in time to smoothly launch a multitude of changes this fall Administrators insist they can, but teachers aren't so sure.  The school board voted 8-1 Tuesday to approve Chief Executive Officer Eugene Sanders' blueprint for raising low test scores and a 54 percent graduation rate. Sanders' document lays out building-by-building strategies, including closing or moving 16 schools. The district will shutter 14 elementary schools and two high schools -- more than 10 percent of its facilities -- after classes end in June.

San Jose Unified School District avoids layoffs, cuts the school year  - San Jose Unified will not be sending out laying off notices to teachers on March 15, but instead teachers will be taking a 2.5 percent pay cut starting the 2010-11 school year, which will translate into five fewer days of instruction. Cupertino Union School District is laying off about 125 teachers, she says, and about 16 school districts in the East Bay will go bankrupt next year. "They are not going to survive because they don't have the reserves to mitigate these cuts," Allen says. "And because the last two years of ongoing draconian cuts are unprecedented in the state, no one ever anticipated something like this going on for as long as it has."

Ann Arbor school district fund balance shrinking; this year's budget deficit estimated at $8M -The Ann Arbor school district keeps sliding toward the day it may need to borrow money to meet payroll during the eight weeks a year the state doesn’t provide aid payments, its chief financial officer said Thursday night. That’s because the district has been spending its fund balance, also known as the rainy day account, to help make up for budget shortfalls. The district expects to be $8 million short at the end of this school year. That’s up from $6 million projections earlier in the year.

Budget Woes Have Schools Expecting the Worst -The Elgin (Illinois) district is not the only one sweating the uncertainty of how the state is going to resolve a $13 billion budget deficit, or whether it will find money to pay the more than $800 million it owes districts for the 2009-10 school year. Christopher Koch, state superintendent of schools, said districts across the state had reported that there would be layoffs of 13,000 teachers this spring. And that figure was based on the notion that the state would maintain level financing for schools

$1.5B state education shortfall predicted -Officials with the State Department of Education are predicting a funding shortfall for public education in the next Fiscal Year of between $800 million and $1.5 billion. That means "per pupil" shortfalls in Hall County Schools could be as much as $500 dollars, according to Supt. Will Schofield. And with about 26,000 students in the system, it would add up to about $13 million. "(Thursday's) State School Board meeting provided their most detailed projection of the state’s budget situation and how it may affect local schools in Georgia,"

Cobb School Budget Shortfall Called 'Almost Unimaginable' MARIETTA, Ga. -- Parents in Cobb County use creative fundraising to help schools that are struggling with a budget deficit that is only expected to grow. "We're having to be very creative because the typical fundraising we used to do doesn't work anymore,""The Cobb school system has already cut its way through a $95 million budget shortfall. The district reduced employee pay by 2 percent, furloughed teachers, and increased class size. "I think it is safe to say that our school district has not faced such a financial burden in anyone's memory," said Cobb Superintendent Fred Sanderson.

Survey: Mich. school districts bracing for layoffs - (AP) - A new survey says 86 percent of Michigan's public school districts expect to have layoffs in the next academic year. The survey of more than 300 districts released Monday by a school funding advocacy group says 21 percent of school districts expect to close at least one school building. The report was released by a coalition of education groups called Save our Students, Schools and State. The group says the state needs to raise more money for public schools despite Michigan's overall state government budget problems. The state cut school funding by a minimum of $165 per student this academic year. Districts are worried cuts will be even deeper in the fiscal year that starts Oct. 1 because of Michigan state government's budget problems.

GOP: Law banning child abuse in schools will lead to ‘government takeover’ A proposed law designed to prevent child abuse in schools has been lauded by children's protection advocates, and slammed by House Republicans as an unnecessary expansion of federal government power.The House of Representatives last week passed the Keeping All Students Safe Act, which for the first time sets minimum national standards for practices such as the use "seclusion rooms" or forced restraint of unruly students. The bill would ban the use of "mechanical restraints" such as tying children to furniture, and would allow seclusion and physical restraint to be used only when there is "imminent danger of injury and only when imposed by trained staff."Though the bill was a bipartisan effort in reaction to a government report last year that found "hundreds of cases of alleged abuse and death" related to the practices, it was opposed by a vast majority of Republicans, who said the bill amounted to an intrusion on states' rights and the ability of local school districts to determine their own policies.

Sen. Joan Bray on budget: “We’re in a very deep hole” Sen. Joan Bray and two education representatives held a conference call with reporters today to underscore the state’s dire need for more federal stimulus money. “The economy in Missouri is not improving at this point, and we’re looking not just months out but years out for it to come around,” said Bray, D-University City. “We are in a very deep hole at this point.”

UW students walk out to protest rising tuition costs - Hundreds of students at the University of Washington joined other schools across the country in staging a walkout Thursday afternoon. UW students face a 14-percent tuition hike next year. The UW rally, organized by the UW Student Worker Coalition, was to demand transparent and democratic budget allocation; cuts from the top administrators with a salary cap of $150,000; no lay-offs; ending "speed-ups" for workers; getting accessible public education for all people; a freeze on tuition; and to replace loans with grants for financial aid. Several local unions supported the walkout, since budget cuts mean more layoffs and more work for the remaining employees. Similar protests are occurring at The Evergreen State College and in schools in at least 32 other states.

Obama’s Student Loan Overhaul Endangered - NYTimes With Democratic Congressional leaders and the White House struggling on Wednesday to finalize the details of major health care legislation, House Democrats were desperately trying to prevent another of President Obama’s top legislative priorities – an ambitious overhaul of student loan programs – from becoming a casualty of the health care battle.  But Democrats in the Senate, where the private student lending industry has strong allies, predicted on Wednesday night that the education bill would not be part of an expedited budget measure containing the final revisions to the health care legislation. Some Democrats said that such a move would stall the student loan changes at a minimum for several months, and perhaps kill the overhaul altogether.

Deal Gives New Life to Overhaul of Student Loans - The deal would bundle the bill into an expedited budget package along with the Democratic health care legislation, which would allow for both measures to be passed by the Senate on a simple majority vote. Without the deal, the student loan bill would have been unlikely to pass because it lacked the 60 votes needed to overcome a filibuster. The bill would end government payments to private, commercial student lenders, leaving the government to lend directly to students. It would also redirect billions of dollars to expand the Pell grant program for low-income students, and to pay for other education initiatives.

Food-stamp recipients up to record 39 million - Almost 39 million Americans received food stamps in December, the most ever, as the jobless rate hovered near a 26- year high, the government said. Recipients of the subsidies for food purchases climbed 23 percent from a year earlier and rose 2.1 percent from November, the U. S. Department of Agriculture said Thursday in a statement on its Web site. The number receiving the benefit has set records for 13 straight months. Food aid climbed as the national unemployment rate reached 10.1 percent in October, the highest since June 1983, and remained at 10 percent through December before easing to 9.7 percent in January. An average of 40.5 million people will get food stamps each month in the federal fiscal year that began Oct. 1, Agriculture Secretary Tom Vilsack said last week. The figure is projected to rise to 43.3 million in 2011.

Pension shortfall near $6000 for every Chicago resident - Taxpayer-supported pension funds in the Chicago region for police, firefighters and teachers, among others, have amassed an $18.5 billion deficit, according to a top civic organization pushing reforms.In all, a report released today by the Civic Federation concludes the shortfalls have more than quadrupled in the last eight years. The federation calculates the deficit amounts to $5,821 for every Chicago resident in the 2009 fiscal year, up from $1,189 in 2000. "The status quo of benefit enhancements and insufficient pension contributions must not continue," said Laurence Msall, federation president, in a statement accompanying the report.

State explores solutions to N.J. pension problem -The state's financial crisis may force New Jersey to raise the retirement age for state workers again and scale back pension benefits even for current government employees, state officials said last week. Those were two of several dramatic proposals aired as officials began to fathom how to deal with the state's $11 billion deficit for the state budget that begins July 1.The public discussions even included a moment when the state treasurer broached the idea of a bankruptcy filing for the state's pension systems, an idea he later said was a "rhetorical question" that is not legally possible.

Public Pensions Are Adding Risk to Raise Returns - NYTimes -Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds. But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk. “In effect, they’re going to Las Vegas,”

California public pension funds take new hits on real estate investments - California's two big public pension funds took fresh hits to their troubled real estate portfolios this week, suggesting the fallout from the real estate bubble hasn't completely run its course. First up was CalPERS, which Wednesday walked away from a controversial Boston investment that cost it about $91 million.Then came CalSTRS. A New York skyscraper it co-owns is about to go into default, a credit-rating agency warned Thursday. Default could cost the California State Teachers' Retirement System its share of a $75 million investment. They show that the funds have yet to completely extricate themselves from the financial debacles that cost them a combined $100 billion in the fiscal year ended last June 30, including several billion in real estate.

Pension crises: Gambling our future | The Economist - IMAGINE you are an institutional investor and it is written into the Constitution that, if necessary, taxpayers will bail you out. That will probably increase your appetite for risk. Imagine further that the higher the return you expect (not adjusted for risk) the less money you have to pay in contributions. Even more reason to go for the gamble—it’s all upside and no downside. That probably explains why, according to the New York Times, state pension plans are investing in riskier exotic assets, post-crisis, than private plans, which are decreasing their risk exposure.

Discouraged older job seekers give up, calling themselves retired – MSN Money - Skidmore is among a growing number of people who want to work into their 60s but are pushed into early retirement by the weak job market. The number of unemployed Americans ages 55 and older expressing interest in finding a job has grown by 60% since the end of 2007, according to the Bureau of Labor Statistics. But finding work has proved difficult.  The unemployment rate for older job seekers has more than doubled since 2007 to 7.2% in December 2009, and the average duration of the job search for older workers was 36 weeks in November -- far longer than the 28 weeks most younger workers remain unemployed. Some discouraged seniors eventually give up on finding a new job and start calling themselves retired. Many workers may want to delay retirement to replenish decimated 401k portfolios, but a larger number may be forced to retire early because of their inability to find new jobs,

Most Americans still unprepared for retirement - survey - Mar. 9, 2010  The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.  The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.  Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.  Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.  The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009.

Social Security to start cashing Uncle Sam's IOUs (AP) — The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in. For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more. Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors.

Retiree Confidence About Comfortable Retirement At Generational Lows Even As Millionaire Ranks Jump By 16% - The fundamental schism within American society continues, with $1 million plus households spiking in 2010 by 16%, even as the broader population has increasingly less (if any) money saved up, and the confidence of retirees who believe they have enough money saved up to last them through their retirement years drop to a generational low. The split between the bankers and Main Street is continuing to crystallize as simply one between the rich and the poor. One wonders how long before pitchforks are involved?

218 New Billionaires Averaged $500M in Gains Last Year – How Are You Doing? - As I mentioned in “The Dooh Nibor Economy (that’s “Robin Hood” backwards),” America has become a real wealth-building machine the funnels every last cent off the bottom of the pyramid and sends it straight to the top.  Those of us standing near enough to the top (the top 10%) are lucky enough to pick up enough table scraps to make us 1,000 times better than you – our bottom 90% “friends” and that is just great for walking around town but you must pity us because even we are embarrassed to show up in our shoddy Armani suits when we are invited to hob-nob with the top 1% in their custom-tailored suits who don’t look at labels but at the thread-count of your sleeve. 25% of Americans feel this country is heading in the right direction according to the latest Rasmussen Report and that’s a poll of people who still have homes – and phone service.

Defaulted Loans May Haunt Seniors – WSJ - A little-noticed law could soon result in smaller Social Security checks for hundreds of thousands of the elderly and disabled who owe the U.S. money from defaulted loans and other debts more than a decade old.Social Security benefits are off-limits to such creditors as credit-card issuers and banks. But the U.S. can collect debts to federal agencies by "offsetting," or withholding Social Security and disability payments. The Treasury withholds benefits of 3.1 million Social Security recipients to recover defaulted student, farm and small-business loans, unpaid income taxes, amounts veterans owe for health care, and other debts to the government.

Pennsylvania seeks federal Medicaid assistance to stave off disaster - The dire financial situation many states find themselves is embodied by efforts the state of Pennsylvania has made to secure additional Medicaid assistance funding, recent news items suggest. Officials at Pennsylvania's Department of Public Welfare are seeking roughly $1 billion in additional Medicaid assistance from Washington. They hope to secure it through an extension of the temporary increase in the federal medical assistance percentage (FMAP) and a Medicaid drug rebate program, the Republican Herald reported. That state expects to see its medical assistance caseload increase by 3% in the next year, and without the federal assistance, state Medicaid spending will drain an extra $1 billion from a state taxpayer-funded General Fund,

Health-Care Status Quo Is Bad Medicine for Jobs - As health care goes, so goes job growth? Amid the worst labor market in more than a generation, it is surprising that discussions — pro and con — about overhauling health insurance tend to ignore one key issue: The current insurance system that relies on employer-provided policies and little portability threatens future job growth. If left alone, the current system will curtail job creation in many ways, from raising the total cost of U.S. labor to hurting global competitiveness, besides dimming the entrepreneurial spirit. While it’s hard to pin down numbers, it’s safe to say that no change on health care will make it even tougher to bring down the unemployment rate, currently at 9.7%.

Letting Perfect be the Enemy of Good? -An Atlantic Monthly article by Megan McArdle questions whether health insurance coverage saves lives, drawing from a narrow slice of the literature to suggest the beneficial effects of insurance coverage on mortality might be negligible.  While it is true these effects have been challenging for researchers to assess accurately, this question deserves more than a selective reading of the literature to inform the public and policymakers properly.  Indeed, when reviewed comprehensively and with an understanding of key clinical and methodological nuances, the research to date provides consistent and compelling evidence that health insurance coverage significantly improves health outcomes, particularly for adults with treatable conditions

Does Lack of Insurance Kill? - How many people die because they lack health insurance has been a matter of debate recently. Some estimates — like those by the Institute of Medicine and a related one by the Urban Institute — have put the number in the range of 20,000 a year. Another study put the number closer to 45,000. Yet another, by a University of California researcher, suggests the number may be much closer to zero. I spent a little time looking into this question for my column this week. The best discussion I found comes from Dr. J. Michael McWilliams of Harvard. “How many lives would universal coverage save each year?” Dr. McWilliams asks. “A rigorous body of research tells us the answer is many, probably thousands if not tens of thousands. Short of the perfect study, however, we will never know the exact number.” His whole post is worth reading.

What "Government Takeover"? - There have been lots of absurdities in the debate—such as it is—about health care reform. There's the hypocrisy of people dependent on government-run health care complaining about government-run health care. And now comes the Republican canard that the current health care reform proposal constitutes a government takeover of one-sixth of the economy. First, the proposed health care reform does not take over the system in any sense. Much to the chagrin of progressives, the bills under consideration don't contain a public option and don't provide for a single payer. In fact, they provide subsidies for millions of people to purchase private insurance. Second, such statements reveal how pathetically little many of our policymakers and pundits understand American health care spending. We're already halfway toward socialized medicine, but not because of Obamacare.

The Real Health Care Debate - If you ever want to see a real debate on health care policy, schedule an event featuring Daniel Callahan and me. Callahan is very anti-market, but he and I start from a baseline level of agreement about what the health care issue is all about. What follows are some excerpts from his book, Taming the Beloved Beast, and my own comments. p.1health care economists attribute about 50% of the annual increase of health care costs to new technologies or to the intensified use of old one. What he calls technology is what in Crisis of Abundance I called "premium medicine," because I want to include the increased use of specialists as well as physical capital.

Is Obama Turning on Goldman Sachs? - As President Barack Obama hits the endgame for health care reform, is he making a ploy to associate price-gouging insurance companies with Wall Street greed? Goldman Sachs recently released a report encouraging investors to buy up shares in two large insurance firms and thereby profit from the industry's soaring premiums. Now, the White House is making that brief the centerpiece of Obama's closing argument for overhauling the health system. It appears that Obama is subtly using the Wall Street titan's toxic reputation to demonize the insurance industry and rally public support for a comprehensive bill.

Obama Criticizes Insurers in Bid to Sell Health Plan (Bloomberg) -- President Barack Obama and his top health official are stepping up attacks on the nation’s insurers in an effort to sway public opinion and persuade lawmakers to back U.S. health-care legislation.  Obama told an audience outside Philadelphia yesterday that insurers have calculated that higher premiums can more than make up for the loss of customers who can’t afford coverage. Health and Human Services Secretary Kathleen Sebelius highlighted her call to insurers to post information justifying their rates. “We can’t have a system that works better for the insurance companies than it does for the American people,”

Kucinich willing to cast the vote that kills health reform - Facing razor-thin margins in the House, Democratic leaders are hoping to convert the sole liberal who opposes their health care bill, but it seems they have their work cut out because he isn't budging. Rep. Dennis Kucinich (D-OH) on Monday defended his opposition to the proposal in an appearance on MSNBC's Countdown With Keith Olbermann, citing as his central concern its lack of a robust public option to provide competition for insurance companies."This bill represents a giveaway to the insurance industry," Kucinich said. "$70 billion dollars a year, and no guarantees of any control over premiums, forcing people to buy private insurance, five consecutive years of double-digit premium increases"

Alan Grayson Tossed Out A Hardball - Now we're talking: Congressman Alan Grayson, D-Fla., today introduced a bill (H.R. 4789) which would give the option to buy into Medicare to every citizen of the United States.  The “Public Option Act,” also known as the “Medicare You Can Buy Into Act,” would open up the Medicare network to anyone who can pay for it. Document Ding ding ding ding. If you're going to mandate that everyone have health insurance, then you have to provide a public option. That is the only way you're going to keep people from being raped.

Unionists make citizens’ arrest of insurance CEOs — Thousands of unionists and their allies marched on and surrounded the hotel where the nation's health insurance firms were meeting, demanding a citizens' arrest of company CEOs and their lobby for greed, corruption and 45,000 deaths a year. Led by AFL-CIO President Richard Trumka, the federation's other top two officers, Change To Win Chair Anna Burger, AFSCME President Gerry McEntee and AFT President Randi Weingarten, demonstrators marched a mile on March 9 from the union groups' headquarters to the Ritz-Carlton. They demanded the insurers and their lobby, America's Health Insurance Plans, stop trying to kill health care reform-and that Congress stop listening to the lobby and instead listen to voters and pass pending health care legislation.Trumka and the other leaders also brandished an arrest warrant for the insurers, which was taken inside. The peaceful protesters, met by police-one mounted outside the hotel's main entrance-stayed outside.

Health-Care Reform and the 'Doc Fix' -The Democrats’ health-care reform plan uses some accounting gimmicks that are fair game for criticism, as I note in my column this week. That said, though, one of the most common criticisms strikes me as pretty flimsy.It’s the one involving the so-called doc fix. In the 1990s, President Bill Clinton and a Republican Congress passed a law cutting Medicare payments to doctors. The cuts ended up being bigger than policy makers first understood, so President George W. Bush and a Republican Congress overrode them in 2003. In the years since, both Republican and Democratic Congresses continued to override them. Officially, the law still says these cuts will take effect — an accounting fiction that keeps Medicare’s long-term budget deficit from being even larger than it already is. Of course, most expect that the cuts will be reduced, if not overridden again.

Health Reform Myths - Krugman - Health reform is back from the dead. Many Democrats have realized that their electoral prospects will be better if they can point to a real accomplishment. Polling on reform — which was never as negative as portrayed — shows signs of improving. And I’ve been really impressed by the passion and energy of this guy Barack Obama. Where was he last year?  But reform still has to run a gantlet of misinformation and outright lies. So let me address three big myths about the proposed reform...

Wishing for a Health Care Plan That Cuts Costs - NYTimes - For anyone who cares about medical costs — which is to say anyone who cares about the take-home pay of American families or about the budget deficit — President Obama’s health reform plan is a terribly mixed bag.  It does so much less than the ideal plan would do. It would not come close to eliminating Medicare’s long-term budget deficit. It would reduce that deficit only if a future Congress did not tinker with the various taxes and spending cuts scheduled to be phased in over the next decade.  On the other hand, the plan would make progress in all sorts of areas. Insurance exchanges would create more competition. A Medicare oversight board would gain authority over reimbursement rates. Hospitals that committed certain medical errors — harmful, costly errors — would face financial penalties.

What, You Have A Better Idea For Cost Control?:  David Brooks thinks it. David Gregory thinks it. The Washington Post editorial page thinks it. And, what the heck, I think it. If health care reform passes Congress, the final legislation probably won't cut the cost of medical care as quickly as seems possible on paper. But would the legislation make a good start--as good a start as possible, given political reality? Brooks, Gregory, the Post, and plenty of other critics seem to think the answer is "no." I think they are nuts. And since arguments about costs are likely to loom large in the thinking of nervous House Democrats, it's worth explaining why..

Health Reform Passes the Cost Test - WSJ - Many people are worried that the health-care reform proposed by President Obama and congressional Democrats will fail to bend the "cost curve." A number of commentators are urging no votes because of this, and Republicans have asked the president to start health reform over, focusing squarely on the issue of cost reduction. These calls overlook the actual legislation. Over the past year of debate, 10 broad ideas have been offered for bending the health-care cost curve. The Democrats' proposed legislation incorporates virtually every one of them. Here they are:

Health Reform: If Not Now, When? - Maxine Udall - The inequalities in income distribution that have become greater in the US over the last 30 years are nothing compared to the growing inequalities that will result from an increasingly larger pool of Americans who lack adequate health insurance cover. Each unforeseen, primary care-preventable illness, every serious injury will cause them and their families to fall further behind economically and in the quality of their lives. The Gini coefficient captures our growing income inequality. How do we capture the inequality induced by 30 million people and growing who have no health insurance? More importantly, why, in a nation whose national narrative extols the virtues of entrepreneurship and individual effort, are young entrepreneurs who choose jobs like hair styling or cab driving penalized for that choice? I personally know two hair stylists who started as independent contractors and worked their way to salon owner and employers of 10 to 20 stylists, manicurists, and estheticians. A major uninsured illness could have stopped them and the contributions they made to our economy dead. Literally.

If Democrats ignore health-care polls, midterms will be costly - Bluntly put, this is the political reality:  First, the battle for public opinion has been lost. Comprehensive health care has been lost. If it fails, as appears possible, Democrats will face the brunt of the electorate's reaction. If it passes, however, Democrats will face a far greater calamitous reaction at the polls. Wishing, praying or pretending will not change these outcomes.  Nothing has been more disconcerting than to watch Democratic politicians and their media supporters deceive themselves into believing that the public favors the Democrats' current health-care plan. Yes, most Americans believe, as we do, that real health-care reform is needed. And yes, certain proposals in the plan are supported by the public. However, a solid majority of Americans opposes the massive health-reform plan.

Poll: Only four percent don’t want any health care reform - Americans and their lawmakers are dramatically out of sync on health care, with large majorities of people looking for bipartisan cooperation that's nowhere in sight. A new Associated Press-GfK Poll finds a widespread hunger for improvements to the health care system, which suggests President Barack Obama and his Democratic allies have a political opening to push their plan. Half of all Americans say health care should be changed a lot or "a great deal," and only 4 percent say it shouldn't be changed at all. But they don't like the way the debate is playing out in Washington, where GOP lawmakers unanimously oppose the Obama-backed legislation and Democrats are struggling to pass it by themselves with narrow House and Senate majorities.

Consumers Value Convenience of Retail Clinics Over Receiving Care from MD By Factor of 2 - LA TIMES -- "Given their druthers, people would rather see their own primary-care doctor in his or her office, receive care on the same day they call for the appointment and pay less than is standard. OK. Sounds reasonable. However, given that this situation does not exist in the real world, consumers are apt to use retail-based health clinics if they can save time and money. In a survey, people were asked how they felt about various forms of medical care for a urinary tract infection or for influenza. While people preferred traditional, office-based care, they would opt to see a nurse-practitioner at a retail clinic if they could save at least $31.42. They would wait one day or more for an appointment if they would save at least $82.12.

Protectionists Dominate Health Care Debate - Anyone seriously interested in controlling health care costs would be actively discussing alternatives to patent protection for financing the development of prescription drugs and medical equipment. Everyone who has taken even an intro economics class knows that there will be horrible waste and corruption when goods can sell for hundreds of times their competitive market price, as can be the case with prescription drugs and medical equipment. Those interested in controlling costs would also be actively seeking to promote international trade in medical services since the health care systems in other countries are so much more efficient than the U.S. system.

Do higher cigarette prices deter smoking? - VoxEU -Do higher cigarette prices deter smoking? This column finds that policymakers in developing countries could reduce cigarette consumption by youths by raising taxes. A 10% increase in the price will reduce youth cigarette demand by 18.3%.

US House panel rejects Obama cuts in farm supports (Reuters) - The House Agriculture Committee on Wednesday rejected President Barack Obama's proposals to reduce crop subsidies to higher-income farmers and federal support for crop insurance. There was little discussion as the committee refused farm cuts requested by the president for the second year in a row. With elections in November, the committee approved a letter saying benefits "should be maintained" at current levels. The 2008 farm law is the first to deny benefits to the wealthiest Americans. It says crop subsidies will go to people with no more than than $500,000 a year in adjusted gross income (AGI) from off-farm sources or $750,000 on-farm AGI. The administration wanted to lower the income cut-off over three years to $250,000 off-farm AGI and $500,000 on-farm AGI. Some 30,000 people would be affected. The White House also proposed a $30,000 cap on the annual direct-payment subsidy, down from the current $40,000, and cuts in federal subsidies to the privately run crop insurance system.

U.S. to Scrutinize Agriculture for Antitrust Issues - NYTimes -The attorney general, Eric H. Holder Jr., traveled to the heart of Midwestern farm country on Friday to declare that the Obama administration was serious about rooting out anticompetitive practices in agriculture.  “Is today’s agricultural industry suffering from a lack of free and fair competition in the marketplace? That’s the central question,” Mr. Holder said. He spoke at an unusual public meeting called to discuss the concerns of some farmers and ranchers that a few large companies had come to dominate many agricultural markets, controlling the seed that farmers plant and the milk they sell and the livestock ranchers raise. Mr. Holder and the agriculture secretary, Tom Vilsack, who co-hosted the event, said their agencies would work together on antitrust enforcement. “You will see an historic era of enforcement that will almost inevitably grow from the partnership that we have established,” Mr. Holder said later in a session with reporters.

Rapid Rise in Seed Prices Draws U.S. Scrutiny - Such price increases for seeds — the most important purchase a farmer makes each year — are part of an unprecedented climb that began more than a decade ago, stemming from the advent of genetically engineered crops and the rapid concentration in the seed industry that accompanied it.  The price increases have not only irritated many farmers, they have caught the attention of the Obama administration. The Justice Department began an antitrust investigation of the seed industry last year, with an apparent focus on Monsanto, which controls much of the market for the expensive bioengineered traits that make crops resistant to insect pests and herbicides. The investigation is just one facet of a push by the Obama administration to take a closer look at competition — or the lack thereof — in agriculture, from the dairy industry to livestock to commodity crops, like corn and soybeans.

Monsanto Faces Fight As Probes Bolster Critics - As the world's largest seed company, Monsanto Co. has been branded a bully before. Usually, the company dismisses such criticism as ax-grinding by activists or others who are opposed to its genetically modified seeds. These days, however, Monsanto has a bigger fight on its hands: a civil antitrust lawsuit by DuPont, the parent of archrival Pioneer Hi-Bred International Inc., and parallel antitrust investigations by the Justice Department as well as several states, including Iowa. The government investigations are thought to focus on the same claims by DuPont — that Creve Coeur-based Monsanto has become a Microsoft-style monopoly, trying to muscle an even larger share of the multibillion-dollar biotech seed business.

World corn crop to top 800m tonnes for first time … - The world's corn crop is to top 800m tonnes for the first time, thanks to raised hopes for Argentine and South African production, US officials have said in a report trimming price hopes for American farmers.The US Department of Agriculture, in a much-watched report on global crop supplies, lifted by 5.9m tonnes to 803.7m tonnes its forecast for the world's 2009-10 corn harvest.The revision reflected an increase of 3.8m tonnes - or 22% - to the harvest in Argentina, the world's second-biggest exporter of the grain, with South African production pegged 2.0m tonnes higher.

Mutated genetic supertrout developed in lab  (video) After ten years of tinkering with DNA in a Rhode Island lab, a top fish boffin claims he has created a genetically enhanced mutant supertrout. "Our findings are quite stunning," says Professor Terry Bradley, an expert on trout, salmon, flounder and tuna. "The results have significant implications." Bradley says he has managed to modify the genetic pattern of rainbow trout so that the tasty fish become hugely more muscular and powerful than normal. Apparently the process is similar to that which occurs in a type of "double muscled" blue cow produced in Belgium.   According to a University of Rhode Island statement, one can easily tell the supertrout from their normal relatives by their "prominent dorsal humps" and "six-pack abs". The prof says that the colossal world trout industry - the US and Europe produce half a million metric tonnes of trout a year, apparently - would bite his arm off if offered the secret of embedding blue Belgian bovine bulge benefits into their fish. He believes that bigger trout could be farmed for the same amount of food.

Food is Too Cheap - The single greatest challenge facing our modern economic food chain is the insanely unnatural cost of food to the consumer, making the simple and necessary act of eating dependent on food that is almost free. The global edifice of cheap food rests on the volatility of a single input; the exponentially depleting supply of easy, cheap oil. We are gorging ourselves at the $1.99 all-you-can-eat oil buffet. Food is too cheap, a "correction" is coming, and there is not a damn thing anybody can do about it.

"Against the grain" | 2010 | Land grabbing in Latin America… The history of Latin America is one of agrarian conflicts, and of indigenous peoples struggling to defend their ancestral territories. A new chapter of this history is opening. Another wave of land grabbing is hitting the Americas, and this time it operates from a distance and wears a halo of “neutrality”. Today’s land grabbers (as thoroughly explained in governmental web brochures) say that they are merely responding to food insecurity and a world crisis “that forces us to grow food wherever we can, even if we outsource production, because we will bring home this food for the benefit of our citizens”. But when we dig a little, the financial monster shows its tail. The land grabbers are in fact big corporations and joint ventures investing enormous amounts of money in land, food production, the export and import of commodities, and food-market speculation.

How Food and Water Are Driving a 21st-Century African Land Grab - Ethiopia is one of the hungriest countries in the world with more than 13 million people needing food aid, but paradoxically the government is offering at least 3m hectares of its most fertile land to rich countries and some of the world's most wealthy individuals to export food for their own populations. The 1,000 hectares of land which contain the Awassa greenhouses are leased for 99 years to a Saudi billionaire businessman, Ethiopian-born Sheikh Mohammed al-Amoudi, one of the 50 richest men in the world. His Saudi Star company plans to spend up to $2bn acquiring and developing 500,000 hectares of land in Ethiopia in the next few years. So far, it has bought four farms and is already growing wheat, rice, vegetables and flowers for the Saudi market. It expects eventually to employ more than 10,000 people.

Africa still hungry despite annual $3 billion of aid and $33 billion of food imports – UN - One in three Africans is chronically hungry, despite $3 billion spent on food aid for the continent annually and $33 billion in food imports, the director of the food security at the United Nations Economic Commission for Africa (ECA) has warned.Much of the $33 billion that Africa spends to import food could be better diverted to domestic production for regional and global trade, contributing to poverty reduction and repositioning Africa in the global economy, said Josue Dione, Director of Food Security and Sustainable Development of ECA, at a conference on agribusiness that wrapped up yesterday in Abuja, Nigeria.“African agriculture is thirsty as less than 4 per cent of the total arable land is irrigated compared to 33 per cent in Asia and the Pacific and 29 per cent in the Middle East. African agriculture is hungry as it receives only 14.6 kilograms of fertilizers per hectare, against 114.3 kilograms per hectare for all developing countries,”

IMF—Delivering on Promises to Africa - IMFdirect  Dominique Strauss-Kahn, Managing Director - This week, I’m on my third visit to sub-Saharan Africa within a year. And what a difference a year has made! This time last year, Africa was swept up into the vortex of the global financial crisis. The global recession struck Africa through several channels—exports collapsed, banks ran into trouble as non-performing loans grew, and investment diminished. Average growth in sub-Saharan Africa fell to 2 percent in 2009 from 5.6 percent the previous year. But improved policies in the face of the crisis helped the continent get through the storm better than expected and at the IMF we anticipate that Africa will see a relatively quick recovery, with average growth bouncing back to 4½ percent this year and 5½ percent in 2011.

This Time It’s Different - IMF direct -My final destination in this week’s visit to Africa was Zambia, where I sought the views not just of the government but also of the people—in a town hall with civil society, students, and the media. Zambia has one of the highest economic growth rates in sub-Saharan Africa: 6.3 percent in 2009 and the outlook for 2010 appears positive. While recognizing that Zambia, just like Kenya and South Africa, has its own unique characteristics, I have pulled together some common threads from what I have been hearing in Africa over the past several days.First, Africa is a different place from how it is often portrayed in the popular media. Thanks to sound economic policies in many countries over the past decade or so, Africa has been able to withstand this crisis much better than has been the case in the past. The fact that the crisis hit Africa anyway does not mean that the policies were wrong.

How is Africa actually doing?  - HERE'S a version of what most people would recognise as the received wisdom on sub-Saharan Africa's economic performance in recent years: Some countries have had a pretty sustained period of high growth rates. But growth has been fairly concentrated in some resource-rich countries; most of the benefits of that growth have gone to the rich. In any case, a rising population means that per capita income growth has been unspectacular. All this together means that the recent period of relatively good growth has not made much of a dent on poverty rates.Two recent papers attempting to revisit the "How has Africa actually fared" question use different methods to answer the question. Interestingly, while these methods are, in some ways, at odds with one another, they both reach the conclusion that the conventional wisdom on Africa's economic performance understates its economic success.

More good news about Africa - This time it is from Alwyn Young: Measures of real consumption based upon the ownership of durable goods, the quality of housing, the health and mortality of children, the education of youth and the allocation of female time in the household indicate that sub-Saharan living standards have, for the past two decades, been growing in excess of 3 percent per annum, i.e. more than three times the rate indicated in international data sets.

Something New Out of Africa: A Global Player – IMF blog - The sense of African energy and dynamism that I described during my visit to Kenya is reinforced strongly here in South Africa. By some estimates, close to 10 million people are expected to visit South Africa this summer for the football (soccer) extravaganza—a further boost to its economy and its image in the world. South Africa is a global player. This country has long been seen as the growth hub in the south and eastern part of the continent. But this past year, as a member of the G-20 group of nations, South Africa has come to be seen as much more–an emerging market, yes. And now also an influence on how global decisions are shaped. This is a new role for Africa in the world—and a new way for Africa to be seen by the world.

World Development Indicators - This dataset contains 54 of the World Development Indicators (WDI). Data from World Bank - Last updated: March 8, 2010

The political limits to globalisation -VoxEU   Is globalisation inevitable and irreversible? This column argues that globalisation is a policy choice. It examines the relationship between military expansion and international trade flows, finding that increased nationalist and militarist sentiments are negatively associated with trade. A 10% increase in military spending between 1985 and 2005 is associated with a reduction in the trade share of GDP of around 2%.

Antidumping: Much ado about nothing? - VoxEU -The global crisis has raised fears that governments would engage in a protectionist spiral. This column argues that, while countries have by and large kept their promises not to raise barriers to trade, antidumping has crept up. Far from being a “small price to pay”, the new tough users of antidumping laws such as Brazil, India, Mexico, Taiwan, and Turkey have 5.9% fewer annual imports as a result.

Trade Growth Could Lead to Shortage in Ships - Cargo container traffic on the Asia to West Coast route will see modest growth this year after seeing a 16 percent drop last year, but whether there will be enough ships to handle all that cargo in a timely fashion is another question. Major cargo container carriers, reeling from one of their worst years in history, idled about 11 percent of the world’s cargo container fleet of 4,731 vessels between September 2008 and now. Many of those ships are mothballed off the coasts of Singapore, the Philippines and China. Carriers also canceled about 6.7 percent of new ship orders, and some pushed delivery off to 2013.

Are Shipping Numbers Masking A Stealth Commodities Selloff? - The China Containerized Freight Index has bee-lined upward in 2010. The index tracks shipping prices for goods sailing from China to 11 different regions around the world. Between January 15 and February 26, the index rose 17%. During the same period, the Baltic Dry Index (which tracks average shipping prices globally) fell 18%.As I mentioned, these numbers suggest a big increase in goods being shipping from China relative to the rest of the world. With anecdotal evidence that at least some of the exports were metals.The fear being that Chinese metals stockpiles are being drawn down and re-exported. Potentially weighing on global prices.

Trade Deficit Threatens a Second Recession -- - On Thursday, the Commerce Department will report the January deficit on international trade in goods and services. Analysts expect it to increase to $41 billion from $40.2 billion in December. My forecast for January is $41.5 billion. The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threatens to stifle the emerging recovery and keep unemployment near 10 percent through 2011. At 3.1 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds. Moreover, Obama’s stimulus is temporary, whereas the trade deficit is permanent and growing.

U.S. setting bad example on protectionism - Sarkozy (Reuters) - President Nicolas Sarkozy of France accused Washington on Friday of setting the wrong example on protectionism, suggesting there had not been a level playing field in the race for a $50 billion refuelling plane contract. U.S. defence contractor Northrop Grumman and its European partner EADS withdrew on Monday from a renewed competition to supply tankers to the U.S. Air Force, saying the rules favoured rival bidder Boeing, the top U.S. exporter. Boeing is now the sole known bidder for the contract.Asked what he thought of the issue during a joint press conference with British Prime Minister Gordon Brown, Sarkozy delivered a scathing attack on how the United States had handled the tender.

The Associated Press: Britain's trade deficit widens - Britain's trade deficit with the rest of the world widened unexpectedly in January after lower sales of chemicals and other commodities led a drop in exports.The trade gap in physical goods widened to 7.99 billion pounds ($12 billion), well above the 7 billion pounds forecast by analysts, according to figures from the Office for National Statistics. The figures were a disappointment given that economists had expected recent weakness in the British pound to boost exports.

German exports plunge 6.3% in January - Arab News - German exports plunged 6.3 percent in January, figures released Wednesday showed, ending four consecutive monthly increases and raising fresh worries about the outlook for Europe's biggest economy. The January slump followed a 3.4 percent surge in exports in December, which in turn followed a 1.6 percent gain in November.Analysts had forecast a rise of about 0.5 percent in January.Amid signs of weak domestic demand, German exports have emerged as the key driving force behind the nation's recovery from what has been its steepest economic downturn in more than six decades.

Record Export Rise Tips Japan Into Current-Account Surplus - WSJ - A record rise in exports helped Japan's current-account balance swing back to surplus in January, government data showed Monday, adding to hopes that overseas demand will continue to support the nation's economic recovery. Underlining the importance of exports for Japanese economic growth, separate data released Monday showed bank lending fell for the third month in a row in February as businesses continued to shy away from making new investments.  January's current-account surplus, or Japan's net earnings from international trade and investment, stood at ¥899.8 billion ($9.95 billion) compared with a ¥132.7 billion deficit a year earlier

China exports leap 46% in February - China's exports rose 46% in February from a year earlier, beating expectations and setting the stage for more calls to increase the value of the Chinese currency, analysts said.  The increase, announced Wednesday, was driven by heightened demand from the United States, the European Union and Japan. Trade tensions have mounted over China's artificially low currency, the yuan, also known as the renminbi.

China doing its part - Back in February, the Census Bureau reported that America's trade deficit continued to grow with recovery. I pointed out at the time that this wasn't due to an increasing American deficit with China. American exports to China have actually been quite strong. Opinionators banging the drum for renminbi appreciation against the dollar, and calling the currency peg protectionist, should take note. Meanwhile, it seems that the peg hasn't prevented China from beginning to rebalance its economy, either.

China Tells Obama Stronger Yuan No Help to Fill Trade Gap - China's central bank said Friday a stronger yuan offers no help for solving the Sino-U.S. trade imbalance problem, and China opposes politicizing yuan's appreciation. Su Ning, vice governor of the People's Bank of China, made the comments a day after U.S. President Barack Obama told the U.S. Export-Import Bank's annual conference that a more market-oriented exchange rate of yuan will make an essential contribution to global rebalancing efforts."We do not think a country should rely others to solve its own problems," Su, a member of the Chinese People's Political Consultative Conference (CPPCC) National Committee, said on the sidelines of the top political advisory body's annual session.

China calls U.S. a hypocrite over human rights -   In its annual survey of human rights in 194 countries issued on Thursday, the U.S. State Department criticized China, along with Cuba, Myanmar, North Korea and Russia. China's State Council Information Office, or cabinet spokesman's office, issued its own annual assessment of the United States' human rights record in response, and this year it dwelt on America's economic woes."The United States not only has a terrible domestic human rights record, it is also the main source of many human rights disasters worldwide," the Chinese report said, according to the official Xinhua news agency. "Especially a time when the world is suffering serious human rights disasters caused by the global financial crisis sparked by the U.S. sub-prime crisis, the U.S. government has ignored its own grave human rights problems and reveled in accusing other countries."

Walmart, Globalization, and Exporting the Rule of Law - Whether or not corporations should care about social issues is often debated, notably in series of essays from Bill Gates, Larry Summers, and others, published in a book called Creative Capitalism. But when you see the positive impacts that a highly image conscious Walmart is having in China, it certainly suggests those pushing for socially conscious corporations may be correct. A recent article in the Washington Post highlights some of these positive impacts: Wal-Mart’s suppliers have been forced to get serious about pollution, Ma said. “Wal-Mart says if you’re over the compliance level, you’re out of business. That will send a powerful signal.” In many cases, Wal-Mart is first trying to bring firms up to government standards. Ma added that suppliers “may not care about government fines, they may not care about exposure. . . . But they care about the order from the buyers.”

The Scary New Rich -The truth is that "they" are not becoming just like "us." The global middle class is rising faster than expected, in numbers and in wealth. Last year 70 million people joined the emerging-market middle class, with incomes between $6,000 and $30,000. They have become "the story of the decade," says Goldman Sachs's chief economist Jim O'Neill, and will surpass their Western peers in global spending power within two decades. Morgan Stanley Asia chair Stephen Roach believes that in five to 10 years, the emerging-market middle class in Asia alone could pick up the slack left by overspent American consumers. Already, emerging markets are bolstering the balance sheets of many Western firms. The Chinese bought more cars than Americans did last year, and India has as many Internet users as the U.S. does. By 2030, more than nine of every 10 mobile phones will be owned by people in the developing world, with India and China leading the way.

Get ready for a little EM inflation - Today I was thinking about tightening cycles in emerging markets; and more specifically, about that in China. Because let’s face it, China matters. China matters to the rest of Asia via competition for export income. China matters to Europe via competition for jobs. China matters to Brazil via domestic production via imports. China matters. The inflation pressures are building in key emerging economies, especially in the BIICs (Brazil, India, Indonesia, and China) – see this previous post regarding my new acronym, and this article at the Curious Capitalist (curiously posted just shortly after my post), which leaves my omitted “R” but relays the intuition behind the second “I”. Although the inflation is not prevalent in any BIIC except India, really, I wanted to comment about why it will build…quickly.

China Regulator Warns Banks On Western Debt Probs, Exits - China's banking regulator warned domestic lenders Thursday of increasingly complicated global economic and financial conditions, in part the result of problems western countries are having with their sovereign debt issues as well as the timing of exit strategies from stimulus policies.  China Banking Regulatory Commission director Liu Mingkang said in a release that banks need to tighten up their risk management as a result of the increasing difficulties facing the world.  "Sovereign debt problems with developed western countries, high unemployment rates, international trade protectionism and exits from economic stimulus are complicating world economic and financial conditions," Liu told major banks in a meeting.

Google `99.9 Percent' Certain to Shut Its Operations in China, FT Reports (Bloomberg) -- Google Inc. has drawn up detailed plans to shut its search engine in China and is “99.9 percent” certain of going ahead with the closure, the Financial Times reported today, citing a person it didn’t name.  The company may make the decision very soon, while it will take time to carry out a closure to make sure staff don’t suffer reprisals from authorities, the paper said, citing the person as familiar with Google’s thinking. Marsha Wang, a Beijing-based spokeswoman for Google, said she had no comment on the report when reached by phone. Google said on Jan. 12 that it will stop filtering results in China after what it called an infiltration of its technology and the e-mail accounts of Chinese human-rights activists. China yesterday called Google’s plan to defy government censorship rules “unfriendly and irresponsible.”

China wants yuan in SDR in 2015: report (Reuters) - China is pushing for the yuan to be added to the basket of currencies that comprise the IMF's special drawing rights, aiming for its inclusion in 2015, Japanese daily Sankei Shimbun said on Saturday. Chinese central bank governor Zhou Xiaochuan caused a stir last March by proposing the Special Drawing Rights (SDR), the International Monetary Fund's in-house unit of account, might eventually displace the dollar as the world's main reserve currency. The SDR's value is based on a basket of four key international currencies, currently the euro, yen, sterling and the dollar. The basket composition is reviewed every five years, with the next review coming up in late 2010. Chinese currency authorities are pushing for the yuan to be included in the SDR's currency basket, and are aiming for its inclusion when the basket composition comes up for review again in 2015, the Sankei Shimbun quoted an international monetary source as saying in a story out of Washington.

Leave yuan to us, China tells Obama (Reuters) - The United States should not make a political issue out of the yuan, a Chinese central banker said on Friday, as the two countries lurched toward a potential bust-up over Beijing's currency regime. The latest rhetorical salvoes underlined how long-running friction caused by the yuan's de facto dollar peg could come to a head next month when President Barack Obama's administration decides whether to brand China as a "currency manipulator." People's Bank of China Vice Governor Su Ning said the United States should look to itself to boost exports and not cast blame on other countries, when asked to comment on remarks on Thursday by Obama, who called on China to move to a "more market-oriented exchange rate."

Beijing looks at severing dollar peg:  China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy. Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis. “This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.” Mr Zhou’s comments contrasted with recent Chinese comments on its currency policy in the face of international criticism that the renminbi was undervalued. In December, premier Wen Jiabao said: “We will not yield to any pressure of any form forcing us to appreciate.” Chinese officials have repeatedly emphasised the need for a stable exchange rate. However, while the recent increase in consumer prices in China has strengthened the hand of those officials who think the currency should now rise, it is not clear that this argument has yet won over the country’s senior leaders. Indeed, Mr Zhou gave no hint about the possible timing of a shift in policy...

China’s Bank Chief Says Currency Is Unlikely to Rise - China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.  At a Saturday news conference, the central bank head, Zhou Xiaochuan, said China should be “very cautious” about revaluing its currency, also known as the yuan, as long as major economies remained mired in slow growth. He called China’s practice of pegging the renminbi to the dollar a “special foreign exchange mechanism” made to respond to the world financial crisis. Such mechanisms will be abandoned “sooner or later,” he said, but “we must be very cautious and discreet in choosing the timing.”

China's Swan Song - Krugman - Today’s markets are being somewhat roiled by news of accelerating inflation in China, leading to worries that China will have to tighten monetary policy. But, you know, that’s not what China is supposed to do in this situation. There’s an oldie but goodie in international macro known as the Swan Diagram — not instructions for making an origami swan, but the insightful analysis developed by the Australian economist Trevor Swan. He suggested that we think of countries as having two objectives — keeping unemployment as low as is consistent with stable inflation, but not lower — and keeping the trade balance at an acceptable level.

China Central Bank Chief: Yuan Policy To Change, But Not Yet -- Chinese central bank Gov. Zhou Xiaochuan said China will in due course move away from its current currency-exchange policy, indicating Beijing doesn't plan to keep the yuan's de-facto peg to the U.S. dollar indefinitely, according to reports.  The central banker described China's foreign-exchange policy as a special response designed to weather the aftermath of the global financial crisis. But Chinese officials also suggested that the yuan's appreciation may not begin anytime soon, particularly with China's trade surplus rapidly shrinking, as its imports rise while its exports remain sluggish.

China banker says local govt debt may be bank risk - China's banks might face risks if finance arms set up by local governments to invest in real estate and infrastructure projects cannot repay heavy borrowing, a deputy central bank governor said Monday. Regulators have told banks to examine outstanding loans to such financing vehicles, said Su Ning at a news conference. He declined to give details of their debt levels but said such entities accounted for a "very high proportion" of bank lending last year.Premier Wen Jiabao warned Friday that China's banks and public finance system face growing risks after a record surge in lending last year, when state-owned banks were told to step up credit to support Beijing's stimulus.

China May Face ‘Massive’ Bank Bailouts After Stimulus (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih. In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said in a note today.“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,”

Bubbling over in China? - From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view: From Michael Kleist in Shanghai: News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?  Not necessarily. Let’s start with the news in the papers. See the WSJ today: China Property Prices Surge

Two Thoughts about China's Cities - Does urban infrastructure such as new airports cause urban growth? China is running an interesting "natural experiment" in cities such as Libo (a city of about 166,000 in a mountainous region in Guizhou, one of the poorest provinces in China) Source . In Libo, China has unveiled a $57-million airport opened in late 2007. "Local officials were so confident that tourists would flock to this beautiful, mountainous county in southwestern China that they made the terminal big enough to accommodate 220,000 passengers annually, and built a runway capable of handling a 140-seat Boeing 737." The LA Times says that as of right now that nobody is using this airline but will this infrastructure attract employers to cluster nearby and then if people follow jobs then you have the start of a dynamic "chain reaction" and a new vibrant city. Switching to the New York Times, there is a long article today probing the deep thoughts of Han Han. Mr. Han is a handsome race car driver and a blogger. So we share 1/3 attributes.

Social networks and the massive migration within China - What determines mass migration within countries? Examining data from China – the biggest internal migration experience in human history – this column finds that migrants from the same village tend to cluster at the same destination for the same occupation. This pattern is driven by social networks within villages that reduce the moving costs for future migrants, such as the risk of not finding a job.

The Chinese Industrial Revolution Right Before our Eyes - The Portland, OR paper has an absolutely fantastic article on Chinese "sweatshop" workers who have now earned enough to own houses (paying cash!) and multi-unit apartment buildings, as well as becoming small business owners and generally aspiring to bigger and better things for them and their children.  This is particularly true of young women. What's striking about the piece is that almost everything that's happening there is an instant replay of what the West went through 150 or 200 years ago, right down to the female-dominated mill towns of the northeastern US. 

Lies, Damned Lies, and Chinese Statistics - In the current economic statistics system, problems arise in three areas: (1) Critical data are not accurate, e.g. how much does GDP grow? (2) Important data are not collected, e.g. the National Bureau of Statistics (NBS) does not report month on month data, which accurately reflect the recent economic trends in the market and are very important for investment and government decision-making; (3) Data that are reported are often useless, e.g. the reported urban unemployment rate does not reflect the real situation in the labor market.The process of estimating China's GDP bears on social stability and even the political future of local leaders, and is inevitably subject to political influence.

Is China Actually Bankrupt?  -Is China broke? It seems like a silly question, right? China's foreign exchange reserves stood at $2.4 trillion at the end of 2009. Yes, China announced that its proposed annual budget for 2010 would produce a record deficit, but the deficit is just $154 billion, or 2.8% of China's gross domestic product. In contrast, the Congressional Budget Office projects the US budget deficit for fiscal 2010 at $1.3 trillion. That's equal to 9.2% of GDP. But remember the theme of my column earlier this week: All governments lie about their finances. At worst, as in Greece and the United States, the lies are bold and transparent. Everybody knows the emperor has no clothes, but no one wants to say so. At best, as in Canada and China, the lies are more subtle—more like a magician's misdirection than a viking raider's ax. Look at these great numbers, the lie goes, but don't look at those up my sleeve.

China's Zombie Growth - Stimulus spending is a net negative in the US; what about in China? The China story is largely a stimulus story too. China’s stimulus, compared to GDP, is the world’s largest ever – four times the size of America’s stimulus program.When bank loan volume is determined by central planners you are asking for trouble. But last year, faced with a downturn in demand from their main customer, the Chinese authorities put out the word to banks – increase loans. Loan volume approximately doubled – to $1.4 trillion – the greatest increase, in GDP terms, ever – equal to a quarter of the entire national output.

Japan finance minister: stimulus plan to continue - It is too early for Japan to end its massive stimulus spending because the world's second biggest economy is still slowly recovering from a severe recession, the finance minister said Sunday. "We actually want to move to an exit strategy soon but it would make things worse," Finance Minister Naoto Kan said. Japan's lower house last week passed a record 92.3 trillion yen (1.0 trillion dollar) budget for the year from April that will add to an already enormous mountain of public debt as Tokyo tries to stimulate a recovery. The Organisation for Economic Cooperation and Development has warned that Japan's public debt, bloated by repeat bouts of stimulus spending, will soar to 200 percent of the country's gross domestic product by 2011.

Beware of Greeks Getting Gifts? - Krugman - Markets are getting slightly more bullish on Greek debt — and Peter Boone and Simon Johnson are crying bubble. I’m not so sure, but I think their argument highlights something else: the possibility of multiple equilibria in sovereign solvency. What they argue, basically, is that with Greek debt likely to hit 150 percent of GDP, the burden of servicing that debt will be intolerable. They reach this conclusion by assuming that Greece will have to pay very high interest rates, say 10 percent, on its debt. But in the past, some countries have managed levels of debt that high or higher, without default:

Greece's hidden debt soaring The Greek debt tragedy currently unfolding -- the country's on-balance-sheet debt is 13 times its gross domestic product -- may be just the tip of the iceberg. More troubling, according to a report out last week, is the off-balance-sheet debt owed by the country, and its fellow, over-indebted nations Portugal, Italy, Ireland and Spain, the so-called PIIGS, representing the five-nation acronym. The off-balance-sheet debt, where countries guarantee the debt of private developments, many of which had gone bust, could multiply the problem many times -- putting further pressure on the euro, the report said. Gordon Long, founder of a private venture-capital fund, said in an investor note that there is more than $600 trillion in notational value in the global derivative market, with $437 trillion of it tied to interest rate swaps. "Any credit event could trigger a cascading event," Long wrote in the report. "It does not have to be default; it could be a downgrade in swap contracts that would do the trick for a collateral call. Something is going to cause it to topple, whether it's a situation in Dubai, Greece or New Jersey." "

Greece is a harbinger of austerity for all - The economic crisis reached a turning point this week. Admittedly, it might have passed you by, as one piece of bad news blended relentlessly into another. And there was certainly no fanfare to mark this change, still less any sign of a break in the clouds.  No, what I am referring to is the sense of resignation, or surrender, that has crept into the economic argument – a collective global realisation that public policy, fiscal and monetary, has reached the limits of its ability to fight the downturn. To many of you, this might have been obvious for some time. But there remained a deluded belief that governments and central banks could magic away the crisis, or at least save us from its worst consequences.

Greek Default Could Be ‘Infectious,’ Deutschlandfunk Reports (Bloomberg) -- A default by Greece may have an “infectious effect” on countries like Portugal, Spain and Italy, forcing European governments to come to the rescue of their banks, Deutsche Bank chief economist Thomas Mayer told Deutschlandfunk radio station. Any indication that creditors will have to make writedowns on a total of more than 520 billion euros ($709 billion) in claims against Greece would be “a real problem,” Mayer said, according to a transcript of the interview dated yesterday. The situation would be similar to what followed the collapse of Lehman Brothers Holdings Inc., he was quoted as saying.

Is Greece the Victim of Speculative Attacks? - I went to a Center for American Progress press event showcasing the Greek prime minister this morning, and one of the slightly improbable ways he showcased to deal with his country's crisis was . . . American financial regulation. I mean, our debt problem is bad, as discussed yesterday. But I don't think it's actually infectious. Of course, what he meant was that he didn't want "speculation" undermining his country's fiscal recovery. The recent Greek foray into the private debt markets was a success in that it was actually oversubscribed, and the interest rates were down from where they had been, indicating some level of confidence in the fiscal future of the Greek government. But the interest rates still reflected a hefty risk premium, and over the long run, the prime minister says that's unsustainable.

Merkel: Need Fast Action On Credit Default Swaps - The European Union should move quickly to regulate credit default swaps, even without an agreement with other nations, German Chancellor Angela Merkel said Tuesday. "The Group of 20 process has put pressure on credit default swaps, but we believe that a fast implementation...must follow," Merkel said. "It&apos;s important that this is done on the American side too, but we think that a step ahead from our side, from the European Union, would help us."  Germany and France want the EU to introduce a directive restricting the use of credit default swaps and banning the short-selling of stocks

FT column: Germany’s eurozone crisis nightmare -Ever since the federal republic was founded, Germany has had two over-riding strategic objectives: sound money and European integration. These were the twin imperatives learned from the calamities of the early 20th century. The euro embodies these aims. Now they conflict with each other.

Greeks Strike Over Budget Cuts, Bonds, Stocks Decline (Bloomberg) -- Greek hospitals, airports and schools were shut and police scuffled with protesters as unions staged the second general strike this year against government budget cuts to curb the European Union’s biggest deficit.  Greek bonds declined and stocks fell as the strike disrupted public services and forced the cancelation of all 479 flights from Athens International Airport. Bus and subway drivers, doctors, journalists and teachers walked off the jobs to protest 4.8 billion euros ($6.5 billion) of wage cuts and tax increases announced by Prime Minister George Papandreou March 3. The union said 90% of the unions 2 million members adhered to the strike. The government’s latest budget cuts, the third package of measures this year, has triggered a new wave of protests in Greece, while being praised by EU officials.

Strike Paralyzes Greece; Protests Turn Violent - Greek public and private sector workers went on strike on Thursday, grounding flights, shutting schools and halting public transport in the second nationwide walkout in two weeks in protest against austerity plans. Athens' streets echoed with loud-speakers blaring slogans calling for the rich to pay for a severe debt crisis, as thousands marched against cuts in civil servants' income, tax hikes, a pension freeze and increase in the retirement age. "No sacrifice for the rich!" protesters chanted, beating drums and holding banners reading: "Where did the money go?" Greek police fired teargas at groups of stone-throwing youths in central Athens. Police first fired teargas at a group of 50 youths in the anarchist neighbourhood of Exarchia, away from the main protest. But soon after, clashes erupted at the march with some 30 youths hurling sticks and stones at police, who returned with several rounds of tear gas.

Germans to debt-ridden Greeks: Sell the Acropolis. And a few islands. - As Prime Minister George Papandreou heads to Germany tomorrow to ask German Chancellor Angela Merkel for help in the Greek debt crisis, two members of her coalition have some advice: sell off your islands to pay off your debt.  The comments, by two members of the German parliament, were published in the German newspaper Bild under the provocative headline: “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!” One parliamentarian, Frank Schaeffler, told the newspaper, "the Greek government has to take radical steps to sell its property – for example its uninhabited islands.” IN PICTURES: Top 10 things Greece could sell.

The Jobs Are Always Greener....One of the notable moments from the meeting with the Greek prime minister yesterday was when someone asked him how he was planning to get the economy back on its feet, and he answered with . . . green jobs, of course!  He correctly pointed out that Greece, having all those islands, has a great opportunity to install windmills.  But aside from early modern Holland, I'm not sure where windmills have proven a useful antidote to massive economic and political problems.  (Today's exhibit: protesters clash with police in Athens).    But green jobs have become the ginseng of progressive politics: a sort of broad-spectrum snake oil that cures whatever happens to ail you. 

Can all European countries be like Germany? - Martin Wolf says no.  For instance: But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not. To be sure, Greece is unlikely to end up as "like Germany."  But in this argument -- which I'm seeing pop up in many places -- I think there is a slight conflation between absolute and relative market shares. Say that Portugal, Italy, and Greece were more like Germany, economically speaking that is.  Toss in Albania to make the contrast starker.  They would have higher productivity and higher output.  They would export more.  But with their higher wealth, they would import more too.  That includes more imports from Germany, most likely.  German *net exports* might well decline, as Germans buy more olive oil and high-powered computer software from Albania.  But German exports need not decline *on net*...

Germany: Europe's engine - The Economist - ELSEWHERE in the world, Europe is widely regarded as a continent whose economy is rigid and sclerotic, whose people are work-shy and welfare-dependent, and whose industrial base is antiquated and declining—the broken cogs and levers that condemn the old world to a gloomy future. As with most clichés, there is some truth in it. Yet as our special report in this week’s issue shows, the achievements of Germany, Europe’s biggest economy, tell a rather different story. A decade ago Germany was the sick man of Europe, plagued by slow growth and high unemployment, with big manufacturers moving out in a desperate search for lower costs. Now, despite the recession, unemployment is lower than it was five years ago. Although Germany recently ceded its place as the world’s biggest exporter to China, its exporting prowess remains undimmed. As a share of GDP, its current-account surplus this year will be bigger than China’s.

Keeping up with the Germans - THE new issue of The Economist picks up the thread on Germany's export-orientation where I left off yesterday: Germany is rightly proud of its ability to control costs and keep on exporting. But it also needs to recognise that its success has been won in part at the expense of its European neighbours. Germans like to believe that they made a huge sacrifice in giving up their beloved D-mark ten years ago, but they have in truth benefited more than anyone else from the euro. Almost half of Germany’s exports go to other euro-area countries that can no longer resort to devaluation to counter German competitiveness.

Spain’s woes and Germany’s export model could mean double dip - The Bloomberg video below is a bit sensationalist in my opinion. But it gets to the heart of the problem in Europe, namely Spain. Spain has an economy and debt which is an order of magnitude larger than Greece. That means that problems in Spain are more critical for the Eurozone than in Greece. But it also means that an EU bailout would simply not be feasible. Watch the video and I will make a few other remarks below.

EU Works on IMF-Style Lender, Curbs on Derivatives (Bloomberg) -- European leaders are in talks to establish a lender of last resort and limits on credit-default swaps to bolster the euro area and prevent a repeat of the Greek financial crisis. Plans for what may become the European Monetary Fund and a German-French push to curb the use of derivatives to bet against sovereign debt are to be ready by June, officials in Berlin and Brussels said today. In Greece, tax and trash collectors walked out as a week of strikes to protest austerity measures began. German Chancellor Angela Merkel and her European counterparts are shifting from rhetoric to regulation as they seek to defend the euro and rally behind coordinated measures. Greek Prime Minister George Papandreou said his country’s fiscal crisis could spread unless “unprincipled speculators” and “ill-regulated” financial markets are reined in.

Germany Considers The Creation of a European Monetary Fund, IMF Model - German Finance Minister Wolfgang Schaeuble told the weekly Welt am Sonntag that given the acute financial problems facing Greece ; the Eurozone should give proper consideration to the  idea of creating an organization with powers similar to the Washington-based International Monetary Fund [IMF]. AFP: "We're not planning an institution that would compete with the IMF, but for the internal stability of the eurozone, we need an institution that has the experience and power of the IMF," Mr. Schaeuble told the paper on Sunday

European indecision: Why is Germany talking about a European Monetary Fund? | The Economist - A GREAT leap forward in European integration? Or just words? That is the question posed by the weekend's flurry of excitement, after Angela Merkel endorsed the idea of a European Monetary Fund, to fulfil the same sort of role as the International Monetary Fund (IMF) within the euro zone. Many in Brussels are pretty excited about this apparent concession from the German chancellor. They are also chipper about the proposal from the Belgian prime minister, Yves Leterme, for a central European debt agency that would issue euro-denominated debt centrally. They liked the report in the German press that EU finance ministers want the creation of a European credit ratings agency under the European Central Bank, to challenge the power of the big three commercial credit rating agencies. And they were pleased, for once, with the European Commission when it said today it would look at ways to curb "speculative" trading in Credit Default Swaps on sovereign debt by market actors who did not own any of the underlying debt (ie, naked trading).

Proposal for European Monetary Fund Wins EU Support - German Finance Minister Wolfgang Schäuble has suggested setting up a European monetary fund to enable the euro zone to tackle debt crises such as that seen in Greece without resorting to the IMF. EU Monetary Affairs Commissioner Olli Rehn has welcomed the idea."We are working closely with Germany, France and the other EU member states on this issue," Rehn told the Financial Times Deutschland in an article published on Monday. "The Commission is prepared to propose such a European instrument that gets the support of the members of the euro zone." Any aid provided by the funds would need to be "combined with strict conditions," he said.

European Monetary Fund, Arriving Soon - American officials are annoyed and deeply skeptical – not thinking that this will amount to anything.  But the future has finally arrived – or perhaps its arrival has just been announced – in the form of the European Monetary Fund.Such an institution would represent a major reshaping of global financial architecture, undermining the traditional basis of power for the United States – which would prefer to keep the International Monetary Fund (IMF) paramount.  This is a good thing for the world, but also for the IMF and – believe it or not – for the US. I laid out the case for regional Monetary Funds in BusinessWeek last year.  The main point is that it makes sense to have a two tier system – at the regional level (or for countries grouped in some other way, like “emerging markets”) and at the global level, meaning the IMF.

Germany Backs European Version of IMF - Germany expressed support for creating a "European Monetary Fund" that could bail out indebted nations in the euro zone, showing how Greece's debt crisis is forcing Europe to rethink the institutional design of its common-currency area. German Finance Minister Wolfgang Schäuble said he would "present proposals soon" for a new euro-zone institution that has "comparable powers of intervention" to the International Monetary Fund.

Merkel warns of hurdles in EMF plan - FT - Radical plans for a European version of the International Monetary Fund to bail out crisis-hit countries would need a new treaty and the agreement of all European Union member states, Angela Merkel, Germany’s chancellor, has warned.  Throwing her weight behind the proposals from Wolfgang Schäuble, her finance minister, Ms Merkel admitted the European Union had lacked the tools to deal with the Greek debt crisis: “The sanctions we have were not good enough.”  But she added that a full-scale negotiation of the EU’s 27 member states would be needed to set up a European Monetary Fund, which would be able to bail out eurozone members subject to strict budgetary conditions. “Without treaty change we cannot found such a fund,” Ms Merkel told foreign correspondents in Berlin on Monday.

FT Alphaville – EMF – you’re unbelievable - An excuse for a headline — and a video. Doubts over the feasibility of a European Monetary Fund (EMF) continue apace on Tuesday morning. German Chancellor Angela Merkel has been warning that such a fund — something along the lines of the international (IMF) version — would require a new European treaty. Meanwhile, ECB board member Jürgen Stark has also been pouring cold water on the idea. BNP Paribas has a good round-up of the issue:

European Debt to Reach 1.4 Trillion Euros, S&P Says  (Bloomberg) -- European government borrowing will probably rise to a record 1.45 trillion ($2 trillion) euros this year to fund fiscal stimulus measures designed to revive growth, Standard & Poor’s said. Borrowing will probably climb about 52 billion euros, or 4 percent, from 1.39 trillion euros in 2009, which was also a record, S&P said in a statement today. The cost of raising the cash will also rise as the phasing out of stimulus measures and central bank purchases reduce demand for bonds and push yields higher, according to the ratings company. “This record level of European sovereign borrowing will be the result of central governments’ sustained high net borrowing requirements,”

Greece debt: EU agrees bailout deal - The eurozone has agreed a multibillion-euro bailout for Greece as part of a package to shore up the single currency after weeks of crisis, the Guardian has learnt.Senior sources in Brussels said that Berlin had bowed to the bailout agreement despite huge resistance in Germany and that the finance ministers of the "eurozone" – the 16 member states including Greece who use the euro – are to finalise the rescue package on Monday. The single currency's rulebook will also be rewritten to enforce greater fiscal discipline among members.The member states have agreed on "co-ordinated bilateral contributions" in the form of loans or loan guarantees to Greece if Athens finds itself unable to refinance its soaring debt and requests help from the EU, a senior European commission official said.

The German Finance Minister Needs To Confront Investment Banks - Simon Johnson - Wolfgang Schauble, German finance minister, has a surprisingly sensible op ed in today’s Financial Times.  As we suggested yesterday, first the relevant Europeans should decide if they want to keep the euro - more precisely, who stays in and who leaves the currency union – then policy must be adjusted accordingly.  Mr Schauble is obviously correct that existing economic self-policing mechanisms are badly broken; the eurozone can only survive if there are effective monitors and appropriate penalties for fiscal and financial transgression.  He is also right to fear that involving the IMF in Greece would necessarily give the Fund greater rights to kibbitz on European Central Bank monetary policy.  But Schauble misses (or holds back for now) on a potentially important point vis-a-vis investment banks.

FT Alphaville - Notch ‘em up, and notch ‘em down - Can banks, or at least their ratings, survive without extraordinary governmental support? Moody’s has just published a report on the phasing out of UK government assistance for British banks — that would be things like the Credit Guarantee and Special Liquidity schemes started in the midst of the financial crisis. By the agency’s reckoning the withdrawal process should take one to three years, and the wind-down could endanger the ratings of some (weaker) banks

Sovereign-debt ratings: The grim rater - The Economist - Now that investor attention has shifted to sovereign risk, the three big agencies (Fitch, Moody’s and Standard & Poor’s) once more find themselves at the centre of the action. Upgrades of sovereign debt exceeded downgrades in every year between 1999 and 2007. That has changed as a result of the financial crisis (see chart). The rules of the financial system make ratings impossible to ignore. If Moody’s joins its peers and downgrades Greece below A-, the country’s bonds risk becoming ineligible for use as collateral by the European Central Bank when the ECB tightens its rules at the end of this year.  Over the long term the ratings of most developed nations have been remarkably stable. That stable record may not persist. Investors have been buying government debt for years in the belief it is “risk-free”, almost regardless of the economic fundamentals. But if they lose faith in a government’s policies, the situation can change very quickly. “Countries can go bust in a matter of weeks if the markets close to them,” says one rating-agency executive.

Sovereign debt crisis may deepen: Pimco - Mohamed El-Erian, whose company runs the world’s biggest mutual fund, said deteriorating public finances around the world may affect the global economy more than is currently realised. “The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” "Governments may have to raise taxes and slash spending to cope with swelling deficits after nations including the US borrowed unprecedented amounts to stave off the global financial crisis, said El-Erian,  A failure to carry out fiscal measures in time would raise the possibility of governments seeking to eliminate excessive debt through inflation or default, he said."

Greece, the Latest and Greatest Bubble - Bubbles are a much more general phenomenon — any time the actual market value for any asset diverges from a reasonable estimate of its “fundamental” value. To think about this more specifically, consider the case of Greece today.  By the end of 2011 Greece’s debt will be around 150 percent of its gross domestic product. (The numbers here are based on the 2009 International Monetary Fund Article IV assessment.)  About 80 percent of this debt is foreign-owned, and a large part of this is thought held by residents of France and Germany.  Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2 percent of G.D.P. abroad to those bondholders. Imagine if Greek interest rates rise to, say, 10 percent....

It's Official - EU Agrees On Greece Bailout - German opposition crumbles, as a Greek bailout plan is now official. We expect Portugal, Spain, Italy, Latvia, Ukraine, Bulgaria, Austria, and, finally, the UK, to line up next at the trough. And for all of you cynical bastards who thought that G-Pap was full of methane when we claimed he was not looking for aid... You were right. So now, under the wise tutelage of Goldman, make sure to plough all your money into the Euro. After all there are at least a few months before the next bailout has to be effected.

Leading PIIGS to Slaughter -The question of fiscal sustainability looms large at the moment – not just in the peripheral nations of the eurozone, but also in the UK, the US, and Japan. More restrictive fiscal paths are being proposed in order to avoid rapidly rising government debt to GDP ratios, and the financing challenges they may entail, including the possibility of default for nations without sovereign currencies. However, most of the analysis and negotiation regarding the appropriate fiscal trajectory from here is occurring in something of a vacuum. To make the interconnectedness of sector financial balances clearer, proposed fiscal trajectories need to be considered in the context of what we call the financial balances map.

The apparent weakness of the Euro (please define "weak") - In today's Financial Times, Wolfgang Munchau writes about "Why the Euro will continue to weaken". He makes an argument that we have heard before: the political tensions, the economic tensions created by the Greek debt problem make it clear that a monetary union without a political union cannot be successful.I will ignore the general question on whether a monetary union can succeed without a political union so that I keep this entry short, but I want to challenge his reading of exchange rates.

The Euro Has Been a Smashing Success - Even small financial crises like the Greek embarrassment stir up a lot of fuss. Germans are complaining that the 1992 Maastricht Treaty did not have enough teeth to discipline states that broke its rules and that tougher measures are needed. In Athens, the public employee unions are loudly warning their socialist friends against any austerity measures that might cut employee benefits. For comic relief, there's the U.S. Senate, where Chris Dodd blames Greece's plight, not on the Greeks themselves but—of course—on "Wall Street." Being Greek, the Athens demonstrators aren't likely to calm down. But everyone else should.

European Sovereign Debt Issuance to Reach £1,446 Billion - European governments’ commercial medium- to long-term (MLT) borrowing will likely reach a historical peak at €1,446 billion in 2010, according to Standard & Poor’s Ratings Services seventh pan-European sovereign issuance survey. This is up €52 billion from the previous peak of €1,394 billion in 2009, according to the survey, which consolidates estimates of borrowing activity of all 46 rated European sovereigns in 2010. Among the five largest European sovereign borrowers, we expect the U.K. to borrow an estimated €38 billion less than in 2009, after very high gross MLT borrowing of €257 billion in 2009. Our estimates of gross borrowing are higher by €41 billion in Germany, and by €26 billion in France, reflecting our expectation that there will be a deterioration in their public finances in 2010. We also estimate large absolute increases in MLT borrowing in Spain (€21 billion), Russia (€20 billion), Turkey (€19 billion), and The Netherlands (€13 billion).

Built on a Lie: The Fundamental Flaw of Europe's Common Currency -  The euro is under attack like never before, as the promises on which it was based turn out to be lies. Hedge funds are speculating against Greek debt, while euro-zone politicians work behind the scenes to cobble together rescue packages. But fundamental flaws in the monetary union need to be fixed if Europe's common currency is to survive. By SPIEGEL staff.

'Lost decade' possible, ECB official Stark says - - The economic recovery could be doomed to being slow, fragile and prone to reversal if there isn't a strong commitment to restructuring the global economy, according to Jurgen Stark, a member of the board of the European Central Bank.  "The failure to address long-overdue reform challenges promptly might result in a 'lost decade' for the global economy," Stark warned.  "Only partial progress has been made so far, and the distortions that led to global imbalances are still present," Stark said. Despite some stability, "substantial fragilities remain and the outlook is fraught with risks,"

The next European country set for debt watch: France – French debt looks set to come under pressure in the near future with investors battered by the Greek crisis arguing it is pricey and does not reflect France's growing indebtedness.  As a result, other euro zone paper, including Germany's and -- perhaps surprisingly -- Italy's, could be in for a filip.  The gist is not that France's economy is under any immediate Greece-like default stress, but the cost of its bonds -- and the cost of insuring them -- does not properly reflect what stress is actually there.  The French deficit is set to climb to 8.2 per cent of gross domestic product this year, the highest for at least half a century. Its debt is projected to jump to 83.2 per cent of GDP -- up 20 percentage points in just two years.

An Irish Mirror for the Financial Crisis:  Everyone has a theory about the financial crisis.... But what do we really know?  We can look at countries that avoided the worst, like Canada, and ask what they did right — such as limiting leverage, protecting consumers and, above all, avoiding getting caught up in an ideology that denies any need for regulation. We can also look at countries whose financial institutions and policies seemed very different from those in the United States, yet which cracked up just as badly, and try to discern common causes. So let’s talk about Ireland.... the shape of Ireland’s crisis was very similar: a huge real estate bubble — followed by a severe banking bust that was contained only via an expensive bailout. Ireland had none of the American right’s favorite villains: it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag. So what did we have in common?

OECD: UK has worse social mobility record than other developed countries - Children from poor families in Britain have a greater chance of struggling on low incomes than their counterparts in the west's other rich countries, the Organisation for Economic Co-operation and Development (OECD) said today. Highlighting the UK's lack of social mobility, the Paris-based thinktank said the chances of a young person from a less well-off family enjoying higher wages or getting a higher level of education than their parents was "relatively low".The findings came in the OECD's latest Going for Growth report, which said the developed world faced a "daunting task" in restoring public finances to health after the most severe recession since the second world war. It stressed the need for stronger financial regulation and structural reform to labour markets in order to lay the foundations for sustained recovery

The end game for Europe: wage cutting and the battle for exports - Yesterday I argued that Latvia's cost-cutting efforts are evident compared to a cross-section of European Union countries. Latvia's efforts, while commendable, were very much a function of the emergency IMF loan in December 2008 and the ensuing recession in 2009.  I now see a very scary trend emerging across Europe: the fight for exports. Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income.  And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!

Coming to a Country Near You: Let a dozen Latvias bloom? - Want to see the real consequence of smash mouth economics? Forget about Greece and take a look at Latvia. Its 25.5 per cent plunge in GDP over just the past two years (almost 20 per cent in this past year alone) is already the worst two-year drop on record. The country recently reported a 12% decline in annual wages in Q4 2009 versus Q4 2008. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. The magnitude of this loss of output in Latvia is more than that of the U.S. Great Depression downturn of 1929-1933. Mainstream economics insists that one path to full employment is via lower wages. If you want to sell more labor services, lower the price of them, namely wages. This is a classic fallacy of composition argument. What might work for one firm is unlikely to work for all firms. Wage cuts in the aggregate simply destroy aggregate spending power, unless the lost demand is made up for in other ways.

Guest Post: No One’s Issuing Credit—Why Are Auerback and Parenteau? - Why, in their article on Latvia’s austerity budget, are Marshall Auerback and Robert Parenteau giving Latvia credit for warm, fuzzy feelings? Especially in the context of Draconian cuts? It’s because Auerback and Parenteau don’t know what they want—their emotions are not grounded in any articulated policies. So they sound friendly. But are they friendly? Let’s take a look. Maybe they just haven’t got their terms straight. For example, they say: “Mainstream economics insists that one path to full employment is via lower wages.” No, that’s not mainstream economics—that’s police state economics. That’s simply liquidation. They seem blithely unaware that since the power structure in America decided the suburbanization binge was over—that our suburban cow had ceased to be a profit center and had turned into a cash guzzler—America is no longer a paying proposition. So power is taking its flunkey, Uncle Sam, out of government. That’s liquidation: power is withdrawing government from American society—and right on cue, the rest of the world is following suit, including Latvia.

Competitive Deflation - Krugman - Rebecca Wilder is right:  Latvia’s model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It’s impossible that the whole of the Eurozone will drop wages to increase export income.  And let’s not forget that all this deflation raises both the real value of euro-denominated debt and real interest rates. It’s the euro version of Andrew Mellon: liquidate Lativa, liquidate Greece, liquidate Spain, purge the rottenness ….

Iceland Voters Reject Payback Plan - Defiant Icelandic voters have resoundingly rejected a £3.5 billion plan to pay off Britain and the Netherlands for debts spawned by the collapse of internet bank Icesave, according to initial results. Results returned from around 83,500 referendum ballots - or more than 40% of the total ballots expected - counted so far showed 93% of voters said No, compared with just 1.5% who backed the deal. The referendum results are indicative of how angry many Icelanders are at bankers and politicians as the tiny island nation struggles to recover from a deep recession.

Iceland Voters Reject Bank Bailouts in Crushing Electoral Defeat; Neo-Liberalism In Context - "Voters rejected the bill because ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers." It is interesting that the government of Iceland had already declared the vote of the people as 'obsolete.' One has to wonder when the voters will declare their current government and their representatives as obsolete. One would give the government credit for at least allowing a vote on a referendum, but to then disregard and circumvent it through political devices is seems like a base hypocrisy. Iceland is a victim of the neo-liberal economic deregulation of the 1990's, in which a few bankers can buy the government, and rack up enormous profits for themselves in Ponzi like leverage, and then attempt to socialize the debt back to the people when their schemes collapse.

Arctic Sea ice arches at the northern end of the Fram Strait permit thickest multi-year ice to flow out, creating a positive feedback loop - The shrinking extent of sea ice in the Arctic has been a cause of concern for some decades, and the record low extent measured with passive-microwave radiometers in September 2007 gathered a good deal of publicity. The September minimum was 7.11 million km2 on average during 1979-1998. In 2007 it was 4.30 million km2. The two minima since then have each been greater. 2008 saw the second lowest and 2009 the third lowest extent. You can check out the state of Arctic sea ice at the National Snow and Ice Data Center in Boulder, Colorado. Thus far during the present winter, 2009-2010, the extent has been tracking pretty closely the course followed in 2007, so two successive years of increased minimum annual extent do not justify us in concluding that the ice pack might be recovering. Equally, there is no sign of an impending catastrophe at the top of the world, but we would still like to understand why 2007 was a record-breaker.

Growing Low-Oxygen Zones In Oceans Worry Scientists - Lower levels of oxygen in the Earth's oceans, particularly off the United States' Pacific Northwest coast, could be another sign of fundamental changes linked to global climate change, scientists say. They warn that the oceans' complex undersea ecosystems and fragile food chains could be disrupted. In some spots off Washington state and Oregon , the almost complete absence of oxygen has left piles of Dungeness crab carcasses littering the ocean floor, killed off 25-year-old sea stars, crippled colonies of sea anemones and produced mats of potentially noxious bacteria that thrive in such conditions. Areas of hypoxia, or low oxygen, have long existed in the deep ocean. These areas — in the Pacific, Atlantic and Indian oceans — appear to be spreading, however, covering more square miles, creeping toward the surface and in some places, such as the Pacific Northwest , encroaching on the continental shelf within sight of the coastline.

Glacier melting a key clue to tracking climate change (Reuters) - The world has become far too hot for the aptly named Exit Glacier in Alaska. Like many low-altitude glaciers, it's steadily melting, shrinking two miles over the past 200 years as it tries to strike a new balance with rising temperatures. The vast amounts of water stored in glaciers play crucial roles in river flows, hydropower generation and agricultural production, contributing to steady run-off for Ganges, Yangtze, Mekong and Indus rivers in Asia and elsewhere. But many are melting rapidly, with the pace picking up over the past decade, giving glaciers a central role in the debate over causes and impacts of climate change.

Abrupt tropical climate change: Past and present - Three lines of evidence for abrupt tropical climate change, both past and present, are presented. First, annually and decadally averaged δ18O and net mass-balance histories for the last 400 and 2,000 yr, respectively, demonstrate that the current warming at high elevations in the mid- to low latitudes is unprecedented for at least the last 2 millennia. Second, the continuing retreat of most mid- to low-latitude glaciers, many having persisted for thousands of years, signals a recent and abrupt change in the Earth’s climate system. Finally, rooted, soft-bodied wetland plants, now exposed along the margins as the Quelccaya ice cap (Peru) retreats, have been radiocarbon dated and, when coupled with other widespread proxy evidence, provide strong evidence for an abrupt mid-Holocene climate event that marked the transition from early Holocene (pre-5,000-yr-B.P.) conditions to cooler, late Holocene (post-5,000-yr-B.P.) conditions. This abrupt event, ≈5,200 yr ago, was widespread and spatially coherent through much of the tropics and was coincident with structural changes in several civilizations. These three lines of evidence argue that the present warming and associated glacier retreat are unprecedented in some areas for at least 5,200 yr.

Climate change 'makes birds shrink' in North America - BBC -  Songbirds in the US are getting smaller, and climate change is suspected as the cause.  A study of almost half a million birds, belonging to over 100 species, shows that many are gradually becoming lighter and growing shorter wings. This shrinkage has occurred within just half a century, with the birds thought to be evolving into a smaller size in response to warmer temperatures.

Americans’ Global Warming Concerns Continue to Drop – Gallup - Gallup's annual update on Americans' attitudes toward the environment shows a public that over the last two years has become less worried about the threat of global warming, less convinced that its effects are already happening, and more likely to believe that scientists themselves are uncertain about its occurrence. In response to one key question, 48% of Americans now believe that the seriousness of global warming is generally exaggerated, up from 41% in 2009 and 31% in 1997, when Gallup first asked the question.

State of the Climate - NOAA | Global Analysis | January 2010

  • The combined global land and ocean average surface temperature for January 2010 was 0.60°C (1.08°F) above the 20th century average of 12.0°C (53.6°F). This is the fourth warmest January on record.
  • The global land surface temperature for January 2010 was 0.83°C (1.49°F) above the 20th century average of 2.8°C (37.0°F)—the twelfth warmest January on record. Land areas in the Southern Hemisphere were the warmest on record for January.
  • The worldwide ocean surface temperature for January 2010 was the second warmest—behind 1998—on record for January, 0.52°C (0.94°F) above the 20th century average of 15.8°C (60.5°F). This can be partially attributed to the persistence of El Niño across the equatorial Pacific Ocean.

Humans <u>must</u> be to blame for climate change, say scientists - Climate Change, Environment - Th - Climate scientists have delivered a powerful riposte to their sceptical critics with a study that strengthens the case for saying global warming is largely the result of man-made emissions of greenhouse gases. The researchers found that no other possible natural phenomenon, such as volcanic eruptions or variations in the activity of the Sun, could explain the significant warming of the planet over the past half century as recorded on every continent including Antarctica. It is only when the warming effect of emitting millions of tonnes of carbon dioxide into the atmosphere from human activity is considered that it is possible to explain why global average temperatures have risen so significantly since the middle of the 20th century

John Kerry Completely Backwards on Purpose of Cap-and-Trade - In an interview Thursday with the Associated Press, Massachusetts Senator John Kerry said that the primary purpose of cap-and-trade legislation is to "create jobs," while benefits to the environment are mostly just side effects. From Yahoo News: "It's primarily a jobs bill, and an energy independence bill and a pollution reduction-health-clean air bill," Kerry said. "Climate sort of follows. It's on for the ride." Regardless of your position on cap-and-trade or a carbon tax, jobs should not be a primary concern in either opposition or support for these measures. When organizations on the right come out and say that a cap-and-trade bill is going to cost X number of jobs, or when Senator Kerry and others on the left claim such a policy is going to create Y number of jobs, they are ignoring the fundamental purpose of such a policy: internalize the externalities of pollution.

Role of Individuals and Institutions in Addressing Climate Change - - This may seem like a trivial question with an obvious answer.  But what really is the proper role for individuals and institutions in addressing climate change?  An immediate and natural response may be that everyone should do their part.  Let’s see what that really means. Decisions affecting carbon dioxide (CO2) emissions, for example, are made primarily by companies and consumers.  This includes decisions by companies about how to produce electricity, as well as thousands of other goods and services; and decisions by consumers regarding what to buy, how to transport themselves, and how to keep their homes warm, cool, and light. However, despite the fact that these decisions are made by firms and individuals, government action is clearly key, because climate change is an externality, and it is rarely, if ever, in the self-interest of firms or individuals to take unilateral actions.

MoMA Challenges Five Teams of Designers to Figure Out How New York Might Deal With Rising Sea Levels - It’s easy to imagine an apocalyptically soggy future for New York—high waves soaking the hem of Lady Liberty’s robes, flash floods roaring through subway tunnels, kayakers paddling down Wall Street—and just as easy to dismiss it all as another end-of-days Hollywood fantasy. Global warming may be powerful and real, but so is denial, and the urge to postpone thinking about that particular item on the world’s to-do list is almost irresistible. Coastal cities, however, don’t have that luxury. For centuries, New York has been steadily expanding into its harbor; when the steroidal storms of the not-too-distant future start pummeling our shores, the waters will push back.  So Barry Bergdoll, the head of the Museum of Modern Art’s architecture and design department, divvied New York Harbor among five teams of designers and challenged them to figure out how a low-lying metropolis might deal with rising sea levels and violent storm surges...

NYT Wastes Readers' Time In Article on Global Warming and China and India -The NYT reported that China and India both signed an agreement to limit their greenhouse gas emissions. The article cites unnamed analysts who complained that the new commitment by China and India falls short of the terms of the agreement. The article neglected to mention that on a per person basis China emits about one quarter as much greenhouse gases as the United States, while India emits around one-eighth as much. It is impossible to understand these countries positions on this issue without recognizing how much less they contribute to global warming than people in the United States. They will not agree to permanently hold their emissions below U.S. levels without compensation and the U.S. lacks the ability to force them.

The Climate Desk - I’m a little scared and more excited to kick off a serious and ambitious exercise in collaboration across a spectacular range of websites, including Center for Investigative Reporting, Grist, Mother Jones, Reuters, Slate, The Atlantic, Wired, and WNET. It’s called The Climate Desk, and although its website isn’t up and running yet, it does have a mission statement: The Climate Desk is a journalistic collaboration dedicated to exploring the impact — human, environmental, economic, political — of a changing climate. My job is to look at the corporate side of things: whether and how big companies are preparing themselves for the downside of climate change. Already the SEC has decreed that companies have to disclose the effect of climate change in four different areas: actual and potential laws and legislation; international accords and treaties; regulatory and business trends, including changes in demand for goods with high or low emissions; and, finally, this: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Industries hoarding greenhouse gas emission permits - Companies across Europe are hoarding permits to produce greenhouse gas emissions worth hundreds of millions of pounds, the Guardian can reveal.The surplus credits have been amassed from over-allocation of permits to pollute from the European emissions trading scheme, and by buying cheap credits from carbon-cutting projects in developing countries and holding on to their more expensive official EU allowances.The saved permits can be used to meet future targets to cut the greenhouse gas emissions blamed for global warming and climate change without actually reducing pollution, or sold for a profit in the future.

Bill Gates on Energy and Carbon (half hour video)

Consumption-based accounting of CO2 emissions -CO2 emissions from the burning of fossil fuels are the primary cause of global warming. Much attention has been focused on the CO2 directly emitted by each country, but relatively little attention has been paid to the amount of emissions associated with the consumption of goods and services in each country. Consumption-based accounting of CO2 emissions differs from traditional, production-based inventories because of imports and exports of goods and services that, either directly or indirectly, involve CO2 emissions. Here, using the latest available data, we present a global consumption-based CO2 emissions inventory and calculations of associated consumption-based energy and carbon intensities. We find that, in 2004, 23% of global CO2 emissions, or 6.2 gigatonnes CO2, were traded internationally, primarily as exports from China and other emerging markets to consumers in developed countries.

Investors Need Climate Information to Make Decisions - A group of 56 investment-industry leaders representing $2.1 trillion in assets applauded the U.S. Securities and Exchange Commission yesterday for taking action to ensure that companies disclose their climate-related risks to investors. The leaders stated that the SEC’s Guidance Regarding Disclosure Related to Climate Change “will provide us with significantly improved information about the material risks and opportunities faced by our portfolio companies.” This reinforces a fundamental principle of the American economy: Investors need transparent information on companies to make informed decisions.Yet there is a movement in the Senate that would deny investors access to that critical information. Sen. John Barrasso (R-WY) introduced legislation on February 24 that would prevent the SEC from forcing companies to disclose their climate-related risks.

'Biodegradable' Plastic Bags May Not Be As Eco-Friendly As Thought - A study into ''oxo-degradable'' plastics, often labelled as degradable or biodegradable, found there was uncertainty about their impact on the natural environment. The carrier bags, bin bags and flexible packaging, made from common plastics with small amounts of chemicals to speed up their breakdown, are also not suitable for recycling with other plastics, reuse or composting, the research by Loughborough University found.

Obama aide urges listing of gas-drilling chemicals (Reuters) - President Barack Obama's top environmental adviser urged the natural gas industry on Tuesday to disclose the chemicals it uses in drilling, warning that the development of massive U.S. shale gas reserves could be held back otherwise.Joseph Aldy, special assistant to the president for energy and the environment, said concerns about water contamination from drilling chemicals could lead to states requiring disclosure and that could deter additional investment. "You can't leave this in the status quo if you think we are going to have significant shale gas development in the United States," Aldy told Reuters after a natural gas conference. Some energy companies decline to publish lists of toxic chemicals used in hydraulic fracturing, a technique used to extract natural gas from shale beds far underground.

The “Success” of Green Subsidies - The size of European and Asian country’s green energy industries and the generous government subsidies and industrial policy they thrive on is looked at jealously by many American commentators who wonder “why not us?”. Leaving aside for the moment the disagreement about whether the composition of American industries is a worthwhile goal of public policy, there are reasons to be wary of heavy-handed green industrial policy. An article in the New York Times today is a great cautionary tale.

Will Politics Slow the Wind? - Not many years ago, there wasn't enough wind power coming from the Great Plains to worry about. Now there is, and lots of people are worrying.A group of mostly East Coast utility companies calling itself the Coalition for Fair Transmission Policy fears that the prime conditions in the Great Plains will make the region's wind power too cheap for its members to compete with, unless developers there are made to pay the costs of moving wind power eastward. Influential natural gas producers and generators in Texas are worried. They are demanding that the state's wind developers share the costs of backup natural gas generators that must pick up the slack when the wind doesn't blow. The gas industry, threatened by state policies that promote wind power, is asking regulators to impose penalties on wind generators that can't deliver scheduled energy when the wind dies dow And last week, four senators representing New York, Ohio, Montana and Pennsylvania proposed to deny federal clean energy grants to wind developers that buy blades, turbines and other components from abroad.

Old School vs. New School: The Case of the Smart Grid and Real Time Electricity Metering - All change is bad. The Smart Electricity Meter roll out offers a test of this claim. These meters provide us with real time information about our minute by minute electricity consumption. In a world where we are glued to our Iphones and Blackberries, shouldn't such information be useful and improve our quality of life? After all, these $100 meters will replace the antiquated monthly electricity bill. Like Star Trek's Captain Kirk, you will now be an informed captain of your own ship! To paraphrase Sy Sims, an educated consumer should be a better customer. But, the NY Times is reporting that a revolt is breaking out. The first guinea pigs of the smart meter roll out are complaining that they are being price gouged. The utilities are countering that the bills are high because of weather shocks..

USDA Guarentees Loan for GA Wood Ethanol Plant - AColorado-based firm with a planned biorefinery located near Soperton, Georgia is the recipient of a loan guaranteed by USDA Rural Development to make cellulosic biofuel from wood chips, according to a USDA announcement. The finalized deal with Range Fuels was first announced last year and represents the first ever loan guarantee by USDA to a commercial-scale cellulosic biofuel plant. This project is expected to provide biorefinery jobs, construction jobs and support the timber industry

U.S. Biodiesel Lives to See Another Day: Tax Credit Back… - Two weeks ago, we wrote that U.S. biodiesel producers were up the creek without a paddle (see The State of U.S. Biodiesel). The U.S. Congress just threw them a life jacket. On December 31, 2009, Congress allowed a crucial $1.01/gal tax credit to expire, resulting in U.S. biodiesel production capacity dipping to around 15%. Fortunately for biodiesel producers, the gravitational pull between politicians and bailing out unprofitable industries is among the strongest forces in the universe. On Wednesday, the U.S. Senate voted 62-36 for the "American Workers, State, and Business Relief Act," which retroactively reinstituted the $1.01/gal biodiesel tax credit through December 31, 2010.  The House and Senate must reconcile differences between a similar bill called H.R. 4213, but the passage of this bill in the Senate is of immense importance for the industry.

Study Shows Taxpayers Subsidizing  Ethanol At $4.18 Per Gallon… - A new study by University of Missouri Food and Agricultural Policy Research Institute (PDF) reveals that the current corn ethanol tax credit is effectively costing tax payers $4.18 per gallon and is driving up grain prices. The study estimates that the tax credit, which would cost about $5.85 billion next year if extended, will lead to 1.4 billion gallons above the 12.6 billion gallons required by law through the Renewable Fuel Standard (see page 64). In other words, next year the oil companies will be required to buy 12.6 billion gallons of conventional corn ethanol, but because tax payers are giving them $5.85 billion they'll consume 1.4 billion more than required. That works out to $4.18 per extra gallon.

It Isn’t Easy Being Clean In 2008, Syncrude became Canada’s first oil-sands operator to receive government reclamation certification for a former mine, meaning that the company had demonstrated the site could support the same vegetation and wildlife as before the land disturbance. That has not saved it, however, from facing legal action over the deaths that same year of 1,600 ducks in a single incident at one of its tailings ponds, where mining waste is dumped

World crude oil production may peak a decade earlier than some predict - In a finding that may speed efforts to conserve oil and intensify the search for alternative fuel sources, scientists in Kuwait predict that world conventional crude oil production will peak in 2014 — almost a decade earlier than some other predictions. Their study is in ACS' Energy & Fuels, a bi-monthly journal. Ibrahim Nashawi and colleagues point out that rapid growth in global oil consumption has sparked a growing interest in predicting "peak oil" — the point where oil production reaches a maximum and then declines. Scientists have developed several models to forecast this point, and some put the date at 2020 or later. One of the most famous forecast models, called the Hubbert model, accurately predicted that oil production would peak in the United States in 1970. The model has since gained in popularity and has been used to forecast oil production worldwide. However, recent studies show that the model is insufficient to account for more complex oil production cycles of some countries. Those cycles can be heavily influenced by technology changes, politics, and other factors, the scientists say.

‘Peak Demand,’ Yes, But Not the Nice Kind | Energy Bulletin - When oil crossed $120 a barrel for the first time in May 2008, oil cornucopians knew they were in trouble. Prices had quadrupled in just five years, yet had failed to bring new production online. Regular crude had flatlined around 74 million barrels per day (mbpd). The case for peak oil was looking stronger with every new uptick in crude futures.  In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less. In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.

Retailers vs rising gasoline prices - Just as retailers continued to power higher yesterday, AAA said the average price of a gallon of unleaded gasoline rose to $2.76, the highest since Oct ‘08. The action in retailers is similar to the action in ‘05-’06 when energy prices rose coincident with the better economy and rising markets with the pain threshold of higher costs at the pump being high because of a good economy. We can be sure though that the threshold now will be much lower than back then.

Ethanol Boondoggle Gets a Second Life - One of my biggest disappointments with Obama so far is his continued support of the ethanol boondoggle. The program was ramped up by the Bush administration to achieve energy independence by subsidizing the production of alcohol from domestically grown corn. Add clean burning moonshine (yes, it’s the same alcohol—C2H5OH), whose combustion products are carbon dioxide (CO2) and water (H2O), to gasoline and emissions also go down.  The irony is that if you include all the upstream and downstream inputs, the process consumes far more energy than it produces. It also demands massive quantities of fresh water, which someday will become more valuable than the oil the ethanol is supposed to replace, turning it into toxic waste.

China's Oil Demand Increase 'Astonishing', says IEA - China's demand for oil jumped by an "astonishing" 28% in January compared with the same month a year earlier, the International Energy Agency (IEA) says. The body added that demand for oil in 2010 would be underpinned by rising demand from emerging markets, with half of all growth coming from Asia.  But the IEA predicted demand in developed countries would fall by 0.3%.  The IEA has increased its global oil demand forecast for 2010 by 1.8% to 86.6 million barrels a day.

IEA Economist Predicts 'Era Of Cheap Energy Is Over' - (Dow Jones)--The chief economist of the International Energy Agency said predicted Tuesday that the "era of cheap energy is over," with oil supply unlikely to keep up with demand.  Fatih Birol told the National Association for Business Economics that China will be the main driver of global oil demand, which he sees increasing by about 1.5 million barrels a day this year. China will account for a third of that gain, with the rest split by Middle Eastern oil producers and other developing countries.  However, he predicted that demand from the major industrialized countries comprising the Organization for Economic Cooperation and Development has peaked.

BP, Devon to develop oil sands project – The Globe and Mail - BP is partnering with Devon Energy Corp. to develop an Alberta oil sands project as part of a much larger deal in which BP will pay $7-billion (U.S.) to buy exploration rights in several countries from the American company. BP, which has not been a major player in the oil sands, said Thursday it will sell a 50 per cent stake in its Kirby leases for $500-million to Oklahoma-based Devon, which already has an oil sands project in the same area. Devon, which has committed to fund an additional $150-million of capital costs for the Kirby project and operate it on BP's behalf, said it plans a multi-stage development that will use steam to soften and extract the bitumen.“While the Kirby development will require additional evaluation to confirm its size and scope, we believe that it will support several phases of development and has total recoverable resources that are greater than our Jackfish complex. We believe Kirby to be similar to Jackfish in terms of geology, reservoir characteristics and oil quality,”

Hurdles for Saudi power plans - The National Newspaper Fuel shortages and other hurdles will put new electricity generation targets in Saudi Arabia out of reach, analysts say, as the kingdom prepares to use more of its valuable crude oil to keep domestic lights on and air conditioners running. Saudi Electricity Company (SEC), the state utility, said in its annual report on Wednesday that it wanted to add 12,043 megawatts of power capacity by 2015, equivalent to between four and eight power plants of the size commonly built in the Gulf. The company plans to add 2,478mw this year alone, according to the report, which was published in Saudi newspapers. The country’s current capacity is just under 40,000mw.

Gartman: Why Nigeria Should Have You Freaked Out Over Oil Prices - By now, a lot of people have read of the savage massacres going on in Nigeria as tribal fighting returns to a gruesome caliber.  Dennis Gartman reminds us that Nigeria is the 3rd to 5th largest exporter of crude oil to the United States, depending on the month. In December of 2009, Nigeria beat the Saudis in total US exports of oil, coming in at 3rd behind Mexico and Canada.So when there's basically an all-out war going down in Nigeria, one must pay close attention to the price of oil with special regard to the US

Oil companies look at permanent refinery cutbacks - Some of the nation's biggest oil companies are looking at permanently reducing how much gasoline and diesel fuel they make, a move that analysts say would almost certainly trigger higher prices for drivers. Energy companies are suffering huge losses from refining because of slumping gasoline use -- a product of the economic downturn and changing consumer habits and preferences. Energy experts say refining cutbacks have begun and will accelerate as corporations strive for profits. Major refiners have been circumspect about their plans, saying that they are considering options that could include closing refineries, selling parts of their operations, laying off workers and slashing spending.

Welcome to the permanent recession - food and transportation prices rising - If employment is inversely proportional to oil prices (it is), and oil prices are only going to trend up…then employment by necessity is going down. Because oil is so fundamental to our economy, oil price increases ripple through the entire economy. Take food as an example: current factory farming methods are entirely dependent upon oil from planting to processing to getting the food to market. Certain types of food are also heavily subsidised, especially meat and dairy. Note that these subsidies do not necessarily include oil subsidies, taxpayer-provided roads, subsidised water, and so on. As the price of oil increases, so goes the price of food; in fact this has already been happening in Canada and the United States. Note especially the increase in transportation costs, and both sources cite rises in fuel as a primary driver of inflation, so-to-speak.

China leading gas race - The world is swimming in gas – wonderful, abundant, unconventional stuff that nobody counted on being able to extract from rocks and coal mines until a few years ago. Given the current glut and depressed prices, who does Shell think is going to buy its wares, if the oil major manages to pull off its £2bn takeover bid for Australian producer Arrow Energy? The clue is in Shell’s choice of a joint venture partner for Arrow, PetroChina – the little-known company that was once the biggest in the world and serves the globe’s fastest growing gas market. China is remarkably unreliant on gas at the moment, generating the vast proportion of its energy needs from coal. Only about 4pc of its energy needs come from natural gas. This is going to change. China has been snapping up oil reserves across Africa over the last 12 months...

The 100 Year Natural Gas Myth -- It's difficult to read an article on natural gas without the mention of the US' 100 years of natural gas supply. It forms the basis of suggestions for a scaling up of the natural gas intensity of transport and power generation. I'll look at the evidence here. Figure 1 shows the historical data, and then in the last year or so what you could be forgiven for believing: (click all images to enlarge)

How China And Oil Exporters Will Gouge The World With Current Account Surpluses Over The Next Five Years - Here's a nice forecast of the world's current account imbalances from an IMF research paper, shown to the right. What's the message? China and oil producers are likely to become an even larger global imbalance when it comes to trade surpluses. As a percentage of global GDP, China's current account surplus could increase 50% to 0.9% of global GDP. Oil exporters' trade surpluses will more than double to 0.7% of global GDP. Obviously the China forecast shown will depend heavily on how the yuan-dollar rate plays out in the future. We could easily see China become a net importer if the yuan were hiked substantially for example. But the oil forecast seems less subject to wild swings, which means that oil could become a far larger part of the global trade imbalance debate, on the scale that China currently is.

Getting the Story Right - c.martenson - Now that I have returned from my UK trip, where I had the opportunity to present the main story of the Crash Course at the Parliament, at the London School of Economics, and to councillors and members of the Scottish Parliament, I've come away with an even stronger sense of the true dimensions of our predicament and what must be done. We desperately need to start telling ourselves a new story, one that at least fits the known data, and we need to be far more urgent in our preparations for a future that is now upon us. This is not a US or a UK story, but one that applies equally to us all, no matter where we live. It is a global story.  I am even more firmly convinced that our best chance at foretelling the future rests with a reasonable understanding of how the economy is organized as a complex system and the role of energy in keeping it that way.

U.S. Sitting on Mother Lode of Rare Tech-Crucial Minerals -  A company called U.S. Rare Earths holds the only known U.S. deposit of heavy rare earths with a concentration worth mining, according to a recent report by the U.S. Geological Survey.  If developed, such deposits could help the U.S. avoid a possibly crippling rare earth shortage in the next decade. China has warned that its own industrial demands could compel it to stop exporting rare earths within the next five or 10 years. "There is already a shortage, because there are companies that already can't get enough material," said Jim Hedrick, a former USGS rare earth specialist who recently retired. "No one's trying to expand their use of rare earths because they know there's not more available."

Iraq littered with high levels of nuclear and dioxin contamination, study finds - Areas in and near Iraq's largest towns and cities, including Najaf, Basra and ­Falluja, account for around 25% of the contaminated sites, which appear to coincide with communities that have seen increased rates of cancer and birth defects over the past five years. The joint study by the environment, health and science ministries found that scrap metal yards in and around Baghdad and Basra contain high levels of ionising radiation, which is thought to be a legacy of depleted uranium used in munitions during the first Gulf war and since the 2003 invasion.

Chilean earthquake moved entire city 10 feet west, shifted other parts of South America - The massive magnitude 8.8 earthquake that struck the west coast of Chile last month moved the entire city of Concepcion at least 10 feet to the west, and shifted other parts of South America as far apart as the Falkland Islands and Fortaleza, Brazil.These preliminary measurements, produced from data gathered by researchers from four universities and several agencies, including geophysicists on the ground in Chile, paint a much clearer picture of the power behind this temblor, believed to be the fifth-most-powerful since instruments have been available to measure seismic shifts. Buenos Aires, the capital of Argentina and across the continent from the quake's epicenter, moved about 1 inch to the west. And Chile's capital, Santiago, moved about 11 inches to the west-southwest. The cities of Valparaiso and Mendoza, Argentina, northeast of Concepcion, also moved significantly.

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